Directorate of Distance Education

UNIVERSITY OF JAMMU
JAMMU

SELF LEARNING MATERIAL

FOR
B.COM SEMESTER - III
COURSE NO : BCG-302 UNIT : I-IV
SUBJECT : INCOME TAX Lesson No. : 1 to 12

Course Coordinator :
Rohini Gupta Suri
94191-86716

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 B.COM. THIRD SEMESTER

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Mob. : 94191-86716

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 UNIVERSITY OF JAMMU
B.COM. THIRD SEMESTER
INCOME TAX LAW AND PRACTICE - 1
C.No. BCG-302 Max Marks = 100
Internal assessment = 20
External Exam. = 80

(Syllabus for examination to be held in Dec. 2015, 2016, 2017 )

OBJECTIVE: To impart knowledge about basic concepts pertaining to theory and

practice of income tax

UNIT I: BASIC TERMS

Assessment year, previous year; Assessee: Deemed assessee, assessee in default,

residential status, Person; Income: Capital receipts and revenue receipts, capital
expenses vs. revenue expenses, capital losses vs. revenue losses, exempted incomes;.

UNIT II: SALARY

Taxability of provident fund- Public, statutory, superannuation and recognized and

unrecognized provident fund; Allowances- Exempted, fully and partially taxable;
Perquisites- Exempted, taxable in all cases, taxable in specified cases; Profits in lieu
of salary; Computation of gross salary, deductions out of gross salary, computation of
income from salary.

(i)
UNITIII: HOUSE PROPERTY

House Property- Concept of annual rental value, MRV, FRV, ERV, standard rent,
treatment of unrealized rent, vacancy, interest on loan- post & pre-construction period
interest, deduction U/S24, computation of income from ‘let out’ and ‘self-occupied
house’.

UNIT IV: GAINS FROM BUSINESS AND PROFESSION

Deductions allowed u/s 30 to 44A, expenses expressly disallowed, treatment of

depreciation, computation of taxable business income, computation of professional
income.

SKILL DEVELOPMENT (GUIDELINES FOR CLASS ROOM TEACHING

AND INTERNAL ASSESSMENT

Enable the students to compute income under various heads.

Create deep understanding of all concepts specified in the syllabus.

BOOKS RECOMMENDED

1. Income Tax Law & Accounts by Dr H C Meharotra and Dr S P Goyal : Sahitya

Bhavan Publications.

2. Income tax Law and Practice by V.P.Gaur & D.B. Narang: Kalyani Publishers.

3. Direct taxes Law and Practices by V.K. Singhania & Kapil Singhania- Taxman
publication.

4. Income tax Law and Practices by Mahesh Chandra, D.C. Shukla, K.A.Mahajan,
M.A. Shah – Pragati publication, New Delhi.

(ii)
5. Conceptual clarity on Income Tax & Wealth Tax by Arvind Tuli & Dr. Mrs.
Neeru chadda – Kalyani Publication, New Delhi

NOTE FOR PAPER SETTER

Equal weightage shall be given to all the units of the syllabus. The externasl Paper
shall be of the two sections viz, A & B of three hours duration.

Section-A: This section shall contain four short answer questions selecting one from
each unit. Each question shall carry 5 marks .A candidate shall be required to attempt
all the four questions. Total weightage to this section shall be of 20 marks.

Section-B: This section shall contain eight long answer questions of 15 marks each.
Two questions with internal choice shall be set from each unit. A candidate shall have
to attempt any four questions selecting one from each unit. Total weightage to this
section shall be of 60 marks.

(iii)
 MODEL QUESTION PAPER
INCOME TAX LAW AND PRACTICE - I
Max Marks: -80
Time allowed: -3 hrs

Section A (20 Marks)

Attempt all the questions. Each question carries five marks.

1. Define any two of the following

(a) Assessee

(b) Residential status

(c) Person

(d) Capital and revenue losses

2. Explain various types of allowances or perquisites.

3. Discuss briefly any two with suitable examples.

(a) Standard Rent

(b) MRV

(c) FRV

(d) ERV

(iv)
4. Write a short note on expenses expressly allowed or disallowed in computation
of business income.

Section B (60 Marks)

Attempt any four questions selecting one question from each unit. Each
question carries 15 marks.

UNIT - I

1. Discuss revenue and capital incomes and expenses and also various systems of
accounting with suitable examples.

OR

Discuss residential status of various ‘Persons’ with suitable examples.

UNIT - II

2. X’ ltd. has advanced an interest free loan of Rs. 5,00,000 to R for purchase of
car on 1-05-2008. R has been regularly repaying the loan in instalments of
Rs. 20,000 p.m at the end of each month.

a. Compute the value of perquisite on account of interest assuming the

interest charged by SBI is 10% p.a.

b. What shall be the valuation if the loan is being regularly repaid on the first
of the next month instead of the end of the month.

OR

Discuss various deduction allowed u/s 80c.

UNIT - III

3. X’ owns a house property. It is used by him throughout the previous year

2019-20 for his (and his family members) residence. Municipal value of the
property is Rs. 1,66,000 whereas fair rent is Rs. 1,76,000 and standard rent

(v)
 is Rs. 1,50,000. The following expenses a incurred by ‘X’- repairs: Rs. 20,000,
municipal taxes Rs. 16.000, insurance Rs. 2,000, interest on capital borrowed
to construct the property Rs. 1,36,000, interest on capital borrowed on
mortgaging the property for daughter’s marriage, Rs. 20,000 (in either case
capital is borrowed before April 1, 1999). Calculate income from house
property of Mr. X for the previous year 2019-20.

OR

Calculate house property income of Mr. Z from the following information given below.
Compute income from house property from the particulars given below for the
assessment year 2019-21.

Municipal rental value 24,000 p.a

Actual rent received 30,000 p.a

Municipal taxes 2,400 p.a

Date of completion 31-3-2009

Date of letting 1-4-2009

Fire insurance premium (due) 400 p.a

Ground rent (due) 600 p/a

Interest on delayed payment of interest. 1000

UNIT - IV

4. Mr. A is a registered medical practitioner. He has prepared the following income

and expenditure account for the previous year 2019-20. You are required to
prepare is statement showing his income from professional.

(vi)
 Income and expenditure account

Rs. Rs.

Household Expenses 20,000 Consultation fees 10,000

Car purchased 30,000 Visiting fees 20,000

Travelling Expenses (Person) 4,000 Gains on Race (gross) 10,000

Charity & Donations 1,000 Share in sale proceeds of

Income Tax 2,000 an ancestral house 34,000

Salaries 8,000 Profit on sale of securities 6,000

Gift to daughter 7,000 Dividend on shares (gross) 5,000

Establishment Exp. 1,000 Interest on P.O. Saving Bank 600

Surgical Equipment 4,000 Gift from Father – in – Law 2,000

Books 2,000 bad debts recovered (Not

Life insurance premium 2,000 Allowed in earlier year) 2,000

Wealth – Tax 1,000 Interest on fixed deposit 1,300

Interest on capital 1,000

Surplus 7,900 ______

90,900 90,900

Rate of depreciation allowable on car is 15% and surgical equipment is at 15%. In

case of books for profession the rate of depreciation is 60%.

(vii)
 OR

Following is the profit and loss Account of Mr. A for the previous year 2019-20.

PROFIT AND LOSS ACCOUNT

Rs. Rs.
To Salaries 25,650 By Gross profit 80,000
To Rent 1,000 By Bank interest 450
To Commission on sales 100 By Bad Debts recovered
To Income – tax 2,600 (Last year allowed) 2,000
To Entertainment expenses 600 By rent from house property 4,800
To commission paid to collect By interest on commercial
interest on securities 25 securities 2,000
To Embezzlement by cashier 1,000
To Municipal tax of H.P. 600
To bad Debts (allowed) 450
To Repairs to house 1,625
To Office expenses 9,180
To Depreciation 5,000
L.I.C. premium 1,320
To Net Profit 40,100
89,250 89,250
Depreciation on all assets is Rs. 4500.
Compute taxable business income for the previous year ________.

(viii)
C. NO. : BCG -302 UNIT - I
SEMESTER -III LESSON 1-3
BASIC TERMS

STRUCTURE

1.1 Introduction

1.2 Objectives

1.3 Assessment year

1.4 Previous year

1.5 Assesses

1.6 Residential status

1.7 Person

1.8 Income

1.8.1 Capital Receipts vs Revenue Receipts, Capital Expenses vs

Revenue Expenses, Capital Lossess vs Revenue Losses.

1.9 Exempted Income

1.10 Summary

11
1.11 Glossary

1.12 Self assessment questions

1.13 References

1.1 INTRODUCTION

Income tax is one of the form of Direct Taxes. 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 e.g income tax, wealth tax
etc.Indirect tax is paid by the person other than the person who utilizes the product
or service e.g Excise duty, Custom duty, Service tax, Sales Tax, Value Added
Tax. The taxes are collected for serving the primary purpose of providing
sufficient revenues to the State, taxes have come to be recognised as an instrument
through which the social and economic objectives of a welfare State could be
achieved. They are utilized now for providing incentives for larger earnings and
more savings, fostering industrial development by selective concessions,
restraining ostentatious expenditure, checking inflationary pressures and
achieving social objectives like inequalities and the enlargement of opportunities
to the common man. Income-tax is one of the major sources of revenue for the
Government. The responsibility for collection of income-tax vests with the
Central Government. This tax is leviable and collected under Income-tax Act,
1961 (hereinafter referred to as the Act). In India, Income tax was introduced for
the first time in 1860, by Sir James Wilson in order to meet the losses sustained
by the Government on account of the Military Mutiny of 1857. Thereafter; several
amendments were made in it from time to time. In 1886, a separate Income tax
act was passed. This act remained in force up to, with various amendments from
time to time. In 1918, a new income tax was passed and again it was replaced by
another new act which was passed in 1922.This Act remained in force up to the
assessment year 1961-62 with numerous amendments. The Income Tax Act of

12
1922 had become very complicated on account of innumerable amendments.
The Government of India therefore referred it to the law commission in1956
with a view to simplify and prevent the evasion of tax. The law commission
submitted its report-in September 1958, but in the meantime the Government of
India had appointed the Direct Taxes Administration Enquiry Committee
submitted its report in 1956.In consultation with the Ministry of Law finally the
Income Tax Act, 1961 was passed. The Income Tax Act 1961 has been brought
into force with 1 April 1962. It applies to the whole of India including Jammu
and Kashmir. The Income tax Act contains the provisions for determination of
taxable income, determination of tax liability, procedure for assessment, appeal,
penalties and prosecutions. It also lays down the powers and duties of various
income tax authorities. “Income Tax is levied on the total income of the previous
year of every person.” 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. The
CBDT issue notifications from time to time for proper administration of the
Income tax Act. These notifications become rules and collectively called Income
Tax Rules, 1962. Circulars are also issued by the CBDT to clarify the doubts
regarding the scope and meaning of the provisions. These provisions are issued
for the guidance of the Income Tax officers and assesses.These circulars are
binding on the department, not on the assessee but assessee can take benefit of
these circulars 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.

1.2 OBJECTIVES

After going through this unit you will be able to understand

13
  The concept about the ‘assessment year’ and ‘previous year’ related to
the charge of Income tax.

 The term assessee and different categories of assessee for the purpose of charge
of Income tax

 The meaning of the residential status for income tax purpose.

 Definition of ‘person’ comes under the purview of the Income Tax Act, 1961.

 The concept of income and various exempted incomes under Income Tax Act,
1961.

1.3 ASSESSMENT YEAR [ Section 2 (9 ) ]

“Assessment year” means the period of twelve months commencing on the 1st
day of April every year. In India, the Govt. maintains its accounts for a period of 12
months commencing from 1st April to 31st March of Next year. As such it is known as
financial year. The income tax department has also selected the same year for the
purpose of assessment procedure.

The assessment year is the financial year of the Govt. of India during which
income of a person relating to the relevant previous year is assessed to tax. Every
person who is liable to pay tax under this act, files return of income by prescribed
dates. These returns are processed by the income tax department officials and officers.
This processing is called assessment. Under this income returned by the assessee is
checked and verified. Tax is calculated and compared with the amount paid and
assessment order is issued. The year in which this process is carried out is called
assessment year. Current assessment year is 2020-21.

14
1.4 PREVIOUS YEAR [SECTION 2 (34) ]

“previous   year”  means  the  financial  year  immediately  preceding  the

assessment year: Provided that, in the case of a business or profession newly set up,
or a source of income newly coming into existence, in the said financial year, the
previous year shall be the period beginning with the date of settingup of the business
or profession or, as the case may be, the date on which the source of income newly
comes into existence and ending with the said financial year.

The term previous year is very important because it is the income earned during
previous year which is to be assessed to tax in the assessment year. As the word
“previous” means coming before, hence it can be simply said that the previous year is
the financial year preceding the assessment year e.g. for assessment year 2020-21,
the previous year should be the financial year ending on 31 st March, 2020.
Understanding concept of previous year is very simple, it’s basically a period of up to
12 months just preceding the assessment year. Since, financial year is always a period
of 12 months and income or source of income may be smaller than of 12 months, so
the concept or term of previous year is used under Income Tax to cover income or
source of income coming into existence after the commencement of financial year and
to cover income or source of income coming to an end before completion of the
financial year. Either, way any income or source of income is not required to be spread
to the whole of financial year, it may be part of the same and the same may be called
a previous year. Current Previous Year is 2018-19

When Previous Year and Assessment Year are the Same

Though income of previous year is taxed in the immediately following assessment

year, in the following cases, income of previous year is taxable in the same year, that
is, previous year and assessment year are the same:

a) Income of non- resident from shipping business

If a non-resident owns a ship that carries passengers, livestock, mail or goods

from a port in India, he has to furnish a return of income on the amount of

15
 carriage earned from the passengers, livestock, mail or goods since the last
arrival of the ship. If, for some reason, the owner of the ship cannot furnish
the return before the departure of the ship, someone authorized on his behalf,
can pay the tax and file the return within 30 days of departure of the ship.
Clearance at the sea port will be given to the ship only after tax has been duly
paid by the assessee or necessary arrangements have been made for the same.

b) Income of persons leaving India

If it appears to the Assessing Officer that an individual may leave India during
the current Assessment year (say, 2009-10) or shortly after its expiry (say,
20th April, 2010) with no intention of coming back to India, income of that
individual up to the date of departure (20/4/10) shall be chargeable to tax in
the assessment year 2009-10. Thus, in the Assessment year, 2009-10, that
individual will be subject to assessment for

 income of the previous year 2008-09 at the rates applicable for the
Assessment year 2009-10

 income of the period 1/4/09-31/3/10 at the rates applicable for the

assessment year 2010-11. (Part I, First schedule, Finance Act, 2010)

\  income of the period 1/4/2010-20/4/2010 at the rates applicable for the

2010-11 (part I, first schedule, Finance Act 2010).

c) Income of bodies (association of persons, body of individuals, artificial

juridical person) formed for a specific event or purpose

If it appears to the Assessing officer that these bodies are formed for a specific
purpose and are likely to be dissolved in the assessment year in which they
are formed or in the next assessment year, total income of such bodies will be
chargeable to tax in that assessment year only at rates applicable for specific
assessment years.

