Direct Tax Law and Practice Book

STUDY MATERIAL
PROFESSIONAL PROGRAMME
DIRECT TAX LAW

& PRACTICE
MODULE 3
ELECTIVE PAPER 9.5
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DIRECT TAX LAW & PRACTICE
This study material has been published to aid the students in preparing for the Direct Tax Law & Practice
[Elective Paper] of the CS Professional Programme. It is part of the educational kit and takes the students
step by step through each phase of preparation stressing key concepts, pointers and procedures. Company
Secretaryship being a professional course, the examination standards are set very high, with emphasis on
knowledge of concepts, applications, procedures and case laws, for which sole reliance on the contents
of this study material may not be enough. Besides, as per the Company Secretaries Regulations, 1982,
students are expected to be conversant with the amendments to the laws made upto six months preceding
the date of examination. The material may, therefore, be regarded as the basic material and must be
read alongwith the original Bare Acts, Rules, Orders, Case Laws, Student Company Secretary e-bulletin
published and supplied to the students by the Institute every month as well as recommended readings
given with each study lesson.
The subject of Direct Tax Law & Practice is inherently complicated and is subjected to constant refinement
through new primary legislations, rules and regulations made thereunder and court decisions on specific
legal issues. It therefore becomes necessary for every student to constantly update himself with the various
changes made as well as judicial pronouncements rendered from time to time by referring to the Institutes
journal ‘Chartered Secretary’ and ‘Student Company Secretary e-bulletin’ as well as other law/professional
journals on direct tax laws. The purpose of this study material is to impart conceptual understanding to the
students of the provisions of the Direct Tax covered in the Syllabus. This study material has been updated
upto 31st December, 2019 and contains relevant amendments made by Finance Act, 2019 applicable for
the Assessment Year 2020-21. This is relevant for students appearing in June, 2020 session onwards.
However, it may so happen that some developments might have taken place during the printing of the
study material and its supply to the students. The students are therefore, advised to refer to the Student
Company Secretary e-bulletin and other publications for updation of the study material. In the event of any
doubt, students may write to the Institute at [email protected] for clarification.
Although care has been taken in publishing this study material yet the possibility of errors, omissions
and/or discrepancies cannot be ruled out. This publication is released with an understanding that the
Institute should not be responsible for any errors, omissions and/or discrepancies or any action taken in
that behalf. Should there be any discrepancy, error or omission noted in the study material, the Institute
shall be obliged if the same are brought to its notice for issue of corrigendum in the Student Company
Secretary e-bulletin.
These are for practice purpose only, not to be sent to the institute.
There is open book examination for this Elective Subject of Professional Programme. This is to inculcate
and develop skills of creative thinking, problem solving and decision making amongst students of its
professional programme and to assess their analytical ability, real understanding of facts and concepts
and mastery to apply, rather than to simply recall, replicate and reproduce concepts and principles in the
examination.
Note: This study material is based on Finance Act, 2019 applicable for Assessment Year 2020-21
and is useful for students appearing in June, 2020 session onwards. The students are expected
to update themselves from reference materials available on the Academic Corner of ICSI website.
The students may also update themselves of the latest developments, notifications and circulars
on Direct Tax from www.incometaxindia.gov.in.
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PROFESSIONAL PROGRAMME – DIRECT TAX LAW
& PRACTICE
An income tax is a tax that governments impose on income generated by businesses and individuals within
their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations.
Income taxes are a source of revenue for governments. They are used to fund public services, pay government
obligations, and provide goods for citizens.
Income Tax Act, 1961 provides for levy, administration, collection and recovery of Income Tax. It provides
progressive rate schedule, exemption limits, and incorporates number of incentive provisions. It provides sound
tax system. Rate schedule & Exemption limits are prescribed by Finance Act.
Indian tax legislative and judicial environment is constantly evolving, along with globalization, economic shifts,
and operational adjustments. Businesses are faced with a tax regime with greater complexities and challenges,
nonetheless moving towards a globally cohesive tax world. Now, more than ever, businesses must have an
ongoing system for adapting to and staying on top of these complex changes.
The tax laws of the country undergo significant changes every year on the passing of Annual Finance Act. Apart
from the amendments coming out every year through the Finance Act, there are circulars / notifications issued
by the CBDT / CBEC to implement the provision of the act, clarifying the scope of the provision.
The study material contains detailed provisions related to Direct Taxes and comprises of Total 12 lesson. The
broad coverage of the lessons is summarized in the below chart.
An Overview of Income Tax Act, 1961

[Lesson 1]
Computation of Computation of Computation of Computation of Computation of

Income under the Income under the Income - Profits Income under the Income from Other
head of Salary head of House and Gains from head of Capital Sources
[Lesson 2] Property Business and Gains [Lesson 6]
[Lesson 3] Profession [Lesson 5]
[Lesson 4]
Clubbing provisions, Set Off and/or Carry Forward of Losses, Deduction,

Rebate and Relief
[Lesson 7]
TDS/TCS, Returns, Refund & Recovery

[Lesson 9]
Computation of
Total Income Tax Planning & Tax Management
and [Lesson 10]
Tax Liability
[Lesson 8]
International Taxation – An Overview
[Lesson 11]
Recent Case Laws

[Lesson 12]
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ROLE OF COMPANY SECRETARIES IN DIRECT TAX LAW
The Company Secretaries as experienced tax professionals can assist in resolving various challenges such as
keeping abreast with tax regulations, efficiently manage compliances, address uncertain tax positions, among
many others. The Company Secretaries can provide with an insight into how to best work to meet the business
needs.
The following are the key important areas under the direct tax regime where a Company Secretaries can play
a vital role.
Tax
Compliance
Role of
Company
Secretaries
Representation Advisory
Services Role
Tax Compliance : As the complexities of businesses increase, the amount of time spent by professionals in
cracking up the law codes increases. However, tax and regulatory systems of even the most developed countries
cannot keep pace with the developments across each industry as businesses emerge day by day. These also
bring out the requirements for new compliances and the challenges of meeting them every single day. More
detailed Income Tax Return forms including disclosures on tax residency certificates and details of foreign
assets, and higher penalties for non disclosures require businesses to gear up for efficient tax compliance.
Following are the areas or avenues where company secretaries can assist client:
l Assist in obtaining Permanent Account Number ‘PAN No.’ Tax Deduction / Collection Account Number
‘TAN No.’
l Filling of Income tax Returns
l Filling of TDS / TCS returns
l Tax Payroll assistance
l Income tax clearance certificate
l Tax Residency Certificate
Advisory : Corporate taxation is an essential aspect of doing business in India and its importance cannot be
undermined. The Company Secretaries can provide the corporate tax advisory services in the following areas:
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l Establishing tax efficient Indian business presence for an MNC.
l Planning a heavy capital outlay in the existing business
l Addressing concerns about cash flow and examining tax inefficiencies
l Ensuring that the tax function is aligned with the business plan
l Assessing the impact of any tax and regulatory changes/ amendments
Representation Services : The Appellate hierarchy in India consists of assessing officer, first appellate authority,
Appellate Tribunal, High Court and Supreme Court. The Company Secretaries can provide the following range
of services comprise of:
l Assisting in filing appeals before the appellate authorities and complying with appellate requirements
and procedure
l Determining the appeal strategy and approach and drafting of legal submissions
l In-house service of the expert counsel with experience in representation before appellate authorities
l Advising on the course of action to be adopted before revenue authorities to mitigate the risk of penal
consequences
l Reviewing pending litigation and other uncertain tax positions, to comment on adequacy of defense,
probability of success and prevention of recurrence
l Assisting the external legal counsel in preparing or representing for appeals, writ petition and special
leave petition before the Supreme Court and court subordinate to it (High Court)
Note : The Study material is based on the provisions of income tax law as amended by the Finance Act,
2019. The study has been updated till 31st December, 2019. The computational / practical problems
have been solved on the basis of the provisions of income tax laws applicable for AY 2020-21 i.e. FY
2019-20. The study material is relevant for the students for June, 2020 examinations onward.
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Module 3
Elective Paper 9.5
Direct Tax Law & Practice (Max Marks 100)
SYLLABUS
Objective
To provide advanced knowledge on practical application of Direct Tax Practice.
Detailed Contents
1. An Overview of Income Tax Act, 1961 : Background, Important definitions, Residential Status, Basis
of Charge, Scope of Total Income, Tax Rates in accordance with the applicable Finance Act for the
relevant assessment year.
2. Computation of Income under the head of Salary : Salary – Coverage, Employer and Employee
Relationship, Allowances, Monetary and Non-Monetary Perquisites – Valuation and Taxability, Profits
in lieu of Salary, Deductions against Salary, Incomes exempt from Tax and not includible in ‘Salary’,
Deduction to be made from salary in respect of Provident Fund under the provisions of the Provident
Fund and Miscellaneous Provisions of Act 1952 and tax treatment of employers’ contribution to
Provident Fund, Tax Deducted at Source on Salary Income and Compliances, Practical Case Studies.
3. Computation of Income under the head of House Property : Chargeability, Owner of house property,
Determination of Annual Value, Deduction from Net Annual Value, Treatment of Unrealized Rent,
Arrears of Rent, Exemptions, Computation of Income from a let out House Property, Self-Occupied
Property, Practical Case Studies.
4. Computation of Income – Profits and Gains from Business and Profession : Profits and Gains
from Business and Profession: Business and Profession – An overview, Chargeability, Profits and
Losses of Speculation Business, Deductions Allowable, Expenses Disallowed, Deemed Profits u/s 41,
Maintenance of Accounts, Tax Audit, Presumptive Base Taxation, Practical Case Studies.
5. Computation of Income under the head of Capital Gains : Chargeability, Capital Gains, Capital
Assets & Transfer, Types of Capital Gains, Mode of Computation of Capital Gains, Exemptions and
Deduction, Special Provision – Slump Sale, Compulsory Acquisition, Fair Market Value, Reference to
valuation officer, Practical Case Studies.
6. Computation of Income from Other Sources : Taxation of Dividend u/s 2(22)(a) to (e), Provisions
relating to Gifts, Deductions, Other Miscellaneous Provisions, Practical Case Studies.
7. Exemptions/Deduction, Clubbing provisions, Set Off and/or Carry Forward of Losses, Rebate
and Relief : Income’s not included in Total Income, Tax holidays, Clubbing of Income, Aggregation
of Income, Set off and/or Carry forward of losses, Deductions (General and Specific), Rebates and
Reliefs.
8. Computation of Total Income and Tax Liability
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9. TDS/TCS, Returns, Refund & Recovery : Tax Deduction at Source ‘TDS’ & Tax Collection at Source
‘TCS’, Advance Tax &Self-Assessment Tax ‘SAT’, Returns, Signatures, E-Filing, Interest for default in
furnishing return of Income, Collection, Recovery of Tax, & Refunds, Assessment, Appeals, Revisions,
Settlement of Cases, Penalties etc., Assessment, Appeals & Revisions, Settlement of Cases, Penalties,
Offences & Prosecution, Practical Case Studies.
10. Tax Planning & Tax Management : Tax Planning, Tax Management and Tax avoidance though
legitimate tax provisions, Various Avenues, Practical Case Studies.
11. International Taxation – An Overview : Double Taxation Avoidance Agreement ‘DTAA’, Residency
Issues, Tax Heaven, Controlled Foreign Corporation (CFC), Concept of Permanent Establishment,
Business Connection, General Anti Avoidance Rules ‘GAAR’, Advance Ruling – Practical Aspect,
Transfer Pricing –An Overview, Practical Case Studies.
12. Recent Case Laws : Practical Case Studies, Case Laws, Case Studies & Practical Aspects.
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LESSON WISE SUMMARY
Lesson 1: An Overview of Income Tax Act, 1961

The taxes are the basic source of revenue for the Government. Revenue raised from the taxes are utilized
for meeting expense of Government like, provision for education, infrastructure facilities such as roads,
dams etc. Taxes are broadly divided into two parts i.e. direct taxes and indirect taxes. The tax that is levied
directly on the income or wealth of a person is called direct tax. Income tax is one of form of direct taxes.
The levy of income tax in India is governed by the Income Tax Act, 1961 and Income Tax Rules, 1962. It is
charged on the Total Income and to derive the total income one must know certain concepts of the Income
Tax Act, such as residential status, assessment year, previous year, assessee etc. Income tax is leviable
on taxable income and to determine taxable income, residential status of the person and scope of total
income are the initial steps.
The coverage of the lesson would include:
• Constitutional Provision
• Some basic concepts like assessment year, previous year, income, person, assessee
• Basic steps in the calculation of tax liability
• Determination of Residential Status of a person
• Scope of total income
• Rates of Tax
• Concept of Marginal Relief
• Concept of Place of Effective Management ‘POEM’
Lesson 2: Computation of Income under the head of Salary

Section 14 of the Income Tax Act, 1961 enumerates the heads of income under which the income of an assessee
will fall. The rules for computing income and the permissible deductions under different heads of income, are
dealt in different sections of the Act. The heads of income, along with their corresponding set of sections for the
purpose of computation of income, are given below:
(A) Salaries (Sections 15 to 17)
(B) Income from house property (Sections 22 to 27)
(C) Profits and gains of business or profession (Sections 28 to 44D)
(D) Capital gains (Sections 45 to 55A)
(E) Income from other sources (Sections 56 to 59)
The coverage of the lesson would include the computation of income under the head salaries, the deductions,
exemptions available while computing income under the head from salaries.
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Lesson 3: Computation of Income under the head of House Property
The provisions for computation of Income from house property are covered under sections 22 to 27 of the
Income Tax Act, 1961. Section 22 of the Act is the charging section that identifies the basis of charge wherein
the annual value is prescribed as the basis for computation of Income from House Property. The process of
computation of “Income from House Property” starts with the determination of annual value of the property.
The concept of annual value and the method of determination are laid down in section 23. The admissible
deductions available from house property are mentioned in section 24.
The coverage of the lesson would include the computation of income under the head of House Property. The
conditions to be satisfied for income to be chargeable under this head. How to determine the annual value
of different type of house properties, admissible deductions and inadmissible deductions from annual value,
tax treatment of unrealized rent, who are deemed owners, what is meant by co-ownership and what is its tax
treatment etc.
Lesson 4: Computation of Income - Profits and Gains from Business and Profession
The provisions for computation of Income from Business or Profession are applicable for Persons who are not
in employment and earn income being their own masters. There are many deductions allowed to such persons
from their Income but there also many conditions for allowability of the same.
The coverage of the lesson would include:
• The incomes chargeable under the head Business or Profession.
• The expenses which are admissible / inadmissible while computing the Income from Business or
Profession.
• Certain receipts deemed to be Income chargeable to tax under this head.
• Deductions allowable on actual payment basis.
• Assessee’s who are required to compulsorily maintain Books of Accounts.
• Compulsory Audit of Accounts
Lesson 5: Computation of Income under the head of Capital Gains

The provisions for computation of Income from Capital Gains are applicable for incomes from transfer of Capital
Asset. The broad coverage of the lesson would include:
• Chargeability of Income under Capital Gains [Section 45(1)]
• Definition of Capital Asset [Section 2(14)] , Transfer [Section 2(47)]
• Computation of Short term and long-term capital gains
• Special cases of computation of capital gains e.g. Slump Sale, Destruction, and Compulsory Acquisition
etc
• Certain transfers not treated as transfer [Section 47]
• Special cases of computation of full value of consideration [Section 50C / Section 50D]
• Reference to Valuation Officer [Section 55A]
• Exemptions from Capital Gains
• Tax rates of Capital Gains
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Lesson 6: Computation of Income from Other Sources
Income which are not chargeable under the previous four heads and which are not exempt u/s 10, must be
charged to tax as “Income from other sources”. In addition to the taxation of income not covered by the other
heads, Section 56(2) specifically provides certain items of incomes as being chargeable to tax under the head
in every case.
The broad coverage of the lesson would include:
• The income which are chargeable under the head income from other sources,
• Taxability of Dividend
• Taxability of Casual Incomes
• Deductions admissible / inadmissible while computing under income the under head of Other sources.
• Provisions of taxability of gift in kind or in cash from relative or unrelated persons.
Lesson 7: Clubbing provisions, Set Off and/or Carry Forward of Losses, Deduction, Rebate
and Relief
• Income which does not form part of the total income.
• The applicability of Clubbing Provisions
• The Provisions related to Set Off and / OR Carry Forward of Losses
• The provisions related to various deductions available while computing income
• The provisions related to Rebate and Relief
Lesson 8: Computation of Total Income and Tax Liability

Income tax being direct tax is a major source of revenue for the Central Government. The entire amount of
income tax collected by the Central Government is classified under the head:
(a) Corporation Tax (Tax on the income of the companies) and
(b) Income Tax (Tax on income of the non-corporate assesses).
This lesson is divided into two parts i.e.
1) Computation of taxable income and tax liability of corporate entity and
2) Computation of taxable income and tax liability of non-corporate entities.
Lesson 9: TDS/TCS, Returns, Refund & Recovery

The Income-tax Act provides for collection and recovery of income-tax in the following ways, namely,
(i) Deduction of tax at source
(ii) Advance payment of income-tax before the assessment by the assessee himself;
(iii) Self-assessment tax
(iv) payment made after the assessment is made by the Assessing Officer.
Once the tax is deducted, it is duty to deposit the same to the credit of the Central Government under prescribed
procedures stated under the Income Tax Act, 1961.
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The procedure under the Income-tax Act for making an assessment of income begins with the filing of
a return of income. Section 139 of the Act contains the relevant provisions relating to the furnishing of a
return of income. On the basis of return of income the income tax authority makes the assessment. Further,
the Income-tax Act provides for various remedies to an assessee on completion of the assessment. The
main remedies available to an assessee on completion of the assessment are Appeals, Revision, and
Rectification.
• The provisions related to tax deducted at source and tax collected at source
• The provisions related to Returns, Signature – E-Filing
• The provisions related to Fee and Interest, collection and recovery of tax
• The provisions related to Assessment, Appeal, Revision etc.
Lesson 10: Tax Planning & Tax Management

Tax planning is an activity undertaken to minimize tax liability through the best use of all available allowances,
deductions, exclusions, exemptions etc., while Tax management consists of steps taken to comply with Income
Tax law e.g. maintaining of books of account, computing the income , deposit of tax, filing of returns etc.
• The meaning of tax planning, tax avoidance and tax evasion and their difference
• The tools of tax planning
• Major areas of tax planning
Lesson 11: International Taxation – An Overview

After the liberalization of Indian economy and easing of restrictions on the entry of foreign entities, cross border
business transactions have increased manifold. With the ratification of WTO by the Government of India, our economy
has become robust and an atmosphere has sprung up where FII investments in India have increased tremendously. All
these economic activities has ramifications for tax laws of the country. Issues like tax havens, transfer pricing, double
taxation, WTO, Subpart F, etc. are required to be taken care of and have become part and parcel of international
taxation regime.

• The need for double taxation relief
• The type of double taxation
• The Residency Issues – Determining Residential Status in cases of Duel Residency
• Concept of Tax Heaven
• Concept of Controlled Foreign Corporation ‘CFC’
• The concept of Permanent Establishment ‘PE’ and Business Connection ‘BC’ under double taxation avoidance
agreements and its relevance
• The impermissible avoidance agreements and its consequences?

• Transfer Pricing provisions in the Income Tax Act, 1961
• Meaning and scope of the term ‘Advance Ruling’ and the need for obtaining Advance Ruling
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Lesson 12: Recent Case Laws
Tax is a Dynamic law and is always evolving. Law makers try to cover every situation while formulating the
law. However, sometimes certain situations cannot be foreseen. This situation creates conflicts between the
Assessee and the Department. Here the role of the courts comes into picture. It is therefore important to study
the Judicial decisions as it helps to interpret the law in a better manner. The broad coverage of the lesson would
include the Latest Supreme Court and High Court Judgements.
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LIST OF RECOMMENDED BOOKS
PROFESSIONAL PROGRAMME – DIRECT TAX LAW & PRACTICE
MODULE 3 – ELECTIVE PAPER - 9.5
READINGS
1. Bharat’s Law House – Income Tax Act
2. Bharat’s Law House – Income Tax Rules
3. Taxmann’s – Income Tax Act
4. Taxmann’s – Income Tax Rules
5. Taxmann’s – Yearly Tax Digest and Referencer
6. Dr. Vinod K. Singhania & Dr. Kapil Singhania – Direct Tax Laws and Practice [Taxmann’s]
7. D. P. Mittal – Indian Double Taxation Agreements & Tax Laws
8. Dr. Girish Ahuja & Dr. Ravi Gupta – Direct Tax Laws and Practice [Wolters Kluwer]
9. Dr. Vinod K Singhania – Direct Taxes Ready Reckoner [Taxmann’s]
10. CA. Atin Harbhajanka – Tax Laws and Practice [Bharat Law House]
11. Circular’s – https://www.incometaxindia.gov.in/Pages/communications/circulars.aspx
12. Notification’s – https://www.incometaxindia.gov.in/Pages/communications/notifications.aspx
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ARRANGEMENT OF STUDY LESSON
Module-3 – Elective Paper-9.5

S.No. Lesson Tittle
1. An Overview of Income Tax Act, 1961

2. Computation of Income under the head of Salary
3. Computation of Income under the head of House Property
4. Computation of Income - Profits and Gains from Business and Profession
5. Computation of Income under the head of Capital Gains
6. Computation of Income from Other Sources
7. Clubbing provisions, Set Off and/or Carry Forward of Losses, Deduction, Rebate and Relief
8. Computation of Total Income and Tax Liability
9. TDS/TCS, Returns, Refund & Recovery
10. Tax Planning & Tax Management
11. International Taxation – An Overview
12. Recent Case Laws
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CONTENTS
LESSON 1
AN OVERVIEW OF INCOME TAX ACT, 1961
INTRODUCTION AND CONSTITUTIONAL PROVISION 3
IMPORTANT DEFINITIONS 9
INCOME [SECTION 2(24)] 14
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF AN ASSESSEE 17
TAX RATES FOR AY 2020-21 19
REBATE [SECTION 87A] 23
RATES OF SURCHARGE 23
MARGINAL RELIEF 24
CASE STUDIES 25
DETERMINATION OF RESIDENTIAL STATUS [SECTION 6] 28
GUIDING PRINCIPLES FOR DETERMINATION OF “POEM” OF A COMPANY 35
SCOPE OF TOTAL INCOME [SECTION 5] 39
INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [SECTION 9] 40
DIVERSION OF INCOME V/S APPLICATION OF INCOME 44
CASE STUDY 46
INCOME WHICH DO NOT FROM PART OF TOTAL INCOME 47
LESSON ROUND UP 61
SELF TEST QUESTIONS 62
LESSON 2
COMPUTATION OF INCOME UNDER THE HEAD OF SALARY
INTRODUCTION 64
EMPLOYER-EMPLOYEE RELATIONSHIP 64
BASIS OF CHARGE 65
SALARY, PERQUISITE AND PROFITS IN LIEU OF SALARY [SECTION 17] 67
ALLOWANCES 72
PERQUISITES 76
DEDUCTION [SECTION 16] 81
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RELIEF [SECTION 89] 81
CASE STUDY 83
LESSON ROUND UP 86
SELF-TEST QUESTIONS 86
LESSON 3
COMPUTATION OF INCOME UNDER THE HEAD OF HOUSE PROPERTY [SECTION 22 TO 27]
INTRODUCTION 91
BASIS OF CHARGE [SECTION 22] 91
PROPERTY HELD AS A STOCK IN TRADE [SECTION 23(5)] 92
TAXATION OF INCOME FROM PROPERTIES SITUATED OUTSIDE INDIA 92
DISPUTED OWNERSHIP 92
TREATMENT OF COMPOSITE RENT 92
CASES WHERE INCOME FROM HOUSE PROPERTY IS EXEMPT FROM TAX 93
DEEMED OWNER [SECTION 27] 94
HOW TO COMPUTE INCOME FROM HOUSE PROPERTY 95
DETERMINATION OF ANNUAL VALUE [SECTION 23] 96
MUNICIPAL TAXES [PROPERTY TAXES] 97
COMPUTATIONOF“INCOMEFROMHOUSE PROPERTY” FOR DIFFERENTCATEGORIESOF PROPERTY 97
DEDUCTIONS [SECTION 24] 107
TAXABILITY OF RECOVERY OF UNREALISED RENT & ARREARS OF RENT RECEIVED 108
INADMISSIBLE DEDUCTIONS [SECTION 25] 110
TREATMENT OF INCOME FROM CO-OWNED PROPERTY [SECTION 26] 110
TREATMENT OF INCOME FROM PROPERTY OWNED BY A PARTNERSHIP FIRM 110
CASE STUDY 115
LESSON ROUND UP 119
SELF-TEST QUESTIONS 120
LESSON 4
COMPUTATION OF INCOME – PROFITS AND GAINS FROM BUSINESS AND PROFESSION
KEY SECTIONS COVERED IN THIS CHAPTER 124

CHARGEABILITY [SECTION 28] 125
COMPUTATION OF INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION 128
DISALLOWANCES 164
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DEEMED PROFITS CHARGEABLE TO TAX [SECTION 41] 172
MAINTENANCE OF ACCOUNTS BY PERSONS CARRYING ON PROFESSION OR BUSINESS 173
COMPULSORY AUDIT OF ACCOUNTS [SECTION 44AB] 175
COMPUTATION OF P/G/B/P ON PRESUMPTIVE BASIS 175
QUESTIONS FOR PRACTICE 179
LESSON ROUND UP 191
SELF TEST QUESTION 192
LESSON 5
COMPUTATION OF INCOME UNDER THE HEAD OF CAPITAL GAINS

CHARGING SECTION [SECTION 45(1)] 200
CAPITAL ASSET [SECTION 2(14)] 201
TRANSFER [SECTION 2(47)] 202
TYPES OF CAPITAL GAINS 203
COMPUTATION OF CAPITAL GAINS [SECTION 48] 204
COST OF ACQUISITION [SECTION 55(2)] 205
COST OF IMPROVEMENT [SECTION 55(1)] 207
COMPUTATION OF CAPITAL GAINS IN CERTAIN CASES 208
SLUMP SALE [SECTION 50B] 214
DISTRIBUTION OF ASSETS BY COMPANY TO ITS SHAREHOLDERS IN LIQUIDATION 216
[SECTION 46(1)]
CAPITAL GAIN ON PURCHASE BY COMPANY OF ITS OWN SHARE/SPECIFIED SECURITIES 217
TRANSACTIONS NOT REGARDED AS TRANSFER [SECTION 47] 218
REFERENCE TO VALUATION OFFICER [SECTION 55A] 223
FULL VALUE CONSIDERATION FOR REAL ESTATE TRANSACTIONS [SECTION 50C] 224
FULL VALUE OF CONSIDERATION FOR TRANSFER OF SHARE OTHER THAN QUOTED SHARE 225
FAIR MARKET VALUE DEEMED TO BE FULL VALUE OF CONSIDERATION IN CERTAIN CASES 226
INCOME EXEMPT FROM TRANSFER OF CERTAIN CAPITAL ASSETS [SECTION 10(38)] 226
TAX RATES ON CAPITAL GAINS FOR AY 2020-21 227
EXEMPTIONS FROM CAPITAL GAINS [SECTION 54 to 54H] 229
LESSON ROUNDUP 234
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LESSON 6
COMPUTATION OF INCOME FROM OTHER SOURCES

CHARGING SECTION [SECTION 56(1)] 238
TAXATION OF DIVIDEND [SECTION 115O] 239
DIVIDEND [SECTION 2(22)] 240
TAX TREATMENT OF DIVIDEND IN THE HANDS OF SHAREHOLDER 241
TAX ON DISTRIBUTED INCOME TO SHAREHOLDERS [SECTION 115QA] 242
TAXATION OF INCOME RECEIVED FROM MUTUAL FUNDS & UTI 243
CASUAL INCOME 243
INTEREST INCOME 243
INCOME FROM LETTING OF MACHINERY, PLANT OR FURNITURE BELONGING TO ASSESSEE 244
SUM RECEIVED UNDER KEYMAN INSURANCE POLICY INCLUDING BONUS 245
TAXATION OF GIFTS 246
OTHER MISC. PROVISIONS 249
DEDUCTIONS AVAILABLE FROM INCOME UNDER OTHER SOURCES [SECTION 57] 250
NO DEDUCTION OF FOLLOWING EXPENSES FROM INCOME FROM OTHER SOURCES 251
[SECTION 58]
LESSON ROUND UP 257
LESSON 7
CLUBBING PROVISIONS, SET-OFF AND / OR CARRY FORWARD OF LOSSES, REBATE AND RELIEF
I. CLUBBING PROVISIONS
KEY SECTIONS 263
CLUBBING OF INCOME 263
TRANSFER OF INCOME [SECTION 60] 263
REVOCABLE TRANSFER OF ASSETS [SECTION 61] 263
INCOME OF SPOUSE 264
TRANSFER FOR IMMEDIATE OR DEFERRED BENEFIT OF SON’S WIFE [SECTION 64(1)(viii)] 265
INCOME TO SPOUSE THROUGH A THIRD PERSON [SECTION 64(1)(vii)] 266
CLUBBING OF INCOME OF MINOR CHILD [SECTION 64(1A)] 266
INCOME FROM THE CONVERTED PROPERTY [SECTION 64(2)] 267
xix
SUMMARY OF THE CLUBBING PROVISION 267
RECOVERY OF TAX 270
II. SET OFF AND / OR CARRY FORWARD OF LOSS [SECTION 70 TO 80]
KEY SECTIONS 271
SET-OFF AND CARRY-FORWARD OF LOSSES 272
SET-OFF OF LOSSES FROM ONE SOURCE AGAINST INCOME FROM ANOTHER SOURCE
UNDER THE SAME HEAD OF INCOME [SECTION 70]
SET-OFF OF LOSS FROM ONE HEAD AGAINST INCOME FROM ANOTHER HEAD [SECTION 71] 273
CARRY-FORWARD OF LOSSES 274
TREATMENT OF CARRY FORWARD OF LOSSES OF CERTAIN ASSESSEES 281
SUBMISSION OF RETURN FOR LOSS [SECTION 80] 282
SUMMARY OF PROVISIONS REGARDING CARRY FORWARD AND SET-OFF OF LOSSES 283
III. DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME [SECTION 80C TO 80U]
DEDUCTIONS UNDER CHAPTER VI-A 284
IV. REBATE [SECTION 87A]
REBATE OF INCOME-TAX IN CASE OF CERTAIN INDIVIDUALS [SECTION 87A] 315
V. RELIEF [SECTION 89]
RELIEF WHEN SALARY IS PAID IN ARREARS OR IN ADVANCE [SECTION 89] 315
CASE STUDIES ON CLUBBING OF INCOME 316
CASE STUDY ON CARRY FORWARD AND SET OFF 318
CASE STUDY ON DEDUCTIONS 320
PRACTICAL PROBLEMS 324
LESSON ROUNDUP 328
LESSON 8
COMPUTATION OF TOTAL INCOME AND TAX LIABILITY
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF COMPANIES 334

MINIMUM ALTERNATE TAX (MAT) 341
DIVIDEND DISTRIBUTION TAX [SECTION 115-O] 349
CARBON CREDIT [SECTION 115BG] 352
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF NON CORPORATE ENTITIES 353
ALTERNATE MINIMUM TAX (AMT) [SECTION 115JC] 355
TAXATION OF AN INDIVIDUAL 357
xx
TAXATION OF HINDU UNDIVIDED FAMILIES 358
TAXATION OF FIRMS 363
TAXATION OF CO-OPERATIVE SOCIETIES 370
TAX EXEMPTIONS TO POLITICAL PARTIES (SECTION 13A) 374
ELECTORAL TRUST 374
TAX EXEMPTIONS FOR CHARITABLE TRUSTS AND INSTITUTIONS 375
CASE LAWS 385
PRACTICAL QUESTIONS 391
LESSON ROUNDUP 419
LESSON 9
TDS/TCS, RETURNS, REFUND & RECOVERY
TAX DEDUCTED AT SOURCE 427

TAX COLLECTION AT SOURCE 456
ADVANCE TAX 458
RETURNS 464
PERMANENT ACCOUNT NUMBER (PAN) [SECTION 139A] 470
VERIFICATION OF RETURN [SECTION 140] 475
E-FILING 477
INTEREST FOR DEFAULT IN FURNISHING RETURN OF INCOME [SECTION 234A] 482
COLLECTION & RECOVERY 484
REFUND [SECTION 237] 492
ASSESSMENT 495
APPEALS 503
REVISIONS 514
SETTLEMENT OF CASES 518
PENALTY 527
PROSECUTION 541
LESSON ROUNDUP 544
LESSON 10
TAX PLANNING AND TAX MANAGEMENT
TAX PLANNING 550

xxi
TAX PLANNING AND DOCTRINE OF FORM AND SUBSTANCE 551
SUCCESSFUL TAX PLANNING : TESTS TO BE APPLIED 552
SYSTEM AND METHOD OF TAX PLANNING 552
TAX PLANNING AND RETROSPECTIVE LEGISLATION 552
TAX PLANNING AND ADMINISTRATIVE LEGISLATION 553
LEGAL EFFECT OF A CIRCULAR 553
TAX PLANNING AND SYSTEM OF ADVANCE RULINGS 554
TAX PLANNING AND INTERPRETATION 554
DOCTRINE OF PRECEDENCE 555
TAX PLANNING AND DIVERSION OF INCOME /APPLICATION OF INCOME 556
VARIOUS AVENUES OF TAX PLANNING 557
TAX PLANNING AND MANAGEMENT/INVESTMENT DECISION 566
TAX PLANNING FOR FOREIGN COLLABORATION 567
TAX PLANNING IN CASE OF LOSSES 569
LESSON ROUNDUP 570
LESSON 11
INTERNATIONAL TAXATION – AN OVERVIEW
DOUBLE TAXATION AVOIDANCE AGREEMENT 574

RESIDENCY ISSUE 584
TAX HAVENS 586
CONTROLLED FINANCIAL CORPORATION (CFC) 589
PERMANENT ESTABLISHMENT ‘PE’ 591
BUSINESS CONNECTION ‘BC’ 592
GENERAL ANTI AVOIDANCE RULE 598
TRANSFER PRICING 608
ADVANCE RULING 625
LESSON ROUND UP 630
LESSON 12
RECENT CASE LAWS
1. CIT vs. Mahindra and Mahindra Ltd (Supreme Court) 636

xxii
2. ACIT vs. Bharat V. Patel (Supreme Court) 639
3. CIT vs. Shree Rama Multi Tech Ltd (Supreme Court) 642
4. CIT vs. Chaphalkar Brothers Pune (Supreme Court) 644
5. Hindustan Coca Cola Beverages Pvt. Ltd vs. CIT (Rajasthan High Court) 645
6. CIT vs. Madhur Housing And Development Co (Supreme Court) 648
7. B. A. Mohota Textiles Traders Pvt. Ltd vs. DCIT (Bombay High Court) 649
8. CIT vs. Equinox Solution Pvt. Ltd (Supreme Court) 652
9. Honda Siel Cars India Ltd. v. CIT [2017] (SC) 652
10. Union of India v. Tata Tea and Others (SC) 653
11. Income-tax Officer v. Venkatesh Premises Co-operative Society Ltd. (SC) 654
12. K. Lakshmansa and Co. v. Commissioner of Income-tax (SC) 655
13. Raj Dadarkar and Associates v. Assistant Commissioner of Income Tax (SC) 655
14. Palam Gas Service v. CIT (SC) 656
15. Faurecia Automotive Holding vs DCIT (ITA No. 784/Pun/2015) 657
16. Pr.CIT vs Maruti Suzuki India Limited (Civil Appeal No. 5409 of 2019) (SLP No. 4298 of 2019) (SC) 659
17. Regional Provident Fund Commissioner (II) West Bengal versus Vivekananda Vidyamandir and 661
Others, Civil Appeal No(s). 6221 of 2011, Transfer Case No. (C) No(s). 19 0f 2019
18. Tata Consultancy Service Ltd. Vs ACIT (ITA No. 5713/Mum/2016) 662
LESSON ROUNDUP 663
TEST PAPER
Model Test Papers 667
xxiii
xxiv
Lesson 1 n An Overview of Income Tax Act, 1961 1
Lesson 1
An Overview of Income Tax Act, 1961
LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction and Constitutional Provision Basic Concept : The taxes are the basic source
– Important Definitions of revenue for the Government. Revenue raised
from the taxes are utilized for meeting expense
– Income [Section 2(24)] of Government like, provision for education,
infrastructure facilities such as roads, dams etc.
– Computation of Taxable Income and Tax Taxes are broadly divided into two parts i.e. direct
Liability of an Assessee taxes and indirect taxes. The tax that is levied
directly on the income or wealth of a person is
– Tax Rates AY 2020-21 called direct tax. Income tax is one of form of direct
– Rebate [Section 87A] taxes. The levy of income tax in India is governed
by the Income Tax Act, 1961 and Income Tax
– Rates of Surcharge Rules, 1962. It is charged on the Total Income and
to derive the total income one must know certain
– Marginal Relief concepts of the Income Tax Act, such as residential
– Case Studies status, assessment year, previous year, assessee
etc. Income tax is leviable on taxable income and
– Determination of Residential Status to determine taxable income, residential status
of the person and scope of total income are the
– Individual initial steps. There are two types of taxpayers from
residential point of view.
– Other Person (except company) –
HUF, Firms, AOP/BOI, Local Authority, Resident in India and Non-resident in India.
AJP Sourced based income in India is taxable in India
whether the person earning income is resident or
– Company non-resident. Conversely, foreign sourced income
of a person is taxable in India only if such person
– Guiding Principles of Place of Effective is resident in India. Therefore, the determination of
Management ‘POEM’ the residential status of a person is very significant
in order to find out his tax liability.
– Scope of Total Income
Exemptions: Tax is calculated on the income
– Income deemed to accrue or arise in India
earned in the previous year. For providing relief
[Section 9]
to the tax payers from payment of tax, income
– Case Studies tax law contains certain provisions relating to
– Exemptions: Income which do not from a part exemption and deduction. Exempted income
of Total Income means the incomes which are not charged to tax.
Under Income Tax Act, section 10 provides for
– LESSON ROUND UP incomes which are exempted from levy of income
– SELF TEST QUESTIONS tax for example Scholarship. Further, deduction
means the amount which needs to be included
in the income first and then they are allowed for
deduction in full or in part on fulfillment of certain
conditions. For example, deduction for payment of
1
2 PP-DTL&P
donations under section 80G. Section 10 provides

for various categories of income that are exempt
from tax. At the end of the lessons students will be
able to understand about the income which does
not form part of the total income.
At the end of this lesson, students will be able to
understand:
• Constitutional Provision
• Some basic concepts like assessment
year, previous year, income, person,
assessee
• Basic steps in the calculation of tax liability
• Be able to determine the residential status
of a person
• Be aware of the importance of residential
status for tax purposes
• The scope of total income
• The rates of tax
• Concept of Marginal Relief
• Concept of POEM
• Exemptions Available under Income Tax
Act, 1961
INTRODUCTION AND CONSTITUTIONAL PROVISION

India is a federal union of States with distribution of powers. Articles 245 to 255 of the Constitution of India relate
to legislative relations between the Union and States in the form of distribution of legislative powers between the
Parliament and the Legislature of a State.
Powers to make laws are conferred by Articles 245, 246 and 248 of the Constitution while subject matters of
laws to be made by Parliament and Legislature of a State are listed in Schedule VII to the Constitution.
As per Article 265, No tax shall be levied or collected except by authority of law. Distribution of legislative
powers is stipulated in Article 246 read with Schedule VII of the Constitution of India. There are three lists
in Schedule VII in respect of which Union or State or both will have concurrent power to make laws.
List I Union List comprises of several items or subjects over which the Union i.e. Central Government
has exclusive powers of legislation.
List II State List comprises of several items or subjects over which the State Legislature shall have the
exclusive powers of legislation.
List III Concurrent list Comprises of several items over which the Parliament and the Legislatures of
States shall have concurrent powers of legislation.
Constitution of India
Seventh Schedule
Union List State List Concurrent List
In respect of levy of taxes and duties, Union and States have respective powers under Union List and State List,
the summary of which is provided as under:
1. Tax-related entries in the Union List (List-I of Schedule VII)
Entry No. Particulars
82 Taxes on income other than agricultural income.
83 Duties of customs including export duties.
84 Duties of excise on the following goods manufactured or produced in India, namely :

(a) petroleum crude; (b) high speed diesel; (c) motor spirit (commonly known as petrol);
(d) natural gas; (e) aviation turbine fuel; and (f) tobacco and tobacco products
85 Corporation tax
86 Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and
companies; taxes on the capital of companies.
87 Estate duty in respect of property other than agricultural land.

4 PP-DTL&P
88 Duties in respect of succession to property other than agricultural land.
89 Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway
fares and freights.
90 Taxes other than stamp duties on transactions in stock exchanges and futures markets.
91 Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills
of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies
and receipts.
2. Tax-related entries in the State List (List - II of Schedule VII)
Entry No. Particulars

46 Taxes on agricultural income.
47 Duties in respect of succession to agricultural land.
48 Estate duty in respect of agricultural land.
49 Taxes on lands and buildings.
50 Taxes on mineral rights subject to any limitations imposed by Parliament by law relating
to mineral development.
51 Duties of excise on the following goods manufactured or produced in the State and
countervailing duties at the same or lower rates on similar goods manufactured or
produced elsewhere in India :
(a) alcoholic liquors for human consumption;
(b) opium, Indian hemp and other narcotic drugs and narcotics; but not including
medicinal and toilet preparations containing alcohol or any substance included in sub-
paragraph (b) of this entry.
53 Taxes on the consumption or sale of electricity
54 Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known
as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption,
but not including sale in the course of inter-State trade or commerce or sale in the
course of international trade or commerce of such goods.
56 Taxes on goods and passengers carried by road or on inland waterways.
57 Taxes on vehicles, whether mechanically propelled or not, suitable for use on roads,
including tramcars subject to the provisions of entry 35 of List III.
58 Taxes on animals and boats.
59 Tolls.
60 Taxes on professions, trades, callings and employments.
61 Capitation taxes.
62 Taxes on entertainments and amusements to the extent levied and collected by a
Panchayat or a Municipality or a Regional Council or a District Council
63 Rates of stamp duty in respect of documents other than those specified in the provisions
of List I with regard to rates of stamp duty.
3. Other constitutional provisions:
Article No. Particulars
Article 13 Laws inconsistent with or in derogation of the fundamental rights.
Article 245 Extent of laws made by Parliament and by the Legislatures of States.
Article 246 Subject matter of laws made by Parliament and by the Legislatures of States.
Article 246A 1. Notwithstanding anything contained in articles 246 and 254, Parliament, and,
subject to clause (2), the Legislature of every State, have power to make
laws with respect to goods and services tax imposed by the Union or by such
State.
2. Parliament has exclusive power to make laws with respect to goods and
services tax where the supply of goods, or of services, or both takes place in
the course of inter-State trade or commerce.
Explanation- The provisions of this article, shall, in respect of goods and services tax
referred to in clause (5), of article 279A, take effect from the date recommended by the
Goods and Services Tax Council.’’.
Article 248 Residuary powers of legislation.
Article 265 Taxes not to be imposed save by authority of law.
Article 269 Taxes levied and collected by the Union but assigned to the States.
(1) Taxes on the sale or purchase of goods and taxes on the consignment of goods
except as provided in Article 269A shall be levied and collected by the Government of
India but shall be assigned and shall be deemed to have been assigned to the States
on or after the 1st day of April, 1996 in the manner provided in clause (2).
Article 269A Goods and services tax on supplies in the course of inter-State trade or commerce shall
be levied and collected by the Government of India and such tax shall be apportioned
between the Union and the States in the manner as may be provided by Parliament by
law on the recommendations of the Goods and Services Tax Council.
Explanation: For the purposes of this clause, supply of goods, or of services, or both in
the course of import into the territory of India shall be deemed to be supply of goods,
or of services, or both in the course of inter-State trade or commerce.
Article 270 Taxes levied and distributed between the Union and the States.- (1) All taxes and duties
referred to in the Union List, except the duties and taxes referred to in articles 268,
*268A and 269, respectively, surcharge on taxes and duties referred to in article 271
and any cess levied for specific purposes under any law made by Parliament shall be
levied and collected by the Government of India and shall be distributed between the
Union and the States in the manner provided in clause (2).
Article 271 Surcharge on certain duties and taxes for purposes of the Union.
Article 273 Grants in lieu of export duty on jute and jute products.
Article 274 Prior recommendation of President required to Bills affecting taxation in which States
are interested.
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Article 276 Taxes on professions, trades, callings and employments.
Article 279A 1. The President shall, within sixty days from the date of commencement of
the Constitution (One Hundred and First Amendment) Act, 2016, by order,
constitute a Council to be called the Goods and Services Tax Council.
2. The Goods and Services Tax Council shall consist of the following members,
namely:
(a) the Union Finance Minister - Chairperson;
(b) the Union Minister of State in charge of Revenue or Finance - Member;
(c) the Minister in charge of Finance or Taxation or any other Minister
nominated by each State Government-Members.
The Members of the Goods and Services Tax Council referred to in sub clause (c) of
clause (2) shall, as soon as may be, choose one amongst themselves to be the Vice-
Chairperson of the Council for such period as they may decide.
Article 286 Restrictions as to imposition of tax on the sale or purchase of goods.
Article 289 Exemption of property and income of a State from Union taxation.
Article 298 Power to carry on trade, etc. The executive power of the Union and of each State shall
extend to the carrying on of any trade or business and to the acquisition, holding and
disposal of property and the making of contracts for any purpose.
Article 304 Restrictions on trade, commerce and intercourse among States.
Article 366 Definitions

(6) “corporation tax” means any tax on income, so far as that tax is payable by
companies and is a tax in the case of which the following conditions are fulfilled:-
(a) that it is not chargeable in respect of agricultural income;
(b) that no deduction in respect of the tax paid by companies is, by any enactments
which may apply to the tax, authorised to be made from dividends payable by
the companies to individuals;
(c) that no provision exists for taking the tax so paid into account in computing for
the purposes of Indian income-tax the total income of individuals receiving such
dividends, or in computing the Indian income-tax payable by, or refundable to,
such individuals;
(12) “goods” includes all materials, commodities, and articles;
(12A) “goods and services tax” means any tax on supply of goods, or services or
both except taxes on the supply of the alcoholic liquor for human consumption;’
Income tax being direct tax happens to be one of the major source of revenue for the Central Government. The
entire amount of income tax collected by the Central Government is classified under the head:
1. Corporation Tax (Tax on the income of the companies); and
2. Income tax (Tax on income of the non-corporate assessees)
The classification of Income tax into above two categories is of great assistance to Central Government while
preparing budget estimates and setting the target. It is also important for easy division of tax between the
Central and State Government as the proceeds from Corporation tax are not divisible with the States
[Article 270(1) read with Article (4)(a)].
Income-tax is a tax levied on the total income of the previous year of every person. A person includes an
individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), a firm, a
company etc. The income- tax law in India consists of the following components–
COMPONENTS OF INCOME TAX LAW
Income Tax Act Finance Act Income Tax Rules Circulars/Notifications Legal Decisions of
Courts
The various components of income-tax law are explained below:

1. Income Tax Act 1961: The levy of income-tax in India is governed by the Income-tax Act, 1961. In this
book we shall briefly refer to this as the Act.
• It came into force on 1st April, 1962.
• It contains 298 sections and XIV schedules.
• A section may have sub-sections, clauses and sub-clauses. For example,
 The clauses of section 2 define the meaning of terms used in the Income-tax Act, 1961.
Clause (1A) defines “agricultural income”, clause (1B) defines “amalgamation” and so on.
Likewise, the clauses of section 10 contain the exemptions in respect of certain income,
like clause (1) provides for exemption of agricultural income and clause (2) provides for
exemption of share income of a member of a hindu undivided family and so on.
 Section 5 defining the scope of total income has two sub-sections and (2). Sub-section (1)
defines the scope of total income of a resident and sub-section (2) defines the scope of total
income of a non-resident.
• A section may also have Provisos and Explanations.
 The Proviso(s) to a section/sub-section/clause spells out the exception(s) to the provision
contained in the respective section/sub- section/clause.
 The Explanation to a section/sub-section/clause gives a clarification relating to the provision
contained in the respective section/sub- section/clause.
 For example, Sections 80GGB and 80GGC provides for deduction from gross total income
in respect of contributions made by Indian companies and other persons, respectively, to
political parties or an electoral trust. The proviso to sections 80GGB and 80GGC provide
that no deduction shall be allowed under those sections in respect of any sum contributed by
cash to political parties or an electoral trust. Thus, the proviso to these sections spell out the
circumstance when deduction would not be available thereunder in respect of contributions
made.
• The Explanation below section 80GGC provides that for the purposes of sections 80GGB and
80GGC, “political party” means a political party registered under section 29A of the Representation
of the People Act, 1951. Thus, the Explanation clarifies that the political party has to be a registered
political party.
8 PP-DTL&P
• It undergoes change every year with additions and deletions brought out by the Annual Finance
Act passed by Parliament.
• In pursuance of the power given by the Income-tax Act, 1961 rules have been framed to facilitate
proper administration of the Income-tax Act, 1961.
2. Finance Act: The Finance Act contains necessary amendments in the Direct taxes (e.g. Income tax)
and Indirect taxes (e.g. GST, custom duties) signifying the policy decisions of the Union Government.
3. Computation and assessment of income are basically goverened by the provisions of income
tax Act but tax rates are not provided by the income tax Act and it is given by the Finance Act
every year.
Finance Bill is presented usually in the month of February every year and this bill contains amendments
in direct as well as indirect taxes. It is usually presented in the Parliament by the Finance Minister.
The finance bill is passed by both the houses of Parliament after it is being tabled and necessary
recommendation/amendments have been made in it. Once this bill has been passed by the Parliament,
it goes to the President for his assent. After President’s assent, the finance bill becomes the Finance
Act.
Finance Bill presented by Finance Minister
Recommendations/Suggestions considered and changes made to Finance Bill
Parliament Approval
President’s Approval
Finance Act
The effective date of applicability of provisions of the Finance Act is usually mentioned in the notification
in the official gazette or in the Act itself. Generally, the amendments by the Finance Act are made
applicable from the first day of the next financial year e.g. most of the amendments by Finance Act,
2019 are effective from 1st April, 2019.
Effective dates of amendments in Finance Bill
Direct Taxes Indirect Tax Taxes
Usually Date of Notification in Usually Midnight of date of

Official Gazette or in the Finance Act Presentation of Finance Bill
The First schedule to the annual Finance Act is divided into four parts:
 Part I of the First Schedule to the Finance Act specifies the rates of income tax for respective
assessees applicable for the current Assessment Year.
 Part II specifies the rates at which tax is deductible at source for the current Financial Year.
 Part III gives the rates for calculating income-tax for deducting tax from income chargeable under
the head “Salaries” and computation of advance tax.
 Part IV gives the rules for computing net agricultural income.
4. Income Tax Rules, 1962
• The CBDT is empowered to make rules for carrying out the purposes of the Act.
• For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time to
time. These rules are collectively called Income-tax Rules, 1962.
• It is important to keep in mind that along with the Income-tax Act, 1961, these rules should also
be studied.
5. Circulars and Notifications
Circulars
• Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify
doubts regarding the scope and meaning of certain provisions of the Act.
• Circulars are issued for the guidance of the officers and/or assessees.
• The department is bound by the circulars. While such circulars are not binding on the assessees, they
can take advantage of beneficial circulars.
Notifications
• Notifications are issued by the Central Government to give effect to the provisions of the Act.
6. Case Law
The study of case laws is an important and unavoidable part of the study of income-tax law. It is
not possible for Parliament to conceive and provide for all possible issues that may arise in the
implementation of any Act. Hence the judiciary will hear the disputes between the assessees and the
department and give decisions on various issues.
The Supreme Court is the Apex Court of the country and the law laid down by the Supreme Court is the
law of the land. The decisions given by various High Courts will apply in the respective states in which
such High Courts have jurisdiction.
IMPORTANT DEFINITIONS
In order to understand the provisions of the Act, one must have a thorough knowledge of the meanings of
certain key terms like ‘person’, ‘assessee’, ‘income’, etc. To understand the meanings of these terms we have
to first check whether they are defined in the Act.
Terms defined in the Act: Section 2 gives definitions of the various terms and expressions used therein. If a
particular definition is given in the Act itself, we have to be guided by that definition.
Terms not defined under the Act: If a particular definition is not given in the Act, reference can be made to the
General Clauses Act or dictionaries.
Some of the important terms defined under section 2 are given below:
10 PP-DTL&P
Assessment 1. Period starting from April1 and ending on March 31 of the next year.
year
2. Income of previous year of an assessee is taxed during the next following
[Section 2(9)]
assessment year.
3. It is always a period of 12 months.
4. Income is a concept of flow, it means it cannot be taxed as and when it accrue or
arised, hence we need period of income and after that period we need time for
assessment of tax on the income so earned in that period.
5. That’s why there is a concept of previous year and assessment year. In previous
year income is earned and “assessed and taxed in assessment year”.
Previous year 1. Previous year means the previous year as defined in section 3;
[Section 2(34)]
2. As per section 3 “previous year” means the financial year immediately preceding
the assessment year.
3. Year in which income is earned is known as previous year.
4. All assessee required to follow financial year (i.e. April 1 to March 31) as the previous
year.
Previous year 1. The first previous year commences on the date of setting up of the business/
in the case of profession or the date on which the source of income newly comes into existence
newly set-up and ends on the immediately following March 31.
business/ 2. The first previous year is a period of 12 months or less than 12 months. It can never
profession. exceed 12 months.
3. The second and subsequent previous years are always of 12 months each (i.e.
April to March.)
Rule – Income of a previous year is taxable in the immediately following assessment year.
Exceptions –
Exception to 1. Income of a non-resident from shipping. [Section 172]
the previous
(7.5% is taxable portion)
year rule
2. Income of persons leaving India either permanently or for a long period of time.
[Section 174]
3. Income of bodies formed for short durations. [Section 174A]
4. Income of a person trying to alienate his assets with a view to avoiding payment of
tax; and [Section 175]
5. Income of a discontinued business. [Section 176]
It means in above stated exceptions(circumstances) such incomes are liable to be
taxed and assessed in the year in which it is / was earned rather than in assessment
year.
Previous 1. Cash Credits [Section 68]

year for
2. Unexplained Investments [Section 69]
undisclosed
sources of 3. Unexplained money etc. [Section 69A]
income 4. Amount of investments etc., not fully disclosed in the books of account [Section
69B]
5. Unexplained expenditure [Section 69C]
6. Amount borrowed or repaid on hundi [Section 69D]
Taxation of Cash Credits, Unexplained Money, Investments, etc. [Section 115BBE]
(a) Unexplained amounts treated as income under sections 68, 69, 69A, 69B, 69C
and 69D of the Act will now be taxed at a flat rate of 60% (plus surcharge@25%
of tax and cess @4 % of tax and surcharge) without granting any deduction
of expenditure or allowance there against. Thus, the effective rate of tax is
78%.
(b) The benefit of threshold exemption and lower slab rates for individuals and HUFs
will not be available to such amounts.
(c) Further, no set off of any loss shall be allowable against income brought to tax
under sections 68 or section 69 or section 69A or section 69B or section 69C or
section 69D.
Person Includes An individual, HUF, company, firm, AOP, BOI, local authority; and every artificial
[Section 2(31)] juridical person not falling above.
Assessee “Assessee” means a person by whom income tax or any other sum of money is payable
[Section 2(7)] under this Act, and includes-
(a) Every person in respect of whom any proceeding under the Act has been taken for
the assessment of his income or the income of any other person in respect of which
he is assessable;
(b) Every person who is deemed to be an assessee under any provision of this Act [u/s
160(2)], or
(c) Every person who is an assessee in default under any provision of this Act under
any provision of this Act [u/s 201(1)].
Definition of Agricultural Income [Section 2(1A)]

Agricultural Income means:-
a) Any rent or revenue received from land that is situated in India and is used for agricultural purposes
b) Any income received from such land through agricultural operations including processing of the
agricultural produce, raised or received as rent in kind so as to provide it fit for the market , or sale of
such produce
c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any
such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which,
or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried
on :
12 PP-DTL&P
d) Provided that—
(i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the
rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with
the land, requires as a dwelling house, or as a store-house, or other out-building, and
(ii) the land is either assessed to land revenue in India or is subject to a local rate assessed and
collected by officers of the Government as such or where the land is not so assessed to land
revenue or subject to a local rate, it is not situated—
(A) in any area which is comprised within the jurisdiction of a municipality (whether known as
a municipality, municipal corporation, notified area committee, town area committee, town
committee or by any other name) or a cantonment board and which has a population of not
less than ten thousand; or
(B) in any area within the distance, measured aerially:
Aerial distance from municipality* Population as per last preceding

census.
Within 2 kms 10,000 to 1,00,000
Within 6 kms 1,00,000 to 10,00,000
Within 8 kms > Rs. 10,00,000
Note :- For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall
be deemed to be agricultural income (w.e.f. Assessment Year 2009-10).
PARTIALLY INTEGRATED TAXATION OF NON-AGRICULTURAL INCOME WITH AGRICULTURAL

INCOME *
Applicable if the following 3 conditions are satisfied :-
1) The taxpayer is an individual, a HUF, a body of individual, an association of persons or a artificial

juridical person (not applicable in case of a firm, company, co-operative society, etc).
2) The non-agricultural income of the taxpayer exceeds the exemption limit.
3) The taxpayer’s agricultural income exceeds Rs 5,000.
*The clubbing of agricultural income and non-agricultural income as provided by the Finance Act is not
unconstitutional – Union Home Products Ltd. v. Union of India [1995] 215 ITR 758 (Kar.).
CALCULATION OF NET AGRICULTURAL INCOME

The net agricultural income (having net agricultural income in addition to the non-agricultural income) will be
computed as follows:
Rule 1 - Agricultural income of the nature referred in section 2(1A)(a) will be computed on the same basis as is
adopted for the computation of income chargeable under the head “Income from other sources” under sections
57 to 59.
Rule 2 - Agricultural income of the nature referred in section 2(1A)(b) will broadly be computed as if it were
income chargeable to tax under the head “Profits and gains of business or profession” and the provisions of
sections 30 to 32, 36, 37, 40, 40A [other than sub-sections (3) and (4)], 41, 43, 43A, 43B and 43C will apply
accordingly.
Rule 3 - Agricultural income of the nature referred in section 2(1A)(c) will be computed as if it were income
chargeable under the head “Income from house property” under sections 23 to 27.
Rule 4 - Where an assessee derives income from sale of tea grown and manufactured by him in India, 60% of
the total income from such business, as computed in accordance with rule 8 of the Income-tax Rules, will be
regarded as agricultural income.
Rule 5 - Where the assessee is a member of an association of persons or a body of individuals (other
than a Hindu undivided family, a company or a firm) which, in the previous year, has either no income
chargeable to tax or has non-agricultural income not exceeding the maximum amount not chargeable to
tax in the case of an association of persons or a body of individuals, but has agricultural income, then the
agricultural income or loss of the association or body is to be computed in accordance with these rules and
the share of the assessee in the agricultural income or loss so computed will be regarded as agricultural
income or loss of the assessee.
Rule 6 - Loss incurred in agriculture will be allowed to be set off against gains from agriculture. No set off will,
however, be allowed in respect of assessee’s share in agricultural loss of an association of persons or a body
of individuals.
Rule 7 – Deduction will be allowed on any tax levied by a State Government on agricultural income.
Rule 8 - The unabsorbed loss from agricultural activities during the previous years relevant to the assessment
years 2010-11 to 2017-18 will be set off against the agricultural income of assessment year 2018-19 in
chronological order. Likewise, an unabsorbed loss from agriculture during the previous year relevant to the
assessment years 2011-12 to 2018-19 will be taken into account in determining the net agricultural income for
the purpose of payment of advance tax during the financial year 2018-19. The set off of loss will, in either case,
be allowed only if such loss has already been determined. Where a person is succeeded by another person
(otherwise than by inheritance), the person (other than the person who has incurred the loss) cannot claim the
set off as discussed above.
Rule 9 - Where the net result of computation of agricultural income from various sources is a loss, the loss will
be disregarded and the net agricultural income of the assessee shall be taken as nil.
Rule 10 - The net agricultural income of the assessee will be rounded off to the nearest multiple of Rs. 10.
COMPUTATION OF TAX COVERED IN THIS SCHEME

Taxation will be computed in the following manner :-
Step 1 – Net agricultural income is to be calculated as if it were income chargeable to income tax.
Step 2 – Aggregate the agricultural and non-agricultural income of the assessee and income tax is calculated
on the aggregate income as if such aggregate income were the total income.
Step 3 – The income calculated in step 1 is the increased by the the first slab of income on which tax is charged
at nil rate and income tax is calculated on net agricultural income, as if such income were the total income of
the assessee.
Step 4 – The amount of income tax determined in step 2 will be reduced by the amount of income tax determined
in step 3
Step 5 – Then find out the balance. Now deduct rebate under section 87A. Add Surcharge and education cess/
secondary and higher education cess or health education cess.
Step 6 – The amount so calculated is the income tax which is payable by the assessee.
14 PP-DTL&P
INCOME [SECTION 2(24)]

“Income is the consumption and savings opportunity gained by an entity within a specified timeframe, which
is generally expressed in monetary terms. However, for households and individuals, “income is the sum of all
the wages, salaries, profits, interests payments, rents, and other forms of earnings received in a given period
of time.”
In general terms, Income is a periodical monetary return with some sort of regularity. However, the Income Tax
Act, even certain income which does not arise regularly are treated as income for tax purposes e.g. Winnings
from lotteries, crossword puzzles.
The definition of Income as given in Section 2(24) of the Act starts with the word includes therefore the list is
inclusive not exhaustive. The definition enumerates certain items, including those which cannot ordinarily be
considered as income but are treated statutorily as such.
As per section 2(24), the term income includes :
S. No. Income under Section 2(24) Head Of Income
1. Profits and gains PGBP
2. Dividend Other Sources
3. Voluntary contributions received by a trust/institution Generally exempt under Section

created wholly or partly for charitable or religious purposes 11 and 12
or by certain research association or universities and other
educational institutions or hospitals and other medical
institutions or an electoral trust.
4. The value of any perquisite or profit in lieu of salary taxable Salary
5. Any special allowance or benefit specifically granted to Salary (Generally exempt)

the assessee to meet expenses wholly, necessarily and
exclusively for the performance of the duties of an office
or employment of profit.
6. City Compensatory Allowance/ Dearness allowance : Salary

Any allowance granted to the assessee either to meet his
personal expenses at the place where the duties of his office
or employment of profit are ordinarily performed by him or at
a place where he ordinarily resides or to compensate him for
the increased cost of living.
7. Benefit or Perquisite to a Director : The value of any Salary (If as per employment
benefit or perquisite, whether convertible into money or agreement)
not, obtained from a company by. (a) a director, or (b) a
Else under Other Sources (If
person having substantial interest in the company, or (c) a
not in the terms of employment
relative of the director or of the person having substantial
agreement)
interest, and any sum paid by any such company in respect
of any obligation which, but for such payment, would have
been payable by the director or other person aforesaid;
8. Any Benefit or perquisite to a Representative Assessee : Other Sources

The value of any benefit or perquisite (whether convertible
into money or not) obtained by any representative assessee
under Section 160(1) (iii)/(iv) or beneficiary, or any amount
paid by the representative assessee in respect of any
obligation which, but for such payment, would have been
payable by the beneficiary;
9. Deemed profits chargeable to tax under section 28 or section PGBP

41 or section 59
10. Capital Gain : Any capital gains chargeable to tax under Capital Gains
Section 45; since the definition of income in Section 2(24) is
inclusive and not exhaustive capital gains chargeable under
Section 46(2) are also assessable as income.
11. Insurance Profit : The profits and gains of any Insurance PGBP
business carried on by a mutual insurance company or by
a co-operative society computed in accordance with the
provisions of Section 44 or any surplus taken to be such
profits and gains by virtue of the profits contained in the First
Schedule to the Income-tax Act
12. Banking income of a Co-operative Society : The profits PGBP

and gains of any business of banking (including) providing
credit facilities carried on by a cooperative society with its
members.
13. Winnings from Lottery : Any winnings from lotteries, Other Sources
crossword puzzles, races, including horse-races, card-
games and games of any sort or from gambling or betting
of any form.
14. Employees Contribution Towards Provident Fund : Any PGBP if not deposited by the
sum received by the assessee from his employees as assessee to the specified fund
contributions to any provident fund or superannuation fund
or any fund set-up under the provisions of the Employees
State Insurance Act, 1948 (34 of 1948) or any other fund for
the welfare of such employees.
15. Amount Received under Keyman Insurance Policy : Any sum PGBP
received under a Keyman Insurance Policy including the sum
allocated 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 the employee of the first
mentioned person or is or was connected with the business
of the first mentioned person in any manner whatsoever.
16 PP-DTL&P
16. Amount received for not carrying out any activity : Any sum PGBP
referred to in Section 28(va), i.e. any sum, whether received
or receivable in cash or kind, under an agreement for -
(i) not carrying out any activity in relation to any business or

profession; [Amendment vide Finance Act, 2016]
not sharing any know-how, patent, copyright, trade-mark,

license, franchise or any other business or commercial right
of similar nature or information or technique likely to assist
in the manufacture or processing of goods or provision for
services
17. Any sum referred to in clause (v) or (vi) of sub-section (2) of Other sources
section 56
18. Gift received for an amount exceeding Rs. 50,000 : Any sum Other sources
of money or value of property referred to in clause (vii) or
clause (viia) of sub-section (2) of Section 56
19. Any consideration received for issue of shares as exceeds Other sources
the fair market value of the shares referred in section 56(2)
(viib).
20. Amount received as an advance or otherwise in the course Other sources

of negotiation for transfer of a capital asset referred to in
clause (ix) of section 56(2).
21. Any sum of money or value of property received without Other sources
consideration or for inadequate considerationas referred to
in clause (x) of Section 56(2)
22. Any compensation or payment in connection with termination Other sources

of employment as referred under clause
(xi) of Section 56(2).
23. Assistance in the form of a subsidy or grant or cash incentive PGBP

or duty drawback or waiver or concession or reimbursement
(by whatever name called) by the Central Government or
a State Government or any authority or body or agency
in cash or kind to the assessee other than the subsidy or
grant or reimbursement which is taken into account for
determination of the actual cost of the asset in accordance
with the provisions of Explanation 10 to clause (1) of section
43.
CASE STUDIES
APPROPRIATION OF PAYMENT BETWEEN CAPITAL AND INTEREST - Where interest is due on capital
and the creditor gets an open payment from the debtor , the creditor is at liberty to appropriate the payment
towards principal _CIT v.Pateshwari Parsad Singh (1970) 76 ITR 208 (all) if , however , neither the debtor nor
the creditor makes any appropriation of payment as between capital and interest , the income tax department
is entitled to treat the payment as applicable to the outstanding interest and assess it as income _CIT v.
Kameshwar Singh [1993] 1 ITR 94 (PC)
IILEGAL INCOME: The income tax does not make any distinction between income accrued or arisen from
the legal source and income tainted with illegality. By bringing the profits of an illegal business to tax ,the state
does not condone it or take part in crime ,nor does it become a party to the illegality. The assesses might be
prosecuted for the offence and yet to be taxed upon profits arising out of its commission -Mann v. Nash [1932]
1 KB 752 . however any expense incurred by an assesee for any purpose which is an offence or which is
prohibited by law shall not to be deemed to have been incurred for the purpose of business or profession an no
deduction or allowance shall be made in respect of such expenditure .however ,explaination to section 37(1)
is applicable only in case expenditure pertaining to illegal business and not in the case of business loss-T.A
Quereshi v. CIT [2006]157 taxman 514 (SC).
DEVALUATION OF CURRENCY – If an assessee receives extra money on account of devaluation of currency,
it is taxable. If the fund is utilised in the course of business for trading purpose, there will be realisation of the
profit arising on devaluation and the profit would be taxable. If, on the other hand, the fund is not utilized for a
business operation (i.e., for non-trading purpose), like payment of income-tax in the foreign country, there is
no profit and the difference in the exchange value cannot be assessed to income-tax – CIT v. Mogul Line Ltd.
[1962] 46 ITR 590 (Bom.).
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF AN ASSESSEE

Income tax is a charge on the assessee’s income. Income Tax Act lays down the provisions for computing the
taxable income on which tax is to be charged. Taxable income of an assessee / person and tax liability shall be
calculated in the following manner:
1. Determine the residential status of the person as per section 6 of the Act.
2. Calculate the income as per the provisions of respective heads of income. Section 14 classifies the
income under five heads:
(i) Income from salaries (only to be consider for individual)

(ii) Income from House Property
(iii) Profits and gains of business or Profession
(iv) Capital Gains
(v) Income from other sources
3. Consider all the deductions and allowances given under the respective heads before arriving at the
gross income.
4. Exclude the income exempt under section 10 of the Act.
5. Aggregate of incomes computed under the 5 heads of income after applying clubbing provisions and
making adjustments of set off and carry forward of losses is known as Gross Total Income.
6. Deduct there from the deductions admissible under Sections 80C to 80U. The balance is called Total
income. The total income is rounded off to the nearest multiple of Rupees ten (Section 288A).
7. Add agriculture income in the total income calculated in (6) above. Then calculate tax on the aggregate
as if such aggregate income is the Total Income.
18 PP-DTL&P
8. Calculate income tax on the net agricultural income as increased by Rs. 2,50,000/3,00,000/5,00,000 as
the case may be, as if such increased net agricultural income were the total income.
9. The amount of income tax determined under (8) above will be deducted from the amount of income tax
determined under (7) above.
10. Calculate income tax on capital gains under Section 112/112A/111A, and on other income at specified
rates.
11. The balance of amount of income tax left as per (9) above plus the amount of income tax at (10) above
will be the income tax in respect of the total income. Applicable surcharge, if any would be levied.
Marginal relief would be provided in cases where the assessee’s income marginally exceeds the total
income on the basis of which surcharge is leviable and the increase in total tax is more than increase
in total income. Health and Education Cess @ 4% will be applied on tax including surcharge
12. Deduct the following from the amount of tax calculated under (11) above:
– Tax deducted and collected at source.
– Advance tax paid.
– Self Assessment tax
– Double taxation relief.
13. The balance of amount left after deduction of items given in (12) above, shall be the net tax payable
or net tax refundable for the assessee. Net tax payable/refundable shall be rounded off to the nearest
multiple of Ten rupees (Section 288B).
14. 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.
The steps involved for calculation of Taxable Income are discussed in brief as follows:
Particulars Amount (Rs.)
Income (taxable) under the head:
+ Income from Salaries (only for individuals) XXX
+ Income from House Property XXX
+ Profits and gains of business or profession XXX
+ Capital gains XXX
+ Income from other sources XXX
Adjustment in respect of:
+ Clubbing of Income XXX
− Set off and carry forward of losses (XXX)
= Gross Total Income XXX
− Deductions under section 80C to 80U (or Chapter VIA) (XXX)
= Total (Taxable) Income (XXX)

The steps involved for calculation of tax liability are discussed in brief as follows:
Tax on Special Incomes @ specified tax rates (Long term capital gains @ 20%/10% ; ***
Casual Income @ 30% and Short term capital gains (on Securities transaction tax paid
securities) @ 15%;
Add: Tax on Balance Income @ Slab Rate/Flat Rate (as applicable on assessee) ***
Total Tax (subject to MAT and AMT as the case may be)* ***
Less: Rebate under section 87A (if applicable)
Add: Surcharge, if any ***
Less: Marginal Relief, if applicable (***)
Tax including Surcharge ***
Add: Health and Education Cess @ 4% on tax including surcharge ***
Tax liability ***
Less: rebate u/s 86,89,90,90A and 91
Add: Interest under Section 234A/234B/ 234C ***
Net tax liability ***
Less: Taxes paid by way of:
– Tax deducted at source (TDS) (***)
–
Advance tax (***)
– Self Assessment Tax (***)
(***)
Tax Payable/Refundable ***
TAX RATES FOR AY 2020-21

Individuals, Hindu undivided families, AOPs, BOIs - The tax rates applicable to individuals are also applicable
to a Hindu undivided family, an association of persons, body of individuals or an artificial juridical person. The
rates applicable for the assessment years 2020-21 are as follows:
In case of every resident individual, In case of resident individual, In case of resident super senior
HUF, AOP & BOI, artificial juridical who is of 60 years or more but citizen (age 80 or more)
person less than 80 years
Income Rate Income Rate Income Rate
Up to Rs. 2,50,000 Nil Up to Rs. 3,00,000 Nil Up to Rs. 5,00,000 NIL
Next Rs. 2,50,000 or 5% Next Rs. 3,00,000 or 5%
Above 2.5 lacs & upto 5 Lacs Above 3.0 lacs & upto 5
Lacs
20 PP-DTL&P
Next Rs. 5,00,000 or 20% Next Rs. 5,00,000 or 20% Next Rs. 5,00,000 or 20%
Above 5 lacs & upto 10 Lacs Above 5 lacs & upto 10 Above 5 lacs & upto 10
Lacs Lacs
Balance Income or Above 10 30% Balance Income or Above 30% Balance Income or 30%
Lacs 10 Lacs Above 10 Lacs
The aforesaid amount of Rs. 2,50,000 or Rs. 3,00,000 or 5,00,000 is called “maximum amount not chargeable
to tax” or “basic exemption limit” applicable to the assessee.
Tax Rates in case of assessee other than Individual, HUF, AOP, BOI
(1) In the case of every co-operative society—
Up to Rs. 10,000 10%

Next Rs. 10,000 20%
Balance 30%
(2) In case of other assessee –
Partnership firm Domestic Company (Note) Foreign Company

(including Limited
Rate of income
Liability Partnership)/
tax
Local Authority
30% a) If Total Turnover or Gross receipts 40% (irrespective
of the company in the last previous of turnover or gross
year does not exceeds 400 crore receipts)
rupees : then 25% of the Total Income
b) Other Case : then 30% of the Total
Income
Note :- Domestic Company

Income-tax rates applicable in case of Domestic Companies for Assessment Year 2020-21
Domestic Company Assessment Year 2020-21
- Where it opted for Section 115BAA

[This benefit shall be available when total income of the company is 22%
computed without claiming specified deductions, incentives, exemptions
and additional depreciation available under the Income-tax Act.]
- Where it opted for Section 115BAB
[This regime shall be available only for the manufacturing companies 15%
incorporated in India on or after 01-10-2019. Hence, old companies will not
be able to take the benefit of this section.]
- Where it has not opted for Section 115BAA and the Total Turnover or
Gross receipts of the company in the last previous year does not exceeds 25%
400 crore rupees
- Any other domestic company 30%
Add:
a) Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 7% of such tax,
where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of
12% of such tax, where total income exceeds ten crore rupees. However, the rate of surcharge in case
of a company opting for taxability under Section 115BAA or Section 115BAB shall be 10% irrespective
of amount of total income.
b) Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further
increased by health and education cess calculated at the rate of four percent of such income-tax and
surcharge.
The new effective tax rate, which will apply to domestic companies availing the benefit of section 115BAA is
25.168%. The break up such tax rate is as follows:
Base tax rate Surcharge applicable Cess Effective tax rate
22% 10% 4% 22*1.1*1.04 = 25.168%
Conditions specified under eligibility criteria of Section 115BAA

All domestic companies shall have an option to pay income tax at the rate of 22% (plus applicable surcharge
and cess), provided the following conditions are complied with:
A. Such companies should not avail any exemptions/incentives under different provisions of income tax.
Therefore, the total income of such company shall be computed without:
1. Claiming any deduction especially available for units established in special economic zones under
section 10AA
2. Claiming additional depreciation under section 32 and investment allowance under section
32AD towards new plant and machinery made in notified backward areas in the states of Andhra
Pradesh, Bihar, Telangana, and West Bengal
3. Claiming deduction under section 33AB for tea, coffee and rubber manufacturing companies
4. Claiming deduction towards deposits made towards site restoration fund under section 33ABA by
companies engaged in extraction or production of petroleum or natural gas or both in India
5. Claiming a deduction for expenditure made for scientific research under section 35
6. Claiming a deduction for the capital expenditure incurred by any specified business under section
35AD
7. Claiming a deduction for the expenditure incurred on an agriculture extension project under
section 35CCC or on skill development project under section 35CCD
8. Claiming deduction under chapter VI-A in respect to certain incomes, which are allowed under
section 80IA, 80IAB, 80IAC, 80IB and so on, except deduction under section 80JJAA
9. Claiming a set-off of any loss carried forward from earlier years, if such losses were incurred in
respect of the aforementioned deductions
22 PP-DTL&P
SPECIAL RATES OF INCOME TAX
Section Nature of Income Rate of tax
111A Short-term capital gains from transfer of securities units on which Securities 15%
Transaction Tax has been charged
112/112A Long-term capital gains 20%/10%
Long-term Capital Gain covered by proviso to Section 112(Listed Bond/ 10%

Debenture)
On Long-term Capital Gain (Listed Share/Unit) Exempt

upto 1 lakh.
Excess
taxable
@10%
115BB Winnings from lotteries, crossword puzzles, races including horse races, card 30%
games and other games of any sort or from gambling or betting of any form or
nature whatsoever.
115BBE Unexplained amounts treated as income under sections 68, 69, 69A, 69B, 69C 60%
and 69D of the Act will be taxable @60% without granting any deduction of
expenditure or allowance there against. The benefit of threshold exemption
and lower slab rates for individuals and HUFs will not be available to such
amounts.
No set off of any loss against Section 68,69,69B,69C and 69D.
115BBDA Income by way of dividends in excess of Rs. 10 Lacs in the hands of a person 10%
other than
(i) a domestic company or
(ii) a fund or institution or trust or any university or other educational

institution or any hospital or other medical institution referred to in sub-
clause (iv) or sub-clause (via) of clause (23C) of section 10; or
(iii) a trust or institution registered u/s 12A or 12AA
who is resident in India Further, the taxation of dividend income in excess Rs.
10 lakh shall be on gross basis i.e., no deduction in respect of any expenditure
or allowance or set-off of loss shall be allowed to the assessee in computing the
income by way of dividends.
115BBF Income by way of royalty in respect of a patent developed and registered in 10%
India in respect of person who is resident in India. No deduction in respect of
any expenditure or allowance or set-off of loss shall be allowed to the assessee
in computing the said income
115BBG Tax on income from transfer of carbon credits [See Note 1] 10%
Note 1:
Insertion of new section 115BBG: After section 115BBF of the Income-tax Act [as inserted by section 54 of
the
Finance Act, 2016], the following section has been inserted with effect from the 1st day of April, 2018, namely:—
‘115BBG. Tax on income from transfer of carbon credits: Where the total income of an assessee includes any
income by way of transfer of carbon credits, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on the income by way of transfer of carbon credits, at the rate of
ten per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had his total income
been reduced by the amount of income referred to in clause (a).
Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall
be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a)
of sub-section (1).
Explanation.—For the purposes of this section “carbon credit” in respect of one unit shall mean reduction of
one tonne of carbon dioxide emissions or emissions of its equivalent gases which is validated by the United
Nations Framework on Climate Change and which can be traded in market at its prevailing market price.’.
REBATE [SECTION 87A]

1. A RESIDENT INDIVIDUAL having TOTAL INCOME upto Rs. 5.00 lac shall be eligible for a rebate of
Rs. 12,500 restricted to the amount of tax payable by him.
2. Rebate u/s 87A not available to any other assessee.
3. This rebate is available before charging education cess.
RATES OF SURCHARGE
Rates of
Surcharge
A.Y. 2020-21
Individual/HUF/AO Co-operative Society/ Domestic Foreign

P/ BOI/AJP Local Company Company
Authority/Firm/LLP
If TI If TI > If TI
If TI > Rs. If TI If TI If TI If TI If TI > If TI >
≤ IfTI≤ If TI IfTI≤ Rs. 1 >
50 > > ≤ Rs.1 Rs. 1
Rs. Rs.1 > Rs.1 crore but Rs. 10
Rs. 1 Rs. 2 above Rs.1 crore crore but
50 crore crore 5 crore Rs. crore ≤ Rs. 10 crore
Rs. 1 crore ≤ Rs. 10
lakh but ≤ but ≤ crore 10 crore.
crore crore.
2 crore 5 crore crore
Nil Nil 2% 5%
10% 15% 25% 37% Nil 12% Nil 12%
7%
* The rate of surcharge in case of a company opting for taxability under Section 115BAA or Section 115BAB
shall be 10% irrespective of amount of total income
24 PP-DTL&P
MARGINAL RELIEF
1) Marginal relief in case of Individual/HUF/AOP/BOI/Artificial juridical person is available if the total
income exceeds Rs. 50 Lacs.
Case 1: If the total income exceeds Rs 50 Lacs but upto Rs. 1 crores
1. Tax on total income (plus surcharge) ****
2. Tax on (total income of Rs. 50 Lacs) +
(Total Income – Rs. 50 Lacs) or (****) (****)
3. 1 (–) 2 = Marginal Relief if positive ****
Illustration: Compute the tax liability of Mr. Atin (aged 32), having total income of Rs. 51 lakhs for the
Assessment Year 2020-21. Assume that his total income comprises of “Salary income” and “Interest
from Saving Bank Account”.
Solution:
Computation of tax liability of Mr. Atin for the A.Y. 2020-21
(A) Tax payable including surcharge on total income of Rs. 51,00,000
Rs. 2,50,000 – Rs. 5,00,000 @ 5% Rs. 12,500
Rs. 5,00,000 – Rs. 10,00,000 @ 20% Rs. 1,00,000
Rs. 10,00,000 – Rs. 51,00,000 @30% Rs. 12,30,000
Total Rs. 13,42,500
Add: Surcharge @ 10% Rs. 1,34,250 Rs. 14,76,750
(B) [Tax Payable on total income of Rs. 50 lakhs (Rs. 12,500 plus
Rs. 1,00,000 plus Rs. 12,00,000)] + [Total income in excess of Rs. 50 Lacs] Rs. 14,12,500
(C) Marginal Reilef (A)-(B) Rs. 64,250
(D) Tax payable (A)-(C) Rs. 14,12,500
Add: Health and Education Cess @4% Rs. 56500
Tax Liability Rs. 14,69,000
Case 2: If the total income exceeds Rs. 1 crores
1. Tax on total income (plus surcharge as applicable) ****
2. Tax on (total income of Rs. 1 crores including surcharge as applicable ) +
(Total Income – Rs.1 crores) or (****) (****)
2. Marginal relief in case of Firm/Limited Liability Partnership/Local Authorities/Co-operative societies is

available if the total income exceeds Rs. 1 crore.

2. Tax on (total income of Rs. 100 Lacs) +
(Total Income – Rs. 100 Lacs) or (****) (****)
3. Marginal relief in case of companies is available if the total income exceeds Rs. 1 crore
Case 1: If the total income exceeds Rs 1 crores but upto Rs. 10 crores
2. Tax on (total income of Rs. 1 crores) +
(Total Income – Rs. 1 crores) or (****) (****)
Case 2: If the total income exceeds Rs. 10 crores
1. Tax on total income (plus surcharge as applicable) ****
2. Tax on (total income of Rs. 10 crores including surcharge as applicable upto 10 crores ) +
(Total Income – Rs.10 crores) or (****) (****)
Health and Education Cess

In case of every assessee, the amount of tax ater surcharge a shall be increased by health and education cess
at the rate 4%.
Average rate of Tax [Section 2(10)]
Average Rate of tax = Amount of income tax calculated on the total income x 100
Total Income
Maximum Marginal Rate (MMR) [Section 2(29C)]

MMR is the rate of income tax (including surcharge, if any) applicable in relation to the highest slab of income,
specified in the Finance Act for the relevant year, in the case of the following persons: – (a) an individual or (b)
an Association of person or body of individuals.
E.g.: MMR for Assessment year 2020-21 is 42.744% [being Tax @ 30% + 37% surcharge (assuming total
income > 5 crore) + 4% cess on income tax]
CASE STUDIES
1. Can capital contribution of the individual partners credited to their accounts in the books of the
firm be taxed as cash credit in the hands of the firm, where the partners have admitted their capital
contribution but failed to explain satisfactorily the source of receipt in their individual hands?
CIT v. M. Venkateswara Rao (2015) 370 ITR 212 (T & AP)
Facts of the case: The assessee-firm was constituted in the year 1982 and its return for the assessment
year 1993-94 was selected for scrutiny under section 143(3). The controversy was in relation to the capital
26 PP-DTL&P
contribution of ten partners aggregating to Rs. 76.57 lakhs. The assessee-firm’s explanation that the partners
have paid various amounts towards contribution of their share in the capital was not accepted since the source
of income for the partners was not explained. The Commissioner (Appeals) observed that the amounts credited
in the names of four partners were valid and that cash credits in the accounts of six other partners in the books
of the firm were to be considered afresh by the Assessing Officer.
Issue under consideration: The issue before the High Court was whether the Assessing Officer was justified
in treating the capital contribution of partners as income of the firm by invoking section 68?
High Court’s Opinion: Section 68 directs that if an assessee fails to explain the nature and source of credit
entered in the books of account of any previous year, the same can be treated as income. In this case, the
amount sought to be treated as income of the firm is the contribution made by the partners to the capital. In a
way, the amount so contributed constitutes the very substratum for the business of the firm and it is difficult to
treat the pooling of such capital as credit. It is only when the entries are made during the course of business,
they can be subjected to scrutiny under section 68.
Where the firm explains that the partners have contributed capital, section 68 cannot be pressed into
service. At the most, the Assessing Officer can make an enquiry against the individual partners and not
the firm when the partners have also admitted their capital contribution in the firm. The High Court made
reference to decision in the case of CIT v. Anupam Udyog 142 ITR 130 (Patna) where it was held if there
are cash credits in the books of the firm in the accounts of the individual partners and it is found as a fact
that cash was received by the firm from its partner, then, in the absence of any material to indicate that they
are the profits of the firm, the cash credits cannot be assessed in the hands of the firm, though they may
be assessed in the hands of individual partners.
High Court’s Decision: The High Court, accordingly, held that the view taken by the Assessing Officer that the
partnership firm has to explain the source of income of the partners as regards the amount contributed by them
towards capital of the firm, in the absence of which the same would be treated as the income of the firm, was
not tenable.
2. What is the nature of liquidated damages received by a company from the supplier of plant for failure
to supply machinery to the company within the stipulated time – a capital receipt or a revenue receipt?
CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)
Facts of the case: The assessee, a cement manufacturing company, entered into an agreement with a supplier
for purchase of additional cement plant. One of the conditions in the agreement was that if the supplier failed to
supply the machinery within the stipulated time, the assessee would be compensated at 5% of the price of the
respective portion of the machinery without proof of actual loss. The assessee received Rs. 8.50 lakhs from the
supplier by way of liquidated damages on account of his failure to supply the machinery within the stipulated
time. The Department assessed the amount of liquidated damages to income-tax. However, the Appellate
Tribunal held that the amount was a capital receipt and the High Court concurred with this view.
Supreme Court’s Decision: The Apex Court affirmed the decision of the High Court holding that the damages
were directly and intimately linked with the procurement of a capital asset i.e., the cement plant, which lead
to delay in coming into existence of the profit-making apparatus. It was not a receipt in the course of profit
earning process. Therefore, the amount received by the assessee towards compensation for sterilization of the
profit earning source, is not in the ordinary course of business, hence it is a capital receipt in the hands of the
assessee
3. Miss Kiara borrowed on Hundi, a sum of Rs.25,000 by way of bearer cheque on 11-09-2018 and repaid
the same with interest amounting to Rs.30,000 by account payee cheque on 12-10-2018. The Assessing
Officer (AO) wants to treat the amount borrowed as income during the previous year. Is the action of
AO valid?
Answer
Section 69D provides that where any amount is borrowed on a hundi or any amount due thereon is repaid
otherwise than by way of an account-payee cheque drawn on a bank, the amount so borrowed or repaid shall
be deemed to be the income of the person borrowing or repaying the amount for the previous year in which the
amount was so borrowed or repaid, as the case may be.
In this case, Miss Kiara has borrowed Rs. 25,000 on Hundi by way of bearer cheque. Therefore, it shall be
deemed to be income of Miss Kiara for the previous year 2018-19. Since the repayment of the same along with
interest was made by way of account payee cheque, the same would not be hit by the provisions of section
69D. Therefore, the action of the Assessing Officer treating the amount borrowed as income during the previous
year is valid in law.
4. MKG Agency is a partnership firm consisting of father and three major sons. The partnership deed
provided that after the death of father, the business shall be continued by the sons, subject to the
condition that the firm shall pay 20% of the profits to the mother. Father died in March, 2018. In the
previous year 2018-19, the reconstituted firm paid Rs. 1 lakh (equivalent to 20% of the profits) to the
mother and claimed the amount as deduction from its income. Examine the correctness of the claim of
the firm.
Answer
The issue raised in the problem is based on the concept of diversion of income by overriding title, which is
well recognised in the income-tax law. In the instant case, the amount ofRs. 1 lakh, being 20% of profits of
the firm, paid to the mother gets diverted at source by the charge created in her favour as per the terms of the
partnership deed. Such income does not reach the assessee-firm.
Rather, such income stands diverted to the other person as such other person has a better title on such income
than the title of the assessee. The firm might have received the said amount but it so received for and on behalf
of the mother, who possesses the overriding title. Therefore, the amount paid to the mother should be excluded
from the income of the firm. This view has been confirmed in CIT vs. Nariman B. Bharucha & Sons (1981) 130
ITR 863 (Bom).
5. Mr. Bhargava, a leading advocate on corporate law, decided to reduce his practice and to accept
briefs only for paying his taxes and making charities with the fees received on such briefs. In a
particular case, he agreed to appear to defend one company in the Supreme Court on the condition
that he would be provided with Rs. 5 lacs for a public charitable trust that he would create. He
defended the company and was paid the sum by the company. He created a trust of that sum by
executing a trust deed. Decide whether the amount received by Mr. Bhargava is assessable in his
hands as income from profession.
Answer
In the instant case, the trust was created by Mr. Bhargava himself out of his professional income. The client did
not create the trust. The client did not impose any obligation in the nature of a trust binding on Mr. Bhargava.
Thus, there is no diversion of the money to the trust before it became professional income in the hands of Mr.
28 PP-DTL&P
Bhargava. This case is one of application of professional income and not of diversion of income by overriding
title. Therefore, the amount received by Mr. Bhargava is chargeable to tax under the head “Profits and gains of
business or profession”.
6. The Assessing Officer found, during the course of assessment of a firm, that it had paid rent in respect
of its business premises amounting to Rs. 60,000, which was not debited in the books of account for
the year ending 31.3.2019. The firm did not explain the source for payment of rent. The Assessing
Officer proposes to make an addition of Rs. 60,000 in the hands of the firm for the assessment year
2020-21. The firm claims that even if the addition is made, the sum ofRs.Rs. 60,000 should be allowed
as deduction while computing its business income since it has been expended for purposes of its
business. Examine the claim of the firm.
Answer
The claim of the firm for deduction of the sum of Rs. 60,000 in computing its business income is not tenable. The
action of the Assessing Officer in making the addition of Rs. 60,000, being the payment of rent not debited in
the books of account (for which the firm failed to explain the source of payment) is correct in law since the same
is an unexplained expenditure under section 69C. The proviso to section 69C states that such unexplained
expenditure, which is deemed to be the income of the assessee, shall not be allowed as a deduction under any
head of income. Therefore, the claim of the firm is not tenable.
DETERMINATION OF RESIDENTIAL STATUS [SECTION 6]

Total income of an assessee cannot be computed unless the person’s residential status in India during the
previous year is known. Income earned and received outside India is taxable in India only if the person is
resident of India. It means the scope or tax incidence is higher on resident assessee and moreover one can
plan his residential status as one of the basic tool of tax planning in the hands of the assessee to reduce his tax
burden. Section 6 of the Income-tax Act prescribes the tests to be applied to determine the residential status of
all tax payers for the purposes of income-tax. According to the provisions relating to residential status, a person
can either be;
(i) Resident in India or
(ii) Non-resident in India
However, individual and HUF cannot be simply called resident in India. If individual or HUF is a resident in India,
they will be either;
(a) Resident and ordinarily resident in India (ROR) or
(b) Resident but not ordinarily resident in India (RNOR or NOR).
Persons other than individual and HUF will be either resident in India or non-resident in India.
Persons
Others
Individual & (Company,
HUF Firm, BOI,
AOP, etc.)
Resident Non-Resident Resident Non-Resident
Resident and
Resident and
Non-ordinarily
ordinarily in
Resident in
India (ROR)
India (RNOR)
1. Residential Status of Individual [Section 6(1) and 6(6)]

Provisions relating to determination of residential status of individuals are summarised as follows:
Resident If satisfies any one of the two basic conditions.

Non-Resident If does not satisfy any one of the two basic conditions.
Basic Conditions 1. Stay of Individual in India should be 182 days or more during relevant
Previous Year (PY); OR
2. Stay of Individual in India should be 60 days or more during relevant PY
and 365 days or more during 4 PYs immediately preceding relevant PY.
Exception to Basic In following cases, only 1st Basic condition needs to be checked:
Conditions 1. Indian Citizen
- who comes on a visit to India during relevant PY; or
- who is leaving India as a crew member of an Indian Ship during the relevant
previous year; or
- who goes abroad for employment purposes during the relevant previous
year.
2. Person of Indian Origin (who himself or his parents or his grandparents were
born in undivided India) who comes on a visit to India during relevant PY
ROR If Resident Individual satisfies both the additional conditions.
RNOR If Resident Individual does not satisfy both the additional conditions.
Additional 1. Individual should be resident (by satisfying any of the two basic conditions
or
Conditions first basic condition, if falls in exception to basic conditions) in at
least 2 PYs out of 10 PYs immediately preceding relevant PY; and
2. Stay of Individual in India should be 730 days or more during 7 PYs
immediately preceding relevant PY.
30 PP-DTL&P
Steps to be followed for determination of Residential status of a Person:

Step 1: Check whether an Individual falls under any exception to basic conditions.
Step 2: If yes, check only first basic condition, otherwise check both the basic conditions. If he satisfies any one
of the basic conditions (only first in case of exception), then he would be resident in India, otherwise he would
be Non-resident in India.
Step 3: If an Individual is resident in India, then check whether he is ROR or RNOR.
Step 4: If Individual satisfies both the additional conditions, then he is ROR. Otherwise, he would be RNOR.
Illustration
Determine the residential status of A for AY 2020-21
A is an Indian Citizen and goes from India to Spain for visit purposes on 27th December, 2019. Prior to this,
he had never been out of India.
Solution
Determination of Residential status of A for Previous Year 2019-20 (Assessment Year 2020-21):
In this case, both the basic conditions would be checked as A does not fall under any exception to basic
conditions.
Stay of A in India during relevant PY 2019-20 = 1st April, 2019 to 27th December, 2019 i.e. 271 days (30 + 31+
30 + 31 + 31 + 30 + 31 + 30 + 27).
A is a Resident in India as he satisfies first basic condition by staying in India for more than 182 days during
relevant previous year.
Now, it would be checked whether A is ROR or RNOR.
Since A had never been out of India before 27th December, 2019, he would be satisfying both the additional
conditions as follows:
Additional Condition 1:
Resident in at least 2 PY out of 10 PYs:
PY Falls under Stay during First Basic Stay during 4 Second Residential
exception relevant PY Condition PY basic status
to basic (days) condition
immediately
condition
preceding
relevant PY
2018-19 No 365 Satisfied Not required Not required Resident
A satisfies 1st additional condition as he is resident in at least 2 PYs out of 10 Pys immediately preceding
Additional condition 2:
Stay of Individual in India during 7 PY immediately preceding relevant PY:
PY Stay Period Days

2018-19 1st April, 2018 to 31st March, 2019 365
Total 2557
A satisfies 2nd additional condition also as his stay during 7 PYs immediately preceding relevant PY is more
than 730 days.
Therefore, A is ROR in India during relevant previous year.
Illustration:
Mr. A,leaves India on 18th April, 2019 and then comes back to India on 9th January, 2020. His stay in India
during earlier years is as follows: 2018-19: Nil; 2017-18: 54 days; 2016-17: 162 days. Prior to this, he never
went out of India. Determine his residential status.
Solution:
conditions.
Stay of A in India during relevant PY 2019-20 = 1st April, 2019 to 18th April, 2019 (18 days) and 9th January, 2020
to 31st March, 2020 (23 + 29 + 31 days) = 101 days.
A does not satisfy 1st Basic condition. We will now check 2nd basic condition. His stay during relevant PY is more
than 60 days.
Stay during 4 PYs immediately preceding relevant PY:
PY Stay Period in India Days

2018-19 Nil 0
2017-18 Given 54
2016-17 Given 162
Total 581
A satisfies 2nd basic condition as his stay during relevant PY is more than 60 days and during 4 PYs immediately
preceding relevant PY is more than 365 days.
Therefore, A is Resident in India. Now, we will check additional conditions:
Additional Condition 1:
Resident in at least 2 PY out of 10 PYs:
32 PP-DTL&P
PY Falls under Stay during First Basic Stay during 4 Second Residential
exception relevant PY Condition PY immediately basic status
to basic (days) preceding condition
condition relevant PY
(days)
2018-19 No Nil Not satisfied Not required Not satisfied Non Resident
2017-18 No 54 Not satisfied Not required Not satisfied Non Resident
2016-17 No 162 Not satisfied 1461 (365 +365 Satisfied Resident

+ 365 +366)
A satisfies 1st additional condition as he is resident in at least 2 PYs out of 10 PYs immediately preceding
Additional condition 2:
Stay of Individual in India during 7 PY immediately preceding relevant PY:
PY Stay Period Days

2018-19 Given 0
2017-18 Given 54
2016-17 Given 162
Total 1677
A satisfies 2nd additional condition also as his stay during 7 PYs immediately preceding relevant PY is more
than 730 days.
Therefore, A is ROR in India during relevant previous year.
Illustration:
A is an Indian citizen and is a practising advocate. He leaves India for his case in UK on 9th May, 2019.
Determine his residential status.
Solution:
conditions.
Stay of A in India during PY 2019-20: 1st April, 2019 to 9th May, 2019 : 39 days (30 + 9)
A does not satisfy 1st basic condition as his stay during relevant PY is less than 182 days.
A also does not satisfy 2nd basic condition as his stay during relevant PY is less than 60 days.
Therefore, A is Non Resident in India during relevant previous year.
Solution:
A falls under exception to basic conditions as he goes for employment purposes outside India during relevant
previous year. Therefore, in A’s case only 1st basic condition would be checked.
Stay of A in India during PY 2019-20: 1st April, 2019 to 18th September, 2019: 171 days (30 + 31 + 30 + 31 + 31
+ 18 days)
A does not satisfy first basic condition as his stay during relevant PY is less than 182 days. Therefore, A is Non
Resident in India.
Note: Residential status of spouse is irrelevant for determining residential status of Individual.
Illustration:
A is a foreign citizen. His father was born in Delhi in 1953 and his mother was born in England in 1954. His
grandfather was born in Pakistan in 1918. He comes to attend his friends’ marriage on 9th December, 2019
and stays in India for 261 days thereafter. Determine his residential status.
Solution:
A falls under exception to basic conditions as he is a Person of Indian origin (as his grandfather was born
in undivided India) and he comes on a visit to India during relevant PY. Therefore, in A’s case, only 1st basic
condition would be checked.
Stay of A in India during PY 2019-20: 9th December, 2019 to 31st March, 2020 : 114 days (23 + 31 + 29 + 31 days)
A does not satisfy first basic condition as his stay during relevant PY is less than 182 days. Therefore, A is Non
Resident in India.
2. Residential Status of HUF, Firm, AOP/BOI, Local Authority, AJP
Determining Factor Control and Management of the affairs of the business (from where major
decisions relating to business are taken).
Resident If Control and Management of the affairs of the business is wholly or partly in
India.
Non-Resident If Control and Management of the affairs of the business is wholly outside India.
ROR in case of HUF If Karta of Resident HUF satisfies both the additional conditions as applicable in
case of an Individual.
Additional Conditions Karta should be resident in at least 2 PYs out of 10 PYs immediately preceding
relevant PY; and Stay of Karta in India should be 730 days or more during 7 PYs
immediately preceding relevant PY.
Illustration:
AT & Co. (HUF) decisions are taken from India except 2 decisions which are taken from outside India.
Determine residential status of HUF for AY 2020-21 assuming Karta of HUF is (a) ROR in India; (b) RNOR in
India and (c) Non-Resident in India.
34 PP-DTL&P
Solution:
Determination of Residential status of AT & Co. (HUF) for Previous Year 2019-20 (Assessment Year 2020-21):
HUF is resident in India as control and management of its business affairs is partly situated in India (as some
of its decisions are taken from India).
Now, it will be checked whether HUF is ROR or RNOR. It would depend upon satisfaction of additional conditions
by Karta of HUF. If he satisfies both the additional conditions, then HUF would be ROR in India, otherwise HUF
would be RNOR in India.
Case (a): HUF would be ROR in this case as Karta is ROR in India and he must be satisfying both the additional
conditions.
Case (b): HUF would be RNOR in this case as Karta is RNOR in India and he would not be satisfying both the
additional conditions.
Case (c): HUF in this case could be ROR or RNOR in India. If Karta is non-resident in India, his additional
conditions are not yet checked. If he satisfies both the additional conditions, then HUF would be ROR and if he
does not satisfy both the additional conditions, then HUF would be RNOR.
Illustration:
AT & Co., a partnership firm is doing its business activities in India. However, meetings of its partners for
decision making take place outside India except one, which has taken place in India. Determine Residential
status of Partnership firm for AY 2020-21.
Solution:
Determination of Residential status of AT & Co. for Previous Year 2019-20 (Assessment Year 2020-21):
AT & Co., a partnership firm is resident in India as control and management of its business affairs is partly
situated in India.
3. Residential status of Company

Indian Company Always resident in India
Foreign Company i) Residential status of a foreign company (whose turnover/gross receipts in the previous
year is more than Rs 50 crore) depends upon place of effective management
“POEM”(Circular No.8/2017, dated February 23, 2017).
ii) Residential status of a foreign company (whose turnover/gross receipts in the
previous year is less than Rs 50 crore) will always be non-resident in India.
Resident POEM of the business is situated wholly in India.
Non-Resident POEM of the business is situated wholly or partly outside India.
From Assessment Year 2019-20 a foreign company (whose turnover/gross receipt in the previous year is more
than Rs 50 crore) will be resident in India if its Place Of Effective Management (POEM) during the previous
year is in India. For this purpose, the Place Of Effective Management means a place where Key management
and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in
substance are made.
GUIDING PRINCIPLES FOR DETERMINATION OF PLACE OF EFFECTIVE MANAGEMENT

(POEM) OF A COMPANY
‘Place of effective management’ (POEM) is an internationally recognised test for determination of residence of
a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognises the
concept of ‘place of effective management’ for determination of residence of a company as a tie-breaker rule for
avoidance of double taxation. The guiding principles to be followed for determination of POEM are enumerated
as follows:
A company shall be said to be engaged in “active business outside India” if the passive income is not more than
50% of its total income; and
(i) less than 50% of its total assets are situated in India; and
(ii) less than 50% of total number of employees are situated in India or are resident in India; and
(iii) the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.
Explanation: For the aforesaid purpose:
where the majority of its employees work or where its board typically meets;
Passive income Passive income” of a company shall be aggregate of, income from the transactions
where both the purchase and sale of goods is from / to its associated enterprises; and
income by way of royalty, dividend, capital gains, interest or rental income;
Note: any income by way of interest shall not be considered to be passive income in
case of a company which is engaged in the business of banking or is a public financial
institution, and its activities are regulated as such under the applicable laws of the
country of incorporation.
Senior “Senior Management” in respect of a company means the person or persons who are
Management generally responsible for developing and formulating key strategies and policies for the
company and for ensuring or overseeing the execution and implementation of those
strategies on a regular and on-going basis. While designation may vary, these persons
may include:
(i) Managing Director or Chief Executive Officer;
(ii) Financial Director or Chief Financial Officer;
(iii) Chief Operating Officer; and
(iv) The heads of various divisions or departments
The determination of the POEM will depend upon the facts and circumstances of a given case. The POEM
concept is one of substance over form. It may be noted that an entity may have more than one place of
management, but it can have only one place of effective management at any point of time. Since “residence” is
to be determined for each year, POEM will also be required to be determined on year to year basis. The process
of determination of POEM would be primarily based on the fact as to whether or not the company is engaged
in active business outside India.
Determination of “POEM” if active business outside India

The place of effective management in case of a company engaged in active business outside India shall
be presumed to be outside India if the majority meetings of the board of directors of the company are held
outside India. However, it is established that the Board of directors of the company are standing aside and not
36 PP-DTL&P
exercising their powers of management and such powers are being exercised by either the holding company or
any other person (s) resident in India, then the place of effective management shall be considered to be in India.
For the purpose of determining whether the company is engaged in active business outside India, the average
of the data of the previous year and two years prior to that shall be taken into account. In case the company has
been in existence for a shorter period, then data of such period shall be considered.
Determination of “POEM” other than those that are engaged in active business outside India
In this case, the determination of POEM would be a two stage process as follows:
First Stage: Identification or ascertaining the person or persons who actually make the key management and
commercial decision for conduct of the company’s business as a whole.
Second Stage: Determination of place where these decisions are in fact being made.
Note: The place where these management decisions are taken would be more important than the place where
such decisions are implemented. For the purpose of determination of POEM it is the substance which would
be conclusive rather than the form.
Some of the guiding principles for determining the POEM

(a) The location where a company’s Board regularly meets and makes decisions may be the company’s
place of effective management provided, the Board retains and exercises its authority to govern the
company; and in substance, make the key management and commercial decisions necessary for the
conduct of the company’s business as a whole. Mere formal holding of board meetings at a place would
by itself not be conclusive for determination of POEM being located at that place.
Note: A company’s board may delegate some or all of its authority to one or more committees such
as an executive committee consisting of key members of senior management. In these situations, the
location where the members of the executive committee are based and where that committee develops
and formulates the key strategies and policies for mere formal approval by the full board will often be
considered to be the company’s place of effective management.
(b) The location of a company’s head office will be a very important factor in the determination of the
company’s place of effective management because it often represents the place where key company
decisions are made. The following points need to be considered for determining the location of the head
office of the company:
If the company’s senior management and their support staff are based in a single location and that
location is held out to the public as the company’s principal place of business or headquarters then that
location is the place where head office is located. If the company is more decentralized (for example
where various members of senior management may operate, from time to time, at offices located in the
various countries) then the company’s head office would be the location where these senior managers:
(i) are primarily or predominantly based; or
(ii) normally return to following travel to other locations; or
(iii) meet when formulating or deciding key strategies and policies for the company as a whole.
In situations where the senior management is so decentralised that it is not possible to determine the
company’s head office with a reasonable degree of certainty, the location of a company’s head office
would not be of much relevance in determining that company’s place of effective management.
(c) The use of modern technology impacts the place of effective management in many ways. It is no longer
necessary for the persons taking decision to be physically present at a particular location. Therefore
physical location of board meeting or executive committee meeting or meeting of senior management
may not be where the key decisions are in substance being made. In such cases the place where the
directors or the persons taking the decisions or majority of them usually reside may also be a relevant
factor.
It may be clarified that day to day routine operational decisions undertaken by junior and middle
management shall not be relevant for the purpose of determination of POEM.
If the above factors do not lead to clear identification of POEM then the following secondary factors can
be considered:
(i) Place where main and substantial activity of the company is carried out; or
(ii) Place where the accounting records of the company are kept.
The determination of POEM is to be based on all relevant facts related to the management and control of the
company, and is not to be determined on the basis of isolated facts that by itself do not establish effective
management, as illustrated by the following examples:
(i) The fact that a foreign company is completely owned by an Indian company will not be conclusive
evidence that the conditions for establishing POEM in India have been satisfied.
(ii) The fact that there exists a Permanent Establishment of a foreign entity in India would itself not be
conclusive evidence that the conditions for establishing POEM in India have been satisfied.
(iii) The fact that one or some of the Directors of a foreign company reside in India will not be conclusive
evidence that the conditions for establishing POEM in India have been satisfied.
(iv) The fact of, local management being situated in India in respect of activities carried out by a foreign
company in India will not , by itself, be conclusive evidence that the conditions for establishing POEM
have been satisfied.
(v) The existence in India of support functions that are preparatory and auxiliary in character will not be
conclusive evidence that the conditions for establishing POEM in India have been satisfied.
Further, based on the facts and circumstances if it is determined that during the previous year the POEM is in
India and also outside India then POEM shall be presumed to be in India if it has been mainly /predominantly
in India.
Example 1: Company A Co. is a sourcing entity, for an Indian multinational group, incorporated in country X and
is 100% subsidiary of Indian company (B Co.). The warehouses and stock in them are the only assets of the
company and are located in country X. All the employees of the company are also in country X. The average
income wise breakup of the company’s total income for three years is:
(i) 30% of income is from transaction where purchases are made from parties which are non- associated
enterprises and sold to associated enterprises;
(ii) 30% of income is from transaction where purchases are made from associated enterprises and sold to
associated enterprises;
(iii) 30% of income is from transaction where purchases are made from associated enterprises and sold to
non-associated enterprises; and
(iv) 10% of the income is by way of interest.
Interpretation: In this case passive income is 40% of the total income of the company. The passive income
consists of:
(i) 30% income from the transaction where both purchase and sale is from/to associated enterprises; and
38 PP-DTL&P
(ii) 10% income from interest.

The A Co. satisfies the first requirement of the test of active business outside India. Since no assets or employees
of A Co. are in India the other requirements of the test is also satisfied. Therefore company is engaged in active
business outside India.
Example 2: The other facts remain same as that in Example 1 with the variation that A Co. has a total of 50
employees. 47 employees, managing the warehouse, store keeping and accounts of the company, are located
in country X. The Managing Director (MD), Chief Executive Officer (CEO) and sales head are resident in India.
The total annual payroll expenditure on these 50 employees is of Rs. 5 crore. The annual payroll expenditure
in respect of MD, CEO and sales head is of Rs. 3 crore.
Interpretation: Although the first limb of active business test is satisfied by A Co. as only 40% of its total income
is passive in nature. Further, more than 50% of the employees are also situated outside India. All the assets
are situated outside India. However, the payroll expenditure in respect of the MD, the CEO and the sales head
being employees resident in India exceeds 50% of the total payroll expenditure. Therefore, A Co. is not engaged
in active business outside India.
Example 3: The basic facts are same as in Example 1. Further facts are that all the directors of the A Co. are
Indian residents. During the relevant previous year 5 meetings of the Board of Directors is held of which two
were held in India and 3 outside India with two in country X and one in country Y.
Interpretation: The A Co. is engaged in active business outside India as the facts indicated in Example 1
establish. The majority of board meetings have been held outside India. Therefore, the POEM of A Co. shall be
presumed to be outside India.
Important Notes:
• It must be noted that only an individual or a HUF can be resident, not ordinarily resident or non- resident
in India. All other assesses can be either resident or non-resident in India but cannot be not ordinarily
resident in the matter of their residential status for all purposes of income tax.
• A person is deemed to be of Indian origin if he, or either of his parents or any of his grandparents,
was born in Undivided India. It may be noted that grandparents include both maternal and paternal
grandparents.
• The residential status of the assessee is to be determined each year with reference to the “previous
year”. The residential status of the assessee may change from year to year. What is essential is the
status during the previous year and not in the assessment year. Moreover, the concept of residential
status is nothing to do with nationality or domicile of a person. An Indian, who is a citizen of India, can
be non-resident for Income Tax purposes, whereas a foreigner can be resident of India for Income Tax
purpose.
Example 4: The facts are same as in Example 3 but it is established by the Assessing Officer that although
A Co.’s senior management team signs all the contracts, for all the contracts above Rs. 10 lakh the A Co.
must submit its recommendation to B Co. and B Co. makes the decision whether or not the contract may be
accepted. It is also seen that during the previous year more than 99% of the contracts are above Rs. 10 lakh
and over past years also the same trend in respect of value contribution of contracts above Rs. 10 lakh is seen.
Interpretation: These facts suggest that the effective management of the A Co. may have been usurped by the
parent company B Co. Therefore, POEM of A Co. may in such cases be not presumed to be outside India even
though A Co. is engaged in active business outside India and majority of board meeting are held outside India.
Example 5: An Indian multinational group has a local holding company A Co. in country X. The A Co. also has
100% downstream subsidiaries B Co. and C Co. in country X and D Co. in country Y. The A Co. has income only
by way of dividend and interest from investments made in its subsidiaries. The Place of Effective Management
of A Co. is in India and is exercised by ultimate parent company of the group. The subsidiaries B, C and D are
engaged in active business outside India. The meetings of Board of Director of B Co., C Co. and D Co. are held
in country X and Y respectively.
Interpretation: Merely because the POEM of an intermediate holding comp any is in India, the POEM of its
subsidiaries shall not be taken to be in India. Each subsidiary has to be examined separately. As indicated in
the facts since companies B Co., C Co., and D Co. are independently engaged in active business outside India
and majority of Board meetings of these companies are also held outside India. The POEM of B Co., C Co., and
D Co. shall be presumed to be outside India.
Further, the CBDT vide Circular no. 8/2017 dated 23.02.2017 also clarified that POEM guidelines shall not apply
to a company having turnover or gross receipts of Rs. 50 crores or less in a financial year.
SCOPE OF TOTAL INCOME [SECTION 5]

Section 5 provides the scope of the total income of the assessee because the incidence of tax on any person
depends upon his residential status. The scope of total income of an assessee depends upon the following
three important considerations:
(i) the residential status of the assessee.
(ii) the place of accrual or receipt of income, whether actual or deemed and
(iii) the point of time at which the income had accrued to or was received by or on behalf of the assessee.
Tax incidence vis-a-vis residential status of all assesses is indicated in the following table.
Where tax incidence arises in case of Resident or Resident but Non-Resident

Resident & not Ordinarily
Ordinarily Resident Resident (only
Individual or
HUF)
Income received in India (Whether accrued in TAXABLE TAXABLE TAXABLE
or outside India)
Income deemed to be received in India TAXABLE TAXABLE TAXABLE

(Whether accrued in or outside India)
Income accruing or arising in India (Whether TAXABLE TAXABLE TAXABLE
received in India or outside India)
Income deemed to accrue or arise in India TAXABLE TAXABLE TAXABLE
(Whether received in India or outside India)
Income received and accrued outside India TAXABLE TAXABLE NOT TAXABLE
from a business controlled or a profession set
up in India
Income received and accrued outside India TAXABLE NOT TAXABLE NOT TAXABLE
from a business controlled from outside India
or a profession set up outside India
Income earned and received outside India NOT TAXABLE NOT TAXABLE NOT TAXABLE
but later on remitted to India (whether tax
incidence arises at the time of remittance)
40 PP-DTL&P
Dividend from an Indian Company OR Mutual EXEMPT U/S 10(34) and 10(35)
Fund specified under Section 10(23D)
Subject to Section 115BBDA
Agricultural Income in India EXEMPT U/S 10(1)
Long term capital gain (on securities units on EXEMPT upto 1 lakh
which Securities transaction tax is paid)
Past untaxed profits (of earlier years) NOT TAXABLE
Remittances (Second receipt) to India NOT TAXABLE
Gifts from relative (on any occasion) or Gift NOT TAXABLE
on marriage from any person(section 56(2)
explained under the head income from other
sources)
Note : a. Income is accrued or arise at a place where source of Income is situated. For example, for salary
income, source is situated at the place where services are rendered.
b. Gift on birthday from other than relatives (taxable if amount exceeds Rs. 50,000)
INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [SECTION 9]

1. Income from a business connection (in the form of branch office, project office, agent etc.) in India will
be deemed to accrue or arise in India. Section 9 applies to all assessees irrespective of their residential
status and place of business [Please refer section 9(1)(i) for detail understanding of business connection
in India].
Following are the case laws through which business connection in India is established:-
a) By business connection means a relation between a business carried on by a non-resident which
yields profit or gains through some activity in India. If both non resident and resident carry on a
business and if the non resident earns income then it can be said that business connection has
been established – CIT v. Ashok Jain [2002] 121 Taxman 328 (Delhi) (Mag.).
Ex :- Mr. A non resident lives in Germany has the business of perfumes and cosmetics entered
into agreement with Mr. B of India on the terms that they share profit equally on the goods supplied
by him from Germany to be sold in India. Mr. A sends perfume bottles @ 100 per piece, agreed
to be sold at Rs. 500 per piece in India. Mr. B sold a total of 1000 pieces the total profits comes
out to be Rs 4,00,000 (to be distributed equally), however Mr. B discloses the cost of the perfume
as 300 per piece (Rs 100 as cost and 200 as profit share of Mr. A) in that case the profit comes
merely Rs 2,00,000 which means Mr.B has benefitted Mr. A from any tax liability. In this way there
is business connection of Mr. A in India and he has earned Rs2,00,000 which is liable to be taxed
in India irrespective of his residential status.
b) Where the assessee, a non resident, carried on business in readymade garments in Japan and
he had an arrangement with a commission agent in India to purchase readymade garments on his
behalf and export them to him, the assessee’s case was covered by clause (b) of Explanation to
Section 9(1)(i) and not by clause (a) thereof and, therefore, the liability of the assessee to pay tax
was not arised on any income deemed to accrue or arise from conversion of materials purchased
for the purpose of export – CIT v. N.K. Jain [1994] 206 ITR 692/77 Taxman 13 (Delhi).
c) A single transaction between non-resident and a resident in India without any course of dealings
such as might fairly be described as business connection, section 9 is not attracted. Therefore
there is no question of continuing business relation when a person purchases machinery or other
goods abroad and uses them in India and earns profit – CIT v. Fried Krupp Industries [1981] 128
ITR 27 (Mad.)
Exceptions:
– Income from a business connection will be deemed to accrue or arise in India only to the extent
of profits attributable to operations in India. Say, if 10% Weightage is given to work in India, then
only 10% of the profits would be deemed to accrue or arise in India.
– Purchase of goods by a NR for the purpose of export will not be deemed to be business connection
in India;
– Collection of news and views by a news channel or news agency etc. in India will not be deemed
to be a business connection in India;
– Shooting of films in India provided: If maker is individual, he should neither be an Indian citizen
nor be Resident in India; if maker is Firm/AOP etc., then none of its members/partners should be
Indian citizen or Indian resident; if maker is company, then none of its shareholders should be
Indian citizen or Indian resident.
2. Income from any property, asset or source of income situated in India[Sec.9(1)(i)].*
*Example – A Ltd. a non-Indian company, owns a property in Chennai. The property is being given
on rent (rent is being 1,000 US dollar per month) to B Ltd. another non-Indian company. Both the
companies are foreign company and their agreement is made outside India. Rent will be payable
outside India in foreign currency. Rent is accrued outside India as per the agreement.
Here the rent of the property will be deemed to be earned in India as the property is only situated in
India.
3. Income from the transfer of any capital asset situated in India*
*AMENDMENT MADE BY THE FINANCE ACT, 2012 – The Finance Act, 2012 inserted certain clarificatory
amendments in the provisions of section 9 to supersede the ruling of Supreme Court in the case of
Vodafone International Holdings B.V. Union of India [2012] 204 Taxman 408. The amendments, inter
alia. Included insertion of Explanation 5 in section 9(1)(i) with retrospective effect from the assessment
year 1962-63. The Explanation 5 clarifies that an asset or capital asset, being any share or interest in a
company or entity registered or incorporated outside India shall be deemed to be situated in India if the
share or interest derives, directly or indirectly, it’s value substantially from the assets located in India.
4. Any income under the head ‘Salaries’ if it is payable for services rendered in India[Sec.9(1)(ii)]*
*Income taxable under the head “Salaries” payable for services rendered in India is considered as
Income earned in India.
And any salary payable for the rest period or leave period which is preceded and succeeded by services
in India, will also be considered as salary earned in India [exception section 9(1)(iii)]. Similarly, if service
is given on board of a ship which is outside shores of India, then the salary will not be deemed to have
accrued in India – DIT v. Prahlad Vijendra Rao [2011] 198 Taxman 551 (Kar.)
5. Salary payable by the Government to an Indian Citizen for services rendered outside India[Sec.9(1)
(iii)]*
*According to this section if salary is paid to Indian nationals by Indian Government, for the services
rendered in foreign country will be deemed to accrue or arise in India. By virtue of section 10(7), any
allowances or perquisites paid outside India is, however, fully exempt tax.
42 PP-DTL&P
6. Dividend paid by an Indian company [Sec.9(1)(iv)]*

* Any dividend which is being paid by an Indian company outside India is deemed to be accrue or arise
in India only. However in case of non-Indian company, dividend shall be deemed to accrue or arise at
a place where register of members is kept – Kusumbai D. Mahadevia v. CIT [1963] 47 ITR 214 (Bom.).
Considering the following points :-
a) Dividend [not under section 2(22)(e)] declared, distributed or paid by an Indian company during
June 1, 1997 and March 31, 2002 or after March 31, 2003 will not be taxable in the hands of
shareholders.
b) Only section 9(1)(iv) will be considered for dividend paid here – Pfizer Corpn. v. CIT [2003] 129
Taxman 459 (Bom.).
7. Interest payable by [Sec.9(1)(v)]:*
– Government(Central or State government)
– Resident except where interest is payable in respect of borrowings used for business or profession
outside India or for earning any income from any source outside India;
– Non-Resident if interest is payable in respect of borrowings used for a business or profession in
India.
*Also the income of a non-resident shall be deemed to accrue or arise in India under clause [(v) or
(vi) or (vii)] of section 9(1) and to be included in his total income irrespective of whether the place of
business or business connection or services is in India or not.
CASE STUDIES-
A) Mr. X a non-resident has a project in Chennai, for financing the project he has taken a loan Rs 100
crore @12% interest p.a. from Mr. Y who is also a non-resident. Now in the year end the interest
receivable (received outside India) of Rs 12 crore (100cr. * 12%=12 cr.) by Mr. Y will be taxable
in India because the business connection has been established in India irrespective of Mr. Y’s
residential status.
B) Mr. A an Indian resident has a Project in Sri-Lanka for which he has taken a loan of Rs 100 crore
@12% interest p.a. from Mr. B a non-resident. The interest received in the year end by Mr. B of
Rs 12 crore (received outside India) is not taxable in India because the business connection is not
established in India.
C) X Ltd. (Govt. of India enterprise) for a project in Sri-Lanka has taken a loan of Rs 100 crore from
Mr. Y a non-resident @12% interest payment p.a. The interest payment of Rs 12 crore receivable
by Mr. Y(received outside India) will be taxable to Mr. Y in India because the business connection
has been established in India as any amount payable by government of India as interest is always
taxable in India.
8. Royalty payable by [Section 9(1)(vi)]:
– Government (Central or State government);
– Resident except where it is payable in respect of any right/information/property used for the
purpose of a business or profession outside India or earning any income from any source outside
India;
– Non-Resident if royalty is payable in respect of any right/information/property used for the purpose
of business or profession in India or earning any income from any source in India.
– Note:”Royality’’ means consideration for –

a. The transfer of all or any rights in respect of the patent, invention, model,design , secret
formulaor process of trade mark or similar property.
b. The imparting of any information concerning the working of, or the use of, a patent, invention,
model, design, secret formula or process of trade mark or similar property.
c. The use of any patent, invention, model, design, secret formula or process or trade mark or
similar property;
d. The imparting of any information concerning technical, industrial, commercial or scientific
knowledge, experience or skill;
e. The use or right to use any industrial, commercial, scientific equipment but not bwing the
amount preferred to in sec. 44BB;
f. The transfer of all or any rights (including the granting of a licence) in respect of any copyright,
literacy, artistic or scientific work including films or videos tapes for use in connection
with television or tapes for use in connection with radio broadcasting, but not including
consideration for sale, distribution or exhibition of cinematographic films;
g. The running of any services in connection with aforesaid activities.
NOTE :- The Finance Act, 2012 has amended the above provision with retrospective effect from June
1, 1976 as follows –
i) Inserted Explanation 4 to clarify that the transfer of all or any rights in respect of any right,
property or information includes transfer of all or any right for use or also the right to use a
computer software regardless of the medium of through which such right is transferred.
ii) Inserted Explanation 5 to clarify that consideration in respect of ay right, property or information
all are included in royalty, whether or not –
a) The possession or control of such right, property or information is with the payer;
b) Such right, property or information is used by the payer directly;
c) The location must be in India of such right, property or information.
iii) Inserted Explanation 6 to clarify that the word “Process” includes transmission by satellite, cable,
optic fibre or by any other similar technology, irrespective such process is secret or not.
9. Fees for technical services payable by [Section9(1)(vii)]:
– Government (Central or State government);
– Resident except where services are utilised for a business or profession carried on outside India
or earning any income from any source outside India; or
Non-Resident if fee is payable in respect of services for a business or profession carried on in India or
earning any income from any source in India.*
*If a non-resident receives fees for giving technical services from a resident person and the fees is
relatable to business carried on by the payer outside India or fees pertains to a source of income
located outside India, then the fees is not deemed to accrue or arise in India. And it is equally
applicable if he payer of technical fees is contemplating to create a source for earning income
outside India though existence of source of income is not yet came – ITO v. Bajaj Hindustan Ltd.
[2011] 47 SOT 74 (Mum.).
44 PP-DTL&P
*Even when the services are given outside India, it is not relevant for the purpose of section 9(1)(vii);
only the place where services are utilised is relevant – Raymond Ltd. v. CIT [2003] 86 ITD 791 (Mum.).
DIVERSION OF INCOME V/S APPLICATION OF INCOME

1) Diversion of Income is the process of diverting income before it is actually earned by the assessee.
Such amount shall be excluded from the Total Income of the assessee as the income is diverted to
someone else before being earned by the assessee. In case of diversion of Income there is an over-
riding title of any other person on such income. Here the income before being earned by the assessee
reaches such person and hence not chargeable to tax in hands of the assessee.
Example of Diversion of Income: – M/s ABC is a partnership firm in which A and his two sons B &
C are partners. The partnership deed provides that after the death of Mr. A, B & C shall continue the
business of the firm subject to a condition that 20% of profit of the firm shall be given to Mrs. D (Wife
of Mr. A/ Mother of B & C). After the death of Mr. A, this 20% amount of profit will not be included in the
Total Income of Firm M/s ABC.
Reason - This is a case if Diversion of Income and hence it is deductible from its Total Income. This is
because the clause mentioned in partnership deed has given an overriding title of the 20% profit to Mrs.
D and such income is a precondition for the firm to continue its business. In other words, this 20% profit
reaches Mrs. D before it becomes income of the firm and hence it is a case of diversion of Income.
2) Application of Income means spending of Income after it is being earned by the assessee. Such amount
shall be included in the total income of the assessee as it is merely application of earned income.
Example of Application of Income: – Mr. A is liable to pay Rs. 10,000/- per month to Ms. B (his ex-
wife) as an alimony sum. Mr. A being an employee of Mr. C, instructs him to pay Rs.10,000/- per month
out of his salary and disburse the remaining salary to him. This amount of Rs.10,000/- per month is to
be included in the Total Income of Mr. A.
Reason - This is a case of Application of Income by Mr. A and not diversion of Income and therefore
it will be included in the Total Income of Mr. A. This is because this amount of Rs. 10,000/- per month
is an obligation of Mr. A to pay to Ms. B out of his income and not an income in which Ms. B had over
riding entitlement from Mr. C before being earned by Mr. A.
Illustration
Details of incomes of Mr. A for the financial year 2019-20 is as follows:
(a) He works in an Indian Company and receives salary in India during the year Rs. 3,60,000.
(b) He has a house in Delhi from which he has earned Income from house property amounting to
Rs. 2,70,000. Rental income is received in Japan.
(c) He has received dividend of Rs. 90,000 from TCS Ltd., an Indian company and has also received
dividend of Rs. 63,000 (equivalent Indian rupees) from a foreign company outside India.
(d) He transfers shares of an Indian company outside India to a Non resident individual and earns a
short term capital gain of Rs. 45,000.
(e) He has also earned a long term capital gain of Rs. 72,000 by sale of shares on stock exchange in India,
on which securities transaction taxes have been paid.
(f) He has rendered technical services to a company outside India, which has used these services for
its business outside India. Income received outside India is Rs. 1,80,000.
(g) Royalty of Rs. 4,50,000 received from providing know-how, which is utilised by a foreign company in
India.
(h) Interest received from Government of India is Rs. 18,000.
(i) Past untaxed profits of financial year 2011-12 are Rs. 5,40,000.
(j) He earns and receives rental income of Rs. 9,00,000 outside India. Out of this, Rs. 7,20,000 is
remitted to India. Remaining amount is spent for education of the children abroad.
(k) He got married in the current year and has received Rs. 81,000 in cash gift from his friends. He also
got a gift on his birthday in June from his wife’s father Rs. 27,000. He also gifts worth Rs. 63,000 from
his friends on his birthday.
(l) He has also earned an agricultural income in India of Rs. 1,23,300.
(m) He is doing a business in Sri Lanka but it is controlled from Delhi. Income of Rs. 1,80,000 is earned
in that business.
(n) He is doing a business in Japan from which he receives an income of Rs. 42,300.
Compute the total income in case of Mr. A for Assessment Year 2020-21 assuming he is (i) Resident and
Ordinary Resident; (ii) Resident but not ordinary resident; (iii) Non-resident.
Solution
Computation of Total Income of Mr. A for Assessment Year 2020-21 (Previous Year 2019-20)
Particulars ROR RNOR NR
(a) Salary received in India (Income received in India) 3,60,000 3,60,000 3,60,000
(b) Rent from a house property in Delhi (Income deemed to 2,70,000 2,70,000 2,70,000
accrue or arise in India)
(c) Dividend from TCS Ltd., an Indian company [Exempt u/s - - -

10(1)]
46 PP-DTL&P
Dividend from a foreign company (Income accrued or arise 63,000 - -

outside India)
(d) Short term capital gain on sale of shares of an Indian 45,000 45,000 45,000
company (Income deemed to accrue or arise in India)
(e) Long term capital gain (on STT paid securities) - - -

[Exempt upto Rs. 1 lakhs]
(f) Fees for technical services used for purposes outside India 1,80,000 - -
(Income accrued or arise outside India)
(g) Royalty from a foreign company for right used in India 4,50,000 4,50,000 4,50,000
(Income deemed to accrue or arise in India)
(h) Interest received from Government of India (Income 18,000 18,000 18,000
deemed to accrue or arise in India)
(i) Past untaxed profits of FY 2011-12 (Not taxable in current - - -

year)
(j) Rental income outside India (Income accrued or arise 9,00,000 - -

outside India)
Note: Remittance (second receipt) and use of money for
education of children is irrelevant.
(k) Gift on the occasion of marriage (not taxable) - - -
Gift on birthday from relative (not taxable) - - -
Gift on birthday from other than relatives (taxable if amount 63,000 63,000 63,000
exceeds Rs. 50,000)
(l) Agricultural income in India [Exempt u/s 10(1)] - - -
(m) Income from business in Sri Lanka controlled from India 1,80,000 1,80,000 -
(Income accrued or arise outside India from a business
controlled from India)
(n) Income from business in Japan (Income accrued or arise 42,300 - -

outside India)
Total Income 25,71,300 13,86,000 12,06,000
CASE STUDY
1. Can consideration for supply of software embedded in hardware tantamount to ‘royalty’ under section
9(1)(vi), where the software was no independent functional existence?
CIT v. Alcatel Lucent Canada (2015) 372 ITR 476 (Del)
Facts of the case: The assessee, a company incorporated in France, was engaged in manufacture, trade and
supply equipment and services for GSM Cellular Radio Telephones Systems. It supplied hardware and software
to various entities in India. Software licensed by the assessee embodied the process which is required to control
and manage the specific set of activities involved in the business use of its customers, and also made available
the process to its customers, who used it to carry out their business activities. The As sessing Officer contended
that the consideration for supply of software embedded in hardware is ‘royalty’ under section 9(1)(vi).
Appellate Authorities’ Views: The Commissioner (Appeals) and Tribunal held that the consideration for supply
of embedded software (which is part of the hardware supplied to the assessee customers) did not constitute
royalty and therefore, section 9(1)(vi) was not attracted.
High Court’s Observations: The High Court, at the outset, noted that the Tribunal had relied upon the
precedent in the case of DIT v. Ericsson A.B. (2012) 343 ITR 470 (Del), where the High Court observed that
what was sold by the assessee to its Indian customers was a GSM which consisted of both hardware and
software. The High Court had also observed that -
(i) the software that was loaded on the hardware did not have any independent existence;
(ii) the software supply is an integral part of GSM mobile telephone system and is used by the cellular
operators for providing cellular services to its customers;
(iii) the software is embedded in the system and there could not be any independent use of such software;
(iv) this software merely facilitates the functioning of the equipment and is an integral part of the hardware.
Further, the High Court had also referred the decision of the Apex Court in Tata Consultancy Services v. State
of Andhra Pradesh (2004) 271 ITR 401, wherein it was held that software incorporated on a media would be
goods liable to sales tax.
High Court’s Decision: The High Court concurred with the decision of the Tribunal holding that where payment
is made for hardware in which the software is embedded and the software does not have independent functional
existence, no amount could be attributed as ‘royalty’ for software in terms of section 9(1)(vi).
INCOME WHICH DO NOT FROM PART OF TOTAL INCOME
Agricultural Income [Section 10(1)]

Income from agricultural activities performed in India is exempt from tax.
Amount received by a member of the HUF from the income of the HUF [Section 10(2)]
As per section 10(2), amount received out of family income, or in case of impartible estate, amount received
out of income of family estate by any member of such HUF is exempt from tax. This is allowable only when the
payments are made by the HUF to it’s members, out of the income of the family or out of the impartible estate
belonging to the family.
Share of profit received by a partner from the firm [Section 10(2A)]

As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in the hands of the
partner. Further, share of profit received by a partner of LLP from the LLP will be exempt from tax in the hands
of such partner. This exemption is limited only to share of profit and does not apply to interest on capital and
remuneration received by the partner from the firm/LLP.
Interest to non-residents [Section 10(4)]

As per section 10(4)(i), in the case of a non-resident; any income by way of interest on certain notified securities
or bonds (including income by way of premium on the redemption of such bonds) is exempt from tax. As per
section 10(4)(ii), in the case of an individual, any income by way of interest on money standing to his credit in a
Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Management
48 PP-DTL&P
Act, 1999, and the rules made thereunder is exempt from tax. Exemption under section 10(4)(ii) is available only
if such individual is a person resident outside India as defined in clause (w) of section 2 of the Foreign Exchange
Management Act, 1999 or is a person who has been permitted by the Reserve Bank of India to maintain the
aforesaid Account.
Interest on notified savings certificates [Section 10(4B)]

As per section 10(4B), in the case of an individual, being a citizen of India or a person of Indian origin, who is
a non-resident, any income by way of interest on notified savings certificates subscribed in convertible foreign
exchange) issued before the 1st day of June, 2002 by the Central Government is exempt from tax.
Leave travel concession [Section 10(5)]

An employee can claim exemption under section 10(5) in respect of Leave Travel Concession. Exemption
under section 10(5) is available to all employees (i.e. Indian as well as foreign citizens). Exemption is available
in respect of value of any travel concession or assistance received or due to the employee from his employer
(including former employer) for himself and his family members in connection with his proceeding on leave to
any place in India.
Remuneration received by specified diplomats and their staff [Section 10(6)(ii)]

As per section 10(6)(ii), in case of an individual who is not a citizen of India, remuneration received by him as
an official (by whatever name called) of an Embassy, High Commission, Legation, Commission, Consulate or
Trade Representative of a Foreign State, or member of the staff of any of that official is exempt from tax, if
corresponding Indian official in that foreign country enjoys a similar exemption.
Salary of a foreign employee and non-resident member of crew [Section 10(6)(vi), (viii)]
As per section 10(6)(vi), the remuneration received by a foreign national as an employee of a foreign enterprise
for services rendered by him during his stay in India is exempt from tax, provided the following conditions are
fulfilled: (a) the foreign enterprise is not engaged in any trade or business in India ; (b) his stay in India does
not exceed in the aggregate a period of 90 days in such year ; and (c) such remuneration is not liable to be
deducted from the income of the employer.
As per section 10(6)(viii), any salaries received by or due to a non-resident foreign national for services
rendered in connection with his employment on a foreign ship where his total stay in India does not exceed in
the aggregate a period of 90 days in the year is exempt from tax.
Remuneration of a foreign trainee [Section 10(6)(xi)]

As per section 10(6)(xi), the remuneration received by a foreign trainee as an employee of foreign Government
during his stay in India in connection with his training in any establishment or office of, or in any undertaking
owned by the Government ; or any company owned by the Central Government, or any State Government or
any company which is a subsidiary of a company referred to above or any corporation established by or under
a Central, State or Provincial Act or any co-operative society wholly financed by the Central Government, or any
State Government Tax, is exempt from tax
Tax paid on behalf of foreign company deriving income by way of royalty or fees for technical
services [Section 10(6A)]
Tax paid by Central Government, State Government or an Indian concern on behalf of a foreign company
deriving income by way of royalty or fees for technical services in pursuance of an agreement made after March
31, 1976 but before June 1, 2002 will be exempt from tax in the hands of such foreign company provided such
agreement is in accordance with the industrial policy of the Indian Government or it is approved by the Central
Government.
Tax paid on behalf of foreign company or non-resident in respect of other income [Section
10(6B)]
Tax paid by Central Government, State Government or an Indian concern on behalf of a foreign company or
non-resident in respect of any income (not being salary, royalty or fees for technical services) will be exempt
from tax in the hands of such foreign company or non-resident if such income is received in pursuance of an
agreement entered into before June 1, 2002 by the Central Government with the Government of a foreign State
or international organisation or any other related agreement approved by the Central Government.
Tax paid on behalf of foreign Government or foreign enterprise deriving income by way of
lease of aircraft or aircraft engine [Section 10(6BB)]
Tax paid by an Indian company, engaged in the business of operation of aircraft, on behalf of foreign Government
or foreign enterprise deriving income by way of lease of aircraft or aircraft engine will be exempt from tax in the
hands of such foreign Government or foreign enterprise if such lease rental is received under an agreement
which is approved by Central Government and entered during the period between 31-3-1997 to 1-4-1999, or
after 31-3-2007.
Technical fees received by a notified foreign company [Section 10(6C)]

Section 10(6C) grants exemption from tax in respect of income arising to notified foreign company by way of
royalty or fees for technical services received in pursuance of an agreement entered into with that Government
for providing services in or outside India in projects connected with security of India.
Allowance/perquisites to Government employee outside India [Section 10(7)]

As per section 10(7), any allowances or perquisites paid or allowed as such outside India by the Government
to a citizen of India for rendering service outside India is exempt from tax.
Income of foreign Government employee under co-operative technical assistance programme

[Section 10(8)]
As per section 10(8), remuneration received directly or indirectly by an individual, from the foreign Government in
connection with a co-operative technical assistance programme and projects in accordance with an agreement
entered into by the Central Government and such foreign Government, is exempt from tax. Further, exemption
is available in respect of any other income of such an individual which accrues or arises outside India and is not
deemed to accrue or arise in India, provided such individual is required to pay income-tax/ social security tax
to the foreign Government.
Remuneration or fees received by a non-resident consultant/its foreign employees [Section

10(8A), (8B)]
Under section 10(8A), (a) remuneration or fees received by a consultant directly or indirectly out of the funds
made available to an international organisation, under a technical assistance agreement between such
organisation and the Government of a foreign State and (b) any other income which accrues or arises to him
outside India and is not deemed to accrue or arise in India, in respect of which such consultant is required to
pay income-tax/social security tax to the foreign Government of the country of his origin, is exempt from tax.
Consultant means any individual who is either not a citizen of India, or being a citizen of India, is not ordinarily
resident in India or any other person who is a non-resident and is engaged by the international organization for
50 PP-DTL&P
rendering technical services in India in accordance with an agreement entered into by the Central Government
and the said international organization and the agreement relating to engagement of consultant is approved by
the prescribed authority.
Section 10(8B) grants similar exemption to the employee of the above discussed consultant, if such employee
is either not a citizen of India or being a citizen of India, is not ordinarily resident in India and the contract of his
service is approved by prescribed authority before the commencement of his service.
Income of a family member of an employee serving under co-operative technical assistance

programme [Section 10(9)]
As per section 10(9), the income of any member of the family of any such individual as is referred to in section
10(8)/(8A)/(8B) accompanying him to India, which accrues or arises outside India and is not deemed to accrue
or arise in India, in respect of which such member is required to pay any income or social security tax to the
Government of that foreign State or country of origin of such member, as the case may be, is exempt from tax.
Retrenchment compensation [Section 10(10B)]

As per section 10(10B), compensation received at the time of retrenchment is exempt from tax to the extent
of lower of the following: (a) An amount calculated in accordance with the provisions of section 25F(b) of the
Industrial Dispute Act, 1947; or (b) Maximum amount specified by the Central Government (Rs. 5,00,000); (c)
Actual amount received.
Under the Industrial Dispute Act, a workman is entitled to retrenchment compensation, equal to 15 days’
average pay for each completed year of continuous service or any part in excess of six months. Compensation
in excess of aforesaid limits is taxable as salary. However, the aforesaid limit is not applicable in cases where
compensation is paid under any scheme approved by the Central Government.
Compensation for Bhopal Gas Leak Disaster [Section 10(10BB)]

Compensation [in accordance with Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985] received by
victims of Bhopal gas leak disaster is exempt from tax. However, compensation received for any expenditure
which is allowed as deduction from taxable income is not exempt.
Compensation on account of any disaster [Section 10(10BC)]

Any amount received from the Central Government or State Government or a Local Authority by an individual
or his legal heirs as compensation on account of any disaster is exempt from tax. However, no deduction is
available in respect of the amount received or receivable to the extent such individual or his legal heirs has
been allowed a deduction under the Act on account of loss or damage caused due to such disaster. Disaster
here means any disaster due to any natural or man-made causes or by accident/negligence which results in
substantial loss of human life or damage to property or environment and the magnitude of such disaster is
beyond coping capacity of community of the affected area.
Payment at the time of voluntary retirement [Section 10(10C)]

As per section 10(10C), any compensation received at the time of voluntary retirement or termination of service
is exempt from tax, if the following conditions are satisfied:
• Compensation is received at the time of voluntary retirement or termination (or in the case of an
employee of public sector Company, at the time of voluntary separation)
• Compensation is received by an employee of following undertakings- a) public sector company; or
b) any other company; or c) an authority established under a Central, State or Provincial Act; or d) a
local authority; or e) a co-operative society ; or f) a University established or incorporated by or under

a Central, State or Provincial Act and an institution declared to be a University under section 3 of the
University Grants Commission Act, 1956 (3 of 1956) ; or g) an Indian Institute of Technology within the
meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961) ; or h) any State
Government; or i) the Central Government; or j) Notified institutes having importance throughout India
or in any State or States, k) Notified institute of management
• Compensation is received in accordance with the scheme of voluntary retirement/separation, which is
framed in accordance with guidelines prescribed under Rule 2BA of Income-tax Rules, 1962. Maximum
amount of exemption is Rs. 5,00,000. Where exemption is allowed to an employee under section
10(10C) for any assessment year, no exemption under this section shall be allowed to him for any other
assessment year. With effect from assessment year 2010-11, section 10(10C) has been amended to
provide that where any relief has been allowed to assessees under section 89 for any assessment year
in respect of any amount received or receivable on his voluntary retirement or termination of service or
voluntary separation, no exemption under section 10(10C) shall be allowed to him in relation to such or
any other assessment year.
Tax on perquisites paid by the employer [Section 10(10CC)]

Perquisites to employees mean any facility provided by the employer to the employees. There are two types
of perquisites, viz., monetary and non-monetary. Value of perquisite is charged to tax in the hands of the
employees, however, the employer may at his will pay tax (on behalf of employees) on such perquisites. In such
a case, the amount of tax paid on such perquisites by the employer on behalf of the employees will be treated as
income of the employees and is charged to tax in his (i.e., in employee’s) hands. However, by virtue of section
10(10CC) tax paid by employer (on behalf of employee) on non-monetary perquisites will be exempt from tax
in the hands of employees. Such tax paid by the employer shall not be allowed as a deductible expenditure
in the hands of employer under section 40. Section 10(10CC) provides exemption only in respect of tax on
nonmonetary perquisites. In other words, this section does not provide exemption in respect of perquisites or
tax paid on monetary perquisites.
Reference Case Law: The assessee, an employee, claimed that the tax paid by the employer on his salary
income is not liable to be included in his total income as it is exempt under section 10(10CC). Assessing Officer
disallowed the claim. The Tribunal following the Special bench in RBF Rigs Corpn. LIC (RBFRC) v. ACIT (2007)
109 ITD 141 (SB) (Delhi)(Trib.) held that tax borne by the employer on behalf of the employee would constitute
a non-monetary payment as such the same is exempt under section 10(10CC).
Amount paid on life insurance policy [Section 10(10D)]

As per section 10(10D), any amount received under a life insurance policy, including bonus is exempt from tax.
Following points should be noted in this regard:
• Exemption is available only in respect of amount received from life insurance policy. Exemption under
section 10(10D) is unconditionally available in respect of sum received for a policy which is issued
on or before March 31, 2003. However, in respect of policies issued on or after April 1st, 2003, the
exemption is available only if the amount of premium paid on such policy in any financial year does
not exceed 20% (10% in respect of policy taken on or after 1st April, 2012) of the actual capital sum
assured. With effect from 1-4-2013, in respect of policy taken in the name of a person suffering from
diseases specified under section 80DDB or in the name of a person suffering from disability specified
under section 80U, the limit will be increased to 15% of capital sum assured
• Value of premium agreed to be returned or of any benefit by way of bonus (or otherwise), over and
above the sum actually assured, which is received under the policy by any person, shall not be taken
into account while calculating the actual capital sum assured
52 PP-DTL&P
• Amount received on death of the person will continue to be exempt without any condition
Note: No exemption would be available in case of any sum received under section 80DD (3) or under Key man
insurance policy.
Payment from account opened in accordance with the Sukanya Samriddhi Account Rules,
2014 [Section 10(11A)]
As per section 10(11A), any payment from an account opened in accordance with the Sukanya Samriddhi
Account Rules, 2014 made under the Government Savings Bank Act, 1873 is exempt from tax. In other words,
interest and withdrawals from such account will be exempt from tax under section 10(11A).
Payment from the National Pension System Trust to an employee [Section 10(12A)]
Any payment from the National Pension System Trust to an employee on closure of account or his opting out
of the pension scheme referred to in section 80CCD, to the extent it does not exceed 60% of the total amount
payable to him at the time of closure or his opting out of the scheme, is exempt from tax.
Partial withdrawal from NPS [Section 10(12B)]

To provide relief to an employee withdrawing partial amount from National Pension System (NPS) Trust. A
new clause (12B) is inserted under section 10 with effect from assessment year 2018-19 to provide that the
withdrawal from NPS will not be chargeable to tax if the following conditions are satisfied:
1) Amount of withdrawal should not exceed 25% of total contribution made by an employee in NPS.
2) Partial withdrawal should be made in accordance with the terms and conditions specified under the
Pension Fund Regulatory and Development Authority Act, 2013 and the regulations made thereunder.
Payment from approved superannuation fund in specified circumstances and subject to

certain limits [Section 10(13)]
Approved superannuation fund means superannuation fund which is approved by the Commissioner of Income-
tax. Tax treatment of such fund is as follows:
Employer’s contribution is exempt from tax, however, from assessment year 2010-11 employer’s contribution
in excess of Rs. 1,50,000 per annum is charged to tax as perquisite. Employee’s contribution qualifies for
deduction under section 80C and interest on accumulated balance is not liable to tax.
Payments made from the fund are exempt from tax under section 10(13) in following cases:
l Payment on death of beneficiary; or
l Payment to employee in lieu of, or in commutation of an annuity on his retirement at or after the
specified age or on his becoming incapable prior to such retirement; or
l Payment by way of refund of contributions on the death of a beneficiary; or
l Payment to employee by way of refund of his contributions on leaving the service in connection with
which the fund is established otherwise than by retirement at or after a specified age or on his becoming
incapacitated prior to such retirement; or Payment to employee by way of transfer to his account under
a pension scheme referred to in section 80CCD
Allowances for meeting business expenditure [Section 10(14)]

These allowances are explained in detail in salary chapter.
Interest Incomes [Section 10(15)]

Interest, Redemption Premium, on notified securities, bonds, certificates, deposits etc., are exempt for all
assessees.
Lease rent of an aircraft [Section 10(15A)]

Lease rent of an aircraft or an aircraft engine paid to a foreign Government or to a foreign enterprise by an
Indian company, engaged in the business of operation of aircraft is not taxable in the hands of such foreign
Government or non-resident concern, if such payment is in pursuance of an agreement (approved by the
Central Government) made before April 1, 1997 or after March 31, 1999 but before April 1, 2007. If such
agreement is entered into during April 1, 1997 and March 31, 1999 or after March 31, 2007, then exemption
under section 10(15A) is not available. However, in such a case, if tax on such payments is borne by the payer,
then tax so borne by the payer is exempt in the hands of payee under section 10(6BB), provided agreement is
approved by the Central Government.
Educational scholarship [Section 10(16)]

Any amount received as educational scholarship (i.e., scholarship to meet the cost of education is exempt from
tax in the hands of recipient).
Daily allowance to a Member of Parliament [Section 10(17)]

Following allowances are exempt from tax in the hands of a Member of Parliament and a Member of State
Legislature:
l Daily allowance received by a Member of Parliament or by a Member of State Legislature or by member
of any committee thereof.
l Any other allowance received by a Member of Parliament under the Members of Parliament (Constituency
Allowance) Rules, 1986.
l Any Constituency allowance received by a Member of State Legislature.
Awards [Section 10(17A)]

Any payment received in pursuance of following (whether paid in cash or in kind) is exempt from tax:
l Any award instituted in the public interest by the Central Government or State Government or by any
other body approved by the Central Government in this behalf.
l Any reward by the Central Government or any State Government for such purpose as may be approved
by the Central Government in this behalf in the public interest.
Pension to gallantry award winner [Section 10(18)]

Pension received by an individual who was employee of the Central Government or State Government and who
has been awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or any other notified gallantry award is
exempt from tax. Family pension received by any member of such individual is also exempt.
Family pension received by the family members of armed forces [Section 10(19)]
From the assessment year 2005-06, family pension received by the widow or children or nominated heirs, of a
member of armed forces (including paramilitary forces) of the Union, is exempt from tax in the hands of such
family members, if the death of such member of armed forces has occurred in the course of operational duty in
prescribed circumstances and subject to such conditions as may be prescribed.
54 PP-DTL&P
Income of a news agency [Section 10(22B)]

Any income of a notified news agency, set-up in India solely for collection and distribution of news is exempt
from tax provided that the news agency applies its income or accumulates it for application solely for collection
and distribution of news and does not distribute its income in any manner to its members.
Income of a professional association [Section 10(23A)]

Any income (other than income from house property and income from rendering any specific service or income
by way of interest or dividend on investment) of an professional institution/association is exempt from tax, if the
following conditions are satisfied:
l Professional institution is established in India for the purpose of control, supervision, regulation or
encouragement of the profession of law, medicine, accountancy, engineering or architecture or such
other notified profession.
l The institution applies its income, or accumulates it for application, solely to the objects for which it is
established.
l The institution is approved by the Central Government by general or special order.
Income received on behalf of Regimental Fund [Section 10(23AA)]

Any income received by any person on behalf of any Regimental Fund or Non-Public Fund established by the
armed forces of the Union for the welfare of the past and present members of such forces or their dependents,
is exempt from tax.
Income of a fund established for welfare of employees [Section 10(23AAA)]

Any income received by any person on behalf of a fund established, for such purpose as may be notified by the
Board in Official Gazette, for the welfare of employees or their dependents and of which fund such employees
are members, is exempt from tax, if such fund applies or accumulates its income for exclusive application
towards its objects, invests its funds in the modes specified in section 11(5) and such fund is approved by the
Principal Commissioner or Commissioner in accordance with rule made in this behalf (see rule 16C and Form
No. 9).
Income of pension fund [Section 10(23AAB)]

Any income of a fund set-up by the Life Insurance Corporation of India on or after August 1, 1996 or any other
insurer to which contribution is made by any person for receiving pension from such fund, and which is approved
by the Controller of Insurance or the Insurance Regulatory and Development Authority, is exempt from tax.
Income from Khadi or village industry [Section 10(23B)]

Income of an institution constituted as a public charitable trust or society which is established for the development
of khadi and village industries (not for profit purpose) is exempt from tax, if following conditions are satisfied:
1) Income is attributable to the business of production, sale, or marketing, of khadi or products of village
industries.
2) Institution applies its income, or accumulates it for application, solely for the development of khadi or
village industries or both 3) Institution is approved by the Khadi and Village Industries Commission.
Income of Hospital [Section 10(23C)]

Income arises to 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, shall be exempt from tax under following situations: 1) If the hospital or other institution is wholly or
substantially financed by the Government then exemption would be available under section 10(23C). 2) If the
aggregate annual receipt of such hospital or institution do not exceed Rs. 1 Crore then exemption would be
available under section 10(23C). 3) If the hospital is approved by the prescribed authority
Income of mutual fund [Section 10(23D)]

Any income of following mutual funds (subject to provisions of sections 115R to 115T) is exempt from tax:
l A mutual fund registered under the Securities and Exchange Board of India Act or regulation made
thereunder.
l A mutual fund set-up by a public-sector bank, or a public financial institution or authorised by RBI
(subject to conditions notified by the Central Government).
Income of notified investor protection fund [Section 10(23EA)]

Any income by way of contributions received from recognised stock exchanges and the members thereof, of a
notified Investor Protection Fund set up by recognised stock exchanges in India is exempt from tax. Provided
that 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 whole of the amount so shared
shall be deemed to be the income of the previous year in which such amount is so shared and shall accordingly
be chargeable to income-tax.
Income of the notified investor protection fund set-up by commodity exchange [Section
10(23EC)]
Any income by way of contributions received from commodity exchanges and the members thereof, of a notified
Investor Protection Fund set up by commodity exchanges in India is exempt from tax. Provided that 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 commodity exchange, the whole of the amount so shared shall be deemed to
be the income of the previous year in which such amount is so shared and shall accordingly be chargeable to
income-tax.
Income of Investor Protection Fund set by a depository [Section 10(23ED)]

Any income, by way of contributions received from a depository, of notified Investor Protection Fund set up by
a depository in accordance with the regulations made under the SEBI Act and Depository Act is exempt from
tax. Provided that 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 depository, the whole of the amount so shared shall
be deemed to be the income of the previous year in which such amount is so shared and shall, accordingly, be
chargeable to income-tax.
Income of a venture capital fund or a venture capital company from investment in a venture
capital undertaking [Section 10(23FB)]
Income of a venture capital fund or a venture capital company from investment in a venture capital undertaking is
exempt from tax from assessment year 2001-02. However, this exemption is subject to satisfaction of conditions
specified in section 10(23FB). These provisions shall not apply in respect of any income of a venture capital
company or venture capital fund, being an investment fund specified in clause (a) of the Explanation 1 to section
115UB, of the previous year relevant to the assessment year beginning on or after the 1st day of April, 2016.
56 PP-DTL&P
Income of an investment fund [Section 10(23FBA)]

Any income of an investment fund other than the income chargeable under the head “Profits and gains of
business or profession” is exempt under Section 10(23FBA). “Investment fund” shall have the same meaning
assigned to it in clause (a) of the Explanation 1 to section 115UB. Income referred to in section 115UB of a
unit holder of an investment fund [Section 10(23FBB)] Any income referred to in section 115UB, accruing or
arising to, or received by, a unit holder of an investment fund, being that proportion of income, which is of the
same nature as income chargeable under the head “Profits and gains of business or profession” is exempt
under section 10(23FBB). “Investment fund” shall have the same meaning assigned to it in clause (a) of the
Explanation 1 to section 115UB.
Income of a registered trade union [Section 10(24)]

Any income chargeable under the head “Income from house property” and “Income from other sources” of a
registered union within the meaning of the Indian Trade Union Act, 1926, formed primarily for the purpose of
regulating the relation between workmen and employers or between workmen and workmen is exempt from tax.
Similar exemption is available to an association of registered unions.
Income of provident fund [Section 10(25)]

Following income is exempt from tax under this section:
• Interest on securities held by a statutory provident fund and any capital gains arising from such securities
• Any income received by the trustee on behalf of a recognised provident fund or an approved
superannuation fund or an approved gratuity fund; and
• Any income received by the Board of Trustees on behalf of Deposit-linked Insurance Fund.
Income of the Employees’ State Insurance Fund [Section 10(25A)]

Any income of the Employees’ State Insurance Fund of the Employees’ State Insurance Corporation set-up
under the provisions of the Employees’ State Insurance Act, 1948 is exempt from tax under section 10(25A).
Income of a member of a Scheduled Tribe [Section 10(26)]

Income of a member of a Scheduled Tribe [as per article 366(25) of the Constitution] is exempt from tax, if
following conditions are satisfied:
• Such member resides in any area in the State of Nagaland, Manipur, Tripura, Arunachal Pradesh,
Mizoram or district of North Cachar Hills, Mikir Hills, Khasi Hills, Jaintia Hills and Garo Hills or in the
Ladakh region of the State of Jammu and Kashmir.
• Such exemption is available in respect of income which accrues/arises from any source in such areas
or income by way of dividends/interest on securities arises from any area.
Income of Minor [Section 10(32)]

Under section 64(1A) income of a minor child is clubbed along with the income of his/her parent, subject to
certain conditions.
If the income of an individual includes any income of his/her minor child, then such individual can claim exemption
(in respect of each minor child) of lower of following amount:
(a) Rs. 1,500 per minor child; or
(b) Amount of income of each minor child (which is clubbed).
Dividends and interest on units [Section 10(34)/ (35)]

Following incomes are not chargeable to tax from the assessment year 2004-05:
• Any income by way of dividends covered by section 115-O [i.e., any dividends from a domestic company
other than dividends covered under section 2(22)(e)]; However, as per section 115BBDA (as inserted
by Finance Act, 2016), in the case of person other than Domestic Company, Funds u/s 10(23C) &
Trusts u/s 12A/12AA, dividend shall be chargeable to tax at the rate of 10% if aggregate amount of
dividend received during the year exceeds Rs. 10,00,000.
• Any income in respect of units of a mutual fund;
• Income received by a unit holder of UTI;
• Income in respect of units of a specified company.
Note:
1. Under section 115-O and section 115R, the person paying the dividends on share or income on units
will have to pay distribution tax on dividend/income distributed.
2. It should be noted that under this clause, Income on transfer of units is not exempt.
Income from international sporting event [Section 10(39)]

From the assessment year 2006-07, any specified income of notified person, arising from an international
sporting event held in India is exempt from tax, if the event is approved by the international body and is notified
by the Central Government and has participation by more than two countries.
Income received as grant by a subsidiary company [Section 10(40)]

Income of any subsidiary company by way of grant or otherwise received from its Indian holding company which
is engaged in the business of generation/ transmission/distribution of power is exempt, if such receipt is for
settlement of dues in connection with reconstruction or revival of an existing business of power generation. The
exemption is available, if the reconstruction or revival is by way of transfer of business to the Indian company
notified under section 80 IA(4)(v)(a).
Under section 10(41), any capital gain arising in the above case is not chargeable to tax, if the transfer has
taken place before April 1, 2006
Income from transfer of asset of an undertaking engaged in the business of generation,

transmission or distribution of power [Section 10(41)]
Income from transfer of capital asset of an undertaking engaged in the business of generation, transmission or
distribution of power where such transfer takes place on or before 31.3.2006 and transfer is made to the Indian
company as notified u/s 801A.
Income of a body or authority set up by two countries [Section 10(42)]

Any specified income arising to a body or authority which –
• 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;
• is established or constituted or appointed not for the purposes of profit;
• is notified by the Central Government in the Official Gazette for the purposes of this clause shall be fully
exempted.
58 PP-DTL&P
Reverse Mortgage [Section 10(43)]

Any amount received by an individual as a loan, either in lump-sum or in instalment in a transaction of reverse
mortgage referred in clause (xvi) of Section 47 shall be exempted.
New Pension System Trust [Section 10(44)]

Any income received by any person for, or on behalf of the New Pension System Trust established on 27th
February, 2008 shall be exempted.
Exemption of Allowance or perquisite to chairman/member of UPSC [Section 10 (45)]

Any allowance or perquisite, as may be notified by the Central Government in the Official Gazette, in this behalf,
paid to the chairman or a retired chairman or any other member or retired member of the Union Public Service
Commission, shall be exempt.
Exemption of ‘specified income’ of certain bodies or authorities [Section 10(46)]

Any specified income arising to a body or authority or Board or Trust or Commission which:
• is constituted or established by or under a Central, State or Provincial Act, or has been constituted by
the Central Government or a State Government with the object of regulating or administering an activity
for the benefit of general public;
• is not engaged in commercial activity; and
• is specified by the Central Government by notification in the Official Gazette in this behalf, shall be
exempt.
The Central Government has the power to notify the nature and extent of the income of the body or authority or
Board or Trust or Commission which shall constitute the specified income.
Exemption of Income of notified ‘Infrastructure debt fund’ [Section 10(47)]

Any income of notified ‘infrastructure debt fund’, which is set up in accordance with the guidelines as may be
prescribed, shall be exempt from income-tax.
Exemption of Income of a foreign company from sale of Crude Oil in India [Section 10 (48)]
Any income of a foreign Co. received in India in Indian currency on account of sale of crude oil to any person in
India shall be exempt if the following conditions are satisfied.
• Such Income is in pursuant to an agreement or an arrangement entered into by the Central Govt. or
approved by the Central Govt.;
• having regard to the national interest, the foreign company and the agreement or arrangement are
notified by the Central Govt. in this behalf; and
• the foreign company is not engaged in any activity, other than receipt of such income, in India.
Exemption of income of National Financial Holdings Company [Section 10(49)]

Any income of the National Financial Holdings Company, being a company set-up by the Central Government,
shall be exempt.
Other important exemptions

1) Section 10AA provides for exemption in respect of income of newly established units in Special
Economic Zones
Applicability
This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:
(i) it has begun or begins to manufacture or produce articles or things or provide services during the
previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any
Special Economic Zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is
formed as a result of the re-establishment, reconstruction or revival by the assessment of the business
of any such undertaking as is referred to in section 33B, in the circumstances and within the period
specified in that section;
(iii) it is not formed by the transfer to a new business, of machinery plant previously used for any purpose.
Deduction
(i) 100% of profits and gains derived from the export, of such articles or things or from services for a period
of five consecutive assessment years beginning with the assessment year relevant to the previous
year in which the Unit begins to manufacture or produce such articles or things or provide services,
as the case may be, and fifty per cent of such profits and gains for further five assessment years and
thereafter;
(ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent
of the profit as is debited to the profit and loss account of the previous year in respect of which the
deduction is to be allowed and credited to a reserve account (to be called the “Special Economic Zone
Re-investment Reserve Account”) to be created and utilized for the purposes of the business of the
assessee in the manner laid down in sub-section (2).
Calculation of Deduction
Step 1: Calculate the total income of the assessee as per the provisions of the act, but before allowing deduction
under section 10AA.
Step 2 : From the amount calculated in Step 1, allow the deduction under section 10AA, which is least of the
following;
– Amount calculated under step 1; or
– Amount deductible under section 10AA
Conditions:
a) the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilised -
(i) for the purpose of acquiring machinery or plant which is first put to use before the expiry of a
period of three years following the previous year in which the reserve was created; and
(ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of
the undertaking other than for distribution by way of dividends or profits or for remittance outside
India as profits or for the creation of any asset outside India;
b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause
(b) of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery
or plant along with the return of income for the assessment year relevant to the previous year in which
such plant or machinery was first put to use.
60 PP-DTL&P
Where any amount credited to the Special Economic Zone Re-investment Reserve Account has been utilised
for any purpose other than those referred, the amount so utilised; or has not been utilised before the expiry of
the period specified, the amount not so utilised, shall be deemed to be the profits,
(i) in a case referred to in clause (a), in the year in which the amount was so utilised; or
(ii) in a case referred to in clause (b), in the year immediately following the period of three years specified
in sub-clause (i) of clause (a) of sub-section (2), and shall be charged to tax accordingly
SUMMARY CHART
Fully Partly
Exempt Exempt
Agricultural
Gratuity
Income
Interest on NRE
a/c of a person Leave
resident o/s Encashment
India
Compensation
received in lieu HRA
of disasters
NPS
Government Withdrawals on
Awards closure / opt
outs
Pension by
recepients of Retrenchment
Gallantry Compensation
Awards
Recd. by a
Receipts from
member from
LIC
the HUF
Clubbed
Share of Partner
Incomes
Allowances paid
o/s India by Commuted
Govt. to Indian Pension
Citizens
Income of
Payments to
member of
MP's / MLA's
Scheduled Tribe
LESSON ROUND UP
– Tax is the financial charge imposed by the Government on income, commodity or activity. Government
imposes two types of taxes namely Direct taxes and Indirect taxes. Direct tax is one where burden of
tax is directly on the payer. While Indirect tax is paid by the person other than the person who utilizes
the product or service.
– The Income tax Act contains the provisions for determination of taxable income, determination of tax
liability, procedure for assessment, appeal, penalties and prosecutions.
– Every year a Budget is presented before the parliament by the Finance Minister. One of the important
components of the Budget is the Finance Bill. The Bill contains various amendments such as the rates
of income tax and other taxes. When the Finance Bill is approved by both the houses of parliament
and receives the assent of President, it becomes the Finance Act.
– To levy income tax, one must have the understanding of the various concepts related to the charge of
tax like previous year, assessment year, Income, total income, person etc.
– Assessee : In common parlance every tax payer is an assessee. However, the word assessee has
been defined in Section 2(7) of the Act according to which assessee means a person by whom any
tax or any other sum of money (i.e. interest, penalty etc.) is payable under the Act.
– Person : Income-tax is charged in respect of the total income of the previous year of every person.
Hence, it is important to know the definition of the word person.
– Assessment year means the period of twelve months commencing on 1st April every year.
– Previous year : Income earned in a year is taxable in the next year. The year in which income is
earned is known as previous year.
– Computation of income : Income tax is a charge on the assessee’s income. Income Tax law lays down
the provisions for computing the taxable income on which tax is to be charged.
– Total income of an assessee cannot be computed unless the person’s residential status in India during
the previous year is known. According to the residential status, the assessee can either be;
(i) Resident in India or
(ii) Non-resident in India
– Section 6 of the Income-tax Act prescribes the tests to be applied to determine the residential status
of all tax payers for purposes of income-tax. There are three alternative tests to be applied for
individuals, two for companies and Hindu Undivided Families and firms, associations of persons,
bodies of individuals and artificial juridical persons.
– Basis of charge : Section 4 of the Act is the charging section which imposes a charge and provides
rules for working out the charge so imposed. Section 4 of the Act imposes a charge of tax on the
total or taxable income of the assessee. The meaning and scope of the expression of total income
is contained in Section 5. The total income of an assessee cannot determined unless we know the
residential status in India during the previous year. The scope of total income and consequently the
liability to income-tax also depends upon the following facts :
• whether the income accrues or is received in India or outside,
• the exact place and point of time at which the accrual or receipt of income takes place, and
• the residential status of the assessee.
62 PP-DTL&P
SELF TEST QUESTIONS

These are meant for re-capitulation only. Answers to these questions are not to be submitted for evaluation.
SHORT NOTES
(1) Income deemed to be received in India
(2) Income deemed to accrue or arise in India
(3) Residential Status of an Individual
(4) Residential Status of Company
(5) Define the term ‘POEM’ Place of Effective Management
ELABORATIVE QUESTIONS :
(1) What are the different categories into which the assessees are divided regarding residence and how
is the residence of assessees determined for income-tax purposes? Explain.
(2) What tests would you apply to determine the residence of :
(a) a Hindu Undivided family,
(b) a firm,
(c) a limited company,
(d) an individual.
SUGGESTED READINGS
2. Dr. Vinod K. Singhania & Dr. Kapil Singhania – Direct Tax Laws and Practice [61st Edition – Wolters
Kluwer]
3. Dr. Girish Ahuja & Dr. Ravi Gupta – Direct Tax Laws and Practice [Taxmann’s 11th Edition]
4. Dr. Vinod K Singhania – Direct Taxes Ready Reckoner [Taxmann’s 42nd Edition]
6. Circular’s – https://www.incometaxindia.gov.in/Pages/communications/circulars.asp
Lesson 2 n Computation of Income under the Head of Salary 63
Lesson 2
Computation of Income under
the Head of Salary
LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction The taxability of income of a person depends on
– Employer-Employee Relationship the chargeability of such income under the Income
tax Act 1961. The total income of an assessee
– Basis of Charge
(subject to statutory exemptions) is chargeable
– Salary, Perquisites and Profit in lieu of under Section 4(1). The scope of the total income,
Salary [Section 17] which varies with the residential status, is defined
in Section 5. Section 14 enumerates the heads of
– Allowances
income under which the income of an assessee
– Perquisites will fall. The rules for computing income and the
– Deduction [Section 16] permissible deductions under different heads of
income, are dealt in different sections of the Act. The
– Relief [Section 89] heads of income, along with their corresponding
– Case Study set of sections for the purpose of computation of
income, are given below : (A) Salaries (Sections 15
– LESSON ROUND UP to 17); (B) Income from house property (Sections
– SELF TEST QUESTIONS 22 to 27); (C) Profits and gains of business or
profession (Sections 28 to 44D); (D) Capital gains
(Sections 45 to 55A); and (E) Income from other
sources (Sections 56 to 59).
understand learn how to calculate income under
the head salaries, what are the deductions,
exemptions available from salaries.
63
64 PP-DTL&P
INTRODUCTION
The provisions pertaining to Income under the head “Salaries” are contained in sections 15, 16 and 17.
Income under the head Meaning (Section 17)

Salary 1. Salary
2. Perquisite
3.Profits in lieu of Salary
Deduction (Section 16)
Chargeability
1. Standard Deduction (Section 16ia)
(Section 15)
2. Entertainment Allowance(Section
16(ii))
2. Professional Tax(Section 16(iii))
EMPLOYER-EMPLOYEE RELATIONSHIP
Before an income can become chargeable under the head ‘salaries’, it is vital that there should exist between
the payer and the payee, the relationship of an employer and an employee. As such the existence of “employer-
employee” relationship is the “sine-qua- non” for taxing a particular receipt under the head salaries. It does not
matter whether the employee is a full time employee or a part-time one. If, for example, an employee works with
more than one employer, salaries received from all the employers should be clubbed and brought to charge
for the relevant previous years. Once the relationship of employer and employee exists, the income is to be
charged under the head “salaries”.
Case Study
(a) Katrina, an actress, is employed in Bansali Films, where she is paid a monthly remuneration of Rs.
10 lakh. She acts in various films produced by various producers. The remuneration for acting in such
films is directly paid to Chopra Films by the different producers. Is the amount received by Katrina is
taxable as a Salary? Will your answer be different if she acts in various films and gets fees from different
producers?
Ans: Case 1: In this case, Rs. 10 lakh will constitute salary in the hands of Katrina, since the relationship
of employer and employee exists between Bansali Films and Katrina.
Case 2: if Katrina acts in various films and gets fees from different producers, the same income will be
chargeable as income from profession since the relationship of employer and employee does not exist
between Katrina and the film producers.
Foregoing of Salary v Surrender of Salary

Foregoing of Salary: Once salary accrues, the subsequent waiver by the employee does not absolve him from
liability to income-tax. Such waiver is only an application and hence, chargeable to tax.
Surrender of salary: However, if an employee surrenders his salary to the Central Government under section
2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would
be exempt while computing his taxable income.
Place of Accrual of Salary

• Section 9(1)(ii), salary earned in India is deemed to accrue or arise in India even if it is paid outside
India or it is paid or payable after the contract of employment in India comes to an end.
• If an employee gets pension paid abroad in respect of services rendered in India, the same will be
deemed to accrue in India.
• Leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in India.
For this purpose, section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for
services outside India shall be deemed to accrue or arise in India. However, by virtue of section 10(7), any
allowance or perquisites paid or allowed outside India by the Government to a citizen of India for rendering
services outside India will be fully exempt.
BASIS OF CHARGE
Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis,
whichever is earlier. However, where any salary, paid in advance, is assessed in the year of payment, it cannot
be subsequently brought to tax in the year in which it becomes due. If the salary paid in arrears has already
been assessed on due basis, the same cannot be taxed again when it is paid. As per Section 15, the income
chargeable to income tax under the head salaries would include:
• Any salary due to an employee from an employer or a former employer during the previous year
irrespective of the fact whether it is paid or not.
• Any salary paid or allowed to the employee during the previous year by or on behalf of an employer,
or former employer, would be taxable under this head even though such amounts are not due to him
during the accounting year.
• Arrears of salary paid or allowed to the employee during the previous year by or on behalf of an
employer or a former employer would be chargeable to tax during the previous year in cases where
such arrears were not charged to tax in any earlier year.
In short, salary is chargeable to tax on DUE OR RECEIPTS BASIS, whichever is earlier.
(i) Due basis – when it is earned even if it is not received in the P.Y. (Accrued)
(ii) Receipt basis – when it is received even if it is not earned in the P.Y. (Advance)
Difference between advance salary and advance against salary

Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain
specified installments, the loan amount cannot be brought to tax as salary of the employee. Similarly, advance
against salary is different from advance salary. It is an advance taken by the employee from his employer. This
advance is generally adjusted with his salary over a specified time period. It cannot be taxed as salary.
Proforma for computation of income under the head “Salaries”

Particulars Amount
(i) Basic Salary xxx
(ii) Fees/Commission xxx
(iii) Bonus xxx
(iv) Allowances:
(a) Dearness Allowance xxx
(b) House Rent Allowance xxx
Less: Least of the following is exempt
HRA actually received xxx
Rent paid (-)10% of salary for the relevant period xxx
66 PP-DTL&P
50%/40% of salary for the relevant period xxx xxx
(c) Children Education Allowance xxx

Less: 100 per month per child upto maximum of two children xxx xxx
(d) Children Hostel Allowance xxx

Less: 300 per month per child upto maximum of two children xxx xxx
(e) Transport allowance xxx

Less: (3,200 in case of blind or deaf and dumb or orthopedically xxx xxx
handicapped employee)
(f) Entertainment Allowance xxx
(g) Other Allowances xxx
(v) Taxable Perquisites
(a) Valuation of rent free accommodation
If accommodation owned by the employer
(i) Cities having population > 25 lakh
15% of salary (–) rent recovered from employee
(ii) Cities having population > 10 lakh < 25 lakh 10% of salary (–) rent recovered
from employee
(iii) In other cities
7.5% of salary (-) rent recovered from employee
If accommodation taken on lease by the employer
Lower of the following
Rent paid by the employer or
15% of salary
Less: rent recovered from the employee xxx
(b) Valuation of use of motor car xxx
(c) Any other perquisite xxx
(vi) Taxable annuity or uncommuted pension xxx
(vii) Taxable Commuted pension xxx
(viii) Taxable Gratuity xxx
(ix) Leave encashment xxx
(x) Leave travel concession/Voluntary retirement compensation/Retrenchment compensation etc. xxx
(xi) Professional tax, if paid by the employer xxx
Gross Salary xxx
Less: Standard Deduction (Rs. 50,000 or salary which ever is less) (xxx)
Less: Entertainment allowance (only for Govt employees) (xxx)
Less: Professional Tax (xxx)
Income under the head salary xxx
SALARY, PERQUISITE AND PROFITS IN LIEU OF SALARY [SECTION 17]

The meaning of the term ‘salary’ for purposes of income tax is much wider than what is normally understood.
The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic
salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation,
medical facility, interest free loans etc).
Section 17(1), defined the term “Salary”. It is an inclusive definition and includes monetary as well as non-
monetary items.
Definition of Salary [Section 17(1)]

(i) wages,
(ii) any annuity or pension,
(iii) any gratuity,
(iv) any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,
(v) any advance of salary,
(vi) any payment received in respect of any period of leave not availed by him i.e. leave salary or leave
encashment,
(vii) the portion of the annual accretion in any previous year to the balance at the credit of an employee
participating in a recognized provident fund to the extent it is taxable and
(viii) transferred balance in recognized provident fund to the extent it is taxable,
(ix) the contribution made by the Central Government or any other employer in the previous year to the
account of an employee under a pension scheme referred to in section 80CCD.
Wages
In common parlance, the term “wages” means fixed regular payment earned for work or services. The words
“wages”, “salary”, “basic salary” are used interchangeably. Moreover, the payments in the form of Bonus,
Allowances etc. made to the employee are also included within the meaning of salary.
Profits in lieu of Salary

It includes the following:
(i) The amount of any compensation due to or received by an assessee from his employer or former
employer at or in connection with the termination of his employment.
(ii) The amount of any compensation due to or received by an assessee from his employer or former
employer at or in connection with the modification of the terms and conditions of employment. Usually,
such compensation is treated as a capital receipt. However, by virtue of this provision, the same is
treated as a revenue receipt and is chargeable as salary.
(iii) Any payment due to or received by an assessee from his employer or former employer from a provident
or other fund, to the sum allocated by way of bonus on such policy.
(iv) Any sum received by an assessee under a keyman insurance policy including the sum allocated by way
of bonus on such policy.
(v) Any amount, whether in lumpsum or otherwise, due to the assessee or received by him, from any
person -
68 PP-DTL&P
(a) before joining employment with that person, or

(b) after cessation of his employment with that person.
(vi) Any other sum received by the employee from the employer
Computation of Salary in the Grade System

An employee may be entitled to receive Salary in grade system. Under this system, the normal annual increments
to be given to employee are already fixed in the grade.
For example, if an employee joins the service on 01.06.2010 and is placed in the grade of Rs. 10000-1000-
15000-2000-25000 then his salary from 01.06.2010 will be Rs. 10,000 p.m. and thereafter his salary will be Rs.
11000 p.m. w.e.f. 31.05.2011 until it reaches Rs. 15,000 after which it will increase annually by Rs. 2000 until it
reaches Rs. 25,000. After that, employee will be placed in another grade.
In certain cases, employee joins in the grade at a salary in between the grade, in that case his salary will
annually increase in the aforesaid manner the only difference is that his intial salary would be a different amount
than the start of grade. For example, if an employee joins the service in the grade of 10000-1000-15000-2000-
25000 on 01.08.2017 at a salary of Rs. 13000, then his salary from 01.08.2017 will be 13000 p.m. and therafter
his salary will be 14000 p.m. w.e.f. 01.08.2018 until it reaches Rs. 15,000 after which it will increase annually by
Rs. 2,000 until it reaches Rs. 25,000.
Different forms of Taxability

salary
Basic salary Taxable.
D.A./pay Taxable.
Advance salary Taxable in the year of receipt
Arrears of salary Taxable in the year of receipt, if not taxed on due basis earlier.
Leave Salary 1. Government employees (only Central or State government)- fully exempt from
[Section tax.
10(10AA)]
2. Non-Government employees, exempt from tax to the extent of the least of the
following:
(a) Cash equivalent of leave salary in respect of the period of earned leave at
the credit of employee at the time of retirement (which cannot exceed 30
days’ “average salary” for every completed year of service); or
(b) 10 months “average salary”; or
(c) Amount specified by the Government i.e. Rs. 3,00,000 or
(d) Leave encashment actually received at the time of retirement.
Notes –
1. “Average salary” means average salary drawn during the period of 10 months
immediately preceding the retirement.
2. Fraction number of years are completely ignored. If the employee rendered
service of 5 years 10 months it will be taken as 5.
3. Leave salary received during the period of service is taxable in all cases.
4. Where an employee has received from his previous employer cash equivalent
to his earned leave and also receives from present employer leave encashment,
the maximum limit shall be reduced by the amount previously exempted.
5. Leave Encashment paid to legal heirs of the deceased employee at the time of
his/her death is not taxable as salary.
6. Meaning of salary: Basic salary, Conditional D.A. and commission based on
fixed percentage of turnover.
Salary in lieu of Taxable.

notice
Fees and com- Taxable.

mission
Bonus Taxable on receipt basis if not taxed earlier on due basis.
Gratuity 1. Government employee [Section 10(10)(i)] (Central Government or State

Government or Local authority but not employees of statutory corporation) –
fully exempt from tax.
2. Non-Government employee covered by the POGA 1972 [Section 10(10)(ii)]:
Least of the following is exempt and the balance (Amt. Received (–) Amt.
Exempted) is taxable :
(a) 15 days salary** last drawn for each completed year of service in excess
of six month;
(b) Rs.20,00,000 (Increased from 10 lacs to 20 lacs by Payment of Gratuity
(Amendment) Act, 2018) ; or
(c) Gratuity actually received.
** Salary means: Basis salary + DA
3. Non-Government employee (not covered by POGA) [Section 10(10)(iii)] exempt
from tax to the extent of the least of the following:
(a) Rs. 20,00,000 (Increased from 10 lacs to 20 lacs by Payment of Gratuity
(Amendment) Act, 2018) ;
(b) Half month’s average salary** for each completed year of service; or
(c) Gratuity actually received.
**Salary means: Basis salary (average of last 10 months) + Dearness allowance (if
provided in terms of employment) + commission as a percentage of turnover achieved
by the employee.
Average salary for this purpose is to be calculated on the basis of average salary drawn
during the period of 10 months immediately preceding the month in which the em-
ployee has retired.
IMPORTANT NOTES:
1. Employees of a seasonal establishment: Instead of 15 days, 7 days salary.
2. Piece rated employee: Daily wages shall be computed on the average of the
total wages received by him for a period of three months immediately preceding
the retirement.
70 PP-DTL&P
3. Where an employee receives gratuity from two or more employers in the same
previous year, then the exemption shall not exceed the maximum limit of Rs.20
lacs. It is very important to note that this provision is applicable only in case
of residual category of employees covered under 10(10)(iii). It means it is not
applicable in case of employees covered by Payment of Gratuity Act.
4. Gratuity received by family members after the death of employee:–
• If gratuity becomes due during lifetime or at time of retirement of assessee
it is taxable in hands of assessee.
• If gratuity becomes due and received after death of employee it is not
taxable in hands of employee. It is also not taxable in hands of legal heirs
as it does not takes partake the character of income in their hands but it is
only a part of estate devolving upon them.
Pension  Uncommuted pension is taxable in all cases.

 Commuted pension is fully exempt from tax in the case of a Government
employee (i.e. an employee of the Central Government, State Government, local
authority and statutory corporation). In the case of non-Government employee,
commuted pension is exempt to the extent given below –
(a) One-third of normal pension is exempt if the employee receives gratuity or
(b) One Half of normal pensions is exempt from tax if the employee does not
receive gratuity.
Pension under As per section 80CCD(1) if an individual employed by central government or any other
new pension employer on or after 01-01-2004 has paid or deposited any amount in a previous year in
scheme in the his account under a NPS a deduction of such amount not exceeding 10% of his salary
case of a Govern- is allowed.
ment employee or
any other employ- According to new provision the date of joining the service being on or after 1.1.2004 is
ee joining, on or not applicable to private sector employees.
after January 1,
2004 1. Employer’s contribution is first included in salary then a deduction is available
(to the extent 14 per cent of salary) under section 80CCD(2).
2. Employee’s contribution is deductible under section 80CCD(1) to the extent of
10 % of salary.
3. When pension is received out of the aforesaid amount, it will be taxable in the
year of receipt.
Employers contribution towards NPS is not considered for monetary ceiling of 1.5 lakh
Notes: –
• If pension is received from United Nation Organisation (UNO) by its employee
or his family members it is not chargeable to tax.
• Family pension received by family members of armed forces is fully exempt
from tax.
• Family pension received by other employee not covered above after death
of employee is taxable in hands of recipient under other sources after giving
standard deduction of 15000 or 1/3 rd of such pension whichever is lower
Annuity from em- Taxable as salary.

ployer
Annual accretion 1. Excess of employer’s contribution over 12% of salary is taxable.

to the credit bal-
2. Excess of interest over notified interest is taxable (notified rate of interest is
ance in RPF
9.5%)
Retrenchment Exempt from tax to the least of the following is exempt from tax—
compensation 1. Amount actually received;
2. Rs.5,00,000;
3. An amount calculated in accordance with Section 25F(b) of the Industrial
Disputes Act, 1947 i.e. 15 days average pay** for each completed year of
service or part thereof in excess of 6 months. However the aforesaid limit is not
applicable in cases where compensation is paid under any scheme approved by
the government.
** Average Pay means:

1. In case of monthly payment- Average of last 3 months.
2. In case of weekly payment- Average of last four completed weeks.
3. In case of daily payment- Average of Last 12 full working days.
Compensation re- It applies to an employee of the company or the authority, as the case may be, who has
ceived under vol- completed 10 years of service or completed 40 years of age.
untary retirement 1. Amount Actually received
scheme (VRS)
2. Amount specified by government i.e. Rs. 5 lakh
3. One of the condition is the amount payable on account of voluntary retirement
or voluntary separation of the employees does not exceed (a) the amount
equivalent to three month’s salary for each completed year of service, or (b)
the salary at the time of retirement multiplied by the balance months service left
before the dated of his retirement on superannuation, whichever is more. Relief
section 89 is not available.
Salary from UNO Not chargeable to tax.
Illustration 1. A is Product (Head) of Z ltd. He retires on November 30, 2019 after service of 25 years and 11
months. At the time of retirement he has been paid Rs. 2, 50,000 as gratuity, although Z Ltd. Is covered by
Payment of Gratuity Act 1972. Find gratuity taxable for assessment year 2020-21.
The following additional information is also provided:
1. Salary And Allowances
a. Basic salary and allowances Rs. 9,000 per month
b. Month from which increment is allowed July
c. Amount of last increment Rs. 1,000
d. Commission ( fixed on per month basis) Rs. 500
72 PP-DTL&P
2. Besides, he gets 0.5 percent commission on turnover achieved by his department. Turnover for different
months is as under:
a. January 2019 Rs. 80,000
b. February 2019 Rs. 90,000
c. March 2019 Rs. 60,000
d. April 2019 to June 2019 Rs. 4,00,000
e. July 2019 to October 2019 Rs. 5,00,000
f. November 2019 Rs. 1,00,000
3. As per service rules, salary and commission becomes due on first day of the next month and paid on
the same day.
Solution:
Basic salary from January to June 2019 (Rs. 8000 x 6) Rs. 48,000
Basic salary from July to October 2019 (Rs. 9000x 4) Rs. 36,000

Fixed Commission Nil
0.5% Commission on turnover during January to October 2019
(0.5% of Rs. 11, 30,000) Rs. 5,650
Total Rs. 89,650
Average Rs. 8,965.50
Computation of exemption under section 10(10) (iii)
Out of Rs. 2, 50,000, the least of following is exempt:
a. Rs. 20,00,000
b. Rs. 134482 [Rs. 8965.50 x26 (15/26)]) or
c. Rs. 2,50,000
Gratuity Amount chargeable to tax is Rs. 115518
ALLOWANCES
Allowance means the fixed sum paid by employer to employee to meet official or personal expenses. Different
types of allowances are given to employees by their employers. Generally allowances are given to employees
to meet some particular requirements like house rent, expenses on uniform, conveyance etc. Under the Income-
tax Act, 1961, allowance is taxable on due or receipt basis, whichever is earlier. Various types of allowances
normally in vogue are discussed below :
Allowances
Fully Taxable Partly Taxable Fully Exempt
(i) Entertainment Allowance (i) House Rent (i) Allowances to High Court
Allowance [u/s Judges
(ii) Dearness Allowance
10(13A)]
(ii) Allowance paid by the United
(iii) Overtime Allowance
(ii) Special Nations Organization.
(iv) Fixed Medical Allowance Allowances [u/s
(iii) Compensatory Allowance
(v) City Compensatory Allowance 10(14)]
received by a judge
(to meet increased cost of
(iv) Sumptuary allowance granted
living in cities)
to High Court or Supreme
(vi) Interim Allowance Court Judges
(vii) Servant Allowance (v) Allowance granted to
Government employees
(viii) Project Allowance
outside India.
(ix) Tiffin/Lunch/Dinner
(x) Any other cash Allowance
(xi) Warden Allowance
(xii) Non-practicing Allowance
(A) Allowances which are fully taxable

(1) City compensatory allowance: City Compensatory Allowance is normally intended to compensate the
employees for the higher cost of living in cities. It is taxable irrespective of the fact whether it is given
as compensation for performing his duties in a particular place or under special circumstances.
(2) Entertainment allowance: This allowance is given to employees to meet the expenses towards
hospitality in receiving customers etc. The Act gives a deduction towards entertainment allowance only
to a Government employee. In the case of government employees (only Central Government and State
Government), First included in salary and there after least of following is deductible;
1. Rs. 5000;
2. 20 per cent of basic salary; or
3. Entertainment allowance.
(3) Non government employees (including employees of statutory corporation and local authority): nothing
is allowed as deduction
Partially exempt or fully exempt allowances on satisfaction of the prescribed conditions

[Section 10(14)]
Certain allowances are exempt upto the amount spent for specified purposes i.e. exemption would be
lower of the actual allowance or amount spent for specified purposes –
Allowances prescribed for the purposes of section 10(14)(i)
(a) any allowance granted to meet the cost of travel on tour or on transfer (Travelling Allowance);
Explanation - “allowance granted to meet the cost of travel on transfer” includes any sum paid in
connection with the transfer, packing and transportation of personal effects on such transfer.
74 PP-DTL&P
(b) any allowance, whether granted on tour or for the period of journey in connection with transfer, to meet
the ordinary daily charges incurred by an employee on account of absence from his normal place of
duty;
(c) any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an
office or employment of profit (Conveyance Allowance);
(d) any allowance granted to meet the expenditure incurred on a helper where such helper is engaged in
the performance of the duties of an office or employment of profit (Helper Allowance);
(e) any allowance granted for encouraging the academic research and training pursuits in educational and
research institutions;
(f) any allowance granted to meet the expenditure on the purchase or maintenance of uniform for wear
during the performance of the duties of an office or employment of profit (Uniform Allowance).
Certain allowances are exempt upto the amount specified by Government i.e. exemption would be lower
of the actual allowance or amount specified by Government.
S. No. Name of Allowance Extent to which allowance is exempt
1. Any Special Compensatory Allowance in the nature Rs. 800 or Rs. 7,000 or Rs. 300 per month
of Special Compensatory (Hilly Areas) Allowance depending upon the specified locations
or High Altitude Allowance or Uncongenial Climate
Allowance or Snow Bound Area Allowance or
Avalanche Allowance
2. Any Special Compensatory Allowance in the nature of Rs. 1,300 or Rs. 1,100 or
border area allowance or remote locality allowance or
Rs. 1,050 or Rs. 750 or
difficult area allowance or disturbed area allowance
Rs. 300 or Rs. 200 per month depending
upon the specified locations.
3. Special Compensatory (Tribal Areas / Schedule Rs. 200 per month.
Areas / Agency Areas) Allowance
4. Allowance for transport employees 70% of such allowance upto a maximum of
Rs. 10,000 per month.
5. Children Education Allowance Rs. 100 per month per child upto a maximum
of two children.
6. Hostel expenditure allowance Rs. 300 per month per child upto a maximum
of two children.
7. Compensatory Field Area Allowance Rs. 2,600 per month in specified areas.
8. Compensatory Modified Field Area Allowance Rs. 1,000 per month in specified areas.
9. Transport allowance Rs. 3200 per month in the case of an

employee who is blind or orthopedically
handicapped employee with disability of
lower extremities or deaf and dump
10. Underground Allowance would be granted to an Rs. 800 per month

employee who is working in uncongenial, unnatural
climate in underground mines. This is applicable to
whole of India.
House rent Exempt from tax to the extent of the least of the following:
allowance 1. 50 per cent of salary in Delhi Mumbai Kolkata Chennai or 40 per cent of salary in
other cases;
2. House rent allowance; or
3. The excess of rent paid over 10 per cent of salary
Taxable HRA = Actual HRA – Exemption
(a) Exemption not available to an assessee who lives in his own house, or in a house
for which he has not incurred the expenditure of rent.
(b) Salary for this purpose means basic salary, dearness allowance, if provided in terms
of employment and commission as a fixed percentage of turnover.
(c) Salary determined on due basis. [Explanation (ii) to rule 2A]
Mode of computation of Exemption: The exemption depends on salary, HRA, rent paid
and place where house is taken. If all these factors are same throughout the previous year
the exemption should be calculated on “annual” basis otherwise monthly basis.
No exemption if employee resides in his own house. Exemption is available even if the house
is owned by close relative and for which rent is regularly paid ( Bajrang Prasad Ramdharant
v. CIT [2013] 60 SOT 66(Ahd.)
(B) Allowances which are fully exempt

(1) Allowance to High Court Judges: Any allowance paid to a Judge of a High Court under section 22A(2)
of the High Court Judges (Conditions of Service) Act, 1954 is not taxable.
(2) Allowance received from United Nations Organisation (UNO): Allowance paid by the UNO to its
employees is not taxable by virtue of section 2 of the United Nations (Privileges and Immunities) Act,
1947.
(3) Compensatory allowance under Article 222(2) of the Constitution: Compensatory allowance received
by judge under Article 222(2) of the Constitution is not taxable since it is neither salary not perquisite.
(4) Sumptuary allowance: Sumptuary allowance given to High Court Judges under section 22C of the High
Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges under section 23B of the
Supreme Court Judges (Conditions of Service) Act, 1958 is not chargeable to tax.
(5) Allowances payable outside India [Section 10(7)]
Allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India for
services rendered outside India are exempt from tax.
Students may remember that in such cases under section 9(1)(iii), the income chargeable under the head
‘Salaries’ is deemed to accrue in India. The residential status of the recipient will, however, not affect this
exemption.
Exemption of specified allowances and perquisites paid to Chairman or a retired Chairman or any other member
or retired member of the UPSC [Section 10(45)]
(i) Under the Income-tax Act, 1961, perquisites and allowances received by an employee are taxable
under the head “Salaries” unless they are specifically exempted.
76 PP-DTL&P
(ii) Section 10(45) exempts specified allowances and perquisites received by Chairman or any other
member, including retired Chairman/member, of the Union Public Service Commission (UPSC).
(iii) The exemption would be available in respect of such allowances and perquisites as may be notified by
the Central Government in this behalf.
(iv) Accordingly, the Central Government has notified the following allowances and perquisites for serving
Chairman and members of UPSC, for the purpose of exemption under section 10(45) -
(1) the value of rent free official residence,
(2) the value of conveyance facilities including transport allowance,
(3) the sumptuary allowance and
(4) the value of leave travel concession.
In case of retired Chairman and retired members of UPSC, the following have been notified for exemption under
section 10(45):
(i) a sum of maximum Rs.14,000 per month for defraying the service of an orderly and for meeting
expenses incurred towards secretarial assistance on contract basis.
(ii) the value of a residential telephone free of cost and the number of free calls to the extent of Rs.1,500
pm (over and above free calls per month allowed by the telephone authorities)
PERQUISITES
Perquisites are the benefits or amenities in cash or in kind, or in money or money’s worth and also amenities
which are not convertible into money, provided by the employer to the employee whether free of cost or at a
concessional rate. Their value, to the extent these go to reduce the expenditure that the employee normally
would have otherwise incurred in obtaining these benefits and amenities, is regarded as part of the taxable
salary.
Taxable Perquisites: We need to understand the valuation of perquisites. The table appended below,
summarises the taxable value of various perquisites in the hands of the employee assessees.
Sl. Perquisite Category of Value of perquisites

No. Employee
1 Rent Free Government Licence Fee determined as per the Government Rules, as
Residential Employee reduced by rent actually paid by the employee for unfurnished
Accommodation accommodation.
For a furnished accommodation, 10% p.a. of the furniture cost
is added to the value obtained above for unfurnished.
In case the furniture is hired, the actual hire charges would be
added to the value obtained above for unfurnished.
Non-Government In case of Unfurnished Accommodation;
Employee (a) If the accommodation is owned by the employer, the value
would be based on the population, i.e.,
(i) if in cities having a population of > 25 Lacs (2001
Census) - - 15% of Salary;
(ii) if the population is between 10 Lacs up to 25 Lacs –
10% of Salary;
(iii) else 7.5% of Salary

(b) If the accommodation is taken on lease by the employer, the
actual value of lease rentals paid by the employer subject to a
maximum of 15% of Salary is considered as Value.
For a furnished accommodation, 10% p.a. of the furniture cost
is added to the value obtained above for unfurnished.
In case the furniture is hired, the actual hire charges would be
added to the value obtained above for unfurnished.
In all cases, any amount recovered from the employee should
be reduced to arrive at the taxable value of the perquisite
Where the accommodation is provided by the employer in a hotel
(except where the employee is provided such accommodation
for a period not exceeding in aggregate 15 days on the transfer
from one place to another): The perquisites value would be
24% of salary paid or payable for the previous year or the
actual charges paid or payable to such hotel, which is lower,
for the period during which such accommodation is provided
as reduced by the rent, if any, actually paid or payable by the
employees.
2 Interest Free / All employees Where the employer grants a loan to an employee,
Concessional exceeding INR 20000, the interest at the rate charged by
Loan SBI, as on the first date of the relevant PY, at maximum
outstanding monthly balance as reduced by the Interest
actually charged to the employee; would be the taxable
value of the perquisite
3 Use of movable All employees 10% p.a. of the actual cost of the asset, if it is owned by the
assets by employer OR the actual hire charges incurred by the employer
employee / any if the asset is hired as reduced by the amount, if any, paid or
member of his recovered from the employee for such use would be the taxable
household value of the perquisite.
Note: Use of laptops and computers wouldn’t attract taxability
as perquisites.
4 Transfer of All employees If Computers / electronic items are transferred, 50% Depreciation
movable assets p.a. (WDV) for every completed year of usage; if Motor cars are
transferred, 20% Depreciation p.a. (WDV) for every completed
year of usage; and for all other assets transferred, 10%
Depreciation p.a. (WDV) for every completed year of usage
would be treated as the taxable value of perquisite net of any
amount so recovered from the employee
78 PP-DTL&P
5 Provision of All employees The value of benefit to the employee resulting from the supply of
gas/electricity / gas, electric energy or water for his household consumption shall
water be determined as the sum equal to the amount paid on that account
by the employer to the agency supplying the gas, electric energy
or water. Where such supply is made from the sources owned
by the employer, without purchasing them from any other outside
agency, the value of perquisites would be the manufacturing cost
per unit incurred by the employer. Where the employee is paying
any amount in respect of such services, the amount so paid shall
be deducted from the value so arrived at.
6 Provision of free All employees Amount actually expended by the employer net of the amount
/ concessional so recovered. However, if the educational institution is owned
educational by the employer, and free educational facilities are provided
facilities to the employee’s children, there wouldn’t be any perquisite
as long as the value of benefit in a month is < INR 1000. Any
amount recovered from the employee would be reduced.
7 Credit Card All employees Membership fees / Annual fees incurred by the employer, on a
Expenses card provided to the employee, would be the taxable value of
perquisite net of the amount, if any, recovered from him.
8 Club expenditure All employees Cost incurred by the employer at actual, net of recovery from the
employee would be the taxable value of perquisite. However, in
case the employee enjoys Corporate Membership in a club, the
value of benefit wouldn’t include the initial membership paid by
the Employer to acquire the corporate membership
9 Health Club, All employees No perquisite if provided uniformly by the employer to all
Sports, Similar employees
facilities
10 Sweat Equity All employees In case where, on the date of exercising the option, the share
of the company is listed on a recognised stock exchange, the
fair market value (FMV) would be the average of the opening
and closing price of the share on that date on the said stock
exchange. If the shares of the company are listed on more
than one stock exchange, the FMV would be the average of
the opening and closing prices of the share on the recognised
stock exchange which records the highest volume of trading in
the share. In case on the date of the exercising of the option, if
there was no trading in the share, the FMV would be the closing
price on the recognised stock exchange, on a date closest
to exercising the option, immediately before that date, and if
the shares of the company are listed on more than one stock
exchange, the FMV would be the closing price of the share
on the recognised stock exchange which records the highest
volume of trading in the share.
In case the shares of the company are not listed on any
recognised stock exchange, the FMV would be that as
determined by the Merchant Banker on the specified date,
i.e., the date of exercising the option or any date earlier not
exceeding 180 days prior to the date of exercise of the option.
Motor Cars
The taxable value of use of motor cars are dealt with separately, as it is situational, as under:
Where the Expenses are met by the employer
 If the Car is owned / hired by the employer; expenses met by the employer & is used by the employee
wholly for Official purposes, there is no perquisite.
 If the Car is owned / hired by the employer; expenses met by the employer & is used by the employee
wholly for Personal purposes, the running and maintenance charges / wear & tear / hire charges /
driver’s salary would be treated as the taxable value of the perquisite net of the amount so recovered
from the employee.
 If the If the Car is owned / hired by the employer; expenses met by the employer & is used by the
employee partly for Official and partly for Personal purposes, the taxable value of the perquisite would
be based on the cc of the engine, as under:
o Up to 1.6 litres, the taxable value of the perquisite would be INR 1800 pm
o > 1.6 litres, the taxable value of the perquisite would be INR 2400 pm
o If chauffer is also provided, INR 900 pm is to be added to either of the above, depending on the
engine capacity
 If the Car is owned / hired by the employee; expenses met by the employer & is used by the employee
wholly for Official purposes, there is no perquisite.
wholly for Personal purposes, the actual expenditure so incurred would be treated as the taxable value
of the perquisite.
partly for Official and partly for Personal purposes, the taxable value of the perquisite would be the actual
expenditure incurred by the employer as reduced by the taxable value of the perquisite determined
above basis the engine capacity.
Where the Expenses are met by the employee

 If the Car is owned / hired by the employer; expenses met by the employee & is used by the employee
wholly for Official purposes, there is no perquisite
 If the Car is owned / hired by the employer; expenses met by the employee & is used by the employee
wholly for Personal purposes, the wear & tear / hire charges / driver’s salary would be treated as the
taxable value of the perquisite
 If the If the Car is owned / hired by the employer; expenses met by the employee & is used by the
employee partly for Official and partly for Personal purposes, the taxable value of the perquisite would
be based on the cc of the engine, as under:
o Up to 1.6 litres, the taxable value of the perquisite would be INR 600 pm
o > 1.6 litres, the taxable value of the perquisite would be INR 900 pm
o If chauffer is also provided, INR 900 pm is to be added to either of the above, depending on the
engine capacity
80 PP-DTL&P
Tax-free perquisites (in all cases)

The value of the following perquisites is not to be included in the salary income of an employee:
Medical Facilities:
(a) The value of any Medical facility provided to an employee or his family member in any hospitals, clinics,
etc. maintained by the employer.
(b) Reimbursement of expenditure actually incurred by the employee on medical treatment for self or
for his family members in any hospitals, dispensaries etc. maintained by the Government or local
authority or in a hospital approved under the Central Health Scheme or any similar scheme of the
state Government or in a hospital, approved by the chief commissioner having regard to the prescribed
guidelines for the purposes of medical treatment of the prescribed diseases or ailments.
(c) Group medical insurance obtained by the employer for his employees (including family members of the
employees) or all medical insurance payments made directly or reimbursement of insurance premium
to such employees who take such insurance.
(d) Reimbursement of medical expenses actually incurred by the employee up to a maximum of Rs. 15,000
in the aggregate in a year, in a private hospital for his and his family.
(e) Any expenditure incurred or paid by the employer on the medical treatment of the employee or any
family member of the employee outside India, the travel and stay abroad of such employee or any
family member of such employee or any travel or stay abroad of one attendant who accompanies the
patient in connection with such treatment will not be included in perquisites of the employee. However,
the travel expenditure shall be excluded from the perquisites only when the employee’s gross total
income as computed before including the said expenditure does not exceed two lakh rupees and
further to such conditions and limits as the Board may prescribe having regard to guidelines, if any,
issued by the Reserve Bank of India.
Refreshment:
The value of refreshment provided by the employer during office hours and in office premises is fully exempt
Subsidized lunch or dinner provided by employer is exempt

Recreational facilities:
The value of recreational facilities provided is exempt. However, the facility should not be restricted to a selected
few.
Telephone facility provided at the residence of the employee is exempt to the extent of the amount of telephone
bills paid by the employer when it is used for official and personal purposes of the employee.
Transport provided by the employer to the employees as a group (and not to any individual or a few employees
alone) from their place of residence to the place of work and back in the case of an employer engaged in
the business of carriage of goods or passengers, to his employees either free of charge or at a concessional
rate. Also from the assessment year 1990-91, conveyance facility provided for the journey between office and
residence and back at free of charge or at concessional rate.
Personal accident insurance, i.e. payment of annual premium by employer on personal accident policy effected
by him to his employee
Refresher Course: Where the employee attends any refresher course in management and the fees are paid by
the employer, the amount spent by employer for the purpose.
Free rations: The value of free rations given to the armed forces personnel.
Computer/laptops provided only for use, ownership is retained by the employer
Rent free houses / conveyance to High Court & Supreme Court Judges
Employers’ Contribution to Group Insurance Schemes, to recognised Provident Funds
Annual Premium by employer on policy taken on life of employee
DEDUCTION [SECTION 16]

(I) Standard Deduction [Section 16(ia)]: Standard deduction of Rs. 50,000 (fifty thousand) or the amount
of the salary, whichever is less w.e.f. Assessment Year 2020-21.
(II) Entertainment Allowance [Section 16(ii)]: Deduction of the least of the following shall be allowed to
Government Employees only;
- 20% of basic salary;
- Rs.5000
- Actual allowance
(III) Professional Tax [Section 16(iii)]: Deduction is allowed in the year of payment. If paid by employer, then
first include in salary as a perquisite and then a deduction shall be allowed.
RELIEF [SECTION 89]

(1) On account of arrears of salary or advance salary: Where by reason of any portion of an assessee’s
salary being paid in arrears or in advance or by reason of his having received in any one financial
year, salary for more than twelve months or a payment of profit in lieu of salary under section 17(3),
his income is assessed at a rate higher than that at which it would otherwise have been assessed, the
Assessing Officer shall, on an application made to him in this behalf, grant such relief as prescribed.
The procedure for computing the relief is given in Rule 21A.
(2) On account of family pension: Similar tax relief is extended to assessees who receive arrears of family
pension as defined in the Explanation to clause (iia) of section 57.
“Family pension” means a regular monthly amount payable by the employer to a person belonging to the
family of an employee in the event of his death.
No relief at the time of Voluntary retirement or termination of service: No relief shall be granted in respect
of any amount received or receivable by an assessee on his voluntary retirement or termination of his service,
in accordance with any scheme or schemes of voluntary retirement or a scheme of voluntary separation (in the
case of a public sector company), if exemption under section 10(10C) in respect of such compensation received
on voluntary retirement or termination of his service or voluntary separation has been claimed by the assessee
in respect of the same assessment year or any other assessment year.
Illustration 1:
Mr. Atin Kumar has the following receipts from his employer:
(1) Basic pay Rs. 3,000 p.m.
(2) Dearness allowance (D.A.) Rs. 600 p.m.
(3) Commission Rs. 6,000 p.a.
(4) Motor car for personal use (expenditure met by the employer) Rs. 500 p.m
(5) House rent allowance Rs. 900 p.m.

82 PP-DTL&P
Find out the amount of HRA eligible for exemption to Mr. Atin Kumar assuming that he paid a rent of Rs. 1,000
p.m. for his accommodation at Indore. DA forms part of salary for retirement benefits.
Solution:
HRA received Rs. 10,800
Less: Exempt under section 10(13A) [Working Note] Rs. 7,680
Taxable HRA Rs. 3,120
Working Note: Exemption shall be least of the following three limits:

(a) the actual amount received (Rs. 900 × 12) = Rs.10,800
(b) excess of the actual rent paid by the assessee over 10% of his salary
= Rent Paid - 10% of salary for the relevant period
= (Rs. 1,000×12) - 10% of [(Rs. 3,000+Rs. 600) × 12] = Rs. 12,000 - Rs. 4,320 = Rs. 7,680
(c) 40% salary as his accommodation is situated at Indore
= 40% of [(Rs. 3,000+ Rs. 600) × 12] = Rs.17,280
Note: For the purpose of exemption under section 10(13A), salary includes dearness allowance only when the
terms of employment so provide, but excludes all other allowances and perquisites.
Illustration 2:
Ruchira, an employee of a management consultancy firm, was sent to UK in connection with a project of the
firm’s client for two months in the previous year. In addition to her salary, the firm paid per diem allowance for the
period when she worked in UK to meet expenses on boarding and lodging. Tax was not deducted at source from
such allowance by the employer. Ruchira did not include such allowance in computation of her taxable salary for
the relevant assessment year. In course of assessment of Ruchira under section 143(3), the Assessing Officer
sent a notice to her asking him to explain why the per diem allowance received by her should not be charged to
tax? Ruchira has sought your advice.
Solution:
Per-diem allowance is exempt from tax under section 10(14)(i) read with Rule 2BB, as it is an allowance granted
and spent to meet the ordinary daily charges incurred by an employee on account of absence from his normal
place of duty. Rule 2BB exempts the allowance granted to meet the ordinary daily charges incurred by an
employee on account of his absence from his normal place of duty.
In the given case, Ruchira was posted for a period of 2 months outside her normal place of duty and the
allowance was paid to meet the boarding and lodging.
Therefore, the allowance would fall under section 10(14)(i) read with Rule 2BB and would hence be exempt,
assuming that expenditure to that extent was actually incurred for her boarding and lodging.
Illustration 3:
Mr. E is a Finance Manager in ABC Ltd. The company has provided him with rent-free unfurnished accommodation
in Mumbai. He gives you the following particulars:
Basic salary Rs. 6,000 p.m.
Dearness Allowance Rs. 2,000 p.m. (30% is for retirement benefits) Bonus Rs. 1,500 p.m.
Even though the company allotted the house to him on 1.4.2019, he occupied the same only from 1.11.2019.
Calculate the taxable value of the perquisite for A.Y. 2020-21.
Solution:
Value of the rent free unfurnished accommodation
= 15% of salary for the relevant period
= 15% of [(Rs.6000 × 5) + (Rs.2,000 × 30% × 5) + (Rs.1,500 × 5)] [See Note below]
= 15% of Rs.40,500 = Rs.6,075.
Note: Since, Mr. E occupies the house only from 1.11.2019, we have to include the salary due to him only in
respect of months during which he has occupied the accommodation. Hence salary for 5 months (i.e. from
1.11.2019 to 31.03.2020) will be considered.
CASE STUDY
1. Ranjit has taken an interest-free loan of Rs. 10 lacs from his company. The amount is utilized by
him for purchasing a house on 30-06-2018. The house is self-occupied. As per the scheme of the
company, loan would be recovered in 40 equal monthly instalments recoverable immediately after
the completion of 18th month from the date of purchase. Assuming the SBI lending rate of similar
loan on 1.4.2019 was 9.75%. Calculate the perquisite value of such loan in the hands of Ranjit for the
assessment year 2020-21. Is it possible to get deduction of perquisite value of interest under section
24(b)? Does it make any difference, if the house is given on rent?
Solution
First instalment will be due on 1st January, 2020. Amount of instalment will be:
Rs. 10,00,000 ÷ 40 = Rs. 25,000.
Therefore, value for perquisite for interest-free loan will be calculated by applying the interest rate charged
by the State Bank of India on the first day of the relevant previous year, on the outstanding amount of loan
as reduced by the interest, if any, actually paid by the employee. Therefore, the value of perquisite will be as
follows:
Therefore, the perquisite value of interest-free loan will be Rs. 96,282.
Interest on capital borrowed for the purchase, construction, re-construction, repair or renewals of house property
is deductible under section 24(b). In this case, capital is borrowed from the employer without interest. There is
no interest paid or payable in respect of the amount of loan of Rs. 10 lacs. Consequently, no deduction under
section 24(b) would be available, whether the house is self-occupied or let out.
2. Mr. X is a Member of Legislative Assembly. He underwent an open heart surgery abroad in respect
of which he received Rs. 5 Lacs from the State Government towards reimbursement of his medical
expenses. The Assessing Officer contended that such amount is taxable as a perquisite under section
17. Discuss the correctness of the contention of the Assessing Officer.
Answer
The facts of this case are similar to the facts in CIT v. Shiv Charan Mathur (2008) 306 ITR 126 (Raj.). In
the instant case, the High Court observed that MPs and MLAs do not fall within the meaning of “employees”.
They are elected by the public, their election constituencies and it is consequent upon such election that they
acquire constitutional position and are in charge of constitutional functions and obligations. The remuneration
84 PP-DTL&P
received by them, after swearing in, cannot be said to be salary within the meaning of section 15, since the
basic ingredient of employer-employee relationship is missing in such cases.
Therefore, the remuneration received by MPs and MLAs is taxable under the head “Income from Other Sources”
and not under the head “Salaries”. When the provisions of section 15 are not attracted to the remuneration
received by MPs and MLAs, the provisions of section 17 also would not apply as section 17 only extends the
definition of salary by providing that certain items mentioned therein would be included in salary as “perquisites”.
Thus, reimbursement of medical expenditure (incurred for open heart surgery abroad) to an MLA cannot be
taxed as a perquisite under section 17.
Applying the above ruling to the case on hand, the contention of the Assessing Officer is not correct.
3. Examine the correctness or otherwise of the following case in the context of provisions contained
in the Income-tax Act, 1961 relevant/applicable for the assessment year 2020-21:
(i) Ashni, working as Regional Area Sales Manager of Pincer Marketing Ltd., was paid salary and
a commission based as a percentage on the volume of sales effected by her. Ashni claimed
the expenses incurred by her for earning the commission in the return of income, which were
disallowed by the Assessing Officer.
(ii) An amount of Rs. 12,50,000 paid by XYZ Ltd., after approval by the board, to a hospital in
UK for the heart surgery of its managing director was charged under medical expenses. The
Assessing Officer, while completing the assessment of the company, taxed the amount so
paid by the company as a perquisite in the hands of its Managing Director.
Answer
(i) The facts of this case are similar to the case decided by the Madras High Court in CIT v. R. Rajendran
(2003) 260 ITR 0476, where it was held that since the assessee was employed as a regional sales
manager and the commission paid to him is based on the volume of sales effected, such commission
was obviously paid to the employee as an encouragement to effect a higher level of sales. The
commission paid in addition to what the employee was getting as a fixed salary would also constitute/
form part of salary. When the commission is chargeable as salary, then no deduction is allowable in
respect of any expenditure incurred to earn the commission.
Therefore, in this case, the claim made by Nargis is not valid and the expenses incurred for earning
commission are not allowable as deduction while computing her salary income.
(ii) A Managing Director generally occupies the dual capacity of being a director as well as an employee
of the company. In this case, assuming that the Managing Director is also an employee of XYZ Ltd.,
clause (vi) of the proviso to section 17(2) would get attracted. Clause (vi) of the proviso to section 17(2)
provides that any expenditure incurred by the employer on medical treatment of the employee outside
India shall be excluded from perquisite only to the extent permitted by RBI. Therefore, the expenditure
on medical treatment of the Managing Director outside India shall be excluded from perquisite to the
extent permitted by RBI as per clause (vi) of the proviso to section 17(2). If it is assumed that the entire
amount is permitted by RBI, there would be no perquisite chargeable in the hands of the Managing
Director. Therefore, in such a case, the action of the Assessing Officer in taxing the entire amount paid
by the company as a perquisite in the hands of the Managing Director is incorrect.
4. Can the limit of Rs. 1,000 per month per child be allowed as standard deduction, while computing the
perquisite value of free or concessional education facility provided to the employee by the employer?
Solution
CIT (TDS) v. Director, Delhi Public School (2011) 202 Taxman 318 (Punj. & Har.) As per the provisions of
Rule 3(5) of the Income-tax Rules, 1962, in case an educational institution is maintained and owned by the
employer and free or concessional education facility is provided to the employees’ household in such institution,
then, the cost of education in a similar institution in or near the locality shall be taken to be the value of perquisite
in the hands of the employee. In case the cost of such education or the value of benefit does not exceed
Rs. 1,000 per month per child, the perquisite value shall be taken to be Nil.
Assessee’s contention: In the present case, the cost of education was more than Rs. 1,000 per month per
child, therefore, while determining the perquisite value on the above basis, the assessee claimed a deduction
of Rs. 1,000 per month per child.
High Court’s Decision: The Punjab and Haryana High Court, in the above case, held that on a plain reading
of Rule 3(5), it flows that, in case the value of perquisite for free/concessional educational facility arising to an
employee exceeds Rs. 1,000 per month per child, the whole perquisite shall be taxable in the hands of
the employee and no standard deduction of
Rs. 1,000 per month per child can be provided from the same. It is only in case the perquisite value is less
than Rs. 1,000 per month per child, the perquisite value shall be nil. Therefore,
Rs. 1,000 per month per child is not a standard deduction to be provided while calculating such a perquisite.
5. Can notional interest on security deposit given to the landlord in respect of residential premises
taken on rent by the employer and provided to the employee, be included in the perquisite value of
rent-free accommodation given to the employee?
Ans: CIT v. Shankar Krishnan (2012) 349 ITR 0685 (Bom.)
Facts of the case: The assessee, a salaried employee, was provided with rent-free accommodation, being a flat in
Mumbai, by his employer company. The monthly rent paid by the employer in respect of the said flat was Rs. 10,000
per month. The employer had given an interest-free refundable security deposit of Rs. 30 lacs to the landlord for
renting out the said premises. The assessee-employee computed the perquisite value on the basis of rent of Rs.
10,000 paid by his employer to the landlord, since the same was lower than 10% (now, 15%) of salary.
Assessing Officer’s contention: The Assessing Officer, however, contended that since the employer had
given interest-free deposit of Rs. 30,00,000 to the landlord, interest @12% on the said deposit is required to
be taken into consideration for estimating the fair rental value of the flat given to the assessee and accordingly,
he enhanced the perquisite value of the residential accommodation provided to the employee by such notional
interest. The Commissioner (Appeals) upheld the decision of the Assessing Officer.
Tribunal’s Observations: The Tribunal observed that, as per Rule 3 of the Income-tax Rules, 1962, the
perquisite value of the residential accommodation provided by the employer shall be the actual amount of lease
rent paid or payable by the employer or 10% (now, 15%) of salary, whichever is lower, as reduced by the rent, if
any, actually paid by the employee. The Tribunal, therefore, held that there is no concept of determination of the
fair rental value for the purpose of ascertaining the perquisite value of the rent-free accommodation provided
to the employees
High Court’s Decision: On appeal by the Revenue, the Bombay High Court held that the Assessing Officer
is not right in adding the notional interest on the security deposit given by the employer to the landlord in
valuing the perquisite of rent-free accomodation, since the perquisite value has to be computed as per Rule
3 and Rule 3 does not require addition of such notional interest. Thus, the perquisite value of the residential
accommodation provided by the employer would be the actual amount of lease rental paid or payable by the
employer, since the same was lower than 10% (now 15%) of salary.
86 PP-DTL&P
LESSON ROUND UP
– Basis of Charge: As per section 15, salary is taxable on due or receipt basis whichever is earlier. Under
Section 15 the income chargeable to income tax under the head salaries would include any salary due
to an employee from an employer or a former employer during the previous year irrespective of the
fact whether it is paid or not.
- Different forms of salary:
(A) Basic Salary: Basic salary is taxable in the hands of an employee.
(B) Allowance: An allowance is defined as a fixed amount of money given periodically in addition
to the salary for the purpose of meeting some specific requirements connected with the
service rendered by the employee or by way of compensation for some unusual conditions of
employment. It is taxable on due/accrued basis whether it is paid in addition to the salary or in
lieu thereon.
(C) Perquisites: The term “perquisites” includes all benefits and amenities provided by the employer
to the employee in addition to salary and wages either in cash or in kind which are convertible
into money. These benefits or amenities may be provided either voluntarily or under service
contract. For income-tax purposes, the perquisites are of three types:
(i) Tax-free perquisites
(ii) Taxable perquisites
(iii) Perquisites taxable under specified cases.
– Valuation of perquisites: The basic principles governing valuation of perquisites are as follows:
– The valuation is done on the basis of their value to the employee and not the employer’s cost for
providing the same - Wilkins v. Rogerson (1963) 49 ITR 395 (CA).
– The value of perquisite is included in the salary income only if the perquisite is actually provided to the
employee.
– Perquisite which is not actually enjoyed by the employee (though the terms of employment provide
for the same) cannot be valued and taxed in the employee’s hands. Therefore, where the employee
waives his right of perquisite, he cannot be taxed thereon.
- Allowable deductions under the head Salaries: The following amounts shall be deducted in order to
arrive at the chargeable income under the head “Salaries”.
(A) Standard deduction: Rs. 50,000 or Salary Income whichever is less
(B) Entertainment allowance
(C) Tax on employment or Professional Tax
SELF-TEST QUESTIONS
These are meant for re-capitulation only. Answers to these questions are not to be submitted for evaluation
SHORT NOTES
1. Profit in lieu of salary
2. Entertainment Allowance
3. Leave Travel Concession
DISTINGUISH BETWEEN
1. Statutory provident fund’ and ‘public provident fund’.
2. House Rent Allowance and Rent Free Accommodation.
3. Allowances and Perquisites.
PRACTICAL QUESTIONS
1. Aniket is an employee of ABC Ltd. He was appointed on 1st Mar 2019 at a scale of 50000 – 5000
– 70000. He is paid DA (which form part of retirement benefits) @ 15% of Basic Pay and Bonus
equivalent to 2 months’ salary at end of FY. He contributes 18% of his Basic + DA to a recognised
provident fund, and the contribution is matched by the employer.
He is provided rent free accommodation, hired by the employer, @ 25000 pm. He is also provided the
following benefits / amenities:
(a) Medical Treatment of his dependant spouse INR 40000
(b) Monthly salary to housekeeper INR 4000
(c) Telephone Allowance INR 1200 pm
(d) Gift Voucher of INR 4500 on account of his marriage anniversary
(e) Medical Insurance Premium for Aniket, paid by his employer INR 15000
(f) Motor Car owned and driven by Aniket, and engine capacity within 1.6 L; used partly for official
and partly for personal purposes. Running & maintenance expenses borne by the employer INR
36,600/-.
(g) Lunch during office hours valued at INR 2200/-.
He was also allotted 2000 sweat equity shares in Sep 2019. The shares were allotted @ INR 227 per
share against the FMV of INR 377 per share as on the date of exercise of the Option.
Compute the Salary Chargeable to tax.
2. Anand is entitled to get a pension of Rs. 600 per month from a private company. He gets three-fifth
of the pension commuted and received Rs. 36,000. He did not receive gratuity. The taxable portion of
commuted value of pension is –
3. Sneha is an employee in a private company. In the previous year she received salary Rs.1,80,000 and
entertainment allowance Rs.12,000. She spent Rs.6,000 on entertainment. Under section 16(ii), she
is entitled to deduction of -
4. Interest-free loan to an employee, where the amount of loan does not exceed any one of the following,
shall be treated as the tax-free perquisite in all cases under section 17(2) -
5. The maximum exemption in respect of transport allowance granted to an employee to meet his
expenditure for the purpose of commuting between the place of his residence and the place of his
duty shall be -
Answers:
1. Rs. 13,62,918
2. Rs. 6000
3. Nil
88 PP-DTL&P
4. Rs. 20000
5. Nil
SUGGESTED READINGS

Kluwer]
Lesson 3 Computation of Income under the Head of House Property 89
Lesson 3
n
Computation of Income under the

Head of House Property
[Section 22 to 27]
LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction The provisions for computation of Income from
– Basis of Charge [Section 22] house property are covered under sections 22
to 27. This chapter deals with the provisions for
– Property held as stock in trade
computation of Income from house property.
– Taxation of Income prom properties situated Section 22 is the charging section that identifies
outside India the basis of charge wherein the annual value is
prescribed as the basis for computation of Income
– Disputed Ownership
from House Property. The process of computation
– Treatment of Composite Rent of “Income from House Property” starts with the
– Cases where Income from House Property determination of annual value of the property.
exempt from tax The concept of annual value and the method of
– Deemed Ownership [Section 27] determination are laid down in section 23. The
admissible deductions available from house
– How to compute income from House property are mentioned in section 24.
Property
At the end of this lesson, students will be able
– Determination of Annual Value [Section 23] to understand the conditions to be satisfied for
– Municipal Taxes income to be chargeable under this head, how
to determine the annual value of different type
– Computation of Income from House of house properties, admissible deductions and
Property for different categories of property inadmissible deductions from annual value, tax
– Deduction [Section 24] treatment of unrealized rent, who are deemed
owners, what is meant by co-ownership and what
– Taxability of Recovery of Unrealised Rent &
is its tax treatment etc.
Arrears of Rent received
– Inadmissible Deduction
– Treatment of Income from co-owned
property [Section 26]
– Treatment of Income from House Property
owned by a partnership firm
– Case Study
– LESSON ROUND UP
– SELF TEST QUESTIONS
89
90 PP-DTL&P
KEY SECTIONS
SECTION PARTICULARS
22 Income from House Property (Charging section - Basis of charge)
23 Annual value how determined
24 Deductions from income from house property
25 Amounts not deductible from income from house property
25A Special provision for arrears of rent and unrealized rent received subsequently
26 Property owned by co-owners
27 "Owner of house property", "annual charge", etc., defined. (Deemed Owner)
KEY RULES
INCOME-TAX RULES, 1962
Rule Particulars Read with
4 Unrealized rent Section 23

Lesson 3 n Computation of Income under the Head of House Property 91
INTRODUCTION
Income from house property is one of the important heads of income under the Income Tax Act. The tax payers
have been, in particular, keen to know about the exemptions and deductions available to them on repayment
of interest and principal of the loan obtained to purchase the house property, if that house property is let out
or self-occupied. The amount of interest on borrowed capital of the current year is available under the head
house property further repayment of principal is available under section 8oC to Individuals and Hindu Undivided
Families. Tax levied under section 22 is based on Principle of Mutuality i.e. tax on income from house property
and it is not a tax on house property.
BASIS OF CHARGE [SECTION 22]

If all the following three conditions are satisfied then the property income will be chargeable to tax under the
head Income from House Property.
1. Property should consist of any BUILDING* or land appurtenant (means land connected with the building
like garden, garage etc.) thereto.
*Building means a permanent structure made of bricks, stones, concrete etc. and which has a
foundation, walls and doors . It does not include temporary structures.
2. Assessee must be the owner of the property.
Notes:
• Assessee need not to be a Registered owner.
• Ownership includes both leasehold and freehold rights and also includes deemed ownership.
[Section 27]
• Assessee must be owner of the property during the previous year. It is not material whether he is
the owner in the Assessment Year.
• If the title of the ownership of the property is under dispute in a court of law, the decision as to who
will be the owner chargeable to income-tax under section 22 will be of the Income-tax Department
till the court gives its decision to the suit filed in respect of such property.
3. The property should not be used by the owner for the purpose of any business or profession carried
on by him, the profit of which is chargeable to tax. The income earned by an assessee engaged in
the business of letting out of properties on rent would also be taxable as business income and not as
income from house property [Rayala Corporation (P) Ltd. v. Asstt. CIT (SC) (2016) 386 ITR 500].
If all the above three conditions are satisfied then the property income will be chargeable to tax under
the head Income from House Property.
Points to remember:
1. Income from subletting of house property will be taxable under the head “Income from other Sources”.
2. Income from vacant plot is taxable under the head “Income from other Sources”.
3. Income from display of advertisement on the roof of building will be taxable under the head income
from other sources and not under the head house property because section 22 conditions are not
satisfied.
92 PP-DTL&P
• Income from letting out a vacant land is chargeable to tax under the
head “Income From Other Sources”
Exceptions • Income earned by an assessee who is engaged in the business of
letting out properties on rent, would be chargeable to tax under the
head “Profits / Gains from Business / Profession”
PROPERTY HELD AS A STOCK IN TRADE [SECTION 23(5)]

Property constitutes stock in trade of the business, then income is to be charged only under the head “Income
from House Property”, till the time they are unsold.
Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the
property or any part of the property is not let during the whole or any part of the previous year, the annual
value of such property or part of the property, for the period up to 1 year from the end of the financial year in
which the certificate of completion of construction of the property is obtained from the competent authority, shall
be taken to be nil.
Exceptions: If the letting out is supplementary to the main business, then rental income is taxable as
Business Income. Deductions or allowances from such income have to calculated as relating to PGBP and
not relating to House Property.
TAXATION OF INCOME FROM PROPERTIES SITUATED OUTSIDE INDIA

Income from properties situated outside India is liable for taxation in India if -
1. The owner of the property is resident in India; or
2. The owner of the property is non-resident or not ordinarily resident in India and the income from such
property is received in India.
Note:
 The municipal taxes paid outside India shall be deductible if such taxes have been actually paid by the
assessee during the previous year.
 The annual value of such property would be computed as if the property is situated in India.
DISPUTED OWNERSHIP
 If title of ownership of a house property is under dispute in a court of law, the decision about who is
owner rests with department.
 Assessment cannot be postponed due to mere dispute regarding the title of property.
 Generally the person who is in receipt of income or person who enjoys possession of house property
as owner, though his claim is disputed, is assessable to tax u/s 22.
TREATMENT OF COMPOSITE RENT

Meaning of Composite Rent:
 Composite rent means the rent charged not only for the property to be let out but also for the other
facilities like furniture, Lift, Security, Power Back-up etc.
Tax Treatment of Composite Rent

1. Composite letting separable:
 Where composite rent is rent of letting out of building and letting out of other assets and two letting
are separable i.e. letting out of one is acceptable to the other party without letting out of the other,
 The sum which is attributable to property is to be assessed in form of annual value
u/s 22 and
 The sum which is attributable to other charges is assessed under PGBP or Other
sources.
Note:
Rent received from paying guest is taxable under the head ‘Income from other sources’.
2. Composite letting not separable:
 Where composite rent is rent of letting out of building and letting out of other assets and two
letting are not separable, then
 The income will be assessable either under PGBP or Income from other sources even if
the composite rent is segregable. (i.e. if sum receivable for the two lettings is fixed separately)
CASES WHERE INCOME FROM HOUSE PROPERTY IS EXEMPT FROM TAX
Sl. Section Particulars

No.
1 10(1) read Income from any farm house forming part of agricultural income.
with section.
2(1A)(c)
2 10(19A) Annual value of any one palace in the occupation of an ex-ruler.
(If the ex-ruler has a house property which partly let out and partly self occupied, then
only the self occupied part of the house property shall be exempted)
3 10(20) Income from house property of a local authority.
4 10(21) Income from house property of an approved scientific research association.
5 10(23B) Institution for development of khadi and village industries.
6 10(23BB) Khadi and Village Industries Board.
7 10(23BBA) A body or Authority for administering religious or charitable trusts or endowments
8 10(23C) Property income of universities, educational institutions, etc.
9 10(24) Property income of any registered trade union.
10 10(26B) Statutory Corporation or an institution/ Association financed by the government for
promoting the interest of members of SC or ST
11 10(27) Co-operative Society for promoting the interest of the members of SC or ST
12 11 Income from house property held for charitable or religious purpose.
13 13A Property income of any political party.
14 22 Property used for own business or profession
15 23(2) One self-occupied property of an individual/HUF
94 PP-DTL&P
DEEMED OWNER [SECTION 27]

In certain cases the legal ownership may vest with one person whereas the taxability is cast on another person
who is deemed to be the owner.
1. An individual who transfers otherwise than for adequate consideration any house property;
a. to his or her spouse (not being a transfer in connection with an agreement to live apart) or
b. to a minor child (not being a married daughter);
2. The holder of an impartible estate (i.e. Deemed owner of all the properties comprised in the estate)
[Impartible estate means a property which is not legally divisible]
3. A member of a Co-operative society, Company or other Association of persons to whom a building or a
part or leased under a house building scheme of the society, company or association;
4. A person who is allowed to take or retain possession of any building or part thereof in part performance
of nature referred to in section 53A of the Transfer of Property Act, 1882;
This would include cases where the –
(i) possession of property has been handed over to the buyer
(ii) sale consideration has been paid or promised to be paid to the seller by the buyer sale deed has
not been executed in favour of the buyer, although certain other documents like power of attorney/
agreement to sell/will etc. have been executed.
5. A person who acquires any rights (excluding any rights by way of lease from month to month or for a
period of one year) in or with respect to any building or part thereof by virtue of any transaction as is
referred to in section 269UA(f) (i.e. transfer of such property by way of sale or exchange or lease for a
term of not less than twelve years.).
IMPORTANT ISSUES
a) House property is owned by the assessee, but it is used by the firm in which he is a partner, and he
not derived any benefit from the firm. It is deemed that the partner is using the property for his own
business, and hence not taxable under “income from House Property”.
b) When property is owned by HUF, but used by the firm in which all the members are partners, income
will be assessed in the hands of HUF as House Property.
Deemed Ownership (Section 27)
House property is transferred House property is transferred by

by an individual to his / her an individual to his / her minor
spouse, otherwise than for child, otherwise than for adequate
adequate consideration consideration
The transferor will be the The transferor will be the

deemed owner. deemed owner.
Exception: In case the Exception: In case the transfer

transfer is necessitated owing is to a minor married
to a separation between, daughter, then, the transferor
them, the transferee will be will not be the deemed owner.
the deemed owner
• The holder of an impartible estate, i.e., one that is not legally divisible, shall be deemed
to be the owner of all the properties in the estate.
• A member of a co-operative society, or any AOP, to whom a building is allotted, under a

house building scheme, shall be deemed to be the owner of the portion so allotted.
• A person who acquires rights with respect to a property, by virtue of transfer vide lease of
> 12 years, shall be deemed to be the owner of the property.
Annual value how determined [Section 23]

Section 23(1) Let out properties
Section 23(2)(a) Self-occupied property (i.e. purposes of his own residence)
Section 23(2)(b) Property not actually occupied by the owner
(by reason of the fact that owing to his employment, business or profession carried on
at any other place)
Section 23(3) Partly let out and partly self occupied property
Section 23(4) Deemed to be let out property
HOW TO COMPUTE INCOME FROM HOUSE PROPERTY
Particulars Let Out/Deemed to

be let out
Gross Annual Value (GAV) xxxx
Less: Property taxes paid to local authority (xxxx)
Net Annual Value (NAV) xxxx
Less: Deductions u/s. 24 -
a) 30% of the net annual value xxxx
b) Interest on capital borrowed (loans) paid or payable xxxx (xxxx)
Income from house property(computed) Xxxx
96 PP-DTL&P
DETERMINATION OF ANNUAL VALUE [SECTION 23]

This involves following steps:
Step 1- Determination of Expected Rent
Fair Rent xxx

Municipal Valuation xxx
(a or b) whichever is higher xxx
Standard Rent xxx
(c or d)whichever is less is Expected Rent [ER] xxx
Note: 1
Fair Rent or Notional rent
 It can be determined on the basis of rent fetched by similar property in the same or similar locality.
Municipal Valuation:
 For collecting municipal taxes, local authorities make a periodical survey of all building in their jurisdiction.
Such valuation may be taken as a strong evidence representing the earning capacity of a building.
Standard Rent under Rent Control Acts:
 Standard rent is the maximum rent which a person can legally recover from his tenant under Rent
Control Act.
 Reasonable Expected Rent cannot exceed Standard Rent but can be lower than Standard Rent.
Step 2-Determination of Rent actually received or receivable:( De-facto rent of the property)
It is calculated as follows:-
Rent of the previous year (or that part of the previous year) for which the property is available for ****
letting out
Less: Unrealised rent if few conditions are satisfied** (****)
Rent Received or receivable before deducting loss due to vacancy ****
Less: Loss due to vacancy (****)
Rent received or receivable after loss due to vacancy ****
If actual rent received or receivable after LDV is higher than ERR, then GAV= ARR(-) UR(-) LDV
But if ARR after deducting UR and LDV is less than ER, then Step 3
Step 3-
1. If ARR after deducting UR and LDV is less than ER, due to loss due to vacancy only, then: GAV= ARR(-)
UR(-)LDV
2. If ARR after deducting UR and LDV is less than ER, due to vacancy and other factors, then: GAV= ER(-)
LDV
3. If ARR after deducting UR and LDV is less than ER, due to other factors, then: GAV= ER
Note: 1
Treatment of unrealized rent [Explanation to section 23(1)] and Rule 4 of INCOME-TAX RULES, 1962
The Actual rent received/receivable should not include any amount of rent which is not capable of being realised.
However the conditions prescribed in Rule 4 should be satisfied. They are
• the tenancy is bona fide;
• the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
• the defaulting tenant is not in occupation of any other property of the assessee;
• the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the
unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.
Step 4 From the GAV as computed above deduct Municipal tax paid by the owner during the previous year. The
balance will be the Net Annual Value (NAV), which as per the Income-tax Act is the annual value.
MUNICIPAL TAXES [PROPERTY TAXES]

Municipal tax includes services related tax like Water tax and Sewerage Tax levied by any local authority in
respect of any house property to the extent to which such taxes are borne and paid by the owner, and include
enhanced municipal tax finally determined on appeal and payable by assessee - Clive Buildings Cola Ltd. v.
CIT (1989) 44 Taxman 160. Property taxes are allowable as deduction from the GAV subject to the following
two conditions:
i. It should be borne by the assessee & actually PAID during the previous year.
ii. It can be claimed as deduction only in respect of let-out or deemed to be let- out properties.
iii. Deduction is allowed in the year of payment only. (i.e. Municipal tax paid in advance is not allowed
as deduction)
Where the tax on property is enchanced with retrospective effect by municipal or local authorities and the
enhanced tax relating to the prior year is demanded during the assessment year, the entire demand is deductible
in the assessment year [C.I.T. v. L. Kuppu Swamy Chettiar (1981) 132 ITR 416 (Mad.)].
Even where the property is situated outside the country taxes levied by local authority is that country are
deductible is deciding the annual value of the property. [CIT v. R Venugopala Riddiar (1965) 58 ITR 439 (Mad.)]
COMPUTATION OF “INCOME FROM HOUSE PROPERTY” FOR DIFFERENT CATEGORIES OF

PROPERTY
(I) PROPERTY LET OUT THROUGHOUT THE PREVIOUS YEAR
Particulars Amount
Computation of GAV
Step 1 Compute ER
ER = Higher of MV and FR, but restricted to SR
Step 2 Compute Actual rent received/receivable
Actual rent received/receivable less unrealized rent as per Rule 4
Step 3 Compare ER and Actual rent received/receivable

Step 4 GAV is the higher of ER and Actual rent received/ receivable
Gross Annual Value (GAV) A
98 PP-DTL&P
Less: Municipal taxes (paid by the owner during the previous year) B
Net Annual Value (NAV) = (A-B) C

Less: Deductions u/s 24
(a) 30% of NAV D
(b) Interest on borrowed capital (actual without any ceiling limit) E
Income from house property (C-D-E) F
Illustration 1 :
Mr. X is the owner of three houses, which are all let out and not governed by the Rent Control Act. From the
following particulars find out the gross annual value in each case:
Particulars I II III
Municipal Value 30,000 20,000 35,000
Actual (De facto) Rent 32,000 28,000 30,000
Fair Rent 36,000 24,000 32,000
Solution:
Gross Annual Value (GAV): Higher of Expected or Actual Rent Expected Rent: Higher of Municipal Valuation
or Fair Rent
House I: Rs. 36,000
House II: Rs.24,000
House III: Rs. 35,000
Actual Rent (given) GAV:
House I: Rs. 36,000 House II: Rs. 28,000 House III: Rs. 35,000
Illustration 2:
Mr. X is the owner of four houses, which are all let out and are covered by the Rent Control Act. From the
following particulars find out the gross annual value in each case, giving reasons for your answer:
Particulars I II III IV
Municipal Value 30,000 26,000 35,000 30,000
Actual (De Facto) Rent 40,000 30,000 32,000 32,000
Fair Rent 36,000 28,000 30,000 36,000
Standard Rent 30,000 35,000 36,000 40,000
Solution:
As all the houses are covered by the Rent Control Act, their gross annual value will be higher of expected Rent
or Actual Rent. Expected Rent Shall be higher of Municipal Value or Fair rent but subject to Standard Rent:
Particulars I II III IV
Expected Rent 30,000 28,000 35,000 36,000
Actual (De Facto) Rent 40,000 30,000 32,000 32,000
G.A.V. 40,000 30,000 35,000 36,000
Annual letting value of self occupied property, subject to Rent Control Act is to be fixed on basis of standard rent
and not on basis of open market Tilak Raj v. CIT (1989) 45 Taxman 279/178 ITR 327 (Punj. & Har.).
In determining annual value salary paid to caretaker cannot be taken into account
CIT v. Smt. Sreelekha Banerjee (1989) 45 Taxman 358/179 ITR 46 (Cal.).
Loss relating to self occupied house property could be set off against income from other sources CIT v. K.K.
Dhanda (HUF) (1989) 45 Taxman 346/178 ITR 602 (Punj. & Har.).
Illustration 3:
Anirudh has a property whose municipal valuation is Rs. 1,30,000 p.a. The fair rent is Rs. 1,10,000 p.a. and
the standard rent fixed by the Rent Control Act is Rs. 1,20,000 p.a. The property was let out for a rent of Rs.
11,000 p.m. throughout the previous year. Unrealised rent was Rs. 11,000 and all conditions prescribed by
Rule 4 are satisfied. He paid municipal taxes @10% of municipal valuation. Interest on borrowed capital was
Rs. 40,000 for the year. Compute the income from house property of Anirudh for A.Y. 2020-21.
Solution:
Computation of Income from house property of Mr. Anirudh for A.Y. 2020-21
Particulars Amount in Rs.

Computation of GAV
Step 1 Compute ER
ER = Higher of MV of Rs. 1,30,000 p.a. and FR of 1,20,000
Rs. 1,10,000 p.a., but restricted to SR of Rs. 1,20,000 p.a.
Step 2 Compute actual rent received/receivable
Actual rent received/receivable less unrealized rent as per Rule 4 = 1,21,000
Rs. 1,32,000 – Rs. 11,000
Step 3 Compare ER of Rs. 1,20,000 and Actual rent received/
receivable of Rs. 1,21,000.
Step 4 GAV is the higher of ER and Actual rent received/receivable 1,21,000
Gross Annual Value (GAV) 1,21,000

Less: Municipal taxes (paid by the owner during the previous year) = 13,000
10% of Rs.1,30,000
Net Annual Value (NAV) 1,08,000
Less: Deductions under section 24
(a) 30% of NAV 32,400
100 PP-DTL&P
(b) Interest on borrowed capital (actual without any ceiling limit) 40,000 72,400
Income from house property 35,600
(II) LET OUT PROPERTY VACANT FOR PART OF THE YEAR
Particulars Amount
Computation of GAV
Step 1 Compute ER
Actual rent received/receivable for let out period less unrealized rent as per Rule 4
Step 3 Compare ER and Actual rent received/receivable computed for the let-out
period
Step 4 If Actual rent is lower than ER owing to vacancy, then Actual rent is the GAV.
If Actual rent is lower than ER due to other reasons, then ER is the GAV.
However, in spite of vacancy, if the actual rent is higher than the ER, then
Actual rent is the GAV.

(a) 30% of NAV D
(b) Interest on borrowed capital (actual without any ceiling E
limit)
Income from house property (C-D-E)
Illustration 4:
Ganesh has a property whose municipal valuation is Rs. 2,50,000 p.a. The fair rent is Rs. 2,00,000 p.a. and
the standard rent fixed by the Rent Control Act is Rs. 2,10,000 p.a. The property was let out for a rent of Rs.
20,000 p.m. However, the tenant vacated the property on 31.1.2020. Unrealised rent was Rs. 20,000 and all
conditions prescribed by Rule 4 are satisfied. He paid municipal taxes @8% of municipal valuation. Interest
on borrowed capital was Rs. 65,000 for the year. Compute the income from house property of Ganesh for
A.Y. 2020-21.
Solution:
Computation of Income from house property of Ganesh for A.Y. 2020-21

Computation of GAV
Step 1 Compute ER
ER = Higher of MV of Rs. 2,50,000 p.a. and FR of Rs. 2,00,000 p.a., but restricted 2,10,000
to SR of Rs. 2,10,000 p.a.
Actual rent received/receivable for let out period
Less unrealized rent as per Rule 4 = Rs. 2,00,000 – Rs. 20,000 1,80,000
Step 3 Compare ER and Actual rent received/receivable
Step 4 In this case the actual rent of Rs. 1,80,000 is lower than ER of Rs. 2,10,000
owing to vacancy, since, had the property not been vacant the actual rent would
1,80,000
have been Rs. 2,20,000 (Rs. 1,80,000 + Rs. 40,000). Therefore, actual rent is the
GAV.
Gross Annual Value (GAV) 1,80,000
Less: Municipal taxes (paid by the owner during the previous year) = 8% of Rs. 2,50,000 (20,000)

(a) 30% of NAV = 30% of Rs. 1,60,000 48,000
(b) Interest on borrowed capital (actual without any ceiling limit) 65,000 (1,13,000)
(III) SELF-OCCUPIED PROPERTY

Particulars Amount
Annual value under section 23(2) Nil
Less: Deduction under section 24
Interest on borrowed capital E
(i) Interest on loan taken for acquisition or construction of house on or after
1.4.99 and same was completed within 5 years from the end of the financial
year in which capital was borrowed, interest or aggregate interest paid or
payable subject to a maximum of Rs. 2,00,000 (including apportioned pre-
construction interest).
(ii) In case of loan for acquisition or construction taken prior to 1.4.99 or loan
taken for repair, renovation or reconstruction at any point of time, interest or
aggregate interest paid or payable subject to a maximum of Rs. 30,000.
Aggregate of the amounts of deduction under (i) & (ii) shall not exceed Rs. 2,00,000
[Inserted by Finance (No. 1) Act, 2019]
Income from house property -E
102 PP-DTL&P
Pre-construction period and Interest

Meaning Start Date of Borrowing
End A. March 31 immediately prior to the year of completion of construction
B. Date of repayment
A or B whichever is earlier
Tax Treatment Pre-construction period interest is allowed as deduction in equal installments for the said
previous year and for each of the four immediately succeeding previous years. (i.e.
5 equal instalments from the year of completion of construction.)
Point of • Interest paid on “new loan”, which is taken to repay subsequent to the capital
consideration borrowed, for the purpose of repayment of such capital shall be allowed as
deduction.
IV HOUSE PROPERTY LET-OUT FOR PART OF THE YEAR AND SELF-OCCUPIED FOR PART
OF THE YEAR
Particulars Amount
Computation of GAV
Step 1 Compute ER for the whole year
Actual rent received/receivable for the period let out less unrealized rent as per
Rule 4
Step 3 Compare ER for the whole year with the actual rent received/receivable for the let
out period
Step 4 GAV is the higher of ER computed for the whole year and Actual rent received/
receivable computed for the let-out period


(a) 30% of NAV D
(b) Interest on borrowed capital (actual without E
any ceiling limit)
Income from house property (C-D-E) F
Illustration 5:
M is the owner of a house. The municipal value of the house is Rs. 40,000. He paid Rs. 8,000 as local taxes
during the year. He was using this house for his residential purposes but let out w.e.f. 1.1.2020 @ Rs. 4,000 p.m.
Compute the net annual value of the house.
Solution:
PARTICULARS AMOUNT Rs.

Annual rent or municipal valuation (whichever is higher) 48,000
Less : Local taxes 8,000
Net annual value of the house (No benefit shall be given for self occupied period as the 40,000
house did not remain vacant during the previous year)
Note: If fair rent is not given, then assume actual rent as fair rent.
Illustration 6:
(i.e. No vacancy but there is unrealized rent)
Mr. A owns two houses. The expected rent of the house one is Rs. 65,000. This house was let out for Rs. 7,500
But the rent for the months of February and March, 2020 could not be realized.
The expected rent of another house is Rs. 1,50,000. This house was let out for Rs.12,000 p.m. But the rent for
the last three months could not be realized.
In the both cases, Mr. A fulfills the conditions of Rule 4. You are required to compute the Gross Annual Value of
both the houses.
Solution:
Particulars House I House II

Expected Rent 65,000 1,50,000
Annual Rent 90,000 144000
Unrealized Rent 15,000 36,000
Computation of Gross Annual Value
Step 1: Expected Rent 65,000 1,50,000

Step 2: Actual Rent (After deducting unrealized rent) if higher than 75,000 1,08,000
Expected Rent then Actual rent otherwise Expected rent
Step 3: Applicable only in case of vacancy N.A. N.A.
Gross Annual Value 75,000 1,50,000
Illustration 7:
(There is vacancy but no unrealized rent)
Find out the gross annual value in the case of the following properties for the Assessment Year 2020-21
Rs. in thousands
Particulars P Q R S
Expected Rent 70 55 85 125
Rent Per Month (if let out) 7 5 8 8
Let out period (in months) 11 0 9 10
Vacancy (in months) 1 12 3 2
Further all the rent were realized for the year by the assessee.
104 PP-DTL&P
Solution:
Calculation of Gross Annual Value of Mr. X for A.Y. 2020-21
P Q R S
Annual Rent (If let out for 12 months) 84 60 96 96
Loss due to vacancy 7 60 24 16
Unrealized rent Nil Nil Nil Nil
Actual Rent (for let out period) 77 Nil 72 88
Calculation of Gross Annual Value
Step 1: Expected Rent 70 55 85 125
Step 2: If actual rent is more than Expected
Rent than Actual rent otherwise expected Rent 77 N.A. N.A. N.A.
Step 3: If property remain vacant then decline due to 77 0 72 109
vacancy shall be considered
Gross annual value 77 0 72 109
Illustration 8:
(Vacancy and unrealized rent both exist)
Mr. X is the owner of a house property. He lets this property during the previous year 2019-20 for Rs. 7,000 p.m.
The house was occupied from 1.4.2017 to 31.1.2020. From 1.2.2020, it remained vacant. Mr. X fails to realize
Rs.. 10,000 from the tenant. The Expected rent of the house is Rs. 82,000 p.a. Calculate the Gross Annual
Value of the house.
Solution:
Particulars Amount Rs.
Expected Rent 82,000
Annual Rent (Actual for the whole year - 7000 x 12) 84,000
Actual Rent (7,000 x 10) 70,000
Unrealized rent 10,000
Realized rent (Rs. 70,000 - 10,000) 60,000
Loss Due to vacancy (7,000 x 2) 14,000
Decline due to vacancy (82,000 - 14,000) but not less than actual rent received 68,000
Calculation of Gross Annual Value
Step 1: Expected Rent 82,000
Step 2: If actual rent is more than expected rent than actual rent otherwise expected rent N.A.
Step 3: Decline due to vacancy in Expected Rent (i.e. Expected Rent minus Loss due to 68,000
vacancy but not less than actual rent received)
Gross Annual Value 68,000

V. More than Two Self Occupied Property [Section 23(4)]

1. If the assessee owns more than two house property as self-occupied property (SOP); then any two of
the property at the option of the assessee shall be treated as “Self- occupied property, and the other
property shall be deemed to be let out.
2. Assessee can choose an option which will yield lower taxable income.
3. In the case of a deemed let-out property, the nature of which is self-occupied property or unoccupied
property, the income shall be similar to that of let-out property but subject to certain modifications i.e.
Fair rent has to be adopted as gross annual value. The question of considering actual rent received or
receivable does not arise.
4. No adjustment arises on account of property remaining vacant or on account of unrealizable rent.
Special Point:
• If a house property has two or more independent residential units, one of which is self occupied for own
residential purposes and other units are let out or used for own business then, valuation of each unit
will be determined separately.
• Loss from one House Property will be set off first against income from another house property in the
current year. If any loss remains after set off then, during that year it will be set off from any other heads
of income subject to maximum Rs.2,00,000/-. If still any loss remains then it will be carry forward to next
year and in the next year it will be available for set off only from income from house property and not
from any other heads of income. Loss can be carry forward for a total period of 8 Years.
Illustration 9:
Ganesh has two houses, both of which are self-occupied. The particulars of the houses for the P.Y.2019-20 are
as under:
Particulars House I House II House III

Municipal valuation p.a. 1,00,000 1,50,000 2,00,000
Fair rent p.a. 75,000 1,75,000 1,90,000
Standard rent p.a. 90,000 1,60,000 1,80,000
Date of completion 31.3.1999 31.3.2001 1.4.2010
Municipal taxes paid during the year 12% 8% 10%
Interest on money borrowed for repair of property - 55,000 40,000
during the current year
Compute Ganesh’s income from house property for A.Y. 2020-21 and suggest which house should be opted by
Ganesh to be assessed as self-occupied so that his tax liability is minimum.
106 PP-DTL&P
Solution:
Let us first calculate the income from each house property assuming that they are deemed to be let
out

House I House II House III
Gross Annual Value (GAV) 1,60,000 1,80,000

ER is the GAV of house property 90,000
Less: Municipal taxes (paid by the owner during the 12,000 12,000 20,000
previous year)
Net Annual Value (NAV) 78,000 1,48,000 1,60,000
(a) 30% of NAV 23,400 44,400 48,000
(b) Interest on borrowed capital NIL 55,000 40,000
Income from house property 54,600 48,600 72,000
OPTION 1 (House I & II – self-occupied and House III – deemed to be let out)

House I & II (Self-occupied) (30,000)
(interest deduction restricted to Rs. 30,000)
House III (Deemed to be let out) 72,000
If House I & II is opted to be self-occupied, the income from house property shall be Rs.42,000
OPTION 2 (House I & III – self-occupied & House II –deemed to be let out)

House I & III (Self-occupied) (interest deduction restricted to Rs. 30,000) (30,000)
House II ( Deemed to be let out) 48,600
If House I & III is opted to be self-occupied, the income from house property shall be Rs.18,600
OPTION 3 (House II & III– self-occupied & House I –deemed to be let out)

House I (Deemed to be let-out) 54,600
House II & III (Self-occupied) 30,000
(interest deduction restricted to Rs. 30,000)
Since Option 2 is more beneficial, Ganesh should opt to treat House 1 & III as self-occupied and House II as
deemed to be let out. His income from house property would be Rs. 18,600 for the A.Y. 2020-21.
VI. Annual value building as Stock In Trade [Section 23(5)]

• Where property consisting of any building or land appurtenant thereto
• is held as stock-in-trade and
• property or any part of the property
• is not let during whole or any part of the p/y,
• Annual value of such property or part of the property,
• for period up to 2 year [Substituted by Finance (No.1) Act, 2019 from the end of F/Y
• in which certificate of completion of construction of the property
• is obtained from the competent authority,
• Shall be taken to be NIL
DEDUCTIONS [SECTION 24]

LET-OUT PROPERTY SELF-OCCUPIED PROPERTY
STANDARD DEDUCTION U/S 24(a) STANDARD DEDUCTION U/S 24(a)
• Deduction @ 30% flat deduction on the Net Annual • This deduction is not available for
Value; self-occupied property
• This deduction is allowed even if no expenditure is
incurred by the assessee.
INTEREST ON BORROWED CAPITAL [Section 24 (b)] INTEREST ON BORROWED CAPITAL
[Section 24 (b)]
a) Interest Payable on loans borrowed for the purpose
of acquisition, construction, renovation, repairing or a) Deduction shall be allowed upto
reconstruction can be claimed as deduction. Rs.2,00,000:
b) Interest relating to the year of completion of construction CONDITIONS:
can be fully claimed in that year irrespective of the
date of completion. 1. Loan borrowed on or after 01-
04-99.
c) Pre-Construction Interest: Interest accrued during the
construction period preceding the year of completion 2. Loan taken only for acquisition/
of construction can be accumulated and claimed construction of house property
as deduction over a period of 5 years in equal 3. If property is constructed then
installments commencing from the year of completion it should be complete before
of construction. 5 year from the end of the
d) Any subsequent loan borrowed to repay the original financial year in which loan is
loan shall also be entitled to the same treatment as borrowed then.
the original loan. Where a person acquires a property OR
and pays only part of the sale consideration, interest
b) Deduction shall be allowed upto
payable on the unpaid purchase price qualifies for
Rs.30,000 in the following cases:
deduction in the computation of income from such
Property. 1. If the conditions specified in
(a) above are not satisfied
e) Deduction under section 24(b) for interest is available
on accrual basis. Therefore interest accrued but not
paid during the year can also be claimed as deduction.
108 PP-DTL&P
f) Interest on unpaid interest is not deductible. 2. Loan borrowed for repair,

renovation etc.
g) Brokerage or commission paid for acquiring the loan
will not be allowed as deduction 3. Capital borrowed before
1.04.1999 for any purpose or
4. Construction of house not
completed within 5 years from
the end of the financial year in
which loan is borrowed.
Illustration 10:
P, an individual, borrowed Rs. 20,00,000 for repair of his self-occupied house property and paid interest of
Rs. 1,60,000 thereon during the financial year 2019-20. What is the amount of interest allowable as deduction
under section 24 for the assessment year 2020-21?
Solution:
Section 24(b) provides that where the self-occupied house property has been acquired, constructed,
repaired, renewed or reconstructed with borrowed capital, deduction towards interest payable thereon shall
not exceed Rs. 30,000. Therefore, only Rs. 30,000 would be allowed as deduction on account of interest on
loan borrowed for repair and reconstruction of self-occupied house property.
The higher limit of Rs. 2,00,000 in respect of interest on loan borrowed on or after 1.4.1999 would be available
only where such loan is borrowed for acquisition or construction of self-occupied property and not for repair
of such property.
TAXABILITY OF RECOVERY OF UNREALISED RENT & ARREARS OF RENT RECEIVED

(i) Unrealised rent is deducted from actual rent in determination of annual value under section 23, subject
to fulfillment of conditions under Rule 4. Subsequently, when the amount is realised it gets taxed under
section 25A in the year of receipt.
(ii) If the assessee has increased the rent payable by the tenant and the same has been in dispute and
later on the assessee receives the increase in rent as arrears, such arrears is assessable under section
25A.
Unrealized rent [Section 25A] Arrears of rent [Section 25A]

(a) Taxable in the hands of the assessee whether Taxable in the hands of the assessee whether he
he is the owner of that property or not. is the owner of that property or not.
(b) Taxable as income of the previous year in Taxable as income of the year in which he re-
which he recovers the unrealized rent. ceives the arrears of rent.
(c) 30% of the unrealized rent deduction shall be 30% of the amount of arrears shall be allowed as
allowed. (i.e. 70% is taxable) deduction. (i.e. 70% is taxable)
Illustration 11:
Nikhil has a property whose Municipal Valuation is INR 500,000 pa. The Fair Rent of the property is INR
400,000 pa and the Standard Rent fixed by Rent Control Act is 450,000 pa. The property was let out for a
Rent of INR 35000 pm and the tenant vacated the same on 31st January 2020. Unrealised Rent was INR
35000 and the conditions are fulfilled with respect to the same. He paid municipal taxes worth INR 15000
during the PY and the Interest on Loan was INR 60000. Please exhibit the computation and advise the
income from house property.
Solution:
Computation of GAV INR INR

ER 4,50,000
Higher of:
1) Fair Rent 4,00,000
2) Muncipal Value 5,00,000
Limited to Standard Rent 4,50,000
Actual rent received/receivable 3,50,000
Less: Unrealised Rent (35,000)
3,15,000
GAV 4,50,000
Less: Municipal Taxes paid by the owner during the PY 15,000
NAV 4,35,000
30% NAV (1,30,500)
Interest on borrowed capital (60,000)
(1,90,500)
Income from House Property 2,44,500
Illustration 12:
Smt. Shanti Devi has a house property in Kolkata. The Municipal Valuation for the same is INR 10,00,000. The
Fair Rental for the property is INR 750,000. The Standard Rent per the Rent Control Act is INR 800,000. She let
out the property until 30th Nov’19 for a monthly rent of Rs. 75,000 per month. Thereafter, the tenant vacated the
property and she used the house for self-occupation. Rent for the months of Oct & Nov 19 couldn’t be realised
despite all efforts, and all the conditions for unrealised rent were satisfied. She paid Municipal Taxes @ 12%
during the year. She also paid Interest of INR 25,000 during the year for amount borrowed for repairs. Compute
the Income from House Property for AY 2020-21.
Solution:

ER
Higher of:
1) Fair Rent 7,50,000
2) Municipal Value 10,00,000

Limited to Standard Rent 8,00,000
Annual Rent 6,00,000
Less: Unrealised Rent 1,50,000
4,50,000
GAV (partly let out and partly self occupied) 8,00,000

110 PP-DTL&P
Less: Municipal Taxes paid by the owner during the PY 1,20,000
30% NAV 2,04,000
Interest on borrowed capital 25,000 2,29,000
INADMISSIBLE DEDUCTIONS [SECTION 25]

Interest chargeable under this Act which is payable outside India shall not be deducted if –
a) tax has not been paid or deducted from such interest and
b) there is no person in India who may be treated as an agent under section163.
TREATMENT OF INCOME FROM CO-OWNED PROPERTY [SECTION 26]

(i) Where property is owned by two or more persons, whose shares are definite and ascertainable,
• then share of each owner in the income of property will be taxed in his individual assessment according
to nature of occupancy
• if the property is self-occupied, then the part of self-occupancy is applicable to each co-owner individually,
and they are entitled for deduction u/s 24 independently.
(ii) Where property is owned by two or more persons, whose shares are not definite:
• income from house property will be determined and charged to tax in the capacity of an AOP.
TREATMENT OF INCOME FROM PROPERTY OWNED BY A PARTNERSHIP FIRM

(i) Where an immovable property or properties is included in the assets of a firm, the income from such property
should be assessed in the hands of the firm only.
(ii) Hence, the property income cannot be assessed as income of the individual partner in respect of his share
in the firm.
Illustration 13:
Two sisters, Seema and Rashmi, are co-owners of a house property, with 50% share each in the property.
The property was constructed prior to 1st April 1999. The property has 7 equal units and is situated in
Bangalore. During the FY 2019-20, each co-owner occupied one unit each and the balance were let out
@ a rental of INR 20000 per unit per month. The Municipal Valuation (MV) was INR 7,00,000 and the
Municipal Taxes were @ 10% of the MV. Interest payable on loan taken for construction was INR 400,000.
One of the let-out units was vacant for 6 months in the year. Compute the Income from House Property for
each of the sisters.
Solutions:

Estimated Rent Higher of:
1) Fair Rent -
2) Municipal Value (700000 x 5/7) 5,00,000

Annual Rent 12,00,000
Less: Unrealised Rent (1,20,000)
10,80,000
GAV (partly let out and partly self occupied) 10,80,000
Less: Municipal Taxes paid by the owner during the PY (50,000)
NAV 10,30,000
30% NAV (3,09,000)
Interest on borrowed capital (Rs.400000 x 5/7) (2,85,714)
(5,94,714)
Share of each Co-owner 2,17,643
Loss from House Property (self occupied portions) -30,000
Income from House Property (each co-owner) 1,87,643
Notes:
1) Observe that the computation has been done for the 5 let out and 2 self-occupied portions separately
and commensurately
2) Note that the Interest on Borrowed Capital for let out proportions is fully allowable as deduction without
any cap
3) Note that the AV for the Self Occupied Portion is NIL and the Interest on Borrowed Capital is restricted
to INR 30,000 for each co-owner
Illustration 14:
Mr. X is the owner of four houses. The following particulars are available:
House 1 House 2 House 3 House 4

Municipal valuation 16,000 20,000 24,000 5,600
Rent (Actual) — 14,000 20,000 6,800
Municipal taxes 400 1,000 1,200 300
Repairs and collection charges 200 2,500 1,040 460
Interest on mortgage — — — 1,000
Ground rent — 100 — 60
Fire premium 140 — 200 —
Annual charges — — 360 —
House No. 1 is self-occupied.

112 PP-DTL&P
House No. 2 is let out for business, construction was completed on 1.3.91 and consists of two residential units.
House No. 3 is 3/4 used for own business 1/4 let out to the manager of the business.
House No. 4 is let out for residential purposes.
His other income is Rs. 30,000. Find out the income of X from house property for the assessment year 2020-21.
Solution:
House No. 1
Rs.
Municipal valuation 16,000
Annual value deemed to be NIL
House No. 2

Less: Municipal taxes 1,000
Net annual value 19,000
Less: 30% of Net Annual Value 5,700
House No. 3
Since the house is used for own business, the income from this house is not taxable under the head ‘Income
from house property’ but will be assessed under ‘Profit and gains of business or profession’. 1/4 of the house
occupied by the Manager is presumed to be incidental to the business and hence not assessable under the
head ‘Income from house property’.
House No. 4

Less: Municipal taxes 300
Net annual Value 6,500
Less: 30% of Net Annual Value 1,950
Income from House Property: Rs. NIL + Rs. 13,300 + Rs. 4,550 = Rs. 17,850. It is presumed that House No. 4
has not been mortgaged for purposes of acquiring or repairs on the house property.
Illustration 15:
Mr. Lal is the owner of a house property. Its municipal valuation is Rs. 80,000. It has been let out for Rs.
1,20,000 p.a. The local taxes payable by the owner amount to Rs. 16,000 but as per agreement between the
tenant and the landlord, the tenant has paid the amount direct to the municipality. The landlord, however, bears
the following expenses on tenant’s amenities:
Extension of water connection 3,000

Water charges 1,500
Lift maintenance 1,500
Salary of gardener 1,800

Lighting of stairs 1,200
Maintenance of swimming pool 750
The landlord claims the following deductions:
Repairs and Collection charges 7,500
Land revenue paid 1,500
Compute the taxable income from the house property for the assessment year 2020-21.
Solution:
Computation of income from house property for the assessment year 2020-21
Gross annual value: to be higher of the following:
(a) Municipal valuation Rs. 80,000 or
(b) De facto rent (1,20,000 less value of amenities)
(c) Rent Received: 1,20,000
Less: Value of the amenities provided by the assessee:
(i) Extension of water connection not deductible as it is capital expenditure

(ii) Water Charges Nil
(iii) Lift maintenance 1500
(iv) Salary of gardener 1,800
(v) Lighting of stairs 1,200
(vi) Maintenance of swimming pool 750
Total (6,750)
Gross Annual Value 1,13,250

Less: Local tax (Nil)
No deduction is permissible as the taxes have been paid by the tenant
Net Annual Value 1,13,250
Less: Standard deduction from net annual value:
30% of Net Annual Value (33,975)
Illustration 16:
For the assessment year 2020-21 Sonu submits the following information:
Income from business (speculative) Rs. 40,000
Property Income House I (Rs.) House II (Rs.)

Municipal valuation 35,000 80,000
Rent received 38,000 68,000
114 PP-DTL&P
Municipal taxes paid by tenant 3,000 4,000

Repairs paid by tenant 500 18,000
Land revenue paid 2,000 16,000
Insurance premium paid 500 2,000
Interest on borrowed capital for payment of municipal tax of house property 200 400
Nature of occupation Let out for Let out for
residence business
Date of completion of construction 1.4.1996 1.7.1994
Determine the taxable income of Sonu for the assessment year 2020-21.
Solution:
Computation of Taxable Income of Sonu for Assessment Year 2020-21
House I Amount (Rs.)
Gross Annual Value 38000
Less: Municipal Taxes - not deductible since paid by tenant NIL
Net Annual Value 38000
Less: 30% of Net Annual Value (11,400)
Taxable Income Total 26,600
House II
Gross Annual Value 80000
Less: Taxes - not deductible, paid by tenant NIL
Net Annual Value 80,000
Less: 30% of Net Annual Value (24,000)
Taxable Income Total 56,000
Total Income = Rs. 26,600 + Rs. 56,000 + Rs. 40,000 = Rs. 1,22,600.
Note: Interest on borrowed capital for payment of municipal tax is not allowed as deduction under Section 24
of the Act.
Tax Planning consideration in case of Income from House Property

Tax Payer should consider following points for tax planning in case of Income from House Property
l Nature, Purpose and type of house property.
l Deductions available under section 24 (Home Loan Interest Rs. 30000 / Rs. 200000)
l Exemptions availability. (i.e. cases where income from house property is exempt from tax)
l Stamp duty and registration charges and other expenses related directly to the transfer are also allowed
as a deduction under Section 80C, subject to a maximum deduction.
l The joint owners, who are also co-borrowers of a self-occupied house property, can claim a deduction
on interest on the home loan up to Rs 2 lakh each.
l Inadmissible deductions under section 25.
CASE STUDY
1. Under what head of income should income from letting out of godowns and provision of warehousing
services be subject to tax - “Income from house property” or “profits and gains of business or
profession”?
CIT v. NDR Warehousing P Ltd (2015) 372 ITR 690 (Mad)
Facts of the case: The assessee engaged in the business of warehousing, handling and transport business
claimed income from letting out of buildings and godowns as business income. The Assessing Officer assessed
such income as “Income from house property”.
Appellate Authorities’ Observations: The Commissioner (Appeals) observed that the assessee’s activity
was not merely letting out of warehouses but storage of goods with provision of several auxiliary services
such as pest control, rodent control and fumigation service to prevent the goods stored from being affected
by vagaries of moisture and temperature. Further, service of security and protection was also provided to
the goods stored. There is, therefore, no dispute that the assessee carries on the activity in an organised
manner. These activities are more than mere letting out of the godown for tenancy.
The Tribunal noted that the objects clause of the memorandum of association of the company clearly shows
that the assessee-company was incorporated with the object of carrying on the business of warehousing
and letting/renting of godowns and providing facilities for storage of articles or things and descriptions
whatsoever. The profit and loss account of the assessee- company shows that its main source of income is
storage charges and maintenance or user charges. Even substantial part of the expenses also relate to the
salaries of employees engaged in the maintenance and upkeep of the godowns and warehouses. Based on
these facts, Tribunal concurred with the findings of the Commissioner (Appeals) and held that the income of
the assessee from letting out of warehouses and godowns is chargeable under the head “Profits and gains
of business or profession” and not “Income from house property”.
High Court’s Decision: The High Court observed that the Commissioner (Appeals) as well as the Tribunal
had not only gone into the objects clause of the memorandum of the assessee but also individual aspects of
the business to come to the conclusion that it was a case of warehousing business, and, therefore, the income
would fall under the head “Profits and gains of business or profession”.
Accordingly, the High Court held that the income earned by the assessee from letting out of godowns and
provision of warehousing services is chargeable to tax under the head “Profits and gains of business or
profession” and not under the head “Income from house property”.
2. Would income from letting out of properties by a company, whose main object as per its memorandum
of association is to acquire and let out properties, be taxable as its business income or income from
house property, considering the fact that the entire income of the company as per its return of income
was only from letting out of properties?
Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673 (SC)
Facts of the Case: The assessee-company was incorporated under the Companies Act, 1956. Its main
objective, as stated in the memorandum of association, is to acquire properties in the city of Madras and let
out those properties. The company had rented out such properties and the rental income was shown as its
business income in the return filed by the assessee.
116 PP-DTL&P
The Assessing Officer, however, assessed the rental income under the head “Income from house property”. On
appeal, the Commissioner (Appeals) concurred with the assessee’s view that the rental income, in this case,
was the company’s business income. The Appellate Tribunal also supported the view of the Commissioner
(Appeals).
High Court’s Opinion: The High Court allowed the Department’s appeal holding that income derived from
letting out of properties has to be assessed as income from house property. It held so on the basis of the
Supreme Court ruling in East India Housing and Land Development Trust Ltd. v. CIT (1961) 42 ITR 9, wherein
it was decided that income from letting out of shops and stalls was to be assessed as income from house
property, in the case of a company whose main object of was buying and developing landed properties and
promoting and developing markets.
Supreme Court’s Observations: The Supreme Court observed that the High Court had pronounced its
ruling on the basis of the decision of the Apex Court in East India Housing and Land Development Trust Ltd.’s
case, wherein the letting out of property was not the object of the company at all. Therefore, in that case,
the Apex Court was of the opinion that the character of the income which was from house property had not
changed merely because it was received by the company formed with the object of developing and setting
up properties.
The Supreme Court further observed the law laid down authoritatively and succinctly by it in Karanpura
Development Co. Ltd. v. CIT [1962] 44 ITR 362. In that case, the assessee- company was formed with the
object of, inter alia, acquiring and disposing of the underground coal mining rights in certain coal fields and
it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields
and then sub-leasing them to collieries and other companies. Thus, in that case, the leasing out of the
coal fields to the collieries and other companies was the business of the assessee. The income which
was received from letting out of those mining leases was shown as business income. Department took the
position that the same was to be treated as income from the house property. Thus, in similar circumstances,
an identical issue arose before the Apex Court. The Apex Court pointed out that the deciding factor as to the
head under which the income was to be assessed is not the ownership of land or leases but the nature of the
activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed
that the objects of the company must also be kept in view to interpret the activities. In support of the aforesaid
proposition, a number of judgments of other jurisdictions, i.e., Privy Council, House of Lords in England and
the US Courts were taken note of.
After applying the aforesaid principle to the facts, the Apex Court had arrived at the conclusion that such
income had to be treated as income from business and not as income from house property.
Supreme Court’s Decision: The Supreme Court opined that the aforesaid judgment in Karanpura
Development Co. Ltd.’s case squarely applied to the facts of the present case, where letting of the properties
is in fact the business of the assessee. The main objective of the company as per its memorandum of
association is to acquire and hold properties in Chennai and let out these properties. Therefore, holding
of the properties and earning income by letting out these properties is the main objective of the company.
Further, in the return of income filed by the company and accepted by the Assessing Officer, the entire income
of the company comprised of income from letting out of such properties. The Supreme Court, accordingly,
held that the assessee had rightly disclosed the income derived from letting out of such properties under the
head “Profits and gains of business or profession”.
3. Can benefit of self-occupation of house property under section 23(2) be denied to a HUF on the
ground that it, being a fictional entity, cannot occupy a house property?
CIT v. Hariprasad Bhojnagarwala (2012) (Guj.)

The Gujarat High Court observed that a firm, which is a fictional entity, cannot physically reside in a house
property and therefore a firm cannot claim the benefit of this provision, which is available to an individual owner
who can actually occupy the house. However, the HUF is a group of individuals related to each other i.e., a
family comprising of a group of natural persons. The said family can reside in the house, which belongs to the
HUF. Since a HUF cannot consist of artificial persons, it cannot be said to be a fictional entity.
4. Can notional interest on interest-free deposit received by an assessee in respect of a shop let out
on rent be brought to tax as business income or income from house property?
CIT v. Asian Hotels Ltd. (2010) 323 ITR 490 (Del.)
Facts of the case: The assessee had received interest-free deposit in respect of shops given on rent. The
Assessing Officer added to the assessee’s income notional interest on the interest free deposit at the rate of
18 per cent simple interest per annum on the ground that by accepting the interest free deposit, a benefit had
accrued to the assessee which was chargeable to tax under section 28(iv).
High Court’s Observations & Decision: The High Court observed that section 28(iv) is concerned with
business income and brings to tax the value of any benefit or perquisite, whether convertible into money
or not, arising from business or the exercise of a profession. Section 28(iv) can be invoked only where the
benefit or amenity or perquisite is otherwise than by way of cash. In the instant case, the Assessing Officer
has determined the monetary value of the benefit stated to have accrued to the assessee by adding a sum
that constituted 18% simple interest on the deposit. Hence, section 28(iv) is not applicable.
Section 23(1) deals with the determination of the expected rent of a let out property for computing the income
from house property. It provides that the expected rent is deemed to be the sum for which the property might
reasonably be expected to be let out from year to year. This contemplates the possible rent that the property
might fetch and certainly not the interest on fixed deposit that may be placed by the tenant with the landlord in
connection with the letting out of such property. Thus, the notional interest is neither assessable as business
income nor as income from house property.
5. Whether the rental income derived from the unsold flats which are shown as stock-in- trade in
the books of the assessee would be taxable under the head ‘Profits and gains from business or
profession’ or under the head ‘Income from house property’, in a case where the actual rent receipts
formed the basis of computation of income?
New Delhi Hotels Ltd. v. ACIT (2014) 360 ITR 0187 (Delhi]
High Court’s Observations: On this issue, in CIT v. Ansal Housing Finance and Leasing Co. Ltd. (2013) 354
ITR 180, where the deemed rent (i.e., Expected Rent) formed the basis of computation of income from unsold
flats held as stock-in-trade, the Delhi High Court held that such rent was taxable under the head “Income from
house property”. Further, in CIT v. Discovery Estates Pvt. Ltd. and CIT v. Discovery Holding Pvt. Ltd. (2013)
356 ITR 159, the same issue emerged when the actual rent formed the basis of computation of income from
unsold flats held as stock-in-trade. In that case also, the Delhi High Court held that the income was taxable
under the head “Income from house property”.
High Court’s Decision: In this case, the Delhi High Court followed its own decision in the case of CIT vs.
Discovery Estates Pvt. Ltd / CIT vs. Discovery Holding Pvt. Ltd., wherein it was held that rental income derived
from unsold flats which were shown as stock-in-trade in the books of the assessee should be assessed
under the head “Income from house property” and not under the head “Profits and gains from business or
profession”.
Note – This has been further substantiated by insertion of new sub-section (5) of section 23, according to
which income from house property held as stock-in-trade would be exempt for a period of one year from
118 PP-DTL&P
the end of the financial year in which certificate of completion was obtained from the competent authority.
However, for availing such exemption, the property should not be let out during the said period. Insertion of
sub-section (5) in section 23 providing for exemption in respect of house property held as stock-in-trade for a
certain period subject to fulfilment of the condition stated therein implies that income from house property held
as stock-in-trade –
(i) beyond the said period; or
(ii) not eligible for such exemption even during the said period due to non-fulfilment of the stated condition,
would be taxable under the same head of income i.e., “Income from house property”.
In effect, where exemption provisions are provided under a particular head of income, it can be inferred that the
income, but for such exemption, would be taxable only under that head of income.
[6] Can interest paid by builder for delay in providing or delivering of flats be admissible under section24
of Income Tax?
Akash and Ambar Trust V CIT [2004]268ITR93/140
Facts of the case: Business of the appellant is to construct flats and sell at profit. Interest has been paid by the
appellant in pursuance of an agreement entered into. The appellant was paid advance money as price of the
flat deliverable within a stipulated period; later appellant had to pay interest to allottee as the flat could not be
delivered during the stipulated period as per agreement.
Issue of Case: Appellant is of contention that the amount paid to the Assessee for purchase of the flat was
utilized for construction of the flat and has to be treated as capital borrowed by the Assessee for construction of
the flat and, therefore, the interest paid thereon is liable to be deducted under Section 24(1)(vi).
High Court’s Observations & Decision: High Court observed that interest paid could not be treated as Interest
paid on capital borrowed for the construction of flats. It is further observed that under section 24 deduction of
amount of interest payable on capital is allowed only when properly has been constructed on the said borrowed
capital. In the present facts apparently the Assessee did not construct the flat on borrowed capital. In addition
to that amount so paid by the Assessee to the purchaser was not interest payable on any borrowed capital
with which the construction of the said flat was made. Actually it was payment made by the Assessee to the
purchaser on his failure to deliver the flat within the stipulated time. Hence, even if it is termed as interest, is
in the nature of penalty or liquidated damages, in respect of which deduction is not permissible under Section
24(1)(vi) of the Income-tax Act, 1961.
[7] Can notional interest on security deposit be included in Annual Letting Value (ALV) and assessed
as Income from house property ?
CIT v. K. Streetlite Electric Corporation
Facts of the case: The Assessee has earned rental income by letting out the facilities of factory, land, building
and offices, etc. Assessing Officer has noticed that the Assessee had taken interest-free security of from two
parties, to whom the assets were leased out and the Assessee has stated a very low rental income of as the
annual letting value (ALV) in respect of those properties. Moreover, AO has sent SCN stating interest at 18%
per annum on the interest-free security.
High Court’s Observations & Decision: It was observed that security deposit was a sham device to avoid
tax and had no real basis with the actual rent that was received by the assessee. According to section 23(1)
(b), where the property is actually let out, the actual amount of rent received or receivable shall form part of
the income from house property. To supplement that, notional interest that may accrue on the security deposit
would not form part of income from house property as held by the Bombay High Court in CIT v. J.K. Investors
(Bombay) Ltd. (2001) 248 ITR 723(Bom). However, where payment of the security deposit is to circumvent the
real rent, the same shall fall within its ambit as income from house property. Hence, it was held hat notional
interest on security deposit would be treated to be included in the ALV as there is no provision in the agreement
to increase in rent from year to year. However, interest rate would be 9 per cent, instead of 18 per cent, on the
security amount would be just to meet the ends of justice and the same will be treated as taxable income of the
assessee under the head “Income from house property” relating to the land and building.
[8] Whether interest charged by the bank on the amount borrowed by the assessee from it for raising
construction was to be allowed or not?
Naman Kumar vs CIT [2014]
Here in the above cited case, income of the assessee under the head “income from house property” is to be
computed for the purpose of income tax after making certain deductions as are envisaged in Section 24 of the
Act. Section 24(1)(vi) of the Act stipulates that amount of interest payable on capital borrowed, interalia, for
construction of the property yielding income, is an admissible deduction. It thus is evident that only interest
payable on such borrowed capital is to be deducted while computing income chargeable to income tax under
the head ‘income from house property”. It would be stated that interest paid on interest levied by the bank,
because of non-payment of installments of borrowed capital to the bank, does not qualify for an admissible
deduction.
LESSON ROUND UP
– Charging Section: Section 22 of the Act provides that the annual value of property consisting of any
buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions
of such property as he may occupy for the purposes of any business or profession carried on by him,
the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head
Income from House Property”.
– Deemed Owner: As per section 27, the following persons though not the legal owners of a property
are deemed to be the owners for the purposes of sections 22 to 26:
(a) Transfer to a spouse or minor child
(b) Holder of an impartible estate
(c) Member of a co-operative society
(d) Person in possession of a property
(e) Person having right in a property for a period not less than 12 years
– The measure of charging income-tax under this head is the annual value of the property, i.e., the
inherent capacity of a building to yield income. The expression ‘annual value’ has been defined in
Section 23(1) of the Income-tax Act as, the annual value of any property shall be deemed to be:
o the sum for which the property might reasonably be expected to let from year to year; or
o where the property or any part of the property is let and the actual rent received or receivable
by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so
received or receivable; or
o where the property or any part of the property is let and was vacant during the whole or any part
of the previous year and owing to such vacancy the actual rent received or receivable by the
owner in respect thereof is less than the sum referred to in clause (a), the amount so received or
receivable.
– Gross annual value shall be higher of
120 PP-DTL&P
(a) Expected Rent

(b) Actual rent received or receivable.
The higher of Municipal value and fair rental value shall be Expected rent. However, expected rent
shall not exceed the Standard rent.
– Net annual value shall be computed in the following manner:
Determine the Gross Annual Value
Deduct municipal tax actually paid by the owner during the previous year from the Gross Annual
Value.
– Deduction from Annual Value (Section 24): W.e.f. Assessment Year 2002-03, income chargeable under
the head “Income from house property” shall be computed after making the following deductions,
namely:
o Standard deduction: a sum equal to 30% of the annual value;
o Interest on borrowed capital: where the property has been acquired, constructed, repaired,
renewed or reconstructed with borrowed capital, the amount of any interest payable on such
capital. The interest on borrowed money pertaining to pre-construction period is available in 5
equal installments commencing from the previous year in which house is acquired or constructed.
For this purpose the pre-construction period means the period commencing on the date of
borrowing and ending on 31st March immediately prior to the date of completion of construction/
date of acquisition or date of repayment of loan, whichever is earlier. Interest for current year is
deductible upto Rs. 30,000/ Rs. 2,00,000 as the case may be.
SELF-TEST QUESTIONS
ELABORATIVE QUESTIONS
1. What is the meaning of ‘Owner of House Property’ under Section 27 of the Income-tax Act, 1961?
2. What is ‘annual value’ of house property? How is it computed?
3. In computing the income from house property what deductions are allowed from the net annual value?
4. What is the basis of computation of income from House property? How would you arrive at the net
annual value of a house occupied by an assessee for his own residence?
5. How would you deal with the following while calculating the income under ‘Income from house
property’:
(a) Annual Charge.
(b) Vacancy Allowance.
(c) Unrealised Rent.
(d) Income from house property situated in a foreign country.
DISTINGUISH BETWEEN
1. Gross Annual Value and Annual Value
2. Deemed owners and Actual owners
3. Standard Rent and Expected Rent
4. Fair Rent and Annual Rent
PRACTICAL QUESTIONS
1. A HUF owns a property which has been let out to a firm carrying on business. HUF is a partner of the
firm through its karta. No rent has been charged by the HUF from the Firm for the use of premises.
The AO, however, taxed the family on the notional income property based on municipal valuation. Is
this decision justified?
2. Mr. Anil revived a sum of Rs. 360000 (Rs. 120000 p.a.) on 1.7.2019 by way of arrears for the last three
years as the govt. department (tenant) enhanced the rate of rent with retrospective effect. Will the sum
of Rs. 360000 be taxable in the AY 2020-21? Can it be speared for the last three years?
3. X, an individual, borrowed Rs. 20,00,000 for the repair of his self occupied house property and paid
interest Rs. 170000 thereon during the financial year 2019-20. What is the amount of interest allowable
as deduction under section 24 for the AY 2020-21?
4. Compute the Net Annual Value of the House Property for AY 2020-21
Mr. A (ROR) in India during the FY 2019-20. He owns a house property in UK which has been let out
at EURO 10000 p.m. The municipal taxes paid is EURO 8000 during 2019-20. The value of 1 EURO
in Indian Rupees taken at Rs. 82.50.
SUGGESTED READINGS
Kluwer]
122 PP-DTL&P
Lesson 4 n Computation of Income – Profits and Gains from Business and Profession 123
Lesson 4
Computation of Income – Profits and
Gains from Business and Profession
LESSON OUTLINE
LEARNING OBJECTIVES
– Incomes Chargeable under the head The provisions for computation of Income from
Business or Profession (Section 28) Business or Profession are applicable for Persons
– Computation of Income from Business or who are not in employment and earn income being
Profession (Section 29) their own masters. There are many deductions
allowed to such persons from their Income but
– Expenses allowed as Deduction [Section 30
there also many conditions for allow ability of the
to Section 37(1)]
same.
– Expenses not allowed as Deduction (Section
40(a)/Section 40(b)/Section 40A(2)/Section
understand:
40A(3) etc)
– What incomes are chargeable under the
– Deemed Incomes chargeable under the
head Business or Profession.
head Business or Profession (Section 41)
– Determine the expenses which are
– Maintenance of Accounts for Business or
admissible/inadmissible while computing
Profession (Section 44AA)
the Income from Business or Profession.
– Compulsory Audit of Accounts for Persons
– Analyse when are certain receipts deemed
Carrying on Business or Profession (Section
to be Income chargeable to tax under this
44AB)
head.
– Computation of Income on Presumptive
– Determine Deductions allowable on actual
basis (Section 44AD/Section 44AE/Section
payment basis.
44ADA)
– Know which Assessee’s are required to
– Question for Practice
compulsorily maintain Books of Accounts.
– LESSON ROUND UP
– Determine when is Audit of Accounts
– SELF TEST QUESTIONS compulsory.
– Determine who are the Assessee’s to
whom provisions of presumptive tax apply
123
124 PP-DTL&P
KEY SECTIONS COVERED IN THIS CHAPTER
Section 28 Basis of Charge
Section 29 Computation of Business Income
Section 30 Building used for business
Section 31 Plant & Machinery, Furniture &Fixtures used for business
Section 32 Depreciation
Section 32AC Investment in new plant & machinery
Section 35 Scientific research
Section 35(2AA) Weighted deduction for cont. to national laboratory etc
Section 35(2AB) Company assessee, In house scientific research
Section 35AD Deduction for specified business
Section 35CCA Expenditure on Rural devp. programmes
Section 35CCC Expenditure on Agricultural extension project
Section 35CCD Expenditure on Skill Development Project
Section 35D Amortization of preliminary expenses
Section 35DDA Amortization of expenditure in case of VRS
Section 36 Allowable deductions
Section 37(1) General deductions
Section 37(2B) Expenditure to political party
Section 38(2) Building/Plant/Machinery/Furniture not exclusively for business
Section 40(a) Deductions not allowable
Section 40A(2) Expenditure to specified persons
Section 40A(3) Payment other than by account payee cheque
Section 40A(7) Disallowance for provision for gratuity
Section 40A(9) Contribution to non statutory funds
Section 40A(13) No deduction of marked to market loss
Section 41 Deemed profits chargeable to tax
Section 43(1) Actual cost
Section 43B Certain deductions on Actual Payment Basis
Section 43AA Taxation of foreign exchange fluctuation
Section 43CA Consideration of real estate transactions
Section 43CB Computation of income from construction and service contracts

Section 44AA Books of account
Section 44AB Audit of accounts
Section 44AD/AE/ADA Deemed business incomes
CHARGEABILITY [SECTION 28]

Following Incomes are chargeable under “Profit and Gains from Business and Profession”
a) Profit of any Business or Profession carried by assessee at any time during Previous Year
b) Partner of a Firm : Any Interest, Salary, Bonus, Commission, or any type of remuneration due /
received from Firm.
c) Compensation due or received [section 28(ii)]
Ø For Termination/Modification of agreement for managing a Company.
Ø For Termination/modification of terms of Agency.
Ø For Vesting in Government, management of any property/business under any law.
Ø From any person, by whatever name called, at or in connection with the termination or the
modification of the terms and conditions, of any contract relating to his business[Finance
Act,2018]
d) Non-Compete fees & Exclusivity rights : Any sum received/receivable in Cash or kind under an
agreement for :
Ø Not carrying out any activity in relation to any business or,
Ø Not sharing any know-how, patent, copyright etc., and any similar right.
Ø Information or techniques likely to assist in the manufacture or processing of goods or provision
for service.
e) Benefits/Perquisites in cash or kind arising from carrying on business or profession
f) Sum received under Keyman Insurance Policy including bonus on such policy
g) Export Incentives like
Ø Sale of Import license.
Ø Cash assistance against Export.
Ø Duty drawback of Customs/Excise.
Ø Profit on transfer of duty entitlement pass book scheme/duty free replenishment certificate
h) Income derived by trade, professional or similar association from Specific services performed for its
members.
i) 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
expenditure on such capital asset has been allowed as a deduction u/s 35AD
j) The fair market value of inventory as on the date on which it is converted into, or treated as, a capital
asset determined in the prescribed manner. [Section 28(via)(Finance Act,2018)]
126 PP-DTL&P
Special Points :
1. Section 2(13) : Business includes any Trade, Commerce or manufacture or any Adventure or
concern in the nature of trade, commerce or manufacture. Even a single and isolated transaction
can be held to be capable of falling in the definition of business. [CIT v Prabhu Dayal (1971) 82
ITR 804(SC)]
Definition of Business in section 2(13) is not exhaustive – The definition of the term business
in section 2(13) is not exhaustive, it covers every facet of an occupation carried on by a person
with a view to earning profits.
Note: production of goods from raw material, buying and selling of goods to make profits and
providing services to others are different form of “business”. profit arising there from are,
therefore, chargeable to tax under the head”profits and gains from business or profession.
The term business” is a word of wide import and in fiscal statutes it must construed in a broad
rather than a restricted sense – Mazagaon Dock Ltd. v. CIT [1958] 34 ITR 368 (SC)
Significance of Profit Motive: Though profit motive is one of the primary requisites of business,
it is not an essential ingredient of business for instance, mutual concerns and societies do
carry on business,but they seldom have profit motive- General Family Pension Fund v. CIT
[1946] 14 ITR 488 (Cal).
Control and Profit Motives are two crucial tests: if there is neither control over the actual conduct
of the day-to day business nor is there any direct nexus (connection or series of connections)
with the profits or losses of a business, there can be no question of a business or profession
carried on by the assesee in terms of section 28 and the case, therefore, must fall within the
ambit of section 56 as income from other sources-CIT v. S.K. Sahana & Sons Ltd.[1987] 33
Taxman 62(Pat).
2. Section 2(29BA) : Manufacture means A change in nonliving physical object or article resulting
in transformation of object or article into a New and Distinct object or article having a different
name, character or use bringing into existence of a new object or article with a Different chemical
composition or integral structure, which is capable as such of being sold or supplied.
Business include trade -In the view of section 2(13) business interalia include trade . therefore it is
mandatory to deal with it seperately. Shah J., observed in the state of Punjab v. Bajaj electricals Ltd
[1968] 70 ITR 730 (SC) that trade in its primary meaning is the exchanging of goods for goods or goods
for money ; in its secondary meaning it is repeated activity in the nature of business carried on with
purpose of making profit, the activity being manual or mercentile, as distinguished from the liberal arts
or learned professions or agriculture.
3. Section 2(36) : Profession includes vocation.
4. Illegal Business : From Income Tax point of view, even profits of illegal business are taxable under
Business or Profession.
5. Speculation Business : Where speculative transaction carried on by an assessee is of such a nature
as to constitute a business, such speculation business shall be deemed to be distinct & separate from
any business. [Explanation to Section 28]
6. Business Loss : Business Income includes business losses provided they are of revenue nature, real
losses & are incidental to carrying on business. [CIT v K.T.M.S Mahmood (1969)74 ITR 100 (Mad),
CIT v Mysore Sugar Co. Ltd. (1962) 46 ITR 649 (SC), CIT v. Abdullabhai Abdulkadar (1961) 41 ITR
545 (SC)]
METHOD OF ACCOUNTING [SECTION 145]

Section 145(1) : Income under head Business or Profession & Income under head Other Sources is to be
calculated on basis of Cash or Mercantile basis of accounting regularly employed by the assessee.
Section 145(2) : The Central Government may notify in Official Gazette from time to time income computation
and disclosure standards to be followed by any class of assessees or in respect of any class of income.
Section 145(3) : Where the AO is not satisfied about the
l correctness or completeness of the accounts of assessee, or
l where the method of accounting have not been regularly followed by the assessee or
l income has not been computed in accordance with the standards notified
l the AO may make an assessment u/s 144
Special point :
Accordingly, the Central Government had, vide Notification No. S.O.892(E) dated 31.3.2015, in exercise of the
powers conferred by section 145(2), notified ten income computation and disclosure standards (ICDSs) to be
followed by all assessees, following the mercantile system of accounting, for the purposes of computation of
income chargeable to income -tax under the head
Profit and gains of business or profession” or “Income from other sources”. This notification was to come into
force with effect from 1st April, 2015, to be applicable from A.Y. 2016-17
However, the Central Government has, vide Notification No. S.O.3078(E) dated 29.9.2016, rescinded Notification
No.S.O.892(E) dated 31.3.2015. Simultaneously, vide Notification No. S.O.3079(E) dated 29.9.2016, the
Central Government has notified ten new ICDSs to be applicable from A.Y.2017-18.
The newly notified ICDSs have to be followed by all assessee (other than an individual or a Hindu undivided
family who is not required to get his accounts of the previous year audited in accordance with the provisions
of section 44AB) following the mercantile system of accounting, for the purposes of computation of income
chargeable to income-tax under the head “Profits and gains of business or profession” or “Income from other
sources”, from A.Y.2017-18
The ten notified ICDSs are :
ICDS I Accounting Policies
ICDS II Valuation of Inventories
ICDS III Construction Contracts
ICDS IV Revenue Recognition
ICDS V Tangible Fixed Assets
ICDS VI The Effects of Changes in Foreign Exchange Rates
ICDS VII Government Grants
ICDS VIII Securities

128 PP-DTL&P
ICDS IX Borrowing Costs
ICDS X Provisions, Contingent Liabilities and Contingent Assets
METHOD OF ACCOUNTING IN CERTAIN CASES [SECTION 145A]

For the purpose of determining the income chargeable under the head “Profits and gains of business or
profession”, –
(i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in
accordance with the income computation and disclosure standards notified u/s 145(2);
(ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include
the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the
assessee to bring the goods or services to the place of its location and condition as on the date of
valuation;
(iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted
on a recognised stock exchange with regularity from time to time, shall be valued at actual cost
initially recognised in accordance with the income computation and disclosure standards notified
u/s 145(2);
(iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of
actual cost or net realisable value in accordance with the income computation and disclosure standards
notified under u/s 145(2) :
Provided that the inventory being securities held by a scheduled bank or public financial institution shall be
valued in accordance with the income computation and disclosure standards notified u/s 145(2) after taking into
account the extant guidelines issued by the Reserve Bank of India in this regard :
Provided further that the comparison of actual cost and net realisable value of securities shall be made
category-wise.
Explanation 1 : For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any
law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence
to such payment.
TAXATION OF CERTAIN INCOMES [SECTION 145B]

(1) Notwithstanding anything to the contrary contained in section 145, the interest received by an assessee on
any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of
the previous year in which it is received (however, it is taxable under section 56 under the head”Income From
Other Sources”).
(2) Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of the
previous year in which reasonable certainty of its realisation is achieved.
(3) The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of
the previous year in which it is received, if not charged to income-tax in any earlier previous year.
COMPUTATION OF INCOME FROM PROFITS AND GAINS OF BUSINESS OR

PROFESSION [SECTION 29]
The income referred to in section 28 shall be computed in accordance with the provisions contained in sections
30 to 43D.
RENT, REPAIRS, TAXES & INSURANCE FOR BUILDINGS [SECTION 30]

In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or
profession, the following deductions shall be allowed –
(a) where the premises are occupied by the assessee –
(i) as a tenant, the rent paid for such premises ; and further if he has undertaken to bear the cost of
repairs to the premises, the amount paid on account of such repairs ;
(ii) otherwise than as a tenant, the amount paid by him on account of current repairs to the premises ;
(b) any sums paid on account of land revenue, local rates or municipal taxes subject to the provision of
section 43B ;
(c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the
premises.
Explanation : For the removal of doubts, it is hereby declared that the amount paid on account of the cost of
repairs referred to in sub-clause (i), and the amount paid on account of current repairs referred to in sub-clause
(ii), of clause (a), shall not include any expenditure in the nature of capital expenditure.
NOTE: (i) Partly used for Business purposes – where only a part of the business premises taken on rent is
used and occupied by the assesee as his dwelling house, a proportion of rent attributable towards the use of
premises as dwelling house is not allowed as deduction.
(ii) Rent V. Premium – Section 105 of the transfer of property act makes a distinction between the two terms
i.e.; rent and premium. while the amount paid for obtaining a lease is “premium”, money paid periodically or
at some specified occasion is “rent “. The consideration for lease may consist of rent and /or premium amount
allowed as deduction under this section is rent for premises taken on lease; such premium is generally regarded
as capital expenditure. If, however, premium merely consist of advance payment of rent, it would be allowed as
deduction in the relevant years.
REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE [SECTION 31]

In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or
profession, the following deductions shall be allowed –
(i) the amount paid on account of current repairs thereto ;
(ii) the amount of any premium paid in respect of insurance against risk of damage or destruction thereof.
(iii) In order to avail deduction,it is mandatory that plant,machinery,or furniture must be utilized for the
purpose of assessee’s business during the previous year. It is however not nessessary that these
assets should be used throughout the previous year - CIT v. National Syndicate [1961] 41 ITR 225(SC).
Explanation : For the removal of doubts, it is hereby declared that the amount paid on account of current repairs
shall not include any expenditure in the nature of capital expenditure.
DEPRECIATION [SECTION 32]

Depreciation under the Income Tax Act is a deduction allowed for the decline or loss in the real value of a
tangible or intangible asset, due to physical wear, tear and decay, and is generally limited to losses or decline
in value which cannot be restored by current repairs and maintenance.
Depreciation shall be allowed if all the following conditions are satisfied :
130 PP-DTL&P
1. Specified Assets : Only the following types of assets are eligible for Depreciation.
n Tangible Assets : Building, Machinery, Plant or Furniture.
n Intangible Assets : Know-how, patent, copyright, trademark, licence, franchise or other rights
2. Purpose : The specified assets should be used for Business or Profession of assessee.
3. Ownership : The specified assets can be Wholly or partly owned by assessee during the previous year.
Note : (i) Registered ownership is not mandatory- it is not mandatory that the assesee should be
registered owner of the asset. Exclusion possession rights, to exclude others from the enjoyment of
the asset, full control over the assets or premises, right to retain possession and defend the same are
but some of the characteristics of the ownership which would entitle a person to claim the depreciation
allowance under section 32-Mysore Minerals Ltd v. CIT [1999] 106 Taxman 166 (SC).
(ii) Property of Partnership Firm : the partnership firm is entitled to claim depreciation only on immoveable
assets brought by partners as their capital contribution,even if such assets are not registered in the
name of the partnership firm under the Transfer of Property Act.
(iii) Property Taken on Hire Purchase: in the case of hire- purchase the rentals paid by the hire-purchaser
enable him to claim depreciation on the assets. Thus in hire purchase contract the economic ownership
rests with the hire-purchaser not the lessor. A circlular of the board issued in 1943 governs the tax
treatment in such cases. The hire vendor will only enter the financial transaction in the books of the
accounts and show only the interest part of the instalment as taxable income. this situation is prevailing
notwithstanding the fact that under the civil law the ownership does not pass to the hire-purchaser until
the last instalment is received.
(iv) Depreciation on Fractional Ownership: After the amendment in section 32(1) by the Finance (No.2)
Act, 1996, depreciation is admissible even in respect of fractional ownership of an asset.
(v) Purchase of Shares : when the shares of a real estate company is purchased by the assessee and
by the virtue of these shares, he become the absolute owner of such flat,so as result of this it is entitled
to claim depreciation on such flat – Deepak Fertilisers & Petrochemicals Corpn. Ltd. v. CIT [2008] 117
TTJ (Mum.) 752.
4. Basis of Depreciation : Depreciation shall be calculated as per below formula :
[Rate of Depreciation ] X [ WDV of the Block Of Asset as on last day of the P/Y]
Block of Asset [Section 2(11)]
Ø Group of assets falling within a class of assets
Ø Comprising of Tangible assets and Intangible assets
Ø In respect of which same percentage of depreciation is prescribed.
Written Down Value (WDV) [Section 43(6)]
WDV of block of assets at the beginning of relevant P/Y A
Add : Actual Cost of asset belonging to that block acquired during P/Y B
Less : Money Received/Receivable on assets sold, discarded, demolished or destroyed during C

previous year including Scrap Value
WDV of the block of asset as on the last day relevant P/Y A+B-C
Special points: (i) Where the income of an assessee is derived in Part from Agriculture & in Part from P/G/
B/P, for computing WDV, the total amount of depreciation shall be computed as if the entire income is derived
from the business of the assessee under the head P/G/B/P.
(ii) the resulting amount is the written down value of the block of the asset on March 31, 2019 relevant for the
A/Y 2019-20
(iii) one may determine WDV for the other assessment year on similiar basis.
(iv) value to be reduced from the block of the asset shall be the actual sale consideration received and not the
fair market value of the asset transferred-CIT v. Cable Corportion of India Ltd. [2011] 201 Taxman 339 (Bom.).
(v) even in case of asset acquired before the previous year where in past no depreciation was computed,
actually
RATES OF DEPRECIATION
TYPES OF ASSETS % Depreciation
Building :
– Residential buildings other than hotels and boarding houses 5%
– Non Residential[it covers hotels and boarding houses] 10 %
– Temporary Structure* 40 %
Furniture & Fittings including Electrical Fittings 10%
Plant & Machinery :

– Books owned by Professional 40%
– Books owned for Library business 40%
– Air & Water Pollution control equipments 40%
– Renewal energy device 40%
– Computer including computer software 40%
– Aero planes 40%
– Life saving Medical Equipment 40%
– Motor car, buses, lorries etc used for hire 30%
– Ships/Speed boats 20%
– Oil wells 15%
– General rate of other machinery 15%
Intangible Assets : 25%
Special Points :
1. Plant Includes Ships, Vehicles, Books, Scientific Apparatus & Surgical Equipment used for business or
profession and does not include Tea Bushes, Live Stock, Building or furniture & fixtures.
2. Building includes Roads, Bridges, Wells, Tube wells.
132 PP-DTL&P
3. Residential Building means a building in which atleast 2/3rd of the built-up area is used for residential
purposes.
4. Wind mills/Related Equipment/Generator or pump driven by wind mills installed w.e.f. 1/4/2014 : 40%
Otherwise : 15%
5. a* building acquired on or after september 1, 2002 for installing plant and machinary forming the part
of water supply project or water supply project or water treatment system and which is put to use for
the purchase of business of providing infrastructure facilities under the clause(i) of sub -section (4) of
section 80-IA;
b. temporary erections such as wooden structures
6. Case laws on depreciation
a) Depreciation is allowed on construction of any land/building taken on lease. [CIT v Noida
toll bridge Co.Ltd (2013) 213 Taxmann 333(All.)]
b) Depreciation is allowed on assets taken on hire purchase
[CIT v General Industries Corporation (1985) 155 ITR 430 (Delhi)]
c) Depreciation at the rate of 10 % is available in respect of hotel building even if the building
is also used for providing residence of the employees, letting out to the bank and shops -
CIT v. Sangu Chakra Hotels (P) Ltd.[2007]161 Taxman 257(Mad). landscaping done by the
assesee in its hotel building is to be considering as building -CIT v. Hotel Excelsior Ltd.
[2011] 141 TTJ (Delhi)248.
Illustration 1 : Compute depreciation for Assessment year 2020-21
Machinery A 15% WDV as on 1/04/19 Rs. 1,00,000
Machinery B 15% acquired on 15/04/19 Rs. 50,000
Machinery C 15% acquired on 30/09/19 Rs. 60,000
Machinery A sold on 20/05/19 for Rs. 40,000 & Machinery C sold on 11/12/19 for Rs. 40,000.
Solution : Closing block = Rs.1,00,000+Rs.50,000+Rs.60,000-Rs.40,000 -Rs.40,000 = Rs.1,30,000
Depreciation = 15% of Rs.1,30,000 = Rs.19,500
Depreciation Restricted to 50% [Proviso to section 32(1)]
n Where assets acquired during previous year
n and put to use for less than 180 days in that previous year
n Then depreciation on that asset restricted to 50% of normal rate
n for that previous year only
Special point : Use includes actual as well as passive use(kept ready to use) [CIT v. Geo Tech Construction
Corpn. (2000) 244 ITR 452/112 Taxmann 373(Ker.)]
Illustration 2 : Compute depreciation for Assessment year 2020-21
Machinery A : 15% WDV as on 01/04/19 : Rs. 1,00,000
Machinery B : 15% acquired on 15/04/19 : Rs. 50,000
& Put to use on 18/12/19
Solution : Closing block = Rs.1,00,000 + Rs.50,000 = Rs.1,50,000

Depreciation = 15% of Rs.1,00,000 + 7.5% of Rs.50,000 = Rs.18,750
Additional Depreciation [Section 32(iia)]
a. General Case :
n Assessee engaged in the business of manufacture or production of any article or thing or
(with effect from the assessment year 2013-14) “In business of Generation, Transmission or
Distribution of power
n New Machinery or plant acquired and installed after March 31, 2005 (other than ships & aircraft)
n it must be an eligible plant and machinary
b. Specific case :
n Assessee, sets up an undertaking for manufacture or production of any article or thing,
n On or after the 1st day of April, 2015
n In any notified backward area,
n In Andhra Pradesh or Bihar or Telangana or West Bengal,
n Acquires and installs any new machinery or plant (other than ships and aircraft)
n for the purposes of the said undertaking
n during 1/4/15 and 31/3/2020 in the said backward area
c. Conditions to be satisfied :
i. Plant & Machinery should not be used by any person in India or outside India before the date of
installation by assessee.
ii. Plant & Machinery not installed in office premises or in residential accommodation including a
guest house.
iii. Plant & Machinery should not be an office appliance or road transport vehicle.
iv. Whole of actual cost of Plant & Machinery not allowed as deduction under P/G/B/P of any one
previous year.
d. Quantum of Increased Depreciation
General case : 20% for the Previous Year in which conditions are satisfied
(If acquired and put to use for less than 180 days then 10% & balance 10% next year )
Special case : 35% for the Previous Year in which in case of notified backward areas of respective
states
(If acquired and put to use for less than 180 days then 17.5% & balance 17.5% next year)
Special point : Eligibility for grant of additional depreciation under section 32(1)(iia) in the case of an
assessee engaged in printing or printing and publishing [Circular No. 15/2016, dated 19-5-2016]
e. the term “manufacture” or “production”, “article” and “things” have been interpreted in many
judicial pronouncements and according to the judgment, a taxpayers which are engaged in the
following kind of activities are not eligible fo the additional depreciation-
• cooking food in Hotel-Indian Hotels Co. Ltd v. ITO [2000]112 taxman 46 (SC)
• construction of dam, building or contract for civil engineering - CIT v. Buildmet (P.) Ltd. [1993] 204
134 PP-DTL&P
ITR 413 (SC), CIT v. N.C Budhraja & co.[1993] 204 ITR 412(SC)
• Cutting and polishing raw diamonds - CIT v. Gem India Manufacturing Co. [2001] 249 ITR 307
(SC)
• incubate of eggs - CIT v. Venkateswara Hatcheries (P) Ltd. [1999] 237 ITR 174 (SC)
• compressing piling for building - CIT v. Pressure Piling Co. (I) (P.) Ltd. [1993) 204 ITR 412 (SC)
Illustration 3 : (Additional Depreciation) : Mr. X is engaged in the business of manufacture. During the
previous year 19-20, he submits the following information :
Machinery Block
Rate of Depreciation 15%
WDV of block as on 01/04/19 2,00,000
New Machinery acquired on 15/04/19 1,00,000
New Machinery put to use 20/05/19
Sale of Old Machinery in opening Block on 15/12/19 50,000
Compute depreciation for A/Y 2020-21.Assuming all conditions for availing additional depreciation are satisfied
Solution : Closing WDV = Rs.2,00,000 +Rs.1,00,000 -Rs.50,000 = Rs.2,50,000
Normal depreciation = 15% of Rs.2,50,000 = Rs.37,500
Additional Depreciation = 20% of Rs.1,00,000 = Rs.20,000
Proportionate Depreciation [Proviso to section 32(1)]
n In case of succession of Partnership Firm/Sole proprietary firm by a Company u/s 47 or
n Conversion of Private Company or Unlisted Public Company into a Limited Liability Partnership
u/s 47
n Amalgamation u/s 2(IB) or De merger u/s 2(19AA) or
n Other cases of Succession otherwise on death
Ø Depreciation allowable for the P/Y in which the above succession takes place
Ø Shall be apportioned between the Predecessor & Successor
Ø On the basis of Number of days the assets used by them during that P/Y.
Illustration 4 : A Sole Proprietary concern, whose WDV of block of asset as on 01-04-2019 carrying 15% rate
of depreciation is Rs.3,00,000, purchased another asset of same block on 15/10/19 for Rs.1,00,000. The said
concern is succeeded by the company on 1/11/19. Compute depreciation available to Proprietary concern and
to the company for A/Y 2020-21.
Solution : Computation of Depreciation for A/Y 2020-21
Assuming no Amalgamation has taken place
Opening WDV 3,00,000
Add : Actual cost of asset 1,00,000
Less : Sale of Asset NIL
Closing WDV 4,00,000
Depreciation
Opening block
3,00,000 x15% 45,000
New Asset
1,00,000 x 15% x ½ 7,500
Apportionment of depreciation between sole proprietary concern & company on the basis of number of
days asset used by each during Previous Year
Particulars Sole proprietary concern Company
Number of days opening block 1/4/2019 to 31/10/19 = 214 days 1/11/2019 to 31/3/20 = 151 days
used in p/y
Apportionment of depreciation of 45,000 x 214/365 = 26,384 45,000 x 151/365 =18,616
opening block
Number of days new asset used in 15/10/19 to 31/10/19 = 17 days 1/11/2019 to 31/3/20 = 151 days
p/y
Apportionment of depreciation of 7,500 x 17/168 = 759 7,500 x 151/168 = 6,741
opening block
Total depreciation 26,384 + 759 = 27,143 18,616 + 6,741 = 25,357
Short Term Capital Gain for Block Assets [Section 50]

Whenever a depreciable asset of block is sold, the Sales consideration is Subtracted from WDV of the block to
which such asset belongs.
CASE 1 CASE 2
1. All Assets of block are transferred during 1. Some Assets of block are transferred during P/Y & Sale
P/Y proceeds of assets transferred > (Opening W.D.V + Actual
cost of new assets acquired during the relevant previous year
2. Block Ceases to exist & no depreciation
of the same block)
shall be provided for that P/Y
2. Block will Exist at NIL value &no depreciation shall be
3. Closing WDV/balance is Short term
provided for that P/Y
capital Gain (in case of negative balance)
or Loss (in case of positive balance) 3. Closing WDV/ balance is Short term capital gain. Refer
Refer illustration 5 illustration 6
136 PP-DTL&P
Illustration 5 : WDV block of machinery (consisting of machinery X & Y) (Depreciation 15%) as on 01-04-19 is
Rs.3,00,000. Another Machinery Z acquired on 30/09/19 for Rs.1,00,000.
All the three Machinery are sold on 20/12/19. Determine tax treatment for assessment year 2020 -21 assuming
A) All Machinery sold for Rs.2,50,000
B) All Machinery sold for Rs.6,50,000
Solution :
A) Block cease to exist, STCL u/s 50 = Rs.3,00,000 + Rs.1,00,000 – Rs.2,50,000 = Rs.1,50,000
B) Block cease to exist, STCG u/s 50 = Rs.3,00,000 + Rs.1,00,000 – Rs.6,50,000 = Rs.2,50,000
Illustration 6 : WDV block of machinery (consisting of machinery X & Y) (Depreciation 15%) as on 01-04-19
is Rs.3,00,000. Another Machinery Z acquired on 30/09/19 for Rs.1,00,000. Machinery X is sold on 20/12/19.
Determine tax treatment for assessment year 2020-21 assuming
A) Sold for Rs.1,50,000
B) Sold for Rs.5,00,000
Solution :
A) Closing WDV = Rs.3,00,000 +Rs.1,00,000 - Rs.1,50,000 = Rs.2,50,000. Depreciation @ 15% of
Rs.2,50,000=Rs.37,500
B) Block exist at Nil Value, STCG u/s 50 = Rs.3,00,000 + Rs.1,00,000 – Rs.5,00,000 = Rs.1,00,000
Depreciation for Undertaking engaged in generation or generation & distribution of power
[Section 32(1)]
Such undertaking has the option either to claim depreciation
Ø On W.D.V basis on block of assets or
Ø On S.L.M basis on the actual Cost of assets
Ø Such option has to be exercised before furnishing ROI for the assessment year in which undertaking
starts to generate power. (Once such option is exercised it will be final and later on cannot be changed)
Tax treatment on Sale of assets by such undertaking
Ø Depreciation Claimed and provided on WDV basis : Treatment as done in block of Asset
Ø Depreciation Claimed and provided on SLM basis :
Step 1 : Find out Opening Value as on 1/4/2020 (Cost of asset less depreciation claimed in prior p/y)
Step 2 :
Sale price < Opening value Sale Price > Opening value
Loss is Terminal Depreciation allowed as Deemed Business Income (Balancing Charge)

deduction in the P/Y of sale.
= Selling price or Deduction Claimed, less taxable u/s
41(2) in P/Y of sale :
Capital Gain = Selling price > Cost
Short term or long term depending upon period of holding
Illustration 7 : X Ltd is power generating unit .On 15th December, 2018, it purchases an asset for Rs.4,00,000
on which it is charging depreciation on straight line method @ 20%. The asset is sold on 20/06/2019. Determine
tax treatment for AY 2020-21 if asset is sold for a) 3,00,000 b) 3,80,000 c) 4,20,000
Solution : Tax treatment for A/Y 2020-21
Particulars Case 1 Case 2 Case 3
Opening value as on 1/4/19 Rs.3,60,000 Rs.3,60,000 Rs.3,60,000

(Cost – depreciation of p/y 18/19) i.e. Rs.4,00,000
– 10% of Rs.4,00,000 (used for < 180 days)
Selling price Rs.3,00,000 Rs.3,80,000 Rs.4,20,000
Gain/Loss Loss Rs.60,000 Gain Rs.20,000 Gain Rs.60,000
Balancing charge taxable under PGBP u/s 41(2) Nil Rs.20,000 Rs.40,000
Capital Gains Nil Nil STCG Rs.20,000
Terminal depreciation as deduction from PGBP Rs.60,000 Nil Nil
Actual Cost [Section 43(1)]

Means actual cost of the asset to the assessee reduced by that portion of the cost, which is met directly or
indirectly by any other person or authority.
If assessee incurred any expenditure for acquisition of any asset or part for which payment or aggregate
of payments made to a person in a day, otherwise than by A/C payee cheque drawn on bank or A/C payee
bank draft or use of ECS through bank account, or through such other electronic mode as may be prescribed
(inserted by Finance (No.2) Act, 2019 exceeds Rs.10,000, such expenditure shall not be included in actual cost.
Explanations to section 43(1) Notional Actual Cost
Asset ceases to be used for Scientific research & now to be used for B/P Actual Cost to Assessee
of the Assessee.
Less : Deduction claimed u/s.35
Where a capital asset referred in section 28(via) is used for the fair market value which has
purposes of business or profession been taken into account for
the purposes of sec 28(via)
Asset belonging to other person is gifted or inherited by the Assessee Actual cost to other person Less
: Deduction allowed to previous
owner as if only asset in block
Asset belonging to other person, used for the purpose of his business or Amount determined by AO
profession is transferred to Assessee and AO is satisfied that transfer is with prior approval of Joint
to reduce Income tax liability Commissioner
Building belonging to assessee brought into B&P during P/Y Actual cost Less Depreciation
allowable as if building used for
Business/profession since its
acquisition.
138 PP-DTL&P
Interest paid or payable for acquiring an asset Will not be added to actual cost
after asset first put to use.
Where an asset is acquired on which Excise, Custom Duty is repayable Actual cost reduced by Excise,
Custom Duty repayable
Where portion of cost of an asset met by Central Government, State Government, Authority or other person
à If Subsidy, Grant etc., is directly related to the asset Actual cost reduced by value of
subsidy
à If Subsidy, Grant etc., is not directly related to an asset but a Actual cost reduced by
consolidated sum proportionate amount of subsidy.
Capital asset on which deduction has been allowed u/s 35AD NIL
MISCELLANEOUS ISSUES OF DEPRECIATION

1. Is it mandatory to claim depreciation : Explanation to Section 32 : Depreciation provisions shall apply
whether or not the assessee has claimed deduction for depreciation.
2. Carry forward and set off of unabsorbed depreciation [Section 32(2)]
a) Deduct current year depreciation from current year income under P/G/B/P.
b) If current year P/G/B/P is insufficient deduct balance depreciation from other head of income for same
previous year.[Except income under the head “Salaries”]
c) Even if incomes under other heads insufficient, it is unabsorbed depreciation which will be carried
forward for any number of assessment years by the same assessee.
d) In the next assessment years,b/f unabsorbed depreciation will be added to current year depreciation
and again step 1 to step 4 will be followed
However, if B/F losses are also there in a previous year along with B/F unabsorbed depreciation, then priority
of set off shall be as follows
Ø 1st setoff current year depreciation
Ø Then setoff brought forward losses
Ø Then setoff unabsorbed depreciation
Current depreciation to be deducted first : The Supreme Court, in CIT v. Mother India Refrigeration (P.) Ltd.
[1985] 23 Taxman 8, has categorically held that current depreciation must be deducted first before deducting
the unabsorbed carried forward business losses of the earlier years in giving set off while computing the total
income of any particular year.
Special point :
1. The business or profession of which depreciation was computed need not be carried on in the previous
year in which b/f depreciation is set off.
2. Depreciation can be c/f only by the same assessee .i.e Assessee who has claimed the deduction for
depreciation and the assessee who wants to carry forward the depreciation must be the same.
Exceptions to 2nd point :

a) Firm succeeded by a company u/s 47
b) Proprietary concern succeeded by a Company u/s 47
c) Amalgamation or Demerger
Illustration 8 : Mr. X furnishes the following particulars of his Income for previous year 2019-20. Determine Mr.
X Total Income for A/Y 2020-21
Particulars Rs.
Depreciation 85,000
Business Income before depreciation 10,000
Income under head House Property 5,000
Income under head Capital Gains 15,000
Income under head Other sources 10,000
Income under head Salary 10,000
Solution :
Total Income for A/Y 2020-21
Heads of Income Amount (Rs.)
Income under head Salary 10,000
Income under head House Property 5,000 – depreciation 5,000 = Nil
Income from Business 10,000 – depreciation 10,000 = Nil
Income under head Capital Gains 15,000 – depreciation 15,000 = Nil
Income under head Other sources 10,000 - depreciation 10,000 = Nil
Gross Total Income/Total Income 10,000
Unabsorbed deprecation C/F to subsequent years 45,000
Illustration 9 : Mr. X furnishes the following particulars of his Income for previous year 2019-20. Determine
Mr.X Total Income for A/Y 2020-21
Particulars Rs.
Depreciation 65,000
Business Income before depreciation 1,00,000
B/f Business Loss 30,000
B/f Depreciation 45,000

140 PP-DTL&P
Income under head Capital Gains 10,000
Income under head Other sources 5,000
Solution :
Heads of Income Amount (Rs.)
Income from Business 1,00,000-Current year depreciation 65,000 – B/F

loss 30,000 – B/F depreciation 5000 = Nil
Income under head Capital Gains 10,000 – B/f depreciation 10,000 = Nil
Income under head Other sources 5,000 – B/f depreciation 5,000 = Nil
Gross Total Income/Total Income NIL
Unabsorbed deprecation C/F to subsequent years 25,000
Asset not exclusively used for Business or Profession [Section 38(2)]

n Where Building, Machinery, Plant or Furniture
n Not exclusively used for Business or Profession
n Then deduction u/s. 30, 31, 32
n Shall be restricted to such fair proportion as AO may determine for purpose of business or profession.
Illustration 10 : Mr. X Purchased a car on 15/05/18 for Rs.5,00,000. Compute the depreciation for Assessment
year 2020-21 assuming :
a) Car is only item in the block and
b) 40% of car is used for personal purpose
c) Rate of depreciation eligible for car is 15%
Solution :
Particulars P/Y 18-19 (Rs.) P/Y 19-20 (Rs.)
Opening WDV Nil 5,00,000 – 45,000 =

4,55,000
Add : Purchase of Car 5,00,000 Nil
Less : Sale Nil Nil
Closing WDV 5,00,000 4,55,000
Depreciation @ 15% 75,000 68,250
Less : disallowed u/s 38(2) 40% of Total depreciation 30,000 27,300
Allowable depreciation 45,000 40,950

INVESTMENT ALLOWANCE FOR NEW PLANT & MACHINERY IN BACKWARD AREA [SECTION
32 AD]
Assessee Assessee, sets up an undertaking for manufacture or production of any article or thing, on
or after the 1st day of April, 2015 in any notified backward area, in Andhra Pradesh or Bihar
or Telangana or West Bengal
Investment Acquires and installs any new asset for the purposes of the said undertaking during 1/4/15
and 31/3/2020 in backward area
Deduction 15% of actual cost of such new asset in previous year in which such new asset is installed
New Asset New plant or machinery (other than ship or aircraft) Excluding :
(i) Plant or Machinery which before its installation by assessee was used either within or
outside India by any other person
(ii) Plant or Machinery installed in any office premises or any residential accommodation,
including guest house
(iii) Office appliances including computers or computer software
(iv) Any vehicle or
(v) Plant or Machinery, whole of actual cost allowed as deduction (whether by way of
depreciation/otherwise) in computing income of Business/Profession of any p/y
New Asset n If any new asset acquired and installed
sold
n sold or otherwise transferred,
n except under amalgamation or demerger or reorganisation of business u/s 47,
n within 5 year from date of its installation,
n Amount of deduction on such new asset
n shall be deemed to be income of business or profession
n of p/y of sale or otherwise transfer,
n in addition to taxability of gains, arising on account of transfer of such new asset.
ü If new asset is sold or transferred under amalgamation or demerger or reorganisation of
business u/s 47
ü within 5 years from date of its installation,
ü Above provisions shall apply
ü to Amalgamated company or resulting company or successor,
ü as they would have applied to amalgamating company or demerged company or
predecessor referred u/s 47
Illustration 11 : X ltd sets up an undertaking in a notified backward area in Andhra Pradesh for manufacturing.
For this purpose, it purchased new plant and machinery (Rate of normal depreciation : 15%, Opening WDV 10
crores) as follows :
Plant Actual cost (Rs. crore) Date of purchase Date of installation Date when put to use
A 20 15/4/2019 20/5/2019 25/5/2019

142 PP-DTL&P
Find out normal depreciation, additional depreciation & investment allowance assuming all the conditions have
been fulfilled for claiming above benefits
Solution :
Normal depreciation : 15% of Closing WDV 15% of (10 + 20 =30 crores) = 4.5 crore
Additional Depreciation : 35% of Actual Cost 35% of 20 crore = 7 crore
Investment Allowance : 15% of Actual cost 15% of 20 crore = 3 crore
DEDUCTION FOR BUSINESS OF TEA/COFFEE/RUBBER/EXPLORATION [SECTION 33AB/

ABA]
Section Tea/coffee/rubber Development Account Site Restoration Fund [Section

[Section 33AB] 33ABA]
1 Assessee Growing and Manufacturing Tea or Coffee or Prospecting or Extraction or production

Rubber in India of Petroleum or Natural Gas or both in
India
2 Conditions Deposit with NABARD or Deposit Account Deposit in State Bank of India in a
under scheme framed by Tea/Coffee/Rubber special Account under scheme framed by
board with the previous approval of the Central Ministry of Petroleum & Natural Gas or
Government within 6 months from end of
In a site restoration account opened as
Previous Year or before due date of furnishing
per the scheme of above ministry before
Return, Whichever is earlier
end of previous year
And the account of the assessee should
be audited.
3 Deduction Amount deposited under point 2 or 40% profits Amount deposited under point 2 or
of such business computed under the head 20% profits of such business computed
“P/G/B/P” before 33AB, whichever is less under the head “P/G/B/P” before 33ABA,
whichever is less
Special Point : Applicable for both Sections
1. Restriction on Amount withdrawn to be utilised in accordance with scheme specified.

utilization of Amount However, amount withdrawn for the purchase of following shall be deemed to
deposited be Business income.
i. Plant & Machinery to be installed in Office or Residence,
ii. Office appliance (other than computer),
iii. Plant & Machinery, whole of cost allowed as deduction under Business in
one year
iv. Plant & Machinery for manufacturing an article specified in XI Schedule.
2. Withdrawal of Amount withdrawn not utilised for,

Deduction
1. Specified purposes, amount that is not utilised shall be Business Income
of that P/Y.
2. Asset sold before 8 years from end of previous year in which acquired,
deduction claimed w.r.t cost of asset, Business Income of P/Y of sale.
3. CA Report Accounts audited by CA & report attach with Return of Income
Illustration 12 : X ltd is engaged in the business of growing and manufacturing tea in India. It has derived a
Total Income from such business of Rs.100 lakhs for previous year 31.3.2020.The said income is computed
before allowing deduction u/s33AB.The company has deposited 30 lakhs with NABARD on 24.5.2020 for
claiming deduction u/s 33AB.The company has brought forward business losses of 6 lakh. Compute Taxable
Income of X ltd.
Solution : Computation of Total Income of X Ltd for A/Y 2020-21
Particulars Amount in lakhs (Rs.)
Income under head Business

Income before deduction u/s 33AB 100
Less : Deduction u/s 33AB 30
40% of 100 lakh or 30 lakhs, 70
Less : Income after deduction
(Rule 8)
40% taxable 40% of 70 = 28
60% exempt i.e. 60% 70 lakh = 42 lakh
Less B.F loss 6
Gross Total Income 22
EXPENDITURE ON SCIENTIFIC RESEARCH [SECTION 35]

The term scientific research means any activities for the augmentation of knowledge in the fields of natural or
applied sciences including agriculture, animal husbandry or fisheries.
Scientific research carried out by assessee i.e. In-house Scientific Research (has to be related to
Assessee Business)
Pre commencement Post commencement

(3 years prior to date of commencement of (On or after date of commencement)
Business)
Revenue expenditure Capital Expenditure Revenue Expenditure Capital Expenditure

Section 35(1)(i) Section 35(1)(iv) Section 35(1)(i) Section 35(1)(iv)
144 PP-DTL&P
Salary of Research Staff Any Capital All Revenue Any Capital expenditure
& expenditure except Expenditure except Land
Land
Purchase of Material for
scientific Research only
Deduction in P/Y of Deduction in P/Y of Deduction in P/Y in Deduction in P/Y in

commencement commencement which incurred which incurred
Expenses on purchase of cabs and buses which are used to transport employees engaged in scientific research.
[CIT v Smith Kline & French (India) Ltd.(1994)77 Taxmann 153(Kar)]
Special Points : Applicable for Pre commencement revenue expenditure only
1. Salary does not include perquisites
2. Such revenue expenditure has to be certified by prescribed authority*
*prescribed authority shall be the director General (income tax exemptions) in concurrence with the secretary,
department of scientific and industrial research,government of India. when the question relates to any activity
under the clause(ii) and (iii) of section 35(1), it shall referred by the board to the central government shall be
final.
Illustration 13 : Mr. X is engaged in paper business and commenced production of paper on 1st December,
2019. He has incurred the following expenditure on scientific research.
1. Salary of research staff from 1st December 2016 to 30th November, 2019 : Rs.60,000 (out of which
Rs.20,000 certified by prescribed authority)
2. Purchase of research material from 1st December, 2016 to 30th November, 2019 : Rs.30,000 (out of
which Rs.25,000 certified by prescribed authority)
3. Rent paid for building in which research carried out from 01/12/16 to 30/11/19 : Rs.36,000 & from 1st
Dec 19 to 31st Jan 20 : Rs.4,000
4. On 15th Feb, 20, the company purchases a plot of land for Rs. 6,00,000. Later on a Laboratory building
is constructed (cost of Construction : Rs.2,70,000 & Date of Completion 25th March 20) to do in house
scientific research.
Compute deduction u/s 35 for A/Y 2020-21.
Solution :
Computation of Deduction u/s 35 for A/Y 2020-21
Type of Expenditure Amount (Rs.)
Salary of research staff 20,000
Purchase of research material 25,000
Rent paid for building 4,000
Purchases of plot of land Not allowed
Construction of Laboratory building 2,70,000
Total 3,19,000
Calculation of Deduction u/s 35

1. Revenue expenditure on scientific research is 100% allowed as deduction irrespective of profits.
2. Capital expenditure on scientific research are allowed as deduction subject to availability of profit.
3. Set off & Carry forward same as unabsorbed depreciation
Section 35 (2AB)
n Company Assessee ( Engaged in Manufacture of any article except specified under XI schedule )
n Incurred expenditure (Except on Land & Building) on in house scientific research approved by
prescribed authority
n Weighted deduction of 150 % of such expenditure will be allowed (A/Y 2013-14 to 2020-21)[100%
w.e.f.A/Y 21-22, but not on weighted deduction]
n Payee company cannot claim weighted deduction under the section 35(2AB): for purpose
avoiding mutiple claims,it has been provided that the payee company approved under the
provision of section 35(2)(iia) will not be entitled to claim weighted deduction under section
35(2AB). Deduction upto 100% of the sum spent as revenue expenditure or capital expenditure
on scientific research, which is available under section 35(1), will continue to be allowed.
Contributions/Donations for Research to Approved Associations
(Related or Unrelated to Assessee business)
Section 35(1)(ii) Section 35(1)(iii) Section 35 (2AA) Section 35(1)(iia)
Approved Research Approved Research National Laboratory Indian company having

association/ University association /University, or University or IIT for main object of scientific
/College for scientific Institution for Social approved Scientific research & development
research science or statistical Research Programme & approved by prescribed
research authority
150% of amount paid 100% of amount paid 150% of amount paid 100% of amount paid
allowed allowed allowed allowed
WEF A/Y 21/22 : 100% WEF A/Y 21/22 : 100%
Special point : Deduction u/s 35 shall not be disallowed if subsequent to payment, approval of such
association, institution, etc is withdrawn.
CASE STUDY : Where the assessee himself carries on scientific research and for the purpose of it incurred
any revenue expenditure during the relevant previous year, deduction will be allowed for such expenditure,
however it must related to the business of the assessee. in this case, expenditure on material purchased for
such research and development will be allowed as deduction under section 35, regardless of the fact that
whether material is comsumed during the relevant previous year or held as closing stock – Balaji Amines Ltd.
v. CIT [2015] 153 ITD 20 (Pune).
Illustration 14 : Mr. X has incurred the below expenditure during previous year 2019-20. Discuss whether such
expenditure will be allowed or not for Assessment year 2020-21.
(a) Payment of Rs. 50,000 on 1st October, 19 an association which is approved us 35(1) for carrying on
scientific research related to business of Mr. X.
(b) Payment of Rs. 35,000 on 15th January, 20 to a university & which is approved up 35(1), for carrying out
social & statistical research related to business of Mr. X.
146 PP-DTL&P
(c) Payment of Rs. 60,000 on 4th December 19 to approved national laboratory for carrying on approved
scientific research programme related to business of Mr. X.
Solution :
Particulars Deduction Amount(Rs.)
(a) Payment of Rs. 50,000 on 1st October,19 an association which is 50,000 x 150% = 75,000
approved us 35(1) for carrying on scientific research related to business
of Mr. X.
(b) Payment of Rs. 35,000 on 15th January, 20 to a university & which is 35,000 x 100 % = 35,000
approved up 35(1), for carrying out social & statistical research related to
business of Mr. X.
(c) Payment of Rs. 60,000 on 4th December 19 to approved national laboratory 60,000 x 150% = 90,000
for carrying on approved scientific research programme related to business of
Mr. X.
Tax treatment on Sale of Asset used for Scientific Research

Option 1 : Sold without using for business
Step 1 : Find out Opening Value as on 1/4/2019 (Cost of asset less deduction claimed in prior p/y)
Step 2 :
Sale price < Opening W.D.V Sale Price > Opening W.D.V
Loss is allowed as Business Deemed Business Income taxable u/s 41(3) in P/Y of sale : Selling price
deduction in the P/Y of sale. or Deduction Claimed, less Capital Gain : Selling price > Cost Short
term or long term depending upon period of holding
Special Point : Business income shall be taxable in the previous year of transfer even if business is not in
existence in that previous year.
Option 2 : Sold after using for business
Step 1 : The cost of asset will be added to value of block to which it belongs. The cost added to value of block
will be :
Actual Cost to Assessee
Less : Deduction claimed u/s.35(1)(iv)
Step 2 : Sale price will be deducted from value of WDV of the block to which it belongs
Illustration 15 : Mr X Purchased a machine to be used for scientific research for Rs.15,00,000 on 15/06/2018.
It ceases to be used for scientific research on 18/12/2019 and therefore sold for Rs.18,00,000 on the same day.
Determine tax treatment for A/Y 2020-21
Solution : Tax treatment for A/Y 2020-21

Value of machine on 1/4/19 Cost 15,00,000 – Deduction allowed earlier 15,00,000 = Nil
Sale of machine 18,00,000
Profit 18,00,000
Business Income u/s 41(3) 15,00,000
STCG 3,00,000
Illustration 16 : Mr X purchased a machine to be used for scientific research for Rs.15,00,000 on 15/06/18. It
ceases to be used for scientific research on 20/05/19 and thereafter is brought into Mr X’s business on the same
day. The eligible depreciation on such machine is 15% and WDV of 15% block as on 01-04-19 is Rs.20,00,000.
The Machine is sold on 05-01-2020 for Rs.10,00,000. Determine tax treatment for A/Y 2020-21.
Solution :
Opening WDV 20,00,000
Add : Actual cost of Machine brought into business Nil (15lac – 15 lac)
Less : Sale of machine 10,00,000
Closing WDV 10,00,000
Depreciation @ 15% 1,50,000
No capital gain or loss u/s 50
EXPENDITURE FOR OBTAINING TELECOMMUNICATION LICENSE [SECTION 35 ABB]
Capital Expenditure ACTUALLY INCURRED to acquire Telecom license
Before commencement of business After commencement of business
Period of Deduction Period of Deduction

Deduction shall be available from P/Y in which Deduction from P/Y in which license fee actually
business commences to P/Y in which license expire paid to P/Y in which license expires
Amount of deduction Amount of deduction
= License fees actually paid / = License fees actually paid /
No. of previous years in above period No. of previous years in above period
Illustration 17 : X Ltd purchased a telecommunication license for Rs.12,00,000 on 15/06/2016 for a period of 11
years. However X Ltd commences the business on 18-08-2019. Compute deduction u/s 35ABB for Assessment
year 2020-21.
Solution : Deduction u/s 33AB for A/Y 2020-21
= License fees actually paid / P/Y in which business commences to P/Y in which license expire
= Rs.12,00,000 / 2019/20to 2027/28
= Rs.12,00,000/9 = Rs.1,33,333
TAX TREATMENT ON SALE OF LICENSE

Option 1 : Whole license sold
Computation of Profit /Loss on sale
148 PP-DTL&P
Step 2 :
Loss is allowed as deduction in the P/Y Deemed Business Income taxable in P/Y of sale :
of sale.
Selling price or Deduction Claimed, less
Capital Gain : Selling price > Cost
Option 2 : Part license sold

Computation of Profit /Loss on sale
Step 2 :
Loss is Deemed Business Income taxable in P/Y of sale :

allowed as deduction in balance P/Y of Selling price or Deduction Claimed, less
life of license Capital Gain : Selling price > Cost
Special point : Business income shall be taxable in the previous year of transfer even if business is not in
existence in that previous year.
Illustration 18 : X Ltd, a Company which provides telecom services, acquire a telecom license for Rs.10,00,000
on 5th April 17 for a period of 10 years. The license is sold by X Ltd on 15/10/19. Compute tax treatment
assuming license sold for :
a) 5,00,000
b) 8,00,000
c) 10,00,000
d) 12,00,000
Solution :
Tax treatment for A/Y 2020-21 All figures in (Rs.)
Particulars Case 1 Case 2 Case 3 Case 4
Opening value as on 8,00,000 8,00,000 8,00,000 8,00,000

1/4/2019
Cost – deduction
claimed in prior p/y
10,00,000
-1,00,000(P/Y 17/18)
-1,00,000(P/Y 18/19)
Selling price 5,00,000 8,00,000 10,00,000 12,00,000

Profit / (loss) (3,00,000) NIL 2,00,000 4,00,000
Business Income Nil Nil 2,00,000 2,00,000
Capital Gains Nil Nil Nil STCG 2,00,000
Assuming 40% of telecom license is sold on 15/10/19.
Particulars Case 1 Case 2 Case 3 Case 4
Opening value as on 8,00,000 8,00,000 8,00,000 8,00,000

1/4/2019
(Cost – deduction
claimed in prior p/y)
10,00,000
-1,00,000(P/Y 17/18)
-1,00,000(P/Y 18/19)
Selling price 5,00,000 8,00,000 10,00,000 12,00,000
Profit / (loss) Nil NIL 2,00,000 4,00,000
Business Income/ Nil, But deduction Nil 2,00,000 2,00,000

(Loss) u/s 35ABB shall
be 3,00,000/8
=37,500
Capital Gains Nil Nil Nil STCG 2,00,000
EXPENDITURE FOR OBTAINING RIGHT TO USE SPECTRUM FOR TELECOMMUNICATION

SERVICES [SECTION 35ABA]
1. Deduction : Capital expenditure, incurred for acquiring any right to use spectrum for telecommunication
services either before the commencement of the business or thereafter at any time during any previous year
and for which payment has actually been made to obtain a right to use spectrum, there shall be allowed for each
of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.
2. Applicability of Section 35ABB : The provisions of section 35ABB, shall apply as if for the word “licence”,
the word “spectrum” had been substituted.
3. Failure to comply : Where, in a previous year, any deduction has been claimed and granted to the assessee,
and, subsequently, there is failure to comply with any of the provisions of this section, then, –
(a) Deduction shall be deemed to have been wrongly allowed;
(b) AO may, notwithstanding anything contained in this Act, re-compute the total income of the assessee
for the said previous year and make the necessary rectification;
Special point :
(i) “Relevant Previous years” means,
• If spectrum fee is actually paid before the commencement of business to operate telecommunication
services, the previous years beginning with the previous year in which such business commenced;
150 PP-DTL&P
• in any other case, the previous years beginning with the previous year in which the spectrum fee is
actually paid, and the subsequent previous year or years during which the spectrum, for which the fee
is paid, shall be in force;
(ii) “Appropriate fraction” means the fraction, the numerator of which is one and the denominator of which is
the total number of the relevant previous years;
(iii) “Payment has actually been made” means the actual payment of expenditure irrespective of the previous
year in which the liability for the expenditure was incurred according to the method of accounting regularly
employed by the assessee or payable in such manner as may be prescribed.’.
DEDUCTION OF CAPITAL EXPENDITURE OF SPECIFIED BUSINESS [SECTION 35AD]
Assessee 1) Setting up & operating Cold Chain facility for specified product
2) Setting up & operating agriculture Warehousing facilities
3) Laying & operating Cross-country Natural Gas/Crude / Petroleum pipeline
network for distribution, including storage facility
4) Building and operating a Hotel of two-star or above category anywhere in India as
classified by the Central Government
(Where the assessee builds a hotel and subsequently, while continuing to own the
hotel, transfers the operation thereof to another person, assessee shall be deemed
to be carrying on Hotel Business)
5) Building and operating a Hospital with at least 100 beds for patients
6) Developing and building a Housing project under a scheme for slum
redevelopment or rehabilitation framed by Government and notified by Board
7) Developing and building Affordable housing project under a scheme framed by
Government & notified by Board
8) Production of fertilizer in India
9) Setting up and operating inland container depot or a container freight station
notified under Customs Act
10) Bee-keeping and production of honey and beeswax
11) Setting up and operating a sugar warehouse facility for storage of sugar
12) Laying and operating a slurry pipeline for transportation of iron ore
13) Setting up and operating a semi-conductor wafer fabrication manufacturing
unit and is notified by the Board
14) Developing or operating and maintaining or developing, operating and maintaining,
any infrastructure facility (applicable from the assessement year 2018-19)
Infrastructure facility means –
(i) Road including toll road, bridge or rail system;
(ii) Highway project including housing or other activities being an integral part of
the highway project;
(iii) Water supply project, water treatment system, irrigation project, sanitation
and sewerage system or solid waste management system;
(iv) Port, airport, inland waterway, inland port or navigational channel in the sea
Deduction 100% Capital expenditure incurred wholly and exclusively for above business incurred
after commencement including Pre commencement Capital Expenditure
Actual cost of any capital asset on which deduction has been allowed or is allowable
u/s 35AD, shall be treated as NIL
Exclusions Does not include expenditure on
a) Land,
b) Goodwill or
c) Financial instrument
d) Any expenditure for which payment or aggregate of payments made to a person in
a day, otherwise than by A/c payee cheque drawn on a bank or an account payee
bank draft or use of ECS through a bank A/c, or through such other electronic mode
as may be prescribed (Finance (No.2) Act, 2019) exceeds Rs.10,000
Conditions 1. It is not set up by Splitting up or Reconstruction of existing business
2. Atleast 80% of Plant & Machinery should not be Previously used for any purpose
Exception to 2nd Condition
- Plant & Machinery used outside India by any person other than assessee &
- Such Plant & Machinery is imported into India &
- No deduction of depreciation on that Plant & Machinery has been allowed to any
person for any period prior to the date of installation by assessee
Limitations If deduction under this section is allowed from specified business for any assessment year,
no deduction shall be allowed under Part C of Chapter VI-A eg 80IA, etc or u/s 10AA in
relation to such specified business for the same or any other A/Y.
Sale of asset Sum received/receivable on account of destruction/ demolition/ discard/ transfer of such
Capital asset shall be deemed as P/G/B/P u/s 28
Use of Asset Any asset on which deduction allowed shall be used only for specified business, for 8 years
beginning with p/y in which such asset is acquired or constructed.
Otherwise deduction allowed in one or more p/y, as reduced by depreciation allowable u/s
32, as if no deduction under this section was allowed, shall be deemed to be income under
PGBP of p/y in which the asset is so used.
Where any capital asset on deduction is allowed u/s 35AD is deemed to be income as
above, actual cost of asset shall be actual cost, as reduced by depreciation calculated
at rate in force that would have been allowable had the asset been used for business
since date of its acquisition
Set off & C/F - Loss of Specified Business can be set off against profits of other specified
of Loss of business only.
business
- Unabsorbed loss will be c/f & set off against profits of specified business of
(Section 73A) subsequent A/Y
- C/F & set off for Unlimited period of A/Y
152 PP-DTL&P
PAYMENT TO ASSOCIATIONS FOR RURAL DEVELOPMENT PLANS [SECTION 35 CCA]
Deduction for payment of sum to

Association whose Association or Rural Development National Urban Poverty
object is to undertake institution engaged in Fund set up by Central Eradication Fund Set up by
Rural Development Training of persons Govt. Central Govt.
Program approved by for implementing Rural
prescribed authority Development Program
before March 1, 1983 approved March 1,
1983
Deduction u/s 35CCA shall not be disallowed if subsequent to payment,approval of such institution or
programme is withdrawn
EXPENDITURE ON AGRICULTURAL EXTENSION PROJECT [SECTION 35CCC]

(1) Where an assessee incurs any expenditure on agricultural extension project notified by the Board in
this behalf in accordance with prescribed guidelines, then, there shall be allowed a weighted deduction of 150%
such expenditure.
(2) Where a deduction under this section is claimed and allowed for any A/Y in respect of any expenditure
referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other
provisions of this Act for the same or any other A/Y.
(3) W.E.F A/Y 21-22 : 100% deduction (but not weighted deduction)
EXPENDITURE ON SKILL DEVELOPMENT PROJECT [SECTION 35CCD]

(1) Where a company incurs any expenditure (not being expenditure in the nature of cost of any land or
building) on any skill development project notified by the Board in this behalf in accordance with prescribed
guidelines, then, there shall be allowed a weighted deduction of 150% such expenditure for the assessment
years 2013-14 to 2017-18.
(2) Where a deduction under this section is claimed and allowed for any A/Y in respect of any expenditure
referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other
provisions of this Act for the same or any other A/Y.
(3) W.E.F A/Y 21-22 : 100% deduction (but not weighted deduction)
(4) special points: A company engaged in manufacture/ production of any thing(not being alcoholic spirits and
tabacco products) or a company engaged corparate engaged in providing specified services can be claimed
the benefit of weighted deduction under section35CCD
(5) Expenditure must be incurred on notified skill development project .
(6) In order to claim weighted deduction, an application should be given in form No.3CQ to National Skill
Development Agency (NSDA).
(7) A copy of form no. 3CQ should be sent to the commissioner of Income Tax.
(8) Form No. 3CQ to be submitted along with the detailed note on skill development, project, expected
expenditure and expected completion date, letter of concurrence from the training institute.
(9) The project should be undertaken in separate facalities in training institute in the training institution which is
set up by the government, local authority or any institute affiliated to National Council for Vocation Training or
State Council for vocational Agency(NSDA).
AMORTIZATION OF PRELIMINARY EXPENSES [SECTION 35D]
1 Assessee Indian Company or Non Corporate Resident
Before commencement of business or
2 Expenditure After commencement of business for
when incurred – Extension of existing undertaking or
– Setting up of new unit
3 Specified Expenditure Expenditure in connection with preparation of:
(Expenditure under (i) Feasibility report (ii) Project report (iii) Conducting a Market/Other Surveys
point i to iv, can be (iv) Engineering Services (v) Legal Charges for drafting agreements
incurred by assessee
For Company Assessee, also expenditure on Memorandum & Articles,
himself or by a concern
Legal Fees for registration, expenses on public issue
approved by Board)
4 Qualifying amount of Non-Corporate resident Assessee

Specified Expenditure
A. Total of Specified expenditure or
B. 5% of Cost of Project
A or B, whichever is less
Indian Company
A. Total of Specified expenditure or
B. 5% of Cost of Project or 5% of Capital employed, Higher
A or B, whichever is less
5 Period of Deduction Qualifying Amount in 5 equal annual installments starting from P/Y of
commencement or completion of extension or setting up new unit (as the
case may be)
6 Compulsory Audit Audit of accounts by CA for the previous year in which expenditure incurred
& attach CA report with ROI for the 1st year.
(Not applicable for
Company, Cooperative
society)
Special Points :
1. Cost of Project : Means Actual cost of FIXED ASSETS [namely land, building, leaseholds, plant, machinery,
furniture, fittings and railway sidings] as per books of accounts on the last day of P/Y in which business is
commenced or extension is completed or new unit is Set up, as the case may be.
2. Capital Employed : Means Aggregate of Issued share capital, Debentures, Long term borrowings as on
the last day of same P/Y as mentioned above
3. Long Term Borrowings : Means
a) Money borrowed from Govt. or IFCI or ICICI or Banking / Approved financial institution, which is
eligible for deduction under section 36(1)(viii), no period is prescribed for repayment of loan.
154 PP-DTL&P
b) Money borrowed in foreign currency for purchase of Plant & Machinery outside India, repayable after
7 years
4. Section 2(12) : Board means Central Board of Direct Taxes
NOTE: Interest accuring on the share application,money,lying with the bank under the mandate of section 42 of
the companies act,2013 is not taxable as “Income From Others Sources” and is required to set off or adjusted
against the public issue expenses,so as to reduce the amount of public issue expenses for the purpose of
enabling the assessee to claim amortisation under in accordance with the provision of section 35D – CIT v.
Neha Proteins Ltd. [2008] 171 Taxman 455 (Raj.), CIT v. Shree Rama Multi Tech Ltd. [2008] 255 Taxman 136
(SC).
Illustration 19 : X Ltd is incorporated in Haryana on 10th November, 2019. It commences production on 15th
February, 2020. The following expenses are incurred by the company before commencement of business : -
a) Expenses on Incorporation, issue of shares : Rs.92,000
b) Preparation of feasibility report, Project report & conducting market survey : Rs.1,40,000.
c) Engineering services (work is carried on by a concern which is not approved by the board) : Rs.1,30,000
Determine the amount of deduction u/s 35D by taking into account below information
Value as on 31-03-2020
Cost of fixed asset : 45,00,000
Share Capital : 20,00,000
Debentures : 12,00,000
Long term borrowings from I.F.C.I : 8,00,000
Solution :
Computation of Deduction u/s 35D for A/Y 2020-21

a) Expenses on Incorporation, issue of shares 92,000
b) Preparation of feasibility report, Project report & conducting market survey : 1,40,000
c) Engineering services (work is carried on by a concern which is not approved by the Not allowed
board)
Total 2,32,000
A) 5% of Cost of project
Cost of fixed Assets : 45,00,000
5 % of 45,00,000 2,25,000
B) 5% of capital Employed
Share Capital : 20,00,000
Debentures : 12,00,000
Long term borrowings from I.F.C.I : 8,00,000
5% of 40,00,000 2,00,000
Total deduction cannot exceed (A or B), whichever if higher i.e. 2,25,000
Annual Deduction : 2,25,000 x 1/5 45,000
EXPENDITURE IN CASE OF AMALGAMATION OR DEMERGER [SECTION 35 DD]

• Indian Company incurs expenditure wholly & exclusively for amalgamation or demerger.
• Deduction shall be allowed of such expenditure in 5 equal annual installments starting from P/Y of
amalgamation or demerger.
• NOTE : AMALGAMATION OR DEMERGER OF CO-OPERATIVE BANKS: the following provision
should be consider in the case of amalgamation or demerger
• The year in which ownership of assets changes because of aforesaid reasons, deduction under section
32,35D,35DD and 35DDA shall be calculated as under
• 1. Figure out the amount of deduction under the aforesaid previous year in the which the title of assets
changes because of the aforesaid reasons on the assumption that the amalgamation or demerger has
not taken place.
• 2. The amount of deduction so determined shall be allocated between the (a) amalgamating co-
operative bank and amalgamated coperative bank or, (b) demerged coperative bank and resulting
co-operative bank, as the case may be, in the ratio of number of days for which the assets are used by
them during the previous year in which the title(ownership) changes.
EXPENSES INCURRED UNDER VOLUNTARY RETIREMENT SCHEME [SECTION 35 DDA]

• Any assessee incurs expenditure for payment of sum under V.R.S.
• Deduction shall be allowed of such expenditure in 5 equal annual installments starting from the P/Y
in which the amount is actually paid.
DEDUCTION FOR PROSPECTING MINERALS [SECTION 35E]

• Indian Company or non-corporate resident assessee engaged in Production of any specified
mineral.(Schedule VII)
• Expenditure incurred for Prospecting or Extraction or Production during year of Commercial
production* or 4 p/y prior to such commercial production.
• Expenditure does not include the following :
1. Expenditure of a Capital nature in respect of any building, machinery, plant or furniture for which
allowance by way of depreciation is admissible under section 32.
2. Expenditure on the acquisition of the site of the source of any such specified mineral or groups
of associated minerals or of any rights in or over such site.
156 PP-DTL&P
3. Any expenditure which is met directly or indirectly by any other person or authority
• Deduction : 10% of qualifying expenditure is allowed in equal expenditure for 10 years starting from
previous year of commercial production
• Maximum deduction allowed each year : 10% of qualifying expenditure or Income from such
Business before 35E, whichever is less.
• Unallowed qualifying expenditure carried forward for next year and added to next year installment.
However after 10th year no deduction shall be allowed
• Audit of accounts by C.A for the previous year in which expenditure incurred & attach C.A report with
ROI for the 1st yr. (Not applicable for Company, Cooperative society)
Special Point : “Operation relating to prospecting” means any operation undertaken for the purposes of
exploring, locating of deposits of mineral, and includes any such operation which proves to be infructuous or
abortive.
* the term “ year of commercial production” means the previous year in which, as consequences of any
operation relating to prospecting, commercial production of one or more of the specified minerals commences.
EXPENSES ALLOWED FROM BUSINESS/PROFESSION [SECTION 36(1)]

1. Premium for insurance of Stock in trade used for Business or Profession.
Working Note :
Expenditure Deduction
Insurance of Building 100% u/s 31
Insurance of Plant/ Machinery/Furniture/ 100% u/s 31
Fixtures
Insurance of Stock in trade 100% u/s 36(1)
2. Amount of any premium paid by a federal milk co-operative society to effect or to keep in force an
insurance on the life of the cattle owned by a member of a co-operative society, being a primary society
engaged in supplying milk raised by its members to such federal milk co-operative society. [Section 36(1)(ia)].
3. Premium by employer for Health insurance of his employees by any mode other than cash under a
approved scheme. [Section 36(1)(ib)].
Working Note :
Mode of payment Allowed u/s 36(1)
Cheque Allowed
Pay Order/Demand Draft Allowed
Credit card Allowed
Debit card Allowed
E - Payment Allowed
ECS Allowed
Cash Disallowed
4. Bonus or Commission to employee provided such bonus or commission is not payable as profit or Dividend
- Loyal Motor Service Co. v. CIT [1946]. (Subject to section 43B)
Working Note :
Mr.A is an employee and also a shareholder,holding 10% equity shares. Mr.B is also a shareholder
holding 10% equity shares.
Case 1 (Rs.)
Shareholder Dividend Bonus Deduction of Bonus u/s 36(1)
A 20,000 5,000 5,000
B 20,000 --- ---
Case 2 (Rs.)
A : 10% 5,000 15,000 Nil [Bonus contains Dividend of Rs.15,000]
B : 10% 20,000 --- ---
Case 3 (Rs.)
A : 10%(Employee) 5,000 25,000 10,000 [Bonus contains Dividend of Rs. 15,000]

B : 10% 20,000 --- ----
5. Interest on Capital Borrowed for the purpose of Business or Profession. (Subject to section 43B)
Working Note :
Type of Interest Deduction u/s 36(1)(iii)

1. Interest for purchase of raw material Allowed
2. Interest for Purchase of Fixed Asset Allowed after asset put to use
3. Interest for Payment of Expense Not allowed
4. Interest on Proprietor Capital Account Not allowed
6. Prorata amount of Discount on a Zero Coupon Bond.

Special Points :
1. Section 2(48) : Zero coupon bond means a bond
(a) issued by any Infrastructure capital company or Infrastructure capital fund or Public sector
company or Scheduled bank on or after June 1, 2005.
(b) For which no benefit / payment is received or receivable before maturity or redemption and
(c) which is notified by Central Government in the Official Gazette
2. Section 2(26A) : Infrastructure capital company means company which makes investments
• by way of acquiring shares or providing long-term finance
• to any undertaking wholly engaged in specified infrastructure business or a project for constructing a
hotel of not less than three-star category or project for constructing a hospital with at least one hundred
beds for patients
3. Section 2(26B) : Infrastructure capital fund means such fund operating under a trust deed
158 PP-DTL&P
• established to raise monies for Investment

• by way of acquiring shares or providing long-term finance
• to any undertaking wholly engaged in specified infrastructure business or a project for constructing a
hotel of not less than three-star category or project for constructing a hospital with at least one hundred
beds for patients
Working Note : Suppose X ltd an Infrastructure Capital Company issues Zero Coupon Bond of Rs.10,00,000
having Maturity Value Rs.35,00,000 on 10th August, 2019 and Maturing on 15th December, 2029
Discount : 35,00,000 – 10,00,000 = Rs.25,00,000
No of calendar months : 10/8/2019 to 15/12/29 = 125
Deduction per Month : 25,00,000/125 = Rs.20,000
Deduction for P/Y 19/20 : 8 x 20,000 = Rs.1,60,000
7. Employer contribution towards Recognised Provident Fund or Approved Superannuation Fund or Approved
Gratuity Fund. [Section 36(1)(iv)] (Subject to section 43B)
Working Note : Assumed due date of return 31st July, 2020 of Mr. X
Employer Amount (Rs.) Deposit upto Date of Actual deposit Deduction u/s
Contribution Due date of 36(1) for P/Y
return
(Mr. X) (Rs.)
April,18 10,000 31/7/2020 15th May,19 10,000 allowed
for p/y 19/20
December,18 10,000 31/7/2020 16th January, 20 10,000 allowed

for p/y 19/20
March,19 10,000 31/7/2020 4,000 on 15th April, 20 4,000 allowed
for p/y 19/20
31/7/2020 4,000 on 31st July, 20 4,000 allowed
for p/y 19/20
31/7/2020 2,000 on 10th Aug, 20 2,000 allowed
or p/y 20/21
8. Employer contribution towards a pension scheme u/s 80CCD, on account of an employee upto 10%
salary of the employee in the previous year. (Subject to section 43B)
Special point : SALARY = Basic + DA (retirement benefit) + commission based on fixed % of turnover
9. Sum received by employer as employee contribution to Provident Fund, Superannuation Fund or under
other welfare fund provided such amount is credited by employer in the account of employee upto due date
of relevant fund
Special Point : Section 2(24) : Amount received by employer from employee as contribution to Provident
Fund, Superannuation Fund or other welfare fund,shall be treated as deemed income of such employer. If the
employer satisfies condition of section 36(1) then he will be entitled to deduction of such amount.
Working Note :
Employee Amount Due date of Date of Actual Deposit Income u/s Deduction for
Contribution deposit in fund 2(24)(x) P/Y u/s 36(1)
April, 19 10,000 15th May, 19 15th May, 19
10,000 10,000
June, 19 10,000 15th July, 19 16th July, 19 10,000 Nil
March, 20 10,000 15th April, 20 4,000 on 15th April, 20 10,000 4,000
4,000 on 31st July, 20 Nil

2,000 on 10th Aug, 20 Nil
10. Animals used for Business or Profession (not as S.I.T) & have died or become useless for such purpose.
Deduction is Difference between actual cost to such assessee & realisation (if any) from sale of carcass of such
animal.
For Eg : Mr. X uses a horse for his business. It was purchased in year 2015 at Rs. 40,000. It died on 30/11/2019
& its carcass was sold for Rs. 5,000.
Solution : Rs.40,000 – Rs.5,000 = Rs.35,000 allowed as deduction u/s 36(1) for A/Y 2020/21
11. Bad debt is written off as irrecoverable in accounts of assessee during P/Y provided such debt should
have been taken into account for computing income of any P/Y
Special Points :
1. Where assessee deals in money lending or is a Bank, income condition need not be satisfied.
2. No deduction is allowed for provision made for bad and doubtful debt.
3. Section 41(4) : Subsequent recovery of written off bad debt.
ü Where deduction claimed upto 36(1)for any previous year
ü and subsequently amount is recovered,
ü than such amount shall be the income under P/G/B/P
ü of P/Y in which it was recovered.
However,
a) Assessee claiming Bad Debt & who recovers the bad debt should be same
b) It is not necessary that business is in existence in previous year of recovery.
For Eg :
a) Mr. X had given advance of Rs. 20,000 for purchase of raw material. The supplier of raw material
became insolvent and therefore could not supply the raw material. Mr. X writes off the debt as bad in
his books.
160 PP-DTL&P
b) Mr. X sells goods on credit. Out of total credit sales, one credit sale was made to Mr. Y of Rs. 25,000,
who has become insolvent. Mr. X writes off Rs. 25,000 as bad debt in his books.
Solution :
a) Bad debt on account of advance is not allowed as deduction u/s 36(1) [Except banks/financial institutions]
b) Bad debt on account of credit sales is allowed as deduction u/s 36(1)
12. In respect of any provision for bad and doubtful debts made by [section 36(1)(viia)] –
(a) Scheduled bank [not being a bank incorporated by or under the laws of a country outside India or a
non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary
co-operative agricultural and rural development bank], an amount not exceeding 8.5% of the total
income (computed before making any deduction under this clause and Chapter VIA) and an amount
not exceeding 10% of the aggregate average advances made by the rural branches of such bank
computed in the prescribed manner :
Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its
option, be allowed in any of the relevant assessment years, deduction in respect of any provision made
by it for any assets classified by Reserve Bank of India as doubtful assets or loss assets in accordance
with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount
of such assets shown in the books of account of the bank on the last day of the previous year :
Provided further that for the relevant assessment years commencing on or after the 1st day of April,
2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as
if for the words “5%”, the words “10%” had been substituted :
Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its
option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an
amount not exceeding the income derived from redemption of securities in accordance with a scheme
framed by the Central Government :
Provided also that no deduction shall be allowed under the third proviso unless such income has been
disclosed in the return of income under the head “Profits and gains of business or profession.”
(b) Bank, being a bank incorporated by or under the laws of a country outside India, an amount not
exceeding 5% of the total income (computed before making any deduction under this clause and
Chapter VI-A);
(c) Public financial institution or a State financial corporation or a State industrial investment corporation,
an amount not exceeding 5% of the total income (computed before making any deduction under this
clause and Chapter VI-A) :
Provided that a public financial institution or a State financial corporation or a State industrial
investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the
two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending
before the 1st day of April, 2005, deduction in respect of any provision made by it for any assets
classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the
guidelines issued by it in this behalf, of an amount not exceeding 10% of the amount of such assets
shown in the books of account of such institution or corporation, as the case may be, on the last
day of the previous year;
(d) Non-banking financial company, an amount not exceeding 5% of the total income (computed before
making any deduction under this clause and Chapter VI-A).
NOTE : No one can claim deduction under section 36(1)(via) without making provision for bad and doubtful
debts in its books of account – Kottakkal Co-op Urban Bank Ltd. v. ITO [2013]
13. In respect of any special reserve created and maintained by a specified entity, an amount not exceeding
20% of the profits derived from eligible business computed under the head “Profits and gains of business
or profession” (before making any deduction under this clause) carried to such reserve account [Section 36(1)
(viii)]:
Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds
twice (i.e., 200 percent) the amount of the paid up share capital and of the general reserves of the specified
entity, no allowance under this clause shall be made in respect of such excess.
Explanation : In this clause, –
(a) “Specified entity” means :
(i) Financial corporation specified in section 4A of the Companies Act, 1956 ;
(ii) Financial corporation which is a public sector company and a Government company;
(iii) Banking company;
(iv) Co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural
and rural development bank;
(v) Housing finance company (i.e., a public company incorporated in India with the main object of carrying
on the business of providing long-term finance for purchase or construction of residential house in
India); and
(vi) Any other financial corporation including a public company;
(b) “Eligible business” means :
(i) In respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-
clause (iv) of clause (a), the business of providing long-term finance for –
(A) industrial or agricultural development;
(B) development of infrastructure facility in India; or
(C) development of housing in India;
(ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing
long-term finance for the construction or purchase of houses in India for residential purposes; and
(iii) in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of providing
long-term finance for development of infrastructure facility in India;
14. Expenditure incurred by Company
§ for promoting Family Planning among Employees [Section 36(1)(ix)]
§ If expenditure is Revenue Expenditure : 100% allowed in P/Y in which incurred
§ If expenditure is Capital Expenditure : Allowed in 5 equal installments from P/Y in which incurred
Special Points : Sale of family planning capital assets treatment same as sale of scientific research capital
assets.
162 PP-DTL&P
16. Commodities Transaction Tax (CTT) in respect of Specified Commodities Transactions if the income
arising from such transactions is chargeable under Business or Profession. [Section 36(1) (xv)/(xvi)].
Special Point :
Commodities Transaction Tax is levied on every taxable commodities transaction, being sale of commodity
derivative @ 0.01 % on value of such transaction & such tax shall be payable by the seller.
Specified Commodities Transaction means a transaction of sale of commodity derivatives in respect of

commodities, other than agricultural commodities, traded in recognised associations.
17. Expenditure incurred by a co-operative society engaged in the business of manufacture of sugar for purchase
of sugarcane at a price which is equal to or less than the price fixed or approved by Government.
18. Marked to market loss [Section 36(1) (xviii)] or other expected loss as computed in accordance with
the income computation and disclosure standards notified u/s 145(2) [Finance Act,2018]
GENERAL DEDUCTION [SECTION 37(1)]

If an expenditure fulfills ALL the below conditions it will allowed u/s 37(1)(residuary section):
§ If not covered under Section 30 to Section36
§ If not of Capital Nature
§ If Not a personal expense of Assessee
§ If incurred in respect of a business carried on by the assessee.
§ If incurred in the previous year
§ If not incurred for any purpose which is an offence or is prohibited by any law
Special Points :
1. Expenditure of any purpose which relates to any Offence or which is prohibited by law shall not be
allowed a deduction.
2. Section 37(2B) : Expenditure on advertisement in any Newspaper, Magazine, souvenir, pamphlet etc.
of a political party is not allowed as deduction.
3. Any expenditure incurred on the activities relating to corporate social responsibility u/s 135 of Companies
Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the
business or profession.
Case Studies:
5. Renovation in hotels-carpets in the hotel business require frequent changes. They are not in the nature
of capital asset, thus the expenditure incurred on such assets for the replacement of the carpets, is
revenue expenditure-CIT v. Piem Hotels Ltd. [2005] 1 SOT 382(Mum.)
6. Market survey-expenditure incurred on the market survey is revenue expenditure - CIT v. Orbit Resorts
(P). Ltd. [2011] 48 SOT 23 (Chd).
7. Employee Stock Option Plan: difference between the market value and issue price of the share, is
revenue expenditure - CIT v. PVP Ventures Ltd. [2012] 211 Taxman 554 (Mad.)
8. Royality paid under a 5 year collaboration agreement for use of technical know-how to run an existing
business more profitability would be allowable as revenue expenditure - CIT v. Southeren Pressing (P).
Ltd. [2000] 242 ITR 67(Mad.).
9. Registration Fees- Registration fee paid by the company assessee for increasing in the authorised
share capital, is the capital expenditure Bharat Carbon & Ribbion Mfg Co. Ltd. v. CIT [1981] 127 ITR
239 (Delhi) [approved in Punjab State Industrial Development Corporation corporation Ltd. v. CIT[1997]
93 Taxman 5 (SC).
10. Interest on delayed payments for purchase of machinery is allowable as a revenue expenditure-CIT
v.sivakumari Mills Ltd.[1997] 227 ITR 465/95 Taxmaan 73(SC).
11. Where the assessee, by paying damages to the preferance shareholders is actually discharging its
liablity to pay dividend under the contract, such kind of payments cannot be allowed as business
expenditure.-G.G.L.Hotels & resorts Co.Ltd v. CIT [2017] 82 taxmann.com 107/390 ITR 160(Cal.)
12. Commission paid at a higher rate in order to attract first customer in a new region is deductable-CIT v.
Bharat Collieries Ltd.[1968] 68 ITR 42(Pat.).
13. Payment made under know-how agreement to use technical know-how and trademark is allowable as
revenue exoenditure and merely because the agreements provided that the assesee shall be entitled
to retain the technical know-how design, drawings etc even after the termination of the agreement,it will
not alter the nature of the transaction-Praga Tools Ltd. v. CIT[1980] 123 ITR 773(AP).
14. Litigation expenses incurred to defend a suit filed by the shareholder where,it relief was granted by it
would have affected the carrying on the assessee’s business, are deductable -Premire Construction
Co. Ltd. v. CIT[1966] 62 ITR 176 (Bom.).
15. Money spend by a partner in a suit against another partner for rendition of accounts is not an allowable
deduction.
16. Taxes: General rule- Any tax ( other than income tax, gift tax,fringe benefits tax,dividend tax,surtax) is
allowed as deduction if it is paid /payable while carrying on the business and profession subject to the
section 43B.
17. Municipal taxes paid by a running concern on plot purchased by it for business purposes is deductable
even if the building is not constructed-CIT v. Suri Sons [1989] 177 ITR 406 (Punj.& Har,).
18. Professional tax paid by a person carrying on business or trade is deductable-Circular No.16, dated
September 18, 1969.
19. Contribution to an association,which does not serve any business purpose,-Iron traders(P) Ltd. v.
CIT[1974] 97 ITR 606(Delhi).
20. Contribution to insurance Fund cannot be considered as an admissible deduction-CIT v. Thanthai
Preiyar Transport Corporation.
21. where loss is incurred by the company-assessee due to fluctuation of exchange rates in remittances of
profit from India to its U.K office, it is allowed as deduction-Goodricke Groups Ltd. (No.2) v. CIT[1993]
201 ITR 266 (Cal.)
22. if an society assessee as a corporate body make a decision to give presents to its members to
celebrate silver jubilee celebration, the expenditure on such expenditure on such presents is allowable
as deduction-Karjan Co-operative cotton sales Ginning & pressing society v. CIT [1993] 199 ITR 17
(Guj.)(FB).
23. Expenditure on Diwali Gifts is allowable as business expenditure - CIT v. Anil Alums (P.) Ltd. [2005] 98
TTJ (Asr.) 56.
164 PP-DTL&P
l KEYMAN INSURANCE PREMIUM

§ Premium paid by the firm in respect of the life of its partners,assured under Keyman
insurance policy - P.G Electronics v. ITO [2007] 15 SOT 79 (Delhi)(SMC)(URO) circular
no.38/2016,dated November 22,2016, CBDT has admitted that premium paid by a firm on
the Keyman Insurance policy of a partner, to safeguard the firm against a disruption of a
business,is allowed as deduction under section 37.
§ Just because Keyman Insurance Policy is assigned by the company to its director after
sometime will not mean that expenditure incurred in first instance will loose flavour of it
being “business expenditure”-CIT v. Rajan Nanda [2012] 205 taxman 138/18 taxmann.com
98 (Delhi).
Working Note :
Expenditure Deduction u/s 37(1)
a) Expenses on legal proceedings under any law incurred in connection with Allowed
Business
b) Penalty for breach of law Not allowed
c) Penalty for breach of contract Allowed
d) Interest under Income Tax Act Not allowed
e) Interest under any other law provided not for breach of law. Allowed
f) Expenses on advertisement in brochure of a political party Not allowed
g) Interest on loan taken to pay Income Tax Not allowed
h) Professional Tax paid in carrying on business or trade Allowed
i) Diwali & muhurat expenses Allowed
j) Deposit under acquiring a telephone Allowed
k) Laga contributions Allowed
l) Fees paid to registrar of companies Allowed
DISALLOWANCES
EXPENSES NOT DEDUCTIBLE [SECTION 40(a)]
Overriding Section 30 to Section 38

1. Expenditure to Non resident without TDS
§ Expenditure during P/Y of Interest,Royalty, fees for technical services or other sum chargeable
under this act ( other than salary)
§ Payable to Non-Resident
§ No Deduction of such expenses shall be allowed if
§ Tax has been not been deducted at source or after deduction has not been deposited upto due
date of return u/s 139(1)
§ However, if deposited after above date, then deduction will be allowed in previous year in which it
is actually deposited.
Where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter
XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section
(1) of section 201, then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted
and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said
proviso. [Inserted by Finance Act, 2019]
Working note : Following is interest payments for loan taken by Mr. X from non resident
Date of Amount Actual date Date of Previous Year in which

payment of deduction Deposit of deductible
TDS
25/5/19 50,000 25/5/19 7/6/19 50,000 allowed in PY 19-20
26/6/19 60,000 26/6/19 10/7/19 60,000 allowed in PY 19-20
15/8/19 1,00,000 Not deducted NA Nil
20/9/19 80,000 20/9/19 Not deposited Nil
15/2/20 20,000 15/2/20 30/4/20 20,000 allowed in PY 19-20
31/3/20 25,000 31/3/20 15/9/20 25,000 allowed in PY 20-21
2. Salary to Non resident

§ Salary Payable to Non-Resident
§ No Deduction of such salary shall be allowed if tax has not been deducted at source or after
deduction has not been deposited within due date u/s 200(1)
3. Expenditure to Resident
§ Who incurs Any Expenditure subject to TDS during Previous Year.
§ Payable to a Resident
§ 30% of such expenditure shall be disallowed allowed if
§ Tax has not been deducted at source or after deduction has not been deposited Upto the Due
Date of Return u/s 139(1)
However, if deposited after above date, then 30% of such expenditure shall be allowed as deduction
in previous year in which it is actually deposited.
Special point : If Payer fails to deduct whole/part of tax for above payment to resident payee but is not
deemed to be assessee in default as resident payee has directly paid the tax, than it shall be deemed
that payer has deducted & paid the tax on such sum on the date of furnishing of return of income by the
payee.
Working Note : Following is interest payments for loan taken from non resident by Mr. X
Date of Amount Actual date of Date of Deposit Previous Year in which deductible
payment deduction of T/D.S
25/5/19 15,000 25/5/19 7/6/19 15,000 allowed in PY 19-20
26/6/19 20,000 26/6/19 11/12/19 20,000 allowed in PY 19-20
166 PP-DTL&P
16/8/19 10,000 Not deducted NA Nil

20/2/20 20,000 20/2/20 Not deposited Nil
25/2/20 10,000 25/2/20 30/6/20 10,000 allowed in PY 19-20
25/3/20 12,000 25/3/20 15/7/20 12,000 allowed in PY 19-20
31/3/20 13,000 31/3/20 10/8/20 70% of 13,000 allowed in PY 19-20
4. Income Tax shall not be allowed as deduction.