16
 ILLUSTRATION

Mr. Arun Passed his MBA examination in June, 2019 and joined his
job on 1st july, 2019 on a salary of Rs 20,000 p.m. He resigned
from his job on 15th November, 2019, and got relieved on 30 th
November, and started his own business on 15 December, 19 and
earned a profit of Rs 60,000 up to 31 st March, 2020. Find out his
taxable income.

Solution :

First previous year of Mr. Arun shall be as under: -

For salary income : From 1/07/2019 to 31/ 11/ 2020 i.e., 5 months

For business income: 15/12/2019 to 31/03/2020 i. e., 3 ½ months

Taxable income for the previous year 2019- 20 shall be from salary
for 5 months @ 20,000 p.m. i.e., Rs 100,000 plus from business Rs
60,000 = Rs 160,000

This income of Rs 160,000 of Mr. Arun will be put to tax in the

assessment year 2020-21 as income of a previous year is taxed in
an assessment year relevant to the previous year and it is taxed as
per rates applicable to the relevant assessment year.

d) Income of persons who transfer their property to avoid tax

If it appears to the Assessing Officer that any person is likely to transfer his
property to avoid payment of tax, he will assess total income of such person
for that previous year from 1st of April up to the date when Assessing officer
commences proceedings at the rates applicable for that assessment year only.

17
e) Income of a discontinued business [ Section 176]

In case any business or profession is discontinued during an assessment year ,

the income of the period from the expiry of last previous year till the date of
discontinuation may be assessed to tax in the current assessment year at the
discretion of the assessing officer

Previous Year in Case of a Continuing Business

It is the financial year proceeding the assessment year. As such for the
assessment year 2020-21, the previous year for a continuing business is 2019-20 i.e.
1-04-2019 to 31-03-2020.

Newly Set Up Business or Profession

The assessee is free to set up a new business or profession on any day and
the first previous year in case of a newly set up business/profession or newly
created source of income shall be on the day it is set up and end on 31 th March
next following. So the first previous year may be of 12 months but all subsequent
previous year shall be of 12 months duration and always be starting on 1 st April
each year.

For example, if a new business / profession is set up on 15 th September, 2019

then the first previous year shall be from 15/09/2019 to 31/03/2020 i.e., the first
previous year shall be only of 6 ½ months.

In Case of Newly Created Source of Income

In such case the previous year shall be the period between the day on which
such source comes into existence and 31st March next following year.

1.5 ASSESSEE [ Section 2 (7)]

Assessee” means a person by whom any tax or any other sum of money is
payable under Income Tax Act 1961 and includes—

18
(a) every person in respect of whom any proceeding under this Act has been
taken for assessment of his income or assessment of fringe benefits or of the
income of any other person in respect of which he is assessable, or of the
loss sustained by him or by such other person, or of the amount of refund due
to him or to such other person ;

(b) every person who is deemed to be an assessee under any provision of this Act.

(c) every person who is deemed to be an assessee in default under any provision of
this Act.

a. Ordinarily Assessee

 any person against whom proceedings under Income Tax Act are going on,
irrespective of the fact whether any tax or other amount is payable by him or not;

 any person who has sustained loss and filed return of loss u/s 139(3);

 any person by whom some amount of interest, tax or penalty is payable under
this Act;

 any person who is entitled to refund of tax under this Act.

b. Representative Assessee or Deemed Assessee

A person may not be liable only for his own income or loss but he may also be
liable for the income or loss of other persons e.g. agent of a non-resident,
guardian of minor or lunatic etc. In such cases, the person responsible for the
assessment of income of such person is called representative assesses. Such
person is deemed to be an assessee.
 In case of a deceased person who dies after writing his will the executors
of the property of deceased are deemed as assessee.

 In case a person dies intestate (without writing his will) his eldest son or
other legal heirs are deemed as assessee.

19
  In case of a minor, lunatic or idiot having income taxable under Income
tax Act, their guardian is deemed as assessee.

 In case of a non-resident having income in India, any person acting on his

behalf is deemed as assessee.

c. Assessee-in-default

A person is deemed to be an assessee-in-default if he fails to fulfill his statutory

obligations. In case of an employer paying salary or a person who is paying
interest, it is their duty to deduct tax at source and deposit the amount of tax
so collected in Government treasury. If he fails to deduct tax at source or
deducts tax but does not deposit it in the treasury, he is known as assessee-
in-default.

1.6 RESIDENTIAL STATUS

In India, as in many other countries, the charge of income tax and the scope of
taxable income varies with the factor of residence. Tax is levied on income of assessee.
Under the provisions of income tax act, 1961 the total income of each person is
based upon his residential status. Section 6 of the act divides the assessable persons
into three categories: (i) ordinary resident; (ii) resident but not ordinarily resident; and
(iii) non- resident. Each of the two tests relate to the physical presence of the taxpayer
in India in the course of the “previous year” which would be the twelve months from
April 1 to March 31.

A person is said to be “resident” in India in any previous year if he

a. is in India in that year for an aggregate period of 182 days or

more; or

20
 b. having within the four years preceding that year been in India for a period
of 365 days or more, is in India in that year for an aggregate period of
60 days or more in that relevant previous year.

The above provisions are applicable to all individuals irrespective of their

nationality. However, as a special concession for Indian citizens and foreign citizens
of Indian origin, the period of 60 days referred to in Clause (b) above, will be extended
to 182 days in two cases: (i) where an Indian citizen leaves India in any year for
employment outside India; and (ii) where an Indian citizen or a foreign citizen of
Indian origin (NRI), who is outside India, comes on a visit to India.

In the above context, an individual visiting India several times during the relevant
“previous year” should note that judicial authorities in India have held that both the
days of entry and exit are counted while calculating the number of days stay in India,
irrespective of however short the time spent in India on those two days may be.

A “non-resident” is merely defined as a person who is not a “resident” i.e. one

who does not satisfy either of the two prescribed tests of residence.

An individual, who is defined as Resident in a given financial year is

said to be “not ordinarily resident” in any previous year if he has been a non-
resident in India 9 out of the 10 preceding previous years or he has during the 7
preceding previous years been in India for a period of, or periods amounting in
all to, 729 days or less.

Till 31st March 2003, “not ordinarily resident” was defined as a person
who has not been resident in India in 9 out of 10 preceding previous years or he
has not during the 7 preceding previous years been in India for a period of, or
periods amounting in all to, 730 days or more.

21
In the case of an individual [Section 6 ]

1. Resident ( Ordinary Resident)[ Section 6 (10 r.w. Section 6 (6) (a) & (b)
: Section 6 (1) of the Income-tax Act, 1961, prescribes the tests for determining the
residential status of a person. As individual who fulfills any one of the following two
tests is called resident under the provisions of this act. These tests are:

(1) An individual is said to be resident in India in any previous year, if he

a. is in India in that year for a period or periods amounting in all to one

hundred and eighty-two days or more;

or

b. having within the four years preceding that year been in India for a period
or periods amounting in all to three hundred and sixty five days or
more, is in India for a period or periods amounting in all to sixty days
or more in that relevant previous year.

Resident = Satisfying any one of the two conditions given u/s 6 (1).

Explanation :

(a) In case of individual being a citizen of India who leaves India in any
previous year as a member of the crew of an Indian ship as defined in
clause (18) of section 3 of the merchant shipping act 1958 ( 44 of
1958) or for the purposes of employment outside India the previous of
sub- clause (b) as given above shall apply in relation to that year as if
the words “ sixty days “ have been substituted by 182 days.

(b) In case of an individual being a citizen of India or a person of Indian

origin within the meaning of explanation to clause (e) of section 115 C
who being outside India, comes on a visit to India in any previous year,

22
 the provisions of sub- clause (b) shall apply in relation to that year as if
for the words. 60 Days occurring therein the words 182 days had been
substituted.

After substituting one of the above two tests, an individual becomes

resident of India but to become an ordinary resident of India an Individual has to fulfill
both the following two conditions:

(1) He has been resident of India ( Fulfilling at least one test given above ) in
at least 2 previous years out of 10 previous years immediately prior
to the previous year in question.

(2) He has stayed in India for at least 730 days in 7 previous years
immediately preceding the previous year in question.

This means that an individual will not become an ordinary resident of

India by simply staying in India for a period of 182 days or more in a previous
year. He will become Ordinary resident only if he fulfills one of these two tests
and was also fulfilling one of the tests in at least 2 previous years preceding the
relevant previous year and did stay in India for at least 730 days in 7 previous
years preceding the relevant previous year.

While calculating number of days for stay in India, days of departure was
not included. But now as per decision of Authority for advance rulings , both
day of departure from India and day of arrival in India are to be counted as stay
in India.

2. Resident but not Ordinarily Resident [ Section 6 (6)] An individual

who is resident u/s 6 (1) can claim the beneficial status of N.O.R if he can prove
that:

(a) He was non resident of India for 9 Previous years out of 10

previous years preceding the relevant previous year

23
 (b) He was in India for a period or periods aggregating in all to 729 days or
less during 7 previous years preceding the relevant previous year.

An individual who is resident u/s 6 (1) can be subdivided into two categories:
(a) ordinary resident and (b) not ordinarily resident.

3. Non – Resident [ Section 2 (30)]: Under section 2 (30) of the income tax act,
1961 an assessee who does not fulfill any of the 2 conditions given in section 6 (1) (a)
or (b) would be regarded as non- resident assessee during the relevant previous
year for all purposes of this act.

Non – resident = Not satisfying any one of the basic conditions given u/s 6 (1).

A Hindu undivided family [ Section 6 (2) r.w Section 6 (6) (a) & (b)]

Firm or other association of persons is said to be resident in India in any

previous year in every case except where during that year the control and
management of its affairs is situated wholly outside India.HUF, is said to be
resident in every year case except where during the year the control and
management of its affairs is situated wholly outside India. It means that If a
HUF is controlled from India even partially it will be resident assessee.

The control and management of affairs refers to the controlling and

directing Power, the head and the brain. It means that decisions making power
for vital affairs is situated in India. The control and management means de-facto
control and management and not merely the right to control or manage.

Resident = control and management of affairs in India ( Wholly or Partially)

A resident HUF is said to be ordinary resident, if the karta fulfills both of

the following additional conditions:

(1) Karta has been resident in India for at least 2 Previous years of immediately
preceding 10 previous years relevant to current previous year and

24
(2) Karta has been in India for 730 days or more during 7 previous years preceding
the relevant previous year.

Ordinary resident = Control and Management of affairs in India ( Wholly or

partially) + Fulfillment of both additional conditions by Karta.

2. Not Ordinarily Resident [ Section 6(2) r.w . Section 6 (6) (a) & (b)]

It is only HUF besides individual which can claim the advantageous state of
Not Ordinarily Resident. A HUF will be “ Not Ordinarily Resident” if :

(i) Its manager ( karta) has not been resident in India in at least 2 previous
years out of 10 previous years preceding the relevant accounting year.

Or

(ii) The manager had not, during the 7 previous years preceding the relevant
previous year been present in India for a period or periods amounting
in all to 730 days . [ Section 6 (6) (b)].

These two tests have to be applied in case of manager ( Karta) of such

HUF. In case the karta has been succeeded by some other man, for
computing the presence in India, the length of presence in India of each
Succeeding Karta will be added.

While determining the residential status of a HUF it should be noted that

residential status of co- parceners of a HUF is of immaterial consideration.
What is important to note is that from where the business of HUF is
being controlled.

Not ordinarily resident status of HUF is linked with the status of its karta.
So, if Karta taken as an individual is not ordinarily resident then the
status of his HUF shall also be not ordinarily resident.

25
3. Non Resident [ Section 2(30) ]: HUF , shall be non- resident in India if the
control and management of affairs is supplied wholly outside India.

Resident status of firm and AOP, Or BOI

1. Resident /Ordinary Resident [ Section 6 (2)]: A firm , an association of

Persons or body of individuals is said to be resident in every case except
where during that year the control and management of its affairs is situated
wholly outside India. It means that if A firm, an association of persons or
body of individuals is controlled from India even partially it will be resident
assessee.

The control and management of affairs refers to the controlling and directing
power, the head and the brain. It means that decision making power for vital
affairs is situated in India. The control and management means de-facto control
and management and not merely the right to control or manage.

In case of a firm, it is said that the control and management of firm is situated at
a place where partners meet to decide the affairs of the firm. If such place is
outside India, it will be said that the control and management is outside India.

There may be a situation where all the partners of a firm are resident in India but
even then that firm may be non- resident if its full control and management lies
outside India.

2. Not ordinarily resident : A firm, an association of persons or body of individuals

cannot claim the status of not ordinarily resident. All these assessee shall be
either resident in India or non- resident in India.

3. Non- Resident [ Section 2 (30)] : A firm or association of persons shall be

non- resident if the control and management of affairs is situated wholly outside
India.

26
Residential status of a company :

Residential status of a company is to be determined on the basis of its

incorporation or registration. Section 6 (3) provides the following tests in this
connection.

1. Resident [ Section 6 (3)]: A company shall be said to be resident in

India, in any previous year, If

(a) It is an Indian company or

(b) Its place of effective management , at any time in that year , is in India.

For this purpose, the expression “:Place of effective management” shall mean 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
made.

2. Not ordinarily resident : A Company cannot have this status. It can either be
resident or non- resident.

3. Non – resident : A company shall be non- resident if it is not resident in India

during the relevant accounting year. It means that a company whose control
and management is situated wholly or partially outside India, will be non-
resident company.

Any other person

Every other person includes body of individuals , a local authority and

an artificial juridical person. They are either Resident or Non- Resident but they
cannot be Not Ordinarily Resident. The test to be applied shall be the of control
and management . If it is situated wholly outside India , the assessee will be non-
resident. If the control and management is wholly or partially situated in India,
the Status will be that of Resident.

27
Incidence of Tax ( Scope of Total Income)

The tax is levied on total income of a person. The total income is based upon
the residential status of an assessee. Section 5 Provides the scope of total
income which varies on the basis of status. Section 5 provides:

1. Subject to the provisions of this act, the total income for any previous
year of a person who is resident includes all incomes from whatever
source derived, which

(a) is received or is deemed to be received in India in such year

by or on behalf of such person or

(b) accures or arises or is deemed to accrue or arise to him in

India during such year or

(c) accrues or arises to him outside India during such year

provided that , in the case of a person not ordinarily resident in India

within the meaning of sub- section ( 6) of section 6 the income which
accrues or arises to him outside India shall not be included unless it is
derived from business controlled in or a profession set up in India.

2. Subject to the provisions of this act, the total income of any previous
year of a person who is non- resident includes all incomes from whatsoever
source derived , which.

(a) Is received or is deemed to be received in India in such year by or

on behalf of such person or

(b) Accrues or arises or is deemed to accrue or arise to him in India.

1.7 PERSON [Section 2(31)]

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. As
per section 2(31), Person includes:
28
 – an individual:

– a Hindu undivided family:

– a company

– a firm

– an association of persons or a body of individuals whether incorporated or

not:

– a local authority:

– every artificial, juridical person, not falling within any of the above categories

An individual

A natural human being, i.e. male, female, minor or a person of sound or unsound
mind.