5. Royalty / License fee / Service fee / Privilege fee / Service charge by State Government undertaking to
State Government is not allowed as deduction.
Special point : State Government undertaking includes :
(i) Corporation established under any Act of State Government
(ii) Company in which more than 50%of paid-up equity share capital is held by State Government
(iii) Undertaking in which State Government has the right to appoint the majority of the directors
6. Tax u/s 10(10CC) on Non Monetary Perquisite shall not be allowed deduction.
EXPENSE GREATER THAN MARKET VALUE [SECTION 40A(2)]

• Expenditure by which payment made /is to be made to Specified Person
• AO may disallow so much expenditure as he consider Excessive or Unreasonable having regard to
FMV of goods or service or facilities for which payment made or legitimate needs of business.
Special Points :
1. Specified Persons :
i. Where assessee is an Individual.
- His Relative
- Company/Firm/AOP/BOI/HUF
(In which such Individual or his Relative has Substantial Interest)
ii. Where Assessee is Company/Firm/AOP/BOI/HUF
COMPANY/FIRM/AOP/BOI/HUF [A]
Any company CO./FIRM/AOP/ CO./FIRM/AOP/

Director/ ANY INDIVIDUAL or carrying on BOI/HUF or BOI/HUF or Director
Partner/ PERSON RELATIVE Director/Partner /Partner/Member
business or
Member or In whose Provided Individual / Member Or their Relative
their business having Substantial profession in Or their Relative Provided
Relatives Substantial Interest in [A] which [A] has Provided Director, Partner,
[B] interest held substantial Co, firm etc has Member
by [A] or[B] interest Substantial has Substantial interest
interest in [A]
[A]
2. A Person has Substantial Interest in

è Company, if he holds at any time during the P/Y beneficial ownership of at least 20% Equity Shares in
that company.
è Other than company, if he is at any time during the Previous Year entitled to at least 20% profits
Illustration 20 : Examine in the following cases, what amount of deduction shall be available to assessee under
head P/G/B/P for AY 20-21.
(a) Mr X who is carrying on business purchases goods at Rs. 8,00,000 from his brother. The Market value
of similar goods is Rs.2,00,000.
(b) Mr X holds 30% equity shares of Y Ltd. Mr X purchases goods worth Rs. 5,00,000 from Y Ltd at Rs. 500
per article. The Market value of such article is Rs. 300 per article.
Solution :
(a) Deduction of Rs. 2,00,000 allowed as deduction and Rs.6,00,000 disallowed u/s 40A(2)
(b) Deduction of Rs.5,00,000/500 x 300 i.e. Rs. 3,00,000 is allowed and Rs.5,00,000/500 x 200 i.e.
Rs.2,00,000 is disallowed u/s 40A(2)
EXPENDITURE IN CASH [SECTION 40A(3)]

• Where the assessee incurs any expenditure
• For which a payment or aggregate of payments
• Made to a person
• In a day,
• Exceeds Rs.10,000
• Otherwise than by account payee cheque drawn on bank or
• Account payee bank draft or
• Use of electronic clearing system through bank account
• No deduction shall be allowed in respect of such expenditure.
Special Point :
1. The limit for Payment for plying, hiring or leasing goods carriages is Rs.35,000 (applicable with effect from
October 1, 2009).
2. Where an expenditure is allowed during any previous year and in subsequent previous year the assessee
makes payment in respect thereof in excess of Rs.10,000 otherwise than by an account payee cheque or
account payee bank draft or use of electronic clearing system through bank account or through such other
electronic mode as may be prescribed the payment so made shall be Deemed to be P/G/B/P Income of
subsequent Previous Year.
Exceptions to Section 40A(3) : Rule 6DD

No disallowance in the following cases even if payment is greater than Rs. 10,000 is made otherwise by
Account payee cheque or Account payee bank draft or Use of electronic clearing system through bank account.
a) Payment to Banks, LIC

168 PP-DTL&P
b) Payment to Government (both Central and State).

c) Payment through the banking system, e.g., letter of credit, telegraphic transfer, bill of exchange, ECS,
credit card or debit card.
d) Payment to cultivator or producer of agriculture, forest, animal husbandry, dairy, poultry farming or fish
products.
e) Payment for purchase of products manufactured by producer without aid of power in a cottage industry.
f) Payment in a village or town not served by any bank on date of payment to a person who resides in
such village or carrying on his business, profession or vocation in such village.
g) Payment to an employee or his legal heir of gratuity, retrenchment compensation or similar terminal
benefit provided aggregate of such amount does not exceed Rs. 50,000.
h) Payment on the day on which banks were closed on account of holiday or strike.
i) Payment made by book adjustment by an assessee in the account of the payee against money due to
the assessee for any goods supplied or services rendered by him to the payee.
Working Note :
Particulars Deduction Particulars Deduction
(Rs.) (Rs.)
Case 1 : Case 2 :
Bill : Rs.20,000 20,000 allowed Bill : Rs.40,000 20,000

as deduction disallowed as
Payment in Cash : Payment in Cash
deduction us/
15th April, 2019 : 10,000 15th April, 2019 -10.am : 10,000 40A(3)
16th April, 2019 : 10,000 15th April, 2019 -11.am : 10,000
Case 3 : Case 4 :
Bill : Rs.25,000 25,000 disallowed Bill : Rs. 20,000 20,000 allowed

as deduction u/s as deduction
Payment in cash Payment in Cash : 10,000
40A(3)
15th April, 2019 : Rs.25,000 Payment by A/C payee cheque :
10,000
DISALLOWANCE FOR GRATUITY [SECTION 40A(7)]

No deduction shall be allowed of any provision made by the Assessee being an Employer for payment of
Gratuity to his employees unless provision made
• Towards Approved Gratuity Fund or
• For payment of gratuity actually becoming payable during P/Y
Note: Even if provision is not made for gratuity in the books of accounts of the assessee, the quantam of
actuarial valuation of such gratuity cannot be claimed on the ground that section 47A(7) is not attracted as no”
provision” is made in the books of the accounts - Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC).
EMPLOYER CONTRIBUTION TOWARDS FUNDS REQUIRED BY LAW [SECTION 40A(9)]

No deduction shall be allowed of sum paid by employer towards the setting up/formation or as contribution to
any fund not required to be kept under law.
NO DEDUCTION OF MARKED TO MARKET LOSS SECTION 40A(13) [FINANCE ACT, 2018]

No deduction or allowance shall be allowed in respect of any marked to market loss or other expected loss,
except as allowable u/s 36(1).
SALARY /INTEREST BY FIRM TO PARTNER [SECTION 40(b)]

• Partnership firm/LLP shall be allowed deduction of
• Salary, Bonus, commission or other remuneration to Working Partner and
• Interest to Any Partner
• Subject to certain conditions :
• Remuneration and interest must be authorized by partnership deed
• It should not pertain to period prior to partnership deed
• Remuneration and interest should not exceed permissible limit
Working Partner : Individual who is actively engaged in conducting the affairs of Business or Profession of the
firm of which he is a partner.
Analysis of Section 40(b)
Type Salary/Bonus/Commission/other Interest on Capital

Remuneration
Partner Working Partner All Partner
Partnership deed Authorized by the terms of Partnership Deed Authorized by the terms of
Partnership Deed
Prospective Such payment should relate to period after date Such payment should relate to period
of Partnership Deed. after date of Partnership Deed
Amount of Book Profits Maximum Deduction

deduction
First 3,00,000 Rs. 1,50,000 or Upto 12 % P.A.
(Including Loss) 90% Book profits

(whichever is more)
Balance Book profit 60% of Book Profit
Computation of Book Profits

1. Compute Net profit of firm under head P/G/B/P after making adjustments as per Section 29 to 43D
2. Add Remuneration to working partner (if Debited to P&L A/C)

170 PP-DTL&P
Tax treatments in hands of Partner
Type of Payment Working Partner Non working Partner

Salary from firm Taxable to the extent allowed as deduction Not Taxable
to firm
Interest from firm Taxable upto 12%pa Taxable upto 12%pa
Share of Profit Exempt u/s 10(2A) Exempt u/s 10(2A)
Illustration 21 : Profit and loss account of A Co. (A firm engaged in manufacturing of Garments, which satisfies
all condition of section 40(b) for the year ending 31st March, 2019 is as follows :
Particulars Rs. Particulars Rs.

Cost of goods sold : 9,00,000 Sales : 12,00,000
Remuneration to Partners
A : 72,000 B : 60,000 : 1,32,000 Long Term Capital Gain : 2,00,000
Remuneration to Employees : 1,00,000
Interest to partner
A : 16,000 B : 14,000 : 30,000
Other expenses : 25,000
Depreciation : 33,000
Net profit : 1,80,000
14,00,000 14,00,000
Other information :
1. Depreciation not allowable as per Income tax act is Rs.18,000
2. Expenses of Rs.5,000 not allowed under 43B
3. Mr. A is Working Partner
4. Interest Paid is as follows : Mr. A @ 20% & Mr. B @7 %
Compute income of Mr. A & Mr. B for A/Y 2020-2021
Solution :
Computation of Book Profit

Net profit as per P&L A/C 1,80,000
Add : Depreciation not allowable 18,000
Add : Expenses of not allowed under 43B 5,000
Add : Remuneration to B (Non working partner not allowed as deduction) 60,000
Add : Remuneration to A (Working partner added to determine book profits) 72,000
Add : Interest to A in excess of 12% p.a. (16,000/20 x 8) 6,400
Less : Long term capital gains 2,00,000

Book profit 1,41,400
Maximum allowable remuneration to Working partner A
Book profit Maximum remuneration

Upto 3,00,000 1,50,000 or 90% of 1,41,400,higher
i.e. 1,50,000
Therefore entire remuneration paid to A i.e. Rs. 72,000 will be allowed as deduction to firm.
Computation of Income of partners for A/Y 2020-21
Income under business Partner A (Rs.) Partner B (Rs.)

Interest on capital 16,000 -6,400 = 9,600 14,000
Remuneration 72,000 Not Taxable
Share of profit Exempt u/s 10(2A) Exempt u/s 10(2A)
Total 81,600 14,000
CERTAIN DEDUCTIONS ON ACTUAL PAYMENT BASIS [SECTION 43B]

• Overriding other provisions of IT Act
• Specified Expenses which are allowable under other sections
• Shall be allowed only in Previous year in which such expenditure is actually paid
• Irrespective of previous year in which liability was incurred as per method of accounting
Specified expenses :
1. Tax, duty under any law
2. Employer Contribution to Provident fund, superannuation fund, Gratuity fund or other welfare fund
3. Bonus or Commission to employee
4. Interest on Loan from Public Financial Institution, State Financial Corporation or State industrial
investment corporation
5. Interest on any loan or advance from schedule bank or a co-operative bank bank (with effect from
the assessment year 2018-19) other than a primary agricultural credit society or primary co-operative
agricultural and rural development bank
6. Payment of leave Salary to employee
7. Sum payable to Indian Railways for use of railway asset
8. Any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-
banking financial company or systemically important non-deposit taking non-banking financial company,
(applicable from the assessment year 2020-21), in accordance with the terms and conditions of the
agreement governing such loan or borrowing.
where a deduction in respect of any sum referred in point 8 is allowed in computing the income referred to in
section 28, of the previous year (being a previous year relevant to the assessment year commencing on the
172 PP-DTL&P
1st day of April, 2019, or any earlier assessment year) in which the liability to pay such sum was incurred by
the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in
computing the income of the previous year in which the sum is actually paid by him.
A deduction of any sum, being interest payable under point 8, shall be allowed if such interest has been actually
paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be
deemed to have been actually paid.
Inserted by Finance Act, 2019
Special point :
• Provision of Section 43B Shall not apply
• for the Previous Year in which liability to pay such sum was incurred
• If such sum is Actually Paid by Assessee
• On or before the due date of return u/s. 139(1)
• And evidence of such payment is furnished along with ROI
Working note : Mr. X maintains his accounts on accrual basis. He has taken a loan from a scheduled bank for
the purpose of his business. Total interest liability relating to P/Y 19-20 is Rs. 40,000.
Mr. X has made the following payments. Deduction will be as follows :
Date of payment Amount(Rs.) Deduction / P/Y of deduction
15/May/19 8,000 8,000 for PY 19-20
15/Nov/19 12,000 12,000 for PY 19-20
15/April/19 5,000 5,000 for PY 19-20
15/July/20 8,000 8,000 for PY 19-20
20/Aug/20 7,000 7,000 for PY 20-21
DEEMED PROFITS CHARGEABLE TO TAX [SECTION 41]
Recovery of Loss/Deductions etc. allowed earlier [Section 41(1)]

• Deduction allowed in any P/Y for loss/Expense (revenue or capital expenditure) or Trading liability
• Subsequently during any P/Y, same assessee or his successor
• Obtains any amount in respect of such loss/expense (in cash or other manner) or some benefit in
respect of such trading liability through remission or cessation thereof.
• Then such amount or benefit shall deemed to be P/G/B/P of P/Y in which received.
Special Points : Provision of section 41(1) will apply even if business is not in existence.
Illustration 22 : Determine whether following amount will be taxable for A/Y 2020-21.
(a) Mr X had claimed a deduction of Rs. 50,000 paid as Indirect Tax for P/Y 18-19 and the same was allowed
as deduction to him. Mr. X receives a refund of Rs. 10,000 on 15/11/2019 from the Tax department.
(b) Mr X had taken a Loan of Rs. 50,000 from Mr. Y on 14/09/2016. Both X & Y decided on 4/11/19 that
Loan need not be paid.
Solution :
(a) Rs.10,000 taxable as Deemed Business Income u/s 41(1) for A/Y 2020-21
(b) Cessation of liability on account of loan is not deemed as business income u/s 41(1) as it is not a trading
liability
Section 41(2) : Balancing Charge (discussed earlier)
Section 41(3) : Sale of Capital Asset used for Scientific Research. (discussed earlier)
Section 41(4) : Recovery of Bad Debt. (discussed earlier)
Section 41(5) : Loss of only that P/Y in which business cease to exist can be set off from Deemed incomes u/s.
41(1), (3), (4). (Exception to rule that business loss can be carried forward for 8 years only)
Recovery after discontinuation of business or profession[section 176(3A,(4)]: This section is applicable where
any business is discontinued in any year, by the virtue of this sub-section of section 176(3A),any sum received
after the discontinued of the business or profession is deemed to be income of the recipient and charged to tax
in the year in which it is received. it may be noted that, if the books of accounts are maintained on mercantile
basis, any receipt after discontinuation of the business or profession must necessary have accrued and been
charged during the continuance of the business or profession and nothing would be chargeable to tax in the
year of receipt of income. If, however the books are maintained on cash basis and some of the profits are
received after the discontinuance of business or profession,it would be chargeable to tax under section 176(3A)
(4) in the year of receipt of income even if the business or profession is not carried on during that year.
Illustration 23 : Mr X’s business was discontinued on 15/10/09 because the business was running into losses.
The business loss upto 31-3-2009 was Rs. 10,000 and loss for the period 01-04-2009 to 15/10/2009 was Rs.
5,000. On 20/11/2019 Mr. X receives a debt of Rs. 40,000 from a debtor which was allowed as bad debt u/s
36(1) for P/Y 05-06. Determine business income for A/Y 2020-21.
Solution :
Business Income of A/Y 2020-21

Recovery of bad debt u/s 41(4) 40,000
Less : Set off of business loss of P/y 08/09 5,000
Taxable Business Income 35,000
Note :- Business loss of ₹10,000 is not an allowable deduction as per section 41(5) because loss of only that
previous year is allowable in which the business cease to exist.
MAINTENANCE OF ACCOUNTS BY PERSONS CARRYING ON PROFESSION OR BUSINESS

[SECTION 44AA]
Section 2(12A) : Books or books of accounts includes ledgers, day-books, cash books, account-books and
other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other
form of electro-magnetic data storage device.
174 PP-DTL&P
Specified Profession Non specified Profession / Business

Gross Receipts > Rs.1,50,000 Gross Receipt > Rs.10,00,000
for All the 3 years preceding Other (For Individual/HUF Rs.25,00,000 Other
the P/Y case
[from the A/Y 2018-19] Case
or
Or
where profession is newly
Income from P/G/B/P > Rs.1,20,000
setup in P/Y, gross receipts is
likely to exceed Rs.1,50,000 (For Individual/HUF Rs.2,50,000
for that P/Y [from the A/Y 2018-19]
in Any of 3 years preceding P/Y’s
or
where profession is newly setup in P/Y,
above limits are likely to exceed for that
P/Y
Specified books of accounts Such books of accounts has to be maintained that Not required to
has to be maintained for that will enable the AO to compute his Total Income maintain any
P/Y books of accounts
(i.e. Cash Book, & Ledger)
Special Points :
1. Specified profession : Legal, Medical, Engineering, Architectural, Accountancy, Technical Consultancy,
Interior decoration or other notified professions [i.e., authorised representative, film artist, company
secretary and information technology]
2. Specified books of accounts :
a. Journal (if accounts on mercantile basis).
b. Cash Book & Ledger.
c. Carbon copies of bill issued exceeding Rs. 25
d. Original bills or receipts received for expenditure incurred exceeding Rs. 50
e. Payment vouchers prepared and signed for expenditure incurred upto Rs. 50
These books are required to be kept and maintained for 6 years from end of relevant A/Y
3. A person carrying on Medical Profession (i.e., a practitioner of any system of medicine –physicians,
surgeons, dentists, pathologists, radiologists, vaids, hakims, etc.), in addition to above shall maintain :
a. A daily case register in Form 3C showing date, patient name, nature of professional services
rendered (i.e.,general consultation,surgery,injection,visit,etc.)
b. A stock register showing inventory as on the 1st and last day of previous year of stock of drugs,
medicines and other consumable accessories used for profession.
Illustration 24 : Mr. X is Company Secretary in practice. His Receipts for the following year are as follows : -
Previous Year Gross Receipts
P/Y 18-19 2,50,000
P/Y 17-18 1,80,000

P/Y 16-17 1,50,000
Determine whether Mr. X has to maintain Accounts u/s 44AA for A/Y 2020-21.
Solution : Since Mr. X is carrying out specified profession and his turnover does not exceed Rs.1,50,000 for
all the 3 prior p/y, he is not requires to maintain specified books of Accounts for A/Y 20-21. He is required to
maintain such accounts to enable the AO to compute his total Income.
COMPULSORY AUDIT OF ACCOUNTS [SECTION 44AB]

PROFESSION : Compulsory audit of accounts for that P/Y in which Fees/Gross receipts* exceeds Rs.50,00,000
BUSINESS : Compulsory audit of accounts for that P/Y in which Sales/Turnover/Gross receipts exceed Rs.
1,00,00,000
Special Points : Accounts have to be audited u/s. 44AB by a CA before due date u/s 139(1) and also the audit
report is to be furnished on or before the said date.
* for the purpose for applicability of this section,receipts by an assessee by the means of sale of trading
business and receipts for doing job work can clubbed to seek whether limit of Rs. 1 crore prescribed for the
applicability of this section is made out - Bajrang Oil Mills v. ITO [2007] 163 taxman 154 (Raj).
# Rs 2 crore in the case of a person, who declares his business profits or gains under section 44AD(1) (applicable
from the assessment year 2017-18)
Illustration 25 : Whether in following cases, tax Audit u/s 44AB is applicable
1) Mr X is a CS in Service. Salary Rs.65,00,000
2) Mr X is a CS in practice. His Gross Receipts are Rs.50,00,000
3) Mr X is a CS in practice. His Gross Receipts are Rs.60,00,000
4) Mr X is carrying on a Chemical Business. His turnover is Rs.90,00,000
5) Mr X Chemical Business turnover : Rs.70,00,000 & Plastic Business turnover : Rs.40,00,00
Solution :
1) Section 44AB not applicable for Persons not carrying out Business or profession.
2) Section 44AB not applicable as professional receipts does not exceed Rs. 50,00,000
3) Section 44AB applicable as professional receipts does exceed Rs. 50,00,000
4) Section 44AB not applicable as Business receipts does not exceed Rs.1 crore
5) Section 44AB applicable as Business receipts exceed Rs. 1 crore
COMPUTATION OF P/G/B/P ON PRESUMPTIVE BASIS
SECTION 44AD SECTION 44AE

1. Overriding Section 28 to 43C Section 28 to 43C
2. Assessee Resident Individual, Resident HUF or Any Assessee (Resident/Non Resident)

Resident Partnership Firm Excluding
Limited Liability Partnership
176 PP-DTL&P
3. Business Any Business except business u/s Plying, Hiring or Leasing goods carriage
44AE
EXCEPTION :
(i) Specified Profession u/s 44AA
(ii) Income in nature of commission
or brokerage or
4. Limitations Provided Gross receipts/turnover Owns not more than 10 goods carriage
does not exceeds 2 Cr at any time during p/y
5. Sum deemed 8 % of Gross Receipts/ Turnover in Heavy goods vehicle (more than 12,000
as P/G/B/P P/Y kg. gross vehicle weight)
6% of Total turnover /Gross receipts Rs.1,000 per ton of gross vehicle weight or
received by A/c payee cheque or unladen weight, as case may be, for every
A/c payee bank draft or use of ECS month or part of a month during which
through a bank A/c or through such the heavy goods vehicle is owned by the
other electronic mode as may be assessee in p/y or amount claimed to have
prescribed during p/y or before due been actually earned from such vehicle,
date u/s 139(1) of that p/y.
whichever is higher;
Other than heavy goods vehicle
Rs.7,500 for every month or part of
month during which the goods carriage
is owned by the assessee in p/y or
amount claimed to have been actually
earned from such goods carriage,
whichever is higher.
[Finance Act 2018]
6. Deductions No deduction u/s Section 30 to 38 No deduction u/s Section 30 to 38 shall
under PGBP shall be allowed from Deemed income be allowed from Deemed income
7. B/F losses Set off of Brought Forward losses Set off of Brought Forward losses Shall be
Shall be available available
8. Benefits If assessee declares Deemed If assessee declares Deemed income or
income or any amount higher,then any amount higher,then no requirement
no requirement to maintain books u/s to maintain books u/s 44AA or to get audit
44AA or to get audit u/s 44AB * u/s 44AB
9. Limit for The turnover of such business will not The turnover of such business will not
44AA/44AB be added to turnover of other business be added to turnover of other business
for applicability of Section 44AA/44AB for applicability of Section 44AA/44AB of
of other business other business
Special point :
1. Section 44AD : Where assessee declares profit for any P/Y u/s 44AD & he declares profit for any of 5
P/Y succeeding such P/Y not in accordance with section 44AD, he shall not be eligible to claim the benefit of
this section for 5 subsequent P/Y from P/Y in which the profit has not been declared.
Eligible assessee to whom above provisions are applicable & whose total income exceeds exemption limit, shall
be required to keep and maintain such books of account u/s 44AA & get them audited and furnish a report of
such audit as required u/s 44AB.
*Section 44AB shall not apply to person, who declares profits for p/y u/s 44AD and his total sales,
turnover/gross receipts in business does not exceed Rs. 2 crores in such previous year
2. Section 44AE : Assessee covered u/s 44AE & disclosing lower profits than deemed profits, shall be
required to keep and maintain such books of account u/s 44AA & get them audited and furnish a report of such
audit as required u/s 44AB
3. “Goods carriage”, “Gross vehicle weight” and “Unladen weight” shall have the respective meanings
assigned to them in section 2 of the Motor Vehicles Act, 1988;
“Heavy goods vehicle” means any goods carriage, the gross vehicle weight of which exceeds 12,000 kgs
Illustration 26 : Mr X is engaged in the business of plying goods carriage. He has purchased the following
vehicles during the previous year 31-3-2020.
1) Three Light goods vehicle on 11-06-2019 (put to use on 1-11-2019)
2) Five Light goods vehicle on 20-4-2019 (put to use on 30-06-2019)
Income claimed to have earned from business is Rs.6,00,000
Brought Forward business loss of p/y 19/20 is Rs.10,000
Solution :
Computation of Presumptive Business Income u/s 44AE for A/Y 2020-21
Income under Business/Profession Amount (Rs.)
3 Light goods vehicle 7,500 x 10 x 3 2,25,000

5 Light goods vehicle 7,500 x 12 x 5 4,50,000
Total 6,75,000
Less : B/F losses 10,000
PGBP 6,65,000
Gross Total Income 6,65,000
Less : Deduction u/s 80C to 80U NIL
Total Income 6,65,000
PROFITS AND GAINS OF PROFESSION ON PRESUMPTIVE BASIS [SECTION 44ADA]

1. Overriding : Notwithstanding anything contained in sections 28 to 43C
2. Assessee : Resident in India, who is engaged in specified profession u/s 44AA & whose Gross receipts is
upto 50 lakh in a P/Y.
3. Sum Deemed as business profits : 50%. of the total gross receipts in the P/Y or sum higher claimed to
have been earned by the assessee.
4. Deductions : Deduction sections 30 to 38, including depreciation and unabsorbed depreciation, shall be
deemed to have been allowed and no further deduction under those sections shall be allowed.
178 PP-DTL&P
5. WDV of block : The WDV of any asset used for purposes of profession shall be deemed to have been
calculated as if assessee had claimed and had been actually allowed the deduction of depreciation for each of
relevant A/Y.
6. Lower Profits : An assessee who claims that his profits from profession are lower than deemed profits &
whose total income exceeds exemption limit shall be required to maintain books of account u/s 44AA and get
them audited and furnish a report of such audit as required u/s 44AB.
TAXATION OF FOREIGN EXCHANGE FLUCTUATION [SECTION 43AA]

(1) Subject to the provisions of section 43A, any gain or loss arising on account of any change in foreign exchange
rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance
with the income computation and disclosure standards notified under sub-section (2) of section 145.
(2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign
exchange rates shall be in respect of all foreign currency transactions, including those relating to –
(i) monetary items and non-monetary items;
(ii) translation of financial statements of foreign operations;
(iii) forward exchange contracts;
(iv) foreign currency translation reserves.
SALE CONSIDERATION IN CASE OF REAL ESTATE TRANSACTIONS [SECTION 43CA]

• Consideration received or accruing on transfer of land or building or both
• Not being a capital asset
• is less than the Stamp duty valuation by any authority of a State Government,then
• Such value shall be deemed to be full value of the consideration for computing Business Profits
Option available to Assessee

• Assessee can claims before AO that
• Stamp duty Valuation exceeds fair market value of property
• On the date of transfer &
• Such value has not been disputed in any Appeal/Revision or
• No reference is made before any authority, court or the High Court, Than
• AO may refer the valuation of Asset to a Valuation Officer and
• Provisions of Wealth tax Act shall apply
Valuation of Valuation Officer

• Valuation of valuation officer is less than Stamp Duty Valuation,
• the value of valuation officer shall be
• taken as the full value of the consideration
Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment
of stamp duty does not exceed 105% of the consideration received or accruing as a result of the transfer, the
consideration so received or accruing as a result of the transfer shall, for the purposes of computing profits and
gains from transfer of such asset, be deemed to be the full value of the consideration. [Finance Act, 2018]
Where Date of agreement for transfer of asset & Date of registration of such transfer are different, the Stamp
duty Value on date of Agreement shall be considered if consideration or part thereof has been received by
account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank
account” or through such other electronic mode as may be prescribed on or before the date of agreement for
transfer of the asset. [Finance Act, 2018]
COMPUTATION OF INCOME FROM CONSTRUCTION AND SERVICE CONTRACTS [SECTION

43CB]
(1) The profits and gains arising from a construction contract or a contract for providing services shall
be determined on the basis of percentage of completion method in accordance with the income computation
and disclosure standards notified under sub-section (2) of section 145 :
Provided that profits and gains arising from a contract for providing services, –
(i) with duration of not more than 90 days shall be determined on the basis of project completion
method;
(ii) involving indeterminate number of acts over a specific period of time shall be determined on the
basis of straight line method.
(2) For the purposes of percentage of completion method, project completion method or straight line
method referred to in sub-section (1) –
(i) the contract revenue shall include retention money;
(ii) the contract costs shall not be reduced by any incidental income in the nature of interest,
dividends or capital gains.
QUESTIONS FOR PRACTICE

1 : JK & Co. a partnership firm engaged in the business has a Gross receipt of Rs. 32,00,000 from such
business. The partnership deed provides for payment of salary Rs. 3,000 p.m. to each of the partners i.e. J and
K. .The firm uses machinery for the purpose of its business and the WDV of the machinery as on 1-4-2019 is
Rs. 2,00,000. The machinery is eligible for depreciation @ 15%. Compute the profits from the business, if the
firm opts for the scheme under section 44AD. (Assume receipts in cash)
Solution : As per section 44AD the profits will be computed as under :
8% of gross receipts i.e. Rs.32,00,000 = Rs.2,56,000
2 : Arjun Singh is the owner of a business. Following is his P & L A/c for year ended on 31-3-20 :
Establishment charges 51,110 Gross profit 5,08,700
Rent, rates and taxes 29,000 Interest on Govt. Securities (Gross) 53,500
Sundry expenses 70,500 Rent from property 54,000
House hold expenses 18,800
Provision for bad debts 12,000
Loss on sale of motor car
(used for private purpose) 18,000
Insurance premium
180 PP-DTL&P
(including life insurance of

Rs.1790 of Arjun Singh) 28,800
Interest on bank loan 13,800
Provision for Depreciation 64,000
Net profit 3,10,200
Total 6,16,200 Total 6,16,200
Additional information :
(i) Bad debts written off during the year Rs.6,500
(ii) Admissible depreciation as per Income tax rules Rs.16,000
(iii) The assessee is running his business in a rented property, half of which is used by him for his own
residence. Rent of Rs. 24,000 in respect of entire house is included in rent, rate and taxes. The balance
of Rs.5.000 is on municipal tax paid for property given on rent.
(iv) Compute the Gross total Income of Sri Arjun Singh for the assessment year 2020-21.
Solution : Rs. Rs.
Income from house property
Rent received 54,000
Less : Municipal taxes (5,000)
49,000
Less : Statutory deduction @ 30% (14,700)
34,300
Profit and gains from business or profession

Profit as per P & L Account 3,10,200
Add : Inadmissible expenses
Rent 12,000
Household expenses 18,800
Provision for bad debts 12,000
Loss on sale of car 18,000
Life insurance premium 17,900
Provision for depreciation 64,000
M. Taxes for let out house property 5,000 1,47,700
Total 4,57,900
Less : Expenses allowed but not debited to P & L A/c
Bad debts (6,500)
Depreciation (16,000) (22,500)
Total 4,35,400
Less : Incomes not taxable under this head but
Credited to P & L A/c.
Interest on govt. securities (53,500)
Rent from property (54,000) (1,07,500)
Income from Business 3,27,900
Income from other sources :
Interest on Govt. securities 53,500
Gross Total Income (34,300 + 3,27,900 + 53,500) 4,15,700
3 : Mr. Avinash furnishes the following particulars of his income for the A/Y 2020-21.
Profit and Loss Account for the year ending 31-3-2020
Particulars Amount Particulars Amount
Rs. Rs.
To Office expenses 12,400 By Gross Profit 2,98,000
To General expenses 12,000 By Sundry Receipts 19,000
To Legal Expenses 8,000 By Custom Duties
To Depreciation on Machinery 11,000 recovered back from Govt.
To staff Salary 21,000 (earlier not allowed as
To bonus to staff 15,000 deduction) 15,300
To contribution to approved 16,000 By bad debts recovered (earlier 3,000
gratuity fund allowed as deduction)
To O/s liability for GST 18,000 By Gift from son 40,000
To Audit Fees 21,000
To Net Profit 2,40,900
3,75,300 3,75,300
Other information :
1. Bonus to employees according to the Payment of Bonus Act 1965, comes to Rs. 4,200.
2. Depreciation on machinery shown in the profit and loss account is calculated according to the income
tax provisions.
3. General expense includes payment of Rs.9,000 to an approved educational institute for the purpose of
carrying on scientific research in natural science. The research is, however now related to the business
of the assessee.
4. During the previous year Mr. Avinash also made a capital expenditure of Rs.5,000 for the purpose of
carrying on a scientific research related to his business. This expenditure is however not recorded in
the profit and loss account.
5. Outstanding liability in respect of GST amounting to Rs.10,500 was paid on 10-4-2020, Rs.1,000 on.
182 PP-DTL&P
10-5-2020, Rs.2,000 on 30-6-2020, Rs.1,000 on 10-7-2020 and Rs.3,500 is still outstanding. The return
is furnished on 31-7-2020.
6. No tax has been deducted at source on the audit fees of Rs.21,000
Determine the taxable income of Mr. Avinash for the assessment year 2020-21 assuming he, annually deposits
Rs.10,000 in a public provident fund account and his turnover for P/Y 2019-20 was Rs.70,00,000.
Solution :
Computation of Business Income of Mr. Avinash for the Assessment Year 2020-21
Rs. Rs.
Profit and Gains from business or profession
Net profit as per P & L A/c 2,40,900
Add : Outstanding for GST 3,500 2,44,400
Less :
Custom duties recovered back 15,300
Gift from son 40,000
Capital expending on scientific research 5,000
Additional deduction of 50% for scientific research 4,500 (64,800)
Income from business 1,79,600
Less : Deduction u/s 80C (10,000)
Taxable income 1,69,600
4 : State with reason whether the following expenses are admissible a deduction while computing income from
business or profession :
(i) Stock in trade was lost in fire, amounting to Rs.12,000 and was debited to profit and loss Account.
(ii) Amount spent on successful suit filed against a person for infringing trade mark of assessee Rs.10,000
(iii) Interest paid to bank Rs.15,000 in connection with overdraft obtained for paying dividend
(iv) Entertainment expenses of Rs.28,000 incurred during the previous year.
(v) Capital expenditure of Rs.1,00,000 has been incurred towards promotion of family planning amongst
employees of ABC Ltd.
(vi) Rs.20,000 were spent in the previous year in connection with statutory income tax proceedings.
(vii) Rs.3,000 spent in connection with installation of a new telephone connection.
(viii) Traveling expenses of a Director of ABC Ltd. Rs.20,000 incurred on a tour to U.S.A in connection with
the negotiation of purchase of a new machinery.
(ix) Compensation paid to the widow and children of deceased employees of the factory on the order of
labour Court
Solution :
(i) Loss of stock in trade by fire is deduction from profit and gains of business or profession.
(ii) Amount spent on a suit field for infringing the trade mark of Rs.10,000 is fully admissible u/s 37(1)
because it is a commercial expediency for security or registration of trade mark.
(iii) Interest of Rs.15,000 paid to bank for overdraft for payment of dividend is allowed u/s 36(1)
(iv) Entertainment expenditure is covered under section 37(1) hence fully allowed.
(v) Expenditure on promotion of family planning incurred by a company amongst its employees is allowed
u/s 36(1) but if it is of capital nature then 1/5th of the amount spent is allowed in the previous year
in which it is incurred and balance in four equal installments in next four previous years. In this case
Rs.20,000 is allowed in the current previous year and balance in next four previous year (Rs. 20,000
each year)
(vi) Amount spent on income tax is allowed as legal charges. Hence Rs.20,000 is deductible u/s 37(1).
(vii) Rs.3,000 is allowed as deduction which is incurred for installation of a new telephone connection u/s
37(1).
(viii) Traveling expenses of a director are fully allowed u/s 37(1) because the tour was for business purposes.
It may also be treated as part of the cost of new machine, if the assessee so desires.
(ix) Compensation paid to the widow & children of deceased employee as per order of court are fully
allowed u/s 37(1).
Illustration 5 : Mr. Vinod caries on his own business. For the year ending 31-3-2020, his Trading/Profit & loss
account was as follows :
Rs. Rs.
Opening stock 20,000 Sales 2,89,000
Purchases 1,09,000 Closing stock 52,000
Salaries 6,000 Interest on Jay Co. Ltd
Rent 11,000 Debentures 2,000
Bonus 3,000 Dividend from UTI 2,000
Printing & Postage and stationery 4,000 Discount received 12,000
Miscellaneous expenses 4,000 Race winning (Gross) 12,000
Advertisement expense 22,000
Drawings 12,000
LIC Premium 5,000
Car expenses :
Driver’s Salary 6,000
Petrol & repair 12,000
Property tax 4,000
Medical expense of son with
Disability at Apollo hospital 3,000
Cost of NSC (IX series) 3,000
Net Profit 1,45,000 _______
3,69,000 3,69,000
184 PP-DTL&P
Other information :
(a) Advertisement expenses included cost of 20 gift packs of Rs.1100 each presented to esteemed
customers on occasion of Diwali.
(b) Assume : Taxes deducted at source on dividends and debentures are ‘Nil’
(c) The car was used both for business and personal purposes. 2/3rd is for business purposes.
(d) The property tax of Rs. 4,000 was in respect of his self occupied house whose rental value is Rs.18,000.
Compute Gross Total Income and Total Income of Mr. Vinod for assessment year 2020-21 showing the incomes
under various heads.
Solution :
Computation of Total Income of Mr. Vinod for the Assessment year 2020-21
Rs. Rs. Rs.
Net profit as per P & L A/c. 1,45,000
Add : expenses/ Payments not admissible
Drawings. 12,000
LIC premium 5,000
Car expenses
Driver salary (1/3) 2,000
Petrol (1/3) 4,000
Property tax 4,000
Medical expenses 3,000
Cost of NSC 3,000 33,000
1,78,000
Less : Incomes which are not taxable under this head
Interest on debentures (2,000)
Dividend from U.T.I (2,000)
Horse race income (12,000) (16,000)
Income from business 1,62,000
Income from other sources
Interest 2,000
Dividend from U.T.I. Exempt
Horse race income 12,000 14,000
Gross total income 1,76,000
Less : Deduction under Chapter VIA
U/s 80C (LIC : Rs.5,000 + NSC : Rs.3,000) (8,000)
U/s 80DD (75,000) (83,000)

Taxable Income 93,000
6 : X furnishes the following particulars for the previous year relevant to A/Y 2020-21.
Profit and Loss A/c for the year ending 31-3-2019
Rs. Rs.
To salary to staff 22,000 By gross profit 2,50,000
To entertainment expenses 13,000
To general expenses 11,000
To bad debts 4,500
To reserve for bad debts 10,000
To advertising expenses 7,000
To interest on X capital A/c 3,000
To acquisition of patent’s rights 28,000
To telephone expenses 12,000
To depreciation 10,000
To provision or Income Tax 4,000
To Net Profit 1,25,500 _______
2,50,000 2,50,000
Other information :
1. Salary to staff includes salary paid to a relative which is unreasonable to the extent of Rs.3,100.
2. Provision for income tax is excessive to the extent of Rs.3,000
3. Depreciation according to the income tax provision comes to Rs.9,500
4. During the previous year 2019-20 the following payment were made and the same have not been
debited to profit and loss account of 2019-20.
a. Rs.3,000 paid on 10-6-2019 on account of outstanding customs duty of the previous year 18-19,
and
b. Rs.5,000 paid on 15-6-2020 on account of outstanding GST of the previous year 2019-20
5. Patents were acquired on 4-11-2019
Find out the taxable income of X for the A/Y 2020-21. Due date of filling return of income of assessment year
2019-20 and 2020-21 is 31st July of the relevant A/Y.
Solution :
Computation of Taxable Income of X for the Assessment year 2020-21
Rs. Rs.
186 PP-DTL&P
Add : Expenses / payments not admissible

Salary to a relative 3,100
Depreciation (in excess of Income tax provision ) 500
Provision for Income tax (full amount) 4,000
Interest on X capital A/c 3,000
Reserve for bad debts 10,000
Expenditure on acquisition of patent rights 28,000 48,600
1,74,100
Less : GST for assessment year 2019-20 5,000
Depreciation on patent rights 12 ½ % of Rs. 28,000 3,500 (8,500)
Income from business / Gross total income 1,65,600
7 : Shri Mihir furnished the following information relevant for the assessment year 2019-20 :
Profits & loss A/c for the year ending 31-3-2019
Household expenses 11,200 Gross profit 2,69,000
Bad debts 600 Commission 5,000
Provision for bad debts 4,800 Sundry receipts 8,000
Fire Insurance 1,000 Bad debts recovered (earlier
Salary to staff 8,000 allowed as deduction) 2,000
Salary to Mihir 3,000 Interest on Govt. securities 17,000
Contribution to
Unrecognised provident fund 32,000
Interest on overdraft 6,000
Interest on capital 13,000
Interest on loan given by
Mihir’s brother 1,000
Depreciation on building and furniture 13,600
Advertisement
Revenue expenses 3,800
Capital expenses on Neon sign board 1,000
General expenses 4,700
Net profit 1,97,300
3,01,000 3,01,000
Other information :
1. General expenses include personal expense of Rs.1,700
2. Income of Rs.3,000, accrued during previous year ending 31-3-2020 is not recorded in the profit and
loss A/c
3. Mihir contributes Rs.14,000 towards public provident fund
4. Depreciation on building and furniture comes to Rs.3,000 according to the tax provision. Determine the
taxable income of Shri Mihir for the assessment year 2020-21.
Solution :
Computation of Taxable Income of Shri Mihir for A/Y 2020-21
Rs. Rs.
Add : Expenses / payments not admissible
General Expenses 1,700
Depreciation (in excess of tax provision i.e.
Rs.13,600 – Rs.3,000) 10,600
House hold expenses 11,200
Provision from bad debts 4,800
Salary to Mihir 3,000
Contribution towards URPF 32,000
Capital expenditure on Neon sign board 1,000
Interest on capital 13,000 77,300
2,74,600
Add : Income not recorded in P & L A/c 3,000
2,77,600
Less : Interest on government securities (17,000)
Less : Depr on Neon sign board @ 10% (100)
Business income 2,60,500
Income from other sources :
interest on government Securities 17,000
Less : Deduction under section 80C (PPF) (14,000)
Taxable Income 2,63,500
8 : G (Age : 68 years) a Resident individual, furnishes following particulars relevant for the A/Y 2020-21 :
188 PP-DTL&P
PROFIT AND LOSS ACCOUNT

for the year ending 31st March, 2020
Salary to staff 34,000 Gross profit 6,86,000
General expenses 48,000 Commission and discount 2,17,200
Bad debts written off 15,000 Sundry receipts 43,000
Reserve for losses 2,000 Short term profit on sale of Investment 31,000
Fire insurance premium (office premises) 4,200
advertisement 2,400
Add : outstanding 1,600 4,000
interest on G’s Capital 3,500
Interest on Bank Loan 14,500
Expenditure on acquisition of a Patent
right acquire and put to use on June 30,
2019 17,000
Lump sum Consideration for acquiring
Know how on March 3, 2020 60,000
Depreciation on plant and machinery 28,000
Provision for outstanding GST 13,000
Net profit 7,34,000 ________
9,77,200 9,77,200
Other information :
1. Advertisement expenditure includes Rs.3,400 being cost of 2 diaries (cost of each being Rs.1,700)
presented to customers.
2. Depreciation on plant and machinery according to income tax provision comes to Rs.29,700.
3. Salary to staff includes payment of Rs. 8,000 to a relative which is unreasonable to the extent of
Rs.3,000.
4. General expenses include (a) expenditure of Rs.4,800 incurred by G on training of his employees (b)
Commission of Rs.10,000 for securing a business order, and (c) compensation of Rs.6,000 paid to an
employee while terminating his service in the business interest.
5. Out of outstanding GST, Rs.3,000 is paid July 31, 2020 and Rs.8,000 is paid on October 3, 2020. The
balance is not paid as yet. Due date of filling return of income is July 31, 2020.
6. Income of G from company deposit is Rs.12,000, which is not shown in the profit and loss account.
Determine the taxable income and tax liability of G for the assessment year 2020-21, assuming that insurance
premium paid by G on the life insurance policy of Mrs. G is Rs.3,200.
Solution :
Particulars Rs. Rs.
Profit as per profit and loss account 7,34,000
Add : Inadmissible expenditure
Salary to staff (salary paid to a relative to the extent is treated as excess

or unreasonable) 3,000
Reserve for losses 2,000
Interest on capital 3,500
Depreciation on Patent Right (amount deductible is 25%
of Rs.17,000, i.e., Rs.4,250; therefore amount inadmissible
is Rs.17,000 – Rs.4,250) 12,750
Depreciation on know-how (50% of 25% of Rs.60,000,
as it is put to use for les than 180 days, is deductible which
comes to Rs.7,500 ; amount not deductible is Rs.52,500) 52,500
Outstanding GST {Rs.3,000 paid on or before July 31, 2020 is deductible.
The balance is not deductible for the previous year ending
March 31, 2020} 10,000 83,750
8,17,750
Less : Provisions for depreciation on plant and machinery (1,700)
(ie., Rs.29,700 – Rs.28,000) 8,16,050
Less : Short term capital gain on sale of investment (31,000)
Computation of Net Income :
Profits and Gains of Business and Profession 7,85,050
Capital gains 31,000
Income from other sources 12,000
Less : Deduction under section 80C (Payment of insurance premium) (3,200)
Net income 8,24,850
Tax on Net Income 74,970
Add : Health & Education Cess (4% of tax ) 2,999
Tax liability (rounded off) 77,970
9 : R (age : 26 years), a resident individual furnishes the following :
Profit and Loss Account for the year ending March 31, 2020
Office expenses 11,000 Gross profit 8,78,000
Security deposit for Telephone 8,000 Sundry receipts 8,000
Salary to staff 42,000
Depreciation 28,000
Traveling expenses 43,000
190 PP-DTL&P
Los of cash by an employee through

embezzlement 5,000
Amount transferred to Special reserve account 7,500
Expenditure on Diwali 7,100
Interest and legal expenses 44,000
Sundry expenses 8,500
Net profit 6,81,900
8,86,000 8,86,000
Other information :
1. Salary to staff includes payment of Rs.12,000 out of India on which tax has not been deducted at
sources nor paid to the Government.
2. Depreciation value of plant and machinery on April 1, 2019 is Rs.1,10,000 (rate of depreciation : 15%)
a. A plant whose WDV on April 1, 2019 is Rs.17,440 is sold during previous year for Rs.11,000.
b. A machinery (cost price Rs.20,000) whose written down value on April 1, 2019 is Rs.2,350 is sold
during the previous year for Rs.15,000.
c. During the year, R purchase a new plant for office Rs.1,22,670 which is eligible for depreciation at
the rate of 15%. The plant is installed and put to use on May 15, 2019.
3. Traveling expenses includes Rs.10,000 being hotel expenditure of an employee in respect of an official
visit to Mumbai for 5 days.
4. Expenditure on the occasion of Diwali includes a gift of Rs.2,000 to Mrs. R.
5. Interest includes a payment of Rs.3,000 out of India on Which tax has not been deducted.
6. Sundry expenses includes expenditure of Rs.1,000 on maintenance of guest house in Delhi for the
purpose of carrying on the business and Rs.4,000 being employer’s contribution towards EPF out of
which Rs.600 is paid after the due date of submission of return of income.
7. Legal expenses includes the following payments :
a. Payments of Rs.4,000 to B, an Employee of R, for filing income tax appeal.
b. Payment of Rs.5,000 to C, not being an employee of R, for preparation of return of income.
c. Payment of Rs.11,000 to D, an advance who is not an employee of R, for filing income tax appeals
and giving tax advice.
d. Payment of Rs.2,000 to E, a Chartered accountant who is not an employee of R for obtaining tax
advice.
Determine the taxable income of R for A/Y 2020-21 assuming that sundry receipts includes Rs.5,000, being
amount of endowment insurance policy received from the Life Insurance Corporation of India at the time of
maturity of the policy (i.e., December 5, 2019) {Amount of Insurance premium last paid on June 5, 2019 :
Rs.400}
Solution :
Rs. Rs.
Net profit as per profit and loss account 6,81,900
Add : Inadmissible expenses
Salary paid outside India {not deductible as tax has not been deducted
at sources} 12,000
Depreciation (taken separately) 28,000
Traveling expenses {fully deductible under section37(1)} --
Gift to Mrs. R on the occasion of Diwali 2,000
Payment of interest out of India {not deductible as
tax is not deducted at sources } 3,000
Expenditure on maintenance of guest house
{deductible under section {37(1)} --
Employer’s contribution towards EPF which is paid
after due date of submission of return income 600
Legal expenses in respect of income tax matters
{such expenses are fully deductible} --
Amount transferred to special reserve account 7,500 53,100
7,35,000
Less : Depreciation (31,000)
7,04,000
Less : Amount credited but not taxable (amount of insurance policy) 5,000
Income under the head “Profits and gains of business or profession” 6,99,000
Income from other sources Nil
Less : Deduction under section 80C {Payment of Insurance premium} 400
Net income 6,98,600
Tax on Net income 52,220.00
Add : Health & Education cess (4% of tax ) 2088.80
Tax liability (rounded off) 54,310.00
LESSON ROUND UP
– Sections 28 to 44D contain the provisions for computation of Income from Business and Profession.
– Section 28 defines the scope of income which can be taxed under this head.
– Sections 29 to 44D specify the method of computation of income under the business or profession.
– Expenses/allowances expressly allowed by the Act are listed under sections 29 to 37, whereas sections
40, 40A and 43B enumerate those expenses which are expressly disallowed while computing taxable
income under this head.
– Section 44AA provides for maintenance of accounts by the assessee carrying on business or
profession.
192 PP-DTL&P
– Mandatory tax audit of accounts of the persons carrying on business or profession is prescribed in
section 44AB.
– Computation of profit from business and profession on presumptive basis are covered under sections
44AD and 44AD.
SELF TEST QUESTION

1. What is the importance of method of accounting while computing business or profession income.
2. What is the percentage of additional depreciation and what are the conditions for the allowability of the
same.
3. If a businessman is not maintaining any books of accounts for his business, can he still compute his
business income.
4. What expenses are allowed as deduction from Business or Profession on actual payment basis.
5. Who is required to maintain books of accounts u/s 44AA and what are the limits for getting them Audited
u/s 44AB.
6. Which taxes are allowed as deduction from Business or Profession Income.
7. Whether expenditure incurred on Corporate Social Responsibility allowed as deduction from Business
or Profession income’.
8. Whether expenditure on contribution to a Political Party allowed as deduction from Business or
Profession income.
9. Mr. X has started a business on 15/4/2019. He has incurred expenditure before setting up the business.
Are there expenditure allowed as deduction and if yes what are the limits and conditions.
10. What are the cases where capital expenditure is fully allowed as deduction from Business or Profession
income.
PRACTICAL QUESTIONS
Question 1 : Y (age : 34years) is a businessman in Delhi. Determine his net income and tax liability on the
basis of the following profit and loss account for the year ending 31, 2020.
Opening stock 1,04,000 Sales 92,51,000
Purchases 80,08,750 Closing stock 2,10,000
Salaries and wages 1,75,000
Rent and rates 1,31,000
Commission 21,500
Household expenses 20,000
Income tax for 2019-20 36,100
Advertisement 5,000
Postage and telegram 4,000
Interest on own capital 84,000

Reserve for bad debts 3,400
Depreciation on furniture 18,000
Net profit 8,50,250
Total 94,61,000 Total 94,61,000
Other particulars :
1. Closing stock and opening stock has consistently been valuated at 10 % below cost price.
2. Depreciation on furniture as per tax provisions is Rs.17,200.
3. Amount of sales includes a sum of Rs.41,250 representing the value of goods withdrawn for the use of
Y’s family members. These goods were purchased at cost of Rs.27,850. Market value of these goods
is Rs.45,240.
4. Household expenses include a contribution of Rs.1,000 towards public provident fund.
5. On September 20, 2019, Y has received a gift of Rs.96,000 from a friend settled in UK.
Question 2 : From the profit and Loss Account of Y (age : 35 years) for the year ending March 31, 2020,
ascertain his total income and tax liability for A/Y 2020-21 :
General expenses 13,400 Gross profits 3,15,500
Bad debts 22,000 Commission 8,600
Advance tax 8,000 Brokerage 37,000
Insurance 600 Sundry receipt 2,500
Salary to staff 26,000 Bad debt recovered
Salary to Y 45,000 (earlier allowed as deduction) 11,000
Interest on overdraft 4,000 Interest on debentures (i.e. net
Interest on loan to Mrs. Y 42,000 amount Rs.22,500 + tax deducted
Interest on capital of Y 23,000 at source : Rs.2,500) 25,000
Depreciation 48,000 Interest on deposit with 13,000
Advertisement expenditure 7,000 company (Net interest : Rs.11,700
Contribution to employee’s + TDS : Rs.1,300)
recognized provident fund 13,000
Net Profit 1,60,600
Total 4,12,600 Total 4,12,600
Other Information :
1. The amount of depreciation allowable Rs.37,300 as per the Income-tax Rule. It includes depreciation
on permanent sign board.
2. Advertisement expenditure includes Rs.3,000, being cost of permanent sign board fixed on office
premises.
194 PP-DTL&P
3. Income of Rs.4,500, accrued during the p/y is not recorded in the Profit and Loss Account.
4. Y pays Rs.6,000 as premium on own life insurance policy of Rs.70,000
5. General expenses include (a) Rs.500 given to Mrs. Y for arranging a party in honour of a friend who
has recently come from Canada (b) Rs.1,000 being contribution to a political party.
6. Loan was taken from Mrs. Y for payment of arrears of income-tax.
7. Interest on debentures is paid to Y on December 31, 2019.
Question 3 : Find out the Gross Total Income of Shri Sunder Kumar on the basis of following particulars -
PROFIT & LOSS ACCOUNT
for the year ended 31st March, 2020
Interest 1,800 Gross profit b/d 1,22,700
Repairs and Renewals 2,200 Interest on debenture of an
Insurance 4,200 Institution (gross) 10,000
Depreciation 5,600 Rent from house property 36,000
Compensation 10,200
Law charges 5,100
Labour Welfare expenses 3,800
Subscription 5,800
Net profit 1,30,000 _______
Total 1,68,700 Total 1,68,700
Interest includes Rs.200 on loan for purchasing debentures of a company and Rs.300 on loan taken for
reconstruction of house property let out.
(i) The expenses relating to house property let out are 40% of the repairs and renewal expenses.
(ii) Depreciation includes Rs.1,200 on house property let out.
(iii) Compensation was paid to an employee whose dismissal was in business interest.
(iv) Insurance includes 30% for fire insurance of the house property let out 30% for workers accident
insurance and the balance for life insurance.
(v) Law charges includes Rs.2,000 relating to a petition filed against breach of contract and the balance
regarding sales tax appeal.
(vi) Subscription includes Rs.2,000 given for election purpose to political parties.
The amount not debited to profit and loss account are as follows
(vii) Expenses incurred on the occasion of Diwali Rs.500
(viii) Theft of cash from iron safe Rs.1,500
(ix) Expense for new telephone connection in the business Rs.2,000
Question 4 : XYZ Ltd., an Indian company, furnishes following particulars for assessment year 2020-21 :
Profit and Loss account for the year ending March 31, 2020

Salary to staff 2,40,000 Gross profit 15,58,000
Expenses on issue of shares for setting Rent of flats given to 12,000
up an industrial undertaking (cost of officers
18,000
project : Rs.10 lakh)
Expenditure on promotion of family Sundry receipts 5,000
planning among employees
3,000
Custom duty 2,000 Interest on bank deposits 17,000
Contribution to a National Laboratory Capital gains on sale of
for carrying out approved scientific short-term investment
1,06,000 3,000
research
Gratuity fund 5,000
Reserve for future losses 20,000
Bad debts written off 3,000
Reserve for payment of advance
income-tax
13,000
Car expenses 9,000
Depreciation :
Ø Machinery 18,000
Ø Car 3,000
Ø Furniture 5,000
Ø Building 3,000
Office expense 7,500
Rent and repairs of building 3,000
Municipal taxes and ground rent of flats
given to officers
7,000
Sundry expenses 11,000
Stationery expenses 5,000
Income-tax 500
Dividend tax 11,200
Net profit 11,01,800
Total 15,95,000 Total 15,95,000
Other information :
1. Expenditure on family planning includes capital expenditure of Rs.2,500.
196 PP-DTL&P
2. Car is utilized partly for private purpose by a director. In the past years, one-fourth of this expenditure
was disallowed.
3. Sundry expenses include Rs.9,000 being payment of printing bill to relative of the managing director
;payment is unreasonable to the extent of Rs.4,700.
4. Salary includes payment of Rs.21,000 in cash to an employee. It also includes “mediclaim” insurance
premium for the benefit of employees of Rs.15,000 out of which Rs.6,000 is paid in cash.
5. Though amount of depreciation on building, car and furniture is calculated as per tax provisions,
depreciation in respect of machinery is excessive to the extent of Rs.2,000.
6. Rs.1,06,000 being payment to National Laboratory is qualified for weighted deduction u/s 35(2AA).
7. The company has deposited Rs.2,40,000 with Maruti Udyog Ltd. on March 1, 2020 for purchasing
Maruti 800 car. The car is likely to be delivered by June 2020. The said amount is not debited to Profit
and Loss Account.
8. During the previous year 2019-20, the company pays Rs.15,00,000 as compensation to employees
on voluntary retirement under the voluntary retirement scheme of the company. The amount is not
debited to the P&L A/c.
9. The company deposits Rs.10,000 in National Housing Bank.
10. On March 16, 2020 the company gets a refund of sales tax of Rs.3,000 (it was allowed as deduction
for the previous year 2016-17). The amount is not credited to the profit and loss account, as the
commissioner’s appeal against the refund is still pending in the Delhi High Court.
Determine the taxable income of the assessee-company for the assessment year 2020-21. Assume tax rate
30%
Question 5 : Mr. Inder Kumar Sharma furnishes the following manufacturing profit and loss account for the
previous year ending 31-3-2020 :
Particulars Amount Rs. Particulars Amount Rs.

To Stock 11,000 By Sales 2,84,500
To Purchases 80,000 By Stocks 26,400
To manufacturing wages 65,900
To Factory Rent Rates and 30,000
Taxes
To Depreciation 15,000
To Gross profit 1,09,000
Total 3,10,900 Total 3,10,900
Profit and Loss Account

Rs.
Rs.
To Office Salaries 27,000 By Gross profit B/D 1,09,000
To Establishment Expenses 6,100 By Rent of staff quarters 19,000

To Interest on Capital 3,300 By Refund of income-tax 2,000

penalty
To Fire Insurance 200 By sale of a machinery 25,000
To Bad debts 7,000 By Recovery of Bad debts,

not allowed as deduction
6,000
earlier
To Income tax 6,000 By Sundry Receipts 35,000
To Expense on GST proceedings 2,000
To Expenses of income-tax 13,000

proceedings
To Diwali Expenses 4,000
To Legal Expenses 7,000
To Medical Expenses of proprietor 3,000
To Staff Welfare Expenses 2,000
To Repair of Staff quarters 4,000
To Security Deposit for telex connection 10,000
To Bonus payable to Employees 20,000
To Provision for GST 25,000
To Municipal taxes for staff quarters 4,000
To General Reserve 26,00
To Entertainment expenses 16,000
To Net profit 10,400
Total 1,96,000 Total 1,96,000
You are required to compute the taxable profits from business after taking the following into consideration :
(i) Purchase include a petty purchase of Rs.21,000. Its payment was made by a crossed cheque.
(ii) Assessee has always valued the stock at cost price but since 2018-19 he has valued it at market price
which was in excess of the cost price by 10%.
(iii) Office salaries paid include Rs.10,400 to the proprietor of the business
(iv) Diwali expense include gifts of Rs.1,000 made to the relatives.
(v) The written down value (WDV) of the block consisting of machinery as on 1-4-2019 is Rs.59,000.
Machinery whose WDV as on 1-4-2019, was Rs.5,000 was sold for Rs.25,000 during the year.
(vi) The written down value (WDV) of the block consisting of factory buildings as on 1-4-2019 is Rs.90,000.
(vii) GST amounting to only Rs.20,000 were paid on or before 31-7-2020.
Answers :
1. Rs. 10,87,930 Tax Liability 1,44,430
198 PP-DTL&P
2. Nil, Tax Refundable Rs. 11,800

3. Rs. 1,22,220
4. Rs. 2,65,080
5. Rs. 71600
SUGGESTED READINGS
Kluwer]
Lesson 5 n Computation of Income under the Head of Capital Gains 199
Lesson 5
Computation of Income under the
Head of Capital Gains
LESSON OUTLINE
LEARNING OBJECTIVES
– Chargeability of Income under Capital Gains The provisions for computation of Income from
[Section 45(1)] Capital Gains are applicable for incomes from
– Definition of Capital Asset [Section 2(14)] transfer of Capital Asset.
– Definition of Transfer [Section 2(47)] At the end of this lesson, students will be able to
understand:
– Types of Capital Gains
– What are Capital Asset u/s 2(14)
– Computation of Capital Gains
– What transactions are treated as transfer
– Cost of Acquisition [Section 55(2)] u/s 2(47)
– Cost of Improvement [Section 55(1)] – Calculate Capital gains
– Computation of Capital Gains in Certain – Know what transaction are not treated as
Cases transfers
– Special cases of computation of capital – Exemptions available
gains e.g. Slump Sale, Destruction, and
– Compute tax on capital gains
Compulsory Acquisition etc.
– Distribution of Assets by Company to tis
shareholders in Liquidation [Section 46(1)]
– Capital Gains on Purchase by Company
of its own shares/specified securities
(Buyback) [Section 46A]
– Certain transfers not treated as transfer
[Section 47]
– Special cases of computation of full value of
consideration [Section 50C / Section 50CA /
Section 50D]
– Reference to Valuation Officer [Section 55A]
– Tax rates of Capital Gains
– Exemptions from Capital Gains
– LESSON ROUNDUP
– SELF TEST QUESTION
199
200 PP-DTL&P
Section 45(1) Basis of charge

Section 45(IA) Destruction of Capital Asset
Section 45(2) Conversion of Capital Asset into Stock in Trade
Section 45(2A) Transfer of Demat Securities
Section 45(3) Transfer of capital asset by Partner to Firm
Section 45(4) Transfer of capital asset by Firm to Partner
Section 45(5) Compulsory Acquisition of Capital Asset
Section 45(5A) Joint development Agreement
Section 46(1)(2) Liquidation of Company
Section 46A Buy back of own shares
Section 47 Transactions not regarded as transfers
Section 50B Slump sale
Section 50C FVC for Real estate transaction
Section 50CA FVC of unlisted shares
Section 50D FVC not ascertainable
Section 54 Exemptions from capital gains
Section 55 Cost of acquisition and cost of improvement
Section 55A Reference to valuation officer
Other Sections
Section 2(14) Capital asset
Section 2(47) Transfer
Section 10(37) Capital gain exempt on compulsory acquisition of Urban agricultural land
Section 10(37A) Capital gain arising under land pooling scheme of Andhra Pradesh
Section 111A STCG @ 15% on shares, units
Section 112 Tax rates of LTCG
Section 112A Tax on long term capital gains in certain cases.
CHARGING SECTION [SECTION 45(1)]

• Any Profit or Gains arising from
• TRANSFER
• Of a CAPITAL ASSET
• Effected in a Previous year
• Shall be chargeable to Income Tax
• Under the Head Capital Gains

• In the Previous Year in which transfer took place
CAPITAL ASSET [SECTION 2(14)]

Capital Asset means:
(a) Property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible held by
assessee, whether or not connected with his business or profession.
(b) Any securities held by Foreign Institutional Investor (FII) which has invested in such securities as per
SEBI regulations (applicable with effect from the assessment year 2015-2016) but does not include:
1. Any stock-in-trade [other than securities referred to in sub-clause (b)]
2. Personal Effects
§ Movable property (including wearing apparel & furniture)
§ for personal use of
§ assessee or for dependent family member.
Personal effects excludes the following
a. Jewellery
b. Archaeological collections
c. Drawings
d. Paintings
e. Sculptures
f. Any work of art
Special Point

Jewellery Includes
Ornaments of Gold, Silver, Platinum or Precious or Semi-precious stones
Other precious Metal
Whether or not set in any furniture, utensil
Whether or not containing precious or semi- or other article and whether or not worked
precious stones & whether or not worked or or sewn into weaning apparel
sewn into wearing apparel
Note: (a) Gold & silver coins and bars used for puja of deities as a matter of pride or for ornament

purpose are not intended for personal or household use, will not be treated as personal effects
and therefore are capital effects. [Maharaja Rana Hemant Singhji v. CIT [1976] 103 ITR 61 (SC)]
(b) A property intended for personal or household use (may be for ceremonial occasions only), is
always a “personal effects”. For instance, clothes meant for use at weddings or formal occasions
are not used daily. Yet, they are stiched for personal use of the wearer. As such, they would form
a part of his personal effects – CIT v. H.H. Maharani Usha Devi [1998] 98 Taxman 309 (SC)
3. Agricultural Land in India situated in RURAL AREA
Following types of Agricultural Lands are Capital Assets

a) Agricultural Land situated in Urban area of India
202 PP-DTL&P
b) Agricultural land situated outside India

Urban Area [section 2(1A)]
(a) Any area within the Jurisdiction of a municipality /Municipal corporation/cantonment board
and which has a population of atleast 10,000 OR
(b) Any area within the distance, measured aerially,
(I) Upto 2 kms from local limits of above jurisdiction having population > 10,000 but
upto 1,00,000 or
(II) Upto 6 kms from local limits of above jurisdiction having population > 1,00,000 but
upto 10,00,000 or
(III) Upto 8 kms, from the local limits of above jurisdiction having population of >
10,00,000.
Special point: “Population” means the population according to the last preceding census of which

the relevant figures have been published before the first day of the previous year.
Note: If agricultural land is situated in a village which comes within a municipality, then population

of the municipality shall be considered and not of the village. . In such a case if population of
the municipality exceeds 10,000, then agricultural land is capital asset, even if population of the
village is less than 10,000 – [G.M.Omer Khan v. CIT [1992] 63 taxmann 533] (SC)
4. Gold Deposit Bonds issued under gold deposit scheme,1999 /Gold deposit certificates issued
under Gold Monetisation scheme,2015
TRANSFER [SECTION 2(47)]

(a) Sale*, Exchange** or Relinquishment*** of Capital Asset.
(b) Extinguishment of any right in a Capital Asset.
(c) Compulsory Acquisition of Capital Asset under Any law.
(d) Conversion of Capital Asset into Stock in trade of Business.
(e) Any transaction in which possession of Immovable Property is taken u/s 53A of Transfer of Property
Act.
(f) Any transaction (whether by way of becoming a member of, or acquiring shares in a Cooperative
Society, Company or AOP), which has effect of transferring or enabling enjoyment of Immovable
Property.
(g) Maturity or Redemption of a zero coupon bond.
Note: Forfeiture of share application money because of failure by an assessee to pay balance amount on
allotment of shares is a transfer. [CIT v BPL Sanyo Finance Ltd [2009] 312 ITR 63 (kar)]
* Following are the essentials for sales:-
a) Must have mutual agreement
b) Parties must be competent
c) Money consideration
d) Absolute or general property transfer from seller to buyer
**An exchange means the transfer of property by one person to another and reciprocally the transfer of property
by that other person to the first person. There must be a mutual transfer of ownership of the one thing for the
ownership of another – CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198 (SC)
***A relinquisgment arises when owner withdraws himself from the property and abandons his rights thereto. It
presumes that the property continues to exist after the relinquishment – CIT v. Rasiklal Maneklal (HUF) [1989]
177 ITR 198 (SC)
TYPES OF CAPITAL GAINS

There are two types of Capital Gains:
1. Short Term Capital Gain (STCG) : It arises on transfer of Short Term Capital Assets(<36 months)*
2. Long Term Capital Gain (LTCG) : It arises on transfer of Long Term Capital Assets(>36 months)**
*Short terms capital assets means a capital asset held by an assessee for not more than 36 months, immediately
prior to its date of transfer.
**Exceptions – Usually, holding period should be more than 36 months to become long-term capital asset.
However, in some cases it is 12 /24 months which (see the below table).
CAPITAL ASSETS
• Listed Security* (other than Unlisted shares / Immovable Other Capital Asset**
unit of MF) on recognised property
stock exchange in India
• Unit of UTI or Equity
oriented mutual fund (listed
or unlisted
• Zero Coupon Bonds (listed
or unlisted)
Held for a Held for period Held for a Held for a Held for a Held for a
period Upto more than period Upto period more period Upto period more
12 months 12 months 24 months than 24 months 36 months than 36 months
preceding preceding date preceding preceding date preceding preceding
date of of transfer date of of transfer date of date of transfer
transfer transfer transfer
Short Term Long term Short Term Long term Short Term Long Term
Capital Asset Capital Asset Capital Capital Asset Capital Capital Asset
Asset Asset
*Listed Securities – Debentures, bonds, government securities, derivatives, etc.

**Other Capital asset – Units of debt oriented mutual fund (listed or unlisted)
204 PP-DTL&P
COMPUTATION OF CAPITAL GAINS [SECTION 48]
Long Term Capital Gain Short Term Capital Gain
Sales Consideration XXX Sales Consideration XXX

(Full Value Consideration)* (Full Value Consideration)*
Less :- Incidental cost XXX Less :- Incidental cost XXX
Net Sales Consideration XXX Net Sales Consideration XXX
Less :- Indexed Cost of Acquisition XXX Less :- Cost of Acquisition XXX
Less :- Indexed Cost of Improvement XXX Less :- Cost of Improvement XXX
Long Term Capital gain XXX Short Term Capital gain XXX
Less :- Exception u/s 54 to 54H XXX Less :- Exception u/s 54B, 54D, 54G, 54GA XXX
Taxable Long Term Capital Gain XXX Taxable Short Term Capital Gain XXX
*Following points should be considered while taking Full Value of Consideration (FVC) :-
1) FVC is the consideration (may be in cash or in kind) received or receivable by the transferor in lieu of
the assets which has been transferred. If it is received in kind, then the fair market value of such assets
is taken as FVC.
2) FVC does not mean market value of that asset which is transferred.
3) For the purpose of determining the FVC, adequacy or inadequacy of consideration is not a relevant
factor.
4) Where consideration for the transfer of capital asset(s) is not determinable, then for computing capital
gains under section 45 , the fair market value of the asset shall be taken as the full market value of
consideration [section 50D].
5) Where by acquiring a portion of a larger plot, the value of unacquired portion is injuriously affected,
compensation received for such unacquired portion will also form the part of FVC – CIT v. P. Mahalakshmi
[1982] 134 ITR 428 (Kar.).
6) Where a mill belonging to the assessee-company is transferred in a public auction and the payment has
been made in installments along with interest by the purchaser of the mill, the amount of interest will
also form the part sale consideration and thus, the same will be treated as capital gain under section 45
and not as income from other sources – Cauvery Spg. & Wvg. Mills Ltd. v. CIT[2011] 200 Taxman 22
(Mad.)(Mag.)
NOTE :- Long Term Capital Assets on which Indexation is not available :-
a) Equity or Preference shares which are listed in a recognised stock exchange in India (listing of shares
is not mandatory if transfer of such shares took place on or before July 10, 2014),
b) Units of Equity oriented Mutual Funds,
c) Listed securities like Debentures and Government securities,
d) Units of UTI and
e) Zero Coupon Bonds
Indexed Cost of Acquisition

Cost inflation index
Cost of Acquisition of (of financial year in which asset transferred)
Capital Asset X ------------------------------------------------------------------------------------
Cost inflation index
(of the 1st financial year in which asset held by Assessee) or (of
financial year 2001-02),whichever is later
Indexed Cost of Improvement
Cost inflation index (of financial year in which asset
Cost of Improvement transferred)
X -------------------------------------------------------------------------------
Cost inflation index (of financial years in which improvement
has taken place by Assessee or/and Previous Owner
COST INFLATION INDEX
Financial Year Cost Inflation Index Financial Year Cost Inflation Index
2001-02 100 2011-12 184
2002-03 105 2012-13 200
2003-04 109 2013-14 220
2004-05 113 2014-15 240
2005-06 117 2015-16 254
2006-07 122 2016-17 264
2007-08 129 2017-18 272
2008-09 137 2018-19 280
2009-10 148 2019-20 289
2010-11 167
Special Points:
ü In case of Long Term Capital Assets, Indexed cost of Acquisition and Indexed cost of Improvement
should be taken.
ü However, where Long Term Capital Asset consists of Bonds (other than capital indexed bonds of
Government & gold sovereign bonds) & Debentures, No indexation is to be done
COST OF ACQUISITION [SECTION 55(2)]

Meaning – Cost of acquisition of any asset is the value for which the asset is actually acquired by the assessee.
Expenses of capital nature for acquiring the title to the property are includible in the cost of acquisition.
206 PP-DTL&P
Types of Capital Asset Cost of Acquisition Section 2(42A) : Period of

holding
A 1) Goodwill of business** NIL Date of Purchase/Self development
2) Trademark, Brand name of [If Self generated]* To
business
Or Date of Transfer
3) Tenancy Rights
Purchase price
4) Stage Carriage permits
(route permit) [If acquired by purchase]
5) Loom Hours
6) Right to manufacture FMV on 1.4.2001 is not
produce or process any available when such
article or thing assets are purchased upto
1.4.2001***
7) Right to carry any Business
or profession
B Shares purchased from company Amount actually paid to Date of Allotment by Company To
company Date of Transfer
Shares purchased from Broker/ Amount actually paid to Date of broker note To Date of
Market broker including brokerage Transfer
Shares purchased from other person Amount actually paid Date of Contract of purchase To
Date of Transfer
Right Shares subscribed by original Amount Actually paid to Date of Allotment by Company To
shareholder company Date of Transfer
Offer of right shares not subscribed Nil Date of offer To Date of

but renounced Renouncement
Person purchasing renounced offer Amount paid to Seller of Date of allotment of right shares To
right and Company Date of Transfer
Bonus Shares/Other Asset allotted Nil

free of cost
[FMV on 1.4.2001 Date of allotment of bonus shares
available if such assets To Date of transfer
acquired on or before
31.3.2001
C Other Capital Assets Cost of Acquisition Date of Acquisition
FMV on 1.4.2001 available To
if such assets acquired
Date of Transfer
on or before 31.3.2001
*Self-generated asset – An asset which does not cost anything in terms of money to the assessee
**When goodwill, right to manufacture, etc. are purchased – If goodwill of a business (right to manufacture,
produce or process any article/thing or right to carry on any business or profession) is purchased and later on
transferred, the purchase price will be taken as cost of acquisition and its cost of improvement will be taken as
nil.
***Options not available – Even when the aforesaid assets were actually acquired before April 1, 2001, the
option of adopting the fair market value on the said date is not available.
NOTE – a) The Brand name associated with a business is taken in expression “goodwill” – Vysali
Chemotherapeutics (P.) Ltd. v. CIT[2004] 134 Taxman 445 (Ker.).
b) When transfer of a Self-Generated asset is not chargeable to Tax – Transfer of self-generated goodwill like
self-generated goodwill of a profession, a new formula patented by the inventor to grow seedless oranges is
not chargeable to tax. The rule is based upon the Supreme Court’s ruling in CIT v. B.C. Srinivasa Setty [1981]
5 Taxman 1, wherein it was said that the income chargeable to capital gain tax is to be computed by deducting
“the cost of acquisition of the capital asset and the cost of any improvement thereto” from the full value of the
consideration. And if it is not possible to ascertain cost of acquisition and / or cost of improvement, the transfer
of that asset is not chargeable to tax under the act.
COST OF IMPROVEMENT [SECTION 55(1)]

Meaning – It is the capital expenditure incurred by the assessee in making any improvement/additions to the
capital asset. It also includes any expenditure incurred to protect or complete the title to the capital asset.
A Capital Assets Cost of improvement

- Goodwill of Business NIL
- Right to manufacture, produce or process (Whether capital asset is Self generated or purchased)
any article or thing
- Right to carry on any business or
profession
B Other Capital Assets • All Capital Expenditure incurred by assessee
• on improvement of Capital Asset
• On or after 1.4.2001 (NOTE)
NOTE : Any cost of improvement incurred before April 1, 2001 is not taken into consideration for calculating
capital gain chargeable to tax (with no exceptions)
Illustration 1: Mr. X had acquired a building on 1-3-19 for ` 1,00,000. He had paid `1,000 as registration charges
for purchase of building. It is sold on 01-01-20 for ` 2,00,000. He paid ` 3,000 to a broker as commission for
selling the building. Determine Capital Gains.
Solution: STCG for AY 20-21: `2,00,000 – `1,00,000 - `1,000 - `3,000 = `96,000
Illustration 2: Mr. X had acquired a building for `5,00,000 on 1.1.1995.Mr X had built two additional floors, one
on 01.01.1999 at a cost of `25,000 and the other on 01-01-2004 at a cost of `40,000. He has also incurred
expenses on repairing the building on 1-10-2010 of `10,000. The Building is sold on 1-1-2020 for `30,00,000.
Selling expenses incurred `15,000. Determine Capital Gains assuming Fair market value as on 1-4-2001 is
`3,00,000
Solution: LTCG for A/Y 20-21: `30,00,000 – `5,00,000 x 289/100 – `40,000 x 289/109 - `15,000 = `14,24,400
NOTE : a) If the building is acquired before 1-4-2001 then, Cost of acquisition is taken at actual cost to the
assessee or the fair market value as on 1-4-2001 whichever is higher.
b) Any Cost of Improvement before 1-4-2001 is always ignored.
208 PP-DTL&P
Illustration 3: Mr. X had acquired 100 unlisted debentures of Y ltd on 1-01-5-2012 at a price of `200 per
Debenture. Commission paid 2%. The debentures are sold on 01-01-2020 at `400 per debenture. Commission
paid 3%. Determine Capital Gains.
Solution: LTCG for AY 20-21: 100 x `400 – 100 x `200 -2% of `20,000 -3% of `40,000 = `18,400
Question 4: Mr. X has self developed a patent on 01-01-05 The patent is sold on 01-01-20 for `1,00,000.
Determine Capital Gain.
Solution: LTCG for AY 20-21: `1,00,000 – Nil = `1,00,000
Question 5: Mr X had applied for 100 shares at `200 per share under IPO of Reliance power Ltd on 15.3.2019.
On 16.6.2019 the company allots 50 shares to Mr. X The Shares are sold by Mr. X on 20-12-19 for `350 per
share. Determine Capital Gains
Solution: STCG: 50 x `350 - 50 x `200 = `7,500
COMPUTATION OF CAPITAL GAINS IN CERTAIN CASES
Insurance Compensation on Damage/Destruction of Capital Asset [Section 45(1A)]

§ Overriding Section 45(1)
§ Where any person receives at any time during previous year
§ Any money or other asset
§ Under insurance from an Insurer
§ On account of Damage or destruction of Capital Asset due to,
v Flood, Typhoon, Cyclone, Earthquake or other Natural Disaster,
v Riot or Civil Disturbance or
v Accidental Fire or Explosion or
v Enemy action or action taken from combating enemy (whether or no war declared)
Then Capital Gains shall be chargeable in hands of such person in Previous year in which money or other
asset is Received from Insurer.
Special Points:
1. Period of Holding: Date of Acquisition to Date of Destruction
2. Full value of Consideration: Value of Money + FMV of asset on date of receipt
3. Indexation: P/Y of Holding to P/Y of Destruction
Illustration 6: Mr. X had purchased a Building on 15-01-2005 for `10,00,000.The building was used for
residential purposes. The building is destroyed due to fire on 10-01-2015. The insurance company gives a new
building to the assessee and `16,00,000 in cash on 20th August, 2019. The fair market value of the new building
is `9,00,000. Compute Capital Gains.
Solution : LTCG for AY 20-21 : `16,00,000 + `9,00,000 – [`10,00,000 x 240/113] = `3,76,106
Conversion of Capital Asset into Stock in Trade [Section 45(2)]

§ Overriding Section 45(1)
§ Where assessee Converts a Capital Asset into Stock in Trade (SIT)
§ Capital Gain arising on above transfer

§ shall be chargeable in hands of Assessee
§ In PY in which such SIT is Sold or otherwise transferred
NOTE :- a) With effect from assessment year 1985-86, conversion of investment into stock in trade
of a business carried on* by the taxpayer will be treated as transfer under section 2(47). The capital
asset which is converted into stock in trade will be treated as transfer in the year in which it is being
converted.
*The business can either be new one or an existing one.
b) It is not necessary that the provisions of section 45(2) would be applicable only in the case of profit
or gain and not when there is loss – CIT v. Claridges Investments & Finances (P.) Ltd. [2007] 18 SOT
390 (Mum.).
Special Points:
1. Period of Holding : Date of Acquisition to Date of conversion of asset to SIT
2. Full value of Consideration : FMV of such Capital Asset on Date of conversion
3. Indexation : PY of Holding to PY of conversion
4. Where Sale price is greater than FMV on date of conversion then (Sale Price – FMV) is
taxable under head Profit and gains from business and profession.
NOTE :- If stock-in-trade is sold in parts in different years then tax on capital gain on conversion of capital asset
into stock-in-trade as per section 45(2), can be said to arise in parts in different years and not in one year in
which last of stock-in-trade is sold – CIT v. Crest Hotels Ltd. [2001] 78 ITD 213 (Mum.)
Illustration 7: Mr. X had purchased jewellery on 15-1-1995 for `1,00,000. (FMV as on 1-4-2001 is `3,00,000).
The assessee starts a jewellery business and brings jewellery as stock in trade of the jewellery business on
01-01-2016 when the fair Market value of the jewellery is `18,00,000. The jewellery is sold on 20-12-19 for
`20,00,000. Compute Capital Gains.
Solution: LTCG for AY 20-21: `18,00,000 – [`3,00,000 x 254/100] = `10,38,000
Business Income for AY 20-21: `20,00,000 – `18,00,000 = `2,00,000
Capital Gain on Transfer of Securities [Section 45(2A)]
Applicability – Where shares/securities are transferred in “demat” form.

• Where any person had at anytime during previous year.
• Any beneficial interest in any securities.
• Then profit or gains arising from Transfer made by depository, of such beneficial interest.
• Shall be chargeable under Capital Gains in previous year of transfer.
Special Points:
1. Capital Gain shall be taxable in hands of person having beneficial interest and not in the hands of
Depository who is the registered Shareholder.
2. Period of Holding & Cost of acquisition: Calculated on FIFO basis
210 PP-DTL&P
Illustration 8: Transfer of demat Shares

Mr. X gives details of his demat account as follows:
Date of Credit Particulars

20-06-2014 120 Shares of X Ltd purchased directly in dematerialized form
for `200/Share
28-06-2015 80 Shares of Y Ltd purchased directly in dematerialized form
for `120/Share
30-06-2016 100 Shares of X Ltd originally purchased in physical form on
15-10-2013 for `100/Share
15-08-2017 200 Shares of X Ltd originally purchased in physical form
on 15-10-2010 for `150/Share
Mr. X sells 300 Shares of X Ltd on 01-01-2020 for `800/ Share. Compute Capital Gains.
Solution: *LTCG for AY 19-20 All figures in (`)
Particulars 120 shares 100 shares 80 shares

Period of holding 20/6/14 to 1/1/20 : LTCA 15/10/13 to 1/1/20 : 15/10/10 to 1/1/20 : LTCA
LTCA
FVC 120 x 800 = 96,000 100 x 800 = 80,000 80 x 800 = 64,000
Less : ICOA 120 x 200 x 289/240= 100 x 100 x 289/220 80 x 150 x 289/167
=13,136
28,900 =20,776
LTCG 67,100 66,864 43,224
*We have ignored 10(38) implications while solving the question.
Capital Gain on Transfer of Capital Asset to Firm etc. [Section 45(3)]

• Where a person transfers a Capital Asset
• To a firm, AOP or BOI
• In which he is/or becomes partner or member
• By way of Capital Contribution or Otherwise
• Shall be chargeable to Capital Gain in hands of such person in the previous year of transfer.
Special Points:
1. Period of Holding : Date of acquisition by partner/member to Date of transfer to firm/AOP/BOI
2. Full value of consideration : Amount recorded in books of account of Firm/AOP/BOI
3. Indexation : P/Y of Holding to P/Y of Transfer
NOTE – As per section 45(3) there is no requirement that in case of transfer of an asset to the firm by a partner,
the amount of sale consideration has got to be credited to his capital account ; crediting of purchase consideration
to current account of the partners is sufficient – Mafatlal Holding Ltd. v. CIT [2004] 85 TTJ (Mum.) 821.
Illustration 8: Mr. X becomes a partner of a partnership firm M/s XYZ on 20/09/19. He transfers a Capital asset
on 15-12-19 as capital contribution to the firm. The Capital Asset was acquired by Mr. X on 1-1-02 for `1,00,000.
The firm records the asset at `5,00,000 in its books of Account. The Fair market value of the asset is `1,50,000.
Compute Capital Gains.
Solution: LTCG in hands of Mr. X for A/Y 20-21: `5,00,000 – `1,00,000 x 289/100 = `2,11,000
Capital Gains on Transfer of Capital Asset on dissolution of Firm etc [Section 45(4)]
§ Where a Firm, AOP or BOI transfers a Capital Asset (can be short term/long term, depreciable/non-
depreciable) by way of distribution
§ To its Partner or Members
§ On its dissolution or otherwise
§ Shall be chargeable to Capital Gains to such Firm, AOP or BOI, in the previous year of transfer.
Special Points:
1. Period of Holding : Date of acquisition of asset to date of transfer by Firm/AOP/BOI
2. Full value of Consideration : FMV on date of such transfer
3. Indexation : PY of Holding to PY of Transfer
4. “Dissolution or Otherwise” : Otherwise means something like dissolution
NOTE:- a) These rules are applicable even when an asset is transferred by an association of persons or body
of individuals.
b) These rules are not applicable when an asset is transferred by a company or a co-operative society.
c) If a firm distributes a depreciable asset, the capital gain/loss shall always be short term capital gain/loss.
d) Amount credited by retired partner in capital account upon revaluation of assets of firm is not taxable as
capital gain as there is no transfer – ITO v. Ramesh M. Shah [2004] 2 SOT 558 (Mum.).
e) Section 45(4) is not applicable where some partners retire and the firm continues to carry on the business
with remaining partners and with new partners or without new partners – CIT v. G.K. Enterprises [2003] 131
Taxman 181 (Mag.).
Illustration 9: X ,Y & Z are three partners of M/s XYZ, a partnership firm. On 10th March, 2020, the firm is
dissolved. The followings assets are distributed to the partners on the same day. Determine Capital Gains.
Particulars land (taken by X) Listed Preference Factory Building

Shares (taken by Y) (taken by Z)
FMV on 10th March, 2020 34,60,000 50,000 6,50,000
Agreed Value as per dissolution 11,70,000 46,000 5,00,000

deed
Cost of acquisition 40,000 5000 1,20,000
WDV as on 1/4/2019 --- ---- 4,00,000
Year of Acquisition 1995-96 2005-2006 2002-2003
FMV on 1st April 2001 3,00,000 NA NA

212 PP-DTL&P
Solution: Capital gains in hands of Firm for AY 19-20 All figures in (`)
Particulars land (taken by X) Listed Preference Factory Building

Shares (taken by Y) (taken by Z)
Period of holding 1995/1996 to 10/3/20: 2005/2006 to 10/3/20 : STCA u/s 50
LTCA LTCA
Full value of consideration 34,60,000 50,000 6,50,000
Less Indexed cost of acquisition / 3,00,000 x 289/100 5,000 x 289/117 4,00,000
Cost of acquisition
= 8,67,000 = 12,350
Capital Gains LTCG 25,93,000 LTCG 37,650 STCG 2,50,000
Compulsory Acquisition of an Asset [Section 45(5)]

• Overriding Section 45(1)
• Where a Capital Asset is Compulsorily acquired under ANY law or
• Where consideration for transfer is to be determined by Central Government (not by a state government)
or RBI.
• It shall be chargeable to Capital Gain in the Previous year in which compensation or part thereof is
FIRST received by the assessee and not in the year in which capital asset is transferred.
Special Points:
1. Period of Holding : Date of acquisition to Date of compulsory acquisition
2. Full value of Consideration : Full amount of compensation/consideration
3. Indexation : P/Y of Holding to P/Y of Compulsory Acquistion
4. Enhanced Compensation :
a) Where the amount of compensation is increased by any
– Court or tribunal or any authority
– Such increased amount shall be deemed as Capital Gain,
– Of the P/Y in which such amount is Received by the Assessee.
b) The nature of capital gain of Enhanced compensation is SAME as for original compensation.
c) Cost of acquisition. & Cost of improvement of enhanced compensation will be NIL.
d) Expenses incurred for enhanced compensation can be deducted as transfer expenses – Chakiri
Ashok Kumar v. ITO [2002] 80 ITD 410 (Hyd.)
5. Reduced Compensation: If subsequently compensation is reduced by court than Capital Gain of
original compensation recomputed by taking the reduced compensation.
6. Enhanced compensation received by other person
– Where due to death of person who made transfer or for other reason,
– Enhanced compensation is received by other person,
– Deemed to be Capital Gain of the person receiving the same.
– Enhanced compensation can be short term capital gains or long term capital gains depending on
the nature of original capital gains.
– Enhanced compensation is always taxed in the year of receipt, ignoring the fact that such
enhanced compensation has been received by the assessee on furnishing bank guarantee or on
any other condition – Catherine Thomas v. CIT [2008] 111 ITD 132 (Coch.).
Question 10 :
(a) Mr. X purchased a house Property in Delhi on 15-4-02.Cost of acquisition `1,00,000. It is compulsorily
acquired by the government on 25-12-15.Compensation determined `6,00,000
(b) Compensation paid by government:`4,00,000 on 10-05-19: and `2,00,000 on 15-04-20.
(c) Mr. X. files an appeal in the Delhi High court on 20-10-20.The HC increases the Compensation from
`6,00,000 to `9,30,000 by its order dated 25-1-2021. Legal expenses incurred by Mr. X is `10,000.
The government on 20-06-21 pays additional compensation of `3,30,000 but the government files an
appeal in the Supreme court against the Judgment of Delhi High Court.
(d) The supreme court reduces the quantum of compensation from `9,30,000 to `7,50,000 by its judgment
dated 20th March, 2021. Mr X repays `1,80,000 to government on 25th March, 2022. Legal Expenditure
by Mr. X in Supreme Court is `25,000. Compute Capital Gains.
Solution:
(a) & (b) : LTCG on original compensation for A/Y 20-21 : `6,00,000 – `[1,00,000 x 254/105] = `3,58,095
(c): LTCG on enhanced compensation for A/Y 22/23 : `3,30,000 -`10,000 = `3,20,000
(d): Recomputed LTCG of A/Y 22/23 : `3,20,000 -`1,80,000 -`25,000 = `1,15,000
Capital gain in case of Joint Development Agreements [Section 45(5A)]

• Notwithstanding anything contained in section 45(1)
• Individual or HUF,
• Transfer of land or building or both,
• under a specified agreement,
• capital gains shall be chargeable in PY
• in which certificate of completion for whole/part of project is issued by competent authority
• FVC shall be SDV (on date of issue of certificate) of his share, being land or building or both in project,
as increased by consideration received in cash, if any,
Special point:
1. If assessee transfers his share in project on or before date of issue of certificate , Section 45(5A) shall
not apply & capital gains shall be deemed to be income of PY in which such transfer takes place &
other provisions of this Act shall apply.
2. Specified agreement means a registered agreement in which person owning land or building or both,
agrees to allow another person to develop a real estate project in consideration of a share, being land
or building or both in such project, whether with or without payment of part of consideration in cash.
3. SDV means the value adopted or assessed or assessable by any authority of Government for purpose
of payment of stamp duty of an immovable property.
214 PP-DTL&P
4. Section 49(7): If sec 45(5A) is applicable, cost of acquisition of such asset, shall be amount which
is deemed as FVC under the section.
SLUMP SALE [SECTION 50B]

In case of slump sale, profits on such sale shall be chargeable under capital Gains in the P/Y in which slump
sale is effected.
Section 2(42C): Slump Sale means
• Transfer of one or more Undertaking
• As a result of sale for lumpsum consideration
• Without values being assigned to individual assets and liabilities
Special Points:
1) Full value of consideration: Sale price of the undertaking
2) Period of holding: Date of ownership of the undertaking to Date of slump sale
However if Undertaking is LTCA, (more than 36 months), no indexation will be done.
3) Cost of Acquisition: Value of assets of undertaking
Less : Value of liability of Undertaking
Type of Assets Value to be Taken

Non depreciable Book Value
Asset
Depreciable asset Actual Cost of assets forming part of undertaking (A)
(A)- (B) Less : Depr allowed on that assets assuming that assets were only assets in the
block (B)
4) WDV OF BLOCK shall be reduced by the following amount (A) – (B)

5) Revaluation of assets shall not be taken into account for valuation of assets
NOTE :- a) If the individual value of assets to be transferred is specified in the transfer agreement, then such a
transaction is not covered by “slump sale”. Hence, capital gain shall be computed separately.
b) In case of slump sale, depreciation/ accumulated business loss will be carried forward and set off by the
transferor (even if the business is discontinued).
Illustration 11: The balance sheet of Mr. X as on 31-3-2020 is as under:
Liabilities Amount Assets Amount
Paid up capital 3,50,000 Software division
Reserve & Surplus 1,50,000 Building 2,50,000
Debtors 1,00,000
Creditors Stock 50,000
Software division 1,50,000
Cement division 2,00,000 Cement division

Building 2,00,000
Debtors 1,50,000
_______ Stock 1,00,000
8,50,000 8,50,000
On 1-4-2020, Mr. X decides to sell the cement Division for `6,00,000 which was set up on 15-06-12. The
Building transferred in the slump sale belongs to 10% block. The WDV as on 1-4-20 of 10% block is `5,00,000.
All the Building belonging to Cement Division was purchased on 18/12/17 for `3,00,000.
Determine tax treatment?
Solution:
LTCG for AY 19-20 All figures in (`)
Period of holding 15/6/12 to 1/4/19 : LTCA

Full value of consideration 6,00,000
Less : Cost of Acquisition
Value of Assets : 5,06,500
Debtors : 1,50,000 3,06,500
Stock : 1,00,000
Building :2,56,500
(3,00,000 – 5% depreciation for p/y 17/18
– 10% depreciation for p/y 18/19)
Less :
Value of liabilities
Creditors 2,00,000
Long Term Capital Gains 2,93,500
FORFEITURE OF ADVANCE MONEY [SECTION 51]
Amount forfeited is upto 31/3/2014

• Where any Capital Asset
• Was on any previous occasion subject matter of negotiation for the transfer
• Any advance or other money received by Assessee
• Is forfeited by him
• Then such amount shall be deducted from cost of acquisition of such Capital Asset
NOTE : If capital asset is not transferred during the lifetime of the assessee, advance money forfeited by him will
not be chargeable to tax. However, if the capital asset is transferred during his lifetime, the advance money will
be deducted from the cost for which the asset was acquired or the written down value or the fair market value,
in computing the cost of acquisition.
216 PP-DTL&P
Amount forfeited is on or after 1/4/2014

Section 56(2)(ix): Advance or other money forfeited will be included in Income of the recipient under the head
Income from other sources in the year in which advance money forfeited. Consequently, it will not be deducted
from cost of acquisition when the capital asset is ultimately transferred.
Proviso to Section 51: If forfeited amount is included in Income of previous year u/s 56(2), then, such sum
shall not be deducted from cost of acquisition
Illustration 12: Mr. X acquired a land on 1/1/2002 for `2,00,000. He enters into an agreement to sell his land to
Mr. Y on 1/1/2011 and received `50,000 as advance money. Mr. Y did not purchase the Land and therefore Mr.
X forfeited the advance. Mr. X sell the land on 1/1/20 for `10,00,000 to Mr. Z. Determine Capital Gains.
Solution: LTCG for A/Y 20-21: `10,00,000 – [{`2,00,000 -`50,000} x 289/100] = `5,66,500
DISTRIBUTION OF ASSETS BY COMPANY TO ITS SHAREHOLDERS IN LIQUIDATION

[SECTION 46(1)]
• Overriding Section 45
• Where any asset of a Company
• Is distributed to its shareholders
• On its liquidation
• Such distribution will NOT be regarded as a Transfer
• In the hands of the company
NOTE :- Where, however the liquidator sells the assets and distributes the cash so realized to the shareholders
then section 46(1) will not apply and the company shall be liable to tax on capital gain arising from sale of the
assets – Sri Kannan Rice Mills Ltd. v. CIT [1954] 26 ITR 351 (Mad.).
Question 13: X Ltd goes into Liquidation and distributes the following assets to the shareholders on 15.10.2019
Shareholder Asset given FMV of asset Book Value Cost of Acquisition
X Building 10,00,000 6,00,000 4,00,000
Y Machinery 5,00,000 2,00,000 1,00,000

Compute capital gains in hands of X ltd.
Solution: Section 46(1): No capital gain in hands of X ltd
Section 46(2)
1. Where a shareholder on liquidation of a company
2. Receives any money or other assets from a company
3. He shall be chargeable under Capital Gain in the Previous year in which above is Received
Special Points:
1) Period of Holding : Date of acquisition of shares to Date of liquidation
2) Full value of Consideration : Money received
Add: MV of assets received as on date of distribution
Less: Deemed dividend u/s. 2(22)(c)
3) Indexation : P/Y of Holding to P/Y of Liquidation

4) Sale of Assets received on liquidation: Cost of acquisition shall be FMV on date of distribution of such asset
Illustration 14: Mr. X Purchased 2000 Shares of A Ltd on 1-1-05 for `20,000. The company A Ltd goes into
Liquidation on 30-06-17 and he receives the following from the Liquidator on 02-03-20:
Cash : `25,000
Machinery : Book Value : 40,000 & FMV : `60,000.
As on 30.06.17, the accumulated profits of the company were `1,50,000. Mr X holds 20% of shares of A Ltd.
Mr. X sells the Machinery on 31.03.20 for `1,00,000. The Company had acquired the Machinery on 1-1-01 for
`40,000. Determine tax treatment.
Solution:
LTCG for A/Y 20-21 u/s 46(2) in hand of Mr. X All figures in (`)
Period of holding 1/1/05 to 30/6/17 : LTCA

Full Value of Consideration 25,000 + 60,000 – Deemed dividend u/s 2(22)(c) i.e.
20% of 1,50,000 = 55,000
Less : Indexed cost of acquisition 48,142
20,000 x 272/113
Long Term Capital Gains 6,858
CAPITAL GAIN ON PURCHASE BY COMPANY OF ITS OWN SHARE/SPECIFIED SECURITIES

(BUY BACK) [SECTION 46A]
• Where a shareholder or holder of specified securities,
• Received any consideration from company for purchase of its own shares or specified securities,
• Shall be chargeable to Capital Gain in year in which shares /securities are purchased by company.
Special Points:
1) Period of Holding : Date of acquisition of Shares/Securities to Date of buy back by company
2) Full value of Consideration : Amount Received from the company
3) Indexation : P/Y of Holding to P/Y of Buy Back
4) Buy Back of shares is exempt in hands of shareholder u/s 10(34A) if TAX paid by Domestic company u/s
115QA*
*In the case given below, the company is (buying its own shares) is required to pay tax on distributed income
(Quantum of distributed income shall be determined in accordance with rule 40BB) under section 115QA with
effect from June 1, 2013.
a) Buy-back of unlisted shares (during June 1, 2013 and July 4, 2019),
b) Buy-back of listed/unlisted shares (on or after July 5, 2019).
NOTE :- “Specified securities” includes employees’ stock options or other securities as may be notified by the
Central Government.
218 PP-DTL&P
Illustration 15: Mr. X holds 25% shares of Y Ltd. He had acquired 1000 shares of Y Ltd on 1.1.2005 for `100
each. The company Y Ltd decides to buy back 600 shares from Mr. X @ `350/ per share on 1.1.2020. Discuss
Tax implications.
Solution: Exempt u/s 10(34A)
TRANSACTIONS NOT REGARDED AS TRANSFER [SECTION 47]

• Overriding Section 45
• Transactions referred to in Section 47, will not be regarded as transfer
• And therefore No Capital Gain will arise in hands of transferor.
1. Distribution of Any Capital Asset on Total or Partial partition of H.U.F.
2. Transfer of Any Capital Asset under Gift or Will or irrevocable trust (Does not include transfer under a gift
of shares, debentures allotted by company to its employees under E.S.O.P)
In the above cases, there will be no transfer and no Capital Gain will arise in hands of transferor. However,
when transferee transfers the above Capital Assets, he will be chargeable to Capital Gains.
Computation of capital gains in hands of transferee
1. Cost of Acquisition to transferee in Cost to previous owner who had actually purchased the Capital
above cases. (Section 49(1)) Asset
2. Period of Holding. (Section 2(42A)) Period of holding will include period of holding of previous owner
3. Indexation *P/Y of Holding to P/Y of transfer
*CIT v Manjula J.Shah [2012] 204 Taxmann 691, indexation has
to be done from p/y in which original owner has acquired the
asset and not when assessee has acquired it.
Illustration 16: Mr. X had acquired the Property in the previous year 2001-02 for `5,00,000 and paid `18,000 as
registration charges. Mr. X gifted the property to Mr. Z on 15-10-16. The Market Value of the Property as on 15-
10-16 is `10,00,000. Mr. Z sold the property on 31-05-19 for `15,00,000. Compute Capital Gains for A/Y 19-20.
Solution:
LTCG in hands of Mr.Z for AY 20-21
[Period of holding : 2002/03 to 31/5/19 = LTCA]
`15,00,000 – `[5,18,000 x 289/100] = `2,980
3. Transfer of Any Capital Asset by amalgamating company to amalgamated Indian company in a scheme of
amalgamation.
4. Transfer of Shares of Amalgamating Company by shareholder of such Company to Amalgamated Indian
Company in a scheme of Amalgamation provided transfer is made in consideration of allotment to him of shares
in Amalgamated Company except where the shareholder itself is the amalgamated company. For the purpose
of computing capital gains on transfer of shares of Amalgamated company.
1 Cost of acquisition of shares in Cost of acquisition of shares in Amalgamating Company

Amalgamated Company
Period of holding of shares in Amalgamated Company will include

period of holding shares in Amalgamating Company
2. Period of Holding
3. Indexation P/Y of Holding shares in Amalgamated Company to P/Y of transfer
5. Transfer of Capital Asset by Demerged company to Resulting Indian company in a scheme of Demerger.
6. Transfer/ issue of Share by resulting company to shareholders of the de merged company if the transfer/
issue is made in consideration of Demerger of the undertaking.
Special Points: For computing capital gain on transfer of shares in resulting company
1. Cost of Acquisition of shares in Cost of acquisition of shares in De-merged co.

Resulting company.
X Book value of assets T/F in Demerger
Net worth of De-merged company
2. Cost of Acquisition of shares of Reduce Original cost by above
Demerged company.
3. Period of Holding of shares in Period of holding of shares in Resulting Co. will include holding
Resulting company period of shares in Demerged company
4. Indexation PY of Holding shares in Resulting Company to P/Y of transfer
7. Any transfer by way of conversion of Debentures of a company into Shares of that company.
Special Points: If converted shares are transferred:
1. Cost of Acquisition of shares Cost of that part of Debenture, which is so converted

2. Period of Holding of Shares Period of holding will include period of holding of Debentures
3. Indexation P/Y of allotment of shares to P/Y of transfer
Illustration 17: Mr. X acquired 200 listed debentures of `100 each on 15-5-2013. 50% value of the debenture
was converted into 4 equity share of the face value of `10 each on 20-08-2016. The shares are sold on 15-06-
2019 @ 40/ share. Compute Capital Gains.
Solution: LTCG on sale of shares for AY 20-21
800 shares x 40/share = `32,000
Less : [50% of (200 x 100)] x 289/264 = `10,106
Other Provisions [Section 47]

1. Any transfer of a capital asset by a company to its subsidiary company, if –
(a) the parent company or its nominees hold the whole of the share capital of the subsidiary company, and
(b) the subsidiary company is an Indian company;
2. 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 :
220 PP-DTL&P
Provided that nothing contained in clause (iv) or clause (v) shall apply to the transfer of a capital asset made
after the 29th day of February, 1988, as stock-in-trade;
3. Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian
company, by the amalgamating foreign company to the amalgamated foreign company, if –
(a) at least 25% of the shareholders of the amalgamating foreign 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;
4. Any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and
brought into force by the Central Government u/s 45(7) of the Banking Regulation Act, 1949, of a capital asset
by the banking company to the banking institution.
5. Any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred to in
the Explanation 5 to Sec 9(1)(i), which derives, directly or indirectly, its value substantially from the share or shares of
an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if –
(A) at least 25% of the shareholders of the amalgamating foreign 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;
6. Any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the
demerged foreign company to the resulting foreign company, if –
(a) the shareholders holding not less than three-fourths in value of the 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 the demerged foreign company
is incorporated :
Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 shall not apply in case of
demergers referred to in this clause;
7. Any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to the
successor co-operative bank;
8. Any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or shares held
by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of
any share or shares in the successor co-operative bank.
9. Any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in the Explanation
5 to section 9(1)(i), which derives, directly or indirectly, its value substantially from the share or shares of an
Indian company, held by the demerged foreign company to the resulting foreign company, if –
(a) the shareholders, holding not less than three-fourths in value of the 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 the demerged foreign company
is incorporated:
Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 shall not apply in case of
demergers referred to in this clause;
10. 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;
11. Any transfer of a capital asset, being bonds or Global Depository Receipts referred u/s 115AC(1), made
outside India by a non-resident to another non-resident;
12. 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;
13. Any transfer of a capital asset, being –
(a) bond or Global Depository Receipt referred to in sec 115AC(1); or
(b) rupee denominated bond of an Indian company; or
(c) derivative, or
(d) such other notified securities
made by a non-resident or a notified fund on a recognised stock exchange located in any International
Financial Services Centre and where the consideration for such transaction is paid or payable in foreign
currency.
14. Any transfer of a capital asset, being a Government Security carrying a periodic payment of interest, made
outside India through an intermediary dealing in settlement of securities, by a non-resident to another non-
resident.
15. Any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond
Scheme, 2015, by way of redemption, by an assessee being an individual;
16. Any transfer of agricultural land in India effected before the 1st day of March, 1970;
17. Any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book,
manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum,
National Art Gallery, National Archives or any such other public museum or institution as may be notified by the
Central Government (i.e., Indira Gandhi National Centre of Art for the A/Y 1987-88 to 2008-09) in the Official
Gazette to be of national importance or to be of renown throughout any State or States.
18. Any transfer by way of conversion of bonds referred u/s115AC(1)(a) into shares or debentures of any
company;
19. Any transfer by way of conversion of preference shares of a company into equity shares of that company;
(applicable from the assessment year 2018-19);
20. Any transfer made on or before the 31st day of December, 1998 by a person (not being a company) of a
capital asset being membership of a recognised stock exchange to a company in exchange of shares allotted
by that company to the transferor.
21. Any transfer of a capital asset, being land of a sick industrial company, made under a scheme prepared and
sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 where such sick
industrial company is being managed by its workers’ co-operative :
Provided that such transfer is made during the period commencing from the previous year in which the said
company has become a sick industrial company u/s 17(1) of that Act and ending with the previous year during
which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
22. Any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the
firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the
222 PP-DTL&P
course of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an

association of persons or body of individuals is succeeded by such company :
Provided that –
(a) all the assets and liabilities of the firm or of the association of persons or body of individuals relating to
the business immediately before the succession become the assets and liabilities of the company;
(b) all partners of firm immediately before the succession become the shareholders of the company in
the same proportion in which their capital accounts stood in the books of the firm on the date of the
succession;
(c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or
manner, other than by way of allotment of shares in the company; and
(d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per
cent of the total voting power in the company and their shareholding continues to be as such for a
period of five years from the date of the succession;
(e) the demutualisation or corporatisation of a recognised stock exchange in India is carried out in
accordance with a scheme for demutualisation or corporatisation which is approved by SEBI established
under section 3 of the Securities and Exchange Board of India Act, 1992);
23. Any transfer of a capital asset being a membership right held by a member of a recognised stock exchange
in India for acquisition of shares and trading or clearing rights acquired by such member in that recognised
stock exchange in accordance with a scheme for demutualisation or corporatisation which is approved by the
Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of
India Act, 1992 ;
24. Any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter
in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares
held in the company by a shareholder as a result of conversion of the company into a limited liability partnership
in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 :
Provided that –
(a) all the assets and liabilities of the company immediately before the conversion become the assets and
liabilities of the limited liability partnership;
(b) all the shareholders of the company immediately before the conversion become the partners of the
limited liability partnership and their capital contribution and profit sharing ratio in the limited liability
partnership are in the same proportion as their shareholding in the company on the date of conversion;
(c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in
any form or manner, other than by way of share in profit and capital contribution in the limited liability
partnership;
(d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability
partnership shall not be less than fifty per cent at any time during the period of five years from the date
of conversion;
(e) the total sales, turnover or gross receipts in the business of the company in any of the three previous
years preceding the previous year in which the conversion takes place does not exceed sixty lakh
rupees;
(ea) the total value of the assets as appearing in the books of account of the company in any of the three
previous years preceding the previous year in which the conversion takes place does not exceed five
crore rupees; and
(f) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit
standing in the accounts of the company on the date of conversion for a period of three years from the
date of conversion.
25. Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result
of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the
company :
Provided that –
(a) all the assets and liabilities of the sole proprietary concern relating to the business immediately before
the succession become the assets and liabilities of the company;
(b) the shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting
power in the company and his shareholding continues to remain as such for a period of five years from
the date of the succession; and
(c) the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or
manner, other than by way of allotment of shares in the company;
26. Any transfer in a scheme for lending of any securities under an agreement or arrangement, which the
assessee has entered into with the borrower of such securities and which is subject to the guidelines issued by
the Securities and Exchange Board of India, established under section 3 of the Securities and Exchange Board
of India Act, 1992 or the Reserve Bank of India constituted under sub-section (1) of section 3 of the Reserve
Bank of India Act, 1934, in this regard;
27. Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by
the Central Government;
28. Any transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of
units allotted by that trust to the transferor;
29. Any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme
of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the
consolidated scheme of the mutual fund:
Provided that the consolidation is of two or more schemes of equity oriented fund or of two or more schemes
of a fund other than equity oriented fund.
30. 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.
REFERENCE TO VALUATION OFFICER [SECTION 55A]

• For ascertaining Fair Market Value of Capital Asset
• U/S 45(1A), 45 (2), 45 (4), 46 (2), Exchange of asset u/s 2(47) & 50C
• The Assessing Officer may
• Refer the valuation of Capital Asset to valuation officer in following cases
224 PP-DTL&P
Case 1 Case 2
Where value claimed by assessee is Where value claimed by assessee is not according to
according to estimate by a registered valuer estimate by a registered valuer
If AO is of opinion that If AO is of opinion that
Value claimed by assessee • Fair Market Value exceeds
is at variance with its Fair Market Value • value claimed by assessee
(applicable from July 1, 2012) [section • by more than 15% or by `25,000,
55A(a)]
whichever is less [section 55A(b)(i)]
Where the AO is of opinion that, having regard to nature of an asset and relevant circumstances, it is necessary
to make a reference to the Valuation Officer [section 55A(b)(ii)]
FULL VALUE CONSIDERATION FOR REAL ESTATE TRANSACTIONS [SECTION 50C]

• Sale consideration on transfer of Land or Building or both
• Is Less than
• Value determined by Stamp valuation authority for payment of stamp duty
• then value so assessed or assessable shall be
• Deemed to be FVC
Note: Assessee claims that Stamp Valuation exceeds FMV of property on date of transfer and It has not been
disputed in any appeal or by any court AO may refer the valuation of above capital asset to valuation officer u/s
55A. Then, valuation determined by valuation officer u/s 50C is less than Stamp valuation then value u/s 50C
shall be Deemed to be FVC.
Provided also that where the value adopted or assessed or assessable by the stamp valuation authority does
not exceed one hundred and five per cent. of the consideration received or accruing as a result of the transfer,
the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be
deemed to be the full value of the consideration. [Finance Act, 2018]
Where the date of the agreement fixing the amount of consideration and the date of registration for the transfer
of the capital asset are not the same, the value adopted or assessed or assessable by the stamp valuation
authority on the date of agreement may be taken for the purposes of computing full value of consideration for
such transfer:
Above provision shall apply only in a case where the amount of consideration, or a part thereof, has been
received by way of an account payee cheque or account payee bank draft or by use of electronic clearing
system through a bank account or through such other electronic mode as may be prescribed , on or before the
date of the agreement for transfer
Judicial Ruling :-
1) Mode of valuation by Valuation Officer- while valuating property the Department Valuation Officer
cannot blindly base his valuation on circle rates - Ravi Kant v. ITO [2007] 110 TTJ (Delhi) 297.
2) Section 50C is not applicable if income is taxable under section 28 – Section 50C is not applicable
for calculating business income under section 28 – Inderlok Hotels (P.) Ltd. v. ITO [2009] 32 SOT 419
(Mum.), CIT v. Thiruvengadam Investments (P.) Ltd. [2010] 320 ITR 345 (Mad.).
Illustration 18: Mr. X had purchased a house property on 15/10/2008 for `3,00,000. The property is sold to Mr.
Y on 1.1.2020 for `8,00,000. Compute Capital Gains assuming Value assessed by the government authority
for purpose of Stamp Valuation is
Case 1 : `7,00,000
Case 2 : `9,00,000
Solution:
Capital gain for A/Y 19/20 Figures (`)
Particulars Case 1 Case 2

Full value of consideration 8,00,000 9,00,000
Less : 3,00,000 x 289 /137 3,00,000 x 289 / 137
ICOA = 6,32,847 = 6,32,847
LTCG 1,67,153 2,67,153
Illustration 19: Mr. X had purchased a Land on 15/10/2010 for `7,00,000. The said Land is sold on 1-1-2020
for `15,00,000, whereas value assessed by government authority for stamp duty valuation is `18,00,000. On
an assessee claim, that FMV of Land on date of transfer is less than value determined by stamp valuation
authority, AO refers the valuation to the valuation officer u/s 55A.
Compute capital Gains assuming, Valuation officer ascertains the Value of Land as:
a) 16,00,000 b) 20,00,000 c) 12,00,000.
Solution :
Capital gain for A/Y 19/20 Figures (`)
Particulars Case 1 Case 2 Case 3

Period of holding 15/10/10 to 1/1/20: LTCA 15/10/10 to 1/1/20 : LTCA 15/10/10 to 1/1/20 :
LTCA
Full value of consideration 16,00,000 18,00,000 15,00,000
Less: Indexed cost of 7,00,000 x 289/167 = 7,00,000 x 289/167 = 7,00,000 x 289/167 =
acquisition 12,11,377
12,11,377 12,11,377
LTCG 3,88,623 5,28,623 2,88,623
FULL VALUE OF CONSIDERATION FOR TRANSFER OF SHARE OTHER THAN QUOTED

SHARE [SECTION 50CA]
If consideration for transfer of share of company other than quoted share, is less than fair market value(FMV)
of such share (determined in prescribed manner), FMV shall be deemed to be consideration.
Exceptions – With effect from assessment year 2020-21 the provisions of this section shall not apply to any
consideration received or accruing as a result of transfer by such class of persons and subject to such conditions
as may be prescribed by the Board.
Special point : “Quoted share” means the share quoted on any recognised stock exchange with regularity from
time to time, where the quotation of such share is based on current transaction made in the ordinary course of
business.
226 PP-DTL&P
FAIR MARKET VALUE DEEMED TO BE FULL VALUE OF CONSIDERATION IN CERTAIN CASES

[SECTION 50D]
Where the consideration as a result of transfer of a capital asset by assessee is not ascertainable, then for the
purpose of computing capital gains under section 45, FMV of asset on the date of transfer shall be deemed as
full value of consideration.
Where by acquiring a portion of a larger plot, the value of the unacquired portion is injuriously affected,
compensation received for injurious affection of unacquired portion is also part of full value of consideration –
CIT v. P. Mahalakshmi [1982] 134 ITR 428 (Kar.).
INCOME EXEMPT FROM COMPULSORY ACQUISITION OF LAND [SECTION 10(37)]

• Individual or HUF
• Compulsory acquisition of urban agricultural land (LTCA or STCA)
• Used for 2 years before date of transfer of agricultural purposes by individual/his parents/HUF
• Compensation received shall be exempt
• from capital gains
CAPITAL GAIN ARISING UNDER LAND POOLING SCHEME OF ANDHRA PRADESH

GOVERNMENT [SECTION 10(37A)]
Clause (37A) has been inserted in section 10 with effect from the assessment year 2015-16.
The clause says any income chargeable under the head “Capital gains” in respect of transfer of a specified
capital asset arising to an assessee, being Individual or Hindu undivided family, who was the owner of such
specified capital asset as on 2nd day of June, 2014 and transfers that specified capital asset under the Land
Pooling Scheme (herein referred to as “the scheme”) covered under the Andhra Pradesh Capital City Land
Pooling Scheme (Formulation and Implementation) Rules, 2015 made under the provisions of the Andhra
Pradesh Capital Region Development Authority Act, 2014 and the rules, regulations and Schemes made under
the said Act is exempt from Capital gains.
Explanation: “specified capital asset” means:
(a) the land or building or both owned by the assessee as on the 2nd day of June, 2014 and which has
been transferred under the scheme; or
(b) the land pooling ownership certificate issued under the scheme to the assessee in respect of land or
building or both referred to in clause (a); or
(c) the reconstituted plot or land, as the case may be, received by the assessee in lieu of land or building
or both referred to in clause (a) in accordance with the scheme, if such plot or land, as the case may be,
so received is transferred within two years from the end of the financial year in which the possession of
such plot or land was handed over to him;
INCOME EXEMPT FROM TRANSFER OF CERTAIN CAPITAL ASSETS [SECTION 10(38)]

Upto AY 2017-18
Capital Asset being Equity shares in company or units of equity oriented fund or unit of business trust
sold through recognized stock exchange & transaction subjected to security transaction tax. Then Long
Term Capital Gains shall be Exempt.
For AY 2018-19
Capital Asset being Equity shares in company or units of equity oriented fund or unit of business trust
sold through recognized stock exchange & transaction subjected to security transaction tax. Then Long
Term Capital Gains shall be Exempt.
Exemption u/s Section 10(38) shall not apply on transfer of equity share in a company, if the transaction
of acquisition, other than the acquisition notified by Central Government in this behalf, of such equity share
is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities
transaction tax.
W.E.F. AY 2019-20
Exemption u/s Section 10(38) shall not apply to any income arising from the transfer of long-term capital
asset, being an equity share in a company or unit of equity oriented fund or unit of business trust, made on or
after the 1st day of April, 2018.
STCG ON LISTED EQUITY SHARES/LISTED UNITS OF EQUITY ORIENTED MUTUAL FUND

[SECTION 111A]
• Equity shares in company or Units of Equity oriented Mutual Fund
• Sold through Recognized stock exchange & Transaction subjected to Security Transaction tax
• STCG shall be chargeable @15% [+ SC + HEC]*
*Surcharge + Higher Education Cess = 4%
Circular no. 36/2016 dated 25th October, 2016: Capital gain arising out of any award/agreement under Right
to fair compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act,2013 is exempt
from Tax.
TAX RATES ON CAPITAL GAINS FOR AY 2020-21
Short Term Capital Gain (STCG)

Section 10(37) Section 111A other STCG
Exempt 15% Taxable at slab rate/Normal rates
Long Term Capital Gain (LTCG)
10(37) Listed securities other than Other LTCG

Units of Mutual funds or Zero
Coupon Bonds
20% (with Indexation) Or

Exempt 10% (without indexation) 20%
whichever is lower
TAX ON LONG TERM CAPITAL GAINS IN CERTAIN CASES [SECTION 112A]

Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be
determined in accordance with the provisions of sub-section (2), if:
(i) the total income includes any income chargeable under the head “Capital gains”;
(ii) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company
or a unit of an equity oriented fund or a unit of a business trust;
228 PP-DTL&P
(iii) securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 has,
(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been
paid on acquisition and transfer of such capital asset; or
(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or
a unit of a business trust, been paid on transfer of such capital asset.
The tax payable by the assessee on the total income referred to in sub-section (1) shall be aggregate of:
(i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at
the rate of ten per cent (The rate of 10 percent is applicable whether the assessee is a corporate –
assessee or non – corporate assessee); and
(ii) the amount of income-tax payable on the total income as reduced by the amount of long-term capital
gains referred to in sub-section (1) as if the total income so reduced were the total income of the
assessee:
Provided that in the case of a resident individual or a resident Hindu undivided family (may be ordinarily
resident or not ordinarily resident), where the total income as reduced by such long-term capital gains is below
the maximum amount which is not chargeable to income- tax, then, the long-term capital gains, for the purposes
of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum
amount which is not chargeable to income-tax.
The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on a recognised
stock exchange located in any International Financial Services Centre and where the consideration for such
transfer is received or receivable in foreign currency.
The Central Government may, by notification in the Official Gazette, specify the nature of acquisition in respect
of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall not apply.
Where the gross total income of an assessee includes any long-term capital gains referred to in sub-section
(1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital
gains.
Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the
rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable
on such capital gains.
Note:
(a) “equity oriented fund” means a fund set up under a scheme of a mutual fund specified under clause
(23D) of section 10 and, –
(i) in a case where the fund invests in the units of another fund which is traded on a recognised stock
exchange, –
(A) a minimum of ninety per cent of the total proceeds of such fund is invested in the units of
such other fund; and
(B) such other fund also invests a minimum of ninety per cent of its total proceeds in the equity
shares of domestic companies listed on a recognised stock exchange; and
(ii) in any other case, a minimum of sixty-five per cent of the total proceeds of such fund is invested
in the equity shares of domestic companies listed on a recognised stock exchange:
Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may
be, shall be computed with reference to the annual average of the monthly averages of the opening and
closing figures;
(b) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section
2 of the Special Economic Zones Act, 2005 ;
(b) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to
clause (5) of section 43.
Cost of acquisition if Section 112A is Applicable [Inserted by Finance Act, 2018] [Section
55(2)]
In relation to a long-term capital asset, 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 section 112A, acquired before the 1st day of February, 2018 shall be
higher of:
(i) the cost of acquisition of such asset; and
(ii) lower of:
(A) the fair market value of such asset; and
(B) the full value of consideration received or accruing as a result of the transfer of the capital asset.
“fair market value” means,:
(i) in a case where capital asset is listed on any recognised stock exchange as on 31st day of January,
2018, highest price of the capital asset quoted on such exchange on the said date:
Provided that where there is no trading in such asset on such exchange on the 31st day of January,
2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day
of January, 2018 when such asset was traded on such exchange shall be the fair market value;
(ii) in a case where the capital asset is a unit which is not listed on a recognised stock exchange as on the
31st day of January, 2018, the net asset value of such unit as on the said date;
(iii) in a case where the capital asset is an equity share in a company which is –
(A) not listed on a recognised stock exchange as on the 31st day of January, 2018 but listed on such
exchange on the date of transfer;
(B) listed on a recognised stock exchange on the date of transfer and which became the property of
the assessee in consideration of share which is not listed on such exchange as on the 31st day of
January, 2018 by way of transaction not regarded as transfer u/s 47,
An amount which bears to the cost of acquisition the same proportion as CII for the financial year 2017-18
bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on the
first day of April, 2001, whichever is later
EXEMPTIONS FROM CAPITAL GAINS [SECTION 54 TO 54H]
Section Section 54 : Transfer Section 54B : Transfer Section 54EC : Section 54EE
of Residential of Agricultural Property Transfer of LTCA Investment in units of
Property specified funds
1 Assessee Individual or HUF Individual or HUF Any Assessee Any Assessee
2 Capital Asset Residential House Urban Agricultural land or building or both Any Capital Asset
Transferred Land used by assessee
[Finance Act,2018]
/ parent for agricultural
for min 2 years prior to
transfer.
230 PP-DTL&P
3 Nature of CA LTCA STCA or LTCA LTCA LTCA
4 New Asset One Residential Agricultural Land Bonds redeemable Units of start up fund
house in India after 3 years issued by
(any area)
Provided that § National Highway
Max Investment in
where the amount Authority of India or
F/Y of Transfer &
of the capital gain § Rural electrification Subsequent F/Y is 50
does not exceed corporation of India lakhs
two crore rupees, § Power Finance
the assessee Corporation ltd.
may, at his
§ Indian Railway
option, purchase
Finance Corporation
or construct two ltd
residential houses
§ Notified bond by
in India
CG W.E.F 1/4/18,
investments in above
bonds redeemable
after 5 years [Finance
Act, 2018]
Max Investment in
F/Y of Transfer &
Subsequent F/Y is 50
lakhs
5 Time period of Within 1 year before Within 2 yrs after Within 6 months of Within 6 months of
New Asset or within 2 years transfer transfer transfer
after transfer or
construct within 3
yrs after transfer
6 Capital Gain Deposit in CGAS on

Account or before Due Date
-Do- NA NA
Scheme of Return (DDR)
[CGAS] u/s.139(1)
7 LTCG invested LTCG invested in LTCG invested in units

in New Asset + Specified Bonds upto of start fund upto 6
Exemption -Do-
Deposited in CGAS 6 months of transfer months of transfer
upto DDR
8 Transfer of If New Asset If New Asset is If New Asset is

New Asset transferred within transferred or transferred or
-Do-
3 years from converted into money converted into money
date of purchase/ within 3 years from within 3 years from
construction, then date of acquisition., date of acquisition.,
then exempt LTCG then exempt LTCG
Cost of acquisition of
taxable in p/y of taxable in p/y of
new asset Reduced
transfer/ conversion of transfer/ conversion of
by Capital Gain
new asset new asset
exempted earlier
Section 54F : Transfer of LTCA 54GB: Capital gain on transfer of residential

property not to be charged in certain cases
[ upto 31/3/21]
1 Assessee Individual or HUF Individual or HUF
2 Capital Asset Any Capital Asset
Transferred
(Other than Residential Residential property (a house or a plot of land)
house)
3 Nature of CA LTCA LTCA
4 New Asset & Time Subscription in Equity shares of an Eligible company
period & company has within 1 year from date of subscription
Purchased 1 year before or
in Equity shares by assessee, utilised this amount for
within 2 yrs after transfer
purchase of New asset
or constructed within 3
yrs after transfer One Eligible Company means
Residential house in India
(i) Indian Company incorporated between 1st April of P/Y
of capital gain upto due date of return u/s 139(1)
(ii) Engaged in eligible business (manufacture of any

article or thing)
(iii) company in which assessee has more than 50% share

capital(30%, applicable from the assessment year 2020-
21)
(iv) company qualifies to be an eligible start-up
New Asset means new plant and machinery but does not
include (i) P&M which, before its installation by assessee,
was used by any other person (ii) P&M installed in any
office premises or any residential accommodation, including
guest-house (iii) any office appliances including computers
or computer software (iv) any vehicle or (v) P&M the whole
of the actual cost of which is allowed as 100% deduction
(by depreciation or otherwise) under PGBP
5 CGAS Available Available
6 LTCG X
Exemption (Cost of new asset + LTCG X (Cost of new asset + Amount deposit in CGAS)
---------------------------------------------------------------------------
Amount deposit in CGAS)
Net Consideration
-------------------------
Net Consideration
7 Transfer of New If New Asset t/f within 3 If Equity shares or New Asset t/f within 5 yrs from date
Asset yrs from date of purchase/ of purchase/ construction, then Exempt Capital Gains
construction, then taxable in P/Y of transfer of Equity shares/New asset
Exempt Capital Gains ‘Provided that in case of a new asset, being computer
taxable in P/Y of transfer or computer software, acquired by an eligible start-
of new asset. up, the lock in period will be 3 years
NOTE :- Amount deposit in CGAS if deposited within the prescribed time period.
232 PP-DTL&P
Section 54D : Compulsory 54G : Transfer under 54GA: Transfer of industrial

Acquisition of Land & shifting of Industrial undertaking to SEZ
Building Undertaking
1 Assessee Any Assessee Any Assessee Any Assessee
2 Capital Asset Compulsory acquisition of Plant & Machinery / Land & Plant & Machinery / Land & Building
Transferred Land & Building used for Building used for Industrial used for Industrial undertaking in
Industrial undertaking in undertaking in Urban Area Urban Area
Any Area
3 Nature of CA STCA or LTCA STCA or LTCA STCA or LTCA
§ Used by Assessee for § Above undertaking shifted § Above undertaking shifted to SEZ
Business for 2 years (to Rural Area) ( in any area)
4 Conditions
immediately prior to date of
acquisition.
§ Above undertaking
shifted (in any area)
5 New Asset & § Within 3 years after § 1 year before or within 3 yrs § 1 year before or within 3 yrs of
Time period transfer of transfer transfer
§ Purchase/Construction of § Purchase Plant/Machinery § Purchase Plant/Machinery
§ Other Land/Building § Purchase /Construct Land/ § Purchase /Construct Land/Building

Building
§ Including expenses on transfer
§ Including expenses on
transfer
6 Treatment Same as Section 54 Same as Section 54 Same as Section 54
of unutilized
Capital Gains
7 Exemption Same as Section 54 Same as Section 54 Same as Section 54
8 Transfer of Same as Section 54 Same as Section 54 Same as Section 54

New Asset
COMMON POINT FOR ALL EXEMPTIONS

Non utilization of balance in Capital Gain A/c. Scheme:
a. Amount deposited is not utilized wholly or partly for specified purpose by specified time.
b. Exemption claimed on unutilized amount is taxable as Capital Gain of P/Y in which specified time
expires.
c. It will be taxable as short term capital gain/long term capital gain depending upon the original capital
gain.
Section 54H: Extension of time for acquiring new asset

• Where transfer of capital asset is by compulsory acquisition under any law.
• Time limits for acquiring new asset & for depositing in CGAS (Capital Gain Account Scheme) shall be.
• Computed from date of receipt of compensation and not from the date of compulsory acquisition.
• Enhanced Compensation – If any enhanced compensation is received, it is taxable in the year in which
such compensation is received and for acquiring new asset under sections 54, 54B, 54D, 54EC, 54F,
the time limit shall be determined from the date of receipt of additional compensation.
Illustration 20 : X sold a residential house on 15/12/2019 for a consideration of `41,00,000/-. Transfer expenses
incurred amounted to `1,00,000/-. The said residential house was purchased in P/Y 01/02 for `1,00,000/- (FMV
as on 1.4.01 is ` 3,60,000). Compute the Capital Gains for assessment Year 2020-21 :
Case 1 : He invests `20,00,000 for purchase of a new residential house on 15/4/20.No further investment was
made.
Solution : LTCG for A/Y 20/21 : `41,00,000 – `1,00,000 – `[1,00,000 x 289/100] = `37,11,000
Exemption u/s 54 : `20,00,000 , Taxable LTCG : `37,11,000 -`20,00,000 = `17,11,000
Case 2 : He invests `20,00,000 for purchase of a new residential house on 15/4/20. He has also deposited
`5,00,000 on 31/7/2020 and `2,08,000 on 1/8/2020 in CGAS .Return is filed on 5/8/2020 [Due date of return
31/7/2020]
Solution : Exemption u/s 54 : `20,00,000 + `5,00,000 = `25,00,000
Taxable LTCG : `37,11,000 – `25,00,000 = `12,11,000
Illustration 21 : Mr. A has three agricultural lands as follows
1) First Agricultural land : This land is situated in Rural area and was purchased for `2,00,000 in 2005/06.
It was sold for `6,00,000 on 15/12/2019
2) Second Agricultural land : This land is situated in Urban Area and was compulsory acquired by
government on 15/12/2017.The compensation of `10,00,000 was received on 15/4/19. This land was
purchased for `2,00,000 on 15/12/2008.
3) Third Agricultural land : This land is situated in Urban Area & was sold for `20,00,000 on 15/3/2020.
Land was purchased for `1,00,000 during P.Y. 07/08.
In order to claim exemption, Mr A has made the following investments :
a) `8,00,000 for purchase of agricultural land in Urban Area on 15/4/20
b) `4,00,000 for purchase of agricultural land in Rural Area on 15/6/20
c) `1,00,000 in CGAS on 15/7/20
[Due date of return 31/7/2020]
Solution :
1) 1st Agricultural land is not a capital asset u/s 2(14). Therefore no capital gain arises.
2) 2nd agricultural land is compulsory acquired by government. The Capital gain is exempt u/s 10(37)
3) LTCG on 3rd Agricultural land for A/Y 20/21 :
`20,00,000 – `1,00,000 x 289/129 = `17,75,969
Exemption u/s 54B : `8,00,000 + `4,00,000 + `1,00,000 = `13,00,000
Taxable LTCG : `17,75,969– `13,00,000 = `4,75,969
Illustration 22: From the following particulars compute Capital Gains in hands of Mr. X for A/Y 20/21.
Mr. X has LTCG from Sale of land of `80,00,000 on 15/1/19.He purchased NHAI bonds of `40,00,000 on 15/2/19
and another 40,00,000 of bonds of RECL on 15/4/19.Compute Capital Gains in hands of Mr. X for A/Y 20/21.
234 PP-DTL&P
Solution : LTCG for A/Y 20/21 : `80,00,000 – Exemption u/s 54EC `50,00,000 = Taxable `30,00,000
Illustration 23 : Mr. X sold jewellery for `60,00,000 on 15/12/19. Jewellery was purchased for `3,00,000 during
P/Y 01/02.The expenditure on transfer is `1,00,000.Determine Capital Gain for A/y 20/21. Mr. X purchased a
new Residential house for `30,00,000 on 15/4/20
Solution : LTCG for A/Y 20/21 : `60,00,000 - `1,00,000 - `3,00,000 x 289/100 = `50,33,000
Exemption u/s 54F : `30,00,000/`59,00,000 x `50,33,000 = `25,59,153
Taxable LTCG : `50,33,000 – `25,59,153 = `24,73,847
LESSON ROUNDUP
– Sections 45 to 55A of the Income-tax Act, 1961 deal with capital gains. Section 45 of the Act, provides
that any profits or gains arising from the transfer of a capital asset effected in the previous year shall,
save as otherwise provided in Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, 54GA and 54H be
chargeable to income-tax under the head “Capital Gains” and shall be deemed to be the income of
the previous year in which the transfer took place.
– Section 2(14) of the Income-tax Act defines the term “capital asset” to means Property of any kind
held by an assessee whether or not connected with his business or profession but does not include
any stock-in-trade, personal effects , agricultural land in India, 6^ per cent Gold Bonds, Special Bearer
Bonds , Gold Deposit Bonds.
– The essential requirement for the incidence of tax on capital gains is the transfer of a ‘capital asset’.-
Any capital gain arising as a result of transfer of a short-term capital asset is known as short-term
capital gain. “Short term” capital asset means a capital asset held by an assessee for not more
than thirty-six months immediately preceding the date of its transfer. In the case of capital assets
(being equity or preference share in a company) held by an assessee for not more than 12 months
immediately prior to its transfer.
– Assets other than short-term capital assets are known as ‘long-term capital assets’ and the gains
arising therefrom are known as ‘long-term capital gains’. Section 48 of the Act provides that the
income chargeable under the head ‘capital gains’ shall be computed by deducting from the full value
of consideration received or accruing as a result of the transfer of the capital asset the f amount
of expenditure incurred wholly and exclusively in connection with such transfer and the cost of
acquisition of the capital asset and the cost of any improvement thereto.
– ‘Cost of acquisition’ of goodwill of a business or a right to manufacture, produce or process any article
or thing, tenancy rights, stage carriage permits or loom hours is in the case of acquisition of such
asset by the assessee by purchase from a previous owner, cost of acquisition means the amount of
the purchase price; and in any other case cost of acquisition shall be Nil.
– Cost of improvement means all capital expenditure in making any additions or alterations by the
assessee after it became his property and where the capital asset became the property of the
assessee by any of the modes specified in Section 49(1) by the previous owner as the case may
be.
– Under Sections 54, 54B, 54D, 54EC, 54F, 54G and 54H of the Act, capital gains arising from the
transfer of certain capital assets are exempt from tax under certain circumstances.
SELF TEST QUESTIONS

1. What are the conditions for the taxability of income under the head Capital Gains?
2. Capital Gains are generally taxable in p/y of transfer of Capital Asset. Are there any exceptions of the
same?
3. Indexation is done for long term capital asset. Are there any exception of the same?
4. Is conversion of capital asset into stock in trade chargeable to Capital Gains?
5. How will Capital Gain be computed when all the assets and liabilities of a division are sold for a
lumpsum consideration without price being assigned for them individually?
6. On liquidation of company, who is liable to pay Capital Gains ,the company or the shareholder. Also
how is full value of consideration computed in that case?
7. If stamp duty value is more than the sale consideration, what will be the full value of consideration in
that case?
8. If full value of consideration is not ascertainable, whether Capital Gain is applicable and is yes what
will the full value of consideration?
9. If compensation due to compulsory acquisition of capital asset is increased on order of court ,will it
be taxable in p/y of order of court or p/y of receipt of compensation and also determine whether any
expenditure is allowed as deduction from it?
10. Write a short note on computation of Capital Gain on transfer of bonus shares.
PRACTICAL QUESTIONS
1. Mr X had purchased 100 Shares of A Ltd on 01-01-10 @ `50/- Per share. The Company had
announced a right issue in the ration of 1:1 in June 2019 of shares of paid up value of `10/- at a
premium of `20/- per share. Mr. X had applied for the right issue and was allotted the right shares in
July, 2019. Mr. X sells all the shares on 01-01-2020 @ `200/- per share. Determine Capital Gains.
2. Mr X had purchased 100 Shares of Y Ltd on 01-01-2008 for `100/- Per share. On 01-05-2019, Y Ltd
has introduced a 1:1 right offer of shares of paid up value of `10/- at a Premium of `50/- per share.
Mr X on 28-05-2019 renounced the right offer in favour of Mr Z for `75/- Per share. Determine Capital
Gain in hands of Mr X.
3. Assume in Q7, Mr. Z had applied for 100 Shares on 30/5/2019 and was allotted the shares on 04-06-
2019. These shares are sold by Mr. Z on 21-03-2020 @ `300/- Per share. Compute Capital Gain in
hands of Mr Z.
4. (a) Mr X had Purchased 100 Shares of Y Ltd @ `50/- Per Share on 01-01-2013.Y Ltd allots one bonus
share for every two shares on 31-05-2019. Mr X sells 150 shares on 01-01-2020 @ `150 per share.
(b) Mr X had Purchased 500 Shares of Y Ltd @ `200/- Per Share on 01-01-1998. Y Ltd allots one
bonus share for every two shares on 31-05-1999. Mr X sells all shares on 01-01-2020 @ `900 per
share. Market value of share on 1-4-2001 is `300 per share.
5. Mr. X acquired a land on 1/1/2002 for ` 1,00,000. He enters into an agreement to sell his land to Mr Y
on 1/1/2020 and received `40,000 as advance money. Mr.Y did not purchase the Land and therefore
Mr. X forfeited the advance. Mr. X sell the land on 1/3/2020 for `10,00,000 to Mr. Z. Determine Tax
Treatment.
236 PP-DTL&P
Answer:
Solution 1: LTCG on Original shares for A/Y 20/21 : 100 x `200 – 100 x `50 x 289/148 = `10,236
STCG on Right shares for A/Y 20/21 : 100 x `200 – 100 x `30 = `17,000
Solution 2: STCG on renounced offer for A/Y 20/21= `75 x 100 = `7,500
Solution 3: STCG for A/Y 20/21 : 100 x `300 – [100 x (`75 + `60)] = `16,500
Solution 4a : LTCG on original shares for A/Y 20/21 : 100 x `150 – [100 x `50 x 289/200] = `7,775
STCG on Bonus Shares for A/Y 20/21 : 50 x `150 – nil = `7,500
Solution 4b : LTCG on original shares for A/Y 20/21 : 500 x `900 – [500 x `300 x 289/100] = `16,500
LTCG on bonus shares for A/Y 20/21 : 250 x `900 – [250 x `300 x 289/100] = `8,250
Solution 5 : LTCG for A/y 20/21 : `10,00,000 – `[1,00,000 x 289/100] = `7,11,000
Income from Other sources for A/Y 20/21 : `40,000
SUGGESTED READINGS
Kluwer]
Lesson 6 n Computation of Income from Other Sources 237
Lesson 6
Computation of Income
from Other Sources
LESSON OUTLINE
LEARNING OBJECTIVES
– Charging Section [Section 56(1)] Income which are not chargeable under the
– Taxation of Dividend [Section 115O] previous four heads and which are not exempt u/s
10, must be charged to tax as “Income from other
– Dividend [Section 2(22)]
sources”. In addition to the taxation of income
– Taxation of Distributed Income to not covered by the other heads, Section 56(2)
Shareholders [Section 115QA] specifically provides certain items of incomes as
being chargeable to tax under the head in every
– Taxation of Income received from Mutual
case.
Funds & UTI
– Casual Income
understand:
– Interest Income • Which are the income chargeable under
– Income from letting of Machines, Plant or the head income from other sources,
Furniture belonging to assessee • Determine taxability of dividend
– Sum received under Keyman Insurance • Know Applicability of Corporate Dividend
Policy including Bonus Tax
– Taxation of Gifts • Determine taxability of casual incomes
– Other Misc. Provisions • Determine taxability of Interest
– Deduction [Section 57] • Know what are admissible deductions,
– Deduction not allowed [Section 58] • Know which are the inadmissible
– LESSON ROUNDUP deductions and
– SELF TEST QUESTIONS • Know what are the provisions of taxability

of gift in kind or in cash from relative or
unrelated persons.
237
238 PP-DTL&P
Section 56(1) General Charging Section
Section 56(2) Specific Charging Section
Section 115O Corporate Dividend Tax by Domestic company
Section 10(34) Dividend referred under 115O Exempt
Section 115BBDA Taxability of dividend
Section 145 Method of accounting
Section 2(22) Deemed dividend
Section 115R Dividend Tax by Mutual funds
Section 10(35) Dividend referred under 115R Exempt
Section 115BB Rate of Tax on lottery Incomes
Section 10(15) Interest exempt from Tax
Section 57 Deductible expenses from Other Sources
Section 58 Non Deductible expenses from Other sources
CHARGING SECTION [SECTION 56(1)]

• Income of every kind
• Not Excluded from Total Income
• Not chargeable to tax under other four heads
• Shall be chargeable to Income Tax under Income from Other Sources.
Examples:
1. Rental Income from vacant land
2. Income from sub-letting of house property
3. Interest on loan/deposits.
4. Agricultural Income outside India
5. Family pension.
6. Insurance Commission
7. Income from Undisclosed sources
8. Royalty(If not covered under Business or Profession)
9. Receipt of Life Insurance money( If not exempt u/s 10(10D)
10. Director Fees/Commission

11. Director salary if not chargeable under salary
12. Salary to MP/MLA etc
Following Incomes SHALL BE chargeable under head Other Sources [Section 56(2)]
1. Dividend Income
2. Winnings from Lotteries, cross word puzzles, card games etc.
3. Interest on Securities ,if not chargeable under Business or Profession
4. Income from letting of Plant, Machinery or Furniture, if income not chargeable under Business or
Profession
5. Income from composite letting of Building together with Plant, Machinery or Furniture, which is
inseparable from letting of such building, if such income not chargeable under Business or Profession
6. Sum received under Keyman Insurance Policy, if not chargeable under salary or Business or
profession
7. Sum/Property received as Gifts
8. Share premium in excess of fair market value received by Closely Held Company
9. Interest received on compensation or on Enhanced compensation
10. Advance or other money received in course of negotiations for transfer of a capital asset, if such sum
is forfeited & negotiations do not result in transfer of such capital asset.
11. Any compensation or other payment, due to or received by any person, by whatever name called,
in connection with the termination of his employment or the modification of the terms and conditions
relating thereto.
Method of Accounting [Section 145]

As per section 145, Income from other sources is to be calculated on basis of Cash or Mercantile basis of
accounting regularly employed by the assessee.
TAXATION OF DIVIDEND [SECTION 115O]

• Every Domestic Company
• shall pay Corporate Dividend tax (CDT)
• @ 15%* + 12 % surcharge + 4 % Health and Education cess
• On divided declared or paid [Actual and Deemed dividend u/s 2(22)(a)(b)(c)(d)]
[*30% for Deemed dividend u/s 2(22)(e) Finance Act, 2018]
Special Point : While calculating CDT Grossing up is to be done as follows
(Dividend to be declared/paid X 15/85) + 12% Surcharge + 4% HEC
Alternatively (Dividend to be declared/paid) X 17.472/82.528
However, no Grossing up is to be done when CDT is payable on Deemed Dividend u/s 2(24)(e)
240 PP-DTL&P
Special Point:
1
Company
Indian Company Other Company
Arrangement for distribution No Arrangement

of dividend in India
Domestic Company 2(22A) Foreign Company 2(23A)
Liable to CDT Not Liable to CDT

2. Dividend in Section115O includes Deemed dividend u/s. 2(22) (a), (b), (c), (d) & 2(22)(e).
3. Dividend includes both Interim & final dividend.
4. Such Corporate Dividend Tax is payable even if Income Tax is not payable by the company
5. Corporate Dividend Tax shall not be chargeable for dividends declared, distributed or paid by enterprise
engaged in developing or developing and operating or developing, operating and maintaining a
Special Economic Zone.
6. Corporate Dividend Tax not payable on Buy Back of shares by company (Exception : Section
115QA )
DIVIDEND [SECTION 2(22)]

Dividend Includes:
Distribution by a Company to
Section 2(22)(a) Section 2(22)(b) Section 2(22)(c) Section 2(22)(d)
ANY ANY Shareholder Preference Equity Equity Shareholder
Shareholder Share Shareholder
Holders
All or part of its Debentures, debenture- Bonus Any money or Any money or asset
Assets stock, deposit certificate shares asset on its on Reduction of its
with or without interest. liquidation capital
To the extent of accumulated profits
Note: While calculating accumulated profits, an allowance for depreciation and additional depreciation at the
rates provided by the Income Tax Act has to be made by way of deduction. [Navnitlal C. Jhaveri v CIT[1971]80
ITR 582 (Bom)]
Deemed Dividend [Section 2(22)(e)]

• Closely held Company
• Gives loan or Advance
• To Specified Shareholder (case 1) or
• To CONCERN in which specified shareholder is partner/member & has substantial interest
(case II) or
• To Any person on behalf or benefit of specified shareholder (case III)
• Shall be deemed as dividend to the extent of accumulated profits
Special Points:
1. Specified Shareholder Means beneficial owner holding atleast 10% voting in the company.
2. Substantial Interest means: If at any time person entitled to atleast 20% income of that concern
(20% voting power, in case of company).
3. Section 2(18): Company in which public are substantially interested (Widely held company)
A company is said to be a company in which the public are substantially interested if
a. It is owned by Government or Reserve Bank of India or
b. Its atleast 40% shares are held by the Government or the RBI or
c. Non profit company or
d. company whose principal business is to accept deposits from its members or
e. Public company & its equity shares were listed on last day of P/Y on recognised stock exchange
A company not covered under above categories is a closely held company.
4. Section 2(22)(e) covers not only advances and loans to shareholders but any other payment by the
company on behalf of or for the Individual shareholders, such as payment of shareholder personal
expenses, Insurance premium etc to the extent of the accumulated profits of the company.
[CIT v jamnadas Khimji Kothari[1973] 92 ITR105(Bom)]
TAX TREATMENT OF DIVIDEND IN THE HANDS OF SHAREHOLDER

1. Section 10(34): Dividend received from domestic company referred to in Section 115O shall be exempt.
This section is subject to Section 115BBDA. Therefore dividend upto 10 lakhs will remain exempt.
2. Section 115BBDA : Tax on dividends received from domestic companies
• In case of Resident + Specified assessee
• Dividend from domestic company [Excluding Deemed Dividend u/s 2(24)(e)]
• Exceeds 10 lakhs
• Such excess is taxable at 10% + Applicable surcharge + 4% Health & Education Cess
Special point:
1. No deduction of any expenditure/allowance/set off of loss shall be allowed u/s 115BBDA
2. Specified assessee” means a person other than,—

242 PP-DTL&P
(i) Domestic company; or
(ii) Fund/trust/university/educational institution/hospital u/s 10(23C) ; or
(iii) Trust registered u/s 12A or u/s 12AA.
TAX ON DISTRIBUTED INCOME TO SHAREHOLDERS [SECTION 115QA]

Domestic company shall pay tax on distributed income by company on buy-back of shares from a shareholder.
The provisions of section shall not apply to such buy-back of shares (being the shares listed on a recognised
stock exchange), in respect of which public announcement has been made on or before the 5th day of July,
2019 in accordance with the provisions of the SEBI (Buy-back of Securities) Regulations, 2018 made under the
SEBI Act, 1992 [Finance Act( No 2),2019].
Special point:
(i) Buy-Back means purchase by company of its own shares.
(ii) Distributed income” means consideration paid by company on buy-back of shares as reduced by the
amount which was received by the company for issue of such shares.
(iii) Section 10(34A) : Any income arising to shareholder, on account of buy back of shares by the company
as referred to in section 115QA is exempt.
Question 1: Mr. X receives the following amounts during previous year. Determine his total Income?
1) A dividend of `20,000 from A ltd, an Indian Company
2) A dividend of `10,000 from Z ltd, a Foreign Company which has made arrangements for distributing
dividends in India
3) A dividend of `15,000 from Z ltd, a Foreign Company which has not made any arrangements for
distributing dividends in India
4) Asset of `18,000 received from B ltd, an Indian Company
5) Debentures worth `22,000 received from C Ltd, an Indian Company

6) A dividend of ` 5,000 from a private limited company ,an Indian Company
7) A Loan of `20,000 from a private limited company ,an Indian Company in which he holds 15% equity
share capital
Solution:
1) Exempt u/s 10(34)
3) Taxable under Other Sources in hands of Mr.X
Question 2 : Mr. X holds 11% Shares of ABC (P) Ltd. Mr X is also a partner in firm M/s XYZ in which his profit
sharing ratio is 25%. The Company X Ltd gives a loan of `2,00,000 to M/s XYZ and also a Loan of `50,000 to
Mr. X. Determine tax treatment.
Solution : Deemed dividend u/s 2(24)(e) of ` 2,50,000 chargeable to CDT u/s 115O in the hands of the company.
Therefore deemed dividend exempt in hands of Mr.X and M/s XYZ.
TAXATION OF INCOME RECEIVED FROM MUTUAL FUNDS & UTI

Section 115R: Mutual Funds shall pay TAX on Income distributed by them.
Section 10(35): Income referred in Sec 115R shall not be included in Total Income of recipient.
CASUAL INCOME
Winnings from Lotteries, Crossword Puzzle, Races including horse races, Card games & other games
of any sort or from gambling or betting of any form – Taxable
Special Points:
(a) Deduction u/s Section 80 C to Section 80 U will not be available from such Incomes
(b) Section 58: No Deduction shall be allowed from such incomes
(c) Amount to be included in Total Income is Gross amount & not Net amount received after TDS
Gross Amount to be = Net Amount Received after TDS X 100

included in Total Income 100 - TDS rate
Question 3 : Mr. X wins a lottery during p/y 19-20. Compute Income from other sources of Mr. X for A/Y 20-21
assuming winning received is `3,50,000.
Solution: Income from Other sources for A/Y 20-21 : `3,50,000/70 x 100 = `5,00,000
Question 4: Mr. X purchased a lottery ticket worth `10,000 on 4.6.2019. He wins a jackpot of `4,00,000 on his
ticket. Mr. X has also made an expenditure of `10,000 for collection of winning amount. Deduction u/s 80C is
`50,000. Compute Total Income of Mr. X for A/Y 20-21.
Solution: Income from Other sources for A/Y 20/21 : `4,00,000
Gross Total Income/Total income: `4,00,000
INTEREST INCOME
Income from Interest on Securities is chargeable under head other sources.(If not chargeable under Business
or Profession)
Interest Exempt from Tax [Section 10(15)]

1. Interest on Notified bonds/certificates
§ Post office Saving Bank account upto `3,500/ `7,000 in joint account in P/Y
§ Post office Time deposit
§ Special Bearer Bonds
2. – Notified Investment Bond
– Notified Relief Bonds of RBI
3. Notified Bond/Debenture of Public Sector Companies. E.g. Rural Electrification Corporation Limited , Indian
Railway Finance Corporation Limited
244 PP-DTL&P
4. Bonds of Local Authority, i.e. Municipal Bonds.
5. Interest on Gold Deposit Bonds issued under Gold Deposit scheme 1999 or Deposit certificates issued
under Gold Monetisation Scheme, 2015
Note:
1. Section 14A: Expenditure of any exempt income is not allowed as a deduction from taxable income
2. Amount to be included in Total Income is Gross amount & not Net amount received after TDS
Gross Amount to be = Net Amount Received after TDS X 100

included in Total Income 100 - TDS rate
BOND WASHING TRANSACTIONS [SECTION 94(1)]

• If owner of security(Transferor)
• Sells security before record date &
• Acquires the same after record date
• Interest received by transferee
• Deemed as Income of transferor
However Deeming provisions of section 94(1) is not applicable if there is no avoidance of Income tax or
Avoidance of Income tax was exceptional & there was no avoidance during last three preceding P/Y
INCOME FROM LETTING OF MACHINERY, PLANT OR FURNITURE BELONGING TO

ASSESSEE
If Plant and Machinery etc. is NOT let out as part of assessee’s business activity than income arising from such
hire will be taxable under other Sources. If letting is as part of his business activity than under BUSINESS OR
PROFESSION
Rent
Business Not Business
House Property P/G/B/P Other sources

(Business/Non Business) u/s 56(2)
Question 5 : Mr. X has let out a car on a rent of `1,20,000 during p/y 19/20. The car was purchased on
15/4/2018 for `2,00,000.The repair and maintenance expenses incurred on car during previous year 19-20 is
`30,000.Compute taxable income under other sources for AY 20-21
Solution: Taxable income from Other Sources for AY 20-21
Rent : `1,20,000 – Depreciation `27,750 – Repairs `30,000 = `62,250
Depreciation
Cost of car : `2,00,000 – 7.5% depreciation for PY 18-19 i.e. `15,000 = `1,85,000
15% depreciation for P/y 19/20 = `27,750
Income from composite letting of machinery, plant furniture and buildings

If letting of building is inseparable from letting of P&M etc. and such letting is NOT as part of his business
activity, than income arising from such letting will be taxable under other sources. If letting is as part of his
business activity than under BUSINESS OR PROFESSION
Rent
Can be separated Cannot be separated
House Property Building Facility
House Property Other Sources *

* Provided not covered under Business
Question 6 : Mr. X has let out a building on a rent of `2,40,000 during PY 2019-20 along with facilities of
electricity, gas and water. The repair and maintenance expenses incurred during PY 2019-20 on building is
20,000 and `30,000 is incurred on payment of Electricity, gas and water bills of tenant. Compute taxable income
under other sources for AY 2020-21
Solution : Taxable income from other sources for AY 2020-21
`2,40,000 -`20,000 -`30,000 = `1,90,000
SUM RECEIVED UNDER KEYMAN INSURANCE POLICY INCLUDING BONUS

Any sum received under Key Man policy including bonus is taxable under other sources provided not chargeable
under head Salary or Business or Profession
246 PP-DTL&P
Received by person taking policy Not received by person taking policy
Received by Employee Received by other person
Business income u/s 28
Salary income u/s 17(3) Other sources u/s 56(2)
TAXATION OF GIFTS
A. Taxation of Cash Gifts

• Sum of money received by ANY PERSON
• Without consideration
• In excess of ` 50,000/-
• in a previous year
• the whole of such sum
• Shall be included in income of receiver under head Other sources
B. Taxation of Property as Gift/Inadequate consideration
Property means following Capital asset of the assessee, namely
(i) Immovable property being land or building or both;
(ii) Shares and securities;
(iii) Jewellery;
(iv) Archaeological collections;
(v) Drawings;
(vi) Paintings;
(vii) Sculptures;
(viii) Bullion;
(ix) Any work of art
Taxation of Immovable property
Without Consideration Inadequate Consideration
Stamp Duty Selling price < Selling Price upto Selling price <
Value (SDV) upto SDV – (a or b, higher) (SDV - `50,000) (SDV - `50,000)
`50,000
a) `50,000
b) 5% of
Exempt consideration Exempt SDV - SP shall be
treated as
Income under Other
SDV shall be sources of receiver
treated as
Income under Other
sources of receiver
Taxation of Movable property
Without Consideration Inadequate Consideration
Fair market value FMV > `50,000 Selling Price upto Selling Price <
(FMV) upto `50,000 (FMV - 50,000) (FMV - 50,000)
FMV shall be
treated as Income Exempt FMV - SP
Exempt under Other shall be treated as
sources of receiver Income under Other
sources of receiver
Special Point:
1. Section 49(4) : If Property is taxable in hands of recipient under Other sources then its Stamp value /
FMV will be taken as its Cost of Acquisition .
2. Sum of Money/Property received from following will not be included in Income
a. From RELATIVE
b. On Marriage of Individual.
c. Under will or inheritance.
d. Received in contemplation of death of payer/donor
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e. From or by Trust registered u/s 12A/12AA

f. From Local authority u/s 10(20)
g. From any university /educational institution/hospital/trust/institution u/s 10(23C)
h. By way of transaction not regarded as transfer u/s 47(certain specific cases)
i. From an individual by a trust created or established solely for the benefit of relative of the individual
j. From such class of persons and subject to such conditions, as may be prescribed.
3. RELATIVE : For above purpose “Relative “ means
In case of individual :
(a) Spouse of the individual
(b) Brother or sister of the individual
(c) Brother or sister of spouse of the individual
(d) Brother or sister of either of the parents of the individual
(e) Any lineal ascendant or descendant of the individual
(f) Any lineal ascendant or descendant of the spouse of the individual
(g) Spouse of the persons referred to in clause (ii) to (vi)
In case of HUF : Any member thereof
4. Where the date of agreement fixing the amount of consideration for the transfer of immovable property
and the date of registration are not the same, the stamp duty value on the date of agreement may be
taken for the purposes of this sub-clause:
Above provision shall apply only in a case where the amount of consideration referred to therein, or a
part thereof, has been paid by way of an account payee cheque or an account payee bank draft or by
use of electronic clearing system through a bank account or through such other electronic mode as may
be prescribed, on or before the date of agreement for transfer of such immovable property:
Question 7: Mr. X receives the following Gifts during PY 19-20
1. He gets a gift of `25,000 from his friend A.
2. He gets another Gift of `5000 from his friend A.
3. He gets a gift of `26,000 from C, who is cousin of his father.
4. He gets a gift of `5000 from D, who is elder brother of his grandfather.
5. He gets gift of `41,000 from his grandmother.
6. On the occasion of Marriage of X, he gets `1,90,000 as gift (out of which `1,00,000 is received
from relatives and remaining amount is received from friends of Mr. X & Mrs. X)
7. He gets `80,000 from a notified public chartable institution.
8. He receives `5,40,000 under a will of a person known to him.
9. He received a house property from his friend as Gift (Stamp Value of the Property is `40,000)
10. He received shares from his friend for `65,000 (Fair market value on the date of receipt is `80,000)
Compute Income chargeable in hands of Mr. X under head Other sources for AY 20-21
Solution: Income Taxable Under Other Sources for AY 20-21
Particulars Taxable Amount (`)
1.He gets a gift of `25,000 from his friend A. 25,000
2.He gets another Gift of `5000 from his friend A. 5,000
3.He gets a gift of `26,000 from C, who is cousin of his father. 26,000
4.He gets a gift of `5000 from D, who is elder brother of his grandfather 5,000
5.He gets gift of `41,000 from his grandmother. Exempt
6.On the occasion of Marriage of X, he gets `1,90,000 as gift (out of which `1,00,000 Exempt
is received from relatives and remaining amount is received from friends of Mr. X
& Mrs. X)
7.He gets `80,000 from a notified public chartable institution Exempt
8.He receives `5,40,000 under a will of a person known to him. Exempt
9.He received a house property from his friend as Gift (Stamp Value of the Property Exempt
is `40,000)
10.He received shares from his friend for `65,000 (Fair market value on the date Exempt
of receipt is `80,000 )
Taxable 61,000
OTHER MISC. PROVISIONS
INTEREST RECEIVED ON COMPENSATION FOR COMPULSORY ACQUISITION OF CAPITAL

ASSET
• Interest received by an assessee on Compensation or on Enhanced Compensation shall be deemed
to be the income of the previous year in which it is received.
• Section 57: A deduction of 50% of such income shall be allowed & no deduction shall be allowed under
any other clause of this section.
Question 8: Mr. X received interest during p/y 19/20 amounting to `50,000 on account of delayed receipt of
compensation due to compulsory acquisition of capital asset by government. Determine the taxable amount
under other sources for AY 20-21.
Solution: `50,000 – `25,000 = `25,000 taxable under other sources for AY 20-21
SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE TO BE TREATED AS INCOME OF

CLOSELY HELD COMPANY
• Where a closely held company i.e. company not covered u/s 2(18),
• Receives, in any previous year
• From a resident
• Any consideration for issue of shares that exceeds
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• Face value of such shares

• Excess of aggregate consideration received for such shares over fair market value of shares
• Shall be treated as income
For eg: ABC(P) ltd issues 10,000 shares at `14/share. The face value of each share is `10/share. The fair
market value of each share is `12/share. In this case `10,000 x (`16-`14)= `20,000 shall be deemed as Income
of ABC (P) Ltd under the head Other sources for AY 20-21
Exception : Above Provisions shall not apply where the consideration for issue of shares is received –
(i) by a venture capital undertaking from a venture capital company or a venture capital fund or a specified
fund ; or
(ii) by a company from a class or classes of persons as may be notified by the Central Government in this
behalf.
Where the provisions have not been applied to a company on account of fulfilment of conditions specified
in the notification issued under clause (ii) above and such company fails to comply with any of those
conditions, then, any consideration received for issue of share that exceeds the fair market value of such
share shall be deemed to be the income of that company chargeable to income-tax for the previous year
in which such failure has taken place and, it shall also be deemed that the company has under-reported
the income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section
270A for the said previous year.
ADVANCE MONEY FORFEITED ON CAPITAL ASSET ON OR AFTER 1/4/2014

If Advance or other money is forfeited under negotiations for transfer of capital asset, it is included in Income of
receiver under Other sources.
For eg: Mr.X entered into an agreement to sell a building for `10,00,000 on 15/4/2019 and received an
advance if `1,00,000 on the same day. The buyer was supposed to make the balance payment upto
30/6/2019. However the buyer defaulted in the payment and the seller forfeited the advance amount of
`1,00,000.In this case the forfeited amount of `1,00,000 shall be treated as income of Mr.X under the head
other sources for AY 20-21.
DEDUCTIONS AVAILABLE FROM INCOME UNDER OTHER SOURCES [SECTION 57]

1. Collection Charges against taxable Dividend/Interest: Any reasonable sum paid by way of commission
or remuneration for realising such dividend/interest
2. Deduction against Income from letting of Plant,Machinery etc: Revenue Repair ,Insurance , Depreciation
of Building ,Machinery, Plant or Furniture
3. Deduction against family pension: 1/3rd of Pension OR `15,000/- , whichever is less
4. Any other Expenditure: Any other expenditure (not being a capital expenditure) expended wholly and
exclusively for the purpose of earning such income.
5. A deduction of 50% shall be allowed from interest received on compensation for compulsory acquisition of
capital asset. No other deduction shall be allowed from such income
Special Points:
1. FAMILY PENSION
§ Regular Amount payable by Employer,
§ To Legal Heir of Deceased Employee

§ Is Taxable under other sources
§ Deduction u/s 57 is available against such pension
However following pension are exempt from tax
Section 10(18) Pension received by Individual or Family Pension by family member if Individual has
been in service of C/S Govt. & awarded Vir Chakra or Mahavir Chakra or Param Vir
Chakra or other notified gallantry awards.
Section 10(19) Family pension received by widow or children or heir on death of member of armed
forces during duty
NO DEDUCTION OF FOLLOWING EXPENSES FROM INCOME FROM OTHER SOURCES

[SECTION 58]
• Personal Expenses of Assessee.
• Interest paid outside India on which Tax not paid or deducted at source
• Income Tax
• Expenditure referred to in Section 40A(2),40A(3)
• Expenditure or allowance for earning income from Lottery, Crossword Puzzles etc., (except Income
from owning & maintaining race horses)
Note: If an expense is allowed as deduction from Other sources in any previous year, recovery of any amount
out of that expense shall be taxable under Other sources in previous year of receipt [Section 59]
QUESTIONS FOR PRACTICE

Question 1: Mrs. W who draws a salary of `20,000 p.m. received the following gifts during P/Y 2019-20:
(a) Gifts of `5,00,000 on from a friend.
(b) Gifts of jewellery worth `3,00,000 from her father
(c) Gifts of `51,000 each received from her 4 friends on the occasion of her marriage.
(d) Gifts of `1,00,000 from her mother’s sister.
(e) Gifts of `60,00 from her father’s brother.
(f) Gifts of `50,000 from her husband’s friend
(g) Gifts of `21,000 from her mother’s friend.
(h) Gifts of `26,000 from her brother’s father in law.
(i) Gifts of `1,21,000 from her husband’s brother.
(j) Gifts of `26,000 from her employer.
(k) Scholarship of `1,20,000 from a charitable institution registered under section 12AA.
Compute total income for the assessment year 2020-21.
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Solution:
` `
Income under the head salary
Salary 20,000 X 12 2,40,000
Add: Cash gift from employer 26,000
2,66,000
Less: deduction U/s 16(ia) (50,000) 2,16,000
(i) Gift from a friend is included 5,00,000
(ii) Gift of jewellery exempt as from relative --
(iii) Gifts received from her 4 friends are exempt as they have
Been received on the occasion of her marriage --
(iv) Gift from her mother’s sister is exempt as the donor is covered
In the definition of relative --
(v) Gift from her father’s brother is exempt as the donor is
Covered in the definition of the relative --
(vi) Gift of `50,000 from her husband’s friend on is taxable 50,000
(vii) Gift of `21,000 from her mother’s friend is includable 21,000
(viii) Gift from her brother’s father in law is taxable as the
donor is not covered in the definition of relative 26,000
(ix) Gift from her husband’s brother is exempt as the donor is
not covered in the definition of the relatives --
(x) Gift from her employer is taxable as income from salary --
(xi) Gift in the from of scholarship from charitable institution
registered u/s 12AA Exempt 5,97,000
Total income 8,13,000
Question 2 : Compute Gross interest / dividend and Net interest / dividend on securities and shares in the
following cases:
1. 10% Unlisted Bonds of Industrial Development Bank of India: `3,20,000.
2. 10% Debentures of ABC Ltd. listed on Stock Exchange Purchased at `96 (face value `100) :`1,34,400.
3. Interest received from debentures issued by L ltd. listed on stock exchange: `29,700.
4. Interest Received from debentures issued by a Ltd. company not listed on stock exchange :`21,600.
5. Dividend received from Z Ltd. on 25-5-2019 : `2,400.
6. Dividend declared by the company on 5-7-2019 on shares of Y Ltd. @ 50% on 1,000 shares of `10
each. Which were purchased at `60 per share.
7. 10% Dividend on preference shares of `10 each amounting to `2,25,000 paid on 31-3-2020.
Solution :
Particulars Gross Rate of TDS Net Interest

Interest/ TDS Amount After TDS (`)
Dividends
(`)
1. 10% Bonds of IDBI (Unlisted) 32,000 10% 3,200 28,800
2. 10% Debenture of ABC Ltd. (Listed ) 14,000 NIL NIL 14,000
3. Interest received of debentures of L Ltd. (Listed) 29,700 NIL NIL 29,700
4. Interest received of debentures (Unlisted) 24,000 10% 2,400 21,600
5. Dividends received from Z Ltd. 2,400 Nil 2,400
6. Dividend on shares of Y ltd. 5,000 Nil 5,000
7. Preference shares dividends 22,500 Nil 22,500
Question 3 : In the above question, compute the income under the head other sources?
Solution:
`
1. 10% Bonds of industrial Development Bank of India of `3,20,000. 32,000
2. 10% Debentures of ABC Ltd. listed on Ahemdabad Stock Exchange
Purchased at `96 (face value `100) `1,34,400. 14,000
3. Interest received from debentures issued by X ltd. listed on stock exchange `29,700. 29,700
4. Interest Received from debentures issued by a Ltd. Company not listed on stock
exchange `21,600. 24,000
5. Dividend received from K Ltd. Exempt
6. Dividend shares of M ltd. @ 50% on 1,000 shares of `10 each. purchased at `60 per
share (net dividend `5,000). Exempt
7. 10% Dividend on preference shares of `2, 25,000. Exempt
99,700
Question 4 : X holds the following securities on April 1, 2019 :
` 86,000 7% securities of Gujarat Government (date of payment of interest :December 15 every year).
` 92,000 9% securities of M.P Government (date of payment of interest : March 31 every year).
` 80,000 6% securities of ABC Ltd. (date of payment of interest : July 31 every year).
On August 3, 2019, he sells `30,000 6% debentures of ABC Ltd. and invests the sale proceeds in Unlisted
debentures of PQR Ltd. During the previous year 2019-20, he receives `5,760 (net) as interest on Unlisted
debentures of PQR Ltd. Interest on 9% MP Government securities, which has accrued on March 31, 2020, is
received by X on April 15, 2020. Calculate the taxable income of X for the assessment year 2020-21, assuming
that his income from salary is `87,000. X maintains books of account on the basis of mercantile system of
accounting.
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Solution : Income from other sources for A/Y 20/21

`
7% securities of the Gujarat Government (i.e., `86,000 X 7/100) 6,020
9% of MP Government securities (i.e., `92,000 X 6/100) 8,280
6% debentures of ABC Ltd. (i.e., `80,000 X 6/100) 4,800
Debentures of PQR Ltd. :
Net interest `5,760
Gross interest `5,760 X 100 / 90 6,400
Salary income 87,000
Less : deduction Nil
Net income (rounded off) 1,12,500
Question 5 : Mr.X has taken a loan of `1,00,000 @ 10%. The amount was invested by him in the securities of
one company. During the year he has received gross interest of `18,000 and has paid collection charges to the
bank `500. He has paid interest `10,000 on the loan taken by him for investment and has long term capital gain
of `2,00,000. Compute his tax liability for assessment year 2020-21.
Solution: `
Gross Interest 18,000
Less:
(i) Bank Charges u/s 57 (500)
(ii) Interest paid for borrowing the amount u/s 57 (10,000)
Income under the head Other Sources 7,500
Income under the head Capital Gains (LTCG) 2,00,000
Computation of Tax Liability

Tax on (`2,00,000 -2,42,500) @ 20% u/s 112 Nil
Tax on `7,500 at slab rate Nil
Question 6: Mrs.X is getting family pension of `7,000 p.m. and has incurred `50 p.m. as bank collection
charges. She also has dividend income from domestic company of `7,00,000 and bank collection charges are
`1,000. She has long term capital gain of `3,89,000. Compute her tax liability for assessment year 2020-21.
` `
Solution:
Family Pension 84,000
(7,000 x 12)
Less: Deduction u/s 57 (15,000) 69,000
1/3 of `84,000 or `15,000 whichever is less

Dividend income (exempt u/s 10(34)) Nil
Income under the head other sources 69,000
Income under the head Capital Gains
Long term capital gain 3,89,000
Less: Deduction u/s 80C to 80U Nil
Computation of Tax Liability
Tax on `208000 (`3,89,000 – `1,81,000) @ 20% u/s 112 41,600

Less rebate u/s 87A (12,500)
Add: Health & Education cess @ 4% 1164
Tax Liability 30,264
Rounded off u/s 288B 30,260
Question 7: Mr.X has one factory building along with machines and furniture in Mumbai which has been let
out @ `50,000 p.m. Repair charges of the building is `7,000 and that of furniture fixtures are `4,000, insurance
premium paid `3,000 and depreciation is `27,000.
Compute his income under the head other sources
Solution: `
Gross Rent (50,000 x 12) 6,00,000
Less: Repair of building (7,000)
Less: Repair of Furniture and fixtures (4,000)
Less: Insurance premium (3,000)
Less: Depreciation (27,000)
Income under the head Other Sources 5,59,000
Question 8 : Mr.X has one factory building with machines and furniture, which has been let out @ `50,000
p.m. and repair charges of the building are `10,000, insurance premium ` 7,000 and repair charges of plant &
machinery is `3,000. Insurance premium `1,000 and depreciation with regard to building plant & machinery etc.
is `12,000.
256 PP-DTL&P
Compute his income under the head other sources.
Solution: `
Gross Rent (50,000 x 12) 6,00,000
Less: Repair of building (10,000)
Less: Repair of plant and machinery (3,000)
Less: Depreciation (12,000)
Income under the head other sources 5,67,000
Question 9 : Mrs.X has received incomes as given below during the previous year 2019-20:
1. Interest on savings bank account with State Bank ` 15,500 (gross).
2. Interest from Government securities `1,000 on 01.01.2020 (collection charge paid to bank @ 1.5%).
3. Interest from ABC Ltd on non listed debentures `4,000 (gross) on 01.03.2020 (collection charge paid to
the bank `30).
4. Interest credited to post office savings bank account during the year ` 230.
5. Interest credited to public provident fund during the year ` 12,000.
6. Interest received from XYZ Ltd on listed debentures ` 5,000 (gross). (Collection charge `30) The
amount was invested by taking a loan of `1,00,000 @ 7% p.a.
Mrs.X has income from house property `2,30,000.
Compute her tax liability for the assessment year 2020-21
Solution : `
Income under the head other sources
Gross interest from State Bank of India 15,500.00
Interest from Government securities {`1,000 – `15} 985.00
Interest from ABC Ltd {`4,000 – `30} 3,970.00
Interest on P.O.S.B [exempt] Nil
Interest on PPF [exempt] Nil
Interest from XYZ Ltd. (2,030.00)
{Gross interest = `5,000
Less: Collection charges = `30
Less: Interest paid on loan = `7,000}
Income under the head Other Sources 18,425.00

Income under the head House Property 2,30,000.00
Gross Total Income 2,48,425.00
Less: Deduction u/s 80TTA (`15,500 or `10,000 whichever is less) 10,000.00
Total Income (rounded off u/s 288A) 2,38,430.00
Computation of tax liability
Tax on `2,38,430 at slab rate NIL
Question 10 : Mr.X has income from business of owning and maintaining race camels `60,000, loss from
owning and maintaining race horses `7,000 and income from horse races `7,000. He has brought forward
business loss of `7,000 of the assessment year 2005-06 and brought forward business loss of `7,000 of the
assessment year 2017-18.
Compute his tax liability for the assessment year 2020-21.
Solution : `
Income under the head Business/Profession 60,000
Less: Brought forward business loss (7,000)
Income under the head Business/Profession 53,000
Income under the head Other Sources (horse races) 7,000
Gross Total Income 60,000
Less: Deductions u/s 80C to 80U Nil
Total Income 60,000
Computation of tax liability
Tax on `7,000 @ 30% 2,100
Tax on `53,000 at slab rate Nil
Less: Rebate u/s 87A 2,100
Tax after rebate NIL
LESSON ROUND UP
– Income chargeable under Income-tax Act, which does not specifically fall for assessment under any
of the heads discussed earlier, must be charged to tax as “income from other sources”.
– Section 56(2) specifically provides for the certain items of incomes as being chargeable to tax
under the head such as Dividend, Keyman Insurance policy, Winnings from lotteries, Contribution
to Provident fund, Income by way of interest on securities, Income from hiring machinery etc., Hiring
out of building with machinery, Money Gifts, Share premiums in excess of the fair market value to be
treated as income, income by way of interest received on compensation.
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– The entire income of winnings, without any expenditure or allowance or deductions under sections
80C to 80U, will be taxable. However, expenses relating to the activity of owning and maintaining
race horses are allowable. Further, such income is taxable at a special rate of income-tax i.e., 30% +
surcharge + cess @ 4%.
– Admissible Deductions : The income chargeable under the head “Income from other sources” is the
income after making the deductions such as
– sum paid by way of commission or remuneration to a banker or any other person for the purpose
of realising such interest;
– deduction shall be allowable in accordance with the provisions of Section 36(1)(va), i.e., if the
employer has credited the employee’s accounts in the respective funds;
– a sum equal to 33-1/3% of the income or Rs. 15,000, whichever is less, is allowable as a
deduction from family pension;
– a deduction of a sum equal to 50% of from Interest on compensation or enhanced compensation,
and
– any other expenditure (not being in the nature of capital expenditure) laid out or expended
wholly and exclusively for the purpose of making or earning such income.
– Inadmissible deductions: The following amounts shall not be deducted in computing income
chargeable under the head ‘Income from other sources’:
– Any personal expenses of the assessee.
– Any interest chargeable under the Income-tax Act which is payable outside India and from which
income-tax has not been paid or deducted at source.
– Any payment which is chargeable under the head “Salaries” if it is payable outside India unless tax
has been paid thereon or deducted therefrom at source.
– Any expenditure referred to in Section 40A of Income-tax Act.
SELF TEST QUESTIONS

1. When is income chargeable under Other Sources?
2. Discuss the taxability of dividend?
3. What are the cases where receipt of gift is exempt?
4. When is receipt of Keyman Insurance Policy amount taxable under Other Sources ?
5. Discuss the taxability of interest received on delayed receipt of compensation on account of compulsory
acquisition of capital asset. Are any expenditure allowed as deduction from it?
6. What are the cases where Interest is exempt u/s 10(15) ?
7. Discuss the taxability of Family Pension?
8. Is advance money forfeited on capital asset chargeable under Other Sources?
9. When is letting out of plant and machinery chargeable under Other Sources?
10. Discuss the taxability of casual Income ?
PRACTICAL QUESTIONS
1. Mr. X is beneficial owner of equity shares holding 10% of the voting power in ABC Ltd, a closely
held company. He is partner in a partnership firm XY and has 20% share in the firm. The company
has given a loan of `5 lakhs to the firm and company’s accumulated profits are ` 6 lakhs. Compute
amount of dividend taxable in the hands of shareholder and the firm.
2. Mr. X is holding 10% equity shares in ABC Ltd, a closely-held company and he has taken a loan of `3
lakhs on 01.10.2019. The loan was repaid after ten days. The company has accumulated profits of
`10 lakhs.
Compute amount of dividends taxable in the hands of Mr.X.

3. ABC Ltd. is a company in which public are not substantially interested. The company has Bonus
share capital of ` 5 lakh and General Reserve of ` 7 lakh and the company has given a loan of ` 8
lakh to one of the shareholders who is holding 10% of the voting power.
Compute amount of dividend taxable in the hands of shareholder.
ANSWERS
1. In this case loan of `5 lakhs is deemed as dividend u/s 2(22)(e).The company is liable to pay CDT u/s
115O. It is Exempt in hand of shareholder u/s 10(34).
2. In this case, loan is deemed as dividend in the hands of company u/s 2(22)(e).The company is liable
to pay CDT u/s 115O even if it is repaid in the same year or at any other time. It is exempt in hands
of shareholder u/s 10(34)
3. In this case there will be deemed dividend of ` 7 lakhs u/s 2(22)(e) and company is liable to pay CDT
u/s 115O and further such dividend is exempt u/s 10(34) in hand of the shareholder
SUGGESTED READINGS

Kluwer]
260 PP-DTL&P
Lesson 7 n Clubbing Provisions, Set Off and/or Carry Forward of Losses, Deduction, Rebate & Relief 261
Lesson 7
Clubbing Provisions, Set Off and/or Carry
Forward of Losses, Deduction, Rebate
and Relief
LESSON OUTLINE
LEARNING OBJECTIVES
I. Clubbing Provisions [Section 60 – 64] 1. Clubbing Provisions: In addition to the
• Clubbing of Income general provisions which are applicable for
computation of total income, there are special
• Transfer of Income [Section 60]
provisions in Sections 60 to 65 of the Income-tax
• Revocable Transfer of Assets [Section Act which provide for inclusion of income of other
61] persons in the total income of assessee. The
special provisions contained in these sections are
• Income of Spouse
designed to counteract the various attempts of an
• Transfer for immediate / deferred individual for avoiding or reducing his liability to
benefit of son’s wife [Section 64(1)(viii)] tax by transferring his assets or income to other
• Income of spouse through a third person(s) while, at the same time, retaining certain
person [Section 64(1)(vii)] powers or interest over the property or it’s income.
These provisions may also be termed as clubbing
• Clubbing of Income of Minor Child provisions. At the end of the lessons students
[Section 64(1A)] will be able to understand When are clubbing
• Income from the converted property provisions applicable.
[Section 64(2)] 2. Set Off and / or Carry Forward of Losses: In the
• Summary of the Clubbing Provisions second part of this lesson provisions for set-off and
carry forward of losses are discussed. Sometimes
• Recovery of Tax the assessee incurs a loss from a source of income
II. Set Off and / or Carry Forward of Losses and unless such loss is set-off against any income,
the net result of the assessee’s activities during the
• Set-off and Carry-forward of Losses
particular accounting year cannot be ascertained
• Set-off of losses from one source against and consequently the tax payable would also be
income from another source under the incapable of determination. For this purpose,
same head of income [Section 70] the Income-tax Act contains specific provisions
(Sections 70 to 80) for the set-off and carry-forward
• Set-off of losses from one head against
of losses. At the end of the lessons students will be
income from another head [Section 71]
able to understand:
III. Deductions
- What are the provisions of set off/carry
• Deduction u/s 80C to 80 U forward and set off of losses
– LESSON ROUND UP - How can losses be set off inter-head and
– SELF TEST QUESTIONS intra-head.
261
262 PP-DTL&P
- The conditions to be satisfied for carry

forward and set off of loss from house
property, business loss and unabsorbed
depreciation.
- Up to what period can the loss be carried
forward and set-off
3. Deductions: Sections 80C to 80U of the
Income-tax Act lay down the provisions relating
to the deductions allowable to assessees from
their gross total income. At the end of the lessons
students will be able to understand:
• The type of deductions allowable from
gross total income
• What are the permissible deductions in
respect of payments
• What are the permissible deductions in
respect of incomes
• What are the deductions allowable in the
case of a person with disability.
4. Rebate and Relief: At the end of the lessons
students will be able to understand the provision
related to Rebate & Relief available under the
Income Tax Act, 1961.
I. CLUBBING PROVISIONS
KEY SECTIONS
SECTION PARTICULARS
60 Transfer of income where there is no transfer of assets.