A Hindu undivided family

It consists of all persons lineally descended from a common ancestor and

includes their wives and unmarried daughters. It is a relationship created due to
operation of hindu law. The manager of HUF is called Karta and its members
called coparceneres.

A Company

It is an artificial person registered under Indian companies act 1956 or

any other law.

A Firm

It is an entity which comes into existence as a result of partnership

agreement between persons to share profits of the business carried on by all or
any one of them. Though, a partnership firm does not have a separate entity,

29
yet it has been regarded as a separate entity under income tax act. Under income tax
act, 1961, a partnership firm can be of the following two types:

(1) A firm which fulfill the conditions prescribed U/s 184

(2) A firm which does not fulfill the conditions prescribed u/s 184

An association of persons or a body of individuals

The difference between Association of persons and body of individuals is that

whereas an association implies a voluntary getting together for a definite purpose, a body
of individuals would be just a body without an intention to get-together. Moreover, the
members of body of individuals can be individuals only whereas the members of an
association of persons can be individual or non-individuals (i.e. artificial persons). There
must be common purpose, and common action to achieve common purpose i.e., to earn
income. An AOP, can have firms, companies, associations and individuals as its members.

A body of individuals cannot have non- individuals as its members . Only natural
human beings can be members of a body of individuals.

Whether a particular group is AOP, or BOI is a question of fact to be

decided in each cases separately.

A local authority

It means a municipal committee, panchayat, cantonment board, district

board, body of port commissioners, or other authority legally entitled to or
entrusted by the Government with the control and management of a Municipal
or local fund.

Every artificial, juridical person, not falling within any of the above
categories

This is a residuary clause and a public corporation established under special act
of legislature and a body having juristic personality of its own are known to be artificial

30
juridical persons. If the assessee does not fall in any of the first six categories, he is
assessed under this clause. Generally, a statutory corporation, deity or charitable
institution or an endowment for charitable or religious purposes falls under artificial
juridical person. For example

1. Reliance industries ltd - a company

2. Punjab national bank- a company

3. Madras university- artificial juridical peson

4. Calcutta municipal committee – a local authority a

5. A partnership firm – a firm

6. G singh parivar consisting of Mr. A , his brother, Mrs. A and B – A HUF

7. AB publisher ltd. – A Company

8. Markfed, housefed – an association of persons.

1.8 INCOME [ Section 2 (24)]

General meaning of “INCOME” covered under income tax Act 1961.

Income Tax Act, 1961 gives the specific definition of the term “income” in section
2(24) which is inclusive and not exhaustive. Before discussing the definition of
income given in section 2(24), it is imperative to know meaning of “income” as
generally understood. The term income simply means something which comes
in. It is a periodical return with regularity or expected regularity. Income does
not only refers to monetary return but also includes non-monetary returns. It
includes value of benefits and perquisites as well. All such incomes are to taxed
unless otherwise it is specifically exempted by any such provisions of the Act.
Income includes:

1. Profits and gains

31
2. Dividend

3. Voluntary contribution received by a trust: Voluntary contribution received by a

trust are included in the definition of income. As such contributions received
by following types of trusts, funds, associations, bodies, etc are included in
the income of such bodies.

(a) Contributions received by a trust created wholly or partly for

charitable or religious purposes.

(b) Contributions received by a scientific research association.

(c) Contribution received by a fund or institution set up for charitable purposes

and notified u/s 10 (23 c) (iv) (v).

(d) Contribution received by any university or other educational institutions ,

hospitals referred in section 10 (23 c).

4. The value of any perquisite or profit in lieu of salary taxable under section 17
(2) (3).

5. Any special allowance or benefit, other than perquisite included under sub clause
(iii), specifically granted to the assessee to meet expenses wholly, necessarily
and exlusively for the performance of the duties of an office or employment of
profit.

6. 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 residues or to compensate
him for the increased cost of living.

7. Value of any benefit or amenity, whether convertible into money or not,

obtained by a representative assessee or by any person on whose behalf
such benefit is received by representative assessee and sum paid by

32
 representative assessee in respect of any obligation which but of such payment
would have been payable by the person on whose behalf representative
assessee has made such payments.

8. The profits and gains of any business of banking including providing credit
facilities, carried on by a co- operative society with its members.

9. The value of any benefits or perquisites, whether convertible into money or

not, obtained from a company either by a director or by a person, who has a
substantial interest in the company or by a relative of a director of such person,
and any sum paid by such company in respect of any obligation but for which,
such payment would have been payable by the director or other person
aforesaid.

10. Any sum chargeable to income tax under section 28 (ii) and (iii) or section 41
or section 59.

11. Any sum chargeable to tax u/s 28 (iii a)

12. Any sum chargeable to tax u/s 28 (iii b)

13. Any sum chargeable to tax u/s 28 (iii c)

14. The value of any benefit or perquisite taxable under section 28 (iv)

15. Any capital gain taxable under section 45

16. An aggregate amount of gift or gifts received ( whether in cash or in the form
of property) exceeding Rs 50,000 in a previous year by an individual or HUF
from non- relatives as referred to u/s 56 (2) (vii).

17. Gifts received by a firm or closely held company as provided in section 56

(2) ( vii a)

18. Any sum of money or value of property referred to in section 56 (2) (x)[ w.e.f
A.Y 2020-21]

33
Features:

a) Regular and definite source – The term “income” connotes a periodical

monetary return coming in with some sort of regularity or expected regularity
from definite sources.

b) Income must come from outside – No one can earn income from himself.
There can be no income from transactions between head office and branch
office. Contributions made by members for the mutual benefit and found
surplus cannot be termed as income of such group.

c) Receipt vs. accrual – Income arises either on receipt basis or on accrual

basis. Income may accrue to a taxpayer without its actual receipt.
Moreover, in some cases, income is deemed to accrue or arise to a person
without its actual accrual or receipt.

d) Tainted income – The income-tax law does not make any distinction between
income accrued or arisen from a legal source and income tainted with illegality.
Assessment of illegal income does not grant him immunity from the applicability
of the provisions of other Act.

e) Disputed title – Income-tax assessment cannot be held up or postponed merely

because of existence of a dispute regarding the title of income.

f) Temporary or permanent – Whether the income is permanent or temporary,

it is immaterial from the tax point of view. Even temporary income is taxable.

g) Diversion of income by overriding title vs. application of income —Any

expenditure/ investment, after income is received, is application of income.
“Income” under the Income-tax Act, which is chargeable to tax, is income
before application of income. Any expenditure investment out of such income
is deductible only if it is permitted by a provision under the Income-tax Act or
Income-tax rules. Diversion of income means that a part of the income or

34
 whole of such income does not reach to assessee. It is diverted to some other
person due to some legal obligation.

h) Lump sum receipt — Income, whether received in lump sum or in instalments,

is liable to tax. For instance , arrears of bonus, received in lump sum, is income
and is taxable as salary.

i) Tax-free income – If a person receives tax—free income on which tax is paid

by the person making payment on behalf of the recipient, it has to be grossed
up for inclusion in his total income.

j) Voluntary receipts – The receipts which do not arise from the exercise of a
profession or business or do not amount to remuneration and are made for
reasons purely of personal nature are not included in the scope of total income.
Receipt on account of dharmada, gaushala, and pathshala is not income and,
therefore, not liable to tax.

k) Income includes loss – Income includes loss. While income, profits and gains
represent “plus income”, losses represent “minus income”.

l) Treatment of gifts – In case of individual or H.U.F., subject to certain

exceptions, the following three kinds of gifts are treated as income under the
head other sources u/s 56(2)(vii) ;

 A) Monetary gifts: Any sum of money received from any person or persons
without consideration exceeding Rs.50000 in aggregate during a previous year,
then

INCOME = THE WHOLE OF SUCH SUM OF MONEY

B)     Gift of immovable property: Any immovable property received from any

perso n wit ho ut co nsiderat io n having st amp dut y value
exceeding Rs.50000, then

35
 INCOME = THE STAMP DUTY VALUE OF SUCH IMMOVABLE
PROPERTY

C)      Gift of property (specified) other than immovable property

a) without consideration: Any property (specified) other than immovable

property received from any person without consideration, the aggregate
F.M.V of which exceeds Rs.50,000, then

INCOME = THE WHOLE OF THE AGGREGATE F.M.V OF SUCH

PROPERTY

b) For inadequate consideration: Any property (specified) other than

immovable property received from any person for inadequate
consideration i.e., for a consideration less than the aggregate F.M.V. of
the property and such consideration is less than the aggregate F.M.V of
t he pro pert y by an amo u nt exceeding Rs. 5000 0, t hen
INCOME = THE AGGREGATE F.M.V OF SUCH PROPERTY –
ACTUAL CONSIDERATION

However, the above gift received from a relative, On the occasion of marriage
of individual, under will/inheritance, in contemplation of death of the payer, received
from specified funds/institutions are not treated as income of the recipient.

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. It includes:

36
a. Cash or kind

Income may be received in cash or kind. When the income is received in

kind, its valuation will be made in accordance with the rules prescribed in the
Income-tax Rules, 1962.

b. Receipt basis/ Accrual basis

Income arises either on receipt basis or on accrual basis. It may accrue to a

taxpayer without its actual receipt. The income in some cases is deemed to
accrue or arise to a person without its actual accrual or receipt. Income accrues
where the right to receive arises.

c. Legal or illegal source

The income-tax law does not make any distinction between income accrued
or arisen from a legal source and income tainted with illegality.

d. Temporary/Permanent

There is no difference between temporary and permanent income under the

Act. Even temporary income is taxable under Income Tax Act.

e. Lump sum/instalments

Income whether received in lump sum or in instalments is liable to tax. For

example: arrears of salary or bonus received in lump sum is income and charged
to tax as salary.

f. Gifts

Gifts of personal nature do not constitute income subject to maximum of

‘50,000 received in cash. The recipient of gifts like birthday, marriage gifts,
etc., is not liable to income-tax as received in kind however as per the Finance
Act, 2009 gifts in kind having fair value upto Rs 50,000 are not liable to tax
but having fair value of more than Rs 50,000 is wholly taxable.

37
g. Revenue or Capital receipt:

Income-tax, as the name implies, is a tax on income and not a tax on every
item of money received. Therefore, unless the receipt in question constitutes
income as distinguished from capital, it cannot be charged to tax. For this
purpose, income should be distinguished from capital which gives rise to
income. However, some capital receipts have been specifically included in
the definition of income.

1.8.1 Capital Receipts vs Revenue Receipts, Capital Expenses vs

Revenue Expenses, Capital Lossess vs Revenue Losses.

Income Tax is levied on income of assessee and not an every

receipt which he receives. The method of charging tax on different
types of receipt is different. Income tax Act, 1961 provides a
separate head “ CAPITAL GAINS” for levying tax on capital
receipts. Similarly, while calculating net taxable income of an
assessee only revenue expenses are allowed to be deducted out of
revenue   receipts.  Particularly   while   calculating  business  profit
or professional gain only revenue receipts and revenue expenses
are considered. This make the distinction between capital and
revenue of vital importance. For this distinguish capital and
revenue items can be divided in to 3 sub-parts :

1. Capital Receipts vs Revenue Receipts

2. Capital Expenses vs Revenue Expenses

3. Revenue Losses vs Capital Losses

A. Capital Receipt Vs Revenue Receipts

As discussed above the capital receipts are to be charged to tax

under “ Capital Gains” and revenue receipts are taxable under
other heads, it is of vital importance to understand which receipt

38
 is a capital receipt and which one is a Revenue. Some tests,
however, can be applied in particular cases.

Immaterial considerations

In deciding whether a particular receipt is of a capital or revenue

type, the following consideration are considered to be immaterial and
not going to decide or change the character or nature of the receipt

1. Receipt in lump sum or in instalments: Whether any income is

received in Lump sum or in instalments, it will not make any
difference as regards its nature.e.g., an employee is to get a salary
of Rs 1,000 p.m. Instead of this he enters into an agreement to get
a sum of Rs 36,000 in lump sum to serve for a period of three
years. The receipt where it is monthly remuneration or lump sum
for 3 years is a revenue receipt. It has been decided in so many
court cases that a lump sum receipt may be an item of revenue
nature and an annual receipt recurring over few years may be a
capital receipt. Thus, whether a receipt is a periodic receipt or a
single receipt is immaterial for the purposes of determining
its[nature. [ Rajah Manyain Meenak and Shamma V. C.I.T ( 1956)
30 I.T.R 286 ]

2. Nature of receipt in the hands of recipient: Whether a receipt is

capital or revenue will be determined in the hands of the persons
receiving such income. No attention will be paid towards the source
from which the amount is coming. Salary even if paid out of capital
by a new business will be it revenue receipt in the hands of employee.

3. Magnitude of receipt. The magnitude of the receipt , whether big

or small , cannot decided the nature of the receipt although the
size of a receipt in a transaction is not an entirely irrelevant

39
 consideration. A receipt of Rs 10,000 may be of revenue nature
whereas a receipt of only Rs 1,000 may be a capital receipt.
Supreme court has ruled in a case Divencha V. CIT (48 ITR 222),
that the magnitude of a receipt is immaterial for the purpose of
determining its nature.

4. Name given by parties and treatment is books of accounts:

What name the recipient or payer of the receipt has given in the
books of accounts or with what name be has called a particular
transaction, all such consideration are immaterial to decide the
nature of the receipt. A capital payment by a dealer may be a revue
receipt in the hands of the recipient. The character of the receipt
shall be decided by consideration other than what comes the parties
call it. [ Divencha V. CIT]. The nature of the receipt will be
determined in the hands of the person receiving such income.

5. Payment made out of capital: No attention will be paid towards

the source from which amount is coming. Salary even paid out of
capital by a new business will be a revenue receipt in the hands of
the employee. It was also decided in a case that if a receipt is made
out of the capital, the receipt may also be a capital receipt. If a
recipient is beneficially entitled not only to the income but also to
the capital, payments given to him by his trustees out of the corpus
would be capital receipts . [ Brudies’s Trustees v. I.R. 25 TC. 13,16].

6. Time of receipt: The nature of the receipt has to be determined

at the time when it is received and not afterwards when it has been
appropriated by the recipient.

7. Quality of receipt: Whether the income is received voluntarily

or under a legal obligation, it will not make any difference as
regards its nature.

40
DistinguishingTests

It is very difficult to draw a line of demarcation between capital

and revenue receipts. Even the courts have found it difficult to lay down
some points of distinction on the basis of which a capital receipt may be
difficult from a revenue receipt. Some tests , however, can be applied in
particular cases. These tests are:

a) On the basis of nature of Assets :  If  a  receipt  is  referred  to

Fixed Asset, it is capital receipt and if it is referable to circulating
asset it is revenue receipt. Fixed assets is that with the help of
which owner earns profit by keeping it in this possession, e.g. Plant,
Machinery, Building or factory etc. Circulating Asset is that with
help of which owner earns profits by parting with it and letting
others to become its owner, e.g. Stock-in trade. Profit on the sale
of Motor Car used in business by an assessee is Capital Receipt
whereas the profit earned by an automobile dealer, dealing in cars,
by selling a car is his revenue receipt.

b) Termination of source of income:  Any  sum  received  in

compensation for the termination of source of income is capital
receipt, e.g. compensation receive by an employee from its
employer on termination of his services is capital receipt.

c)  Amount received in substitution of income: Any sum received

in substitution of income is revenue receipt.