61 Revocable transfer of assets.
62 Transfer irrevocable for a specified period.
63 "Transfer" and "revocable transfer" defined.
64 Income of individual to include income of spouse, minor child, etc.
65 Liability of person in respect of income included in the income of another person.
CLUBBING OF INCOME
Normally, a person is taxed in respect of income earned by him only. However, in certain special cases
income of other person is included (i.e. clubbed) in the taxable income of the taxpayer and in such a case he
will be liable to pay tax in respect of his income (if any) as well as income of other person too. The situation in
which income of other person is included in the income of the taxpayer is called as clubbing of income. E.g.,
Income of minor child is clubbed with the income of his/her parent. Section 60 to 64contains various provisions
relating to clubbing of income.
The special provisions contained in these sections are designed to counteract the various attempts which an
individual may make for avoiding or reducing his liability to tax by transferring his assets or income to other
person(s) while, at the same time, retaining certain powers or interest over the property or it’s income. These
provisions are explained below.
TRANSFER OF INCOME [SECTION 60]

Section 60 of Income Tax Act, 1961 provides the provisions relating to clubbing of income where transfer
of income is done without transferring the assets. Where a person transfers to any other person, income
(whether revocable or not) from an asset without transferring that asset, the income shall be included in the
total income of the transferor. “Transfer” includes any settlement, trust, covenant, agreement or arrangement.
The transfer also includes a lease for inadequate consideration and the income derived by the lessee from the
leased property is included in the income of the lessor.
These are applicable if the following conditions are satisfied:
a) The taxpayer owns an asset
b) The ownership of asset is not transferred by him.
c) The income from the asset is transferred to any person under a settlement, or agreement.
If the above conditions are satisfied, the income from the asset would be taxable in the hands of the transferor.
If the transferor transfers the asset and keeps the income for himself, the income shall be included in the income
of transferor.
Section 60 of the Act has no application where assets producing income are transferred along with the income
C.I.T. v. Ram Prasad Mehta (1975) 100 ITR 468 (Bombay). There may be a field of operation of Sections 61 to
64 but certainly not of Section 60.
REVOCABLE TRANSFER OF ASSETS [SECTION 61]

‘Revocable transfer’ means the transferor of asset assumes a right to re-acquire asset or income from such an
264 PP-DTL&P
asset, either whole or in parts at any time in future, during the lifetime of transferee. It also includes a transfer
which gives a right to re-assume power of the income from asset or asset during the lifetime of transferee.
Where a person transfers any asset to any person with a right to revoke the transfer, all income accruing to the
transferee from the asset shall be included in the total income of the transferor.
The income under revocable transfer of asset shall be included in the income of transferor even when only a
part of income from transferred asset has been applied for the transferor.
For this purpose assets include movable or immovable property whether situated in India or abroad.
As per Section 63, a transfer shall be deemed to be revocable if:
(i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income
or assets to the transferor; or
(ii) it, in any way, gives the transferor a right to reassume power directly, or indirectly over the whole or any
part of the income or assets.
Examples of revocable transfers

Some of the examples of revocable transfers are as follows:
(i) If there is an express clause of revocation in the instrument of transfer; or
(ii) If there is a sale with a condition of re-purchase; or
(iii) If the transfer is to a trust and if the transfer can be revoked with the consent of two or more beneficiaries;
or
(iv) If the trustees are empowered in sole discretion to revoke the transfer; or
(v) If the transferor has power to change beneficiary or trustees.
“Transfer” includes any settlement, trust, covenant, agreement or arrangement.
Note: Re-transfer to the transferor must be in the same capacity in which he made the transfer or settlement. If
a settlement is made by a Hindu undivided family and there is a re-transfer to one member of the family in his
capacity as an individual and not in his capacity as a member of the family this cannot be termed a re-transfer
for this purpose.
INCOME OF SPOUSE
The following incomes of the spouse of an individual shall be included in the total income of the individual:
(a) Income to spouse from a concern in which such individual has substantial interest [Section 64(1)(ii)]
All such income as arises directly or indirectly, to the spouse of an individual by way of salary, commission, fees
or any other remuneration, whether in cash or kind from a concern in which such individual has a substantial
interest, shall be included in the income of the individual.
Exception: However, where the spouse possesses technical or professional qualifications and the income is
solely attributable to the application of his/her technical or professional knowledge and experience, the income
shall not be included in the income of (other spouse) the assessee.
Substantial Interest: An individual shall be deemed to have a substantial interest in a concern -
(i) In a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of
dividend whether with or without a further right to participate in profits) carrying not less than 20% of the
voting power are, at any time during the previous year, owned beneficially by such person or partly by
such person and partly by one or more of his relatives;
(ii) In any other case, if such person is entitled, or such person and one or more of his relatives are entitled
in the aggregate, at any time during the previous year, to not less than 20% of the profits of such
concern.
When both husband and wife have substantial interest

Where both husband and wife have a substantial interest in the concern and both are in receipt of the
remuneration in such concern, the remuneration from such concern is to be included in the total income of the
husband or, as the case may be, the wife whose total income excluding the income referred to in that clause
i.e. 64(1)(ii) is greater; (Circular No. 258, dated 14-6-79) and where any such income is once included in the
total income of either spouse, any such income arising in any succeeding year shall not be included in the total
income of the other spouse unless the Assessing Officer is satisfied, after giving that spouse an opportunity of
being heard, that it is necessary so to do.
(b) Income to spouse from the assets transferred [Section 64(1)(iv)]
Where any individual transfers directly or indirectly any asset (other than a house property) to the spouse, the
income from such asset shall be included in the income of the transferor.
In order to attract the provisions of this section, it is not necessary that the asset must have been transferred
by the assessee to his spouse in the same form in which it stands at the time the income arises. Conversion
of assets from one form to another would be totally immaterial and it is also not essential that the transfer must
have taken place directly between the spouses.
Exception: However, there are exceptions to this rule:
(i) The transferor has received adequate consideration in money or money’s worth. If the consideration
was inadequate, proportionate income shall be included in the income of the transferor.
(ii) The transfer has been made in connection with an agreement to live apart. This separation can be
either judicial or voluntary under circumstances in which a judicial separation can be granted.
(iii) The income from the assets transferred shall not be included in the income of transferor after the death
of spouse, either transferor or transferee.
(iv) The income from assets transferred shall be included in the income of the transferor, only if the
relationship as spouse exists on the two dates, i.e., the date of transfer and the date on which the
income accrues or arises to the transferee. If any asset has been transferred before marriage, the
income from such asset cannot be included in the income of the transferor.
(v) Only the direct income (including capital gains) earned with the help of the transferred assets shall
be included in the income of the transferor. Any indirect income to the transferee from the transferred
assets shall not be included in the income of the transferor.
Suppose, A transfers certain shares to his wife B. Dividends received on such shares are taxable in the hands
of A. If B sells the shares and makes some capital gains, such gains are also taxable in A’s hands. Now from the
dividend money, B purchases some more shares and receives dividends on these new shares, such dividends
are not taxable to A. In the same way, if B receives certain bonus shares on the shares transferred by her
husband and later on she receives dividend on such bonus shares, the dividend shall not be included in the
income of the transferor because the bonus shares were never transferred by her husband.
If some pin-money is given to wife by her husband neither the savings out of pin-money nor the income earned
with the help of savings out of pin-money can be included in the income of husband.
TRANSFER FOR IMMEDIATE OR DEFERRED BENEFIT OF SON’S WIFE [SECTION 64(1)(VIII)]

Any income arising, directly or indirectly, to any person or association of persons from assets transferred
directly or indirectly after June 1, 1973, otherwise than for adequate consideration to the person or association
266 PP-DTL&P
of persons by such individual shall, to the extent to which the income from such assets is for the immediate or
deferred benefit of his son’s wife be included in computing the total income of such individual.
Explanation: For the purpose of clauses (iv) and (vi), where the assets transferred directly or indirectly by an
individual to his spouse or son’s wife (hereafter in this Explanation referred to as “the transferee”) are invested
by the transferee -
(i) in any business, such investment being not in the nature of contribution of capital as a partner in a firm
or, as the case may be, for being admitted to the benefits of partnership in a firm, that part of the income
arising out of the business to the transferee in any previous year, which bears the same proportion to
the income of the transferee from the business as the value of the assets aforesaid as on the first day
of the previous year bears to the total investment in the business by the transferee as on the said day;
(ii) in the nature of contribution of capital as a partner in a firm, that part of the interest receivable by the
transferee from the firm in any previous year, which bears the same proportion to the interest receivable
by the transferee from the firm as the value of investment aforesaid as on the first day of the previous
year bears to the total investment by way of capital contribution as a partner in the firm as on the said
day, shall be included in the total income of the individual in that previous year.
INCOME TO SPOUSE THROUGH A THIRD PERSON [SECTION 64(1)(VII)]

Where a person transfers some assets directly or indirectly to a person or association of persons (trustee or
body of trustees or juristic person) without adequate consideration for the immediate or deferred benefit of his
or her spouse, all such income as arises directly or indirectly from assets transferred shall be included in the
income of the transferor. If only a portion is reserved for the benefit of spouse and a portion is utilised for the
benefit of others, only the portion reserved for the spouse shall be included in the income of the transferor.
The share of income of the spouse can be included in the income of the transferor provided the spouse has
either received the income or the income has accrued to spouse or the spouse has a beneficial interest in the
income. If an individual creates a life-interest in a property in favour of a third person and grants the remainder
to his spouse, and so long as the third person is alive, she should not be getting any benefit out of transferred
asset, such income cannot be included in the income of the transferor. If however, the benefit from the assets
transferred is to be derived by the transferor himself, the transfer would be treated as revocable and would
consequently fall within the purview of Section 61 which provides that the entire income arising from the assets
so transferred shall be included in the total income of the transferor.
Where a trust was created by assessee’s mother for the benefit of the assessee, his wife and the trustees were
authorised to carry on business, the income from the business was held to be income of the trust and the share
of wife could not be added to the income of the spouse because neither the trust was created by the assessee
nor the business done in the partnership. [K.T Doctor v. C.I.T (1980) 124 ITR 501 (Guj.)].
CLUBBING OF INCOME OF MINOR CHILD [SECTION 64(1A)]

All income which arises or accrues to the minor child (not being a minor child suffering from any disability of the
nature specified in Section 80U) shall be clubbed in the income of his parent. However, any income which is
derived by the minor from manual work or from any activity involving application of his skill, talent or specialised
knowledge and experience will not be included in the income of his parent. Further, the income of the minor shall
be included in the income of that parent whose total income excluding income includible under this subsection
is greater, where the marriage of minor’s parents subsists, otherwise the income of the minor will be includible
in the income of that parent who maintains the minor child in the relevant previous year.
Once the income of the minor is included in the total income of any one parent, clubbing of income of the minor
with the same parent will continue in subsequent years also, unless the Assessing Officer is satisfied, after
giving that parent an opportunity of being heard that it is necessary so to do.
In case the income of an individual includes any income of his minor child in terms of this section [i.e. Section 64(1A)],
such individual shall be entitled to exemption of the amount of such income or Rs. 1,500 whichever is less.
INCOME FROM THE CONVERTED PROPERTY [SECTION 64(2)]

Where an individual, being a member of Hindu Undivided Family, transfers his self-acquired property after 31st
December, 1969 to the family for the common benefit of the family, or throwing it into the common stock of the
family, or transfers it directly or indirectly to the family otherwise than for adequate consideration, such property
is known as converted property. The income derived from the converted property or any part thereof, shall be
included in the income of the transferor.
For this section “property” includes any interest in property, movable or immovable the proceeds of sale thereof
and any money or investment for the time being representing the proceeds of sale thereof and where the
property is converted into any other property by any method, such other property.
Income from converted property to spouse after partition

Where the converted property has been the subject matter of total or partial partition amongst the members of
the family, the income derived from such converted property as is received by the spouse of the transferor on
partition shall be included in the income of the individual.
The income so included in the total income of the individual shall be excluded from the total income of the family
or spouse, as the case may be.
The income from the above mentioned items shall first be computed under the appropriate heads in the hands
of the transferee and after that it shall be included in the total income of the transferor under the head, “Income
from other sources”. However, the income from house property transferred to spouse shall be computed under
the head ‘Income from house property’ in the hands of transferor and not in the hands of the transferee.
Explanation to the term ‘income’ used in Section 64 includes ‘loss’. This amendment nullifies the decision in
Dayalbhai Madhavji Vadera v. C.I.T. (1966) 60 ITR 551 of the Gujarat High Court that the term ‘income’ used in
Sub-section (1) of Section 64 does not include a loss.
SUMMARY OF THE CLUBBING PROVISION
NATURE OF CLUBBED CONDITIONS/ RELEVANT REFERENCE

TRANSACTION IN THE EXCEPTIONS
HANDS OF
Transfer of Transferor Irrespective of: 1. Income for the purpose of Section 64
Income without who 1. Whether such transfer includes losses. [P. Doriswamy Chetty 183
transfer of Assets transfers is revocable or not. ITR 559 (SC)] [also see Expl. (2) to Section
(Section 60) the income 64]
2. Whether the transfer is
effected before or after 2. Section 60 does not apply if corpus itself
the commencement of IT is transferred. [Grandhi Narayana Rao 173
Act. ITR 593 (AP)]
Revocable Transferor Clubbing not applicable if: Transfer held as revocable
transfer of Assets who 1. Trust/transfer 1. If there is provision to re transfer directly
(Section 61) transfers irrevocable during the or indirectly whole/part of income/asset to
the Assets. lifetime of beneficiaries/ transferor;
transferee or
2. If there is a right to reassume power, directly
2. Transfer made or indirectly, the transfer is held revocable
prior to 1-4-1961 and and actual exercise is not necessary.
not revocable for a [S. Raghbir Singh 57 ITR 408 (SC)]
period of 6 years. 3. Where no absolute right is given to
Provided the transferor transferee and asset can revert to transferor
derives no direct or in prescribed circumstances, transfer is
indirect benefit from such held revocable. [Jyotendrasinhji vs. S. I.
income in either case. Tripathi 201 ITR 611 (SC)]
268 PP-DTL&P
Salary, Spouse Clubbing not applicable if: 1. The relationship of husband

Commission, whose total Spouse possesses and wife must subsist at the
Fees or income technical or professional time of accrual of the income. [Philip John
remuneration (excluding qualification and Plasket Thomas 49 ITR 97 (SC)]
paid to spouse income to remuneration is solely
2. Income other than salary, commission,
from a concern be clubbed) attributable to application of
fees or remuneration is not clubbed under
in which an is greater. that knowledge /
this clause
individual has a qualification.
substantial*
interest. [Section
64 (1)(ii)]
Income from Individual Clubbing not applicable if: 1. Income earned out of Income arising from
assets transferring transferred assets not liable for clubbed.
The assets are transferred;
transferred the asset. [M.S.S. Rajan 252 ITR 126
1. With an agreement to
directly or
live apart. (Mad)]
indirectly to the
spouse without 2. Before marriage. 2. Cash gifted to spouse and he/she invests
adequate to earn interest. [Mohini Thaper vs. CIT 83
3. Income earned when
consideration ITR 208 (SC)]
relation does not exist.
[Section 64 (1) 3. Capital gain on sale of property which
(iv)] 4. By Karta of HUF gifting
was received without consideration from
co-parcenary property to
spouse [Sevential M. Sheth vs. CIT 68 ITR
his wife.
503 (SC)]
L. Hirday Narain vs. ITO
4. Transaction must be real. [O.N.
78 ITR 26 (SC)
Mohindroo 99 ITR 583 (Delhi)]
5. Property acquired out
of pin money.
R.B.N.J. Naidu vs. CIT 29
ITR 194 (Nag.)
Income from the Individual Condition: Cross transfers are also covered
assets transferred transferring [C.M.Kothari 49 ITR 107 (SC)]
The transfer should
to son’s wife the Asset.
be without adequate
[Section 64(1)(vi)]
consideration.
Transfer of Individual Condition: 1. Transferor need not necessarily have
assets by an transferring taxable income of his own.
1. The transfer should be
individual to the Asset.
without adequate [P. Murugesan 245 ITR 301 (Mad)]
a person or
consideration.
AOP for the 2. Wife means legally wedded wife. [Executors
immediate or of the will of T.V. Krishna Iyer 38 ITR 144
deferred benefit (Ker)]
of his:
(vii) - Spouse
(viii) - Son’s wife
[Section 64(1)
(vii)&(vii)]
Income of a 1. If the Clubbing not applicable 1. Income out of property transferred for no
minor child marriage for: – consideration to a minor married daughter,
[Child includes subsists, in shall not be clubbed in the parents’ hands.
1. Income of a minor child
step child, the hands of [Section 27]
suffering any disability
adopted child the parent
specified u/s. 80U. 2. The parent in whose hands
and minor whose total
the minor’s income is clubbed is entitled
married income is 2. Income on account of
to an exemption up to Rs. 1,500 per child.
daughter] greater; or; manual work done by the
[Section 10(32)]
[Section 64 (1A)] minor child.
3. Income on account of any
activity involving application
of skills, talent or
specialized knowledge and
experience.
2. If the
marriage
does not
subsist, in
the hands
of the
person who
maintains
the minor
child.
3. Income
once
included
in the total
income of
either of
parents,
it shall
continue to
be included
in the hands
of same
parent in the
subsequent
year unless
AO is
satisfied
that it is
necessary
to do so
(after giving
that parent
opportunity
of being
heard)
270 PP-DTL&P
Income of HUF Income is Clubbing applicable even Fiction under this section must
from included in if: be extended to computation of
property the hands of income also. [M.K. Kuppuraj
The converted property is
converted by the individual 127 ITR 447 (Mad)]
subsequently partitioned;
individual into & not in the
income derived
HUF property hands of
by the spouse
[Section 64 (2)] HUF.
from such con-
verted property
will be taxable in the hands
of individual.
RECOVERY OF TAX
Dual Liability for Tax: The tax on the income of the other person which has been included in the income of the
assessee can either be recovered from the assessee or from the other person. The liability of other person
is limited to the portion of the tax levied on the assessee which is attributable to the income so included. His
liability arises after the service of a notice of demand by the Assessing Officer in this behalf.
Where any such asset (the income from which has been included in that of the assessee) is held jointly by more
than one person, they shall be jointly and severally liable to pay the tax which is attributable to the income from
the assets so included.
II. SET OFF AND / OR CARRY FORWARD OF LOSS [SECTION 70 TO 80]
KEY SECTIONS
SECTION PARTICULARS
70 Set off of loss from one source against income from another source under the same head
of income.
71 Set off of loss from one head against income from another.
71A Transitional provisions for set off of loss under the head "Income from house property".
71B Carry forward and set off of loss from house property.
72 Carry forward and set off of business losses.
72A Provisions relating to carry forward and set off of accumulated loss and unabsorbed
depreciation allowance in amalgamation or demerger, etc.
72AA Provisions relating to carry forward and set-off of accumulated loss and unabsorbed
depreciation allowance in scheme of amalgamation of banking company in certain cases.
72AB Provisions relating to carry forward and set-off of accumulated loss and unabsorbed
depreciation allowance in business re-organisation of co-operative banks.
73 Losses in speculation business.
73A Carry forward and set off of losses by specified business.
74 Losses under the head "Capital gains".
75 Losses of firms.
78 Carry forward and set off of losses in case of change in constitution of firm or on succession.
79 Carry forward and set off of losses in case of certain companies.
80 Submission of return for losses.

272 PP-DTL&P
SET-OFF AND CARRY-FORWARD OF LOSSES

While one endeavors to derive income, the possibility of incurring losses cannot be ruled out. Based on the
principles of natural justice, a set-off should be available for loss incurred. The income tax laws in India recognize
this and provide for adjustment and utilization of the losses. For this purpose, the Income-tax Act, 1961 contains
specific provisions (Sections 70 to 80) for the set-off and carry- forward of losses.
Income-tax is levied on the total income of the previous year of an assessee and it is necessary to ascertain
the total income. Further, loss incurred by the assessee is to be set-off against any income, the net result of
the assessee’s activities during the particular accounting year cannot be ascertained and consequently the tax
payable would also be incapable of determination.
SET-OFF OF LOSSES FROM ONE SOURCE AGAINST INCOME FROM ANOTHER SOURCE
UNDER THE SAME HEAD OF INCOME [SECTION 70]
The process of adjustment of loss from a source under a particular head of income against income from other
source under the same head of income is called intra-head adjustment, e.g. Adjustment of loss from business
A against profit from business B.
Income of a person is computed under five heads. ‘Sources’ of income derived by an individual may be many
but yet they could be classified under the same head. Consider a situation where Harish has two properties
- one, occupied by him and the other, let out. Harish pays interest on loan of Rs 1.50 lakh on the property
occupied and derives net rental income of Rs 1.50 lakh from the let-out property. In case of a self-occupied
property, income is computed as nil and interest expenditure results in loss. The loss of Rs 1.50 lakh can be
set off against rent income of Rs 1.50 lakh; the income chargeable under the head ‘House property’ will be ‘Nil’.
Thus, in general, if the net result for any assessment year in respect of any source falling under any head of
income is a loss, the assessee is entitled to set off the amount of such loss against his income from any other
source under the same head.
However, the following are the exceptions to general rule:
1. Speculative Business Losses: Loss from speculation business cannot be set of against profit from an non
speculation business however loss from non speculative business can be set-off against speculation income)
2. Long-term capital Loss: Long Term Capital Loss (LTCL) can only be set off against Long Term Capital Gain
(LTCG) and cannot be set off against Short term Capital Gain (STCG) however STCL can be set off against
LTCG)
3. Casual Income: No loss can be set-off against casual income i.e. Income from lotteries, crossword puzzles,
race including horse race, card game, and any other game of any sort or from gambling or betting of any form
or nature. No expenses can be claimed against casual income.
4. Income Losses from owning and maintaining race horses: Loss from the business of owning and
maintaining race horses cannot be set off against any income other than income from the business of owning
and maintaining race horses.
5. Loss from an exempted source cannot be set off against taxable Income: If income from a particular
source is exempt from tax, then loss from such source cannot be set off against any other income which
is chargeable to tax. E.g., Agricultural income is exempt from tax, hence, if the taxpayer incurs loss from
agricultural activity, then such loss cannot be adjusted against any other taxable income.
6. Income Losses of specified Business: Loss from business specified under section 35AD cannot be set
off against any other income except income from specified business (section 35AD is applicable in respect of
certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for
storage of agricultural produce, developing and building a housing projects, etc.)
Income losses Intra-head Set off

(A) Loss from business or profession
Any loss from business or profession (other than speculation business or loss from the activity of owning and
maintaining race horses) can be set off against the income from any other business or profession including the
income from speculation business or income from the activity of owning and maintaining race horses.
If any business has been discontinued during the year, the loss from such business can also be set-off from the
income of other business or profession.
The loss suffered by a wholly owned subsidiary company cannot be set-off by the parent company, since both
are separate assessees. Similarly, where loss incurred by a wholly owned subsidiary company is reimbursed by
the holding company, the subsidiary company does not use the right to carry forward and set-off the loss. [C.I.T
v. Handicraft Handloom Export Corporation (1982) 133 ITR 590 (Delhi)].
(B) Loss from speculation business
Such loss can be set-off only against the income from speculation business. It is not essential that the nature
of the other speculation transaction must be the same. Speculative transactions in different commodities and in
different markets are to be treated as one business. However, a loss from an illegal speculation business cannot
be set-off against income from any lawful speculation. [C.I.T. v. K.J. Kotecha 107ITR 101 (SC)]. Similarly, where
the assessee earns commission on speculative transactions, he is not entitled to set-off speculative loss against
such commission because there is no element of speculation in the commission [C.I.T. v. Pangal Vittal Nayak
& Co. Pvt. Ltd. (1969) 74 I.T.R. 754 (S.C.)]. By virtue of an explanation to Section 73 where any part of the
business of a company (other than a company whose gross total income consists mainly of income which is
chargeable under the heads: “Interest on securities”, “Income from House Property”, “Capital gains”, “Income
from other sources”, or a company the principal business of which is the business of banking or granting of
loans and advances) consists of the purchase and sale of shares of other companies, such company shall for
the purpose of this section (Section 73), be deemed to be carrying on a speculation business to the extent to
which the business consists of the purchase and sale of such shares.
SET-OFF OF LOSS FROM ONE HEAD AGAINST INCOME FROM ANOTHER HEAD [SECTION 71]
After making intra-head adjustment (if any) the next step is to make inter-head adjustment. If in any year, the
taxpayer has incurred loss under one head of income and is having income under other head of income, then he
can adjust the loss from one head against income from other head, E.g., Loss under the head of house property
to be adjusted against salary income.
A person may have various sources of income computed under different heads of income. Loss under one head
of income is generally allowed to be set off against income under another head.
For instance, X has only one property, which is occupied by him and the loss is Rs 1.50 lakh. He derives salary
of Rs 10 lakh during the year. Here, he can set off the loss of Rs 1.50 lakh against his salary income by making
appropriate declarations to his employer, thereby making his net taxable income Rs 8.50 lakh.
The provision of Section 71 reads as under:
(a) an assessee not having any income under the head “Capital gains” and having loss from income under
other heads (excluding capital gains) can set off such loss against his income under any other head
(other than “capital gains”);
(b) loss under any head of income (other than “capital gains”) can be set off against income from any head
of income, including “capital gains”;
(c) loss under the head “capital gains” cannot be set off against income under any other head. It must be
set off only against income from “capital gains”.
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(d) Loss under the head “Profits and gains of business or profession” cannot be set off against the head
“income from Salaries”.
(e) Where the assessee incurs any loss under the head income from house property it can be set off
against the assessee’s any other income under other head during the previous years where such
loss is not fully adjusted under other heads of income in the same assessment year, then the balance
loss shall be allowed to be carried forward and set off in subsequent years subject to a limit of eight
assessment years against income from house property.
Section 71(3A) Inter head adjustment of loss under the head House Property (i.e. adjustment of loss
under the head House Property against Income under any other head in the same year) cannot exceed
Rs 2,00,000 for any assessment year. Remaining loss can be carried forward to be set off in future as
per provisions of Section 71B. (There is no restriction of Rs. 2,00,000 in section 71B). [Inserted vide
Finance Act, 2017 w.e.f. AY 2018-19]
(f) Loss incurred by an assessee from a source, income from which is exempt, cannot be set-off against
income from a taxable source.
There are certain exceptions to the general rule that Loss under one head of income is allowed to be set off
against income under another head.
a) Loss from speculative business cannot be set off against any other income. However, non-speculative
business loss can be set off against income from speculative business. For Example: House property
loss can be set-off against Speculative Incomes but speculation loss cannot be set off against House
property)
b) Business loss cannot be set-off against salary income. (It can be set-off against other incomes)
c) Loss under the head Capital Gains (LTCL or STCL) cannot be set-off against any other head however
Loss from other heads can be set-off against Capital Gains. For an instance, House Property loss can
be set-off against CG but LTCL or STCL cannot be set off against HP, i.e., house property Income.
d) No loss can be set off against Casual income such as winnings from lotteries, crossword puzzles, race
including horse race, card game, and any other game of any sort or from gambling or betting of any
form or nature.
e) No expenses can be claimed against casual income.
f) Loss from the business of owning and maintaining race horses cannot be set off against any other
income.
g) Loss from an exempted source cannot be set off (e.g. Share of loss of firm, agricultural income,
cultivation expenses)
h) Loss from business specified under section 35AD cannot be set off against any other income (section
35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting
up and operating warehousing facility for storage of agricultural produce, developing and building
housing projects, etc.)
It may be noted that before making inter-head adjustment, the taxpayer has to first make intra-head adjustment.
CARRY-FORWARD OF LOSSES
Many times it may happen that after making intra-head and inter-head adjustments, still the loss remains
unadjusted. Such unadjusted loss can be carried forward to next year for adjustment against subsequent
year(s)’ income. Separate provisions have been framed under the Income-tax Law for carry forward of loss
under different heads of income. Losses can be set-off against the income of following years provided that they
have been suffered by assessee and determined in pursuance of a return filed by the asessee. Further, carry
forward of losses (other than loss from house property and unabsorbed depreciation) is permissible if the return
of income for the year, in which loss is incurred, is filed in time. The late filing of return should not impact the
status of carry forward of loss of previous years.
The following losses could be carried forward:
(i) Loss in non-speculation business or profession.
(ii) Loss in speculation business.
(iii) Loss in transfer of capital assets [whether short-term or long-term].
(iv) Loss from activity of owning and maintaining of race horses.
(v) Loss under the head ‘Income from House Property’.
However, losses suffered under the following heads are not allowed to be carried forward and set off:
(1) Losses under the head ‘salaries’.
(2) Losses under the head ‘Income from other sources’ (excepting loss suffered from the activity of owning
and maintaining race horses).
(A) LOSS IN NON-SPECULATION BUSINESS [SECTION 72]

It shall be set-off against the profits and gains, if any, of any business or profession carried on by him and
assessable for that assessment year.
From this it follows that the loss from non-speculation business or profession can be set-off against the income of
the business in which it was suffered or any other business or profession either old or new including speculation
business income or from any other head, such as house property, or other sources, if the income under this
head forms part of the trading activities of the assessee. [Western States Trading Co. (P) Ltd. v. C.I.T. (1971)
80 ITR 21 (SC)].
The loss can be set-off against the business profits of the year provided such profits are asessable to tax. If the
profits are exempt from tax for any reason, no set-off can be made by the income-tax officer against such profits.
Conditions for carry forward and set-off of business loss

(i) The right of carry-forward and set-off is available to the same assessee who has sustained the loss. A
holding company however, cannot claim to carry forward the losses, if any, incurred by its wholly owned
subsidiary company. Exceptions to this rule are (a) cases of succession by inheritance [a loss incurred
by the father in the course of carrying on his business can be carried forward and set-off by his son, if
the son succeeds to the business of his father on account of the father’s death but not otherwise] (b)
accumulated business loss of an amalgamating company under Section 72A (c) the share of loss of
partnership taken over by one of its partners can also be set-off by the partner [Dwarkadass Leeladhar
v. CIT (1963) 47 ITR 619 (Ker.)]
However, loss incurred by HUF cannot be carried forward and set-off after its partition against income of firm
formed thereafter by certain coparceners [Keshrichand Bhanabhai v. CIT(1951) 20ITR 201 (Bom.)].
(ii) The loss can be carried forward to a maximum of eight consecutive assessment years immediately
succeeding the assessment year for which the loss was first computed. In case of a business on which
rehabilitation allowance has been allowed, the previous losses are allowed to be carried forward to the
assessment year relevant to the previous year in which the business was so revived or re-established
and are allowed to be set-off against the profits of that assessment year. Any balance of loss can be
carried forward to the succeeding seven assessment years.
276 PP-DTL&P
(iii) Where any unabsorbed depreciation or capital expenditure on scientific research has been brought
forward alongwith business loss, the business loss shall first be set-off.
Order of Set-off of losses

In case where profits are insufficient to absorb brought forward losses, current depreciation and current business
losses, the same should be deducted in the following order:
(a) Current scientific research expenditure [under Section 35(1)].
(b) Current Depreciation [under Section 32(1)].
(c) Brought forward business losses [under Section 72(1)].
(d) Unabsorbed family planning promotion capital expenditure [under Section 36( 1)(ix)].
(e) Unabsorbed Depreciation [under Section 32(2)].
(f) Unabsorbed scientific research expenditure [under Section 35(4)].
(B) LOSS IN SPECULATION BUSINESS [SECTION 73]

Where, for any assessment year, any loss computed in respect of a speculation business has not been wholly
set-off against the profits of another speculation business, it shall be carried forward to the following assessment
year and shall be set-off against the profits of any speculation business carried on by him and assessable for
the assessment year.
Speculative Business
Explanation to section 73 provides that where any part of the business of a company (other than a company
whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”,
“Income from house property”, “Capital gains” and “Income from other sources”, or a company the principal
business of which is the business of trading in shares or banking or the granting of loans and advances)
consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this
section, be deemed to be carrying on a speculation business to the extent to which the business consists of the
purchase and sale of such shares.
Sub-section (5) of section 43 defines the term speculative transaction as a transaction in which a contract for
purchase or sale of any commodity, including stocks and shares, is settled otherwise than by way of actual
delivery. However, the proviso to sub-section (5) of section 43 exempts, inter alia, transaction in respect of
trading in derivatives on a recognised stock exchange from its ambit.
Carry forward of losses in speculative business

In case of speculation loss even if the particular speculation business in which there is loss is discontinued,
this loss can be carried forward to be set-off in the succeeding year against the profits of any other speculation
business.
This loss can be carried forward to a maximum of four consecutive assessment years immediately succeeding
the assessment year for which the loss was first computed.
However, the loss from an illegal speculation business or loss incurred in speculation business in banned items
can be neither set-off against income from any lawful speculation business nor can it be carried forward for
being set-off in the subsequent year against income even from an illegal speculation business because the law
assumes that any illegal business dies with all its losses in the same year [CIT v. Kurji Jinabhai Kotecha (1977)
107 ITR 101 (SC)].
Where any unabsorbed depreciation or capital expenditure on scientific research has been brought forward
along with speculation loss, the speculation loss shall first be set-off.
Sometimes there may be brought-forward speculation loss and current year’s non-speculation business loss.
Now the problem arises whether the brought forward speculation loss should be adjusted first against the
current year’s speculation income or current year’s non-speculative business loss should be set-off first against
the current year’s speculative income. Accordingly to the administrative instructions the Assessing Officer may
allow the assessee:
(i) either to first set-off the speculation loss carried forward from an earlier year against the speculation
profits of the current year and then to set-off the current year’s losses against other sources and against
the remaining part, if any, of the current year’s speculation profits; or
(ii) to first set-off the current year’s losses from non-speculation business and other sources against the
current year’s speculation profits and then to set-off the carried forward speculation losses of the
earlier year against the remaining part, if any, of the current year’s speculation profits, whichever is
advantageous to the assessee.
Where an assessee has brought forward speculative loss from his individual business and during the current
year he receives some speculative gains from a firm in which he is a partner, the brought forward loss can be
set-off against the speculative profits received from the firm. Similarly, where a speculation business is carried
on by sole proprietor and after his death the business is continued by legal heirs forming partnership, the firm is
entitled to carry forward and set-off such loss. [C.I.T. v. Madhukant M. Mehta (1981) 132 ITR 159 (Guj.)].
Explanation to section 73 does not apply to shares acquired as investment. Moreover, loss from activity of trading
in derivatives carried out in recognized stock exchange shall not be treated as Speculative loss. [Exception to
section 43(5)]
(C) CARRY FORWARD AND SET OFF OF LOSSES BY SPECIFIED BUSINESS [SECTION 73A]
(1) Any loss of any specified business in section 35AD shall not be set off except against profits and gains
of any other specified business.
(2) Where for any assessment year any loss computed of the specified business has not been wholly set
off, the loss not set off shall be carried forward to the following assessment year, and
(i) it shall be set off against the profits and gains of any specified business carried on by him and
(ii) if the loss cannot be wholly set off, the amount of loss not set off shall be carried forward to the
following assessment year and so on.
(D) SET-OFF AND CARRY FORWARD OF CAPITAL LOSSES [SECTION 74]

Where, in respect of any assessment year, the net result of the computation under the head “Capital gains” is a
loss to the assessee, it can be carried forward to the following assessment year. The short-term and long-term
losses shall be separately carried forward. In case of short-term capital loss it can be set off against income, if
any, under the head “Capital gains” (whether short-term or long-term) assessable for that assessment year in
respect of any other capital asset. But in case of long-term capital loss, it can be set off only against long-term
capital gain.
While losses on transfer of capital assets, whether short-term or long-term cannot be set off against any other
income of the assessee under other heads of income i.e. heads other than ‘capital gains’ in the previous year in
which such loss was incurred, it can be carried forward to be set off against capital gains if any during the next
eight assessment years.
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(E) LOSS ON MAINTENANCE OF RACE HORSES [SECTION 74A]

Where an assessee who is the owner of race horses sustains a loss in the activity of owning and maintaining
race horses, he can carry-forward and set-off such loss against his income (Prize money received on a race
horse or race horses) from the activity of owning and maintaining race horses in subsequent years. This loss
can be carried forward to a maximum of four assessment years immediately succeeding the assessment year
for which the loss was first computed.
(F) LOSS UNDER THE HEAD “INCOME FROM OTHER SOURCES”

Except the loss from the activity of owning and maintaining of race horses, the unabsorbed loss from no other
activity under the above head is permitted to be carried forward and set off against income of subsequent years.
Carry forward and set-off of Accumulated Business Loss and Unabsorbed Depreciation in
certain cases of amalgamation or demerger etc. [Section 72A]
Section 72A provides for carry forward and set off of accumulated loss and unabsorbed depreciation allowance
in case of:
(i) Amalgamation [Section 72A(1), (2) and (3)], or
(ii) Demerger [Section 72A(4) and (5), or
(iii) Reorganisation of business [Section 72A(6)]
(i) Carry forward and set off of accumulated loss and unabsorbed depreciation in case of amalgamation
[Section 72A(1), (2) and (3)]
(1) Where there has been an amalgamation of a company owning an industrial undertaking or a ship
or a hotel with another company or an amalgamation of a banking company referred to in Clause
(c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank, then,
notwithstanding anything contained in any other provision of this Act, the accumulated loss and the
unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case
may be, allowance for depreciation of the amalgamated company for the previous year in which the
amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss
and allowance for depreciation shall apply accordingly.
(2) Notwithstanding anything contained in Sub-section (1), the accumulated loss shall not be set off
or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the
amalgamated company unless -
(a) the amalgamating company -
(i) has been engaged in the business, in which the accumulated loss occurred or depreciation
remains unabsorbed, for three or more years;
(ii) has held continuously as on the date of the amalgamation at least three-fourths of the book
value of fixed assets held by it two years prior to the date of amalgamation;
(b) the amalgamated company -
(i) holds continuously for a minimum period of five years from the date of amalgamation at least
three- fourths of the book value of fixed assets of the amalgamating company acquired in a
scheme of amalgamation;
(ii) continues the business of the amalgamating company for a minimum period of five years
from the date of amalgamation;
(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of
the amalgamating company or to ensure that the amalgamation is for genuine business
purpose.
Consequences if the above conditions are not satisfied [Section 72A(3)]: In a case where the conditions
laid down under Clause (b) above are not complied with, the set off of loss or allowance of depreciation made
in any previous year in the hands of the amalgamated company shall be deemed to be in the income of the
amalgamated company chargeable to tax for the year in which such conditions are not complied with.
[Note: The carry forward and set off of loss and unabsorbed depreciation as per the above provisions shall be
allowed only when amalgamation is as per the provisions of Section 2(1B) of the Income-tax Act, 1961].
(ii) Carry forward and set off of accumulated losses and unabsorbed depreciation in case of demerger
[Sections 72A(4) and (5]
Notwithstanding anything contained in any other provisions of this Act in the case of a demerger, the accumulated
loss and the allowance for absorbed depreciation of the demerged company shall -
(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the
resulting company, be allowed to be carried forward and set off in the hands of the resulting company;
(b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to
the resulting company, be apportioned between the demerged company and the resulting company
in the same proportion in which the assets of the undertakings have been retained by the demerged
company and transferred to the resulting company, and be allowed to be carried forward and set off
transferred to the resulting company, and be allowed to be carried forward and set off in the hands of
the demerged company or the resulting company, as the case may be.
The Central Government may, for the purposes of this Act, by notification in the Official Gazette, specify such
conditions as it considers necessary to ensure that the demerger is for genuine business purposes.
[Note: The carry forward and set off of accumulated loss and unabsorbed depreciation as per the above
provisions shall be allowed only when demerger is as per the provisions of Section 2(19AA) of the Income-tax
Act.]
(iii) Carry forward and set off of accumulated losses and unabsorbed depreciation in case of
reorganisation of business [Section 72A(6)]
Where there has been reorganisation of business, whereby, a firm is succeeded by a company fulfilling the conditions
laid down in Clause (xiii) of Section 47 or a proprietary concern is succeeded by a company fulfilling the conditions
laid down in Clause (xiv) of Section 47, then, notwithstanding anything contained in any other provisions of this Act,
the accumulated loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern, as the
case may be, shall be deemed to be the loss or allowance for depreciation of the successor company for the purpose
of previous year in which business reorganisation was effected and other provisions of this Act relating to set off and
carry forward of loss and allowance for depreciation shall apply accordingly.
Section 72(6A): Where there has been reorganisation of business whereby a private company or unlisted
public company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso
to clause (xiiib) of section 47, then, notwithstanding anything contained in any other provision of this Act, the
accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the
loss or allowance for depreciation of the successor limited liability partnership for the purpose of the previous
year in which business reorganisation was effected and other provisions of this Act relating to set off and carry
forward of loss and allowance for depreciation shall apply accordingly.
Consequences if the conditions laid down under Section 47(xiii), (xiv) and 47(xiiib) are not
complied with [Proviso to Section 72A(6) & (6A)]
If any of the conditions laid down under Section 47(xiii) and (xiv) are not complied with, the set off of loss or
280 PP-DTL&P
allowance of depreciation made in any previous year in the hands of the successor company, shall be deemed
to be the income of the company chargeable to tax in the year in which such conditions are not complied with.
If any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied with, the set off
of loss or allowance of depreciation made in any previous year in the hands of the successor limited liability
partnership, shall be deemed to be the income of the limited liability partnership chargeable to tax in the year in
which such conditions are not complied with.
Note: “Accumulated loss” means so much of the loss of the predecessor firm or the proprietary concern
or the private company or unlisted public company before conversion into limited liability partnership or the
amalgamating company or the demerged company, as the case may be, under the head “Profits and gains of
business or profession” (not being a loss sustained in a speculation business) which such predecessor firm
or the proprietary concern or the company or amalgamating company or demerged company, would have
been entitled to carry forward and set off under the provisions of section 72 if the reorganisation of business or
conversion or amalgamation or demerger had not taken place;
“Unabsorbed depreciation” means so much of the allowance for depreciation of the predecessor firm or the
proprietary concern or the private company or unlisted public company before conversion into limited liability
partnership or the amalgamating company or the demerged company, as the case may be, which remains to be
allowed and which would have been allowed to the predecessor firm or the proprietary concern or the company
or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the
reorganisation of business or conversion or amalgamation or demerger had not taken place.
Carry forward and set off of Accumulated Loss and Unabsorbed Depreciation allowance in
scheme of amalgamation of banking company in certain cases [Section 72AA]
Section 72AA inserted by the Finance Act, 2005 provides for carry forward and set off of accumulated loss and
unabsorbed depreciation allowance in scheme of amalgamation of banking companies.
Where there has been an amalgamation of a banking company with any other banking institution under a
scheme sanctioned and brought into force by the Central Government under Sub-section (7) of Section 45
of the Banking Regulation Act, 1949, the accumulated loss and the unabsorbed depreciation of such banking
company shall be deemed to be the loss or, as the case may be, allowance for depreciation of such banking
institution for the previous year in which the scheme of amalgamation was brought into force and other provisions
of this Act relating to set-off and carry forward of loss and allowance for depreciation shall apply accordingly.
The terms, “accumulated loss”, “banking company”, “banking institution” and “unabsorbed depreciation” for the
purposes of this Section are defined as under:
(i) “accumulated loss” means so much of the loss of the amalgamating banking company under the
head “Profits and gains of business or profession” (not being a loss sustained in a speculation business)
which such amalgamating banking company, would have been entitled to carry forward and set-off
under the provisions of Section 72, if the amalgamation had not taken place.
(ii) “banking company” shall have the same meaning assigned to it in Clause (c) of Section 5 of the
Banking Regulation Act, 1949 (10 of 1949);
(iii) “banking institution ” shall have the same meaning assigned to it in Sub-section (15) of Section 45
of the Banking Regulation Act, 1949 (10 of 1949);
(iv) “unabsorbed depreciation” means so much of the allowance for depreciation of the amalgamating
banking company which remains to be allowed and which would have been allowed to such banking
company if amalgamation had not taken place.
TREATMENT OF CARRY-FORWARD OF LOSSES OF CERTAIN ASSESSEES

(1) Carry-forward and set-off of losses in case of change in constitution of firm [Section 78]
Where a change has occurred in the constitution of a firm, the firm is not entitled to carry forward and set off so
much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits, if
any, in the firm in respect of the previous year.
(2) Carry-forward and set-off of losses in case of succession of business or profession
When a business or profession is succeeded by another person, the brought forward losses by the predecessor
can be set-off against the income earned by the predecessor before the succession. The successor is not
entitled to carry forward the losses sustained by the predecessor and set them off against the income earned by
him. However, there is exception. If the succession is by inheritance, the heir-at-law is entitled to carry-forward
and set-off the losses sustained by the predecessor provided the business in question continues to be carried
on by the successor.
(3) Carry-forward and set-off of losses of companies in case of certain companies [Section 79]
Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place during the
previous year in the case of a company, not being a company in which the public are substantially interested,
no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of
the previous year, unless on the last day of the previous year, the shares of the company carrying not less than
51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying
not less than 51% of the voting power on the last day of the year or years in which the loss was incurred:
Provided that even if the said condition is not satisfied in case of an eligible start up as referred to in section
80-IAC, the loss incurred in any year prior to the previous year shall be allowed to be carried forward and set off
against the income of the previous year if all the shareholders of such company who held shares carrying voting
power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the
last day of such previous year and such loss has been incurred during the period of seven years beginning from
the year in which such company is incorporated. (Date of Setting up of business is irrelevant)
Nothing contained in sub-section (1) shall apply:
(a) to a case where a change in the said voting power and shareholding takes place in a previous year
consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any
relative of the shareholder making such gift;
(b) to any change in the shareholding of an Indian company which is a subsidiary of a foreign company
as a result of amalgamation or demerger of a foreign company subject to the condition that 51%
shareholders of amalgamating or demerged foreign company continue to be the shareholders of the
amalgamated or the resulting foreign company;
(c) to a company where a change in the shareholding takes place in a previous year pursuant to a
resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable
opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner;
(d) to a company, and its subsidiary and the subsidiary of such subsidiary, where,––
(i) the Tribunal, on an application moved by the Central Government under section 241 of the
Companies Act, 2013, has suspended the Board of Directors of such company and has appointed
new directors nominated by the Central Government, under section 242 of the said Act; and
(ii) a change in shareholding of such company, and its subsidiary and the subsidiary of such subsidiary,
282 PP-DTL&P
has taken place in a previous year pursuant to a resolution plan approved by the Tribunal under
section 242 of the Companies Act, 2013 after affording a reasonable opportunity of being heard
to the jurisdictional Principal Commissioner or Commissioner.
Explanation. – For the purposes of this section:
(i) a company shall be a subsidiary of another company, if such other company holds more than half in
nominal value of the equity share capital of the company;
(ii) “Tribunal” shall have the meaning assigned to it in clause (90) of section 2 of the Companies Act, 2013.’
Section 79 substituted by Finance Act 2019
Points to be considered:
• The scheme of Section 79 has been modified w.e.f A.Y.2020-21, to facilitate ease of doing business
in case of eligible start up so as to provide brought forward business loss of closely held eligible start
up shall be carried forward and set off against income of previous years on satisfaction of either of two
conditions mentioned under clause (a) or (b) of section 79.
• For other closely held companies, there would be no change, and loss incurred in any year prior to PY
shall be carried forward and set off only on satisfaction of condition stipulated at clause (a).
SUBMISSION OF RETURN FOR LOSS [SECTION 80]

An assessee is not entitled to carry-forward a loss unless he has filed a return of loss to the Department in
time and in the prescribed form. It is obligatory on the part of the assessee to file such return, otherwise he will
be deprived of the benefit of carry-forward of losses. In fact, only that amount of loss is allowed to be carried-
forward which has been computed by the Assessing Officer and not by the assessee.
Section 80 places restrictions on assessee from claiming set off and carry forward of losses of earlier years
if return has been filed after due date, can’t be treated as straight jacket one which could be applied without
reference to different provisions included in section 139 and elsewhere to be more extensive time for filling
return. Chhattisgarh State Civil Supplies Corporation v CIT[2017] 396 ITR440(Chhattisgarh)
Where business loss has not been notified to assessee by AO, Assessee could not be allowed to carry forward
and set off business losses of earlier years during AY in question. The assessee must have loss determined in
subsequent year in which business loss is to be set off. CIT v Haryan Hotels Ltd [2005] (Punj. & Har.)
Section 80 of the Act provides that a loss which has not been determined in pursuance of return filed u/s
139(3) shall not be carried forward and set-off u/s 72(1), 73(2), 74(1), 74(3), 74A. Previously, it does not
include Section 73A which provides that any loss, computed in respect of any specified business referred
to in section 35AD.
Section 80 of the Act has been amended by Finance Act, 2016 to provide that the loss determined u/s 73A
shall not be allowed to be carried forward and set off unless it is determined in pursuance of a return filed
u/s 139(3).
These amendments effective retrospectively from 1st April, 2016 and accordingly apply in relation to the
assessment year 2016-17 and subsequent years.
SUMMARY OF PROVISIONS REGARDING CARRY FORWARD AND SET-OFF OF LOSSES

SET-OFF OF LOSSES [SECTIONS 70, 71]
Loss Set-Off
1. Loss from house property. (a) Income from any other house property
(b) Any other head of income upto maximum of
Rs. 2,00,000
2. Loss from business or profession (a) Income from any other business or Profession.
(b) Any other head of income except under the
head “Salaries”
3. Loss from speculation (a) Income from speculation

4. Short-term capital loss (a) Short-term capital gain (b) Long-term capital gain
5. Long-term capital loss (a) Long-term capital gain
6. Loss from activity of owning and maintaining race (a) Income from activity of owing and maintaining race
horses horses.
7.Loss from a business specified under Section 35AD Income from a specified business under Section 35AD
CARRY FORWARD AND SET-OFF OF LOSSES [SECTION 72]
Loss Set-Off
1. Loss from house property. In following eight years, income from house property.
2. Loss from business or profession In following eight years, income from business or
profession.
3. Loss from speculation In following four years (w.e.f. A.Y. 2006-07), income
from speculation.
4. Short-term capital loss In following eight years :

(a) Short-term capital gain
(b) Long-term capital gain
5. Long-term capital loss In following eight years, Long-term capital gain.
6. Loss from activity of owning and maintaining race In following four years, Income from activity of owing
horses and maintaining race horses.
7.Loss from specified business under Section 35AD Income from a specified business under Section
35AD in future years.
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III. DEDUCTIONS TO BE MADE IN COMPUTING

TOTAL INCOME [SECTION 80C TO 80U]
DEDUCTIONS UNDER CHAPTER VI-A
Deduction in respect of investments [Section 80C]

Section 80C provides deduction to (a) an individual; (b) a Hindu undivided family for investments made in
specified assets subject to a maximum amount of’ one lakh and fifty thousand rupees.
The specified Investments include:
a) Premium paid on life Insurance policy taken on the life of an individual assessee or spouse and any
child of such individual, and any member of the Hindu Undivided Family subject to a maximum of 10%
of the actual sum assured, if insurance policy is taken on or after 1.04.2012. But if, insurance policy is
taken on or before 31.03.2012, then maximum limit is 20% of actual sum assured. Further, if insurance
policy is taken on or after 01.04.2013 and the policy is on the life of a person with disability or severe
disability mentioned in Section 80U or a person suffering from a disease or aliment mentioned in
Section 80DDB, then 15% of actual sum assured.
“actual sum assured” in relation to a life insurance policy shall mean 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--
1.
the value of any premium agreed to be returned; or
2. 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.
b) Amounts paid to effect or to keep in force a contract for a non-cummulative deferred annuity not being
an annuity plan referred to in clause (j) below on the life of: (i) in the case of an individual, the individual,
spouse or any child of such individual and
However, such contract should not contain a provision for exercise of an option by the insured to
receive cash payment in lieu of the payment of the annuity.
c) Deduction from the salary payable by or on behalf of the Government to any individual, in accordance
with the conditions of his service, for securing to him a deferred annuity or making provision for his wife
or children, to the extent of one-fifth of salary.
d) Contribution made by an individual to a Recognised provident fund; an approved superannuation fund;
public provident fund; a ten-year account or a fifteen- year account under the Post Office Savings Bank
(Cumulative Time Deposits) Rules, 1959
e) Purchase of notified securities or deposit scheme of the Central Government. Sukanya Samriddhi
Account Scheme has been notified.
f) Subscription to other notified savings certificates defined in Section 2(c) of the Government Savings
Certificates Act, 1959 [For this clause, National Savings Certificates (VIII) issue has been notified] and
interest accured deemed to be reinvested also qualifies.
g) Contributions made by an individual or HUF, for participation in the Unit-Linked Insurance Plan, 1971,
deemed to have been made under Section 19(8)(a) of the Unit Trust of India Act, 1963. [For this clause,
Dhanaraksha-1989 plan of LIC Mutual Fund has been notified].
h) Contributions made in the name of an individual or HUF for participation in any notified Unit-Linked
Insurance Plan of the LIC Mutual Fund.
i) Any contribution to effect or keep in force any notified annuity plan of the LIC or any other insurer.
j) Any subscription, to any units of any Mutual Fund or the Unit Trust of India under any notified plan
formulated by the Central Government.
k) Any contribution to any pension fund set up by any Mutual Fund as notified by the Central Government.
l) Subscription to the notified deposit scheme of or contribution to any such pension fund set up by the
National Housing Bank established under Section 3 of the National Housing Bank Act, 1987. [For this
clause, Home Loan Account Scheme of National Housing Bank has been notified].
m) Only tuition fees (excluding any payment towards any development fees or donation or payment of
similar nature), whether at the time of admission or thereafter, - (for full time education of any 2 children)
to any university, college, school or other educational institution situated within India;
n) For purchase or construction of a residential house property, the income of which is chargeable to tax
under the head “Income from House Property”, where such payments are made towards or by way of:
i. any instalment or part payment of the amount due towards the cost of the house property allotted
or construction and sale of house property on ownership basis; or
ii. E-payment of any loan taken for the purpose of purchase or construction of residential house
property subject to some conditions.
o) Subscription to equity shares or debentures or units forming part of any eligible issue of capital i.e.
issue made by a company registered in India or a public financial institution or an approved mutual
fund for the purpose of developing, maintaining and operating an infrastructure facility as defined in the
explanation to Sub-section (4) of Section 80-IA or for generation, or for generation and distribution of
power or for providing telecommunication services whether basic or cellular.
p) Fixed deposits for a minimum period of 5 years in any Scheduled Banks
q) As subscription to such bonds issued by the National Bank for Agriculture and Rural Development, as
the Central Government may, by notification in the Official Gazette specify in this behalf.
r) In an account under the Senior Citizens Savings Scheme Rules, 2004.
s) As five year time deposit in an account under the Post Office Time Deposit Rules, 1981.
t) Contribution as an employee of the Central Government, to a specified account of the pension scheme
referred to in section 80CCD:
(a) for a fixed period of not less than three years; and
(b) which is in accordance with the scheme as may be notified by the Central Government in the
Official Gazette for the purposes of this clause.
Explanation : For the purposes of this clause, “specified account” means an additional account referred to in
sub-section (3) of section 20 of the Pension Fund Regulatory and Development Authority Act, 2013. [Inserted
by Finance Act, 2019]
Deduction for Contribution to Pension Fund [Section 80CCC]

Section 80CCC provides deduction with respect to amount deposited by an individual out of his taxable income
to any annuity plan of the Life Insurance Corporation of India or any insurer approved by the IRDAI for receiving
pension subject to a maximum of Rs. 1,50,000.
No deduction for this contribution will be available u/s 80C. The pension received by the assessee or his
nominee is taxable in the year of receipt.
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If the asseesee or his nominee surrenders the annuity before its maturity, then surrender value including bonus/
interest is taxable in the year of receipt.
Deduction in respect of Contribution to Pension Scheme of Central Government [Section

80CCD]
Section 80CCD provides deduction with respect to employers and employees contribution to pension
scheme which is applicable to new employees of the Central Government employed on or after 01.01.2004
or being an individual employed by any other employer. It is mandatory for such employee to contribute
10% of salary every month towards the pension scheme. A matching contribution is required to be made
by the employer also.
As per section 80CCD (1), employees contribution towards the notified pension scheme is deductible, but upto
maximum of 10% of the salary of employee. As per section 80CCD (1B), an additional deduction of maximum
Rs. 50,000 can also be availed. This deduction is out of the focus of section 80CCE. As per section 80CCD
(2) if the employer contributes towards the notified pension scheme, then deduction can be claimed but upto
maximum of 10% of the salary of employee. If employer is Central government then instead of 10%, Deduction
shall be 14% of the salary of employee. This deduction is out of the focus of section 80CCE.
Salary here means basic salary plus dearness allowance (forming part) plus commission at a fixed percentage
of turnover achieved by the employee. Self-employed individuals can also contribute to NPS and in such a case,
maximum limit of deduction is 20% of his gross total income. Any amount received from pension fund, shall
be taxable as income of the recipient (assessee or his nominee) in the year in which such amount is received.
Limit on Deductions under sections 80C, 80CCC and 80CCD(1) [Section 80CCE]
The aggregate amount of deductions under Sections 80C, 80CCC and 80CCD (1) shall not in any case, exceed
Rs. 1,50,000.
Deduction in respect of Investment made under any Equity Saving Scheme [Section 80CCG]
Deduction under Section 80CCG is not allowed from AY 2018-19. However, an assessee who has claimed
deduction under this section in AY 2017-18 or earlier years shall be allowed deduction under this section till
AY 2019-20 (if otherwise eligible). Section 80CCG provided for deduction of 50% of the investment but up to
maximum of Rs. 25,000, with respect to investment in listed equity shares or listed units of an equity oriented
funds in accordance with a notified scheme to a resident individual, if his gross total income does not exceed
Rs. 12 Lakh. Further, the investment should be locked in for a period of 3 years from the date of acquisition in
accordance with the above scheme. The assessee must satisfy any other condition as may be prescribed. The
deduction shall be allowed for 3 consecutive assessment years beginning with assessment years in which listed
equity shares or units were first acquired.
Note: The assessee should be a new retail investor as per the requirements of the notified scheme. Equity
oriented fund shall have the same meaning assigned in section 10(38).
Deduction in respect of Medical Insurance Premia [Section 80D]

Section 80D provides deduction to an individual or a Hindu undivided family towards medical insurance premium
and preventive health check-up or contribution to Central Government Health Scheme (CGHS) or any scheme
notified by the Central Government on the health of the assessee, his family, parents or members of the HUF.
Where the assessee is an individual, following expenditures are eligible for deduction:
(a) the whole of the amount paid to effect or to keep in force an insurance on the health of the assessee or
his family or “any contribution made to the Central Government Health Scheme” or such other scheme
as may be notified by the Central Government in this behalf or any payment made on account of
preventive health check-up of the assessee or his family and the sum does not exceed in the aggregate
Rs. 25,000; and
(b) the whole of the amount paid to effect or to keep in force an insurance on the health of the parent
or parents of the assessee or any payment made on account of preventive health check-up of the
assessee or his family as does not exceed in the aggregate Rs. 25,000.
(c) the whole of the amount paid on account of medical expenditure incurred on the health of the assessee
or any member of his family, who is senior citizen or very senior citizen and not having medical insurance,
as does not exceed in the aggregate Rs. 50,000.
(d) the whole of the amount paid on account of medical expenditure incurred on the health of any parent
of the assessee who is senior citizen or very senior citizen and not having medical insurance, as does
not exceed in the aggregate Rs. 50,000.
Explanation: family means the spouse and dependent children of the assessee.
Payment shall be made by any mode, including cash, in respect of any sum paid on account of preventive
health check-up and by any mode other than cash in all cases other than preventive health check up.
Where the assessee is a Hindu undivided family, the expenditure eligible for deduction, shall be aggregate of
the following namely:
(a) whole of the amount paid to effect or to keep in force an insurance on the health of any member of that
Hindu undivided Family as does not exceed in the aggregate Rs. 25,000
(b) whole of the amount paid on account of medical expenditure incurred on the health of any senior citizen
or senior citizen member of the Hindu undivided family as does not exceed in the aggregate Rs. 50,000
and no amount has been paid to effect or to keep in force and insurance on the heath of such a person:
Provided Further that the aggregate of the sum specified under the clause (a) and clause (b) shall not exceed
Rs. 50,000
In case of a senior citizen the amount shall not exceed Rs.50,000.
Note:- where amount is paid in lump sum in the previous year to effect or to keep in force an insurance
on the health of any person specified there in for more than a year, then, subject to the provisions of
this section, deduction shall be allowed proportionately for each relevant previous year.
Explanation: For the purposes of this sub-section,
1. Senior citizen means an individual resident in India who is of the age of sixty years or more at any time
during the relevant previous year.
Deduction in respect of maintenance including medical treatment of a dependant who is a

person with disability [Section 80DD]
Section 80DD provides deduction to an individual or a Hindu undivided family, who is a resident in India,
(a) for expenditure incurred during the previous year for the medical treatment (including nursing), training
and rehabilitation of a dependent, being a person with disability; or (b) paid or deposited any amount under
a scheme framed in this behalf by the Life Insurance Corporation or any other insurer or as specified in the
section. The amount deduction shall be Rs. 75000 (flat deduction irrespective of the expenditure incurred or
amount paid or deposited). However, in case of severe disability (disability of at least 80%) the deduction shall
be Rs. 1, 25,000 flat.
The deduction under clause (b) shall be allowed only if the following conditions are fulfilled, namely: -
(a) the scheme provides for payment of annuity or lump sum amount for the benefit of a dependant, being
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a person with disability, in the event of the death of the individual or the member of the Hindu undivided
family in whose name subscription to the scheme has been made;
(b) the assessee nominates either the dependant, being a person with disability, or any other person or
a trust to receive the payment on his behalf, for the benefit of the dependant, being a person with
disability.
If the dependant, being a person with disability, predeceases the individual or the member of the Hindu undivided
family, an amount equal to the amount paid or deposited under Clause (b) shall be deemed to be the income of
the assessee of the previous year in which such amount is received by the assessee and shall accordingly be
chargeable to tax as the income of that previous year.
The assessee, claiming a deduction under this section, shall furnish a copy of the certificate issued by the
medical authority in the prescribed form and manner, along with the return of income under Section 139, in
respect of the assessment year for which the deduction is claimed:
For the purpose of this section
a) “dependent” means -
(i) in the case of an individual, the spouse, children, parents, brothers and sisters of the individual or
any of them;
(ii) in the case of a Hindu undivided family, a member of the Hindu undivided family, dependant
wholly or mainly on such individual or Hindu undivided family for his support and maintenance,
and who has not claimed any deduction under Section 80U in computing his total income for the
assessment year relating to the previous year;
b) “disability”shall have the meaning assigned to it in clause (i) of Section 2 of the Persons with Disabilities
(Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 (1 of 1996);
Deduction in respect of medical treatment of certain specified disease or ailment [Section

80DDB]
Section 80DDB provides deduction to an individual or a Hindu undivided family, who is a resident in India for
amount actually paid during the previous year, for the medical treatment of such disease or ailment as may be
specified in the rules made in this behalf by the Board -
(a) for himself or a dependent, in case the assessee is an individual; or
(b) for any member of a Hindu undivided family, in case the assessee is a Hindu undivided family,
subject to a maximum of Rs. 40,000 (in case of senior citizen Rs. 1,00,000 )
Deduction is allowed only when a certificate in Form No. 10-I (issued by neurologist, oncologist, urologist,
haematologist, immunologist or any such specialist as may be specified working in a Government Hospital) is
furnished.
Provided further that the deduction under this section shall be reduced by the amount received, if any, under an
insurance from an insurer, or reimbursed by an employer, for the medical treatment of the person referred to in
Clause (a) or Clause (b).
For the purposes of this section, “dependent” means -
(a) in the case of an individual, the spouse, children, parents, brothers and sisters of the individual,
dependant wholly or mainly on such individual for support and maintenance;
(b) in the case of a Hindu undivided family, any member of the Hindu undivided family, dependant wholly
or mainly on Hindu undivided family for support and maintenance;
Deduction in respect of repayment of loan taken for Higher Education [Section 80E]
Section 80E provides deduction to an individual for amount actually paid during the previous year out of
his income chargeable to tax by way of an interest on loan, taken by him from any financial institution
or any approved charitable institution for the purpose of pursuing higher education of self or any of the
relative (i.e. spouse, children of the assessee or student for whom the individual is the legal guardian).
The deduction will be available in computing the total income in respect of initial assessment year and the
seven assessment years immediately succeeding the initial assessment year or until the interest thereon
is paid by such individual in full, whichever is earlier. The expression “initial assessment year” means
the assessment year relevant to the previous year, in which the assessee starts paying the interest on the
loan.
For the purposes of this section, the expression “higher education” is being defined to mean any course of study
pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university
recognised by the Central Government or State Government or local authority or by any other authority
authorised by the Central Government or State Government or local authority to do so.
The expression “financial institution” is being defined to mean a banking company to which the “Banking
Regulation Act, 1949 applies (including any bank or banking institution referred to in Section 51 of the Act) or
any other financial institution which the Central Government may, by notification in the Official Gazette, specify
in this behalf.
The expression “approved charitable institution” is being defined to mean an institution specified in, or as the
case may be, an institution established for charitable purposes and notified by the Central Government under
Section 10(23C) or an institution referred to in Section 80G(2)(a).
Deduction in respect of interest on loan taken for Residential House Property [section 80EE]
Section 80EE provides deduction to an individual for interest payable on loan taken by him from any financial
institution for the purpose of acquisition of a residential house property for the assessment year beginning on
1st day of April, 2017 and subsequent assessment year, subject to maximum of Rs. 50,000.
The deduction under section shall be subject to the following conditions, namely
(i) the loan has been sanctioned by the financial institution including housing finance company during the
period beginning on the 1st day of April, 2016 and ending on the 31st day of March, 2017;
(ii) the amount of loan sanctioned for acquisition of the residential house property does not exceed 35 lakh
rupees;
(iii) the value of the residential house property does not exceed 50 lakh rupees;
(iv) the assessee does not own any residential house property on the date of sanction of the loan.
Where a deduction under this section is allowed for any interest, deduction shall not be allowed in respect of
such interest under any other provisions of the Act for the same or any other assessment year. Therefore, this
deduction is other than the deduction u/s 24(b) under the head “Income from house property”. If in case, the
amount of interest exceeds Rs. 50,000 then the individual can claim the balance deduction u/s 24(b), if relevant
conditions are satisfied.
For the purposes of this section,
a) “financial institution” means a banking company to which the Banking Regulation Act, 1949 (10 of 1949)
applies including any bank or banking institution referred to in section 51 of that Act or a housing finance
company;
b) “housing finance company” means a public company formed or registered in India with the main object
290 PP-DTL&P
of carrying on the business of providing long-term finance for construction or purchase of houses in
India for residential purposes.
Tax incentives for affordable housing [Section 80EEA] [Inserted by Finance Act, 2019]
New Section 80EEA of the Income Tax Act, 1961 has been introduced vide Finance Act, 2019 as per which
an Additional tax deduction up to 1.5 Lakh is available for interest paid on loans taken up to 31st March 2020.
It is an additional benefit on the top of 2 Lakh benefit extended by section 24. The maximum tax deduction on
interest amount paid for home loan will be 3.5 Lakhs i.e. 2 Lakh under section 24 and 1.5 Lakh under section
80EEA. The deduction will be available on loans taken up to 31st March 2020. The benefit will be given only on
the interest component of the home loan.
Eligibility conditions for claiming a deduction

• This benefit will be extended only to the first time homeowner i.e. the assessee should not be owner of
any other house at the time of sanction to avail this benefit.
• The stamp duty value of a home should be 45 Lakhs or less.
• The deduction under this scheme is available only to the individuals. HUF, company or any other kind
of taxpayer cannot claim benefit under this section.
• In order to claim this benefit the property should be self-occupied and affordable.
• To claim this benefit, the individual must have taken the loan from the financial institution or bank. The
loan sanction should be between 1st April, 2019 to 31st March, 2020.
• This tax deduction can be claimed for by individual as well as joint home loan borrower. The joint home
loan borrower can individually claim this benefit.
• The above benefit is not applicable for the commercial properties.
Maximum Tax Deduction benefit on Home Loan Interest = 2 Lakh (Section 24) + 1.5 Lakh (Section 80EEA)
Example : Rakesh works in pune in IT Company. He lives in pune in a rented house. He purchased property in
Surat. His father and family members live in a newly purchased house. He is buying a home for the first time, so
he can take benefit of section 80EEA. The cost of a home is 45 Lakh and. He purchased this home by taking a
home loan of 40 Lakh in May 2019.
The monthly EMI of this property is Rs.37000. The total of EMI for FY2019-20 will be 4.07 Lakh. This includes
principal payment of 0.3 Lakh and 3.77 Lakh of interest component.
As it is self occupied house and fulfilling condition of section 80EEA, Rakesh can claim 3.5 Lakh as tax deduction
while filing Income tax return.
Tax incentives for electric vehicles [Section 80EEB] [Inserted by Finance Act, 2019]
In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with
and subject to the provisions of this section, interest payable on loan taken by him from any financial institution
for the purpose of purchase of an electric vehicle.
The deduction under sub-section (1) shall not exceed one lakh and fifty thousand rupees and shall be allowed
in computing the total income of the individual for the assessment year beginning on the 1st day of April, 2020
and subsequent assessment years.
The deduction under sub-section (1) shall be subject to the condition that the loan has been sanctioned by
the financial institution during the period beginning on the 1st day of April, 2019 and ending on the 31st day of
March, 2023.
Where a deduction under this section is allowed for any interest referred to in sub-section (1), deduction shall
not be allowed in respect of such interest under any other provision of this Act for the same or any other
assessment year.
For the purposes of this section, –
(a) “electric vehicle” means a vehicle which is powered exclusively by an electric motor whose traction
energy is supplied exclusively by traction battery installed in the vehicle and has such electric
regenerative braking system, which during braking provides for the conversion of vehicle kinetic energy
into electrical energy;
(b) “financial institution” means a banking company to which the Banking Regulation Act, 1949 applies,
or any bank or banking institution referred to in section 51 of that Act and includes any deposit taking
non-banking financial company or a systemically important non-deposit taking non-banking financial
company as defined in clauses (e) and (g) of Explanation 4 to section 43B.’
Deduction in respect of donations to certain funds, charitable institutions, etc. [Section 80G]
Section 80G provides deduction to all assessee’s for donations to specified organizations or institutions or
funds. However, any donation of any sum exceeding Rs. 2,000 shall not be allowed as deduction under the
section unless such sum is paid by any mode other than cash. Further, where an assessee has claimed and
has been allowed any deduction under this section in respect of any amount of donation, the same amount will
not again qualify for deduction under any other provision of the Act for the same or any other assessment year.
Donations in kind is not eligible as per the Supreme Court Ruling (Vijaipat Singhania v. CIT).
The quantum of deduction under this section is the aggregate of deduction permissible under clauses (A), (B),
(C) & (D) mentioned below. Together for (C) and (D) below, there is a qualifying limit which is 10% of adjusted
Gross Total Income.
Adjusted Gross total income means the “Gross Total Income” as reduced by:
I. Long-term Capital gains, if any which have been included in the “Gross Total Income”.
II. All deductions permissible under Sections 80C to 80U excepting deduction under Section 80G.
III. Exempted Income.
IV. Income of NRIs and Foreign Companies under Sections 115A, 115AB, 115AC, 115ACA or 115AD.
(A) 100% Deduction without any qualifying limit:
(i) National Defense fund.
(ii) Prime Minister’s National relief fund.
(iii) Prime Minister’s Earthquake relief fund.
(iv) Africa fund.
(v) National Trust for welfare of persons with autism, cerebral palsy, mental retardation and multiple
disabilities.
(vi) National cultural fund set up by the Central Government.
(vii) The Chief Minister’s relief fund or the lieutenant Governor’s relief fund.
(viii) National Illness Assistance fund.
(ix) The Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996.
(x) The Army/Air force Central welfare fund or the Indian Naval Benevolent fund.
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(xi) Any fund set up by a State Government to provide medical relief to poors.
(xii) The National/State Blood transfusion Council.
(xiii) Zila Saksharta Samiti constituted in any district.
(xiv) Any fund set up by the State Government of Gujarat, exclusively for providing relief to the victims of
earthquake in Gujarat.
(xv) Maharashtra Chief Minister’s Earthquake Relief Fund.
(xvi) University/Educational Institute of National Eminence approved by the prescribed authority.
(xvii) National foundation for communal harmony.
(xviii) Fund for technology development and application, set up by the Central Government.
(xix) National sports fund set up by the Central Government.
(xx) National Children’s Fund.
(xxi) the Swachh Bharat Kosh, set up by the Central Government, other than the sum spent by the assessee
in pursuance of Corporate Social Responsibility under sub-section (5) of section 135 of the Companies
Act, 2013 (18 of 2013);
(xxii) the Clean Ganga Fund, set up by the Central Government, whereas such assessee is a resident and
such sum is other than the sum spent by the assessee in pursuance of Corporate Social Responsibility
under sub-section (5) of section 135 of the Companies Act, 2013
(xxiii) the National Fund for Control of Drug Abuse constituted under section 7A of the Narcotic Drugs and
Psychotropic Substances Act, 1985 (61 of 1985);
(B) 50% Deduction without any qualifying limit:
(i) Jawaharlal Nehru Memorial Fund.
(ii) Indira Gandhi Memorial Trust.
(iii) Rajiv Gandhi Foundation.
(iv) Prime Minister’s Drought Relief Fund.
(C) 100% Deduction subject to qualifying limit:
(i) Any sum to Government or any approved local authority, institution or association to be utilized for
promoting family planning.
(ii) Any sum paid by the assessee, being a company, in the previous year as donation to Indian Olympic
Association or to any other association established in India and notified by the Central Government for:
I. Development of infrastructure for sports and games or
II. Sponsorship of sports and games in India.
(D) 50% Deduction subject to qualifying limit:
(i) Donation to Government or any approved Local Authority, Institution or Association to be utilized for any
Charitable purpose other than promoting family planning.
(ii) Any other Fund or Institution, which satisfies the conditions of Section 80G(5).
(iii) Notified Temple, Mosque, Gurudwara, Church or any other place notified by the Central Government to
be of historic, as chorological or artistic importance, for renovation or repair of such place.
(iv) Any corporation established by the Central or State Government specified under Section 10(26BB) for
promoting interests of the members of a minority community.
(v) Any authority constituted in India by or under any law for satisfying the need for housing accommodation
or for the purpose of planning development or improvement of cities, towns and villages or for both.
Deduction in respect of Rent Paid [Section 80GG]

Section 80GG provides deduction to an individual for rent paid if in case the individual does not receive HRA
exempt u/s 10(13A) or rent free accommodation from his employer. The accommodation should be occupied by
the assessee for the purpose of his own residence. Further, the individual/spouse/minor child/HUF of which he
or she is member does not own a residential accommodation at a place where the individual resides, performs
the duties of his office or employment or carries on his or her business or profession. For the purpose of this
section, the individual will give declaration in Form 10BA. The amount of deduction admissible under this
Section is lower of:
– Actual rent paid less 10% of ‘Adjusted Total Income’.
– 25% of such ‘Adjusted Total Income’.
– Amount calculated at Rs. 5,000 p.m.
Where Adjusted Total Income means the Gross total income as reduced by long term capital gain if included
in the gross total income and income referred to in section 115A to 115D and the amount of deduction under
section 80C other than deduction under this section.
Deduction in respect of certain donations for Scientific Research or Rural Development

[Section 80GGA]
Section 80GGA provides 100% deduction to any assessee (other than an assessee whose gross total income
includes income chargeable under the head “profits and gains of business or profession”) in respect of the
following payments/donations:
a) Sums paid to a research association which has, as its object the undertaking of scientific research, or
to a university, college or other institution to be used for scientific research where such association,
university, college or institution has been approved by the prescribed authority for the purpose of
Section 35(1)(ii).
b) any sum paid by the assessee in the previous year to a research association which has as its object
the undertaking of research in social science or statistical research or to a University or college or other
institution to be used for social science or statistical research where such association or university
college or institution is for the time being approved by the prescribed authority for the purpose of
Section 35(1)(iii).
c) Sums paid to an approved association or institution which has as its object the undertaking of any
programme of rural development, to be used for the purposes of carrying out any programme of
rural development approved for the purposes of Section 35CCA provided the assessee furnishes the
certificate referred to in Section 35CCA(2).
d) Sums paid to an approved association or institution which has as its object the undertaking of any
programme of rural development provided the assessee furnishes a certificate referred to in Section
35CCA(2A).
e) any sum paid by the assessee in the previous year to a public sector company or a local authority or
an association or institution approved by the National Committee for carrying out any eligible project or
scheme, provided the assessee furnishes a certificate referred to in Section 35AC(2)(a).
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f) For the purposes of this clause, ‘National Committee’ means the committee constituted by the Central
Government from amongst persons of eminence in public life, in accordance with the rules made under
Income-tax Act, 1961 and “eligible project or scheme” means such project or scheme for promoting the
social and economic welfare of, or the uplift of, the public as may be notified by Central Government on
the recommendations of the National Committee.
g) Sums paid before April 1, 2002 to an approved association or institution which has as its object the
undertaking of any programme of conservation of natural resources or afforestation to be used for
carrying out any programme of conservation of natural resources or of afforestation approved under
Section 35CCB(2).
h) Sums paid to the National Fund for Rural Development set up and notified by the Central Government
for the purpose of carrying out rural development. This section also provides that where deduction
under this section is claimed and allowed, deduction will not be allowed in respect of the same payment
under any other provision of the Act for the same or any other assessment year.
i) any sum paid by the assessee in the previous year to the National Urban Poverty Eradication Fund set
up and notified by the Central Government.
No deduction shall be allowed under this section in respect of any sum exceeding ten thousand rupees unless
such sum is paid by any mode other than cash.
Deduction in respect of contributions given by Companies to Political Parties or an Electoral

Trust [Section 80GGB]
Section 80GGB provides 100 % deduction for any sum contributed by an Indian Company in the previous year
to any political party or to an electoral trust while computing its total income by a mode other than cash.
Deduction in respect of contributions given by any person to Political Parties or an Electoral

Trust [Section 80GGC]
Section 80GGC provides 100 % deduction for any sum contributed by an assessee being any person to a
political party or an electoral trust except local authority and every artificial juridical person wholly or partly
funded by the Government while computing its total income by a mode other than cash.
Deduction in respect of profits and gains from industrial undertakings or enterprise engaged
in infrastructure development [Section 80-IA]
Section 80IA provides a deduction to an assessee in respect of profits and gains derived from any business of:
(1) Infrastructure facility: The enterprise is carrying on the business of operating any infrastructure facility
which fulfills the following conditions:
(a) It is owned by an Indian company or consortium of companies or by an authority or a board or a
corporation or any other body established or constituted under any Central or State Act registered in
India;
(b) It enters into an agreement with the Central or State Government or a local authority or any other statutory
body for (i) developing, (ii) operating and maintaining, (iii) developing, operating and maintaining, a new
infrastructure facility.
(c) It transfer such infrastructure facility after the period stipulated in the agreement to such Government or
authority or body concerned;
(d) It starts operating and maintaining the infrastructure facility on or after 1st April, 1995.
It has entered into an agreement with the Central Government or a State Government or a local authority or
any other statutory body for developing a special economic zone and maintaining a new infrastructure facility.
Where an infrastructure facility is transferred after 31.3.1999 by an enterprise which has developed it to another
enterprise for operating and maintaining it on its behalf, in accordance with the agreement with person mentioned
in (b), the transferee will get the benefit of deduction for the unexpired period.
Explanation - For the purposes of this clause, “infrastructure facility” means:
(a) a road including toll road, a bridge or a rail system;
(b) a highway project including housing or other activities being an internal part of the highway project;
(c) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or
solid waste management system;
(d) a port, airport, inland waterway or inland port.
W.e.f. Assessment year 2001-02, infrastructure facility shall also include water treatment system and solid
waste management system.
The benefit of deduction to housing and other development activities which are an internal part of a highway
project shall be allowed if the following conditions are satisfied:
(a) Such profits are transferred to a special reserve account.
(b) Such profits are utilised for highway project, excluding housing and other activities, before the expiry of
three years following the year in which the amount was transferred to the reserve account.
The amount remaining unutilised shall be chargeable to tax as income of the year in which it was transferred
to the reserve account.
(2) Telecommunication services: Any undertaking which has started or starts providing telecommunication
services whether basic or cellular including radio-paging, domestic satellite service or network of trunking and
electronic data interchange services at any time after 31.3.1995 but before 31.3.2005. Domestic Satellite Service
means a satellite owned and operated by an Indian Company for providing telecommunication services.
(3) Industrial park: Any undertaking which develops a special economic zone and operates an industrial park
(notified by the Central Government) after 31.3.1997 but before 1.4.2006 and in case of SEZ, it should begin on
or after 1.4.2001 but before 1.4.2006.
Where an undertaking develops industrial park after 31.3.1999 and transfers the operations and maintenance
of it to another undertaking, the transferee will get the benefit of deduction for the unexpired period. However,
Investments made to develop industrial park has been extended from 31.3.2006 to 31.3.2011.
(4) Generation and distribution of power: An undertaking which:
(a) is set-up in any part of India for the generation or generation and distribution of power if it begins to
generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the
31st day of March 2017.
(b) starts transmission or distribution by laying a network of new transmission or distribution lines at any
time during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March
2017.
(c) undertakes substantial renovation and modernization of the existing network of transmission or
distribution lines at any time during the period beginning on the 1st day of April, 2004 and ending on the
31st day of March, 2017.
Provided that the deduction under this section to an industrial undertaking under sub-clause (b) shall be
allowed only in relation to the profits derived from laying of such network of new lines for transmission or
distribution.
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Quantum and period of deduction:

(1) First five assessment years - 100% of such profits.
(2) Next five assessment years - In case of companies 30% of such profits. In case of other assessees
25% of such profits.
The deduction under (4) above shall be allowed if the following conditions are satisfied:
(a) It is not formed by the splitting up, or the reconstruction, of a business already in existence;
(b) it is not formed by the transfer to a new business of machinery or plant (exceeding 20%) previously
used for any purpose.
(5) Re-construction or revival of a power generating plant
(a) Such undertaking must be owned by an Indian Company, formed before 30.11.2005 with majority
equity participation by public sector companies for the purpose of enforcing the security interest of the
lenders to the company owning the power generation plant.
(i) Such Indian Company is notified before 31.12.2005 by the Central Government for the purposes
of this clause and begins to generate or transmit or distribute power before 31.3.2011 (w.r.e.f 1st
April 2008 by Finance Act 2009.
Option to claim deduction: The assessee, at his option, can claim deduction in any ten consecutive assessment
years out of fifteen years beginning from the year in which it begins operations.
If the assessee is engaged in infrastructure facility mentioned in (b) above he can claim deduction in any ten
consecutive assessment years out of twenty years instead of out of fifteen years.
Computation of Income for Deduction: For the purpose of computing the deduction at the specified percentage
for the assessment year immediately succeeding the initial assessment year and any subsequent assessment
year, the profits and gains will be computed as if such business were the only source of income of the assessee
in all the assessment years for which the deduction at the specified percentage under this section is available.
It means if the loss or any allowance (e.g. depreciation allowance) of such business is set-off against any
other income in an earlier assessment year to find out the income of the current year for deduction under this
section the loss so set-off shall be deducted from the current year’s income and on the balance so arrived, the
deduction shall be computed.
Where goods held for the purpose of eligible business are transferred to any other business of the assessee,
or vice-versa, such transfer is required to be done at the market value of such goods. If such goods are not
transferred at market value on the date of transfer, then the profits and gains of such eligible business shall be
recomputed as if transfer has been made at the market value of such goods, as on that date.
If in the opinion of the Assessing Officer, such recomputation presents exceptional difficulties, the Assessing
Officer may compute such profits and gains on such reasonable basis as he may deem fit.
Market Value in relation to any goods or services, means
(i) the price that such goods or services would ordinarily fetch in the open market; or
(ii) the arm’s length price as defined in clause (ii) of section 92F, where the transfer of such goods or
services is a specified domestic transaction referred to in section 92BA.
Where deduction to an industrial undertaking or an enterprise for profit and gains is allowed under this section
for any assessment year, deduction to that extent shall not be allowed under any other provision of chapter VIA
under the heading deductions in respect of certain incomes.
The deduction shall not exceed the profit and gains of such eligible business of industrial undertaking or
enterprise. If the profit shown for the eligible business under this section, appears to the assessing officer as
more than the ordinary profits which might be expected to arise in such eligible business, owing to some close
connection with a person with whom business transactions are so arranged to yield higher profit, the assessing
officer may take the amount of profits as may be reasonably derived therefrom.
Where any undertaking of an Indian company which is entitled to deduction under this section is transferred,
before the expiry of the period of tax holiday, to another Indian company in a scheme of amalgamation or
demerger, then the deduction will be available as follows:
(i) No deduction shall be admissible under this section to the amalgamating company/demerged company
for the previous year in which amalgamation/ demerger takes place.
(ii) The amalgamated company or resulting company will be entitled to claim deduction under this section
for the unexpired period of tax holiday (including for the previous year in which the amalgamation/
demerger takes place). The provisions of the section shall, as far as may be, apply to the amalgamated
or resulting company as they would have applied to the amalgamating or demerged company as if the
amalgamation or demerger had not taken place.
Provided that in a case where an undertaking develops an industrial park on or after the 1st day of April, 1999
or a special economic zone on or after the 1st day of April, 2001 and transfers the operation and maintenance
of such industrial park or such special economic zone, as the case may be, to another undertaking (hereafter
in this section referred to as the transferee undertaking), the deduction under Sub-section (1) shall be allowed
to such transferee undertaking for the remaining period in the ten consecutive assessment years as if the
operation and maintenance were not so transferred to the transferee undertaking.
The provisions contained in this section shall not apply to any special economic notified on or after the 1st day
of April, 2005 in accordance with the scheme referred to in sub-clause (iii) of clause (c) of Sub-section (4).
Deduction in respect of profit and gains by an undertaking or an enterprise engaged in

development of Special Economic Zone [Section 80-IAB]
Section 80IB provides a deduction to an assessee which develops Special Economic Zone (SEZ), notified on or
after 1.4.2005 under the Special Economic Zones Act, 2005 equal to 100% of the profit and gains derived from
such business for 10 consecutive assessment years, out of 15 years beginning from the year in which a SEZ
has been notified by the central government, at option of the assessee. Such assesse would not be eligible to
claim deduction u/s 80-IA.
Deduction in respect of profits and gains from certain industrial undertakings other than
infrastructure development undertakings [Section 80-IB]
Section 80IB provides deduction to an assessee whose gross total income includes profits and gains derived
from the following business. The deduction equal to such percentage and for such number of assessment years
as given below:
Deduction under Section 80-IB is available to different industrial undertakings as follows:
(i) business of an industrial undertaking
(ii) operation of ship
(iii) Hotels
(iv) Scientific research
(v) production of mineral oil
(vi) Developing and building housing projects.
(vii) Cold Chain facility for agriculture produce..
(viii) Multiplex theatres.
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(ix) Convention Centre

(x) Hospital in Rural area.
(xi) Hospital anywhere in India.
An industrial undertaking should be mainly engaged in the business of construction of ships or in the manufacture
or processing of goods or in mining. Construction of dam, bridge, road or building cannot be characterised as
manufacture or production of articles.
The Industrial undertaking claiming deduction under this section, however need to fulfill the following conditions:
1. It is not formed by splitting up, or the reconstruction, of a business already in existence. This condition is
not violated, where the business is re-established, reconstructed or revived by the same assessee after the
business of any industrial undertaking carried on by him in India is discontinued due to extensive damage
to or destruction of, any building, machinery, plant or furniture owned by the assessee (and used for the
purpose of such business) as a direct result of (i) flood, typhoon, hurricane, cyclone, earthquake or other
convulsion of nature, or (ii) riot or civil disturbance, or (iii) accidental fire or explosion, or (iv) action by any
enemy or action taken in combating an enemy (whether with or without a declaration of war).
2. It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
However, plant and machinery, already used for any purpose, can be transferred to the new industrial
undertaking, provided value of such plant and machinery does not exceed 20% of the total value of
plant and machinery of the new industrial undertaking.
3. It manufactures or produces any article or thing, not being any article or thing specified in the list in the
Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India. However,
a small scale industrial undertaking or an industrial undertaking located in an industrially backward
state specified in the Eighth Schedule shall be eligible for the deductions, even if it manufactures or
produces any article/thing which is specified in the Eleventh Schedule.
4. The undertaking employs ten or more workers in a manufacturing process carried on with the aid of
power or employs twenty or more workers in a manufacturing process carried on without the aid of
power.
I. The amount of deduction to industrial undertaking shall be as follows:
Sl. Industrial Undertaking Period Period of deduction %age of profit

No. within which (commencing from eligible for
production initial assessment deduction
should start year)
(1) (2) (3) (4) (5)
(i) Any industrial undertaking

1.4.1991 to Ten consecutive 30%
31.3.1995* (or assessment year
Owned by a company 25%
any further notified
Twelve consecutive
Owned by a co-operative period)
assessment year
society
Any other assessee Ten consecutive 25%

assessment year
*However where it is an industrial undertaking being a small scale industrial undertaking, it begins
to manufacture or produce article or things or to operate its cold storage plant (other than those
specified below) the period shall be construed as the period beginning on 1.4.95 and ending on
31.3.2002.
(ii) Industrial undertaking set up in an industrial backward state specified in Eighth Schedule*
Owned by a company 1.4.1993 to First five years 100%
31.3.2002
Next five years 30%
(extended to
Owned by a co-operative society 31.3.2012 only in First five years 100%
J&K) Next seven years 25%
Any other assessee First five years 100%
Next five years 25%
*However in case of notified industries in the North-Eastern Region, the amount of deduction shall be
hundred percent of profits for a period of ten assessment years.
(iii) Industrial undertaking located in notified industrially backward districts of Category A
Owned by a company 1.10.1994 to First five years 100%

31.3.2004
Next five years 30%
Owned by a co-operative society First five years 100%
Next seven years 25%
Any other assessee First five years 100%
Next five years 25%
(iv) Industrial undertaking located in notified industrially backward districts of Category B
Owned by a company 1.10.1994 to First three years 100%

31.3.2004
Next five years 30%
Owned by a co-operative society First three years 100%
Next nine years 25%
Any other assessee First three years 100%
Next five years 25%
I. Deduction under this section shall also be available in the case of the business of a ship @ 30% of the
profits and gains derived from such ship for a period of ten consecutive assessment years including the initial
assessment year.
However, to claim deduction it is required that the ship -
(i) is owned by an Indian company and is wholly used for the purposes of the business carried on by it.
(ii) was not, previous to the date of its acquisition by the Indian company, owned or used in Indian territorial
waters by a person resident in India.
(iii) is brought into use by the Indian company at any time during the period beginning on the 1.4.1991 and
ending on 31.3.1995.
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Sl. Type of Hotel Period Period of Profit

No. within deduction eligible for
which (commencing deduction
functioning from initial
should start assessment
year)
(i) Hotel located in a hilly area or a rural area 1.4.1990 to Ten consecutive 50%
or a place of pilgrimage or any other place 31.3.1994 years
notified by Central Government having regard
to the need for development of infrastructure
for tourism in any place and other relevant
consideration.
(ii) Hotel located in a hilly area or a rural area or a 1.4.1997 to Ten consecutive 50%
place of pilgrimage or any other place notified 31.3.2001 years
by Central Government. However, such
hotel should not be located within Municipal
Jurisdiction of Calcutta, Chennai, Delhi and
Mumbai. Such hotel should however be
approved by the prescribed authority.
(iii) Hotel located in any place other than those 1.4.1991 to Ten consecutive 30%
mentioned in (i) above 31.3.1995 years
(iv) Hotel located in any other place other than 1.4.1997 to Ten consecutive 30%
those mentioned in (i) above. However, such 31.3.2001 years
hotel should not be located within Municipal
Jurisdiction of Calcutta, Chennai, Delhi and
Mumbai.
However, the following conditions need to be satisfied by a hotel in order to claim deduction:
(i) The business of the hotel is not formed by the splitting up; or the reconstruction of a business already
in existence or by the transfer to a new business of a building previously used as a hotel or of any
machinery or plant previously used for any purpose.
(ii) The business of hotel is owned and carried on by a company registered in India with a paid up capital
of not less than Rs. 5 lakhs.
(iii) The hotel is for the time being approved by the prescribed authority. Any hotel approved before 1.4.99
shall be deemed to have been approved for the purpose of this section.
IV. Deduction in the case of any company carrying on scientific research and development is available @
100% of the profits and gains of such business for a period of five assessment years beginning from the initial
assessment year. However, to claim deduction under this section, it is required that such a company -
(i) is registered in India.
(ii) has the main object of scientific and industrial research and development.
(iii) is for the time being approved by the prescribed authority at any time before 1.4.1999.
Further, the amount of deduction in the case of any company carrying on scientific research and development
shall be hundred per cent of the profits and gains of such business for a period of ten consecutive assessment
years, beginning from the initial assessment year, if such company -
(i) is registered in India;
(ii) has its main object the scientific and industrial research and development;
(iii) is for the time being approved by the prescribed authority at any time after the 31st day of March, 2000,
but before the 1st day of April, 2007;
(iv) Fulfills such other conditions as may be prescribed.
IV. Industrial undertaking producing or refining mineral oil in the North Eastern Region or in any part
of India:
The amount of deduction to an undertaking shall be 100% of the profits for a period of seven consecutive
assessment years, including the initial assessment year, if such undertaking fulfils any of the following conditions:
(i) is located in North-Eastern Region and has begun or begins commercial production of mineral oil
before the 1st day of April, 1997;
(ii) is located in any part of India and has begun or begins commercial production of mineral oil on or after
the 1st day of April, 1997;
Provided that the provisions of this clause shall not apply to blocks licensed under a contract awarded
after the 31st day of March, 2011 under the New Exploration Licencing Policy announced by the
Government of India vide Resolution No. O-19018/22/95-ONG.DO.VL, dated the 10th February, 1999
or in pursuance of any law for the time being in force or by the Central or a State Government in any
other manner;
(iii) is engaged in refining of mineral oil and begins such refining on or after the 1st day of October, 1998 but
not later than 31st day of March 2012..(w.e.f Assessment year 2001-02) (the words “but not later than
the 31st day of March, 2012” shall be inserted w.r.e.f 1st April 2009);
(iv) is engaged in commercial production of natural gas in blocks licensed under the VIII Round of bidding
for award of exploration contracts (hereafter referred to as “NELP-VIII”) under the New Exploration
Licencing Policy announced by the Government of India vide Resolution No. O-19018/22/95-ONG.
DO.VL, dated 10th February, 1999 and begins commercial production of natural gas on or after the 1st
day of April, 2009.
(v) is engaged in commercial production of natural gas in blocks licensed under the IV round if bidding
for award of exploration contracts for Caol Bed Methane blocks and begins commercial production of
natural gas on or after the 1st day of April 2009.
Explanation: All blocks licensed under a single contract, which has been awarded under the New Exploration
Licencing Policy announced by the Government of India vide Resolution No. O-19018/22/95-ONG.DO.VL,
dated 10th February, 1999 or has been awarded in pursuance of any law for the time being in force or has been
awarded by Central or a State Government in any other manner, shall be treated as a single undertaking.
V. Deduction of 100% of the profits of an undertaking engaged in developing and building housing
projects approved before the 31st day of March, 2008 by a local authority provided that:
(a) such undertaking has commenced or commences development and construction of the housing project
on or after 1st day of October, 1998 and completes such construction -
(i) in case where a housing project has been approved by the local authority before the 1st day of
April, 2004, on or before 31st day of March, 2008;
(ii) in a case where a housing project has been or, is approved by the local authority on or after the
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1st day of April, 2004 but not later than the 31st March 2005, within four years from the end of
financial year in which the housing project is approved by the local authority.
(iii) In a case where a housing project has been approved by the local authority on or after the 1st day
of April, 2005, within five years from the end of the financial year in which the housing project is
approved by the local authority.
(b) the project is of the size of a plot of land which has minimum area of one acre;
(c) the residential unit has a maximum built-up area of one thousand square feet where such residential
unit is situated within the cities of Delhi or Mumbai or within twenty-five kilometers from the municipal
limits of these cities and one thousand and five hundred square feet at any other place; and
(d) the build-up area of the shops and other commercial establishments included in the housing project
does not exceed three of the aggregate built-up area of the housing project or five thousand square feet
whichever is higher.
(e) not more than one residential unit in the housing project is allotted to any person not being an individual;
and
(f) in a case where a residential unit in the housing project is allotted to a person being an individual, no
other residential unit in such housing project is allotted to any of the following persons,
(i) the spouse or the minor children of such individual,
(ii) the Hindu undivided family in which such individual is the karta,
(iii) any person representing such individual, the spouse or the minor children of such individual or the
Hindu undivided family in which such individual is the karta.
VI. Hundred percent of the profits and gains derived by an industrial undertaking from the business of
setting up and operating a cold chain facility for agricultural produce shall be deductible:
Industrial Period within which Period of deduction %age of profit

production should (commencing from eligible for
Undertaking
start initial assessment deduction
year)
First five years 100%

For a company
Next five years 30%

For a co-operative society 1.4.1999 to 31.3.2003
Next seven years 25%
Any other assessee
Next five years 25%
Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred,
before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation
or demerger -
(a) no deduction shall be admissible under this section to the amalgamating or the demerged company for
the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall as far as may be apply to the amalgamated or the resulting company
as they would have applied to the amalgamating or the demerged company if the amalgamation or
demerger had not taken place.
Further, the amount of deduction in a case of an undertaking deriving profit from the integrated business of
handling, storage and transportation of foodgrains, shall be hundred per cent of the profits and gains derived
from such undertaking for five assessment years beginning with the initial assessment year and thereafter,
twenty-five per cent (or thirty per cent, where the assessee is a company) of the profits and gains derived from
the operation of such business in a manner that the total period of deduction does not exceed ten consecutive
assessment years and subject to fulfillment of the condition that it begins to operate such business on or after
the 1st day of April, 2001.
In the case of an undertaking engaged in the integrated business of handling, storage and transportation of
foodgrains, means the assessment year relevant to the previous year in which the undertaking begins such
business.
VII. Deduction in the case of any multiplex theatre
Fifty per cent of the profits and gains derived, from the business of building, owning and operating a multiplex
theatre, for a period of five consecutive years beginning from the initial assessment year in any place. Multiplex
theatre should not be located at a place within the municipal jurisdiction of Kolkata, Chennai, Delhi or Mumbai.
Such multiplex theatre should be constructed at any time during the period beginning on the 1st day of April,
2002 and ending on the 31st day of March, 2005. The business should not be formed by splitting up or the
reconstruction, of a business or any plant and machinery previously used for any purpose, and assessee should
furnish alongwith the return of income, the report of an audit in Form No. 10CCBA.
VIII. Deduction in the case of any convention centre:
Fifty per cent of the profits and gains derived, by the assessee from the business of building, owning and
operating a convention centre, for a period of five consecutive years beginning form the initial assessment year.
Such convention centre is constructed at any time during the period beginning on the 1st day of April, 2002 and
ending on the 31st day of March, 2005. The business should not be formed by splitting up or the re-construction
of a business or any plant and machinery previously used for any purpose.
IX. 100% deduction in case of an undertaking deriving profits from the business of operating and
maintaining a hospital in a rural area for a period of five consecutive assessment years beginning with the
initial assessment year if (w.e.f. A.Y. 2005-06) -
(i) such hospital is constructed at any time during the period from 1.10.2004 to 31.3.2008.
(ii) the hospital has atleast one hundred beds for patients.
(iii) construction of hospital is in accordance with the regulations, for the time being in force, of the local
authority; and
(iv) the assessee furnishes alongwith the return of income the report of audit in such form and containing
such particulars as may be prescribed and duly signed and verified by a chartered accountant that the
deduction has been correctly claimed.
X. The amount of deduction in the case of an undertaking deriving profits from the business of operating
and maintaining a hospital located anywhere in India, other than the excluded area, shall be hundred per
cent of the profits and gains derived from such business for a period of five consecutive assessment years,
beginning with the initial assessment year, if -
(i) the hospital is constructed and has started or starts functioning at any time during the period beginning
on the 1st day of April, 2008 and ending on the 31st day of March, 2013;
(ii) the hospital has at least one hundred beds for patients;
(iii) the construction of the hospital is in accordance with the regulations or bye-laws of the local authority;
and
304 PP-DTL&P
(iv) the assessee furnishes along with the return of income, a report of audit in such form and containing
such particulars, as may be prescribed, and duly signed and verified by an accountant, as defined in the
Explanation to sub-section (2) of section 288, certifying that the deduction has been correctly claimed.
ILLUSTRATION
1. Deduction under Section 80-IB is available to:
(a) Charitable Trust
(b) Tour and Travels
(c) Industrial Research
(d) Convention Centre
2. Which of the following gets 50% deduction on the profits and gains derived from its business for a period of
five consecutive years beginning from the initial assessment year in any place?
(a) Multiplex Theatre
(b) Convention Centre
(c) Hospital
(d) Charitable Trust
Deduction in respect of eligible Start-Up [Section 80IAC]

Section 80IAC provides a deduction to an assessee who is a Company or LLP incorporated after 31st March,
2016 but before 31st March, 2019, engaged in an eligible business ( means a business carried out by an
eligible start up engaged in innovation, development or improvement of products or processes or services or
a scalable business model with a high potential of employment generation or wealth creation) , whose gross
total income includes any profits and gains derived from eligible start up equal to 100% of the profit and gains
derived from such business for 3 consecutive assessment years, at the option of the assessee out of five years
beginning from the year in which the eligible start-up is incorporated. The Eligible Start-up should not be formed
by splitting up, or the reconstruction, of a business already in existence and should not formed by the transfer
to a new business of machinery or plant previously used for any purpose. Annual turnover of Company or LLP
should not exceed Rs 25 crore during the previous year in which such deduction is claimed.
Deductions in respect of profits and gains from Housing Projects [Section 80IBA]
Section 80IBA provides deduction to an assessee whose gross total income includes any profits and gains
derived from the business of developing and building housing projects, subject to the provisions of this section,
of an amount equal to 100% of the profits and gains derived from such business.
A housing project shall be a project which fulfils the following conditions:
(a) the project is approved by the competent authority after the 1st day of June, 2016, but on or before the
31st day of March, 2020 [Finance (No.2) Act, 2019];
(b) the project is completed within a period of 5 years from the date of approval by the competent authority:
(c) the carpet area of the shops and other commercial establishments included in the housing project does
not exceed 3% of the aggregate carpet area
(d) the project is on a plot of land measuring not less than one thousand square metres, where the project
is located within the cities of Chennai, Delhi, Kolkata or Mumbai ; or two thousand square metres,
where the project is located in any other place;
(e) the project is the only housing project on the plot of land as specified in clause (d);
(f) the carpet area of the residential unit comprised in the housing project does not exceed, thirty square
metres, where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai ; or sixty
square metres, where the project is located in any other place
(g) where a residential unit in the housing project is allotted to an individual, no other residential unit in the
housing project shall be allotted to the individual or the spouse or the minor children of such individual;
(h) the project utilises not less than ninety per cent of the floor area ratio permissible in respect of the plot
of land under the rules to be made by the Central Government or the State Government or the local
authority, as the case may be, where the project is located within the cities of Chennai, Delhi, Kolkata
or Mumbai, or not less than eighty per cent of such floor area ratio where such project is located in any
place other than the place referred to in sub-clause (i); and
(i) the assessee maintains separate books of account in respect of the housing project.
‘Provided that for the projects approved on or after the 1st day of September, 2019, the provisions of this sub-
section shall have effect as if for clauses (d) to (i), the following clauses had been substituted, namely [Inserted
by Finance Act, 2019]
(d) the project is on a plot of land measuring not less than one thousand square metres, where such project
is located within the metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited
to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai
(whole of Mumbai Metropolitan Region); or two thousand square metres, where such project is located
in any other place;
(e) the project is the only housing project on the plot of land as specified in clause (d);
(f) the carpet area of the residential unit comprised in the housing project does not exceed sixty square
metres, where such project is located within the metropolitan cities of Bengaluru, Chennai, Delhi
National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad),
Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region); or ninety square metres,
where such project is located in any other place;
(g) the stamp duty value of a residential unit in the housing project does not exceed forty-five lakh rupees;
(h) where a residential unit in the housing project is allotted to an individual, no other residential unit in the
housing project shall be allotted to the individual or the spouse or the minor children of such individual;
(i) the project utilises, not less than ninety percent of the floor area ratio permissible in respect of the plot
of land under the rules to be made by the Central Government or the State Government or the local
authority, as the case may be, where such project is located within the metropolitan cities of Bengaluru,
Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram,
Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region); or not less than
eighty percent of such floor area ratio where such project is located in any place other than the place
referred to in sub-clause (I); and
(j) the assessee maintains separate books of account in respect of the housing project.”
Special provisions in respect of certain undertakings or enterprises in certain special category

States [Section 80-IC]
Section 80IC provides deduction from such profits and gains as specified in Sub-section (3) to an assessee
whose gross total income includes any profits and gains derived by an undertaking or an enterprise from any
business referred to in Sub-section (2), in accordance with and subject to the provisions of this section.
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(1) This section applies to any undertaking or enterprise, -

(a) which has begun or begins to manufacture or produce any article or thing, not being any article
or thing specified in the Thirteenth Schedule, and undertakes substantial expansion during the
period beginning –
(i) on the 23rd day of December, 2002 and ending before the 1st day of April, 2012, in any
specified areas, in the State of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in any specified
areas, in the State of Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any
specified areas, in any of the North-Eastern States;
Specified area means any Export Processing Zone or Integral Infrastructure Development
Centre or Industrial Growth Centre or Industrial Park or Theme Park, as notified by the Board in
accordance with the scheme framed and notified by the central government in this regard.
(b) which has begun or begins to manufacture or produce any article or thing, specified in the
Fourteenth Schedule or commences any operation specified in that Schedule, and undertakes
substantial expansion during the period beginning -
(i) on the 23rd day of December, 2002 and ending before the 1st day of April, 2012, in the State
of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of
Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any of
the NorthEastern States.
(2) The deduction referred to in Sub-section (1) shall be -
(i) in the case of any undertaking or enterprise referred to in Sub-clauses (i) and (iii) of Clause (a)
or Subclause (i) and (iii) of Clause (b), of Sub-section (2), 100% of such profits and gains for ten
assessment years commencing with the initial assessment year;
(ii) in the case of any undertaking or enterprise referred to in Sub-clause (ii) of Clause (a) or Sub-
clause (ii) of Clause (b), of Sub-section (2), 100% of such profits and gains for five assessment
years commencing with the initial assessment year and thereafter, 25% (or 30% where the
assessee is a company) of the profits and gains.
(3) This section applies to any undertaking or enterprise which fulfils all the following conditions, namely:
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence;
Provided that this condition shall not apply in respect of an undertaking which is formed as a result
of the re-establishment, reconstruction or revival by the assessee of the business of any such
undertaking as is referred to in Section 33B, in the circumstances and within the period specified
in that section;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any
purpose.
Explanation. - The provisions of Explanations 1 and 2 to Sub-section (3) of Section 80-IA shall apply
for the purposes of Clause (ii) of this sub-section as they apply for the purposes of Clause (ii) of that
sub-section.
(4) Notwithstanding anything contained in any other provision of this Act, in computing the total income of
the assessee, no deduction shall be allowed under any other section contained in Chapter VIA or in
Section 10A or Section 10B, in relation to the profits and gains of the undertaking or enterprise.
(5) Notwithstanding anything contained in this Act, no deduction shall be allowed to any undertaking or
enterprise under this section, where the total period of deduction inclusive of the period of deduction
under this section, or under the second proviso to Sub-section (4) of Section 80-IB or under Section
10C, as the case may be, exceeds ten assessment years.
(6) The provisions contained in Sub-section (5) and Sub-sections (7) to (12) of Section 80-IA shall, so far
as may be, apply to the eligible undertaking or enterprise under this section.
(7) For the purposes of this section, -
(i) “Industrial Area” means such areas, which the Board, may by notification in the Official Gazette,
specify in accordance with the scheme framed and notified by the Central Government;
(ii) “Industrial Estate” means such estates, which the Board may, by notification in the Official Gazette,
(iii) “Industrial Growth Centre” means such centres, which the Board, may, by notification in the Official
Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(iv) “Industrial Park” means such parks, which the Board, may by notification in the Official Gazette,
(v) “initial assessment year” means the assessment year relevant to the previous year in which the
undertaking or the enterprise begins to manufacture or produce articles or things, or commences
operation or completes substantial expansion;
(vi) “Integrated Infrastructure Development Centre” means such centres, which the Board, may, by
notification in the Official Gazette, specify in accordance with the scheme framed and notified by
the Central Government;
(vii) “North-Eastern States” means the States ofArunachal Pradesh, Assam, Manipur, Meghalaya,
Mizoram, Nagaland and Tripura;
(viii) “Software Technology Park” means any park set up in accordance with the Software Technology
Park scheme notified by the Government of India in the Ministry of Commerce and Industry;
(ix) “substantial expansion” means increase in the investment in the plant and machinery by at least
fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as
on the first day of the previous year in which the substantial expansion is undertaken;
(x) “Theme Park” means such parks, which the Board, may, by notification in the Official Gazette,
specify in accordance with the scheme framed and notified by the Central Government.
Deduction in respect of profits and gains from the Business of collecting and processing
Bio-Degradable Waste [Section 80-JJA]
Section 80 JJA provides deduction to an assessee whose gross total income includes any profits and gains
derived from the business of collecting and processing or treating of bio-degradable waste for generating power,
or producing bio-fertilizers, bio-pesticides or other biological agents or for producing bio-gas, making pellets or
briquette for fuel or organic manure, of an amount equal to the whole of such profit and gains for a period of
five consecutive assessment years beginning with the assessment year relevant to the previous year in which
such business commences.
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Deduction in respect of Employment of New Workmen [Section 80-JJAA]

New provisions of Section 80JJAA w.e.f. AY 2017-18 are as under:-
Conditions
1. Assessee has income from business and is subject to tax audit u/s 44AB.
2. The business of assessee is not formed by splitting up , or the reconstruction , of an existing business
(other than establishment, reconstruction or revival of business under section 33B)
3. Business is not acquired by the assessee by way of transfer from any other person or as a result of
business reorganisation.
Quantum of Deduction: 30% of additional employee cost is allowed as deduction for 3 assessment years
starting from the assessment year relevant to assessment year in which such additional employee cost is
incurred. Books of accounts should be audited and audit report should be submitted with return of income.
Deduction should be claimed in return of income otherwise it is not allowed.
Notes:
1. ‘Additional employee cost’ means total emoluments paid or payable to additional employees employed
during the previous year.
2. In case of existing business, additional employee cost shall be nil, if-
a) There is no increase in number of employees from the total number of employees employed on
the last day of preceding year.
b) If emoluments are paid otherwise than an account payee cheque or account payee bank draft
or by use of ECS, through bank account or through such other electornic mode as prescribed
[Inserted by Finance (No.2) Act, 2019].
3. In the first year of a new business, emoluments paid or payable to employees employed during that
previous year shall be deemed to be the additional employee cost.
4. “ Additional employees” does not include;
a) An employee whose total emoluments are more than 25000 per month; or
b) An employee whose entire contribution is paid by the Government under the Employees Pension
Scheme notified in accordance with the provisions of Employees Provident fund and Miscellaneous
provisions Act, 1952.
c) An emolyee employed for a period of less than 240 days( 150 days in case of employee working
in apparel, shoes or leather industry) during the previous year; or
d) An employee who does not participate in RPF.
5. “Emoluments” does not include employer’s contribution to employees pension/provident fund etc. And
also it does not include terminal benefits such as leave encashment, retrenchment compensation,
gratuity etc.
6. Where an employee is employed during the previous year for a period of less than 240 days or 150
days, as the case may be, but is employed for a period of 240 days or 150 days, as the case may be, in
the immediately succeeding year, he shall be deemed to have been employed in the succeeding year
and the provisions of this section shall apply accordingly.
7. Provisions of old 80JJAA shall apply to an assessee who is eligible to claim any deduction under
section 80JJAA for the assessment year 2016-17( or any earlier assessment year).
Deduction in respect of certain incomes of Offshore Banking Units [Section 80LA]

(1) Where the gross total income of an assessee, being a scheduled bank, or, any bank incorporated by or
under the laws of a country outside India; and having an Offshore Banking Unit in a Special Economic Zone,
includes any income referred to in sub-section (2), there shall be allowed, in accordance with and subject to the
provisions of this section, a deduction from such income, of an amount equal to––
(a) 100% of such income for five consecutive assessment years beginning with the assessment year
relevant to the previous year in which the permission, under clause (a) of sub-section (1) of section 23
of the Banking Regulation Act, 1949 or permission or registration under the Securities and Exchange
Board of India Act, 1992 or any other relevant law was obtained, and thereafter;
(b) 5% of such income for five consecutive assessment years.
(1A) Where the gross total income of an assessee, being a Unit of an International Financial Services Centre,
includes any income referred to in sub-section (2), there shall be allowed, in accordance with and subject to the
provisions of this section, a deduction from such income, of an amount equal to one hundred per cent. of such
income for any ten consecutive assessment years, at the option of the assessee, out of fifteen years, beginning
with the assessment year relevant to the previous year in which the permission, under clause (a) of sub-section
(1) of section 23 of the Banking Regulation Act, 1949 or permission or registration under the Securities and
Exchange Board of India Act, 1992 or any other relevant law was obtained.
Conditions to be satisfied: No deduction under this section shall be allowed unless the assessee furnishes
along with the return of income, -
(i) in the prescribed form (Form No. 10CCF), i.e., the report of a accountant as defined in the Explanation
below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed in
accordance with the provisions of this section; and
(ii) a copy of the permission obtained under Clause (a) of Sub-section (1) of Section 23 of the Banking
Regulation Act, 1949 (10 of 1949), in case of a offshore Banking Unit.
Explanation - For the purposes of this section:
(a) “convertible foreign exchange” shall have the same meaning assigned to it in clause (a) of the
Explanation below Sub-section (4C) of Section 80HHC;
(b) “Offshore Banking Unit” means a branch of a bank in India located in the special economic zone
and has obtained the permission under Clause (a) of Sub-section (1) of Section 23 of the Banking
Regulation Act, 1949 (10 of 1949);
(c) “scheduled bank” shall have the same meaning assigned to it in Clause (e) of Section 2 of the Reserve
Bank of India Act, 1934 (2 of 1934);
(d) “special economic zone” shall have the same meaning assigned to it in Clause (viii) of the Explanation
2 to Section 10A.”
Deduction in respect of Income of Co-Operative Societies [Section 80P]

Section 80P provides deduction to cooperative societies in respect of following incomes, which are included in
gross total income:
A. 100% of the profits of a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised
or grown by its members to
– The government or a local authority; or
– A government company or a statutory corporation; or
310 PP-DTL&P
– A federal co-operative society, engaged in the business of supplying the above-said products.
B. 100% of the profits of co-operative society engaged in any one of the following activities:
– Carrying on the business of banking or providing credit facilities to its member, or
– A cottage industry, or
– The marketing of agricultural produce grown by its members, or
– The purchase of agricultural implements for the purpose of supplying them to its members, or
– The processing, without the aid of power, of agricultural produce of its members, or
– The collective disposal of the labour of its member, or
– Fishing or allied activities for the purpose of supplying them to its members.
Provided, in the case of last two types of co-operative societies, the deduction, is available subject to
the condition that the rules and bye-laws of the society restrict the voting rights to the members like,
State Government, Co-operative Credit Society which provide financial assistance to the society and
individual, who contributes their labours.
W.e.f. Assessment Year 2007-08 this exemption is not be available to co-operative banks other than a
primary agricultural credit society or a primary co-operative agricultural and rural development bank.
C. Profits and gains of co-operative society other than those specified in A and B above is exempt up to
the specified limits:
– is case of a consumer co-operative society - Rs. 1,00,000
-– is any other case - Rs. 50,000
D. All profits by way of interest or dividend from its investment with any other co-operative society.
E. 100% of income or profit of a Co-operative Society from the letting of godowns or warehouse for
storage, processing or facilitating the marketing of commodities.
F. A co-operative society, not being a housing society or an urban consumers society or a society carrying
on transport business or a society engaged in the performance of any manufacturing operation with the
aid of power, where the gross total income does not exceeds Rs. 20,000. The amount of any income by
way of interest on securities or any income from house property chargeable under Section 22 will also
be allowed as deduction.
Deduction from income of Farm Producer Company [Section 80PA]

Deduction is allowed to a Producer company from its gross total income if following conditions are satisfied;
1) Producer Company is having a total turnover of less 100 crore rupees in during the previous year.
2) Its gross total income includes any profits and gains derived from eligible business.
3) Deduction is available in respect of profits of such eligible business from PY 2018-19 to PY 2024-25
Deduction:
A deduction of an amount equal to one hundred per cent. of the profits and gains attributable to such business
is allowed.
If any deduction is available and availed in respect of such profit under any other section of chapter VI-A, then
only the profit after allowing deduction under such other sections is eligible for deduction under this section.
Explanation. – For the purposes of this section, –
(i) “eligible business” means –

(a) the marketing of agricultural produce grown by the members; or
(b) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture
for the purpose of supplying them to the members; or
(c) the processing of the agricultural produce of the members;
(ii) “member” shall have the meaning assigned to it in clause (d) of section 581A of the Companies Act,
1956;
(iii) “Producer Company” shall have the meaning assigned to it in clause (l) of section 581A of the Companies
Act, 1956.
Deduction in respect of Royalty Income, etc., of authors of certain books other than text
books [Section 80QQB]
Section 80 QQB provides deduction to a resident individual who is an author or a joint author of a book whose
income includes income derived from such profession, received either as a lump sum consideration for the
assignment or grant of any of his interests in the copyright of any book or royalty of books other than text books.
The amount of deduction is the lower of eligible income or Rs. 3, 00,000. Eligible income (before deducting
expenditure incurred) is lower of
1. Lump sum consideration for the assignment or grant
2. Royalty not exceeding 15%
3. If such income is earned outside India, the part of the income brought to India in convertible foreign
exchange within 6 months from the end of the previous year or the extended period by the RBI will be
considered.
Books exclude brochures, diaries, guides, journals, magazines, newspapers, pamphlets, text books for schools,
tracts, commentaries or any such publication whatever name may be. No deduction under this section shall be
allowed unless an assessee furnishes a certificate in the prescribed form 10CCD/10H.
Deduction in respect of Royalty on Patents [Section 80RRB]

Section 80RRB provides deduction to resident individual, a patentee who is in receipt of income by way of
royalty in respect of a patent registered on or after the 1st day of April, 2003 under the Patents Act, 1970,
and his gross total income of the previous year includes royalty, subject to the provisions of this section.
This deduction shall be available only to a resident individual who is registered as the true and first inventor
in respect of an invention under the Patents Act, 1970, including the co-owner of the patent. The amount of
deduction is lower of 100% of such income or Rs. 300,000. In case, any such income is earned from any
sources outside India, so much of the income, shall be taken into account for the purpose of this section
as is brought into India by, or on behalf of, the assessee in convertible foreign exchange within a period of
six months from the end of the previous year in which such income is earned or within such further period
as the competent authority may allow in this behalf.
Provided that where a compulsory licence is granted in respect of any patent under the Patent Act, 1970, the
income by way of royalty for the purpose of allowing deduction under this section shall not exceed the amount
of royalty under the terms and conditions of a licence settled by the Controller under that Act:
No deduction under this section shall be allowed unless the assessee furnishes a certificate in the prescribed
form (Form No. 10CCD), duly signed by the prescribed authority, along with the return of income setting forth
such particulars as may be prescribed.
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No deduction under this section shall be allowed in respect of any income earned from any source outside
India, unless the assessee furnishes a certificate in the prescribed form (Form No. 10H), from the authority or
authorities, as may be prescribed, along with the return of income.
Explanation. - For the purposes of this section, -
(a) “Controller” shall have the meaning assigned to it in clause (b) of Sub-section (1) of Section 2 of the
Patents Act, 1970;
(b) “lump sum” includes an advance payment on account of such royalties which is not returnable;
(c) “patent” means a patent (including a patent of addition) granted under the Patents Act, 1970;
(d) “patentee” means the person, being the true and first inventor of the invention, whose name is entered
on the patent register as the patentee, in accordance with the Patents Act, 1970, and includes every
such person, being the true and first inventor of the invention, where more than one person is registered
as patentee under that Act in respect of that patent;
(e) “patent of addition” shall have the meaning assigned to it in clause (q) of Sub-section (1) of Section 2
of the Patents Act, 1970;
(f) “patented article” and “patented process” shall have the meanings respectively assigned to them in
clause (o) of Sub-section (1) of Section 2 of the Patents Act, 1970;
(g) “royalty”, in respect of a patent, means consideration (including any lump sum consideration but
excluding any consideration which would be the income of the recipient chargeable under the head
“Capital gains” or consideration for sale of product manufactured with the use of patented process or of
the patented article for commercial use) for -
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent; or
(ii) the imparting of any information concerning the working of, or the use of, a patent; or
(iii) the use of any patent; or
(iv) the rendering of any services in connection with the activities referred to in Sub-clauses (i) to (iii);
(h) “true and first inventor” shall have the meaning assigned to it in Clause (y) of Sub-section (1) of Section
2 of the Patents Act, 1970.
Deduction in respect of interest on deposits in Savings Account [Section 80TTA]

Section 80TTA provides deduction to an assessee (other than referred to section 80TTB) individual or a Hindu
undivided family whose gross total income includes any income by way of interest on deposits (not being time
deposits) in a savings account with -
(a) a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any
bank or banking institution referred to in section 51 of that Act);
(b) a co-operative society engaged in carrying on the business of banking (including a co-operative land
mortgage bank or a co-operative land development bank); or
(c) a Post Office as defined in clause (k) of section 2 of the Indian Post Office Act, 1898 (6 of 1898)
The maximum amount of deduction is Rs. 10,000.
Further, where the income referred to in this section is derived from any deposit in a savings account held by,
or on behalf of, a firm, an association of persons or a body of individuals, no deduction shall be allowed under
this section in respect of such income in computing the total income of any partner of the firm or any member
of the association or any individual of the body.
For the purposes of this section - “Time deposits” means the deposits repayable on expiry of fixed periods.
Note: Under Section 10(15) (i), post office savings bank interest is exempt up to Rs. 3,500.
Deduction in respect of Interest income to senior citizen [Section80TTB]

Where the gross total income of an assessee, being a senior citizen, includes any income by way of interest on
deposits with –
(a) a banking company to which the Banking Regulation Act, 1949, applies (including any bank or banking
institution referred to in section 51 of that Act);
(b) a co-operative society engaged in carrying on the business of banking (including a co-operative land
mortgage bank or a co-operative land development bank); or
(c) a Post Office as defined in clause (k) of section 2 of the Indian Post Office Act, 1898
Then, least of the following shall be allowed as deduction:-
1) aggregate amount of interest in (a), (b), (c) above, or
2) Rs. 50,000.
Where the income such interest income is derived from any deposit held by, or on behalf of, a firm, an association
of persons or a body of individuals, no deduction shall be allowed under this section in respect of such income
in computing the total income of any partner of the firm or any member of the association or any individual of
the body.
Also no deduction shall be allowed to such senior citizen under section 80TTA who have availed deduction
under this section.
Deduction in case of a Person with Disability [Section 80U]

Section 80U provides deduction to a resident individual who suffers from 40% or more of any of the disabilities,
namely, blindness, low vision, leprosy-cured, hearing impairment, locomotor disability, mental retardation and
mental illness.
The amount of deduction is Rs. 75,000 (flat in case of disability) and Rs. 1, 25,000 (flat in case of severe
disability, being disability of at least 80%). To claim deduction under this section, a certificate issued by the
medical authority authority in the form and manner, as may be prescribed, to be a person with disability is
required to be furnished along with the return of income under Section 139, in respect of the assessment year
for which the deduction is claimed.
Provided that where the condition of disability requires reassessment of its extent after a period stipulated in the
aforesaid certificate, no deduction under this section shall be allowed for any assessment year relating to any
previous year beginning after the expiry of the previous year during which the aforesaid certificate of disability
had expired, unless a new certificate is obtained from the medical authority in the form and manner, as may be
prescribed, and a copy thereof is furnished along with the return of income under Section 139.
Explanation - For the purposes of this section, -
(a) “disability” shall have the meaning assigned to it in clause (i) of Section 2 of the Persons with Disabilities
(Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 and includes “autism”,
“cerebral palsy” and “multiple disabilities” referred to in clauses (a), (c) and (h) of Section 2 of the
National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities Act, 1999;
(b) “medical authority” means the medical authority as referred to in clause (p) of Section 2 of the Persons
with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, or such
314 PP-DTL&P
other medical authority as may, by notification, be specified by the Central Government for certifying
“autism”, “cerebral palsy”, “multiple disabilities”, “person with disability” and “severe disability” referred
to in clauses (a), (c), (h), (q) and (o) of Section 2 of the National Trust for Welfare of Persons with
Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999;
(c) “person with disability” means a person referred to in clause (t) of Section 2 of the Persons with
Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, or clause (j) of
Section 2 of the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation
and Multiple Disabilities Act, 1999;
(d) “Person with severe disability” means:
(i) a person with eighty per cent or more of one or more disabilities, as referred to in Sub-section (4)
of Section 56 of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full
Participation) Act, 1995; or
(ii) a person with severe disability referred to in clause (o) of Section 2 of the National Trust for Welfare of
Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999.
IV. REBATE [SECTION 87A]
REBATE OF INCOME-TAX IN CASE OF CERTAIN INDIVIDUALS [SECTION 87A]

Section 87A provides rebate of income tax to resident individual, whose total income does not exceed ` 5,00,000.
The amount of rebate is ` 12,500 or 100% of income tax whichever is less. It is deductible from income tax
before calculating health and education cess. [Amendment by Finance (No.2) Act, 2019]
V. RELIEF [SECTION 89]
RELIEF WHEN SALARY IS PAID IN ARREARS OR IN ADVANCE [SECTION 89]

Section 89 provides relief to an individual who receives any portion of his salary in arrears or in advance or
receives profit in lieu of salary during the previous year. The assessee may apply to the Assessing Officer
who is been empowered to grant relief in appropriate cases in accordance with Rule 21AA of the Income-tax
Rules, 1962. However, no such relief shall be granted in respect of any amount received or receivable by an
assessee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes
of voluntary retirement or in the case of a public sector company referred to in sub clause (i) of clause (10C) of
section 10, a scheme of voluntary separation, if an exemption in respect of any amount received or receivable
on such voluntary retirement or termination of his service or voluntary separation has been claimed by the
assessee under clause (10C) of section 10 in respect of such, or any other, assessment year.
Relief under Section 89 is provided in the following cases :
- in respect of salary received in advance or in arrears;
– in respect of arrears of family pension;
– in respect of gratuity;
– in respect of compensation on termination of employment;
– in respect of commutation of pension;
– in respect of other payment.
Such relief shall be computed as per rule 21A/21AA in the manner given below:
1. Compute tax liability for the previous year in which the arrear or advance of salary has been received
including the amount of such arrear or advance.
2. Compute tax liability for the previous year in which the arrear or advance has been received excluding
such arrear or advance.
3. Tax at step no. 1 minus tax at step no. 2 shall be the tax on such arrear or advance.
4. Compute tax liability of the previous year to which the arrear or advance relates including such arrear
or advance
5. Compute tax liability of the previous year to which arrear or advance relates excluding such arrear or
advance.
6. Tax at step no. 4 minus tax at step no. 5 shall be tax on the arrears or advance in the year to which such
arrear or advance relates.
7. Tax at step no. 3 minus tax at step no 6. shall be the relief under section 89(1).
If there is no excess, no relief is admissible.
316 PP-DTL&P
CASE STUDIES ON CLUBBING OF INCOME
1. INCOME ON ACCRETION NOT TO BE CLUBBED
Commissioner of Income-Tax vs M.S.S. Rajan on 20 June, 2001

FACTS OF THE CASE: The assessee transferred a flat which was in his name to that of his wife. There was no
consideration for such transfer. The rental income from the flat was taxed in the hands of the assessee. Despite
the transfer, the rental income realised from the flat was treated as the income of the assessee by reason
of Section 64(1)(iv) of the Income-tax Act, 1961.
The wife being prudent, instead of spending the rental income, chose to save the same and the savings so
effected were put in a fixed deposit in her name.
CONTENTION OF REVENUE: Assessing officer was of the view that such interest accruing to the wife is
should be clubbed in the hands of assessee u/s 64(1)(iv), therefore, interest accruing to her from those deposits
was regarded by the Income-tax Officer as the income of the assessee for the assessment year 1979-80.
VIEW OF TRIBUNAL: The correctness of that view was questioned by the assessee in appeal. The Appellate
Assistant Commissioner agreed with the assessee. The Revenue’s appeal to the Tribunal against that order in
appeal having proved unsuccessful.
HIGH COURT’S OBSERVATIONS:
 Section 64(1)(iv) of the Income-tax Act refers to “such income as arises directly or indirectly to the
spouse of such individual” “from the assets transferred directly or indirectly to the spouse by such
individual otherwise than for adequate consideration or in connection with an agreement to live apart”.
The income from the asset transferred to the spouse for inadequate consideration is, by reason
of Section 64, made taxable in the hands of the spouse who transferred the asset. What is made
taxable in the hands of the transferor-assessee is the income from the asset. The manner in which the
income realised from the asset is applied--whether it is spent or saved is a matter which falls outside the
purview of Section 64. This section merely treats the income from the asset transferred for inadequate
consideration as taxable in the hands of the assessee-transferor and nothing more.
 The source of the interest income derived by the assessee’s wife who had saved the rental income
and made the fixed deposit is not the flat that was transferred to her. The source is the money which
she had deposited in the bank. There was no direct nexus between the interest which she received
on her deposit and the flat which had been transferred to her name by her husband for inadequate
consideration.
 The scope of Section 64 is limited to income which is directly or indirectly received from the transferred
asset and does not include income received from the savings effected from the income realised from
the transferred assets.
 Therefore, Tribunal was right in deleting the assessee’s wife’s interest income included in the income
of the assessee, in favour of the assessee and against the Revenue.
2. PROFESSIONAL QUALIFICATION OR KNOWLEDGE NOT NECESSARILY A DEGREE
Commissioner of Income-Tax vs Smt. R. Bharathi on 10 June, 1998 1999 240 ITR 697 Mad
FACTS OF THE CASE: The question Raised at the instance of the Revenue was as to whether the salary paid
to the husband of the assessee for the services rendered by him as a jeweller in the jewellery shop owned by
her is required to be clubbed with the income of the assessee and the benefits of the proviso to Section 64(1)
(ii) of the Income-tax Act, 1961, should be denied to the husband of the assessee.
Department had contended that the experience of the husband of the assessee in the line of business in
evaluating the jewellery could not be equated to the professional and technical qualifications referred to in the
proviso to Section 64(1)(ii) of the Act and that the possession of professional knowledge and experience was
not a substitute for the possession of technical qualifications.
CONTENTION OF THE REVENUE: Revenue contended that Parliament has advisedly used the expression,
“professional or technical qualifications” in the proviso to Section 64(1)(ii) of the Act and that unless one possesses
professional or technical qualifications, mere application of his technical or professional knowledge and experience
would not be sufficient to render his income immune from being clubbed with that of other spouse.
HIGH COURT’S OBSERVATIONS:
 The proviso to Section 64(1)(ii) is meant to be applied to all assessees irrespective of their qualification or
the nature of the trade or business carried on by them. The spouse of such an assessee would be governed
by the proviso to Section 64(1)(ii) . The proviso in terms does not limit its application to the professions such
as medicine, law, engineering or accountancy. All those professions are governed by the proviso
 It is a fact that Universities do not offer courses for every avocation in life. There are numerous
avocations for which courses of study in the University are not readily available. There are numerous
avocations which are not regulated by professional bodies. Nevertheless such professions are carried
on, and they constitute the source of livelihood for those who engage in such professions. Cobblers,
tailors, or jewellers to cite a few of such professions, carry on their avocation after having acquired
experience in that line of work and gathered knowledge on their way and by exercising their skill they
are able to derive income to sustain themselves. The fact that there is no course of study prescribed for
such avocations and there are no professional bodies to regulate their entry into these and conferment
of right to practise such professions, cannot have the effect of denying to those who are engaged in
such trade or profession their right to receive income without having the same clubbed with the income
of the spouse solely on the ground that there is no prescribed course of study in the Universities for
such trade or profession,
 The words “technical or professional qualification” do not necessarily connote a qualification conferred
by a recognised University after examining the candidate who has undergone a course of study in
the technical subject or a course of study preparing him for a profession like law, accountancy, etc.
The term “qualification” must be given a wide meaning as referring to the qualities which are required
to be possessed by a person performing the work that he does so long as that work is capable of
being regarded as technical or professional. The word, “professional” is a term capable of very broad
meaning and would encompass varieties of occupation . In the context in which the words, “professional
qualifications” are used in the Act, it is not possible to hold that Parliament intended to confine the scope
of the proviso only to the professions such as medicine, law, engineering or accountancy, A large
number of occupations that are being practised, and which form a source of livelihood are capable of
being regarded as professions as long as they require a degree of skill. The degree of skill required is
a matter for examination in each case. A person having skill, experience and competence in that line of
work can be regarded as professionally qualified for the purpose of Section 64(1)(ii), proviso.
 Revenue did not contend that the husband of the assessee did not have any knowledge of jewellery or
he was incapable of rendering any assistance in the running of the jewellery business or that he did not
have the expertise in appraising gold items of jewellery. All that was contended was that he did not have
a degree or diploma in that subject conferred by a recognised University or equivalent institution. Having
regard to the object of the section and the liberal interpretation required to be given to the expessions
used in the proviso, we find that the spouse of the assessee did possess technical or professional
qualification, knowledge and experience in the business run by the assessee. The remuneration paid
to him for his services is therefore not to be clubbed with the income of the assessee.
318 PP-DTL&P
CASE STUDY ON CARRY FORWARD AND SET OFF
1. CAN LOSS SUFFERED BY FIRM CAN BE CARRIED ON BY AN INDIVIDUAL
Pramod Mittal vs CIT 2013

FACTS OF THE CASE: Assessee was a partner in a firm. Firm was duly dissolved by a dissolution deed
and assessee took over the firm as a sole proprietor. Assessee took over the entire business in his individual
capacity by taking over all the assets and liabilities and paying all the dues to the other partner. Thereafter he
ran the business as sole proprietor. He claimed the set off of the losses of erstwhile firm against the income
earned by him as an individual sole proprietor, relying on section 78(2) and decision of Supreme Court in CIT
vs Madhukant M. Mehta (2001), considering his case as inheritance of a business.
CONTENTION OF REVENUE: Only the person who has suffered the loss is entitled to carry forward and set
off. Therefore, the claim of the assessee was rejected by the Assessing officer. Same view was upheld by the
Tribunal on assessee’s appeal.
HIGH COURT’S OBSERVATIONS: On the dissolution of partnership firm, the firm ceased to exist and taking
over of business of firm in Individual capacity does not amount to inheritance of business on the death of the
person as per law of succession.
Section 78(2) dealing with carry forward and set off of losses states that loss can be carried forward and set off
by the same person who actually has suffered it. An exception to it given in section 78(2) is of succession by
inheritance.
Also the decision of CIT vs Madhukant M. Mehta (2001), ( in this case business of a sole proprietor was carried
on by his legal heirs as partnership firm and since all the partners were legal heirs therefore it was treated as
succession by inheritance) cannot be applied as it was not a case of succession by inheritance.
Therefore, the loss suffered by erstwhile firm cannot be carried forward and set off by a partner taking over the
business after the dissolution of firm as it does not amount to succession by inheritance.
2. Whether the Tribunal was right in law in holding that there was succession by inheritance
as contemplated by section 78(2) of the Act and, therefore, the assessee is entitled to carry
forward and set off the deceased’s loss in business against the income for these years ?
CIT v Madhukant Mehta [2001] SC

FACTS OF CASE: Assessee was carrying on proprietary business of speculation in shares, cotton and other
commodities and he died. he Three heirs of assessee entered into a partnership and executed a partnership
deed wherein they agreed to carry on the said business of speculation. The assessee sought to carry forward and
set off the losses incurred by the deceased in his proprietary business against the income from the speculation
business of the partnership firm. The Income-tax Officer disallowed such set-off on the ground that there was
no succession to the business of the deceased.
COURT’S OBSERVATIONS & DECISION: The High Court has observed that during the interval of time between
the death of the deceased and the formation of the partnership the outstanding recoveries were effected and
the subsisting transactions were cleared and the assets of the business were utilised in clearing the liabilities
by the three heirs in the process of carrying on the business as successors. Hence, it has been held that where
business is succeeded by inheritance, legal heirs as assessable as Body of Individuals are entitled to get
benefit of loss of predecessor. Even if the legal heirs constitute themselves as partnership firm, the benefit of
carry forward and set off loss of predecessor should be made available to firm.
3. Can benefit under section 72A be available if amalgamation is followed by closure of

business unit?
Indian Metals and Ferro Alloys vs Union of India [2003] 262 ITR 553 (Ori.)
FACTS OF CASE: The cited case related with aggregation of income and set-off or carry forward of loss in the
Income-tax Act, Section 72A was introduced by the Finance (No. 2) Act, 1977, with effect from April 1, 1978. It
was further observed the amalgamating company was not financially viable by reason of its liabilities, losses
and other relevant factors immediately before such amalgamation. The scheme of amalgamation along with the
detailed revival and rehabilitation package had been submitted by the petitioner.
HIGH COURT’S OBSERVATIONS & DECISION: Section 72A of the Act seeks to achieve the main object of
ensuring that an Unviable industry in the hands of the amalgamating company would not allowed to be closed
down and revived by framing a scheme of amalgamation with the amalgamated company, with a view to the
continuance of the business or industry in public interest and in the interests of employment of the workers
involved. It was further observed that concession under section 72A is given to ensure that the company is
revived or rehabilitated not for the amalgamation is followed by a Closure of the business, sending out most
of the workmen and the amalgamated company or a subsidiary of the amalgamated company starts a new
business or industry of its own altogether with practically a new work force. Hence it was held that benefit under
section 72A is not available if amalgamation is followed by closure of business unit.
4. Carry forward and set off losses incurred by the amalgamating societies.
Rajasthan R.S.S. & Ginning Mills vs Dy.CIT[2014]

FACTS OF CASE: The State Government had substantial shareholding in four co-operative societies and
decision was taken by the state Government to amalgamate all the four co-operative societies into the appellant
co- operative society stating reason that of four societies were not sound financially and they had substantial
accumulative losses. In the cited case deals with set off accumulated losses of the amalgamating societies
against the profits of the amalgamated society.
High Court’s Observations & Decision: Section 72 and 72A of the Act clearly states that the co-operative
societies cannot get the benefit of carrying forward and setting off accumulated losses if the said societies were
not in existence. Benefit is only available in case of a ‘company’, the benefit of set off could be availed by an
amalgamated company, if the amalgamating company had accumulated losses which could have been carried
forward and adjusted against the profits of the amalgamated company in accordance with the provisions of the
Act. It was further observed that non-existent person cannot file an income tax return and therefore they cannot
carry forward its losses after its existence comes to an end. All those four societies, upon their amalgamation
into the appellant society, had ceased to exist and registration of those societies had been cancelled. Under
these circumstances, those societies had no right under the provisions of the Act to file a return to get their
earlier losses adjusted against the income of a different legal personality i.e. the appellant society. But in case of
company there is specific provision by virtue of Section 72 A of the Act upon amalgamation of one company with
another, losses of the amalgamating companies can be carried forward and the amalgamated company can
get those losses set off against its profits subject to the provisions of the Act. Hence, High court has held that
as there is no provision under the Act for setting off accumulated losses of the amalgamating societies against
the profits of the amalgamated society, the appellant society could not have got the benefit of carrying forward
losses of the erstwhile societies which were not in existence during the relevant Assessment Year.
5. Can carry forward of losses be allowed on ground of change in shareholding due to merger?
CIT v Select Holiday resorts (P) ltd [2013]

FACTS OF CASE: Assessing Officer stated that assessee had received exempted income (Tax free Income)
320 PP-DTL&P
during the year and found that assessee had allocated expenditure of towards tax free income. Assessing
Officer further stated that assessee has claimed set off brought forward loss and unabsorbed depreciation and
asked assessee to explain and justify the conditions laid down in section 79 of the Income Tax Act in regard
to change in the shareholding after the amalgamation by submitting a list of directors on the Board of the two
companies prior to merger as well as the directors on the Board of merged company.
HIGH COURT’S OBSERVATIONS & DECISION: It has been held that every change in shareholding need
not fall within the provision of section 79. In closely held company 51% shareholding is considered to be the
requirement for retaining control and management over the company. It was further stated that the reason for
change in shareholding of more than 51% was the merger of two companies. There was however no change of
control and management. Hence, it is clear that there is no change in the management of the Company which
remained with the same family (set of persons) who was earlier exercising control as it was clear from a list of
directors submitted on the Board of the two companies prior to merger as well as the directors on the Board of
merged company and remained in same hands. Hence it was held that carry forward of losses can’t be denied
on ground of change in shareholding due to merger and that to remain with same set of people.
CASE STUDY ON DEDUCTIONS
1. IS INCREASE IN GTI DUE DISALLOWANCE U/S 40(a)(ia) ELIGIBLE FOR DEDUCTION

UNDER CHAPTER VI-A
CIT V SUNIL VISHWAMBHARNATH TIWARI 2016

FACTS OF THE CASE: The assessee whose eligibility to claim deduction under Section 80IB (10) of the Income
Tax Act, 1961 is not in dispute, filed a return in Assessment Year 2006-07 for accounting period 01.04.2005
to 31.03.2006, claiming deduction of Rs. 16,82,121/- under that provision. It was taken up for scrutiny, and an
order under Section 143(3) of the Act came to be passed, dis-allowing the expenses under Section 40[a][ia] of
the Act for not deducting TDS at source. Thus, payment of Rs.83,00,738/- under the head Subcontract payment;
Rs. 1,75,000/- as Commission payments and Rs.7,96,375/- as Advertisement Payment was dis-allowed. The
Assessing Officer though allowed deductions under Sections 80IB(10) of the Act, assessed total income of
Rs.92,71,375/- on account of above dis-allowance. The assessee filed an appeal before the CIT (Appeals),
which held that there could not have been such separate treatment to income and deductions under Section
80IB of the Act needed to be allowed on gross total income of the assessee. Income Tax Department preferred
further appeal before the ITAT, which rejected that appeal.
CONTENTION OF REVENUE: Department submits that the correctness or otherwise of dis-allowance is not in
dispute before this Court. Violation of Section 194C and 194H of the Act is accepted, and as such, the dis-allowance
was not arising out of eligible business. He states that the word “derived from” cannot have such wide impact, so as
to include any income which can in some manner be attributed to the business. It is further submitted that in present
matter, the assessee can claim these expenses as per the provisions in Section 40[a][ia], if TDS is paid in later year.
Thus, in subsequent assessment years, the assessee would be able to claim deduction from his profit, on account
of these expenses, hence, purpose of having Section 40[a][ia] itself gets defeated.
HIGH COURT’S OBSERVATIONS: Court observed that TDS was not effected by the respondent assessee, is
not in dispute. In view of the scheme of Section 40 of the Act, as TDS is not effected, payment to contractors
cannot be deducted, as those expenditure become inadmissible.
The expenditures therefore are added back to the income, which is nothing but, eligible income. This income
which is eligible for deduction in terms of Section 80IB(10) of the Act, therefore, only increases by said figure
of disallowed expenditure. Deduction allowable under Section 80IB(10) of the Act is with reference to the
respondents gross total income. Hence, dis-allowance under Section 40[a] cannot be treated separately and it
gets added back to the gross total income of the assessee.
Therefore, Increase in Gross total income due to disallowance under section 40(a)(ia), is eligible for deduction
under section 80-IB.
2. WHETHER DEDUCTION UNDER SECTION 80-IB IS ALLOWED IN REMAINING YEARS OF

ELIGIBILITY IF NOT CLAIMED IN INITIAL YEAR
PRAVEEN KUMAR SONI vs CIT (2011) 333 ITR 324 (Delhi)

FACTS OF CASE: Assessee was engaged in manufacturing and exporting of readymade garments. He started
manufacturing unit on 01.07.1997. He did not claim the deduction under section 80-IB in initial assessment year
i.e. 1998-99 though he satisfied all the conditions of Section 80-IB. Assessee claimed the deduction first time in
Assessment year 2004-05. He was denied deduction by assessing officer.
CONTENTION OF REVENUE: Deduction is not allowed for AY 2004-05 as it was not claimed in initial year i.e.
AY 1998-99 ( relevant to previous year in which manufacturing was started.
COURT’S OBSERVATION: Deduction is allowed to the assessee as allowance of deduction is dependent upon
of conditions of Section 80-IB in the relevant Previous year. It is not relevant whether in the past conditions were
satisfied or not; deduction was claimed or not. Also it is no where mentioned in the Section 80-IB that deduction
is to be claimed from first year of qualification for deduction otherwise deduction shall not be allowed. Therefore,
deduction is allowed to the assessee for the remaining period during which he is entitled to claim deduction
subject to fulfilment of conditions.
3. WHETHER ENGINEERS EMPLOYED BY THE ASSESSEE FALLING UNDER THE CATEGORY

OF WORKMEN AS PER THE DEFINITION PROVIDED UNDER SECTION 80JJAA?
Texas Instruments (India) (P) Ltd v CIT [2017] (Bang.)

FACTS OF CASE: The TPO has denied the deduction under Section 80JJAA of the Act on the ground that
the engineers employed by the assessee are not falling under the category of workmen as per the definition
provided under Section 80JJAA. There is no dispute regarding the objects for which this provision of Section
80JJAA was inserted in the Act vide Finance Act, 1998 w.e.f. 1.4.1999.
HIGH COURT’S OBSERVATIONS & DECISION: It was observed that in order to generate more employment
particular section 80JJAA was inserted to provide an incentive in the form of Special Deduction (over and above
the expenditure of wages or salaries which is otherwise allowable as business expenditure) equivalent to 30%
of the aggregate charges or salary paid to new workmen on satisfaction of the IT(TP)A Nos.1478/Bang/2010
& 1603/Bang/2014 conditions provided under the said provision. It was further observed that “workman” shall
have the meaning assigned to it in clause (s) of section 2 of the Industrial Disputes Act, 1947 (14 of 1947). It
was stated towards explanation to section defines regular workmen which do not include:-
a) Casual Worker
b) Any other workmen employed for a period of less than 300 days during the previous year.
c) A workmen employed through contract labour.
Hence it was held that issue regarding the engineers can be considered as workmen as per the provisions of
section 80JJAA of the Act is decided in favour of the assessee.
4. Can royalty received on book on income-tax be eligible for deduction under section 80QQB?
Dilip Loyalka V CIT [2015]

FACTS OF CASE: The assessee has authored book entitled “How to handle income tax problems” in Q&A
322 PP-DTL&P
format and received royalty for his book and claimed deduction under section 80QQB of the Act. The Assessing
Officer disallowed deduction on the ground that the book on income-tax is not a literary work and held that in
view of the above exclusion of printed material the assessee’s claim of the book that is in ‘’question and answer’’
format cannot be taken as literary works.
Observations & Decision
It has been observed that the word literary work has not defined under the Act but has been defined by section
2(o) of the Copyright Act, 1957. The expression literary work covers which are expressed in printing or writing
irrespective of the question whether the quality or style is high or whether there is any literary merit or not.
The expression literary work means not only such work which deals with any particular aspect of literature in
poetry but also indicates a work which is literature i.e. anything in writing which could be said to come within
the ambit of literary work. Hon’ble Kerala High Court has dealt on this issue in the case of Infoseek Solutions
& Anr. Vs. Kerala Law times (2007) 34 PTC 231 (Ker) and observed that a law report is a composite document
and its head notes, editorial comments, footnotes, setting, layout, presentation etc. From the above facts and
circumstances of the case, the definitions and the precedents of Hon’ble Supreme Court and Kerala High Court,
cited in I. T. A. N o. : 5 3 6 / KO L / 2 0 1 3 Assessment year : 2005-2006, it was held that the assessee’s authored
book is a literary work in term of section 80QQB of the Act and accordingly, assessee is entitled to deduction
u/s. 80QQB of the Act.
5. Can Interest on loan taken for higher education outside India be allowed as deduction
under section 80E?
Nitin Shantilal Muthiyan v. Dy. CIT [2015] (Pune)

Assessee claimed deduction under section 80E for interest on loan taken for higher education of his son
pursuing MS Electrical Engineering in USA after completing his Secondary Education or its equivalent. AO
disallowed the same by stating that deduction under section 80E is allowable only in case of higher education
pursued in Indian Educational Institutes duly authorized in India and not for higher education pursued in abroad
or Foreign Educational Institutes. It was held that there is no requirement that higher education should be in
India only. Hence, it was held that interest expenditure was not in dispute, therefore, assessee was entitled to
deduction under section 80E for interest expenditure on loan taken for higher education.
6. Disallowing the deduction claimed under Section 80IB on the ground that the Assessee
was not involved in the activity of manufacture when the Assessee was converting raw 24
carat gold into 22 carat gold ornaments?
CIT V Lakesh Handa [2017] (J&K)

FACTS OF CASE: Assessee engaged in business of converting raw 24 carat gold into 22 carat gold ornaments
and treated such activity amount to manufacture and claimed deduction under section 80IB. wherein the
Assessing Officer took the view that the activity of the assessee did not amount to manufacture and consequently
held that the assessee was not entitled to any deduction, as claimed under Section 80IB of the said Act.
HIGH COURT’S OBSERVATIONS & DECISION: In that case, a Division Bench of the Delhi High Court was
considering as to whether the conversion of standard gold into ornaments or jewellery amounted to manufacture.
Though the said question was considered in the context of Section 10A/10B of the said Act, the Division Bench,
relying upon various decisions of the Supreme Court as also the definition of manufacture in Section 2(f) of the
Central Excise Act, 1944, came to the conclusion that such an activity whereby standard gold is converted into
ornaments/jewelery, would amount to manufacture. In addition to that the definition of manufacture had been
inserted in the Income Tax Act itself under section 2 (29BA) which refers
“Manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing,
(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing
having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition
or integral structure.”
It was observed that the above case alls under clause (a) of Section 2 (29BA) of the said Act because standard
24 carat gold being a non-living physical object is changed through the processes employed by the assessee,
into a new and distinct object or article or thing having a different name, character and use in the form of
22 carat gold jewellery. Moreover high court has further observed that the essential character has clearly
undergone a change and this is the determinative factor. Gold in the raw form cannot be classified as jewelery
or as an ornament. One of the main distinctive features being that raw gold or standard gold does not have
the ability and character of being wearable whereas jewelery/ornaments are made for that specific purpose.
Hence, finished product of the process employed by the assessee is of a different and distinct commodity,
commercially known as such in the market having a different name, character and use. Consequently it was
held that the processes employed by the assessee amount to manufacture and benefit claimed under Section
80IB of the said Act cannot be denied to the assessee. The Income Tax Appellate Tribunal has accordingly
correctly decided in favour of the assessee and against the revenue.
7. Whether the learned ITAT was right in law in holding that the income from sale of scrap was
eligible for deduction under section 80IC of the Income Tax Act?”
CIT v Micro Turners [2012] (Punj. & Har.)

FACTS OF THE CASE: The assessee is a manufacturing unit at Parwanoo. The assessee claimed deduction
under Section 80-IC of the Act to the tune of transfer sales and scrap sales. The Assessing Officer found that
the scrap sales and stock transfer to sister concern is not an income derived from manufacturing process and,
therefore, not liable to deduction as contemplated under Section 80-IC of the Act.
HIGH COURT’S OBSERVATIONS & DECISION: It has been observed that the assessee is engaged in the
manufacturing of automobile shafts’ accessories where scrap is generated and which has direct link with the
manufacturing process. Hence it was held that generation of scrap has direct link with manufacturing process
carried out by assessee and income arising from sale of scrap is eligible for deduction under section 80IC.
8. Allowability processing of bio-degradable waste under section 80JJA
CIT v/s Padma S. Bora [2010]

FACTS OF CASE: Assessee was engaged in business of manufacturing fuel briquettes from bagasse and such
collected bagasse had been used by assessee to make briquette for fuel. Assessee has claimed deduction
under section 80JJA which was disallowed by AO. However, CIT (A) and Tribunal, however, allowed deduction
under section 80JJA on ground that assessee had fulfilled all conditions precedent and bagasse was a waste
and purchased for price and generated by sugar industries
HIGH COURT’S OBSERVATIONS & DECISION: It was observed by CIT (A) as well as Tribunal that bagasse
is a biodegradable waste used for making briquettes for fuel by the assessee. It was further observed that
Bagasse is a waste of the sugar factory. This waste is a bio-degradable waste and the same is collected
on consideration by the respondent assessee from the factory. It is an admitted/undisputed position that the
respondent assessee has collected bagasse from sugar factories after having made payment for the same.
Therefore, the aforesaid requirement of collecting as provided under section 80JJA is satisfied. Hence, it was
held that business of biodegradable waste should be done by assessee as a part of his business and that
the reason that he is allowed to take deduction under section 80JJA but if such activity is done by job work
customers, he would not be entitled to deduction.
324 PP-DTL&P
PRACTICAL PROBLEMS
Illustration 1: Mr. Raman has gifted a house property valued at Rs. 45 lakh to his wife, Renu. Renu has gifted
the same to Suman, their daughter-in-law. House is let out on monthly rent of Rs. 18000 throughout the year.
Compute total Income of Mr. Raman and Ms. Suman. What would have been the tax consequences if property
was gifted his Son Mr. Sandeep (Husband of Suman).
Solution: When Property is ultimately gifted to Suman:- It will be treate as indirect Transfer by Mr. Raman(father-
in-law) to Ms. Suman( daughter-in-law). Property income shall be calculated in the hands of Ms. Suman and It
would be included in income of Mr. Raman. From the given information Property income shall be:
GAV 18000x12 = 2,16,000
Municipal taxes nil
NAV 2,16,000
Deduction u/s 24(a)
@30%of NAV 64,800
Deduction u/s 24(b) Nil
Income from property 1,51,200
Therefore, Rs. 1,51,200 shall be included in Income of Mr. Raman as Income under the head House Property
by virtue of Section 64(1)(vi). Ms. Suman shall not be taxable for this Income.
When Property is Gifted to his son Mr. Sandeep:
If the property is gifted by Mr. Raman to his wife Ms. Renu and ultimately gifted by Ms. Renu to their Son Mr.
Sandeep, it shall be treated as Indirect Transfer by Mr. Raman to His Son Mr. Sandeep and it does not attract
clubbing provisions. Therefore, property income of Rs. 1,51,200 shall be taxable in hands of Mr. Sandeep and
Mr. Raman shall not be Taxable for it.
Illustration 2: Ram gifted an amount of Rs. 5,00,000 to Mrs. Shyam (wife of his brother Shyam), which was
used by Mrs. Shyam for purchasing a house and simultaneously on the Same day Shyam gifted shares owned
by him in a foreign company worth Rs. 5,00,000 to the minor son of Ram. What would be the tax consequences
of these transfers in the hands of transferors and transferees.
Solution: It will be treated as indirect transfer by Ram to his minor son and by Shyam to Mrs. Shyam.
Dividend from shares of foreign company shall be taxable in hands of Mr. Ram or Mrs. Ram whose income is
higher[exemption upto Rs. 1500 shall be allowed to the person who is taxable from such dividend income under
section 10(32)].
Income from House property shall be in hands of Mr. Shyam.
Illustration 3: Mr. A transferred 2000 debentures of Rs. 100 each of X Ltd. to Mrs. A, without adequate
consideration. X Ltd. paid the Interest of Rs. 30,000 during the previous year which was deposited by Mrs. A
in Bank as fixed deposit. Mrs. A received Interest of Rs. 3,000 on such fixed deposit during the previous year.
What would be the tax treatment of such Interest Income ?
Solution: Interest of Rs. 30,000 on debentures of X Ltd. shall be taxable in hands of Mr. A by virtue of Section
64(1). However, Interest income of Rs. 3,000 from fixed deposit shall not be taxable in hands of Mr. A as this
income does not arise from the transferred asset. Such interest shall be taxable in hands of Mrs. A.
Illustration 4:
If Mr. ‘A’ had income against the following heads,
Taxable salary income 40,000

Interest on securities of DCM Ltd. (Gross) 8,000
1,43,000
He made following payments:
Contribution to P.F. (recognised) 2,000
Donation to the Prime Minister’s National Relief Fund 2,500
Donation to the Indira Gandhi Memorial Trust 4,000
Donation to an approved association for promoting family planning 4,000
Donation to approved charitable trust 10,000
Compute Mr. A’s taxable income for assessment year 2020-21.
Solution :
His taxable income for assessment year 2020-21 will be computed as follows:
Net income from salary 40,000
Less: Deduction under Section 80C 2,000
Less: Deduction permissible: Donation under Section 80G 13,500
(as worked out below)
Taxable income 1,27,500
Income-tax on Rs. 1,27,500 NIL
Net tax payable NIL
Note: Under Section 80G the various items of donations will be dealt with as under:
1. Prime Minister’s National Relief Fund deductible in full without any restrictions.
2. Donation to Indira Gandhi Memorial Trust is deductible to the extent of 50% of donation without any
restrictions.
3. Donation to approved family planning association is deductible in full so long as it is within the 10% limit
imposed by Section 80G(4).
4. Donation to an approved charitable trust is deductible to the tune of 50% so long as it is also within the
limit imposed by Section 80G(4).
Calculation of deduction under Section 80G:
Less: Deduction under Sections 80C to 80U (2,000)
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Adjusted gross total income 1,41,000

(i) Donation on which qualifying limit is not applicable:
Allowed @ 100%
Prime Minister’s National Relief Fund 2,500
Allowed @ 50%
I. Indira Gandhi Memorial Trust (4000) 2,000
(ii) Donation to which qualifying limit is applicable:
(1) For promotion of family planning 4,000
(2) Charitable trust 10,000
Total( Subject to maximum of 10% of Adjusted GTI) 14000
Deduction (4000+5000) 9,000
Total deduction allowed under Section 80G = 2500+2000+9000=13500
Illustration 5:
Mr. ‘A’ had income against the following heads
Professional income 6,40,000
Income from STCG (covered under section 111A) 5,000
Income from LTCG 12,000
Contribution to P.P.F. 70,000
Payment of Rent 84,000
Compute Mr. A’s taxable income for assessment year 2020-21
Solution :
His taxable income for assessment year 2020-21 will be computed as follows:
Professional income 6,40,000
Income from capital gains 17,000
Less : Deduction under Section 80C (70,000)
Less : Deduction under Section 80GG (26,000)
(as worked out below)
Taxable income 571,000
Working Note:
Least of the following is deductible under section 80GG
– 84,000 – (10% of 5,80,000) = 26,000
– 25% of 5,80,000 = 1,45,000.

– Rs. 5,000 * 12 = 60,000
Deduction under Section 80GG is lower of three above Rs. 26,000.
Adjusted Total Income = 6,67,000-17,000-70,000= 5,80,000.
Illustration 6: Following are the particulars of income of Mr. Ram, who is 70 years old resident in India, for the
Assessment year 2020-21:
Gross Total Income Rs. 8,12,000 which includes long-term capital gain of Rs. 2,55,000, Short-term capital gain
of Rs. 88,000, interest income of Rs. 12,000 from savings bank deposits with banks and Rs 30000 from bank
FD. Mr. Ram invested in PPF Rs. 1,40,000 and also incurred medical expenditure (no medical insurance) Rs.
61,000. Compute the total income of Mr. Ram.
Solution: Computation of Total Income for the Assessment Year 2020-21
Rs.
Less: Deductions:
Under section 80C 1,40,000
Under section 80D 50,000
Under section 80TTB 42,000
Illustration 7: Mrs. X, wife of X, is a partner in a firm. Her capital contribution to the firm as on April 1, 2019 is
Rs. 5 lakh, out of which Rs. 3 lakh is contributed out of her own sources and Rs. 2 lakh is contributed out of
gift from her husband. As further capital is needed by the firm, she further invests Rs. 2 lakhs on May 1, 2019
out of the funds gifted by her husband. The firm pays interest on capital of Rs. 80,000 and share of profit of Rs.
60,000 for the financial year 2019-20. Advise X as to the applicability of the provision of section 64(1 (iv) and
the manner thereof in respect of the above referred transactions.
Solution:
First day of the previous year 2019-20 : April 1, 2019
(a) Total investment in the firm by Mrs. X on April 1, 2019 5,00,000
(b) Out of which how much is financed by taking gift from X 2,00,000
(c) How much is contributed by Mrs. X out of her own sources 3,00,000
Amount Taxable in hands of X and Mrs. X
Share of profit Interest
Amount taxable in hands of X[ (b)/(a)X Rs. 80,000] Exempt 32,000
Amount taxable in hands of Mrs. X [(c)/(a)X Rs. 80,000] Exempt 48,000
Note: Amount contributed by X after April, 2019 shall not be considered for the purpose of apportionment of
Interest pertaining to the previous Year 2019-20.
Illustration 8: X, an individual engaged in the business of finance, advances Rs. 5 lakh to his HUF on interest
at 12 per cent per annum, which is the prevailing market rate. The HUF invests the amount in its business
and earn profit of Rs. 2 lakh from this money. Can the Assessing Officer add a sum ofRs. 1,40,000 (i.e., Rs.
328 PP-DTL&P
2,00,000-Rs. 60,000) as income of X under section 64(2) ? Will the position remain the same, if X does not
charge any interest ?
Solutions: Since the prevalent market rate is charged the Assessing Officer’s action is not tenable. If X did
not charge any interest, then also the income cannot be subjected to tax in his hands as the business (asset)
belongs to HUF and is not owned by him individually.
Illustration 9: X & Co., the sole proprietary concern of X, gets converted into partnership after his death on May
10, 2019 by his two sons and the business of X & Co. is continued to be carried in the same manner. There are
business losses of Rs. 4.25 lakh till March 31, 2013. The net results of the business for the year ending March
31, 2020 is profits of Rs. 5 lakh. The partners want to set off the losses of Rs. 4.25 lakh from the profits of the
firm. Can they do so?
Solution: It has been held by the Apex Court in CIT v. Madhukant M. Mehta [2001] , that where legal heirs of a
deceased-proprietor enters into partnership and carries on the same business in the same premises under the
same trade name, there is succession by inheritance as contemplated in section 78(2) and the assessee-firm is
entitled to car-forward and set-off of the deceased’s business loss against its income for the subsequent years.
In view of the aforesaid case, in the present problem, partners are entitled to set off the losses of Rs. 4.25 lakh
from business income of the firm.
Illustration 10: A company which is entitled to claim deduction under section 80-IB has received duty drawback
under a scheme framed by the Central Government under the Customs Act, 1962. Can such duty drawback
form part of profit of eligible undertaking for the purpose of deduction under section 80-IB?
Solution: In Liberty India v. CIT[2009] , the Supreme Court held that the duty drawback receipt/DEPB benefits
do not form part of the net profits of eligible industrial undertaking for the purposes of section 80-I/80-IA/80-IB.
Duty drawback is an incentive. Essentially, it is an export incentive. The object behind the duty drawback is to
neutralize the incidence of customs duty payment on the import content of export product. The profits derived
by way of such incentives do not fall within the expression “profits derived from industrial undertaking” in section
80-IB.
Illustration 11: If assessee fails to make claim for any deduction in the return of income, he looses his
opportunity for claiming such deduction at the assessment stage or subsequent stage. Do you agree with
the proposition?
Solution: If the assessee fails to make a claim in his return of income for any deduction under sections 10A,
10AA, 10B, 10BA, 80HH to 80RRB, no deduction shall be allowed to him thereafter. This provision is given
in section 80A(5). In respect of other deductions (not claimed in the return of income), the assessee can file
revised return - Goetze (India) Ltd. v. CIT[2006] 157 . If, however, sufficient information is available in the return
of income, revised return is not required and deduction can be claimed at the time of assessment - CIT v.
Ramco International [2009].
LESSON ROUNDUP
Clubbing of Income and Set-off and carry forward of losses
– Sections 60 to 65 of the Income-tax Act provide that in computing the total income of an individual for
purposes of assessment, there shall be included all the items of income specified in these sections.
– Transfer of Income (section 60): Where a person transfers to any other person income (whether
revocable or not) from an asset without transferring that asset, the income shall be included in the
total income of the transferor. “Transfer” includes any settlement, trust, covenant, agreement or
arrangement.
– Revocable transfer: Where a person transfers any asset to any other person with a right to revoke
the transfer, all income accruing to the transferee from the asset shall be included in the total income
of the transferor.
– The income under revocable transfer of asset shall be included in the income of transferor even when
only a part of income from transferred asset has been applied for the transferor.
– Irrevocable Transfer: In case of an irrevocable transfer of assets for a specified period, the income
from such assets shall not be included in the income of transferor.
– Income to spouse from a concern in which such individual has substantial interest [Section
64(1 )(ii)]: All such income as arises directly or indirectly, to the spouse of an individual by way of
salary, commission, fees or any other remuneration, whether in cash or kind from a concern in which
such individual has a substantial interest, shall be included in the income of the individual.
– Income to spouse from the assets transferred [Section 64(1)(iv)]: Where any individual transfers
directly or indirectly any asset (other than a house property) to the spouse, the income from such
asset shall be included in the income of the transferor.
– Income To Son’s Wife [Section 64(1)(vi)]: Where any individual transfers, directly or indirectly, any
asset to his/her son’s wife without adequate consideration, after 1.6.1973, the income from such
asset shall be included in the income of the transferor.
– Transfer for Immediate or Deferred Benefit of Son’s Wife [Section 64(1)(viii)]: Any income
arising, directly or indirectly, to any person or association of persons from assets transferred directly
or indirectly after June 1, 1973, otherwise than for adequate consideration to the person or association
of persons by such individual shall, to the extent to which the income from such assets is for the
immediate or deferred benefit of his son’s wife be included in computing the total income of such
individual.
– Income to spouse through a third person [Section 64(1)(vii)]: Where a person transfers some
assets directly or indirectly to a person or association of persons (trustee or body of trustees or juristic
person) without adequate consideration for the immediate or deferred benefit of his or her spouse, all
such income as arises directly or indirectly from assets transferred shall be included in the income of
the transferor.
– Clubbing of Income Of Minor Child [Section 64(1a)]: All income which arises or accrues to the
minor child (not being a minor child suffering from any disability of the nature specified in Section 80U)
shall be clubbed in the income of his parent. However, any income which is derived by the minor from
manual work or from any activity involving application of his skill, talent or specialised knowledge and
experience will not be included in the income of his parent.
In case the income of an individual includes any income of his minor child in terms of this section [i.e.
Section 64(1A)], such individual shall be entitled to exemption of the amount of such income or
Rs. 1,500 whichever is less.
– Set Off - carry Forward of losses: Sometimes the assessee incurs a loss from a source of income
and unless such loss is set-off against any income, the net result of the assessee’s activities during
the particular accounting year cannot be ascertained and consequently the tax payable would also
be incapable of determination. For this purpose, the Income-tax Act contains specific provisions
(Sections 70 to 80) for the set-off and carry-forward of losses.
– Set-Off of Losses from one source against Income from another source under the same Head
of Income [Section 70]: If the net result for any assessment year in respect of any source falling
under any head of income is a loss, the assessee is entitled to set off the amount of such loss against
330 PP-DTL&P
his income from any other source under the same head. However, Loss from Speculation Business,
Loss from the activity of owning and maintaining race horses, long-term capital loss can be set-off
from any other source of income.
– Where any individual transfers directly or indirectly any asset (other than a house property) to the
spouse, the income from such asset shall be included in the income of the transferor.
– Carry-Forward and Set-Off of Losses If it is not possible to set-off the losses during the same
assessment year in which these occurred, so much of the loss as has not been so set-off out of the
following losses, can be carried forward to the following assessment year and so on to be set-off
against the income of those years provided the losses have been determined in pursuance of a return
filed by the asessee and it is the same assessee who sustained the loss.
However, losses suffered under the following heads are not allowed to be carried forward and set off:
(1) Losses under the head ‘salaries’.
(2) Losses under the head ‘Income from other sources’
(excepting loss suffered from the activity of owning and maintaining race horses).
– Submission of Return for Loss (Section 80): An assessee is not entitled to carry-forward a loss
unless he has filed a return of loss to the Department in time and in the prescribed form. It is obligatory
on the part of the assessee to file such return; otherwise he will be deprived of the benefit of carry
forward of losses. In fact, only that amount of loss is allowed to be carried-forward which has been
computed by the Assessing Officer and not by the assessee.
Deductions
– Section 80C: Deduction on life insurance premia, contribution to provident fund, etc - Available to
individual/HUF for a maximum amount ofRs. 1,50,000.
– Section 80CCE: Limit on deductions under Sections 80C, 80CCC and 80CCD - can not exceed
Rs. 1,50,000.
– Section 80D: Deduction in respect of medical insurance premia - Available to individual/HUF.
– Section 80DD: Deduction in respect of maintenance including medical treatment of a dependant who
is a person with disability or severe disability.
– Section 80DDB read with Rule 11DD: Deduction in respect of medical treatment, etc.: Available to
Resident individual/resident HUF.
– Section 80E: Deduction in respect of repayment of loan taken for higher education: Available to
individual.
– Section 80G: Deduction in respect of donations to certain funds, charitable institutions, etc. Available
to all assessees subject to maximum of 50% of qualifying amount, 100% as the case may be.
– Section 80GG: Deduction in respect of rent paid Available to individual
– Section 80GGA: Deduction in respect of certain donations for scientific research or rural
development
– Section 80GGB: Deduction in respect of contributions given by companies to political parties
– Section 80GGC: Deduction in respect of contributions given by any person to political parties
– Section 80-JJA: Deduction in respect of profits and gains from the business of collecting and
processing bio-degradable waste - Available to all assessees carrying on the business of collecting
and processing bio-degradable waste.
– Section 80-JJAA: Deduction in respect of employment of new workmen - Available to Indian company
of 30% of additional wages paid to new regular workmen.
– Section 80P: Deduction in respect of income of co-operative societies - Specified incomes subject to
amount specified in sub section (2).
– Section 80QQB: Deduction in respect of royalty income, etc., of authors of certain books other than
text books - Available to resident individual, for a maximum deduction of Rs. 3,00,000.
– Section 80RRB: Deduction in respect of royalty on patents - Available to Resident Individual,
maximum of Rs. 3,00,000.
– Section 80TTA: Deduction in respect of interest on deposits in savings account - Available to
Individual/ HUF upto Rs. 10,000.
– Section 80TTB – Available to Senior Citizens – Maximum amount – Rs. 50,000
– Section 80U: Deduction in case of a person with disability - Available to Resident individual subject
to maximum of Rs. 125,000
– Provision related to rebate and relief – Section 87A/89
SELF TEST QUESTIONS

1. Discuss the tax treatment to transactions which result in (a) transfer of income without transfer of the
assets yielding the income; and (b) gift of the assets by an individual to his/her spouse, minor children,
major sons and married daughters.
2. Distinguish between revocable and irrevocable transfer of assets and state what is meant by
“a revocable transfer” for purposes of income-tax. Discuss also the tax implications arising out of
revocable and irrevocable transfer of assets.
3. Discuss the tax effects of creation of a trust by an individual for the benefit of (i) himself, (ii) his/her
spouse, (iii) his/her minor children, (iv) his married daughter, (v) his daughter-in-law and sisters.
4. What do you mean by “Set-off and carry forward of losses”? which losses can be carried forward?
5. Discuss the provisions of the Income-tax Act relating to the set-off of losses.
6. Enumerate the various rebates and reliefs available to individuals under the Income-tax Act, 1961.
7. What are the different kinds of incomes which are included in the total income but on which no income-
tax is payable?
8. What conditions are to be satisfied in order to claim a deduction for donations made to certain funds
or/ and charitable institutions? Illustrate.
9. Write a short note on the relief available under Section 89.
10. Explain in brief the deduction for the medical insurance premium paid by the assessee.
11. Write a short note on :
a. Deduction under section 80RRB in respect of royalty from patents
332 PP-DTL&P
b. Deduction under section 80GGB and section 80GGC in respect of contribution to political parties.
SUGGESTED READINGS
Kluwer]
Lesson 8 n Computation of Total Income and Tax Liability 333
Lesson 8
Computation of Total Income and Tax
Liability
LESSON OUTLINE
LEARNING OBJECTIVES
– Computation of taxable income and tax Income tax being direct tax is a major source of
liability of companies revenue for the Central Government. The entire
– Minimum Alternate Tax (MAT) amount of income tax collected by the Central
Government is classified under the head: (a)
– Dividend Distribution Tax [Section 115-O]
Corporation Tax (Tax on the income of the
– Carbon Credit [Section 115BG] companies) and (b) Income Tax (Tax on income
of the non-corporate assesses). We shall divide
– Computation of Taxable Income and Tax
our discussion in this chapter in two parts i.e.
Liability of Non Corporate Entities
(1) Computation of taxable income and tax liability
– Alternate Minimum Tax (AMT) [Section of corporate entity and (2) Computation of taxable
115JC] income and tax liability of non-corporate entities.
– Taxation of Individual
– Taxation of HUF
– Taxation of Firm
– Taxation of AOP/BOI
– Taxation of Co-Operative Society
– Tax Exemptions to Political Parties (Section
13A)
– Case Law
– Tax Planning consideration for Firm V/s LLP
V/s Company
– Practical Questions
– LESSON ROUNDUP
333
334 PP-DTL&P
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF COMPANIES
CONSTITUTIONAL PROVISIONS
Under the Constitution of India, the legislative fields in entries 85 and 86 of the Union List in the Seventh
Schedule specify Corporation tax and taxes on capital value of the assets, exclusive of agricultural land of
individuals and companies, respectively. A tax on capital value of assets is a composite tax on the totality of all
the assets owned by the company.
Article 366(6) of the Constitution defines corporate tax as follows:
Corporate tax means any tax on income, so far as that tax is payable by companies and is a tax in case the
following conditions are fulfilled:
a) that it is not chargeable in respect of agricultural income;
b) that no deduction in respect of tax paid by companies is by any enactments which may apply to the tax
authorised to be made from dividends payable by the companies to individuals;
c) that no provision exists for taking the tax so paid into account for computing for the purposes of Indian
income tax, the total income of individuals receiving such dividends, or in computing the Indian income
tax payable by, or refundable to, such individuals.
DEFINATION OF THE TERM COMPANY UNDER SECTION 2(17) OF THE INCOME TAX ACT,
1961
As per section 2(17), company means:
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India, or
(iii) any institution, association or body which is or was assessable or was assessed as a company for
any assessment year under the Indian Income Tax Act, 1922 (11 of 1922) or was assessable or was
assessed under this Act, as a company for any assessment year commencing on or before April 1,
1970; or
(iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian,
which is declared by general or special order of the CBDT to be a company.
Provided that such institution, association or body shall be deemed to be a company only for such assessment
year or assessment years (whether commencing before the 1st day of April 1971, or on or after that date) as
may be specified in the declaration.
CBDT Order
In cases where the CBDT specifies any association or body to be a company, it is essential that the order of the
Board is taken to be valid only in respect of the assessment year or years specifically mentioned in the Board’s
order. The Board’s power is specifically made exercisable in respect of past assessment year. In other words,
the declaration of the Board does not automatically mean that the association or body would continue to be
treated as a company for all purposes and for all assessment years. Whilst declaring any institution, association
or body as a company, the Board has also to justify itself that they have characteristics as would generally
enable them to be recognized as companies in common parlance as sometimes, such a declaration may be
sought for by institutions for avoiding taxes.
The power of the Board to declare any foreign association or body as a company is absolute and unqualified and
the Board would normally declare such association or body to be a ‘company’ only after taking into consideration
the benefit to the revenue (Section 119 read together with Section 295 of the Income Tax Act, 1961).
Liquidating Company
A Company in liquidation is also a “company” and the Income tax authorities are entitled to call upon the
liquidator to make a return of the company’s income. Likewise, penalty proceedings can also be initiated against
a company in liquidation for a default committed prior to liquidation. Thus, the expression Company as defined
in the Income Tax Act has a much wider connotation than what is normally understood by a ‘Company’ under
the Companies Act.
Companies established under section 8 of the Companies Act, 2013

In order to be regarded as a taxable entity under the Income Tax Act, 1961, it is not essential that the company
must always have a share capital and must have been formed with a profit motive. Even companies having no
share capital and those, which are limited by guarantee, are assessable as companies for income-tax purposes
even if such companies may have been formed without any profit motive and registered under Section 8 of the
Companies Act, 2013 (e.g. Chambers of Commerce etc.). Under Section 28 (iii) of the Income tax Act, 1961,
trade, professional or similar associations are liable to tax in respect of the income they derive from rendering of
specific services to their members. Accordingly, in respect of specific services to their members, such entities,
even if they are non-profit making, would become liable to tax under the Income tax Act as a company in respect
of their income from business although they may not have been specifically formed to carry on any business with
a view to make profit. A statutory corporation established under the Act of Parliament, Government companies
and the State Government companies who carry on a trade or business would also be treated as a company
for all purposes of income tax.
Discontinuance of Business
A company or for that matter, any assessee who discontinued their business are statutorily required to intimate
to the Assessing Officer within 15 days (Section 176 of the Income Tax Act, 1961).
Assessment of Companies
For assessment to income tax, each company is assessed separately although the companies might be
interrelated or inter-connected; for instance, holding and subsidiary companies must be assessed separately
to Income tax in respect of the profits made by each of them since they have a separate and distinct legal
existence. The company is liable to pay tax at a flat rate on its taxable income. In addition to such tax, domestic
company is liable to pay Dividend Distribution tax under section 115-O on the amount distributed as profit to its
shareholders. Such distribution of profits is not allowed as expenditure to the company (as it is an appropriation
of profits of company and not a charge against it).
Similarly Company being an independent and separate legal entity distinct from its members, income of the
company is computed and assessed separately in the hands of the company.
Dividend received by the shareholders from the company, on which company has paid tax under Section 115-
O, is exempt in the hands of shareholders under Section 10(34) unless it is taxable under Section 115BBDA.
The Supreme Court in the case of Mrs. Bacha F. Guzdar v. CIT (1955) 27 ITR 1(SC) has held that dividend
received from a company earning agricultural income is not an agricultural income in the hands of the
shareholders and therefore does not qualify for exemption under Section 10(1) which grants exemption to
agricultural income.
336 PP-DTL&P
CLASSIFICATION OF COMPANIES UNDER INCOME TAX ACT, 1961

In continuation of our, earlier discussion on definition of company, we will now discuss broadly the different
categories of companies:
Let us now discuss these in detail from taxation point of view.
Indian Company
Section 2(26) of the Income Tax Act, 1961 defines the expression ‘Indian Company’ as a company formed and
registered under the Companies Act, 2013 and includes:
(a) a company formed and registered under any law relating to companies formerly in force in any part of
India (other than the State of Jammu and Kashmir, and the Union Territories specified in (e) below);
(b) any corporation established by or under a Central, State or Provincial Act;
(c) any institution, association or body which is declared by the Board to be a company under Section
2(17) of the Income Tax Act, 1961;
(d) in the case of State of Jammu & Kashmir, any company formed and registered under any law for the
time being in force in that State; and
(e) in the case of any of the Union Territories of Dadra and Nagar Haveli, Goa, Daman and Diu and
Pondicherry, a company formed and registered under any law for the time being in force in that Union
Territory;
Provided that the registered or, as the case may be, principal office of the company, corporation, institution,
association or body in all cases is in India.
From the above definition, it may be seen that statutory corporations as well as government companies are
automatically treated as Indian companies for purposes of the Income Tax Act, 1961. The definition of an Indian
company has been specifically given under the Income Tax Act, 1961 because of the fact that Indian companies
are entitled to certain special tax benefits under this Act. It must be noted that all companies falling within the
definition given in Section 2(17) of the Act are not necessarily Indian companies whereas all Indian companies
are companies within the meaning of Section 2(17) of the Act.
Infrastructural capital company is defined under Section 2(26A). It means a company which makes
investments by way of acquiring shares or providing long-term finance to any enterprise or undertaking wholly
engaged in the business referred to in Section 80-IA(4) or Section 80-IAB(1) or an undertaking developing and
building a housing project referred to in Section 80-IB(10) or a project for constructing a hotel of not less than
three-star category as classified by the Central Government or a project for constructing a hospital with at least
one-hundred beds for patients.
Domestic Company
Section 2(22A) of the Income Tax Act, 1961, defines domestic company as an Indian company or any other
company which, in respect of its income liable to tax under the Income Tax Act, has made the prescribed
arrangements for the declaration and payment within India, of the dividends (including dividends on preference
shares) payable out of such income.
From this definition, it is clear that all Indian companies are domestic companies while all domestic companies
need not necessarily be Indian companies. In other words, a non-Indian company would be considered as a
domestic company if it makes the prescribed arrangements for the declaration and payment of dividends in
India on which tax is deductible under Section 194.
Under Rule 27 of Income tax rules, the prescribed arrangements are as follows:
(i) the share register of the company concerned, for all its shareholders, shall be regularly maintained at
its principal place of business within India in respect of any assessment year from a date not later than
the first day of April of such year.
(ii) the general meeting for passing the accounts of the previous year relevant to the assessment year
declaring any dividends in respect thereof shall be held only at a place within India;
(iii) the dividends declared, if any, shall be payable only within India to all shareholders.
Foreign Company
Section 2(23A) of the Income tax Act defines foreign company as a company, which, is not a domestic
company. However, all non-Indian companies are not necessarily foreign companies. If a non-Indian company
has made the prescribed arrangements for declaration and payments of dividends within India, such a non-
Indian company must be treated as a “domestic company” and not as a “foreign company”.
Company in which public are substantially interested (a widely-held company)

Section 2(18) of the Income Tax, Act defines the expression “company in which the public are substantially
interested”.
A company is said to be one in which public are substantially interested in the following cases, namely -
(i) A company owned by Govt./ RBI: If it is a company owned by the Government or the Reserve Bank
of India or in which not less than 40 per cent of the shares, whether singly or taken together, are held
by the Government or the Reserve Bank of India or a corporation owned by the Reserve Bank of India;
or
(ii) Section 8 company: If it is a company which is registered under Section 8 of the Companies Act,
2013 ; or
(iii) A company having no share capital declared by CBDT: If it is a company, having no share capital
and if, having regard to its objects, the nature and composition of its membership and other relevant
considerations, it is declared by an order of the Board (CBDT) to be a company in which the public are
substantially interested. However, such a company shall be deemed to be one in which the public are
substantially interested only for the assessment year(s) as may be specified in the declaration; or
(iv) Nidhi/ Mutual Benefit Society: If it is mutual benefit finance a company which carries on, as its
principal business, the business of acceptance of deposits from its members and which is declared by
the Central Government under Section 406 of the Companies Act, 2013 to be a Nidhi or Mutual Benefit
Society; or
(v) A company owned by co-operative Society: If it is a company in which shares carrying not less than
50 per cent of the voting power have been allotted unconditionally to or acquired unconditionally by, and
are throughout the relevant previous year beneficially held by, one or more cooperative societies; or
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(vi) Listed company: If it is a company which is not a private company as defined in Companies Act, and
equity shares of the company (not being shares entitled to a fixed rate of dividend whether with or
without a further right to participate in the profits, i.e. preference shares) were, as on the last day of the
relevant previous year, listed in a recognised stock exchange in India;
(vii) Public company owned by Govt. and/ or public limited company: If it is a company which is not a
private company within the meaning of the Companies Act, and the shares in the company (not being
shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits)
carrying not less than 50 per cent (40 per cent in case of an industrial company) of the voting power
have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant
accounting year beneficially held by (a) the Government, or (b) a corporation established by a Central
or State or Provincial Act, or (c) any company in which the public are substantially interested or a wholly
owned subsidiary company.
Note:
Industrial Company means an Indian company where business consists mainly in the construction of ships or
in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any
other form of power.
It may be noted that, a public company under the Companies Act, need not necessarily fall within the meaning
of a company in which the public are substantially interested under the Income-tax Act, 1961 because a
public company under the Companies Act, may be considered as one in which the public are not substantially
interested under the Income-tax Act, 1961 after considering the nature and extent of shareholding.
Illustration: State with the reason whether in the following cases Companies are widely held or closely held:
(a) The shares of ABC Private Limited are held as follows:
i A corporation owned by RBI 15%
ii
Central Govt. 18%
iii
R.B.I. 10%
iv
Mr. Raman 28%
v
Mr. Bhuvan 27%
(b) 85% equity shares of Progressive Private Limited were held by the public and its affairs during the
relevant previous year were controlled by seven persons.
Solution: (a) Shares held by Govt., RBI and Corporation owned by by RBI = 18%+10%+15% = 43%.
As shares held by CG along with RBI are more than 40%, therefore, ABC Pvt. Ltd. is a Govt. Participating
company. Hence it is a company in which Public is substantially interested i.e. widely held.
(b) As none of the criteria mentioned in Section 2(18) is met in case of Progressive Pvt. Ltd. (such as Govt.
Participating, Section 8 Company or Nidhi etc.) therefore, it is a closely held company.
Closely held company

A Company in which the public is not substantially interested is known as a closely held company.
The distinction between a closely held and widely held company is significant from the following viewpoints.
(i) Section 2(22)(e), which deems certain payments as dividend, is applicable only to the shareholders of
a closely-held company; and
(ii) A closely held company is allowed to carry forward its business losses only if the conditions specified
in Section 79 are satisfied.
TAX INCIDENCE UNDER INCOME TAX ACT, 1961

As you know, the incidence of Income tax depends upon the residential status of a company in India during the
relevant previous year. A Company may be either resident or non-resident in India, i.e., company cannot be
ordinary or not-ordinary resident.
According to Section 6(3) of the Act, a company is said to be resident in India (resident company) in any
previous year, if:
(i) It is an Indian company; or
(ii) Its place of effective management, in that year, is in India.
If any of the above two tests is satisfied the company would be a resident company in India during that previous
year.
From Assessment Year 2017-18 a foreign company is resident in India if its Place of Effective Management
(POEM) during the previous year is in India. For this purpose, the Place of Effective Management means a
place where Key management and commercial decisions that are necessary for the conduct of the business of
an entity as a whole are, in substance are made.
According to Section 5(1) of the Act, the total income of any previous year of a resident company would
consist of:
(i) income received or deemed to be received in India during the previous year by or on behalf of such
company;
(ii) income which accrues or arises or is deemed to accrue or arise to it in India during the previous year;
(iii) income which accrues or arises to it outside India during the previous year.
It is important to note that under clause (iii) only income accruing or arising outside India is included. Income
deemed to accrue or arise outside India is not includible in the hands of residents. Hence, net dividends received
from foreign companies are includible in income and not the gross dividends [CIT v. Shaw Wallace & Co. Ltd.
(1981) 132 ITR 466].
In this context, the Calcutta High Court had followed the Supreme Court’s decision in Commissioner of Income-
tax v. Clive Insurance Co. Ltd. (1978, 113 ITR 636) holding that the assessee could be said to have paid Income
Tax in U.K, by deduction or otherwise, in respect of the net dividend so as to be eligible for relief contemplated
by Section 49D of the Indian Income Tax Act, 1922. Following the Supreme Court’s decision, the Bombay
High Court held in the case of Commissioner of Income tax v. Tata Chemicals Ltd. (1986, 162 ITR 556) that
the assessee was entitled to double taxation relief under Section 91 of the Income Tax Act, 1961 in respect of
dividends from the United Kingdom. Following its decision in the case of Shaw Wallace & Co. Ltd. (supra), the
Calcutta High Court held in the case of the same assessee (1983, 143 ITR 207) that dividends from foreign
companies are to be assessed not on the gross amount of the dividends but on the gross amount of the
dividends less tax deducted there from in foreign countries. In other words, only the net foreign dividends are
to be included in the total income of a resident assessee under Section 5(1)(c) of the Income Tax Act, 1961.
Under Section 5(2) of the Act, the total income of any previous year of non-resident company would consist
of:
(i) Income received or deemed to be received in India in the previous year by or on behalf of such company;
(ii) Income which accrues or arises or is deemed to accrue or arise to it in India during the previous year.
340 PP-DTL&P
The decision of the Supreme Court in the case of Standard Triumph Motor Co. Ltd. v. CIT (1993) 201 ITR
391 to the effect that when an Indian resident passes an entry crediting a non-resident with amount payable
to him, that would tantamount to the latter receiving income in India, is having grave consequences. In this
case, the royalty payable to non-resident in pound sterling was credited to the non-residents accounts in the
books of the assessee. The Supreme Court held that the plea to accept royalty income in U.K. was immaterial
because the amount was available for the use of the non-resident in India in any manner he liked. Hence, the
income was received in India. In the wake of this decision, non-residents who have all along been held to be
not liable to Indian Income-tax if the contract was signed outside India, executed outside India and paid for
outside India could well fall into the Indian- tax net, should their clients/customers credit them for the amount
due before making payments to them outside India. In other words, a non-resident’s tax liability depends upon
the accounting entry passed by his client customer.
RATES OF TAX FOR ASSESSMENT YEAR 2020-21

Domestic Company Assessment Year
2020-21
- Where it opted for Section 115BAA 22%
[This benefit shall be available when total income of the company is computed
without claiming specified deductions, incentives, exemptions and additional
depreciation available under the Income-tax Act.]
- Where it opted for Section 115BAB 15%
[This regime shall be available only for the manufacturing companies
incorporated in India on or after 01-10-2019. Hence, old companies will not be
able to take the benefit of this section.]
- Where it has not opted for Section 115BAA and the Total Turnover or Gross 25%
receipts of the company in the last previous year does not exceeds 400 crore
rupees
- Any other domestic company 30%
Foreign Company
On so much of the total income as consists of- royalties received from Government or
an Indian concern in pursuance of an agreement made by it with the Government or the
50%
Indian concern after the 31st day of March, 1961 but before the 1st day of April, 1976;
or fees for rendering technical services received from Government or an Indian concern
in pursuance of an agreement made by it with the Government or the Indian concern
after the 29th day of February, 1964 but before the 1st day of April, 1976,and where such
agreement has, in either case, been approved by the Central Government
On other incomes 40%
a) Surcharge:
(i)
For Domestic Company : The amount of income-tax shall be increased by a surcharge at the
rate of 7% of such tax, where total income exceeds one crore rupees but not exceeding ten crore
rupees and at the rate of 12% of such tax, where total income exceeds ten crore rupees. However,
the rate of surcharge in case of a company opting for taxability under Section 115BAA or Section
115BAB shall be 10% irrespective of amount of total income.
(i)
For Foreign Company : Surcharge @ 2% where total income exceeds Rs. 1 crore and @ 5%
where total income exceeds Rs. 10 crore.
(ii) Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further
increased by health and education cess calculated at the rate of four percent of such income-tax and
surcharge.
Marginal Relief: In case of a company having a total income exceeding Rs. 1 crore, marginal relief would be
provided to ensure that the additional income-tax payable including surcharge, on the excess of income over
Rs. 1 crore is limited to the amount by which the income is more than Rs. 1 crore.
In other words, marginal relief = {Tax on total income (plus surcharge) - Tax on total income of Rs. 1 crore} –
{Total Income – Rs. 1 crore)}, if positive.
Similarly in case of a company having total income exceeding 10 Crore, the amount payable as income tax and
surcharge shall not exceed the total amount payable as income tax and surcharge on total income of Rs 10
Crore by more than the amount of income that exceeds Rs 10 Crore.
In other words marginal relief = [Tax on total income (+surcharge) – Tax on total income of 10 crore(+surcharge)]
– [ Total Income – 10 crore ], if positive.
Section 115BA [New Section inserted vide Finance Act, 2016]

In order to provide relief to newly setup domestic companies engaged solely in the business of manufacture or
production of article or thing, a new section 115BA inserted to provide that the income-tax payable in respect of
the total income of a domestic company for any previous year relevant to the assessment year beginning on or
after the 1st day of April, 2017 shall be computed @ 25% at the option of the company, if, -
i. the company has been setup and registered on or after 1st day of March, 2016 and is engaged in the
business of manufacture or production of any article or thing and is not engaged in any other business;
ii. the company while computing its total income has not claimed any benefit under section 10AA, benefit
of accelerated depreciation, benefit of additional depreciation, investment allowance, expenditure on
scientific research and any deduction in respect of certain income under Part-C of Chapter-VI-A other
than the provisions of section 80JJAA; and
iii. the option is furnished in the prescribed manner before the due date of furnishing of income.
iv. Total income of the company is calculated after claiming depreciation( rate of depreciation shall not
exceed 40% ) and without adjusting brought forward loss from any earlier year ( if deduction pertains to
the above mentioned sections ) and such losses shall not be carried forward to future years.
v. This option shall be exercised on or before the due date of furnishing the returns of income, which the
company is required to furnish under the Act. Once company has exercised the option for any previous
year it cannot be subsequently withdrawn for same or any other previous year.
MINIMUM ALTERNATE TAX (MAT)

Section 115J which was a special provision applicable to a company if its total income as computed under the
Income tax Act was less than thirty per cent of its book profit was introduced with effect from 1.4.1988 but was
discontinued with effect from 1.4.1991. It was revived as Section 115JA with effect from 1.4.1997 as a provision
deeming total income equal to thirty per cent of book profit of companies referred to earlier. This provision was
also discontinued with effect from 1.4.2001 but was substituted by Section 115JB effective from the same date.
This provision follows concept of minimum alternate Tax.
As provided out in the Explanatory Memorandum to the Finance Bill, 2000, the Minimum Alternate Tax had been
levied from the assessment year 1997-98 as the number of zero tax companies and companies paying marginal
tax had proliferated. The efficacy of that provision, however, had declined in view of the exclusions of various
sectors from the operation of MAT and the tax credit systems.
Hence, in its place the new provisions of Section 115JB were inserted which are simpler in application. They
342 PP-DTL&P
provide that all companies having book profits under the Companies Act shall have to pay a minimum alternate
tax at a rate of 18.5%. These provisions are applicable to all corporate entities.
Section 115JB(1)-Applicability of MAT: if the income tax payable by a company on its total income as computed
under the Income Tax Act in respect of any previous year relevant to the assessment year commencing on or
after the 1st day of April, 2012, is less than 18.5% of such book profit plus surcharge plus education cess then
such book profit shall be treated as total income of the company and the tax payable for the relevant previous
year shall be deemed to be 18.5% of such book profit. This non-absolute provision will override any other
provision of the Income Tax Act.
Thus, where the Income-tax payable is less than 18.5% of Book Profit, such book profit will be deemed to be
total Income and Income Tax will be payable @ 18.5% on such Book Profit. [9% of book profits, in case of the
assessee is a unit located in an International Financial Services Centre and derives its income solely in
convertible foreign exchange][Section 115JB(7) w.e.f. AY 2017-18 ]
Section 115JB(2): Maintenance of statement of Profit and loss account;-
Such company assessee has to prepare Profit & Loss A/c in accordance with the provisions of Part II of
Schedule VI of the Companies Act, 1956 or statement of profit and loss as per Schedule III of companies Act
2013.
Sub-section (2) of this section requires the company in this case will prepare its profit and loss account for the
relevant previous year in accordance with the provisions of Parts II of Schedule VI of the Companies Act, 1956
or statement of profit and loss as per schedule III of companies Act 2013. However, while preparing the annual
accounts including profit and loss account -
(a) the accounting policies;
(b) the accounting standards followed for preparing such accounts including profit and loss accounts; and
(c) the method and rates adopted for calculating the depreciation,
shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss
account and laid before the company at its annual general meeting . But where the company has adopted
or adopts the financial year, which is different from the previous year under the Income Tax Act, (a), (b) and
(c) aforesaid shall correspond to the accounting policies, accounting standards and the method and rates for
calculating the depreciation which have been adopted for preparing such accounts including profit and loss
account for such financial year or part of such financial year falling within the relevant previous year.
As per section 115JB, every company is required to prepare its accounts as per Schedule VI of the Companies
Act, 1956. However, as per the provisions of the Companies Act, 1956, certain companies, e.g. Insurance,
Banking or Electricity Company, are allowed to prepare their profit and loss account in accordance with the
provisions specified in their regulatory Acts.
In order to align the provisions of Income-tax Act with the Companies Act, 1956, with effect from assessment
year 2013-14, section 115JB has been amended to provide that the companies which are not required to
prepare their profit and loss account in accordance with the Schedule VI of the Companies Act, 1956*, profit
and loss account prepared in accordance with the provisions of their regulatory Acts shall be taken as a basis
for computing the book profit under section 115JB.
However, Section 115JB(5A) MAT provisions shall not apply to any income accruing or arising to a company
from life insurance business w.e.f. AY 2001-02.
COMPUTATION OF BOOK PROFIT FOR THE PURPOSE OF MAT AS PER AMENDED SECTION
115JB [w.e.f. AY 18-19]
Due to applicability of Ind AS Section 115JB has been amended to calculate MAT in case of Ind AS compliant
companies. Following are steps for computation of book profit-
Step 1: Find out the net profit [before other comprehensive income (OCI)] as per statement of profit and loss
of the company.
Step 2: Make adjustments which are given in existing provisions under section 115JB(2) i.e. as per explanation
1 given u/s 115JB(2).
Step 3: Make specific adjustments in the case of demerger as given by new sub-section 2B to section 115JB.
Step 4: Make further adjustments pertaining to OCI items that will be permanently recorded in reserves (i.e.
never to be reclassified to the statement of profit and loss).
Detailed discussion of steps to calulate book profit is as under:-

Step 1:- Find out Net profit (before other comprehensive income) as shown in profit and loss account (prepared
in accordance with provisions of Part II and III of Schedule VI to Companies Act, 1956) or Statement of profit
and loss (prepared in accordance with Schedule III of Companies Act, 2013).
Step 2:- Adjustments to be made to the Net Profit in Step 1 as given in existing provisions under Section
115JB(2):-
Following amounts shall be added; if debited to Profit and Loss account:-
(a) the amount of Income tax paid or payable, and the provision therefor;
The amount of income-tax shall include:
(i) any tax on distributed profits under Section 115O or on distributed income under section 115R;
(ii) any interest charged under this Act; and
(iii) Surcharge, Education Cess and SHEC on Income-tax, if any, as levied by the Central Acts from
time to time.
The amount of income tax shall not include following taxes:
• STT, Banking cash transaction tax, wealth tax, gift tax, FBT, indirect taxes
• Interest, penalty, fine, surcharge, education cess on above taxes.

(b) the amounts carried to any reserves, by whatever name called other than reserve specified under
Section 33AC, i.e., shipping reserve; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained
liabilities, (i.e. unascertained liabilities); or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any incomes to which MAT is not applicable [e.g.
Section 10 (other than the provisions contained in clause 38) or Section 11 or Section 12 apply.]
(fa) the amount or amounts of expenditure relatable to, income, being share of the assessee in the income
of an association of persons or body of individuals, on which no income-tax is payable in accordance
with the provisions of section 86; or
(fb) the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a
foreign company, from, -
– the capital gains arising on transactions in securities; or

344 PP-DTL&P
– the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in
Chapter XII (i.e. Section 115A to 115BBE)
if the income-tax payable thereon in accordance with the normal provisions of this Act, other than the
provisions governing MAT, is at a rate less than the rate specified in Section 115JB(1); or
(fc) -the amount representing notional loss on transfer of a capital asset, being share or a special purpose
vehicle to a business trust in exchange of units allotted by the trust referred to in section 47(xvii)
Or
- the amount representing notional loss resulting from any change in carrying amount of said units
Or
-the amount of loss on transfer of units referred to in clause (xvii) of section 47 whether or not it appears
in profit and loss account.
(fd) the amount or amounts of expenditure relatable to income by way of royalty in respect of patent
chargeable to tax under section 115BBF; or
(g) the amount of depreciation.
(h) the amount of deferred tax and provisions therefore (inserted by Finance Act, 2008 with retrospective
effect from 1.4.2001).
(i) the amount or amounts set aside as provision for diminution in the value of any asset (w.r.e.f. 1.4.2001)
e.g. provision for bad and doubtful debts and provision for impairment losses.
(j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of
such asset if such profit is not credited to profit and loss account.
(k) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking
into account the cost of the shares exchanged with units referred to in the said clause or the carrying
amount of the shares at the time of exchange where such shares are carried at a value other than the
cost through profit or loss account, as the case may be.
Amounts to be deducted from Net profit mentioned in step 1:
(i) the amount withdrawn from any reserves or provisions if any such amount is credited to the profit and
loss account;
Provided that, where this section is applicable to an assessee in any previous year, the amount
withdrawn from reserves created or provisions made in a previous year relevant to the assessment
year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless
the book profit of such year has been increased by those reserves or provisions (out of which the said
amount was withdrawn) under this Explanation or Explanation below second proviso to Section 115JA,
as the case may be; or
In other words, if amount is withdrawn from provisions/reserve not allowed as deduction earlier, it will
not be added (taxed) again ; however in any other case the withdrawal will be taxed.
(ii) the amount of income to which any of the provisions of Section 10 (other than the provisions contained
in clause 38) or Section 11 or Section 12 apply, if any such amount is credited to the profit and loss
account; or
(iia) the amount of depreciation debited to the profit and loss account (excluding the depreciation on account
of revaluation of assets); or
(iib) the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent
it does not exceed the amount of depreciation on account of revaluation of assets referred to in Clause
(iia); or
(iic) the amount of income, being the share of the assessee in the income of an association of persons or
body of individuals, on which no income-tax is payable in accordance with the provisions of section 86,
if any, such amount is credited to the profit and loss account; or
(iid) the amount of income accruing or arising to assessee, being a foreign company, from, -
(A) the capital gains arising on transactions in securities; or
(B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in
Chapter XII,( i.e. under section 115A to 115BBE)
if such income is credited to the profit and loss account and the income-tax payable thereon in
accordance with the normal provisions of this Act, other than the provisions of MAT , is at a rate less
than the rate specified in section 115JB(1); or
(iie) the amount representing, -
(A) notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business
trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or
(B) notional gain resulting from any change in carrying amount of said units; or
(C) gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the profit and
loss account; or
(iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking
into account the cost of the shares exchanged with units referred to in the said clause or the carrying
amount of the shares at the time of exchange where such shares are carried at a value other than the
cost through profit or loss account, as the case may be;
(iig) the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF; or
(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less, as per books of
account. For the purposes of this clause, the loss shall not include depreciation. Therefore, in a case
where an assessee has shown profit in a year, but after adjustment of depreciation it results profit or
loss, no adjustment in book profit is allowed; or
(iv) the amount of profits of sick industrial company for the assessment year commencing on and from the
assessment year relevant to the previous year in which the said company has become a sick industrial
company under Sub-section (1) of Section 17 of the Sick Industrial Companies (Special Provisions)
Act, 1985 and ending with the assessment year during which the entire net worth of such company
becomes equal to or exceeds the accumulated losses. “Net Worth” shall have the meaning assigned to
it in Clause (ga) of Sub-section (1) of Section 3 of the Sick Industrial Companies (Special Provisions)
Act, 1985.
(v) The amount of deferred tax, if any such amount is credited to the profit and loss account.
Step 3 and step 4

A) No further adjustments to be made to net profits(i.e. net profits before other comprehensive income),
other than those already specified under section 115JB, shall be made.
B) The OCI includes certain items that will permanently be recorded in reserves and hence never be
reclassified to statement of profit and loss included in computation of book Profit. Following items shall
be included in the book profits for the MAT purposes as explained under:
346 PP-DTL&P
1. Changes in revaluation surplus of Property, Plant or Equipment (PPI) and Intangible assets (Ind
AS 16 and 38)
• Revaluation reserve credited or debited to OCI shall not be adjusted in the book profits in the
year in which it is debited or credited. First proviso to section 115JB (2A)
• It shall be included in the book profit in the year in which the Asset/Investment is retired,
disposed, realised or otherwise transferred. Second Proviso to section 115JB(2A)
2. Gains and losses from Investments in equity instruments designated at fair value through OCI
(Ind AS 109)
• Gain or loss from such Investments debited/credited to OCI shall not be adjusted in book
profits in the year in which it is credited/debited. First proviso to section 115JB (2A)
• It shall be adjusted in book profits in the year in which investment is retired/disposed/realised
. Second proviso to section 115JB (2A)
3. Re-measurements of defined benefit plans (Ind AS 19) - It shall be adjusted in book profits every
year in which such re-measurement gain/loss arises.
4. Any other Item - It will be adjusted in book profits every year in which such profit/loss arises.
C) As per Appendix A of Ind AS 10 any distribution of non cash assets to shareholders in case of demerger
shall be accounted at fair value and the difference between carrying value and fair value of such
assets is adjusted in profit and loss. Reserves of such company are debited with fair value of assets to
record distribution of “deemed dividend” to shareholders. Since such difference between fair value and
carrying amount is included in retained earnings, therefore, such difference arising on demerger shall be
excluded from book profits. However, where such assets are recorded in books of resulting company at
any value different from the value at which such assets were recorded in books of demerged company
before demerger, then such difference shall be ignored for the purpose of calculation of book profits of
resulting company. [Section 115JB(2C)]
D) MAT on first time adoption [Section 115JB(2C)]
The adjustments arising on account of shifting from existing Indian GAAP to Ind AS are required to be
recorded in OCI at the date of such transition to Ind AS. Several of these items shall never be reclassified
to statement of profit and loss or included in computation of book profits. Following adjustments shall be
made:
• Those adjustments which are recorded in OCI and which would be reclassified to profit or loss
account subsequently shall be included in book profits in the year in which these are reclassified
to profit or loss.
• Those adjustments recorded in OCI and which would never be reclassified to profit or loss shall
be treated as under:
i. Changes in revaluation surplus of Property, Plant or Equipment (PPI) and Intangible assets
(Ind AS 16 and 38) - It shall be included in the book profit in the year in which the Asset/
Investment is retired, disposed, realised or otherwise transferred.
ii. Gains and losses from Investments in equity instruments designated at fair value through
OCI (Ind AS 109) - It shall be adjusted in book profits in the year in which investment is
retired/disposed/ realised.
iii. Re-measurements of defined benefit plans (Ind AS 19) - It shall be adjusted in book profits
equally over a period of 5 years starting from the year of first time adoption of Ind AS.
iv. Any other Item - It shall be adjusted in book profits equally over a period of 5 years starting
from the year of first time adoption of Ind AS.
• All other adjustments recorded in reserves and surplus (excluding capital reserve and securities
premiums) and which would otherwise never subsequently be reclassified to profit and loss
account, shall be included in book profits, equally over a period of 5 years starting from the year
of first time adoption of Ind AS.
Note 3 : If an entity shows fair value of PPE and Intangible asset in opening Ind AS Balance sheet as
deemed cost as per Ind AS 101, then treatment shall be as under :
i. Existing provisions of section 115JB provide that in case of revaluation of assets, any impact on
account of such revaluation shall be ignored for the purpose of computation of Book profits. Also
the adjustments in retained earnings due to first time adoption of Ind AS shall be ignored for the
purposes of computation of Book Profit.
ii. Depreciation shall be computed ignoring above said adjustment.
iii. Gain or loss on realisation/disposal/retirement of such assets shall be computed ignoring the
above said adjustment to retained earnings.
E) If any entity uses fair value as deemed cost in its opening Ind AS Balance Sheet in respect of investments
in subsidiary, joint venture or associate as per Ind AS 101, then retained earnings adjustment shall be
included in in the book profits at the time of realisation of such investment.
F) If any entity, at the time of transition to Ind AS, chooses that cumulative translation differences of all
foreign operations are deemed to be zero and also gain or loss on a subsequent disposal of any foreign
operations shall exclude translation differences that arose before the date of transition to Ind AS and
shall include only the translation difference after the date of transition, then the cumulative translation
differences transferred to the retained earnings on the date of transition shall be included in book profits
at the time of disposal of foreign operation.
G) All other adjustments to retained earnings at the time of transition ( e.g. decommissioning liability, asset
retirement obligations, foreign exchange capitalisation/de-capitalization, borrowing costs etc,) shall be
included in book profits, equally over a period of 5 years starting from the year of first time adoption of
Ind AS.
H) As section 115JB already provides for adjustment on account of deferred tax and its provision. Any
deferred tax adjustment recorded in reserves and surplus on account of transition to Ind AS shall be
ignored.
The following points should also be noted in this context:
1. Losses and unabsorbed Depreciation allowed to be carried forward [Section 115JB(3)]
Provisions of MAT under Section 115JB(1) shall not affect the determination of the amounts unabsorbed
depreciation under Section 32(2), business loss u/s 72(1), speculation loss u/s 73, capital loss u/s 74
and loss u/s 74A in relation to the relevant previous year to be carried forward to the subsequent year
or years. In other words these are allowed to be carried forward in usual manner.
2. Report from a Chartered Accountant to be submitted [Section 115JB(4)]
Every company to which this section applies, shall furnish a report in the prescribed form from a
Chartered accountant as defined in the Explanation below Section 288(2), certifying that the book profit
has been computed in accordance with the provisions of this section along with the return of income
filed under Section 139(1) or along with the return of income furnished in response to a notice Section
142(1)(i).
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3. All other provisions to be applicable as usual [Section 115JB(5)]

Save as otherwise provided in this section, all other provisions of this Act shall apply to such companies,
i.e. all the provisions such as Advance tax, Interest under Section 234A, 234B and 234C, penalty etc
shall also apply to such companies.
4. Applicability of Provisions to SEZ enterprises and SEZ developers:-
The provisions of this section shall not apply to the income accrued or arising on or after 1/04/05 but
before 01/04/11from any business carried on, or service rendered, by an entrepreneur or a Developer
in a unit or SEZ, as the case may be. [Section 115JB(6)]. However, provisions of this section are
applicable to SEZ enterprises and SEZ Developers from AY 2012-13.
5. Rate of MAT in case of a unit located in International Financial Service Centre:-
Notwithstanding anything contained in Section 115JB(1), where the assessee referred to therein, is a
unit located in an International Financial Services Centre and derives its income solely in convertible
foreign exchange, the rate of MAT shall be 9% instead of 18.5% of Book Profits. [section 115JB(7) by
the Finance Act, 2016, w.e.f. 1-4-2017].
6. Applicability of provisions of MAT applicable to foreign companies:-
Since ‘company’ defined u/s 2(17) includes any body corporate incorporated under the laws outside
India, so foreign companies are also liable to MAT in respect of their income in India.
However, foreign companies shall not liable u/s 115JB without physical presence.
The Authority for Advance Ruling (“AAR”) has delivered a ruling in the case of Timken India Ltd. In
re (2005) 273 ITR 67 (AAR) where it holds that the provisions of section 115JB of the Income-tax
Act, 1961 (“the Act”) levying Minimum Alternate Tax (“MAT”) on the book profit of a Company would
not apply to a Foreign Company not having any physical presence in India. In this case, the AAR
distinguished its earlier ruling of 1998 (234 ITR 828) wherein it had held that a foreign company would
be subject to MAT provisions. The critical factor for distinguishing was on the basis that in the earlier
ruling the applicant had a project office in India, which constituted a Permanent Establishment and was
preparing its financial statements as required under Indian Companies Act, 1956. In order to comply
with the requirement of MAT provisions regarding preparing Profit & Loss Account in accordance with
the provisions of the Indian Companies Act, it is essential that the foreign company should have a place
of business within India.
Similar view has been upheld by AAR in the recent ruling of Praxair Pacific Ltd., In re [2010] 326 ITR 276
(AAR)
Further, the provisions of section 115JB were amended vide Finance Act, 2015 to provide that in case
of a foreign company any income chargeable at a rate lower than the rate specified in section 115JB
shall be reduced from the book profits and the corresponding expenditure will be added back.
However, since this amendment was prospective w.e.f. assessment year 2016-17, the issue for
assessment year prior to 2016-17 remained to be addressed.
With a view to provide certainty in taxation of foreign companies, an amedment has been made vide
Finance Act, 2016 so as to provide that with effect from 01.04.2001, the provisions of section 115JB
shall not be applicable to a foreign company if -
• the assessee is a resident of a country or a specified territory with which India has an agreement
referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement
under sub-section (1) of section 90A and the assesse does not have a permanent establishment
in India in accordance with the provisions of such Agreement; or
• the assessee is a resident of a country with which India does not have an agreement of the nature
referred above and the assessee is not required to seek registration under any law for the time
being in force relating to companies.
This amendment effective retrospectively from the 1st day of April, 2001 and accordingly apply in relation
to assessment year 2001-02 and subsequent years.
7. Whether Assessing officer has the power to examine correctness of net profit shown in profit and loss
Account [Appolo Tyres Ltd. v. CIT(2002) 255 ITR 273 (SC)]
The AO does not have the power to question correctness of P&L A/c prepared by assessee and certified
by the statutory auditors of the company as having been prepared in accordance with the provisions of
the Companies Act, 2013. The AO does not have the jurisdiction to go behind the net profits shown in
the P&L A/c except to the extent provided in the Explanation 1 to Section 115JB.
In the following cases Assessing officer has power to rework or rewrite the profit and loss account:
• Where the profit and loss account submitted is not as per Companies Act, 2013.
• Where accounting policies or accounting standards or rate of depreciation adopted are different
from those adopted for the profit and loss prepared for the AGM.
MAT CREDIT [SECTION 115JAA]

MAT Credit for taxes paid as per Section 115JB in earlier years (in which MAT liability was more than tax liability
as per normal provisions of the Act) is available in the Assessment year in which Tax payable on the total income
computed under the normal provisions of this Act is more than tax payable u/s 115JB for that Assessment year.
MAT Credit to be set off in an AY = Regular Income tax - Minimum alternate tax
MAT credit can be carried forward up to 15th assessment year (10th assessment year upto AY 2017-18)
immediately succeeding the assessment year in which such credit becomes allowable. [w.e.f. AY 18-19]
The amount of MAT credit shall not be allowed to be carried forward to the subsequent year to the extent such
credit relates to the difference between the amount of foreign tax credit (FTC) allowed against MAT and FTC
allowable against the tax computed under regular provisions of the Act. [w.e.f. AY 18-19]
DIVIDEND DISTRIBUTION TAX [SECTION 115-O]

Dividend Distribution Tax: It is a tax on dividend(interim or final) declared, distributed or paid by a company
(whether out of current or accumulated profits) on or after June 1, 1997 (excluding previous year 2002-03).
Dividend distribution tax is in addition to income tax on total income. Term “Dividend” has the same meaning
as defined under section 2(22) (excluding Section 2(22)(e)). This tax is applicable on Domestic Company only.
Dividend distribution tax is not applicable in following cases:
I. the amount of dividend, if any paid to any person for, or on behalf of, the New Pension system Trust
referred to in Section 10(44).
II. any amount declared, distributed or paid by the specified domestic company by way of dividends
(whether interim or otherwise) to a business trust out of its current income on or after the specified date.
Explanation.
(a) “specified domestic company” means a domestic company in which a business trust has
become the holder of whole of the nominal value of equity share capital of the company (excluding
the equity share capital required to be held mandatorily by any other person in accordance with
any law for the time being in force or any directions of Government or any regulatory authority, or
equity share capital held by any Government or Government body);
350 PP-DTL&P
(b) “specified date” means the date of acquisition by the business trust of such holding as is referred
to in clause (a).]
III. Any Dividend (interim or final) declared, distributed or paid on or after April 1, 2016 by a Company,
being a unit established on or after April 1, 2016 in an International Financial Services Centre, deriving
income solely in convertible foreign exchange out of its current income. Such dividend is not taxable in
the hands of receiver also.
Explanation: For the purposes of this sub-section,
(a) “International Financial Services Centre” shall have the same meaning as assigned to it in clause
(q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);
(b) “unit” means a unit established in an International Financial Services Centre, on or after the 1st
day of April, 2016;
(c) “convertible foreign exchange” means foreign exchange which is for the time being treated by the
Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange
Management Act, 1999 (42 of 1999) and the rules made thereunder.
IV. Any dividend distributed by the recipient out of the III above.
V. Dividend declared, distributed or paid during April1,2005 and May 31, 2011 by a SEZ enterprise or
SEZ developer. (However, As per proviso 6 of section 115-O inserted by finance Act 2011, Provisions
of section 115-O are also applicable to an enterprise/undertaking developing, operating or maintaining
SEZ).
Inter-corporate Dividend relief: According to Section 115-O(1A) Where a holding company receives dividend
from its subsidiary company in a financial year and in the same financial year such holding company also
declares dividend, then dividend tax shall be levied on dividend declared by holding company after reducing
dividend received from subsidiary company. This relief is available only in the following situations:
(a) where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under
this section on such dividend; or
(b) where such subsidiary is a foreign company, the tax is payable by the domestic company under section
115BBD on such dividend.
However, the same amount of dividend shall not be taken into account for reduction more than once.
Explanation- a company shall be a subsidiary of another company, if such other company, holds more than half
in nominal value of the equity share capital of the company.
Dividend tax is to be paid within 14 days from the date of declaration or distribution or
payment of dividend, whichever is earlier [Section 115-O(3)]
Calculation of Dividend distribution tax: Dividend tax is to be calculated @15% (+SC+HEC) of the Gross
amount of dividend. The Finance Act 2014 has inserted sub-section (1B) in section 115-O to ensure that tax is
levied on a proper base. In order to ensure that tax is levied on a proper base, the dividend actually received
need to be grossed up for the purpose of computing the dividend distribution tax.
For the purpose of determining the tax on distributed profits payable in accordance with this section, any
amount by way of dividends referred to in section 115-O(1) as reduced by the amount referred to in section
115-O(1A) shall be called net distributed profits. This net distributed profit shall be increased to such amounts
as would, after reduction of the tax on such increased amount at the rate of 15% plus surcharge and Health and
Education Cess, be equal to the net distributed profits.
Thus, where the amount of dividend paid or distributed by a company is Rs. 85 lakhs, then Dividend Distribution
Tax (DDT) under the amended provision would be calculated as follows:
Dividend amount distributed = Rs. 85 lakhs
Increase by Rs. 17,99,534 [i.e. (85*0.17472)/(1-0.17472)]
Increased amount = Rs. 1,02,99,534
DDT @ 15% plus surcharge @ 12% and HEC @ 4% of Rs. 1,02,99,534 = Rs. 17,99,534
Tax payable u/s 115-O is Rs. 17,99,534
Dividend distributed to shareholders = Rs. 85 lakhs
Similarly, section 115R is amended by the Finance Act 2014 to provide that for the purposes of determining the
additional income-tax payable in accordance with section 115R (2), the amount of distributed income shall be
increased to such amount as would, after reduction of the additional income-tax on such increased amount at
the rate specified in section 115R (2), be equal to the amount of income distributed by the Mutual Fund.
Note:-
1. DDT is additional tax in addition to normal tax payable by the company and this additional tax is to
be paid even if no income tax is payable by such domestic company. Moreover, brought forward MAT
credit cannot be adjusted against the additional tax on dividend.
2. DDT is a final levy i.e. no credit is available in future in respect of such tax.
Dividend Distribution tax in case of Deemed Dividend Under Section 2(22)(e)

Finance Act, 2018 has amended Section 115-O and related sections in order to provide that dividends referred
to in Section 2(22)(e) of the Act are also part of Section 115-O and chargeable to DDT @ 30% (instead of
20.5553%).
However, no change has been made in Section 115BBDA and Section 10(34) of the Act.
Post Amendment, It can be inferred that:
♦ Deemed Dividend u/s 2(22)(e) is chargeable to DDT @ 30% in hands of closely held co.
♦ Since Section 115BBDA of the Act do not cover above dividend u/s 2(22)(e), hence the same is wholly
exempt from tax under Section 10(34) of the Act even exceeds Rs. 10 lakhs.
♦ TDS under Section 194 of the Act is not required to be deducted since such dividend is now covered
under Section 115-O of the Act.
Taxability of Dividend income of an Indian company from a Specified foreign company

[Section 115BBD]
Dividend Income of an Indian company out of dividend declared, distributed or paid by a Specified foreign
company is taxable @ 15%. No deduction in respect of any expenditure or allowance shall be allowed to the
assessee under any provision of this Act in computing its income by way of dividends.
“Specified Foreign Company” means a foreign company in which the Indian company holds 26% or more
in nominal value of the equity share capital of company.
Taxability of Dividend in hands of Recipient: Dividend received from a Domestic company on which
352 PP-DTL&P
company has paid Dividend tax u/s 115-O is exempt in the hands of the shareholder. However from AY 18-19
in case of a resident Individual/HUF/Firm or any person (not being a domestic company, or a fund/ institution
/ trust / university / educational institution / hospital / medical institution referred to in section 10(23C)(iv)(v)
(vi)(via), or a trust/institution registered under section 12A/12AA) aggregate dividend income from domestic
company in excess of 10 lakhs is taxable @ 10% (+SC+HEC) under Section 115BBDA. For AY 17-18 this
provision was applicable to resident Individual/HUF/Firm.
1. No assessee can claim any deduction from taxable income in respect of dividend tax paid by him. Also
no deduction is available from tax on dividend under any section.
2. Interest @ 1% per month or part of month shall be payable on the amount of dividend tax not paid in
specified time limit of 14 days. Interest shall be calculated from the period starting from the next date
after the last date of payment and ending on the date of actual payment. [Section 115P]
3. Penalty under section 271C equal to amount of tax which company fails to pay shall be levied. Penalty
is not applicable if assessee shows that there was reasonable cause for failure to pay.
4. As per Section 276B Person shall be punishable with rigorous imprisonment for a term of three months
to seven years and fine, if he fails to pay tax as per provisions of Section 115-O. However, such
punishment is not applicable if it could be proved that there was reasonable cause for default/failure.
Tax on distributed income of domestic company for buy back of shares [Section 115QA]
Any amount distributed by a domestic company for buy back of its own shares (not listed in any recognised
stock exchange) is chargeable to tax @20%(+SC+HEC) of distributed income. Distributed income for this
purpose means consideration paid by company on buy-back of shares as reduced by the amount received by
company on issue of such shares. Such income is exempt in the hands of shareholders under Section 10(34A).
Remaining provisions such as date of payment, interest for delay etc. are same as under section 115-O.
Exemption on Sale of stock of crude oil by Foreign Company

♦ The provisions of Section 10(48), 10(48A) and 10(48B) of the Income tax Act, 1961 exempts the
following Incomes of a foreign company:
1. Income received in India on account of Sale of crude oil as per the agreement approved by the
Central Government – Section 10(48).
2. Income accrue or arise in India on account of storage of crude oil in India and sale of crude oil
therefrom in India as per the agreement approved by Central Government – Section 10 (48A).
3. Income accrue or arise in India on account of Sale of leftover stock after the expiry of agreement
approved by Central Government – Section 10(48B).
Finance Bill, 2018 has made the amendment that even in case of termination of agreement,
exemption benefit under Section10(48B) will be available to such foreign company.
Liability of director of private company in liquidation: Director of a private company any time during the
previous is jointly and severally liable for amount of tax which due from such company in respect of such
previous year, if such tax could not be recovered from company. However, he shall not be liable if it can be
proved that such non recovery was not any way attributed to any of his act which can be regarded as gross
negligence, misfeasance or breach of duty on his part in relation to affairs of company.
CARBON CREDIT [SECTION 115BG]

Where total income of the assessee includes any income from the transfer of carbon credit then such income
shall be taxable at concessional rate of 10% (+SC+EC+SHEC) on the gross amount of such income. No
expenditure or allowance in respect of such income shall be allowed. [New section inserted vide Finance
Act, 2017 w.e.f. AY 18-19]
STATEMENT SHOWING COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY FOR COMPANY/
AOP/BOI
COMPUTATION OF TOTAL INCOME

Income from house property [A] xxx
Income from PGBP [B] xxx
Income from Capital gain [C] xxx
Income from Other source [D] xxx
Total [A+B+C+D] xxx
Less: Adjustment towards set off and carry forward of losses xxx
Gross Total Income (GTI) xxx
Less: Deduction under Chapter VIA xxx
Total income or Net income (Taxable income) [R/O Sec.288A] xxx
COMPUTATION OF TAX LIABILITY

Tax on Total income or Net income (Taxable income) xxx
Add: Surcharge xxx
Tax and surcharge xxx
Add: Health and Education Cess @ 4% xxx
Less: Rebate under section 86/89/90/90A/91
Total Tax payable xxx
Less: Prepaid taxes
• Self-assessment tax xxx
• TDS/TCS xxx
• Advance tax xxx
Net Tax liability [R/O Sec.288B] xxx
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF NON CORPORATE ENTITIES

Income tax is a charge on the assessee’s income. Income Tax law lays down the provisions for computing
the taxable income on which tax is to be charged. Taxable income of an assessee shall be calculated in the
following manner.
1. Determine the residential status of the person as per section 6 of the Act.
2. Calculate the income as per the provisions of respective heads of income. Section 14 classifies the
income under five heads.
(i) Income from salaries

354 PP-DTL&P
(ii) Income from House Property
(iii) Profits and gains of business or Profession
(iv) Capital Gains
(v) Income from other sources
3. Consider all the deductions and allowances given under the respective heads before arriving at the net
under each head.
4. Exclude the income exempt under section 10 of the Act.
5. Aggregate of incomes computed under the 5 heads of income after applying clubbing provisions and
making adjustments of set off and carry forward of losses is known as Gross Total Income.
6. Deduct therefrom the deductions admissible under Sections 80C to 80U. The balance is called Total
income.
7. The total income is rounded off to the nearest multiple of Rupees ten. (Section 288A)
8. Add agriculture income (if any) in the total income calculated in (6) above. Then calculate tax on the
aggregate as if such aggregate income is the Total Income.
9. Calculate income tax on the net agricultural income as increased by Rs. 2,50,000/3,00,000/5,00,000 as
the case may be, as if such increased net agricultural income were the total income.
10. The amount of income tax determined under (9) above will be deducted from the amount of income tax
determined under (8) above.
11. Calculate income tax on capital gains under Section 112, and on other income at specified rates.
12. The balance of amount of income tax left as per (10) above plus the amount of income tax at (11) above
will be the income tax in respect of the total income.
13. Deduct the following from the amount of tax calculated under (12) above.
- Rebate under section 87A (if applicable).
- Tax deducted and collected at source.
- Advance tax paid.
- Double taxation relief (Section 90 or 91).
14. The balance of amount left after deduction of items given in (13) above, shall be the net tax payable
or net tax refundable for the assessee. Net tax payable/refundable shall be rounded off to the nearest
multiple of Ten rupees (Section 288B).
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.
For calculation of income, amount received is classified under 5 heads of income; it is then to be adjusted with
reference to the provisions of the Income Tax laws in the following manner:

Income under the head:
+ Income from Salaries XXX
+ Income from House Property XXX
+ Profits and gains of business or profession XXX
+ Capital gains XXX
+ Income from other sources XXX
Adjustment in respect of:
+ Clubbing of Income XXX
− Set off and carry forward of losses (XXX)
= Gross Total Income XXX
− Deductions under section 80C to 80U (or Chapter VIA) (XXX)
= Total Income XXX
ALTERNATE MINIMUM TAX (AMT) [SECTION 115JC]

The provisions of section 115JC are applicable both to firm and LLP where the regular income tax payable for
a previous year is less than the alternate minimum tax payable for such previous year then the adjusted total
income shall deemed to be the total income of that person for such previous year and it shall be liable to pay
income tax on such adjusted total income @ 18.5% plus HEC @ 4%.
It is further provided that the provisions of AMT under Chapter XII-BA shall also apply to an individual or a
Hindu undivided family or an association of persons or a body of individuals (whether incorporated or
not) or an artificial juridical person if the adjusted total income of such person exceeds twenty lakh rupees.
The regular income tax payable shall be the income-tax payable for a previous year by a person other than a
company on his total income in accordance with the provisions of the Act other than the provisions of Chapter
XII-BA i. e section 115JC to 115JF.
Adjusted total income shall be the total income before giving effect to provisions of Chapter XII-BA as increased
by the deductions claimed under any section (other than section 80P) included in Chapter VI-A under the
heading “C - Deductions in respect of certain incomes” and deduction claimed under section 10AA. Further,
total income shall be increased by the deduction claimed under section 35AD for purpose of computation of
adjusted total income. The amount of depreciation allowable under section 32, as if no deduction u/s 35 AD in
respect of such assets was allowed, shall however, be reduced in computing the adjusted total income.
The provisions can be summarized as:
1. If regular income tax payable is more than or equal to the alternate minimum tax (18.5% plus HEC @
4% of adjusted total income), the regular income tax payable is the tax liability of the assessee.
2. If regular income tax payable is less than the alternate minimum tax (18.5% plus HEC @ 4% of
adjusted total income), the adjusted total income is the deemed income of the assessee for that year
and alternate minimum tax is the tax liability.
However, it is also provided that the credit for tax (tax credit) paid by a person on account of AMT under Chapter
XII- BA shall be allowed to the extent of the excess of the AMT paid over the regular income-tax. This tax
credit shall be allowed to be carried forward up to the fifteen assessment year (w.e.f. AY 18-19) immediately
356 PP-DTL&P
succeeding the assessment year for which such credit becomes allowable and set off against regular tax
liability. In other words, it shall be allowed to be set off for an assessment year in which the regular income-tax
exceeds the AMT, to the extent of the excess of the regular income-tax over the AMT.
The amount of AMT credit shall not be allowed to be carried forward to the subsequent year to the extent such
credit relates to the difference between the amounts of foreign tax credit (FTC) allowed against AMT and FTC
allowable against the tax computed under regular provisions of the Act.
No interest is allowed on such tax credit. Tax credit shall be allowed even if adjusted total income does not
exceed 20 lakh in the year of set off.
As per Section 115JE all other provisions of act such as self assessment u/s 140A, advance tax, Interest u/s
234A, 234B, 234C , penalty etc. shall also apply to the person covered by AMT.
Every person to which this section applies shall obtain a report, in such form as may be prescribed from
a chartered accountant certifying that the adjusted total income and the alternate minimum tax have been
computed in accordance with the provisions of this Chapter and furnish such report on or before the due date
of filing of return under sub-section (1) of section 139.
FORMAT SHOWING COMPUTATION TAXABLE INCOME AND TAX LIABILITY FOR

INDIVIDUAL/HUF/FIRM
COMPUTATION OF TOTAL INCOME

Income from Salary [A] xxx
Income from House Property [B] xxx
Income from PGBP [C] xxx
Income from Capital Gain [D] xxx
Income from Other Source [E] xxx
Total [A+B+C+D+E] xxx
Less: Adjustment towards set off and carry forward of losses xxx
Gross Total Income (GTI) xxx
Less: deduction under section 80C to 80U xxx
Total income or Net income (Taxable income) [R/O Section 288A] xxx
COMPUTATION OF TAX LIABILITY

Tax on Total income or Net income (Taxable income) xxx
Less: Rebate u/s 87A xxx
( In case of Resident Individual having Net income not exceeding Rs. 500000)
(a) 100% of Tax on income
(b) Rs. 12500 (a) or (b) whichever is lower.
Income Tax After Rebate under section 87A xxx
Add: Surcharge xxx
Tax and surcharge xxx

Add: Health and Education Cess@4% xxx
Less: Rebate under section 86/89/90/90A/91
Total Tax payable xxx
Less: Prepaid taxes
• Self-assessment tax xxx
• TDS/TCS xxx
• Advance tax xxx
Net Tax liability [R/O Section 288B] xxx
Rounding off Income [Section 288A]

Taxable income shall be rounded off to the nearest multiple of Rs. 10 and any part of rupee consisting of paisa
shall be ignored and thereafter such amount is not multiple of 10, then last figure in that amount if five or more,
the amount shall be increased to the next higher amount which is multiple of Rs10 and if last figure is <5,
amount shall be reduced to next lower amount which is multiple of 10.
Rounding off Income [Section 288B]

Any sum payable by an assessee and the amount of refund due under provision of act shall be rounded off to
nearest Rs. 10.
TAXATION OF AN INDIVIDUAL
Tax Act As per section 2(31) of Income tax act, the term “person” includes an Individual. However, the term
‘Individual’ is not defined anywhere in Income Tax Act, but it means a human being or a natural person. It also
includes a minor or a person of unsound mind whether major or minor, married or unmarried. Individual shall be
liable to tax if his income exceeds threshold exemption limit.
Steps for computation of taxable income have been explained in Introduction part above. However, steps for
computation of taxable income and tax liability of an individual are briefly explained as under:-
1. Calculate the gross total income ignoring incomes exempted u/s 10, 10A or 10B or 10BA etc. of the
Individual by adding Income under the five heads. Adjustment should be made regarding clubbing
provisions u/s 60 to 65 and losses should be set off as per provisions of section 70 to 80.
2. Deductions should be allowed from gross total income under chapter VI-A for arriving at taxable income.
An Individual is allowed deduction u/s 80C, 80CCC, 80CCD, 80CCG, 80D, 80DDB, 80E, 80EE, 80G,
80GG, 80GGA, 80GGC, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80-JJAA, 80QQB, 80RRB,
80TTA, 80TTB, 80U.
3. Certain incomes of Individual are taxable at flat rate of 30% under section 115BB such as winnings from
lottery etc. No deduction is allowed under section 80C to 80U on such Income. Similarly care should be
taken to calculate tax on capital gains u/s 112 or 111A etc.
4. There are special provisions related to taxation of non resident Indians u/s 115C to 115-I. Non resident
Indians can take benefit of these provisions.
5. Provisions of AMT are applicable to an Individual who has claimed deduction under 10A or 80H to
80RRB( except section 80P) or 35AD and their adjusted total income exceeds Rs. 20 lakh.
358 PP-DTL&P
6. Certain rebates and reliefs are specifically allowed to Individuals from their tax liability such as:
• Rebate u/s 87A
• Rebate u/s 86
• Relief u/s 89 in respect of arrears or advance of salary income.
TAXATION OF HINDU UNDIVIDED FAMILIES

The term ‘Hindu undivided family’ has not been defined in the Income-tax Act but it is treated as a separate
entity or person under section 2(31)of the Income-tax Act, 1961 for the purpose of assessment under the Act.
Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor
and includes their wives and unmarried daughters. Jain and Sikh families even though are not governed by
the Hindu Law, but they are treated as HUF under the Act. An HUF cannot be created under a contract and is
created automatically in a Hindu Family. Creation of a HUF is a God-gifted phenomenon since birth of a child
to a married Hindu, automatically creates a new HUF. It is not at all necessary that every HUF must have joint
property or family income. [R. Subramania Iyer v. CIT (1955) 28, ITR, 352]. However, to become an assessee
under the Income-tax Act, there must be ‘income-yielding’ joint property of the family.
A HUF may consist of a number of smaller HUFs. A smaller HUF has a legal existence and may be assessable
as a unit distinct from the apex joint family even when the bigger HUF is in place [CIT v. Khanna (1963) 49 ITR
232].
The Supreme Court’s decision in the case of Surjit Lal Chhabra v. CIT (1975 101 ITR 776) has come to stay
as one of the leading case laws. The ratio laid down by the Supreme Court had been applied by the Andhra
Pradesh, Orissa and Madras High Courts, followed by Bombay, Patna, Madhya Pradesh and Delhi High Courts
and relied upon by the Punjab High Court. In the latest case, the Delhi High Court held in Commissioner of
Income-tax v. S.P Chopra (1991, 191 ITR 455) that the income from the half share of the property had to be
treated as the individual income of the assessee under the personal law and not as income of the family. The
character of the property had to be determined in accordance with the personal law of the assessee and not on
the basis of how the property had been treated by the revenue in respect of earlier assessments.
A son conceived or in his mother’s womb is equal in many respects to a son actually in existence, viz., inheritance,
partition, survivorship etc. But this doctrine does not apply to the Income-tax Act. Hence, a son conceived is not
treated a member of the H.U.F. for Income-tax purposes. [IS. Srinivasan v. C.I.T., (1966) 60, ITR, p.36 (S.C.)].
Jain and Sikh undivided families are also treated as Hindu undivided families unless, under special circumstances,
the assessee claims not to be treated as such. If such claim is made, the assessee shall have to prove that
there is some such custom in his family on account of which it cannot be treated as a Hindu undivided family.
A Hindu does not cease to be a Hindu merely because he declared for the purpose of the Special Marriage
Act, 1872, that he does not profess Hindu Religion. Such a Hindu does form an H.U.F. with his children
from such marriage. [CIT v. Partap Chand (1959), 36 ITR, 262]. Similarly, a Muslim family governed by the
Marumakkathayam law constitutes ‘Tarwad’ or ‘Thavazhi’ and falls within the definition of a H.U.F. [V.K.P. Abdul
Kadar Hajiv. Ag. ITO (1967) 66, ITR, 173].
If a Hindu gets converted as a Christian, the family of such a person will not be a HUF. However a Hindu, along
with his son (by a christian wife) who has been brought up as a Hindu will be a HUF. [CWT v. R. Sridharan
(1976) 104, ITR, 436 (S.C.)].
A Hindu Joint Family consists of two types of members:
1. Coparceners: The lineal male descendants of a person up to the third generation of such person are known
as coparceners. The coparceners acquire, on birth, ownership in the ancestral properties of such ascendant
and have a right to claim partition of such property at any time. However, w.e.f. 9.9.2005 due to amendment of
Hindu Succession Act, the daughter of a coparcener shall by birth become a coparcener in her own right in the
same manner as the son. Hence, the daughter can also ask for partition.
2. Other members: Such members include wives of male members of the family and other male members.
Widow or widows of deceased male member or members. [Gowli Buddanna v. C.I.T. (1966) 60, ITR, p. 293
(S.C.)]
However, an unmarried coparcener who receives share on the partition of joint family properties, cannot
form a Hindu undivided family unless he marries. After his marriage, he can hold the property received from
family as joint family property consisting of himself and his wife. [C. Krishna Prasadv. C.I.T. (1974) 97, p.
493 (S.C.)].
The joint property of the HUF is managed through Karta: Property of the family is ordinarily managed by the
father or other senior member for the time being of the family. He is called Karta. However, the senior member
may give up his right of management and a junior member may be appointed as Karta with the consent of all
other members. [Narendra Kumar J. Modi v. CIT (1976) 105, ITR, 109 (S.C.)]. In the absence of a male member
in the family or when all male members are minors, a woman member can be treated as manager of the family
for income-tax purposes. [Smt. Champa Kumari Singhi v. Addl. Member of the Board of Revenue (1962) 46,
ITR, p. 81].
School of Hindu Law: According to Hindu Law, HUFs are governed by two schools viz. Mitakshara and
Dayabhaga. Mitakshara School applies to whole of India except the states of West Bengal and Assam.
Dayabhaga school applies to the States of West Bengal and Assam. The difference between the two schools
is as under:
(i) Foundation: In the Mitakashara School, the foundation of a coparcenary is laid down when a child is
born to the Mitakshara father. Under the Dayabhaga school the foundation of a coparcenary is laid on
the death of the father leaving, as survivors, one or more sons.
(ii) Right to partition: A Mitakshara son, in whom the interest in family property is vested by birth, all along
possesses a right to demand partition. A Dayabhaga son, on the other hand acquires no interest in the
family property by birth and, consequently, has no right to demand partition of the HUF property from
his father.
(iii) Quantum of share: Under Mitakshara Law, each coparcener takes as undefined share in the coparcenary
property. The share of the members decreases by birth in the family and increases upon death of a
coparcener. A Dayabhaga coparcener, on the other hand, always takes a defined share in the property
left by his deceased father. Thus, the heirs of a deceased governed by the Dayabhaga school do not
constitute a HUF automatically on the death of the deceased and cannot be assessed as a HUF unless
they have by mutual consent agreed to form a joint family.
(iv) Gift out of ancestral property: A Mitakshara Karta may make a gift of movable property of the family,
out of love and affection, within reasonable limits. He can also make a gift of immovable properties,
within reasonable limits for pious purposes; i.e., for charitable and religious purposes or to a daughter
in fulfilment of a nuptial promise etc. However, a gift to a stranger is void. On the contrary, a Dayabhaga
father can alienate ancestral property, both movable as well as immovable, by sale, gift, will or otherwise
in the same way as he can dispose of his separate property.
Position under Hindu Succession Act, 1956

This Act came into force on and from 17th June, 1956. It lays down a uniform and comprehensive system of
inheritance and applies to persons governed by the Mitakshara as well as the Dayabhaga Schools, superseding
and abrogating all previous law or customs or usage having the force of law.
360 PP-DTL&P
Under this Act, the heirs of a male Hindu dying intestate on or after 17th June, 1956 are divided into three
classes. Class I heirs get the right to the deceased’s property simultaneously to the exclusion of all other
Classes of heirs. Class II relations succeed only if there is no class I relation and, the heirs in the first entry of
class II being preferred to heirs in the second entry, and so on, but heirs in any one entry taking in equal shares
amongst themselves.
The students should note that Section 4 of the Hindu Succession Act, 1956 clearly lays down that “save as
otherwise expressly provided in the Act, any text, rule or interpretation of Hindu Law or any custom or usage as
part of that law in force immediately before the commencement of the Act shall cease to have effect with respect
to any matter for which provision is made in the Act.” And, Section 8 of the Hindu Succession Act, 1956, lays
down the scheme of succession to the property of a Hindu dying intestate. The schedule classifies the heirs on
which such property shall devolve.
The preferential heirs of class I are as under:
(1) Son (2) Daughter (3) Widow (4) Mother (5) Son/daughter/widow of a predeceased son (6) son/daughter of
a predeceased daughter (7) Son/daughter/ widow of a predeceased son of a predeceased son.
A son’s son is not mentioned as an heir under Class I of the schedule and, therefore, he cannot get any right in
the property of his grandfather under the provision. The right of a son’s son in his grandfather’s property during
the lifetime of his father which existed under the Hindu Law as in force before the Act, is not saved expressly
by the Act and, therefore the earlier interpretation of Hindu Law giving a right by birth in such property ‘ceased
to have effect’.
Therefore, the property which devolves on a Hindu on the death of his father intestate after coming into force of
the Hindu Succession Act, 1956, does not constitute H.U.F. property consisting of his own branch including his
sons. [Shri Vallabhdas Modani v. C.I.T. (1982) 138, ITR, p. 673].
The Allahabad High Court’s decision supra in the case of Shri Vallabhdas Modani v. Commissioner of Income-
tax was followed by the Andhra Pradesh High Court (1983, 144 ITR 18) and later approved by the Supreme
Court in the case of Commissioner of Wealth-Tax v. Chander Sen (1986, 161 ITR 370) holding that it is not
possible to say that when a son inherits the property in the situation contemplated by the Hindu Succession Act,
1956, he takes as Karta of his own undivided family.
COMPUTATION OF INCOME OF THE H.U.F.

Income of the HUF is assessed as joint family income of HUF if there exists a coparcenership and joint property
of the family till partition is claimed by any of its coparceners.
Joint Property of the family consists of:
(i) ancestral property which a man inherits from any of his three immediate male ancestors, namely, father,
grandfather , great grandfather;
(ii) accretion thereto;
(iii) acquisition with joint funds; and
(iv) self-acquired property of any member thrown by him into the common stock to be treated as family
property. In the case of Pushpa Devi v. C.I.T. the Supreme Court has held that a Hindu female, not
being a coparcener, cannot blend her separate property with Joint family property. However, she can
make a gift of her property or sell the property to the family. [(1977) 109, ITR p. 730].
The gross total income of the family for the relevant previous year shall be computed under the relevant heads
(as per the provisions of the Income-tax Act) as it is computed for other assessee’s. Incomes exempt under
section 10 to 13A are exempt and deductions allowable under chapter VIA are to be provided. However, in this
connection the following points are worth noting:
(i) The holder, who is the senior most male member of the family, of a impartible estate is liable to tax on
income from that estate in his individual capacity though the estate belongs to HUF.
(ii) Conversion of self-acquired property into joint family property. Section 64(2) provides that where an
individual being a member of Hindu undivided family transfers his separate property after 31st December,
1969 to the family for the common benefit of the family, otherwise than for adequate consideration, such
property is known as converted property. The income derived from the converted property or any part
thereof shall be included in the total income of the transferor individual and not in the income of the
family.
(iii) If the funds of a Hindu Undivided family are invested in a company or a firm, fees or remuneration
received by the member as a director, or a partner in the company or firm may be treated as income of
the family in case the fees or remuneration is earned essentially as a result of investment of funds. But,
if the fees or remuneration is earned essentially for services rendered by the member in his personal
capacity, the income shall constitute the personal income of the member.
(iv) Where a member of a HUF is a partner in a firm on behalf of the family and on partition of the property
of the family, the share in the firm is allotted to such a member, subsequent to such allotment when the
firm settles its accounts the whole income for that year would be the income of the individual member
and no part of the income would be added to the income of the family. [CIT v. Ashok Bhai Chiman Bhai
(1965) 56, ITR, 42 (S.C.)].
(v) The personal earning, including income from self acquired property of a member of the HUF, even
though he has sons, would not be included in the income of the family. Such income shall be assessed
as income of that individual. [Kalyanji Vithal Das v. CIT (1937) 5 ITR 90 (PC)].
(vi) Any sum paid by an HUF to a member of the family out of its income is not deductible in computing
the income of the family. However, such amount will not be included in the income of such individual
whether the family had paid tax on its income or not [Section 10(2)].
(vii) If any remuneration is paid by the Hindu Undivided family to the karta or any other member for services
rendered by him in conducting family’s business, the remuneration is deductible if remuneration
is (a) paid under a valid and bona fide agreement; (b) in the interest of, and expedient for, the
business of family; and (c) genuine and not excessive. Jugal Kishore Baldeo Sahai v. CIT [1967]
63 ITR 238 (SC).
(viii) If salary is paid by the Hindu undivided family to its karta for looking after its interest in firms in which
it is partner through said karta, such salary is allowable as deduction - CIT v. Prakash Chand Agarwal
[1982] 11 Taxman 55 (MP).
(ix) Income from ‘stridhan’ is not includible in the income of the family. Property derived by a woman from
her father or brother or husband or any other relative either before or after her marriage is known as
‘stridhan’.
(x) Under the Dayabhaga School of law, as stated in a preceding page, no son has any right in the
ancestral property during the lifetime of his father. If, therefore, the father does not have any brother as
a coparcener, income arising from ancestral property is taxable as his individual income.
Partition of a Hindu undivided family [Section 171]

‘Partition’ signifies division of property. In the cases of property capable of physical division, share of each
member is determined by making physical division thereof. It must be noted that a division of income without
physical division of property does not amount to partition. Where, however, the property is not capable of
physical division, partition implies such division as the property may admit.
362 PP-DTL&P
Who is entitled to share on partition

Though only coparceners can demand partition, once the partition takes effect, the following persons are
entitled to a share:
(a) all coparceners;
(b) a son in the womb of his mother at the time of partition;
(c) mother, who gets an equal share if the partition takes place among her sons after the death of her
husband; and
(d) wife, who gets a share equal to that of a son at the time of a partition between father and sons.
Assessment after partition (Section 171)
Section 171 applies to an HUF which is assessed as such. Therefore, if incase a family is not assessed as
a hindu undivided family this section does not apply. A joint family, once assessed as a HUF, continues to be
assessed as such till one or more coparceners claim partition. Such claim must be made by the coparceners
before the assessment of the income of the HUF for the relevant assessment year is completed. On the receipt
of such a claim, the Assessing Officer must make an inquiry after giving due notice to the members and record a
finding whether there has been a partition and, if so, the date of the partition. The income of the family from the
first day of the previous year to the date of partition is assessed as income of the HUF and from the next date
of the partition to the date of close of the previous year, as the individual income of the recipient-members. If
the recipient member forms another HUF along with his wife and son(s), the income of the property which was
subject to partition is chargeable to tax in the hands of the new H.U.F.
A partition of the HUF can be both total and partial
Where the entire joint family property is divided among all coparceners and the family ceases to exist as an
undivided family, the partition is total. A partial partition may be as regards: (a) the persons constituting the joint
family, or (b) the properties belonging to the joint family, or (c) both. In case of partial partition, some coparceners
continue as a joint family or some properties continue as a joint estate as against some coparceners or properties
which separate from HUF. The device of partial partition has been used as a medium for reduction of proper tax
liability. To curb such a practice, the Finance (No. 2) Act, 1980 inserted Sub-section 9 in Section 171 which lays
down that partial partitions of HUFs assessed as such (Union of India vs MV Valliappan 1999 AIR SCW 2689),
effected after 31st December 1978 will not be recognised for tax purposes.
The provisions made by Sub-section (9) in Section 171 are as follows:
(i) In a case where a partial partition of a HUF has taken place after 31.12.1978, no claim of such partition will
be enquired into and the Assessing Officer will not record a finding as to whether there has been a partition of
the family property. Further, any finding regarding partial partition recorded under Section 171(3) will be null and
void and of no legal effect.
(ii) Such family will continue to be assessed as if no such partial partition has taken place, i.e., the property
or source of income will be deemed to continue to belong to the Hindu undivided family and no member
will be deemed to have separated from the family.
(iii) Each member or group of members of such family will be jointly and severally liable for any tax, interest,
penalty, fine or other sum payable under the Act by the family, whether before or after such partition.
The several liability of any member or group of members of such family will be computed according
to the portion of the joint family property allotted to him on such partial partition. This amendment has
come into force with effect from April 1, 1980 and has, accordingly, been applicable with effect from
assessment year 1980-81 and onwards.
TAXATION OF FIRMS
Under Section 2(23) of the Income-tax Act, the terms “firm”, “partner”, and “partnership” have the meanings
respectively assigned to them in the Indian Partnership Act, 1932 and Limited Liability Partnership Act, 2008.
The expression “partner” also includes a minor who has been admitted to the benefits of partnership and a
partner of a Limited Liability Partnership Act 2008. However a minor cannot validly enter into any partnership as
a ‘full partner’ with other persons but he can be admitted to the benefits of partnership only.
A joint Hindu family as such cannot be a partner in a firm. However, through its Karta it may enter into a valid
partnership with a third person or with a member of the undivided family in his individual capacity. In such a
case, the Karta occupies a dual position. On the partnership he functions in his individual capacity; on the
relations to other members of the Hindu undivided family, in his representative capacity.
An incorporated company being a legal person may form a partnership with an individual or with another
company. In considering the maximum number of partners comprising a firm, the company will be considered
as one person only.
A partnership firm as such is not entitled to enter into a partnership with another firm, H.U.F., individual, or a
company. However, its partners in their individual capacity can enter into another partnership.
Scheme of taxation of a firm and its partners Assessment as a Firm [Section 184]
As per the scheme, a partnership firm in the first assessment year shall be assessed as a firm if the following
conditions are satisfied:
1. The partnership is evidenced by an instrument i.e. partnership deed which is to be in writing containing
necessary clauses.
2. The individual shares of the partners as specified in that instrument (including how the loss will be
borne by major partners in case of a minor admitted for benefits only).
3. A copy of the partnership deed certified by all the partners or their duly authorized agents, in writing
(other than the minors) is submitted along with the return of income in respect of which assessment as
a firm is first sought.
Where the return is made after the dissolution of the firm, the copy of the partnership deed should be certified
in writing by all persons (excluding minors) who were partners of the firm immediately before its dissolution and
by the legal representative of any deceased partner.
When a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every
subsequent year if there is no change in the constitution of the firm or in the shares of partners as evidenced by
the partnership deed on the basis of which assessment as a firm was first sought.
Where any such change has taken place in the previous year, the firm shall furnish a certified copy of the revised
instrument of partnership along with the return of income for the assessment year relevant to such previous
year. In doing so all the provisions of Section 184 will apply to the firm. Further, any change in remuneration or
interest to partners is to be notified in the same manner to comply with section 40(b).
Circumstances where the firm will be assessed as a firm but shall not be eligible for deduction on account of
interest, salary, bonus, etc.
Where the firm -
(a) fails to make the return required under Section 139(1) and has not made a return or revised return
under Section 139(4) or 139(5), or
(b) fails to comply with all the terms of a notice issued under Section 142(1) or fails to comply with a
direction issued under Section 142(2A), or
364 PP-DTL&P
(c) having made a return, fails to comply with all the terms of a notice issued underSection143(2),
(d) does not comply with three conditions mentioned above u/s 184.
then the firm shall not be eligible for any deduction on account of interest to a partner and remuneration to a
working partner although the same is mentioned in the partnership deed.
Computation of income and tax thereon of firm

The income of the firm shall be computed as per the normal provisions of the Act under various heads of income
excluding incomes exempt from tax and deductions under section 80 as applicable.
Rate of Tax
In the case of a firm which is assessable as such (i.e. as a firm), tax is chargeable on its total income at the rate
of 30%.
Surcharge @12% shall be applicable where the total income exceeds Rs. 1 crore. Health and Education cess
shall be added as 4% of tax plus surcharge. However, firm and LLP is subject to alternate minimum tax under
section 115JC (as discussed in introduction part above).
Partnership is not a separate entity distinct from the partners, but for tax purposes a partnership is taxed as
a separate entity and therefore total income will be computed under various heads of income. A partnership
firm is also entitled for deductions under section 30 to 38 for expenditures incurred. However, for payment of
remuneration to partners and interest on capital are allowed subject to conditions laid down under section 40(b).
Section 40(b), contain the following conditions which need to be complied with while making payment of
remuneration and interest on borrowed capital to the partners:
(i) Payment of salary, bonus, commission or remuneration by whatever name called to a non-working
partner shall not be allowed as deduction. Such payments are allowed only to working partners if it is
authorised by the partnership deed and are in accordance with partnership deed. Also, such payments
should pertain to the period after the partnership deed.
(ii) Interest payable to a partner, authorised by the partnership deed for period after the partnership deed
shall be allowable as deduction subject to a maximum of 12% p.a. If the partnership deed provides for
interest at less than 12% p.a, the deduction of interest shall be allowed to the extent provided by the
partnership deed.
(iii) the payment of remuneration to working partner, although authorised by partnership deed however it is
subject to maximum of the following limits.
Finance Act, 2009 provides for uniform limits for both professional firms and nonprofessional firms:
I. On the first Rs. 3,00,000 of the book-profit or in case Rs. 1,50,000 or 90% of the book-profit, whichever is
of a loss more.
II. On the balance of the book-profit 60% of the book profits.
Meaning of Book Profit [Explanation 3 to section 40(b)]

Book-profit” means the net profit, as shown in the profit and loss account and make the additions and deductions
as per section 28 to 44DB explained under the head income from Business and Profession increased by the
aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been
deducted while computing the net profit. Interest paid/payable to partners in excess of 12% shall also be
disallowed as per section 40(b).
Change in Constitution of a Firm [Section 187]

Where at the time of making an assessment under Section 143 or Section 144 of the Act it is found that a
change has occurred in the constitution of a firm, the assessment will be made on the firm as constituted at the
time of making the assessment.
For the purposes of this section there is a change in the constitution of a firm if:
(a) one or more of the partners cease to be partners or one or more new partners are admitted, in such
circumstances that one or more of the persons who were partners of the firm before the change continue
as partner or partners after the change (this clause, however, shall not apply to a case where the firm
is dissolved on the death of any of its partners) or
(b) where all the partners continue with a change in their respective shares or in the shares of some of
them. Losses of Registered Firms [Section 75]
Where the assessee is a firm, any loss in relation to the assessment year commencing on or before the 1st day
of April, 1992, which could not be set off against any other income of the firm and which had been apportioned
to a partner of the firm but could not be set off by such partner prior to the assessment year commencing on
the 1st day of April, 1993, then, such loss shall be allowed to be set off against the income of the firm subject to
the condition that the partner continues in the said firm and to be carried forward for set off under sections 70,
71, 72, 73, 74 and 74A.
Carry forward and set off of losses in case of change in constitution of firm or on succession
[Section 78(1)]
Where a change has occurred in the constitution of a firm on account of death or retirement, the firm is not
entitled to carry forward and set off so much of the loss as is proportionate to the share of a deceased or retired
partner in the firm in respect of the previous year.
Method of computation of amount not to be allowed to be set off and carried forward
Step 1: In the year of change first ascertain the share of outgoing partner in the profit or loss of the firm.
Step 2: Compute share of loss of the outgoing partner for each of the preceding years from which the loss is
carried forward.
Step 3: Amount not allowed to be set off and carried forward:
(i) Sum of [Amounts computed in Steps (1) and (2) where there is loss in the year of change].
(ii) Difference of [Amounts computed in Steps (1) and (2) in case of profit in the year of change].
Carry forward of unabsorbed depreciation

Unabsorbed depreciation and unabsorbed capital expenditure on scientific research can be carried forward by
the reconstituted firm (without deducting share of the outgoing partner) as these are not covered under section
78.
Assessment of Partners
As per Section 10(2A) of the Act, any person who is a partner of a firm which is assessed as such, his share in
the total income of the firm will not be included in computing his total income. Partner includes a minor admitted
to the benefits of partnership as per Section 2(23) of the Act.
Further, the explanation to Sub-clause (2A) provides that the share of a partner in the total income of the firm
assessed as a firm shall be an amount which bears to the total income of the firm the same proportion as the
amount of his share in the profits of the firm (in accordance with the partnership deed) bears to such profits.
366 PP-DTL&P
In terms of a formula, the amount exempt would be:

Partners share in the profit of the firm =as shown in the partnership deed Total Profits of the Firm x Total income
of the firm
Any interest, salary, bonus, commission or remuneration by whatever name called which is due to or received
by a partner of a firm from the firm will be chargeable to tax in the hands of the partner (to the extent allowed
as deduction to the firm) under the head “profits and gains of business or profession”. However, if such salary,
interest, bonus, commission or remuneration (or any part thereof) has not been allowed as deduction as per
Section 40(b) in the hands of the firm, the amount not allowed as deduction shall not be charged to tax in the
hands of partners.
Further, deductions under Sections 32 to 37 can be claimed by a partner from any income where any expenditure
was incurred to earn such income.
Succession of one firm by another firm [Section 188]

When all the partners in the predecessor firm are replaced by new partners in the successor firm, it is known
as succession of one firm by another firm. If a firm is dissolved and some of the partners take over the firm’s
business or carry on a similar business with or without new partners, it would be a case of succession by a new
firm (62 I.T.R. 75).
In CITv. K.H. Chambers (1965) 55 ITR 674, the Supreme Court laid down the following requisites of succession:
(i) There is a change of ownership.
(ii) The whole business is transferred.
(iii) Substantially the identity and the continuity of the business are preserved.
Where the partnership deed does not provide specifically for continuance of the firm on the death of a partner,
there would be no change in constitution of the firm but it would be a case of succession. [Addl. CIT v.
Thyagasundara Mudaliar (1981) 127 ITR 520].
Where a firm is succeeded by another firm, separate assessments are made on the predecessor and successor
firms respectively in accordance with the provisions of Section 170. Section 170 provides that the predecessor
shall be assessed in respect of the income of the previous year in which the succession took place up to
the date of succession and the successor shall be assessed in respect of the income of the previous year
after the date of succession. If the predecessor cannot be found, or the tax assessed on the predecessor
cannot be recovered from him for the previous year (in which the succession took place) and the previous year
immediately preceding such previous year, the unrealised tax payable by the predecessor shall be recovered
from the successor.
However, the successor firm is entitled to recover from the predecessor firm any tax paid by it on behalf of the
former. If any tax is due against any partner of the predecessor firm, it cannot be recovered from the successor
firm.
Joint and several liability of partners for tax payable by firm [Section 188A]
Section 188A provides that every person who was, during the previous year, a partner of a firm, and the legal
representative of any such person who is deceased, shall be jointly and severally liable along with the firm for
the amount of tax, penalty or other sum payable by the firm for the assessment year to which such previous year
is relevant, and all the provisions of Income-tax Act, so far as may be, shall apply to the assessment of such tax
or imposition or levy of such penalty or other sum.
Firm Dissolved or Business Discontinued [Section 189]

Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the
assessment of the total income of the firm shall be made as if no such discontinuance or dissolution had taken
place and all the provisions of the Act, including the provisions relating to penalty or any other sum (interest,
fine) chargeable under the Act, shall apply. Consequently, every person who was a partner of the firm at the
time of discontinuance of business or dissolution of the firm and legal representative of the deceased partner
shall be jointly and severally liable to the amount of tax penalty and any other sum. Where the dissolution
or discontinuance of business takes place after any proceedings in respect of an assessment year have
commenced, the proceedings may be continued against the partners or legal representative of a deceased
partner from the stage at which the proceedings stood at the time of such dissolution or discontinuance.
Thus, every partner of the firm and the legal representative of the deceased partner is liable to pay the tax
which is already due or may have become due after the dissolution, irrespective of his interest in the firm.
However, if there was any irrecoverable amount at the time of dissolution or discontinuance of business and
later on it was recovered by the partners, the partners shall personally pay the tax on their share so recovered.
Taxation of Association of Persons /Body of Individuals

‘Association of persons’ has not been defined in the Income-tax Act. However in the case of CIT v. Indira
Balkrishna [(1960) 39 ITR 546] the Supreme Court has defined it as:
“Association of persons” means an association in which two or more persons join in for a common purpose or
common action to produce income, profits or gains.
An association of persons may consist of non-individuals (Companies, firms joint families) [Ipoth v. CIT (1968)
67 ITR 106 (S.C.)]. A minor can join an AOP if his lawful guardian gives his consent. [Murugesan & Bros. v. CIT
(1973) 88 ITR 432 (SC)].
Applying the ratio laid down by the Supreme Court in the case of G Murugesan and Bros. v. Commissioner of
Income-tax (1973, 88 ITR 432), the Kerala High Court held in the case of Commissioner of Income-tax v. Goel
C. Dalal and Perin C. Dalal (1990, 184 ITR 248) that in order to acquire the status of an association of persons,
the persons must join in a common purpose or action and the object of the association must be to produce
income. It is not enough that the persons receive the income jointly.
For the formation of an AOP, the association need not necessarily be on the basis of a contract, consent and
understanding may be presumed [Shanmugham & Co. v. CIT(1971) 81 ITR 310 (S.C.)].
Applying the ratio laid down by the Supreme Court in the case of N.V. Shanmugham & Co. v. Commissioner
of Income-tax (1971, 81 ITR 310) the Calcutta High Court held in the case of Gopal Chand Sen v. Income-tax
Officer and others (1977, 109 ITR 820) that an assessment of business income has to be done in the hands of
receivers and in such an assessment, the receivers are never assessed as independent earners of income. The
income in the hands of the receiver is assessable in the like manner and to the same extent as it would have
been assessed on the real owners.
However, co-owners, co-heirs or co-legatees do not constitute an AOP in respect of the income of the joint or
common asset by reason only of their jural relationship. But if they write themselves with the objective of earning
income they constitute an AOP for assessment purposes. [Estate of MohamedRowtherv. CIT (1963, 49 ITR
39)]. Section 26 of the Income-tax Act provides that where property consisting of building or buildings and lands
appurtenant thereto is owned by two or more persons in definite and ascertainable shares, such persons shall
not, in respect of such property be assessed as an AOP, but on their respective share of income therefrom.
In order to constitute an association of persons, there must be joining together in a common purpose or in a
common action, the object of which is to produce income, profits and gains. Though a body of individuals is not
identical with an association of persons, they have some similarities. An association of persons may consist of
368 PP-DTL&P
non-individuals also but a body of individuals has to consist only of human beings. The word ‘body’ would require
an association for some common purpose or for a common cause or there must be unity under some common
tie or occupation. A mere collection of individuals without a common tie or common aid cannot be taken to be
a body of individuals failing under Section 2(31) of the Income-tax Act, 1961. [See CITv. Deghamwala Estates
(1980, 121 ITR 684)].
Tax Liability of Association of Persons /Body of Individuals

With effect from assessment year 1989-90, the following provisions are applicable to assessees other than
companies, co-operative societies and societies registered under the Societies Registration Act, 1860 or any
law corresponding to that Act in force in any part of India.
(1) Interest paid by the AOP to a member will not be allowed as deduction from the income of the AOP
[(Section 40(ba)]. In cases where interest is paid by the AOP to any member, who has also paid interest
to the AOP, the amount of interest, that will be disallowed, is the amount of interest paid by the AOP
to the member less the amount of interest paid to the AOP by the member [(Explanation 1 to section
40(ba)].
(2) In cases where an individual is a member of an AOP in a representative capacity, any interest paid by
the AOP to such individual or by such individual to the AOP, otherwise than in a representative capacity
will not be subject to disallowance under explanation 2(i) to Section 40(ba).
(3) In the cases of interest paid by AOP to such individual or by such individual to the AOP in a representative
capacity any interest paid by the AOP to the person represented by such person or vice versa, will not
be allowed under Section 40(ba) [Explanation 2(ii) to Section 40(ba)].
(4) Explanation 3 to Section 40(ba) further provides that where an individual is a member of the AOP
otherwise than as member in a representative capacity, any interest paid by the AOP to such individual
will not be disallowed if the interest is received by him on behalf of any other person.
(5) Any salary, bonus, commission or remuneration (by whatever name called) paid by the AOP to a
member will not be allowed as a deduction.
Section 167B makes the following provisions as regards the incidence of charge of tax on the association of
persons.
A. Where shares of members are determinate

In this case, tax is chargeable on the income of the association of persons at the same rate as applicable to an
individual. However, where the total income of any member of the association of persons for the previous year
(excluding his share of income from the association of persons) exceeds the maximum amount not chargeable
to tax in the case of an individual, tax will be charged on the total income of the AOP at the maximum marginal
rate of 30%, i.e. the highest slab applicable to an individual.
More so, where the total income of any member of the AOP, irrespective of whether or not it exceeds the
maximum amount not chargeable to tax in the case of an individual, is chargeable to tax at a rate higher than
the maximum marginal rate (e.g. foreign company), tax will be charged on the total income of the AOP at such
higher rate for that portion of the income of AOP which relates to the share of such member and the balance of
income at a maximum marginal rate of tax.
Note: 1. Some incomes are taxable at special rates.
2. Provisions of alternate minimum tax under section 115JC to 115JF shall apply.
B. Where the shares of the members are indeterminate

In this case, tax will be charged on the total income of the AOP at the maximum marginal rate, that is, the rate of
tax as well as surcharge, if any, applicable to the highest slab of income in the case of an individual as specified
in the Finance Act of the relevant year. However, if income of any member of AOP is chargeable to tax at a rate
higher than maximum marginal rate, then the rate of tax for the entire income of AOP shall be such higher rate.
The individual shares of the members in the whole or any part of the income of the AOP will be deemed to be
indeterminate or unknown if such shares are indeterminate or unknown on the date of formation of the AOP, or
at any time thereafter.
Method of Computing Share of a Member of Association of Persons / Body of Individuals

[Section 67A]
Section 67A seeks to provide for the method of computing a member’s share in the income of an association of
persons or a body of individuals, wherein the shares of the members are determinate, in the same manner as
provided for in Sub-sections (1) to (3) of Section 67 for computing a partner’s share in a firm.
This section lays down the following methods of computing the member’s share:
(a) Any interest, salary, bonus, commission or remuneration, by whatever name called, paid to any member
in respect of the previous year shall be deducted from the total income of the association or body and
the balance ascertained and apportioned among the members in the proportion in which they are
entitled to share the income of the association or body.
(b) Where the amount apportioned to a member under (a) hereinabove is a profit, any interest, salary,
bonus, commission or remuneration paid to the member by the AOP in respect of the previous year
shall be added to that amount - the result shall constitute the member’s share in the income of the
association or body.
(c) Where the amount apportioned to a member under (a) is a loss, any interest, salary, bonus, commission
or remuneration aforesaid paid to the member by the association or body in respect of the previous year
shall be adjusted against that amount, the result shall be adjusted against that amount, and the result
shall be treated as the member’s share in the income of the association or body.
Notes:
1. The share of each member of AOP/BOI shall be apportioned under the various heads of income as is
determined while computing the income of the AOP/BOI.
2. Deductions under section 80 to the extent allowed to AOP/BOI shall not be allowed to the members.
Taxation of share of income of a member of AOP/BOI

Section 86 relates to shares of members of an association of persons or a body of individuals in the income of
the association or body. This section provides that if the assessee is a member of an association of persons or a
body of individuals (other than a company or a Co-operative society or a Society registered under the Societies
Registration Act, 1860, or any law corresponding to that Act in force in any part of India), his share in the income
of the association or body, computed in the manner provided in Section 67A shall not be liable to tax.
Further
The taxability of share of income of a member of AOP/BOI depends on the rate at which income of such AOP/
BOI is taxable:
1. Where AOP/BOI is chargeable to tax on its total income at the maximum marginal rate or any higher
rate, the share of the member shall not be included in his total income.
370 PP-DTL&P
2. Where AOP/BOI is chargeable to tax on its total income at the rate applicable to individuals (normal
rate) and tax is paid, share of income of a member shall be chargeable to tax as part of his total income
and rebate under section 86 shall be claimed.
3. Where AOP/BOI is chargeable to tax on its total income at the rate applicable to individuals (normal
rate) and no tax is chargeable, share of income of a member shall be chargeable to tax as part of his
total income and no rebate under section 86 shall be claimed.
Assessment in case of Dissolution of an Association of Persons [Section 177]

Where any business or profession carried on by an AOP has been discontinued or an AOP is dissolved, the
Assessing Officer shall make an assessment of the total income of the AOP as if no such discontinuance or
dissolution had taken place, and all provisions of this Act, including the provisions relating to the levy of penalty
or any other sum chargeable under any provisions of the Income-tax Act shall apply.
Every person who was at the time of such discontinuance or dissolution a member of the AOP and the legal
representative of any such person who is deceased, shall jointly and severally be liable for the amount of tax,
penalty or other sum payable.
Where such discontinuance or dissolution takes place after any proceeding in respect of an assessment
year have commenced, the proceedings may be continued against the members from the stage at which the
proceedings stood at the time of such discontinuance or dissolution.
TAXATION OF CO-OPERATIVE SOCIETIES
Meaning [Section 2(10)]

‘Co-operative Society’ means a co-operative society registered under the Co-operative Societies Act, 1912, or
under any other law for the time being in force in any state for the registration of co-operative societies. The
Income of the co-operative society is computed in the same manner as provided for other assesses. A co-
operative society is entitled to the deductions from its gross total income u/s 80G, 80GGA, 80GGC, 80IA, 80-IB,
80JJA and 80P.
A regional rural bank (to which provisions of the Regional Rural Bank Act, 1976, apply) is deemed to be a
cooperative society [Circular No. 319 dated 11.1.1982].
Computation of Income of Co-operative Societies

The income of a co-operative society is computed in the same manner as provided for other assessee’s under
the Act.
The provisions under various heads of income, clubbing of incomes, set off and brought forward losses,
deductions under section 80 shall apply.
Further, the subsidy given by the government to a co-operative society for meeting managerial expenses and
admission fee collected by the society is treated as revenue receipt and liable to tax. [Ludhiana Central Co-operative
Consumers’ Stores Ltd. v. C.I.T (1980) 122, I.T.R. 942]. There is, however difference of opinion with regard to tax
treatment of ‘subsidy’ received from the Government. Distinguishing the ratio laid down by the Punjab & Haryana
High Court in the case of Ludhiana Central Cooperative Consumers’ Stores Ltd. v. Commissioner of Income-tax
(1980, 122 ITR 942), the Punjab & Haryana High Court held in the case of Commissioner of Income-tax v. Jindal
Brothers Rice Mills (1989, 179 ITR 470) that depreciation is allowable on the cost of the machinery or plant reduced
by the amount of the subsidy as actual cost stands reduced by the percentage allowed by the subsidy. Though this
case was followed by it in the case of Commissioner of Income-tax v. Janak Steel Tubes (Pvt.) Ltd. (1989, 179 ITR
536) (the capital subsidy should be deducted from the value of plant and machinery) but had been dissented from by
the Bombay, Madras and Rajasthan High Courts in the following cases:
(i) Srinivas Industries v. Commissioner of Income-tax (1991, 188 ITR 22): The Madras High Court held that
the subsidy really partook the character of cash grant expendable for any purpose-consequently, the
amount of subsidy granted could not be deducted from the capital cost of the machinery.
(ii) In Commissioner of Income-tax v. Elys Plastics Pvt. Ltd. (1991, 188 ITR 11) the Bombay High Court
held that the subsidies were not deductible in computing the cost of plant and machinery for purposes
of allowing depreciation.
(iii) In Commissioner of Income-tax v. Ambica Electrolytic Capacitors (P) Ltd. and others (1991, 191 ITR
494) the Rajasthan High Court held that the subsidy or investment subsidy given by the Government
cannot be deducted from the actual cost for purposes of investment or depreciation allowance.
Rates of Income-tax
The rates of income-tax applicable to a co-operative society for the assessment year 2020-21 are as follows:
1. Where the total income does not exceed Rs. 10,000 10% of total income
2. Where the total income exceeds Rs. 10,000 but total Rs. 1,000 plus 20% of the amount
income does not exceeds Rs. 20,000. by which income exceeds Rs.
10,000
3. Where the total income exceeds Rs. 20,000 Rs. 3,000 plus 30% of the amount
by which income exceeds Rs.
20,000
Health and Education cess @ 4%.
Surcharge @12% shall be applicable where the total income exceeds Rs. 1 crore
Note: 1. Some incomes are taxable at special rates.
2. Provisions of alternate minimum tax under section 115JC to 115JF shall apply.
Deduction in respect of income of co-operative societies [Section 80P]

Section 80P provides for certain deductions from the gross total income of a Co-operative Society. These
deductions are:
(a) In the case of Co-operative Society engaged in:
(i) the business of Banking or providing credit facilities to its members, or
(ii) a cottage industry, or
(iii) the marketing of the agricultural produce grown by its members, or
(iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture
for purpose of supplying them to its members, or
(v) the processing, without the aid of power, of the agricultural produce of its members, or
(vi) the collective disposal of the labour of its members, or
(vii) fishing or allied activities, i.e., catching, curing, processing, preserving, storing or marketing of fish
or the purchase of materials and equipment in connection therewith for the purpose of supplying
them to its members,
the whole of the amount of profits and gains of business attributable to any one or more of such
372 PP-DTL&P
activities shall be deducted from the gross total income provided that in the case of a co-operative
society falling under Subclause (vi) or (vii), the rules and bye-laws of the society restrict the voting rights
to the following classes of its members:
(i) the individuals who contribute their labour or carry on the fishing or allied activities;
(ii) the co-operative credit societies which provide financial assistance to the society;
(iii) the State Government.
(b) In the case of primary co-operative society engaged in supplying milk, oilseeds, fruits, vegetables
raised or grown by its members to
(i) a federal co-operative society engaged in supplying the above mentioned products; or
(ii) a Government or a local authority; or
(iii) a Government Company or a Corporation established by or under a Central, State or a Provincial
Act (being a company or corporation engaged in supplying the above mentioned products to the
public).
the whole of the amount of profits and gains of such business shall be deducted from the gross total
income.
In the case of a co-operative society engaged in activities other than those specified in clauses (a) or
(b) either independently of, or in addition to, profits and gains attributable to the activities mentioned at
clauses (a) and (b) deduction from the gross total income will be allowed to the extent of’ 50,000 w.e.f.
assessment year 1999-2000.
(c) Where such co-operative society is a Consumers’ Co-operative Society, the deduction shall be ‘
1,00,000 w.e.f. assessment year 1999-2000.
(d) In the case of every co-operative society, the whole of the income by way of interest or dividends
derived from its investments with any other co-operative society shall be deducted from the gross total
income.
(e) In the case of every co-operative society, the whole of the income derived by the society from the letting
of godowns or warehouses for storage, processing or facilitating the marketing of commodities shall be
deducted from its gross total income.
(f) In the case of every co-operative society, not being a housing society or an urban consumers’ society, or
a society carrying on transport business or a society engaged in the performance of any manufacturing
operations with the aid of power, where the gross total income does not exceed ‘ 20,000 the amount of
any income by way of interest on securities or any income from house property shall be deducted from
the gross total income.
Urban Consumers’ Co-operative Society

An urban consumers’ co-operative society means a society for the benefit of consumers, within the limits of a
municipal corporation, municipality, notified areas committee, town area or, cantonment [Explanation to Section
80P(2)].
The provisions of this Section shall not apply in relation to any cooperative bank other than a primary agricultural
credit society or a primary cooperative agricultural and rural development bank.
Other points
• Amount received for letting of godowns, incidental services of taking delivery of stock at rail-head and
transporting it to godowns were also rendered and amount received was described as ‘commission’
was wholly exemption I.T. v. South Arcot District Co-operative Marketing Society Ltd. (1989) 43 Taxman
328/176 ITR 117 (SC).
• Income from ginning and pressing of cotton is exempt. Broach Distt. Co-operative Cotton Sales, Ginning
& Pressing Society Ltd. v. CIT (1989) 177 ITR 418/44 Taxman 439 (SC).
• Where assessee, an apex co-operative society, derived (i) interest on cash security furnished by it for
carrying on sugar agency business, and (ii) interest on temporary loans given by it for financing sugar
business, while former interest was not exempt, latter was exempt under Section 14(3)(iii) of the 1922
Act, CIT v. U.P. Cooperative Federation Ltd. (1989) 176 ITR 435/43 Taxman 20 (SC).
• Amount of subsidy received by assessee from National Co-operative Development Corpn. towards loss
incurred on account of price fluctuation qualifies for deduction under Section 81 (1)(c) - CIT v. Punjab
State Co-operative Supply & Marketing Federation Ltd. (1989) 46 Taxman 156 (Punj. & Har.).
• Proportionate expenditure relating to such business activities of assessee co-operative society as are
contemplated by Section 80P(2) is not to be disallowed. Baghapurana Co-operative Marketing Society
Ltd. v. CIT (1989) 178 ITR, 653/44 Taxman 92 (Punj. & Har.).
• In the cases of agricultural produce, the agricultural produce marketed by assessee co-operative
society need not have been produced by assessee’s members - CIT v. Punjab State Co-operative
Supply & Marketing Federation Ltd. (1989) 46 Taxman 156 (Punj. & Har.).
• The expression ‘the marketing of the agricultural produce of its members means that agricultural produce
should be owned by its members, whether supplied by them (that is, the members) or purchased
from the market or acquired from any other producer. C.I.T. v. Haryana State Co-operative Supply &
Marketing Federation Ltd. (1989) 79 CTR (Punj. & Har.) 94.
• Short-term call deposits are investment within the meaning of Section 80P(2)(d) CIT v. Haryana Co-
operative Sugar Mills Ltd. (1989) 46 Taxman 28 (Punj. & Har.).
Assessment of Co-operative Societies

The following are the provisions which are specifically applicable to the assessment of Co-operative Societies -
I. Co-operative Housing Society. Under Section 27(iii), a member of co-operative society, company or other
association of persons to whom a building or part thereof is allotted or leased under a house building scheme
of the society, company or association, as the case may be, shall be deemed to be owner of that building or
part thereof.
Clause (iiia) further provides that a person who is allowed to take or retain possession of any building or part
thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act,
1882 shall be deemed to be the owner of that building or part thereof; and
As per Clause (iiib), a person who acquires any rights (excluding any rights by way of a lease from month to
month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of
any such transaction as is referred to in Clause (f) of Section 269UA, shall be deemed to be the owner of that
building or part thereof.
Clause (f) of Section 269UA, it may be noted, defines “transfer” for the purposes of Chapter XX-C of the Income-
tax Act, dealing with purchase by Central Government of immovable properties in certain cases of transfer.
II. Profits and Gains of Co-operative Society from insurance business [Section 44]. The profits and gains of any
business of insurance carried on by a Co-operative Society shall be computed in accordance with the rules
contained in the First Schedule.
374 PP-DTL&P
In this connection, the First Schedule and Rule 6E of the Income-tax Rules, 1962 provides as under:
The profits of non-life insurance business, e.g., Fire insurance business, marine insurance business, general
insurance business etc. shall be the profits disclosed by the annual accounts required to be prepared under the
Insurance Act, 1938 subject to the following adjustments:
(i) If such profits are arrived at after deducting any expenditure or allowance which is not admissible under
Sections 30 to 43B of the Income-tax Act, such expenditure or allowance shall be added back to the
profits.
(ii) The reserve for unexpired risks shall be allowed as a deduction to the following extent:
(a) where the insurance business relates to fire insurance or miscellaneous insurance - 50% of the
net premium income of such business of the previous year;
(b) where the insurance business relates to marine insurance, 100% of the net premium income of
such business of the previous year.
‘Net premium income’ means the amount of premium received, as reduced by the amount of re-insurance
premiums paid during the relevant previous year.
TAX EXEMPTIONS TO POLITICAL PARTIES (SECTION 13A)

‘Political party’ means an association or body of individual citizens of India registered with the Election
Commission of India as a political party and includes a political party deemed to be registered with that Election
Commission of India.
Political parties are liable to pay tax on their income and they are assessed as ‘An association of persons’.
However, the income derived by these parties as income by way of voluntary contributions, Income from House
Property; and Income from Other Sources or Capital Gains are exempt from subject to the following conditions:
(i) the party keeps and maintains such books of account and other documents as would enable the
Assessing Officer to properly deduce the income;
(ii) in respect of each such voluntary contribution in excess of’ 20,000, the party keeps and maintains a
record of the contributions and names and addresses of the persons who have made such contribution;
and
(iii) the accounts of the party are audited by a Chartered Accountant or other qualified accountant.
(iv) No donation of Rs. 2000 or more can be received by a Political Party otherwise than by an account
payee cheque/draft/ECS through a bank account or through electoral bonds. (w.e.f. AY 2018-19)
Return of income under section 139(4B) should be filed by the Political Party on or before due date of filing of
return u/s 139(1), otherwise exemption under section 13A will not be given. (w.e.f. AY 2018-19)
The Chief Executive Officer of the political party is required to file a return of income if the total income (computed
under this Act without giving effect to the provisions of Section 13A) exceeds the maximum amount which is not
chargeable to income-tax. In this connection, the provisions of Section 139(1) shall apply.
ELECTORAL TRUST
‘Electoral Trust’ means a trust so approved by the Board in accordance with the scheme made in this regard by
the Central Government
Voluntary contributions received by an Electoral Trust (Section 13B)

Any voluntary contributions received by an electoral trust shall not be included in the total income of the previous
year of such electoral trust, if -
(a) such electoral trust distributes to any political party, registered under section 29A of the Representation
of the People Act, 1951, during the said previous year, ninety-five per cent of the aggregate donations
received by it during the said previous year along with the surplus, if any brought forward from any
earlier previous year; and
(b) such electoral trust functions in accordance with the rules made by the Central Government.
TAX EXEMPTIONS FOR CHARITABLE TRUSTS AND INSTITUTIONS

Trust: Section 3 of the Indian Trusts Act defines a trust to mean “an obligation annexed to the ownership of
property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by
him for the benefit of another and the owner”.
Institution: An organisation with a constitution composed of a President, Vice-President, Secretary, Committee
Members and ordinary members, is known as an Institution. The activities of the institution and its office-holders
are regulated by rules and bye-laws of the institution. A university or a Chamber of Commerce is an Institution.
Charitable purpose: The term ‘charitable purpose’ has been defined in this Act in a wider sense than what
is commonly understood. According to Section 2(15) of the Act, it includes relief of the poor, education, yoga
medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of
monuments or places or objects of artistic or historic interest and advancement of any other object of general
public utility not involving the carrying on of any activity for profit.
In order to qualify for tax exemptions the charity must be of a public character, and the trust or institution
should not be created or established for the benefit of any particular religious community or caste, if the trust or
institution is established for the benefit of the member of a club or employees of a factory, it would not be a public
charitable trust. Vide Circular No. 395 dated Sept. 24, 1984 promotion of sports and games is considered to
be a charitable purpose within the meaning of Section 2(15). Accordingly an association or institution, engaged
in the promotion of sports or games can claim exemption under Section 11, even if it is not approved under
Section 10(23).
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it
involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering
any service in relation to any trade, commerce or business, for a cess or fee or any other consideration,
irrespective of the nature of use or application, or retention, of the income from such activity, unless -
(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object
of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty
per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that
previous year;
Income not to be included in the Total Income

According to Section 11(1), the following items of income are not to be included in the total income of the
previous year of the assessee who is in receipt of the same:
(i) Income derived from property held under trust wholly for charitable or religious purposes: Income derived
from property held under trust wholly for charitable or religious purposes shall be exempt to the extent
to which such income is applied for such purposes in India and where any such income is accumulated
or set apart for application to such purposes in India, to the extent to which the income so accumulated
or set apart is not in excess of 15% of the income from such property.
(ii) Income derived from property held under trust in part only for charitable or religious purposes: Income
376 PP-DTL&P
derived from property held under trust in part only for charitable or religious purposes shall be exempt.
This exemption would, however, be available only for trusts created before 1.4.1962. Further, where
any such income is finally set apart for application to such purposes in India, shall be exempt to the
extent to which the income so set apart is not in excess of 15% of the income from such property.
(iii) Income from property held under trust created on or after 1.4.1952: for a charitable purpose which
tends to promote international welfare in which India is interested shall be exempt to the extent to which
such income is applied for such charitable purposes outside India.
(iv) Income from property held under trust created before 1.4.1952 for charitable or religious purposes
shall be exempt to the extent to which such income is applied for such purposes outside India. This
exemption is, however, subject to the condition that the Central Board of Direct Taxes has, by a general
or special order, issued a direction in either of the above two cases that the income in question would
not be included in the total income of the person in receipt of such income.
(v) Income in the form of voluntary contributions made with a specific direction that they shall form part
of the corpus of the trust or institution shall be fully exempt.
Explanation
In respect of items (i) and (ii) above:
(1) In computing the 15% of the income which may be accumulated or set apart, any such voluntary
contributions as are referred to in Section 12 (dealt with later in this Chapter) shall be deemed to be
part of the income.
(2) If, in the previous year, the income applied to charitable or religious purposes in India falls short of 85%
of the income derived during that year from property held under trust, by any amount on account of (i)
not receiving the income during that year, or (ii) for any other reason, then:
(a) In case referred to in (i), so much of the income applied to such purpose in India during the
previous year in which the income is received or during the previous year immediately following
as does not exceed the said amount shall be deemed to be income applied to such purposes
during the previous year in which the income was derived; and the income so deemed to have
been applied shall not be taken into account in calculating the amount of income applied to such
purposes during the previous year in which the income is received or during the previous year
immediately following, as the case may be.
(b) In case referred to in (ii), so much of the income applied to such purposes in India during the
previous year immediately following the previous year in which the income was derived as
does not exceed the said amount shall be deemed to be income applied to such purposes
during the previous year in which the income was derived; and the income so deemed to have
been applied shall not be taken into account in calculating the amount of income applied to
such purposes during the previous year immediately following the previous year in which the
income was derived.
Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1,
to any other trust or institution registered under section 12AA, being contribution with a specific direction
that they shall form part of the corpus of the trust or institution, shall not be treated as application of
income for charitable or religious purposes. (w.e.f. AY 2018-19)
Where any income as discussed in (a) and (b) above is not applied to charitable or religious purposes
in India within the prescribed time, then such income shall be deemed to be the income of the person
in receipt thereof:
(a) In case of not receiving the income: Such income shall be deemed to be the income of the
previous year immediately following the previous year in which the income was received.
(b) In any other case: Such income shall be deemed to be the income of the previous year immediately
following the previous year in which the income was derived [Clause (1B)].
(3) For the purpose of computation of amount applied in clause a) and b) of explanation 2 above the
provisions of section 40(a)(ia) and 40A(3) and 40A(3A) shall apply in the same manner as they apply
as in case of computation of PGBP income. (w.e.f. AY 2020-21)
Capital Gains [Section 11(1A)]
Asset held wholly for religious purposes or charitable purposes

Sometimes a capital asset held under trust wholly for charitable or religious purposes is transferred resulting
in a capital gain. The net consideration received on such transfer may be utilised wholly or in part in acquiring
another capital asset to be so held wholly for religious or charitable purposes. In such cases the capital gains
arising from the transfer shall be deemed to have been applied for charitable or religious purposes to the extent
stated herein below:
(i) Where the whole of the net consideration is utilised for acquiring the new capital assets, so much of the
capital gains.
(ii) Where only a part of the net consideration is utilised for acquiring the new capital asset, so much of
the capital gain as is equal to the amount by which the amount so utilised exceeds the cost of the
transferred asset.
Example 1: A charitable trust had a capital asset the cost of which was Rs.80,000 and it sold the same for Rs.
1,00,000. The whole of the consideration, i.e., Rs. 1,00,000 will be exempt from capital gains tax if a new capital
asset is bought for Rs. 1,00,000.
Example 2: If a trust had a capital asset costing Rs.1,00,000 and sold the same for Rs. 1,50,000 and then
bought a capital asset for Rs. 1,30,000, then the working will be as follows:
Particulars Rs.
Sale proceeds of old asset 1,50,000
Cost of the old asset (1,00,000)
Capital gain 50,000
Cost of the new asset 1,30,000
Cost of the old asset (1,00,000)
Capital gain utilised is 30,000
Capital gain taxable is 20,000
Assets held partly for religious or charitable purposes

It is quite possible that a capital asset is held by a trust partly for religious or charitable purposes. Where such
a capital asset is transferred and the whole or any part of the net consideration is utilised for acquiring another
capital asset, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been
applied to charitable or religious purposes to the extent specified here under:
(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the
appropriate fraction of such capital gain;
(ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if
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any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the
appropriate fraction of the cost of the transferred asset
“Explanation” to Section 11(1A) provides:
‘Appropriate fraction’ means the fraction which represents the extent to which the income derived from the
capital asset transferred was immediately before such transfer applicable to charitable or religious purposes.
‘Cost of the transferred asset’ means the aggregate of the cost of acquisition (as ascertained for the purposes of
Secti in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any,
by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate
fraction of the cost of the transferred asset on 48 and 49 of the capital asset which is the subject of the transfer
and the cost of any improvement thereto within the meaning assigned to that expression in sub-clause (b) of
clause (1) of Section 55.
‘Net consideration’ means the full value of the consideration received or accruing as a result of the transfer of the
capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.
Illustration
A trust has a capital asset costing Rs. 2,00,000 and 1/2 of its income is utilised for charitable purpose. It is sold for Rs.
3,50,000. If the trust buys another capital asset for Rs. 3,50,000 then appropriate fraction of the capital gain deemed
to have been applied for charitable purpose. Supposing that the trust buys another asset for Rs. 2,90,000:
Particulars Rs.
Sale proceeds of Capital asset 3,50,000
Cost of the asset sold (2,00,000)
Capital gain on transfer of capital asset 1,50,000
Appropriate fraction i.e. 1/2 75,000
Another asset purchased 2,90,000
Appropriate fraction utilised (1/2 of Rs. 2,90,000)= 1,45,000
Appropriate fraction of the original capital asset 1/2 of (1,00,000)
Rs. 2,00,000
Capital gain utilised 45,000
Capital gain not utilised 30,000
Accumulations of Income [Section 11(2)]

While dealing with Section 11 it has been stated that accumulation of income from trust property held for
charitable purpose is permissible up to 15 per cent without attracting any liability to tax. Where the balance 85
per cent of the income is not applied or is not deemed to have been applied to charitable or religious purposes
in India during the previous year, such income so accumulated or set apart shall not be included in the total
income if the following conditions are fulfilled:
(a) such person furnishes a statement in the prescribed form and in the prescribed manner to the Assessing
Officer, stating the purpose for which the income is being accumulated or set apart and the period for
which the income is to be accumulated or set apart, which shall in no case exceed five years;
(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in
subsection (5);
(c) the statement referred to in clause (a) is furnished on or before the due date specified under sub-
section (1) of section 139 for furnishing the return of income for the previous year:
Provided that in computing the period of five years referred to in clause (a), the period during which the income
could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of
any court, shall be excluded.
Explanation : Any amount credited or paid, out of income referred to in clause (a) or clause (b) of Sub-section
(1), read with the explanation to that sub-section, which is not applied, but is accumulated or set apart, to any
trust or institution registered under Section 12AA or to any fund or institution or trust or any university or other
educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v)
or sub-clause (vi) or sub-clause (via) of clause (23C) of Section 10, shall not be treated as application of income
for charitable or religious purposes, either during the period of accumulation or thereafter.
It is important to note that to claim exemption subject to Section 11(2) it is enough to invest in Government
securities etc., only that part of the unspent balance which falls over and above 15% of the total income derived
from the property held under trust [C.I.T. v. H.H. Marthanda Varma Elayaraja of Travancore Trust and others
(1981) 129 I.T.R. 191 (Ker.)].
Section 11(3) provides that:
(i) if the income accumulated for the specific purpose under Section 11(2) is applied to purposes other
than charitable or religious, or ceases to be accumulated or set apart for application thereto, it will be
chargeable to tax as income of that year. Further, such accumulated income will become liable to be
taxed if,
(ii) it ceases to remain invested in any security or deposited in the manner provided under Section 11(5),
or
(iii) it is not utilised for the purpose for which it is so accumulated or set apart during the specified period,
or in the year immediately following the expiry thereof;
(iv) is credited or paid to any trust or institution registered under Section 12AA or to any fund or institution or
trust or any university or other educational institution or any hospital or other medical insitution referred
to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of Section
10.
it shall be deemed to be the income of the previous year in which it ceases to remain so invested or deposited
or is not so utilised, as the case may be.
Section 11(3A) provides that where due to circumstances beyond the control of the person in receipt of the
income, any income invested or deposited in accordance with the provisions of Section 11(2) cannot be applied
for the purpose for which it was accumulated or set apart, the Assessing Officer may, on an application made
to him in this behalf allow such person to apply such income for such other charitable or religious purpose in
India, as is specified by the person in the application subject further to the condition that it is in conformity with
the objects of the trust.
Provided that the Assessing Officer shall not allow application of such income by way of payment or credit made
for the purposes referred to in clause (d) of Sub-section (3) of section 11.
For the purposes of Section 11, ‘property held under trust’ includes a business undertaking so held and where
a claim is made that the income of any such undertaking shall not be included in the total income of the
persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking
in accordance with the provisions of the Income-tax Act relating to assessment and where any income so
determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be
deemed to be applied to purposes other than charitable or religious.
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Provided that the Assessing Officer shall not allow application of such income by way of payment or credit made
for the purposes referred to in clause (d) of Sub-section (3) of Section 11:
Provided further that in case the trust or institution, which has invested or deposited its income in accordance
with the provisions of clause (b) of Sub-section (2), is dissolved, the Assessing Officer may allow application
of such income for the purposes referred to in clause (d) of Sub-section (3) in the year in which such trust or
institution was dissolved.
Sub-section (4A) as substituted by Finance Act, 1991 with effect from 1.4.1992 states that Sub-sections (1)
or or (3) or (3A) of Section 11 shall not apply in relation to any business income of a trust or institution unless
the business is incidental to the attainment of the objectives of the trust or institution and separate books of
accounts are maintained by such trust or institution in respect of such business.
Forms and Modes of Investment [Section 11(5)]

The forms and modes for investing funds of charitable and religions trusts and institutions are given hereunder:
(i) investment in saving certificates as defined in clause (c) of Section 2 of the Government Savings
Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central
Government under the Small Savings Schemes of that Government. Investments in Indira Vikas Patra
and Kisan Vikas Patra also qualify for the purpose of this Section;
(ii) deposit in any account with the Post Office Savings Bank;
(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the
business of banking (including a co-operative land mortgage bank or a co-operative land development
bank);
Explanation: In this clause, “scheduled bank” means the State Bank of India constituted under the State
Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary
Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under Section 3 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under Section 3 of the
Banking Companies (Acquisition and Transfer of Undertaking Act, 1980 (40 of 1980), or any other bank
being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);
(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of
1963);
(v) investment in any security for money created and issued by the Central Government or a State
Government;
(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal
whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government
or by a State Government;
(vii) investment or deposit in any public sector company;
Provided that where an investment or deposit in any public sector company has been made and such
public sector company ceases to be a public sector company:
(A) such investment made in the shares of such company shall be deemed to be an investment made
under this clause for a period of three years from the date on which such public sector company
ceases to be a public sector company;

Investment in debt instruments issued by and infrastructure Finance Company registered with
RBI.
(B) such other investment or deposit shall be deemed to be an investment or deposit made under this
clause for the period up to the date on which such investment or deposit becomes repayable by
such company;
(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing
long-term finance for industrial development in India and which is eligible for deduction under clause
(viii) of Sub-section (1) of Section 36;
(ix) deposits with or investment in any bonds issued by a public company formed and registered in India
with the main object of carrying on the business of providing long-term finance or construction or
purchase of houses in India for residential purposes and which is approved by the Central Government
for the purposes of clause (viii) of Sub-section (1) of Section 36;
(ixa) deposits with or investment in any bonds issued by a public company formed and registered in India
with the main object of carrying on the business of providing long-term finance for urban infrastructure
in India.
Explanation: For the purpose of this clause:
(a) “long-term finance” means any loan or advance where the terms under which moneys are loaned or
advanced provide for repayment along with interest thereof during a period of not less than five years;
(b) “public company” shall have the meaning assigned to it in Section 3 of the Companies Act, 1956
(1 of 1956);
(c) “urban infrastructure” means a project for providing potable water supply, sanitation and sewerage,
drainage, solid waste management, roads, bridges and flyovers or urban transport.
(x) investment in immovable property.
Explanation: “Immovable property” does not include any machinery or plant (other than machinery or
plant installed in a building for the convenient occupation of the building) even though attached to, or
permanently fastened to, anything attached to the earth;
(xi) deposits with the Industrial Development Bank of India established under the Industrial Development
Bank of India Act, 1964 [(18 of 1964)];
(xii) any other form or mode of investment or deposit as may be prescribed including investments in units of
Mutual Fund and Transfer of Deposits to Public Account of India.
According to section 11(6), where any income is required to be applied or accumulated or set apart for
application, then, for such purposes the income shall be determined without any deduction or allowance by way
of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of
income under this section in the same or any other previous year.
According to section 11(7), where a trust or an institution has been granted registration under clause (b)
of subsection (1) of section 12AA or has obtained registration at any time under section 12A and the said
registration is in force for any previous year, then, nothing contained in section 10 [other than clause (1) and
clause (23C) thereof] shall operate to exclude any income derived from the property held under trust from the
total income of the person in receipt thereof for that previous year.
Income of trusts or institutions from contributions [Section 12]

(1) The income of a trust by way of voluntary contributions would also be treated for all purposes as income
deemed to have been derived by the trust from property held by it under trust except, however, in case where
the voluntary contribution is received with a specific direction that it shall form part of the corpus of the trust. As
382 PP-DTL&P
a result, voluntary contribution received by a trust should also be applied for charitable purposes before the end
of the accounting year or within 3 months following so that income-tax exemption could be availed of. However,
voluntary contributions could be accumulated for future obligation for charitable purposes in the same manner
as specified earlier.
(2) The value of any services, being medical or educational services, made available by any charitable or
religious trust running a hospital or medical institution or an educational institution, to any person referred to in
Clause (a) or Clause (b) or Clause (c) or Clause (cc) or Clause (d) of Sub-section (3) of Section 13, shall be
deemed to be income of such trust or institution derived from property held under trust wholly for charitable or
religious purposes during the previous year in which such services are so provided and shall be chargeable to
income-tax notwithstanding the provisions of Sub-section (1) of Section 11.
Explanation: For the purposes of this sub-section, the expression “value” shall be the value of any benefit or
facility granted or provided free of cost or at concessional rate to any person referred to in Clause (a) or Clause
or Clause (c) or Clause (cc) or Clause (d) of Sub-section (3) of Section 13.
(3) Notwithstanding anything contained in Section 11, any amount of donation received by the trust or
institution in terms of Clause (d) of Sub-section (2) of Section 80G which has been utilised for purposes
other than providing relief to the victims of earthquake in Gujarat or which remains unutilised in terms of
Sub-section 5(C) of Section 80G in respect of which accounts of income and expenditure have not been
rendered to the authority prescribed under clause (v) of sub-section (5C) of that section, in the manner
specified in that clause, and not transferred to the Prime Minister’s National Relief Fund on or before the
31st day of March, 2004 shall be deemed to be the income of the previous year and shall accordingly be
charged to tax.
Conditions as to Registration of Trusts, etc. [Section 12A]

The provisions of Sections 11 and 12 shall not apply in relation to any trust or institution unless the following
conditions are fulfilled:
(1) (aa) the person in receipt of the income has made an application for registration of the trust or institution on
or after the 1st day of June, 2007 in the prescribed form and manner to the Principal Commissioner or
Commissioner and such trust or institution is registered under section 12AA;
(ab) the person in receipt of the income has made an application for registration of the trust or institution,
and subsequently, it has adopted or undertaken modifications of the objects which do not conform to
the conditions of registration, in the prescribed form and manner, within a period of thirty days from the
date of said adoption or modification, to the Principal Commissioner or Commissioner and such trust or
institution is registered under section 12AA; (w.e.f. AY 2018-19)
(b) where the total income of the trust or institution as computed under this Act without giving effect to
the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to
income-tax in any previous year, the accounts of the trust or institution for that year have been audited
by an accountant as defined in the Explanation to sub-section (2) of section 288 and the person in
receipt of the income furnishes along with the return of income for the relevant assessment year the
report of such audit in the prescribed form duly signed and verified by such accountant and setting forth
such particulars as may be prescribed.
(ba) the person in receipt of the income has furnished the return of income for the previous year in accordance
with the provisions of sub-section (4A) of section 139, within the time allowed under that section. (w.e.f.
AY 2018-19)
(2) Where an application has been made on or after the 1st day of June, 2007, the provisions of sections 11
and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately
following the financial year in which such application is made:
Provided that where registration has been granted to the trust or institution under section 12AA, then, the
provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust
of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are
pending before the Assessing Officer as on the date of such registration and the objects and activities of such
trust or institution remain the same for such preceding assessment year:
Provided further that no action under section 147 shall be taken by the Assessing Officer in case of such trust or
institution for any assessment year preceding the aforesaid assessment year only for non-registration of such
trust or institution for the said assessment year
Rule 17A of the Income-tax Rules, 1962 provides that an application for registration of a trust shall be made in
duplicate in Form No. 10A and shall be accompanied by the following documents:
(i) where the trust is created or the institution is established under an instrument, the instrument in original
together with a copy thereof and where it is created otherwise than under an instrument, the document
evidencing the creation of the trust or the establishment of the institution together with one copy thereof.
The Principal Commissioner or Commissioner may accept a certified copy instead of the original where
the original cannot be conveniently produced.
(ii) where the trust is in existence during any year or years prior to the financial year in which the application
for registration is made, two copies each of the accounts of the trust for the three years (immediately)
preceding the years in which the application for which the accounts have been made-up.
Procedure for Registration [Section 12AA]

In terms of Section 12AA, on receipt of application for registration, the Principal Commissioner or Commissioner
shall call for such documents or information from the trust or institution as he thinks necessary in order to satisfy
himself about the genuineness of activities of the trust or institution and may also make such inquiries as he
may deem necessary in this behalf. Sub-section 12AA. He has to either grant or decline registration within six
months from the end of the month in which the application was received.
Where the Principal Commissioner or Commissioner is satified that the activites of the trust or institution are not
genuine or are not carried out in accordance with the objects of the trust or institution then the commissioner
may pass an order in writing for the cancellation of registration granted under section 12AA or under section
12A after giving an opportunity of being heard.
Further, where a trust or an institution has been granted registration or has obtained registration at any time
under section 12A and subsequently it is noticed that the activities of the trust or the institution are being carried
out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any part of
the income of such trust or institution due to operation of sub-section (1) of section 13, then, the Principal
Commissioner or the Commissioner may by an order in writing cancel the registration of such trust or institution.
However the registration shall not be cancelled under this sub-section, if the trust or institution proves that there
was a reasonable cause for the activities to be carried out in the said manner.
Levy of tax where the charitable institution ceases to exist or converts into a non-charitable
organization
Sections 11 and 12 of the Act provide for exemption to trusts or institutions in respect of income derived from
property held under trust and voluntary contributions, subject to various conditions contained in the said sections.
The primary condition for grant of exemption is that the income derived from property held under trust should
be applied for the charitable purposes, and where such income cannot be applied during the previous year,
it has to be accumulated and invested in the modes prescribed and applied for such purposes in accordance
with various conditions provided in the section. If the accumulated income is not applied in accordance with
384 PP-DTL&P
the conditions provided in the said section within a specified time, then such income is deemed to be taxable
income of the trust or the institution. Section 12AA provides for registration of the trust or institution which
entitles them to be able to get the benefit of sections 11 and 12. It also provides the circumstances under which
the registration can be cancelled. Section 13 of the Act provides for the circumstances under which exemption
under section 11 or 12 in respect of whole or part of income would not be available to a trust or institution.
A society or a company or a trust or an institution carrying on charitable activity may voluntarily wind up its
activities and dissolve or may also merge with any other charitable or non-charitable institution, or it may
convert into a non-charitable organization. In such a situation, the existing law does not provide any clarity as
to how the assets of such a charitable institution shall be dealt with.
In order to ensure that the intended purpose of exemption availed by trust or institution is achieved, a new
chapter has been introduced that provide for levy of additional income-tax in case of conversion into, or merger
with, any non-charitable form or on transfer of assets of a charitable organization on its dissolution to a non-
charitable institution. The elements of the regime are under:
i. The accretion in income (accreted income) of the trust or institution shall be taxable on conversion of
trust or institution into a form not eligible for registration u/s 12AA or on merger into an entity not having
similar objects and registered under section 12AA or on non-distribution of assets on dissolution to any
charitable institution registered u/s 12AA or approved under section 10(23C) within a period twelve
months from dissolution.
ii. Accreted income shall be amount of aggregate of total assets as reduced by the liability as on the
specified date. The method of valuation is proposed to be prescribed in rules. The asset and the liability
of the charitable organisation which have been transferred to another charitable organisation within
specified time will be excluded while calculating accreted income.
iii. The taxation of accreted income shall be at the maximum marginal rate.
iv. This levy shall be in addition to any income chargeable to tax in the hands of the entity.
v. This tax shall be final tax for which no credit can be taken by the trust or institution or any other person,
and like any other additional tax, it shall be leviable even if the trust or institution does not have any
other income chargeable to tax in the relevant previous year.
vi. In case of failure of payment of tax within the prescribed time, a simple interest @ 1% per month or part
of it shall be applicable for the period of non-payment.
vii. For the purpose of recovery of tax and interest, the principal officer or the trustee and the trust or the
institution shall be deemed to be assessee in default and all provisions related to the recovery of taxes
shall apply. Further, the recipient of assets of the trust, which is not a charitable organisation, shall also
be liable to be held as assessee in default in case of non-payment of tax and interest. However, the
recipient’s liability shall be limited to the extent of the assets received.
These amendments effective from 1st June, 2016.
Tax Planning Consideration for Firm V/s LLP V/s Company

Following points to be kept in mind while tax planning with reference to different form of organization.
l Tax Rate applicability
l MAT/AMT
l Dividend Distribution Tax

l Tax treatment in the hands of shareholder or partners
l Interest on capital to partners (Deducted up to 12% subject to conditions of section 184)

l Remuneration to partners
l Applicability of section 78 and 79 in case of change in constitution.
l Loan to partner or shareholders with reference to Section 2(22) (e)
l Applicability of presumptive taxation scheme under section 44AD
TAX PLANNING WITH REFERENCE TO NEW BUSINESS
LOCATION OF BUSINESS NATURE OF BUSINESS

Tax incentives available Tax incentives available
l SEZ (Section10AA) l SEZ (Section10AA)
l EOU (Section10B) l Investment Allowances (Section 32AD)
l Section 80IA l Tea development Account (Section 33AB)
l Section 80IAB l Telecommunication services (Section 35ABB)
l Section 80IB l Expense on specified business (Section 35AD)
l Section 80IC l Section 35CCC
l Section 80ID l Section 35CCD
l Section 80IE l Section 44BB
[Section 80IA to 80IE as per chart provided] l Section 44AD
l Section 44AE
l Section 80IA
l Section 80IAB
l Section 80IAC
l Section 80IB
l Section 80IBA
l Section 80IC
l Section 80JJAA
l Tonnage Tax scheme (Section 115V to 115VZC)
CASE LAWS
1. Allow ability of remuneration when partnership deed not specify the remuneration payable to each
individual working partner but lays down the manner of fixing the remuneration.
OR
In a case where the partnership deed does not specify the remuneration payable to each individual
working partner but lays down the manner of fixing the remuneration, would the assessee-firm be
entitled to deduction in respect of remuneration paid to partners?
386 PP-DTL&P
CIT Vs. Anil Hardware Store (2010) 323 ITR 0368 (HP)
Relevant section: 40(b)(v)
FACTS OF THE CASE
The partnership deed of the assessee firm provided that in case the book profits of the firm are up to Rs.
75,000, then the partners would be entitled to remuneration up to Rs. 50,000 or 90 per cent of the book profits,
whichever is more. In respect of the next Rs. 75,000, it is 60 per cent and for the balance book profits, it is 40 per
cent. Thereafter, it is further clarified that the book profits shall be computed as defined in section 40(b) of the
Income-tax Act, 1961, or any other provision of law as may be applicable for the assessment of the partnership
firm. It has also been clarified that in case there is any loss in a particular year, the partners shall not be entitled
to any remuneration. Clause 7 of the partnership deed laid down that the remuneration payable to the partners
should be credited to the respective accounts at the time of closing the accounting year and clause 5 stated that
the partners shall be entitled to equal remuneration.
HIGH COURT’S DECISION
The High Court held that the manner of fixing the remuneration of the partners has been specified in the
partnership deed. In a given year, the partners may decide to invest certain amounts of the profits into other
venture and receive less remuneration than that which is permissible under the partnership deed, but there
is nothing which debars them from claiming the maximum amount of remuneration payable in terms of the
partnership deed. The method of remuneration having been laid down, the assessee- firm is entitled to deduct
the remuneration paid to the partners under section 40(b)(v) of the Income-tax Act.
Note:
(1) Payment of remuneration to working partners is allowed as deduction if it is authorised by the partnership
deed and is subject to the overall ceiling limits specified in section 40(b)(v). The limits for partners’ remuneration
under section 40(b)(v) has revised upwards and the differential limits for partners’ remuneration paid by
professional firms and non-professional firms have been removed. On the first Rs. 3 lakh of book profit or in
case of loss, the limit would be the higher of Rs. 1,50,000 or 90% of book profit and on the balance of book
profit, the limit would be 60%.
(2) The CBDT had, vide Circular No. 739 dated 25-3-1996, clarified that no deduction under section 40(b)(v)
will be admissible unless the partnership deed either specifies the amount of remuneration payable to each
individual working partner or lays down the manner of quantifying such remuneration.
In this case, since the partnership deed lays down the manner of quantifying such remuneration, the same
would be allowed as deduction subject to the limits specified in section 40(b)(v).
2. Interest for default in payment of advance tax liable on to companies liable to MAT
Join CIT v Rolta India ltd. (2011) 330 lTR 470 (SC)
FACTS OF THE CASE
The assessee filed NIL return of income for the relevant AY 1997-98. The TO assessed the income of the
assessee under Minimum Alternative Tax (“MAT”) provisions, levied MAT on the book profit and also levied
interest under section 234B of the Act for default in payment of advance tax on the tax payable under a MAT.
SUPREME COURT’S OBSERVATION AND DECISION
The Supreme Court observed and held that,
• Sections 234B and 234C do not make any reference to section 115J / 115JA of the Act; however, levy
of interest under section 234B is on ‘assessed tax’ so as to include tax determined on application of
sections 115J / 115JA in the regular assessment
• Sections 115J / 115JA are special provisions. The sub-section (4) of section 115JA and sub-section (5)
of section 115JB specifies that all other provisions of the Act shall apply to a company liable to MAT
• Para 2 of the Board circular no. 13/2001 dated 9 November, 2001 [2001] 252 ITR 50 (St.) clarified that
section 115JB is a self-contained code and that all companies were liable to payment of advance tax
under section 115JB of the Act, and consequently, the provisions of sections 234B and 234C of the act
relating to default in payment of advance tax were also applicable
• Accordingly, interest under sections 234B and 234C of the Act would become payable on failure to pay
advance tax if the company is liable to pay MAT.
3. Whether Long term capital gain exempted by virtue of Section 54E/54EC be included in book profits
for the purpose of calculation of MAT under section 115J/115JB ?
N. J. JOSE & CO. (p) LTD. V ACIT [2010] 321 ITR 0132 (KER)
FACTS OF THE CASE
This is an appeal filed by the assessee under Section 260A of the IT Act, challenging the order of the Tribunal
disposing of the appeal filed against the assessment for the year 1989-90. The substantial questions of law
arising from the order under challenge are the following:
1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding
that the capital gains is part of the book profits under Section 115J of IT Act, 1961?.
2. Whether there were materials for the Tribunal to hold that even though Section 115J is a deeming
provision the long-term capital gain which itself is deemed income and which is saved by the operation
of Section 54E is liable to be included in the book profit under Section 115J of the Act?
During the previous year relevant for the asst. yr. 1989-90, among other items, the appellant has substantial
income of Rs. 26,03,245 being long-term capital gains. The assessee claimed relief under Section 54E of
the Act on the income from long-term capital gains by depositing amounts in specified assets in terms of the
said provision. However, after computation of income including income from capital gains and after granting
exemption under Section 54E, the AO found that the total income so computed is less than 30 per cent of book
profit and therefore the AO proceeded to make assessment on book profit authorised under Section 115J of the
Act. In the computation of book profit under Section 115J of the Act, the assessee claimed exclusion of capital
gains because of exemption available on it by virtue of Section 54E of the Act. The AO rejected the claim and
reckoned the book profit including long-term capital gains for the purpose of assessment under Section 115J
of the Act. Even though the assessee was successful in first appeal, the Tribunal on second appeal filed by the
Department, reversed the order of the first appellate authority and held that long-term capital gains form part of
book profit. It is against this order of the Tribunal, the assessee filed this appeal raising the above questions.
HIGH COURT’S OBSERVATIONS AND DECISION
Assessee contended that capital gains under Section 45 of the Act is a profit arising on transfer of capital assets
and though chargeable to income-tax, the benefit of deduction/exemption available on investments made in
specified assets in terms of Section 54E of the Act, cannot be denied to the assessee even if assessment is made
under Section 115J of the Act. According to him, there is nothing in Chapter XII-B providing for disallowance of
eligible exemption under Section 54E of the Act on capital gains in the course of assessment based on book
profit.
Revenue, on the other hand contended that no deduction can be allowed in the computation of book
profit except to the extent permissible under Section 115J(1A) of the Act. We are unable to accept the
contention of the assessee, because assessment under Chapter XII-B on book profit is a self contained
code. The scheme there under is to adopt the P & L a/c of the assessee prepared in accordance with the
provisions of Parts II and III of Schedule VI to the Companies Act, 1956( now statement of profit and loss
388 PP-DTL&P
prepared in accordance with part –II of Schedule –III of Companies Act,2013) and to treat the net profit
shown therein as book profit The permissible adjustments in the form of additions and deductions are
provided under Explanation to Section 115J(1A) of the Act. No more deductions, rebates or allowances
other than what is stated in the said Explanation are available for the computation of book profit. In fact,
it is very clear from the non obstante clause in Section 115J(1) that the assessment under Section 115J
overrides other provisions of the Act. In fact, the AO gets jurisdiction to make assessment under Section
115J of the Act only when the total income computed under the provisions of the Act is below 30 per cent
of the book profit of the assessee as contemplated under the said section. While deductions, rebates and
allowances are available in the computation of income for normal assessment, additions, deductions and
adjustments except to the extent covered by the Explanation to Section 115J(1A) are not available in the
computation of book profit. In other words, once the AO finds that total income as computed under the
provisions of the Act is less than 30 per cent of the book profit he has to give up normal assessment and
proceed to make assessment. The AO has to opt for the assessment under Section 115J which does not
provide for any deduction in terms of Section 54E of the Act. The assessee has no case that the long-term
capital gain is not profit includible in the P & L a/c prepared in terms of Schedule VI of the Companies Act.
Since there is no provision in Chapter XII-B for deduction of capital gains in the computation of book profit,
the assessee is not entitled to the deduction claimed. The Bombay High Court in the decision in CIT v.
Veekaylal Investment Co. (P) Ltd. : [2001]249ITR597(Bom) also took the view that capital gains is part of
profit which cannot be excluded in the computation of book profit. Even though the assessee contended
that the case decided by the Bombay High Court did not Involve claim of exemption on capital gains under
Section 54E of the Act, we do not think this distinction makes any difference, because so long as long-term
capital gains is part of profit included in the P & L a/c prepared under Chapter VI of the Companies Act, it
cannot be excluded unless so provided under Explanation to Section 115J(1A) of the Act. In the absence
of any provision for exclusion of capital gains in the computation of book profit under the above provision,
assessee is not entitled to the exclusion claimed. In other words, Section 54E has no application in the
computation of book profit under Section 115J.
Therefore order of the tribunal is upheld and appeal of assessee is rejected.
4. Where the credit facility is extended to members of the society by virtue of sale of goods to them
by consumers’ co-operative society, the exemption is not available. When the society sells goods on
credit to its members, such transaction cannot be construed as a credit society to which the benefit
of Section 80P(2)(a)(i) can be extended.
[Rodier Mill Employees’ Co-operative Stores Ltd. v. CIT (1982) 135 ITR 355].
Following the ratio laid down by the Madras High Court in the case of Rodier Mill Employees’ Co-operative
Stores Ltd. v. Commissioner of Income-tax (1982, 135 ITR 355), the Kerala High Court held in the case of
Kerala Co-operative Consumers Federation Ltd. v. Commissioner of Income-tax (1988, 170 ITR 455) that
the words ‘providing credit facilities’, occurring in Section 80P(2)(a)(i) of the Income-tax Act, 1961 should be
construed as similar to, or akin to the ‘carrying on the business of banking’, preceding the words “or providing
credit facilities” in the same sub-section. The words ‘providing credit facilities to its members’ means providing
credit by way of loans and not selling goods on credit.
5. Where society purchases auto-rickshaws and sells them to members on hire-purchase, it is not
providing credit facility to members and not entitled to exemption.
[C.I.T. v. Madras Auto Rickshaw Drivers’ Co-operative Society (1983) 143 ITR 981].
In this case it was held that the tax relief under Section 80P(2)(a)(i) of the Income- tax Act, is a grant not to a
category of income but to a category of assessees namely, a co-operative society answering the description
of a society engaged in carrying on the business of providing credit facilities to its members. If the society in
question does not answer to this description, it is not entitled to the relief.
(1) In Bihar State Co-operative Bank Ltd. v. C.I.T. [(1960) 39 I.T.R. 114] the Supreme Court has held that
if a co-operative society carrying on banking business invests its circulating capital in such a manner that it is
readily available, the interest on such investment shall constitute income from banking business and therefore
shall be exempt in the hands of the co-operative society.
(2) Interest received on Government Securities held by co-operative society as its stock-in-trade qualifies for
deduction from gross total income. But the deduction is inapplicable to interest received from Government
Securities held as investments. [CIT v. Bombay State Co-operative Bank Ltd. (1968) 70 ITR 86 (S.C.)].
The Madhya Pradesh High Court held in the case of M.P. State Co-operative Bank Ltd. v. Addl. Commissioner
of Income-tax (1979, 119 ITR 327) that income from investment of reserve capital in securities was not a
part of the income from banking business and did not qualify for exemption. Similarly, the interest income
from investment of provident fund income did not form part of the income from the banking business and did
not qualify for exemption under Section 80(i)(a) (now Section 80P). Distinguishing the ratio laid down in this
case, the Madhya Pradesh High Court held in the case of Commissioner of Income-tax v. Bhopal Co-operative
Central Bank Ltd. (1987, 164 ITR 713) that the security deposits made are in accordance with the Banking
Regulation Act, 1949 and interest income received on deposits formed part of income from business of banking
and exempt under Section 80P(2)(i) of the Income-tax Act, 1961.
The Allahabad High Court held in the case of Addl. Commissioner of Income-tax v. U.P. Co-operative Cane
Union (1978, 114 ITR 70) that selling goods on credit was only a mode of carrying on business. It did not
become a business of providing credit facility. Following this case, the Allahabad High Court held in the case of
Commissioner of Income-tax v. U.P. Co-operative Cane Union Federation Ltd. (1980, 122 ITR 913) that the
expression ‘providing credit facilities’ in Section 80P(2)(a)(i) would comprehend the business of lending money on
interest. It would also comprehend the business of lending services on profit for guaranteeing payments because
guaranteeing payment is as much a part of banking business for affording credit facility as advancing loans.
However, where a co-operative society holds securities as per requirements of Banking Regulation Act and
directions of the RBI, the deduction is available on such interest income. Similarly, subsidy from Government
for opening new branches and giving loans to poorer sections at lower rate of interest, is income attributable to
banking business [CIT v. Madurai District Central Co-operative Bank Ltd. (1984) 148 ITR 196].
6. The Income earned by a co-operative society carrying on the business of banking and providing
credit facilities to its members from commission and brokerage by dealing in bills of exchange,
subsidy from Government, admission fee from members, incidental charges and financial penalties
is attributable to the business of banking of providing credit facilities to its members and hence
deductible under Section 80P(2)(a)(i).
[CIT v. Dhar Central Co-operative Bank (1984) 149 ITR 438 (MP)]
Following its decision in the case of Commissioner of Income-tax v. Dhar Central Co-operative Bank (1984, 149
ITR 438), the Madhya Pradesh High Court held in the case of Commissioner of Income-tax v. Bhopal Cooperative
Central Bank Ltd. (1988, 172 ITR 423) that a co-operative society carrying on the business of banking is entitled
to exemption in respect of interest on securities, commission, subsidy, donation and locker rent. Again, the said
decision was followed by it in the case of Madhya Pradesh Rajya Sahakari Bank v. Commissioner of Income-tax
(1988, 174 ITR 150) holding that the income from commission, exchange and other miscellaneous income was
attributable to the business of banking and that the assessee was entitled to exemption under Section 81 (now
80P) of the Income-tax Act, 1961 in respect thereof.
7. A society which buys and sells products of other societies or individuals is not entitled to exemption.
Where a society manufactures and sells its own products or the products of its members, such society
is entitled to exemption. Hence, the Central Cottage Industries Emporium, New Delhi, is not entitled
to exemption under Section 80P.
390 PP-DTL&P
[Addl. C.I.T. v. Indian Co-operative Union Ltd. (1982) 134 ITR 108 (Delhi)].
If the godown or warehouse is let for a purpose other than storage, processing of facilitating the marketing of
commodities, the income derived therefrom by a co-operative society would not be deductible under Section
80P C.I.T. v. Ahmedabad Maskati Cloth Dealers Co-operative Warehouses Society Ltd. [(1986) 162 ITR 142
(Guj.)] it was also held in this case that shops in which wholesale or retail business in cloth is carried on cannot
come within the meaning of ‘godowns’ or ‘warehouses’.
The Gujarat High Court’s decision in the case of Commissioner of Income-tax v. Ahmedabad Maskati Cloth
Dealers Co-operative Warehouses Society Ltd. (1986, 162 ITR 142) had since been approved by the Supreme
Court in the case of South Arcot District Co-operative Marketing Society Ltd. (infra). The Gujarat High Court
had, inter alia, held that the words facilitating the marketing of commodities’ would not lend colour to the words
‘godowns or warehouses’ so as to enlarge their meaning.
8. Whether the provisions of section 115JB of the Act relating to payment of MAT are applicable to
only such foreign companies that have a physical business presence in India?
Timken Co., In re. [2010] ITR 193(AAR-New Delhi)
The applicant is a company registered under the laws of Panama. India has not entered into a Double Taxation
Avoidance Convention with Panama. The applicant holds shares in two public limited companies, both governed
by the Companies Act, 1956 and proposed to transfer shares. However, section 10(38) of the Income-tax Act
exempts any income arising from the transfer of a long-term capital asset, being an equity share in a company,
when such transaction is chargeable to securities transaction tax. According to it, however, the proviso to
section 10(38) of the Act states that such long-term capital gain earned by a company shall be taken into
account in computing the book profit and income-tax payable thereon under section 115JB of the Act. Since
the proviso to section 10(38) would be attracted, it is desirous of seeking a ruling whether, the computation of
tax based on the prescription contained in section 115JB of the Act would be applicable. The applicant had no
physical presence in India. Hence, it was held that Section 115JB is not designed to be applicable of applicant,
a foreign company having no presence or PE in India.
9. Constitutional Validity of Section 115-O and whether tea companies are liable for the tax on only
40% of the dividend income?
UOI vs. Tata Tea Co. Ltd [2017] 85 (Supreme Court)
Act was challenged before the High Court. The main plank of attack of learned counsel for the writ petitioners
is, lack of legislative competence in the Parliament to enact Section 115O so as to impose additional income
tax. The income out of which dividend is declared, distributed or paid is an agricultural income to the extent of
60%, tax on which can only be imposed by State legislature. The Parliament has transgressed its legislative
power in enacting Section 115O. It has been observed that Part XI of the Constitution of India Chapter I contain
provisions relating to distribution of legislative powers. Article 246 provides for subject matter of laws made by
the Parliament and by the Legislatures of States. Hence, it has been held that Section 115-O is constitutionally
valid.
10. Whether exemption be granted to Political party under section 13A if they unable to main accounts
and fails to get it audited?
If political party fails to maintain its accounts for any reason whatsoever or satisfy preconditions sets out in
proviso to section 13A, then exemption can’t be granted to it from payment of tax. CIT v Janata paty[2016]
In addition to that where political party failed to submit accounts within stipulated time and mandated as per
section 13A, it would not be entitled to tax exemption under section 13A. CIT v Indian National Congress/All
India Congress Committee[2016] (Delhi)
11. LTCGC on concessional rate of tax under section 115E. (Assessment of Individual)
Shashi Parvatha Reddy v. Dy. CIT [2017] (Hyd)
Facts of Case: Where bonus shares were issued to assessee (who is NRI) on basis of original shares issued
by overseas investors, the same would be treated as foreign exchange assets and cost of acquisition would be
‘Nil. AO has viewed that long-term capital gain (LTCG) was taxed @ 10%, instead of 20%. AO observed that
the assessee had been allotted bonus shares against the original shares bought by him and that some other
shares were given to him by overseas investors without any payment from him.
High court observation and Decision: It has been observed that Bonus shares issued on original shares by
investing convertible foreign exchange were also foreign exchange asset under section 115E. Therefore, the
bonus shares acquire the nature of the original shares, though the cost of acquisition shall be “nil” under section
55(2)(aa). It was further observed that assessee had received the asset without any cost, it had to be treated as
a gift and the cost of acquisition of the previous owner had to be treated as a cost of acquisition to the assessee.
Hence it has been held that hares sold by the assessee have been treated as long-term capital assets and
being the assets acquired by way of foreign exchange fall within the definition of foreign exchange asset under
section 115E(b). Hence, the assessee was eligible for a concessional rate of 10% under section 115E.
12. Can widow be Karta of Joint Family?

CIT v Seth Govindram Sugar Mills [1965]57 ITR 510(SC)
Generally right to become manage of Joint Family based on fundamental fact that the person on whom the
right devolves is a coparcener of joint family and Coparcener ship is essential qualification for manager of
Joint Hindu Family. And as widow is not admittedly a coparcener and she has no legal qualification to become
manager of Joint Hindu Family.
As per Hindu Succession (Amendment) Act, 2005, daughters are also given coparcener status in family and
she can become karta of HUF. [Sujat Sharma V Manu Gupta [2016] (Delhi)]. However, widow is eligible for
share in assets of family event of partition can’t become karta of HUF. She can act as manager of HUF if all
coparceners are minors.
13. Whether firm constituted by partners including partner in dual capacity, entitle to get deduction of
salary and interest paid to partners?
CIT V Budhalal Amolakhdas[1981] (Guj.)
There is no any provision which restrict individual to become partner in firm in dual capacity provided there is
one or more other individuals to join valid and legal partnership. And they entitled to get deduction of salary and
interest paid to partners if stipulated conditions are satisfied.
PRACTICAL QUESTIONS
Illustration 1:
Gross total Income of Mr. X, a tax consultant based at Mumbai, is Rs. 18,00,000 (income from profession
Rs. 17,00,000 and interest on bank deposit Rs. 1,00,000). He pays Rs. 3,00,000 as house rent. He deposits
Rs. 50,000 in public provident fund. Compute his taxable income for the assessment year 2020-21.
392 PP-DTL&P
Solution
Computation of taxable Income of Mr. X for the A.Y 2020-21
Professional Income 17,00,000
Interest on Bank Deposit 1,00,000
Less: Deductions under Chapter VI-A
u/s 80C (PPF) (50,000)
u/s 80 GG (Note-1) (60,000) (1,10,000)
Net Income 16,90,000
Note 1 : Deduction u/s 80GG is least of the following:

a) Rs. 60,000
b) Rs. 4,37,500 [25% of total income (Rs. 18,00,000- 50,000)]
c) Rs. 1,25,000 [Excess of rent paid over 10% of Adjusted total income (Rs. 3,00,000- 1,75,000)]
Illustration 2:
From the following profit and loss account of Vinay for the year ended 31st March, 2020, compute his total
income and tax liability for the assessment year: 2020-21:

Rs. Rs.
Interest on capital 12,000 Gross profit 5,10,000
Insurance 2,000 Brokerage 30,000
Bad debts 30,000 Bad debts recovered (earlier allowed 15,000

as deduction)
Depreciation 34,000 Sundry receipts 18,000
Advance tax 25,000 Interest on debentures
General expenses 12,000 (gross) [TDS Rs. 4,120] 40,000
Advertisement 5,000
Salary (including salary to Vinay 85,000

Rs.20,000)
Interest on loan 8,000
Net profit 4,00,000
Total 6,13,000 Total 6,13,000

Additional information:
(i) The amount of depreciation allowable as per income-tax rules is Rs. 42,000.
(ii) General expenses include Rs.5,000 given as Health insurance Premium.
(iii) Vinay pays Rs. 5,200 as premium on his own life insurance policy of Rs. 50, 000 issued in 2016-17.
(iv) Loan was obtained for payment of income-tax.
Solutions:
Particulars Amount (Rs.) Amount (Rs.)
(I) Income from business
Net profit for the year 4,00,000
Add: Expenses not allowed under Income tax Act but debited to P &

L A/C
Interest on capital (Note 2) 12,000
Depreciation as per books of a/c 34,000
Advance tax 25,000
General Expenses 5,000
Salary to Vinay 20,000
Interest on loan (Note 2) 8,000 1,04,000
Less : Income not allowed but Credited to P& L a/c or deductible

expenses
Interest on debentures (40,000)
Depreciation as per Income tax Act (42,000) (82,000)
Profits and Gains of Business & Profession 4,22,000
(II) Income from other sources (interest on debenture) 40,000
Gross total income (I + II) 4,62,000
Less: Deduction U/S 80C – 80U
(i) Premium on life insurance policy (u/s 80C)(Note 1) (5,000)
(ii) Health insurance Premium (u/s 80 D ) (5,000)
Total Taxable Income 4,52,000
Tax on total Income [4,52,000-2,50,000]*5% = 10,100
Less:- Rebate u/s 87A 10,100

394 PP-DTL&P
Tax liability Nil
Tax already paid:- TDS 4,120
Tax refundable 4120
Note
1. Under section 80C deduction of life insurance premium cannot exceed 10% of the sum assured.
2. Under Section 36(1)(iii) Interest paid on borrowed capital is allowed as a deduction. Interest on own
capital is not deductible. Similarly, interest on money borrowed to pay income tax in not allowed as a
deduction.
Illustration 3:
X (63 years) has the following income during the previous year 2019-20
Salary Income : Rs.6,80,000
Interest on savings bank account with Allahabad Bank : Rs.16,000
Interest of fixed deposit with Canara Bank 40,000
Other particulars given by X are as under -
1. Insurance premium paid to Max Life Insurance (premium paid: Rs. 25,000 under a policy taken on life of
X’s son. The policy was taken on July 20, 2011 and the sum assured is Rs. 1,80,000).
2. Insurance premium paid to LIC (premium paid: Rs. 22,000 under a policy taken on X’s life on April 20,
2012 and the sum assured is Rs. 2,00,000).
3. Health insurance premium paid to National Insurance Co. (premium paid by cheque : Rs. 38,000 on the
health insurance of X).
4. Expenditure on preventive health check-up (expenditure incurred in cash: Rs. 8,000 paid to a hospital
for X).
Compute total income of X for assessment year 2020-21 on the basis of above particulars.
Solution:
Computation of income of X-
Particulars Rs.
Salary income 6,80,000
Income from other sources (savings bank interest) 56,000
Less : Deductions –
Under section 80C
[(Rs. 25,000 or 20% of Rs. 1,80,000, whichever is less)
+ (Rs. 22,000 or 10% of Rs. 2,00,000, whichever is less),
subject to a maximum of Rs. 1,50,000] (45,000)
Under section 80D
(Rs. 38,000 + Rs. 5,000, subject to a maximum of Rs. 50,000) (43,000)

Under section 80TTB (savings bank interest+ FD)
(maximum: Rs.50,000) (50,000)
Net income 5,98,000
Illustration 4:
X, 66 years, has a proprietary business. He furnishes the particulars of his income for the year ending March
31, 2020:
1. Net profit of Rs. 4,35,500 from the wholesale business of textiles and fabrics arrived at after charge of
following expenses in the profit and loss account:
a. personal travelling expenses of Rs. 12,750; and
b. purchase of furniture items for shop on June 13, 2019 of Rs. 25,000 but charged in shop expenses.
2. He owns a two storey house. It was constructed with financial assistance of HDFC. The ground floor
of the house is used by him for his self use and the first floor is on rent from April 1, 2019 for Rs. 8,500
per month. The municipal tax paid for the whole house is of Rs. 2,500 and interest paid on housing loan
taken for the construction is Rs. 52,000. Both the floors of the house are identical
3. He had deposited insurance premium on his own life of Rs. 12,500, on the life of his wife of Rs. 13,500
and on the lives of his son and daughter of Rs. 28,000. Further, he has made investment of Rs.
50,000 in the bonds issued by infrastructure company and paid Rs. 82,500 by credit card for med claim
insurance of himself and the family( children and spouse).
Compute taxable income and the amount of tax payable by X for the assessment year 2020-21.
Solution:
Particulars GF FF
Computation of income from house property Rs. Rs.
Gross annual value NIL 1,02,000
Less: Municipal tax NIL (1,250)
Net annual value 1,00,750
Deduction under section 24
Standard deduction NIL (30,225)
Interest on borrowed capital (26,000) (26,000)
Income from House Property (26,000) 44,525
Computation of Business Income -
Adjustments
Add: Personal travelling expenses 12,750
Add: Cost of furniture included in shop expenses 25,000

396 PP-DTL&P
Less: Depreciation on furniture (2,500)
Computation of income and tax liability -
Income from house property (Rs. 44,525 – Rs. 26,000) 18,525
Less: Deductions
Under section 80C (Rs. 12,500 + Rs. 13,500 + Rs. 28,000 + Rs. 50,000, 1,04,000
subject to a maximum of Rs. 1,50,000)
Under section 80D( Rs. 50,000 for self and Rs. 25,000 for family) 75,000
Net income (rounded off) 3,10,280
Tax on net income
Income-tax 3,014
Rebate u/s 87A 3014
Tax after rebate Nil
Tax liability Nil
Assumptions - The following assumptions have been made to calculate net income and tax liability —
1. X is resident in India.
2. Insurance premium is not more than 20% of sum assured in the case of insurance policies given in the
problem,
3. Mediclaim insurance premium payable on the life of X (who is a senior citizen) is not less than Rs. 50,000.
Illustration 5:
Ram Manhar & Sons HUF, running Raghuveer Departmental Stores consists of Karta, his wife, two sons and
daughter. Both the sons who are having professional/technical qualifications as a Chartered Accountant and as
an Automobile Engineer started in partnership, a garage for the repairing of motor cars, with a clear understanding
that the technical side of the business be looked after by the Engineer while the general administration and
finance part be taken care by the Chartered Accountant. They had taken an interest-free loan of Rs. 5,00,000
from the HUF for starting the venture. The business of garage resulted in a net profit of Rs. 15,00,000 for the
year ended 31.03.2020. The Assessing Officer proposes to assess the income from the business of motor
garage in the hands of HUF. Examine the validity of the proposition of the Assessing Officer in the light of a
decided case law.
Solution:
The facts of the case are similar to that of the case of CIT v. Charan Dass Khanna & Sons (1980) 123 ITR 194,
where the Delhi High Court observed that if the investment made by the HUF in the business started by the
coparceners plays a minor role and it is primarily the personal efforts, specialized skill and enterprise of the
individual coparceners which resulted in setting up of a new business and earning of goods profits, then it may
not essentially be said that the income belongs to the HUF.
The Supreme Court has also supported this view in the case of K.S. Subbiah Pillai v. CIT (1999) 237 ITR 11
and held that where the remuneration and commission earned by the Karta were on account of the personal
qualifications and exertions and not on account of the investment of the family funds, such income cannot be
treated as income of the HUF.
Thus, in the given case, profits were earned primarily because of the specialized skills acquired by both the
partners in their respective fields and used in the business of motor garage. The initial capital taken from the
HUF as interest free loan, of course, has its role but it is nevertheless a minor one. Therefore, the income from
the business set up by the brothers is assessable in their individual hands and not as the income of the family.
Further, the proposition of the Assessing Officer to tax the profits of the business of motor garage earned by the
two sons in the hands of the HUF is not valid.
Illustration 6:
X & Family is a HUF in which Mrs. X has impressed upon a house property owned by her for the common hatch
patch of the family. Examine whether the personal property of Mrs. X so blended by her be treated a property
of HUF.
Solution:
Mrs. X is not a coparcener of HUF and she cannot blend her separate property as property of the HUF—
Pushpa Devi v. CIT[1977] 109 ITR 730 (SC). The income from property would continue to get taxed in her
hands only.
Illustration 7:
ABC LLP, a limited liability partnership in India, is engaged in development of software and providing IT enabled
services through two units, one of which is located in a notified Special Economic Zone (SEZ) in Chennai. The
particulars relating to previous year 2019-20 furnished by the assessee are as follows -
Total turnover: SEZ unit Rs. 120 lakh and the other unit Rs. 100 lakh
Export turnover: SEZ unit Rs. 100 lakh and the other unit Rs. 60 lakh
Profit: SEZ unit Rs. 50 lakh and the other unit Rs. 40 lakh.
The assessee has no other income during the year. Compute tax payable by ABC LLP for the assessment year
2020-21. Will the amount of tax payable change, if ABC LLP is an overseas entity?
Solution:
Computation of deduction under section 10AA- Rs.
Profit of SEZ unit (a) 50,00,000
Export Turnover of SEZ unit (b) 1,00,00,000
Total Turnover of SEZ unit (c) 1,20,00,000
Amount Deductible u/s 10AA [i.e. (a)X(b)/(c)] 41,66,667
Computation of Normal Tax Liability:
Income before deduction u/s 10AA (Rs.50 lakh+ Rs. 40 lakh) 90,00,000
Less: Deduction u/s 10AA 41,66,667

398 PP-DTL&P
Net Income (rounded off) 48,33,330
Tax on total income @ 30% (+ HEC @4%) 15,07,999
Computation of AMT:
Adjusted total Income (Rs. 48,33,333 + 41,66,667) 90,00,000
Alternate Minimum Tax @ 18.5% (+ HEC @4%) 17,31,600
Tax payable – Normal Tax or AMT whichever is higher 17,31,600
Provisions of AMT shall be applicable even if ABC LLP is an overseas entity. Therefore tax liability will remain
same i.e. Rs. 17,31,600
Illustration 8
XY Associates is an association of persons (AOP) consisting of two members, Xand Y (6:4). Income of the
AOP for the previous year 2019-20 is Rs. 6 lakh. Compute the tax liability of the AOP and the members in the
following two situations:
1. Income of X and Y from other sources is Rs. 1,00,000 and Rs. 3,10,000, respectively.
2. Income of X and Y from other sources is Rs. 1,00,000 and Rs. 1,20,000, respectively.
Solution:
Situation 1 - Since one of the members of the AOP has total income exceeding the basic exemption limit, the
income of AOP will be taxed at maximum marginal rate, i.e., @ 31.2%. Tax liability of AOP will be Rs.1,87,200.
Tax liability of the members shall be calculated as follows –
Particulars X Y
Rs. Rs.
Share of profit from AOP (not chargeable to tax, as AOP is Taxable as maximum NIL NIL
marginal rates)
Income from other sources 1,00,000 3,10,000
Net income 1,00,000 3,10,000
Tax liability NIL 3,000
Less:- rebate u/s 87A NIL 3,000
Tax liability NIL Nil
Add Health and Education Cess @ 4% NIL Nil
Tax + HEC NIL Nil
Situation 2 - Since none of the members has income exceeding the exemption limit, AOP would be taxed at the
rates applicable to an individual. The tax liability on Rs. 6,00,000 will be Rs. 33,800 (Tax 32500 + HEC @4% -
1300). Tax liability of members will be calculated as follows:
Particulars X Y
Rs. Rs.
Share of profit from AOP 3,60,000 2,40,000
Income from other sources 1,00,000 1,20,000
Net income 4,60,000 3,60,000
Tax liability (tax + HEC) (a) 10,920 5,720
Less: Rebate u/s 87A 10,920 5,720
Tax payable Nil Nil
Illustration 9:
M, N and O are partners sharing profits and losses in the ratio of 2:1:1 respectively. Their summarised Profit and Loss A/c
for the year ending 31st March, 2020 is appended below:
Office salaries 5,680 Gross Profit 60,570
Telephone and Telegram 2,000 Rent received 6,000
Interest on loan from M 2,000 Interest on securities 4,000
Local taxes (let out property) 1,000
Salary to N 3,000
Commission to partners
M 4,000
N 5,000
O 6,000
Collection charges of interest on securities 50
Bad debts reserve 1,000
Net Profit to partners:
M 20,420
N 10,210
O 10,210
Total 70,570 Total 70,570
Compute total income of the firm for the assessment year 2020-21 and tax liability thereon. Interest paid to M has been
calculated at the rate of 20% p.a. simple.
400 PP-DTL&P
Solution:
Computation of Book-Profit
Net Income as per P & L A/c 40,840
Add: Inadmissible items -
Local taxes (on let out property) 1,000
Salary to N (Partner) 3,000
Commission to partners 15,000
Collection charges 50
Bad debts reserve 1,000 20,050
Less: Other Incomes –
Rent received (6,000)
Interest on securities (4,000) (10,000)
Book Profit 50,890
Maximum remuneration payable to partners

Here Rs. 1,50,000 will be allowed as maximum remuneration. But as the partners have drawn only Rs. 18,000
by way of salary and commission, the entire amount will be allowed as deduction.
Computation of total income of the firm for the Assessment Year 2020-21
Book Profit: 50890
Less: Salary and commission to partners (18,000)
Taxable Business Profit (A) 32,890
Income from house property Rent received 6,000
Less: Municipal taxes (1,000)
Net adjusted annual value (NAAV) 5,000
Less: Repairs (30% of NAAV) u/s 24 (1,500)
Income from House Property (B) 3,500
Income from other sources:
Interest on Securities 4,000
Less: Collection charges (50)
Income from Other Sources (C) 3,950

GROSS TOTAL INCOME (A) + (B) + (C) 40,340
The firm will have to pay tax on Rs. 40,340 @ 30%, which comes to Rs. 12,102 plus health and education cess
@ 4% on 12,102 making the total liability as Rs. 12,586.
Illustration 10:
Compute tax liability of the firm X & Co. for the assessment year 2019-20 considering the provisions of Section
115JC. The business income of the firm is Rs. 21,00,500 before deduction under section 32 and before deduction
under section 35AD Rs. 11,00,000, because of which depreciation of Rs. 40,000 cannot be claimed. Deduction
under section 80IB Rs. 1,00,000. Donation paid to a political party Rs. 85,000.
Solution:
Particulars Rs. Rs.

GTI - Business Income (Rs. 21,00,500 less 11,00,000) 10,00,500
Less Deductions
Under section 80IB 1,00,000
Under section 80GGC 85,000 (18,5000)
Net Income 8,15,500
Tax on Rs. 8,15,500 @ 30% 2,44,650
Add: HEC @ 4% 9,786
Tax liability 2,54,436
Tax liability (Rounded off) 2,54,440
Adjusted total income and alternate minimum tax for the purpose of
section 115JC
Net Income 8,15,500
Add: Under section 80IB 1,00,000
Add: under section 35AD (Rs. 11,00,000 less 40,000) 10,60,000
Adjusted total income 19,75,500
AMT on Rs. 19,75,500 @ 18.5% 3,65,468
Add: HEC @ 4% 14,619
AMT liability 3,80,087
3,80,090
(round off )
Tax payable is Rs. 3,80,090 being higher of tax liability Rs. 2,54,440 and AMT Rs. 3,80,090.
402 PP-DTL&P
Illustration 11:
Income & Expenditure A/c of Lawyers & Co. for the year ending March 31, 2020

Rs. Rs.
To Expenses 1,50,000 By Professional Receipts 3,80,000
To Depreciation 20,000 By Other fees 90,000
To Remuneration to partners 1,50,000
Interest on Capital to partners @ 20,000

20 per cent
To Net Profit 1,30,000
Total 4,70,000 Total 4,70,000
Other Information:
1. Expenses include Rs. 18,000 and Rs. 12,000 paid in cash as brokerage to a single party on a single
day.
2. Depreciation calculated as per section 32 is Rs. 40,000
Compute the total income of the firm.
Solution:
Computation of Total Income of Lawyers & Co. for A. Y. 2020-21
Particulars Amount Rs. Amount Rs.
Add : Expenses not allowable
Section 40A(3)- Cash payments to a broker exceeding Rs. 20,000 (Note 1) 30,000
Section 40(b)-Excess interest on capital to partners 20%-12% i.e. 8,000 38,000

(20000*8/20) (Note 2)

Add : Remuneration to partners debited to profit and loss account 1,50,000
Less : Depreciation u/s 32
(Rs. 40,000-Rs. 20,000 debited in profit and loss account) (20,000)
Book profit (Note 3) 2,98,000
Maximum permissible remuneration(lower of the two :
(i.e. 90 per cent of Rs. 2,98,000) 2,68,200
Actual 1,50,000 (1,50,000)

Business Income of the Firm 1,48,000
Tax Liability (30% of 1,48,000) 44,400
Add : Health and Education Cess @ 4% 1,776
Total Tax Liability 46,176
Notes :
1. As per section 40A(3) of the Act, if the aggregate payment made (otherwise than by an account payee
cheque/draft) to the same person during a day exceeds Rs. 20,000/- the entire amount of such payment
is disallowed.
2. As per section 40 (b) of the Act, if the interest payable to the partners exceeds simple interest of 12%
per annum, the excess amount is not deductible.
3. The remuneration paid to the working partners cannot exceed the permissible limits specified under
section 40 (b) of the Act.
Illustration 12:
Mr. X, carrying on the business of operating a warehousing facility for storage of sugar, has a total income of
Rs. 80 lakh. In computing the total income, he had claimed deduction under section 35AD to the tune of Rs. 70
lakh on investment in building (on 1.4.2019) for operating the warehousing facility for storage of sugar. Compute
his tax liability for A.Y. 2020-21. Show the calculations of Alternate minimum Tax also.
Solution:
Computation of Tax payable by Mr. X for AY 2020-21
Computation of Normal Tax
Particulars Amount (Rs. in lakh)
Tax liability under the normal provisions of the Income-tax Act, 1961 24.00
Add: Health and Education Cess @4% 0.96
Total Tax Liability 24.96
Computation of Alternate Minimum Tax
Particulars Amount (Rs. in lakh)
Total Income 80.00
Add : Deduction under section 35AD 70.00
Less : Depreciation under section 32 (7.00)
Adjusted Total Income 143.00
AMT @18.5% 26.46
Surcharge @ 15% (since adjusted total income> Rs. 100 lakh) 3.97
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Tax 30.43
Add: Health and Education Cess @ 4% 1.22
Total tax Liability 31.65
Since the regular income tax payable is less than the AMT payable, the adjusted total income of Rs. 143 lakhs
shall be deemed to be the total income of Mr. X and tax is payable @18.5% thereof plus surcharge @ 15% and
HEC @4%. Therefore, tax liability is 31.65 lakhs.
However, Mr. X would be eligible for credit in 15 subsequent years to the extent of difference between the AMT
and Normal Tax i.e. Rs. 6.69 lakhs.
Illustration 13:
Mr. A, Mr. B and a foreign company X Ltd. are members of a AOP sharing profits and losses in the ratio of 2:2:1.
The total income of the AOP is Rs. 2,50,000 including long term capital gains Rs. 40, 000. Calculate tax liability
of the AOP for AY 2020-21.
Solution:
Foreign company X Ltd. is taxable at a rate higher than maximum marginal rate (i.e. 40%) and remaining
income is taxable at maximum marginal tax rate (i.e. 30%)
Particulars Rs.
Tax on LTCG 40,000 at 20% 8,000
Tax on share of X Ltd. (2,10,000 *40%*1/5) 16,800
Balance (2,10,000 *30%*4/5) 50,400
Total Tax 75,200
Add Health and Education Cess (4%) 3,008
Tax liability 78,208
Tax liability (round off) 78,210 (round off)
Illustration 14:
Delhi Co-operative Society derived the following incomes during the previous year (1.4.2019 to 31.3.2020 -
Assessment Year 2020-21).
(1) Marketing of agricultural produce of its members 10,000
(2) Interest from members on delayed payment of the price of goods purchased 1,000
(3) Processing (without aid of power) of agricultural produce of its members 8,000
(4) Supplying milk to the Government (raised by its members) 15,000
(5) Agency business 25,000
(6) Dividends from other Co-operative Societies 15,000
(7) Income from letting of godowns 20,000
(8) Income from House Property 30,000

Compute the total income of the Delhi Co-operative Society.
Solution:
Computation of total income of Delhi Co-operative Society
Particulars Rs. Rs.
(1) Income from House Property 30,000
Letting of godowns 20,000 50,000
(2) Income from Business:
Marketing of agricultural product 10,000
Processing of goods 8,000
Supplying milk 15,000
Agency business 25,000 58,000
(3) Income from other sources:
Interest from members 1,000
Dividends 15,000 16,000
Gross Income 1,24,000
Deductions under Section 80P:
(1) Letting of godowns (20,000)
(2) Marketing of agricultural produce (10,000)
(3) Processing of goods (8,000)
(4) Supplying milk (15,000)
(5) Agency business (25,000)
(6) Dividends (15,000) (93,000)
Total income 31,000
Notes:
(1) Interest from members Rs. 1,000 is not deductible as it is not from the credit facilities provided to
the member and for this purpose society cannot be said to be a credit society [Rodier Mill Employees’
Cooperative Stores Ltd. v. CIT (1982) 135 ITR 355].
(2) The gross total income of the society exceeds Rs. 20,000 hence deduction regarding income from
house property is not available.
Illustration 15:
Compute the net income and tax liability of X Ltd. For the assessment year 2020-21 assuming that X Ltd. has
a deemed long-term capital gain of Rs.60,000 under proviso (i) to section 54D(2) which is not credited in profit
and loss account.
406 PP-DTL&P
Sale proceeds of goods (domestic sale) 22,23,900
Sale proceeds of goods (export sale) 5,76,100
Amount withdrawn from General Reserve (created by debiting the P&L

a\c) 2,00,000
Amount withdrawn from revaluation reserve 1,50,000
Total 31,50,000
Less:
Business Expenses (2,10,000)
Depreciation (normal) (6,16,000)
Depreciation (extra depreciation because of revaluation) (2,70,000)
Salary & wages (2,85,820)
Income-tax (3,50,000)
Outstanding customs duty (not paid as yet) (17,500)
Proposed Dividend (60,000)
Consultation fees paid to a tax expert (1,39,000)
Other expenses (21,000) (19,69,320)
Net profit 11,80,680
The company wants to claim/ set off the following:-

1. Deduction under section 80-IB (30% of Rs. 11,80,680)
2. Depreciation under section 32 (Rs. 5,36,000)
3. Bought forward the loss of 2015-16 being Rs. 14,80,000 for tax purposes and Rs. 40,00,000 for
accounting purpose
4. Unabsorbed depreciation being Rs. 70,000 for accounting purpose.
Solution:
Computation of the net income and tax liability of X Ltd. for the assessment year 2020-21
Tax Liability under normal provisions of Income Tax Act
Net profit as per P&L A/c 11,80,680

Add:
Excess depreciation 3,50,000
[i.e., Rs. 6,16,000+Rs. 2,70,000 – Rs. 5,36,000]
Income Tax 3,50,000
Customs Duty which is not paid 17,500
Proposed dividend 60,000 7,77,500
Less:
Amount withdrawn from General reserve (2,00,000)
Amount withdrawn from Revaluation reserve (1,50,000)
Unabsorbed loss (14,80,000) (18,30,000)
Business Income 1,28,180
Long term capital gain 60,000
Deductions under section 80-IB (30% of 1,28,180) (38,454)
Net Income 1,49,726
Tax Liability( rounded off) 38,920
Computation of Book Profits and Tax Liability as per MAT provisions under section 115 JB of the Act

Net Profit 11,80,680
Add:
Depreciation (Rs. 6,16,000+Rs.2,70,000) 8,86,000
Income Tax 3,50,000
Proposed dividend 60,000 12,96,000
Less:
Amount withdrawn from general reserve (2,00,000)
Unabsorbed depreciation (70,000)
Normal depreciation (6,16,000)
Amount withdrawn from revaluation reserve to the extent it (1,50,000) (10,36,000)
does not exceed extra depreciation because of revaluation
Book Profit 14,40,680
Tax Liability @ 19.24% (18.5% plus HEC @ 4%)(rounded off) 2,77,190
X Ltd. will pay Rs. 2,77,190 as tax for the A.Y 2020-21 as per section 115JB. Tax credit however is available in
respect of excess tax (Rs. 2,38,270) under section 115JBB).
Illustration 16
Xavier Ltd., a domestic company, has distributed dividend of Rs. 230 lakh to its shareholders on 1/11/2019. On
408 PP-DTL&P
1/10/2019, it has received dividend of Rs. 60 lakh from its domestic subsidiary company Yale Ltd., on which
Yale Ltd. has paid dividend distribution tax under section 115-O. Compute the additional income-tax payable by
Xavier Ltd. under section 115-O.
Solution:
Computation of Income Tax Payable by Xavier Ltd.
Particulars Rs. (in lakhs)
Dividend distributed by Xavier Ltd. 230
Less : Dividend received from subsidiary Yale Ltd. (60)
Net Distributed profits 170
Add: increase for the purpose of grossing up of dividend (100 x 170/100-15) 30
Gross Dividend 200
Additional income tax payable by X Ltd. u/s 115-O(15% of Rs. 200 lakhs) 30.00
Add : Surcharge @ 12% 3.60
Tax before cess 33.60
Add : Health and Education cess@ 4% 1.344
Tax Payable 34.944
Note :
• W.e.f. 1st October, 2014 the dividend paid is required to be to grossed up with the income distributed
for computing the tax liability on account of dividend distribution tax. With the grossing up, the effective
tax rate on dividend distribution has increased as under:
• If surcharge and cess is excluded then effective rate of dividend distribution tax would be 20.555%
{17.647% -(100 X15/85 )+ 12% surcharge and 4% Health and education cess thereon}.
• If surcharge and cess is included then the rate would be 21.171%- (100X 17.472/82.528).
Illustration 17:
X Ltd. an Indian Company received dividend of Rs. 15 lakhs from a foreign company in which it holds 28%
in nominal value of the equity share capital of the company. X Ltd. incurred expenditure of Rs. 0.25 lakhs on
earning this income. Examine the taxability of the dividend under the provisions of the Income tax Act, 1961.
Solution
Under section 115BBD, dividend received by an Indian company from a foreign company in which it holds
26% or more in nominal value of the equity share capital of the company, would be subject to a concessional
tax rate of 15% plus surcharge and cess, as against the tax rate of 30% applicable to other income of a
domestic company. This rate of 15% plus surcharge and cess would be applied on gross dividend, in the
sense, that no expenditure would be allowable in respect of such dividend. Therefore, dividend of Rs. 15
lakhs received by X Ltd. from a foreign company, in which it holds 28% in nominal value of equity share
capital of the company, would be subject to tax@15% under section 115BBD. Such dividend would be
taxable under the head “Income from other sources”. No deduction is allowable in respect of Rs. 0.25 lakhs
spent on earning this income.
The Finance (No.2) Act, 2014 extended the benefit of concessional rate of taxation@15% on gross dividend
received by Indian companies from specified foreign companies without limiting it to a particular assessment
year, in order to encourage Indian companies to repatriate foreign dividends into the country.
Illustration 18:
Anubav Pvt. Ltd. is a Company incorporated on 1.4.2010, and the only capital issued is in the form of
equity shares. The shares are held throughout by X, Y and Z, equally. The company has made losses/profits in
the past as under and the these have been accepted by the tax department on assessment :
Assessment Year Business Loss Unabsorbed Depreciation Total
Rs. Rs. Rs.
2015-16 -- 15,00,000 15,00,000
2016-17 -- 12,00,000 12,00,000
2017-18 6,75,000 11,25,000 18,00,000
Total 6,75,000 38,25,000 45,00,000
During the previous year ended 31.3.19 X transferred his shares to P and during previous year ended 31.3.20
Y transferred his shares to Q. During the year ended 31.3.2019 the company made a profit of Rs.15,00,000
(before charging depreciation of Rs.9,00,000) and during the year ended 31.3.19 a profit of Rs.45,00,000
(before charging depreciation of Rs.7,50,000). Compute taxable income of the company with proper working
for A.Y. 2020-21.
Solution:
Shareholding of company at end of different previous years
Previous year X Y Z P Q
Ending on
31/03/18 1/3 1/3 1/3 --- ---
31/03/19 --- 1/3 1/3 1/3 ---
31/03/20 --- --- 1/3 1/3 1/3
For AY 2019-20 at 2/3 of the shareholders are same as they were in year of loss, therefore, provisions of section
79 do not apply in this year. Computation of taxable income and carry forward and set off position is as under:
Particulars Rs.
Business profits 15,00,000
Less: Depreciation for PY18-19 (9,00,000)
Profits after Depreciation 6,00,000
Less: B/F loss of PY 17-18 6,00,000
Taxable Income Nil
Note: Unabsorbed depreciation carried forward 38,25,000

410 PP-DTL&P
Loss of PY 17-18 carried forward 75,000
Computation of Taxable Income of AY 20-21
Business Profits 45,00,000
Less: Depreciation for PY 19-20 (7,50,000)
Profits after depreciation 37,50,000
Less: Loss of PY 17-18 B/F NIL*
Less: Unabsorbed depreciation B/F (37,50,000)
Taxable Income NIL
Note:- *As shareholders holding 51% of voting rights in PY 17-18 (i.e. year of loss) are not same in PY 19-20
(i.e. the year in which loss is sought to be b/f and set off), therefore such loss cannot be b/f and set off. However
provisions of Section 79 are not applicable on unabsorbed Depreciation.
Unabsorbed Depreciation carried forward 75,000
Illustration 19:
Profit and loss account of XLtd. for the year ending March 31, 2020 shows a net profit of Rs. 75 lakh after
debiting / crediting the following items:
1. Depreciation: Rs. 24 lakh (including Rs. 4 lakh on revaluation).
2. Interest to financial institution not paid before due date of filing return of income: Rs. 6 lakh.
3. Provision for doubtful debts : Rs. 1 lakh.
4. Provision for unascertained liabilities : Rs. 2 lakh.
5. Transfer to general reserve : Rs. 5 lakh.
6. Net agricultural income : Rs. 16 lakh.
7. Amount withdrawn from reserve created during 2016-17 : Rs. 3 lakh (book profit was increased by the
amount transferred to such reserve in assessment year 2020-21)
Other information -
Brought forward loss and unabsorbed depreciation as per books are Rs. 12 lakh and Rs. 10 lakh, respectively.
Compute minimum alternate tax under section 115JB for the assessment year 2020-21.
Solution:
Computation of book profit -
Particulars Rs.
Adjustments -
Add: Amount transferred to general reserve 5,00,000
Add: Provision for unascertained liability 2,00,000

Add: Depreciation 24,00,000
Add: Provision for doubtful debts 1,00,000
Less: Amount withdrawn from reserve account (3,00,000)
Less: Agricultural income (16,00,000)
Less: Depreciation (other than depreciation which arises because of revaluation of assets) (20,00,000)
Less: Amount of loss brought forward or unabsorbed depreciation, whichever is less (10,00,000)
Book profit 58,00,000
Minimum alternate tax (@ 18.5%) 10,73,000
Add: Surcharge nil
Total 10,73,000
Add: Health and Education cess @ 4% 42,920
Minimum alternate tax 11,15,920
Illustration 20:
X Ltd. has claimed exemption on the income from long-term capital gains under section 54EC by investing
in bonds of National Highway Authority of India within the prescribed time. In the computation of “book profit”
under section 115JB, the company claimed exclusion of long-term capital gains because of exemption available
on it by virtue of section 54EC. The Assessing Officer reckoned the book profit including long-term capital gains
for the purpose of levy of minimum alternate tax payable under section 115JB. Is the action of the Assessing
Officer justified in law?
Solution:
Capital gain credited to profit and loss account is part of book profit even if it is exempt under section 54EC – N
J. Jose & Co. (P.) Ltd. v. C/r[2008] 174 Taxman 141 (Ker.).
Illustration 21:
Examine the following, statements in the context of the provisions in the various Chapter of the Act:
1. The provisions of section 115JB are not applicable in case of foreign companies.
2. The provisions of dividend distribution tax are also applicable to an undertaking or enterprise engaged
in developing, operating and maintaining a Special Economic Zone (SEZ).
Solution:
1. Applicability of MAT provisions in the case of foreign companies -Foreign companies operating in India
are subject to provisions of minimum alternate tax under section 115JB. However, section 115JB is not
applicable to a foreign company which has no presence or PE in India—Tunken Co., In re [2010] 193
Taxman 20 (AAR-New Delhi), Praxair Pacific Ltd., [2010] 193 Taxman 1 (AAR-New Delhi).
2. The provisions of dividend distribution tax are not applicable (up to May 31, 2011) to an undertaking or
enterprise engaged in developing, operating and maintaining a Special Economic Zone (SEZ).
Illustration 22: X ltd is a closely held company engaged in manufacture of garments where value of plant and
machinery owned by company is Rs. 5500000. The following information for the previous year 2018-19
412 PP-DTL&P
Particulars Rs.
Domestic sales 2223900
Export sales 576100
Amount withdraw from General reserve (Reserve created in 1997-98 by debiting P&L account) 200000
Amount withdrawn from revaluation reserve 150000
Total 3150000
Depreciation (Normal) 616000
Depreciation (Due to revaluation) 270000
Salary and wages 210000
Income tax 360000
Outstanding custom duty not paid yet 17500
Proposed dividend 60000
Consultation fees paid to tax consultant 21000
Other exp 139000
Net Profit 1456500
The assessee claims the following as deductions:

l Deduction under section 80IB-30% of 1456500
l Depreciation under section 32 is Rs.536000
l The company wants to set off following losses
Particulars For Tax Purpose For Accounting

Purpose
B/F loss of 2011-12 1480000 400000
Unabsorbed depreciation Nil 70000
Compute net income and tax liability of X ltd for the AY 2019-20 assuming that X ltd gets deemed long term
capital gain of Rs. 60000 under section 54D(2) which is not credited in P&L
Solution:
Statement showing computation of Taxable income and Tax Liability
Particulars Amount Rs
Net Profit as per P&L 1456500
Add:
l Excess Depreciation[616000+270000-536000] 350000
l Income tax 360000
l Custom duty paid on paid yet 17500
l Proposed dividend 60000
Total 2244000
Less: Amount withdraw from reserve (200000+150000) (350000)
Business Income 1894000
Less: Unabsorbed loss (1480000)
Net Business Income 414000
Long Term Gain 60000
Less: Deduction under section 80C to 80U (124200)
Deduction under section 80IB (30% of 414000)
Net Income (Round off) 349800
Tax on net income 98940

l 20% of 60000 (i.e. on LTCG) = 12000
l 30% of 289800 (i.e. 349800-60000) = 86940
Add: HEC@4% 3958
Net Tax Liability (Round off) [A] 102898
Statement showing computation of MAT
Net Profit 1456500
Add:
l Depreciation [616000+270000] 886000
l Income Tax 360000
l Proposed dividend 60000
Less:
l Amount withdraw from General Reserve 200000
l Unabsorbed depreciation 70000
l Depreciation (Normal) 616000
l Amount withdraw from revaluation reserve to the extent not exceed 150000
revalued depreciation
Book Profit 1726500

Tax liability 18.5% of Book Profit [18.5%*1726500] 319403
Add: HEC@4% 12776
Tax Liability based on Book profit (Round off) [B] 332180
A. Tax as per normal Income Tax 102898

414 PP-DTL&P
B. Tax as per 18.5% of Book profit 332180

Tax Payable by X ltd = A or B whichever is higher 332180
Tax Credit available [B-A] 227075
Illustration 23:
The projected P&L of A ltd and B ltd

(both companies under same management) for PY2018-19
Particulars A ltd B Ltd Particulars A ltd B Ltd
COGS 4500000 6100000 Sale 6500000 8600000
Depreciation 153000 198913 Profit on sale 120000
of plot of land
(15.3% on (13.91% of
[LTCG under
Rs1000000) Rs1430000)
section 48]
Other Exp 200300
Net Profit 1646700 2421087
Total 6500000 8720000 Total 6500000 8720000
l A ltd has set up industrial undertaking in notified industrial park and eligible for 100% deduction under
section 80IA and WDV of Plant and Machinery for tax purpose would be Rs. 1250000.
l B ltd is not eligible to any deduction under section 80IA and WDV of assets for income tax purpose
would be Rs. 1876670.
Solution:
Statement showing computation of Taxable income and Tax Liability
Particulars A ltd B ltd

Net Profit 1646700 2421087
Add: Depreciation 153000 198913
Less: Depreciation (187500) (281500)
Less: LTCG - (120000)
Business Income 1612200 2218500
Income from Capital Gain (LTCG) - 120000
Gross Total Income 1612200 2338500
Less: Deduction under section 80IA 1612200 -
Net Income Nil 2338500
Book Profit 1646700 2421087
Tax As per Normal Income Tax Act
Tax On Net income Nil 689550
[For B ltd : 30% of 2218500+20% of 120000]
Add: HEC@4% - 27582

Tax Liability [A] - 717130
Tax as per MAT under section 115JB
18.5% of Book Profit 304640 447901
Add: HEC @4% 12186 17916
Tax Liability [B] 316830 465820
Tax payable
Tax Liability = A or B whichever is higher 316830 717130
Illustration 24:
Example Based on section 115-O
X ltd is a manufacturing company located in India. Business income of company for the PY 18-19 under section
28 is Rs. 4000000. X ltd holds share in few companies.
Investee Country of Shareholding of Dividend Whether investee

Companies (In incorporation X td in Investee received during co has paid tax
which X ltd is of investee co co % PY 2018-19 under sec 115O
shareholder)
A India 51 40000 Yes
B India 26 50000 Yes
C Country C 51 60000 No
D Country C 26 70000 No
E Country C 25 80000 No
On1.9.2018, X ltd declares a dividend of Rs. 500000 for its own shares. Find out the tax liabilities and dividend
tax liability assuming India has Double Taxation Avoidance Agreement with country C and dividend income is
taxable in India and not in Country C.
Solution:
Statement Showing Computation of Income Tax Liability
Income From PGBP (Business Income) [Given] 4000000
Income From other Source
l Dividend from A ltd and B ltd [Exempt under section 10(34)
l Dividend from C/D/E ltd [60000+70000+80000] 210000
Net Income 4210000
416 PP-DTL&P
Tax liability
l On dividend under section 115BBD on C ltd and D ltd [15% of 60000+70000] 19500
l 30% of 4080000 [On balance i.e. 4210000-60000-70000] 1224000
Total Tax 1243500
Add: HEC @4% 49740
Net Tax Liability 1293240
Statement Showing Computation of Dividend Tax Liability
Dividend declared by X ltd 500000
Less: Dividend received by X ltd from investee Companies
l From A ltd [Indian Subsidiary, DDT has been paid under section 115-O] 40000
l From C ltd [Foreign subsidiary and tax paid under section 115BBD 60000
Net Dividend distributed 400000
DDT @17.64706% 70588
Add: Surcharge @12% 8471
Tax and Surcharge 79059
Add: HEC @4% 3162
Dividend Tax Liability 82221
Illustration 25:
Firm Vs Private Company [Tax Planning]
Following details are identified in below case of Firm V Private Company
Particulars Firm Private Company

Numbers of Partners/Directors 4 4
Taxable income before interest/ 1400000 1400000
Remuneration
Interest on capital to partners 180000
(12% of 1500000)
Remuneration payable to 822000 1200000 salary to each, being
Partners/directors Rs300000 payable in cash and
(At Maximum Level)
kind as below:
[Salary to each partner at
Basic Pay 120000
Rs205500 payable in cash
or cash/Kind] Education Allow 2400
Free Residential House 177600
at Delhi (Rent paid by employer)
Solution:
Statement showing tax liability of Company
Business Income 1400000
Less: Salary and Perks to four directors (1200000)
Taxable Income 200000
Tax Liability 30% of 200000 60000
Add: HEC@4% 2400
Net Tax liability (Round off) 62400
Statement showing tax liability of Firm
Income 1400000
Less: Interest on capital (180000)
Book Profit 1220000
Less: Remuneration to partners (822000)
Tax Income of firm 398000
Tax Liability 30% of 398000 119400
Add: HEC@4% 4776
Net Tax liability (Round off) 124180
Statement showing tax liability of Directors
Basic Salary 120000
Education Allowances Exempt under section 10(14)
Perquisites [Free Residential House at Delhi] 18000
[A] Rent Paid (177600/3) 59200
[B] 15% of Salary (i.e. 15% of 120000] 18000
Taxable = A or B whichever is lower
Gross Salary 138000
Less: Standard Deduction (50000)
Income From salary 88000
Tax liability Nil
Conclusion:
A. Tax liability of Firm 124180
418 PP-DTL&P
B. Tax liability of Company and Directors 62400

It is advisable to convert firm into private ltd in order to reduce tax liability.
Illustration 26:
Political Party Exemption under section 13A
The books of account maintained by a Public Vikas Political Party (PVPP) registered with Election Commission
for the year ending 31-3-2019 disclose the following receipts:
l Rent of property let out to a departmental store at Delhi 6,00,000
l Interest on deposits other than banks 5,00,000
l Contribution from 100 person
(Party submitted a report to the Election Commission) 21,00,000
of Rs 21,000 each (received through an account payee cheque)
l Net profit of cafeteria run in the premises at Delhi 3,00,000
Compute total income of the political party for the previous year 2018-19.
Solution:
Computation of total income of PVPP for the Assessment year 2019-20
Particulars Amt Rs Remarks

l Rent of property let out to a departmental store at Nil Exempted u/s 13A
Delhi
PGBP 300000
l Net profit of cafeteria run in the premises at Delhi
l Interest on deposits other than banks Nil Exempted u/s 13A
l Contribution exceeding Rs 20,000 Nil Exempted u/s 13A
Total Income 300000
[6] Cooperative Society

DP Consumer Co-operative Society furnishes the following particulars of its income in respect of financial year
ended on 31-3-2019, Find tax liability of the co-operative society –
l
Income from business Rs 5,00,000
l Interest received on company deposits Rs100,000
l Interest on deposit with banks Rs20,000
l Income from letting of godown for storage of commodities Rs40,000
Solution:
Computation of total income for the Assessment year 2019-20
Particulars Amt Rs Remarks

l Income from letting of godown for storage of commodities 40000
Income from Profit or Gain from Business 500000
l Interest received on company deposits 100000
l Interest on deposit with banks 20000
Less: Deduction under section 80P
l Income from letting of godown for storage of commodities 40000
l Income from activity other than specified activity
(consumer co-operative society)
100000 140000
Total Income 520000
LESSON ROUNDUP
– Article 366(6) of the Constitution defines corporate tax.
– As per section 2(17) of the Income Tax Act, Company means any Indian Company, or any body
corporate incorporated by or under the laws of a country outside India, or any institution, association
or body which is or was assessable or was assessed as a company for any assessment year under
the Indian Income Tax Act, 1922 (11 of 1922) or was assessed under this Act, as a company for any
assessment year commencing on or before April 1, 1970; or any institution, association or body,
whether incorporated or not and whether Indian or non-Indian, which is declared by general or special
order of the CBDT to be a company.
– Minimum Alternate Tax (“MAT”) on the book profit of a Company would not apply to a Foreign Company
not having any physical presence in India.
– A domestic company is liable to pay tax on the amounts distributed, declared or paid as dividend
(whether interim or otherwise), it shall be payable @ 15% plus surcharge @ 12% and health and
education cess @ 4% in addition to the income tax payable.
– Section 115BBD provides for taxing foreign dividends received from a foreign company at the rate of
15% plus surcharge @7% and health and education cess @ 4%.
– The term ‘Hindu undivided family’ has not been defined in the Income-tax Act. However, in general
parlance it means an undivided family of Hindus. Creation of a HUF is a God-gifted phenomenon. As
soon as a married Hindu gets a child, a new HUF comes into existence. It is not at all necessary that
every HUF must have joint property or family income.
– A Hindu Joint Family consists of Coparceners & members.
420 PP-DTL&P
– The gross total income of the family for the relevant previous year shall be computed under the
relevant heads (as per the provisions of the Income-tax Act) as it is computed for other assessees.
– Partnership Firm: Under Section 2(23) of the Income-tax Act, the terms “firm”, “partner”, and
“partnership” have the meanings respectively assigned to them in the Indian Partnership Act, 1932
and Limited Liability Partnership Act, 2008.
– As per the scheme, a partnership firm shall be assessed as a firm if the following conditions are
satisfied:
• The partnership is evidenced by an instrument i.e. partnership deed.
• The individual shares of the partners are specified in that instrument.
• A copy of the partnership deed certified by all the partners in writing (other than the minors)
is submitted along with the return of income in respect of which assessment as a firm is first
sought.
– As per Section 10(2A) of the Act, any person who is a partner of a firm which is assessed as such, his
share in the total income of the firm will not be included in computing his total income. Partner includes
a minor admitted to the benefits of partnership as per Section 2(23) of the Act.
– Alternate Minimum Tax: From the assessment year 2012-13 onwards, where the regular income tax
payable for a previous year by a person other than a company is less than the alternate minimum tax
payable for such previous year then the adjusted total income shall deemed to be the total income
such person for such previous year and it shall be liable to pay income tax on such adjusted total
income @ 18.5% + SC plus health and education cess @ 4%. AMT is applicable if adjusted total
income exceeds Rs. 20 lakh.
– Association of persons: “Association of persons” means an association in which two or more
persons join in a common purpose or common action to produce income, profits or gains.
– For the formation of an AOP the association need not necessarily be on the basis of a contract, consent
and understanding may be presumed. Section 167B makes the following provisions as regards the
incidence of charge of tax on the association of persons.
• Where shares of members are determinate In this case, tax is chargeable on the income of the
association of persons at the same rate as applicable to an individual. However, where the total
income of any member of the association of persons for the previous year (excluding his share
of income from the association of persons) exceeds the maximum amount not chargeable to tax
in the case of an individual, tax will be charged on the total income of the AOP at the maximum
marginal rate of 30%, i.e. the highest slab applicable to an individual.
• Where the shares of the members are indeterminate In these cases, tax will be charged on
the total income of the AOP at the maximum marginal rate, that is, the rate of tax as well as
surcharge, if any, applicable to the highest slab of income in the case of an individual as specified
in the Finance Act of the relevant year
– Co-operative Society means a co-operative society registered under the Co-operative Societies Act,
1912, or under any other law for the time being in force in any State for the registration of co-operative
societies.
– The income of a co-operative society is computed in the same manner as provided for other assessees.
– Section 80P provides for certain deductions from the gross total income of a Co-operative Society.
– The provision related to Charitable Trust exemptions.
– The provision related to Electoral Trust
SELF TEST QUESTIONS

1. What are the provisions relating to assessment of a HUF after its partition?
2. Explain the terms ‘Partition’, ‘Partial Partition’, and ‘Co-parceners’.
3. Explain Carbon Credit?
4. What is the New Scheme of Taxation of a firm?
5. Explain in brief the condition for allowability of deduction of interest to a partner.
6. Explain the difference between the change in constitution and succession of a firm. Illustrate.
7. What is meant by Association of Persons? How is it formed?
8. Discuss tax liability of an Association of Persons.
9. Discuss tax liability of the members of Association of Persons. State the circumstances, if any, under
which their share of income from an association of persons is not chargeable to tax.
10. Explain the following under the Income-tax Act:
(a) “Co-operative Society”.
(b) “Urban Consumers” Co-operative Society”.
11. Explain the deductions which are allowed under Section 80P to arrive at the total income of a
cooperative society.
12. Explain the exemption available to political parties ?
13. What do you understand by “Book Profit” in the context of Minimum Alternate Tax.
14. Explain the significance of classification of companies under the Income tax Act, 1961 and their impact
on the tax liability.
15. Explain how is the residential status of a company determined under the Income tax Act, 1961.
16. Explain the concept of MAT and its rationale.
17. When will the ‘book profits’ of a company deemed to be the total income of the company for the
purposes of levy of MAT under section 115JB? Indicate briefly the points to be taken into account while
preparing annual accounts for the purpose of MAT. The MAT does not apply to foreign companies
operating in India. Do you agree? Give reasons.
18. What is the quantum of MAT for a ‘domestic company’ and ‘foreign company’?
19. The cascading effect of dividend distribution tax is minimised in the case of holding and subsidiary
companies. Discuss.
20. Distinguish between Domestic company and foreign company. Are they treated alike under the
income- tax rate structure?
422 PP-DTL&P
PRACTICAL QUESTIONS
1. A Ltd. is a company in which 60% of the shares is held by B Ltd. A Ltd. declared a dividend amounting
to Rs. 35 Lakhs to its shareholders for the FY 2018-19 in its AGM held on 10th July, 2019. Dicidend
distribution tax was paid by A Ltd. on 15th July, 2019. B Ltd. declared an interim dividend Rs. 50 Lakhs
on 15th August, 2019. Compute the amount of tax on dividend payable by B Ltd.
2. Mr. Anil has income of Rs. 45 lakhs under PGBP. One of his business is eligible for deduction @ 100
% of profits u/s 80IB for AY 2020-21. The profits of such business is included in the business income
is Rs. 20 Lakhs. Compute the tax payable by Mr. Anil during PY 2019-20.
3. C sells agricultural land situated in an urban area for `8,30,000 (brokerage paid @ 2 %) on March
31, 2019 (cost of acquisition : `1,05,000 on March 1, 2004; it was used for agricultural purposes
since2001) On March 31, 2019 he owns one residential house property. On April 6, 2019, he purchases
the following assets –
a. Agricultural land: `1,50,000 ; and
b. Residential house property : `3,00,000.
Find out the capital gains chargeable to tax for the A/Y 2020-21.
4. A sells agriculture land situated within the municipal limits of Calcutta for `30,00,000 on July 4,
2018, which was purchased by him on March 1, 2002 for `4,00,000. On July 15, 2019 he purchases
agricultural land in rural area for `4,30,000 and deposits `10,80,000 in a deposit account for availing
exemption under section 54B.
Determine the amount of capital gains.
5. T purchased a house on 28-6-2002 for `1,10,000 and paid `10,000 for getting the property registered
in his name. On 15-6-2010, he spent `80,000 on improvement of the house. The house was sold on
21-10-2018 for `10,00,000. Commission of `4,000 was paid on the sale of the house. Compute the
capital gains.
Answer:
1. Rs. 6,13,959
2. Rs. 8,65,800
3. Rs. 1,93,156
4. Rs. 3,70,000
5. Rs. 5,41,868
SUGGESTED READINGS

Kluwer]
424 PP-DTL&P
Lesson 9 n TDS/TCS, Returns, Refund & Recovery 425
Lesson 9
TDS/TCS, Returns, Refund & Recovery
LESSON OUTLINE
LEARNING OBJECTIVES
– Tax Deduction at Source ‘TDS’ The Income-tax Act provides for collection and
– Tax Collection at Source ‘TCS’ recovery of income-tax in the following ways,
namely,
– Advance Tax & Self-Assessment Tax ‘SAT’
(i) deduction of tax at source in respect of
– Returns
income by way of salaries, interest on
– Permanent Account Number (PAN) securities, interest other than interest on
securities, winnings from lotteries and
– Signatures
crossword puzzles, winnings from horse
– E-Filing race, insurance commission, dividends,
– Interest for default in furnishing return of payment to contractors or subcontractors
Income and payments to non- residents;
– Collection of Tax (ii) advance payment of income-tax before

the assessment by the assessee himself;
– Recovery of Tax
(iii) direct payment of income-tax by the
– Refunds assessee on self-assessment; and
– Assessment (iv) payment made after the assessment is
– Appeals made by the Assessing Officer.
– Revisions Once the tax is deducted, it is duty to deposit the

same to the credit of the Central Government under
– Settlement of Cases prescribed procedures stated under the Income
– Penalties etc. Tax Act, 1961. In this chapter TDS related aspects
of the Income Tax Act have been elaborately
– LESSON ROUNDUP
discussed with special emphasis on e-TDS and
– SELF TEST QUESTIONS other relevant issues.
The provisions of the Income-Tax Act contained in
Sections 117 to 136 specify the procedure relating
to the appointment of the various income-tax
authorities, their powers, functions, jurisdiction and
control. The procedure under the Income-tax Act
for making an assessment of income begins with
the filing of a return of income. Section 139 of the
Act contains the relevant provisions relating to the
furnishing of a return of income. On the basis of
return of income the income tax authority makes
the assessment.
425
426 PP-DTL&P
Further, the Income-tax Act provides for various

remedies to an assessee on completion of the
assessment. The main remedies available to an
assessee on completion of the assessment are
Appeals, Revision, and Rectification. All these
remedies work in different areas. However, strictly
speaking the remedies are not alternative to
each other but at times more than one remedial
proceeding may be used as complimentary to each
other so as to achieve the best results. The right
to appeal arises where the taxpayer is aggrieved
by the order passed by the income-tax authority.
Where the Assessing Officer accepts the return
filed by the tax payer and passes an order making
no modification, an appeal does not lie against
that order as the taxpayer cannot be said to be
aggrieved of that order.
understand;
– What is tax deducted at source and tax
collected at source
– What are the rates of TDS and TCS
– The due dates for payment of TDS and
TCS and Advance Tax
– The provisions related to Returns,
Signature – E-Filing
– Fee and Interest
– Collection and Recovery of Tax
– Refunds
– What are the types of assessment
– When can order for re-assessment be
issued.
– How the mistake in return can be rectified
and by whom.
– What are the provisions for filing of appeal.
– What is the procedure to file an application
before the appellate authority.
– When order of appeal can be revised.
– What is the ground and quantum of penalty
imposed.
TAX DEDUCTED AT SOURCE

Income Tax Act provides for scope of the total income of a person chargeable to tax on an annual basis. The
tax liability is determined as per the provisions of the Income-tax Act and such tax liability is discharged vide
any of the following mode:
Tax Tax Self Tax on

Deducted Collected Advance Assessme Regular
at Source at Source Tax nt Tax Assessmen
(TDS) (TCS) (SAT) t
It is a measure, in which person who are making payment of income are responsible to deduct tax from such
income (at specified rates) and pay only net amount. Tax so deducted (called TDS) shall be deposited with the
Government’s treasury within the stipulated time. The payer will issue a certificate in Form 16 or 16A to the
payee and the payee will get credit for TDS and his tax liability shall be reduced to that extent. In nutshell, the
provisions are merely a mode of collection of income tax and a check on tax evasion through proper control
and information.
All deductors (including Government deductors who deposit TDS in the Central Government Account through
book entry) shall issue TDS certificate generated through TIN central system and which is downloaded from the
TIN website with a unique TDS certificate number.
As per provision of Section 206AA, if resident payee fails to provide his PAN, tax is required to be deducted at
the rate mentioned in respective section or 20%, whichever is higher. [The Section 206AA is discussed later in
the chapter]
Objects
• Quicker realisation of tax
• Effective realisation of tax
There are several provisions in the Act for TDS, being discussed infra.
Direct Payment [Section 191]

Section 191 provides that in the following cases, tax is payable by the assessee directly –
(1) in the case of income in respect of which tax is not required to be deducted at source; and
(2) income in respect of which tax is liable to be deducted but is not actually deducted.
In view of these provisions of section 191, the proceedings for recovery of tax necessarily had to be taken
against the assessee whose tax was liable to be deducted, but not deducted.
In order to overcome this difficulty, the Explanation to this section provides that if any person, including the
principal officer of a company –
(1) who is required to deduct tax at source; or
(2) an employer paying tax on non-monetary perquisites under section 192(1A),
does not deduct the whole or part of the tax, or after deducting fails to pay such tax deducted, then,
such person shall be deemed to be an assessee-in-default.
However, if the assessee himself has paid the tax, this provision will not apply.
428 PP-DTL&P
TDS ON SALARY [SECTION 192]
Who is responsible to deduct tax

Any person responsible for paying any income chargeable to tax under the head “Salaries” (i.e. employer) is
required to deduct tax at source on the amount payable.
When tax shall be deducted

Tax shall be deducted at the time of payment of such income.
Rate of TDS
Tax shall be deducted at the average rate of tax, computed on basis of prescribed rates in force for the relevant
financial year in which payment to employee is made on the estimated total income of the assessee.
Note:
Following points shall be kept in mind by the person responsible to deduct tax at source u/s 192 –
1. Maximum exempted limit: Tax shall not be deducted if taxable salary is less than basic exemption limit.
2. Payment of tax by employer: The employer paying any income in the nature of non-monetary perquisite
may pay, at his option, tax on such income without making any deduction therefrom at the time when
such tax was otherwise deductible. For this purpose, tax shall be determined at the average of income-
tax computed on the basis of the rates in force for the financial year, on the income chargeable under
the head “Salaries”. It is to be noted that tax paid on non-monetary perquisites by the employer shall
not be considered as income of the employee.
3. Particulars of perquisites: The employer shall furnish a statement to the employee (whose salary
exceeds Rs 1,50,000) giving correct and complete particulars of perquisites or profits in lieu of salary
provided to employee and the value thereof in Form 12BA provided salary of such employee exceeds
Rs 2,00,000.
4. Salary from more than one source: As per Section 192(2), where assessee is working simultaneously
with more than one employer, he may furnish to any one employer at his choice, details (in Form No.
12B) of income taxable under the head “Salaries” due to or received by him from other employer(s) and
such employer shall deduct tax on aggregate salary.
5. Treatment of other income: As per Section 192(2B), where an assessee who receives any income
chargeable under the head “Salaries” has, in addition, any income chargeable under any other head
of income for the same financial year, he may (or may not) furnish to employer the particulars (in plain
paper) of –
• such other income (only income and not loss)
• tax deducted on such other income as per provision of this chapter;
• the loss, if any, under the head “Income from house property” (Losses under any other head are
not to be considered)
Tax deducted u/s 192 shall be higher of the following:
• Tax deductible from income,that would be so deductible, if loss under the head ‘Income from
House Property’, other income (only income) and the tax deducted thereon had been taken into
account.
• Tax deductible from income under the head “Salaries”, that would be so deductible (after adjusting
loss under the head Income from house property), if the other income (or loss) and the tax
deducted thereon had not been taken into account.
Salaries payable in a foreign currency
For purposes of deduction of tax out of salaries payable in a foreign currency, the value of salaries in
terms of rupees should be calculated at the prescribed rate of exchange as specified in Rule 26 of the
Income-tax Rules, 1962.
6. Evidence of claim: The responsible person shall, for the purposes of estimating income of the assessee
or computing tax deductible, obtain the evidence or proof or particulars of prescribed claims (including
claim for set-off of loss) from the assessee in such form and manner as may be prescribed.
Case Law:
Section 192(1) requires any person responsible for paying any income chargeable under the head “Salaries”
to deduct tax at source at the time of payment. If an employee receives income chargeable under a head other
than “Salaries”, section 192 does not get attracted at all.
In the case of ITC Ltd v. CIT (2016) 384 ITR 14, the issue under consideration before the Supreme Court was
whether “tips” received by the hotel-company from its customers and distributed to the employees fell within the
meaning of “Salaries” to attract tax deduction at source under section 192.
The Supreme Court observed that in respect of tips collected by the company from the customers and
distributed to the employees, the person responsible for paying the employee was not the employer at all, but
a third person, namely the customer. As income from tips would be chargeable in the hands of the employees
as “Income from Other Sources”, on account of such tips being received from customers and not from the
employer, section 192 would not get attracted at all.
The Supreme Court further observed that there was no vested right in the employee to claim any amount of tip
from his employer. Tips are purely voluntary amounts that may or may not be paid by customers for services
rendered to them, and hence, would not fall within the meaning and scope of section 15. Further, the amount of
tips collected from the customers by the employer and paid to the employees has no reference to the contract
of employment at all. Tips were received by the employer in a fiduciary capacity as trustee for payments that
were received from customers which they disbursed to their employees for service rendered to the customer.
There was, therefore, no reference to the contract of employment when these amounts were paid by the
employer to the employee. Due to this reason the tips received by the employees could not be regarded as
profits in lieu of salary in terms of section 17(3). The payments of collected tips included and paid by way of
a credit card by a customer, would not be payments made “by or on behalf of” an employer. The contract of
employment not being the proximate cause for the receipt of tips by the employee from a customer, such
payments would be outside the scope of sections 15 and 17.
Provision Illustrated
Mr. A non-resident working in X Ltd. furnishes the following, compute the tax to be deducted at source by X Ltd.
Taxable salary Rs 4,00,000
Loss from House Property Rs 5,000
Loss from Business Rs 10,000
Gross Interest Income (TDS Rs 5,000) Rs 60,000
Investment in PPF Rs 10,000
430 PP-DTL&P
Solution
Computation of tax to be deducted at source by Y Ltd
Particulars Tax on income Tax on income

including other excluding other
income income
Salary income 4,00,000 4,00,000
Loss from House Property (5,000) (5,000)
Interest Income 60,000 Nil
Gross Total Income 4,55,000 3,95,000
Less: Deduction u/s 80C [Investment in PPF] 10,000 10,000
Total Income 4,45,000 3,85,000
Tax on above 9,750 6,750
Less: Rebate u/s 87A (not allowed to non-resident) Nil Nil
Tax after rebate 9,750 6,750
Add: Health and Education cess @ 4% 390 270
Tax and cess payable 10,140 7,020
Less: Tax deducted at source on other income 5,000 Nil
Balance 5,140 7,020
Tax to be deducted by Y Ltd. (Higher of Rs 5,140 or Rs 7,020) 7,020
Exemption or relaxation from the provision

When the recipient applies to the Assessing Officer in Form 13 and gets a certificate authorizing the payer to
deduct no tax or deduct tax at lower rate. [Refer section 197]
TDS ON PAYMENT FROM EMPLOYEES PROVIDENT FUND [SECTION 192A]
Who is responsible to deduct tax

The trustees of the Employees’ Provident Fund Scheme, 1952, framed u/s 5 of the Employees’ Provident
Funds and Miscellaneous Provisions Act, 1952 or any person authorised under the scheme to make payment
of accumulated balance due to employees.
When tax shall be deducted

The tax shall be deducted at the time of making of payment of accumulated balance due to the employee.
Deduction on which amount:
Tax is deducted on the accumulated balance due to an employee participating in a recognised provident fund
includible in his total income owing to the not applicability of the provisions of rule 8 of Part A of the Fourth
Schedule.
Rule 8 of Part A of the Fourth Schedule provides the accumulated balance due and becoming payable to an
employee participating in a recognised provident fund shall be exempted:
1. if he has rendered continuous service with his employer for a period of 5 years or more; or
2. if, though he has not rendered such continuous service, the service has been terminated by reason of
the employee’s ill-health, or by the contraction or discontinuance of the employer’s business or other
cause beyond the control of the employee; or
3. if, on the cessation of his employment, the employee obtains employment with any other employer, to
the extent the accumulated balance due and becoming payable to him is transferred to his individual
account in any recognised provident fund maintained by such other employer
Rate of TDS: 10%
 Any person entitled to receive any amount on which tax is deductible shall furnish his Permanent
Account Number (PAN) to the person responsible for deducting such tax, failing which tax shall be
deducted at the maximum marginal rate.
TDS is not applicable when amount of such payment or aggregate amount of such payment to the
payee is less than Rs. 50,000/-.
TDS ON INTEREST ON SECURITIES [SECTION 193]

Who is responsible to deduct tax: Any person responsible for payment of interest on securities (other than
interest on Government securities and certain specified securities) to any resident person.
Note: In the following cases tax is not required to be deducted:
1. Interest payable to a resident-individual or a resident HUF on debentures is not subject to TDS provided
following conditions are satisfied –
(a) Such debentures are issued by a company in which the public are substantially interested;
(b) Such debentures may be listed or unlisted
(c) The interest is paid by the company by an account payee cheque; and
(d) The amount of such interest payable during the financial year to such individual does not exceed
Rs 5,000
2. Any interest payable on any security of the Central or State Government. (However, tax is required to
be deducted on interest payable on 8% Savings (Taxable) Bonds, 2003 or 7.75% Savings (Taxable)
Bonds, 2018 [Finance Act, 2018] if amount of interest in a financial year exceeds Rs 10,000).
3. Any interest payable on any security issued by a company, where such security in dematerialised form
and is listed on a recognised stock exchange.
4. Any interest payable on securities beneficially held by Life Insurance Corporation of India or General
Insurance Corporation of India or any of the 4 companies formed by virtue of the scheme framed u/s
16(1) of the General Insurance Business (Nationalisation) Act, 1972 or any other insurer.
5. Any interest payable to Regimental Fund or non-Public Fund established by Armed Force [income of
whose is exempt u/s 10(23AA).
When tax shall be deducted:
The tax shall be deducted at the time of payment or crediting the payee, whichever is earlier.
Rate of TDS : 10% (No surcharge & Health & Education Cess) both in the case of domestic companies and
resident non-corporate assessees.
Exemption or relaxation from the provision:

 When the recipient applies to the Assessing Officer in Form 13 and gets a certificate authorizing the
payer to deduct tax at lower rate or deduct no tax; [Refer section 197]
432 PP-DTL&P
 When a declaration in Form 15G (in duplicate) is furnished by the assessee to the payer [Refer section
197A]
TDS ON INTEREST OTHER THAN INTEREST ON SECURITIES [SECTION 194A]
Who is responsible to deduct tax:

Following person are responsible to deduct tax at source on interest other than interest on securities to a
resident person –
 Any person, other than Individual or HUF; or
 An individual or HUF, whose books of account are required to be audited u/s 44AB (due to turnover or
gross receipt criteria) during the financial year immediately preceding the financial year in which such
interest is credited or paid.
However, following persons are responsible to deduct tax at source on interest other than interest on
securities paid or payable to a resident person if during the financial year, interest paid/payable exceeds
*Rs. 40,000:
a. A banking company;
b. Co-operative society engaged in carrying on the business of banking;
c. Post office in respect of notified scheme
*Provided that in case of payee being a senior citizen, instead of limit of “fourty thousand rupees”, the
limit of“fifty thousand rupees” shall apply.
The tax shall be deducted at the time of payment or crediting the payee, whichever is earlier.
Rate of TDS: 10%(no surcharge and Cess) both in case of resident non-corporate assessees and domestic
companies.
Other points
Following interests are not subject to TDS –
• Interest payable to –
a. Banking company; or
b. Co-operative society engaged in carrying on the business of banking (including a co-operative

land mortgage bank); or
c. Financial corporation established by or under a Central, State or Provincial Act; or
d. The Life Insurance Corporation of India; or
e. The Unit Trust of India; or
f. Any company or co-operative society carrying on the business of insurance; or
g. Such other notified institution, association or body.
• Interest credited or paid by a firm to a partner of the firm;
• Interest credited or paid by a co-operative society (other than a co-operative bank) to a member thereof
or to such income credited or paid by a co-operative society
• Interest credited or paid in respect of deposits under any notified scheme like NSC, Indira Vikas Patra,
Kisan Vikas Patra and Post office Monthly Income Account.
• Interest credited or paid in respect of deposits (other than time deposits and recurring deposit) with a
banking company. TDS is also required to be deducted on Recurring Deposits.
• Interest credited on the compensation amount awarded by the Motor Accidents Claims Tribunal;
• Interest paid on the compensation amount awarded by the Motor Accidents Claims Tribunal where the
amount of such income or, as the case may be, the aggregate of the amounts of such income paid
during the financial year does not exceed Rs 50,000
• Interest credited or paid by the Central Government under any provision of the Income Tax Act
• Income which is paid or payable by an infrastructure capital company or infrastructure capital fund or
a public sector company or scheduled bank in relation to a Zero Coupon Bond issued on or after 1-6-
2005 by such company or fund.
• Income by way of interest referred to in section 10(23FC)
• Interest on FDRs, made in the name of the Registrar General of the Court or the depositor of the fund
on the directions of the Court, will not be subject to TDS till the matter is decided by the Court. However,
once the Court decides the ownership of the money lying in the fixed deposit, the provisions of section
194A will apply to the recipient of the income

• When the recipient applies to the assessing officer in Form No. 13 and gets a certificate authorizing the
payer to deduct tax at lower rate or deduct no tax. [Refer section 197]
• When a declaration in Form 15G is furnished by the assessee to the payer [Refer section 197A]
Adjustment for short-deduction

The person responsible to deduct tax may at the time of making any deduction, increase or reduce the amount
to be deducted for the purpose of adjusting any excess or deficiency arising out of any previous deduction or
failure to deduct during the financial year.
TDS ON WINNING FROM LOTTERIES OR CROSS WORD PUZZLES, ETC. [SECTION 194B]

Any person responsible for paying to any person any income by way of winning from any lottery or crossword
puzzle or card game and other game of any sort, exceeding Rs 10,000 is responsible to deduct TDS at the time
of payment.
If income is more than Rs 10,000 (say Rs 12,000), then tax shall be deducted on the whole amount (i.e. Rs 12,000).
Rate of TDS:
The rate of TDS 30% (in case of non-resident payee, applicable surcharge, Health & Education cess shall also
be considered)
Payee Rate of TDS as a % of amount paid or payable

Resident Person 30%
Non-Resident 30% + Surcharge + Health & Education Cess)
434 PP-DTL&P
Other Points
• If prize is given partly in cash and partly in kind then tax on whole prize (i.e. aggregate of cash and value
of prize in kind) shall be deducted from the cash prize.
• If prize is given in kind only (or cash prize is not sufficient), then payer should ensure that tax has been
paid on such income before releasing such prize.
• Where a certain percentage has to be forgone either in favour of Government or an agency conducting
lotteries, then such portion is not subject to deduction of tax at source.
• Where an agent receives the prize money on unsold ticket or becomes entitled to an unclaimed prize,
it shall form part of his business income and therefore not liable for tax deduction u/s 194B
• If prize money is paid in instalments, then tax shall be deducted at the time of payment of each
instalment.
• Tax shall be deducted on payment of commission, etc. to the lottery agent u/s 194G and not u/s 194B.
TDS ON WINNING FROM HORSE RACES [SECTION 194BB]

Any person responsible for paying to any person any income by way of winning from horse races, exceeding
Rs 10,000 is responsible to deduct TDS

At the time of payment.
Rate of TDS:
30%
Other Points
1. Any person, here means a book-maker or a person to whom a licence has been granted by the
Government for horse racing or arranging for wagering, betting in any race course.
2. Race-income other than horse races like camel races etc is not covered by this section.
TDS ON PAYMENT TO CONTRACTOR [SECTION 194C]

Any specified person responsible for paying any sum to any resident-contractor for carrying out any work
(including supply of labour for carrying out any work) in pursuance of a contract is responsible to deduct TDS.
Following are the specified person –
a. The Central Government or any State Government; or
b. Any local authority; or
c. Any corporation established by or under a Central, State or Provincial Act; or
d. Any company; or
e. Any co-operative society;
f. Any authority, constituted in India by or under any law, engaged either for the purpose of dealing with
and satisfying the need for housing accommodation or for the purpose of planning, development or
improvement of cities, towns and villages, or for both; or
g. Any society registered under the Societies Registration Act, 1860 or under any law corresponding to
that Act in force in any part of India; or
h. Any trust; or
i. Any University established or incorporated by or under a Central, State or Provincial Act and an
institution declared to be a University u/s 3 of the University Grants Commission Act, 1956; or
j. Any Government of a foreign State or a foreign enterprise or any association or body established
outside India; or
k. Any firm; or
l. Individual or a HUF or an association of persons or a body of individuals (if not covered by aforesaid
cases), whose books of account are required to audited u/s 44AB (due to turnover or gross receipt
criteria) during the financial year immediately preceding the financial year in which such sum is credited
or paid.
Time of deduction
Tax has to be deducted at the time of payment of such sum or at the time of credit of such sum to the account
of the contractor, whichever is earlier.
When tax cannot be deducted

• Case 1
When following conditions are satisfied then tax cannot be deducted:
i. Any sum credited or paid in pursuance of any contract, the consideration for which does not
exceed ` 30,000; and
ii. Where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid
during the financial year does not exceed Rs 1,00,000
• Case 2
When following conditions are satisfied then tax cannot be deducted:
a. Amount is paid or payable to a resident contractor during the course of plying, hiring or leasing
goods carriage (here-in-after referred to as transport operator).
b. Such operator furnishes his Permanent Account Number (PAN) to the payer.
c. Where such contractor owns 10 or less goods carriages at any time during the previous year and
furnishes a declaration to that effect along with his PAN to the person paying or crediting such
sum.
The tax shall be deducted at the time of payment or crediting the party, whichever is earlier.
Therefore, even if a single payment to a contractor does not exceed Rs. 30,000, TDS provisions under section
194C would be attracted where the aggregate of the amounts of such sums credited or paid or likely to be
credited or paid to the contractor during the financial year exceeds Rs. 1,00,000.
436 PP-DTL&P
Rate of TDS
Payee Rate as a % of amount paid or payable

Individual or HUF 1%
Other Payee 2%

When the recipient applies to the Assessing Officer in Form 13 and gets a certificate authorising the payer to
deduct tax at lower rate or deduct no tax. [Refer section 197]
Other Points
• Contract shall include sub-contract.
• “Work” shall include –
a. advertising;
b. broadcasting and telecasting including production of programmes for such broadcasting or
telecasting;
c. carriage of goods and passengers by any mode of transport other than by railways;
d. catering.
e. manufacturing or supplying a product according to the requirement or specification of a customer
by using material purchased from such customer
but does not include manufacturing or supplying a product according to the requirement or specification
of a customer by using material purchased from a person, other than such customer.
• Where any sum is paid or credited for carrying out any work mentioned in (e), tax shall be deducted at
source:
(i) on the invoice value excluding the value of material, if such value is mentioned separately in the
invoice; or
(ii) on the whole of the invoice value, if the value of material is not mentioned separately in the
invoice.
TDS ON INSURANCE COMMISSION [SECTION 194D]

Any person responsible for paying to a resident person any income by way of remuneration or reward (i.e.
commission etc.) for soliciting or procuring insurance business including business relating to the continuance,
renewal or revival of policies of insurance need to deduct TDS at the time of payment or crediting the party
whichever is earlier.
Note: Tax shall not be deducted if the aggregate amounts of remuneration or reward credited or paid during the
financial year to the payee does not exceed Rs 15,000.
Rate of TDS:
Payee Rate of TDS

Domestic Company 10%
Other Payee 5%

• When the recipient applies to the Assessing Officer in Form 13 and gets a certificate authorizing the
payer to deduct tax at lower rate or deduct no tax; [Refer section 197]
• When a declaration in Form 15G (in duplicate) is furnished by the assessee to the payer [Refer section
197A]
TDS ON PAYMENT IN RESPECT OF LIFE INSURANCE POLICY [SECTION 194DA]

Any person responsible for paying to a resident any sum under a life insurance policy, including the sum
allocated by way of bonus on such policy other than the amount not includible in the total income u/s 10(10D)
is responsible to deduct TDS at the time of payment.
• TDS is not required to be deducted on any payment which is exempt u/s 10(10D).
• Tax shall not be deducted if the aggregate amounts of payments to the payee during the financial year
is less than Rs 1,00,000.
Rate of TDS: 1%[w.e.f 1.09.2019 TDS rate is 5% on income comprised therein i.e., after deducting the
amount of insurance premium paid by the resident assessee from the total sum received. [inserted by
Finance (No. 2) Act, 2019]
TDS ON PAYMENT TO NON-RESIDENT SPORTSMAN OR SPORTS ASSOCIATIONS

[SECTION 194E]
Any person who is responsible to pay the following income –
Payee Income by way of

Sportsman (including an 1. Participation in India in any game (excluding card game or gambling) or sport
athlete) or an entertainer being
non-resident foreign citizen 2. Advertising
3. Contribution of articles relating to any game or sports in any newspaper,
magazine or journal.
Sports association being non- Any game (other than card game) or sports organised in India
resident
Shall deduct TDS at the time of payment or crediting the party whichever is earlier @ 20% (+ Surcharge +
Health & Education Cess)
PAYMENTS IN RESPECT OF DEPOSITS UNDER NATIONAL SAVINGS SCHEME, ETC.[SECTION

194EE]
Any person [i.e. post office] responsible for paying an amount (either principal or interest) referred to in section
80CCA(2)(a) [i.e. National Saving Scheme, 1987] shall deduct TDS at the time of payment.
Note: Tax shall not be deducted at source if the aggregate amount of such payments to the payee during the
financial year is less than Rs 2,500.
Rate of TDS:

Resident 10%
Non-Resident 10% (+ Surcharge + Health & Education Cess)
438 PP-DTL&P

a. Where the payment is made to the heirs of the deceased assessee.
b. When a declaration in Form 15-G (in duplicate) is furnished by the assessee to the payer.
TDS ON REPURCHASE OF UNITS OF MUTUAL FUND OR UNIT TRUST OF INDIA [SECTION

194F]
The person responsible for paying to any person any amount referred to in section 80CCB(2) [i.e. mutual fund
or UTI] shall be responsible to deduct TDS at the time of payment at the rate of 20%..
TDS ON COMMISSION ON SALE OF LOTTERY TICKETS [SECTION 194G]

Any person responsible for paying any income by way of commission, remuneration or prize (by whatever name
called) on lottery tickets to any person, who is stocking, distributing, purchasing or selling such tickets shall be
responsible to deduct tax at the time of payment or crediting the payee, whichever is earlier.
Rate of TDS:

Resident 5%
Non-Resident 5% (+ Surcharge + Health & Education Cess)
TDS cannot be made where amount of commission, etc. on such tickets does not exceed Rs 15,000.