ILLUSTRATION
‘A’ company purchased the right to produce a Film from its
earlier producer with the condition that no other producer will
be given these rights. Afterwards, it is found that the rights for
producing this film had already been sold. The ‘A’ Company

41
 claimed damages and was awarded Rs.50,000. It was held that
damages received are the compensation for the profits which were
to be earned. Hence, this is Revenue Receipt.

d) Compensation received on termination of Lease or surrender of a Right.  Any

amount received as compensation on surrendering a right or termination of any
Lease is Capital Receipt where as any amount received for loss of future income
is a revenue receipt.

ILLUSTRATION:  An Author gives up his right to publish a

book and receives Rs. 1,00,000 as compensation. It is capital
receipt but if he receives it as advance Royalty for 5 years it is
Revenue receipt.

e) Tests as to the purpose of keeping an article: If a person purchase a

piece of sculpture to keep as decoration piece in his house, if sold later
on, will bring causal receipt but if the same sculpture is sold by an art dealer it
will be his revenue receipt.

Examples of capital and revenue receipts

Capital receipts

1. Salami or Nazrana received for grant of permanent lease.

2. Compensation received for loss or right to future remuneration

3. Compensation received from the employer for loss of employment due to

premature termination of service.

4. Price received on sale of know- how

5. Damages received by an employee who is wrongly dismissed or a payment

received by an employee in lieu of notice.

42
Revenue receipts

1. Lump sum royalty received in advance.

2. A “Pugree” Received by the owner of the house property from tenants

3. Damages awarded by a court to a company for breach of contract by another

company.

4. A passenger is injured in a railway accident and its temporarily disabled thus

losing income for a short period. Any receipt as compensation shall be revenue
receipt. But if the passenger is permanently disabled, the compensation
received would have been a capital receipt.

B. Capital Expenses Vs Revenue Expenses

To distinguish a Revenue Expenditure from a Capital Expenditure, the following

tests can be applied for this

(i)         Nature of the assets:  Any expenditure incurred to acquire  a Fixed Assets
or in connection with installation of Fixed Assets is Capital Expenditure.
Whereas. Any expenditure incurred as price of goods purchased for resale
along with other necessary expenses incurred in connection with such purchase
are Revenue Expenses.

(ii)        Nature of liability: A payment made by a person to discharged a capital

liability is a capital expenditure. Whereas, expenditure incurred to
discharged a revenue liability is Revenue Expenditure, e.g. Amount paid
to a contractor for cancellation of contract to construct a factory building
is capital expenditure.

(iii)       Nature of transaction: If expenditure is incurred to acquire a source of

income, it is Capital Expenditure e.g. purchase of patents to produce
picture tubes of T.V. sets. Whereas expenditure incurred to earn an income
is revenue expenditure, e.g. salary to staff, advertisement expenses etc.

43
(iv)       Nature of payment in the hands of payer: If an expenditure is incurred
by an assessee as a Capital Expenditure, it will remain a capital expenditure
even if the amount may be revenue receipt in the hands of receiver, e.g.
purchase of motor car by a businessman is capital expenditure in his hands
although it is revenue receipt in the hands of car dealer.

 C. Capital Losses Vs Revenue Losses

Distinction has to be made between revenue losses and capital losses of the
business because under the provisions of this act capital losses are dealt with under
the chapter “ capital gain” whereas revenue looses are treated as business losses and
as such are treated under the head “ profit and gains of business or profession”.
Distinguish has to be made between Revenue Losses and Capital Losses of the business
because under the provisions of this Act, Capital Losses can be set off against the
Income from Capital Gain only, whereas the Revenue Losses are business losses and
as such can be set off against any other income of the assessee.

It is very difficult to distinguish between a Capital Loss and a Revenue Loss on

the basis of certain principles.

The main distinguishing points are:

(i)       Loss due to sale of assets : Where there is loss on selling a Capital Assets,

it is a Capital Loss whereas any loss incurred during the sale of Stock-in-
Trade is a Revenue Loss.

(ii)        Loss due to embezzlement : Where there is embezzlement done by an

employee and this causes loss to the business, it is of revenue loss.

(iii)        Loss  due  to  withdrawal  of  money  from  bank  : Once  the  amount  is
deposited in Bank and then it is withdrawn by an employee and is
misappropriated , is a Capital Loss.

44
(iv)    Loss due to liquidation of company: Amount deposited by a person with
manufacturing industry to get its agency and lost due to company being
liquidated is a Capital Loss.

(v)        Loss due to theft by an employee : losses occurring due to theft or

embezzlement of misappropriation committed by an employee is revenue
loss.

1.9 EXEMPTED INCOMES

A. Agriculture Income [Section 10(1)]

Agricultural income from land situated in India is fully exempted.

B. Any sum received by a Co-parcener from Hindu Undivided Family

(H.U.F.) [Section 10(2)]

Any sum received by an individual as a member of a Hindu Undivided Family,

where such sum has been paid out of the income of the family, or in the
case of any impartible estate, where such sum has been paid out of the
income of the estate belonging to the family is fully exempted. This is subject
to the provisions of section 64(2). Out of the income of HUF, if a co-
parcener gets any sum of money, it is fully ‘exempted in the hands of its
co-parceners. It is exempted from tax whether the income of HUF was
chargeable to tax or not.

ILLUSTRATION 1.   HUF    earned ‘ 5,00,000  during  the

previous year and paid tax on its income. Mr. A, a co-parcener
is an employee and earns a salary of ‘ 20,000 p.m. During the
previous year Mr. A also received ‘ 1,00,000 from HUF. Mr. A
will pay tax on his salary income but any sum of money received
from his HUF is not chargeable to tax in Mr. A’s hands.

45
 ILLUSTRATION 2. HUF earned ‘ 90,000 during the previous
year 2013-14 and it is not chargeable to tax. Mr. A, a co-
parcener is earning individual income of ‘ 20,000 p.m. Besides
his individual income, Mr. A receives ‘ 30,000 from his HUF. 

Mr. A will pay tax on his individual income but any sum of money
received by him from his HUF is not chargeable to tax in the
hands of co-parcener whether the HUF has paid tax or not on
that income.

C. Share of Income from the Firm [Section 10(2A)]

In case of a person being a partner of a firm, which is separately assessed

as such, his share in the total income of the firm shall be fully exempted.

The share of partner in the total income of the firm shall be in same
proportion as is given in partnership deed.

D. Interest paid to Non-Resident [Section 10(4)(i)]

The amount of interest payable to a non-resident on such securities or

bonds as the Central Govt. may, by notification in the Official Gazette,
specify in this behalf, including income by way of premium on the
redemption of such bonds, shall be exempt from tax. The exemption under
this section shall not be allowed on interest on bonds or securities issued on
or after 1-6-2002.

E. Interest to Non-Resident on Non-Resident (External) Account [Section

10(4)(ii)]

Any income by way of interest on moneys standing to his credit in a Non-

Resident (External) Account in any bank in India shall be exempt from

46
 tax in case of an individual who is a person resident outside India or is a
person who has been permitted by the RBI to maintain the aforesaid
account.

The person residing outside India shall have the same meaning as defined under
Foreign Exchange Regulation Act, 1973, FEMA, 1999. This exemption shall
not be available on any income by way of interest paid or credited on or after
1-4-2005.
F.    Interest paid to a person of Indian Origin and who is Non-Resident
[Section 10(4B)]

In case of an individual, being a citizen of India or a person of Indian origin, who is

nonresident, any income from interest on such savings certificates issued by the
Central Government, as Government may specify in this behalf by notification in
the Official Gazette, shall be fully exempt. The exemption under this section shall
not be allowed on bonds or securities issued on or after 1-6-2002.

This exemption shall be allowed only if the individual has subscribed to such
certificates in Foreign Currency or other foreign exchange remitted from a country
outside India in accordance with the provisions of the Foreign Exchange Act,
1973, FEMA, 1999 and any rules made there under. For this purpose, a person
shall be deemed to be of Indian origin if he or either of parents or any of his
grandparents, was born in India or in undivided India.

G.     Travel Concession to an Indian Citizen Employee [Section 10(5)]

The provisions of section 10(5) relating to leave travel concession have been
completely changed with effect from 1-4-89, i.e., assessment year 1989-90 by
the Direct Tax Law (Second Amendment Act 1989) which are as follows:

          (a) Value of any travel concession or assistance received by or due to an

individual from his employer for himself and his family in connection with
his proceeding on leave to any place in India. OR

47
 (b) Value of any travel concession or assistance received by or due to an
individual from his employer or former employer for himself and his family
in connection with his proceeding to any place in India after retirement
from service or after the termination of his service shall be completely
exempt from tax subject to conditions given below :

 The concession must have been allowed having regard to the travel
concession or assistance granted to the Central Govt. employees.

 In no case the exempted amount shall exceed the amount of expenses

actually incurred for the purpose of this travel.

 The term ‘Family’ shall mean

o The spouse and children of the individual ; and

o The parents, brothers and sisters of the individual or any of them wholly
or mainly dependent on the individual.

The following new rules have been incorporated for journeys performed on or
after 1-10-97

(i) In case journey is performed by air: Leave travel concession shall be exempted

upto an amount not exceeding the air economy fair of the National Carrier

by the shortest route to the place of journey.

(ii) In case journey is performed by any mode other than by air: If place of origin
of journey and place of destination are connected by rail but journey is performed
by any mode other than by air, the benefit shall be exempted up to an amount not
exceeding air conditioned first class rail fare by the shortest route to the place of
destination.

(iii) In case place of origin of journey and place of destination are not
connected by rail.

The benefit shall be exempted as following:

48
 (a) where a recognised public transport system exist, it shall be exempted
upto an amount equal to first class or deluxe class fare, as the case
may be, on such transport by shortest route to the place of destination.

(b) where no recognised public system of transport exists the exempted

amount shall not exceed the air conditioned first class fare for the
distance of journey by shortest route as if journey is performed by rail.

H. Remuneration received by an individual who is not a citizen of India

[Section 10(6)]

The following incomes are exempt when received by an individual who is not a
citizen of India:

(i) Remuneration [U/s 10(6)(ii)].

(a) The remuneration received by an ambassador or other officials of the

Embassy, High Commission or Legation of a foreign State in India.

(b) The remuneration by a consular officer of a foreign State in India.

(c) The remuneration received by a trade commissioner or other official

representative in India of a foreign State, provided corresponding
officials of the Government of India in that country are given a
similar concession.

(d) The remuneration received by a member of the staff of any of the

officials referred to in (a), (b) and (c) above.

If the person mentioned above in (a) to (d) is a subject of the country represented,
is not engaged in any business, profession or employment in India (otherwise
than as a member of such staff), and the country represented gives similar

49
 concession to the members of the staff of corresponding officials of the
Government of India.

(ii) Remuneration received by him as an employee of foreign

enterprise [U/s 10(6) (vi)]
(e.g., technician deputed by a foreign firm to work in India), for service
rendered by him during his stay in India 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 previous year ; and (c) such
remuneration is not liable to be deducted from the income of the
employer chargeable under the Act.

(iii) Employment on a foreign ship [U/s 10(6) (viii)].

Any income chargeable under the head “Salaries” received by or due to any
such individual being a non-resident, as remuneration for service rendered in
connection with his employment on a foreign ship where his total stay in India
does not exceed in the aggregate of a period of 90 days in the previous year.

(iv) Remuneration received by an employee of foreign govt. during his stay

in India for his training in India [U/s 10(6) (xi)].

Such remuneration shall be fully exempted if he is taking training in any of the

following concern

(a) Institution owned by Govt.

(b) A company wholly owned by Central or State govt. or partly owned

by Central and partly by State Govt.

(c) A subsidiary Co. of company referred at point (b) above

50
 (d) Any corporation established by or under Central, State or Provincial
Act

(e) Any society registered under Societies Registration Act; 186Q and
which is wholly financed by Central or State Govt.

I. Tax paid by Government or Indian concern on Income of a Foreign

Company [Section 10(6A), (6B), (6BB) and (6C)] (6A):

(i)   Where a foreign company renders technical services to Government of

India or to a State Government or to an Indian enterprise and for such
services a foreign company is paid income by way of royalty or fees.

(ii)   Such fees or royalty is paid by an India concern in pursuance of an

agreement entered into before 1-6-2002 and such agreement is approved
by Government of India and it is in accordance with the Industrial Policy
of the Government of India.

(iii) Since royalty or fees paid to a foreign company accrues in India, so

such income is liable to be taxed in India and as per agreement the
payer of income in India pays tax liability of the foreign company.

(iv) Tax so paid by Government of India or a State Government or an

Indian enterprise will be exempted i.e., it will not be grossed up with
the income of the foreign company.

ILLUSTRATION: A foreign company renders technical

services to an Indian company and as per agreement, foreign
company is to be paid a fees of 1,00,000. Tax of Rs 30,000 on
such fees is also paid by the Indian company. Tax paid by Indian
company will be exempt and so it will not be grossed up with
the income of the foreign company and such foreign company’s
income will be only Rs 1,00,000.

51
(6B)

The tax liability of a non-resident (Not being a company) or a foreign company

if paid by an Indian concern or Government of India or a State Government the same
will be exempted and so will not be grossed up with the income of the foreign entity.

(6BB) Tax paid on income received by foreign government or a foreign

enterprise on leasing aircraft

In case any income is received by a foreign government or a foreign enterprise

from an Indian company which is engaged in the operation of aircraft and such income
is by way of consideration of acquiring an aircraft or an engine of aircraft (other than
payment for providing spares or services in connection with the operation of leased
aircraft) on lease under an agreement entered into after 31-3-1996 but before 1-4-
2007 and approved by the Central Government in this behalf, and the tax on such
income is payable by such Indian company under the terms of agreement, the tax so
paid shall be fully exempted.

This benefit shall be available only to that foreign enterprise which is

non-resident.

(6C)

Any income derived by a foreign company (so notified by Central govt.)

by way of royalty or fees for technical services under an agreement for providing
services in or outside India in projects connected with security of India shall be fully
exempted.

J. Perquisites and Allowances paid by Government to its Employees serving

outside India [Section 10(7)]

All the perquisites and allowances paid by the Government to its employees for
services rendered outside India, are exempt from tax. This exemption is allowed
only to such employees of the Government who are citizens of India.

52
11. Employees of Foreign Countries working in India under Cooperative

Technical Assistance Programme [Section 10(8)]

The persons who are working in India under co-operative technical assistance
programmes   accordance  with  an  agreement  entered  into  by  the  Central
Government and the Government of a foreign State, the following incomes of
such individuals shall be exempt provided the terms of agreements provide for
such exemption
1. the remuneration received by him directly or indirectly from the
Government of the foreign State for such duties rendered in
India ; and

2. any other income of such individual which accrues or arises outside

India and is not deemed to accrue or arise in India, in respect of which
individual is required to pay any income or social security tax to the
Government of that foreign State.

K. Income of a Consultant [Section 10(8A)]

Any remuneration or fee received by a consultant from an international

organisation who derives its fund under technical assistance grant agreement
between such organisation and the Foreign Government, and any other income
accruing or arising to him outside India (which is not deemed to accrue or arise
in India) and which is subject to income-tax or social security tax in foreign
country, shall be fully exempted. The agreement of the service of consultant
must be approved by the competent authority.
The consultant means :

1. an individual who is (a) not a citizen of India; or (b) if citizen but is not

ordinarily resident in India ; or

53
 2. any person who is non-resident ; and  is  rendering  technical
services in India in connection with any technical assistance
programme or project.

L. Income of Employees of Consultant [Section 10(8B)]

In case of an individual who is assigned duties in India under technical

assistance programme—
1. the remuneration received by him directly or indirectly from any
consultant as referred u/s 10 (8A) above and

2. any other income accruing or arising to him outside India (which is not
deemed to accrue or arise in India) and which is subject to income-tax
or social security tax in foreign country. shall be fully exempted provided

3. such individual is not a citizen of India ; or

4. if citizen but is not ordinarily resident and

5. the contract of service is approved by the competent authority.

M. Income of any member of the family of individuals working in India under

co-operative technical assistance programmes [Section 10(9)]

The income of any member of the family of any such individual as referred
to under Section 10(8) or (8A) or as the case may be clause 8(B)
accompanying him to India, which accrues or arises outside India 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 as the case may be, country of origin of such member.

54
N. Gratuity [Section 10(10)]

(i) Death-cum-retirement gratuity—anysuch amount received by the

employees working on Civil or Defence services of Govt. of India,
or on any part of State Govt. or Local authority covered under
Revised Pension Rules of the Central Govt. shall be fully
exempted.

(ii) Gratuity received under Payment of Gratuity Act—shall be exempted

upto an amount as calculated in accordance with the provisions of
such Act.

(iii) For other employees—Exempted up to least of the following

1. Statutory Limit Rs 20,00,000 ( Rs 10,00,000 for those who

retired before march 29, 2018)

2. 1/2 month’s average salary for every one completed year

of service

3. Actual gratuity received.

Average Salary. : The Direct Tax Laws (Amendment) Act 1987 has
revised the definition of average salary. In future average salary is to be calculated
on the basis of average of salary received during 10 months preceding the month
in which death or retirement occurs.

Statutory Limit. : The present ceiling of Rs 20,00,000 is applicable for

whole service life of an employee. With effect from assessment year 1989-90
the monetary ceiling will be such limit as the Central Government may by notification
in the Official Gazette specify in this behalf keeping in view the limit applicable to
Central Government employees.

55
 Salary : The word ‘salary’ here has the same meaning as assigned to it for
provident fund purposes, i.e., the Basic Pay plus dearness pay plus any portion of
D.A. which enters into pay for service benefits.

O. Commuted value of pension received [Section 10(I0A)]

(i) The full amount of commuted value of pension received is exempted if it is

received from the Government, a local authority or a statutory corporation.

(ii) Any payment in commutation of pension received under any scheme from
any other employer to the extent it does not exceed

1.  in  a  case  where  the  employee  receives  any  gratuity,  the

commuted value of 1/3rd of pension which he is normally
entitled to receive ; and

2.  in any other case the commuted value of 1/2 of such pension.

P. Amount received as leave encashment on retirement [Section 10(10AA)]

(a) Central & State Govt. Employees—any payment received as the cash
equivalent of the leave salary in respect of the earned leave at his credit
at the time of his retirement shall be fully exempt.

(b) Other Employees—any payment received as the cash equivalent of

the leave salary at his credit at the time of superannuation shall be
exempt upto least of the following four amounts

(a) Actual amount received

(b) Amount calculated at average salary of 10 months (average

salary means average of salary drawn by employee during
10 months immediately preceding the month of his retirement);

56
 (c) Cash equivalent of leave salary due at the time of retirement.

(d) Notified Limit—Rs 3,00,000.

Excess of amount received over the least of the above shall be

taxable.

Q. Retrenchment compensation paid to workmen [Section 10(10B)]

The Finance Act, 1975 has inserted a new clause 10B in section 10 of Income
tax Act which provides that retrenchment compensation received by a workman
shall be exempted from Income-tax to the extent such compensation does not
exceed
1. Amount calculated in accordance with the provisions of Section 15F(b)
of the Industrial Disputes, Act,

2. 1947,

or

3. 5,00,000, whichever is less.

This exemption will be available only to workmen as defined in Industrial

Disputes Act, 1947.

R. Payment received under Bhopal Gas Leak Disaster (Processing of

Claims) Act 1985 [Section 10 (10BB)]

Any amount received under the provision of such Act or any scheme framed
there under shall be fully exempted but in case payment is received against
a loss or damage, for which deduction has been claimed ealier, it shall be
taxable.

57
19A. Compensation received in case of any disaster [Section 10(10BC) ]

In case an individual or his legal heir receives any compensation on account of

any disaster from Central or State Government or from a local authority, the
same shall be exempted.
S. Retirement Compensation from a Public Sector Company or any other

Company [Section 10 (10C)]

Any amount received is receivable by an employee of :

1. a public sector company ; or

2. any other company ; or

3. any authority established under a Central, State or Provincial Act ; or

4. a local authority,

5. a co-operative society, or

6. a university established or corporated by or under a Central, State

or Provincial Act, and an institution declared to be university `
under section 3 of the University Grants Commission Act, 1956 ;
or

7. an Indian Institute of Technology within the meaning of clause (g) of

section 3 of the Institute of Technology Act, 1961 ; or

8. such institute of management as the Central Goyt. may, by notification

in the official gazette may specify in this behalf.

9. the Central Government.

10.  the State Government.

58
 At the time of his voluntary retirement, or in case of a public sector companies
under a scheme of voluntary separation, under a scheme framed in accordance with
guidelines issued by the Government and in case of companies or co-operative
societies, scheme is approved by Chief Commissioner or Director General of Income-
tax, shall be exempted up to (a) Actual Amount received ; (b) 500,000 (c) 3 month’s
‘salary’ for each completed year of service ; or, (d) salary last drawn multiplied by
number of months’ service is left from date of retirement; whichever is less. In case
any exemption is claimed under this clause, the employee cannot claim exemption for
the same amount under any other section. The approval of scheme of voluntary
retirement from Chief Commissioner of Income Tax or Director General of Income
Tax is not necessary w.e.f. assessment year 2001-02.

Guidelines for the above purpose [Rule 2BA of Income-tax Rules 1962]

1. The scheme applies to an employee of the company who has completed 10

years of service or 40 years of age.

2. It applies to all employees except Directors of the Company.

3. The scheme has been made to result in overall reduction in the existing strength
of the employees of the Company.

4. The vacancy so caused is not to be filled up and retired employee is not to be

employed again in another company or concern belonging to the same
management.

5. The amount payable is to be calculated as 3 months salary for each completed

year of service, or salary at the time of retirement multiplied by the balance
months of service left before his date of retirement or superannuation.

6. The employee should not have availed benefit of any other voluntary retirement
scheme earlier.

59
7. The term ‘Salary’ shall have the same meanings as it has for provident fund
purposes.

T. Income by way of tax on perks [Section 10(10CC)]

In case employer pays, at its option, tax on value of perks given by it to an

employee (Not provided by way of monetary payment) shall be fully exempted
in the hands of employee.

U. Any sum received under a life insurance policy [Section 10(10D)]

Any sum received under a life insurance policy, including the sum allocated
by way of bonus on such policy shall be fully exempted in following cases :

1. If any sum received from insurance company on insurance of a

dependent handicapped member [under subsection (3) of section
80DD]

2. If any sum received from insurance company when a dependent, or a

member of family is suffering from a notified disease [under subsection
(3) of section 80DDA]

3. Any sum received under a Key man insurance policy “Key man
insurance policy” means a life insurance policy taken by a person on
the life of another person who is or was the employee of the first
mentioned person or is or was connected in any manner whatsoever
with the business of the first mentioned person ; or

4. Any sum received under an insurance policy issued on or after the 1st
day of April, 2003 but before 1-4-2012 in respect of which the premium
payable for any of the years during the term of the policy exceeds
twenty per cent of the actual capital sum assured.

60
 5.  Any sum received under an insurance policy issued on or after 1-4-
2012 in respect of which the premium payable for any of the years
during the term of the policy exceeds 10% of the actual capital sum
assured. Thus, in case of life insurance policies issued on or after 1-4-
2012, the exemption regarding any sum received under a life insurance
policy shall be allowed only if premium paid on such a policy does not
exceed 10% of the capital sum assured.

6. Any sum received under an insurance policy issued on or after 1-4-

2013 on the life of a person with disability ( referred u/s 80 U ) or
Suffering from disease as specified in the rules made u/s 80 DDB in
respect of which premium payable for any of the years during the term
of the policy exceeds 15 % of the actual capital sum assured [ w.e.f
assessment year 2014-15].

Note. Any sum received in respect of policies covered under points (iv) and (v)
above shall be fully exempt if such sum is received on the death of the person (i.e.,
policy holder).

Raising the limit of premium for the LIC policies of persons with disability or
disease for exemption of sum received [Sec l0(1OD)] [w.e.f A.Y. 2014-15].

For persons suffering from disability (u/s 80U) or certain diseases, the exemption of
any sum received under LIC policy, shall be available if the premium for the policy
does not exceed 15% (earlier 10%) of the capital sum assured. The increased limit of
premium shall be applicable in respect of LIC policies issued on or after 1-4-2013.

Amendment in Explanation-1 section 10 (1OD) regarding key man

insurance policy.

A key man insurance policy which has been assigned to a person during its term
wit h o r wit ho u t co nsid erat io n shall co nt inue t o be t r eat ed as a

61
 key man insurance policy for the purpose of section 10 (10D).

For the purpose of calculating the actual capital sum assured effect shall be
given to the following :

1. of the value of any premiums agreed to be returned, or

2. of 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. [Explanation to sub-section (2A) of section 88 and sub-section
3 of section 80C] .

V. Payment from Statutory Provident Fund [Section 10(11)]

Any amount withdrawn from the statutory provident fund is exempt from tax.
This provision is applicable on Public Provident Fund also.

Payment received from Sukanya samridhi account [ Section 10 (11A)]

Any payment from an account opened in accordance with the sukanya samridhi
account rules, 2014 shall be exempted.

W. Payment from Recognised Fund [Section 10(12)]

The accumulated balance due and becoming payable to an employee participating

in a recognised provident fund, is exempt to the extent provided in rule 8 of part
A of the Fourth Schedule .
Partial exemption of payment from national pension system trust to all
subscribers on closure of account or opting out of the pension scheme reffered
to in section 80 CCD[ Section 10 (12A)]

Any payment from the national pension system trust to all the subscribers or
assesses ( employees as well as non- employees) on closure of account or his opting
out of the pension scheme referred to in section 80 CCD, to the extent it does not
exceed 40 % of the total amount to him at the time of closure or his opting out of the
scheme, shall be exempt from tax.

62
 Note: Up to A.Y 2018-19 , this exemption was available only to employees.
However, w.e.f A.Y 2019-20 , this exemption has been extended to all subscribers.

Exemption of partial withdrawal from national pension system trust referred to

in section 80CCD [ Insertion of section 10 (12B )] [ w.e.f A.Y. 2018-19].

Any partial withdrawal by an employee from national pension system trust in

accordance with the terms and conditions specified under pension fund regulatory
development authority act , 2013 and regulations made thereunder, shall be exempt
to the extent it does not exceed 255 % of the amount of contributions made by him.

X. Payment from Superannuation Fund [Section 10(13)]

Any payment from an approved superannuation fund made

1. on the death of a beneficiary ; or

2. to an employee in lieu of or in commutation of an annuity on his retirement at

or after a specified age or on his becoming incapacitated prior to such
retirement ; or

3. by way of refund of contribution on the death of beneficiary ; or

by way of refund of contribution to an employee on his leaving the service

in connection with which the fund is established otherwise than by
retirement age or after a specified age or on his becoming incapacitated
prior to such retirement, to the extent to which such payment does exceed
the contributions made prior to the commencement of this Act and any
interest thereon.

4. by way of transfer to the account of the employee under a pension schemes

referred to in section 80 CCD and notified by the central government .

63
Y House Rent Allowance [Section 10(13A) Read with Rule 2A]

(a) Persons living in rented houses

Any amount of House Rent Allowance received by the employee from his
employer is exempted up to the least of the following limits

1. excess of actual rent paid over 10% of salary

2.  an amount equal to 50% of salary where such accommodation is situated
in any one of the following places, namely, Bombay, Calcutta, Delhi and
Madras and 40% of salary in other towns ; or

3. actual amount of House Rent Allowance received.

(b) Persons living in their own houses or not paying any rent but getting
HRA—

Full HRA received is taxable. No exemption under this provision. [Inserted
by Taxation laws ( Amendment) act, 1984 w.e.f from 1-4-1976].

Z. Any Allowance given for meeting Business Expenditure [Section

10(14)]

Any such special allowance or benefit, not being in the nature of a perquisite
within the meaning of clause (2) of section 17 specifically granted to meet
expenses wholly, necessarily and exclusively incurred in the performance of
the duties of an office or employment of profit, as the Central Government
may, by notification in the Official Gazette, specify, to the extent to which
such expenses are actually incurred for that purpose.

1. any such 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 place where he ordinarily
resides, or to compensate him for the increased cost of living, as the

64
 Central Government may, by notification in the Official Gazette, specify,
to the extent specified in the notification.

2. With effect from 1.4.89, i.e., assessment year 1989-90, the Direct Tax
Laws (Second Amendment) Act 1989 has inserted the following
proviso  :

Nothing given in sub-clause (ii) shall apply to any allowance in the nature of
personal allowance granted to the assessee to remunerate or compensate him
for performing duties of special nature relating to his office or employment
unless such allowance is related to the place of his posting or residence.

OTHER INCOMES ARE:

i) Interest Incomes [Section 10(15)]

The following interest incomes due to an assessee are exempt from tax :

(ia) Income by way of interest, premium on redemption or other payments on

such securities, bonds, annuity certificates, savings certificates, other certificates
issued by the Central Government shall be exempted if such notification is
issued by Central Government in Official Gazette and shall be subject to such
conditions and limits as prescribed in such notification.

(ii) In the case of an individual or a H.U.F. interest on such Relief Bonds as the
Central Government may, by notification in the Official Gazette, specify in this
behalf.

(jib)  Interest on such Capital Investment Bonds held by individual or H.U.F. and
so notified. The Central Govt. shall not specify any such bonds on or after 1-
6-2002.

(iic)  Interest on Relief Bonds issued and notified by the Central Government is
fully exempted for an individual and HUF.

65
(iid) Interest on such notified bonds issued to non-residents and purchased by
them in foreign exchange is fully exempted. With effect from 1-6-2002 the
Central Govt. shall not notify any such bonds.

(iii) Interest on securities held by the Issue Dept. of the Central Bank of Ceylon,
constituted under the Ceylon Monetary Law Act, 1949.

(iiia) Interest payable to any bank incorporated in a country outside India and
authorised to perform Central Banking functions in that country on any deposit
made by it, with the approval of the Reserve Bank of India, with any
Scheduled Bank.