When the recipient applies to the assessing officer in Form 13 and gets a certificate authorising the payer to
TDS ON COMMISSION, ETC. OTHER THAN INSURANCE COMMISSION [SECTION 194H]

Following persons are responsible to deduct tax at source on commission or brokerage (other than commission
on insurance) to a resident person –
• Any person, other than individual or HUF; &
• Individual or HUF, whose books of account are required to be audited u/s 44AB (due to turnover or
commission is credited or paid.
Note:
1. No tax shall be deducted if the aggregate amounts of commission or brokerage credited or paid during
the financial year to the payee does not exceed Rs 15,000.
2. No deduction shall be made on any commission or brokerage payable by Bharat Sanchar Nigam
Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.
Tax shall be deducted at the time of payment or crediting the payee, whichever is earlier @ 5%
Time of deduction
The deduction shall be made at the time such income is credited to the account of the payee or at the time of
payment in cash or by issue of cheque or draft or by any other mode, whichever is earlier.
Even where income is credited to some other account, whether called “Suspense account” or by any other
name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be
credit to the account of the payee for the purposes of this section.

When the recipient applies to the Assessing Officer in Form No. 13 and gets a certificate authorising the payer
to deduct tax at lower rate or deduct no tax [Refer section 197]
When commission is retained by an agent

Where commission or brokerage is retained by the consignee/agent while remitting the sale consideration, the
consignor/principal will have to deposit the tax deductible on the amount of such retained commission - [Circular
No.619]
Other Points:
Commission or brokerage includes any payment received or receivable, directly or indirectly, by a person acting
on behalf of another person for services rendered (not being professional services) or for any services in the
course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or
thing, not being securities.
TDS ON RENT [SECTION 194-I]

Following persons are responsible to deduct tax at source on rent to a resident person –
rent is credited or paid.
Note: Tax shall not be deducted if the aggregate amounts of rent credited or paid during the financial year to
the payee does not exceed Rs 2,40,000 (Increased from 1,80,000 to 2,40,000 by Finance (No. 2) Act, 2019).
“Rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other
agreement or arrangement for the use of (either separately or together) any, -
(a) Land (b) Building (including factory (c) Land appurtenant

building) to a building (including
factory building)
(d)Machinery (e) Plant
(f) Furniture (g)Fittings (h) Equipment
- whether or not any or all of the above are owned by the payee.
Tax shall be deducted at the time of payment or crediting the account of payee, whichever is earlier.
Rate of TDS:
Nature of Assets Rate

Machinery or plant or equipment 2%
Land or building (including factory building) or land appurtenant to a building 10%
(including factory building) or furniture or fittings
440 PP-DTL&P
When TDS cannot be made

• Where the payee is the Government, local authorities u/s 10(20) and statutory authorities u/s 10(20A),
then TDS cannot be made - [Circular No. 699, dated 30-1-1995].
• Where rent is credited or paid to a business trust, being a real estate investment trust, in respect of any
real estate asset, referred to in section 10(23FCA), owned directly by such business trust

• When a declaration in Form 15G (in duplicate) is furnished by the assessee to the payer [Refer section
197A]
• When the recipient applies to the Assessing Officer in Form 13 and gets a certificate authorising the
payer to deduct tax at lower rate or deduct no tax. [Refer section 197]
Clarification regarding TDS on Goods and Services Tax (GST) component comprised in payments
made to residents [Circular No. 23/2017 dated 19.07.2017]
The CBDT had, vide Circular No. 1/2014 dated 13.01.2014, clarified that wherever in terms of the agreement
or contract between the payer and the payee, the service tax component comprised in the amount payable to
a resident is indicated separately, tax shall be deducted at source on the amount paid or payable without
including such service tax component.
In order to harmonize the same treatment with the new system for taxation of services under the GST regime
w.e.f. 01.07.2017, the CBDT has, vide this circular, clarified that wherever in terms of the agreement or contract
between the payer and the payee, the component of ‘GST on services’ comprised in the amount payable to a
resident is indicated separately, tax shall be deducted at source on the amount paid or payable without including
such ‘GST on services’ component.
GST shall include Integrated Goods and Services Tax, Central Goods and Services Tax, State Goods and
Services Tax and Union Territory Goods and Services Tax.
Further, for the purposes of this Circular, any reference to “service tax” in an existing agreement or contract
which was entered into prior to 01.07.2017 shall be treated as “GST on services” with respect to the period
from 01.07.2017 onward till the expiry of such agreement or contract
Clarification on applicability of TDS provisions of section 194-I on lumpsum lease premium paid for
acquisition of long term lease [Circular No.35/2016, dated 13-10- 2016]
The issue of whether or not TDS under section 194-I is applicable on ‘lump sum lease premium’ or ‘one-time
upfront lease charges” paid by an assessee for acquiring long-term leasehold rights for land or any other
property has been examined by the CBDT.
Accordingly, the CBDT has, vide this clarified that lump sum lease premium or one-time upfront lease charges,
which are not adjustable against periodic rent, paid or payable for acquisition of long-term leasehold rights over
land or any other property are not payments in the nature of rent within the meaning of section 194-I. Therefore,
such payments are not liable for TDS under section 194-I.
The issue as to whether the charges fixed by the Airport Authority of India (AAI) for landing and parking facility
for the aircraft are for the “use of the land” by the airline company came up before the Supreme Court in Japan
Airlines Co. Ltd. v. CIT / CIT v. Singapore Airlines Ltd. (2015) 377 ITR 372.
The Supreme Court observed that the charges which are fixed by the AAI for landing and take-off services
as well as for parking of aircrafts are not for the “use of the land”. These charges are for services and facilities
offered in connection with the aircraft operation at the airport which include providing of air traffic services,
ground safety services, aeronautical communication facilities, installation and maintenance of navigational aids
and meteorological services at the airport.
There are various international protocols which mandate all authorities manning and managing these airports to
construct the airport of desired standards which are stipulated in the protocols. The services which are required
to be provided by these authorities, like AAI, are aimed at passengers’ safety as well as for safe landing and
parking of the aircrafts. Therefore, the services are not restricted to merely permitting “use of the land” of
airport. On the contrary, it encompasses all the facilities that are to be compulsorily offered by the AAI in tune
with the requirements of the protocol.
The Supreme Court observed that the charges levied on air-traffic includes landing charges, lighting charges,
approach and aerodrome control charges, aircraft parking charges, aerobridge charges, hangar charges,
passenger service charges, cargo charges, etc. Thus, when the airlines pay for these charges, treating such
charges as charges for “use of the land” would tantamount to adopting a totally simplistic approach which is far
away from the reality.
The Supreme Court opined that the substance behind such charges has to be considered and when the issue
is viewed from this angle, keeping the larger picture in mind, it becomes very clear that the charges are not for
use of the land per se and, therefore, it cannot be treated as “rent” within the meaning of section 194-I. The
Supreme Court, thus, concurred with the view taken by the Madras High Court in Singapore Airlines case and
overruled the view taken by the Delhi High Court in United Airlines/Japan Airlines case.
TDS ON TRANSFER OF CERTAIN IMMOVABLE PROPERTY OTHER THAN AGRICULTURAL

LAND [SECTION 194-IA]
Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to
a resident transferor any sum by way of consideration for transfer of any immovable property (other than rural
agricultural land) is responsible to deduct TDS at the time of payment or crediting the payee, whichever is
earlier @ 1%
• “Immovable property” means any land (other than rural agricultural land) or any building or part of a
building.
• “Rural agricultural land” – as discussed in Chapter ‘Capital Gain’
Where the consideration for the transfer of an immovable property is less than Rs 50 lakh TDS cannot be made.
Note: The deductor is not required to obtain Tax Deduction Account Number as required u/s 203A.
Consideration for immovable property” shall include all charges of the nature of club membership fee, car
parking fee, electricity or water facility fee, maintenance fee, advance fee or any other charges of similar nature,
which are incidental to transfer of the immovable property. [Inserted by Finance (No.2) Act, 2019]
Time and mode of payment of tax deducted at source under section 194-IA to the credit of Central
Government, furnishing challan-cum-statement and TDS Certificate [Rules 30, 31A & 31]
(i) Such sum deducted under section 194-IA shall be paid to the credit of the Central Government within a
period of 30 days from the end of the month in which the deduction is made and shall be accompanied
by a challan-cum-statement in Form No.26QB [Rule 30].
(ii) The amount so deducted has to be deposited to the credit of the Central Government by electronic
remittance within the above mentioned time limit, into RBI, SBI or any authorized bank [Rule 30].
(iii) Every person responsible for deduction of tax under section 194-IA shall also furnish to the DGIT
(Systems) or any person authorized by him, a challan-cum-statement in Form No.26QB electronically
within 30 days from the end of the month in which the deduction is made [Rule 31A].
Every person responsible for deduction of tax under section 194-IA shall furnish the TDS certificate in Form
No.16B to the payee within 15 days from the due date for furnishing the challan-cum-statement in Form
442 PP-DTL&P
No.26QB under Rule 31A, after generating and downloading the same from the web portal specified by the
DGIT (Systems) or the person authorized by him [Rule 31].
TDS ON PAYMENT OF RENT BY CERTAIN INDIVIDUAL / HUF [SECTION 194-IB]

Any person, being an individual or a Hindu undivided family (other than those referred to in section 194-I),
responsible for paying to a resident any rent shall be responsible to deduct tax at the time of credit of rent for
the last month of the previous year (or the last month of tenancy, if the property is vacated during the year) to
the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any
other mode, whichever is earlier @ 5%
• “Rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any
other agreement or arrangement for the use of any land or building or both
TDS cannot be made where rent for a month or part thereof does not exceed Rs 50,000
Notes:
• The deductor is not required to obtain Tax Deduction Account Number as required u/s 203A.
• As per provision of section 206AA, if payee fails to provide his PAN, TDS is required to be deducted @
20%. However, deduction under this section shall not exceed the amount of rent payable for the last
month of the previous year (or the last month of the tenancy).
Payment under specified agreement [Section 194-IC]

(1) Applicability and Rate
This section casts responsibility on any person responsible for paying to a resident any sum by way of
consideration, not being consideration in kind, under a specified agreement under section 45(5A), to deduct
income-tax at the rate of 10%.
(2) Time of deduction
This deduction is to be made at the time of credit of such sum to the account of the payee or at the time of
payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier.
(3) Non-applicability of section 194-IA
Since tax deduction at source for specified agreement under section 45(5A) is covered under section 194-IC,
the provisions of section 194-IA do not get attracted in the hands of the transferee in such cases.
(4) Meaning of specified agreement
Specified agreement under section 45(5A):
– It means a registered agreement in which a person owning land or building or both, agrees to allow
another person to develop a real estate project on such land or building or both.
– The consideration, in this case, is a share, being land or building or both in such project; Part of the
consideration may also be in cash.
FEES FOR PROFESSIONAL OR TECHNICAL SERVICES [SECTION 194J]

Following persons are responsible to deduct tax at source for paying fees for professional or for technical
service or royalty or any sum referred to in section 28(va) (i.e., fees for non-competence) or director fees (which
is not covered u/s 192) to a resident person –
fees is credited or paid.
Note: Tax cannot be deducted if the aggregate amount of such fees credited or paid during the financial year
to the payee does not exceed:
Nature of Payment Amount

Professional fees Rs 30,000
Fees for technical service Rs 30,000
Royalty Rs 30,000
Any sum referred to in sec.28(va) Rs 30,000
Director fees by whatever name called, (which is Nil
not covered u/s 192)
Note: Rs 30,000 limit is not on individual transaction. If several professional bills in a year together exceed the
amount of Rs 30,000, tax shall be deducted, even though any individual bill amount does not exceed Rs 30,000.
Tax shall be deducted at the time of payment or crediting the payee, whichever is earlier @ 10% (@ 2% in case
payee is engaged only in the business of operation of call centre)

1. Individual or HUF shall not be liable to deduct income-tax on fees which is credited or paid exclusively
for personal purposes of such individual or any member of HUF.
2. Fees paid by non-resident: Any fees paid through regular banking channels to any professional
who is resident in India by the non-resident who does not have any agent or business connection or
permanent business establish-ment in India, may not be subject to this provision [Circular No.726 dated
16-10-1995].

Note:
“Professional services” means services rendered by a person in the course of carrying on legal, medical,
engineering or architectural profession or the profession of accountancy or technical consultancy or interior
decoration or advertising (i.e. Model, photographer, artist providing service to advertising agency) or such other
profession as is notified by the Board for the purposes of section 44AA or of this section;
“Fees for technical services” means any consideration (including any lump sum consideration) for rendering
of any managerial, technical or consultancy services (including the provision of services of technical or other
personnel) but does not include consideration for any construction, assembly, mining or like project undertaken
by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.
In the case of CIT v. Kotak Securities Ltd. (2016) 383 ITR 1 (SC) the Supreme Court dealt on whether transaction
charges paid by the members of the stock exchange for availing fully automated online trading facility, being a
facility provided by the stock exchange to all its members, constitute fees for technical services to attract the
provisions of tax deduction at source under section 194J. It observed that technical services like managerial
and consultancy service are in the nature of specialised services made available by the service provider to cater
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to the special needs of the customer-user as may be felt necessary. It is the above feature that would distinguish
or identify a service provider from a facility offered
The Apex Court, accordingly, held that the service provided by the BSE for which transaction charges are paid
failed to satisfy the test of specialized, exclusive and individual requirement of the user or the consumer who
may approach the service provider for such assistance or service.
Therefore, the transaction charges paid to BSE by its members are not for technical services but are in the
nature of payments made for facilities provided by the stock exchange. Such payments would, therefore, not
attract the provisions of tax deduction at source under section 194J.
(1) Consideration for use or right to use of computer software is royalty within the meaning of section
9(1)(vi)
As per section 9(1)(vi), any income payable by way of royalty in respect of any right, property or information
is deemed to accrue or arise in India. The term “royalty” means consideration for transfer of all or any right in
respect of certain rights, property or information.
The consideration for use or right to use of computer software is royalty by clarifying that, transfer of all or any
rights in respect of any right, property or information includes and has always included transfer of all or any right
for use or right to use a computer software (including granting of a licence) irrespective of the medium through
which such right is transferred.
Consequently, the provisions of tax deduction at source under section 194J and section 195 would be attracted
in respect of consideration for use or right to use computer software since the same falls within the definition
of royalty.
TDS ON PAYMENT OF COMPENSATION ON ACQUISITION OF CERTAIN IMMOVABLE

PROPERTY [SECTION 194LA]
Any person responsible for paying to a resident any sum, being compensation or the enhanced compensation
or the consideration or the enhanced consideration on account of compulsory acquisition of any immovable
property (other than agricultural land) is responsible to deduct tax at the time of payment of such sum in cash
or by issue of a cheque or draft or by any other mode, whichever is earlier @ 10%.

Where the amount of such payment or the aggregate amount of such payments to a resident during the financial
year does not exceed Rs. 2,50,000.

deduct tax at lower rate or deduct no tax [Refer section 197]
Note:
1. Agricultural land means agricultural land in India.
2. Immovable property means any land (other than agricultural land) or any building or part of a building.
3. Deduction shall not be made where payment is made in respect of any award or agreement which has
been exempted from levy of income-tax u/s 96 of the Right to Fair Compensation and Transparency in
Land Acquisition, Rehabilitation and Resettlement Act, 2013
TDS ON INTEREST FROM INFRASTRUCTURE DEBT FUND [SECTION 194LB]

Any person responsible for paying income by way of interest by an infrastructure debt fund referred to in section
10(47) to a non-resident or a foreign company responsible to deduct tax at the time of payment or crediting the
payee, whichever is earlier @ 5% (+ SC + Health & Education Cess)
TDS ON CERTAIN INCOME FROM UNITS OF A BUSINESS TRUST [SECTION 194LBA]

Any business trust distributing income referred to in sec. 115UA [being of the nature referred to in section
10(23FC) or 10(23FCA)] to its unit holder shall be responsible to deduct tax at the time of payment or crediting
the payee, whichever is earlier.
Rate of TDS:
Payee Rate of TDS

Payment referred to in section Payment referred to in section
10(23FC) 10(23FCA)
If payment is made to a resident unit 10% 10%
holder
If payment is made to a unit holder 5% 30% + Health & Education Cess
being non- resident (not being a
company)
If payment is made to a unit holder 5% 40% + Health & Education Cess
being a foreign company
TDS ON INCOME OF UNITS OF INVESTMENT FUND [SECTION 194LBB]

The person responsible for making the payment of any income, other than that proportion of income which is of
the same nature as income referred to in section 10(23FBB), to a unit holder in respect of units of an investment
fund specified in clause (a) of the Explanation 1 to section 115UB is responsible to deduct TDS at the time of
payment or crediting the payee, whichever is earlier.
Rate of TDS:
Payee Rate of TDS

Resident 10%
Non-resident (not being a company) 30%
Foreign Company 40%

TDS ON INCOME FROM INVESTMENT IN SECURITIZATION FUND [SECTION 194LBC]

The person responsible for making the payment to an investor in respect of an investment in a securitisation
trust, being referred to in section 115TCA shall be responsible to deduct TDS at the time of payment or crediting
the payee, whichever is earlier.
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Payee Rate of TDS

Resident
- Individual or HUF 25%
- Other resident 30%
Non-Resident
- Foreign Company 40%
- Other than foreign company 30%

TDS ON INTEREST TO NON-RESIDENT [SECTION 194LC]

Any Indian company or a business trusts responsible for paying income by way of interest to a non-resident or a
foreign company shall be responsible to deduct TDS at the time of payment or crediting the payee, whichever is
earlier @ 5% (+SC +Health & Education cess). Such interest is payable in respect of monies borrowed by such
company at any time on or after 01/07/2012 but before 01/07/2020 in foreign currency, from a source outside
India:
(a) under a loan agreement; or
(b) by way of issue of long-term bonds including long term infrastructure bonds,
(c) by way of issue of rupee denominated bond before the 1st day of July, 2020
as approved by the Central Government
However, interest payable by an Indian company or a business trust to a non-resident, including a foreign
company, in respect of rupee denominated bond issued outside India during the period from 17.9.2018 to
31.3.2019, shall be exempt from tax, and consequently, no tax shall be deducted on the payment of interest in
respect of the said bond.
Note: W.e.f. 01-06-2013, the provisions of section 206AA (i.e. rate of TDS will be 20% in absence of PAN) shall
not apply in respect of payment of interest, on long-term bonds including long term infrastructure bonds (being
referred to in sec. 194LC) to a non-resident, not being a company, or to a foreign company.
INCOME BY WAY OF INTEREST ON CERTAIN BONDS, GOVT. SECURITIES [SECTION

194LD]
Any person who is responsible for paying interest (at the rate notified by the Central Government) to a person
being a Foreign Institutional Investor or a Qualified Foreign Investor shall be responsible to deduct tax @
5% (+ SC + Health & Education cess). Such interest is payable at any time on or after 01/06/2013 but before
01/06/2020 in respect of investment made by the payee in:
(i) a rupee denominated bond of an Indian company ; or
(ii) a Government security:
“Qualified Foreign Investor” shall have the meaning assigned to it in the Circular No. Cir/IMD/DF/14/2011, dated
the 9th August, 2011, as amended from time to time, issued by the Securities and Exchange Board of India,
under section 11 of the Securities and Exchange Board of India Act, 1992.
Payment by Individual/HUF to contractors and professionals [Section 194M]

Any person, being an individual or a Hindu undivided family (other than those who are required to deduct
income-tax as per the provisions of section 194C or section 194J) responsible for paying :
– any sum to any resident for carrying out any work (including supply of labour for carrying out any work)
in pursuance of a contract or
– by way of commission (not being insurance commission referred to in section 194D) or brokerage; or
– by way of fees for professional services during the financial year, shall, at the time of credit of such sum
or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode,
whichever is earlier, deduct an amount equal to 5% of such sum as income -tax thereon.
Exception : An individual or a Hindu undivided family is not liable to deduct tax at source under section 194M,
if –
(i) they are required to deduct tax at source under section 194C for carrying out any work (including
supply of labour for carrying out any work) in pursuance of a contract i.e., an individual or a HUF who
is subject to tax audit under section 44AB(a)/(b) in the immediately preceding financial year and such
amount is not exclusively credited or paid for personal purposes of such individual or HUF.
(ii) they are required to deduct tax at source under section 194H on commission (not being insurance
commission referred to in section 194D) or brokerage i.e., an individual or a HUF whose total sales,
gross receipts or turnover from the business or profession carried on by him exceed the monetary
limits of Rs. 1 crore and Rs. 50 lakhs, respectively, specified under section 44AB during the immediately
preceding financial year.
(iii) they are required to deduct tax at source under section 194J on fees for professional services i.e., an
individual or a HUF whose total sales, gross receipts or turnover from the business or profession
carried on by him exceed the monetary limits of Rs. 1 crore and Rs. 50 lakhs, respectively, specified
under section 44AB during the immediately preceding financial year and such amount is not exclusively
credited or paid for personal purposes of such individual or HUF.
The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the
provisions of this section.
Explanation. – For the purposes of this section, –
(a) “contract” shall have the meaning assigned to it in clause (iii) of the Explanation to section 194C;
(b) “professional services” shall have the meaning assigned to it in clause (a) of the Explanation to section
194J;
(c) “work” shall have the meaning assigned to it in clause (iv) of the Explanation to section 194C.
TDS on cash withdrawal to discourage cash transactions [Section 194N]

Every person, being a banking company including any co-operative bank or a post office, who is responsible for
paying any sum in cash, in excess of 1 crore rupees during the previous year, to any person (herein referred to
as the recipient) from an account maintained by the recipient with it shall, at the time of payment of such sum,
deduct an amount equal to 2% of sum exceeding 1 crore rupees.
Exception : Nothing contained in this sub-section shall apply to any payment made to:
(i) the Government;
(ii) any banking company or co-operative society engaged in carrying on the business of banking or a post
office;
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(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the
business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of
India under the Reserve Bank of India Act, 1934;
(iv) any white label automated teller machine operator of a banking company or co-operative society
engaged in carrying on the business of banking, in accordance with the authorisation issued by the
Reserve Bank of India under the Payment and Settlement Systems Act, 2007;
(v) such other person or class of persons, which the Central Government may, by notification in the Official
Gazette, specify in consultation with the Reserve Bank of India.
Accordingly, the Central Government has, in consultation with the RBI, notified the following class of persons,
payment to whom would not attract liability to deduct tax at source u/s 194N –
(i) Cash Replenishment Agencies (CRAs) and franchise agents of White Label Automated Teller
Machine Operators (WLATMO’s) – For availing exemption from applicability of TDS u/s 194N, CRAs
and franchise agents of WLATMOs should maintain a separate bank account from which withdrawal is
made only for the purposes of replenishing cash in the Automated Teller Machines (ATMs) operated by
such WLATMOs. Further, the WLATMO should furnish a certificate every month to the bank certifying
that the bank account of the CRAs and the franchise agents of the WLATMOs have been examined and
the amounts being withdrawn from their bank accounts has been reconciled with the amount of cash
deposited in the ATM’s of the WLATMO’s.
(ii) Commission agent or trader, operating under Agriculture Produce Market Committee (APMC),
and registered under any law relating to Agriculture Produce Market of the concerned State – For
availing exemption from the applicability of TDS u/s 194N, the commission agent/trader should intimate
to the banking company or co- operative society or post office, his account number through which he
wishes to withdraw cash in excess of Rs. 1 crore in the previous year along with his Permanent Account
Number (PAN) and the details of the previous year. Also, he should certify to the banking company or
co-operative society or post office that the withdrawal of cash from the account in excess of Rs. 1 crore
during the previous year is for the purpose of making payments to the farmers on account of purchase
of agriculture produce. Further, the banking company or co-operative society or post office has to
ensure that the PAN quoted is correct and the commission agent or trader is registered with the APMC,
and for this purpose, collect necessary evidences and place the same on record.
TDS ON OTHER SUMS PAYABLE TO NON-RESIDENT [SECTION 195]

Any person (resident or non-resident) responsible for paying any sum chargeable under this Act (excluding
income chargeable under the head “Salaries”) to a non-resident is responsible to deduct tax at the time of
payment or crediting the payee, whichever is earlier at the rate in force during the financial year

Other Points to be considered:
The person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum,
whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of
such sum, in such form and manner, as may be prescribed.
If a person fails to furnish such information or furnishes inaccurate information, the Assessing Officer may direct
that such person shall pay, by way of penalty, a sum of Rs 1,00,000/- [Section 271-I]
The Board may notify a class of persons or cases, where the person responsible for paying to a non-
resident, any sum, whether or not chargeable under the provisions of this Act, shall make an application
to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum
chargeable, and upon such determination, tax shall be deducted on that proportion of the sum which is so
chargeable.
TDS ON INCOME FROM UNITS [SECTION 196B]

Any person responsible for paying any income in respect of units referred to in section 115AB or by way of long-term
capital gains arising from the transfer of such units to an Offshore Fund shall be responsible to deduct TDS at the
time of payment or crediting the payee, whichever is earlier @ 10% + Surcharge + Health & Education cess.
TDS ON INCOME FROM FOREIGN CURRENCY BONDS OR GDR [SECTION 196C]

Any person responsible for paying any income by way of interest or dividends in respect of bonds or Global
Depository Receipts referred to in section 115AC or by way of long-term capital gains arising from the transfer
of such bonds or Global Depository Receipts to a non-resident responsible to deduct tax at the time of payment
or crediting the payee, whichever is earlier @ 10% + Surcharge + Health & Education cess
TDS ON INCOME OF FII FROM SECURITIES [SECTION 196D]

Any person responsible for paying any income in respect of securities referred to in section 115AD (1)(a) to
Foreign Institutional Investor shall be responsible to deduct tax at the time of payment or crediting the payee,
whichever is earlier @ 20% + Surcharge + Health & Education cess
Notes
Tax shall not be deducted from any capital gains arising from the transfer of securities referred to in section
115AD, payable to a Foreign Institutional Investor. However, Tax shall not be deducted in respect of any
dividends referred to in section 115-O.
OTHER PROVISIONS
TDS on sums payable to Government, Reserve Bank or certain corporations [Section 196]
No deduction of tax shall be made from any sums payable to following person:
(i) the Government, or
(ii) the Reserve Bank of India, or
(iii) a corporation established by or under a Central Act which is, under any law for the time being in force,
exempt from income-tax on its income, or
(iv) a Mutual Fund specified u/s 10(23D),
Tax deducted is income received [Section 198]

• All sums deducted shall, for the purpose of computing the income of an assessee, be deemed to be
income received. E.g., If Mr. X received interest of Rs. 18,000 (after deduction of tax Rs. 2,000), then
interest income of Mr. shall be considered as Rs. 20,000/-.
Exception: The sum being the tax paid, u/s 192(1A) [i.e., tax paid by employer on non-monetary
perquisite] for the purpose of computing the income of an assessee, shall not be deemed to be income
received.
• Where any income is paid ‘net of tax’ (i.e., tax chargeable on such income shall be borne by the
450 PP-DTL&P
payer), then for the purpose of deducting tax, such income is required to be grossed up [Section 195A].
However, grossing up is not required in case of tax on non-monetary perquisite paid by the employer.
Credit for tax deducted [Section 199]

• Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central
Government shall be treated as a payment of tax on behalf of the person from whose income the
deduction was made. If such income is assessable in the hands of other person, credit shall be given
to such other person.
• Any sum referred to in section 192(1A) and paid to the Central Government shall be treated as the tax
paid on behalf of such employee.
• The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the
provisions of this Chapter, make such rules as may be necessary, including the rules for the purposes
of giving credit to a person other than those referred above and also the assessment year for which
such credit may be given.
Certificate for deduction at lower rate [Section 197]

• Where the Assessing Officer, on an application (Form 13) made by a person, is satisfied that existing
and estimated tax liability of a person justifies the deduction of tax at lower rate or no deduction of tax,
as the case may be, the Assessing Officer shall issue a certificate for deduction of tax at such lower rate
or no deduction of tax.
• The certificate shall be valid for such period of the previous year as may be specified in the certificate,
unless it is cancelled by the Assessing Officer at any time before the expiry of the specified period.
• The certificate shall be valid only with regard to the person responsible for deducting the tax and named
therein.
• The certificate shall be issued direct to the person responsible for deducting the tax under advice to the
person who made an application for issue of such certificate
Computation of lower rate [Rule 28AA]

The existing and estimated liability shall be determined by the Assessing Officer after taking into consideration
the following:
(i) tax payable on estimated income of the previous year relevant to the assessment year;
(ii) tax payable on the assessed or returned income, as the case may be, of the last 3 previous years;
(iii) existing liability under the Income-tax Act,1961 and Wealth-tax Act,1957;
(iv) advance tax payment for the assessment year relevant to the previous year till the date of making
application;
(v) tax deducted / collected at source for the assessment year relevant to the previous year till the date
of making application In nutshell, the Assessing Officer may issue a certificate for deduction of tax at
source at lower rate calculated in the manner specified below:
Calculate estimated total income of the current year A

Calculate tax payable thereon B
Examine the advance tax already paid or tax already deducted for the current C
year
Reduce advance tax already paid or tax already deducted from the current D=B-C
year estimated tax liability
Calculate average rate of tax E = D / A × 100
Calculate average of the average rate of tax of preceding 3 years F
Rate of TDS for Certificate Higher of E and F
No deduction to be made in certain cases [Section 197A]

• No deduction shall be made under any section from any payment made to New Pension System Trust
referred to in section 10(44).
• No deduction of tax shall be made u/s 194 (Dividend) and 194EE (NSS),
(a) The payee is a resident individual;
(b) The aggregate amount of income paid or credited does not exceed basic exemption limit
(c) Such individual furnishes to the payer, a declaration in writing in duplicate in the Form 15G (Form
15H in case of senior citizen).
(d) Such declaration states that the tax on his estimated total income of the previous year in which
such income is to be included in computing his total income will be nil.
• No deduction of tax shall be made u/s 192A (payment of accumulated balance of provident fund) or 193
(interest on securities) or 194A (other interest) or 194D (insurance commission) or 194DA (payment in
respect of life insurance policy) or 194-I (rent),
(a) The payee is a person other than company or a firm.
(b) The aggregate amount of income paid or credited does not exceed basic exemption limit.
(c) Such person furnishes to the payer a declaration in writing in duplicate in the form 15G (Form 15H
in case of senior citizen).
(d) Such declaration states that the tax on his estimated total income of the previous year in which
such income is to be included in computing his total income will be nil.
• No deduction shall be made from such specified payment to notified institution, association or body. E.g.
specified payment (like bank guarantee commission, clearing charges, etc.) made to bank [Notification
47/2016 dated 17-06-2016]
DUTY OF PERSON RESPONSIBLE FOR DEDUCTING TAX AT SOURCE

Deposit of TDS within Time-Limit [Section 200 read with Rule 30]
Tax deducted by the deductor shall be deposited electronically through internet banking facility to the credit of
the Central Government within following time limit –
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TDS Time limit

(a) Tax is deducted on behalf of the Government
• Where the tax is paid without production of an income- On the same day
tax challan
• Where the tax is paid with production of an income-tax On or before 7 days from the end of the month in
challan which tax is deducted
(b) When the Assessing Officer (after obtaining prior approval from Joint Commissioner) permits quarterly
payment of tax:
• Where deduction is made u/s 192, 194A, 194D or 194H Within July 7 (for Quarter ending on June 30),
October 7 (for Quarter ending on September 30),
January 7 (for Quarter ending on December 31)
& April 30 (for Quarter ending on March 31)
(c) In any other case
• For the month of March Within forthcoming 30th April
• For the months other than month of March Within 7 days from the end of the month in which
tax is deducted at source.
Exception: Where tax is deducted u/s 194-IA or 194-IB, tax shall be paid to the credit of the Central Government
within a period of 30 days from the end of the month in which the deduction is made and shall be accompanied
by a challan-cum-statement in Form No. 26QB (for section 194-IA) / 26QC (for section 194-IB)
Issuance of certificate to payee Any person responsible for deducting tax, shall require to issue a certificate
(electronically generated) to the payee –
Nature of payment Certificate Time-limit

Salary 16 Annual certificate shall be issued on or before June 15 of the financial
year following the financial year in which tax is deducted.
Others 16A Quarterly certificate shall be issued within 15 days from the due date
of furnishing quarterly TDS return
Duty to furnish statement: Any person after paying the tax collected to the credit of the Central Government
prepare following quarterly statements:
Particulars Form No.

Tax is deducted from salary u/s 192 24Q
Tax is deducted from payment made to non-resident, foreign company or not-ordinarily 27Q
resident
In other cases 26Q
Note: The person may also deliver to the prescribed authority a correction statement for rectification of any
mistake or to add, delete or update the information furnished in the statement delivered under this sub-section
in such form and verified in such manner as may be specified by the authority.
Due date of furnishing quarterly statement
Particulars Due date of submission of quarterly return

For quarter ending on 30 June July 31 of the financial year
For quarter ending on 30 September October 31 of the financial year
For quarter ending on 31 December January 31 of the financial year
For quarter ending on 31 March May 31 of the forthcoming financial year
Processing of statements of tax deducted at source [Section 200A]

• The aforesaid statement (including correction statement) shall be processed in the following manner:
(a) the sums deductible shall be computed after making the following adjustments:
(i) any arithmetical error in the statement; or
(ii) an incorrect claim, apparent from any information in the statement#;
(b) the interest, if any, shall be computed on the basis of the sums deductible as computed in the
statement.
(c) the fee, if any, shall be computed in accordance with the provisions of sec. 234E;
(d) the sum payable by, or the amount of refund due to, the deductor shall be determined after
adjustment of the amount computed under clause (b) and clause (c) against any amount paid u/s
200 or 201 or 234E and any amount paid otherwise by way of tax or interest or fee;
(e) an intimation shall be prepared or generated and sent to the deductor specifying the sum
determined to be payable by, or the amount of refund due to, him under clause (d); and
(f) the amount of refund due to the deductor in pursuance of the determination under clause (d) shall
be granted to the deductor
• Such intimation shall not be sent after the expiry of 1 year from the end of the financial year in which
the statement is filed.
• For the purposes of processing of statements, the Board may make a scheme for centralised processing
of statements of tax deducted at source to expeditiously determine the tax payable by or refundable to
the deductor.
# An incorrect claim apparent from any information in the statement shall mean a claim, on the basis of an entry,
in the statement:
(i) of an item, which is inconsistent with another entry of the same or some other item in such statement;
(ii) in respect of rate of deduction of tax at source, where such rate is not in accordance with the provisions
of this Act;
TAX DEDUCTION AND COLLECTION ACCOUNT NUMBER [SECTION 203A]

Every person, deducting tax or collecting tax, who has not been allotted a tax-deduction account number or
tax- collection account number, shall within specified time, apply to the Assessing Officer for the allotment of
a “tax- deduction and collection-account number” in Form 49B. Where such number has been allotted to a
person, such person shall quote such number –
a. in all challans for the payment of tax deducted or collected;
b. in all certificates furnished u/s 203 or section 206C(5);
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c. in all the statements prepared and delivered u/s 200(3) or 206C(3);

d. in all the returns delivered u/s 206 or 206C(5A) or (5B) to any income-tax authority; and
e. in all other documents pertaining to such transactions as may be prescribed in the interests of revenue.
Note: The section is not applicable to the person deducting tax u/s 194-IA or 194-IB.
Furnishing of statements in respect of payment of any income to residents without deduction

of tax [Section 206A]
(1) This section casts responsibility on every banking company or co-operative society or public company
referred to in the proviso to section 194A(3)(i) [i.e., a public company formed and registered in India with the
main object of carrying on the business of providing long-term finance for construction or purchase of residential
houses in India and which is eligible for deduction under section 36(1)(viii)] to prepare such statement, for such
period as may be prescribed –
– if they are responsible for paying to a resident,
– the payment should be of any income not exceeding Rs. 40,000, where the payer is a banking company
or a co-operative society, and Rs. 5,000 in any other case.
– such income should be by way of interest (other than interest on securities)
(2) The statements have to be delivered or caused to be delivered to the prescribed income-tax authority or the
person authorised by such authority.
(3) The statements have to be in the prescribed form, containing such particulars verified in the prescribed
manner. The statement has to be filed within the prescribed time.
(4) The CBDT may cast responsibility on any person other than a person mentioned in (1) above, who is
responsible for paying to a resident any income liable for deduction of tax at source.
(5) Such persons may be required to prepare statement for such period as may be prescribed in the
prescribed form and deliver or cause to be delivered such statement within the prescribed time to the prescribed
income-tax authority or the person authorized by such authority.
(6) Such statements should be in the prescribed form, containing such particulars and verified in the prescribed
manner.
(7) Such person referred to in (1) and (4) above may also deliver to the prescribed authority, a correction
statement -
(a) for rectification of any mistake; or
(b) to add, delete or update the information furnished in the statement delivered referred in (2) & (5) above.
Note: The above section has been substituted with effect from 1st September, 2019 to enable online filing
of such statements (where tax has not been deducted on payment of interest to residents) in the prescribed
form and manner. Prior to this date, the section provided for filing of such statements on a floppy, diskette,
magnetic tape, CD-ROM or any other computer readable media. The new section also provides for correction
of such statements to rectify a mistake or to add, delete or update the information furnished. Consequential
amendment arising out of increased in threshold limit for TDS on payment of interest by a banking company
or co- operative society to Rs. 40,000 has also been made.
REQUIREMENT TO FURNISH PERMANENT ACCOUNT NUMBER [SECTION 206AA]

• Any person entitled to receive any sum or income or amount, on which tax is deductible (hereafter
referred to as deductee) shall furnish his Permanent Account Number (PAN) to the person responsible
for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the
higher of the following rates:
(i) at the rate specified in the relevant provision of this Act; or
(ii) at the rate or rates in force; or
(iii) at the rate of 20%.
• No declaration u/s 197A shall be valid unless the person furnishes his Permanent Account Number in
such declaration.
• In case any declaration becomes invalid, the deductor shall deduct the tax at source accordingly.
• No certificate u/s 197 shall be granted unless the application made for the purpose contains the
Permanent Account Number of the applicant.
• The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the
same in all the correspondence, bills, vouchers and other documents which are sent to each other.
• Where the Permanent Account Number provided to the deductor is invalid or does not belong to the
deductee, it shall be deemed that the deductee has not furnished his Permanent Account Number to
the deductor.
• In the case of a non-resident, not being a company, or a foreign company and not having PAN, the
provisions of sec. 206AA shall not apply in respect of payments in the nature of interest, royalty, fees for
technical services and payments on transfer of any capital asset, if the deductee furnishes the specified
details and the documents to the deductor [Notification 53 dated 24-06-2016]
ELECTRONIC-PAYMENT OF TAX [RULE 125]

The following persons shall pay tax electronically:
(i) a company; and
(ii) a person (other than a company), to whom provisions of section 44AB (tax audit) are applicable.
Direct Payment [Section 191]

In the case of income in respect of which provision is not made for deducting income-tax at the time of payment;
Income-tax has not been deducted in accordance with the provisions of this Chapter, tax shall be payable by
the assessee direct.
If any person, including the principal officer of a company:
(a) who is required to deduct any sum in accordance with the provisions of this Act; or
(b) referred to in section 192(1A), being an employer,
does not deduct, or after so deducting fails to pay, or does not pay, the whole or any part of the tax, as required
by or under this Act, then, such person shall, without prejudice to any other consequences which he may incur,
be deemed to be an assessee in default. [Section 201(1)].
Exception
First proviso to section 201(1) states that the payer is not deemed as an assessee in default:
i. Such resident recipient has furnished his return of income u/s 139
ii. Such resident recipient has taken into account such sum for computing income in such return of income;
and
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iii. Such resident recipient has paid the tax due on the income declared by him in such return of income,
iv. The payer furnishes a prescribed certificate [Form No. 26A] to this effect from a chartered accountant
No penalty shall be charged u/s 221 from such person, principal officer or company unless the Assessing Officer
is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient
reasons failed to deduct and pay the tax. [Second Proviso to Section 201(1)]
TDS is to be deducted on amount excluding GST component: Wherever in terms of the agreement/contract
between the payer and the payee, the GST component comprised in the amount payable to a resident is
indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/
payable without including such GST component.
TAX COLLECTION AT SOURCE

1. Every seller, shall collect tax from the buyer of any specified goods, at the time of Debiting the amount
payable by the buyer to the account of the buyer; or Receipt of such amount from the buyer, whichever
is earlier.
2. Every person, who grants a lease or a licence or enters into a contract or otherwise transfers any right
or interest in-
• any parking lot; or
• toll plaza; or
• mine or quarry excluding mines or quarrying of mineral oil (mineral oil includes Petroleum and
Natural gas), to another person (other than a public sector company) for the use of such parking
lot or toll plaza or mine or quarry for the purpose of business shall collect tax from the licensee or
lessee at the time of:
• Debiting the amount payable by the licensee or lessee to the account of the licensee or lessee; or
• Receipt of such amount from the licensee or lessee, - whichever is earlier.
Here,
“Seller” means - (a) The Central Government; or (b) State Government; or (c) Local authority; or (d)
Statutory corporation; or (e) Authority established by or under a Central, State or Provincial Act; or (f)
Company; or (g) Firm; or (h) Co-operative society; or (i) An individual or HUF, whose books of account are
required to be audited u/s 44AB during the financial year immediately preceding the financial year in which
such goods are sold.
“Buyer” (for specified goods other than motor car) means a person who obtains in any sale (by way of auction,
tender or any other mode) specified goods or the right to receive any such goods but does not include, — (i)
A public sector company, the Central Government, a State Government and an embassy, a High Commission,
Legation, Commission, consulate and the trade representation, of a foreign state and a club; or (ii) A buyer in
the retail sale of such goods purchased by him for personal consumption.
Buyer in case of motor car means a person who obtains in any sale, motor care, but does not include: (a)
the Central Government, a State Government and an embassy, a High Commission, legation, commission,
consulate and the trade representation of a foreign State; or (b) a local authority; or (c) a public sector company
which is engaged in the business of carrying passengers
“Specified goods” includes: (i) Alcoholic Liquor for human consumption (ii) Tendu leaves; (iii) Timber; (iv) Any
forest-produce; (v) Scrap. (vi) Specified minerals i.e., coal, lignite and iron-ore (vii) Motor car value of which
exceeds Rs. 10 lakhs
Rate of TCS
Particulars Rate as a % of the amount payable

by the buyer or licensee or lessee*
Alcoholic liquor for human consumption 1%
Tendu leaves 5%
Timber obtained under a forest lease 2.5%
Timber obtained by any mode other than under a forest lease 2.5%
Any other forest produce (not being timber or tendu leaves) 2.5%
Scrap 1%
Specified minerals 1%
Motor car value of which exceeds Rs. 10 lakh 1%
Parking lot, toll plaza, mining and quarrying 2%
* However, where the purchaser or licensee or lessee is a non-resident non-corporate assessee or a non-
domestic company, then surcharge (if any applicable), Health & Education Cess is also required to be deducted
alongwith aforesaid rates.
Note: “Scrap” means waste and scrap from the manufacture or mechanical working of materials which is
definitely not usable as such because of breakage, cutting up, wear and other reasons.
REQUIREMENT TO FURNISH PAN BY COLLECTEE [SECTION 206CC]

Any person paying any sum, on which tax is collectible at source shall furnish his PAN to the person responsible
for collecting such tax, failing which tax shall be collected at the higher of the following rates: i. at twice of the
specified TCS rate; or ii. at the rate of 5%.
Where the PAN provided is invalid or does not belong to the collectee, it shall be deemed that the collectee has
not furnished his PAN to the collector.
Exception The provisions of higher rate shall not be applicable to a non-resident who does not have permanent
establishment in India.
CBDT Clarification relating to certain issues with respect to section 206C(1F)

These amendments in section 206C have given rise to certain issues relating to the scope and applicability of
the provisions. Accordingly, the CBDT has, vide Circular No. 22/2016 dated 8.6.2016 and Circular No.23/2016
dated 24.6.2016, clarified the following issues in “Question & Answer (Q&A)” format.
Whether TCS@1% is on sale of motor vehicle at retail level or also on sale of motor vehicles
by manufacturers to dealers/ distributors?
A. To bring high value transactions within the tax net, section 206C has been amended to provide that the
seller shall collect the tax @ 1% from the purchaser on sale of motor vehicle of the value exceeding Rs.
10 lakhs. This is brought to cover all transactions of retail sales and accordingly, it will not apply on sale
of motor vehicles by manufacturers to dealers/distributors.
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Whether TCS @ 1% on sale of motor vehicle is applicable only to luxury cars?

No, as per section 206C(1F), the seller shall collect tax@1% from the purchaser on sale of any motor vehicle
of the value exceeding Rs. 10 lakhs.
Whether TCS@ 1% is applicable in the case of sale to Government Departments, Embassies,

Consulates and United Nation Institutions, of motor vehicle or any other goods or provision
of services?
Government, institutions notified under United Nations (Privileges and Immunities) Act 1947, and Embassies,
Consulates, High Commission, Legation, Commission and trade representation of a foreign State shall not be
liable to levy of TCS@1% under sub-section (IF) of section 206C.
Whether TCS is applicable on each sale of motor vehicle or on aggregate value of sale during
the year?
Tax is to be collected at source@1% on sale consideration of a motor vehicle exceeding Rs. 10 lakhs. It is
applicable to each sale and not to aggregate value of sale made during the year.
Whether TCS @ 1% on sale of motor vehicle is applicable in case of an individual?

The definition of “Seller” as given in clause (c) of the Explanation below sub-section (11) of section 206C shall
be applicable in the case of sale of motor vehicles also.
Accordingly, an individual who is liable to audit as per the provisions of section 44AB during the financial year
immediately preceding the financial year in which the motor vehicle is sold shall be liable for collection of tax at
source on sale of motor vehicle by him.
How would the provisions of TCS on sale of motor vehicle be applicable in a case where part
of the payment is made in cash and part is made by cheque?
The provisions of TCS on sale of motor vehicle exceeding Rs. 10 lakhs is not dependent on mode of payment.
Any sale of motor vehicle exceeding Rs. 10 lakhs would attract TCS@1%.
ADVANCE TAX
Generally, tax on the income earned in the previous year is paid in the respective assessment year, but in
certain cases, an assessee may be required to pay tax during the previous year itself, as Advance tax. The
scheme of advance tax is based on the concept “Pay as you earn”. Under this scheme assessee needs to
estimate its income and tax liability of the previous year and pay tax on basis of such estimation in the previous
year itself. For instance, income earned during the previous year 2019-20 is normally taxable in the assessment
year 2020-21, however under the scheme of Advance tax, assessee is required to pay tax on estimated income
of previous year 2019-20 in the previous year itself.
Scheme of Advance tax [Section 208]

The Advance Tax is applicable on all assessee irrespective of his residential status and citizenship.
Where the advance tax liability of the assessee is Rs 10,000 or more, the assessee should pay such tax in the
previous year itself within the due date.
Advance tax liability [Section 209]
PARTICULARS AMOUNT
Estimated Gross Total Income [other than income covered u/s 44AD] ****
Less: Deduction under chapter VIA ****
Estimated Total Income ****
Gross tax liability on Estimated Total Income ****

Less: Rebate u/s 87A ****
Tax liability after Rebate ****
Add: Surcharge (if applicable) ****
Tax and surcharge payable ****
Add: Health & Education cess ****
Tax liability after Cess ****
Less: Tax deducted or collected at source / other Rebate & Relief ****
ADVANCE TAX LIABILITY ****
Due date for payment of Advance Tax [Section 211]
Assessee Due date of installment (of Minimum amount payable

previous year)
An eligible assessee in respect of an On or before March 15 100% of advance tax liability

eligible business referred to in sec.
44AD or 44ADA
Other Assessee On or before June 15 Upto 15% of advance tax liability
On or before September 15 Upto 45% of advance tax liability

On or before December 15 Upto 75% of advance tax liability
On or before March 15 Upto 100% of advance tax liability
Additional points:
(a) Any amount paid u/s 211 on or before 31st March of the previous year, shall be treated as advance tax
paid during the financial year.
(b) Where an assessee is a senior citizen (or super senior citizen) and does not have any income chargeable
under the head “Profits and gains of business or profession”, provision of advance tax is not applicable.
In other words, senior citizen not having business income is not liable to pay advance tax irrespective
of the amount of tax liability.
(c) Every income including capital gain, winning from lotteries, etc. is subject to advance tax. However, it is
not possible to estimate capital gain or casual gain or where income under the head “Profits and gains
of business or profession” accrues or arises for the first time, therefore, where the assessee has paid
the whole of the amount of tax payable in respect of such income:
1. As part of the remaining instalments of advance tax which were due; or
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2. Where no instalments were due, by March 31 of the financial year immediately preceding the
assessment year,
- then it is deemed that all the provisions are complied.
(d) While calculating advance tax, net agricultural income shall also be taken into consideration for
computing tax liability.
(e) If any assessee does not pay any instalment within due date he shall be deemed to be an assessee in
default [Sec. 218]
(f) Any sum, other than a penalty or interest, paid by an assessee as advance tax shall be treated as a
payment of tax and credit for such shall be given to the assessee in the regular assessment [Sec. 219]
NOTE: Nowadays due to tailor made Tax Assessment Software, all the above points are due taken care “by
default”. Even the Forms available on Income Tax Department Website (https://www.incometaxindiaefiling.gov.
in), these provisions are taken care while computing tax liability.
ADVANCE TAX
A. On assessee’s own motion [Section 210(1)]
Procedure for 1st installment
1. Make an estimate of current year’s income (excluding income covered u/s 44AD or 44ADA), considering
brought-forward losses, after deducting all allowable deductions under chapter VIA.
Note: The estimate is not required to be filed with the tax authorities.
2. Compute the tax liability on above estimated income at the rates in force during the financial year and
reduce rebate, If any.
3. Add surcharge (if applicable).
4. Add Health & Education Cess.
5. Deduct tax deducted or collected at source.
6. The amount so derived is the advance tax payable.
Where the advance tax payable is Rs. 10,000 or more, an appropriate percentage thereof should be deposited.
Procedure for subsequent installments

1. Check if estimate of income made earlier requires revision.
2. If not, deposit appropriate amount of second, third or fourth installment of advance tax.
3. If estimate of income needs revision then make a revised estimate and compute tax liability thereon.
4. Determine advance tax payable in subsequent installments after deducting amount paid in earlier
installments.
5. Deposit such advance tax.
B. On receipt of order from the Assessing Officer [Section 210(3) or (4)]
The A.O. may pass an order and issue a notice of demand u/s 156 requiring the assessee to pay advance tax.
Such order can be issued even if assessee has paid any instalment of advance tax during the year, which is, in
the opinion of the Assessing Officer, not as per provision of section 211.
The amount determined by the Assessing Officer shall be the higher of the following –
• Tax on latest assessed income as per regular assessment; or

• Tax on income declared by the assessee in the return relating to the previous year subsequent to the
previous year for which regular assessment has been made.
As per section 210(4), Assessing Officer can revise his order to pay advance tax at any time before 1st March
of the relevant previous year.
Interest on non-payment of advance tax

Where an assessee fails to pay advance tax or defers the payment of advance tax on specified date, he shall
be liable to pay interest u/s 234B & 234C.
Interest for defaults in payment of advance tax [Section 234B]

(1) Interest under section 234B is attracted for non-payment of advance tax or payment of advance tax of
an amount less than 90% of assessed tax.
(2) The interest liability would be 1% per month or part of the month from 1st April following the F.Y.
upto the date of determination of total income under section 143(1) and where regular assessment is
made, upto the date of such regular assessment.
(3) Such interest is calculated on the amount of difference between the assessed tax and the advance tax
paid.
(4) “Assessed tax” means the tax on total income determined u/s 143(1)/under regular assessment, as the
case may be, less TDS & TCS, any relief of tax allowed u/s 89, any tax credit allowed to be set off in
accordance with the provisions of section 115JD.
(5) Where self-assessment tax is paid by the assessee under section 140A or otherwise, interest shall be
calculated upto the date of payment of such tax and reduced by the interest, if any, paid under section
140A towards the interest chargeable under this section.
Interest for deferment of advance tax [Section 234C]

(a) Manner of computation of interest u/s 234C for deferment of advance tax by corporate and non-
corporate assessees:
In case an assessee, other than an assessee who declares profits and gains in accordance with the
provisions of section 44AD(1) or section 44ADA(1), who is liable to pay advance tax u/s 208 has failed
to pay such tax or the advance tax paid by such assessee on its current income on or before the dates
specified in column (1) below is less than the specified percentage [given in column (2) below] of tax
due on returned income, then simple interest@1% per month for the period specified in column (4) on
the amount of shortfall, as per column (3) is leviable u/s 234C.
Specified date Specified % Shortfall in advance tax Period
(1) (2) (3) (4)
15th June 15% 15% of tax due on returned income (-) advance tax 3 months
paid up to 15th June
15th September 45% 45% of tax due on returned income (-) advance tax 3 months
paid up to 15th September
15th December 75% 75% of tax due on returned income (-) advance tax 3 months
paid up to 15th December
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15th March 100% 100% of tax due on returned income (-) advance 1 month
tax paid up to 15th March
Note: However, if the advance tax paid by the assessee on the current income, on or before 15th June
or 15th September, is not less than 12% or, as the case may be, 36% of the tax due on the returned
income, then, the assessee shall not be liable to pay any interest on the amount of the shortfall on those
dates.
Tax due on returned income = Tax chargeable on total income declared in the return of income – TDS
– TCS - any relief of tax allowed u/s 89 - any tax credit allowed to be set off in accordance with the
provisions of section 115JD
(b) Computation of interest under section 234C in case of an assessee who declares profits and
gains in accordance with the provisions of section 44AD(1) or section 44ADA(1):
In case an assessee who declares profits and gains in accordance with the provisions of section
44AD(1) or section 44ADA(1), who is liable to pay advance tax u/s 208 has failed to pay such tax or the
advance tax paid by the assessee on its current income on or before 15th March is less than the tax
due on the returned income, then, the assessee shall be liable to pay simple interest at the rate of 1%
on the amount of the shortfall from the tax due on the returned income.
(c) Non-applicability of interest under section 234C in certain cases: Interest under section 234C
shall not be leviable in respect of any shortfall in payment of tax due on returned income, where
such shortfall is on account of under-estimate or failure to estimate –
(i) the amount of capital gains;
(ii) income of nature referred to in section 2(24)(ix) i.e., winnings from lotteries, crossword puzzles
etc.;
(iii) income under the head “Profits and gains of business or profession” in cases where the income
accrues or arises under the said head for the first time.
(iv) income of the nature referred to in section 115BBDA(1) i.e., dividend in aggregate exceeding of
Rs. 10 lakhs including in the assessee’s total income.
However, the assessee should have paid the whole of the amount of tax payable in respect of such
income referred to in (i), (ii), (iii) and (iv), as the case may be, had such income been a part of the total
income, as part of
Illustration 1
Find out the amount of advance tax payable by Mr. A on specified dates under the Income tax Act, 1961 for the
financial year 2019-20:
Business income Rs 4,00,000
Long term capital gain on 31-5-2019 Rs 60,000
Winning from lotteries on 17-6-2019 Rs 50,000
(If the date of winning from lotteries is 31-03-2020)* Interest on loan Rs 10,000
Other income Rs 5,000
Investment in notified Equity Shares Rs 10,000
Tax deducted at source:
Case 1 Rs. 29,000

Case 2 Rs. 14,000
Solution
Computation of total income of Mr. A for the previous year 2019-20
Particulars Details
Amount
Profits and gains of business or profession 4,00,000
Capital gains: Long term capital gains 60,000
Winning from lotteries 50,000
Interest on loan 10,000
Other income 5,000 65,000
Less: Deduction u/s 80C (10,000)
Computation of tax liability of Mr. A for the previous year 2019-20
Income Case 1 Case 2

Long term capital gain (Rs 60,000 @ 20%) 12,000 12,000
Winning from lotteries (Rs 50,000 @ 30%) 15,000 15,000
Balance income (Rs 4,05,000) 7,750 7,750
Tax 34,750 34,750
Less: Rebate u/s 87A Nil Nil
Total Tax 34,750 34,750
Add: Health & Education Cess @ 4% 1,390 1,390
Total tax including cess 36,140 36,140
Less: Tax Deducted at Source 29,000 14,000
Total Advance tax payable 7,140 22,140
Advance tax to be paid on specified dates:
Case 1: Since amount of advance tax payable is less than Rs 10,000, assessee is not liable to pay advance
tax.
Case 2:
Date Alternate 1 Alternate 2
Working Amount Working Amount
15-06-2019 15% of Rs 22,140 3,321 15% of Rs 22,140 3,321
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15-09-2019 30% of Rs 22,140 6,642 [(45% of Rs 22,140) – 6,642

Rs 3,321]
15-12-2019 30% of Rs 22,140 6,642 [(75% of Rs 22,140) – 6,642
(Rs 3,321 + Rs 6,642)]
15-03-2020 25% of Rs 22,140 5,535 [100% of Rs 22,140 – 5,535
(Rs 3,321 + Rs 6,642 +
Rs 6,642)]
Total 22,140 Total 22,140
*If the date of Winning from Lotteries is 31-03-2020:

In such cases, the assessee cannot pre-estimate his income, hence advance tax on winning from lotteries if
earned on later quarters then it shall be paid as advance tax from those respective quarters itself.
RETURNS
INTRODUCTION
Every person:
a) Being a company or a firm; or
b) Being a person other than a company or a firm, if his total income or the total income of any other person
in respect of which he is assessable under this Act during the previous year exceeded the maximum amount
which is not chargeable to income-tax, shall, on or before the due date, furnish a return of his income or the
income of such other person during the previous year, in the prescribed form and verified in the prescribed
manner and setting forth such other particulars as may be prescribed – [Section 139(1)]
ITR-7
ITR-6 ITR-1
RETURN
OF
INCOME
ITR-5 ITR-2
ITR-4 ITR-3
Compulsory filing of return

(1) Any person, being resident other than not ordinarily resident, shall furnish, a return, within due date, in
respect of his income or loss for the previous year irrespective of the fact that his total income does not exceed
basic exemption limit or does not have any taxable income, if he:
(i) holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity)
located outside India or has signing authority in any account located outside India; or
(ii) is a beneficiary of any asset (including any financial interest in any entity) located outside India.
Exception: An individual, being a beneficiary of any asset (including any financial interest in any entity) located
outside India where, income, if any, arising from such asset is includible in the income of the person referred
above in accordance with the provisions of this Act.
● “Beneficial owner” in respect of an asset means an individual who has provided, directly or indirectly,
consideration for the asset for the immediate or future benefit, direct or indirect, of himself or any other
person.
● “Beneficiary” in respect of an asset means an individual who derives benefit from the asset during the
previous year and the consideration for such asset has been provided by any person other than such
beneficiary.
(2) A person referred, who is not required to furnish a return u/s 139(1), and who during the previous year––
(i) has deposited an amount or aggregate of the amounts exceeding one crore rupees in one or more
current accounts maintained with a banking company or a co-operative bank; or
(ii) has incurred expenditure of an amount or aggregate of the amounts exceeding two lakh rupees for
himself or any other person for travel to a foreign country; or
(iii) has incurred expenditure of an amount or aggregate of the amounts exceeding one lakh rupees towards
consumption of electricity; or
(iv) fulfils such other conditions as may be prescribed, shall furnish a return of his income on or before the
due date in such form and verified in such manner and setting forth such other particulars, as may be
prescribed.
It is further provided that a person who is claiming such rollover benefits on investment in a house or a bond or
other assets, under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB of the Act, shall necessarily be
required to furnish a return, if before claim of the rollover benefits, his total income is more than the maximum
amount not chargeable to tax. [Inserted by Finance (No.2) Act, 2019]
FORMS – RETURN OF INCOME (FOR A.Y. 19/20)

Rule 12 provides following Form for filing return of income for different assessee:
ITR - 1 (Sahaj) For Individuals being a resident other than not ordinarily resident having income from Salaries,
one house property, other sources (Interest etc) and having total income upto Rs. 50 lakh
ITR - 2 For Individuals and HUFs not having income from profits and gains of business or profession.
ITR - 3 For individuals and HUFs having income from profits and gains of business or profession
ITR - 4 (Sugam) For presumptive income from Business & Profession
ITR - 5 For person other than (i) Individual; (ii) HUF; (iii) Company; & (iv) Person filing Form ITR-7
ITR - 6 For Companies other than companies claiming exemption u/s 11
ITR - 7 For persons including companies required to furnish return u/s 139(4A) or 139(4B) or 139(4C) or
139(4D) or 139(4F)
TIME LIMIT FOR FILING RETURN OF INCOME [EXPLANATION 2 TO SECTION 139(1)]

A return should be filed on or before the following due date (of respective assessment year):
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Assessee Due date

● Where the assessee is required to furnish a report in Form 3CEB u/s 92E pertaining 30th November
to international transaction(s)
● Where the assessee is a company not having international transaction(s) 30th September
● Any other assessee
- Where accounts of the assessee are required to be audited under any law 30th September
- Where the assessee is a working partner in a firm and the accounts of the firm are 30th September
required to be audited under any law
- In any other case 31st July
FEE FOR DEFAULT IN FURNISHING RETURN OF INCOME [SECTION 234F]

Where a person required to furnish a return of income u/s, fails to do so within the due date, he shall pay fee of:
Case Fee
Total income does not exceed Rs 5 lakh Rs 1,000
Total income exceeds Rs 5 lakhs
- If the return is furnished on or before 31st December of the assessment year Rs 5,000
- In any other case Rs 10,000
SPECIFIED CLASS OR CLASSES OF PERSONS TO BE EXEMPTED FROM FILING RETURN

OF INCOME [SECTION 139(1C)]
(1) Under section 139(1), every person has to furnish a return of his income on or before the due date, if his total
income exceeds the basic exemption limit.
(2) For reducing the compliance burden of small taxpayers, the Central Government has been empowered to
notify the class or classes of persons who will be exempted from the requirement of filing of return of income,
subject to satisfying the prescribed conditions.
Accordingly, the Central Government has, vide Notification No. S.O.2672(E) dated 26.7.2019, exempted non-
corporate non-residents and foreign companies, having any income chargeable under the Income-tax Act, 1961
during a previous year from any investment fund set up in an International Financial Services Centre (IFSC)
located in India, from the requirement of furnishing a return of income under section 139(1) from A.Y.2019-20
onwards.
The exemption from filing return of income would be available to such class of persons only if any income-tax
due on income of the said class of persons has been deducted at source and remitted to the Central Government
by the investment fund at the tax-rate in force as per provisions of section 194LBB; and there is no other income
during the previous year for which the said class of persons, is otherwise liable to file the tax-return.
Also, the exemption from the requirement of furnishing a return of income shall not be available to the said class
of persons where a notice under section 142(1) or section 148 or section 153A or section 153C has been issued
for filing a return of income for the assessment year specified therein.
For this purpose, “investment fund” means any fund established or incorporated in India in the form of a trust
or a company or a limited liability partnership or a body corporate which has been granted a certificate of
registration as a Category I or Category II Alternative Investment Fund (AIF) and is regulated under the SEBI
(AIF) Regulations, 2012 made under the SEBI Act, 1992.
WHEN A RETURN OF LOSS SHOULD BE FILED [SECTION 139(3)]

An assessee, other than few, is not compulsorily required to furnish return of loss. However, the following losses
cannot be carried forward if the return of loss is not submitted within the time allowed u/s 139(1) –
a. Business loss (speculative or otherwise)u/s 72(1) and 73(2);
b. Capital loss u/s 74)(1);
c. Loss from the activity of owning and maintaining race horses u/s 74A(3)
d. Loss from business specified u/s 35AD u/s 73A(2)
Points to be noted:
a. Loss declared in belated return cannot be carried forward. However, set-off of losses of current year is
not prohibited while computing the total income, even if the return of loss is filed after the due date.
b. Delay in filing the return of loss may be condoned in certain cases
c. Unabsorbed depreciation u/s 32 and loss under the head “Income from house property” can be carried
forward even if the loss return is filed after the due date u/s 139(1).
d. Although the loss of the current year cannot be carried forward unless the return of loss is submitted
before the due date but the loss of earlier years can be carried forward if the return of loss of that year
was submitted within the due date.
BELATED RETURN [SECTION 139(4)]

If an assessee fails to file return within the time limit allowed u/s 139(1) or within the time allowed under a notice
issued u/s 142(1), he can file a belated return.
Assessee may file such return –
● before the end of the relevant assessment year; or
● before the completion of assessment (u/s 144),
- whichever is earlier.
However, if an assessee files a belated return, he would be liable to fee u/s 234F and interest u/s 234A.
RETURN OF INCOME OF CHARITABLE TRUST [SECTION 139(4A)]

Every person who is in receipt of –
● income from property held under the trust or other legal obligation wholly or partly for charitable or
religious purpose; or
● income by way of voluntary contribution on behalf of such trust or institution, and if such income before
allowing exemption u/s 11 or 12 exceeds the maximum amount which is not chargeable to tax, must file
a return before the due date as per section 139(1).
Where an assessee fails to file return of income under this section, within the time limit, it shall be liable to pay
a penalty of Rs. 100 per day during which such failure continues [Section 272A(2)]
RETURN OF INCOME OF POLITICAL PARTY [SECTION 139(4B)]

The chief executive officer (whether such chief executive officer is known as Secretary or by any other designation)
of any political party is required to furnish a return in respect of income of such political party, if the amount of gross
total income before allowing exemption u/s 13A exceeds the maximum amount not chargeable to tax.
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RETURN OF INCOME OF SCIENTIFIC RESEARCH ASSOCIATION, ETC. [SECTION 139(4C)]

Every –
● Research Association referred to in section 10(21);
● News agency referred to in section 10(22B);
● Association or institution referred to in section 10(23A) or section 10(23B);
● Specified Employee Welfare Fund referred to in section 10(23AAA);
● Any university or other educational institution referred to in section 10(23C)(iiiad) or (iiiab);
● Any hospital or other medical institution referred to in section 10(23C)(iiiae) or (iiiac);
● Fund or institution referred to in section 10(23C)(iv);
● Trust or institution referred to in section 10(23C)(v);
● Any university or other educational institution referred to in section 10(23C)(vi);
● Any hospital or other medical institution referred to in section 10(23C)(via);
● Mutual Fund referred to in section 10(23D);
● Securitisation trust referred to in section 10(23DA);
● Investor Protection Fund referred to in section 10(23EC) or section 10(23ED);
● Core Settlement Guarantee Fund referred to in section 10(23EE);
● Venture Capital Company or Venture Capital Fund referred to in section 10(23FB);
● Trade union or an association of such union referred to in section 10(24);
● Body or authority or Board or Trust or Commission referred to in section 10(46) or 10(29A);
● Infrastructure debt fund referred to in sec. 10(47), must file a return, if the total income without giving
effect to the provisions of sec. 10, exceeds the maximum amount which is not chargeable to income-
tax.
Penalty: Where an assessee fails to file return of income under this section, within the time limit, it shall be
liable to pay a penalty of Rs 100 per day during which such failure continues [Section 272A(2)].
RETURN OF INCOME BY A UNIVERSITY/ COLLEGE ETC. [SECTION 139(4D)]

Every University, college or other institutions referred to in sec. 35(1)(ii) or (iii) is required to furnish a return in
respect of income or loss irrespective of size of income or loss.
RETURN OF INCOME OF A BUSINESS TRUST [SECTION 139(4E)]

Every business trust, which is not required to furnish return of income or loss under any other provisions of this
section, shall furnish the return of its income in respect of its income or loss in every previous year and all the
provisions of this Act shall, so far as may be, apply if it were a return required to be furnished u/s 139(1).
RETURN OF INCOME OF INVESTMENT FUND [SECTION 139(4F)]

Every investment fund referred to in sec. 115UB, which is not required to furnish return of income or loss under
any other provisions of this section, shall furnish the return of income in respect of its income or loss in every
previous year and all the provisions of this Act shall, so far as may be, apply as if it were a return required to be
furnished u/s 139(1)
REVISED RETURN [SECTION 139(5)]

If an assessee discovers any omission or wrong statement (bonafide in nature) in the return filed, he can revise
his return u/s 139(5).
Time limit: Assessee may file the revised return –
● before the end of the relevant assessment year; or
● before completion of regular assessment,
- whichever is earlier.
Points to be noted:
a) Replacement of original return: Once a revised return is filed, it replaces the earlier return. This
signifies that the revised return should be complete in itself and not merely an accessory to the original
return.
b) Revision of revised return: A revised return can again be revised i.e. a second revised return can be
filed u/s 139(5) for correcting any omission or wrong statement made in the first revised return within
specified time.
c) Revision of belated return: A belated return u/s 139(4) can be revised.
d) Revision of loss return: A loss return can be revised
e) Return filed pursuant to notice u/s 142(1) cannot be revised.
DEFECTIVE RETURN [SECTION 139(9)]

When a return is termed defective - A return of income is said to be defective where all the following conditions
are not fulfilled:
● The return is furnished without paying self-assessment tax along with interest, if any.
● The annexure, statements and columns in the return of income have been duly filled in.
● The return is accompanied by the following documents –
a. a statement showing the computation of tax liability;
b. the audit report u/s 44AB (where the report has been submitted prior to the furnishing of return, a
copy of audit report together with proof of furnishing the report);
c. the proof of tax deducted or collected at source, advance tax paid and tax paid on self-assessment;
d. where regular books of account are maintained by the assessee:
i. copies of Manufacturing A/c, Trading A/c, Profit and Loss A/c or Income and Expenditure A/c
or any other similar account and Balance Sheet;
ii. in the case of –
♦ A proprietary business or profession - the personal account of the proprietor;
♦ A firm, AOP or BOI - personal account of the partners or members; or
♦ A partner or member of the firm, AOP or BOI - his personal account in the firm,
association of persons or body of individuals;
where regular books of account are not maintained by the assessee –

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e. where regular books of account are not maintained by the assessee:
i. a statement indicating the amount of turnover or gross receipts, gross profit, expenses and
net profit of the business or profession and the basis on which such amount have been
computed; and
ii. the amount of sundry debtors, sundry creditors, stock and cash balance as at the end of the
previous year.
f. where the accounts of the assessee have been audited, copies of the audited Profit and Loss A/c,
Balance Sheet and a copy of the Auditor’s report;
g. Cost audit report u/s 233B of the Companies Act, 1956 (if any).
Time limit for rectification: The assessee must rectify the error within a period of 15 days from the date of
intimation (served on the assessee) or within such extended time as allowed by the Assessing Officer. Where
the taxpayer rectifies the defect after the expiry of the period of 15 days or such extended period but before the
assessment is completed, the Assessing Officer can condone such delay.
Consequence when defect is not rectified: If defect is not rectified within the time limit, the Assessing Officer
will treat the return as an invalid return and provisions of the Act will apply as if the taxpayer had failed to furnish
the return at all.
PERMANENT ACCOUNT NUMBER (PAN) [SECTION 139A]

(1) Section 139A(1) requires the following persons mentioned in column (2), who have not been allotted a
permanent account number (PAN), to apply to the Assessing Officer within the time specified in column (3) for
the allotment of a PAN –
(1) (2) (3)
Persons required to apply for PAN Time limit for making such application
(i) Every person, if his total income or the total On or before 31st May of the assessment year for
income of any other person in respect of which he which such income is assessable
is assessable under the Act during any previous
year exceeds the maximum amount which is not
chargeable to income-tax
(ii) Every person carrying on any business or Before the end of that financial year (previous
profession whose total sales, turnover or gross year).
receipts are or is likely to exceed Rs. 5 lakhs in any
previous year
(iii) Every person who is required to furnish a return of Before the end of the financial year
income under section 139(4A)
(iv) Every person being a resident, other than an On or before 31st May of the immediately following
individual, which enters into a financial transaction financial year
of an amount aggregating to Rs. 2,50,000 or more
in a financial year
(v) Every person who is a managing director, director, On or before 31st May of the immediately following
partner, trustee, author, founder, karta, chief financial year in which the person referred in (iv)
executive officer, principal officer or office bearer enters into financial transaction specified therein.
of any person referred in (iv) above or any person
competent to act on behalf of such person referred
in (iv) above
Further, for widening the tax base, every person who has not been allotted a PAN and intends to enter into such
transaction as prescribed by the CBDT is also required to apply to the Assessing Officer for allotment of PAN
(inserted w.e.f. 1.9.2019)
The Central Government is empowered to specify, by notification in the Official Gazette, any class or classes
of persons by whom tax is payable under the Act or any tax or duty is payable under any other law for the time
being is force. Such persons are required to apply within such time as may be mentioned in that notification to
the Assessing Officer for the allotment of a PAN [Sub-section (1A)].
(2) For the purpose of collecting any information which may be useful for or relevant to the purposes of the
Act, the Central Government may notify any class or classes of persons, and such persons shall within the
prescribed time, apply to the Assessing Officer for allotment of a PAN [Sub-section (1B)].
(3) The Assessing Officer, having regard to the nature of transactions as may be prescribed, may also allot a
PAN to any other person (whether any tax is payable by him or not) in the manner and in accordance with the
procedure as may be prescribed [Sub-section (2)].
(4) Any person, other than the persons mentioned in (1) to (4) above, may apply to the Assessing Officer for the
allotment of a PAN and the Assessing Officer shall allot a PAN to such person immediately.
(5) Such PAN comprises of 10 alphanumeric characters.
(6) Quoting of PAN is mandatory in all documents pertaining to the following prescribed transactions:
(a) in all returns to, or correspondence with, any income-tax authority;
(b) in all challans for the payment of any sum due under the Act;
(c) in all documents pertaining to such transactions entered into by him, as may be prescribed by the
CBDT in the interests of revenue. In this connection, CBDT has notified the following transactions,
namely:
S. Nature of transaction Value of transaction

No.
1. Sale or purchase of a motor vehicle or vehicle, as defined in the All such transactions
Motor Vehicles Act, 1988 which requires registration by a registering
authority under that Act, other than two wheeled vehicles.
2. Opening an account [other than a time-deposit referred to at Sl. All such transactions
No.12 and a Basic Savings Bank Deposit Account] with a banking
company or a co-operative bank to which the Banking Regulation
Act, 1949 applies (including any bank or banking institution
referred to in section 51 of that Act).
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3. Making an application to any banking company or a co- operative All such transactions
bank to which the Banking Regulation Act, 1949, applies (including
any bank or banking institution referred to in section 51 of that Act)
or to any other company or institution, for issue of a credit or debit
card.
4. Opening of a demat account with a depository, participant, custodian All such transactions
of securities or any other person registered under section 12(1A) of
the SEBI Act, 1992.
5. Payment to a hotel or restaurant against a bill or bills at any one Payment in cash of an amount
time. exceeding Rs. 50,000.
6. Payment in connection with travel to any foreign country or payment Payment in cash of an amount
for purchase of any foreign currency at any one time. exceeding Rs. 50,000.
7. Payment to a Mutual Fund for purchase of its units Amount exceeding Rs. 50,000.
8. Payment to a company or an institution for acquiring debentures or Amount exceeding Rs. 50,000.
bonds issued by it.
9. Payment to the Reserve Bank of India for acquiring bonds issued Amount exceeding Rs. 50,000.
by it.
10. Deposit with Cash deposits exceeding Rs.

50,000 during any one day.
– a banking company or a co-operative bank to which the
Banking Regulation Act, 1949, applies (including any bank
or banking institution referred to in section 51 of that Act);
or
– post office
11. Purchase of bank drafts or pay orders or banker’s cheques from Payment in cash of an amount
a banking company or a co-operative bank to which the Banking exceeding Rs. 50,000 during any
Regulation Act, 1949 applies (including any bank or banking one day.
institution referred to in section 51 of that Act).
12. A time deposit with, - Amount exceeding Rs. 50,000 or

aggregating to more than Rs. 5
– a banking company or a co-operative bank to which the
lakh during a financial year.
Banking Regulation Act, 1949 applies (including any bank
or banking institution referred to in section 51 of that Act);
– a Post Office;
– a Nidhi referred to in section 406 of the Companies Act,
2013; or
– a non-banking financial company which holds a certificate
of registration under section 45-IA of the Reserve Bank of
India Act, 1934, to hold or accept deposit from public.
13. Payment for one or more pre-paid payment instruments, as defined Payment in cash or by way of
in the policy guidelines for issuance and operation of pre-paid a bank draft or pay order or
payment instruments issued by Reserve Bank of India under the banker’s cheque of an amount
Payment and Settlement Systems Act, 2007, to a banking company aggregating to more than Rs.
or a co- operative bank to which the Banking Regulation Act, 1949, 50,000 in a financial year.
applies (including any bank or banking institution referred to in
section 51 of that Act) or to any other company or institution.
14. Payment as life insurance premium to an insurer as defined in the Amount aggregating to more than
Insurance Act, 1938. Rs. 50,000 in a financial year.
15. A contract for sale or purchase of securities (other than shares) as Amount exceeding Rs. 1 lakh per
defined in section 2(h) of the Securities Contracts (Regulation) Act, transaction
1956.
16. Sale or purchase, by any person, of shares of a company not listed Amount exceeding Rs. 1 lakh per
in a recognised stock exchange. transaction.
17. Sale or purchase of any immovable property. Amount exceeding Rs. 10 lakh
or valued by stamp valuation
authority referred to in section
50C at an amount exceeding
Rs. 10 lakh
18. Sale or purchase, by any person, of goods or services of any nature Amount exceeding Rs. 2 lakh per
other than those specified at Sl. No. 1 to 17 of this Table, if any. transaction.
Inter-changeability of PAN & Aadhaar and Mandatory Quoting in Prescribed Transactions

To ensure ease of compliance, it is provided for inter-changeability of PAN with the Aadhaar number. Accordingly
the provisions of section 139A is amended so as to provide that,-
i. every person who is required to furnish or intimate or quote his PAN under the Act, and who, has not
been allotted a PAN but possesses the Aadhaar number, may furnish or intimate or quote his Aadhaar
number in lieu of PAN, and such person shall be allotted a PAN in the prescribed manner;
every person who has been allotted a PAN, and who has linked his Aadhaar number under section 139AA, may
furnish or intimate or quote his Aadhaar number in lieu of a PAN.
Penalty for failure to comply with the provisions of section 139A [Section 272B]
Section Default Penalty
272B(1) Failure to comply with the provisions of section 139A Rs. 10,000
272B(2) Failure to quote PAN/Aadhaar number in any document referred to in section Rs. 10,000
139A(5)(c) for each such
default
Failure to intimate PAN/Aadhaar number as required by section 139A(5A)/
(5C)
Knowingly quoting or intimating a number which is false

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272B(2A) Failure to quote PAN/Aadhaar Number in documents referred to in section Rs. 10,000
inserted 139A(6A) or authenticate such number in accordance with the provisions for each such
w.e.f. contained therein default
1.9.2019
272B(2B) (i) Failure to ensure that PAN/Aadhaar Number is duly quoted in the Rs. 10,000
inserted documents relating to transactions referred to in section 139A(5)(c) or for each such
w.e.f. section 139A(6A) default
1.9.2019
(ii) Failure to ensure that PAN/Aadhaar Number has been duly authenticated
in respect of transactions referred to under section 139A(6A)
Note – It is necessary to give an opportunity to be heard to the person on whom the penalty under
section 272B is proposed to be imposed.
Scheme for Submission of Returns through Tax Return Preparers [Section 139B]
(1) This section provides that, for the purpose of enabling any specified class or classes of persons to prepare
and furnish their returns of income, the CBDT may notify a Scheme to provide that such persons may furnish
their returns of income through a Tax Return Preparer authorised to act as such under the Scheme.
(2) The Tax Return Preparer shall assist the persons furnishing the return in a manner that will be specified in
the Scheme, and shall also affix his signature on such return.
(3) A Tax Return Preparer can be an individual, other than –
(i) any officer of a scheduled bank with which the assessee maintains a current account or has other
regular dealings.
(ii) any legal practitioner who is entitled to practice in any civil court in India.
(iii) a chartered accountant. an employee of the ‘specified class or classes of persons’.
(4) The “specified class or classes of persons” for this purpose means any person other than a company or a
person whose accounts are required to be audited under section 44AB (tax audit) or under any other existing
law, who is required to furnish a return of income under the Income-tax Act, 1961.
(5) The Scheme notified under the said section may provide for the following -
(i) the manner in which and the period for which the Tax Return Preparers shall be authorised,
(ii) the educational and other qualifications to be possessed, and the training and other conditions required
to be fulfilled, by a person to act as a Tax Return Preparer,
(iii) the code of conduct for the Tax Return Preparers,
(iv) the duties and obligations of the Tax Return Preparers,
(v) the circumstances under which the authorisation given to a Tax Return Preparer may be withdrawn,
and
(vi) any other relevant matter as may be specified by the Scheme.
(6) Accordingly, the CBDT has, in exercise of the powers conferred by this section, framed the Tax Return
Preparer Scheme, 2006, which came into force from 1.12.2006.
Particulars Contents
Applicability of the The scheme is applicable to all eligible persons.

scheme
Eligible person Any person being an individual or a Hindu undivided family.
Tax Return Preparer Any individual who has been issued a "Tax Return Preparer Certificate" and a
"unique identification number" under this Scheme by the Partner Organisation to
carry on the profession of preparing the returns of income in accordance with the
Scheme.
However, the following person are not entitled to act as Tax Return Preparer:
(i) any officer of a scheduled bank with which the assessee maintains a
current account or has other regular dealings.
(ii) any legal practitioner who is entitled to practice in any civil court in India.
(iii) an accountant.
Educational An individual, who holds a bachelor degree from a recognised Indian University
qualification for Tax or institution, or has passed the intermediate
Return Preparers level examination conducted by the Institute of Chartered Accountants of India or
the Institute of Company Secretaries of India or the Institute of Cost Accountants
of India, shall be eligible to act as Tax Return Preparer.
Preparation of and An eligible person may, at his option, furnish his return of income under section
furnishing the Return 139 for any assessment year after getting it prepared through a Tax Return
of Income by the Tax Preparer:
Return Preparer
However, the following eligible person (an individual or a HUF) cannot furnish a
return of income for an assessment year through a Tax Return Preparer:
(i) who is carrying out business or profession during the previous year and
accounts of the business or profession for that previous year are required
to be audited under section 44AB or under any other law for the time
being in force; or
(ii) who is not a resident in India during the previous year.
An eligible person cannot furnish a revised return of income for any assessment
year through a Tax Return Preparer unless he has furnished the original return of
income for that assessment year through such or any other Tax Return Preparer.
VERIFICATION OF RETURN [SECTION 140]

The return of income is required to be verified:
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Assessee Case Verified by
Individual In general Individual himself
Where the individual concerned is absent from Individual himself or by the duly authorized
India person of such individual
Where the individual is mentally incapacitated Guardian of such individual or any other
person competent to act on his behalf
Where by any other reason it is not possible for Any person duly authorised by him
the individual to verify the return.
Note: When return is verified by any authorised person in that case the return should be
accompanied with power of attorney.
HUF In general Karta
Where the ‘karta’ is absent from India or is Any adult member of the family.
mentally incapacitated
Firm In general Managing partner
If due to any reason it is not possible for Any adult partner

managing partner to verify or where there is no
managing partner
Limited liability In general Designated partner

partnership
If due to any unavoidable reason such Any partner
designated partner is not able to verify the
return, or where there is no designated partner
as such
Local authority Principal Officer
Political party Chief Executive Officer
Company In general Managing Director (MD)
If due to any reason it is not possible for MD to Any director

verify or where there is no MD
Non-resident company A person holding a valid power of attorney.

Copy of such power of attorney must be
attached with the return.
Company in process of winding up Liquidator of the company
Where in respect of a company, an application Insolvency professional appointed by

for corporate insolvency resolution process has such Adjudicating Authority.
been admitted by the Adjudicating Authority
u/s or u/s 9or u/s 10 of the Insolvency and
Bankruptcy Code, 2016,
“Insolvency professional” and “Adjudicating

Authority” shall have the respective meanings
assigned to them u/s 3(18) and u/s 5(1)
of Insolvency and Bankruptcy Code, 2016
[Finance Act, 2018]
Where the management of the company Principal officer

has been taken over by the Central or State
Government.
Any other Any member or principal officer

association
Any other Such person or any other person competent to act on its behalf.
person
QUOTING OF AADHAAR NUMBER [SECTION 139AA]

Every person who is eligible to obtain Aadhaar number shall quote Aadhaar number in the application form for
allotment of permanent account number; and in the return of income.
Note:
■ 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.
■ Every person who has been allotted PAN before 01-07-2017 and who is eligible to obtain Aadhaar number,
shall intimate his Aadhaar number to such authority on or before specified date (31-12-2017). In case of
failure to intimate the Aadhaar number, the PAN allotted to the person shall be inoperative after the date so
notified in such manner as may be prescribed. [Inserted by Finance (No. 2) Act, 2019]
■ The provisions of this section shall not apply to notified persons or State.
E-FILING
MODE OF FURNISHING INCOME-TAX RETURN

1. Paper Return
2. Electronic Return with Digital Signature
3. Transmitting the data in the return electronically and thereafter submitting the verification of the return
in Form ITR-V
4. Transmitting the data electronically in the return under electronic verification code
The table enumerates mode of filing of return of income:
Person Condition Mode

Company - Electronically with digital sign
Political Party -
Firm or LLP or Individual or HUF Audit u/s 44AB required
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Resident Individual (other than If he/it has: Electronically with or without

not-ordinarily resident) or a digital sign
(a) assets (including financial interest
resident HUF (other than not-
in any entity) located outside India; or
ordinarily resident)
(b) signing authority in any account
located outside India.
Any person Claiming any relief u/s 90 or 90A or 91
Individual or HUF Where total income assessable during Any of the given mode
the previous year of a person:
a. being an individual of the age of 80
years or more at any time during the
previous year; or
b. whose income does not exceed ` 5
lakh and no refund is claimed in the
return of income,
and who furnishes the return in Form
No. ITR-1 or Form No. ITR-4
Any other case Any mode other than paper mode
Steps for e-filing of Return (with offline utility)

Step 1:
Register with http://incometaxindiaefiling.gov.in. For registration, one requires following:
– Name of the assessee;
– PAN of the assessee;
– Date of birth (in case of person other than individual, date of incorporation)
– Mobile Number
– Email ID
– Password of your choice
After successful registration, remember the login credentials:
● User ID: PAN of the assessee (the ID is not case sensitive)
● Password: As provided
● Date of birth / incorporation
Step 2
Download appropriate form utility of return of income (or else one can fill the appropriate form online after login).
For this, Go to the ‘Downloads’ located below the login button -> Click ‘Offline Utilities’ -> Click ‘Income Tax
Return Preparation Utilities’
Step 3
Select the type of ‘ITR’ form depending on the types of income you have received in the financial year for which
the return is to be filed -> Click ‘Download’ link available under ‘Excel Utility’ or ‘Java Utility’ column
Step 4
Extract the download ZIP file Open the extracted ZIP file.
● For Excel File - Click ‘Import Personal / Tax Details from XML’, located at right side of the ‘Income
Details’ tab. The side buttons (like validate, Next, Calculate Tax, etc.) of the excel file will work only if
‘Macros’ and ‘ActiveX’ function of the Excel workbook is enabled.
Step 5
Attach the ‘Pre-filled XML’ file which has been downloaded. For Pre-filled XML file:
a) Login to ‘e-Filing’ Portal
b) Go to the ‘My Account’ menu located at upper-left side of the page -> Click ‘Download Pre-filled XML’
c) Select the ‘Assessment Year’ and ‘ITR Form Name’ from the dropdown list
d) Click ‘Continue’ Choose the type of details Click ‘Confirm’ Click ‘Download XML’
Step 6
Attach the downloaded ‘Pre-fill XML’ file to populate the relevant details.
Step 7
Enter all the Mandatory Fields Validate all the sheets Calculate Tax
Step 8
Click ‘Generate XML’
Step 9
Click ‘Save XML’ button to save the XML file at your desktop
Step 10
After saving the generated XML, Upload the XML file at e-Filing Website. For this follow these steps:
a) Login to ‘e-Filing’ Portal
b) Go to the ‘e-File’ menu located at upper-left side of the page Click ‘Income Tax Return’
c) Select the ‘Assessment Year’, ‘ITR Form Name’ from the dropdown list
d) Select the ‘Submission Mode’ as ‘Upload XML’ from the dropdown list
e) Choose any one of the following option to verify the Income Tax Return:
● Digital Signature Certificate (DSC). If you do not have DSC
● Aadhaar OTP
● EVC using Prevalidate Bank Account Details
● EVC using Prevalidate Demat Account Details
● Already generated EVC through My Account Generate EVC Option or Bank ATM. Validity of
such EVC is 72 hours from the time of generation
● Don’t Want to e-verify this Income Tax Return and would like to send signed ITR-V to Bengaluru
f) Click ‘Continue’
g) Attach the XML file at option ‘Attach the ITR XML file
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h) Taxpayer will get an option to enter OTP for e-verifying the ITR, if an EVC or Aadhaar OTP option is
chosen.
Or
To attach DSC, if DSC option is chosen to e-verify the ITR.
Step 11
After successful submission, ITD will process your ITR and send an email confirmation stating the same
Steps for e-filing of Return Form 1 and Form 4 (online)

Step 1
Logon to ‘e-Filing’ Portal
Step 2
Go to the ‘e-File’ menu located at upper-left side of the page Click ‘Income Tax Return’
Step 3
Select the ‘Assessment Year’, ‘ITR Form Name’ from the dropdown list
Step 4
Select the ‘Submission Mode’ as ‘Prepare and Submit Online’ from the dropdown list
Step 5
Choose any one of the following option to verify the Income Tax Return:
● Digital Signature Certificate (DSC). If you do not have DSC
● Aadhaar OTP
● EVC using Prevalidate Bank Account Details
● EVC using Prevalidate Demat Account Details
● Already generated EVC through My Account Generate EVC Option or Bank ATM. Validity of such
EVC is 72 hours from the time of generation
● Don’t want to e-verify this Income Tax Return and would like to send signed ITR-V to Bengaluru
Click ‘Continue’
Step 6
Read the instructions Fill in Required details While filling the details in ITR, under category ‘Return Filed’
Note: Before submitting the data, kindly save the data you have entered by clicking on ‘Save as Draft’ to
recheck any mistakes.
Step 7
Click ‘Preview and Submit’ button to preview your ITR from before submitting it.
Step 8
Click ‘Submit’
Taxpayer will get an option to enter OTP for e-verifying the ITR, if an EVC or Aadhaar OTP option is chosen or
To attach DSC, if DSC option is chosen to e-verify the ITR. After successful submission, ITD will process your
ITR and send an email confirmation stating the same.
26AS Statement
The following details (on yearly basis) have been provided in 26AS statement:
● Advance tax, Self-Assessment Tax and Regular Assessment Tax paid by the assessee
● Tax paid through Tax Deducted at Source (TDS) or TCS on behalf of the assessee
● Refund issued by the Department to the assessee
● Information received from various agencies on high value transaction carried by the assessee.
Steps are required to follow to view or download 26AS statement:
Step 1 Logon to the ‘e-Filing’ Portal

Step 2 Go to the ‘My Account’ menu located at upper-left side of the page Click ‘View Form 26 AS
(Tax Credit)’ , User is redirected to TDS-CPC Portal
Step 3 View the disclaimer Click ‘Confirm’ Agree the acceptance of usage Click ‘Proceed’
Step 4 Click ‘View Tax Credit (Form 26AS)’
Step 5 Select the ‘Assessment Year’ and ‘View type’ (HTML, Text or PDF)
Step 6 Click ‘View / Download’
One can also view the 26AS statement from his banking portal.
Functionalities available at e-Filing Portal
Few of the functionalities available at e-filing portal are as follow:
● View Form 26AS
● View (with download facility) e-Filed Return / Form
● Tax Credit mismatch
● Download pre-filled XML
● e-Verify Return
● Generate EVC
● Add / Disengage CA or e-Return Intermediary
● Add / Register as Representative
● Filing of Returns
● Filing of Rectification
● Filing of return in response of notice u/s 139(9)
● Status of refund issue or status of demand
● Aadhar linking
● e-Proceedings
● Filing of appeal to CIT(Appeals)
● Registration or updation of Digital Sign
● Refund reissue request
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● Validation of Bank Account or Demat Account

● Profile updation
INTEREST FOR DEFAULT IN FURNISHING RETURN OF INCOME [SECTION 234A]

Condition: Where a person, who is required to furnish return of income –
a) fails to furnish a return; or
b) furnishes it after the due date specified u/s 139(1).
On the amount of tax determined u/s 143(1) or on regular assessment as reduced by advance tax paid and tax
deducted or collected at source, if any.
In other words, interest is to be calculated on the following amount:
Particulars Amount Amount

Tax determined u/s 143(1) or on Regular Assessment ***
Less: Advance Tax paid ***
Relief u/s 90 or 90A or 91 ***
Credit allowed u/s 115JAA / 115JD (MAT or AMT Credit) ***
Tax deducted/collected at source *** ***
Amount for interest calculation ***
Simple interest is calculated @ 1% per month or part thereof

For every month or part of a month commencing from the day immediately following the due date for furnishing
return for the relevant assessment year and ending on –
● Where the return is furnished after due date : Date of furnishing return
● Where the return is not furnished at all : Date of completion of assessment u/s 144
The interest is to be charged on the amount by which tax on total income as per sec.147, exceeds the tax on
the total income determined on the basis of earlier assessment
Commencing on the day immediately following the expiry of the time allowed under that notice and ending on –
● Where the return is furnished after the expiry of time allowed : Date of furnishing return
● Where the return is not furnished at all : Date of completion of reassessment u/s 147 or 153A
Where tax payable is reduced or increased by an order u/s 154, 155, 245D, 250, 254, 260, 262, 263 & 264, the
amount of interest shall be reduced or increased accordingly.
ILLUSTRATION 1
Calculate interest u/s 234A in the following cases –
Name of the assessee A A Ltd. B

Due date of furnishing return 31st July 30th September 31st July
Date of filing return 4th December 30th January Not filed
Date of completion of assessment 1st March 15th April 15th February
Income as per return Rs 5,80,000 Rs 5,00,000 -

Assessed Income Rs 6,10,000 Rs 5,50,000 Rs 12,00,000
Advance tax paid Rs 10,000 Rs 25,000 Rs 80,000
Tax deducted at source Rs 10,000 Rs 15,000 Rs 80000
Tax paid along with return Rs 6,000 Rs 1,50,000 -
Also state interest payable u/s 234A for the purpose of section 140A. Ignore interest under any other section.
Solution
Computation of interest u/s 234A
Particulars Code A A Ltd. B

Period of default A# 5 months 4 months 7 months
(Aug. to Dec.) (Oct. to Jan.) (Aug. to Feb.)
Assessed Income B 6,10,000 5,50,000 12,00,000
Tax rate C Slab-rate 30% Slab rate
Tax liability before D=B×C 34,500 1,65,000 1,72,500
surcharge
Rate of Surcharge E Nil Nil Nil
Surcharge F=D×E Nil Nil Nil
Tax and surcharge G=D+F 34,500 1,65,000 1,72,500
payable
Health & Education H=G×4% 1,380 6,600 6,900
Cess
Tax liability on assessed I=G+H 35,880 1,71,600 1,79,400
income
Less: Advance tax paid J 20,000 40,000 1,60,000
& tax deducted at source
Shortfall K=I-J 15,880 1,31,600 19,400
Rounded off L 15,800 1,31,600 19,400
Interest (1% × A × L) 790 5,264 1,358
Note: Tax paid along with return shall not be reduced while computing interest u/s 234A
Computation of interest u/s 234A for the purpose of section 140A
Name of the assessee Code A A Ltd.

Period of default A# 5 month 4 months
(Aug. to Dec.) (Oct. to Jan.)
Returned Income B 5,80,000 5,00,000
Tax rate C Slab-rate 30%
484 PP-DTL&P
Tax liability before surcharge D=B×C 28,500 1,50,000

Rate of Surcharge E Nil Nil
Surcharge F=D×E Nil Nil
Tax & surcharge on above G=D+F 28,500 1,50,000
Health & Education cess H=G×4% 1,140 6,000
Tax liability on assessed income I=G+H 29,640 1,56,000
Less: Advance tax paid & tax deducted at source J 20,000 40,000
Shortfall K=I-J 9,640 1,16,000
Rounded off L 9,600 1,16,000
Interest (1% × A × L) 480 4,640
# It is to be noted that when interest is calculated on monthly basis, any fraction of the month shall be taken as
full month.
Note: In case of B, return has not been filed, hence interest payable u/s 234A at the time of self-assessment
cannot be computed.
COLLECTION & RECOVERY
Notice of Intimation
1. Demand
[Section 2. of loss
[Section 3. Assessee
in Default
156] 157]
DEMAND NOTICE [SECTION 156]

On completion of assessment, a demand notice [in Form 7] is served for additional demand raised in the
assessment.
The assessee should make the payment of amount demanded within 30 days of service of notice [Section
220(1)] The Assessing Officer may with the previous approval of the Joint Commissioner direct that the sum
specified in the notice of demand shall be paid within such time as may be specified by him in the notice.
On an application made by the assessee before the expiry of due date, the Assessing Officer may extend the
time for payment, subject to such conditions as he may think fit to impose in the circumstances of the case.
Interest shall be payable @ 1% for every month of the delay if the payment is not made within 30 days or time
specified. [Section 220(2)]
The Chief Commissioner or Commissioner may reduce or waive the amount of interest paid or payable by an
assessee u/s 220(2), if he satisfied that:
a) payment of such amount has caused or would cause genuine hardship to the assessee;
b) default in the payment of the amount on which interest has been paid or was payable under the said
sub-section was due to circumstances beyond the control of the assessee; and
c) the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the
recovery of any amount due from him.
The order accepting or rejecting the application of the assessee, either in full or in part, shall be passed within a
period of 12 months from the end of the month in which the application is received. No order rejecting the application,
either in full or in part, shall be passed unless the assessee has been given an opportunity of being heard.
Assessee in default [Section 220(4)]: If the amount is not paid within the time (or extended time) at the
place and to the person mentioned in the said notice the assessee shall be deemed to be in default. Further,
if, in a case where payment by instalments is allowed, the assessee commits default in paying any one of the
instalments within the time, the assessee shall be deemed to be in default as to the whole of the amount then
outstanding, and the other instalment or instalments shall be deemed to have been due on the same date as
the instalment actually in default.
Exception: In the following circumstances, the assessee may not be considered as an assessee in default:
a) Where an assessee has presented an appeal u/s 246A, the Assessing Officer may, in his discretion
and subject to such conditions as he may think fit to impose in the circumstances of the case, treat the
assessee as not being in default in respect of the amount in dispute in the appeal, even though the time
for payment has expired, as long as such appeal remains undisposed of.
b) Where an assessee has been assessed in respect of income arising outside India in a country, the
laws of which prohibit or restrict the remittance of money to India, the Assessing Officer shall not treat
the assessee as in default in respect of that part of the tax which is due in respect of that amount of
his income which, by reason of such prohibition or restriction, cannot be brought into India, and shall
continue to treat the assessee as not in default in respect of such part of the tax until the prohibition or
restriction is removed.
For this purpose, income shall be deemed to have been brought into India if it has been utilised or could have
been utilised for the purposes of any expenditure actually incurred by the assessee outside India or if the
income, whether capitalised or not, has been brought into India in any form.
PENALTY PAYABLE WHEN TAX IN DEFAULT [SECTION 221]

When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition
to the amount of the arrears and the amount of interest payable u/s 220(2), be liable, by way of penalty, to pay
such amount as the Assessing Officer may direct, and in the case of a continuing default, such further amount
or amounts as the Assessing Officer may, from time to time, direct, so, however, that the total amount of penalty
does not exceed the amount of tax in arrears.
CERTIFICATE TO TAX RECOVERY OFFICER [SECTION 222]

♦ When an assessee is in default or is deemed to be in default in making a payment of tax, the Tax
Recovery Officer may draw up under his signature a statement in the prescribed form (Form 57)
specifying the amount of arrears due from the assessee (such statement being hereafter referred to as
“certificate”) and shall proceed to recover from such assessee the amount specified in the certificate
by one or more of the modes mentioned below (in accordance with the rules laid down in the Second
Schedule)
a. attachment and sale of the assessee’s movable property;
b. attachment and sale of the assessee’s immovable property;
c. arrest of the assessee and his detention in prison;
d. appointing a receiver for the management of the assessee’s movable and immovable properties.
486 PP-DTL&P
♦ The assessee’s movable or immovable property shall include any property which has been transferred,
directly or indirectly after 31-5-1973, by the assessee to his spouse or minor child or son’s wife or son’s
minor child, otherwise than for adequate consideration, and which is held by, or stands in the name of,
any of the persons aforesaid. If the movable or immovable property was transferred to his minor child
or his son’s minor child, it shall, even after the date of attainment of majority by such minor child or
son’s minor child, as the case may be, continue to be included in the assessee’s movable or immovable
property for recovering any arrears due from the assessee.
♦ No step in execution of a certificate shall be taken until the period of 15 days has elapsed since the date
of the service of the notice. However, if the Tax Recovery Officer is satisfied that the defaulter is likely
to conceal, remove or dispose of his property, he may at any time direct, for reasons to be recorded in
writing, an attachment of such property.
Further, if the defaulter whose property has been so attached furnishes security to the satisfaction of
the Tax Recovery Officer, such attachment shall be cancelled from the date on which such security is
accepted by the Tax Recovery Officer.
♦ Arrear amount includes:
(a) interest upon the amount of tax or penalty or other sum to which the certificate relates as is
payable in accordance with sec. 220(2); and
(b) all charges incurred in respect of:
(i) the service of notice and of warrants and other processes; &
(ii) all other proceedings taken for realising the arrears
♦ The proceeds shall be disposed of in the following manner:
(a) they shall first be adjusted towards the amount due under the certificate in execution of which the
assets were realised and the costs incurred in the course of such execution;
(b) if there remains a balance, the same shall be utilised for satisfaction of any other amount
recoverable from the assessee under this Act which may be due on the date on which the assets
were realised; &
(c) the balance, if any, remaining after above adjustments shall be paid to the defaulter.
♦ The order of Tax Recovery Officer relating to the execution or discharge etc. shall be final. However, a
suit may be brought in a civil court upon the ground of fraud.
♦ If at any time after the certificate is drawn up by the Tax Recovery Officer the defaulter dies, the
proceedings (except arrest and detention) may be continued against the legal representative of the
defaulter.
♦ An appeal from any original order passed by the Tax Recovery Officer shall lie to the Chief Commissioner
or Commissioner. Such appeal must be presented within 30 days from the date of the order appealed
against. Pending the decision of any appeal, execution of the certificate may be stayed if the appellate
authority so directs, but not otherwise.
TAX RECOVERY OFFICER BY WHOM RECOVERY IS TO BE EFFECTED [SECTION 223]

♦ The Tax Recovery Officer competent to take action u/s 222 shall be:
(a) the Tax Recovery Officer within whose jurisdiction the assessee carries on his business or
profession or within whose jurisdiction the principal place of his business or profession is situate;
or
(b) the Tax Recovery Officer within whose jurisdiction the assessee resides or any movable or
immovable property of the assessee is situate, the jurisdiction for this purpose being the jurisdiction
assigned to the Tax Recovery Officer under the orders or directions issued by the Board, or by the
Chief Commissioner or Commissioner who is authorised in this behalf by the Board in pursuance
of sec. 120.
♦ Where an assessee has property within the jurisdiction of more than one Tax Recovery Officer and the
Tax Recovery Officer by whom the certificate is drawn up:
(a) is not able to recover the entire amount by sale of the property, movable or immovable within his
jurisdiction; or
(b) is of the opinion that, for the purpose of expediting or securing the recovery of the whole or any
part of the amount, it is necessary so to do, he may send the certificate or, where only a part of
the amount is to be recovered, a copy of the certificate certified in the prescribed manner and
specifying the amount to be recovered to a Tax Recovery Officer within whose jurisdiction the
assessee resides or has property and, thereupon, that Tax Recovery Officer shall also proceed to
recover the amount as if the certificate or copy thereof had been drawn up by him.
VALIDITY OF CERTIFICATE AND CANCELLATION OR AMENDMENT THEREOF [SEETION 224]

It shall not be open to the assessee to dispute the correctness of any certificate drawn up by the Tax Recovery
Officer on any ground whatsoever, but it shall be lawful for the Tax Recovery Officer to cancel the certificate if,
for any reason, he thinks it necessary so to do, or to correct any clerical or arithmetical mistake therein.
STAY OF PROCEEDINGS [SECTION 225]

♦ It shall be lawful for the Tax Recovery Officer to grant time for the payment of any tax and when he does
so, he shall stay the proceedings for the recovery of such tax until the expiry of the time so granted.
♦ Where the order giving rise to a demand of tax for which a certificate has been drawn up is modified in
appeal or other proceeding under this Act, and, as a consequence thereof, the demand is reduced but
the order is the subject-matter of further proceeding under this Act, the Tax Recovery Officer shall stay
the recovery of such part of the amount specified in the certificate as pertains to the said reduction for
the period for which the appeal or other proceeding remains pending.
♦ When the order which was the subject-matter of such appeal or other proceeding has become final and
conclusive, TRO shall amend the certificate or cancel it.
OTHER MODES OF RECOVERY [SECTION 226]

♦ Whether or not certificate has been drawn up u/s 222, the Assessing Officer may recover the tax by any
one or more of the modes provided in this section.
♦ Attachment of salary: If any assessee is in receipt of any income chargeable under the head
“Salaries”, the Assessing Officer or Tax Recovery Officer may require any person paying the same (i.e.,
the employer) to deduct from any payment subsequent to the date of such requisition, any arrears of tax
due from such assessee. The employer shall comply with any such requisition and shall pay the sum
so deducted to the credit of the Central Government or as the Board directs:
♦ Garnishee order: The assessing Officer or Tax Recovery Officer may by notice in writing require,
any person from whom money is due or any person holds or may subsequently hold money for or on
account of the assessee, to pay to the Assessing Officer or Tax Recovery Officer so much of the money
(subject to maximum of amount payable to assessee) as is sufficient to pay the amount due by the
assessee.
488 PP-DTL&P
If the person to whom a notice is sent fails to make payment in pursuance thereof to the Assessing
Officer or Tax Recovery Officer, he shall be deemed to be an assessee in default in respect of the
amount specified in the notice and further proceedings may be taken against him for the realisation of
the amount as if it were an arrear of tax due from him, in the manner provided in section 222 to 225.
Any person discharging any liability to the assessee after receipt of a notice shall be personally liable
to the Assessing Officer or Tax Recovery Officer to the extent of his own liability to the assessee so
discharged or to the extent of the assessee’s liability for any sum due under this Act, whichever is less.
A copy of the notice shall be forwarded to the assessee at his last address known to the Assessing
Officer or Tax Recovery Officer.
Where a person to whom a notice is sent objects to it by a statement on oath that the sum demanded or
any part thereof is not due to the assessee or that he does not hold any money for or on account of the
assessee, then, nothing shall be deemed to require such person to pay any such sum or part thereof.
But if it is discovered that such statement was false in any material particular, such person shall be
personally liable to the Assessing Officer or Tax Recovery Officer to the extent of his own liability to the
assessee on the date of the notice, or to the extent of the assessee’s liability for any sum due under this
Act, whichever is less.
♦ The Assessing Officer or Tax Recovery Officer may apply to the court in whose custody there is money
belonging to the assessee for payment to him of the entire amount of such money, or, if it is more than
the tax due, an amount sufficient to discharge the tax.
♦ The Assessing Officer or Tax Recovery Officer may, if authorised by the Chief Commissioner or
Commissioner by general or special order, recover any arrears of tax due from an assessee by distraint
and sale of his movable property in the manner laid down in the Third Schedule.
RECOVERY THROUGH STATE GOVERNMENT [SECTION 227]

The recovery of tax in any area has been entrusted to a State Government, the State Government may recovers
any arrears of tax in the same manner as the municipal tax or local rate is recovered.
RECOVERY OF TAX IN PURSUANCE OF AGREEMENTS WITH FOREIGN COUNTRIES

[SECTION 228A]
Where an agreement is entered into by the Central Government with the Government of any country outside
India for recovery of income-tax under this Act and the corresponding law in force in that country and the
Government of that country or any authority under that Government which is specified in this behalf in such
agreement sends to the Board a certificate for the recovery of any tax due under such corresponding law from a
person having any property in India, the Board may forward such certificate to any Tax Recovery Officer within
whose jurisdiction such property is situated and thereupon such Tax Recovery Officer shall:
(a) proceed to recover the amount specified in the certificate in the manner in which he would proceed to
recover the amount specified in a certificate drawn up by him u/s 222; and
(b) remit any sum so recovered by him to the Board after deducting his expenses in connection with the
recovery proceedings.
Where an assessee is in default or is deemed to be in default in making a payment of tax, the Tax
Recovery Officer may, if the assessee has property in a country outside India (being a country with which
the Central Government has entered into an agreement for the recovery of income-tax under this Act and
the corresponding law in force in that country), forward to the Board a certificate drawn up by him u/s 222
and the Board may take such action thereon as it may deem appropriate having regard to the terms of the
agreement with such country.
RECOVERY OF PENALTIES, FINE, INTEREST AND OTHER SUMS [SECTION 229]

Any sum imposed by way of interest, fine, penalty, or any other sum payable under the provisions of this Act,
shall be recoverable in the manner provided for the recovery of arrears of tax.
TAX CLEARANCE CERTIFICATE [SECTION 230]
Person not domiciled in India

♦ No person,—
a. who is not domiciled in India;
b. who has come to India in connection with business, profession or employment; and
c. who has income derived from any source in India,
shall leave the territory of India by land, sea or air unless he furnishes to the prescribed authority:
(i) an undertaking in the prescribed form [Form 30A] from his employer; or
(ii) through whom such person is in receipt of the income,
to the effect that tax payable by such person who is not domiciled in India shall be paid by the employer
or the payer, and the prescribed authority shall, on receipt of the undertaking, immediately give to such
person a no objection certificate [Form 30B], for leaving India.
♦ The aforesaid provision is not applicable to a person who is not domiciled in India but visits India as a
foreign tourist or for any other purpose not connected with business, profession or employment.
Person domiciled in India

♦ Every person, who is domiciled in India at the time of his departure from India, shall furnish, in the
prescribed form [Form 30C] to the income-tax authority or such other prescribed authority.
the permanent account number allotted to him u/s 139A
(a)

However, where permanent account number has not been allotted to him, or his total income is
not chargeable to income-tax or he is not required to obtain a permanent account number under
this Act, such person shall furnish a certificate in the prescribed form.
(b) the purpose of his visit outside India;
(c) the estimated period of his stay outside India:
♦ No person:
(i) who is domiciled in India at the time of his departure; and
(ii) in respect of whom circumstances exist which, in the opinion of an income-tax authority render it
necessary for such person to obtain a certificate under this section,
shall leave the territory of India by land, sea or air unless he obtains a certificate from the income-tax
authority stating that he has no liabilities under direct tax, or that satisfactory arrangements have been
made for the payment of all or any of such taxes which are or may become payable by that person.
No such order shall be made unless such income tax authority records the reasons therefor and obtains the
prior approval of the Principal Chief Commissioner or Chief Commissioner of Income-tax.
490 PP-DTL&P
Liability of the carrier

If the owner or charterer of any ship or aircraft carrying persons from any place in the territory of India to
any place outside India allows any of the aforesaid person to travel by such ship or aircraft without first
satisfying himself that such person is in possession of a certificate as required, he shall be personally liable
to pay the whole or any part of the amount of tax, if any, payable by such person as the Assessing Officer
may, determine.
In respect of any sum payable by the owner or charterer of any ship or aircraft, the owner or charterer, as the
case may be, shall be deemed to be an assessee in default for such sum, and such sum shall be recoverable
from him as if it were an arrear of tax.
Owner and charterer include any representative, agent or employee empowered by the owner or charterer to
allow persons to travel by the ship or aircraft.
RECOVERY BY SUIT OR UNDER OTHER LAW NOT AFFECTED [SECTION 232]

The several modes of recovery specified in this Chapter shall not affect in any way:
(a) any other law for the time being in force relating to the recovery of debts due to Government; or
(b) the right of the Government to institute a suit for the recovery of the arrears due from the assessee;
and it shall be lawful for the Assessing Officer or the Government, as the case may be, to have recourse to any
such law or suit, notwithstanding that the tax due is being recovered from the assessee by any mode specified
in this Chapter.
PROVISIONAL ATTACHMENT TO PROTECT REVENUE IN CERTAIN CASES [SECTION 281B]

Where, during the pendency of any proceeding for the assessment or reassessment, the Assessing Officer is
of the opinion that for the purpose of protecting the interests of the revenue it is necessary so to do, he may,
with the previous approval of the Chief Commissioner, Commissioner, Director General or Director, by order
in writing, attach provisionally any property belonging to the assessee in the manner provided in the Second
Schedule.
Every such provisional attachment shall cease to have effect after the expiry of a period of 6 months from the
date of such order.
However, Principal Chief Commissioner or Chief Commissioner, Principal Commissioner or Commissioner,
Principal Director General or Director General or Principal Director or Director may, for reasons to be recorded
in writing, extend the aforesaid period by such further period or periods as he thinks fit, so, however, that the
total period of extension shall not in any case exceed 2 years or 60 days after the date of order of assessment
or reassessment, whichever is later.
Where the assessee furnishes a guarantee from a scheduled bank for an amount not less than the fair market
value of the property provisionally attached, the Assessing Officer shall, by an order in writing, revoke such
attachment. However, where the Assessing Officer is satisfied that a guarantee from a scheduled bank for an
amount lower than the fair market value of the property is sufficient to protect the interests of the revenue, he
may accept such guarantee and revoke the attachment.
The Assessing Officer may, for the purposes of determining the value of the property provisionally attached,
make a reference to the Valuation Officer referred to in sec. 142A, who shall estimate the fair market value of the
property in the manner provided under that section and submit a report of the estimate to the Assessing Officer
within a period of 30 days from the date of receipt of such reference.
An order revoking the provisional attachment shall be made:
– within 45 days from the date of receipt of the guarantee, where a reference to the Valuation Officer has
been made; or
– within 15 days from the date of receipt of guarantee in any other case.
Where a notice of demand specifying a sum payable is served upon the assessee and the assessee fails to
pay that sum within the time specified in the notice of demand, the Assessing Officer may invoke the guarantee
furnished, wholly or in part, to recover the amount.
The Assessing Officer shall, in the interests of the revenue, invoke the bank guarantee, if the assessee fails to
renew the guarantee, or fails to furnish a new guarantee from a scheduled bank for an equal amount, 15 days
before the expiry of the guarantee.
The amount realised by invoking the guarantee shall be adjusted against the existing demand which is payable
by the assessee and the balance amount, if any, shall be deposited in the Personal Deposit Account of the
Principal Commissioner or Commissioner in the branch of the Reserve Bank of India or the State Bank of India
or of its subsidiaries or any bank as may be appointed by the Reserve Bank of India as its agent at the place
where the office of the Principal Commissioner or Commissioner is situate.
Where the Assessing Officer is satisfied that the guarantee is not required anymore to protect the interests of
the revenue, he shall release that guarantee forthwith.
CERTAIN TRANSFERS TO BE VOID [SECTION 281]

Where, during the pendency of any proceeding under this Act or after the completion thereof, but before the
service of notice by TRO, any assessee creates a charge on or parts with the possession (by way of sale,
mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any
other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum
payable by the assessee as a result of the completion of the said proceeding or otherwise.
Assets means land, building, machinery, plant, shares, securities and fixed deposits in banks, to the extent to
which any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee.
However such charge or transfer shall not be void if it is made:
(i) for adequate consideration and without notice of the pendency of such proceeding or without notice of
such tax or other sum payable by the assessee; or
(ii) with the previous permission of the Assessing Officer.
This section applies to cases where the amount of tax or other sum payable or likely to be payable exceeds Rs.
5,000 and the assets charged or transferred exceed Rs. 10,000 in value.
SERVICE OF NOTICE GENERALLY [SECTION 282]

The service of a notice or summon or requisition or order or any other communication under this Act (hereafter
in this section referred to as “communication”) may be made by delivering or transmitting a copy thereof, to the
person therein named:
a) by post or by such courier services as may be approved by the Board; or
b) in such manner as provided under the Code of Civil Procedure, 1908 for the purposes of service of
summons; or
c) by e-mail; or
d) by any other means of transmission of documents as provided by rules made by the Board in this
behalf.
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AUTHENTICATION OF NOTICES AND OTHER DOCUMENTS [SECTION 282A]

♦ Where the Act requires a notice or other document to be issued by any income-tax authority, such
notice or other document shall be signed and issued in paper form or communicated in electronic form
by that authority in accordance with such procedure as may be prescribed.
♦ Every notice or other document to be issued, served or given for the purposes of this Act by any income-
tax authority, shall be deemed to be authenticated if the name and office of a designated income-tax
authority is printed, stamped or otherwise written thereon.
RETURN OF INCOME, ETC., NOT TO BE INVALID ON CERTAIN GROUNDS [SECTION 292B]

No return of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken
or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act
shall be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice,
summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in
substance and effect in conformity with or according to the intent and purpose of this Act.
NOTICE DEEMED TO BE VALID IN CERTAIN CIRCUMSTANCES [SECTION 292BB]

Where an assessee has appeared in any proceeding or co-operated in any inquiry relating to an assessment
or reassessment, it shall be deemed that any notice, which is required to be served upon him, has been duly
served upon him in time in accordance with the provisions of this Act and such assessee shall be precluded
from taking any objection in any proceeding or inquiry under this Act that the notice was—
(a) not served upon him; or
(b) not served upon him in time; or
(c) served upon him in an improper manner.
However, aforesaid provision is not applicable, where the assessee has raised such objection before the
completion of such assessment or reassessment.
REFUND [SECTION 237]

As per section 237, if any person satisfies the Assessing Officer that the amount of tax paid by him (or on his
behalf) for any assessment year, exceeds the amount with which he is chargeable under this Act, then he shall
be entitled to a refund of such excess amount.
# Tax paid by the assessee includes the following –
1. Advance tax;
2. Tax deducted at source (TDS);
3. Tax collected at source (TCS);
4. Self-assessment tax; and
5. Tax paid on demand
Following person can claim refund –
1. A person who has paid tax more than the amount for which he is chargeable under this Act [Section
237];
2. Where the income of one person is included in the total income of other person, such other person is
entitled to claim refund on tax paid on such income [Section 238(1)]
3. Where due to death, incapacity, insolvency, liquidation or any other cause, a person is unable to claim
or receive any refund due to him, his legal representative, trustee, guardian or receiver, as the case
may be, can claim and receive such refund for the benefit of such person or his estate [Section 238(2)]
FORM AND TIME LIMIT FOR CLAIMING REFUND [SECTION 239]

A claim for refund should be made in Form 30. Such form should be verified in the prescribed manner and shall
be accompanied by the return of income except in cases where return had already been filed.
Refund shall be claimed within 1 year from the end of relevant assessment year [Section 239]
REFUND ON APPEAL, ETC. [SECTION 240]

Where any refund becomes due as a result of any order passed in appeal or other proceedings, the Assessing
Officer shall refund the amount to the assessee suomoto i.e. without any claim being made by the assessee in
this behalf. Such refund shall become due on –
Case When refund becomes due

Where an assessment is set aside or cancelled The refund shall become due on completion of such
and an order of fresh assessment is directed to be fresh assessment and amount of refund shall be decided
made as per the fresh assessment.
Where the assessment is annulled The refund shall become due when such assessment is
annulled. The refund shall be only of the amount of the
tax paid in excess of tax as per return.
CORRECTNESS OF ASSESSMENT NOT TO BE QUESTIONED [SECTION 242]

In a claim of refund, it shall not be open to the assessee to question the correctness of any assessment or other
matter decided which has become final and conclusive or ask for a review of the same, and the assessee shall
not be entitled to any relief on such claim except refund of tax wrongly paid or paid in excess.
INTEREST ON REFUND [SECTION 244A]

An assessee who is entitled to get refund shall also be entitled to interest on such refund. Provision relating to
interest is enumerated below –
Rate of interest: Simple interest @ ½% per month or part thereof
Period for calculation of interest
Case Period
1. Refund is out of TDS or TCS or Advance tax (Note
1)
- Where return of income is furnished within due date From first day of relevant assessment year to the date
on which such refund is granted.
- Where return is after due date From the date of furnishing return to the date on which
such refund is granted.
2. Refund is out of self-assessment tax (Note 1) From the date of furnishing return or payment of tax,
whichever is later to the date on which such refund is
granted.
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3. Refund due to any other reason From date of payment of such tax to the date on which
such refund is granted.
4. Refund due to excess payment of TDS by deductor From the date on which claim for refund is made
(however, where refund arise on account of giving
effect to an order u/s 250 or 254 or 260 or 262, from
date of payment of tax) to the date on which refund is
granted.
Notes
1. Interest on refund due to TDS or TCS: In case (1) and (2), no interest on refund shall be allowed if
the amount of refund is less than 10% of the tax determined u/s 143(1) or on regular assessment.
2. Interest on Refund arising out of giving effect to an order: In a case where a refund arises as a result
of giving effect to an order u/s 250 or 254 or 260 or 262 or 263 or 264, wholly or partly, otherwise than
by making a fresh assessment or reassessment, the assessee shall be entitled to receive, in addition
to the interest payable (as aforesaid), an additional interest on such amount of refund calculated at the
rate of 3% p.a., for the period beginning from the date following the date of expiry of the time allowed
u/s 153(5) [i.e., 3 months from the end of the month in which appellate order is received by the CIT) to
the date on which the refund is granted
3. Taxability of refund and interest on refund: It is to be noted that refund of tax itself is not taxable.
However, interest received on delayed refund is taxable under the head “Income from other sources”.
4. Adjustment in interest: Where tax payable is reduced or enhanced by an order u/s 143(3), 144, 147,
154, 155, 250, 254, 260, 262, 263, 264 & 245D(4), the amount of interest shall be reduced or enhanced
accordingly.
5. Delay in refund due to reason attributable to the assessee: Where the refund are delayed for the
reason attributable to the assessee (or deductor), the period of delay so attributable to him shall be
excluded from the period for which interest is payable. Further, where any question arises as to the
period to be excluded, it shall be decided by the Principal Chief Commissioner or Chief Commissioner
or Principal Commissioner or Commissioner whose decision shall be final.
SET-OFF OF REFUND AGAINST TAX REMAINING PAYABLE [SECTION 245]

If a refund is due to an assessee, it can be set-off against the sum payable under this Act. However, tax
authorities must give a written intimation to the assessee before such set-off.
WITHHOLDING OF REFUND IN CERTAIN CASES [SECTION 241A]

If the following conditions are fulfilled, the Assessing Officer, may, for reasons to be recorded in writing and with
the previous approval of the Principal Commissioner or Commissioner, withhold the refund due to the assessee
u/s 143(1) up to the date on which the assessment u/s 143(3) is made:
a. Refund of any amount becomes due to the assessee u/s 143(1);
b. The Assessing Officer is of the opinion, having regard to the fact that a notice has been issued u/s
143(2) [i.e., notice for scrutiny assessment u/s 143(3)] in respect of such return; and
c. The Assessing Officer is of the opinion that the grant of the refund is likely to adversely affect the
revenue.
Payment of interest on refund u/s 244A of excess TDS deposited u/s 195 [Circular 11/2016
dated 26-04-2016]
The procedure for refund of tax deducted at source u/s 195, to the person deducting the tax is delineated in
CBDT Circular No. 7/2007 dated 23-10-2007. Circular No. 7/2007 states that no interest u/s 244A is admissible
on refunds to be granted in accordance with the circular or on the refunds already granted in accordance with
Circular No. 769 or Circular 790 dated 20-4-2000.
The issue of eligibility for interest on refund of excess TDS to a tax deductor has been a subject matter of
controversy and litigation. The Hon’ble Supreme Court of India in the case of Tata Chemical Limited’, Civil
Appeal No. 6301 of 2011 vide order dated 26-02-2014, held that:
Refund due and payable to the assessee is debt-owed and payable by the Revenue. The Government, there
being no express statutory provision for payment of interest on the refund of excess amount / tax collected
by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the
accrued interest for the period of undue retention of such monies. The State having received the money without
right, and having retained and used it, is bound to make the party good , just as an individual would be under
like circumstances. The obligation to refund money received and retained without right implies and carries with
it the right to interest.
In view of the above judgment of the Apex Court it is settled that if resident deductor is entitled for the refund of
tax deposited u/s 195, then it has to be refunded with interest u/s 244A, from the date of payment of such tax.
ASSESSMENT
Assessment means to compute the income & tax of the assessee. It begins with self-assessment and ends
with the assessment by the authority. From classification point of view following are the types of assessment.
1. SELF-ASSESSMENT [SECTION 140A]

Provision of section 140A is as follows –
a) Where any tax is payable (after deducting relief, rebate, advance payment of tax or tax deducted
or collected at source or MAT or AMT credit, if any) on the basis of return furnished the assessee is
required to pay such tax before filing the return.
b) If any interest is payable for delayed filing of return (u/s 234A) or default in payment of advance tax (u/s
234B) or for deferment of advance tax (u/s 234C) or fee (u/s 234F) is payable for filing return after due
date, then such interest or fee should be paid along with self-assessment tax.
c) Where the amount paid by the assessee falls short of the aggregate of tax, interest and fee, the amount
so paid shall first be adjusted towards fee and thereafter towards interest payable and the balance, if
any, shall be adjusted towards tax payable.
d) After assessment, any amount paid under this section shall be deemed to have been paid towards such
assessment.
e) If an assessee fails to pay whole or any part of such tax or interest or both in accordance with the
provisions of sec. 140A, he shall be deemed to be an assessee in default.
2. ASSESSMENT BY INCOME TAX DEPARTMENT

After submission of return or on non-submission of return by the assessee, assessment is made by the Income
tax department. The Assessing Officer can assess the income of the assessee in any of the following manner:
1. Intimation u/s 143(1);
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2. Scrutiny Assessment u/s 143(3);

3. Best Judgment Assessment u/s 144;
4. Income Escaping Assessment u/s 147
While assessing the income by the Assessing Officer the inquiry can be sought by him. He can inquiry in the
following manner:
1. Pre-Assessment Inquiry
• Issue of notice to the assessee [Section 142(1)] to submit a return [Section 142(1)(i)] or to produce
accounts, documents etc. [Section 142(1)(ii) & (iii)]
• Making inquiry [Section 142(2)]
• Giving direction to get books of account audited [Section 142(2A) to (2D)]
• Opportunity of being heard [Section 142(3)]
• Estimate by Valuation Officer in certain cases [Section 142A]
INTIMATION BY ASSESSING OFFICER

The Assessing Officer makes the following order:
Intimation [Section 143(1)] : No intimation shall be sent after the expiry of 1 year from the end of the financial
year in which the return is made. The period of limitation will run from the date of filing of latest revised return.
Regular assessment:
● On the basis of further evidence gathered by him [Scrutiny Assessment u/s 143(3)]
● On the basis of best of his judgement [Best Judgement Assessment u/s 144]
SCRUTINY ASSESSMENT [SECTION 143(3)]

A return has been furnished u/s 139 or in response to a notice u/s 142(1); and Assessing Officer considers it
necessary or expedient to ensure that the assessee has not understated his income, declared excessive loss
or under-paid the tax.
Procedure
Notice for scrutiny [Section 143(2)] :Assessing Officer shall serve on the assessee a notice requiring the
assessee, on a date specified in the notice, to produce, or cause to be produced, any evidence on which
assessee may rely, in support of the return.
Time limit of notice:No notice shall be served on the assessee after the expiry of 6 months from the end of the
financial year in which the return is furnished.
Order: After collecting such information and hearing such evidence as the assessee produces in response
to the notice u/s 143(2) and after taking into account all relevant materials, which the Assessing Officer has
gathered;
The Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the
assessee and determine the sum payable by him or refund of any amount due to him on the basis of such
assessment
Time limit for completion of scrutiny assessment

Assessment u/s 143(3) should be completed within 18 months (from A.Y. 2019-20: 12 months) from the end of
the relevant assessment year.
Special procedure in case of research association etc. [Proviso to Section 143(3)]
Applicable to
● Research association referred in section 10(21);
● News agency referred in section 10(22B);
● Association or institution referred in section 10(23A);
● institution referred in section 10(23B);
● fund or institution referred in section 10(23C)(iv);
● trust or institution referred in section 10(23C)(v);
● any university or other educational institution referred in section 10(23C)(vi);
● any hospital or other medical institution referred in section 10(23C)(via)
● any university or college u/s 35(1)(ii) or (iii) - which is required to furnish the return of income u/s
139(4C) or (4D)
BEST JUDGMENT ASSESSMENT [SECTION 144]

In the following situations assessment shall be made under this section –
a. If the person fails to file the return u/s 139(1), 139(4) or 139(5); or
b. If the person fails to comply with the terms of notice u/s 142(1); or
c. If the person fails to comply with the directions u/s 142(2A) requiring him to get his accounts audited; or
d. If the person fails to comply with the terms of notice u/s 143(2), requiring his presence or production of
evidence and documents.
In any of the given situation, the Assessing Officer is under an obligation to make an assessment under this
section. In other words, Best judgment assessment is not the discretionary power of the Assessing Officer but
mandatory in nature.
Opportunity of being heard :The assessment u/s 144 can only be made after giving the assessee a reasonable
opportunity of being heard. Such opportunity shall be given by serving a “Show cause notice” calling upon the
assessee to show cause(s), on a date and time specified in the notice, why the assessment should not be
completed to the best of judgment of the Assessing Officer.
Exception: Such opportunity need not be given, where notice u/s 142(1) has already been issued.
Time limit for completion of assessment [Section 153(1)]:18 months (from A.Y. 2019-20: 12 months) from
the end of relevant assessment year
POWER OF JOINT COMMISSIONER TO ISSUE DIRECTIONS IN CERTAIN CASES [SECTION

144A]
Joint Commissioner may (on his own motion or on a reference being made to him by the Assessing Officer or
on the application of an assessee) –
a) Call for and examine the record of any proceeding in which an assessment is pending; and
b) Having regard to the nature of the case or the amount involved or for any other reason,
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– issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to
complete the assessment and such directions shall be binding on the Assessing Officer.
REFERENCE TO DISPUTE RESOLUTION PANEL [SECTION 144C]

The Income-tax Act is amended to provide for an alternate dispute resolution mechanism which will facilitate
expeditious resolution of disputes in a fast track basis. The provision relating to alternate dispute resolution
mechanism are as under:
1. The Assessing Officer shall, in the first instance, forward a draft of the proposed order of assessment
(hereafter in this section referred to as the draft order) to the eligible assessee# if he proposes to make
any variation in the income or loss returned which is prejudicial to the interest of such assessee.
# Eligible assessee means:
(i) Any person in whose case the variation referred to arises as a consequence of the order of the
Transfer Pricing Officer passed u/s 92CA(3); and
(ii) Any foreign company
2. On receipt of the draft order, the eligible assessee shall, within 30 days of the receipt by him of the draft
order:
(a) File his acceptance of the variations to the Assessing Officer; or
(b) File his objections, if any, to such variation with, –
(i) The Dispute Resolution Panel; and
(ii) The Assessing Officer.
$ Dispute Resolution Panel means a collegium comprising of 3 Commissioners of Income-tax constituted
by the Board for this purpose.
3. The Assessing Officer shall complete the assessment on the basis of the draft order, if: (a) The assessee
intimates to the Assessing Officer the acceptance of the variation; or (b) No objections are received
within 30 days as specified above.
Time limit for passing of order: The Assessing Officer shall pass such order within 1 month from the
end of the month in which,—
(i) The acceptance is received; or
(ii) The period of filing of objections (i.e. 30 days) expires.
The time limit is irrespective of time limit given u/s 153 (or 153B) for passing an assessment order.
4. The Dispute Resolution Panel shall, in a case where any objections are received, issue such directions,
as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment.
5. The Dispute Resolution Panel shall issue the directions, for guidance of the Assessing Officer, after
considering the following:
a. Draft order;
b. Objections filed by the assessee;
c. Evidence furnished by the assessee;
d. Report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other
authority;
e. Records relating to the draft order;

f. Evidence collected by it; and
g. Result of any enquiry made by it.
6. The Dispute Resolution Panel may, before issuing any directions:
a. Make such further enquiry, as it thinks fit; or
b. Cause any further enquiry to be made by any income tax authority and report the result of the
same to it.
7. The Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that
it shall not set aside any proposed variation or issue any direction for further enquiry and passing of the
assessment order.
8. If the members of the Panel differ in opinion on any point, the point shall be decided according to the
opinion of the majority of the members.
9. Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer.
10. No direction shall be issued unless an opportunity of being heard is given to the assessee and the
Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest
of the revenue, respectively.
11. No direction shall be issued after 9 months (irrespective of any limitation given u/s 153) from the end of
the month in which the draft order is forwarded to the eligible assessee.
12. Upon receipt of the directions, the Assessing Officer shall, in conformity with the directions, complete,
the assessment without providing any further opportunity of being heard to the assessee, within 1
month from the end of the month in which the direction is received.
13. The provisions of this section shall not apply to any assessment or reassessment order passed by the
Assessing Officer with the prior approval of the Principal Commissioner or Commissioner as provided
in sec. 144BA
14. The Board may make rules for the efficient functioning of the Dispute Resolution Panel and expeditious
disposal of the objections filed by the eligible assessee.
INCOME ESCAPING ASSESSMENT [SECTION 147]

The Assessing Officer may assess or reassess an income, if he has reason to believe# that such income though
chargeable to tax has escaped assessment$ for any assessment year.
Tax point: A reassessment proceeding may end without creating a tax liability.
Income chargeable to tax has escaped assessment

Following shall deem to be the cases where income chargeable to tax has escaped assessment –
1. Where no return of income has been furnished by the assessee although his total income (or the total
income of any other person in respect of which he is assessable under this Act) exceeded the maximum
amount which is not chargeable to tax;
2. Where a return of income has been furnished by the assessee but no assessment has been made and
it is noticed by the Assessing Officer that the assessee has understated the income or has claimed
excessive loss, deduction, allowance or relief in the return;
3. Where the assessee has failed to furnish a report in respect of any international transaction which he
was so required u/s 92E;
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4. Where an assessment has been made, but—

● income chargeable to tax has been under-assessed; or
● such income has been assessed at too low a rate; or
● such income has been subject to excessive relief under this Act; or
● excessive loss or depreciation allowance or any other allowance under this Act has been
computed.
5. Where a return of income has not been furnished by the assessee or a return of income has been
furnished by him and on the basis of information or document received from the prescribed income-tax
authority, u/s 133C(2), it is noticed by the Assessing Officer that the income of the assessee exceeds
the maximum amount not chargeable to tax, or as the case may be, the assessee has understated the
income or has claimed excessive loss, deduction, allowance or relief in the return.
6. Where a person is found to have any asset (including financial interest in any entity) located outside
India.
Reason to believe escapement: Section 147 can be applied only on ’reason to believe’ that income chargeable
to tax has escaped assessment. It cannot be applied merely on suspicion, gossip or rumour. There must be
nexus between material and belief. Furthermore, before issuing any notice for assessment or reassessment,
Assessing Officer must record the reasons for doing so.
Treatment of new information subsequently found

Once an assessment has been reopened, any income –
● which has escaped assessment; and
● which comes to the notice of the Assessing Officer subsequently,
may also be included in the assessment in the course of the proceedings of this section.
When can a reassessment proceeding be dropped [Section 152(2)]

Where an assessment is reopened u/s 147 and the assessee –
a) has not opposed any part of the original assessment order for that year either u/s 246 to 248 or u/s 264;
and
b) shows that he had been assessed on an amount or to a sum not lower than what he would be rightly
liable for even if the income alleged to have escaped assessment had been taken into account, or the
assessment or computation had been properly made.
– then the proceedings u/s 147 shall be dropped.
Rate of taxation [Section 152(1)]: If an assessment/reassessment is made u/s 147, then tax shall be chargeable
at the rates at which it would have been charged had the income not escaped assessment.
Issue of notice [Section 148]: Before making the assessment u/s 147, the Assessing Officer shall serve
on the assessee a notice requiring him to furnish a return within such period, as may be specified in the
notice.
Note: Notice u/s 148 cannot be issued during pendency of assessment proceedings
TIME LIMIT FOR NOTICE [SECTION 149]

Notice u/s 148 can be issued subject to the following time limit –
Time limit for issue of notice Size of escaped Person authorised to issue notice
income
Where assessment has already been completed u/s 143(3) or 147
Upto 4 years from the end of the Any amount Any Assessing Officer with the permission of
relevant assessment year Joint Commissioner
Beyond 4 years and upto 6 years Rs. 1,00,000 or Assessing Officer after approval of the Principal
from the end of relevant assessment more Chief Commissioner or Chief Commissioner or
year. Principal Commissioner or Commissioner.
In case income is in relation to any Notice u/s 148 has to be issued within 16 years
asset (including financial interest in from the end of the relevant A.Y.
any entity) located outside India has
escaped assessment
Where assessment has not been completed u/s 143(3) or 147
Upto 4 years from the end of relevant Any amount Any Assessing Officer with the permission of
assessment year Joint Commissioner.
Beyond 4 years and upto 6 years Rs. 1,00,000 or Assessing Officer after approval of the Principal
from the end of relevant assessment more Chief Commissioner or Chief Commissioner or
year. Principal Commissioner or Commissioner.
If the person on whom a notice u/s 148 is to be served, is a person treated as the agent of a non-
resident u/s 163
Up to 6 years from the end of Escaped income is Assessing Officer
relevant assessment year of any amount
Tax point: The above time limit is for issuance of notice and not for service of notice. If the notice is issued
within the above time limit but served to the assessee after the above time limit, shall be a valid notice.
Exceptions to the above time limit: Where an assessment u/s 143(3) or 147 has been made for the relevant
assessment year, no action shall be taken under this section after the expiry of 4 years from the end of relevant
assessment year, unless any income chargeable to tax has escaped assessment by reason of failure on the
part of the assessee –
● to file a return u/s 139 or in response to a notice issued u/s 142(1) or u/s 148; or
● to disclose fully and truly all material facts necessary for his assessment for that assessment year.
Time limit for completion of assessment u/s 147: No order of assessment, reassessment shall be made
u/s 147 after the expiry of 9* months from the end of the financial year in which notice u/s 148 was served.
SUMMARY OF TIME LIMIT FOR VARIOUS PURPOSES [SECTION 153]
Particulars Section Time limit

Intimation of summary assessment 143(1) Must be send within 1 year from the end of
financial year in which return of income is filed.
Issuance of notice for scrutiny 143(2) Must be served within 6 months from the end
assessment of the financial year in which return of income
is filed.
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Completion of Scrutiny assessment 153(1) Assessment must be completed within 18

u/s 143(3) months (from A.Y. 2019-20: 12 months) from the
end of the relevant assessment year.
Completion of Best judgment
assessment u/s 144
Issuance of notice for Income 149 Notice must be issued within 6 years (maximum;
escaping assessment u/s 147 6years, in some cases 16 years) from the end of
the relevant assessment year
Completion of Income escaping 153(2) Assessment must be completed within 9 months
assessment u/s 147 from the end of the financial year in which notice
for such assessment u/s 148 was served.
FRESH ASSESSMENT [SECTION 153(3)]

An order of fresh assessment in pursuance of an order u/s 254, 263 or 264 may be made for setting aside or
canceling an assessment.
Time limit for making fresh assessment
In case of the order Time limit

passed
U/s 254 Within 91 months from the end of the financial year in which such order is received by
the Principal Chief Commissioner or Principal Commissioner or Chief Commissioner
or Commissioner
U/s 263 or 264 Within 92 months from the end of the financial year in which such order is passed by
the Principal Commissioner or Commissioner.
1 Where such order is received on or after 01-04-2019: Within 12 months

2 Where such order is passed on or after 01-04-2019: Within 12 months
RECTIFICATION OF MISTAKE [SECTION 154]

An income-tax authority, is empowered (suo moto or on application by assessee) to –
a) rectify any mistake apparent in an order passed by him; or
b) amend any intimation issued u/s 143(1) or deemed intimation
c) amend any intimation issued u/s 200A(1) or 206CB(1).
Time limit for Rectification [Section 154(7)] : Within 4 years from the end of the financial year in which the
order sought to be amended was passed.
However, in respect of an application made by the assessee or deductor or collector, the authority shall, within
a period of 6 months from the end of the month in which the application is received by it, pass an order –
a. making the amendment; or
b. refusing to allow the claim.
Opportunity of being heard [Section 154(3)]: If such rectification order is prejudicial to the assessee or
deductor or collector, an opportunity of being heard must be given to the assessee, before passing such order.
DEMAND NOTICE [SECTION 156]

On completion of assessment, a demand notice is served for additional demand raised in the assessment.
Time limit for payment of tax: The assessee should make the payment of amount demanded within 30
days of service of notice [Section 220(1)] Where the Assessing Officer has any reason to believe that it will be
detrimental to revenue if the full period of 30 days is allowed, then he may with the previous approval of the
Joint Commissioner direct that the sum specified in the notice of demand shall be paid within such time as may
be specified by him in the notice. Interest on delay in payment: If the payment is not made within 30 days
(or time allowed in the notice), interest shall be payable @ 1% for every month (or part thereof) of the delay
[Section 220(2)]
An assessee in default shall be liable to a penalty of an amount not exceeding the amount of tax in arrears.
[Section 221(1)]
Note: Where any sum is determined to be payable by the assessee or by the deductor or collector u/s 143(1)
or 200A(1) or 206CB(1), the intimation under those sections shall be deemed to be a notice of demand for the
purposes of this section.
APPEALS
The expression “Appeal” has been defined in Mozley and Whiteley’s Law Dictionary as “a complaint to a
superior court of an injustice done by an inferior one”. The party complaining is styled as the “appellant”. The
other party is known as “respondent”. The right to appeal must be given by express enactment and cannot be
implied- Harihar Gir vs CIT [1941] 9 ITR 246 (Pat.).
APPELLATE HIERARCHY
Appellate Authorities in Income-tax Act
Appeal Appellate authority Against which order Appellant

1st Commissioner Against specified order of the Assessing Assessee only
(Appeals) Officer
2nd Income Tax Appellate Against the order of Commissioner
Tribunal (ITAT) (Appeals)
Assessee or the
3rd High Court Against the order of ITAT (the case must Commissioner (or
involve substantial question of law) Principal Commissioner)
of Income tax
Final Supreme Court Against the order of High Court
APPEALS TO COMMISSIONER (APPEALS) [SECTION 246A TO 250]

Aggrieved tax payer can file appeal before the Commissioner (Appeals) having, jurisdiction over the tax payer.
Designation of the Commissioner (Appeals), with whom appeal is to be filed is also mentioned in the notice
issued by the Assessing Officer u/s 156.
Appealable Orders
1. U/s 246A
• Order passed by a Joint Commissioner u/s 115VP(3)(ii);
• Order against the assessee, where the assessee denies his liability to be assessed under this Act;
• Intimation u/s 143(1) or 143(1B) or 200A(1) or 206CB(1) or Order of assessment u/s 143(3) [Scrutiny
504 PP-DTL&P
assessment] [except an order passed in pursuance of directions of the Dispute Resolution Panel or
an order referred to in sec. 144BA(12)] or u/s 144 [Best judgment assessment] in respect of income
assessed or tax determined or loss computed or residential status;
• Order of assessment, reassessment or recomputation u/s 147 [(except an order passed in pursuance
of directions of the Dispute Resolution Panel or an order referred to in sec. 144BA(12)], 150 & 153A
[except an order passed in pursuance of directions of the Dispute Resolution Panel or an order referred
to in sec. 144BA(12)];
• Order u/s 154 (Rectification of Mistake) or u/s 155 (other amendments) having the effect of enhancing
the assessment or reducing a refund or an order refusing to allow the claim made by the assessee
[except where it is in respect of an order referred to in sec. 144BA(12)]
• Order of assessment or reassessment u/s 92CD(3)
• Order u/s 163 treating assessee as an agent of a non-resident;
• Order u/s 170 relating to assessment on succession;
• Order u/s 171 refusing to recognize partition of an HUF;
• Order u/s 201 or 206C(6A) for default of provisions of TDS/TCS;
• Order u/s 237 relating to refunds;
• Order relating to Penalty;
• Order imposing penalty under chapter XXI;
• An order of penalty imposed under chapter XXI or an order of imposing or enhancing penalty u/s
275(1A)
• Any order made by an Assessing Officer other than a Joint Commissioner, as the Board may direct.
2. U/s 248
Where under an agreement or other arrangement –
• the tax deductible u/s 195 on any income (other than interest) is to be borne by the person by whom the
income is payable; &
• such person having paid such tax to the credit of the Central Government, claims that no tax was
required to be deducted on such income,
he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on such income
Notes:
a) Even when reassessment proceedings have been initiated u/s 147, an appeal can still be filed against
the original assessment order passed u/s 143(3)
b) Assessee has the right to appeal against an order of the Assessing Officer which is passed while giving
effect to the decision of the appellate authority.
Time limit for filing appeal: Appeal should be filed within 30 days from –
Where the appeal is u/s 248 The date of payment of the tax
Where the appeal relates to any assessment or The date of service of notice of demand relating to the
penalty assessment or penalty
In any other case The date on which intimation of the order, sought to be
appealed against, is served.
Period to be excluded [Section 268]: While calculating the above time limit, following period shall be
excluded –
a) The day on which order complained of was served; and
b) Time required for obtaining a copy of the order, where a copy of the order was not furnished with notice
of demand.
c) Where an application has been made u/s 270AA (seeking immunity from penalty and prosecution),
the period beginning from the date on which the application is made, to the date on which the order
rejecting the application is served on the assessee.
Delay in filing appeal: The Commissioner (Appeals) may admit belated application on sufficient cause being
shown.
Note: It is statutory obligation of the appellate authority (where an application for condonation is filed) to consider
whether sufficient cause was shown by the appellant
Form of appeal: Form 35 (Mode of filing depends i.e., electronically or in paper form, on mode of filing return
of income of the assessee)
Documents to be submitted
● Order against which appeal is made
● Statement of facts
● Grounds of appeal
● Notice of demand (in Original)
● Challan
Verification of Form: Form & grounds of appeal must be verified by the person authorised to verify the return
of income u/s 140
Payment of tax before filing of appeal

If a return has been filed – Tax as per the return should be paid.
If no return has been filed – The assessee should pay an amount equal to the advance tax which was payable
by him. However, CIT(A) may, for any good and sufficient reason (recorded in writing), accept the appeal
without payment of such advance tax.
Power of Assessing Officer: As per section 220(6), where an assessee has presented an appeal u/s 246A,
Assessing Officer may treat the assessee as not being in default in respect of the amount in dispute in the
appeal.
It may be applied –
● at the discretion of the Assessing Officer;
● subject to such conditions as Assessing Officer may think fit to impose;
● even though the time for payment has expired;
● as long as such appeal remains undisposed of.
Where assessee has not made an application u/s 220(6) or his application u/s 220(6) has been rejected, he can
approach the appellate authority for stay order against collection
Fee for filing an appeal: Where assessed income as computed by the Assessing Officer is –
506 PP-DTL&P
● Up to Rs 1,00,000 - Rs 250
● Exceeds Rs 1,00,000 but does not exceed Rs 2,00,000 - Rs 500
● Exceeds Rs 2,00,000 - Rs 1000
Where the subject matter of appeal is not covered in above cases - Rs 250
Procedure
1. Fixation of Day & Place: The Commissioner (Appeals) shall fix a day and place for the hearing of the
appeal, and shall give notice of the same to the appellant and to the Assessing Officer against whose order the
appeal is preferred.
2. Hearing: The appellant (either in person or by an authorised representative) and the Assessing Officer (either
in person or by an authorised representative) shall have the right to be heard at the hearing of the appeal.
Tax point: Where the assessee does not insist on a personal hearing the appeal may be decided on the basis
of written submission made by him. [Letter No. 277/7/84 of November, 1985]
3. Adjournment: The Commissioner (Appeals) shall have the power to adjourn the hearing of the appeal from
time to time.
4. Inquiry: The Commissioner (Appeals) may, before disposing of any appeal, make such further inquiry as
he thinks fit, or may direct the Assessing Officer to make further inquiry and report the result of the same to the
Commissioner (Appeals).
5. Order: Commissioner (Appeals) must dispose of the appeal by passing an order which shall –
• be in writing;
• mention the points for determination;
• mention the decision thereon; and
• mention the reason for the decision.
6. Communication of Order: The Commissioner (Appeals) shall communicate the order passed by him to
the assessee and to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner.
Note: If during pendency of an appeal, provision of any law has changed with retrospective effect, then such
changed law shall be applicable on such appeal too. Law amended retrospectively would be a good law for
applicability during the pendency of the appeal
New grounds during hearing: The Commissioner (Appeals) may, at the hearing of an appeal, allow the
appellant to go into any ground of appeal not specified in the ‘grounds of appeal’, if he is satisfied that the
omission of that ground from the Form of appeal was not wilful or unreasonable.
Time limit for disposal of appeal: Within one year from the end of financial year in which appeal is filed (if
possible).
Production of additional evidence: Appellate authority has the power to accept additional evidence (after
recording reason for its admission in writing) and may make further enquiry at his discretion before disposing
of the appeal
In the following circumstances additional evidence shall be admitted by the Commissioner (Appeals):
a) Where the Assessing Officer has refused to admit evidence which ought to have been admitted; or
b) Where appellant was prevented by sufficient cause from producing before the Assessing Officer any
evidence, which is related to any ground of appeal; or
c) Where the appellant was prevented by sufficient cause from producing the evidence, which he was
called upon to produce by the Assessing Officer; or
d) Where the Assessing Officer has made an order (appealed against) without giving sufficient opportunity
to the appellant to produce evidence relevant to any ground of appeal.
Tax point: Before taking into account the additional evidence filed, Commissioner (Appeals) is to provide
reasonable opportunity to the Assessing Officer for examining the additional evidence or the witness as well as
to produce evidences to rebut additional evidences filed by the tax payer.
Powers of Commissioner (Appeals) u/s 251

1. Against an order of assessment: To confirm, reduce, enhance or annul the assessment
2. Against an order imposing a penalty: To confirm or cancel such order or vary it so as either to enhance
or to reduce the penalty;
3. Against the order of assessment in respect of which the proceeding before the Settlement Commission
abates u/s 245HA: To confirm, reduce, enhance or annul the assessment after taking into consideration
all the material and other information produced by the assessee before, or the results of the inquiry
held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and
such other material as may be brought on his record
4. Relating to any other case: To pass such orders as he thinks fit.
Notes:
1. The Commissioner (Appeals) may consider and decide any matter arising out of the proceedings in
which the order appealed against was passed, notwithstanding that such matter was not raised before
the Commissioner (Appeals) by the appellant.
2. Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund
unless the appellant has had a reasonable opportunity of showing cause against such enhancement or
reduction.
3. An assessment order, which is void ab initio cannot become a valid order simply by virtue of the fact
that it has been confirmed by an appellate authority.
4. Appeal once filed cannot be withdrawn.
APPEALS TO INCOME TAX APPELLATE TRIBUNAL (ITAT) [SECTION 252 TO 255]

Appeal against an order of Commissioner (Appeals) lies with the Income Tax Appellate Tribunal (ITAT). Both
tax payer and the Assessing Officer can file appeal before the Appellate Tribunal. Several Benches of the
Appellate Tribunal constituted all over India by the Central Government and it functions under the Ministry of
Law. It consists of as many judicial and accountant members as the Central Government thinks fit to exercise
the powers and discharge the functions conferred on the Appellate Tribunal by this Act.
508 PP-DTL&P
Qualification of members
Member Qualification
Judicial ● He has held a post of Judicial Officer in the territory of India for at least 10 years; or
● He has been served as a member of the Indian Legal Service in Grade II post or any
higher post for at least 3 years; or
● He has been an advocate for at least 10 years.
Accountant ● He has practiced as a Chartered Accountant for at least 10 years; or
● He has practiced as a registered accountant for at least 10 years; or
● He has practiced partly as a registered accountant and partly as a Chartered
Accountant for at least 10 years; or
● He has been a member of the Indian Income-tax Service, Group A and has held the
post of the Additional Commissioner of Income tax or any equivalent or higher post
for at least 3 years.
President of the ITAT

♦ The Central Government shall appoint:
a. a person who is a sitting or retired Judge of a High Court and who has completed not less than 7
years of service as a Judge in a High Court; or
b. one of the Vice-Presidents of the Appellate Tribunal, - to be the President thereof.
♦ The Central Government may appoint one or more members of the Appellate Tribunal to be the Vice-
President(s) thereof.
♦ The Vice-President shall exercise such of the powers and perform such of the functions of the President
as may be delegated to him by the President by a general or special order in writing.
Appealable Orders
A. Appeal by assesse
1. An order passed by a Commissioner (Appeals) u/s 154, 250, 270A, 271, 271A or 272A; or
2. An order passed by a Principal Commissioner or Commissioner u/s 12AA [registration of trust], 80G(5)
(vi), 263 [revision order], 154, 270A or 271 or 272A; or
3. An order passed by an Assessing Officer u/s 143(3) or 147 or 153A or 153C in pursuance of the
directions of the Dispute Resolution Panel or with the the approval of the Commissioner (or Principal
Commissioner) as referred to in sec. 144BA(12) or an order passed u/s 154 or 155 in respect of such
order.
4. An order passed by an Assessing Officer u/s 115VZC(1)
5. An order passed by the prescribed authority u/s 10(23C)(iv) or (v) or (vi) or (via)
6. An order passed by Principal Chief Commissioner or Chief Commissioner or Principal Director General
or Director General or Principal Director or Director u/s 272A [penalty].
B. Appeal by the Principal Commissioner or Commissioner
The Principal Commissioner or Commissioner may direct the Assessing Officer to appeal against the order
passed by the Commissioner (Appeals) u/s 154 or 250 [The Board has directed that the appeal shall be filed by
the department only if tax effect exceeds Rs 10,00,000]
Time limit for filing appeal: Within 60 days. The period shall start from the date on which order sought to be
appealed is communicated to the assessee or Commissioner.
Delay in filing appeal: Tribunal may admit belated application on sufficient cause being shown.
Withdrawal of appeal: An assessee cannot withdraw an appeal filed to Tribunal
Form - Form 36
Documents to be submitted and number of copies thereof

1. Memorandum of Appeal
2. Order appealed against (including one certified copy)
3. Order of Assessing Officer
4. Grounds of appeal before first appellate authority
5. Statement of facts filed before first appellate authority
6. In case, appeal against order levying penalty, relevant order
Fee payable by assessee: Where assessed income as computed by the Assessing Officer is –
• Upto Rs 1,00,000 Rs 500

• Exceeds Rs 1,00,000 but does not exceed Rs 2,00,000 Rs 1500
• Exceeds Rs 2,00,000 1% of Assessed income [Max. Rs 10,000]
• Stay petition Rs 500

• Any other case Rs 500
• Upto Rs 1,00,000 Rs 500
• Exceeds Rs 1,00,000 but does not exceed Rs 2,00,000 Rs 1500
• Exceeds Rs 2,00,000 1% of Assessed income [Max. Rs 10,000]
• Stay petition Rs 500
• Any other case Rs 500
Fee payable by CIT: No fees shall be payable in case of appeal by Commissioner

Verification of Form: Form 36 and grounds of appeal should be verified by the person authorized to verify the
return of income u/s 140 [Rule 47]
Cross objection: Assessing Officer or the assessee, as the case may be, on receipt of notice that an appeal
against the order of the Commissioner (Appeals) has been filed by the other party, may file a memorandum of
cross objection with the Tribunal.
Time limit for filing of cross-objections: Within 30 days of receipt of notice that appeal has been filed by the
other party. However, Tribunal may admit belated memorandum of cross objection on sufficient cause being
shown.
Form for filing of cross-objections: Form 36A
Fee for cross objection: Nil
510 PP-DTL&P
Order of tribunal: The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of
being heard, pass such orders as it thinks fit. Tribunal must record its reasons for its decisions. Order should
set out all facts and contentions.
Communication of order: Tribunal shall send a copy of the order passed by it to the assessee and to the
Principal Commissioner or Commissioner.
Notes:
a) Decision of Tribunal on matter involving question of fact is final. However, one can file a writ petition.
b) A decision of the tribunal, when passed in appeal, is final not only for the assessee but also for the
tribunal itself.
c) The assessee cannot seek to reopen and reargue the whole matter. i.e. order of Tribunal cannot be
reviewed by Tribunal.
d) On a question of fact determined by ITAT, a writ petition can be filed to the High Court challenging the
fact finding process adopted by the ITAT. If the High Court is satisfied that the fact finding process was
not correct, then it will quash the order passed by the ITAT and direct the ITAT to do the fact finding in
the proper manner and/or as per the direction of the High Court.
If the writ petition is dismissed by the High Court then the assessee can file a Special Leave Petition to the Apex
Court challenging the fact finding process of the ITAT. If the Apex Court is satisfied that the fact finding process
was incorrect then the Apex Court quash the order passed by the ITAT and direct the ITAT to do the fact finding
in the proper manner and/or as per the direction of the Apex Court.
Rectification of mistake (Miscellaneous Application)

● The Tribunal may, at any time within 6 months from the end of the month in which the order was passed,
with a view to rectify any mistake apparent from the record, amend any order passed by it.
● Mistake may be brought to the notice of the Tribunal by the assessee or the Assessing Officer.
● Where assessee applies for any rectification, it shall be accompanied by a fee of Rs. 50.
● An amendment which has the effect of enhancing an assessment or reducing a refund or otherwise
increasing the liability of the assessee, shall not be made unless the Appellate Tribunal has given notice
to the assessee of its intention to do so and has allowed the assessee a reasonable opportunity of
being heard.
● It is to be noted that income tax authority [including CIT(A)] can rectify order u/s 154, however in that
case:
a. Assessee is not required to pay any fee; and
b. Time limit is 4 years from the end of the financial year in which the order sought to be rectified was
passed.
Additional grounds which may be taken in appeal: Tribunal has discretionary power to refuse additional
ground to be raised. Tribunal may permit the assessee to urge grounds of appeal not mentioned in the
memorandum of appeal.
Additional evidence: The parties to the appeal are not entitled to produce additional evidence of any kind,
either oral or documentary before the Tribunal. However, if the Tribunal requires production of any document,
examination of any witness or filing of any affidavit to enable it to pass orders, it may allow such document to be
produced, witness to be examined, affidavit to be filed and such evidence to be adduced.
Paper Book: The appellant or the respondent, as the case may be, may submit a paper book in duplicate
containing documents or statements or other papers referred to in the assessment or appellate order, which it
may wish to rely upon. The paper book duly indexed and page numbered is to be filed at least a day before the
hearing of the appeal along-with proof of service of copy of the same on the other side at least a week before.
The Bench may in appropriate cases condone the delay and admit the paper book. The Tribunal can also, on its
own direct preparation of paper book in triplicate by and at the cost of appellant or the respondent as it may consider
necessary for disposal of appeal. Each paper in the paper book is to be certified as true copy by the party filing the
same. Additional evidence, if any, should not be part of the paper book and it should be filed separately.
Time limit for passing order: Appellate Tribunal, where it is possible, may hear and decide such appeal within
a period of 4 years from the end of the financial year in which such appeal is filed.
However, the Tribunal may pass an order of stay in any proceedings for a period not exceeding 180 from the
date of such order and the Tribunal shall dispose of the appeal within the said period of stay specified in that
order.
Further where such appeal is not so disposed of within the said period of stay as specified in the order of stay,
the Tribunal may, on an application made in this behalf by the assessee and on being satisfied that the delay in
disposing of the appeal is not attributable to the assessee, extend the period of stay, or pass an order of stay for
a further period or periods as it thinks fit; so, however, that the aggregate of the period originally allowed and the
period or periods so extended or allowed shall not, in any case, exceed 365 days and the Tribunal shall dispose
of the appeal within the period or periods of stay so extended or allowed.
Further if such appeal is not so disposed of within the period allowed (original and extended), the order of stay
shall stand vacated after the expiry of such period (i.e., 365 days), even if the delay in disposing of the appeal
is not attributable to the assessee.
Cost of appeal: Cost of appeal shall be borne by the person as decided by the Tribunal.
Procedure
♦ The powers and functions of the Appellate Tribunal may be exercised and discharged by Benches
constituted by the President of the Appellate Tribunal from among the members thereof.
♦ A Bench shall consist of one judicial member and one accountant member. However, in some case,
single member bench may be constituted.
♦ The President or any other member of the Appellate Tribunal authorised in this behalf by the Central
Government may, sitting singly, dispose of any case which has been allotted to the Bench of which he
is a member and which pertains to an assessee whose total income as computed by the Assessing
Officer in the case does not exceed Rs 50 lakh.
♦ The President may, for the disposal of any particular case, constitute a Special Bench consisting of 3 or
more members, one of whom shall necessarily be a judicial member and one an accountant member.
♦ If the members of a Bench differ in opinion on any point, the point shall be decided according to the
opinion of the majority. But if the members are equally divided, then the case shall be referred
by the President of the Appellate Tribunal for hearing on such point by one or more of the other
members of the Appellate Tribunal, and such point shall be decided according to the opinion of the
majority of the members of the Appellate Tribunal who have heard the case, including those who
first heard it.
APPEAL TO HIGH COURT [SECTION 260A]

Who can file appeal: Assessee or the Principal Chief Commissioner / Chief Commissioner / Principal
Commissioner / Commissioner, being aggrieved by the order of ITAT.
512 PP-DTL&P
Tax point: Only order passed by the ITAT (which involves substantial question of law) can be appealed in the
High court.
[The Board has directed that the appeal shall be filed by the department only if tax effect exceeds Rs 20,00,000.]
Appealable order: Any order of the Tribunal, if the High Court is satisfied that the case involves a substantial
question of law.
Substantial question of law

● The word “substantial” means having substance, essential, real, of sound worth, important or
considerable;
● The substantial question of law, need not necessarily be a substantial question of law of general
importance (i.e. it should be a question of law between the parties);
● To be “substantial”, a question of law must be debatable, not previously settled by law of the land or a
binding precedent, and must have a material bearing on the decision of the case.
Time limit for filing appeal: 120 days from the date on which order of the Tribunal is received by the assessee
or Principal Chief Commissioner / Chief Commissioner / Principal Commissioner / Commissioner.
The High Court may admit an appeal after the expiry of said period, if it is satisfied that there was sufficient
cause for not filing the same within that period.
Court Fee: The Court fee shall be as specified in relevant law relating to Court fees for filing an appeal to High
Court.
Manner of appeal: The appeal shall be in form of a memorandum of appeal, precisely stating the substantial
question of law involved in the appeal.
Formulation of question of law:

● Where the High Court is satisfied that a substantial question of law is involved, it shall formulate the
question.
● The appeal is to be heard only on the questions formulated. However, the respondents shall, at the
hearing of appeal, be allowed to argue that the case does not involve such question.
Hearing of appeal
● The appeal is to be heard by a bench of not less than 2 judges of the High Court. Decision will be in
accordance with opinion of the majority of judges.
● Where judges are equally divided in their opinions, the case on the point on which they differ shall be
heard by one or more other judges of the High Court.
Hearing of other substantial question of law: The Court has the power to hear the appeal on any other
substantial question of law not formulated by it, if it is satisfied that the case involves such question.
Decision: The High Court shall decide the question of law so formulated and deliver such judgment thereon
containing the ground on which such decision is founded and may award such cost as it deems fit. The High
Court may determine any issue which –
a) has not been determined by the Tribunal; or
b) has been wrongly determined by the Tribunal, by reason of a decision on such question of law .
Stay of recovery proceedings: High Court has power to stay proceedings for recovery of demand arising out
of the assessment order, pending disposal of appeal.
APPEAL TO THE SUPREME COURT [SECTION 261]

Who can file appeal: Assessee or the Principal Chief Commissioner / Chief Commissioner / Principal
Commissioner / Commissioner aggrieved from the judgment of High Court.
[The Board has directed that the appeal shall be filed by the department only if tax effect exceeds Rs 25,00,000.]
Order against which appeal is possible: Any order passed in the High Court, provided that High Court
● is satisfied that the case involves a substantial question of law; and
● certifies the case is fit for appeal to the Supreme Court.
If High Court refuses to certify the case: The aggrieved party may make an application to the Supreme Court
under Article 136 of the Constitution of India.
Cost of appeal: The costs of the appeal shall be borne by the person as decided by the Supreme Court.
Effect of judgment: Where the judgment of the High Court is varied or reversed by the Supreme Court,
Tribunal should pass necessary order to dispose the case in conformity with such judgment.
MONETARY LIMITS FOR FILING OF APPEALS BY THE DEPARTMENT BEFORE INCOME TAX
APPELLATE TRIBUNAL, HIGH COURTS AND SLPS/APPEALS BEFORE SUPREME COURT
The CBDT has specified the monetary limits and other conditions for filing departmental appeals before Income
Tax Appellate Tribunal, High Courts and SLPs/ appeals before Supreme Court vide Circular No. 3/2018, Dated
11-7-2018, F. No. 279/Misc. 142/2007-ITJ (Pt), Dated 20-8-2018, Circular No. 17/2019, Dated 8-8-2019 and F.
No. 279/Misc./M-93/2018-ITJ (Pt), Dated 16-9-2019.
It has been decided by the CBDT that departmental appeals may be filed on merits before Income Tax Appellate
Tribunal and High Courts and SLPs/ appeals before Supreme Court keeping in view the monetary limits and
conditions specified below.
Monetary Limits specified:
Appeals/ SLPs shall not be filed in cases where the tax effect does not exceed the monetary limits given
hereunder:
S. No. Appeals/ SLPs in Income-tax matters Monetary Limit (Rs.)