(iiib) Any interest payable to the Nordic Investment Bank, being a multilateral
financial institution constituted by the Governments of Denmark, Finland,
Iceland, Norway and Sweden, on a loan advanced by it to a project approved
by the Central Government in terms of the Memorandum of Understanding
entered into by the Central Government with that Bank on the 25th day of
November, 1986.

(iiic) Interest payable to the European Investment Bank, on a loan granted by it in

pursuance of the framework-agreement for financial cooperation entered into on
the 25th day of November, 1993 by the Central Government with that Bank.

(iv) Interest payable—

(a) by Government or a local authority on money borrowed by it from sources

outside India ;

(b) by an industrial undertaking in India on money borrowed by it from such

financial institution in a foreign country as is approved in this behalf by the
Central Government;

(c) by an industrial undertaking in India on any moneys borrowed or

debt incurred in a foreign country in respect of its purchase outside
India of raw materials or components, plant or machinery, to the
66
 extent of amount calculated at the rate approved by the Central
Government in this behalf ;

(d) by the Industrial Finance Corporation of India established by the

Industrial Finance Corporation Act, 1948 or the Industrial
Development Bank of India established under the Industrial
Development Bank of India Act, 1964 or Export Import Bank of
India, or the National Housing Bank ; or the Small Industries
Development Bank of India or the Industrial Credit and Investment
Corporation of India (a company formed and registered under the
Indian Companies Act, 1956) on any moneys borrowed by it from
sources outside India, to the extent to which such interest does not
exceed the amount of interest calculated at the rate approved by
the Central Government in this behalf, having regard to the terms of
the loan and its repayment

(e)  by any other financial institution established in India or a banking
company to which the Banking Regulation Act, 1940 applies
(including bank or banking institution referred to in Section 51 of
that Act), on any moneys borrowed by it from sources outside India
under a loan agreement approved by the Central Government where
the moneys are borrowed either for the purpose of advancing loans
to industrial undertakings in India for purchase outside India of raw
materials or capital plant and machinery or for the purpose of
importing any goods which the Central Government may consider
necessary to import in the public interest to the extent to which
such interest does not exceed the amount of interest calculated at
the rate approved by the Central Government in this behalf, having
regard to the terms of the loan and its repayment

67
(f) by an industrial undertaking in India on any moneys borrowed by it
in foreign currency from sources outside India under approved loan
agreement. The loan agreement is to be approved by the Central
Government of India before 1-6-2003. The exempted rate of
interest is also to be fixed by the Central Government having regard
to the terms of the loan and its repayment ; For the purposes of this
sub-clause, the expression “Industrial undertaking” means any
undertaking which is engaged in—

(a) the manufacture or processing of goods ; or

(b) the business of generation or distribution of electricity or any

other form of power; or

(c) the business of providing telecommunication services

(d) mining ; or

(e) the construction of ships ; or

(f) the operation of ships or aircrafts or construction or operation

of rail systems.

(g) by a schedule bank on deposits in foreign currency where

the acceptance of such deposits by the bank is approved by
Reserve Bank of India.

(g) by a public company whose main object is of carrying on the

business of providing long-term finance for construction or
purchase of houses in India for residential houses, on any
money borrowed by it in foreign currency from outside India
upto the rate prescribed by Govt.

For exemption u/s 10(15)(iv) (g) the term interest shall

not include interest paid on delayed payment of loan
or in default
68
 (h) by any public sector company in respect of such bonds or
debentures. The holder of such bonds or debentures must register
his name and the holding with that company.

1. by Government on deposits made by an employee of the Central Government

or a State Government in accordance with such scheme as the Central Govt.
may frame and notify in Official Gazette, out of moneys due to him on account
of his retirement whether on superannuation or otherwise.

(v) Interest on securities held by the Welfare Commissioner Bhopal gas victims
Bhopal is the Reserve Bank’s SGL—AJC No. SLIDHO48 shall be fully
exempted. Interest on any deposits (so notified) held for the benefit of victims
of Bhopal gas tragedy held with Reserve Bank of India or any Public Sector
Bank shall be fully exempted.

(vi) Interest on Gold Deposit Bonds issued under the Gold Deposit Scheme 1999
notified by Government.

(vii) Interest on Bonds

1. issued by a local authority ; and

2. specified by the Central Govt. by notification in the official Gazzete.

(viii) Interest on saving bank account in a post office is exempt

1. upto ‘ 3,500 in the case of an individual account; and

2. upto ‘ 7,000 in the case of a joint account.

(ix) Interest on bonds issued by State Pooled Finance Entity and specified by the
Central Government by notification in the official Gazettee shall be exempted
from Income Ta.

69
ii. Lease rental income of a foreign government or foreign enterprise
from leasing of aircraft/aircraft engine to an Indian company [Section
10(15A)]

Such payment made to acquire an aircraft or an aircraft engine on lease (other

than for providing spares, facilities or service in connection with this operation
of leased aircraft) to foreign govt. or a foreign enterprise under an agreement
entered before 1-4-97 and between 1-4-99 to 31-3-07 and approved by
Central Government shall be fully exempted.

In case payer of lease rent also pays income tax of the foreign enterprise, the
same shall be exempted, i.e., tax paid will not be grossed up with the income
of the foreign recipient.

iii. Scholarship [Section 10(16)]

The full amount of scholarship granted to meet the cost of education is

exempted.

‘Cost of education’ includes not only the tuition fees but all other expenses
which are incidental to acquiring education. Scholarship may have been given
by Govt., University, Board, Trust, etc. The exemption is irrespective of actual
expenditure incurred by the recipient to meet the cost of education.

iv. Allowance of M.P./M.L.A.Ior M.L.C. [Section 10(17)]

Any income by way of:

1. Daily allowance received by M.P./M.L.A. or M.L.C. or any committee

thereof is fully exempted.

2. any allowance received by any person by reason of his membership of

Parliament under the Members of Parliament (Constituency Allowance)
Rules, 1986 is fully exempted

70
 3. Constituency allowance received by any person by reason of his
membership of any State Legislature or of any Committee thereof,
which the Central Government may notify, is also fully exempted.

v. Awards Instituted by Government [Section 10(17A)]

(i) Any payment made whether in cash or in kind under any awards
instituted in the public interest by the Central or State Government or
instituted by any other body and approved by the Central Govt. in this
behalf shall be fully exempted.

(ii) Any other reward given by Central or State Government for such
purposes as may be approved by the Central Government in this behalf
in public interest shall also be fully exempted.

vi. Pension received by certain winners of gallantry awards [Section 10(18)]

(i) Any amount received by an individual as pension shall be exempt if:

(a) such individual has been in the service of the Central or State
Government, and

(b) he/she has been awarded ‘Param Vir Chakra’ or ‘Mahavir Chakra’ or
‘Vir Chakra’ or such other notified gallantry awards.

(ii) Also, any amount received as family pension by any member of the family
of an individual referred above shall be fully exempted.

vii. Family pension received by family members of armed forces including

para military forces [Section 10(19)]

With effect from the 1st day of April, 2005 family pension received by the
widow or children or nominated heirs, as the case may be, of a member of the
armed forces (including paramilitary forces) of the Union, where the
death of such member has occurred in the course of operational duties,

71
 in such circumstances and subject to such conditions, as may be
prescribed shall be fully exempted.

viii. Income from one palace of a former ruler [Section 10(19A)]

Annual value of any one palace or a portion of a palace in the occupation of a

former ruler shall be exempted but in case such palace or a portion of
a palace is letout , its income shall not be exempted.

ix. Income of a local authority [Section 10(20)]

The following types of incomes in the hands of a local authority are exempt
from tax

1. Income from house property,

2. Capital gains,

3. Income from other sources, or

4. From a trade or business carried on by it which accrues or arises from

the supply of a commodity or service (not being water or electricity)
within its jurisdictional area or from the supply of water or electricity
within or outside its own jurisdictional area.

This means that the income of a local authority from trade or business
of supply of a commodity or service (excluding water and electricity)
outside its jurisdictional area will be taxable.

x. Pension received by certain winners of gallantry awards [Section 10(18)]

(i) Any amount received by an individual as pension shall be exempt if:

72
 (a) such individual has been in the service of the Central or State
Government, and

(b) he/she has been awarded ‘Param Vir Chakra’ or ‘Mahavir Chakra’
or ‘Vir Chakra’ or such other notified gallantry awards.

(ii) Also, any amount received as family pension by any member of the
family of an individual referred above shall be fully exempted.

xi. Family pension received by family members of armed forces including

para military forces [Section 10(19)]

With effect from the 1st day of April, 2005 family pension received by the
widow or children or nominated heirs, as the case may be, of a member of the
armed forces (including paramilitary forces) of the Union, where the death of
such member has occurred in the course of operational duties, in such
circumstances and subject to such conditions, as may be prescribed shall be
fully exempted.

xii. Income from one palace of a former ruler [Section 10(19A)]

Annual value of any one palace or a portion of a palace in the occupation of a

former ruler shall be exempted but in case such palace or a portion of a palace
is letout , its income shall not be exempted.

xiii. Income of a local authority [Section 10(20)]

The following types of incomes in the hands of a local authority are exempt
from tax

1. Income from house property,

2. Capital gains,

3. Income from other sources, or

73
 4. From a trade or business carried on by it which accrues or arises from
the supply of a commodity or service (not being water or electricity)
within its jurisdictional area or from the supply of water or electricity
within or outside its own jurisdictional area.

This means that the income of a local authority from trade or business
of supply of a commodity or service (excluding water and electricity)
outside its jurisdictional area will be taxable.

xiv. Income of scientific research association [Section 10(21)]

Any income of an approved scientific research association and if the same income
is applied solely for the purposes of that association, i.e., for carrying scientific
research.

The approval given under this section shall be withdrawn in following cases if :

1. the scientific research association has not applied its income as per
conditions prescribed

2. the scientific research association has not invested or deposited its

funds as per conditions prescribed ;

3. the activities of the scientific research association are not genuine

4. the activities of the scientific research association are not being carried
on in accordance with conditions subject to which such institution was
approved. 

xv. Income of a News Agency [Section 10(22B)]

In case there is any income of a news agency set up solely in India for collection
and distribution of news and which is so notified in this behalf shall be fully
exempted provided such income or accumulated income is used solely for

74
 collection and distribution of news and not to be distributed in any manner
amongst its members.

The approval given under this section shall be withdrawn if the news agency
has not applied, accumulated or distributed its income in accordance with the
prescribed conditions, the notification issued under this section shall be cancelled.

xvi. Income of some Professional Institutions [Section 10(23A)]

Any income other than income chargeable under the head ‘ income from house
property’ or any income received for rendering any specific services or income
by way of interest or dividends derived from its investments of an association
or institution established in India having its object as the control, supervision, or
encouragement of the profession of law, medicine, accountancy, engineering or
architecture or such other profession as the Central Government may notify in
the Official Gazette. The following conditions are to be satisfied before any
exemption is allowed under this clause

1. The association or institution applies its income or accumulates it for

application, solely to the objects for which it is established.

2. The institution or association is approved for the purpose by the Central

Government.

The approval given under this section shall be withdrawn in following cases if

1. the such association or institution has not applied its income as per
conditions prescribed

2. the activities of the association or institution are not being carried on

in accordance with conditions subject to which such institution was
approved.

75
xvii. Exemption of Income Received by Regimental Fund [Section 23AA]

Any income received by any person on behalf of any Regimental Fund or Non
Public Fund established by the armed forces of India for the welfare
of the past and present members of such forces or their dependents
shall be exempted from tax.

xviii. Income of a Fund set-up for the welfare of employees or their dependents
[Section 10(23AAA)]

Any income of such fund which is approved by Commissioner of Income-tax

shall be fully exempted provided its income is applied wholly and
exclusively for the objects for which it is established.

The CBDT has notified following purposes for which the fund is expected to
help its members or their dependents—

1. Cash amount given to a member of the fund—

2. on superannuation, or

3. in the event of member’s own illness or illness of his/her spouse or

dependent children; or

4. to meet the cost of education of dependent children of members.

5. Cash amount given to the dependents of members in the event of

death of such a member.

xix. Income of a pension fund set up by LIC or other insurer [Section

10(23MB)]

Any income of a fund set up by Life Insurance Corporation of India on or after

1.8.1996 under a pension scheme or by any other insurer shall be
fully exempted if contribution to such fund is made by any person for

76
 receiving pension from such fund which is approved by the Insurance
Regulatory and Development Authority.

xx. Income of Institutions established for development of Khadi and Village

Industries [Section 10(23B)]

The public charitable trusts and societies registered under the Societies
Registration Act, 1860 will be entitled to claim exemption from Income-tax for
the income derived by such institutions from the production, sale or marketing
of Khadi or products of village industries. The exemption will not be allowed
unless the institution applies its income or accumulates it for application solely
for the development of Khadi or Village Industries. Only such institutions will
qualify for exemption which are approved by Khadi or Village Industries
Commission.

The approval given under this section shall be withdrawn in following cases if

1. such association or institution has not applied its income as per

conditions prescribed

2. the activities of the association or institution are not being carried on

in accordance with conditions subject to which such institution was
approved.

xxi Income of State Level Khadi and Village Industries Board [Section
10(23BB)]

Any income from an authority (whether known as the Khadi and Village Industries
Board, or by any other name) established in a State by or under a State or
Provincial Act for the development of Khadi or Village Industries in the State,
shall be exempted from tax.

xxii. Income of certain Authorities set up to manage Religious and Charitable

Institutions [Section 10(23BBA)]

77
 Any income of any body or authority established, or appointed by or under
any Central, State or Provincial Act which provides administration of any of
the following institutions
1. Public, Religious or Charitable Trusts

2. Endowments (including Maths, Gurudwaras, Temples, Wakfs etc.)

; or

3. a society for religious or charitable purposes registered under

Societies Act 1860, shall be exempted from tax.

xxiii. Income of European Economic Community [Section 10(23BBB)]

Any income of European Economic community derived in India by way of

interest, dividend or capital gain from investments made out of its funds under
such scheme as the Central Govt. may notify is fully exempted.

xxiv. Income of a SAARC Fund for regional projects [Section 10(23BBC)]

Any income of a fund set up as SAARC Fund for Regional Projects set up by
Colombo Declaration issued on 21 st. Dec. 1991 by Heads of State or
Government of the Member Countries of South Asian Association for Regional
Co-operation shall be fully exempted.

xxv. Any income of Insurance Regulatory and Development Authority

[Section 10(23BBE)]

Any income of Insurance Regulatory and Development Authority established

under Insurance Regulatory and Development Authority Act 1999 shall be
fully exempted.

78
xxvi. Income of Prasar Bharti [Section 10(23BBH)] [Inserted by the Finance
Act 2012, w.e.f. 2013-14]

Any income of the Prasar Bharti (Broadcasting Corporation of India)

established under section 3(1) of the Prasar Bharti (Broadcasting Corporation
of India) Act, 1990, shall be exempt.

xxvii. Any income received by a person on behalf of following Funds [Section

10(23C)]

Any income received by any person on behalf of :

1. the Prime Minister’s National Relief Fund ; or

2.  the Prime Minister’s Fund (Promotion of Folk Art) ; or

3. the Prime Minister’s Aid to Student’s Fund ; or

4. The National Foundation for Communal Harmony

5. Any educational institution which is

6. a non profit earning body and is wholly or substantially financed by the

Government;

7. a non profit earning body whose aggregate annual receipts do not exceed the
prescribed limits (to be notified) ; or

8. a non profit earning body other than those mentioned at (a) and (b) above but
are approved by the prescribed authority.

9. any hospital or other institution for the reception and treatment of persons
suffering from illness or mental defectiveness or reception and treatment of
persons during convalescence or of persons requiring medical attention and
existing solely for philanthropic purposes and which:

10. is wholly or substantially financed by the Government ; or

79
11. whose aggregate annual receipts do not exceed the prescribed limits (to be
notified); or

12. other than those mentioned a) and (b) above but is approved by the prescribed
authority.

13. any other fund established for charitable purposes which may be notified by
Central Government ; or

14. any trust or institution set up wholly for religious purposes or purpose which
may be notified by the Central Government.

The above exemption shall not be available for the profits and gains of any
business which is carried on, on behalf of or by any fund or institution referred
in points (iv) and (v) above or to the profits or gains of any business undertaking
held under trust for the purposes of any fund or institution referred in
points (iv) and (v) above.  This  amendment  has  come  into  effect  from
assessment year 1984-85.

In case annual receipts of such an institution exceeds ‘ 1 crore in a previous

year, it has to file an application upto 30th September in the succeeding financial
year.

Under Section 10(23C) income of institutions specified above shall be exempt

from income tax. In certain cases, approvals are required to be taken from
prescribed authority in the prescribed manner to became eligible for claiming
exemption.

xxviii. Income of Mutual Fund [Section 10(23D)]

Any income of such Mutual Fund set up by other public sector bank or a
public financial institution or any fund authorised by Securities & Exchange
Board of India or Reserve Bank of India and subject to such conditions as the
Central Govt. may, by notification in the Official Gazette, specify in this behalf.

80
 ‘Other Public Sector Banks’ means the State Bank of India, all its subsidiary
banks and all other’ nationalised banks. The expression ‘public financial
institution’ shall have the meaning assigned to it in Section 4A of the Companies
Act, 1956.

xxix. Exemption of income of a securitisation trust [Section 1O(23DA)] [w.e.f.

A.Y. 2014-15]

Any income of a securitisation trust from the activity of securitisation shall be

exempt.

xxx. Income of Investor Protection Fund [Section 10(23EA)]

Any income received by an Investor Protection Fund by way of contributions

received from recognised stock exchanges and the members thereof shall be
fully exempted.

From the assesssment year 2007-08 similar exemption has been extended to
Investor Protection Fund set up by Commodity Exchanges also.

xxxi. Income of the Credit Guarantee Trust for Small Industries [Section
10(23EB)]

Such income shall be fully exempted for a period of 5 assessment years

commencing with the assessment year 2002-03 to 2006-07.

xxxii. Exemption of income of investor protection fund of depository [Section

10(23ED)] [w.e.f. A.Y. 2014-15]

Any income, by way of contribution received from a depository, of such Investor

Protection Fund set up in accordance with the regulations made under SEBI
Act, 1992 and the Depositories Act, 1996 by a depository, as the Central
Government may specify, by notification in the Official Gazette.

81
xxxiii. Exemption for Certain Incomes of a Venture Capital Company or
Venture Capital Fund from Certain Specified Business or Industries
[Section 10 (23FB)]

As per this amendment, the exemption will now be available only in respect of
income of a Venture Capital Company or Venture Capital Fund from investment
in a venture capital undertaking engaged in certain specified businesses or
industries.

New definition of “Venture Capital Company”, “Venture Capital Fund”

and “Venture Capital undertaking” [Explanation 1 of section 10 (23FB)]
[w.e.f A.Y. 20 13-14]

1. Meaning of Venture Capital Company. A company  which  has  been

registered before 21-5-2012 under the SEBI Regulations, 1996 (Venture
Capital Fund Regulation) or which has been registered as venture capital fund
being a sub category of category 1 Alternative Investment Fund under the
SEBI Regulation 2012 (Alternative Investment Fund Regulations). The
Company has to satisfy the conditions mentioned in clause (a).

2. Meaning of Venture Capital fund. A trust which has been registered before

21-5-2012 under the Venture Capital Fund Regulations or which has been
registered as venture capital fund being a sub-category of category 1 Alternative
Investment Fund under the Alternative Investment Funds Regulations. The trust
has to satisfy the conditions mentioned in clause (b).

3. Meaning of venture Capital undertaking. As defined under the Venture

Capital Fund Regulation or under the Alternative Investment Funds Regulation.

82
xxxiv. Income of Registered Trade Unions [Section 10(24)]

The following incomes of registered trade unions are exempt from tax :

1. Income from house property.

2. Income from other sources.

The trade union must be a registered one and formed primarily for the purpose
of regulating the relations between workmen and employer or between
workmen and workmen. This benefit shall also be available to an association
of registered trade unions.

xxxv. Income of Provident and Superannuation Funds [Section 10(25)]

(i) Interest on securities which are held by or are the property of any
provident fund to which Provident Funds Act, 1925 applies and any capital
gains of the fund arising from the sale, exchange or transfer of such
securities.

(ii) Any income received by the trustees on behalf of a recognised provident

fund.

(iii) Any income received by the trustees on behalf of an approved

superannuation fund.

xxxvi. Income of Employee’s State Insurance Fund [Section 10 (25A)]

Income of such fund is fully exempted.

xxxvii.Income of Schedule Tribe Members [Section 10(26) and 10(26A)]

Certain types of incomes of the members of Scheduled Tribes living in tribal

areas are exempt from tax. The Scheduled Tribes to which this exemption
applies are defined in Clause (25) of Article 366 of the Constitution, residing
in any areas specified in Part A or Part B of the table appended to paragraph

83
 20 of the Sixth Schedule of the Constitution or in the State of Arunachal
Pradesh, Manipur, Tripura, Mizoram and Nagaland or in the Ladakh region of
the State of Jammu & Kashmir.

The exempted incomes are incomes which accrue or arise to him :

1. from any source in the area, State, or Union Territories aforesaid, or

2. by way of dividend.

This means that if a member of a Schedule Tribe sets up a business at any place
other than mentioned above, profit from such business will be taxable.

xxxviii. Income of Sikkimese individual [Section 10(26AAN] (With

retrospective effect from 1-4-1990)

The following incomes which accures or arises to a Sikkimese individual

shall be exempt from income tax—

1. income from any source in the State of Sikkim; or

2. income by way of dividend or interest on seëurities.

This exemption will not be available to a Sikkimese women who, on or after

1-4-2008 marries a non-Sikkimese individual.

xxxix. Regulating the marketing of agricultural produce [Section 10[26AAB]

Any income of an agricultural produce market committee or board constituted

under any law for the time being in force for the purpose of regulating the
marketing of agricultural produce shall be exempted.

xxxx. Income of a corporation set-up for promoting the interests of Scheduled

Castes, Scheduled Tribes or Backward Classes [Section 1 0(26B)]

84
 Income of such corporation or body, institutions or associations which are
wholly financed by govt. and which have been set-up to promote the interest
of above mentioned communities shall be fully exempted.

xxxxi. Income of a corporation set-up to protect the interests of Minorities

[Section 10(26BB)]

Income of such a corporation is fully exempted.

xxxxii. Any income of a corporation for ex-servicemen [Section 10(26BBB)]

Any income of a corporation established by a Central, State or provincial Act

for the welfare and economic upliftment of ex-servicemen being the citizens
of India shall be fully exempted.

“Ex-serviceman” means a person who has served in any rank, whether as

combatant or noncombatant in the armed forces of the Union or armed forces
of the Indian States before the commencement of Constitution (but excluding
the Assam Rifles. Defence Security Corps, General Reserve Engineering
Force, Lok Sahayak Sena, Jammu and Kashmir Militia and Territorial Army)
for a continuous period of not less than six months after attestation and has
been released, otherwise than by way of dismissal or discharge on account of
misconduct or inefficiency, and in the case of a deceased or incapacitated ex-
servicemen includes his wife, children, father, mother, minor brother, widowed
daughter arid widowed sister, fully dependent upon such ex-serviceman
immediately before his death or incapacitation.

xxxxiii. Income of cooperative society looking after the interests of Scheduled

Castes or Scheduled Tribes or Both [Section 10(27)]

Such income shall be fully exempted provided the membership of such society
consists of only other cooperative societies formed for similar purposes and
the finances of the society are provided by Government and such other
societies.

85
xxxxiv. Any income accruing or arising to Commodity Boards etc. [Section
10(29A)]

Any income accruing to

1. the Coffee Board constituted under section 4 of the Coffee Act, 1942
(7 of 1942), in any previous year relevant to any assessment year
commencing on or after the 1st day of April, 1962 or the previous
year in which such Board was constituted, whichever is later

2.  the Rubber Board constituted under sub-section (1) of section 4 of

the Rubber Board Act, 1947 (24 of 1947), in any previous year relevant
to any assessment yeai commencing on or after the 1st day of April,
1962 or the previous year in which such Board was constituted,
whichever is later

3. the Tea Board established under section 4 of the Tea Act 1953 (29
of 1953), in  any  previous  year  relevant  to  any  assessment  year
commencing on or after the 1st day of April, 1962 or the previous
year in which such Board was constituted, whichever is later

4. the Tobacco Board constituted under the Tobacco Board Act, 1975
(4 of 1975), in any previous year relevant to any assessment year
commencing on or after the 1st day of April, 1975 or the previous
year in which such Board was constituted, whichever is later

5. the Marine Products Export Development Authority established under

section 4 of the Marine Products Export Development Authority Act,
1972 (13 of 1972), in any previous year relevant to any assessment
year commencing on or after the 1st day of April, 1972 or the previous
year in which such Authority was constituted, whichever is later

86
 6. the Agricultural and Processed Food Products Export Development
Authority established under section 4 of the Agricultural and Processed
Food Products Export Development Act, 1985 (2 of 1986), in any
previous year relevant to any assessment year commencing on or after
the 1st day of April, 1985 or the previous year in which such Authority
was constituted, whichever is later

7. the Spices Board constituted under sub-section (1) of section 3 of

the Spices Board Act, 1986 (10 of 986), in any previous year relevant
to any assessment year commencing on or after the 1St day of April,
1986 or the previous year in which such Board was constituted,
whichever is later.

8. the Coir Board established under section 4 of the Coir Industry Act,
1953.

xxxxv. Amount received as subsidy from or through the Tea Board [Section
10(30)]

This exemption is available to assessee carrying on the business of growing

and manufacturing tea in India. The subsidy received by such assessee
from or through the Tea Board under any such scheme for replantation or
replacement of tea bushes or for rejuvenation or consolidation of areas used
for tea cultivation (inserted by Finance Act, 1984) as the Central Government
may notify in the Official Gazette is exempt. For getting this exemption, the
assessee is required to furnish to Assessing Officer, along with his return of
income a certificate from the Tea Board showing the amount of subsidy received
by him during the previous year. The A.O. may allow the assessee such time
as he thinks desirable and the assessee is required to submit the said certificate
within the allowed time.

87
xxxxvi. Amount received as subsidy from or through the concerned Board
[Section 10(31)]

Any amount received as subsidy from or through the concerned Board

for replantation or replacement of Rubber, Coffee, cardamom plants or
plants for growing of such other commodities or for any other scheme so
notified shall be fully exempted.

xxxxvii. Income of child clubbed uls 64 (IA) [Section 10(32)]

In case income of a minor child is clubbed with the income of his parent,
the parent can claim exemption upto actual income of child clubbed or
1,500 whichever is less in respect of each minor child whose income is
included.

xxxxviii. Income from transfer of capital assets of UTI [Section 10(33)]

Any income arising from the transfer of a capital asset, being a unit of the
Unit Scheme, 1964 referred to in Schedule I to the Unit Trust of India
(Transfer of Undertaking and Repeal) Act, 2002 and where the transfer
of such asset takes place on or after the 1St day of April, 2002 shall be
fully exempted.

xxxxix. Income by way of dividend from Indian company [Section 10(34)]

Any income by way of dividends referred to in Section 115-O

xxxxx. Exemption of income to a shareholder on buyback of shares of

unlisted company [Section 10 (34A) [w.e.f. A.Y. 2014-15]

Any income arising to an assessee being a shareholder, on account of

buyback of shares, (not being listed on a recognised stock exchange) by
the company as referred to in section 1 15QA shall be exempt.

88
xxxxxi. Income from units of UTI and other mutual funds [Section 10(35)]

Any income by way of:

1. income received in respect of the units of a Mutual Fund specified

under clause (23D); or

2. income received in respect of the units from the Administrator of

the specified undertaking; or

3. income received in respect of units from the specified company;

shall be fully exempted in the hands of the recepient of such income.

This clause shall not apply to any income arising from transfer of
units of the Administrator of the specified undertaking or of the
specified company or of a mutual fund, as the case may be.

xxxxxii. Exemption of income from securitization trust [Section 10(35A)] [w;e.f

A.Y. 2014-15]

Any income received by any person being an investor of the Securitisation

Trust from such a trust, by way of distributed income referred to in section
11 5TA shall be exempt.

xxxxxiii. Income from sale of shares in certain cases [Section 10(36)]

Any income arising from the transfer of a long-term capital asset, being
an eligible equity share.. in a company purchased on or after the 1st day
of March, 2003 and before the 1st day of March 2004 and held for a
period of twelve months or more.

For the purposes of this clause, “eligible equity shares” means :

1. any equity share in a company being a constituent of BSE-500 Index

of the Stock Exchange. Mumbai as on the 1st of March, 2003 and the

89
 transactions of purchase hind sale of such equity share are entered
into on a recognized stock exchange in India

(ii)     any equity share in a company allotted through a public issue on or
after the 1st. day of March, 2003 and listed in a recognized stock
exchange in India before the 1st day of March, 2004 and the
transaction of sale of such share is entered into on a recognized
stock exchange in India.

xxxxxiv. Capital Gain on compulsory acquisition of urban Agricultural Land

[Section 10(37)]

In the case of an assessee, being an individual or a Hindu individual family,

any income chargeable under the head” Capital gain” arising from the
transfer of agricultural land, shall be exempted, where :

1. Such land is situate in any area referred to in, item (a) or item (b) of
sub-clause (iii) of clause (14) of Section 2

2. Such land, during the period of two years immediately preceding

the date of transfer, was being used for agricultural purposes by
such Hindu undivided family or individual, or a parent of his

3. Such transfer is by way of compulsory acquisition under any law,

or a transfer the consideration for which is determined or approved
by the Central Government or the Reserve Bank of India

4. Such income has arisen from the compensation or consideration

for such transfer received by such assesses on or after the 1st day
of April, 2004.

It may be noted in this connection that exemption is available only if compulsory

acquisition has taken place on or after 1-4-2004. Exemption is also available if
acquisition has taken place before 1-4-2004 but compensation has been received
on or after 1-4-2004.