1. Before Appellate Tribunal 50,00,000
2. Before High Court 1,00,00,000
3. Before Supreme Court 2,00,00,000
It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary
limits prescribed above. Filing of appeal in such cases is to be decided on merits of the case.
Meaning of Tax Effect:
Case Tax Effect
i. In case not covered in ii, iii The tax on the total income assessed (-)
and iv below
The tax that would have been chargeable had such total income been
reduced by the amount of income in respect of the issues against which
appeal is intended to be filed (“disputed issues”).
Note – However, the tax will not include any interest thereon, except
where chargeability of interest itself is in dispute.
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ii. In case the chargeability The amount of interest

of interest is the issue
under dispute
iii. In case where returned The tax effect would include notional tax on disputed additions
loss is reduced or
assessed as income
iv. In case of penalty orders Quantum of penalty deleted or reduced in the order to be appealed against
Note – Tax effect shall be tax including applicable surcharge and cess.
SPECIAL PROVISION FOR AVOIDING REPETITIVE APPEALS [SECTION 158A]

Where an assessee claims (a declaration in the Form 8 and verified in the prescribed manner) that:
– any question of law arising in his case for an assessment year which is pending before the Assessing
Officer or any appellate authority (such case being hereafter in this section referred to as the relevant
case) is identical with a question of law arising in his case for another assessment year which is
pending before the Supreme Court, against the order of the High Court in favour of the assessee (such
case being herein referred to as the other case),
he may, instead of directing the Assessing Officer to appeal to the Appellate Tribunal, direct the Assessing
Officer to make an application to the Appellate Tribunal in the prescribed form within 60 days from the date of
receipt of the order of the Commissioner (Appeals) stating that an appeal on the question of law arising in the
relevant case may be filed when the decision on the question of law becomes final in the other case.
The Commissioner or Principal Commissioner shall direct the Assessing Officer to make an application only if
an acceptance is received from the assessee to the effect that the question of law in the other case is identical
to that arising in the relevant case.
Where the order of the Commissioner (Appeals) is not in conformity with the final decision on the question of
law in the other case, the Commissioner or Principal Commissioner may direct the Assessing Officer to appeal
to the Appellate Tribunal against such order and save as otherwise provided in this section all other provisions
of Part B of Chapter XX shall apply accordingly.
Aforesaid appeal shall be filed within 60 days from the date on which the order of the Supreme Court in the other
case is communicated to the Commissioner or Principal Commissioner.
REVISIONS
REVISION BY THE COMMISSIONER OF INCOME TAX [SECTION 263 & 264]

The right to file such appeals against the orders of the Assessing Officer is not available to the Department.
It is for this reason that the Commissioner has been vested with revisional powers under Section 263, where
the order of Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue. But
such revisional power can be exercised only in respect of orders which are not the subject matter of appeals.
The reason is that once an assessment order is appealed against, the Commissioner (Appeals) has got the
powers to enhance the assessment under Section 263 and a right of appeal upto the Tribunal is provided to the
assessee against the orders of the Assessing Officer. In the following cases Commissioner of Income-tax can
revise an order passed by the Assessing Officer:
REVISION OF ORDER PREJUDICIAL TO THE REVENUE [SECTION 263]
Orders which may be revised

Any order passed by the Assessing Officer, which is –
a) Erroneous;
b) Prejudicial to the interests of the revenue; and
c) Passed by an authority subordinate to the Principal Commissioner or Commissioner
Notes
a) Orders passed by the Assessing Officer includes –
i. An order of assessment made by the Assistant Commissioner on the basis of the directions issued
by the Joint Commissioner u/s 144A;
ii. An order made by the Joint Commissioner as an Assessing Officer.
b) Even an intimation u/s 143(1) can be revised
Tax point
– Order made by the Assessing Officer after making proper enquiries and considering relevant details
and decisions of Supreme Court cannot be said to be erroneous and prejudicial to the interest of the
revenue, hence such order cannot be revised.
– An order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial
to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner:
a) the order is passed without making inquiries or verification which should have been made;
b) the order is passed allowing any relief without inquiring into the claim;
c) the order has not been made in accordance with any order, direction or instruction issued by the
Board under section 119; or
d) the order has not been passed in accordance with any decision which is prejudicial to the assessee,
rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any
other person
Treatment of an order, which is subject matter of the appeal

Revision u/s 263 of an order, which is subject matter of appeal, cannot be made.
Notes
● The Principal Commissioner or Commissioner can revise such order (which has been a subject matter
of appeal) which had not been considered and decided in such appeal.
E.g., From the perusal of the order u/s 143(3) passed by the Assessing Officer following was observed:
– Point A: Against the assessee
– Point B: In favour of the assessee
The assessee being aggrieved with point A in the order passed by the Assessing Officer, preferred an
appeal to the Commissioner (Appeals). However, the Commissioner wants to revise the order u/s 263
for point B (subject to other conditions being fulfilled). It is possible as doctrine of partial merger of the
order is applicable in case of sec. 263. However, the Commissioner cannot revise the order for point A
(as the same is subject matter of an appeal)
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● An order cannot be said to have been made subject of an appeal if the appeal has been disposed of by
the appellate authority without passing an order
Procedure to be followed
1. Examination of Records: The Principal Commissioner or Commissioner may call for and examine the
records of any proceeding under the Act. If he considers that any order passed by the Assessing Officer
is prejudicial to the interest of the revenue, he can revise and rectify the assessment.
Record shall include all records relating to any proceeding under this Act available at the time of
examination by the Principal Commissioner or Commissioner. This means that any material, which
was not available at the time of assessment but available at the time of examination by the Principal
Commissioner or Commissioner, shall also be considered for order u/s 263.
2. Inquiry: He must make or cause to be made such inquiry as he deems necessary.
3. Opportunity of being Heard: No revision order shall be passed u/s 263 without giving the assessee
an opportunity of being heard.
Order: Finally, he may pass such revision order as the circumstances of the case justify including an order
enhancing, modifying or cancelling the assessment and directing a fresh assessment.
Time limit for passing revision order: 2 years from the end of the financial year in which the order sought to
be revised was passed.
In computing the above period of limitation following period shall be excluded-
● Time taken in giving an opportunity to the assessee of being re-heard u/s 129; &
● Any period during which any proceeding under this section is stayed by an order or injunction of any
court.
Exception: There is no time limit for passing a revision order to give effect to, or in consequence of, an order
of the ITAT, the High Court or the Supreme Court.
Appeal against order u/s 263: A revisional order passed by the Principal Commissioner or Commissioner u/s
263 can be appealed to the Tribunal.
Section 263 vs. Section 154: Principal Commissioner or Commissioner can exercise the power even in a
case where the issue is debatable. Revisional power u/s 263 is not comparable with the power of rectification
of mistake u/s 154.
REVISION OF ORDER IN FAVOUR OF ASSESSEE [SECTION 264]
Orders which may be revised

Any order which is –
● erroneous;
● not covered u/s 263 (i.e. not prejudicial to the interest of the revenue);
● passed by an authority subordinate to the Principal Commissioner or Commissioner.
Taxpoint: No order under this section can be passed which is prejudicial to the assessee.
Notes:
a) Order which is not appealable before the Commissioner (Appeal) can also be referred to the
Commissioner for revision.
b) For the purposes of this section, the Deputy Commissioner (Appeals) shall be deemed to be an authority
subordinate to the Commissioner.
On whose motion is revision possible: Either on own motion of the Principal Commissioner / Commissioner
or on an application by the assessee for revision.
Procedure to be followed
1. Examination of Records: Once revision proceedings have been initiated, the Principal Commissioner
or Commissioner may call for and examine the record of any proceeding.
2. Inquiry: He must also make or cause to be made such inquiry as he deems necessary
3. Order: He may pass such revision order as the circumstances of the case justify. However, the order
passed should not be prejudicial to the assessee.
Time limit for filing an application: Where revision has been initiated by the assessee, the application must
be made within 1 year from the date on which the order in question was communicated to the assessee or the
date on which he otherwise came to know of it, whichever is earlier.
However, the Principal Commissioner or Commissioner can admit a belated application if the assessee was
prevented by sufficient cause from making the application within time. In computing the above period of limitation
following time shall be excluded:
● The day on which the order complained of was served; and
● If the assessee had not received the copy of the order, the time required to obtain copy of such order.
Time limit for passing a revisional order: Where the Principal Commissioner or Commissioner acts on his
own motion, Within 1 year from the date of original order.
Where the application is made by the assessee, Within 1 Year from the end of the financial year in which such
application is made.
In computing the above period of limitation following period shall be excluded.
● Time taken in giving an opportunity to the assessee of being re-heard u/s 129; &
● Any period during which any proceeding under this section is stayed by an order or injunction of any
court. [Section 264(6)]
● However, there is no time limit for passing a revision order for giving effect to, or in consequence of, an
order of the ITAT, the High Court or the Supreme Court.
Orders which cannot be revised [Section 264(4)]

a) Where an order is appealable but no appeal has been made to CIT (Appeals) or to the Tribunal and
time within which such appeal can be made, has not expired.
Note: Where an appeal lies to the Commissioner (Appeals) or to the Appellate Tribunal and the right of
appeal is waived by the assessee, the Principal Commissioner or Commissioner may revise the order
even before the expiry of time limit of appeal.
b) Where the order has been made the subject of an appeal to the Commissioner (Appeals) or to the
Appellate Tribunal.
E.g., the assessee has been aggrieved with point A and point B in the order passed by the Assessing Officer.
He preferred an appeal to the Commissioner (Appeals) in respect of point A and seeks to file revision petition
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u/s 264 in respect of point B. It is not possible, he cannot file revision petition u/s 264 due to doctrine of total (or
complete) merger of the order. He has to choose either way of the course.
It is to be noted that for the purpose of sec. 264, doctrine of total merger is applicable, on the other hand, for the
purpose of sec. 147, 154 and 263, doctrine of partial merger is applicable.
Note
The assessment order could not be said to have been made subject matter of appeal, where an appeal was
dismissed –
a) on the ground that the same was incompetent; or
b) as barred by limitation; or
Fee: Rs 500 where the application for revision is made by the assessee.
Appeal against order u/s 264: A revisional order passed by the Principal Commissioner or Commissioner u/s
264 cannot be appealed to the Tribunal or the High Court. However, a petition for a writ of certiorari under Article
226 is maintainable
Other points
● The assessee cannot claim the right of revision in respect of an earlier year on the basis of finding of
the Tribunal for a subsequent year.
● An order by the Principal Commissioner or Commissioner declining to interfere shall not be deemed to
be an order prejudicial to the assessee.
SETTLEMENT OF CASES
The provisions related to settlement of cases are contained in Chapter XIX-A consisting of sections 245 A to
245 M.
An assessee can make an application to the Settlement Commission at any stage of a “case” relating to him.
The Finance Act, 2007 substituted clause (b) of section 245A which has changed the meaning of term “case”
and reduced the scope for settlement of cases to great extent. However, the Finance (No 2) Act, 2014 and
Finance Act, 2015 further amended section 245 A to increase the scope of settlement of cases.
A pending proceeding is a “case”- An assessee can make an application to the Settlement Commission
at any stage of a “case” relating to him. A “case” means any proceeding for assessment under the Act of any
person, in respect of any assessment year which may be pending before the Assessing Officer on the date on
which an application under section 245 C(1) is made. In respect of all pending cases, one can have recourse
to the Commission for settlement-
Taken as pending proceeding and consequently During the period given below settlement
settlement is possible in the cases given below- application can be filed
1. Income escaping assessment- A proceding for Period commencing on the date of issue of notice
assessment or reassessment or re-computation under under section 148 and ending with the date of
section 147 assessment/ reassessment order.
2. Fresh Assessment- A proceeding for making fresh Period commencing on the date on which order
assessment in pursuance of an order under section 254 under section 254 or 263 or 264, setting aside or
or section 263 or section 264, setting aside or cancelling cancelling the assessment is passed and ending
an assessment. with the date on which fresh assessment is made.
3. Search Assessment- A proceeding for assessment/ Period commencing on the date of issue of notice
reassessment for any assessment year referred to in initiating search proceedings and concluded on the
section 153A(1)(b) in the case of a searched person date on which the assessment is made.
(section 153A) or other person (section 153C)
4. Regular Assessment- A regular Assessment (other • Up to May 31, 2015 – Period Commencing
than proceedings of assessment/ reassessment is given on first day of the assessment year and
above) ending on the date on which assessment
is made.
• From June 1, 2015- Period commencing
on the date on which return of income is
furnished under section 139 (or in response
to a notice under section 142) and ending
on the date on which assessment is made
[or the time specified under section 153(1)
if no assessment is made.
Provisions Illustrated- Consider the following cases-

1. In the case of X Ltd., assessment is completed under section 143 (3) for the assessment year 2011-12
on April 20, 2013 (order is passed on April 20, 2013 but it is served on the assessee on April 26, 2013).
Reassessment notice under section 148 is issued on November 13, 2014 (date of service: November
20, 2014). Reassessment is completed on December 4, 2015 (order dated December 4, 2015 is served
on December 10, 2015). In this case, X Ltd. can have recourse to the Settlement Commission on or
after April 1, 2011 but before April 20, 2013. Further, Settlement Commission can be approached on or
after November 13, 2014 but before December 4, 2015.
2. For the assessment year 2016-17, Y Ltd submits return of income under section 139 on December 2,
2016. The Assessing Officer completes the assessment under section 143(3) on February 15, 2018
(date of service of assessment order February 19, 2018). In case, Y Ltd. can have recourse to the
Settlement Commission on or after December 2, 2016 but before February 15, 2018. If, however, no
assessment is made, Y Ltd cannot have recourse to the Settlement Commission after March 31, 2019.
• Amendment by the Finance Act, 2015- The proceeding for assessment or reassessment under
section 147 is deemed to commence from the date of issue of notice under section 148. Issue
relating to escapement of income is often involved in more than one assessment year. In such a
case the assessee becomes eligible to approach Settlement Commission only for the assessment
year for which notice under section 148 has been issued. Therefore, to take the proceeding for
all other assessment years where there is escapement, the assessee becomes eligible only after
notice under section 148 has been issued for all such assessment years.
In order to obviate the need for issue of notice in all such assessment years for commencement
of pendency. Explanation (i) to section 245A(b) has been amended by the Finance Act, 2015 (with
effect from June 1, 2015). After the amendment, a proceeding for assessment or reassessment or
recomputation under section 147 shall be deemed to have commenced-
a. From the date on which a notice under section 148 is issued for any assessment year;
b. From the date of issuance of such notice referred to in (a) (supra) for any other assessment years
for which notice under section 148 has been issued but such notice could have been issued on
such date, if the return of income for the other assessment year has been furnished under section
139 or in response to a notice under section 142.
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In other words, where a notice under section 148 is issued for any assessment year, the assessee can approach
Settlement Commission for other assessment years as well (for which notice could I have been issued on such
date) even if notice under section 148 for such other assessment years has not been issued. However, a return
of income for such other assessment years should have been furnished under section 139 or in response to
notice under section 142.
Settlement Commission [Section 245B]

Chapter XIXA provides for settlement of cases pending before income-tax authority. For this purpose, the
Central Government constituted the ‘Settlement Commission’. The Commission shall consist of a Chairman
and as many Vice-Chairmen and other members as the Central Government thinks fit. It shall function within
the Department of the Central Government dealing with direct taxes.
The members shall be appointed by the Central Government from amongst persons of integrity and
outstanding ability, having special knowledge of, and, experience in, problems relating to direct taxes and
business accounts.
Where a member of the Board is appointed as a member of the Commission, he shall cease to be a member
of the Board.
Jurisdiction and powers of Settlement Commission [Section 245BA]

♦ The jurisdiction, powers and authority of the Settlement Commission may be exercised by Benches
thereof.
♦ A Bench shall be presided over by the Chairman or a Vice-Chairman and shall consist of 2 other
Members.
♦ The Bench for which the Chairman is the Presiding Officer shall be the principal Bench and the other
Benches shall be known as additional Benches.
♦ The Chairman may authorise the Vice-Chairman or other Member appointed to one Bench to discharge
also the functions of the Vice-Chairman or, as the case may be, other Member of another Bench.
♦ When one of the persons constituting a Bench (whether such person be the Presiding Officer or other
Member of the Bench) is unable to discharge his functions owing to absence, illness or any other cause
or in the event of the occurrence of any vacancy either in the office of the Presiding Officer or in the
office of one or the other Members of the Bench, the remaining two persons may function as the Bench
and if the Presiding Officer of the Bench is not one of the remaining two persons, the senior among the
remaining persons shall act as the Presiding Officer of the Bench.
♦ If at any stage of the hearing of any such case or matter, it appears to the Presiding Officer that the case
is ought to be heard of by a Bench consisting of 3 Members, the case may be referred by the Presiding
Officer of such Bench to the Chairman for transfer to such Bench as the Chairman may deem fit.
♦ The Chairman may, for the disposal of any particular case, constitute a Special Bench consisting of
more than 3 Members.
♦ The places at which the principal Bench and the additional Benches shall ordinarily sit shall be such as
the Central Government may, by notification in the Official Gazette, specify and the Special Bench shall
sit at a place to be fixed by the Chairman.
♦ Transfer of cases: On the application of the assessee or the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner and after notice to them, and after
hearing such of them as he may desire to be heard, or on his own motion without such notice,
the Chairman may transfer any case pending before one Bench, for disposal, to another Bench
[Section 245BC]
♦ Decision by majority: If the Members of a Bench differ in opinion on any point, the point shall be decided
according to the opinion of the majority. But if the Members are equally divided, they shall refer the
point to the Chairman who shall either hear the point himself or refer the case for hearing on such point
by one or more of the other Members of the Settlement Commission and such point shall be decided
according to the opinion of the majority of the Members of the Settlement Commission who have heard
the case, including those who first heard it [Section 245BD]
Application for Settlement of Cases [Section 245C & Rule 44C]
Who can apply Any assessee

When to apply At any stage of a Case1
Conditions to a) The additional amount of income-tax2 payable on the income disclosed in

be satisfied for the application exceeds specified amount3
application
b) such tax and the interest thereon, which would have been paid under the
provisions of this Act had the income disclosed in the application been
declared in the return of income before the Assessing Officer on the date of
application, has been paid on or before the date of making the application
and the proof of such payment is attached with the application
Submission of A settlement application shall be presented in Form No. 34B (in quintuplicate) by
application form the applicant in person or by his agent, to the Secretary at the headquarters of the
Commission at New Delhi or of the Bench within whose jurisdiction his case falls or
to any officer authorised in this behalf by the Secretary, or shall be sent by registered
post addressed to the Secretary, or to such officer.
A settlement application sent by post shall be deemed to have been presented on
the day on which it is received in the office of the Commission.
Information to be Following information are required to be given in application form –
given in the form
● Full and true disclosure of his income which has not been disclosed before
the AO;
● The manner in which such income has been derived;
● The additional amount of income-tax payable on such income; and
● Such other particulars as may be prescribed.
Fees The application should be accompanied by fee of Rs. 500.
Verification of the Every application and other document accompanied with such application must be
application verified by the person who is authorised to verify return of income u/s 140
Intimation to the AO An assessee shall, on the date on which he makes an application, also intimate the
AO in the prescribed manner of having made such application to the Commission.
1. Case means any proceeding for assessment, of any person in respect of any assessment year
or assessment years which may be pending before an Assessing Officer on the date on which an
application is made.
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Points need to be consider:

1. A proceeding for assessment or reassessment or recomputation u/s 147 shall be deemed to have
commenced:
a. from the date on which a notice u/s 148 is issued for any assessment year;
b. from the date of issuance of the notice referred above, for any other assessment year or
assessment years for which a notice u/s 148 has not been issued, but such notice could have
been issued on such date, if the return of income for the other assessment year or assessment
years has been furnished u/s 139 or in response to a notice u/s 142;
2. A proceeding for making fresh assessment in pursuance of an order u/s 254 or sec. 263 or sec. 264,
setting aside or cancelling an assessment shall be deemed to have been commenced from the date on
which such order, setting aside or cancelling an assessment was passed;
3. A proceeding for assessment or reassessment for any of the assessment years u/s 153A / 153C shall
be deemed to have commenced on the date of issue of notice initiating such proceeding and concluded
on the date on which the assessment is made;
4. A proceeding for assessment for any assessment year, other than aforesaid proceedings shall be
deemed to have commenced from the date on which the return of income for that assessment year is
furnished u/s 139 or in response to a notice served u/s 142 and concluded on the date on which the
assessment is made; or on the expiry of the time specified for making assessment u/s 153(1), in case
where no assessment is made.
Additional amount of Income Tax : The additional amount of income-tax payable shall be calculated in
accordance with the following provisions –
a. Where the income disclosed in the application relates to only one previous year –
Situation Income for the purpose Additional amount of tax

Col. 1 Col. 2 Col. 3
If return of such year has not Income disclosed in the Tax as calculated on income shown in
been filed u/s 139 (whether or not application col. 2
assessment has been made)
If return of such income has Income disclosed in the Tax as calculated on income ****
been submitted (whether or not application as well as in the return shown in col. 2
(****)
assessment has been made)
Less: Tax calculated on the
total income returned for
that year
b. Where the income disclosed in the application relates to more than one previous year –
(i) Calculate additional amount of income tax payable (as mentioned above) in respect of each year for
which the application has been made.
(ii) The aggregate amount of the additional income tax of each of the years shall be the additional amount
of income-tax payable.
Specified Amount
Particulars Amount
Where an application before the Commission is filed in a Additional amount of income tax payable on the
case where proceedings for assessment or reassessment income disclosed in application should exceeds
have been initiated as a result of search or as a result of Rs. 50 lakh
requisition of books of account or assets, etc
Where the applicant is related to the aforesaid person Additional amount of income tax payable on the
and in whose case proceedings have been initiated as income disclosed in application should exceeds
a result of search Rs. 10 lakh
In any other case Additional amount of income tax payable on the
income disclosed in application should exceeds
Rs. 10 lakh
Procedure on Receipt of an Application [Section 245D]

♦ Admission or Rejection of Application: On receipt of an application, the Settlement Commission shall
within 7 days from the date of receipt of the application, issue a notice to the applicant requiring him
to explain as to why the application made by him be allowed to be proceeded with, and on hearing the
applicant, the Settlement Commission shall, within a period of 14 days from the date of the application,
by an order in writing, reject the application or allow the application to be proceeded with.
♦ Report from the Commissioner
4 The Commission shall (in respect of an application which is allowed to be proceeded) within 30 days
from the date on which the application was made call for a report from the Principal Commissioner
or Commissioner, and the Principal Commissioner or Commissioner shall furnish the report within
a period of 30 days of the receipt of communication from the Settlement Commission.
4 On the basis of the report and within a period of 15 days of the receipt of the report, by an order
in writing (and after giving an opportunity of being heard), declare the application in question as
invalid and shall send the copy of such order to the applicant and the Commissioner.
4 Where the Principal Commissioner or Commissioner has not furnished the report within the
aforesaid period, the Settlement Commission shall proceed further in the matter without the report
of the Commissioner
♦ Examination of Records and Passing of Order
4 The Commission in respect of an application which has not been declared invalid may call for the
records from the Principal Commissioner or Commissioner.
4 After examination of such records, if the Settlement Commission is of the opinion that any further
enquiry or investigation in the matter is necessary, it may direct the Principal Commissioner or
Commissioner to make such further enquiry or investigation and furnish a report on the matters
covered by the application and any other matter relating to the case.
4 The Principal Commissioner or Commissioner shall furnish the report within a period of 90
days of the receipt of communication from the Settlement Commission. Where the Principal
Commissioner or Commissioner does not furnish the report within the aforesaid period, the
Settlement Commission may proceed to pass an order without such report.
4 After –
(a) examination of the records and the report of the Principal Commissioner or Commissioner
if any, received;
524 PP-DTL&P
(b) giving an opportunity to the applicant and to the Principal Commissioner or Commissioner to
be heard (either in person or through a representative)
(c) and after examining such further evidence as may be placed before it or obtained by it,
the Settlement Commission may, in accordance with the provisions of this Act, pass such order as it
thinks fit on the matters covered by the application and any other matter relating to the case not covered
by the application, but referred to in the report of the Principal Commissioner or Commissioner.
♦ Every such order shall provide for –
(a) The terms of settlement including any demand by way of tax, penalty or interest;
(b) The manner in which any sum due under the settlement shall be paid;
(c) All other matters to make the settlement effective; and
(d) The settlement shall be void if it is subsequently found by the Settlement Commission that it has
been obtained by fraud or misrepresenta tion of facts.
♦ Such order shall be passed within 18 months from the end of the month in which the application was
made
♦ Time Limit for Payment of Tax: Any tax payable in pursuance of order of settlement commission must
be paid within 35 days of the receipt of a copy of the order.
♦ Interest on Late Payment of Tax due on Settlement: Where tax, as settled by the Commission, is not
paid within 35 days of the receipt of a copy of the order (whether or not the Commission has extended
the time for payment), the assessee shall be liable to pay simple interest @ 1.25% p.m. on the amount
remaining unpaid from the date of expiry of the period of 35 days.
♦ Settlement obtained by Fraud, etc.: The settlement shall be void, if it is subsequently found by the
Settlement Commission, that it has been obtained by fraud or misrepresentation of facts.
♦ Consequences where the Settlement becomes Void
Where a settlement becomes void, the proceedings shall be deemed to have been revived from the
stage at which the application was allowed to be proceeded with by the Settlement Commission.
The income-tax authority concerned may complete such proceedings before the expiry of two years
from the end of the financial year in which the settlement became void.
♦ Rectification of Order: The Settlement Commission may, with a view to rectifying any mistake apparent
from the record, amend any order passed by it:
(a) at any time within a period of 6 months from the end of the month in which the order was passed;
or
(b) at any time within the period of 6 months from the end of the month in which an application for
rectification has been made by the Principal Commissioner or the Commissioner or the applicant,
as the case may be.
However, no application for rectification shall be made by the Principal Commissioner or the Commissioner or
the applicant after the expiry of 6 months from the end of the month in which an order for settlement is passed
by the Settlement Commission.
An amendment which has the effect of modifying the liability of the applicant shall not be made unless the
Settlement Commission has given notice to the applicant and the Principal Commissioner or Commissioner
of its intention to do so and has allowed the applicant and the Principal Commissioner or Commissioner an
opportunity of being heard.
Power of Settlement Commission

♦ To order Provisional Attachment to protect Revenue [Section 245DD]
Where, during the pendency of any proceeding, the Settlement Commission is of the opinion that for the purpose
of protecting the interests of the revenue it is necessary to do so, it may, by order, attach provisionally (in the
manner provided in the Second Schedule) any property belonging to the applicant.
Cessation of Attachment: Every provisional attachment shall cease to have effect after the expiry of a period
of 6 months from the date of such order. However, the Commission may, for reasons to be recorded in writing,
extend the period by such further period(s) as it thinks fit.
♦ Re-Opening of Completed Proceedings [Section 245E]
The Settlement Commission shall not have any power to reopen the proceedings in respect of an application
made on or after 1.6.2007.
♦ To provide Inspection, etc., of Reports [Section 245G]
No person shall be entitled to inspect or obtain copies of, any reports given by any income-tax authority to the
Commission. However, on an application, the Commission may furnish copies thereof to any such person on
payment of the prescribed fee.
For the purpose of enabling assessee to rebut any evidence brought on record against him in any such
report, the Settlement Commission shall furnish him with a certified copy of any such report or part thereof
relevant for the purpose. For this purpose, assessee needs to make an application and payment of the
prescribed fee.
♦ To grant Immunity from Prosecution and Penalty [Section 245H]
The Settlement Commission may grant immunity (subject to such conditions as it may think fit to impose for the
reasons to be recorded in writing) from –
(a) Prosecution for any offence under this Act or under the Wealth Tax Act; and
(b) Imposition of any penalty (wholly or partly) under this Act,
– with respect to the case covered by it.
● Such immunity can be granted by the Commission, if the assessee –
(a) has co-operated with the Settlement Commission in the proceedings before it;
(b) has made a full and true disclosure of his income; and (c) has made a full and true
disclosure of the manner in which such income has been derived.
♦ Withdrawal of Immunity Granted
An immunity granted to a person shall stand withdrawn if –
(1) Such person fails to –
(a) Pay any sum specified in the order of settlement within the time allowed by the Settlement
Commission; or
(b) Comply with any other condition(s) subject to which the immunity was granted.
(2) Such person had, in the course of the settlement proceedings, concealed any particulars material to the
settlement or had given false evidence.
♦ Consequences of Withdrawal of Immunity Granted
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On withdrawal of immunity granted the provisions of this Act shall apply as if such immunity had not been
granted.
♦ Other Power [Section 245F]
(1) In addition to the powers conferred on the Settlement Commission under this Chapter, it shall have all
the powers, which are vested in an income-tax authority under this Act.
(2) The Commission shall have exclusive jurisdiction from the date on which the application was made.
Where an application is rejected or not allowed to be further proceeded or declared invalid, the
Commission shall have such exclusive jurisdiction upto the date on which application is rejected, etc.
(3) The Commission shall have power to regulate its own procedure and the procedure of Benches thereof
in all matters or of the discharge of its functions, including the places at which the Benches shall hold
their sittings.
(4) In the absence of any express direction to the contrary by the Settlement Commission, nothing contained
in this section shall affect the operation of any other provision of this Act –
● Requiring the applicant to pay tax on the basis of self-assessment in relation to the matters before
the Settlement Commission; and
● Related to any matters other than those before the Settlement Commission.
Abatement of Proceeding [Section 245HA]

♦ Where an application has been rejected or not been allowed to be proceeded or declared as invalid
or has been allowed but no order has been passed within prescribed time or an order u/s 245D(4)
has been passed not providing for the terms of settlement, the proceedings before the Settlement
Commission shall abate on the specified date (i.e. the day on which application is rejected or declared
invalid or time limit of 18 months expires).
♦ Where a proceeding before the Commission abates, the AO before whom the proceeding at the time of
making the application was pending, shall dispose of the case in accordance with the provisions of this
Act as if no application u/s 245C had been made.
♦ The AO shall be entitled to use all the material and other information produced by the assessee before
the Commission or the results of the inquiry held or evidence recorded by the Commission in the course
of the proceedings before it, as if such material, information, inquiry and evidence had been produced
before the AO or held or recorded by him in the course of the proceedings before him.
♦ For the purposes of the time-limit u/s 149, 153, 153B, 154, 155, 158BE & 231 and for the purposes of
payment of interest u/s 244A, for making the assessment or reassessment, the period commencing on
and from the date of the application to the Settlement Commission and ending with specified date shall
be excluded.
♦ Where a proceeding before the Settlement Commission abates, the period of limitation available u/s
153 to the AO for making an order of assessment shall, after the exclusion of the said period, be not
less than 1 year; and where such period of limitation is less than 1 year, it shall be deemed to have been
extended to 1 year.
Credit for Tax paid in case of Abatement of Proceedings [Section 245 HAA]
Where an application made u/s 245C is rejected or not allowed to be proceeded or declared invalid or an order
has not been passed within the time of 18 months, the Assessing Officer shall allow the credit for the tax and
interest paid on or before the date of making the application or during the pendency of the case before the
Settlement Commission.
Order of Settlement to be Conclusive [Section 245-I]

Every order of settlement shall be conclusive as to the matter stated therein. Any matter covered by such order
shall not be reopened in any proceeding under this Act or under any other law for the time being in force.
Note: An order, which have a mistake apparent from the record, can be rectified by Commission u/s 154
Recovery of Sums due under Order of Settlement [Section 245-J]

Any sum specified in an order of settlement may, subject to such conditions, if any, as may be specified therein,
be recovered, and any penalty for default in making payment of such sum may be imposed and recovered in
accordance with the provisions of Chapter XVII, by the Assessing Officer having jurisdiction over the person
who made the application for settlement.
Restriction on Subsequent Application for Settlement in certain cases [Section 245K]

♦ Where —
(a) an order of settlement provides for the imposition of a penalty on the person who made the application
for settlement, on the ground of concealment of particulars of his income; or
(b) after the passing of an order of settlement, such person is convicted of any offence under Chapter XXII
in relation to that case; or
then, he or any person related to such person shall not be entitled to apply for settlement in relation to any other
matter.
♦ Where a person has made an application and if such application has been allowed to be proceeded with, such
person (or related person) shall not be subsequently entitled to make an application for settlement. That means,
settlement can be made once in life time.
♦ Related person with respect to a person means:
(i) where such person is an individual, any company in which such person holds more than 50% of the
shares or voting rights at any time, or any firm or association of persons or body of individuals in which
such person is entitled to more than 50% of the profits at any time, or any Hindu undivided family in
which such person is a karta;
(ii) where such person is a company, any individual who held more than 50% of the shares or voting rights
in such company at any time before the date of application before the Settlement Commission by such
person;
(iii) where such person is a firm or association of persons or body of individuals, any individual who was
entitled to more than 50% of the profits in such firm, association of persons or body of individuals, at
any time before the date of application before the Settlement Commission by such person;
(iv) where such person is a Hindu undivided family, the karta of that Hindu undivided family
PENALTY
In Income Tax Act, 1961 provides for the imposition of a penalty on an assessee who commits any offences
under the provisions of the Act. Penalty levied over and above the amount of any tax or interest payable by the
assessee and thus, penalty is distinct and different from the tax payable. Penalty proceedings, however, are a
part of the assessment proceedings. The authority concerned is entitled to levy penalty only if satisfied in the
course of any proceedings under the Act that a person has been found guilty of any default in complying with
the provisions of the Act. If the order of the penalty is set aside in appeal on the ground the assessee was not
given a reasonable opportunity of being heard, the Assessing Officer would be entitled to levy a penalty again
528 PP-DTL&P
after rectifying the mistake in proceedings. The penalty to be levied on an assessee is to be based upon law
as it stood at the time the default was committed and not the law as it stands in the financial year for which the
assessment is made.
Penalty is imposed on an assessee for violating the different provisions of the Act. The provisions of penalty are
tabulated below:
Section Nature of default Penalty Levied by

(Authority)
Minimum Maximum
221(1) Failure in making the Amount decided by the Tax or Assessing
payment of tax, interest Assessing Officer interest Officer or
or any demand within the or both in Commissioner
prescribed time limit arrears (Appeals)
Assessing
Officer
140A(3) Failure to pay whole or

any part of income tax
and/or interest as per
sec.140A(1)
270A Penalty for under- 50% of the tax on under- 200% of

reporting and misreporting reported income the tax on
of income misreported
income
271A Failure to comply with Rs 25,000 Rs 25,000 Assessing
sec. 44AA i.e. to keep Officer or
or maintain books of Commissioner
account, documents, etc. (Appeals)
271AA(1) Failure to keep and - 2% of Assessing
maintain, information the value Officer or
and documents for of each Commissioner
international transactions international (Appeals)
or specified domestic transaction
transaction or fails to or specified
report such transaction domestic
transaction
271AA(2) Fails to furnish the Rs 5,00,000 Assessing
information and the Officer or
document as required u/s Commissioner
92D(4) (Appeals)
271AAB(1A) Undisclosed income in 60% of the undisclosed

case of search initiated on income of the specified
or after 15-12-2016 previous year
However, if the assessee: 30% of the undisclosed
a) in the course of the income of the specified
search, in a statement previous year
u/s 132(4), admits the
undisclosed income and
specifies the manner in
which such income has
been derived.
b) substantiates the
manner in which the
undisclosed income was
derived; and
c) on or before the
specified date:
A. pays the tax, together
with interest in respect of
the undisclosed income;
and
B. furnishes the return of
income for the specified
previous year declaring
such undisclosed income
therein
271AAC Where the income 10% of tax payable u/s
determined includes any 115BBE
income referred to in sec.
No penalty shall be levied
68, 69, 69A, 69B, 69C or
if such income has been
69D for any previous year
included by the assessee in
the return of income furnished
u/s 139 and the tax thereon
(as per sec. 115BBE) has
been paid on or before the end
of the relevant previous year.
271B Failure to comply with ½% of the total sales or Assessing
sec. 44AB i.e. to get turnover or gross receipts Officer
accounts audited or to
furnish such audit report.
271BA Failure to furnish report Rs 1,00,000 Assessing
from an accountant as per Officer
sec.92E
530 PP-DTL&P
271C Failure to deduct part or Amount of tax failed to deduct Assessing

whole of tax u/s 192 to Officer
196C
Failure to pay tax on Amount of tax failed to pay

dividends u/s 115-O or
under second proviso to
sec. 194B
271CA Failure to collect tax at Amount of tax failed to collect Imposed

source by Joint
Commissioner
271D Taking or accepting Amount of the loan or deposit Imposed

any loan or deposit or specified sum so taken/ by Joint
or specified sum in accepted Commissioner
contravention of the
provisions of sec.269SS
271DA Receives any sum in Amount equal to such receipt Imposed

contravention of section by Joint
269ST Commissioner
271DB Failure to comply with Rs. 5,000 for every day during Imposed
[Inserted vide provisions of section which such failure continues by Joint
FA, 2019] 269SU Commissioner
271E Repayment of any loan Amount of loan or deposit or Imposed

or deposit or specified specified advance so repaid. by Joint
advance in contravention Commissioner
of the provisions of
sec.269T
271FA Failure to furnish a Rs 500 for every day during Imposed

statement of financial which the failure continues by Joint
transaction or reportable Commissioner
account as required
u/s 285BA(1) within the
prescribed time limit
Proviso to Failure to furnish the Rs 1,000 for every day during Imposed
section 271FA statement of financial which the failure continues, by Joint
transaction or reportable beginning from the day Commissioner
account as within the immediately following the day
period specified in on which the time specified in
the notice issued u/s such notice expires
285BA(5)
271FAA Person referred to in Rs 50,000 Prescribed

section 285BA(1) provides income tax
inaccurate information in authority
the ‘statement of financial
transaction or reportable
account’
271FAB Fails to furnish Rs 500000

information or document
as required u/s 9A(5)
within the prescribed time
limit
271G Failure to furnish 2% of the value of the Transfer Pricing

information or documents international transaction or Officer as
as required u/s 92D(3) specified domestic transaction. referred to in
Section 92CA
271GA Failure to furnish 2% of the value of the

information or documents transaction, if such transaction
as required u/s 285A had the effect of directly or
indirectly transferring the right
of management or control in
relation to the Indian concern;
In other case: Rs. 5,00,000
271GB(1) Failure by any reporting 4Failure does not exceed one

entity to furnish the report month: Rs.5,000 per day
referred to in sec. 286(2)
4Failure continues beyond
in respect of a reporting
the period of one month:
accounting year
Rs. 15,000 per day
4Failure continues after

an order of penalty has
been served on the entity:
Rs.50,000 per day from the
date of service of such order
271GB(2) Failure by any reporting 4Rs 5,000 per day

entity to produce
4Failure continues after
the information and
an order of penalty has
documents within the
been served on the entity:
period specified u/s
Rs.50,000 per day from the
286(6)
date of service of such order
532 PP-DTL&P
271GB(4) Reporting entity provides Rs 5,00,000 Penalty shall be

inaccurate information in levied if:
the report referred to in
a) the entity has knowledge of
sec. 286(2)
the inaccuracy at the time of
furnishing the report but fails to
inform the prescribed authority;
or
b) the entity discovers the
inaccuracy after the report is
furnished and fails to inform
the prescribed authority and
furnish correct report within
a period of 15 days of such
discovery; or
c) the entity furnishes
inaccurate information or
document in response to the
notice issued u/s 286(6),
271H Failure to furnish TDS / Rs 10,000
TCS Return or furnishing
inaccurate details in these
Return
However, no penalty
shall be payable if tax
along with interest has
been deposited and
the statement has been
furnished within one year
from the time prescribed.
271-I Fails to furnish Rs 1,00,000 Assessing
information, or furnishes Officer
inaccurate information as
required u/s 195(6)
271J Furnishing incorrect Rs 10,000 for each report Assessing
information in reports Officer or the
Penalty is leviable by the
or certificates by an Commissioner
AO or the Commissioner
accountant or merchant (Appeals)
(Appeals) who in the course
banker or registered
of any proceedings finds that
valuer
such report has incorrect
information
272A(1)(a) Failure to answer any 10,000 for each default Joint Director
question (related to or Joint
assessment) of an Commissioner
income-tax authority
272A(1)(b) Refuse to sign any

statement made by the
assessee in course of
income tax proceedings
272A(1)(c) Failure to comply with
summons u/s 131(1) to
attend office or to give
evidence or to produce
books of account or other
documents, at certain
place & time
272A(1)(d) Fails to comply with
a notice u/s 142(1) or
143(2) or fails to comply
with a direction issued
u/s 142(2A) [Penalty
shall be levied by such
authority]
272A(2)(a) Failure to comply with a A sum of Rs. 100, for every day during which
notice issued u/s 94(6) the failure continues: However, the amount of
penalty for failures in relation to a declaration
272A(2)(b) Failure to give notice of
mentioned in sec. 197A, a certificate as
discontinuance of his
required by sec. 203 and returns or statement
business or profession as
u/s 200 or 206 and 206C shall not exceed the
required u/s 176(3)
amount of tax deductible or collectible.
272A(2)(c) Failure to furnish in due
time any of the returns,
statements or particulars
mentioned in section 133,
206, 206C or 285B
272A(2)(d) Failure to allow
inspection of any register
u/s 134 or of any entry in
such register or to allow
copies of such register
or of any entry therein to
be taken
272A(2)(e) Failure to furnish the
return of income which
he is required to furnish
u/s 139(4A) or (4C) within
time allowed and in the
manner required.
534 PP-DTL&P
272A(2)(f) Failure to deliver or

cause to be delivered in
due time a copy of the
declaration mentioned in
sec. 197A
272A(2)(g) Failure to furnish a
certificate u/s 203 or
206C
272A(2)(h) Failure to deduct and pay
tax u/s 226(2)
272A(2)(i) Failure to furnish a
statement u/s 192(2C)
272A(2)(j) Failure to deliver a copy
of declaration referred u/s
206C(1A) within due time
272A(2)(l) Failure to deliver or
cause to be delivered the
quarterly return within
the time prescribed u/s
206A(1)
272A(2)(m) Failure to deliver a
statement within the time
prescribed u/s 200(2A) or
206C(3A)
272AA Failure to comply with the Maximum up to Rs. 1,000
provisions of sec. 133B
272B Failure to comply with the Rs. 10,000 per each defaults
provisions of sec. 139A
272BB(1A) Failure to quote Tax Rs. 10,000
deduction or collection
number
272BBB Failure to comply with the Rs. 10,000
provisions of sec. 206CA
Notes:
1) Specified previous year means previous year:
(i) which has ended before the date of search, but the date of filing the return of income u/s 139(1) for such
year has not expired before the date of search and the assessee has not furnished the return of income
for the previous year before the said date; or
(ii) in which search was conducted.
2) As per section 274(2), in the following cases, penalty can be imposed only with the prior approval of the Joint
Commissioner:
Where penalty is imposed by the Income-tax Officer Exceeds Rs 10,000

Where penalty is imposed by the Assistant Commissioner Exceeds Rs 20,000
or Deputy Commissioner
PENALTY FOR UNDER-REPORTING AND MISREPORTING OF INCOME [SECTION 270A]

The
– Assessing Officer; or
– Commissioner (Appeals); or
– Principal Commissioner or Commissioner
may, during the course of any proceedings under this Act, direct that any person who has under-reported his
income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.
Quantum of penalty [Section 270A(7) & (8)]

- 50% of the amount of tax payable on under-reported income [Sec. 270A(7)]
- 200% of the amount of tax payable on under-reported income,
where under-reported income is in consequence of any misreporting thereof by any person - [Sec. 270A(8)]
Cases of under-reporting of income [Section 270A(2)]

A person shall be considered to have under-reported his income, if:
a. the income assessed is greater than the income determined in the return processed u/s 143(1)(a);
b. the income assessed is greater than the maximum amount not chargeable to tax, where no return of
income has been furnished;
c. the income reassessed is greater than the income assessed or reassessed immediately before such
reassessment;
d. the amount of deemed total income assessed or reassessed u/s 115JB or 115JC is greater than the
deemed total income determined in the return processed u/s 143(1)(a);
e. the amount of deemed total income assessed u/s 115JB or 115JC is greater than the maximum amount
not chargeable to tax, where no return of income has been filed;
f. the amount of deemed total income reassessed u/s 115JB or 115JC is greater than the deemed total
income assessed or reassessed immediately before such reassessment;
g. the income assessed or reassessed has the effect of reducing the loss or converting such loss into
income.
Computation of amount of under-reported income [Section 270A(3)]

The amount of under-reported income shall be:
■ in a case where income has been assessed for the first time:
4 If return has been furnished Assessed Income – Income determined u/s 143(1)a)
4 If return has not been furnished In case of company, firm or local authority: Assessed Income Other
persons: Assessed Income – Basis Exemption Limit
536 PP-DTL&P
■ in a case where income has been assessed for the first time: Income reassessed or recomputed -
Income assessed, reassessed or recomputed in a preceding order
4 Preceding order means an order immediately preceding the order during the course of which the
penalty has been initiated.
■ in a case where under-reported income arises out of determination of deemed total income in
accordance with sec. 115JB or 115JC, the amount of total under-reported income shall be determined
in accordance with the following formula:
(A — B) + (C — D)
Where, A = Total income assessed as per the provisions other than the provisions contained in section
115JB or 115JC (herein called general provisions) B = Total income that would have been chargeable
had the total income assessed as per the general provisions been reduced by the amount of under-
reported income; C = Total income assessed u/s 115JB or 115JC D = Total income that would have been
chargeable had the total income assessed u/s 115JB or 115JC been reduced by the amount of under-
reported income. However, where the amount of under-reported income on any issue is considered
both u/s 115JB / 115JC and under general provisions, such amount shall not be reduced from total
income assessed while determining the amount under item D.
■ in a case where an assessment or reassessment has the effect of reducing the loss declared in the
return or converting that loss into income:
The income or loss assessed or reassessed - Loss claimed
Meaning of under-reported income in a case where source is linked to earlier year [Section
270A(4)]
Where: - the source of any receipt, deposit or investment in any assessment year - is claimed to be an amount
added to income or deducted while computing loss, as the case may be, in the assessment of such person - in
any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred
to as “preceding year”) - and no penalty was levied for such preceding year, then, the under-reported income
shall include such amount as is sufficient to cover such receipt, deposit or investment.
Cases not considered as under-reported income [Section 270(6)]

The under-reported income shall not include the following:
a. Proper Explanation: The amount of income in respect of which the assessee offers an explanation
and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal
Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has
disclosed all the material facts to substantiate the explanation offered.
b. Estimate by the authority: The amount of under-reported income determined on the basis of an
estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the
Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but
the method employed is such that the income cannot properly be deduced therefrom;
c. Estimate by the assessee: The amount of under-reported income determined on the basis of an
estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the
same issue, has included such amount in the computation of his income and has disclosed all the facts
material to the addition or disallowance.
d. Arm’s length price: The amount of under-reported income represented by any addition made in
conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee
had maintained information and documents as prescribed u/s 92D, declared the international transaction
under Chapter X, and, disclosed all the material facts relating to the transaction; and
e. Undisclosed income in search operation: The amount of undisclosed income referred u/s 271AAB
Cases of misreporting of income [Section 270A(9)]

The cases of misreporting of income shall be the following: a. misrepresentation or suppression of facts; b.
failure to record investments in the books of account; c. claim of expenditure not substantiated by any evidence;
d. recording of any false entry in the books of account; e. failure to record any receipt in books of account having
a bearing on total income; and f. failure to report any international transaction or any transaction deemed to be
an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.
Computation of tax payable on under-reported income [Section 270A(10)]

The tax payable in respect of the under-reported income shall be:
Where no return of income has Tax calculated on the under-reported income as increased by the maximum
been furnished and the income amount not chargeable to tax as if it were the total income
has been assessed for the first
time
Where the total income Tax calculated on the under-reported income as if it were the total income
determined u/s 143(1)(a) or
assessed, reassessed or
recomputed in a preceding order
is a loss
In any other case Tax on (Under-reported income + Income determined u/s *****
143(1(a) or income assessed, reassessed or recomputed
*****
in a preceding order) Less: Tax on Income determined u/s
143(1(a) or income assessed, reassessed or recomputed
in a preceding order
Other Points
- No double penalty on same amount: No addition or disallowance of an amount shall form the basis
for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty
in the case of the person for the same or any other assessment year – [Section 270A(11)].
- Written order: The penalty shall be imposed, by an order in writing, by the Assessing Officer, the
Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be – [Sec.
270A(12)]
IMMUNITY FROM IMPOSITION OF PENALTY, ETC. [SECTION 270AA]

■ An assessee may make an application to the Assessing Officer to grant immunity from imposition of
penalty u/s 270A and initiation of proceedings u/s 276C or 276CC, if he fulfils the following conditions:
a. the tax and interest payable as per the order of assessment or reassessment u/s 143(3) or 147,
as the case may be, has been paid within the period specified in such notice of demand; and
b. no appeal against aforesaid order has been filed.
■ An application shall be made within 1 month from the end of the month in which the said order has been
received and shall be made in such form (Form 68) and verified in prescribed manner.
538 PP-DTL&P
■ The Assessing Officer shall (on fulfilment of the aforesaid conditions) and after the expiry of the period
of filing the appeal to the Commissioner (Appeals), grant immunity from imposition of penalty u/s 270A
and initiation of proceedings u/s 276C or 276CC, where the proceedings for penalty u/s 270A has not
been initiated due to misreporting of income.
■ The Assessing Officer shall, within a period of 1 month from the end of the month in which the application
is received, pass an order accepting or rejecting such application after giving an opportunity of being
heard to the assessee.
■ The order made by the assessing officer in this regard is final.
■ Where immunity is granted to the assessee, then appeal to Commissioner (Appeals) or an application
for revision u/s 264 shall not be admissible against the order of assessment or reassessment.
POWER TO REDUCE OR WAIVE PENALTY, ETC., IN CERTAIN CASES [SECTION 273A]

Power u/s 273A(1): The Principal Commissioner or Commissioner may, in his discretion, whether on his own
motion or otherwise reduce or waive the amount of penalty imposed or imposable on a person u/s 270A* for
concealment of income (not other penalty) if he is satisfied that such person:
(a) has, prior to the detection by the Assessing Officer, of the concealment of particulars of income or of
the inaccuracy of particulars furnished in respect of such income, voluntarily and in good faith, made
full and true disclosure of such particulars;
Note: A person shall be deemed to have made full and true disclosure of his income or of the particulars
relating thereto in any case where the excess of income assessed over the income returned is of such
a nature as not to attract the provisions of sec. 270A.
(b) has, co-operated in any enquiry relating to the assessment of his income; and
(c) has either paid or made satisfactory arrangements for the payment of any tax or interest payable in
consequence of an order passed under this Act in respect of the relevant assessment year.
However, where the amount of income in respect of which the penalty is imposed or imposable for the relevant
assessment year, or, where such disclosure relates to more than one assessment year, the aggregate amount
of such income for those years, exceeds a sum of Rs. 5,00,000, no order reducing or waiving the penalty shall
be made by the Principal Commissioner or Commissioner except with the previous approval of the Principal
Chief Commissioner or Chief Commissioner or Principal Director General or Director General, as the case may
be.
Where an order of waiver u/s 273A(1) has been made in favour of any person, whether such order relates to
one or more assessment years, he shall not be entitled to any relief under this section in relation to any other
assessment year at any time after the making of such order. That means such waiver can be done once in life
of assessee.
Power u/s 273A(4): The Principal Commissioner or Commissioner may, on an application (not suo motu) made
in this behalf by an assessee, and after recording his reasons for so doing, reduce or waive the amount of any
penalty payable by the assessee under this Act, or stay or compound any proceeding for the recovery of any
such amount, if he is satisfied that—
i. to do otherwise would cause genuine hardship to the assessee, having regard to the circumstances of
the case; and
ii. the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the
recovery of any amount due from him.
Where the amount of any penalty payable under this Act or, where such application relates to more than
one penalty, the aggregate amount of such penalties exceeds Rs. 1,00,000, no order reducing or waiving
the amount or compounding any proceeding for its recovery shall be made by the Principal Commissioner or
Commissioner except with the previous approval of the Principal Chief Commissioner or Chief Commissioner
or Principal Director General or Director General, as the case may be.
The order, either accepting or rejecting the application in full or in part, shall be passed within a period of 12
months from the end of the month in which the application is received by the Principal Commissioner or the
Commissioner. Further, no order rejecting the application, either in full or in part, shall be passed unless the
assessee has been given an opportunity of being heard.
POWER OF PRINCIPAL COMMISSIONER OR COMMISSIONER TO GRANT IMMUNITY FROM

PENALTY [SECTION 273AA]
1. A person may make an application to the Principal Commissioner or Commissioner for granting immunity
from penalty, if —
(a) he has made an application for settlement u/s 245C and the proceedings for settlement have abated
u/s 245HA; and
(b) the penalty proceedings have been initiated under this Act.
2. The application to the Principal Commissioner or Commissioner shall not be made after the imposition of
penalty after abatement.
3. The Principal Commissioner or Commissioner may, subject to such conditions as he may think fit to
impose, grant to the person immunity from the imposition of any penalty under this Act, if he is satisfied that
the person has, after the abatement, co-operated with the income-tax authority in the proceedings before
him and has made a full and true disclosure of his income and the manner in which such income has been
derived.
4. The order, either accepting or rejecting the application in full or in part, shall be passed within a period of 12
months from the end of the month in which the application is received by the Principal Commissioner or the
Commissioner. Further, no order rejecting the application, either in full or in part, shall be passed unless the
assessee has been given an opportunity of being heard.
5. The immunity granted to a person shall stand withdrawn, if such person fails to comply with any condition
subject to which the immunity was granted and thereupon the provisions of this Act shall apply as if such
immunity had not been granted.
6. The immunity granted to a person may, at any time, be withdrawn by the Principal Commissioner or
Commissioner, if he is satisfied that such person had, in the course of any proceedings, after abatement,
concealed any particulars material to the assessment from the income-tax authority or had given false evidence,
and thereupon such person shall become liable to the imposition of any penalty under this Act to which such
person would have been liable, had not such immunity been granted.
PENALTY NOT TO BE IMPOSED IN CERTAIN CASES [SECTION 273B]

Penalty referred to in section 271A, 271AA, 271B, 271BA, 271BB, 271C, 271CA, 271D, 271E, 271FA, 271FAB,
271FB, 271G, 271GA, 271GB, 271H, 271-I, 271J, 272A(1)(c), 272A(1)(d), 272A(2), 272AA, 272B, 272BB or
272BBB, shall not be imposable on the person or the assessee, as the case may be, for any failure referred to
in the said provisions if he proves that there was reasonable cause for the said failure.
PROCEDURE [SECTION 274]

No order imposing a penalty under this Chapter shall be made unless the assessee has been heard, or has
540 PP-DTL&P
been given a reasonable opportunity of being heard. No order imposing a penalty under this Chapter shall be
made:
(a) by the Income-tax Officer, where the penalty exceeds Rs. 10,000;
(b) by the Assistant Commissioner or Deputy Commissioner, where the penalty exceeds Rs. 20,000,
except with the prior approval of the Joint Commissioner.
An income-tax authority on making an order under this Chapter imposing a penalty (unless he is himself the
Assessing Officer) shall send a copy of such order to the Assessing Officer.
BAR OF LIMITATION FOR IMPOSING PENALTIES [SECTION 275]

No order imposing a penalty under this Chapter shall be passed after following time limit:
Where the relevant assessment or other order is the An order imposing penalty shall be passed
subject-matter of an appeal to the Commissioner
a. before the expiry of the financial year in which the
(Appeals) and the Commissioner (Appeals) passes
proceedings, in the course of which action for imposition
the order on or after 01-06-2003 disposing of such
of penalty has been initiated, are completed; or
appeal
b. within 1 year from the end of the financial year in which
the order of the Commissioner (Appeals) is received by
the Principal Chief Commissioner or Chief Commissioner
or Principal Commissioner or Commissioner,
whichever is later
Where the relevant assessment or other order is Penalty order shall not be passed after the expiry of 6
the subject-matter of revision u/s 263 or 264 months from the end of the month in which such order of
revision is passed
In any other case Penalty order shall not be passed:

a. after the expiry of the financial year in which the
proceedings, in the course of which action for the
imposition of penalty has been initiated, are completed;
or
b. six months from the end of the month in which action
for imposition of penalty is initiated,
whichever period expires later
Revision of penalty order [Section 275(1A)]

Case:
Where the relevant assessment or other order is the subject-matter of an appeal to the Commissioner (Appeals)
or to the Appellate Tribunal or to the High Court or to the Supreme Court [here-in-after referred to as ‘appeal’]
or revision u/s 263 or 264.
An order imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition
of penalty is passed before appeal order is received by the Principal Chief Commissioner or Chief Commissioner
or the Principal Commissioner or Commissioner or the order of revision is passed,
Then
An order imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition
of penalty may be passed on the basis of assessment as revised by giving effect to such appeal and revision.
However, no order of imposing or enhancing or reducing or cancelling penalty or dropping the proceedings
for the imposition of penalty shall be passed after the expiry of 6 months from the end of the month in which
the appeal order is received by the Principal Chief Commissioner or Chief Commissioner or the Principal
Commissioner or Commissioner or the order of revision is passed.
Further, no penalty order is passed unless the assessee has been heard, or has been given a reasonable
opportunity of being heard.
PROSECUTION
WHEN ASSESSEE BECOMES LIABLE FOR PROSECUTION

The Department is empowered to put on prosecution proceedings for offences committed by taxpayers.
Prosecution details are tabulated below:
Section Nature of offence Rigorous Imprisonment and Fine
Minimum Maximum
275A Contravention of any order referred to in the second Any period up to 2 years (and fine also)
proviso to sec. 132(1) or (3)
275B Failure to comply with provision of sec. 132(1)(iib)
276 Removal, concealment, transfer or delivery of

property or any interest therein to prevent tax
recovery.
276A Failure to comply with provision of sec. 178(1)/(3) Any period up to 2 years
by liquidator of a company.
276B Failure to pay to the credit of Central Government 3 months (with fine) 7 years (with
- tax deducted at source or tax on dividend u/s 115- fine)
O or tax payable under second proviso to sec.194B
276BB Failure to pay to the credit of Central Government

tax collected at source u/s 206C
276C(1) Attempt to evade tax, penalty or interest chargeable/ 6 months (with fine) 7 years (with
imposable, or under-reports income fine)
Case I: If amount sought to be evaded exceeds Rs.
25,00,000 3 months (with fine) 2 years (with
fine)
Case II: If such amount involved does not exceed
Rs. 25,00,000
276C(2) Attempt to evade the payment of any tax, penalty 3 months (with fine) 3 years (with
or interest. fine)
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276CC Willful failure to file return of income in time u/s

139(1), or in response to notice u/s 142(1) or u/s
148 or u/s 153A
Case I: If amount of tax sought to be evaded 6 months (with fine) 7 years (with
exceeds Rs. 25,00,000 fine)
Case II: If amount of tax sought to be evaded does 3 months (with fine) 2 years (with
not exceed Rs. 25,00,000 fine)
276D Wilful failure to produce books of account and Any period up to one year (and with fine)
documents as required u/s 142(1) or wilful failure
to comply with direction u/s 142(2A) to get the
accounts audited
277 Makes false statement in any verification or delivers

a false account or statement under this Act or rules
there under
Case I: If amount of tax sought to be evaded 6 months (with fine) 7 years (with
exceeds Rs. 25,00,000 fine)
Case II: If amount of tax sought to be evaded does 3 months (with fine) 2 years (with
not exceed Rs. 25,00,000 fine)
277A Where any person (hereafter referred to as the first The first person shall The first
person) wilfully and with intent to enable any other be punishable with person shall
person (hereafter referred to as the second person) rigorous imprisonment be punishable
to evade any tax or interest or penalty chargeable for 3 months and with with rigorous
and imposable under this Act, makes any entry or fine. imprisonment
statement which is false and which the first person for 2 years with
either knows to be false or does not believe to be fine.
true, in any books of account or other document
being useful in any proceedings against the first
person or the second person. For establishing
the charge, it shall not be necessary to prove that
the second person has actually evaded any tax,
penalty or interest chargeable or imposable under
this Act.
278 Abetment or inducement in any manner to another 6 months (with fine) 7 years (with
person to make false statement or declaration fine)
relating to any income or any fringe benefits
chargeable to tax.
Case I: Where the amount of tax, penalty or interest
which would have been evaded due to such false
presentation, exceeds Rs. 25,00,000
Case II: In any other case 3 months (with fine) 3 months (with
fine)
278A Punishment for second and subsequent offences 6 months for every 7 years for
u/s 276B, 276C(1), 276CC, 277 or 278 offence (with fine) every offence
(with fine)
278B Where an offence under this Act has been Liable to be proceeded against and
committed by a company – punished accordingly.
● The company itself; and Note: Where the punishment for an
offence is imprisonment and fine, then
● Every person who, at the time the offence
such company shall be punished with fine
was committed, was in charge of, and was
only.
responsible to the company for the conduct
of the business of the company,
– shall be deemed to be guilty of the offence
Note: Company includes firm, AOP/BOI.
278C Where an offence under this Act has been

committed by an HUF, the Karta thereof shall be
deemed to be guilty of the offence
280 Disclosure of any information by public servants in Upto 6 months (with fine)
contravention of sec. 138(2)
(With previous sanction of the Central
Government)
POWER OF COMMISSIONER TO GRANT IMMUNITY FROM PROSECUTION [SECTION 273AB]

A person may make an application to the Principal Commissioner or Commissioner for granting immunity from
prosecution, if he has made an application for settlement u/s 245C and the proceedings for settlement have
abated u/s 245HA.
The application to the Principal Commissioner or Commissioner shall not be made after institution of the
prosecution proceedings after abatement.
The Principal Commissioner or Commissioner may, subject to such conditions as he may think fit to impose,
grant to the person immunity from prosecution for any offence under this Act, if he is satisfied that the person
has, after the abatement, co-operated with the income-tax authority in the proceedings before him and has
made a full and true disclosure of his income and the manner in which such income has been derived:
The immunity granted to a person shall stand withdrawn, if such person fails to comply with any condition
subject to which the immunity was granted and thereupon the provisions of this Act shall apply as if such
immunity had not been granted.
The immunity granted to a person may, at any time, be withdrawn by the Principal Commissioner or
Commissioner, if he is satisfied that such person had, in the course of any proceedings, after abatement,
concealed any particulars material to the assessment from the income-tax authority or had given false evidence,
and thereupon such person may be tried for the offence with respect to which the immunity was granted or for
any other offence of which he appears to have been guilty in connection with the proceedings.
544 PP-DTL&P
LESSON ROUNDUP
– The Income-tax Act provides for collection and recovery of income-tax in the following ways, namely,
(i) Tax Deduction at Source / Tax Collection at source
(ii) Advance Tax
(iii) Self Assessment Tax
(iv) Payment of Tax after the assessment is made by the Assessing Officer.
– Sections 192 to 206 of the Income-tax Act lay down the provisions relating to deduction of tax at
source.
– Section 197A provides that no deduction of tax at source is to be made from (i) interest on securities,
(ii) dividends, and (iii) payments in respect of deposits under NSS, etc. if the following conditions are
satisfied:
a) The recipient of such income is an individual and resident in India.
b) Such person furnishes a declaration in writing in duplicate, in the prescribed form and verified in
the prescribed manner, to the payer of such income to the effect that the tax on his estimated total
income of the previous year in which such income is to be included for computing his total income
will be nil.
– Section 207-219 of the Income Tax Act deals with the provisions relating to advance payment of tax.
In advance payment of tax, the assessee has to pay tax in a financial year under estimated income
which is to be taxed in the subsequent assessment year. It follows the doctrine known as pay as you
earn scheme. It is obligatory for an assessee to pay advance tax where the advance tax payable is
Rs. 10,000 or more (Section 208).
– Filing of Return: The procedure under the Income-tax Act for making an assessment of income
begins with the filing of a return of income. Section 139 of the Act contains the relevant provisions
relating to the furnishing of a return of income.
– E-Filing of Return: The Income Tax Department has introduced on line facility in addition to conventional
method to file return of income. The process of electronically filing of Income Tax return through the
mode of internet access is called e-filing of return.
– Refund means “to repay” or restore what was taken under the income-tax law. Refunds arise in those
cases where the amount of tax paid by a person or on his behalf is greater than the amount with which
he is properly chargeable for that year.
– Types of Assessment
Self assessment (Section 140A)
Regular assessment (Section 143)
Best judgment assessment (Section 144)
Income escaping assessment or re-assessment (Section 147)
Precautionary assessment.
Self assessment is the first step in the process of assessments.
– Self Assessment is simply a process where a person himself assesses his tax liability on the income
earned during the particular previous year and submits Income Tax Return to the department.
– Under summary assessment, Assessing Officer completes the assessment without passing a regular
assessment order. The Assessing Officer issue an acknowledgement/intimation under section 143(1)
of tax payable or refundable as the case may be on the basis of Return of Income filed by the assessee
under section 139 or in response to a notice issued under section 142(1).
– Where a return has been made under Section 139, or in response to a notice under sub–section (1)
of Section 142, the Assessing Officer shall, if he considers necessary or expedient to ensure that the
assessee has not understated the income or has not computed excessive loss or has not underpaid
the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein,
either to attend his office or to produce, or cause to be produced there, any evidence on which the
assessee may rely in support of the return.
– Best Judgment Assessment: The Assessing Officer, after taking into account all relevant material
which he has gathered, and after giving the assessee an opportunity of being heard, makes the
assessment of the total income or loss to the best of his judgment and determine the sum payable by
the assessee on the basis of such assessment.
– Income Escaping Assessment : If the Assessing Officer has reason to believe that any income
chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions
of sections 148 to 153.
– The right to appeal must be given by express enactment in the Act. Therefore, in case there is no
provision in the Act for filing an appeal regarding a particular matter, no appeal shall lie. The right to
appeal arises where the taxpayer is aggrieved by the order passed by the income-tax authority.
– The assessee may prefer an appeal against the orders of the Assessing Officer to the Commissioner
(Appeals), in accordance with the relevant provisions under Section 246 and appeal against the order
of the Commissioner (Appeals) can be preferred by the Assessee or the Commissioner of Income Tax
and such appeal lies with the Appellate Tribunal.
– The Central Government shall constitute an Appellate Tribunal consisting of as many judicial and
accountant members as it thinks fit to exercise the powers and discharge the functions conferred on
the Appellate Tribunal by this Act.
– Section 260A provides that an appeal shall lie to the High Court from every order passed in appeal by
the Appellate Tribunal if the High Court is satisfied that the case involves a substantial question of law.
– The aggrieved party is entitled to appeal to the Supreme Court against the judgment delivered by the
High Court.
– Chapters XVII and XXI of Income-tax Act, 1961, contain various provisions empowering an Income
tax Authority to levy penalty in case of certain defaults.
SELF TEST QUESTIONS

1. What is Tax deducted at Source?
2. Explain the procedures regarding refund of excess tax paid by the assessee to the Department.
546 PP-DTL&P
3. State the provisions regarding deduction of tax at source in respect of the following incomes:
(i) Rent
(ii) Professional or technical fees.
(iii) Winning from horse races.
4. State the income-tax authorities who are empowered to administer the Income-tax Act and explain
their powers, functions and jurisdiction in relation to assessment of income.
5. Discuss the statutory obligations of an assessee to file a return of his income and indicate the time-
limits for filing the return.
6. Explain the following :
(a) Return of loss;
(b) Belated return;
(c) Revised return; and
(d) Voluntary return.
7. What is self-assessment? What are the consequences of non-payment of tax on “Self-assessment”?
8. Discuss how regular assessments and best judgment assessments are made under the Act?
9. Under what circumstances is the Assessing Officer empowered to reopen the assessment made by
him? Give example.
10. Explain the circumstances under which income is said to have escaped assessment and state the
power of the Assessing Officer to assess such escaped income. Illustrate.
11. Specify the time limits within which -
(a) notice should be issued by the Assessing Officer for making an assessment or re-assessment;
(b) the assessment or re-assessment should be completed.
12. What is a mistake apparent from the record? Explain the specific cases of mistakes given in the Act
which are to be rectified and state the time limits for rectification in each case.
13. Write a lucid note on best judgment assessment with suitable illustration.
14. Explain the provisions with respect to appeals and revisions with reference to tax planning.
15. Explain the provisions relating to revision of assessment order prejudicial to the interest of assessee.
16. What are the various grounds of appeals available before different types of authorities to the assessee?
17. Under what circumstances the assessment order can be revised on the basis of applications of the
assessee? Under what circumstances the revision cannot be made?
18. Under what circumstances can an assessee appeal to the Appellate Tribunal? What documents are
to be attached in mailing an appeal to the Tribunal?
19. When can an aggrieved party appeal to the Supreme Court against the judgment delivered by the
High Court?
20. Compliance with legal formalities is less costly than the payment of penalty or interest due on taxes.
Explain the statement briefing the defaults and penalties under the Income-tax Act.
SUGGESTED READINGS
Kluwer]
548 PP-DTL&P
Lesson 10 n Tax Planning and Tax Management 549
Lesson 10
Tax Planning and Tax Management
LESSON OUTLINE
LEARNING OBJECTIVES
– Tax Planning Tax planning is an activity undertaken to minimize
– Doctrine of Form and Substance tax liability through the best use of all available
allowances, deductions, exclusions, exemptions
– Test to be applied – Tax Planning
etc., while Tax management consists of steps taken
– Systems to Method of Tax Planning to comply with Income Tax law e.g. maintaining of
books of account, computing the income , deposit
– Tax Planning and Retrospective Legislation
of tax, filing of returns etc.
– Tax Planning and Administrative Legislation
– Legal effect of a circular understand
– Tax Planning and Systems of Advance ruling – what is tax planning, tax avoidance and
– Tax Planing and Interpretation tax evasion and their difference
– Doctrine of Precedence – what are the tools of tax planning
– Tax Planning & Diversion of Income V/s – Determine how tax planning can be
Application of Income implemented
– Various Avenues of Tax Planning – which are the major areas of tax planning
– Tax Planning and Management/Investment – How to do tax planning with respect to

Decision non-resident
– Tax Planning for Foreign Collaboration

– Tax Planning in case of Losses
– LESSON ROUNDUP
549
550 PP-DTL&P
TAX PLANNING
Tax planning is application of the various provisions of tax laws to reduce the tax impact on the assessee to
the minimum with the help of deductions, exemptions, rebates, reliefs etc.
Tax planning requires latest knowledge of tax laws, circulars issued by the CBDT and various decisions of the
Courts. Tax Planning is a system which in its implementation is designed to achieve a specific result.
Tax planning aims to reduce the outflow of cash resources made available to the Government by way of taxes
so that the same may be effectively utilised for the benefit of the individual or the business, as the case may
be.
Tax planning may be defined as an arrangement of one’s financial affairs in such a way that, without violating
in any way the legal provisions, full advantage is taken of all tax exemptions, deductions, concessions, rebates,
allowances and other reliefs or benefits permitted under the Act so that the burden of taxation on the assessee
is reduced to the minimum.
Saving of taxes by legal means may take two forms — Tax Planning and Tax Avoidance.
‘Tax planning’ is wider in range. The dividing line between tax evasion and tax avoidance is very thin. Tax
planning involves reduction of taxes by taking benefits expressly provided under the Law but Tax Evasion
involves reduction of taxes by using loopholes/lacunas in law. Tax avoidance defeats the object of law and not
the law.
However, Tax Evasion refers to any attempt to avoid payment of taxes by using illegal means. Some of the
ways of tax evasion are:
• Providing false information;
• failure to record investments in books of account;
• claim of bogus expenditure;
• recording of any false entry in books of account;
• failure to record any receipt in books of account having a bearing on total income; and
Tax Planning under English Law

In Inland Revenue Commissioner vs. Duke of Westminster 1936 AC 1, it was held every man is entitled if he
can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If
he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of
Inland revenue or his fellow taxpayers may be.
In I.R.C. vs. Burmah Shell Co. Ltd. (1982) STC 30 (Burmah) and Furniss (Inspector of Taxes) vs. Dawson
(1984) 1 All E.R.530, it was held that where tax avoidance was targeted through a series of transactions with no
commercial or substantial value but with the only aim of avoiding tax, the Courts have to ignore the transactions
and the tax liability has to be determined as if these transactions never took place.
Tax Palnning under Indian Law

In CIT vs. A. Raman & Co. 1 SCR 10, the Supreme Court followed the case of the Westminster’s case. It
observed that avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is
not prohibited. The tax payer may resort to a device to divert the income before it accrues or arises to him.
Effectiveness of the device depends not upon consideration of morality but on the operation of the Income-tax
Act, 1961. Legislative injunction in taxing statutes may not, except on pain of penalty, be violated but it may
lawfully be circumvented.
However, the Supreme Court in Mc Dowell’s case clearly departed from the above views and expressly
disassociated itself with the earlier observations of the Supreme Court echoing the sentiments of Westminster
principle. The court enumerated the evil consequences of tax avoidance as follows:
(1) Substantial loss of much needed public revenue.
(2) Serious disturbance caused to the economy of the country by the piling up of mountains of black
money, directly causing inflation.
(3) Large hidden loss to the community by some of the best brains of the country involved in perpetual
litigation.
(4) Sense of injustice and inequality which tax avoidance arouses in the minds of those who are unwilling
or unable to profit by it.
(5) The unethical practice of transferring the burden of tax liability to the shoulders of the guileless, good
citizens from those of the ‘artful dodgers’
The court felt that there was as much moral sanction behind taxation laws as behind any other welfare legislation
and avoidance of taxation was not ethical. In the view of the Court, the proper way to construe a taxing statute
while considering a device to avoid tax was not to ask whether the provisions should be construed literally or
liberally, nor
The Supreme Court emphasised that tax planning may be legitimate provided it is within the framework of
law and colourable devices cannot be part of tax planning. It is wrong to encourage or entertain the belief
that it is honourable to avoid the payment of tax by resorting to dubious methods. The Supreme Court also
recommended that it is the obligation of every citizen to pay the taxes honestly without resorting to subterfuge.
TAX PLANNING AND DOCTRINE OF FORM AND SUBSTANCE

One of the reason of tax planning is the existence of the doctrine of form and substance. Is it possible to ignore
the form of a transaction and determine the substance thereof?
In Commissioner of Income tax vs. Motor and General Stores (P) Ltd. (1967) 66 ITR 692 (SC.) the Supreme
Court had observed that in the absence of any suggestion of bad faith or fraud the true principle is that the
taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. According
to the court, when the transaction is embodied in a document the liability to tax depends upon the-meaning and
content of the language used in accordance with the ordinary rules of construction. The House of Lords in Duke
of Westminster vs. ICR (1936) 19 ATC 498 held that in considering the substance of the transaction, the legal
form cannot be disregarded.
Principles governing the form and substance:
(i) In deciding whether the transaction is a genuine or colourable one, it will be open to the authorities to
pierce the corporate veil and look behind the legal facade at the reality of the transaction.
(ii) The above rule cannot naturally apply where the transaction, as put through by the assessee, is not
genuine but colourable or is a mere device. For here, the question is not one between ‘form’ and
‘substance’ but between appearance and truth.
(iii) It is well settled that when a transaction is entered in one form known to law, it will attract tax liability
while, if it is entered into in another form which is equally lawful, it may not. In considering, therefore,
whether a transaction attracts tax or not, the form of the transaction put through by the assessee is to
be considered and not the substance thereof.
(iv) Where the terms of a transaction are contained in a document, it should not be construed only in its
formal or technical aspect. While the words used should be looked at, too much importance should not
552 PP-DTL&P
be attached to the name or label given by the parties and the document should be interpreted so as to
accord with the real intention of the parties as appearing from the instrument.
(v) Where the authorities are charged under the Act with the duty of determining the nature or purpose of
and payment or receipt on the facts of a case, it is open to them to work at the substance of the matter
and the formal aspect may be ignored.
SUCCESSFUL TAX PLANNING : TESTS TO BE APPLIED

Successful tax planning must fulfil two outstanding tests i.e.,
(a) Conformity with the current law and
(b) Flexibility.
In order to satisfy the first test, the essential requirement is a comprehensive knowledge of the law, rules and
regulations on the part of the tax planner. This knowledge of law extends not only to the provisions of the taxing
statutes and the case law that has developed on those statutes, but also to other branches of law, both civil and
personal, so that the tax planner’s device does not get defeated by the universal principles of jurisprudence.
The second test of flexibility seeks to ensure that the success of the tax planning device is not nullified by
statutory negation. Though the tax planner may be successful in seeking out a device which in his opinion is in
conformity with law, the subsequent statutory negation may nullify his success. In order to counter this exigency,
his tax plan must be flexible. Flexibility essentially means that the device provides for suitable changes in
accepted forms.
SYSTEM AND METHOD OF TAX PLANNING

Tax-planning will either be
• Short-range tax-planning or
• Long-range tax-planning.
The short-range tax planning has limited objective and is done for immediate benefits. For eg An assessee
whose high income in a particular year on account sale of capital asset like house property, as compared to the
preceding year might plan to invest the same in notified bonds, bonds of National Highway Authority of India or
Rural Electrification Corporation Limited to claim exemption u/s 54EC. This has a lock-in period of 3 years. Such
a plan does not involve any permanent or long-term commitment and yet it results in substantial tax saving. This
is an example of short-range tax planning.
The long- range tax planning, on the other hand, may not even confer immediate tax benefits. For e.g. in a case
where an assessee transfers certain shares to his spouse, the income arising from the shares will be clubbed
with the transferor’s income. However, if the company subsequently issues bonus shares in respect of those
shares the income arising from the bonus shares will not be clubbed with the transferor’s income. Similarly, the
income arising out of the investment of the income from the transferred assets will not also be clubbed with the
transferor’s income. Long range tax planning may be resorted to even for domestic or family reasons.
TAX PLANNING AND RETROSPECTIVE LEGISLATION

TAX PLANNING also has to deal with the specific problems arising from the retrospective application of tax
rates and tax amendments.
The cardinal principle of construction is that a statute must always be interpreted prospectively unless the
language of the statute makes it retrospective either expressly or by necessary implication. A retrospective
operation is not to be given to a statute so as to impair vested rights or the legality of past transactions.
In India, the Government generally follows the principle that the changes in the rates of tax, as also the other
amended provisions of tax laws, should ordinarily be made operative prospectively in relation to current incomes
and not in relation to incomes of the past year. However, there are cases where the Government have introduced
retrospective amendments in tax laws. The Supreme Court has upheld the validity of such retrospective laws.
Any retrospective legislation has two aspects. For pending assessments, the amended provision would be
applied. The difficulty would arise in the case of completed assessments. The effect of a retrospective legislative
amendment is that the provisions as amended, shall, for all legal purposes be deemed to have been included in
the statute from the date on which the amendment came into force. All orders relating to periods subsequent to
the date of retrospective amendment must be in consonance with the specific and clear provisions, as amended
retrospectively.
TAX PLANNING AND ADMINISTRATIVE LEGISLATION

It is a common feature of enactment to lay down in the section of the Act, the principles and the policy of the
Legislature leaving out details to be filled in or worked out by rules or regulations made either by the Government
or by some other authority as may be empowered in the legislation.
The following principles emerging from various rulings are relevant in this context.
1. The rules cannot be made which are contrary to the object of the Act
2. A rule cannot have a condition ,which is not sanctioned/consistent with the Act.
3. No rule/Regulation can be contrary to the rules of natural justice.
4. A rule cannot over-ride the subject-matter relevant to the particular provision in the Act.
5. A rule cannot reduce, negate or take away the right, privilege, advantage or benefit granted by the
section or the enactment relevant to it.
6. A rule cannot seek to impose a tax which the Legislature has not thought it fit or expedient to impose.
7. Both a rule and a provision of law are equally bound to respect the constitutional protection and
fundamental right of the citizen contained in Article 14 of the Constitution.
8. A rule has to strictly confine itself to the subject-matter for which the rule-making authority has been
empowered by the enactment.
9. Merely because a rule is subsequently laid before the Parliament, it cannot be given the status of a law
of Parliament.
10. As in the case of an enactment, if a rule classifies persons and objects into identifiable classes and
such classification is relevant to the purpose of the enactment and for carrying out the provisions of the
Act, it cannot be called in question.
11. A rule has no retrospective operation unless the Act to which it is relevant specifically provides for the
making of rules having retrospective operation.
LEGAL EFFECT OF A CIRCULAR

The various judicial rulings which have considered the legal aspects of Circulars under the Income-tax
Act, 1961 point out the following:
(i) The instructions in favour of the assessee should be followed by the Department, irrespective of
the question of their legality; but the instructions adverse to the assessee can be challenged by the
assessee.
(ii) The instructions of the Board are binding on the Department but not on the assessee.
554 PP-DTL&P
(iii) Instructions adverse to the assessee cannot be issued with retrospective effect, while instructions
favourable to the assessee can be so issued.
(iv) Instruction withdrawn subsequently should be given effect to by the Assessing Officer for the
assessment year for which they were in force even though they are withdrawn at the a time he makes
the assessment.
(v) In the exercise of its power, the Board cannot impose a burden or put the assessee in a worse position
but the Board can grant relief or relax the rigour of the law.
(vi) No instruction or circular can go against the provisions of the Act.
(vii) Circulars and instructions of the Board are envisaged only in regard to administrative aspects and
cannot restrict the judicial power or the discretion of an officer -ALA Firm vs. CIT 102 ITR 622 (Madras),
Sirpur Paper Mills Ltd. vs. CWT 77 ITR 6 (SC).
(viii) No such orders, instructions or directions shall be issued — (a) so as to require any income-tax authority
to make a particular assessment or to dispose of a particular case in a particular manner or (b) so as to
interfere with the discretion of the Deputy Commissioner (Appeals) or the Commissioner (Appeals) in
the exercise of his appellate functions.
TAX PLANNING AND SYSTEM OF ADVANCE RULINGS

A ruling is a statement in writing of prescribed tax administering authority to a taxpayer, which interprets and
applies the law and regulation to a specific set of facts and states a conclusion as to the tax consequences of
that particular transaction. As the rulings are given in advance of the concerned transactions they are called
advance rulings.
The advance rulings given are binding on the tax authorities and the applicant who had sought such ruling, with
reference to the particular cases in respect of which they are given. A change in the facts can affect the basis of
the rulings because the law often pivots on a date, an amount, type of tax payer and so on.
Likewise, a ruling issued with respect to one transaction may not be good to the same tax payer for a subsequent
transaction even on what might appear to be identical facts.
Advance rulings are an excellent device for fostering and encouraging the self-assessment system and would
contribute to good relations between the administration and tax paying public. From the tax payer’s point of
view, these rulings are most desirable because they give more assurance of certainty prior to entering into a
transaction and guarantee more uniformity in the application of the tax legislation. They are desirable for the
administration also as they minimise the scope for controversy and litigation, reduce the time spent in answering
question from tax payers and help to achieve a fair and co-ordinated tax administration.
TAX PLANNING AND INTERPRETATION

No tax can be imposed on the subject without words in the clearly showing an intention to lay a burden upon
him. In other words, the subject cannot be taxed unless he comes within the letter of the law.
(a) Natural Justice: Tax laws are to be interpreted reasonably and as per with principles of natural justice. Where
a literal construction would defeat the obvious intention of the legislation and produce a wholly unseasonable
result, the court must achieve that obvious intention and produce a rational construction.
If the interpretation of a fiscal enactment is open to doubts, the construction most beneficial to the subject should
be adopted, even if it results in his obtaining “a double advantage”. A provision for exemption of relief should be
construed liberally and in favour of the assessee. Likewise, a provision for appeal should be liberally construed.
In cases of doubt regarding the construction, assistance may be sought from previous judicial interpretation or
from previous legislation or by adverting to the mischief intended to be suppressed. A subsequent enactment
affords no useful guide to the interpretation of earlier law, unless it is on the same subject and the earlier law is
ambiguous.
(b) Definition clause and undefined words: A definition or interpretation clause which extends the meaning
of a word should not be construed as taking away its ordinary meaning. Further, such a clause should be so
interpreted as not to destroy the basic concept or essential meaning of the expression defined, unless there
are competing words to the contrary. Words used in the sections of the Act are presumed to have been used
correctly and exactly as defined in the Act and it is for those who assert the contrary to show that there is
something repugnant in the subject or context. Words which are not specifically defined must be taken in their
legal sense or their dictionary meaning or their popular or commercial sense as distinct from their scientific or
technical meaning unless a contrary intention appears.
(c) Marginal Notes: Marginal notes to the sections cannot control the construction of the statute but they may
throw light on the intention of the legislature.
(d) Legal fiction: The word “deemed” may include the obvious, the uncertain and the impossible. A legal fiction
has to be carried to its logical conclusion but only within the field of definite purpose for which the fiction is
created. As far as possible, a legal fiction should not be so interpreted as to work injustice.
(d) Provisos: A proviso cannot be held to control the substantial enactment or to withdraw by mere implication
any part of what the main provision has given. A proviso is not applicable unless the substantive clause is
applicable to the facts of the case. The proper function of a proviso is to provide an exception to a case which
would otherwise fall within the general language of the main enactment and its effect as confined to that case.
However, a proviso may be read as an independent substantive enactment where the context warrants such
construction. Whether a proviso is construed as restricting the main provision or as a substantive clause, it
cannot be divorced from the provision to which it stands as a proviso. It must be construed harmoniously with
the main enactment.
DOCTRINE OF PRECEDENCE
Doctrine of Precedence would be applicable in case of tax laws. The following principles which govern the rule
of precedence may be noted.
SUPREME COURT
• The Supreme Court judgments are binding on all the courts, Tribunals and authorities.
• Not only the ratio decidendi, but also obiter dicta of the Supreme Court are binding on all the Courts.
• Decision of a larger Bench shall prevail, when there are two irreconcilable decisions of the Supreme
Court on some point of law.
• When there are two irreconcilable decisions of two Benches of similar strength, the decision later in
time will have to be followed by the lower courts.
• The Supreme Court judgments cannot be ignored by the lower courts though such judgments are per
incuriam.
• The Supreme Court, though expected to follow its own judgments, is not bound to follow them and in
appropriate cases it can review its earlier judgment.
HIGH COURT
• A Division Bench of a High Court is generally bound by its earlier decision, but it may refuse to follow
the same if the earlier judgment is per incuriam.
• If the Division Bench of a High Court does not agree with its earlier judgment it will have to either follow
the same or refer the issue to a Full Bench.
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• A Division Bench of High Court is bound to follow a decision of the Full Bench of the same High Court.
• A single judge of a High Court is bound by a decision of a Division Bench or of the Full Bench of the
same High Court.
• A single judge of a High Court is not bound to follow the decision of another single judge, though he is
expected to follow the same.
• All the lower authorities, courts and tribunals are absolutely bound to follow the decision of a High Court
within whose jurisdiction they function. Here, the High Court decisions include decision of a single
judge.
• The lower authorities and courts can ignore a decision of a High Court only if it is overruled by a larger
Bench of the same High Court, or by the Supreme Court or by a later enactment.
OTHERS
• In all Indian Acts like the Income-tax Act, 1961, to keep the uniformity of law, a High Court should
normally follow the decision of another High Court, unless it finds an overriding reason not to follow the
same.
• The lower appellate authorities are bound to follow the decision of another High Court, though they do
not function within the jurisdiction of the said High Court, if there is no contrary decision of any other
High Court.
• The Bench of the Appellate Tribunal, should generally follow the orders of other Benches of the Tribunal,
unless those orders of the Tribunal are per incuriam.
• An order of a Full Bench of a Tribunal is binding on the ordinary Bench of the Tribunal.
• If an ordinary bench of a Tribunal does not agree with an order of another Bench of the Tribunal, and
that order of the another Bench of the Tribunal is not per incuriam, the Bench cannot differ from the view
taken by the other Bench. It can only get the matter referred to a larger Bench.
• The Tribunal orders are binding on the Commissioner (Appeals) falling within the territorial jurisdiction
of the Tribunal passing the order in question.
• The Assessing Officer and the Commissioner, while acting under section 263, cannot refuse to follow
the decision of High Court. They cannot pass orders which are inconsistent with the decisions of the
High Court within whose jurisdiction they function, even for the purpose of keeping the issue alive.
• The Assessing Officer or the Commissioner need not follow the decision of another High Court if the
department has not accepted the said decision and has taken the matter to Supreme Court.
• The Assessing Officer and the Commissioner are bound by the order of the Tribunal (falling within the
jurisdiction of the Tribunal unless the Department has not accepted the decision of the Tribunal.)
TAX PLANNING AND DIVERSION OF INCOME /APPLICATION OF INCOME

• The concept of diversion of income by overriding title signifies diversion of income at source by an
overriding title before it reaches an assessee.
• Such a diversion can take place either under a legal compulsion or under a contractual obligation or
otherwise. An obligation to apply the income in a particular way before it has accrued or arisen to the
assessee results in the diversion of the income.
• On the other hand, an obligation to apply income which has accrued or arisen or has been received
amounts merely to the apportionment or application of the income and not to its diversion.
• Sometimes the dividing line between diversion by overriding title and the application of income after it
has accrued is somewhat thin.
When income or a portion of income is diverted at the source by an overriding title before it started flowing into
the channel which was to reach the assessee concerned it could be excluded from his assessable income.
Wherever there is such diversion of income, such diverted income, cannot be included in the total income of the
assessee who claims that there has been a diversion. On the other hand, where income has accrued or arisen
in the hands of the assessee, its subsequent application in any way will not affect the tax liability.
VARIOUS AVENUES OF TAX PLANNING
Tax Planning and Salary Income

The definition of salary is very wide and includes not only monetary salary but also benefits and perquisites in
kind. The only deductions available in respect of salary income are the deduction for entertainment allowance
and deduction for professional tax. Therefore, the scope for tax planning in respect of salary income is severely
limited. However, the following are some ideas of tax planning in regard to salary income.
1. Salary structure: The employer should not pay a lumpsum amount as salary to employee because the entire
amount of salary will become taxable without any exemption. It should divide the same and pay it as basic
salary plus various allowances and perquisites.
For example, the employer could provide Children education allowance, hostel allowance, house rent allowance,
transport allowance etc. The employee will get exemption from salary incomes.
2. Employee welfare scheme: There are several employees welfare schemes such as recognised provident
fund, approved superannuation fund, gratuity fund. Payments received from such funds by the employees are
totally exempt or exempt upto significant amounts.
For example, the entire provident fund received by the employee from recognised provident fund is exempt. The
employer should form such welfare schemes for the benefit of the employees. Such amount contributed by the
employer towards the above funds are deductible from business Income.
However, the restrictive provisions of section 40A(9), disallows any contribution made to any non statutory
welfare funds.
In this connection, it may be noted that section 10(23AAA) exempts any income of a staff welfare fund subject
to the satisfaction of certain conditions.
(3) Insurance policies: Any health insurance premium payable by employer on health of an employee will
not be treated as perquisite in the hands of the employee. Further, payments received from the employer in
respect of keyman insurance policies constitute income in the hands of the employees. However, the payment
of life insurance premium by the employer on behalf of the employee will be treated as a perquisite in hands of
employee.
(4) Dearness Allowance and Dearness Pay: The employer should ensure that dearness allowance and
dearness pay should form part of “salary”. This is because certain items like gratuity, commuted pension, leave
salary,VRS and the employer’s contribution to the recognised provident fund etc. are calculated on the basis of
salary. Therefore, if dearness allowance, dearness pay etc. are included in salary, the above benefits will also
increase leading to higher exemption in the hands of the employee.
(5) Commission : The Supreme Court, in Gestetner Duplicators Pvt. Ltd. v. CIT 117 ITR 1, has held that
if, under the terms of employment, commission is payable at a fixed percentage of turnover achieved by an
employee such commission should be taken into account for calculating “salary” for the purpose of gratuity etc.
The employer will be well advised to provide for such commission.
(6) Leave travel facility : The employer should provide leave travel facility to all employees . Under section
558 PP-DTL&P
10(5) of the Income-tax Act, 1961, exemption is provided to employee from LTC twice in a block of 4 years
.Such exemption is available for the employee, spouse, children (to a maximum of 2 children born on or after
1/10/98), dependent parents, dependent brothers and dependent sisters.
(7) RFA/HRA: An employee should analyse the tax incidence of a RFA and HRA whenever he is given an
option, in order to choose the one which is more beneficial to him. The perquisite of RFA is taxed as per Rule 3
of the Income-tax Rules, 1962 and HRA is exempt as per limits u/s 10(13A) read with Rule 2A. The employee
should therefore work out his tax liability and net cash flow under both the options and then, decide on whether
to receive HRA or choose RFA.
(8) Medical Allowance: The employer should avoid paying fixed medical allowance. This is 100% taxable.
Whereas, he can also provide free medical facilities in his own hospital/Government hospital which is not
taxable.
(9) Pension: Uncommuted pension (regular pension) is fully taxable. Therefore, the employees should get their
pension commuted. Commuted pension (lumpsum pension) is fully exempt from tax in the case of government
employees(Central and state) and partly exempt from tax in the case of non-government employees.
(10) Provident fund: Amount received from Recognised provident fund is exempt u/s 10(12) is received after 5
years of service. Where an employee, who resigns before completing five years service should ensure that he
joins a firm which maintains a recognised provident fund. The accumulated balance of the provident fund with
the previous employer will be exempt from tax provided the same is transferred to the new employer who also
maintains a recognised provident fund.
(11) Retirement benefit : Incidence of tax on retirement benefits like gratuity, commuted pension, accumulated
balance of unrecognized provident fund is lower if they are paid in the beginning of the financial year. The
employer and the employees should mutually plan their affairs in such a way that retirement takes place in the
beginning of a financial year.
(12) Pension by non resident : Pension received in India by a non-resident assessee from abroad is taxable
in India. If, however, such pension is first received by or on behalf of the employee in a foreign country and later
on remitted to India, it will be exempt from tax.
(13) Accidents Insurance : In respect of accident insurance policies, the decision of the Supreme Court in CIT v.
L.W.Russel (1964) 53 ITR 91 points out that the term perquisite applied to only such sums in regard to which there
was an obligation on the part of the employer to pay and a vested right on the part of the employee. If the employee
has no vested interest in the policy, it cannot be considered as a perquisite. In view of this position, in cases where
an employer takes out accident insurance policy covering all workmen and staff members and pays insurance
premium and whenever any worker/staff member meets with an accident and the amount of claim is received from
the insurance company and the same is paid away by the employer to the said worker or his family members, the
premium paid by the employer in respect of group accident policies could not be considered as a perquisite, under
section 17 to be added in the salary income of any employee [CIT v. Lala Shri Dhar (1972) 84 ITR 192]. The amount
received from insurance company on accident or death by employee or his dependents will not also be in the nature
of income but a capital receipt and therefore the same will not be taxable.
(14) Exempt perquisite: The following are the perquisites which are exempt from tax–
• Free meals in office upto `50/meal
• Use of telephone/mobile phone by employee
• Use of computers and laptop by employee;
• Medical facility in employer’s own hospital or a public hospital or Government or other approved
hospital;
• Educational benefit in a school run by employer provided value of benefit does not exceed ` 1,000 per
month per child.
Tax Planning Considerations in relation to Business

For a new business, the spheres in which the question of tax planning is relevant are as follows:
1. Form of the organisation
2. Nature of the business
3. Financial Structure
4. Acquisition of plant and machinery and other fixed assets
5. Setting up and commencement of business
1. FORM OF BUSINESS ORGANISATION: The choice of the appropriate form of business organisation will
have to be thought of and decided by the person who intends to carry on business or profession at the beginning
itself, because a change in the form of business organisation after the commencement of the business, may
attract liability to tax. A new business can be organised under any of the following forms:
(i) Sole proprietorship
(ii) Hindu undivided family
(iii) Association of persons or Body of Individuals
(iv) Partnership firm/LLP
(v) Company
(vi) Co-operative society
The selection of a particular form of organisation would depend not only on the tax aspect but on other
considerations also, e.g., financial requirements and resources, requirement of limited liability and many other
practical considerations.
However, depending upon the taxable status and level of tax liability of the owners, a selection can be made
from the various forms available for setting up a new unit.
Sole Proprietorship: In the case of a sole proprietorship concern, remuneration paid to proprietor is not allowed
as deduction from business profits of the sole proprietorship firm. Whereas remuneration paid by partnership
firm/LLP to its working partner is allowed as deduction subject to sec 40(b) As a result, the taxable income from
business would get reduced and correspondingly, the incidence of tax would also be reduced.
Under sole proprietorship, the entire income of a business unit gets assessed in the hands of the same person
along with other income, while the entire loss and other allowances shall be available for set off in his hands
against other income. This may have some advantage in the initial years, after which the possibility of converting
it into company/firm may be considered; on such conversion, the questions of possible capital gains tax, etc.,
will have to be considered.
Hindu Undivided Family ‘HUF’: The HUF is treated as a separate entity under the Income Tax Act. Since
the law does not specifically provide for the disallowance of such expenses, it is advantageous to carry on a
business through the HUF wherever possible. The income of the family is computed and first taxed in the hands
of the family at the rates applicable to it.
The income of the family may, thereafter, be divided amongst the members of the family and the members, in
such cases, do not attract any liability to tax in view of the specific exemption granted under section 10(2) of the
Income-tax Act, 1961. Thus, if a business is carried on by a Hindu undivided family, the advantages which are
560 PP-DTL&P
available in the case of a company could be fully availed of and in addition, the members of the family would not
become liable to tax when they receive any portion of the family’s income.
Partnership and LLP: All firms and LLPs will be taxed at a flat rate of 30%. If the total income exceeds ` 1
crore, surcharge @ 12% is applicable. There will be no initial exemption and the entire income will be taxed. In
computing the taxable income of a firm, certain prescribed deductions in respect of interest and remuneration
have to be allowed. The share income of a firm in the hands of the partners of the firm is fully exempt under
section 10(2A).
Also, partnership firms carrying on eligible business can declare income on presumptive basis as per the
provisions of section 44AD@8% of gross receipts (6% in case gross receipts are received by an account payee
cheque/bank draft/ use of ECS through bank account).
Partnership firms carrying on notified profession can declare income on presumptive basis@50% of gross
receipts as per the provisions of section 44ADA.
Company: Within the company form of organisation, however, several alternatives exist. On the basis of the
ownership and control, a company can either be organised as a widely held company, i.e. a company in which
the public are substantially interested u/s 2(18) of the Income-tax Act, 1961. Alternatively, it can be organised as
a closely held company. Depending upon the choice of the form of organisation of the company, the following
important tax consequences would have to be considered from the view point of tax planning:
(1) The General tax rate of domestic company is 30% and if turnover is upto ` 400 crores in last previous
year, then General tax rate is 25%.
(2) The general tax rate of foreign company is 40%.
(3) The surcharge on domestic company is 7% if Total Income exceeds 1 crore and 12% if Total Income
exceeds 10 crores.
(4) The surcharge on foreign company is 2% if Total Income exceeds 1 crore and 5% if Total Income
exceeds 10 crores.
(5) The provisions of section 79 regarding restrictions on carry forward of losses in the event of substantial
change in the shareholding of the company also become applicable if the company is one in which the
public are not substantially interested. This aspect would assume particular significance in the case of
closely held companies where losses are made and shareholdings are transferred before such losses
are fully absorbed.
(6) Domestic companies have to pay CDT @ 15% plus surcharge @12% plus cess @ 4% on dividend
declared, distributed or paid u/s 115O.
(7) MAT provisions are applicable to companies. It so happens that in case of companies enjoying tax
holiday benefits still have to pay tax under MAT provisions, credit of which also cumulated for number
of years without being used causing significant outflow of funds in the initial years.
Place of Effective Management (POEM)

• The concept of POEM was introduced to determine the tax payable by a foreign company that for all
purposes is managed from India and yet does not pay tax domestically.
• These provisions provide for a foreign company to be a resident of India if the company’s place of
effective management is in India. If a company’s POEM is situated in India; it will be treated as Indian
resident. Its global income will be taxable in India. It will have to file its tax returns, audit reports etc. with
Indian tax department.
Cooperative Society: A co-operative society is also advantageous from the tax angle and, in addition to the
general benefits flowing from the co-operative form the society, can claim deduction in respect of the reasonable
amount of remuneration payable to the members of the society for their services rendered, including the amount
of commission, if any payable to them and the interest on the deposits or loans given by them.
The co-operative society is entitled to a further tax benefit arising from section 80P under which the income
of a co-operative society is exempted from tax under different circumstances depending upon the nature of
the income and/or the amount thereof. In addition to the various tax concessions which are available to all
assessees, the co-operative society stands to gain substantially by virtue of the special benefits available to it
under section 80P. The profits of the society remaining after payment of tax would be distributed by it amongst
its members in the form of dividends subject to the relevant legislation.
However, under section 80P has been withdrawn w.e.f. A.Y.2007-08 in respect of all co-operative banks, other
than primary agricultural credit societies and primary co-operative agricultural and rural development banks
(i.e. societies having its area of operation confined to a taluka and the principal object of which is to provide for
long-term credit for agricultural and rural development activities). This is for the purpose of treating co-operative
banks at par with other commercial banks, which do not enjoy similar tax benefits.
From the above analysis of various forms of the organisation and their treatment for income-tax purposes, it
may be appreciated that the provisions of the taxation laws have a considerable influence on the entrepreneurs
in their choice of particular form of the organisation that they should establish.
2. NATURE OF BUSINESS: Besides the form of organisation, the choice of the nature of the business also
calls for appropriate planning with reference to the various special benefits available under the taxation laws to
the particular kinds of industries which are not available to other kinds.
Some of these benefits are of such a substantial nature that they constitute one of the major factors in the
determination of the nature of the business.
Broadly, business for this purpose may be divided into two categories—trading and manufacturing business.
There could be a third category involving combination of both.
Deduction is available under section 10AA to newly established units in Special Economic Zones.
A taxpayer carrying on manufacturing or industrial activities would be in a position to avail of the various
concessions such as Depreciation allowance u/s 32, Spectrum expenditure u/s 35ABA, Telecomm licence u/s
35ABB, Preliminary expenses u/s 35D and Mining expenditure u/s 35E.
Tax holiday benefit under section 80-IAC would be available in case of eligible start-up, under section 80- IBA in
case of developing and building housing projects and under section 80LA in case of offshore banking unit and
IFSC located in Special Economic Zone.
While deciding the nature of the business, the benefit of tax exemption or treatment available in respect of
certain types of income such as agricultural concessional income, new industrial undertakings, ships, business
of repairs to ocean going vessels, business of exploration, etc. of mineral oils, etc. should also be taken into
account.
(3) FINANCIAL STRUCTURE: Choice in the matter of financing a new unit or business would be between
capital and borrowings. New units being set up by existing units or companies would have the possibility of
using retained profits. In the case of a company, the means of finance are as follows:
(i) Share capital.
(ii) Debentures.
(iii) Other borrowings
(iv) Generation of funds through profits.
562 PP-DTL&P
While the return on share capital is a charge on the profits after tax, the return on loans to the lenders is a charge
on the profits before tax. Thus, recourse to borrowings would offer a tax advantage which will be reflected in a
higher rate of return on the owner’s capital.
(4) ACQUISITION OF FIXED ASSETS: Assets can be bought or hired. If these are bought and are depreciable,
e.g. building, plant and machinery and furniture, the assessee can claim depreciation on the cost and over the
years. The entire cost can be claimed as deduction against the profit.
If hired, however, the charge for hire becomes an admissible deduction. Having regard to the fact that the
acquisition of an asset requires a larger immediate outlay than what is necessary in the case of hiring, the
company may opt for hiring in some cases rather than for straight acquisition. For example, taking the business
premises on rent rather than purchasing the same may be a better proposition.
But in the case of plant and machinery, two additional considerations may arise. New plant and machinery
in certain industries may enable a company to claim deduction on account of depreciation and additional
depreciation which may outweigh other considerations. Similarly, if there can be a new industrial undertaking,
substantial tax benefits may be available by way of tax holiday benefit, etc. but that would require employment
of new plant and machinery to a large extent.
These considerations are out and out tax considerations which may prompt an assessee to make two choices
(i) not to hire plant and machinery but to purchase them and (ii) not to purchase second hand plant and
machinery but to purchase them new.
In appropriate cases, the assessee may go in for second hand imported plant and machinery, satisfying the
conditions laid down. In cases where an assessee opts to go for old plant and machinery, the limit regarding the
use of old plant and machinery, as laid down in Section 80-IAC should be taken into consideration.
The assessee engaged in the specified business mentioned in section 35AD can avail the benefit of deduction
of capital expenditure incurred wholly and exclusively of the purpose of such specified business. Capital
expenditure incurred prior to commencement of business shall be allowed as deduction during the previous
year in which the assessee commences operation of the specified business if, such expenditure incurred is
capitalized in the books of accounts of the assessee on the date of commencement of its operation. However,
such deduction is not available in respect of capital expenditure incurred on acquisition of any land, goodwill or
financial instrument.
(5): SETTING UP AND COMMENCEMENT OF PRODUCTION: Setting up of business in the context of the
Income-tax Act, 1961 is a concept entirely confined to that Act. It is not the same as the commencement of the
business and these two concepts have been clearly distinguished for income-tax purpose. Between the date
of the setting up and date of commencement, there may be a gap during which the assessee may be incurring
expenses of a revenue nature.
Under the taxation laws, the expenditure incurred prior to the date of setting up is not normally admissible for
income-tax purposes. But if those are incurred on and from the date of setting up, but before commencement of
the business, they may be allowed as deduction for tax purposes provided of course they are revenue in nature
and are incurred wholly and exclusively for the purposes of business.
It is well settled position by various judicial rulings that a business is set up as soon as it is ready to commence
production and it is not necessary that actual production should be so commenced. Thus, in the case of a
company established for manufacturing plastics, the business is set up as soon as acquiring of raw material is
commenced even if at that time the plant and machinery may not have been installed so that actual manufacturing
operations may commence.
A tax planner should accordingly fix the setting up date in such a manner that the company gets the maximum
scope for allowability of expenses incurred contemporaneously to the date of setting up remembering that
if those are incurred prior to the setting up date those are inadmissible as direct deductions while, if such
expenses are of a revenue nature and they are wholly and exclusively incurred for business purpose, and are
incurred subsequent to the date of setting up, they will be admissible as normal deductions.
In this context, the provisions of Explanation 8 to Section 43(1) to the effect that any interest paid or payable in
connection with the acquisition of an asset, which is relatable to any period after such asset is first put to use
cannot be capitalised, are relevant.
(c) Such expenditure may constitute preliminary expenditure and may be eligible for amortisation over a
ten year or five year (as the case may be) period under section 35D.
(d) Such expenditure, if being of a capital nature and if not falling under any of the three categories noted
above may be disallowed and there may not be relief either on account of depreciation or amortisation.
Tax Planning for Claiming Business Deduction

There are several matters which affect the assessee’s ability to deduct various expenses for income-tax
purposes. Successful tax planning for business deductions pre-supposes a clear and thorough understanding
of the various statutory provisions governing the deductions and an awareness of the statutory rights as well as
various restrictions and conditions governing such rights. The general considerations applicable to tax planning
in the field of business deductions, revolve round their-
(a) Allowability.
(b) Year of allowability.
(c) Amount of allowability (disallowing provisions if any), and
(d) Carry-forward in future years..
Normally, deductions of expenditure is allowable in the year in which it is incurred or paid depending on the
method of accounting followed, viz, mercantile or cash. In other words, the expenditure to be claimed as
deduction should be claimed in the relevant year.
Where the assessee follows the cash system of accounting, the allowance in respect of expenses would be
available only when the moneys in respect of them are actually paid by the assessee. Whereas in the case of
mercantile system of accounting, if a business liability has definitely arisen in the accounting year, a deduction
should be allowed.
Where accounts are kept on a mercantile basis, if an expenditure is claimed on the ground that it is legally
deductible, it can be claimed in the year in which the liability for the expenditure is incurred even though the
payment itself is made in a subsequent year. If an assessee following mercantile system fails to claim an
expense in the year in which it accrues he loses the right to claim it as a deduction altogether. He cannot claim
or make any attempt to reopen the accounts of the earlier year to which the expense relates.
The Supreme Court’s decision in C.I.T. vs. Gemini Cashew Sales Corporation (1967), 651 T.R. 642 emphasizes
the principle that if the liability to make the payment has arisen during the previous year, it must be appropriately
regarded as the expenditure of that year and merely because the payment in respect of the expenditure is
made in the subsequent year, the assessee would not be entitled to claim deduction in respect thereof in the
subsequent year. As pointed out earlier, this is subject to the provisions of section 43B.
Normally, deduction can be claimed by the assessee only in respect of those expenses and losses which have
been actually incurred by the assessee during the previous year, i.e. after the business is set up. However, there
are some exceptions to this rule and a tax planner should be aware of the exceptions and make use of them in
appropriate cases.
For example, expenditure incurred on scientific research before the commencement of the business — capital
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or revenue during the three years immediately preceding the commencement of the business and coming
within the scope of the Explanation to sections 35(1)(i) and 35(1)(ii), capital expenditure incurred prior to
commencement of specified business allowed as deduction in the year of commencement of business, in case
capitalized under section 35AD, preliminary expenses incurred before commencement of the business and
coming within the scope of section 35D, expenditure on prospecting for minerals coming within the scope of
section 35E, are cases where the assessee could claim deduction in respect of the expenditure even though
the expenditure was not incurred during the previous year.
Similarly, the expenditure in respect of which deduction is claimed by the assessee should not be in the nature
of capital expenditure. This is again subject to the statutory exceptions contained in provisions like section 35
and 35AD. Again, subject to the statutory exceptions, the expenditure should be incurred wholly and exclusively
for the purpose of the business.
Various other expenses incurred prior to the commencement of commercial operations may, in appropriate
cases, be accumulated and capitalised by being spread over the cost of various assets constructed or acquired
during the pre-production period. If this is done on a proper basis, the cost
of the various assets including the indirect expenses capitalised can be depreciated for tax purposes to the
extent that the cost relates to assets which are themselves depreciable for income-tax purposes.
Under section 36(1)(iii), deduction of interest is allowed in respect of capital borrowed for the purposes of
business or profession in the computation of income under the head “Profits and gains of business or profession”.
As per the proviso to section 36(1)(iii), any amount of interest paid, in respect of capital borrowed for acquisition
of an asset for any period beginning from the date on which the capital was borrowed for acquisition of the asset
till the date on which such asset was first put to use, shall not be allowed as deduction.
Specific deductions under the Income-tax Act, 1961: The Income-tax Act, 1961 lists several specific
deductions. A deduction falling under each category is allowable subject to the conditions and limitations, if any
which may be specified. At times the restrictive conditions apply to expenditure which is prima facie suspect
as, for example, transactions with relatives or associates or within the same group coming within the scope of
section 40A(2). While planning for business deductions, due regard must be had to these limitations.
In addition to the specific provisions the omnibus provision in section 37 also enables an assessee to claim
deduction in respect of expenditure laid out ‘wholly and exclusively for the purpose of the business’ the tax
planner has to take into consideration the principles emerging from the innumerable relevant judicial rulings
while availing of the facility of deduction under this provision. Any expenditure incidental to business, may be
deducted except those prohibited by any provision of the Act.
Interest on borrowed capital: An expenditure which is specifically provided for should be claimed under the
relevant section rather under the general provision. To justify the deduction under the residual clause, all that is
required is that the expenditure must have been incurred wholly and exclusively and it is not necessary to prove
that the expenditure was also incurred ‘necessarily’ or ‘reasonably”. The expenditure must have been incurred
‘for the purpose of business’. These words are wider than the phrase “for the purpose of earning profits”. A
specific quid pro quo is not essential. It is not necessary to show that the expenditure resulted in commensurate
benefit or advantage either during the same year or subsequently.
An expenditure is liable to be disallowed if it is either of a personal nature or of a capital nature. The question
whether a particular expenditure is of a personal nature must be judged by reference to the assessee himself
and not any other person.
Capital or Revenue: An expenditure is regarded as being of a capital nature, if it results in the acquisition of an
asset or of an advantage or benefit of an enduring nature.
The test with regard to the nature of the expenditure-capital or revenue - is to be applied with reference to its
purpose rather than its effect. The test must be applied by reference to the assessee himself and not any other
person.
For instance, a company must be obliged to construct pipelines for the purpose of its business but under
conditions whereby the pipelines ultimately become the property of a municipal corporation rather than the
company itself. In such a case, although the pipelines undoubtedly constitute tangible assets the expenditure
may not be regarded as of a capital nature, since the assets do not belong to the company but to some other
person. There are many judicial rulings to support this view. A leading case that maybe referred to in this context
is Lakshmiji Sugar Mills Co. P. Ltd. vs. CI T 82 ITR 376].
If the purpose of the expenditure is to secure a commercial advantage, rather than acquisition of a capital asset,
it is likely to be allowed as revenue expenditure even though the advantage may endure for an indefinite period.
However, this rule is by no means inflexible or capable of universal application. Conversely, if the purpose of
the expenditure is the acquisition of an advantage or benefit of an enduring nature the expenditure is liable
to be treated as capital expenditure even if the period or durability of the asset acquired as the result of the
expenditure is very short. For example, if a company making shoes acquires knives and lasts, whose life is only
three years, the expenditure may nevertheless be regarded as capital expenditure.
In applying the various case laws on the subject of distinction between capital and revenue, it should be
recognised that circumstances do change and the law normally keeps pace with such changing circumstances.
The expenditure that was regarded as capital expenditure resulting in long- term benefit during the relatively
laissez faire days of the 19th century may not perhaps, be regarded as capital expenditure in the context of the
rapid technological changes which are the feature of industrial life today. The decision of the Supreme Court in
Shahzada Nund & Sons vs. CIT 108 ITR 358 also supports this view. A tax planner would do well to keep track
of the various cases reported from time to time so as to keep himself informed of the trend of judicial thinking
in this regard.
In this context, the requirements spelt out in the various income computation and disclosure standards have
also to be kept in mind while considering the point in time of deductibility of expenditure.
Expenditure specifically allowed: The Income-tax Act, 1961 specifically allows many types of expenditure
such as depreciation, expenditure on scientific research, expenditure on know-how, preliminary expenses, bad
debts etc. The Act prescribes several conditions and restrictions for the allowance of such expenditure. The
tax-planner should take care to see that all the prescribed conditions are complied with so that deductions may
not be denied.
Other business expenses: As already explained earlier, section 37(1) deals with the various items of
expenses which are otherwise not covered by the provisions of Section 30 to 36 of the Income-tax Act, 1961
and specifically provides that all expenses which are incurred wholly and exclusively (though not necessarily)
for the purpose of the business or profession carried on by the assessee would be deductible in computing
the assessee’s business income. In order to qualify for deduction under this provision, the following important
conditions will have to be fulfilled:
(i) The expenditure should have been incurred by the assessee in the ordinary course of his business or
profession;
(ii) The expenditure should be of a revenue nature and should not be of capital nature;
(iii) The expenditure should not be of a personal nature;
(iv) The expenditure should not be covered by any other provisions of sections 30 to 36 for purposes of
allowance and it should not also be covered by any of the provisions of disallowance contained in
sections 40 to 44D; and
(v) The expenditure should not be one which is in the nature of an appropriation of income or diversion of
profits by an overriding title. It should not also be one in respect of which deduction is permissible under
Chapter VI-A of the Income-tax Act, 1961 from the gross total income of the assessee.
Commercial expediency: The concept of ‘commercial expediency’ helps a tax payer in insisting that a
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reasonable view is taken of his right to deduct normal expenditure. The trend in judicial thinking has also
recognised this concept. This concept reflects the fact that it is virtually impossible for the legislation to list all
possible deductions to which an assessee would be entitled in computing his taxable income and therefore
the fact that a business has to be run by the assessee himself under normal commercial conditions must be
recognised in determining the allowability of certain expenditure.
The test of commercial expendiency should be applied from the point of view of a normal prudent businessman,
by reference to modern concepts of business responsibility and not by reference to the subjective standards of
the revenue department.
A claim on the ground of commercial expediency is subject to the under-noted conditions and limitations:
(a) If the expenditure is covered by one of the express provisions in the Act, it must conform to the
requirements stipulated therein.
(b) An expenditure which is expressly disallowed under the Act cannot be claimed on grounds of commercial
expediency.
(c) An expenditure cannot be claimed on grounds of commercial expediency if it is improper or illegal. It
may be commercially expedient to pay a bribe or incur a penalty but this does not mean that the bribe
or penalty would be normally deductible for tax purposes.
There is also a distinction between a payment made for a violation or breach of law and payment made for
a breach of contract. Courts have taken the view that where the payments are not in the nature of penalties
for infraction of any law but made in pursuance of the exercise of an option given in a particular scheme and
where the assessee opts for it out of commercial expediency and business consideration, it could be allowed as
deduction. For instance, payments made to Export Promotion Council for shortfall in export performance and
payment made to Cotton Mills Federation for non-import of allotted quota of requisite cotton, etc. were held to
be allowable as payments falling in this category [CIT vs. Manekia Harilal Spg & Mfg. Co. Ltd. (1991) 7 Taxman
395 (Guj), CIT vs. Raj Kumar Mills. Ltd. (1982) 135 ITR 812 (M.P.) CIT vs. Vasanth Mills Ltd. (1979) 120 ITR
311 (Mad.)] and other cases.
TAX PLANNING AND MANAGEMENT/INVESTMENT DECISION

Though management/investment decisions are not based on the tax factor alone, yet it has become imperative
to consider tax factors before adopting any course of action because the effect of this factor is not only significant
but it may also differ from one alternative to another. To illustrate this point, tax implications that are relevant
while taking some specific management decisions are explained below:
Make or buy decision: In making ‘make or buy’ decisions, the variable cost of making the product or part/
component of product is compared with its purchase price in the market. The article is brought if the former is
greater than the latter.
Alternatively, if the decision to make involves establishment of a separate industrial unit for this purpose, a
decision may be taken on the basis of total cost rather than variable cost. In such an event, the assessee would
also be in a position to get the tax benefits arising from allowances such as depreciation, tax holiday benefit and
deduction in respect of profits from new industrial undertakings, wherever they are applicable.
There are many other costing and non-costing considerations which are kept in mind at the time of taking the
decision, like capacity utilisation, supply position of the article to be bought, terms of purchase, etc. The basis
of taking make or buy decision should be ‘saving after tax’. The net saving can be ascertained after deducting
from gross savings, income-tax payable on the amount of saving. The long-term advantages arising out of a
decision to make should also be given due weightage in arriving at a decision.
At the time of ascertaining variable cost of the product (for taking make or buy decision) all taxes such as excise
duty, import duty, customs duty, octroi etc., payable in the process of manufacture should be taken into account
and in determining purchase price of the product. All taxes to be borne by the purchaser such as sales tax, local
taxes should be added for the purpose of comparison and cost of purchasing.
Own or lease: Another important area of decision making is whether to own or lease (or sale and lease
back). There are advantages as well as disadvantages in leasing. Leasing avoids ownership and with it, the
accompanying risks of obsolescence and terminal value losses. In leasing, immediate payment of capital costs
is avoided but fixed rental obligation arises. There are many factors which are required to be considered before
making ‘own or lease’ decision such as cost of asset to be owned, rent of the asset to be taken on lease, source
of financing the asset, risk involved in the alternatives, impact of tax concessions such as depreciation, tax
holiday benefit, etc.
Leasing can also provide important tax advantages. If the asset is taken on lease, the firm can deduct for
income-tax purposes, the entire rental payment. If the rate of tax is 30%, then, the effective rent obligation
is reduced to that extent. Another tax advantage of the lease is that the life of the lease can be shortened
compared to the depreciable life otherwise allowed if the assessee purchased the asset. Thus, there is a delay
in paying taxes and in effect an interest free loan by the Government to the extent of the delay in taxes. There
is one more tax advantage arising out of lease which arises from the opportunity to depreciate otherwise non-
depreciable assets. The principal asset of this type is land. The lease rental covers the cost of the land which
thus becomes deductible. This arrangement may prove particularly attractive where the land value constitutes
a high percentage of the total value of the real estate or where the building is already fully depreciated. Leasing
is becoming popular in India.
Wherever possible or appropriate, the concept of sale and lease back can also be made use of as a tool for tax
planning with its attendant advantages.
♦ Lease rent paid: As regards the consideration for the lease, there could be two types of receipts in the
hands of the lessor-receipt on capital account termed ‘premium’ in respect of the transfer of rights and
receipts on revenue account termed ‘rent’ for the right or liberty to use the property for a term of years.
The lease rental paid is chargeable to revenue every year. The lease rental may be split into three
components—the recovery of principal, cost, the interest chargeable and an element of profit. It is
generally believed that the interest rate in-built into the rent would be more than the going market
interest rate for term loans for purchase of equipment. Since the entire lease rental is chargeable
to revenue the lessee could claim tax benefits on even the principal investment in the equipment.
Tax advantage in such cases is reported to be more in a leasing transaction than in a similar loaning
transaction.
♦ Retain or Replace Decision: One of the important decisions which involves alternative choice is
whether or not to buy new capital equipment. Both have their own merits and demerits. Generally,
replacement offers cost saving which results in increase in profit. However, replacement requires
investment of large funds resulting in extra cost. The decision is based on the relative profitability and
other financial and non-financial considerations. Tax considerations should also be taken into account
in this context. Some of the important considerations from the tax angle to which attention will have to
be paid relate to the allowance of depreciation, as also the allowance on account of expenditure on
scientific research. The applicability of the provisions for allowances should be considered and their
impact ascertained before any decision is taken.
TAX PLANNING FOR FOREIGN COLLABORATION

Sometimes, Indian entities enter into foreign collaboration agreements. The tax implications of these
agreements both on the foreign party and on the Indian concern are required to be known in advance. The
foreign collaborator wants to make sure about his tax liabilities in India and unless assured of involvement
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with a not too high amount of tax, the foreign party is not very eager to conclude an agreement with an
Indian party.
In such a case, the foreign collaborator can seek advance ruling under the provisions of Chapter XIX-B of
the Income-tax Act, 1961, for determination of tax implication of the transaction to be undertaken by the non-
resident applicant. The Indian party must examine all the tax angles and devise a method which will saddle the
foreign collaborator with the minimum amount of tax in India. The aim should be to arrange the affairs in such a
way within the four corners of the law so as to attract the minimum amount of tax.
♦ Double Taxation Avoidance Agreements: For the determination of the taxability of foreign collaborators,
the provisions of section 90 are very relevant. This provision empowers the Central Government to enter into
double taxation avoidance agreement with foreign countries. In exercise of this power, the Government has
entered into such agreements with a number of foreign countries.
Where there is an agreement between the Government of India and the Government of a foreign country, the tax
liability of the foreign participant is determined in accordance with and subject to the provisions of the agreement
and the Income-tax Act, 1961, to that extent, stands superseded by such agreement. In fact, Circular No. 333
dated 2.4.1982, issued by the CBDT clarifies that where a double taxation avoidance agreement provides for
a particular mode of computation of income the same should be followed irrespective of the provision of the
Income-tax Act, 1961. Where there is no specific provision in the agreement, it is the basic law, i.e., the Income-
tax Act, 1961 which will govern the taxation of income.
Generally, the foreign party happens to be a non-resident for tax purposes. The status in which the chargeability
to tax usually arises in the hands of the foreign party is either that of a company, or of an association of persons
or of an individual. Body corporates incorporated outside India are treated as ‘companies’ for the purposes of
section 2(17)(ii).
♦ Advance Rulings: In appropriate cases, the facility of getting Advance Rulings, envisaged by section
245N-245V could also be availed of.
♦ Double taxation relief: Taxpayers deriving income chargeable to tax both in India and in a foreign country
by virtue of their business being carried on in more countries than one or otherwise, should avail of the benefit
of double taxation relief granted under sections 90, 90A and 91 of the Income-tax Act, 1961 subject to GAAR
provisions in Chapter X-A of the Act. In order to get the benefit of relief, before starting to carry on business
operations in a foreign country, the assessee should be certain whether India has entered into a double taxation
avoidance agreement with the foreign country and, if so, the extent to which and the manner in which the relief
has to be availed of.
Taxpayers should prefer to derive income from those countries with which India has entered into agreement
for granting relief from double taxation as compared to those countries with which no such agreement exists.
Even in cases where the income is derived from a country with which India has not entered into double taxation
avoidance agreement, the assessee should claim the unilateral relief available under section 91 by proving that
he has paid tax in that country on the income which accrued or arose there during the previous year.
In such a case, he would be entitled to a deduction from the Indian-tax-payable by him, of a sum calculated on
such doubly taxed income at the Indian rate of tax or at the rate of tax of the concerned country, whichever is
the lower, or at the Indian rate of tax, if both the rates are equal. The claiming of this statutory relief would help
to reduce the total incidence of tax on such doubly taxed income. However the arrangement’s main purpose
should not be to obtain a tax benefit, thus, not void of commercial substance and should not result in abuse/
misuse of the provisions of the Act.
Another aspect which will require consideration is the effect of double taxation avoidance agreements wherever
they exist. To the extent specific provisions exist in such agreements, the corresponding provisions in the
national law will not have application. Therefore, in understanding the tax liability in respect of technical tie -ups
with foreign parties, attention will have to be paid to the relevant provisions of the double taxation avoidance
agreements vis-à-vis the provisions of the Income-tax Act, 1961.
TAX PLANNING IN CASE OF LOSSES

The provisions of sections 70, 71 and 72 of the Income-tax Act, 1961 regulate the manner in which losses
incurred in the business carried on by any tax payer will have to be dealt with for tax purposes. The consideration
to be given by tax payers in the matter of taking the full benefit of set-off of losses permissible under the law is
as important as the considerations for tax planning which are taken into account in regard to business expenses
or claiming the maximum allowances and deductions particularly in view of the fact that the provisions of set-off
of losses offer valuable scope for planning.
Under section 73, losses incurred in speculation business are to be set off only against the income from the
business of speculation, if any, which the assessee may derive in the same year or in the subsequent four
years. In view of the prohibition in the matter of set- off of losses incurred in speculation business, it would be
in the interest of the assessee to avoid indulging in the business of speculation if it is likely to result in losses
and there is no possibility of setting it off against future speculation profits within the specified period. Where
the business of speculation carried on by the assessee is not profitable, he could discontinue the business of
speculation in the same line so that the quantum of losses could be reduced and the assessee could resort to
speculation in any other profitable field thereby taking the benefit of exception provided under the law.
Loss from specified business referred to in section 35AD can be carried forward indefinitely under section 73A
for set-off against income from the same or any other specified business. Such loss cannot, however, be set-off
against income from non-specified business or income under any other head.
The Supreme Court, in CIT vs. Shantilal P. Ltd. (1983) 145 ITR 57, held that a transaction cannot be described
as a ‘speculative transaction’ within the meaning of section 43(5), where there is a breach of a contract and on a
dispute between the parties, damages are awarded as compensation by an arbitration award. However, where
there is no dispute and damages on a pre-determined basis are payable under the contract, without actual
delivery of the goods contracted for, the transaction would be a speculative one. If any loss arises out of such
a speculative transaction, such speculation loss would not be available for adjustment against other business
profits, if any.
The assessee should exercise his right of set off of brought forward loss at the first available opportunity. The
Madras High Court, in Tyresoles (India) vs. CIT [1963] 49 ITR 15, held that where losses sustained are not
set off against the profits of the immediately succeeding year or years, they cannot be set off against profits
at a later date. This has been followed by the Punjab and Haryana High Court in B.C.S. Kartar Chit Fund and
Finance Co. (P.) Ltd.vs. CIT [1989] 79 CTR (P&H) 232. Hence, as a matter of proper tax planning, the assessee
should exercise the right under section 72 in the immediately succeeding year/years when the profits allow such
a set off.
It is also significant to note that under section 79, a closely held company will not be entitled to claim the benefit
of carry forward and set-off of losses, if shares carrying at least 51% of the voting power is not held on the
last day of the previous year by the same persons who held such shares on the last day of the previous year
in which the loss was incurred. A closely held company, eligible for deduction under section 80-IAC will not be
entitled to claim the benefit of carry forward and set off of losses, if all the shares are not held on the last day of
the previous year by the same persons who held such shares on the last day of the previous year in which the
loss was incurred and such loss should have been incurred during the seven years beginning from the date of
incorporation of such company. It should be kept in mind that section 79 applies to carry forward and set off of
losses and not to the benefit of deduction in respect of unabsorbed depreciation.
Loss Returns: If an assessee is to get the benefit of carry forward under section 72 or 73 or 73A or 74 or 74A,
he should file a return of loss within the period specified in section 139(1). Otherwise as per Section 80, their
c/f will be restricted.
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However, loss from house property under section 71B and unabsorbed depreciation u/s 32 can be carry forward
even if sec 139(3) is not followed because their carried forward is not restricted by 139(3).
LESSON ROUNDUP
– Tax Planning may be legitimate provided it is within the framework of the law. Colourable devices
cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable
to avoid payment of tax by resorting to dubious methods.
– Tax planning, in fact, is an honest and rightful approach to the attainment of maximum benefits of the
taxation laws within their framework.
– Tax planning can be of following types: Short and long range tax planning, Permissive tax planning
and purposive tax planning.
– Some of the important areas where planning can be attempted in an organised manner are as under:
1. At the time of setting up of new business entity:
a) Form of organisation/ownership pattern;
b) Locational aspects;
c) Nature of business.
2. For the business entities already in existence:
a) Tax planning in respect of corporate restructuring;
b) Tax planning in respect of financial management;
c) Tax planning in respect of employees remuneration;
d) Tax planning in respect of specific managerial decisions;
e) Tax planning in respect of Foreign collaborations
f) Tax planning in the light of various Double Taxation Avoidance Agreements (DTAA)
– The basic objectives of tax planning are: (a) Reduction of tax liability; (b) Minimisation of litigation;
(c) Productive Investment; (d) Healthy growth of economy; (e) Economic Stability.
– The test to be applied for Tax Planning
– Tax Planning and Retrospective / Administration Legislation
– Tax Planning and Interpretation
– The tax planner while planning his affairs or that of his clients must take into account not only the
relevant legal provisions, but also the judicial pronouncements of Appellate Tribunals, High Courts
and Supreme Court. He should also take into consideration all relevant rules, notifications, circulars
etc.
SELF TEST QUESTIONS

1. Specify whether the following acts can be considered as an act of (i) Tax management; or (ii) Tax
planning; or (iii) Tax evasion:
(a) X has paid premium of `72,000 for Life Insurance Policy so as to reduce Total Income.
(b) X has installed an air conditioner costing `60,000 at his residence but shows as it is fitted in a
factory. This is with the objective to claim depreciation.
(c) Y Ltd maintains registers of tax deduction effected by it to enable timely compliance.
(d) Z ltd issues a credit note for `36,000 for brokerage payable to A, who is son of G, managing
director of the company. The purpose is to reduce Z ltd. income and increase A’s income from
`18,000 to `54,000.
(e) A is a working partner in ABC Firm. In such capacity, he is entitled to a salary of `7,500 per
month. He treats this as salary instead of business income.
(f) A is using a motor car for his personal purposes, but charges as business expenditure.
(g) X always pays advance tax on time
(h) Y sell his residential house and purchases another residential house to claim exemption u/s 54
(i) X had Fixed deposit interest amounting to `5,000 but did not disclose this amount in his Income
Tax Return
(j) Y had Saving deposit interest amounting to `5,000, he disclosed this amount under other sources
and claimed deduction u/s 80TTA
2. Test to be applied for Tax Planning – Explain?
3. Elaborate the types of Tax Planning.
4. Diversion of Income V/s Application of Income?
5. Various Avenues of Tax Planning – Discuss.
Answer
1. (a) Tax planning; (b) Tax evasion; (c) Tax management; (d) Tax evasion; (e) Tax evasion; (f) Tax evasion
(g) Tax management; (h) Tax Planning ; (i) Tax Evasion ; (j) Tax Planning
SUGGESTED READINGS
Kluwer]
572 PP-DTL&P
Lesson 11 n International Taxation – An Overview 573
Lesson 11
International Taxation – An Overview
LESSON OUTLINE
LEARNING OBJECTIVES
– Double Taxation Avoidance Agreement After the liberalization of Indian economy and easing of
restrictions on the entry of foreign entities, cross border
– Residency Issues business transactions have increased manifold. With
the ratification of WTO by the Government of India,
– Tax Heaven
our economy has become robust and an atmosphere
– Controlled Foreign Corporation has sprung up where FII investments in India have
increased tremendously. All these economic activities
– Permanent Establishment has ramifications for tax laws of the country. Issues
like tax havens, transfer pricing, double taxation, WTO,
– Business Connection Subpart F, etc. are required to be taken care of and have
become part and parcel of international taxation regime.
– General Anti Avoidance Rules
At the end of the lesson, students will be able to
– Advance Ruling understand:
• The need for double taxation relief
– Transfer Pricing
• The type of double taxation
– Case Studies • Comprehend the procedure for claiming
deduction where there is no double taxation
– LESSON ROUND UP
avoidance agreement between Indian and
– SELF TEST QUESTIONS the other country where the income has been
taxed and compute the amount of deduction
• The Residency Issues – Determining
Residential Status in cases of Duel Residency
• Concept of Tax Heaven
• How to determine whether a state or a country
is a tax heaven
• Concept of Controlled Foreign Corporation
‘CFC’
• The concept of Permanent Establishment
‘PE’ and Business Connection ‘BC’ under
double taxation avoidance agreements and its
relevance
• What are impermissible avoidance agreements
and its consequences?
• Appreciate the need for incorporation of
Transfer Pricing provisions in the Income Tax
Act, 1961
• Comprehend the meaning and Significance
of Arm’s Length Price, ‘associated enterprise’
‘international transaction’ specified domestic
transaction’
• Comprehend the meaning and scope of
the term ‘Advance Ruling’ and the need for
obtaining Advance Ruling
• Know the circumstances when an advance
rulings can be declared void
573
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DOUBLE TAXATION AVOIDANCE AGREEMENT

Generally, Income is taxable on two basis viz.
• Source of Income Basis and
• Residential Status Basis,
which results into double taxation of same income of the person.
Firstly, such income is taxed in the country in which such income is generated and again, the same income may
be taxed on the basis of residential status of the person in another country.
Example: Mr. X, an ordinarily resident in India, earned bank interest of Rs. 1,00,000 on his money deposited
into a bank located in US. In that case, such income is taxable in US on source of income basis and again in
India as he is a ordinarily resident in India.
In times when economies are going global and borders fading, double taxation is still one of the major obstacles
to the development of inter-country economic relations. In order to prevent this hardship or to avoid double
taxation, relief is provided to the tax-payer.
Such relief is provided by two ways:
■ Bilateral Relief
■ Unilateral Relief
BILATERAL RELIEF
In this, government of two countries enters into an agreement (known as ‘treaties’) to provide relief against
double taxation of same income. The relief is granted on the basis of terms of such agreement. Generally, such
agreement provides relief through following methods:
• Exemption Method: In this method, one country provides exemption to such type of income. Generally,
residence country gave up its right and the country of source is then given exclusive right to tax such
incomes.
• Credit Method: In this method resident remains liable in the country of residence on its global income,
however as far the quantum of tax liabilities is concerned credit or deduction for tax paid in the source
country is given by the residence country against its domestic tax as if the foreign tax were paid to the
country of residence itself.
UNILATERAL RELIEF
The aforesaid method is depending on bilateral activity of both the countries. However, no country will have such
an agreement with every country in the world. In order to avoid double taxation in such cases, country of residence
itself may provide relief on unilateral basis. In India, relief for avoidance of double taxation is provided in both ways.
Provisions relating thereto are enumerated here-in-below:
AGREEMENT WITH FOREIGN COUNTRIES [SECTION 90 BILATERAL RELIEF]

The Central Government may enter into an agreement with the Government of any country outside India or
specified territory outside India:
a. for the granting of relief in respect of—
(i) income on which have been paid both income-tax under this Act and income-tax in that country or
specified territory, as the case may be, or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country
or specified territory, as the case may be, to promote mutual economic relations, trade and
investment, or
b. for the avoidance of double taxation of income under this Act and under the corresponding law in force
in that country or specified territory, as the case may be, or
c. for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under
this Act or under the corresponding law in force in that country or specified territory, as the case may
be, or investigation of cases of such evasion or avoidance, or
d. for recovery of income-tax under this Act and under the corresponding law in force in that country
or specified territory, as the case may be, and may make such provisions as may be necessary for
implementing the agreement.
Notes:
♦ Where the Central Government has entered into an agreement with the Government of any country
or specified territory outside India for granting relief of tax or avoidance of double taxation, then, in
relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the
extent they are more beneficial to that assessee. However, the provisions of Chapter X-A of the Act (i.e.
GAAR) shall apply to the assessee even if such provisions are not beneficial to him.
♦ An assessee, not being a resident, to whom DTA applies, shall not be entitled to claim any relief under
such agreement unless a certificate of his being a resident in any country outside India or specified
territory outside India, as the case may be, is obtained by him from the Government of that country or
specified territory. Further, the assessee shall also provide such other documents and information, as
may be prescribed.
♦ Where any term used in an agreement entered into u/s 90 is defined under the said agreement, the
said term shall have the same meaning as assigned to it in the agreement; and where the term is not
defined in the said agreement, but defined in the Act, it shall have the same meaning as assigned to it
in the Act and explanation, if any, given to it by the Central Government.
♦ Further, any term used but not defined in the Act or in the agreement shall, unless the context other
wise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same
meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in
this behalf.
♦ Where any term is used in any agreement and not defined under the said agreement or the Act, but is
assigned a meaning to it in the notification issued, then, the meaning assigned to such term shall be
deemed to have effect from the date on which the said agreement came into force.
♦ The charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic
company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such
foreign company.
♦ “Specified territory” means any area outside India which may be notified as such by the Central
Government.
♦ If no tax liability is imposed under this Act, the question of relief does not arise [UOI vs Azadi Bachao
Andolan (2003) (SC)]
♦ Relief cannot be granted unless the income which has been taxed in one of the contracting countries
has also suffered tax in the other contracting country. Proof has to be provided of the income having
suffered double taxation.
576 PP-DTL&P
♦ Sections 4 and 5 of the Income-tax Act provide for taxation of global income of an assessee but this
is subject to the provisions of an agreement entered into between the Central Government and the
Government of a foreign country for avoidance of double taxation. In case of any conflict between the
provisions of the agreement and the Act, the provisions of the agreement would prevail over the Act in
view of the provisions of section 90(2) [CIT v Kulandagan Chettiar (P V A L) (2004) (SC)] If any matter
or income is not covered by the agreement, the Income- tax Act shall be applicable.
♦ In case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force,
the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate
provided in the Double Taxation Avoidance Agreement, whichever is more beneficial to the assessee.
ILLUSTRATION 1: Mr. Ramesh, a resident Indian, has derived the following incomes for the previous year
relevant to the A.Y. 2020-21:
a. Income from profession in India Rs 2,44,000
b. Income from profession in country A (Tax paid in foreign country @ 5%) Rs 4,50,000
Compute Indian tax liability of the assessee assuming that as per treaty between India and Country A, Rs
4,50,000 is taxable in India. However foreign tax can be set off against Indian tax liability
Solution: Computation of total income and tax liability of Mr. Ramesh for the A.Y. 2020-21
Particulars Amount
Income from profession in India 2,44,000
Income from profession in Country A 4,50,000
Less: Deduction u/s VIA Nil
Tax on above 51,300
Add: Health & Education cess 2,052
Tax and cess payable 53,352
Less: Relief u/s 90 [Rs 4,50,000 * 5%] 22,500
Tax payable in India (Rounded off u/s 288B) 30,850
ILLUSTRATION 2: Shri Anuj, an ordinarily resident in India, provides following details of his income for the
previous year relevant to the A.Y. 2020-21 –
Income from India Rs 3,40,000
Income from Country Z Rs 2,00,000
Investment in PPF Rs 10,000
India has avoidance of double taxation agreement with Country Z. According to said agreement, income is
taxable in the country in which it is earned and not in other country. However, in the other country such income
can be included for the purpose of country Z @ 20%. Compute Indian tax payable.
Solution: Computation of total income and tax liability of Shri Anuj for the A.Y. 2020-21
Particulars Amount
Income from India 3,40,000
Income from Country Z 2,00,000
Less: Deduction u/s 80C [Investment in PPF] 10,000
Tax on above 18,500
Add: Health & Education cess 740
Less: Relief u/s 90 [Rs 2,00,000 × 3.63%] 7,260
Tax payable in India (Rounded off u/s 288B) 11,980
[Average rate of Indian tax = Rs 19,240 / Rs 5,30,000 × 100 = 3.63%]
Illustration3: Examine the correctness or otherwise of the following statement with reference to the provisions
of Income-tax Act, 1961.
The double taxation avoidance treaties entered into by the Government of India override the domestic law.
Answer:
The statement is correct.
Section 90(2) provides that where a double taxation avoidance treaty is entered into by the Government, the
provisions of the Income-tax Act, 1961 would apply to the extent they are more beneficial to the assessee.
In case of any conflict between the provisions of the double taxation avoidance agreement and the Income-tax
Act, 1961, the provisions of the DTAA would prevail over the Act in view of the provisions of section 90(2), to
the extent they are more beneficial to the assessee [CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654
(SC)].
ADOPTION BY CENTRAL GOVERNMENT OF AGREEMENTS BETWEEN SPECIFIED

ASSOCIATIONS FOR DOUBLE TAXATION RELIEF [SECTION 90A]
Any specified association in India may enter into an agreement with any specified association in the specified
territory outside India and the Central Government may, by notification in the Official Gazette, make such
provisions as may be necessary for adopting and implementing such agreement –
a) for granting of relief in respect of –
(i) income on which have been paid both income-tax under this Act and income-tax in any specified
territory outside India; or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that specified
territory outside India to promote mutual economic relations, trade and investment, or
b) for the avoidance of double taxation of income under this Act and under the corresponding law in force
in that specified territory outside India, or
578 PP-DTL&P
c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under
this Act or under the corresponding law in force in that specified territory outside India, or investigation
of cases of such evasion or avoidance, or
d) for recovery of income-tax under this Act and under the corresponding law in force in that specified
territory outside India.
Notes
♦ Specified association means any institution, association or body, whether incorporated or not, functioning
under any law for the time being in force in India or the laws of the specified territory outside India and
which may be notified as such by the Central Government for the purposes of this section.
♦ An assessee, not being a resident, to whom DTA applies, shall not be entitled to claim any relief under
such agreement unless a certificate of his being a resident in any country outside India or specified
territory outside India, as the case may be, is obtained by him from the Government of that country or
specified territory. Further, the assessee shall also provide such other documents and information, as
may be prescribed.
♦ Specified territory means any area outside India which may be notified as such by the Central
Government for the purposes of this section.
♦ Where any term used in an agreement entered into is defined under the said agreement, the said term
shall have the same meaning as assigned to it in the agreement; and where the term is not defined in
the said agreement, but defined in the Act, it shall have the same meaning as assigned to it in the Act
and explanation, if any, given to it by the Central Government.
♦ Where any term is used in any agreement and not defined under the said agreement or the Act, but is
assigned a meaning to it in the notification issued, then, the meaning assigned to such term shall be
deemed to have effect from the date on which the said agreement came into force.
♦ Where a specified association in India has entered into an agreement with a specified association of
any specified territory outside India and such agreement has been notified, for granting relief of tax,
or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such
agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that
assessee. However, the provisions of Chapter X-A of the Act (i.e., GAAR) shall apply to the assessee
even if such provisions are not beneficial to him.
♦ The DTAAs under section 90A are intended to provide relief to the taxpayer, who is resident of one
of the contracting country to the agreement. Such tax payer can claim relief by applying the beneficial
provisions of either the treaty or the domestic law. However, in many cases, taxpayers who were not
residents of a contracting country also resorted to claiming the benefits under the agreement entered
into by the Indian Government with the Government of the other country. In effect, third party residents
claimed the unintended treaty benefits.
♦ Therefore, section 90A(4) provides that the non-resident to whom the agreement referred to in section
90A(1) applies, shall be allowed to claim the relief under such agreement if a Tax Residence Certificate
(TRC) obtained by him from the Government of that country or specified territory is furnished, declaring
his residence of the country outside India or the specified territory outside India, as the case may be.
♦ Therefore, a certificate issued by the Government of a foreign country would constitute proof
of tax residency, without any further conditions regarding furnishing of “prescribed particulars”
therein. In addition to such certificate issued by the foreign Government, section 90A(5) requires
the assessee to provide such other documents and information, as may be prescribed, for claiming
the treaty benefits.
Documents and information, to be furnished by the assessee for claiming treaty benefits, prescribed by
CBDT vide Notification No. 57/2013 dated 01.08.2013:
(i) Status (individual, company, firm etc.) of the assessee;
(ii) Nationality (in case of an individual) or country or specified territory of incorporation or registration (in
case of others);
(iii) Assessee’s tax identification number in the country or specified territory of residence and in case
there is no such number, then, a unique number on the basis of which the person is identified by the
Government of the country or the specified territory of which the assessee claims to be a resident;
(iv) Period for which the residential status, as mentioned in the certificate referred to in section 90(4) or
section 90A(4), is applicable; and
(v) Address of the assessee in the country or specified territory outside India, during the period for which
the certificate, as mentioned in (iv) above, is applicable.
However, the assessee may not be required to provide the information or any part thereof, if the information
or the part thereof, as the case may be, is already contained in the TRC referred to in section 90(4) or section
90A(4).
The assessee shall keep and maintain such documents as are necessary to substantiate the information
provided. An income-tax authority may require the assessee to provide the said documents in relation to a
claim by the said assessee of any relief under an agreement referred to in section 90(1) or section 90A(1), as
the case may be.
Illustration 4: The Income-tax Act, 1961 provides for taxation of a certain income earned in India by Mr. X, a
non-resident. The Double Taxation Avoidance Agreement, which applies to Mr. X provides for taxation of such
income in the country of residence. Is Mr. X liable to pay tax on such income earned by him in India? Examine.
Answer : Section 90(2) makes it clear that where the Central Government has entered into a Double Taxation
Avoidance Agreement with a country outside India, then in respect of an assessee to whom such agreement
applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. This means
that where tax liability is imposed by the Act, the Double Taxation Avoidance Agreement may be resorted to for
reducing or avoiding the tax liability.
However, as per section 90(4), the assessee, in order to claim relief under the agreement, has to obtain a
certificate [Tax Residence Certificate (TRC)] from the Government of that country, declaring the residence of
the country outside India. Further, he also has to provide the following information in Form No. 10F:
(i) Status (individual, company, firm etc.) of the assessee;
(ii) PAN of the assessee, if allotted;
(iii) Nationality (in case of an individual) or country or specified territory of incorporation or registration (in
case of others);
(iv) Assessee’s tax identification number in the country or specified territory of residence and in case
there is no such number, then, a unique number on the basis of which the person is identified by the
Government of the country or the specified territory of which the assessee claims to be a resident;
(v) Period for which the residential status, as mentioned in the certificate referred to in section 90(4) or
section 90A(4), is applicable; and
(vi) Address of the assessee in the country or specified territory outside India, during the period for which
the certificate, as mentioned in (v) above, is applicable.
580 PP-DTL&P
However, the assessee may not be required to provide the information or any part thereof, if the information
or the part thereof, as the case may be, is already contained in the TRC referred to in section 90(4) or section
90A(4).
The Supreme Court has held, in CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654, that in case of any
conflict between the provisions of the Double Taxation Avoidance Agreement and the Income-tax Act, 1961, the
provisions of the Double Taxation Avoidance Agreement would prevail over those of the Income-tax Act, 1961.
Mr. X is, therefore, not liable to pay tax on the income earned by him in India provided he submits the Tax
Residence Certificate obtained from the government of the other country, and provides such other documents
and information as may be prescribed.
COUNTRIES WITH WHICH NO AGREEMENT EXISTS [SECTION 91 UNILATERAL RELIEF]

If any person who is resident in India in any previous year proves that:
a) The income has accrued or arose during the previous year outside India (and which is not deemed to
accrue or arise in India),
b) He has paid in any country income-tax on such income, by deduction or otherwise, under the law in
force in that country
c) India does not have any agreement u/s 90 for the relief or avoidance of double taxation with that
country, then he shall be entitled to the deduction from the Indian income-tax payable by him
(i) of a sum calculated on such doubly taxed income at the average of Indian rate of tax or
(ii) of a sum calculated on such doubly taxed income at the average rate of tax of the said country,
whichever is the lower, or at the Indian rate of tax if both the rates are equal.
Notes
a) The expression ‘such doubly taxed income’ really purports to indicate that it is only that portion of the
income on which tax has been imposed and been paid by the assessee that is eligible for the double tax
relief. Thus, where the foreign income which suffered tax in the foreign country was Rs 88,535, and the
income actually taxed in India after allowances and set off of losses (or deduction under chapter VIA)
was Rs 63,141, relief admissible would be calculated on Rs 63,141 [CIT v. O.VR.SV.VR. Arunachalam
Chettiar]
b) Relief u/s 91 is to be calculated on income country-wise and not on basis of aggregation or amalgamation
of income of all foreign countries [CIT v. Bombay Burmah Trading Corpn. Ltd. (2003)]
c) No benefit is available on income which is deemed to accrue or arise in India, even though such income
is doubly taxed.
Illustration 5: Mr. Saha, a resident Indian, has derived the following incomes for the previous year relevant to
the A.Y. 2020-21:
a. Income from profession Rs 3,74,000
b. Royalty on books from foreign country Y (Rs 3,00,000 is eligible for deduction u/s 80QQB) (Tax paid in
foreign country @ 20%) Rs 5,00,000.
Compute Indian tax liability of the assessee assuming that India does not have any agreement with country Y.
Solution: Computation of total income and tax liability of Mr. Saha for the A.Y. 2020-21
Particulars Amount
Income from profession 3,74,000
Royalty earned in country Y 5,00,000

Less: Deduction u/s 80QQB 3,00,000
Tax on above 27,300
Add: Health & Education cess 1,092
Average rate of tax [Rs 28,392 / Rs 5,74,000 × 100] 4.95%
Rate of tax in country Y 20%
Relief u/s 91 [4.95% of Rs 2,00,000] 9,900
Tax payable (Rounded off u/s 288B) 18490
Note: Indian average tax rate: 4.95% Foreign average tax rate: 20.00% Relief u/s 91 is available at lower of
aforesaid rate. i.e. 4.95%.
Illustration 6: Ruchira, an individual resident retired employee of the Prasar Bharati aged 60 years, is a well-
known dramatist deriving income of Rs. 1,10,000 from theatrical works played abroad. Tax of Rs.
11,000 was deducted in the country where the plays were performed. India does not have any Double Tax
Avoidance Agreement under section 90 of the Income-tax Act, 1961, with that country. Her income in India
amounted to Rs. 6,10,000. In view of tax planning, she has deposited Rs. 1,50,000 in Public Provident Fund
and paid contribution to approved Pension Fund of LIC Rs. 32,000. She also contributed Rs. 28,000 to Central
Government Health Scheme during the previous year and gave payment of medical insurance premium of Rs.
26,000 to insure the health of her father, a non-resident aged 84 years, who is not dependent on her. Compute
the tax liability of Ruchira for the Assessment year 2020-21.
Solution:
Computation of tax liability of Ruchira for the A.Y. 2020-21
Particulars Rs. Rs.
Indian Income 6,10,000
Foreign Income 1,10,000
Less: Deduction under section 80C
Deposit in PPF 150000
Contribution to approved Pension Fund of LIC (Section 80CCC) 32000
Total 182000
The aggregate deduction under section 80C, 80CCC and 80CCD(1) has to 150000
be restricted to Rs. 1,50,000
582 PP-DTL&P
Contribution to Central Government Health Scheme Rs. 28,000 is also 28000

allowable as deduction under section 80D. Since she is a resident senior
citizen, the deduction is allowable to a maximum of Rs. 50,000 (See Note 1)
Medical insurance premium of Rs. 26,000 paid for father aged 84 years. 25000 203000
Since the father is a non-resident in India, he will not be entitled for the higher
deduction of Rs. 50,000 eligible for a senior citizen, who is resident in India.
Hence, the deduction will be restricted to maximum of Rs. 25,000.
Tax on Total Income
Income-tax (See Note below) 13,400
Add: Health and Education Cess @4% 536
Total Tax 13,936
Average rate of tax in India (i.e. Rs. 13,936/ Rs. 5,17,000 × 100)
Average rate of tax in foreign country (i.e. Rs. 11,000/ Rs. 1,10,000 ×100)
Deduction under section 91 on Rs. 1,10,000 @ 2.696% (lower of average (2,966)

Indian-tax rate or average foreign tax rate)
Tax payable in India (Rs. 13,936 – Rs. 2,966) 10,970
Notes:
1. Section 80D allows a higher deduction of up to Rs. 50,000 in respect of the medical premium paid to
insure the heath of a senior citizen. Therefore, Ruchira will be allowed deduction of Rs. 28,000 under
section 80D, since she is a resident Indian of the age of 60 years.
2. The basic exemption limit for senior citizens is Rs. 3,00,000 and the age criterion for qualifying as a
“senior citizen” for availing the higher basic exemption limit is 60 years. Accordingly, Ruchira is eligible
for the higher basic exemption limit of Rs. 3,00,000, since she is 60 years old.
3. An assessee shall be allowed deduction under section 91 provided all the following conditions are
fulfilled:-
(a) The assessee is a resident in India during the relevant previous year.
(b) The income accrues or arises to him outside India during that previous year.
(c) Such income is not deemed to accrue or arise in India during the previous year.
(d) The income in question has been subjected to income-tax in the foreign country in the hands of
the assessee and the assessee has paid tax on such income in the foreign country.
(e) There is no agreement under section 90 for the relief or avoidance of double taxation between
India and the other country where the income has accrued or arisen.
In this case, since all the above conditions are satisfied, Ruchira is eligible for deduction u/s 91.
Illustration 7: The following are the particulars of income earned by Miss Rinki, a resident Indian aged 25, for
the assessment year 2020-21:
Particulars (Rs. In lacs)
Income from playing snooker matches in country L 12.00
Tax paid in country L 1.80
Income from playing snooker tournaments in India 19.20
Life Insurance Premium paid 1.10
Medical Insurance Premium paid for her father aged 62 years (paid through credit card) 0.54
Compute her total income and tax liability for the assessment year 2020-21. There is no Double Taxation
Avoidance Agreement between India and country L.
Solution:
Computation of total income and tax liability of Ms. Rinki for the A.Y. 2020-21
Particulars Rs. Rs.
Indian Income [Income from playing snooker tournaments in India] 19,20,000
Foreign Income [Income from playing snooker matches in country L] 12,00,000
Less: Deduction under Chapter VIA
Deduction under section 80C
Life insurance premium of Rs.1,10,000 paid during the previous year 1,10,000
deduction, is within the overall limit of Rs. 1.5 lakh. Hence, fully allowable as
deduction
Deduction under section 80D
Medical insurance premium of Rs. 54,000 paid for her father aged 62 years. 50,000 (1,60,000)
Since her father is a senior citizen, the deduction is allowable to a maximum
of Rs. 50,000 (assuming that her father is also a resident in India). Further,
deduction is allowable where payment is made by any mode other than cash.
Here payment is made by credit card hence, eligible for deduction.
Tax on Total Income
Income-tax 7,00,500
Add: Health and education cess @4% 28,020
Total tax including cess 7,28,520

584 PP-DTL&P
Average rate of tax in India (i.e. Rs. 7,28,520/Rs. 29,60,000 × 100) 24.61%
Average rate of tax in foreign country (i.e. Rs. 1,80,000/ Rs.12,00,000 ×100) 15.00%
Deduction under section 91 on Rs. 12 lakh @ 15% (lower of average Indian-

tax rate or average foreign tax rate) (1,80,000)
Tax payable in India (Rs. 7,28,520 – Rs. 1,80,000) 5,48,520
Note: Miss Rinki shall be allowed deduction under section 91, since the following conditions are fulfilled:-
(a) She is a resident in India during the relevant previous year.
(b) The income accrues or arises to her outside India during that previous year and such income is not
deemed to accrue or arise in India during the previous year.
(c) The income in question has been subjected to income-tax in the foreign country L in her hands and she
has paid tax on such income in the foreign country L.
There is no agreement under section 90 for the relief or avoidance of double taxation between India and
country L where the income has accrued or arisen.
RESIDENCY ISSUE
In India, section 6 of the Income-tax Act provides for the definition of residential status of different categories of
persons. Similarly, every Government will have its own legislation providing for its own definition of residential
status. There can be very wide differences amongst different definitions. For example, consider an individual.
Section 6 of the Indian Income-tax Act, provides for physical stay of the individual. If the individual is physically
present in India for the specified number of days, then he is an Indian resident. If he is present less than the
specified number of days, then he is a non-resident of India.
However, the US Internal Revenue Code (IRC) provides as under: Every citizen of USA is tax resident of USA.
Even a Green Card holder is a tax resident of USA. This would be true even if the assessee has left USA for a
job/ business abroad for many years.
The issue relevant here is that different countries have different definitions of residential status. This has several
consequences. The best solution adopted in the treaties is: not to define residential status in the treaty. The
treaties refer to the domestic legislation. In other words, the residential status will be determined by the domestic
Income-tax Act.
In case of cross border income, the issue arises as to under which jurisdiction the income would be taxed. In
international taxation jurisdiction are referred to as Connecting Factors or Nexus. It’s an internationally accepted
principle to tax the global income of assessee qualifying as resident of that particular country. Further it is also
accepted that if the income is sourced in a country, it has a right to tax that income. India also follows the same
principles.
The Organization of Economic and Co-operation Development (OECD) Model Convention and the UN Model
Convention are identical and provide for a definition of “resident of a Contracting State” as follows:
For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under
the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any
other criterion of a similar nature, and also includes that State and any political sub-division or local authority
thereof. This term, however, does not include any person who is liable to tax in that State in respect only of
income from sources in that State or capital situated therein.
Where by reason of the provisions of aforesaid paragraph an individual is a resident of both Contracting States,
then his status shall be determined as follows:
a. he shall be deemed to be a resident only of the State in which he has a permanent home available to
him; if he has a permanent home available to him in both States, he shall be deemed to be a resident
only of the State with which his personal and economic relations are closer (centre of vital interests);
b. if the State in which he has his centre of vital interests cannot be determined, or if he has not a
permanent home available to him in either State, he shall be deemed to be a resident only of the State
in which he has an habitual abode;
c. if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident
only of the State of which he is a national;
d. if he is a national of both States or of neither of them, the competent authorities of the Contracting
States shall settle the question by mutual agreement. Where by reason of the aforesaid provisions, a
person other than an individual is a resident of both Contracting States, then it shall be deemed to be
a resident only of the State in which its place of effective management is situated.
1. Dual Residence - Individuals: Article 4(2)

Same individual may be treated as resident of both the countries being parties to a treaty. For example, Mr.
A is a citizen of UK. He has a house, a bank account and other connections with UK. However, he has taken
up employment in India. For last few years, as well as during the current previous year, he is residing in India.
Hence, under section 6(1) he will be treated as a resident of India. However, under the UK Income-tax Act, he
will be treated as a resident of UK. Hence the same person will be treated as resident of two countries. This is
called dual residence.
India and UK both will want to tax the global income of Mr. A. Let us say, India and UK both have the highest tax
rate of 30%. Then Mr. A will pay 60% income-tax. To avoid such situation, article 4 (2) provides for Tie-Breaking
provisions. Article 4 (2) considers several probable tests which determine the country in which the tax payer is
resident. Each test is to be considered in the serial order in which it is listed under article 4 (2).
Permanent Home:
Consider a situation where Mr. A has a permanent home available to him in any one of the countries and does
not have a permanent home in the other country. He will be considered to be a resident of the country in which
he has the permanent home. It may be noted that it is not necessary that the assessee owns a home. The only
condition applicable is that the assessee has a home available to him. It may be a rental home. Or it may be a
home owned or rented by a family member. As long as the home is available to Mr. A, he will be considered as
resident of the country in which the home is available.
Personal & Economic Relations:
Another probable situation: Mr. A has permanent home available to him in both the countries or in no country.
Then it will not be possible to determine his residential status by the permanent home test. Hence the treaty
provides that he will be treated as resident of that country with which he has closer personal and economic
relations.
Thus for example, Mr. A is employed by British company, his family continues to stay in Britain and he is only
deputed to an Indian Group company, then Mr. A may claim that his personal and economic relations with Britain
are closer than his personal and economic relations with India. In such a case, he will be treated as resident of
Britain.
The test: Personal & Economic Relations is also referred to as Centre of Vital Interests.
586 PP-DTL&P
Habitual Abode:
Some people may have their commercial interest as well as family spread out in both countries. For example,
Mr. A and his wife may stay in India. However, his parents and children continue to stay in UK. Mr. A has
substantial savings, and investments and income in both the countries. It is not very easy to determine whether
the centre of his vital interests lies in India or in UK. In such a situation, one has to find out the state in which
the assessee has his habitual abode. Now the term habitual abode is different from the term permanent home.
There may be some people who do not have a permanent home but do have a habitual abode in one of the
countries. Habitual abode refers to that country where the tax payer stays for a comparatively longer time.
Nationality:
Again there can be some people who have a habitual abode either in both the states or in none of the states.
Here one may consider the concept of permanent travelers. There are some people who have their business
and or investments in several countries. They can arrange their affairs so that they are not physically present in
any single country for a period of 6 months. These people either may not have house in any country; nor have
habitual abode in any country; or may be having homes available to them in several countries. Since they are
permanent travelers, they may not be held to be resident of any one country. In such cases, they avoid COR
taxes in all the countries. Of course they will be liable to COS taxes in the countries in which they earn income.
If they are actually non-residents of all the countries, they will not get treaty benefit in any country.
However, in cases like UK, Canada, USA, etc. even if a person is not present for a long period in the country,
he may be held to be tax resident of that country. And he may become resident of two countries. In such cases,
for the purposes of tie-breaking under Article 4(2)(c) one has to examine his nationality. He will be considered
to be a resident of that country of which he is a national.
Mutual Agreement:
There may be individuals who are not nationals of any of the Treaty countries or who are nationals of both
countries. India does not permit a person to be citizen of two countries. In other words, if a person wants Indian
citizenship, he cannot be citizen of any other country. However, there are some countries which permit dual
citizenship.
In such cases it becomes impossible to determine the residence by any criteria listed in article 4 (2). Then for
the purposes of tie-breaking, he will have to apply to the competent authority. The competent authorities of both
the countries will mutually discuss and decide the residence of the assessee.
2. Dual Residence Companies: Article 4(3)
Just as an individual can be resident of two or more countries, a company or other non-individual entity can also
be resident of two or more countries. In such cases, determining the residential status for the purposes of treaty
becomes difficult. OECD Model provides a criterion for the purposes of tie breaking. The country in which its
Place of Effective Management is situated shall be considered to be the Country of Residence.
Place of Effective Management ignores incorporation, location of registered office and all formal nomenclature.
The country from which the management of the Company is effectively carried out, is considered to be the
Country of Residence.
TAX HAVENS
Most effective way to attract foreign investment, many sovereign states and countries use tax and non-tax
incentives. Such countries or state as the case may be, offer the foreign investor an environment with either
no taxation or only nominal taxation which is generally equipped with a perquisites in which regulatory or
administrative constraints are for name sake. The laws made for these investors are usually not subject to
information exchange.
These countries and states are known as tax havens. In simple words, if any country or states mend their tax
and allied laws to gain the confidence of foreigners could be considered a tax haven. The utmost feature of a
haven is that its mended laws and other activities can be used to evade or avoid the tax of other jurisdictions.
Mauritius is accused of being a tax haven, the island has a corporation tax of 15%, but tax credits for global
business companies mean an effective rate of 3%. There is no capital gains tax and no withholding tax on
dividends.
Seychelles, where there is absolutely no tax on income or profits for international companies and as well as no
capital gains tax, and the government does not tax interest payments from abroad.
Such tax systems are one of the potent tool which allow companies to speck themselves and register ‘shell
companies’, companies only in name with no substantial operations or no operations at all in the tax haven.
So, what does make a country a tax haven is if it creates legal loopholes to allow organizations to register their
shell companies without due diligence. The countries in which real economic activities take place are unable to
collect taxes corresponding with the economic activity and failed to have effective fiscal control.
Cayman Islands for the size and secrecy of its offshore financial activities.
The Tax Justice Network estimates that there is between $21 trillion and $32 trillion of private financial wealth
parked in what it calls “secrecy jurisdictions” around the world. The U.S. has been steadily increasing its market
share for offshore financial services, and now claims about 22 percent of the global market. Top of FoBottom
of Form
According to the group, “The U.S. provides a wide array of secrecy and tax-free facilities for non-residents, both
at a Federal level and at the level of individual states. Many of the main Federal-level facilities were originally
crafted with official tolerance or approval, in some cases to help with the U.S. balance of payments difficulties
during the Vietnam War; however some facilities – such as tolerance by states like Delaware or Nevada of
highly secretive anonymous shell companies – are more the fruit of a race to the bottom between individual
states on standards of disclosure and transparency.”
Here are the top 15 countries in the financial secrecy Index for 2018:
1. Switzerland
2. USA
3. Cayman Islands
4. Hong Kong
5. Singapore
6. Luxembourg
7. Germany
8. Taiwan
9. United Arab Emirates (Dubai)
10. Guernsey
11. Lebanon
12. Panama
13. Japan
14. Netherlands
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15. Thailand
Four vital contributors are used to determine whether a state or a country is a tax haven:
1. Taxes are absent or nominal tax rate: Tax havens impose nil or only nominal taxes (generally or in
special circumstances)and offer themselves, or are perceived to offer themselves, as a place to be
used by non-residents to escape high taxes in their country of residence.
2. Least transparency: Transparency ensures that there is an open and consistent application of tax
laws among similarly situated taxpayers and that information needed by tax authorities to determine
a taxpayer’s correct tax liability is available (e.g., accounting records and underlying documentation).
A lack of transparency in the operation of the legislative, legal or administrative provisions is another
factor used to identify tax havens. The OECD is concerned that laws should be applied openly and
consistently, and that information needed by foreign tax authorities to determine a taxpayer’s situation
is available. Lack of transparency in one country can make it difficult, if not impossible, for other tax
authorities to apply their laws effectively. ‘Secret rulings’, negotiated tax rates, or other practices that
fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory
supervision or a government’s lack of legal access to financial records are contributing factors.
3. Lack of effective exchange of tax information with foreign tax authorities: Whether there are laws
or administrative practices that prevent the effective exchange of information for tax purposes with
other governments on taxpayers benefiting from the no or nominal taxation. Tax havens typically have
laws or administrative practices under which businesses and individuals can benefit from strict rules
and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of
information about taxpayers who are benefiting from the low tax jurisdiction.
4. No requirement for a substantive local presence of the entity: The absence of a requirement that
the activity be substantial is important because it suggests that a jurisdiction may be attempting to
attract investment and transactions that are purely tax driven. It may also indicate that a country
does not provide a legal or commercial environment or offer any economic advantages that would
attract substantive business activities in the absence of the tax minimising opportunities it provides.
The no substantial activities criterion was included in the 1998 Report as a criterion for identifying
tax havens because the lack of such activities suggests that a jurisdiction may be attempting to
attract investment and transactions that are purely tax driven. In 2001, the OECD’s Committee on
Fiscal Affairs agreed that this criterion would not be used to determine whether a tax haven was
cooperative or un-cooperative.
With regard to exchange of information in tax matters, the OECD encourages countries to adopt information
exchange on an “upon request” basis. Exchange of information upon request describes a situation where a
competent authority of one country asks the competent authority of another country for specific information
in connection with a specific tax inquiry, generally under the authority of a bilateral exchange arrangement
between the two countries. An essential element of exchange of information is the implementation of appropriate
safeguards to ensure adequate protection of taxpayers’ rights and the confidentiality of their tax affairs.
Methodology
The methods followed in doing business through tax heavens, broadly, are as under:
Personal residency : Wealthy individuals from high-tax jurisdictions have sought to relocate themselves in
low-tax jurisdictions. In most countries in the world, residence is the primary basis of taxation. In some cases
the low-tax jurisdictions levy no, or only very low, income tax, capital gain tax and inheritance tax. Individuals
who are unable to return to a higher-tax country in which they used to reside for more than a few days a year
are sometimes referred to as tax exiles.
Asset holding : Asset holding involves utilizing a trust or a company, or a trust owning a company. The company
or trust will be formed in one tax haven, and will usually be administered and resident in another. The function
is to hold assets, which may consist of a portfolio of investments under management, trading companies or
groups, physical assets such as real estate or valuable chattels. The essence of such arrangements is that by
changing the ownership of the assets into an entity which is not resident in the high-tax jurisdiction, they cease
to be taxable in that jurisdiction. Often the mechanism is employed to avoid inheritance tax.
Trading and other business activity : Many businesses which do not require a specific geographical location
or extensive labour are set up in tax havens, to minimize tax exposure. Perhaps the best illustration of this is
the number of reinsurance companies which have migrated to Bermuda over the years. Other examples include
internet based services and group finance companies.
Financial intermediaries : Much of the economic activity in tax havens today consists of professional financial
services such as mutual funds, banking, life insurance and pensions. Generally the funds are deposited with the
intermediary in the low-tax jurisdiction, and the intermediary then on-lends or invests the money (often back into
a high-tax jurisdiction). Although such systems do not normally avoid tax in the principal customer’s jurisdiction,
it enables financial service providers to provide multi-jurisdictional products without adding an additional layer
of taxation. This has proved particularly successful in the area of offshore funds.
Counteracting harmful tax practices : OECD has issued a report on Harmful Tax Competition and has made
19 specific recommendations, some of them are as follows:
a. Adopt Controlled Foreign Corporations (CFC) or equivalent rules
b. Consider foreign information reporting rules
c. Enter into Tax Information Exchange Agreement (TIEA)
d. Application of provision of withholding tax while making payment to offshore recipients
e. Curbing ‘ treaty shopping nations’ of existing treaties with tax heaven
f. Mutual assistance of tax authorities in the recovery of cross boarder tax claims
g. More international co-operation by establishing Forum to avoid Harmful Tax Practices
h. Other measures
● Adopt foreign investment fund or equivalent rules
● Considering restrictions on participation exemption and other systems of exempting foreign
income in the context of harmful tax competition
● Formulation and adoption of transfer pricing rules
● Providing access to banking information for tax purposes
● Considering co-ordinated enforcement regimes (joint audits; co-ordinated training programmes,
etc.)
● Guidelines to develop and actively promote Principles of Good Tax Administration
CONTROLLED FINANCIAL CORPORATION (CFC)

ABC LTD on an average pay enormous amount of tax to US authorities (US taken in case study is purposively
because in India such provision are not applicable, they are just a part of direct tax code as proposed by Kelkar
committee) every year. Assume tax rate is very high. Country invites FDI and provided for tax exemption to
foreign companies. The proposal seems to be interesting to ABC ltd and they want to open a 100% subsidiary
over there and have intentions to shift about 70% business to that country by which they manage to lesser their
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tax burden substantially. But on the other hand US revenue department will lose huge revenue. So following
question arises :
• Such act of ABC ltd legitimate?
• Can US stop shifting its business to different country?
• Is there any solution to this problem
To answer all the above questions one need to understand the concept CFC which are as follows :
One of the of Tax deferral or avoidance is transfer of passive or investment income (such as interest, dividend
and capital gains) by establishing an entity in a low tax country or tax havens.
The system of tax deferrals can be initiated by establishing an entity in a low tax jurisdiction. Such entity as
it is controlled by parent company is called a “Controlled Foreign Corporation” in the home country of parent
company. E.g., a 100% subsidiary of an Indian company in China is a CFC in India.
There are two ways to defer/avoid the tax:
1. Shift the management base to that country and enjoy tax benefits as additional cash inflows.
2. Dividend and interest income not to be distributed to the stake holders of CFC for a long time.
This manipulative deferral of taxes through these kinds of practices has been considered as an injurious
to revenue collection targets in various countries specially the developed economies. Many countries have
adopted measures aimed at preventing this manipulative deferral of passive or investment income through
CFC’s. USA was first to introduce the CFC rules followed by Germany, Canada, Japan, France, UK, New
Zealand, Sweden, Australia, Norway, Finland, Spain, Indonesia, Portugal, Denmark, Korea, Hungry, Mexico,
South Africa, Argentina, Venezuela, Italy, Israel, Egypt, Estonia, Turkey, Iceland, Brazil, China and Lithuania
While the rules applicable to CFCs and the attributes of a CFC differ from country to country, the concept of CFC
regimes in general is that they eliminate the deferral of income earned by a CFC and tax residents currently on
their proportionate share of a CFC’s income.
The CFC rules are one of the tool to curb the practice of artificial deferral of income.
Under CFC rules any undistributed income of a CFC is deemed to be distributed to the parent company /
shareholders, thus taxed in their hand in the home country tax jurisdiction. Thus, Controlled foreign company
(CFC) regimes are used in many countries as a means to prevent erosion of the domestic tax base and to
discourage residents from shifting income to jurisdictions that do not impose tax or that impose tax at low rates.
Typical conditions for the application of such regimes are that:
1. a domestic taxpayer “control” the CFC;
2. the CFC be located in a “low tax” jurisdiction or a jurisdiction that imposes a tax rate lower than the rate
in the shareholder’s country, or alternatively that the CFC be located in a “black” or “grey” list jurisdiction
(as opposed to favored “white” list jurisdictions); and
3. the CFC has earned the passive income like interest, dividend, capital gains, etc.;
4. the CFC has not distributed such income to the parent company for a long time. In case the above
conditions are satisfied, the passive undistributed income of the CFC is deemed to be distributed to the
shares holders and is taxed in the hands of such shareholders in the home country of such shareholder
in proportion of their shareholdings.
According to definition given u/s 952 of the US Code by Legal Information Institute (Cornell University Law
School), Sub Part F income, in general, means in the case of any controlled foreign corporation, the sum of:
(1) Insurance income (as defined u/s 953),
(2) The foreign base company income (as determined u/s 954),
(3) an amount equal to the product of: (A) the income of such corporation other than income which is
attributable to earnings and profits of the foreign corporation included in the gross income of a United
States person u/s 951 (other than by reason of this paragraph), multiplied by (B) the international
boycott factor (as determined u/s 999),
(4) the sum of the amounts of any illegal bribes, kickbacks, or other payments (within the meaning of
sec.162(c)) paid by or on behalf of the corporation during the taxable year of the corporation directly or
indirectly to an official, employee, or agent in fact of a government, and
(5) The income of such corporation derived from any foreign country during any period during which sec.
901(j) applies to such foreign country.
The payments referred to in paragraph (4) are payments which would be unlawful under the Foreign Corrupt
Practices Act of 1977 if the payer were a United States person. For purposes of paragraph (5), the income
described therein shall be reduced, under regulations prescribed by the Secretary, so as to take into account
deductions (including taxes) properly allocable to such income.
PERMANENT ESTABLISHMENT ‘PE’

One of the important terms that occurs in all the Double Taxation Avoidance Agreements is the term ‘Permanent
Establishment’ (PE) which has not been defined in the Income Tax Act.
However as per the Double Taxation Avoidance Agreements, PE includes, a wide variety of arrangements i.e.
a place of management, a branch, an office, a factory, a workshop or a warehouse, a mine, a quarry, an oilfield
etc. Imposition of tax on a foreign enterprise is done only if it has a PE in the contracting state.
Tax is computed by treating the PE as a distinct and independent enterprise. Generally, in Indian context, the
term permanent establishment” means a fixed place of business through which the business of an enterprise is
wholly or partly carried on. The term “permanent establishment” shall also include:
a. a place of management;
b. a branch;
c. an office;
d. a factory;
e. a workshop;
f. a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
g. a warehouse in relation to a person providing storage facilities for others;
h. a farm, plantation or other place where agricultural, pastoral, forestry or plantation activities are carried
on;
i. premises used as a sales outlet or for receiving or soliciting orders;
j. an installation or structure, or plant or equipment, used for the exploration for or exploitation of natural
resources;
k. a building site or construction, installation or assembly project, or supervisory activities in connection
with such a site or project, where that site or project exists or those activities are carried on (whether
separately or together with other sites, projects or activities) for more than specified months (generally
6 months).
Exclusion An enterprise shall not be deemed to have a permanent establishment merely by reason of:
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a. the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to
the enterprise;
b. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose
of storage or display ;
c. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose
of processing by another enterprise;
d. the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise,
or of collecting information, for the enterprise; or
e. the maintenance of a fixed place of business solely for the purpose of advertising, for the supply
of information, for scientific research, or for similar activities which have a preparatory or auxiliary
character, for the enterprise.
An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the
other Contracting State merely because it carries on business in that other State through a broker, a general
commission agent or any other agent of an independent status, where that person is acting in the ordinary
course of the person’s business as such a broker or agent.
However, when the activities of such a broker or agent are carried on wholly or principally on behalf of that
enterprise itself or on behalf of that enterprise and other enterprises controlling, or controlled by or subject to the
same common control as, that enterprise, the person will not be considered a broker or agent of an independent
status within the meaning of this paragraph.
Illustration 8: The concept of Permanent Establishment is one of the most important concepts in determining
the tax implications of cross border transactions. Examine the significance thereof, when such transactions are
governed by Double Taxation Avoidance Agreements (DTAA).
Solution: Double Taxation Avoidance Agreements (DTAAs) generally contain an Article providing that business
income is taxable in the country of residence, unless the enterprise has a permanent establishment in the
country of source, and such income can be attributed to the permanent establishment.
As per section 92F(iiia), the term “Permanent Establishment” includes a fixed place of business through which
the business of an enterprise is wholly or partly carried on.
As per this definition, to constitute a permanent establishment, there must be a place of business which is fixed
and the business of the enterprise must be carried out wholly or partly through this place.
Section 9(1)(i) requires existence of business connection for deeming business income to accrue or arise in
India. DTAAs however provide that business income is taxable only if there is a permanent establishment in
India.
Therefore, in cases covered by DTAAs, where there is no permanent establishment in India, business income
cannot be brought to tax due to existence of business connection as per section 9(1)(i).
However, in cases not covered by DTAAs, business income attributable to business connection is taxable.
BUSINESS CONNECTION ‘BC’

The concept of permanent establishment (“PE”) has gained considerable importance with the growing trend
of globalization. The concept of a PE is important for several Articles of the Convention and the concept or its
cognate, also appears in the domestic laws of some countries. For example, in India we have the concept of
business connection (BC).
BC is the Indian equivalent of PE. It is much wider in connotation and has been very effectively used by the
revenue authorities to tax the income of non-residents in India. Despite being referred to in the Income Tax Act,
1961 (“ITA”), the term was not defined till the Finance Act, 2003 inserted a somewhat cryptic explanation to
Section 9 of the Indian Income Tax Act, 1961.
The government aims to toughen the existing ‘Business Connection’ (treaty equivalent of the term ‘Permanent
Establishment’) regime by adopting the more stringent definition of Dependent Agent Permanent Establishment
(DAPE)
India has been an active advocate of the initiative by Organisation for Economic Co-operation and Development
and the G20 on the Base Erosion and Profit Shifting (BEPS) project. The outcome of the project, in the form
of 15 action plans, addresses various issues of tax avoidance contemporaneous with the current digitalized
business environment. The final report provided its recommendations pertaining to various domestic and tax
treaty provisions. Considering the colossal number of such tax treaties, the Action Plan 15 recommended
creation of a multilateral instrument (MLI) wherein one document containing all the amendments could be
applicable to all the tax treaties. The MLI has had 78 countries and counting, to being a signatory to the
convention, including India.
As a part of the Budget proposals, the government aims to toughen the existing ‘Business Connection’ (treaty
equivalent of the term ‘Permanent Establishment’) regime by adopting the more stringent definition of Dependent
Agent Permanent Establishment (DAPE) as has been provided by the OECD under BEPS Action Plan 7 and
the MLI.
Since India is a signatory to the multilateral instrument, the DAPE provisions of India’s tax treaties, as modified
by MLI, shall become wider in scope than the current provisions contained in the Income-tax Act, 1961 (the Act),
and as a result of this non-residents would have an option to choose the provisions of the Act that are beneficial
to them.
By virtue of this proposed amendment, the definition of the DAPE as per the Act is being amended to be at par
with the definition contained in the MLI.
The proposed amendment is in two parts:
Business Connection: As per existing provisions, in order to constitute a taxable presence (that is, a business
connection) in India, inter alia, any person acting on behalf of the non-resident must have had an authority to
conclude contracts on behalf of such non-resident. By merely taking away such authority, certain taxpayers
would take the benefit of the loophole in the law and avoid payment of taxes in India.
Under the revised definition proposed in the Finance Bill 2018, an agent would include not only a person who
habitually concludes contracts on behalf of the non-resident, but also a person who habitually plays a principal
role leading to the conclusion of contracts.
Significant Economic Presence: As per BEPS Action Plan 1, OECD analysed three ways to tax digital
transactions undertaken by the non-residents without having any physical presence in a country: (i) a new
nexus in the form of a significant economic presence, (ii) withholding tax on certain types of digital transactions,
and (iii) an equalization levy. OECD left it to individual countries to adopt any of these three measures in their
domestic law as additional safeguards against BEPS.
India has already introduced the concept of equalisation levy as a separate code by Finance Act, 2016, in order
to tax certain digital transactions.
However, it seems that the government is of the opinion that the equalization levy is not a one-stop solution
and the memorandum to the Finance Bill, 2018 specifically addresses this issue of tax avoidance in a digital
economy.
A non-resident enterprise interacts with customers in another country without having any physical presence
in that country resulting in avoidance of taxation in the source country. Therefore, going a step further, the
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Finance Bill, 2018, now proposes to tax digital transactions on the basis of ‘significant economic presence’ vis-
à-vis ‘physical presence’ by making amendments to the definition of the term ‘business connection’ as provided
under the Act.
A non-resident enterprise that generates significant revenues from in-country customers by targeting them
through digital means and without any physical presence would be a substantial economic presence.
The proposed amendment would only make an impact if India is able to negotiate its treaties to include ‘significant
economic presence’ in the definition of Permanent Establishment.
It appears that India is adopting a two-pronged approach to tax e-commerce trade to demand its share of taxes.
The Indian Income-tax Act provides for levy of income-tax on the income of foreign companies and non-residents,
but only to the extent of their income sourced from India. Under section 5 of the Act, a foreign company or any
other non-resident person is liable to tax on income which is received or is deemed to be received in India by
or on behalf of such person, or income which accrues or arises or is deemed to accrue or arise to it in India.
Income tax is payable by a taxpayer, regardless of whether he is a resident taxpayer, a non-resident taxpayer,
or a non-resident Indian, on the total income computed by the Assessing Officer under the provisions of the
Income Tax Act 1961. Section 9 thereafter specifies certain types of income that are deemed to accrue or arise
in India in certain circumstances. These two sections embody the source rule of income taxation in the domestic
law. No income of a non-resident can be taxed in India unless it falls within the four corners of section 5 read
with section 9 of the Income-tax Act. Section 9(1) of the I.T. Act specifies that for the income to be taxed in India,
it should deemed to accrue or arise in India.
And one among those incomes are income from “business connection” in India .The basic aim of this paper
work is to look into the series of judicial pronouncements related to the term “business connection” and the
changes which have been introduced therein after.
Section 9 of IT Act: Broadly speaking, business income of a foreign company or other non-resident person
is chargeable to tax to the extent it accrues or arises through a business connection in India or from any
asset or source of income located in India, and to the extent such income is attributable to the operations
carried out in India. Certain income is deemed to accrue or arise in India under section 9 of the said act,
even though it may actually accrue or arise outside India .Section 9 applies to all assesses irrespective of
their residential status and place of business. Thus, only Indian income is liable to income tax in India in
the case of a non-resident person. This means that a non-resident person is not liable to pay any income
tax in India on his foreign income. Though an income may not actually accrue or arise in India, yet it may
be deemed to accrue or arise in India.
Thus, under Section 9, the following are the important types of income which are deemed to accrue or arise in
India:
• Income through any business connection in India, or through or from any property in India, or through
or from any asset or source of income in India or through the transfer of a capital asset situated in India.
• Salary income for service rendered in India; and
• Salary for the rest period or leave period which is preceded and succeeded by services rendered
in India and forms part of the service contract of employment from the A.Y. 2000.Also the following
incomes which are payable outside India are deemed to arise in India:-
a. Dividend paid by an Indian company outside India.
b. Interest payable on money borrowed and brought into India.
c. Royalty and technical service fees payable in respect of any right/ technical services used
for business / profession in India. However, royalty and fees for technical services is exempt,
where such royalty / fees earned is in respect of computer software supplied by a Non-resident
manufacturer along with the computer or computer based equipment under an approved scheme.
“Business Connection”- The term business connection has undergone lot of changes. The Hon’ble Courts
have time and again interpreted the term “business connection” with reference to facts, circumstances and
prevailing conditions. A business connection involves a relation between a business carried on by a non-resident
which yields profits or gains and some activity in India which contributes to the earning of these profits or gains.
A business connection can arise between a non-resident and a resident if both of them carry on business and if
the non-resident earns income through such a connection. A business connection involves a relation between
business carried on by non-resident which yields profits or gains and some activity in India which contributes to
the earning of these profits or gains.
A business connection can arise between a non-resident and a resident of both of then carry on business and
if the non-resident earns income through such connections. It basically predicates an element of continuity
between the business of the non-resident and the activity in India: a stray or isolated transaction is not normally
regarded as business connection.
“BUSINESS CONNECTION” as defined in the Act (Section 9(1) Income Tax Act) And also in Circular No 23,
Section(s) referred 9 of income tax. It includes a profession connection. It includes a person acting on behalf of
a non-resident and who performs any one or more of the following –
Activity 1: He exercises in India an authority to conclude contracts on behalf of non-resident (it does not cover
the activity of only the purchase of goods or merchandise for then on-resident)
Activity 2: He has no such authority but habitually maintains in India a stock of goods or merchandise from
which he regularly delivers goods or merchandise on behalf of the non-resident
Activity 3: He habitually secures order in India (mainly or wholly) for the non-resident or for non-residents under
the same management.
Where such a business is carried on in India through a person referred to in Activity one, two or three (mentioned
above) only so much of income is attributable to the operations carried out in India shall be deemed to accrue
or arise in India.
Also according to the Circular No 23, income tax some illustrative instances of a non-resident having business
connection in India, are given below:
(a) Maintaining a branch office in India for the purchase or sale of goods or transacting other business.
(b) Appointing an agent in India for the systematic and regular purchase of raw materials or other
commodities, or for sale of the non-resident’s goods, or for other business purposes.
(c) Erecting a factory in India where the raw produce purchased locally is worked into a form suitable for
export abroad.
(d) Forming a local subsidiary company to sell the products of the non-resident parent company.
(e) Having financial association between a resident and a non-resident company.
Although the term business connection is nowhere defined in the act but the courts have given various judicial
pronouncements which have been categorically classified below:
1) There must be element of continuity as well as real and intimate connection - The expression ‘business
connection’ undoubtedly means something more than ‘business’. A business connection involves a relation
between a business carried on by a non-resident which yields profits or gains and some activity in the taxable
territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element
of continuity between the business of the non-resident and the activity in the taxable territories. The expression
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‘business connection’ postulates a real and intimate relation between trading activity carried on outside the
taxable territories and trading activity within the territories, the relation between the two contributing to the
earning of income by the non-resident in his trading activity.
In the case of CIT v. R.D. Aggarwal & Co. ,the contracts for the sale of goods took place outside the taxable
territories, price was received by the non-residents outside the taxable territories, and delivery was also given
outside the taxable territories. Therefore in the view of the court case such a relation w.r.t expression “business
connection” must be real and intimate through or from which income must accrue or arise whether directly
or indirectly to the non-resident was absent. The Supreme Court in the same case further observed that a
business connection.....involves a relation between a business carried on by a non-resident which yields profits
or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those
profits or gains. Business connection may take several forms: it may include carrying on a part of the main
business or activity incidental to the main business of the non-resident through an agent, or it may merely be a
relation between the business of the non-resident and the activity in the taxable territories, which facilitates or
assists the carrying on of that business. In each case the question whether there is a business connection from
or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts
and circumstances of the case.
The expression “business” is defined in the Act as any trade, commerce, manufacture or any adventure or
concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression
“business connection” and its precise connotation is vague and indefinite.
In CIT v. Fried Krupp Industries it was held that an isolated transaction between a non-resident and a resident
in India without any course of dealings such as might fairly be described as business connection does not
attract section 9. There is no question of continuing business relating when a person purchases machinery
or other goods abroad or uses them in India and earns profit but where there is connection a continuity in
business relationship between the person in India who helps to make the profits and the person outside India
who receives and realizes the profit, such relationship constitute a business connection. In each of such case
whether there is a business connection from or through which income arises or accrues must be determined
upon the facts or circumstances of that case.
2) ‘Business’ includes profession, vocation and callings - The expression ‘business’ does not necessarily
mean trade or manufacture only. It is being used as including within its scope profession, vocations and calling
from a fairly long-time.
In the context in which the expression ‘business connection’ is used in section 9(1), there is no warrant for giving
a restricted meaning to it excluding ‘professional’ connection, from its scope. The definition of the expression
“business” given in the Act is an inclusive one. The expression “business connection”, however, is not defined in
the Act It is no doubt true that there is specific reference to “business” in section 9(1) and there is no reference
to “profession”.
“The phrase ‘business connection’ is different from, though doubtless not unrelated to, the word business of
which there is a definition in the Act.”
The expression “business” does not necessarily mean trade or manufacture only. It is being used as including
within its scope professions, vocations and callings from a fairly long time. The Shorter Oxford English Dictionary
defines “business” as “stated occupation, profession or trade” and “a man of business” is defined as meaning
“an attorney” also. In view of the above dictionary meaning of the word “business”, it cannot be said that
the definition of business given in section 45 of the Partnership Act, 1890 (53 & 54 Vict. clause 39), was an
extended definition intended for the purpose of that Act only. Section 45 of that Act says:
“The expression ‘business’ includes every trade, occupation, or profession.”
Section 2(b) of the Indian Partnership Act, 1932, also defines “business” thus:” ‘Business’ includes every trade,
occupation and profession.”
The observation of Rowlett J. in Christopher Barker & Sons v. IRC , “All professions are businesses, but all
businesses are not professions ...” also supports the view that professions are generally regarded as businesses.
The same learned judge in another case, IRC v. Marine Steam Turbine Co. Ltd. held:
“The word ‘business’, however, is also used in another and a very different sense, as meaning an active
occupation or profession continuously carried on and it is in this sense that the word is used in the Act with
which we are here concerned.”
The word “business” is one of wide import and it means an activity carried on continuously and systematically
by a person by the application of his labor or skill with a view to earning an income. The Courts are of the view
that in the context in which the expression “business connection” is used in section 9(1) of the Act, there is no
warrant for giving a restricted meaning to it excluding “professional connections” from its scope.
In the case of Barendra Prasad Ray v. ITO, the contention of the appellants was that a professional connection
cannot amount to a business connection attracting section 9(1) of the Act. The Court held that the word
“business” is one of wide import and it means an activity carried on continuously and systematically by a person
by the application of his labour or skill with a view to earning an income. The judges were of the view that in the
context in which the expression “business connection” is used in section 9(1) of the Act, there is no warrant for
giving a restricted meaning to it excluding “professional connections” from its scope.
3) Mere purchase abroad and use in India is not ‘continuing business’ - The term ‘business connection’
postulates a continuity of business relationship between the foreigner and the Indian. There is no question of
continuing business relation when a person purchase the machinery or other goods abroad and uses them
in India and earns profit as it was held in CIT v. Fried Krupp Industries. In this case the court looked into the
question whether principal to principal transaction amounts to any business connection.
The court observed that where a person purchased goods from a foreigner without anything more, and the
purchased goods are utilized in commercial operations in India by the Indian, then the Indian merchant or
company is earning his own or its own income. The foreigner in such a case has nothing to do with the Indian-
assessee’s transaction in India, as by selling his machinery abroad, he had no further interest in the business
in India. The term “business connection” postulates a continuity of business relationship between the foreigner
and the Indian. The court held that there is no question of continuing business relation when a person purchases
machinery or other goods abroad and uses them in India and earns profit and the part of the foreigner has been
played wholly abroad, so that there is no connection as such with any business in India. The Supreme Court
referred and approved the decision of the Bombay High Court in CIT v. Tata Chemicals Ltd., wherein it had
been held that in order to rope in the income of a non-resident, under the deeming provision, it must be shown
by the department that some of the operations were carried out in India in respect of which the income was
sought, to be assessed. Therefore the court declared that in respect of principal to principal transaction there is
no question of any business connection.
4) Capital gains derived outside India is excluded - If the words ‘business connection in India’ were wide
enough to cover all transactions including transactions in capital assets, there was no reason for Parliament to
specifically include income (a) through or from any property in India, (b) through or from any asset or source
of income from India, and (c) through or from sale of a capital asset situate in India. From the very fact that
the transfer of a capital asset situate in India has been brought within the purview of section 9 the intention of
Parliament was not to bring within its purview any income derived out of sale or purchase of a capital asset
effected outside India as it was held in the case of CIT v. Quantas Airways Ltd.
5) If no operations are carried in India, deeming concept cannot apply: In CIT v. Toshoku Ltd. the court
observed that if no operations of business are carried out in the taxable territories, it follows that the income
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accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or
arise in India.
6) Transactions must be systematic and well-defined: It is not every business activity of a manufacturer that
comes within the expression ‘operation’ to which the provisions of section 42(3) of the 1922 Act [corresponding
to section 9 of the 1961 Act] are attracted. In the case of Anglo-French Textile Co. Ltd. v. CIT (No. 2) it was
observed that activities which are not well defined or are of a casual or isolated character would not ordinarily
fall within the ambit of this rule, in a case where all that may be known is that a few transactions of purchase of
raw materials have taken place in British India, it could not ordinarily be said that the isolated acts were in their
nature ‘operations’ within the meaning of that expression.
Therefore these were the changes introduced by the judiciary in the definition of tern “business connection”.
Other then the above mentioned transactions, following transactions does not amount to business connections:-
a. In respect of business operations carried out both in India and overseas, transactions relating to
overseas operations,
b. Transactions relating only to purchase of goods in India for purpose of export by the non-resident,
c. Transactions confined to the collection of news for transmission outside India in the business of news
agency or publishing newspapers, magazines or journals, carried on by non-resident,
d. Operations confined to shooting of cinematography films by a non-resident foreign national.
Conclusion
The expression ‘business connection’ limits no precise definition. The import and connotation of this expression
has been explained by the Supreme Court in their judgment in C.I.T. v. R.D. Aggarwal and Co. which still holds
good. Although the question whether a non-resident has a ‘business connection’ in India from or through which
income, profits or gains can be said to accrue or arise to him within the meaning of section 9 of the Income-
tax Act, 1961, has to be determined on the facts of each case but its definitely has given some relief so as do
away with the prevalent confusion regarding the term business connection. Generally confusion prevailed in
a situation where few transactions of purchases of raw materials took place in India and the manufacture and
sale of goods took place outside India, the profits arose from such sales were considered to have arisen out of
a business connection in India which was a wrong practice .Later the case of CIT v. Fried Krupp Industries has
made the concept even more clear by hinting at “continuity of business” which is essential so as to establish
business connections. Therefore the term business connection has been rationalized with the help of the judicial
interpretation and been successful to a larger extent in resolving various complications related to transaction
and unlike few years back.
GENERAL ANTI AVOIDANCE RULE

An arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement
and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this
Chapter. The provisions of this Chapter may be applied to any step in, or a part of, the arrangement as they are
applicable to the arrangement.
Impermissible Avoidance Arrangement [Section 96]

1. An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a
tax benefit, and it—
(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;
(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
(c) lacks commercial substance or is deemed to lack commercial substance u/s 97, in whole or in part; or
(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide
purposes.
2. An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered
into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part
of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole
arrangement is not to obtain a tax benefit.
Arrangement to Lack Commercial Substance [Section 97]

An arrangement shall be deemed to lack commercial substance, if—
a. the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from,
the form of its individual steps or a part; or
b. it involves or includes—
i. round trip financing;
ii. an accommodating party;
iii. elements that have effect of offsetting or cancelling each other; or
iv. a transaction which is conducted through one or more persons and disguises the value, location,
source, ownership or control of funds which is the subject matter of such transaction; or
c. it involves the location of an asset or of a transaction or of the place of residence of any party which is
without any substantial commercial purpose other than obtaining a tax benefit (but for the provisions of
this Chapter) for a party; or
d. it does not have a significant effect upon the business risks or net cash flows of any party to the
arrangement apart from any effect attributable to the tax benefit that would be obtained (but for the
provisions of this Chapter).
For the aforesaid purposes, round trip financing includes any arrangement in which, through a series of
transactions–
a. funds are transferred among the parties to the arrangement; and
b. such transactions do not have any substantial commercial purpose other than obtaining the tax benefit
(but for the provisions of this Chapter), without having any regard to —
A.
whether or not the funds involved in the round trip financing can be traced to any funds transferred
to, or received by, any party in connection with the arrangement;
B. the time, or sequence, in which the funds involved in the round trip financing are transferred or
received; or
C. the means by, or manner in, or mode through, which funds involved in the round trip financing are
transferred or received.
A party to an arrangement shall be an accommodating party, if the main purpose of the direct or indirect
participation of that party in the arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit
(but for the provisions of this Chapter) for the assessee whether or not the party is a connected person in
relation to any party to the arrangement.
The following may be relevant but shall not be sufficient for determining whether an arrangement lacks
commercial substance or not, namely:—
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(i) the period or time for which the arrangement (including operations therein) exists;
(ii) the fact of payment of taxes, directly or indirectly, under the arrangement;
(iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the
arrangement.
Consequences of Impermissible Avoidance Arrangement [Section 98]

If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in
relation to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be
determined, in such manner as is deemed appropriate, in the circumstances of the case, including by way of
but not limited to the following:
a. disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible
avoidance arrangement;
b. treating the impermissible avoidance arrangement as if it had not been entered into or carried out;
c. disregarding any accommodating party or treating any accommodating party and any other party as
one and the same person;
d. deeming persons who are connected persons in relation to each other to be one and the same person
for the purposes of determining tax treatment of any amount;
e. reallocating amongst the parties to the arrangement:
(i) any accrual, or receipt, of a capital nature or revenue nature; or
(ii) any expenditure, deduction, relief or rebate;
f. treating –
(i) the place of residence of any party to the arrangement; or
(ii) the situs of an asset or of a transaction, at a place other than the place of residence, location of
the asset or location of the transaction as provided under the arrangement; or
g. considering or looking through any arrangement by disregarding any corporate structure.
For this purposes:
(i) any equity may be treated as debt or vice versa;
(ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or
(iii) any expenditure, deduction, relief or rebate may be recharacterised.
Treatment of Connected Person and Accommodating Party [Section 99]

For the purposes of this Chapter, in determining whether a tax benefit exists,—
(i) the parties who are connected persons in relation to each other may be treated as one and the same
person;
(ii) any accommodating party may be disregarded;
(iii) the accommodating party and any other party may be treated as one and the same person;
(iv) the arrangement may be considered or looked through by disregarding any corporate structure.
Application of this Chapter [Section 100]

The provisions of this Chapter shall apply in addition to, or in lieu of, any other basis for determination of tax
liability.
Framing of Guidelines [Section 101]

The provisions of this Chapter shall be applied in accordance with such guidelines and subject to such conditions,
as may be prescribed. Following scheme has been framed:
Application of General Anti Avoidance Rule [Rule 10U]
The provisions of Chapter X-A (i.e. GAAR Provisions) shall not apply to:
a. an arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the
parties to the arrangement does not exceed a sum of Rs. 3 crore;
b. a Foreign Institutional Investor:
i. who is an assessee under the Act;
ii. who has not taken benefit of an agreement referred to in section 90 or 90A; and iii. who has
invested in listed securities, or unlisted securities, with the prior permission of the competent
authority, in accordance with the Securities and Exchange Board of India (Foreign Institutional
Investor) Regulations, 1995 and such other regulations as may be applicable, in relation to such
investments;
c. a person, being a non-resident, in relation to investment made by him by way of offshore derivative
instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor.
d. any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be
received by, any person from transfer of investments made before 01-4-2017 by such person.
The provisions shall apply to any arrangement, irrespective of the date on which it has been entered into, in
respect of the tax benefit obtained from the arrangement on or after 01-04-2017.
Determination of consequences of impermissible avoidance arrangement [Rule 10UA]

For the purposes of section 98(1), where a part of an arrangement is declared to be an impermissible avoidance
arrangement, the consequences in relation to tax shall be determined with reference to such part only.
Notice, Forms for reference under section 144BA [Rule 10UB]

1. For the purposes of section 144BA(1), the Assessing Officer shall, before making a reference to the
Commissioner, issue a notice in writing to the assessee seeking objections, if any, to the applicability of
provisions of Chapter X-A in his case.
2. The notice shall contain the following:
i. details of the arrangement to which the provisions of Chapter X-A are proposed to be applied;
ii. the tax benefit arising under the arrangement;
iii. the basis and reason for considering that the main purpose of the identified arrangement is to obtain
tax benefit;
iv. the basis and the reasons why the arrangement satisfies the condition provided in section 96; and
v. the list of documents and evidence relied upon in respect of (iii) and (iv) above.
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3. The reference by the Assessing Officer to the Commissioner u/s 144BA(1) shall be in Form No. 3CEG.
4. Where the Commissioner is satisfied that the provisions of Chapter X-A are not required to be invoked
with reference to an arrangement after considering: i. the reference received from the Assessing Officer u/s
144BA(1); or ii. the reply of the assessee in response to the notice issued u/s 144BA(2), he shall issue directions
to the Assessing Officer in Form No. 3CEH.
5. Before a reference is made by the Commissioner to the Approving Panel u/s 144BA(4), he shall record his
satisfaction regarding the applicability of the provisions of Chapter X-A in Form No. 3CEI and enclose the same
with the reference.
Time limits [Rule 10UC]

For the purposes of section 144BA:
i. No directions u/s 144BA(3) shall be issued by the Commissioner after the expiry of 1 month from the
end of the month in which the date of compliance of the notice issued u/s 144BA(2) falls;
ii. No reference shall be made by the Commissioner to the Approving Panel u/s 144BA(4) after the expiry
of 2 months from the end of the month in which the final submission of the assessee in response to the
notice issued u/s 144BA(2) is received;
iii. The Commissioner shall issue directions to the Assessing Officer in Form No.3CEH:
a. in the case referred to in rule 10UB(4)(i), within a period of 1 month from the end of month in which the
reference is received by him; and
b. in the case referred to in rule 10UB(4)(ii), within a period of 2 months from the end of month in which
the final submission of the assessee in response to the notice issued u/s 144BA(2) is received by him.
Definitions [Section 102]

Meaning of various term used are as under:
1. “arrangement” means any step in, or a part or whole of, any transaction, operation, scheme, agreement
or understanding, whether enforceable or not, and includes the alienation of any property in such
transaction, operation, scheme, agreement or understanding;
2. “asset” includes property, or right, of any kind;
3. “benefit” includes a payment of any kind whether in tangible or intangible form;
4. “connected person” means any person who is connected directly or indirectly to another person and
includes,—
a. any relative of the person, if such person is an individual;
b. any director of the company or any relative of such director, if the person is a company;
c. any partner or member of a firm or association of persons or body of individuals or any relative of
such partner or member, if the person is a firm or association of persons or body of individuals;
d. any member of the Hindu undivided family or any relative of such member, if the person is a Hindu
undivided family;
e. any individual who has a substantial interest in the business of the person or any relative of such
individual;
f. a company, firm or an association of persons or a body of individuals, whether incorporated or not, or
a Hindu undivided family having a substantial interest in the business of the person or any director,
partner, or member of the company, firm or association of persons or body of individuals or family,
or any relative of such director, partner or member; g. a company, firm or association of persons or
body of individuals, whether incorporated or not, or a Hindu undivided family, whose director, partner,
or member has a substantial interest in the business of the person, or family or any relative of such
director, partner or member; h. any other person who carries on a business, if –
i. the person being an individual, or any relative of such person, has a substantial interest in
the business of that other person; or
ii. the person being a company, firm, association of persons, body of individuals, whether
incorporated or not, or a Hindu undivided family, or any director, partner or member of such
company, firm or association of persons or body of individuals or family, or any relative of
such director, partner or member, has a substantial interest in the business of that other
person;
5. “fund” includes— (a) any cash; (b) cash equivalents; and (c) any right, or obligation, to receive or pay,
the cash or cash equivalent;
6. “party” includes a person or a permanent establishment which participates or takes part in an
arrangement;
7. a person shall be deemed to have a substantial interest in the business, if,—
a. in a case where the business is carried on by a company, such person is, at any time during the
financial year, the beneficial owner of equity shares carrying twenty per cent or more, of the voting
power; or
b. in any other case, such person is, at any time during the financial year, beneficially entitled to
twenty per cent or more, of the profits of such business;
8. “step” includes a measure or an action, particularly one of a series taken in order to deal with or achieve
a particular thing or object in the arrangement;
9. “tax benefit” includes,—
a. a reduction or avoidance or deferral of tax or other amount payable under this Act; or
b. an increase in a refund of tax or other amount under this Act; or
c. a reduction or avoidance or deferral of tax or other amount that would be payable under this Act,
as a result of a tax treaty; or
d. an increase in a refund of tax or other amount under this Act as a result of a tax treaty; or
e. a reduction in total income; or
f. an increase in loss, in the relevant previous year or any other previous year;
Example 1:
Facts:
M/s India Chem Ltd. is a company incorporated in India. It sets up a unit in a Special Economic Zone (SEZ) in
F.Y. 2017-18 for manufacturing of chemicals. It claims 100% deduction of profits earned from that unit in F.Y.
2018-19 and subsequent years as per section 10AA. Is GAAR applicable in such a case?
Interpretation:
There is an arrangement of setting up of a unit in SEZ which results into a tax benefit. However, this is a case
of tax mitigation where the tax payer is taking advantage of a fiscal incentive offered to him by submitting to the
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conditions and economic consequences of the provisions in the legislation e.g., setting up the business unit in
SEZ area. Hence, the Revenue would not invoke GAAR as regards this arrangement.
Example 2:
Facts:
In the above example 1, let us presume M/s India Chem Ltd. has another unit for manufacturing chemicals in a
non- SEZ area. It then diverts its production from such manufacturing unit and shows the same as manufactured
in the tax exempt SEZ unit, while doing only process of packaging there. Is GAAR applicable in such a case?
Interpretation: This is a case of misrepresentation of facts by showing production of non-SEZ unit as production
of SEZ unit. Hence, this is an arrangement of tax evasion and not tax avoidance. Tax evasion, being unlawful,
can be dealt with directly by establishing correct facts. GAAR provisions will not be invoked in such a case.
Example 3
Facts:
In the above example 2, let us presume that M/s India Chem Ltd. does not show production of non-SEZ unit as
a production of SEZ unit but transfers the product of non-SEZ unit at a price lower than the fair market value
and does only some insignificant activity in SEZ unit. Thus, it is able to show higher profits in SEZ unit than in
non-SEZ unit, and consequently claims higher deduction in computation of income. Can GAAR be invoked to
deny the tax benefit?
Interpretation:
As there is no misrepresentation of facts or false submissions, it is not a case of tax evasion. The company
has tried to take advantage of tax provisions by diverting profits from non-SEZ unit to SEZ unit. This is not the
intention of the SEZ legislation. However, such tax avoidance is specifically dealt with through transfer pricing
regulations that deny tax benefits. Hence, the Revenue would not invoke GAAR in such a case.
Example 4
Facts:
In the above example 3, let us presume, that both units in SEZ area (say A) and non-SEZ area (say B) work
independently. M/s India Chem Ltd. started taking new export orders from existing as well as new clients for
unit A and gradually, the export from unit B declined. There has not been any shifting of equipment from unit B
to unit A. The company offered lower profits from unit B in computation of income. Can GAAR be invoked on
the ground that there has been shifting or reconstruction of business from unit B to unit A for the main purpose
of obtaining tax benefit?
Interpretation: The issue of tax avoidance through shifting / reconstruction of existing business from one unit
to another has been specifically dealt with in section 10AA of the Act. Hence, the Revenue would not invoke
GAAR in such a case.
Example 5
Facts:
An Indian company (Indco) has set up a holding company (Holdco) in a no tax jurisdiction outside India (say
NTJ) which has set up further subsidiary companies (Subco A and Subco B) which pay dividends to Holdco.
Such dividends are not repatriated to Indco. Can GAAR be invoked to look through Holdco to tax dividends in
the hands of Indco?
Interpretation: Declaration / repatriation of dividend is a business choice of a company. India does not have anti-
deferral provisions in the form of Controlled Foreign Company (CFC) rules in the Income Tax Act. Accordingly,
GAAR would not be invoked in such a case.
Example 6
Facts:
In the above example 5, dividend is accumulated in Holdco for a number of years and subsequently, Holdco is
merged into Indco through a cross–border merger. Can GAAR be invoked on the ground that the merger route
has been adopted to avoid payment of tax on dividend in India?
Interpretation: It is true that if Holdco declares dividends to Indco before merger, then, such dividend would
have been taxable in India. But the timing or sequencing of an activity is a business choice available to the
taxpayer. Moreover, section 47 of the Act specifically exempts capital gains on cross border merger of a foreign
company into an Indian company. Hence, GAAR cannot be invoked when taxpayer makes a choice about
timing or sequencing of an activity to deny a tax benefit granted by the statute.
Example 7
Facts:
The merger of a loss-making company into a profit making one results in losses setting off profits, a lower net
profit and lower tax liability for the merged company. Would the losses be disallowed under GAAR?
Interpretation: As regards setting off of losses, the provisions relating to merger and amalgamation already
contain specific anti- avoidance safeguards. Therefore, GAAR would not be invoked when SAAR is applicable.
Example 8
Facts:
A choice is made by a company by acquiring an asset on lease over outright purchase. The company claims
deduction for lease rentals in case of acquisition through lease rather than depreciation as in the case of
purchase of the asset. Would the lease rent payment, being higher than the depreciation, be disallowed as
expense under GAAR?
Interpretation: GAAR provisions, would not, prima facie, apply to a decision of leasing (as against purchase of
an asset). However, if it is a case of circular leasing, i.e. the taxpayer leases out an asset and through various
sub-leases, takes it back on lease, thus creating a tax benefit without any change in economic substance,
Revenue would examine the matter for invoking GAAR provisions.
Example 9
Facts:
1. X Ltd. is a banking institution in LTJ (low tax jurisdiction);
2. There is a closely held company Subco in LTJ which is a wholly owned subsidiary of another closely
held Indian company Indco;
3. Subco has reserves and, if it provides a loan to Indco, it may be treated as deemed dividend u/s 2(22)
(e) of the Act.
4. Subco makes a term deposit with X Bank Ltd. and X Bank Ltd. bank based on this security provides a
back to back loan to Indco.
Say, India-LTJ tax treaty provides that interest payment to a LTJ banking company is not taxable in India.
Can this be examined under GAAR?
Interpretation:
This is an arrangement whose main purpose is to bring money out of reserves in Subco to India without
payment of due taxes. The tax benefit is saving of taxes on income to be received from Subco by way of
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dividend or deemed dividend. The arrangement disguises the source of funds by routing it through X Bank Ltd.
X Bank Ltd. may also be treated as an accommodating party. Hence the arrangement shall be deemed to lack
commercial substance.
Consequently, in the case of Indco, the loan amount would be treated as dividend income received from Subco
to the extent reserves are available in Subco; and no expense by way of interest would be allowed.
In the case of X Bank Ltd, exemption from tax on interest under the DTAA may not be allowed as X Ltd is not
a beneficial owner of the interest, provided the DTAA has anti-avoidance rule of beneficial ownership. If such
anti-avoidance rule is absent in DTAA, then GAAR may be invoked to deny treaty benefit as arrangement will
be perceived as an attempt to hide the source of funds of Subco.
Example 10
Facts:
Indco incorporates a Subco in a NTJ with equity of US$100. Subco has no reserves; it gives a loan of US$100 to
Indco at the rate of 10% p.a. which is utilized for business purposes. Indco claims deduction of interest payable
to Subco from the profit of business. There is no other activity in Subco. Can GAAR be invoked in such a case?
Interpretation:
The main purpose of the arrangement is to obtain interest deduction in the hands of Indco and thereby tax
benefit. There is no commercial substance in establishing Subco since without it there is no effect on the
business risk of Indco or any change in the cash flow (apart from the tax benefit). Moreover, it is a case of
round tripping which means a case of deemed lack of commercial substance. Hence, it would be treated as an
impermissible avoidance arrangement.
Consequently, in the case of Indco, interest payment would be disallowed by disregarding Subco. No
corresponding relief would be allowed in the case of Subco by way of refund of taxes withheld, if any.
Example 11
Facts:
A large corporate group has created a service company to manage all its non core activities. The service
company then charges each company for the services rendered on a cost plus basis. Can the mark up in the
cost of services be questioned using GAAR.
Interpretation: There are specific anti avoidance provisions through transfer pricing regulations as regards
transactions among related parties. GAAR will not be invoked in this case.
Example 12
Facts
1. Y Ltd. is a company incorporated in country C1. It is a non-resident in India.
2. Z Ltd. is a company resident in India.
3. A Ltd. is a company incorporated in country F1 and it is a 100% subsidiary of Y Ltd.
4. A Ltd. and Z Ltd. form a joint venture company X Ltd. in India after the date of commencement of GAAR
provisions. There is no other activity in A Ltd.
5. The India-F1 tax treaty provides for non-taxation of capital gains in the source country and country F1
charges no capital gains tax in its domestic law.
6. A Ltd. is also designated as a ―permitted transferee– of Y Ltd. ―Permitted transferee– means that
though shares are held by A Ltd, all rights of voting, management, right to sell etc., are vested in Y Ltd.
7. As per the joint venture agreement, 49% of X Ltd‘s equity is allotted to A Ltd. and 51% is allotted to Z
Ltd..
8. Thereafter, the shares of X Ltd. held by A Ltd. are sold to C Ltd., a company connected to the Z Ltd.
group.
As per the tax treaty with country F1, capital gains arising to A Ltd. are not taxable in India. Can GAAR be
invoked to deny the treaty benefit?
Interpretation The arrangement of routing investment through country F1 results into a tax benefit. Since there
is no business purpose in incorporating company A Ltd. in country F1 which is a LTJ, it can be said that the
main purpose of the arrangement is to obtain a tax benefit. The alternate course available in this case is direct
investment in X Ltd. joint venture by Y Ltd. The tax benefit would be the difference in tax liabilities between the
two available courses. The next question is, does the arrangement have any tainted element? It is evident that
there is no commercial substance in incorporating A Ltd. as it does not have any effect on the business risk of
Y Ltd. or cash flow of Y Ltd. As the twin conditions of main purpose being tax benefit and existence of a tainted
element are satisfied, GAAR may be invoked. Additionally, as all rights of shareholders of X Ltd. are being
exercised by Y Ltd instead of A Ltd, it again shows that A Ltd lacks commercial substance. Hence, unless it is
a case where Circular 789 relating Tax Residence Certificate in the case of Mauritius, or Limitation of Benefits
clause in India-Singapore treaty is applicable, GAAR can be invoked.
Example 13
Facts:
A Ltd. is incorporated in country F1 as a wholly owned subsidiary of company Y Ltd. which is not a resident of
F1 or of India. The India-F1 tax treaty provides for non-taxation of capital gains in India (the source country)
and country F1 charges no capital gains tax in its domestic law. Some shares of X Ltd., an Indian company,
are acquired by A Ltd in the year after date of coming into force of GAAR provisions. The entire funding for
investment by A Ltd. in X Ltd. was done by Y Ltd. These shares are subsequently disposed of by A Ltd after 5
years. This results in capital gains which A Ltd. claims as not being taxable in India by virtue of the India-F1 tax
treaty. A Ltd. has not made any other transaction during this period. Can GAAR be invoked?
Interpretation: This is an arrangement which has been created with the main purpose of avoiding capital gains
tax in India by routing investments through a favourable jurisdiction. There is neither a commercial purpose nor
commercial substance in terms of business risks or cash flow to Y Ltd in setting up A Ltd. It should be immaterial
here whether A Ltd has office, employee etc in country F1. Both the purpose test and tainted element tests
are satisfied for the purpose of invoking GAAR. Unless it is a case where Circular 789 relating Tax Residence
Certificate in the case of Mauritius, or Limitation of Benefits clause in India-Singapore treaty is applicable, the
Revenue may invoke GAAR and consequently deny treaty benefit.
Example 14
Facts:
The shares of V Ltd., an asset owning Indian company, was held by another Indian company X Ltd. X Ltd. was
in turn held by two companies G Ltd. and H Ltd., incorporated in country F2, a NTJ. The India-F2 tax treaty
provides for non- taxation of capital gains in the source country and country F2 charges no capital gains tax in
its domestic law. X Ltd. was liquidated by consent and without any Court Decree. This resulted in transfer of the
asset/shares from X Ltd., to G Ltd. and H Ltd. Subsequently, companies G Ltd and H Ltd sold the shares of V
Ltd to A Ltd. which was incorporated in F2. The companies G Ltd and H Ltd claimed benefit of tax treaty and the
resultant gains from the transaction are claimed to be not taxable. Can GAAR be invoked to deny treaty benefit?
Interpretation: The alternative courses available to taxpayer to achieve the same result (with or without the
tax benefit) are:
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ii. Option 1 (as mentioned in facts): X Ltd. liquidated, G Ltd. and H Ltd. become shareholders of V Ltd.; A Ltd.
acquires shares from G Ltd. and H Ltd.; and becomes shareholder of V Ltd.
iii. Option 2: A Ltd. acquires shares of X Ltd. from G Ltd. and H Ltd.; X Ltd. is liquidated; and A Ltd. becomes
shareholder of V Ltd.
iv. Option 3: X Ltd. sells its entire shareholding in V Ltd. to A Ltd. and subsequently, X Ltd is liquidated.
In Options 1 & 2, there is no tax liability in India except the deemed dividend taxation to the extent reserves are
available in X Ltd. This is because of the treaty between India and country F1. In option 3, tax liability arises to X
Ltd., an Indian company, on sale of shares of V Ltd. Subsequently, when X Ltd. is liquidated, tax liability arises
on account of deemed dividend to the extent reserves are available in X Ltd.
The taxpayer exercises the most tax efficient manner in disposal of its assets through proper sequencing of
transactions. The Revenue cannot invoke GAAR as regards this arrangement.
TRANSFER PRICING
Transfer Pricing Regulations in India

The Indian Transfer Pricing regulations are based on arm’s length principle. The regulations came into
effect from 1 April, 2001. The regulations provide that any income arising from an international transaction
between associated enterprises shall be computed having regard to the arm’s length price (ALP). The concept
of associated enterprises has been defined in detail in the regulations. The regulations do not provide any
hierarchy of the Arm’s Length Methods and support concept of “most appropriate method” which provide the
most reliable measure of an arm’s length result under a particular set of facts and circumstances. The regulation
prescribes mandatory annual filing requirements as well as maintenance of contemporaneous documentation by
the taxpayer in case international transactions between associated enterprises cross a threshold and contains
stringent penalty implications in case of non– compliance. The primary onus of proving arm’s length price of the
transaction lies with the taxpayer. Indian transfer pricing administration prefer Indian comparables in most of
the cases and also accept foreign comparables in cases where foreign associated enterprises is less or least
complex entity and requisite information are available about tested party and comparables. In order to provide
uniformity in application of transfer pricing law there is a specialized Directorate of transfer pricing to administer
transfer pricing rule under supervision of Director General of Income tax (International Taxation). Transfer
Pricing officers (TPO) are vested with powers of inspection, discovery, enforcing attendance, examining a
person under oath, on–the–spot enquiry/verification and compelling the production of books of account and
other relevant documents during the course of a transfer pricing audit. A dispute resolution panel (in short DRP)
is available to taxpayer to resolve disputes relating to transfer pricing before disputes of final order by Assessing
Officer, (which incorporates the order of TPO).
XYZ ltd., a giant electronic brand of japan selling goods all over the world. They set up a call center in Gurugram,
Haryana, India. Total number of employees employed by the said company is above 1000 total set up cost came
out to Rs.100 crores, which they bring in fully convertible foreign exchange currency. There annual expenses
are about 85 crores per annum, which the call center business gets reimbursed from XYZ LTD. again all the
money received by call center is in fully convertible foreign exchange. Moreover ‘call center set up’ comply all
the related laws applicable with them. XYZ LTD believes in full transparency and don’t want to encourage any
culture which leads to law evasion or avoidance.
But despite of extreme precautions they got demand from Income Tax Office, and they charge, that the company
is engaged in tax evasion and avoidance practices. There total expenditure on average basis ranges from
80crores to 90crores and same amount they got reimbursed from XYZ ltd.
So there profit and loss expenses are like this:
Total revenue (reimbursed money) 85 crores
Total expenditure (Actual) 85 crores
Net profit before tax 0
Tax on profit 0
The plea from the call center business is as follows:
1. There net profit before tax is zero and hence no tax liability
2. They are all law compliant and hence they cannot be charge as tax evader by the income tax authority.
3. They bring fully convertible exchange in India every year.
4. They are providing employment and training to more than thousand personnels in India,
5. They are the contributors in real sense to the Indian economy.
6. They are neither selling anything from this call center, nor they provide any after sales services, what
they are just doing, is helping customers (buyers) or facilitating them on effective use of electronic
equipment and hence they are not doing any business activity in India.
Now, you as a student of company secretary course, what is your call? To understand the legal provisions one
has to go through the provisions of Income tax Act, 1961 regarding provisions of transfer pricing and business
connection.
In the above case one can have soft corner for XYZ LTD. But from taxation point of view they are indulge in tax
evasion practices .They are doing one of the business activity in India because such act is integral part of their
business as it is one of the condition of sale, which is so called customer care services.
Instead of opening their call center in Japan or other developed countries, they are saving cost by this practice,
because labour in japan or other developed country is much higher as compared to India.
So from Indian taxman point of view, if they would have engaged any person (enterprise) for this work, the price
paid to such enterprise should be considered as revenue from operation and after deducting related expenses
from this activity will be the profit which is chargeable to tax under these circumstances.
Hence the price assumed by Indian taxman on certain prescribed basis as given under sections from to this, is
known as arm’s length price.
Transfer price is the price charged in a transaction. The term ‘transfer price’ is used to describe the actual price
charged between the associated enterprises in an international transaction.
Transfer pricing issues arise when entities of multinational corporations resident in different jurisdictions transfer
property or provide services to one another. These entities do not deal at arm’s length and, thus, transactions
between these entities may not be subject to ordinary market forces. Where the transfer price is different from
the price which would have been charged if the enterprises were not associated and the difference gives rise
the tax advantage, the tax is calculated on the basis of arm’s length price.
Transfer price is the price which is charge by one associated company to another. And that can be considered
as measure of tax avoidance by tax authorities because by this one can manipulate profits of associated
enterprise.
Article 9 of the OECD Model Tax Convention is dedicated to the Arms Length Principle (ALP). It says that the
transfer prices set between the corporate entities should be in such a way as if they were two independent
entities.
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ALP is based on real markets and provides the MNE’s and the governments a single international standard for
the contracts that allows various different government entities to collect their share of tax.
A functionally separate entity approach as a working hypothesis underlying the application of the arm’s length
principle, is found in almost all tax treaties.
Multinational groups has given rise to new and complex issues emerging from transactions entered into between
two or more enterprises belonging to the same group. Such multinationals carrying on business in India can be
controlled by their holding companies (parent companies) and the profit of Indian business can be controlled by:
• manipulating the prices charged and paid in such intra-group transactions
• The allowance for any expense or interest arising from an international transaction or specified domestic
transaction.
• Where in an international transaction or specified domestic transaction,
o two or more associated enterprises
 enter into a mutual agreement or arrangement for the apportionment of, or any contribution
to, any cost incurred
 in connection with a benefit, service or facility provided to any such enterprises,
the cost apportioned to (contributed by), any such enterprise shall be determined having regard to the
arm’s length price of such benefit, service or facility.
• The provisions (in any of aforesaid situation) shall not apply in a case where the computation of income
or the determination of the allowance for any expense or interest or the determination of any cost or
expense allocated or contributed has the effect of reducing the income chargeable to tax or increasing
the loss, as the case may be, computed on the basis of entries made in the books of account in respect
of the previous year in which the international transaction or specified domestic transaction was entered
into.
• thereby, leading to erosion of tax revenues. In other words, the course of business between a resident
person and an associated non- resident or not ordinarily resident person, is so arranged that the
resident makes either no profit or less than the ordinary profit in that business. Such an arrangement
would deprive that Indian revenue of the tax which would otherwise be payable by the resident. With a
view to provide a statutory framework which can lead to computation of reasonable, fair and equitable
profits and tax in India, in case of such multinational enterprise, new set of special provisions relating
to avoidance of tax have been introduced under chapter X in the Income tax Act. These provisions
relate to computation of income from international transaction having regard to arm’s length price,
meaning of associated enterprises, meaning of international transaction, determination of arm’s length
price, keeping and maintaining of information and documents by persons entering into international
transaction, furnishing of a report from an accountant by persons entering into such transactions.
Illustration 9: What is the legislative objective of bringing into existence the provisions relating to transfer
pricing in relation to international transactions? Examine.
Solution:
The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by
controlling prices in intra-group transactions prompted the Government to set up an Expert Group to examine
the issues relating to transfer pricing.
There is a possibility that two or more entities belonging to the same multinational group can fix up their prices
for goods and services and allocate profits among the enterprises within the group in such a way that there
may be either no profit or negligible profit in the jurisdiction which taxes such profits and substantial profit in
the jurisdiction which is tax haven or where the tax liability is minimum. This may adversely affect a country’s
share of due revenue. The increasing participation of multinational groups in economic activities in India has
given rise to new and complex issues emerging from transactions entered into between two or more enterprises
belonging to the same multinational group. The profits derived by such enterprises carrying on business in India
can be controlled by the multinational group, by manipulating the prices charged and paid in such intra- group
transactions, which may lead to erosion of tax revenue. Therefore, transfer pricing provisions have been
brought in by the Finance Act, 2001 with a view to provide a statutory framework which can lead to computation
of reasonable, fair and equitable profits and tax in India, in the case of such multinational enterprises.
Arm’s length price means

(i) a price which is applied or proposed to be applied in a transaction
(ii) between persons other than associated enterprises (i.e., unrelated person, resident or non-resident),
(iii) in uncontrolled conditions. Taxpoint : There may be more than one arm’s length price. Process The
process to arrive at the appropriate arm’s length price typically involves the following processes or steps:
(a) Comparability analysis The concept of establishing comparability is central to the application of the
arm’s length principle. An analysis under the arm’s length principle involves information on associated
enterprises involved in the controlled transactions, the transactions at issue between the associated
enterprises, the functions performed and the information derived from independent enterprises
engaged in comparable transactions (i.e., uncontrolled transactions). The objective of comparability
analysis is always to seek the highest practicable degree of comparability, recognising that there will
be unique transactions and cases where any applied method cannot be relied on. It is clear that the
closest approximation of the arm’s length price will be dependent on the availability and reliability of
comparables. There are many factors determining the comparability of transactions for transfer pricing
analysis:
(i) Characteristics of the property or services Property, tangible or intangible, as well as services,
may have different characteristics which may lead to a difference in their values in the open
market. Therefore, these differences must be accounted for and considered in any comparability
analysis of controlled and uncontrolled transactions. Characteristics that may be important to
consider are:
● In case of tangible property, the physical features, quality, reliability and availability of volume
and supply;
● In the case of services, the nature and extent of such services; and
● In case of intangible property, the type and form of property, duration and degree of protection
and anticipated benefits from use of property.
(ii) Functional analysis (Functions, Assets and Risks)
♦ In dealings between two independent enterprises, the compensation usually reflects the
functions that each enterprise performs, taking into account assets used and risks assumed.
Therefore, in determining whether controlled and uncontrolled transactions are comparable,
a proper study of all specific characteristics of an international transaction or functional activity
needs to be undertaken, including comparison of the functions performed, assets used and
risks assumed by the parties. Such a comparison is based on a “functional analysis”.
♦ A functional analysis seeks to identify and compare the economically significant activities and
responsibilities undertaken by the independent and associated enterprises. An economically
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significant activity is considered to be any activity which materially affects the price charged
in a transaction and the profits earned from that transaction.
♦ Functional analysis is thus a key element in a transfer pricing exercise. It is a starting point
and lays down the foundation of the arm’s length analysis. The purpose of functional
analysis is to describe and analyse the operations of an enterprise and its associated
enterprises.
♦ Functional analysis typically involves identification of ‘functions performed’, ‘assets employed’
and ‘risks assumed’ (therefore named a “FAR analysis”) with respect to the international
transactions of an enterprise. Functions that may need to be accounted for in determining
the comparability of two transactions can include:
Research and development

● Product design and engineering;
● Manufacturing, production and process engineering;
● Product fabrication, extraction and assembly;
● Marketing and distribution functions, including inventory management and advertising activities;
● Transportation and warehousing; and
● Managerial, legal, accounting and finance, credit and collection, training and personnel management
services.
● Outsourcing nature of work
● Business process management
♦ Risks that need to be considered while determining the degree of comparability between controlled and
uncontrolled transactions include:
● Financial risks including method of funding, funding of losses, foreign exchange risk
● Product risk including design & development of product, after sales service, product liability risk,
intellectual property risk, risks associated with R&D, obsolescence / upgrading of product
● Market risks including fluctuations in prices and demand, business cycle risks, development of
market including advertisement and product promotion
● Credit and collection risks;
● Entrepreneurial risk including risk of loss associated with capital investment
● General business risks related to ownership of plant, property and equipment.
♦ Furthermore it is not only necessary to identify the risks but to identify who bears such risks. The
allocation of risk is usually based on contractual terms between the parties; however these may not
always reflect the reality of a transaction or a relationship, and an allocation of risk between controlled
taxpayers after the outcome of such risk is known or reasonably knowable lacks economic substance.
♦ Consider an example where company S, situated in country A, is the wholly owned subsidiary of
company P, situated in country B but a foreign manufacturer. The subsidiary company S acts as the
distributor of goods manufactured by the parent company P and both parties execute an agreement
that any product liability costs will be borne by the parent company P. However, in practice when
product liability claims are raised, subsidiary company S always pays the resulting damages. In such a
case the tax authorities will generally disregard the contractual arrangement and treat the risk as having
been in reality assumed by subsidiary company S.
(iii) Contractual Terms
♦ The conduct of the contracting parties is a result of the terms of the contract between them and
the contractual relationship thus warrants careful analysis when arriving at the transfer price. Other
than a written contract, the terms of the transactions may be figured out from correspondence and
communication between the parties involved. In case the terms of the arrangement between the two
parties are not explicitly defined, then the terms have to be deduced from their economic relationship
and conduct.
♦ One important point to note in this regard is that associated enterprises may not hold each other to the
terms of the contract as they have common overarching interests, unlike independent enterprises, who
are expected to hold each other to the terms of the contract. Thus, it is important to figure out whether
the contractual terms between the associated enterprises are a “sham” (something that appears
genuine, but when looked closer lacks reality, and is not valid under many legal systems) and/or have
not been followed in reality.
♦ Also, explicit contractual terms of a transaction involving members of a MNE may provide evidence as
to the form in which the responsibilities, risks and benefits have been assigned among those members.
For example, the contractual terms might include the form of consideration charged or paid, sales and
purchase volumes, the warranties provided, the rights to revisions and modifications, delivery terms,
credit and payment terms etc. This material may also indicate the substance of a transaction, but will
usually not be determinative on that point.
Illustration 10: Examine the consequences that would follow if the Assessing Officer makes adjustment to
arm’s length price in international transactions of the assessee resulting in increase in taxable income. What
are the remedies available to the assessee to dispute such adjustment?
Solution:
In case the Assessing Officer makes adjustment to arm’s length price in an international transaction which
results in increase in taxable income of the assessee, the following consequences shall follow:-
(1) No deduction under section 10AA or Chapter VI-A shall be allowed from the income so increased.
(2) No corresponding adjustment would be made to the total income of the other associated enterprise
(in respect of payment made by the assessee from which tax has been deducted or is deductible at
source) on account of increase in the total income of the assessee on the basis of the arm’s length price
so recomputed.
The remedies available to the assessee to dispute such an adjustment are:-
(1) In case the assessee is an eligible assessee under section 144C, he can file his objections to the variation
made in the income within 30 days [of the receipt of draft order by him] to the Dispute Resolution Panel
and Assessing Officer. Appeal against the order of the Assessing Officer in pursuance of the directions
of the Dispute Resolution Panel can be made to the Income-tax Appellate Tribunal.
(2) In any other case, he can file an appeal under section 246A to the Commissioner (Appeals) against the
order of the Assessing Officer within 30 days of the date of service of notice of demand.
(3) The assessee can opt to file an application for revision of order of the Assessing Officer under section
264 within one year from the date on which the order sought to be revised is communicated, provided
the time limit for appeal to the Commissioner (Appeals) or the Income-tax Appellate Tribunal has expired
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or the assessee has waived the right of such an appeal. The eligibility conditions stipulated in section
264 should be fulfilled.
Illustration 11:
I. Limited, an Indian Company supplied billets to its holding company, U. Limited, UK during the previous year
2019-20. I. Limited also supplied the same product to another UK based company, V. Limited, an unrelated
entity. The transactions with U. Limited are priced at Euro 500 per MT (FOB), whereas the transactions with V.
Limited are priced at Euro 700 per MT (CIF). Insurance and Freight amounts to Euro 200 per MT. Compute the
arm’s length price for the transaction with U. Limited.
Solution:
In this case, I. Limited, the Indian company, supplied billets to its foreign holding company, U. Limited. Since the
foreign company, U. Limited, is the holding company of I. Limited, I. Limited and U. Limited are the associated
enterprises within the meaning of section 92A.
As I. Limited supplies similar product to an unrelated entity, V. Limited, UK, the transactions between I. Limited
and V. Limited can be considered as comparable uncontrolled transactions for the purpose of determining the
arm’s length price of the transactions between I. Limited and U. Limited Comparable Uncontrolled Price (CUP)
method of determination of arm’s length price (ALP) would be applicable in this case.
Transactions with U. Limited are on FOB basis, whereas transactions with V. Limited are on CIF basis. This
difference has to be adjusted before comparing the prices.
Amount (in Euro)
Price per MT of billets to V. Limited 700
Less: Cost of insurance and freight per M.T. 200
Adjusted Price per M.T. 500
Since the adjusted price for V. Limited, UK and the price fixed for U. Limited are the same, the arm’s length price
is Euro 500 per MT. Since the sale price to related party (i.e., U. Limited) and unrelated party (i.e., V. Limited) is
the same, the transaction with related party U. Limited has also been carried out at arm’s length price.
Illustration 12: Examine the correctness or otherwise of the following with reference to the provisions of the
Income-tax Act, 1961
(i) Transfer pricing rules shall have no implication where income is computed on the basis of book profits.
(ii) Assessing Officer can complete the assessment of income from international transaction in disregard
of the order passed by the Transfer Pricing Officer by accepting the contention of assessee.
Solution:
(i) The statement is correct:
For the purpose of computing book profit for levy of minimum alternate tax, the net profit shown in the statement
of profit and loss prepared in accordance with the Companies Act can be increased/ decreased only by the
additions and deductions specified in Explanation 1 below section 115JB(2).
No other adjustments can be made to arrive at the book profit for levy of MAT, except where:
(a) it is discovered that the statement of profit and loss is not drawn up in accordance with the relevant
Schedule of the Companies Act
(b) incorrect accounting policies and/or accounting standards have been adopted for preparing such
accounts; and
(c) the method and rate of depreciation adopted is not correct.

Therefore, transfer pricing adjustments cannot be made while computing book profit for levy of MAT.
(ii) The statement is not correct:
Section 92CA(4) provides that on receipt of the order of the Transfer Pricing Officer determining the arm’s
length price of an international transaction, the Assessing Officer shall proceed to compute the total income in
conformity with the arm’s length price determined by the Transfer Pricing Officer.
The order of the Transfer Pricing Officer is binding on the Assessing Officer. Therefore, the Assessing Officer
cannot complete the assessment of income from international transactions in disregard of the order of Transfer
Pricing Officer by accepting the contention raised by the assessee.
Introduction of Advance Pricing Agreements [Sections 92CC & 92CD]

(1) An Advance Pricing Agreement (APA) is an agreement between a taxpayer and a taxing authority on an
appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future. They offer
better assurance on transfer pricing methods and provide certainty and unanimity of approach. Keeping in mind
the benefits offered by the APAs, sections 92CC and section 92CD have been introduced in the transfer pricing
regime to provide a framework for formulation of APAs between the tax payer and the income-tax authorities.
(2) Section 92CC enables the Board (with the approval of the Central Government), to enter into an APA with
any person undertaking an international transaction.
(i) Purpose of APA: The APA shall relate to an international transaction to be entered into by such person.
The APA shall be entered into for the purpose of determination of the arm’s length price or specifying
the manner in which arm’s length price shall be determined, in relation to such international transaction.
(ii) Manner of determination of Arm’s Length Price in APA: The manner for determination of arm’s
length price referred above may include methods referred to in section 92C(1) or any other method with
necessary adjustments or variations.
(iii) Non-applicability of section 92C or section 92CA: In case an APA has been entered into in respect of
any international transaction, the arm’s length price in relation to that transaction shall be determined in
accordance with that APA notwithstanding any contrary provisions contained in section 92C or section
92CA i.e., the provisions of the APA shall apply overriding the provisions of section 92C or section
92CA, which are normally applicable for determination of arm’s length price.
(iv) Validity of APA: The APA shall be valid for such period as specified in the agreement, which shall in no
case exceed five consecutive previous years.
(v) Binding nature of APA: The APA so entered into shall be binding on:
(a) the person in whose case, and in respect of the transaction in relation to which, the APA has been
entered into; and
(b) the Principal Commissioner or Commissioner and the income-tax authorities subordinate to him,
in respect of the said person and the said transaction.
(vi) Not binding of APA: The APA shall not be binding if there is any change in law or facts having bearing
on such APA.
(vii) Conditions to declare APA as void ab initio: In case the Board finds that the APA so entered into has
been obtained by the person by way of fraud or misrepresentation of facts, the Board is empowered to
pass an order declaring any such APA to be void ab initio, with the approval of Central Government.
(viii) Consequences of declaration of an APA as void ab initio: As a result of declaration of an APA as
void ab initio:
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A) all the provisions of the Act shall apply to such person as if such APA had never been entered
into.
(a) The period beginning with the date of such APA and ending on the date of order declaring
the APA as void ab initio, shall be excluded for the purpose of computation of any period of
limitation under this Act (for example period of limitation specified in the section 153, 153B
etc). This is irrespective of anything contained in any other provision of the Act.
(b) In case the period of limitation after exclusion of the above mentioned period is less than 60
days, such remaining period of limitation shall be extended to 60 days.
(ix) If an application is made by a person for entering into an APA, then, the proceeding, in respect of such
person for the purpose of the Act, shall be deemed to be pending.
(x) Prescribed scheme for APA: The Board is empowered to prescribe a scheme specifying the manner,
form, procedure and any other matter generally in respect of the APA.
Prescribed Advance Pricing Agreement Scheme for the purpose of section 92CC [Rule 10F to 10T] : In
exercise of the powers conferred in section 92CC(9) read with section 295 of the Income-tax Act, 1961, the
CBDT has prescribed rules specifying an Advance Pricing Agreement (APA) Scheme. Some of the important
provisions of the scheme are briefed hereunder –
(1) Persons eligible to apply [Rule 10G]: Any person who has undertaken an international transaction or
is contemplating to undertake an international transaction, shall be eligible to enter into an agreement
under these rules.
(2) Pre-filing Consultation [Rule 10H]:
(a) Any person proposing to enter into an agreement under these rules may, by an application in
writing, make a request for a pre-filing consultation in the prescribed form to the Director General
of Income-tax (International Taxation).
(b) The pre-filing consultation shall, among other things,-
(i) determine the scope of the agreement;
(ii) identify transfer pricing issues;
(iii) determine the suitability of international transaction for the agreement;
(iv) discuss broad terms of the agreement.
(c) The pre-filing consultation shall –
(i) not bind the Board or the person to enter into an agreement or initiate the agreement process;
not be deemed to mean that the person has applied for entering into an agreement.
(3) Application for advance pricing agreement [Rule 10-I]
(a) Any person who is eligible to apply may enter into agreement may, if such person desires to enter
into an agreement furnish an application in the prescribed form along with proof of payment of
requisite fee as specified, to the Director General of Income-tax (International Taxation) in case
of unilateral agreement and to the competent authority in India in case of bilateral or multilateral
agreement.
(b) The application may be filed at any time -
(i) before the first day of the previous year relevant to the first assessment year for which the
application is made, in respect of transactions which are of a continuing nature from dealings
that are already occurring; or
(ii) before undertaking the transaction in respect of remaining transactions.
Note - The applicant may withdraw the application for agreement at any time before the finalisation
of the terms of the agreement. However, application fees paid shall not be refunded on withdrawal of
application by the applicant.
(4) Approval of Central Government: The agreement shall be entered into by the Board with the applicant
after its approval by the Central Government.
(5) Terms of the agreement [Rule 10M]
(a) An agreement may among other things, include –
(i) the international transactions covered by the agreement;
(ii) the agreed transfer pricing methodology, if any;
(iii) determination of arm’s length price, if any;
(iv) definition of any relevant term to be used in item (ii) or (iii);
(v) critical assumptions i.e., the factors and assumptions that are so critical and significant that
neither party entering into an agreement will continue to be bound by the agreement, if any
of the factors or assumptions is changed;
(vi) rollback provision referred to in Rule 10MA;
(b) the conditions, if any, other than provided in the Act or these rules. The agreement shall not be
binding on the Board or the assessee if there is a change in any of critical assumptions or failure
to meet conditions subject to which the agreement has been entered into.
(c) The binding effect of agreement shall cease only if any party has given due notice of the concerned
other party or parties.
(d) In case there is a change in any of the critical assumptions or failure to meet the conditions subject
to which the agreement has been entered into, the agreement can be revised or cancelled, as the
case may be.
(6) Furnishing of Annual Compliance Report [Rule 10-O]: The assessee shall furnish an annual compliance
report in quadruplicate in the prescribed form to Director General of Income-tax (International Taxation)
for each year covered in the agreement, within 30 days of the due date of filing income-tax return for
that year, or within 90 days of entering into an agreement, whichever is later.
(7) Compliance Audit of the agreement [Rule 10P]:
(a) The Transfer Pricing Officer having the jurisdiction over the assessee shall carry out the compliance
audit of the agreement for each of the year covered in the agreement. For this purpose, the
Transfer Pricing Officer may require –
(i) the assessee to substantiate compliance with the terms of the agreement, including
satisfaction of the critical assumptions, correctness of the supporting data or information
and consistency of the application of the transfer pricing method;
(ii) the assessee to submit any information, or document, to establish that the terms of the
agreement has been complied with.
(b) The compliance audit report shall be furnished by the Transfer Pricing Officer within six months
from the end of the month in which the Annual Compliance Report is received by the Transfer
Pricing Officer.
(8) Revision of an agreement [Rule 10Q]:
(a) An agreement, after being entered, may be revised by the Board either suo moto or on request
of the assessee or the competent authority in India or the Director General of Income-tax
(International Taxation), if –
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(i) there is a change in critical assumptions or failure to meet a condition subject to which the
agreement has been entered into;
(ii) there is a change in law that modifies any matter covered by the agreement but is not of
the nature which renders the agreement to be non-binding ; or there is a request from
competent authority in the other country requesting revision of agreement, in case of bilateral
or multilateral agreement.
(b) Except when the agreement is proposed to be revised on the request of the assessee, the
agreement shall not be revised unless an opportunity of being heard has been provided to the
assessee and the assessee is in agreement with the proposed revision.
(c) The revised agreement shall include the date till which the original agreement is to apply and the
date from which the revised agreement is to apply.
(9) Cancellation of an agreement [Rule 10R]:
(a) An agreement shall be cancelled by the Board for any of the following reasons:
(i) the compliance audit has resulted in the finding of failure on the part of the assessee to
comply with the terms of the agreement;
(ii) the assessee has failed to file the annual compliance report in time;
(iii) the annual compliance report furnished by the assessee contains material errors; or
(iv) the assessee is not in agreement with the revision proposed in the agreement or the
agreement is to be cancelled under rule 10RA(7);.
(b) The Board shall give an opportunity of being heard to the assessee, before proceeding to cancel
an application.
(c) The order of cancellation of the agreement shall be in writing and shall provide reasons for
cancellation and for non-acceptance of assessee’s submission, if any.
(d) The order of cancellation shall also specify the effective date of cancellation of the agreement,
where applicable.
(e) The order under the Act, declaring the agreement as void ab initio, on account of fraud or
misrepresentation of facts, shall be in writing and shall provide reason for such declaration and
for non-acceptance of assessee’s submission, if any.
(10) Mere filing of an application for an agreement under these rules shall not prevent the operation of
Chapter X of the Act for determination of arms’ length price under that Chapter till the agreement is
entered into. [Rule 10T(1)]
(11) The negotiation between the competent authority in India and the competent authority in the other
country or countries, in case of bilateral or multilateral agreement, shall be carried out in accordance
with the provisions of the tax treaty between India and the other country or countries. [Rule 10T(2)]
(xi) Provision for Roll back in APA Scheme [Section 92CC]
(a) In order to reduce current pending as well as future litigation in respect of the transfer pricing
matters, section 92CC(9A) provides roll back mechanism in the APA scheme.
(b) Accordingly, the APA may, subject to such prescribed conditions, procedure and manner, provide
for determining the ALP or for specifying the manner in which ALP is to be determined in relation
to an international transaction entered into by a person during any period not exceeding four
previous years preceding the first of the previous years for which the APA applies in respect of the
international transaction to be undertaken.
The CBDT has, vide Notification No.23/2015 dated 14.3.2015, in exercise of the powers conferred by 92CC(9A)
read with section 295, following conditions, procedure and manner for determining the arm’s length price or for
specifying the manner in which arm’s length price is to be determined in relation to an international transaction:
Rule Particulars Conditions, Procedure & Manner of determination of ALP
10F(ba) Definition of A person who has made an application.

Applicant
10F(ha) Definition of Any previous year, falling within the period four previous years, preceding the
Rollback year first of the five consecutive previous years referred to in section 92CC(4).
10MA Roll back of the The said rule provides the following:
agreement
1. The agreement may provide for determining the arm’s length price or
specify the manner in which arm’s length price shall be determined in relation
to the international transaction entered into by the person during the rollback
year (hereinafter referred as “rollback provision”).
2. Conditions for applying for rollback provisions:
The agreement shall contain rollback provision in respect of an international
transaction subject to the following, namely:-
(i) the international transaction is same as the international transaction
to which the agreement (other than the rollback provision) applies;
(ii) the return of income for the relevant rollback year has been or is
furnished by the applicant before the due date as specified in
Explanation 2 of section 139(1).
(iii) the report in respect of the international transaction had been
furnished in accordance with section 92E;
(iv) the applicability of rollback provision, in respect of an international
transaction, has been requested by the applicant for all the rollback
years in which the said international transaction has been undertaken
by the applicant; and
(v) the applicant has made an application seeking rollback in Form
3CEDA in accordance with sub-rule (5);
3. Non-applicability of Rollback provision: Rollback provision shall not be
provided in respect of an international transaction for a rollback year, if,-
(i) the determination of arm’s length price of the said international
transaction for the said year has been subject matter of an appeal
before the Appellate Tribunal and the Appellate Tribunal has passed
an order disposing of such appeal at any time before signing of the
agreement; or
(ii) the application of rollback provision has the effect of reducing the total
income or increasing the loss, as the case may be, of the applicant
as declared in the return of income of the said year.
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4. Manner for determining arm length price to be the same for rollback years and
other previous years: Where the rollback provision specifies the manner in which
arm’s length price shall be determined in relation to an international transaction
undertaken in any rollback year then such manner shall be the same as the
manner which has been agreed to be provided for determination of arm’s length
price of the same international transaction to be undertaken in any previous
year to which the agreement applies, not being a rollback year.
5. Time limit for filling application for rollback provision: The applicant may
furnish along with the application for advance pricing agreement, the request
for rollback provision in Form No. 3CEDA with proof of payment of an
additional fee of Rs. 5 lakh.
10RA Procedure for Rule 10RA has been inserted to provide the “Procedure for giving effect to
giving effect to rollback provision of an Agreement” as follows:
rollback provision
(i) The applicant shall furnish modified return of income referred to in section
of an Agreement
92CD in respect of a rollback year to which the agreement applies along with
the proof of payment of any additional tax arising as a consequence of and
computed in accordance with the rollback provision.
(ii) The modified return in respect of rollback year shall be furnished along
with the modified return to be furnished in respect of first of the previous years
for which the agreement has been requested for in the application.
(iii) If any appeal filed by the applicant is pending before the Commissioner
(Appeals), Appellate Tribunal or the High Court for a rollback year, on the
issue which is the subject matter of the rollback provision for that year, the
said appeal to the extent of the subject covered under the agreement shall be
withdrawn by the applicant before furnishing the modified return for the said
year.
(iv) If any appeal filed by the Assessing Officer or the Principal Commissioner
or Commissioner is pending before the Appellate Tribunal or the High Court for
a rollback year, on the issue which is subject matter of the rollback provision
for that year, the said appeal to the extent of the subject covered under the
agreement, shall be withdrawn by the Assessing Officer or the Principal
Commissioner or the Commissioner, as the case may be, within three months
of filing of modified return by the applicant.
(v) The applicant, the Assessing Officer or the Principal Commissioner or the
Commissioner, shall inform the Dispute Resolution Panel or the Commissioner
(Appeals) or the Appellate Tribunal or the High Court, as the case may be, the
fact of an agreement containing rollback provision having been entered into
along with a copy of the same as soon as it is practicable to do so.
(vi) In case effect cannot be given to the rollback provision of an agreement
in accordance with this rule, for any rollback year to which it applies, on
account of failure on the part of applicant, the agreement shall be cancelled.
Subsequent to the notification of the rules, the CBDT has issued Circular No. 10/2015 dated 10.6.2015 adopting
a Question and Answer format to clarify certain issues arising out of the said Rules. The questions raised and
answers to such questions as per the said Circular are given hereunder:
Question 1
Under rule 10MA(2)(ii) there is a condition that the return of income for the relevant roll back year has been or
is furnished by the applicant before the due date specified in Explanation 2 to section 139(1). It is not clear as
to whether applicants who have filed returns under section 139(4) or 139(5) of the Act would be eligible for roll
back.
Answer
The return of income under section 139(5) can be filed only when a return under section 139(1) has already
been filed. Therefore, the return of income filed under section 139(5) of the Act, replaces the original return of
income filed under section 139(1). Hence, if there is a return which is filed under section 139(5) to revise the
original return filed before the due date specified in Explanation 2 to sub-section (1) of section 139, the applicant
would be entitled for rollback on this revised return of income.
However, rollback provisions will not be available in case of a return of income filed under section 139(4)
because it is a return which is not filed before the due date.
Note: A belated return filed under section 139(4) can also be revised under section 139(5). In such a case,
the revised return would replace the belated return. Therefore, an applicant would not be entitled for roll back
provisions on a revised return which replaces a belated return.
Question 2
Rule 10MA(2)(i) mandates that the rollback provision shall apply in respect of an international transaction that
is same as the international transaction to which the agreement (other than the rollback provision) applies. It is
not clear what is the meaning of the word “same”. Further, it is not clear whether this restriction also applies to
the Functions, Assets, Risks (FAR) analysis.
Answer
The international transaction for which a rollback provision is to be allowed should be the same as the one
proposed to be undertaken in the future years and in respect of which the agreement has been reached. There
cannot be a situation where rollback is finalised for a transaction which is not covered in the agreement for
future years. The term same international transaction implies that the transaction in the rollback year has to be
of same nature and undertaken with the same associated enterprise(s), as proposed to be undertaken in the
future years and in respect of which agreement has been reached. In the context of FAR analysis, the restriction
would operate to ensure that rollback provisions would apply only if the FAR analysis of the rollback year does
not differ materially from the FAR validated for the purpose of reaching an agreement in respect of international
transactions to be undertaken in the future years for which the agreement applies.
The word “materially” is generally being defined in the Advance Pricing Agreements being entered into by CBDT.
According to this definition, the word “materially” will be interpreted consistently with its ordinary definition and
in a manner that a material change of facts and circumstances would be understood as a change which could
reasonably have resulted in an agreement with significantly different terms and conditions.
Question 3
Rule 10MA(2)(iv) requires that the application for rollback provision, in respect of an international transaction,
has to be made by the applicant for all the rollback years in which the said international transaction has been
undertaken by the applicant. Clarification is required as to whether rollback has to be requested for all four years
or applicant can choose the years out of the block of four years.
Answer
The applicant does not have the option to choose the years for which it wants to apply for rollback. The applicant
has to either apply for all the four years or not apply at all. However, if the covered international transaction(s)
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did not exist in a rollback year or there is some disqualification in a rollback year, then the applicant can apply
for rollback for less than four years. Accordingly, if the covered international transaction(s) were not in existence
during any of the rollback years, the applicant can apply for rollback for the remaining years. Similarly, if in
any of the rollback years for the covered international transaction(s), the applicant fails the test of the rollback
conditions contained in various provisions, then it would be denied the benefit of rollback for that rollback year.
However, for other rollback years, it can still apply for rollback.
Question 4
Rule 10MA(3) states that the rollback provision shall not be provided in respect of an international transaction
for a rollback year if the determination of arm’s length price of the said international transaction for the said year
has been the subject matter of an appeal before the Appellate Tribunal and the Appellate Tribunal has passed
an order disposing of such appeal at any time before signing of the agreement. Further, Rule 10 RA(4) provides
that if any appeal filed by the applicant is pending before the Commissioner (Appeals), Appellate Tribunal or
the High Court for a rollback year, on the issue which is subject matter of the rollback provision for that year,
the said appeal to the extent of the subject covered under the agreement shall be withdrawn by the applicant.
There is a need to clarify the phrase “Tribunal has passed an order disposing of such appeal” and on the
mismatch, if any, between Rule 10MA(3) and Rule 10RA(4).
Answer
The reason for not allowing rollback for the international transaction for which Appellate Tribunal has passed an
order disposing of an appeal is that the ITAT is the final fact finding authority and hence, on factual issues, the
matter has already reached finality in that year. However, if the ITAT has not decided the matter and has only set
aside the order for fresh consideration of the matter by the lower authorities with full discretion at their disposal,
the matter shall not be treated as one having reached finality and hence, benefit of rollback can still be given.
There is no mismatch between Rule 10MA(3) and Rule 10RA(4).
Question 5
Rule 10MA(3)(ii) provides that rollback provision shall not be provided in respect of an international
transaction for a rollback year if the application of rollback provision has the effect of reducing the total
income or increasing the loss, as the case may be, of the applicant as declared in the return of income
of the said year. It may be clarified whether the rollback provisions in such situations can be applied in
a manner so as to ensure that the returned income or loss is accepted as the final income or loss after
applying the rollback provisions.
Answer
It is clarified that in case the terms of rollback provisions contain specific agreement between the Board and
the applicant that the agreed determination of ALP or the agreed manner of determination of ALP is subject to
the condition that the ALP would get modified to the extent that it does not result in reducing the total income
or increasing the total loss, as the case may be, of the applicant as declared in the return of income of the said
year, the rollback provisions could be applied. For example, if the declared income is Rs. 100, the income as
adjusted by the TPO is Rs. 120, and the application of the rollback provisions results in reducing the income to
Rs. 90, then the rollback for that year would be determined in a manner that the declared income Rs. 100 would
be treated as the final income for that year.
Question 6
Rule 10RA(7) states that in case effect cannot be given to the rollback provision of an agreement in accordance
with this rule, for any rollback year to which it applies, on account of failure on the part of applicant, the agreement
shall be cancelled. It is to be clarified as to whether the entire agreement is to be cancelled or only that year for
which roll back fails.
Answer
The procedure for giving effect to a rollback provision is laid down in Rule 10RA. Sub-rules (2), (3), (4) and
(6) of the Rule specify the actions to be taken by the applicant in order that effect may be given to the rollback
provision. If the applicant does not carry out such actions for any of the rollback years, the entire agreement
shall be cancelled.
This is because the rollback provision has been introduced for the benefit of the applicant and is applicable at
its option. Accordingly, if the rollback provision cannot be given effect to for any of the rollback years on account
of the applicant not taking the actions specified in sub-rules (2), (3), (4) or (6), the entire agreement gets vitiated
and will have to be cancelled.
Question 7
If there is a Mutual Agreement Procedure (MAP) application already pending for a rollback year, what would be
the stand of the APA authorities? Further, what would be the view of the APA Authorities, if MAP has already
been concluded for a rollback year?
Answer
If MAP has been already concluded for any of the international transactions in any of the rollback year under
APA, rollback provisions would not be allowed for those international transactions for that year but could be
allowed for other years or for other international transactions for that year, subject to fulfilment of specified
conditions in Rules 10MA and 10RA. However, if MAP request is pending for any of the rollback year under
APA, upon the option exercised by the applicant, either MAP or application for roll back shall be proceeded with
for such year.
Question 8
Rule 10MA(1) provides that the agreement may provide for determining ALP or manner of determination of ALP.
However, Rule 10MA(4) only specifies that the manner of determination of ALP should be the same as in the
APA term. Does that mean the ALP could be different?
Answer
Yes, the ALP could be different for different years. However, the manner of determination of ALP (including
choice of Method, comparability analysis and Tested Party) would be same.
Question 9
Will there be compliance audit for roll back? Would critical assumptions have to be validated during compliance
audit?
Answer
Since rollback provisions are for past years, ALP for the rollback years would be agreed after full examination
of all the facts, including validation of critical assumptions. Hence, compliance audit for the rollback years would
primarily be to check if the agreed price or methodology has been applied in the modified return.
Question 10
Whether applicant has an option to withdraw its rollback application? Can the applicant accept the rollback
results without accepting the APA for the future years?
Answer
The applicant has an option to withdraw its roll back application even while maintaining the APA application
for the future years. However, it is not possible to accept the rollback results without accepting the APA for the
future years. It may also be noted that the fee specified in Rule 10MA(5) shall not be refunded even where a
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rollback application is withdrawn.

Question 11
For already concluded APAs, will new APAs be signed for rollback or earlier APAs could be revised?
Answer
The second proviso to Rule 10MA(5) provides for revision of APAs already concluded to include rollback
provisions.
Question 12
For already concluded APAs, where the modified return has already been filed for the first year of the APA term,
how will the time-limit for filing modified return for rollback years be determined?
Answer
The time to file modified return for rollback years will start from the date of signing the revised APA incorporating
the rollback provisions.
Question 13
In case of merger of companies, where one or more of those companies are APA applicants, how would the
rollback provisions be allowed and to which company or companies would it be allowed?
Answer
The agreement is between the Board and a person. The principle to be followed in case of merger is that the
person (company) who makes the APA application would only be entitled to enter into the agreement and be
entitled for the rollback provisions in respect of international transactions undertaken by it in rollback years.
Other persons (companies) who have merged with this person (company) would not be eligible for the rollback
provisions.
To illustrate, if A, B and C merge to form C and C is the APA applicant, then the agreement can only be entered
into with C and only C would be eligible for the rollback provisions. A and B would not be eligible for the rollback
provisions. To illustrate further, if A and B merge to form a new company C and C is the APA applicant, then
nobody would be eligible for rollback provisions.
Question 14
In case of a demerger of an APA applicant or signatory into two or more companies (persons), who would be
eligible for the rollback provisions?
Answer
The same principle as mentioned in the previous answer, i.e., the person (company) who makes an APA
application or enters into an APA would only be entitled for the rollback provisions, would continue to apply.
To illustrate, if A has applied for or entered into an APA and, subsequently, demerges into A and B, then only A
will be eligible for rollback for international transactions covered under the APA. As B was not in existence in
rollback years, availing or grant of rollback to B does not arise.
Section 92CD provides for the following procedure for giving effect to an APA
(i) In case a person has entered into an APA and prior to the date of entering into such APA, he has
furnished the return of income under the provisions of section 139 in respect of any assessment year
relevant to a previous year to which the APA applies, then, such person shall, within a period of three
months from the end of the month in which the said agreement was entered into, furnish a modified
return, notwithstanding any contrary provision contained in section 139.

Such modified return shall be in accordance with and limited to the provisions of such APA i.e.,
modifications can only be made on account of such APA in the return to be filed. All other provisions of
this Act shall apply as if the modified return is a return furnished under section 139, unless anything to
the contrary is provided in this section.
(ii) If the assessment or reassessment proceedings for an assessment year relevant to a previous year
to which the APA applies have been completed before the expiry of period allowed for furnishing of
modified return, the Assessing Officer shall, in a case where modified return is filed in accordance with
the provisions of this section, proceed to assess or reassess or re-compute the total income of the
relevant assessment year having regard to and in accordance with the APA.
However, with effect from 1.9.2019, Assessing Officer shall pass an order modifying the total income of
the relevant assessment year determined in such assessment or reassessment, as the case may be,
having regard to and in accordance with the APA, instead of proceeding to assess or reassess the total
income.
Such order for assessment or reassessment or re-computation of total income shall be passed within a
period of 1 year from the end of the financial year in which the modified return was furnished. This shall
apply notwithstanding the period of limitation contained under section 153 or 153B or 144C.
The appeal against such order shall lie to Commissioner (Appeals) [Section 246A]
(iii) Where the assessment or reassessment proceedings for an assessment year relevant to the previous
year to which the APA applies, are pending on the date of filing of modified return, the Assessing Officer
shall proceed to complete the assessment or reassessment proceedings in accordance with the APA
taking into consideration the modified return so furnished.
In this case, the time period of completion of pending assessment or reassessment mentioned under
section 153 or 153B or 144C shall be extended by 12 months. This shall apply notwithstanding the
period of limitation contained under section 153 or 153B or 144C.
(iv) The assessment or reassessment proceedings for an assessment year shall be deemed to have been
completed where -
(a) an assessment or reassessment order has been passed; or
(v) no notice has been issued under section 143(2) till the expiry of the limitation period provided under the
said section.
ADVANCE RULING
XYZ LTD a German company (well renowned in providing technical know how world- wide) wants to enter into
technical collaboration with Indian company. The technical know-how which will be provided to Indian company
may come from various research centers from all over the world. The total turnover and income of XYZ LTD. is
huge and business in Indian may be 2% to 3% of their total turnover.
XYZ LTD. is very cautious that the tax incidence in India should be restricted to Indian transactions only, so they
want to be doubly sure of such thing.
The answer to this problem lies with authority for advance ruling which can clearly identify the tax incidence on
such income in India and such rulings are binding on income tax authorities as well.
By having ruling in advance, both German company and tax authorities are equally sure about the tax incidence
on such transaction, which will definitely settle things amicably between them.
626 PP-DTL&P
Moreover in the following cases also the advance rulings have no parallel:
• Determination of Tax Liability in Advance.
• Prevent & Reducing Litigation.
• Attract Foreign Direct Investment.
To avoid needless dispute & litigation and facilitating better taxpayer relations, a scheme for giving advance
rulings was introduced by the Finance Act, 1993.
Chapter XIX-B of the Income-tax Act, deals with advance rulings, came into force with effect from 1-6-1993.
Chapter XIX-B, consisting of section 245N to 245V, provides a scheme for giving advance rulings in respect
of transactions involving non-residents and specified residents, with a view to avoid needless litigations and
promoting better tax-payer relations.
This scheme, the authority of accord advance rulings has been entrusted to an self governing adjudicatory
body. Adjudicatory body, is high powered headed by a retired judge of the Supreme Court has been set-up.
The authority has power to issue rulings, which are binding both on the Income- tax Department and the
applicant who sought such ruling subject to certain exceptions. The process is quite normal, less costly (as
compared to fees charged by professional), expeditious and authoritative (have binding effect).
Advance Ruling means written opinion or authoritative decision by an Authority empowered to render it with
regard to the tax consequences of a transaction or proposed transaction or an assessment in regard thereto. It
has been defined in section 245N(a) of the Income-tax Act, 1961 as amended from time-to-time.
Advance Ruling means formal ruling given in advance by authority in respect of tax incidence of a transaction
or proposed transaction or an assessment in regard thereto.
ADVANCE RULING DEFINITIONS (SECTION 245N)

As per section 245N(a) of the Income-tax Act, 1961
Advance ruling means:
(i) A determination by the Authority in relation to a transaction which has been undertaken or is proposed
to be undertaken by a non-resident applicant; or
(ii) A determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction
which has been undertaken or is proposed to be undertaken by a resident applicant with such non-
resident; or
(iia) A determination by the Authority in relation to the tax liability of a resident applicant, arising out of a
transaction which has been undertaken or is proposed to be undertaken by such applicant
In above cases, such determination shall include the determination of any question of law or of fact
specified in the application.
(iii) A determination or decision by the Authority in respect of an issue relating to computation of total income
which is pending before any income-tax authority or the Appellate Tribunal and such determination or
decision shall include the determination or decision of any question of law or of fact relating to such
computation of total income specified in the application.
(iv) A determination or decision by the Authority whether an arrangement, which is proposed to be undertaken
by any person being a resident or a non-resident, is an impermissible avoidance arrangement as
referred to in Chapter X-A or not.
Applicant [Section 245N(b)]

Applicant means any person who is:
a) a non-resident referred to in sub-clause (i) of clause (a) above; or
b) a resident referred to in sub-clause (ii) of clause (a) above; or
c) a resident who has undertaken or propose to undertake one or more transactions of value of 100 crores
or more in total [Notification No. 73, dated 28-11-2014]
d) a public sector company [Notification No. 725, dated 03-08-2000]
e) a resident or a non-resident referred to in sub-clause (iv) of clause (a) above
f) an applicant as defined in section 28E(c) of the Customs Act, 1962
g) an applicant as defined in section 23A(c) of the Central Excise Act, 1944
h) an applicant as defined in section 96A(b) of the Finance Act, 1994
- makes an application u/s 245Q(1).
Authority for Advance Rulings [Section 245-O]

• The Central Government shall constitute an Authority for giving advance rulings, to be known as
“Authority for Advance Rulings”.
Provided that the Authority shall cease to act as an Authority for Advance Rulings for the purposes of
Chapter V of the Customs Act, 1962 on and from the date of appointment of the Customs Authority for
Advance Rulings under section 28EA of that Act.
On and from the date of appointment of the Customs Authority for Advance Rulings referred to in the
proviso to sub-section (1), the Authority shall act as an Appellate Authority, for the purpose of Chapter
V of the Customs Act, 1962 :
Provided that the Authority shall not admit any appeal against any ruling or order passed earlier by it
in the capacity of the Authority for Advance Rulings in relation to any matter under Chapter V of the
Customs Act, 1962 after the date of such appointment of the Customs Authority for Advance Rulings.
• The Authority shall consist of a Chairman and such number of Vice-chairmen, revenue Members and
law Members as the Central Government may, by notification, appoint.
• A person shall be qualified for appointment as –
a) Chairman, who has been a Judge of the Supreme Court or the Chief Justice of a High Court or for
at least 7 years a Judge of a High Court;
b) Vice-chairman, who has been Judge of a High Court;
c) a revenue Member –
i. from the Indian Revenue Service, who is (or is qualified to be), a Member of the Board; or
ii. from the Indian Customs and Central Excise Service, who is (or is qualified to be), a Member
of the Central Board of Excise and Customs, on the date of occurrence of vacancy
d) a law Member from the Indian Legal Service, who is (or is qualified to be), an Additional Secretary
to the Government of India on the date of occurrence of vacancy.
• The terms and conditions of service and the salaries and allowances payable to the Members shall be
such as may be prescribed.
628 PP-DTL&P
• The Central Government shall provide to the Authority with such officers and employees, as may be
necessary, for the efficient discharge of the functions of the Authority under this Act.
• The powers and functions of the Authority may be discharged by its Benches as may be constituted by
the Chairman from amongst the Members thereof.
• In the event of the occurrence of any vacancy in the office of the Chairman by reason of his death,
resignation or otherwise, the senior-most Vice-chairman shall act as the Chairman until the date on
which a new Chairman, appointed to fill such vacancy, enters upon his office.
• In case the Chairman is unable to discharge his functions owing to absence, illness or any other cause,
the senior- most Vice-Chairman shall discharge the functions of the Chairman until the date on which
the Chairman resumes his duties
• A Bench shall consist of the Chairman or the Vice-chairman and one revenue Member and one law
Member.
Provided that where the Authority is dealing with an application seeking advance ruling in any matter
relating to this Act, the revenue Member of the Bench shall be such Member who is member of IRS
[inserted by finance Act, 2018]
• The Authority shall be located in the National Capital Territory of Delhi and its Benches shall be located
at such places as the Central Government may, by notification specify.
• “Member” means a Member of the Authority and includes the Chairman and Vice-chairman.
• “Vice-chairman” means the Vice-chairman of the Authority.
Vacancies etc., not to invalidate proceedings (Section 245P)

Although, the members of the Authority function as a body in disposing off the applications before them, but
section 245P makes it clear that no proceeding before the Authority, or the pronouncement of advance ruling
by the Authority, shall be questioned or shall be invalid on the ground merely of the existence of any vacancy or
defect in the Constitution of the Authority
Application for Advance Ruling [Section 245Q]

An applicant desirous of obtaining an advance ruling may make an application stating the question on which the
advance ruling is sought in quadruplicate in:
(a) in Form No. 34C in respect of a non-resident applicant;
(b) in Form No. 34D in respect of a resident applicant seeking advance ruling in relation to a transaction
undertaken or proposed to be undertaken by him with a non-resident;
(c) in Form No. 34DA in respect of a resident applicant referred to in section 245N(b)(iia) falling within any
such class or category of person as notified by the Central Government; and
(d) in Form No. 34E in respect of a notified resident referred to in section 245N(b)(iii)
(e) in Form No. 34EA in respect of a applicant referred to in section 245N(b)(iiia) and shall be verified in the
manner indicated therein.
• The application shall be accompanied by a fee of
a. Rs 10,000 or
b. such fees as may be prescribed.
– whichever is higher
• An applicant may withdraw an application within 30 days from the date of the application.
• An application shall be presented by the applicant in person or by an authorised representative to the Secretary
or any other officer notified in writing by the Secretary or sent by registered post addressed to the Secretary
along with a fee (in the form of a Demand Draft drawn in favour of “Authority for Advance Rulings” payable at
New Delhi).
• An application sent by registered post shall be deemed to have been made on the date on which it is received
in the office of the Authority.
• If the applicant is not hitherto assessed in India, he shall indicate in Annexure I to the application:
(a) his head office in any other country,
(b) the place where his office and residence is located or is likely to be located in India and
(c) the name and address of his representative in India, if any, authorised to receive notices and papers
and act on his behalf.
• The Secretary may send the application back to the applicant if it is defective in any manner for removing the
defects within such time as he may allow. Such application shall be deemed to have been made on the date
when it is represented after correction.
Procedure on Receipt of Application [Section 245R]

• On receipt of an application, the Authority shall cause a copy thereof to be forwarded to the Principal
Commissioner or Commissioner and, if necessary, call upon him to furnish the relevant records. Where
any records have been called for by the Authority, such records shall, as soon as possible, be returned
to the Principal Commissioner or Commissioner.
• The Authority may, after examining the application and the records called for, by order, either allow or
reject the application. However, where the question raised in the application –
(i) is already pending before any income-tax authority or Appellate Tribunal [except in the case of a
resident applicant falling in section 245N(b)(iii)] or any court;
(ii) involves determination of fair market value of any property;
(iii) relates to a transaction or issue which is designed prima facie for the avoidance of income-tax
[except in the case of a resident applicant falling in section 245N(b)(iii)] - shall be rejected by the
authority.
• The words ‘already pending’, should be interpreted to mean: ‘already pending as on the date of the
application’ and not with reference to any future date [Monte Harris -vs.- CIT (AAR)].
• No application shall be rejected unless an opportunity has been given to the applicant of being heard.
Further, where the application is rejected, reasons for such rejection shall be given in the order.
• A copy of every order (allowing or rejecting) shall be sent to the applicant and to the Principal
Commissioner or Commissioner.
• Where an application is allowed, the Authority shall, after examining such further material as may
be placed before it by the applicant or obtained by the Authority, pronounce its advance ruling on the
question specified in the application.
• On a request received from the applicant, the Authority shall, before pronouncing its advance ruling,
provide an opportunity to the applicant of being heard, either in person or through a duly authorised
representative.
630 PP-DTL&P
• The Authority shall pronounce its advance ruling in writing within 6 months of the receipt of application.
• A copy of the advance ruling pronounced by the authority, duly signed by the Members and certified in the
prescribed manner shall be sent to the applicant and to the Principal Commissioner or Commissioner,
as soon as may be, after such pronouncement.
Appellate Authority not to proceed in certain cases [Section 245RR]

No Income-tax Authority or the Appellate Tribunal shall proceed to decide any issue in respect to which an
application has been made by an applicant, being a resident, u/s 245Q.
Applicability of Advance Ruling [Section 245S]

The advance ruling pronounced by the Authority u/s 245R shall be binding only:
(a) on the applicant who had sought it;
(b) in respect of the transaction in relation to which the ruling had been sought; and
(c) on the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in
respect of the applicant and the said transaction.
The advance ruling shall be binding as aforesaid unless there is a change in law or facts on the basis of which
the advance ruling has been pronounced.
Advance ruling to be void in certain circumstances [Section 245T]

Where the Authority finds, on a representation made to it by the Principal Commissioner or Commissioner
or otherwise, that an advance ruling pronounced by it has been obtained by the applicant by fraud or
misrepresentation of facts, it may, by order, declare such ruling to be void ab initio and thereupon all the
provisions of this Act shall apply to the applicant as if such advance ruling had never been made.
A copy of such order shall be sent to the applicant and the Principal Commissioner or Commissioner.
Powers of the Authority [Section 245U]

The Authority shall, for the purpose of exercising its powers, have all the powers of a civil court under the Code
of Civil Procedure, 1908 as are referred to in section 131 of this Act.
Power to regulate its own procedure [Section 245V]

The Authority shall, subject to the provisions of this Chapter, have power to regulate its own procedure in all
matters arising out of the exercise of its powers under this Act.
LESSON ROUND UP
– Tax Haven: A Tax Haven is a place where there is no tax on income or it is taxed at low rate.
Individuals or corporate entities move from jurisdiction of high rates of taxes to the region of low tax in
order to lower their overall tax liability.
– Factors for determining whether a country is tax haven or not are: Nil or Nominal tax Rate, No
Exchange of Information, Lack of Transparency, Limited Regulatory supervision.
– Controlled foreign Corporation: The OECD recommended for adoption of CFCs Rules for taxing
those entities which defer the tax liability after moving to the tax haven country. A CFC is a legal entity
that exists in one jurisdiction but is owned or controlled primarily by taxpayers of a different jurisdiction.
The CFC rules may also be termed ‘anti-deferral rules’.
– Sub Part F means special category of foreign source unearned income that is currently taxed by the
Internal Revenue Code, 1986 of US whether or not it is remitted to the U.S. It is basically U.S. financial
term used for the U.S. based institutions.
– Residency Issue : Residence as defined in double taxation treaties is different from residence as
defined for domestic tax purposes. The situation of double taxation will arise where the income gets
taxed in two or more than two countries whether due to residency or source principle as the case may
be. The problem of double taxation arises if the income of a person is taxed in one country on the
basis of residence and on the basis of residency in another country or on the basis of both.
– Permanent Establishment: as per the Double Taxation Avoidance Agreements, PE includes, a wide
variety of arrangements i.e. a place of management, a branch, an office, a factory, a workshop or a
warehouse, a mine, a quarry, an oilfield etc. Imposition of tax on a foreign enterprise is done only if it
has a PE in the contracting state.
– Transfer Pricing Provisions in India: The Finance Act, 2001 introduced law of transfer pricing in
India through Sections 92 to 92F of the Income Tax Act, 1961 which guides computation of the transfer
price and suggests detailed documentation procedures.
Arm’s length price means fair price of goods transferred or services rendered. In other words, the
transfer price should represent the price which could be charged from an independent party in
uncontrolled conditions. Arm’s length price calculation is very important for a company.
Associated Enterprises has been defined in Section 92A of the Act. It prescribes that “associated
enterprise”, in relation to another enterprise, means an enterprise –
(a) Which participates, directly or indirectly, or through one or more intermediaries, in the management
or control or capital of the other enterprise; or
(b) In respect of which one or more persons who participate, directly or indirectly, or through one
or more intermediaries, in its management or control or capital, are the same persons who
participate, directly or indirectly, or through one or more intermediaries, in the management or
control or capital of the other enterprise.
“International Transaction” means a transaction between two or more associated enterprises,
either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible
or intangible property, or provision of services, or lending or borrowing money, or any other
transaction having a bearing on the profits, income, losses or assets of such enterprises, and
shall include a mutual agreement or arrangement between two or more associated enterprises
for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to
be incurred in connection with a benefit, service or facility provided or to be provided to any one
or more of such enterprises.
– Specified Domestic transactions: Finance Act, 2012 has made a very important change and it has
extended the applicability of Transfer Pricing Provisions to specified domestic transaction w.e.f. 1st
April, 2012.
– Methods for determination of Arm’s Length Price: Section 92C of Income Tax Act defines the
methods which are to be used in determination of Arm’s Length prices for International Transaction
and specified domestic transaction.
(A) Comparable Uncontrolled Price Method (CUP)
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(B) Resale Price Method (RPM)

(C) Cost Plus Method (CPM)
(D) Profit Split Method (PSM)
(E) Transactional Net Margin Method (TNMM)
(F) Such other method as may be prescribed by the Board.
– Advance Pricing Agreement: As per Section 92CC of Income Tax Act, 1961, w.e.f. 1st July, 2012,
the Central Board of Direct Taxes (Board), with the approval of the Central Government, may enter
into an Advance Price Agreement with any person, determining the arm’s length price or specifying
the manner in which arm’s length price is to be determined, in relation to an international transaction
to be entered into by that person. Advance Pricing Agreement (APA) is an agreement between a
taxpayer and a taxing authority(Board) on an appropriate transfer pricing methodology for fixing the
arm’s length price for a set of transactions over a fixed period of time in future.
SELF TEST QUESTIONS

1. Examine the correctness or otherwise of the following statement with reference to the provisions of
Income tax Act, 1961 – The Double Taxation Avoidance Treaties entered into by the Govt. of India
override the domestic law?
2. Explain the term ‘Permanent Establishment’ and examine its significance when such transaction is
governed by double taxation avoidance agreements?
3. Explain the Bilateral and Unilateral tax treaty?
4. In cases, wherein Individual is resident in both the contracting states, how the residential status would
be determine?
5. Explain the term ‘Tax Heaven”. How to determine whether a state or a country is a tax heaven?
6. What is impermissible avoidance agreement u/s 96 of Income Tax Act, 1961 and its consequences?
7. What is Arm’s Length Price with respect to Transfer Pricing Provisions?
8. Who can make an application for Advance Ruling u/s 245N?
9. What of Controlled Foreign Corporation?
10. Explain the objective of bringing into existence the provisions relating to transfer pricing in relation to
International Transaction?
11. When can an advance ruling pronounced by the authority for advance Rulings be declared void?
What is the consequence?
PRACTICAL QUESTIONS
1. Mr. Amit, ROR in India, is a singer deriving income of Rs. 750000 from performance in show outside
India. Tax of Rs. 100000 was deducted at the source country. India does not have double taxation
avoidance agreements with that country. His Indian Income is Rs. 30,00,000. Compute the tax liability
of Mr. Amit during the FY 2018-19 in India assuming he has deposited Rs. 150000 in PPF and paid
medical insurance premium Rs. 32000 of his parents aged 65 year.
2. Mr. M , a non resident, made an application to the authority for advance rulings on 2.7.2019 in relation
to a transaction to be undertaken by him. On 31.08.2019, he decides to withdraw the said application.
Can he withdraw the application on 31.08.2019?
Answer:
1. Rs. 8,18,840
2. Refer provisions of section 245Q(3) of the Income Tax act, 1961
SUGGESTED READINGS
Kluwer]
634 PP-DTL&P
Lesson 12 n Recent Case Laws 635
Lesson 12
Recent Case Laws
LESSON OUTLINE
LEARNING OBJECTIVES
– Latest Supreme Court and High Court TAX is a Dynamic law and is always evolving.
Judgements Law makers try to cover every situation while
– LESSON ROUNDUP formulating the law. However, sometimes certain
situations cannot be foreseen. This situation
– SELF TEST QUESTION
creates conflicts between the Assessee and the
Department. Here the role of the courts comes
into picture. It is therefore important to study the
Judicial decisions as it helps to interpret the law in
a better manner.
After reading this lesson, students will be able to
understand:
– How are arguments put forward in the
courts by both parties
– How the courts put reliance on past judicial
decisions while formulating its opinion
– What are the questions of law involved in
the cases discussed
– How does the courts pronounce its
judgements
635
636 PP-DTL&P
1. CIT VS. MAHINDRA AND MAHINDRA LTD (SUPREME COURT)
ISSUE INVOLVED :
Whether a Loan Waiver is treated as Business Income u/s Section 28 or Deemed Business Income
u/s 41
Brief facts:-
(a) For the proper appreciation of the issue in the case at hand, we deem it apposite to mention the gist
of the facts. The appellant herein is the Department of Income Tax (for brevity ‘the Revenue), on the
other hand, respondent herein is Mahindra & Mahindra Ltd. (for brevity ‘the Respondent’) – a company
registered under the Companies Act, 1956.
(b) The Respondent, way back, decided to expand its jeep product line by including FC-150 and FC-170
models. For this purpose, on 18.06.1964, it entered into an agreement with Kaiser Jeep Corporation
(for short ‘the KJC’) based in America wherein KJC agreed to sell the dies, welding equipments and die
models to the assessee. The final price of the tooling and other equipments was agreed at $6,50,000/-
including cost, insurance and freight (CIF). Meanwhile, the Respondent took all the requisite approvals
from the concerned Government Departments. The said toolings and other equipments were supplied
by the Kaiser Jeep Corporation through its subsidiary Kaiser Jeep International Corporation (KJIC).
(c) However, for the procurement of the said toolings and other equipments, the KJC agreed to provide
loan to the Respondent at the rate of 6% interest repayable after 10 years in installments. For this
purpose, the Respondent addressed a letter dated 07.06.1965 to the Reserve Bank of India (RBI) for
the approval of the said loan agreement. The RBI and the concerned Ministry approved the said loan
agreement.
(d) Later on, it was informed to the Respondent that the American Motor Corporation (AMC) had taken over
the KJC and also agreed to waive the principal amount of loan advanced by the KJC to the Respondent
and to cancel the promissory notes as and when they got matured. The same was communicated to the
Respondent vide letter dated 17.02.1976.
(e) On 30.06.1976 the Respondent filed its return and shown Rs. 57,74,064/- as cessation of its liability
towards the American Motor Corporation. After perusal of the return, the Income Tax Officer (ITO)
concluded that with the waiver of the loan amount, the credit represented income and not a liability.
Accordingly, the ITO, vide order dated 03.09.1979, held that the sum of Rs 57,74,064/- was taxable
under Section 28 of the Income Tax Act, 1961 (for brevity ‘the Income Tax Act’).
(f) Being dissatisfied, the Respondent preferred an appeal before the Commissioner of Income Tax
(Appeals) being No. CIT(A) V/CCIV/IT/261/79-80. After perusal of the matter, learned CIT (Appeals),
vide order dated 23.03.1981, dismissed the appeal and upheld the order of the ITO with certain
modifications.
(g) Being aggrieved, the Respondent as well as the Revenue preferred appeals being Nos. 2007 (Bomb.)
of 1981 and 2132 of 1981 respectively before the Tribunal. The Tribunal, vide order dated 16.08.1982,
set aside the order passed by learned CIT (Appeals) and decided the case in favour of the Respondent.
(h) Being aggrieved, the Revenue filed a Reference before the High Court at Bombay. In that Reference,
three applications were filed, one by the assessee and rest two by the Revenue. Vide impugned common
judgment and order dated 29.01.2003, the High Court confirmed certain findings of the Tribunal in
favour of the Respondent.
(i) Hence, these instant appeals have been filed by the Revenue.
Heard learned senior counsel for parties and perused the factual matrix of the case.
Point(s) for consideration: The short point for consideration before this Court is whether in the present facts
and circumstances of the case the sum of Rs. 57,74,064/- due by the Respondent to Kaiser Jeep Corporation
which later on waived off by the lender constitute taxable income of the Respondent or not?
Revenue contentions: At the onset, learned senior counsel for the Revenue submitted that the Respondent
had received the amount of Rs. 57,47,064/- from the American Motor Corporation as loan waiver, which it had
initially borrowed from the Kaiser Jeep Corporation as loan in order to enable it to purchase dies, tools etc.
for manufacture of jeeps. The waiver of loan was done by the American Motor Corporation, who took over
the Kaiser Jeep Corporation, as a measure of compensation for certain losses including goodwill, the benefit
of association, and also for sudden change to the American Motor Corporation as a share holder which was
credited by the Respondent to its account but was claimed as exemption from taxation being capital receipt.
Before concluding, it was contended that since an amount is waived off, for which the Respondent is claiming
exemption, Income Tax Actually amounts to income at the hands of the Respondent in the sense that an amount
which ought to be paid by it is now not required to be paid. As a result, the case of the Revenue falls within the
ambit of Section 28(iv) and, alternatively within Section 41 of the Income Tax Act. Hence, the decision of the
High Court is liable to be set aside.
Conversely, learned senior counsel for the Respondent submitted that the Kaiser Jeep International Corporation
(KJIC) supplied the toolings and the loan was given by the Kaiser Jeep Corporation (KJC), hence, these
transactions were independent transactions. The only relationship, which survived after the supply of toolings,
was that of a lender and borrower. The purchase of toolings was not a transaction for the purchase of goods
on credit in the ordinary course of business nor could it be equated to unpaid purchase consideration to be
liquidated over a period of time.
Further, it was also submitted that it is very clear that the amount of $650,000 provided by KJC was in fact a loan
on which interest was being paid regularly from time to time. It is also pointed out that in the books of account of
the Respondent, this loan has been shown in the Balance Sheet under the heading “Loans-unsecured”. Hence,
it is submitted that the said sum could not be brought to tax as it represents the waiver of a loan liability which
was on the capital amount and is not in the nature of income. Accordingly, the High Court rightly upheld the
order of the Tribunal and, hence, these appeals deserve to be dismissed.
Discussion: The term “loan” generally refers to borrowing something, especially a sum of cash that is to be
paid back along with the interest decided mutually by the parties. In other terms, the debtor is under a liability to
pay back the principal amount along with the agreed rate of interest within a stipulated time.
It is a well-settled principle that creditor or his successor may exercise their “Right of Waiver” unilaterally to
absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the
liability of repayment of loan subject to the conditions of waiver. The waiver may be a partly waiver i.e., waiver
of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts.
Hence, waiver of loan by the creditor results in the debtor having extra cash in his hand. It is receipt in the
hands of the debtor/assessee. The short but cogent issue in the instant case arises whether waiver of loan by
the creditor is taxable as a perquisite under Section 28 (iv) of the Income Tax Act or taxable as a remission of
liability under Section 41 (1) of the Income Tax Act.
The first issue is the applicability of Section 28 (iv) of the Income Tax Act in the present case. Before moving
further, we deem it apposite to reproduce the relevant provision herein below:-
“Profits and gains of business or profession [Section 28] - The following income shall be chargeable to
income-tax under the head “Profits and gains of business profession”,–
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or
the exercise of a profession; ”
638 PP-DTL&P
On a plain reading of Section 28 (iv) of the Income Tax Act, prima facie, it appears that for the applicability of
the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to
invoke the provision of Section 28 (iv) of the Income Tax Act, the benefit which is received has to be in some
other form rather than in the shape of money. In the present case, it is a matter of record that the amount of
Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition
of Section 28 (iv) of the Income Tax Act which says any benefit or perquisite arising from the business shall
be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case.
Hence, in our view, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under
the provisions of Section 28 (iv) of the Income Tax Act.
Another important issue which arises is the applicability of the Section 41 (1) of the Income Tax Act. The said
provision is re-produced as under:
“Profits chargeable to tax [Section 41] - (1) Where an allowance or deduction has been made in the
assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter
referred to as the first-mentioned person) and subsequently during any previous year,-
(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any
amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way
of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing
to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to
income-tax as the income of that previous year, whether the business or profession in respect of which
the allowance or deduction has been made is in existence in that year or not; or”
On a perusal of the said provision, it is evident that it is a sine qua non that there should be an allowance or
deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading
liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives
any such liability, then the assessee is liable to pay tax under Section 41 of the Income Tax Act. The objective
behind this Section is simple. It is made to ensure that the assessee does not get away with a double benefit
once by way of deduction and another by not being taxed on the benefit received by him in the later year with
reference to deduction allowed earlier in case of remission of such liability.
It is undisputed fact that the Respondent had been paying interest at 6 % per annum to the KJC as per the
contract but the assessee never claimed deduction for payment of interest under Section 36 (1) (iii) of the
Income Tax Act. In the case at hand, learned CIT (A) relied upon Section 41 (1) of the Income Tax Act and
held that the Respondent had received amortization benefit. Amortization is an accounting term that refers to
the process of allocating the cost of an asset over a period of time, hence, it is nothing else than depreciation.
Depreciation is a reduction in the value of an asset over time, in particular, to wear and tear. Therefore, the
deduction claimed by the Respondent in previous assessment years was due to the deprecation of the machine
and not on the interest paid by it.
Moreover, the purchase effected from the Kaiser Jeep Corporation is in respect of plant, machinery and tooling
equipments which are capital assets of the Respondent. It is important to note that the said purchase amount
had not been debited to the trading account or to the profit or loss account in any of the assessment years.
Here, we deem it proper to mention that there is difference between ‘trading liability’ and ‘other liability’. Section
41 (1) of the Income Tax Act particularly deals with the remission of trading liability. Whereas in the instant
case, waiver of loan amounts to cessation of liability other than trading liability. Hence, we find no force in the
argument of the Revenue that the case of the Respondent would fall under Section 41 (1) of the Income Tax
Act. In view of above discussion, we are of the considered view that these appeals are devoid of merits and
deserve to be dismissed.
CONCLUSION :
Loan waiver would not be taxable as
(a) Business Income u/s 28(iv) of the Income Tax Act as receipts should be in the nature of cash
or money.
(b) Deemed Business Income u/s 41(1) of the Income Tax Act as it does not apply since waiver
of loan does not amount to cessation of trading liability because no deduction was claimed
under business in any previous year.
2. ACIT VS. BHARAT V. PATEL (SUPREME COURT)
ISSUE INVOLVED :
Whether amount received by an employee from redemption of Stock Appreciation Rights (SARs) can
be assessed as “perquisite” u/s 17(2)(iii) or as “profits of business” u/s 28(iv) or as “capital gains”
(despite no “cost of acquisition”) u/s 45
FACTS OF THE CASE

At the outset, learned counsel for the Revenue contended that the High Court erred in law while upholding
that the amount received on redemption of Stock Appreciation Rights (SARs) is to be treated as capital gains
and not perquisite under section 17(2)(iii) of the Income Tax Act. However, the same is not taxable under the
category of capital gains since no consideration had passed from the Respondent.
In support of his argument, learned counsel placed reliance on Sumit Bhattacharya vs. ACIT Circle 16(1),
Mumbai [2008] 112 ITD 1 (MUM.) (SB) and contended that the Respondent, having received an amount on
redemption of Stock Appreciation Rights (SARs) as an employee of the company and there was an employer
employee relationship subsisting at the relevant point of time, therefore, the amount received on redemption of
Share Appreciation Rights must be treated as taxable income under the head income from “Salaries”. Learned
counsel finally contended that the impugned decision of the High Court deserves to be set aside
Per contra, learned senior counsel appearing for the Respondent submitted that the amount received by the
Respondent from redemption of Stock Appreciation Rights (SARs) can be treated only as capital gains and
cannot be treated as perquisite under Section 17(2)(iii) of the Income Tax Act or under Section 28 (iv) of
the Income Tax Act. However, it was pointed out that the said capital gains cannot be said to arose to the
Respondent since there was no consideration paid as the cost of acquisition by the Respondent. It was also
submitted that such amount received on account of redemption of Stock Appreciation Rights could have been
taxed if at all under the provisions of Clause (iiia) of Section 17(2) of the Income Tax Act. Finally, it was also
submitted that the question of law sought to be raised by the Revenue is no more res integra as settled by
this Court in the case of Commissioner of Income Tax vs. Infosys Technologies Ltd., [2008] 297 ITR 167 (SC).
Hence, these appeals deserve to be dismissed at the threshold.
Discussion:
Before examining the case at hand, it is pertinent to have an understanding of the words “Perquisite” and
“Capital Gains”. The word “Perquisite” in common parlance may be defined as any perk or benefit attached to
an employee or position besides salary or remuneration. Broadly speaking, these are usually noncash benefits
given by an employer to an employee in addition to entitled salary or remuneration. It may be said that these
benefits are generally provided by the employers in order to retain the talented employees in the organization.
There are various instances of perquisite such as concessional rent accommodation provided by the employer,
any sum paid by an employer in respect of an obligation which was actually payable by the employee etc.
Section 17(2) of the Income Tax Act was enacted by the legislature to give the broad view of term perquisite.
640 PP-DTL&P
On the other hand, the word ‘Capital Gains’ means a profit from the sale of property or an investment. It may
be short term or long term depending upon the facts and circumstances of each case. This gain or profit is
charged to tax in the year in which transfer of the capital assets takes place. In the instant case, the fundamental
question which arises for consideration before this Court is with regard to the taxability of the amount received
by the Respondent on redemption of Stock Appreciation Rights (SARs.)
It is a matter of record that the Respondent was employed as the Chairman cum Managing Director of the
(P&G) India Ltd. at the relevant time and the said company is the subsidiary of (P&G) USA through Richardson
Vicks Inc. USA and that (P&G) USA owned controlling equity. It is an undisputed fact that the Respondent was
working as a salaried employee. The (P&G) USA was the company who had issued the Stock Appreciation
Rights (SARs.) to the Respondent without any consideration from 1991 to 1996. The said SARs were redeemed
on 15.10.1997 and in lieu of that the Respondent received an amount of Rs 6,80,40,724/from (P&G) USA.
However, when the Respondent filed his return, he claimed this amount as an exemption from the ambit of
Income Tax. The issue involved in this appeal is in respect of Rs 6,80,40,724/made on account of amount
received on redemption of Stock Appreciation Rights.
The Tribunal was of the view that the stock options are capital assets and such assets in the instant case
acquired for consideration, hence, gain arising therefrom is liable to capital gain tax. However, the stand of the
Revenue before the Tribunal was that the amount in question is taxable as perquisite under Section 17(2)(iii)
of the Income Tax Act or in alternatively under Section 28(iv) of the Income Tax Act instead of capital gains.
The High Court also upheld the view of the Tribunal but the High Court disagreed that such capital gains arose
to the Respondent on redemption of Stock Appreciation Rights since there was no cost of acquisition involved
from the side of the Respondent. The meaning of the word perquisite for the instant case is given under Section
17(2) of the Income Tax Act. The Revenue alternatively contended that the case of the Respondent should
come under the ambit of Section 28(iv) of the Income Tax Act.
It is apposite to note here that, particularly, in order to bring the perquisite transferred by the employer to the
employees within the ambit of tax, legislature brought an amendment under Section 17 of the Income Tax Act
by inserting Clause (iiia) in Section 17(2) of the Income Tax Act through the Finance Act, 1999 (27 of 1999) with
effect from 01.04.2000, which was later on omitted by the Finance Act, 2000. The said Clause (iiia) as it was
then is reproduced herein below:
“(iiia) the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost
or at concessional rate, to an individual who is or has been in employment of that person:
Provided that in a case where allotment or transfer of specified securities is made in pursuance of an
option exercised by an individual, the value of the specified securities shall be taxable in the previous
year in which such option is exercised by such individual.
Explanation: For the purposes of this clause,( a) “cost’ means the amount actually paid for acquiring
specified securities and where no money has been paid, the cost shall be taken as nil; (b) “specified
securities” means the securities as defined in clause(h) of section 2 of the Securities Contracts
(Regulation) Act, 1956 (42 of 1956) and includes employees’ stock option and sweet equity shares;
(c) “sweat equity shares” means equity shares issued by a company to its employees or directors at a
discount or for consideration other than cash for providing knowhow or making available rights in the
nature of intellectual property rights or value additions, by whatever name called; and (d) “value” means
the difference between the fair market value and the cost for acquiring specified securities;”
The intention behind the said amendment brought by the legislature was to bring the benefits transferred by
the employer to the employees as in the instant case, within the ambit of the Income Tax Act, 1961. It was the
first time when the legislature specified the meaning of the cost for acquiring specific securities. Only by this
amendment, legislature determined what would constitute the specific securities. By this amendment, legislature
clearly covered the direct or indirect transfer of specified securities from the employer to the employees during
or after the employment. On a perusal of the said clause, it is evident that the case of the Respondent falls under
such clause. However, since the transaction in the instant case pertains to prior to 01.04.2000, hence, such
transaction cannot be covered under the said clause in the absence of an express provision of retrospective
effect. We also do not find any force in the argument of the Revenue that the case of the Respondent would fall
under the ambit of Section 17(2) (iii) of the Income Tax Act instead of Section 17(2) (iiia) of the Income Tax Act.
It is a fundamental principle of law that a receipt under the Income Tax Act must be made taxable before it can
be treated as income. Courts cannot construe the law in such a way that brings an individual within the ambit of
Income Tax Act to pay tax who otherwise is not liable to pay. In the absence of any such specific provision, if an
individual is subjected to pay tax, it would amount to the violation of his Constitutional Right.
The Revenue also contended before the High Court that the amendment brought in by Section 17(2) of the
Income Tax Act was clarificatory, hence, retrospective in nature. However, the High Court rejected the stand of
the Revenue. The High Court, in its impugned judgment, on the point of the applicability of clause has held as
under:
In the case of Commissioner of Income Tax, Bangalore vs B.C. Srinivasa Setty [(1981) 128 ITR 294 (SC)] this
Court held that the charging section and computation provision under the 1961 Act constituted an integrated
code. The mechanism introduced for the first time under the Finance Act, 1999 by which cost was explained
in the manner stated above was not there prior to 1.4.2000. The new mechanism stood introduced w.e.f.
1.4.2000 only. With the above definition of the word cost introduced vide clause (iiia), the value of option
became ascertainable. There is nothing in the Memorandum to the Finance Act, 1999 to say that this new
mechanism would operate retrospectively. Further, a mechanism which explains cost in the manner indicated
above cannot be read retrospectively unless the Legislature expressly says so. It was not capable of being
implemented retrospectively. Till 1.4.2000, in the absence of the definition of the word cost value of the option
was not ascertainable. In our view, clause (iiia) is not clarificatory. Moreover, the meaning of the words specified
securities in section (iiia) was defined or explained for the first time vide Finance Act , 1999 w.e.f. 1.4.2000.
Morevover, the words allotted or transferred in clause (iiia) made things clear only after 1.4.2000. Lastly, it
may be pointed out that even clause (iiia) has been subsequently deleted w.e.f. 1.4.2001. For the aforestated
reasons, we are of the view the clause (iiia) cannot be read as retrospective.”
Circular No. 710 dated 24.07.1995 which was issued by the CBDT deals with the taxability of shares issued
at less than the market price. For ready reference, Circular No. 710 issued by the CBDT is reproduced herein
below:
“Taxability of the perquisite on shares issued to employees at less than market price:
1. Chief Commissioners and corporate assessees have been seeking clarification regarding taxability of
the perquisite on shares issued to the employees at less than market price.
2. The matter has been considered by the Board. The benefit does amount to a perquisite within the
meaning of clause (iii) of subsection (2) of Section 17 of the IncomeTax Act, 1961. The various situations
in this regard have to be dealt with as under:
(i) where the shares held by the Government have been transferred to the employee, there will be
no perquisite because the employer employee relationship does not exist between Government
and the employee (transferor and the transferee);
(ii) where the company offers shares to the employees at the same price as have been offered to the
other shareholders or the general public, there will be no perquisite;
(iii) where the employer has offered the shares to its employees at a price lower than the one at which
the shares have been offered to the other shareholders/public, the difference between the two
prices will be taxed as perquisite;
(iv) where the shares have been offered only to the employees, the value of perqusite will be the
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difference between the market price of the shares on the date of acceptance of the offer by the
employee and the price at which the shares have been offered.”
On a perusal of the above, prima facie, it appears that such Circular dealt with the cases where the employer
issued shares to the employees at less than the market price. In the instant case, the Respondent was allotted
Stock Appreciation Rights (SARs.) by the (P&G) USA which is different from the allotment of shares. Hence,
in our opinion such Circular has no applicability on the instant case. Moreover, a Circular cannot be used to
introduce a new tax provision in a Statute which was otherwise absent.
Alternatively, the Revenue also contended that the case of the Respondent shall come within the ambit of the
Section 28(iv) of the Income Tax Act. At this juncture, we deem it appropriate, for the sake of convenience, to
refer Section 28(iv) of the Income Tax Act which is reproduced herein below:
“Section 28. Profits and gains of business or profession. The following income shall be chargeable to income
tax under the head “Profits and gains of business or profession”(iv) the value of any benefit or perquisite,
whether convertible into money or not, arising from business or the exercise of a profession.”
On a first look of the said provision, it is apparent that such benefit or perquisite shall have arisen from the
business activities or profession whereas in the instant case there is nothing as such. The applicability of Section
28(iv) is confined only to the case where there is any business or profession related transaction involved. Hence,
the instant case cannot be covered under Section 28(iv) of the Income Tax Act for the purpose of tax liability.
CONCLUSION:
Amount received on account of Stock Appreciation Rights(SAR) would be taxable as perquisite under
head salary and not under Capital Gain or Business Income
3. CIT VS. SHREE RAMA MULTI TECH LTD (SUPREME COURT)
ISSUE INVOLVED :
Whether Interest accrued on account of deposit of share application money is not taxable income.
Can Such interest, which is inextricably linked with the requirement to raise share capital and is thus
adjustable towards the expenditures involved for the share issue.
The common rationale that is followed in Bokaro Steel Ltd (1999) 236 ITR 315 (SC) and Karnal Cooperative
Sugar Mills Ltd. (2000) 243 ITR 2 (SC) is that if there is any surplus money which is lying idle and it has been
deposited in the bank for the purpose of earning interest then it is liable to be taxed as income from other
sources but if the income accrued is merely incidental and not the prime purpose of doing the act in question
which resulted into accrual of some additional income then the income is not liable to be assessed and is eligible
to be claimed as deduction. Putting the above rationale in terms of the present case, if the share application
money that is received is deposited in the bank in light of the statutory mandatory requirement then the accrued
interest is not liable to be taxed and is eligible for deduction against the public issue expenses.
Learned counsel appearing on behalf of the Appellant contended that the impugned final order passed by
the High Court is against law and facts of the present case. He further contended that the High Court grossly
erred in relying on its earlier order dated 26.07.2011 passed in Tax Appeal No. 315 of 2010 titled Assistant
Commissioner of Income Tax vs. Panama Petrochem Ltd. and not appreciating the fact that the Department
could not file a petition for special leave before this Court due to low tax effect being Rs. 9,81,541/wherein it was
held that the interest income occurred by keeping the amount of share application money in a bank account is
liable to be set-off against the public issue expenses.
Learned counsel for the appellant finally contended that the law is well settled that the interest income is always
regarded as of revenue nature unless it is received by way of damages or compensation. The present case is
not related either to damages or compensation and the High Court erred in arriving on such a conclusion which
is not in accordance with law and is liable to be aside.
Discussion:
The Respondent company had come out with initial public issue during the year under consideration and the
amount of share application money received was deposited with the banks on which interest of Rs. 1,71,30,202/
was earned which was shown in the return of income originally filed as income from other sources which was
also referred to in Col. 13(d) of the Tax Audit report filed under Section 44AB of the Income Tax Act.
Even though initially the income from the interest was shown as income from other sources in the return of
income, however, the Respondent had raised an additional ground before the Tribunal to allow the set off of
such interest against the public issue expenses. The issue was examined by the Tribunal and was set aside for
fresh adjudication by the Assessing Officer. During the course of fresh proceedings, an opportunity was given
to the Respondent to file the details of interest on share application money. The Respondent stated that the
details of interest income on share application money was already furnished at Annexure No. 7 of their letter
dated 11.03.2003 at the time of original assessment.
The verification of the said Annexure reveals that the Respondent had earned the interest income on FDRs
placed with the bank, however, the period for which such FDRs were placed and the specific period of the
interest earned was not found to have been mentioned. Under the circumstances, it was not possible to identify
as to what portion of interest earned on FDRs was relating to the period prior to the allotment of shares or after
the allotment of shares. Keeping in view the specific guidelines of the Tribunal in this regard and in the absence
of specific working of interest for pre allotment and post allotment, the claim of the Respondent was not allowed
and added to the total income under the head income from the other sources as was declared in the original
return of income filed by the Respondent.
Coming back to the facts of the case, we may reiterate that the Respondent was statutorily required to keep
share application money in the separate account till the allotment of shares was completed. Interest earned on
such separately kept amount was to be adjusted towards expenditure for raising share capital.
We are, therefore, of the opinion that interest earned was inextricably linked with requirement of company to
raise share capital and was thus adjustable towards the expenditures involved for the share issue. Though
learned counsel for the Appellant contended that part of the share application money would normally have to
be returned to unsuccessful applicants, and therefore, the entire share application money would not ultimately
be appropriated by the Company, insofar as present case is concerned, we do not see how this factor would
make any significant difference. Interest earned from share application money statutorily required to be kept in
separate account was being adjusted towards the cost of raising share capital. In that view of the matter, we are
of the opinion that the High Court was right in allowing such deduction.
In light of the above developments in the case, the question of law has been decided by this Court in case in
Bokaro Steel Ltd. (supra), wherein the company was set up to produce steel. When the construction of plant was
yet not completed, company earned interest on advances to contractor, rent from quarters let out to employees
of the contractor as well as other income such as hire charges on plant and machinery let out to contractor,
royalty on stones removed from its land. It was in this background that this Court held that the amounts were
directly connected to and incidental to construction of plant by the company, amounts were capital receipts and
not income from any independent source.
Further, the rationale of judgment of Bokaro Steel Ltd. (supra) was followed in Commissioner of Income Tax vs.
Karnal Cooperative Sugar Mills Ltd. (2000) 243 ITR 2 (SC). In this case, the company had deposited certain
amount with the bank to open letter of credit for purchase of machinery for setting up plant. On the money so
deposited, it earned interest. In that background, this Court observed that this is not a case where any surplus
shares capital money which was lying idle had been deposited in the bank for the purpose of earning interest.
The deposit of money is directly linked with the purchase of plant and machinery.
644 PP-DTL&P
The common rationale that is followed in all these judgment is that if there is any surplus money which is lying
idle and it has been deposited in the bank for the purpose of earning interest then it is liable to be taxed as
income from other sources but if the income accrued is merely incidental and not the prime purpose of doing
the act in question which resulted into accrual of some additional income then the income is not liable to be
assessed and is eligible to be claimed as deduction. Putting the above rationale in terms of the present case,
if the share application money that is received is deposited in the bank in light of the statutory mandatory
requirement then the accrued interest is not liable to be taxed and is eligible for deduction against the public
issue expenses.
The issue of share relates to capital structure of the company and hence expenses incurred in connection with
the issue of shares are to be capitalized because the purpose of such deposit is not to make some additional
income but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental.
In the present case, the Respondent was statutorily required to keep the share application money in the bank
till the allotment of shares was complete.
In that sense, we are of the view that the High Court was right in holding that the interest accrued to such
deposit of money in the bank is liable to be set-off against the public issue expenses that the company has
incurred as the interest earned was inextricably linked with requirement of the company to raise share capital
and was thus adjustable towards the expenditure involved for the share issue.
CONCLUSION :
Interest income earned out of the share application money is liable to be set off against the public
issue expenses.
4. CIT VS. CHAPHALKAR BROTHERS PUNE (SUPREME COURT)
ISSUE INVOLVED :
Taxability of subsidies : Whether a subsidy granted by the Govt to achieve the objects of acceleration
of industrial development and generation of employment is of capital in nature or revenue nature.
The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons
come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment
duty for a period of three years and partial remission for a period of two years should go towards helping the
industry to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept
Mr. Narasimha’s argument that it is only the immediate object and not the larger object which must be kept in
mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold
(i) Applying the aforesaid test contained in both Sahney Steel & Press Works Ltd., Hyderabad Vs. Commissioner
of Income-Tax, A.P.-I, Hyderabad 1997 (7) SCC 765 and Commissioner of Income Tax, Madras Vs. Ponni
Sugars and Chemicals Limited 2008 (9) SCC 337, we are of the view that the object, as stated in the statement
of objects and reasons, of the amendment ordinance was that since the average occupancy in cinema theatres
has fallen considerably and hardly any new theatres have been started in the recent past, the concept of a
Complete Family Entertainment Centre, more popularly known as Multiplex Theatre Complex, has emerged.
These complexes offer various entertainment facilities for the entire family as a whole. It was noticed that
these complexes are highly capital intensive and their gestation period is quite long and therefore, they need
Government support in the form of incentives qua entertainment duty. It was also added that government
with a view to commemorate the birth centenary of late Shri V. Shantaram decided to grant concession in
entertainment duty to Multiplex Theatre Complexes to promote construction of new cinema houses in the State.
(ii) The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons
come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty
for a period of three years and partial remission for a period of two years should go towards helping the industry
to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept Mr.
Narasimha’s argument that it is only the immediate object and not the larger object which must be kept in mind
in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold. We
hasten to add that the object of the scheme is only one -there is no larger or immediate object. That the object
is carried out in a particular manner is irrelevant, as has been held in both Ponni Sugar and Sahney Steel.
(iii) Mr. Ganesh, learned Senior Counsel, also sought to rely upon a judgment of the Jammu and Kashmir High
Court in Shri Balaji Alloys vs. C.I.T. (2011) 333 I.T.R. 335. While considering the scheme of refund of excise
duty and interest subsidy in that case, it was held that the scheme was capital in nature, despite the fact that
the incentives were not available unless and until commercial production has started, and that the incentives
in the form of excise duty or interest subsidy were not given to the assessee expressly for the purpose of
purchasing capital assets or for the purpose of purchasing machinery. After setting out both the Supreme Court
judgments referred to hereinabove, the High Court found that the concessions were issued in order to achieve
the twin objects of acceleration of industrial development in the State of Jammu and Kashmir and generation of
employment in the said State. Thus considered, it was obvious that the incentives would have to be held capital
and not revenue.
(iv) Mr. Ganesh, learned Senior Counsel, pointed out that by an order dated 19.04.2016, this Court stated that
the issue raised in those appeals was covered, inter alia, by the judgment in Ponni Sugars, and the appeals
were, therefore, dismissed. We have no hesitation in holding that the finding of the Jammu and Kashmir High
Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object
of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy
took a particular form and the fact that it was granted only after commencement of production would make no
difference.
CONCLUSION :
Subsidy granted by the Govt to achieve the objects of acceleration of industrial development and
generation of employment is of capital in nature. The fact that the incentives are not available unless
and until commercial production has started, and that the incentives are not given to the assessee
expressly for the purpose of purchasing capital assets or for the purpose of purchasing machinery
is irrelevant. The object has to be seen and not the form in which it is granted.
5. HINDUSTAN COCA COLA BEVERAGES PVT. LTD VS. CIT (RAJASTHAN HIGH COURT)
ISSUE INVOLVED :
Whether TDS u/s 194H will be applicable when the relationship between the assessee and the
distributor was that of “principal to principal” and whether the “discount” amount to a “payment” for
the purpose of deduction of TDS
Taking into account the provisions of Section 182 of the Contract Act and the arrangement which has been
entered into between the company and the distributor and taking into account the provisions of Section 194H,
the Tribunal while considering the evidence on record, in our considered opinion, has misdirected itself in
considering the case from an angle other than the angle which was required to be considered by the Tribunal
under the Income Tax Act. The Tribunal has travelled beyond the provisions of Section 194H where the condition
precedent is that the payment is to be made by the assessee and thereafter he is to make payment. In spite
of our specific query to the counsel for the department, it was not pointed out that any amount was paid by the
assessee company. It was only the arrangement by which the amount which was to be received was reduced
and no amount was paid as commission
The High Court had to consider the following questions of law in appeals filed by the assessee:
646 PP-DTL&P
“(i) Whether in the facts and circumstances of the case the learned Tribunal was right and justified in
holding that assessee was liable to withhold tax at source under S.194H of the Income Tax Act, 1961
amounting to Rs.19,74,842/- (including interest) in respect of sales to its distributors, which are on a
principal to principal basis and wherein property in the goods is transferred to the distributors?
(ii) Whether the Tribunal was justified in ignoring the statutory books of accounts, the auditors report
and the certificate issued by the auditors and merely relying on the internal Management Information
System records in coming to the conclusion on the nature of the dealings with the distributors?
(iii) Whether on the facts and in the circumstances of the case the Tribunal erred in law in holding that
interest under Sec.201(1A) and Sec.220(2) of the Income Tax Act, 1961 should be levied on the
appellant when the taxes due had already been paid by the distributor(s)/ when a valid stay of recovery
has been obtained?
HELD by the High Court allowing the appeals:
(a) Now, the first question which has come up for our consideration is, ‘whether in the facts and
circumstances of the case the learned Tribunal was right and justified in holding that assessee was
liable to withhold tax at source under S. 194H of the Income Tax Act, 1961 amounting to Rs.19,74,842/-
(including interest) in respect of sales to its distributors, which are on principal to principal basis and
wherein property in the goods is transferred to the distributor’.
(b) Taking into account the provisions of Section 182 of the Contract Act and the arrangement which has
been entered into between the company and the distributor and taking into account the provisions of
Section 194H, the Tribunal while considering the evidence on record, in our considered opinion, has
misdirected itself in considering the case from an angle other than the angle which was required to be
considered by the Tribunal under the Income Tax Act. The Tribunal has travelled beyond the provisions
of Section 194H where the condition precedent is that the payment is to be made by the assessee and
thereafter he is to make payment. In spite of our specific query to the counsel for the department, it was
not pointed out that any amount was paid by the assessee company. It was only the arrangement by
which the amount which was to be received was reduced and no amount was paid as commission.
(c) In that view of the matter, if we look at the provisions of Section 194H and even if explanation is taken
into consideration, there is no occasion of invoking provisions of Section 194H, since the amount is not
paid by the assessee.
(d) Taking into account the conclusion which has been arrived at by the Tribunal is misdirected in view
of the arrangement which has been arrived at between the company and the Distributor. Assuming
without admitting, if the contention which has been raised before the Tribunal is accepted, the same
can be at the most expenses which are not allowable under the Income Tax Act, if at all claimed without
proper basis but to conclude that they are covered under Section 194H and the income tax or the TDS
is required to be deducted is not correct and accordingly disallowance on that basis is not correct.
(e) In our considered opinion, from which amount of tax is to be deducted is a doubtful proposition inasmuch
as the Management Information System which has been sought to be relied upon for alleging that
expenditure has been claimed could not have been relied upon by the Tribunal or the authorities under
the Income Tax Act.
(i) The findings which are given by the Tribunal regarding Distributor being Agent in view of the
discussion made here-inabove, the arrangement which has been made between the Company
and the Distributor is on Principal to Principal basis and the responsibility is on the basis of
agreement entered into between the parties
(ii) Regarding MRP, the findings which are arrived at is a price which has been fixed by the assessee
company and other expenses, namely; commission given to the retailer and everything is to be
managed by the Distributor. In that view of the matter, the restrictions which are put forward will
not decide the relation-ship of Principal and Agent.
(iii) The Distributor has all rights to reduce his margin. He can increase the margin of retailer and
will reduce the margin from 10% to anything between 1% to 10%. There is no restriction by the
assessee to give commission amount to the retailer.
(iv) Regarding area of operation, it is the business policy of the assessee to give Distributor-ship for
a particular area. Only on that basis, it will be erroneous to held that it is on Principal to Principal
basis. For deciding the relation-ship on Principal to Principal basis, the criteria will not be of area
of operation but agreement entered into between the parties.
(v) Regarding the change in price it is always between the assessee or the company and the
Distributor to decide who will absorb the loss. In that view of the matter, the findings arrived at by
the Tribunal is erroneous.
(vi) Regarding the return of goods after expiry date, it is always the understanding between the
manufacturer and company that the product is not for preparation or consumed before expiry
date, the consumed items cannot be allowed otherwise manufacturer will invite criminal liability.
To avoid any criminal liability or any criminal act is done for taking back the goods, will not deter
the relation-ship of Principal to Principal basis.
(vii) Regarding supervision, it is always for the manufacturer and the company to look into the matter
that his Distributor or Sub- Distributor or Retailer will not induct in mal practice.
(viii) Regarding goods sold to the Distributor, it is always a matter of contract how further goods will
be distributed. Restriction on sub-distributor will not change the transaction from Principal to
Principal.
(ix) Regarding expenses which are described by the Tribunal and one of the reason is that it is always for
the assessee to allow any special allowance or expenses to promote the sale. In a competitive world
to promote the sale, if the Distributor is not given any encouragement, the business will not grow.
In that view of the matter, in view of the observations of the Supreme Court, the Income Tax
Officer cannot enter into the shoes of the assessee. (S.A. Builders Vs. Commissioner of Income
Tax- (2007) 288 ITR 1 (SC).
(x) Regarding providing a vehicle it was very clear that by providing vehicle and getting list of expenses
will not decide the relation-ship of Principal and Agent.
(f) In our considered opinion, Section 194H pre-supposes the payment to be made to the third party
namely, Distributor or the Agency and if on a close scrutiny of Section 182, Distributor is not an agent,
therefore, in our considered opinion, the provisions of Section 194H have wrongly been invoked, and
therefore, the first issue is answered in favour of assessee and against the Department.
(g) The second issue which has been raised for our consideration, as discussed hereinabove, the
Management Information System was not a part of their books of accounts nor could have been
relied upon by the Income Tax Authorities. The basis on which the proceedings were initiated, in our
considered opinion, the Statutory Audit Report is final conclusion over the authorities under the Income
Tax Act, therefore, the second issue is required to be answered in favour of the assessee.
(h) Regarding third issue whether 201A or 201(1A), in view of the decisions of different High Courts, the
argument canvassed by counsel for the appellant pre-supposes deduction out of the payment. In our
conclusion in issue No.1, the amount was not required to be deducted since they have not made any
payment. In that view of the matter any proceedings under Section 201 or 201(1A) are misconceived.
In that view of the matter, this issue is also answered in favour of assessee.
648 PP-DTL&P
(i) Contention regarding provisions of Section 271 of the Act,in view of our answer in favour of assessee,
this issue is also required to be answered in favour of assessee. Even otherwise as rightly held by the
Supreme Court in CIT Vs. Eli Lilly & Co. (India) P. Ltd. (supra), the penalty could not have been levied
in all the appeals filed by assessee Coca Cola.
CONCLUSION :
Sec 194H : An obligation to deduct TDS u/s 194H arises only if the relationship is that of “principal
and agent” and if a “payment” is made. As the relationship between the assessee and the distributor
was that of “principal to principal” and as the “discount” did not amount to a “payment”, there was
no liability to deduct TDS on discounts provided.
6. CIT VS. MADHUR HOUSING AND DEVELOPMENT CO (SUPREME COURT)
ISSUE INVOLVED :
Whether Any payment by a closely-held company by way of advance or loan to a concern in which
a substantial shareholder is a member holding a substantial interest is deemed to be “dividend” u/s
2(22)(e) in hands of the receiver of loan or in hands of the substantial shareholder.
In CIT vs. Ankitech Pvt Ltd (2012) 340 ITR 14, the Delhi High Court was concerned with a case where the
assessee, a company, received advances of Rs. 6.32 crores by way of book entry from Jacksons Generators
Pvt. Ltd, a closely held company. The shareholders having substantial interest in the assessee company were
also having 10% of the voting power in Jacksons Generators. The AO & CIT(A) held that as the shareholders
who held substantial interest in Jacksons Generators also had substantial interest in the assessee company, for
purposes of s. 2(22)(e), the amount received by the assessee from Jacksons constituted “advances and loans”
and was assessable as deemed dividend.
On appeal, the Tribunal, relying on Bhaumik Colour 313 ITR 146 (Mum) (SB), deleted the addition on the ground
that though the amount received by the assessee by way of book entry was “deemed dividend” u/s 2(22)(e), it
was not assessable in the hands of assessee company as it was not a shareholder of Jacksons Generators. On
appeal by the department to the High Court, the High Court dismissed the appeal on the basis that:
(i) U/s 2(22)(e), any payment by a closely-held company by way of advance or loan to a concern in which a
substantial shareholder is a member holding a substantial interest is deemed to be “dividend” on the presumption
that the loans or advances would ultimately be made available to the shareholders of the company giving the
loan or advance. The legal fiction in s. 2(22)(e) enlarges the definition of dividend but does not extend to, or
broaden the concept of, a “shareholder”. As the assessee was not a shareholder of the paying company, the
“dividend” was not assessable in its hands (Bhaumik 313 ITR 146 (Mum) (SB), approved in Universal Medicare
324 ITR 363 (Bom) & Hotel Hilltop 313 ITR 116 (Raj) followed);
(ii) As the conditions stipulated in s. 2(22)(e) treating the loan and advance as deemed dividend are established
in these cases, it is open to the Revenue to take corrective measure by treating this dividend income at the
hands of the shareholders and tax them accordingly as otherwise it amounts to escapement of income at the
hands of those shareholders.
On appeal by the department to the Supreme Court, HELD dismissing the appeal
CONCLUSION:
Any payment by a closely-held company by way of advance or loan to a concern in which a substantial
shareholder is a member holding a substantial interest is deemed to be “dividend” u/s 2(22)(e) in
hands of the shareholder on the presumption that the loans or advances would ultimately be made
available to the shareholders of the company giving the loan or advance.
Note: After Amendment by FA,2019 now Deemed dividend u/s 2(22)(e) would be chargeable to CDT
and not taxable .
7. B. A. MOHOTA TEXTILES TRADERS PVT. LTD VS. DCIT (BOMBAY HIGH COURT)
ISSUE INVOLVED :
Whether a family arrangement/settlement amount to a “transfer” u/s 2(47) on account of transfer of
shares made by a company
The assessee contended that transfer of shares in M/s. Rekhchand Mohota Spinning and Weaving Mills Ltd. and
M/s. Vaibhav Textiles Pvt. Ltd. to members of Group ‘A’ and ‘C’ was done in pursuance of family arrangement/
settlement as reflected in the Arbitration Award dt.30.4.1995. Therefore, it was contended that no Capital
gains would be attracted as there was no transfer as it was working out of family settlement/arrangement.
However, the Assessing Officer negatived the same and inter alia held that the Company being a separate
legal entity distinct from it’s share holders, cannot be as part of family settlement/arrangement. Thus, transfer of
shares done by independent entity such as the assessee would not be covered by the ‘Family Settlement’ and
consequently, brought the transfer of 25,650 shares for consideration of Rs.225/- per share of M/s. Rekhchand
Mohota Spinning and Weaving Mills Ltd. and 1,22,000 shares for consideration of Rs.10/- per share of M/s.
Vaibhav Textiles Pvt. Ltd. to Capital Gains Tax.
On appeal, the CIT accepted the position in law that family settlement cannot amount to transfer or create any
interest and it is binding upon all the members of the family. However, the same can only be applied to members
of the family who are parties to the settlement. In this case, the assessee was a Company incorporated under
the Companies Act having a distinct and independent entity from it’s share holders. Thus, while holding that
the Award dt.30.4.1994 is a family settlement, the same can only be applied to members of Mohota family,
who were party to the proceedings before the Arbitrator and not to a Limited Company such as the Appellant/
Company. Therefore, notwithstanding the fact that the Appellant/assessee was under control and management
of the members of Mohota family, who were part of family settlement, yet the transfer of shares by the Company
would be covered within the meaning of Section 2(47) of the Act so as to be assessable to Capital Gains Tax.
On further appeal, the Tribunal upheld the view of the lower Authorities by holding that a family settlement
would not amount to transfer as it only recognizes pre-existing rights. However, it held that the assessee (even
if controlled by members of a family), on incorporation as a Limited Company becomes a separate legal entity
and the members who own shares in the Company and the Company are in law different persons. It held that
there exists a veil between the members of the Company and the Company. Thus, the family settlement arrived
at between the members of a family will not inure to the benefit of the Appellant/assessee as it is not a member
of the family. Consequently, the Tribunal dismissed the assessee’s appeal. On further appeal by the assessee
to the High Court HELD dismissing the appeal:
(i) There is no dispute before us that a family arrangement/settlement would not amount to a transfer. In
fact, all the three Authorities under the Act have not disputed the aforesaid position in law. So far as
the members of Mohota family are concerned, who are parties to the family settlement, any transfer
inter se between them on account of family settlement would not result in a transfer so as to attract the
provisions of the Capital gain tax under the Act. However, in the present case, we are not concerned
with the members of Mohota family who were parties to the family settlement, but with transfer of share
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done by the Company incorporated under the Companies Act having separate/independent corporate
existence, perpetual succession and common seal. This Company is independent and distinct from it’s
members. In fact, this principle dates back to the decision of House of Lords in Saloman .vs. Saloman
& Co. Ltd., 1897 AC 22. Our Court in T.R. Pratt (Bombay) Ltd. vs. E.D. Sassoon and Co. Ltd., AIR 1936
(Bombay) 62 has observed as under
“As held in 1897 A.C. 22 (23), under the law, an incorporated Company is a distinct entity and although
shares may be practically controlled by one person, in law a Company is a distinct entity and it is not
relevant to enquire whether the directors’ belonged to the same family or whether it is compendiously
described ‘a one-man Company‘.
(ii) However, the Courts have permitted the lifting of corporate veil to prevent injustice. One such class
of cases, where the Court has disregarded the corporate entity is where it is used for tax evasion. A
classic illustration of this is found In Re. Dinshaw Maneckjee Petit, AIR 1927 (Bombay) 371, where the
Court lifted the corporate veil as it found that “the Company in this case was formed by the assessee
purely and simply as a means of avoiding super tax and that the Company was nothing more than the
Assessee himself. It did no business but was created purely and simply as a legal entity to ostensibly
receive dividends and interest and handed them over to the assessee as pretended loan”. In the present
case, the Revenue does not seek to lift the corporate veil. It is not the case of the Revenue that the
Corporate identity is a sham and it has been formed only to circumvent the law. In this case, it is the
Assessee which seeks to lift the corporate veil so as to identify the members of the Assessee/Company
as those who entered into family settlement as reflected in the Arbitration Award dt.30.4.1994 and call
upon the authority to ignore the corporate existence of the Appellant. This lifting of the corporate veil is
not allowed when it is not for the benefit of the Revenue. The Apex Court in the case of M/s. Bacha F.
Guzdar vs. CIT, 27 ITR 1 has inter alia observed that
“A shareholder has no interest in the property of the Company…… It has only a right to participate in
the profits of the Company as and when the Company decides to divide them. The Company is a juristic
person and is distinct different from it’s share holders. It is the Company which owns the property and
not the share holders.”
Therefore, the attempt of the share holder to lift the corporate veil at the instance of the share holder
was rejected. In this case also, shares in M/s. R.S. Rekhchand Mohota Spinning and Weaving Mills
Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are held by the appellant/assessee and not it’s members. The
members, therefore, cannot claim any rights to the property of appellant/assessee Company i.e. shares
of M/s. R.S. Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. as
rightly held by the Authorities under the Act.
(iii) The submission that the entire transaction should be looked at wholistically bearing in mind the
purpose and object of the settlement as recorded in the Arbitration Award dt.30.4.1994 so as to settle
the dispute between members of the family and it was to achieve aforesaid objective that the shares
in the appellant/assessee were directed to be transferred is not acceptable. The objective/purpose
of family settlement would restrict itself only to the persons who entered into the family arrangement
and are part of the settlement. It cannot extend to the persons who are strangers to the settlement. In
this case, admittedly, the assessee is not a member of Mohota family so as to be a part of the family
settlement. The assessee having been formed under the Companies Act have certain advantages and
disadvantages attached to it. But once a Company comes into existence under the provisions of the
Companies Act and it is considered to be an independent entity, then it’s obligation under the law as a
separate legal entity has to be complied with and settlement arrived at between it’s members cannot
discharge the assessee from complying with it’s obligations under the Law.
(iv) The submission that the assessee had no volition in transferring the shares overlooks the fact that an
artificial entity such as a Company only acts through it’s Directors and in no case, does the Company
has a mind of it’s own to decide the course of action to be adopted.
(v) The submission that no consideration was received by the assessee for the transfer of shares and
that the fair market value of M/s. R.S. Rekhchand Mohota Spinning and Weaving Mills Ltd. arrived
at Rs.225/- per share and that of M/s. Vaibhav Textiles Pvt. Ltd. arrived at Rs.10/- per share by the
Arbitrator was only for the purposes of adjustment of rights amongst the parties overlooks the fact
that the Arbitration Order annexed to the decree (Page 62 of the Appeal memo) itself records that the
shares in M/s. R.S. Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt.
Ltd. are to be transferred at a consideration of Rs.225/- and Rs.10/- per share respectively. Thus, the
consideration has been determined and accepted by the members of the family, who are in management
of the Assessee/Company.
(vi) The decision of the Calcutta High Court in the case of Shaw Wallace and Company Ltd. vs.
Commissioner of Income Tax 119 ITR 399 that one is entitled to lift corporate veil and look behind to find
out who are the real persons in control of the incorporated Company is distinguishable because in the
aforesaid case, the issue was with regard to amalgamation of 100% subsidiary company to it’s holding
company. The question which arose for consideration before the Calcutta High Court was whether an
amalgamation between holding and subsidiary Companies would amount to transfer of capital asset in
terms of Section 45 r/w. 2 (47) of the Act. The Calcutta High Court specifically referred to Section 47 of
the Act and in particular, to Section 47, sub-clause (v) of the Act to hold that a transfer by a subsidiary
company to the holding Company of the whole of it’s share capital will not be regarded as transfer for
the purposes of computing capital gains under Chapter IV-E of the Act. Further observations made by
the Calcutta High Court to the effect that, on looking behind the facade of the Company, one would
notice that all the assets of the subsidiary company are held by it’s parent company which owns 100 %
of it’s shares. The aforesaid observations of the Calcutta High Court seems to provide the rationale for
Section 47(v) of the Act in excluding a transfer of the entire share capital of a subsidiary to it’s holding
company which owns 100% of it’s shares from being considered a transfer. In the present facts, we
are not concerned with transfer between holding and subsidiary companies. It is not the case of the
appellant that Section 47 of the Act is applicable.
(vii) Further, lifting of corporate veil at the instance of the assessee would mean that it is denying it’s
corporate existence. This, after taking advantage of the separate existence of a Company under the
Act. Therefore, after having incorporated the Limited Company and given it separate existence from it’s
share holders, it is not open to the Company to urge “Please ignore my separate existence and look at
the persons behind me.” If that be so, the Appellant/Company must opt for voluntarily winding up and
then the shares being allotted to the individual members on liquidation would be governed by the family
arrangement/settlement.
(viii) In the above view, the Tribunal was correct in holding that the transaction of transfer of shares by
the independent corporate entity was assessable to capital gain tax. Therefore, the substantial
questions of law which arise for our consideration are all decided in favour of the respondent/
revenue and against the appellant/assessee. Accordingly, the appeal is dismissed. No order as
to costs
CONCLUSION:
A family arrangement/settlement does not amount to a “transfer” u/s 2(47) as it only recognizes
“pre-existing rights” between the parties, the same applies only to members of the families and
not to transfers made by corporate entities. Therefore transfer of shares of a company under family
settlement will be chargeable under Capital Gains. The fact that the Company is wholly owned by the
members of the family is irrelevant
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8. CIT VS. EQUINOX SOLUTION PVT. LTD (SUPREME COURT)
ISSUE INVOLVED :
If an undertaking is sold as a running business with all assets and liabilities for a slump price, whether
capital gain chargeable u/s 50 or provisions of slump sale will apply.
The assessee claimed that as it had sold their entire running business in one go with its assets and liabilities at
a slump price, the provisions of Section 50 (2) of the Act could not be applied to such sale. It was claimed that it
was not a case of sale of any individual or one block asset which may attract the provisions of Section 50 (2) of
the Act. It was also claimed that that since the undertaking itself is a capital asset owned by the assessee nearly
for six years and being in the nature of long term capital asset and the same having been sold in one go as a
running concerned, it cannot be termed a “short terms capital gain” so as to attract the provisions of Section 50
(2) of the Act as was held by the Assessing Officer. This plea was upheld by the e CIT (Appeals), Tribunal and
the High Court. On appeal by the department to the Supreme Court HELD dismissing the appeal:
(i) In our considered opinion, the case of the respondent (assessee) does not fall within the four corners of
Section 50 (2) of the Act. Section 50 (2) applies to a case where any block of assets are transferred by
the assessee but where the entire running business with assets and liabilities is sold by the assessee
in one go, such sale, in our view, cannot be considered as “short-term capital assets”. In other words,
the provisions of Section 50 (2) of the Act would apply to a case where the assessee transfers one or
more block of assets, which he was using in running of his business. Such is not the case here because
in this case, the assessee sold the entire business as a running concern.
(ii) As rightly noticed by the CIT (appeal) that the entire running business with all assets and liabilities
having been sold in one go by the respondent-assessee, it was a slump sale of a “long-term capital
asset”. It was, therefore, required to be taxed accordingly.
(iii) Our view finds support with the law laid down by this Court in Commissioner of Income Tax, Gujarat vs.
Artex Manufacturing Co. [1997(6) SCC 437 CIT].
(iv) In Premier Automobiles Ltd. vs. Income Tax Officer & Anr., 264 ITR 193 (Bombay) also, the Division
Bench of the Bombay High Court examined this question in detail on somewhat similar facts and has
taken the same view. The Learned Judge S.H Kapadia – (as His Lordship then was as Judge of the
Bombay High Court and later became CJI) speaking for the Bench aptly explained the legal position to
which we concur as it correctly summarized the legal position applicable to such facts.
(v) Learned Counsel for the appellant (Revenue) was not able to cite any decision taking a contrary view
nor was he able to point out any error in the decisions cited at the Bar by the assessee’s counsel
referred supra.
CONCLUSION :
If an undertaking is sold as a running business with all assets and liabilities for a slump price, then
provisions of slump sale will apply and 50(2) will not apply. Therefore capital gain will not be always
deemed as short term but if undertaking sold after 36 months ,can also be treated as long term.
9. HONDA SIEL CARS INDIA LTD. V. CIT [2017] (SC)
Whether Technical Fee Paid Under A Technical Collaboration Agreement For Setting Up A Joint
Venture Company In India Is To Be Treated As Revenue Or Capital Expenditure, Where, Upon
Termination Of The Agreement, The Joint Venture Would Come To An End?
Facts of the case: The assessee, Honda Siel Cars India Ltd., is a joint venture company between Honda
Motors, a Japanese company and Siel Ltd., an Indian company. The assessee and Honda Motors entered
into a technical collaboration agreement (TCA) on May 21, 1996 under which a technical fee of 30.5 million
USD was payable by the assessee in five equal instalments on a yearly basis. Under the agreement, TCA
Honda Motors had to provide manufacturing facilities, know-how, technical information, information regarding
intellectual property rights to the assessee which the assessee was entitled to exploit only as a licensee, without
any proprietary rights. The assessee treated the technical fees as revenue while the Revenue authorities
contended that it is capital in nature.
Issue: Whether the technical fee of 30.5 million USD payable by the assessee is in the nature of revenue
expenditure or capital expenditure?
Appellate Authorities’ views: The Tribunal held that the assessee had acquired only a limited right to use and
not a proprietary right, and hence, the expenditure was revenue in nature. It did not matter that the agreement
was entered into at the time of setting up the business. The High Court, however, held that though the rights
were in the nature of a right to use, the joint venture’s business was set up pursuant to the agreement, and
hence, the expenditure was capital in nature.
Supreme Court’s Observations: From a review of relevant precedents, the Court observed that if a limited
right to use technical know-how is obtained for a limited period for improvising existing business, the expenditure
is revenue in nature. However, if technical know-how is obtained for setting up a new business, the position may
be different. There is no single principle or test for determining the nature of expenditure; it is a question to be
answered based on the circumstances in each case.
In the given facts, the very purpose of the TCA was to set up the Joint Venture. The collaboration included not
only transfer of technical information, but, complete assistance, actual, factual and on the spot, for establishment
of plant, machinery, etc. so as to set up a manufacturing unit. Upon termination of TCA, the joint venture itself
would come to an end. Though the TCA is framed in a manner to look like a licence for a limited period having
no enduring nature but a close scrutiny into the said agreement shows otherwise.
Supreme Court’s Decision: Affirming the decision of the High Court, the Supreme Court held that, in this
case, technical fee is capital in nature since upon termination of TCA, the joint venture itself would come to
an end.
10. UNION OF INDIA V. TATA TEA AND OTHERS (SC)
Can dividend distribution tax under Section 115-O of Income-tax Act, 1961 be levied in respect of the
dividend declared out of agricultural income?
Facts of the case: The petitioner is a tea company engaged in cultivating and processing tea in its factory
for marketing. The cultivation of tea is an agricultural process while the processing of tea in the factory
is an industrial process. The petitioners contend that when the company distributes dividend, it is taxed
under Section 115-O. The tax on dividend declared by it in this case is nothing but a tax on agricultural
income. The legislative competence for taxing agricultural income lies with the State Government and not
the Central Government.
Issue: Can dividend distribution tax be levied on dividend income of a tea company under section 115-O?
Supreme Court’s Observations: As per entry 82 of List I the Union Parliament has the competence to tax
“income other than agricultural income.” Section 115-O pertains to additional tax at the stage of distribution of
dividend by domestic company which is covered by entry 82 in List I. When dividend is declared to be distributed
and paid to a company’s shareholders it is not impressed with character of the source of its income. The Court
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relied on Mrs. Bacha F Guzdar v. CIT AIR 1955 SC 74 which looked into the nature of the dividend income in
the hands of the shareholders. Dividend is derived from the investment made in the company’s shares and the
foundation rests on the contractual relations between the company and the shareholder.
Dividend is not ‘revenue derived from land’ and hence cannot be termed as agricultural income in the hands
of a shareholder. Hence, despite the petitioner’s company being involved in agricultural activities, in the
shareholder’s hands, the income is only dividend and not agricultural income.
The Calcutta High Court had upheld the vires of section 115-O but put a qualification that additional tax levied
under section 115-O shall be only to the extent of 40% which is the taxable income of the tea company. The
Supreme Court overturned this cap placed by the Calcutta High Court. Section 115-O is within the competence
of the Parliament and hence, no limits can be placed on the same.
Supreme Court’s Decision: When dividend is declared to be distributed and paid to a company’s
shareholders, it is not impressed with character of the source of its income. Section 115-O is within the
competence of the Union Parliament and therefore dividend distribution tax can be levied in respect of the
entire dividend declared and distributed by a tea company.
11. INCOME-TAX OFFICER V. VENKATESH PREMISES CO-OPERATIVE SOCIETY LTD. (SC)
Whether certain receipts by co-operative societies from its members (non-occupancy charges,
transfer charges, common amenity fund charges) are exempt based on the doctrine of mutuality?
Supreme Court’s observations: The doctrine of mutuality is based on the common law principle that a person
cannot make a profit from himself. The income of a co-operative society from business is taxable under section
2(24)(vii) and will stand excluded based on the principle of mutuality. The essence of the principle of mutuality
lies in the commonality of the contributors and the participants who are also the beneficiaries. The contributors
to the common fund must be entitled to participate in the surplus and the participators in the surplus are
contributors to the common fund. Any surplus in the common fund shall, therefore, not constitute income but
will only be an increase in the common fund meant to meet sudden eventualities.
The Supreme Court made the following observations:
• If for convenience, part of the transfer charges were paid by the transferee, they would not partake of
the nature of profit. The amount is appropriated only after the transferee was inducted as a member. In
the event of non-admission, the amount was returned. The moment the transferee was inducted as a
member the principles of mutuality would apply.
• Non-occupancy charges were levied by the society and were payable by a member who did not himself
occupy the premises but let them out to a third person. The charges were utilised only for common
benefit of facilities and amenities to the members.
• Contribution to the common amenity fund taken from a member disposing of property was utilized for
meeting heavy repairs to ensure hazard-free maintenance of the properties of the society which
ultimately benefitted the members. Membership forming a class, the identity of the individual
member not being relevant, induction into membership automatically attracted the doctrine of
mutuality.
• If a society had surplus floor space index available, it was entitled to utilise it by making fresh construction
in accordance with law. Naturally, such additional construction would entail extra maintenance charges.
If the society first inducted new members who were required to contribute to the common fund for
availing of the common facilities, and then granted only occupancy rights to them by draw of lots, the
ownership remaining with the society, the receipts could not be bifurcated into two segments of receipt
and costs, so as to hold the former to be outside the purview of mutuality classifying it as income of the
society with commerciality.
Supreme Court’s Decision: The doctrine of mutuality, is based on the common law principle that a person
cannot make a profit from himself. Accordingly, the transfer charges, non-occupancy charges common
amenity fund charges and other charges are exempt owing to application of the doctrine of mutuality.
12. K. LAKSHMANSA AND CO. V. COMMISSIONER OF INCOME-TAX (SC)
Is an assessee receiving refund consequent to waiver of interest under sections 234A to 234C of the
Income-tax Act, 1961 by the Settlement Commission, also entitled to interest on such refund under
section 244A?
Facts of the case: The assessee had approached the Settlement Commission for waiver of interest under
sections 234A to 234C of the Income-tax Act, 1961. The Settlement Commission partially waived the interest
but refused to grant interest on refund on the grounds that section 244A does not provide for payment of interest
in such cases. Further, the Settlement Commission’s power to waive interest does not enable the Commission
to provide for payment of interest under section 244A.
The High Court held that since waiver of interest was at the discretion of the Settlement Commission, no right
flowed to the assessee to claim refund as a matter of right under law.
Issue: When refund is awarded by the Settlement Commission at its discretion under section 244A, is there a
right to receive interest on the same?
Supreme Court’s observations: The Supreme Court observed that the right to claim refund is automatic once
the statutory provisions have been complied with. The statutory obligation to refund, being non-discretionary,
carries with it the right to interest. Section 244A is clear and plain – it grants a substantive right of interest and
is not procedural.
Under section 244A, it is enough if the refund becomes due under the Income-tax Act, 1961 in which case the
assessee shall, subject to the provisions of that section, be entitled to receive simple interest. The expression
“due” only means that a refund becomes due pursuant to an order under the Act which either reduces or waives
tax or interest. It does not matter that the interest being waived is discretionary in nature; the moment that
discretion is exercised and refund becomes due consequently, a concomitant right to claim interest springs into
being in favour of the assessee.
The Supreme Court, thus, did not agree with the High Court opinion that when discretionary power has been
exercised, no concomitant right to claim interest on refund arises in favour of the assessee.
Supreme Court’s Decision: Overruling the High Court Decision, the Supreme Court held that the assessee
has a right to interest on refund under section 244A.
13. RAJ DADARKAR AND ASSOCIATES V. ASSISTANT COMMISSIONER OF INCOME TAX

(SC)
Whether rental income earned from letting out of premises is to be treated as business income or as
income from house property?
Facts of the case: The assessee had acquired the right to conduct a market on certain land from Municipal
Corporation, Greater Bombay under an auction on May 28, 1993. The premises allotted to the appellant was a
bare structure and it was for the appellant to make the premises fit to be used as a market. The appellant spent
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substantial sums to construct 95 shops and 30 stalls. From the years 1999 to 2004, the assessee treated income
from sub-letting of such shops and stalls as business income. The return of the assessee for assessment year
2000-2001 was reopened by Assessing Officer by issuing notice under section 148.
Issue: Whether the income earned by the appellant is to be taxed under the head ‘Income from house property’
or ‘Profits and gains from the business or profession’?
Supreme Court’s Observations: The Supreme Court held that wherever there is an income from leasing out
of premises, it is to be treated as income from house property. However, it can be treated as business income if
letting out of the premises itself is the business of the assessee. The question has to be decided based on the
facts of each case as was held in Sultan Brothers Pvt Ltd. v. CIT [1964] 51 ITR 353 (SC).
In the given facts, it was an undisputed fact that the assessee would be considered to be a deemed owner
under section 27(iiib) read with section 269UA(f) as it had a leasehold right for more than 12 years. The
only evidence adduced for proving that letting out and earning rents is the main business activity of the
appellant was the object clause of the partnership deed. The clause provided that “The Partnership shall
take the premises on rent to sub-let or do any other business as may be mutually agreed by the parties
from time to time.” The Supreme Court held the clause to be inconclusive and observed that the assessee
had failed to produce sufficient material to show that its entire or substantial income was from letting out
of the property.
Supreme Court’s Decision: The Supreme Court, accordingly, held that, in this case, the income is to be
assessed as “Income from house property” and not as business income, on account of lack of sufficient
material to prove that the substantial income of the assessee was from letting out of the property.
Note - In Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673, the Supreme Court observed
that holding of the properties and earning income by letting out of these properties is the main objective of the
company. Further, in the return of income filed by the company and accepted by the Assessing Officer, the
entire income of the company comprised of income from letting out of such properties. The Supreme Court,
accordingly, held that such income was taxable as business income. Likewise, in Rayala Corporation (P) Ltd. v.
Asst. CIT (2016) 386 ITR 500, the Supreme Court noted that the assessee was engaged only in the business of
renting its properties and earning rental income therefrom and accordingly, held that such income was taxable
as business income. In this case, however, on account of lack of sufficient material to prove that substantial
income of the assessee was from letting out of property, the Supreme Court held that the rental income has to
be assessed as “Income from house property”
14. PALAM GAS SERVICE V. CIT (SC)
Whether section 40(a)(ia) is attracted when amount is not ‘payable’ to a sub-contractor but has been
actually paid?
Facts of the case: The assessee, Palam Gas Service, is engaged in the business of purchase and sale of LPG
cylinders. The assessee had arranged for the transportation to be done through three sub-contractors within the
meaning of section 194C. During the relevant assessment year, when the assessee made freight payments of
Rs.20,97,689 to the sub-contractors, it did not deduct tax at source. The Assessing Officer disallowed the freight
expenses as per section 40(a)(ia) on account of failure to deduct tax. The assessee contended that section
40(a)(ia) did not apply as the amount was not ‘payable’ but had been actually paid.
Issue: Whether the provisions of Section 40(a)(ia) would be attracted when the amount is not ‘payable’ to
a sub-contractor but has been actually paid? Would the obligation to deduct tax depend on the method of
accounting followed by an assessee?
Supreme Court’s Observations: The Supreme Court noted the difference in opinion amongst the various
High Courts. On the one hand, the High Courts of Punjab & Haryana, Madras, Calcutta and Gujarat
held that Section 40(a)(ia) extended to amounts actually paid. The Allahabad High Court had, however,
held otherwise. The Supreme Court agreed with the observations of the majority High Courts and held
that section 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid.
Accordingly, the judgment of the Allahabad High Court in CIT v. Vector Shipping Services (P.) Ltd. [2013]
357 ITR 642 stands overruled.
The Supreme Court reaffirmed that the obligation to deduct tax at source is mandatory and applicable irrespective
of the method of accounting adopted. If the assessee follows the mercantile system of accounting, then, the
moment amount was credited to the account of the payee on accrual of liability, tax was required to be deducted
at source. If the assessee follows cash system of accounting, then, tax is required to be deducted at source at
the time of making payment.
Supreme Court’s Decision : The Supreme Court, accordingly, upheld the decision of the majority High
Courts that section 40(a)(ia) would be attracted for failure to deduct tax in both cases i.e., when the amount
is payable or when the amount is paid, as the case may be, depending on the system of accounting followed
by the assessee.
15. FAURECIA AUTOMOTIVE HOLDING VS DCIT (ITA NO. 784/PUN/2015)
Whether Salary cost reimbursement and payment towards Global Information Support Services to French
Company, taxable in India or not?
Facts of the case: Faurecia Automotive Holding (the taxpayer), a Company being tax resident of France, is
into the business of designing and building various interior components (such as dashboards, door panels, etc.)
of passenger cars. During the fiscal year 2010-11, the taxpayer had received following sums from Faurecia
Technology Center India Limited (Faurecia India):
l INR 4.73 million towards reimbursement of salary cost, in respect of an employee (i.e. Mr. Franck
Euvrard) seconded to India
l INR 266.72 million towards support services
While the taxpayer treated both these amounts as not taxable, the Tax Officer brought them to tax.
Issue: To have a uniformity across location, support its establishments in India etc., MNCs send their employees
to India either on deputation or secondment. Depending upon the terms of agreement, either the Indian entity
or the Foreign Company pays salary to the said employees. Where the Foreign Company pays salary to such
employee, such cost is reimbursed by the Indian entity. Indian Revenue Authorities at times tries to bring such
payment within the ambit of Fees for Technical Service (FTS) and hence the taxability of such payment has
always been litigative.
Further, some of the Double Taxation Avoidance Agreement (DTAA) entered by India contains Most Favoured
Nation (MFN) clause. This clause grants access to the favourable DTAAs that are entered post signing of the
concerned DTAA.
With respect to taxing reimbursement of employee cost, the brief facts are as under:
l As per the secondment agreement, Mr. Franck was to render services to Faurecia India. For this
purpose, Mr. Franck was appointed as Faurecia India’s CEO in 2006 and was CEO till 2011.
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l His salary consisted basic Salary, housing allowance, conveyance allowance, child education allowance
and special allowance etc. He had to become member of Employees’ Provident Fund
l Mr. Franck’s leave entitlements were governed by the rules of Faurecia India
l The taxpayer paid INR 47.30 million directly to Mr. Franck, which was subsequently reimbursed by
Faurecia India.
l For fiscal year 2010-11, the Tax Officer proposed to tax this amount by treating that the taxpayer
rendered managerial, consultancy or technical services to Faurecia India and the amount paid as
quid pro quo represents payment towards technical services as covered under section 9(1)(vii) of the
Income-tax Act, 1961 (the IT Act).
With respect to taxing support services, the brief facts are as under:
l The taxpayer provided services to Faurecia India in one or several of the following areas:
o General management
o Communication
o Sales and marketing
o Program management
o Accounting, controlling and tax
o Treasury
o Legal, insurance, real estate
o General management of information system organisation
o Information system
o Human resources
o General management of purchasing organisation
o Production purchasing
o Non production purchasing
o Manufacturing
o Quality
l For the above, it received INR 26.6 million from Faurecia India. The taxpayer treated this amount as
not taxable claiming it did not make available any technical knowledge, experience, skill or know how
etc. to Faurecia India and hence, the same did not fall within the meaning of FTS under Article 13 of the
DTAA with France read with para 7 of the Protocol.
l The Tax Officer taxed this amount by treating it to be royalty as defined in section 9(1)(vi) of the IT Act
and also covered by Explanation 2 to section 9(1)(vii) of the IT Act as FTS.
Accordingly, the Tax Officer passed a draft order proposing to add the above amounts. The taxpayer filed
objections against the draft order, which were dismissed by the Dispute Resolution Panel.
Tribunal’s Observations:
For concluding that the payment towards support services is also not in the nature of FTS, the Tribunal observed
that:
As per para 7 of the Protocol, if India has entered into a DTAA with a third state which is a member of the OECD
and the scope of the term FTS under such DTAA with a third state is limited vis-à-vis its scope given in the DTAA
with France, then such limited scope as per the DTAA with the third state shall stand substituted in place of para
4 of Article 13 of the DTAA with France.
l India has entered into a DTAA with UK, which is a member of the OECD. Article 13 of such DTAA with
UK has a narrower definition of the term FTS.
l In view of the MFN clause in the Protocol, Article 13(4) of the DTAA with UK shall overshadow Article
13(4) of the DTAA with France and limit the scope of the DTAA with France to the extent provided in the
DTAA with UK.
l The term managerial is missing so far as the scope of FTS under the DTAA with UK is concerned.
l The second departure in the DTAA with UK from the DTAA with France is that the ‘scope’ of technical
consultancy services in the DTAA with UK has been restricted to ‘make available’ any technical
knowledge, experience, skill knowhow or processes etc.
l Thus, Article 13(4)(c) of the DTAA with UK, when read in place of Article 13(4) of the DTAA with France,
deciphers that FTS shall mean any payment for rendering of any technical or consultancy services
which ‘make available’ technical knowledge, experience or skill etc. to the recipient.
l The services rendered by the taxpayer to Faurecia India are in the nature of managerial and also
technical in nature. In so far as the managerial services are concerned, the consideration for them goes
out of the purview of FTS as the term ‘managerial’ is absent in Article 13(4) of the DTAA with UK.
l As far as the remaining Technical services are concerned, these are of coordinating the information
system and assisting Faurecia India in computerisation of systems, office automation and utilisation of
personal computers which fall into three categories namely Operations, Technical Support and Studies.
On going through the nature of such services, it manifests that these do not result in making available
any technical knowhow etc to Faurecia India.
l In view of the above, payment towards support services should not be taxable as FTS under the DTAA.
Tribunal’s Decision : Salary cost reimbursement and payment towards Global Information Support
Services to French Company, not taxable in India
16. PR.CIT VS MARUTI SUZUKI INDIA LIMITED (CIVIL APPEAL NO. 5409 OF 2019) (SLP
NO. 4298 OF 2019) (SC)
Whether Assessment in the name of amalgamating company is valid or not?
Facts of the case: Suzuki Powertrain India Limited (SPIL or amalgamating company) had amalgamated with
Maruti Suzuki India Limited (MSIL or amalgamated company) by a scheme of amalgamation approved by the
High Court (HC) on January 29, 2013, with effect from fiscal year commencing on April 1, 2012. The scheme
provided that all the assets, liabilities and duties of the amalgamating company be transferred to the MSIL and
that the SPIL would stand dissolved without winding up. Subsequent chain of events is summarised hereunder:
l April 2, 2013 - the taxpayer intimates the Tax Officer (TO) about the amalgamation
l September 26, 2013 – TO issues notice for scrutiny under section 143(2) of the Income-tax Act, 1961
(the IT Act) for fiscal year 2011-12
l September 4, 2015 - the TO calls for various information. The TO’s communication was addressed to:
The Principal Officer
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M/s Suzuki Powertrain India Limited

(Now known as M/s Maruti Suzuki India Limited)
l March 11, 2016 – TO passes draft assessment order in the name of SPIL
l April 12, 2016 – Objections are filed before the Dispute Resolution Panel (DRP). The objections were
filed by MSIL as successor in interest of erstwhile SPIL.
l October 14, 2016 - DRP passes its order
l October 31, 2016 – TO passes final order in the name of SPIL (amalgamated with MSIL).
l April 6, 2017 – Tax Tribunal set asides the assessment order on the ground that it was void ab initio
having been passed in the name of a non-existent entity by the TO
l January 9, 2018 – Delhi HC affirms Tribunal’s order. While approving Tribunal’s order, Delhi HC followed
its own decision rendered in MSIL’s case for fiscal year 2010-11.
The TO has filed a Special Leave Petition (SLP) before Supreme Court against the decision of HC.
Issue: In case of amalgamation of two or more entities, the amalgamating entity ceases to exist post the
appointed date. As the amalgamation process generally takes time to complete, the scheme document contains
appointed date – i.e. date from which the scheme shall be effective. Hence, once the scheme is approved, the
same is effective retrospectively.
As a result, there are instances where the tax return is filed by the amalgamating company in its own name.
Further, the assessment for earlier year(s) (i.e. tax years prior to the year in which amalgamation took place),
could be underway and would get concluded post the amalgamation. In such cases, it is a contentious issue as
to whether the assessment should be done in the name of amalgamating company or resulting / amalgamated
company. Recently, Hon’ble Supreme Court had an occasion to delve into this issue.
Supreme Court’s Observations: For this case, SC observed that:
l Under the approved scheme of amalgamation, the amalgamated company had assumed the liabilities
of the transferor company including the tax liabilities.
l Upon scheme of amalgamation getting approved, the amalgamating company ceases to exist. This
principle has been formulated by SC in case of Saraswati Industrial Syndicate Ltd.
l Once amalgamating company ceases to exist, it cannot be termed as a “person” under section 2(31) of
the IT Act against whom assessment proceedings can be initiated or an order can be passed.
l The TO assumed jurisdiction to make an assessment in pursuance to the notice under section 143(2)
of the IT Act. Prior to the date on which the jurisdictional notice under section 143(2) of the IT Act was
issued, the scheme of amalgamation had been approved and this fact was already communicated to
the TO.
l The jurisdictional notice issued under section 143(2) of the IT Act in the name of amalgamating company,
a non-existent entity, was invalid and thereby the initiation of assessment proceedings was void ab
initio. The mere fact that the amalgamated company participated in the assessment proceedings would
not operate as estoppel.
Supreme Court’s Decision : The Supreme Court, accordingly, upheld the decision of the majority High
Courts that the assessment done in the name of amalgamating company was void ab initio.
17. Regional Provident Fund Commissioner (II) West Bengal versus Vivekananda Vidyamandir

and Others, Civil Appeal No(s). 6221 of 2011, Transfer Case No. (C) No(s). 19 0f 2019
Whether the special allowances paid by an establishment to its employees would fall within the expression
"basic wages" under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction towards
Employees' Provident Fund”?
Facts of the case: The common submission on behalf of the appellants was that basic wages defined under
Section 2(b) contains exceptions and will not include what would ordinarily not be earned in accordance with the
terms of the contract of employment. Even with regard to the payments earned by an employee in accordance
with the terms of contract of employment, the basis of inclusion in Section 6 and exclusion in Section 2(b)
(ii) is that whatever is payable in all concerns and is earned by all permanent employees is included for the
purpose of contribution under Section 6. But whatever is not payable by all concerns or may not be earned by
all employees of a concern are excluded for the purposes of contribution. Dearness allowance was payable
in all concerns either as an addition to basic wage or as part of consolidated wages. Retaining allowance was
payable to all permanent employees in seasonal factories and was therefore included in Section 6. But, house
rent allowance is not paid in many concerns and sometimes in the same concern, it is paid to some employees
but not to others, and would therefore stand excluded from basic wage. Likewise overtime allowance though in
force in all concerns, is not earned by all employees and would again stand excluded from basic wage. It is only
those emoluments earned by an employee in accordance with the terms of employment which would qualify as
basic wage and discretionary allowances not earned in accordance with the terms of employment would not be
covered by basic wage. The statute itself excludes certain allowance from the term basic wages. The exclusion
of dearness allowance in Section 2(b)(ii) is an exception but that exception has been corrected by including
dearness allowance in Section 6 for the purpose of contribution.
Issue: The division bench at Supreme Court was considering 4 appeals in which the issue was “whether the
special allowances paid by an establishment to its employees would fall within the expression “basic
wages” under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction towards
Employees’ Provident Fund”.
Supreme Court’s Observations: For this case, SC observed that:
l Any variable earning which may vary from individual to individual according to their efficiency and
diligence will stand excluded from the term “basic wages” (as held in Muir Mills Co. Ltd., Kanpur Vs. Its
Workmen, AIR 1960 SC 985);
l The basic principles as laid down in Bridge Roof’s case (supra) on a combined reading of Sections 2(b)
and 6 are as follows:
l Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments
are basic wages.
l Where the payment is available to be specially paid to those who avail of the opportunity is not basic
wages. By way of example it was held that overtime allowance, though it is generally in force in all
concerns is not earned by all employees of a concern. It is also earned in accordance with the terms
of the contract of employment but because it may not be earned by all employees of a concern, it is
excluded from basic wages.
l Conversely, any payment by way of a special incentive or work is not basic wages.” [Manipal Academy
of Higher Education vs. Provident Fund Commissioner, (2008) 5 SCC 428, relying on Bridge and Roof
Co. (India) Ltd. vs. Union of India, (1963) 3SCR 978.]
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Supreme Court’s Decision : The Supreme Court, has held that

"In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned
had become eligible to get this extra amount beyond the normal work which he was otherwise required
to put in. There is no data available on record to show what were the norms of work prescribed for those
workmen during the relevant period. It is therefore not possible to ascertain whether extra amounts paid
to the workmen were in fact paid for the extra work which had exceeded the normal output prescribed for
the workmen. The wage structure and the components of salary have been examined on facts, both by
the authority and the appellate authority under the Act, who have arrived at a factual conclusion that the
allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as
to avoid deduction and contribution accordingly to the provident fund account of the employees."
18. TATA CONSULTANCY SERVICE LTD. VS ACIT (ITA NO. 5713/MUM/2016)
Whether there is possibility of claiming Foreign Tax Credit on the income pertaining to section 10A / section
10AA eligible units (i.e. SEZ / EOU etc.)?
Facts of the case: Taxpayer, IT and ITeS Company, is a Company resident in India. The Company earns
income which is entitle for exemption under section 10A / 10AA of the IT Act. The tax officer, after examining
Company’s claim and verifying the details, denied relief for FTC in respect of income subjected to tax abroad
but exempt from tax in India. The taxpayer contested the tax officer’s action before the appellate authority [i.e.
Commissioner of Income-tax (Appeals) (‘CIT(A)’)]. Relying on the decision of Karnataka High court in case of
Wipro Ltd., the CIT(A) allowed taxpayer’s claim in respect of income earned from USA. However, in respect of
income earned from other DTAA countries and non-DTAA countries, CIT(A) rejected taxpayer’s claim. Hence,
the taxpayer filed second appeal before the Mumbai Tribunal. Similarly, the tax department filed appeal before
the tribunal against the CIT(A)’s order in respect of relief granted to the tax payer.
The taxpayer contended that section 90 of the IT Act empowers the Central Government to enter into Double
Taxation Avoidance Agreement (‘DTAA’) with the Government of any other country for granting relief in respect
of cases where the income tax is chargeable. The taxpayer further contended that the income covered by
section 10A/10AA of the IT Act is chargeable to tax in India as per section 4 and 5 of the IT Act. Furthermore, the
exemption is for a specified period and after expiry of that period such income would otherwise be chargeable
to tax. It was further contended that Article 25 of India-USA DTAA mandates that if any income derived and
tax paid in USA on such income then tax relief / credit shall be granted in India of such tax paid in USA. Thus,
the Article does not say anything about income tax being paid by the resident taxpayer under the IT Act as a
condition precedent for claiming the benefit of tax credit under the DTAA. It was contended that a similar clause
is there in the DTAAs entered by India (i.e. Denmark, Finland, Hungary, Norway, Oman, South Africa, Saudi
Arabia and Taiwan).
The Revenue Authorities contended that since entire income of section 10A / 10AA eligible units are exempt and
not subjected to tax in India, the taxpayer would not get tax credit for taxes paid on such income in overseas
countries, except USA.
Issue: A resident tax payer is eligible to claim Foreign Tax Credit (‘FTC’) if any tax has been paid by him in a
country or specified territory outside India. As per the FTC Rules notified by the Central Board of Direct Taxes
(CBDT), proportionate tax credit method is to be followed for claiming relief of foreign taxes paid. In other words,
credit for foreign taxes cannot exceed the tax liability on such income in India.
A question generally arises as to whether the foreign tax credit is available in respect of income which has
suffered tax in overseas jurisdiction but is not taxable in India. Recently, Mumbai Bench of Income-tax Appellate
Tribunal (Mumbai Tribunal), along with other grounds of appeal, had an occasion to delve on this aspect.
Tribunal’s Observations: For this case, Tribunal observed that:

l The provision of section 90(1)(a)(ii) of the IT Act applies to a case where the income of the taxpayer is
eligible to tax under the IT Act as well as in the corresponding law in force in the other country
l Though income tax is chargeable under the IT Act, it is open to the Parliament to grant exemption under
the IT Act from payment of tax for any specified period, normally, to incentivize the taxpayer to carry on
manufacturing activities or providing services
l It is not the requirement of law that the taxpayer before he claims credit under the Indo-US convention
or under the provision of IT Act must pay tax in India on such income.
l As per the embargo placed in the DTAA, the taxpayer is entitled to such tax credit only in respect of that
income which is taxed in USA
Tribunal’s Decision : The Tribunal, has held that

Where the respective tax treaty provides for benefit for foreign tax paid even in respect of income on which
the taxpayer has not paid tax in India, still, it would be eligible for tax credit under section 90 of the IT Act. As
India’s treaties with other countries such as Denmark, Hungary, Norway, Oman, Saudi Arabia and Taiwan
have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to
tax in India, the foreign tax credit would be available to the taxpayer in respect of foreign taxes paid in such
countries.
LESSON ROUNDUP
– Loan waiver would not be taxable as
a) Business Income u/s 28(iv) of the Income Tax Act as receipts should be in the nature of cash or
money.
b) Deemed Business Income u/s 41(1) of the Income Tax Act as it does not apply since waiver of
loan does not amount to cessation of trading liability because no deduction was claimed under
business in any previous year.
CIT vs. Mahindra and Mahindra Ltd (Supreme Court)
– Amount received on account of Stock Appreciation Rights (SAR) would be taxable as perquisite under
head salary and not under Capital Gain or Business. ACIT vs. Bharat V. Patel (Supreme Court).
– Interest income earned out of the share application money is liable to be set off against the public
issue expenses. CIT vs. Shree Rama Multi Tech Ltd (Supreme Court).
– Subsidy granted by the Govt to achieve the objects of acceleration of industrial development and
generation of employment is of capital in nature. The fact that the incentives are not available unless
and until commercial production has started, and that the incentives are not given to the assessee
expressly for the purpose of purchasing capital assets or for the purpose of purchasing machinery
is irrelevant. The object has to be seen and not the form in which it is granted. CIT vs. Chaphalkar
Brothers Pune (Supreme Court).
– Section 194H : An obligation to deduct TDS u/s 194H arises only if the relationship is that of “principal
and agent” and if a “payment” is made. As the relationship between the assessee and the distributor
was that of “principal to principal” and as the “discount” did not amount to a “payment”, there was
no liability to deduct TDS on discounts provided. Hindustan Coca Cola Beverages Pvt. Ltd vs. CIT
(Rajasthan High Court).
664 PP-DTL&P
– Salary cost reimbursement and payment towards Global Information Support Services to French
Company, not taxable in India. Faurecia Automotive Holding vs DCIT
– Assessment in the name of amalgamating company is void ab inito. Pr.CIT vs Maruti Suzuki India
Limited (Civil Appeal No. 5409 of 2019) (SLP No. 4298 of 2019)
– Special allowances paid by an establishment to its employees would fall within the expression “basic
wages” under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction towards
Employees’ Provident Fund - Regional Provident Fund Commissioner (II) West Bengal versus
Vivekananda Vidyamandir and Others, Civil Appeal No(s). 6221 of 2011, Transfer Case No. (C) No(s).
19 0f 2019
– Possibility of claiming Foreign Tax Credit on the income pertaining to section 10A / section 10AA
eligible units (i.e. SEZ / EOU etc.) Tata Consultancy Service Ltd. Vs ACIT (ITA No. 5713/Mum/2016)
– Any payment by a closely-held company by way of advance or loan to a concern in which a substantial
shareholder is a member holding a substantial interest is deemed to be “dividend” u/s 2(22)(e) in
hands of the shareholder on the presumption that the loans or advances would ultimately be made
available to the shareholders of the company giving the loan or advance.
Note: After Amendment by Financial Act, 2019 now Deemed dividend u/s 2(22)(e) would be chargeable
to CDT and not taxable.
CIT vs. Madhur Housing And Development Co (Supreme Court)
– A family arrangement/settlement does not amount to a “transfer” u/s 2(47) as it only recognizes
“pre-existing rights” between the parties, the same applies only to members of the families and not
to transfers made by corporate entities. Therefore transfer of shares of a company under family
settlement will be chargeable under Capital Gains. The fact that the Company is wholly owned by the
members of the family is irrelevant. B. A. Mohota Textiles Traders Pvt. Ltd vs. DCIT (Bombay High
Court).
– If an undertaking is sold as a running business with all assets and liabilities for a slump price, then
provisions of slump sale will apply and 50(2) will not apply. Therefore capital gain will not be always
deemed as short term but if undertaking sold after 36 months , can also be treated as long term. CIT
vs. Equinox Solution Pvt. Ltd (Supreme Court).
– Important website for Information on Direct Tax Matters
www.incometaxindia.gov.in
www.itatonline.org
www.indiabudget.gov.in
www.nsdl.co.in
www.taxmann.com
www.incometaxindiaefiling.gov.in
SELF TEST QUESTIONS

Discuss the points with the help of decided case laws:
1. Income from letting out of properties by a company, whose main object as per its memorandum of
association is to acquire and let out properties, be taxable as its business income or income under the
head of house property, considering the fact that the entire income of the company as per its return of
income was only from letting out of properties.

2. Can the commission paid to doctors by a diagnostic center for referring patients for diagnosis be
allowed as business expenses u/s 37 or would it be treated as illegal expenses and against public
policy to attract disallowance.
3. Can payment to police personnel and thief to keep away from the cinemas theatres run by the
assessee be allowed as deduction?
4. Would the winning of prize money on unsold lottery tickets held by a distributors of lottery tickets be
assessed as business income and be subjects to normal rates of tax instead of the rates prescribed
under section 115BB.
5. Can discount given to stamp vendors on purchase of stamp papers be treated as ‘commission or
brokerage’ to attract the provision of TDS u/s 194H
Answer Hints:
1. Chennai properties and investments ltd v/s CIT (2015) 373 ITR 673 (SC)
2. CIT v/s Kap Scan and Diagnostic Centre P. Ltd. (2012) 344 ITR 476 (P&H)
3. CIT v/s Neelavathi & Others (2010) 322 ITR 643 (Karn)
4. CIT v/s Manjoo and Co. (2011) 335 ITR 527 (Kerala)
5. CIT v/s Ahmedabad Stamp Vendors Associations (2012) 348 ITR 378 (SC)
Note: Students are advised to keep updated with the recent case laws on Direct Tax.
SUGGESTED READINGS
Kluwer]
666 PP-DTL&P
Test Paper 667
PP-DTL&P
WARNING
It is brought to the notice of all students that use of any malpractice in Examination is misconduct as
provided in the explanation to Regulation 27 and accordingly the registration of such students is liable to
be cancelled or terminated. The text of regulation 27 is reproduced below for information:
“27. Suspension and cancellation of examination results or registration.
In the event of any misconduct by a registered student or a candidate enrolled for any examination conducted
by the Institute, the Council or any Committee formed by the Council in this regard, may suo motu or on
receipt of a complaint, if it is satisfied that, the misconduct is proved after such investigation as it may deem
necessary and after giving such student or candidate an opportunity of being heard, suspend or debar him
from appearing in any one or more examinations, cancel his examination result, or registration as student,
or debar him from re-registration as a student, or take such action as may be deemed fit.
668 PP-DTL&P
DIRECT TAX LAW & PRACTICE – TEST PAPER
(This Test Paper is for recapitulate and practice for the students. Students need not to submit
responses/ answers to this test paper to the Institute)
All questions are compulsory
Time allowed: 3 hours Maximum Mark: 100
Question 1.
i) Mr. A daughter stays in USA. She owns a house in India and has let it out. She has asked tenants to pay
rent to her father i.e. Mr. A. She has not received any rent. Is she still liable to tax? What if she transfers
the house to Mr. A?
ii) Mr. A transferred his residential house to Mr. B for Rs 10 lakh on 1st April, 2019. The value of the said house
as per Stamp Valuation Authority was Rs 16 lakh. Mr. B is a childhood friend of Mr. A. Mr. A gifted a plot of
land (purchased by him on 1st August, 2007) to Mr. B on 1st July, 2019. The value as per Stamp Valuation
Authority is Rs 8 lakh. Mr. B sold the land on 1st March, 2020 at Rs 14 lakh. Compute the income of Mr. B
chargeable under the heads “Capital Gains” and “Income from other sources” for AY 2020-21.
iii) Following are the details of income and investments for financial year 2019-20 (Assessment Year
2020-21):-
Particulars Amount
(In Rupees)
Income from house property (Net Annual Value) 3,00,000
Income from Business 9,00,000
Income from other sources (Taxable at normal rate) 1,00,000
Deductions Under Chapter VI-A 1,00,000
Calculate the income tax liability for financial year 2019-20 (Assessment Year 2020-21) if the tax payer
is:-
a) 45 years old male
b) 45 years old female
c) 61 years old male
d) 61 years old female
e) 81 years old male
iv) Mr. A a resident individual age 35 years earned the following income during the previous year 2019-20.
Income from playing cricket in UK – Rs. 12 lakhs
Tax paid in UK Rs. 1.8 lakhs
Income from playing cricket in India Rs. 19.20 lakhs
LIC premium paid – Rs. 1.10 lakhs
Medical insurance premium paid for his father age 65 year Rs. 32000
Compute his tax liability?
Test Paper 669
v) X Ltd, a non-resident UK company, do not have a permanent establishment in India, entered into an
agreement for execution of technical work in India. Separate payments were made towards designs
which were described as engineering fees. The assessee contended that such business profits should
be taxable in UK as there is no business connection within the meaning of section 9(1)(i) of Income tax
Act, 1961. Discuss?
(10 Marks Each)
Question 2.
i) ABC Ltd. is engaged in the business of warehousing, handling and transportation along with the relevant
auxiliary services like pest control, rodent control, fumigation and security etc. Statement of profit and
loss of company shows that the main source of income is storage charges and maintenance or user
charges. The substantial part of expenses relate to salaries of employees engaged in maintenance and
upkeep of warehouses. The company has filed return of income showing income from letting out of
buildings and godown space as “Income from Business”. The Assessing Officer rejected the view of the
assessee and assessed the same as “Income from House Property”. Comment on the validity of action
taken by Assessing Officer.
ii) XYZ Ltd., a non-banking finance company was engaged in the business of leasing and hire purchase.
It purchased motor cars from Yamaha motors and leased out these vehicles to its customers. The lease
agreement with the customer stated that XYZ Ltd. was empowered to repossess the vehicle, in case the
lessee committed a default. Registration of the vehicle in the name of lessee, during the period of lease is
mandatory as per the Motor Vehicles Act, 1988. XYZ Ltd. Claimed Rs. 10,00,000 as depreciation on the
vehicles leased out for the year ending 31.3.2019. The claim was rejected by the Assessing Officer on the
ground that the assessee had merely financed the purchase of motor cars and was neither the owner nor
the user of these assets. Is the action of the Assessing Officer valid? Discuss.
iii) Mr. Aman is proprietor of M/s. Kunal Textile which is engaged in garment manufacturing business. The
entire block of Plant & Machinery chargeable to depreciation @ 15%, has 15 different machinery items
as at 31-03-2019. One of the machinery used for packing had become obsolete and was discarded
by Mr. Aman in July 2017. Assessee filed its return for AY 2020-21 claiming total depreciation of Rs 50
lacs which includes Rs 5.00 lacs being the depreciation claimed on the machinery item discarded by
Mr. Aman. The A.O. disallowed the claim of depreciation of Rs 5.00 lacs during the course of scrutiny
assessment. Comment on the validity of action taken by A.O.
(10 Marks Each)
Question 3. How the residential status of company would be determined as per the provisions of the Income
Tax Act, 1961.
(5 Marks)
Question 4. Discuss the provisions related to Minimum Alternate Tax ‘MAT’ under Income Tax Act, 1961.
(5 Marks)
Question 5. Briefly discuss the provisions related to deduction of tax at source u/s 194 C of the Income tax Act,
1961.
(5 Marks)
Question 6. Discuss Best Judgement Assessment u/s 144 of Income Tax Act, 1961
(5 Marks)
670 PP-DTL&P
REFERENCES – DIRECT TAXATION
For Journals :
Monthly Journal of ICSI – Chartered Secretary
For Publications:
l ICSI Study Material
l Bharat’s Law House – Income Tax Act & Rules
l Taxmann’s – Income Tax Act & Rules
l Taxmann’s – Yearly Tax Digest and Referencer
l Dr. Vinod K. Singhania & Dr. Kapil Singhania – Direct Tax Laws and Practice [Taxmann’s 61st Edition]
l Dr. Girish Ahuja & Dr. Ravi Gupta – Direct Tax Laws and Practice [Wolters Kluwer 11th Edition]
l Dr. Vinod K Singhania – Direct Taxes Ready Reckoner [Taxmann’s 42nd Edition]
l CA. Atin Harbhajanka – Tax Laws and Practice (Bharat Law House)
For Case Law :

l http://www.taxscan.in/30-important-tax-judgments-2017/15597/
l https://www.bcasonline.org/ContentType/2.%20KDevdas.pdf
l https://www.taxmann.com/
For Electronic Documents:

l CBDT Website – www.incometaxindia.gov.in
l Circular’s – https://www.incometaxindia.gov.in/Pages/communications/circulars.aspx
l Notification’s – https://www.incometaxindia.gov.in/Pages/communications/notifications.aspx

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STUDY MATERIAL

DIRECT TAX LAW

Public Dealing Timings

Laser Typesetting by AArushi Graphics, Prashant Vihar, New Delhi, and

An Overview of Income Tax Act, 1961

Computation of Computation of Computation of Computation of Computation of

Clubbing provisions, Set Off and/or Carry Forward of Losses, Deduction,

TDS/TCS, Returns, Refund & Recovery

Recent Case Laws

To provide advanced knowledge on practical application of Direct Tax Practice.

Lesson 1: An Overview of Income Tax Act, 1961

Lesson 2: Computation of Income under the head of Salary

Lesson 5: Computation of Income under the head of Capital Gains

Lesson 8: Computation of Total Income and Tax Liability

Lesson 9: TDS/TCS, Returns, Refund & Recovery

Lesson 10: Tax Planning & Tax Management

Lesson 11: International Taxation – An Overview

The broad coverage of the lesson would include:

• The impermissible avoidance agreements and its consequences?

MODULE 3 – ELECTIVE PAPER - 9.5

DIRECT TAX LAW & PRACTICE

1. An Overview of Income Tax Act, 1961

INTRODUCTION AND CONSTITUTIONAL PROVISION 3

KEY SECTIONS COVERED IN THIS CHAPTER 124

KEY SECTIONS COVERED IN THIS CHAPTER 200

KEY SECTIONS COVERED IN THIS CHAPTER 238

COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF COMPANIES 334

TAX DEDUCTED AT SOURCE 427

TAX PLANNING 550

DOUBLE TAXATION AVOIDANCE AGREEMENT 574

1. CIT vs. Mahindra and Mahindra Ltd (Supreme Court) 636

donations under section 80G. Section 10 provides

INTRODUCTION AND CONSTITUTIONAL PROVISION

Union List State List Concurrent List

1. Tax-related entries in the Union List (List-I of Schedule VII)

Entry No. Particulars

82 Taxes on income other than agricultural income.

83 Duties of customs including export duties.

84 Duties of excise on the following goods manufactured or produced in India, namely :

87 Estate duty in respect of property other than agricultural land.

88 Duties in respect of succession to property other than agricultural land.

2. Tax-related entries in the State List (List - II of Schedule VII)

Entry No. Particulars

3. Other constitutional provisions:

Article No. Particulars

Article 13 Laws inconsistent with or in derogation of the fundamental rights.

Article 248 Residuary powers of legislation.

Article 265 Taxes not to be imposed save by authority of law.

Article 276 Taxes on professions, trades, callings and employments.

Article 286 Restrictions as to imposition of tax on the sale or purchase of goods.

Article 304 Restrictions on trade, commerce and intercourse among States.

Article 366 Definitions

COMPONENTS OF INCOME TAX LAW

The various components of income-tax law are explained below:

Finance Bill presented by Finance Minister

Recommendations/Suggestions considered and changes made to Finance Bill

Effective dates of amendments in Finance Bill

Direct Taxes Indirect Tax Taxes

Usually Date of Notification in Usually Midnight of date of

Previous 1. Cash Credits [Section 68]

22% 10% 4% 221.11.04 = 25.168%