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For the purposes of this clause, the expression, compensation or consideration”
includes the compensation or consideration enhanced or further enhanced by any
court, tribunal or other authority.

xxxxxv. Long Term Capital Gain on transfer of shares and securities

covered under Security Transaction Tax (STT) [Section 10(38)]

Any income arising from the transfer of a long-term capital asset, being securities,
i.e. shares of a company or units of an equity oriented fund and the transaction
of sale of such securities is entered into in a recognised stock exchange in India on or
after 1-10-2004 shall be fully exempted.

But the income by way of long-term capital gain of a company shall be taken into
account in computing the book profit and income-tax payable under section 11 5JB.

xxxxxvi. Income from international Sporting event [Section 10(39)]

Any specified income (which is from such international event and which is notified by
the Central Govt.) of specified persons from any international event held in India shall
be fully exempted if

1. such event is approved by the international body regulating the international

sport relating to such event

2. it has participation by more than two countries ; and

3. is notified by the Central Govt. in this regard.

xxxxxvii. Income received as grant by a subsidiary company [Section 10(40)]

Any income of a subsidiary company received as grant or otherwise from its holding
company which is engaged in the business of generation, transmission or distribution
of power if such amount is received as for settlement of dues in connection with
revival of existing business of power generation.

91
xxxxxviii. 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.

xxxxxix. Income of a body or authority set up by two countries [Section 10(42)]

Any specified income arising to a body or authority which—

1. 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;

2. is established or constituted or appointed not for the purposes of profit;

3. is notified by the Central Government in the Official Gazette for the

purposes of this clause shall be fully exempted.

Explanation.  For the purposes of this clause “specified income” means the income,
of the nature and to the extent, arising to the body or authority
referred to in this clause, which the Central Government may notify
in this behalf.

xxxxxx. Reverse Mortgage [Sec. 10(43)]

Any amount received by an individual as a loan, either in lump-sum or in

installment in a transaction of reverse mortgage referred in clause (xvi) of
Section 47 shall be exempted.

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xxxxxxi. New Pension System Trust [Sec. 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.

xxxxxxii. 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.

xxxxxxiii. 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 :

1. 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;

2. is not engaged in commercial activity; and

3. 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.

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xxxxxxiv. 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.

xxxxxxv. 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

1. Such Income is in pursuant to an agreement or an arrangement

entered into by the Central Govt. or approved by the Central Govt.;

2. having regard to the national interest, the foreign company and the
agreement or arrangement are notified by the Central Govt. in this
behalf; and

3. the foreign company is not engaged in any activity, other than reciept
of such income, in India.

xxxxxxvi. Exemption of income of National Financial Holdings Company

[Section 10(49)] [w.e.f. A.Y. 2014-15]

Any income of the National Financial Holdings Company, being a

company set up by the Central Government, shall be exempt.
1.10 SUMMARY

In India Income tax is governed by the Income tax Act 1961. It was first came into
force on 1-4-1962. Income tax Act is used for determination of taxable income, tax
liability and also provides procedure for assessment, appeal, penalties and prosecutions.
Every year Finance Act bring amendment to this Act. Income Tax Act Contain 298 sections
and XIV Schedules.

94
 Income Tax is charge on total income earned by every person during the relevant
previous year. Before this Act, the Indian Income-tax Act, 1922 was in force. The
procedural matters with regard to income-tax are governed by the Income-tax Rules,
1962, its earlier counterpart being the Income-tax Rules, 1922. One must understand
the basic concept important for the charge of Income tax i.e assessment year, previous
year, income, exempted income etc.

1.11 GLOSSARY

Income: No precise definition of the word ‘Income’ is available under the

Income-tax Act, 1961. 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.

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.

95
1.12 SELF ASSESSMENT QUESTIONS

1. Write a short note on i) Assessment year ii) Previous year iii) Residential
status

___________________________________________________________

___________________________________________________________

___________________________________________________________

2. Define income under sec 2(24) of the Income Tax Act 1961.

___________________________________________________________

___________________________________________________________

___________________________________________________________

3. DISTINGUISH BETWEEN

i. Capital Receipt and Revenue Receipt

ii. Capital expenses and Revenue Expenses

iii. Capital losses and Revenue Losses

___________________________________________________________

___________________________________________________________

___________________________________________________________

4. Explain exempted incomes.

___________________________________________________________

___________________________________________________________

___________________________________________________________

96
5. ‘Every assessee is a person, but every person need not be an assessee’.
Critically examine the statement with reference to the relevant definitions
under the provisions of the Income Tax Act, 1951.

___________________________________________________________

___________________________________________________________

___________________________________________________________

6. “Income tax is a tax on income and not a tax on every item of money
received.” Explain this statement with reference to capital and revenue
receipts.

___________________________________________________________

___________________________________________________________

___________________________________________________________

7. What are important points to be borne in mind while determining the

residential status of an individual?

___________________________________________________________

___________________________________________________________

___________________________________________________________

1.13 SUGGESTED READINGS

1. Bare Act : Income Tax Act, 1961 & Income Tax Rules, 1962.

2. Girish Ahuja and Ravi Gupta : Systematic Approach to Income-tax and Sales-tax;
Bharat Law House, New Delhi.

3. Sampath Iyengars : Law of Income Tax, 11th Edition; Bharat Law House Pvt. Ltd.,
T-1/95, Mangolpuri Industrial Area, Phase I, New Delhi-110 083.

4. Dr. V.K. Singhania : Students Guide to Income-tax; Taxmann Publications Pvt.

Ltd., New Delhi.

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C. NO. : BCG -302 UNIT - II
SEMESTER -III LESSON 4-6
SALARY

STRUCTURE

2.1 Introduction

2.2 Objectives

2.3 Provident fund

2.4 Allowances

2.5 Perquisities

2.6 Profits in lieu salary

2.7 Income from salary

2.8 Summary

2.9 Glossary

2.10 Self assessment questions

2.11 Suggested readings

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2.1 INTRODUCTION

The taxability of income of a person depends on the chargeability of such

income under the Income tax Act 1961. The total income of an assessee (subject
to statutory exemptions) is chargeable under Section 4(1). The scope of the
total income, which varies with the residential status, is defined in Section
5. Section 15 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. All income received as salary under Employer –
Employee relationship is taxed under this head.On due or receipt basis, whichever
arises earlier. Employers must withhold tax compulsarily (subject to section 192),
if income exceeds minimum exemption limit, as tax deducted at source (TDS),
and provide their employees Form 16 which shows the total amount of tax
deducted from his net income.

2.2 OBJECTIVES

 To enable the students with basic and practical understanding about the various
components that form the part of total ‘Salary’ eligible for tax purpose

 To acquaint the students with the understanding of various deductions available

out the gross salary

 To impart the practical knowledge about the computation of Income from Salary

Definition of word ‘ salary’ [ section 17 (1)]

According to section 17 (1) salary includes the following amounts received by

an employee from his employer, during the previous year

(i) Wages

99
 (ii) Any annuity or pension (Family pension received by heirs of an employee
is taxable under income from other sources)

(iii) Any gratuity

(iv) Any fees, commission, perquisities or profits in lieu of or in addition to any

salary or wages

(v) Any advance of salary

(vi) Any payment received by an employee in respect of any period of leave

not availed of by him

(vii) The annual accretion to the balance at the credit of an employee

participating in a recognized provident fund to the extent to which it is
chargeable to tax under rule 6 of part A of 4 th schedule ;

(viii) The aggregate of all sums that are comprised in the transferred balance
as referred to in sub rule ( 2) of rule 11 of part A of the 4th schedule ,
of an employee participating in a recognized provident fund, to the
extent to which it is chargeable to tax, under sub- rule (4) there, i.e.,
taxable portion of transferred balance from URPF to RPF

(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 80 CCD.

Characteristics of salary

1. Relationship of employer and employee: For a payment to fall under the

head salaries the relationship of employer and employee must exist between
payee and the receiver of the salary. The employer may be government, a
local authority, a company or any other public body or an association or HUF
or even an individual . Every kind of payment to every kind of servant, public
or private, however, high or low placed he may be, is a covered under the

100
 provisions of this act. Even the remuneration payable to an employee of a
foreign covered under the provisions of this act. Even servant is an employee,
but an agent may or may not be employee. Govt falls within this section. A
detailing agent of a selling concern is its employee whereas the person holding
an agency to sell the goods of such a concern will not be employee. The
relationship of master and servant is the only test to establish the relationship
of employer and employee. A director of a company, though holding an office,
is not an employee unless it is so provided in the independent contract, or the
articles of association of the company provide for such a relationship.

2. Nature of employer: An employer may be an individual i.e., sole proprietor,

partnership firm, limited liability , partnership firm, HUF, company , local
authority , AOP/BOI Or any other artificial judicial person.

3. Salary from more than one employer: Any amount of salary received or due
from one or more than one employer/ source shall be taxable under this head.
Such situation may arise when an employee is working with two employers
simultaneously or has worked with one employer and later on serves with
another employer after leaving services with first employer, salary from both
the employers shall be taxable under this head.

4. Salary from present, past or Prospective employer: Salary received or

due from present , past or future employer is also taxable under this head
.

5. Tax free salary: Sometimes, the employer allows an employee to draw tax
free salary e.g., the employer pays full salary to the employee and also pays
tax on this directly to the department. The empoyee’s assessment is to be
made not on the amount of salary he is drawing but on gross amount i.e,
salary drawn plus the tax paid by the employer.

6. Receipts from persons other than employer: Perquisities or benefits or

any other remuneration received from persons other than the employer would

101
 be taxable not under the head ‘ salaries’ but under the head ‘ income from
other sources’ even if they accurate to the employee by reason of his
employment or while he was discharging his normal duties e.g., amount
received by a professor of a college for acting as an examiner in a university.

7. Salary or pension received by UNO employees: It is fully exempted as per

circular NO. 293 dt. 10-2- 81.

8. Salary received by a teacher/ researcher from a SAARC member state:

Exempted upt 2 years.

9. Salary as partner: Any Salary, commission or remuneration received by a

working partner from a firm/ LLP shall not be taxable under the head ‘ salaries’.
It is taxable under the head profits and gains in the hands of partner to the
extent deduction is allowed to him.

10. Payment made after cessation of employment: Payment made by an

employer to his employee after the cessation of his employment is also taxable
under the head salries. It is taxable under this head because it represents
remuneration for services rendered in the past.

2.3 PROVIDENT FUND

To encourage savings for the social security of employees, the Government has set
up various kinds of provident funds. The employee contributes a fixed percentage of his
salary towards these funds and in many cases employer also contributes. The whole
contribution along with interest is credited to employee’s account. He will get payment out
of this fund at the time of retirement and at some

other important occasions. If the employee dies, his heirs will get the full payment.

Provident funds are of four kinds:

1. Statutory provident fund or the fund to which the act of 1925 applies (S.P.F0

2. Recognised provident fund ( RPF)

102
3. Unrecognised provident fund ( URPF)

4. Public provident fund (PPF)

Treatment of provident funds

Under Income Tax Act, 1961, contribution by employer and employee to the
provident fund account enjoys certain tax benefits and some are taxable as well.
Provident Funds provides a compulsory contribution for the future of an employee
after his retirement or for his dependents in case of his early death. In such fund
employee and employer contribute equally. There are many provident funds in which
the contribution can beFund
particulars
made and the taxability of the same depends upon the type of
governed by PF Recognised provident Unrecognised URPF
Act, 1925 for govt. fund for Private sector for private sector
and semi- govt.
employees
Employees own Fully qualifies for Fully qualifies for Does not qualify for
contribution deduction u/s 80 C deduction u/s 80 C deduction u/s 80 C
Employer’s Fully exempted It is deemed to be Ignore for the time
contribution received by employee. being.
Excess of employer’s
contribution to RPF
over 12 % of salary is
taxable.
Interest credited to Fully exempted Exempted upto rate Ignore for the time
accumulated balance prescribed by the being
government. Excess
over this amount is
taxable i.e., 9.5 %
Refund/Transferred Fully exempted Exempted in all cases In case of refund
balance of URPF to except when taxable portion is
RPF employee leaves added in salary
service of his own income of the year [
accord before entitled to relief u/s 89
completion of 5 years (1)]. In case
continuous service. In transferred balance
such case the amount amount which would
which has not been have been taxable had
charged to tax is the fund been RPF is
added in salary added in salary.

103
provident fund in which the contribution is made. Basically, there are three types of
Provident Fund Schemes provided by the employer, namely Statutory provident fund,
Recognised provident fund and Unrecognised provident fund. However, an employee
may also contribute to the Public Provident Fund scheme. Contribution is made in the
Provident Fund for the employee’s welfare by the employee and the employer. The
deduction is available under section 80C.

Provident fund is a kind of security fund in which the employees contribute a

part of their salary and the employer also contributes on behalf of their employees.
Section 10(11) and 10(12) of the Income Tax Act defines the exemption on the amount
added to the provident fund. Additionally, the amount allowed as a deduction on
contributing to the provident fund is dealt in section 80C of the Income Tax Act.

a) Statutory provident fund- Statutory Provident Fund (SPF) is meant for

employees of Government or Universities or Educational Institutes affiliated
to University. This fund is set up under the provisions of the Provident Fund
Act, 1925. This fund is maintained by Government and Semi-Government
organizations, local authorities, railways universities and recognized educational
institutions. Generally, this fund is maintained by Government or Semi-
Government Departments like Railways, Reserve Bank of India, Colleges,
Universities, local bodies, insurance companies, etc. The employer’s
contribution towards the employee’s statutory provident fund and the amount
of interest earned on the accumulated balance to the employee’s credit balance
are not to be included in the income of employee and so it is ignored.

When the employee retires or leaves the service and receives any amount from
the accumulated balance to his credit in the statutory provident fund, the amount
so received will not be included in employee’s total income [Section 10(11)]
being exempted income.The employee’s own contribution will qualify for
deduction u/s 80C.

Taxability as per the Income Tax Act, 1961:

104
 • Employer’s contribution to provident fund – Exempt

• Deduction under Section 80C – Available for employee’s own contribution

• Interest credited to provident fund – Exempt

• Payment at retirement or termination of service – Exempt

b) Recognized Provident Fund – Recognised Provident Fund (RPF) is recognised

by Commissioner of Income Tax under EPF and Miscellaneous Provision
Act, 1952. According to this Act, any organisation, which employs 20 or
more persons, is obligated to register under the Act and start a PF scheme for
the employees in the organisation. As the name suggests, it is a fund to which
the Commissioner of Income-tax has given the recognition as required under
the Income-tax Act. Generally this fund is maintained by industrial undertakings,
business houses, banks, etc.The employer’s contribution over and above 12%
of employee’s salary, will be included in employee’s salary income for tax
purposes. The employee’s contribution towards this fund will fully qualify for
deduction u/s 80C. Interest on Provident Fund credit balance upto prescribed
rate (9.5%) is exempted, but interest credited over and above such rate is
deemed to be employee’s salary income and is included in salary income of
that previous year.

Taxability as per the Income Tax Act, 1961:

• Employer’s contribution to provident fund – Exempt up to 12% of salary

– excess is taxable

• Deduction under Section 80C – Available for employee’s own contribution

• Interest credited to provident fund – Exempt up to notified rate (now

9.5%)

 Payment at retirement – Taxable except in following under mentioned

circumstances –

105
 The employee should have rendered continious service with his employer for 5
years or more; or if not so, he should have been terminated due to ill health,
due to discontinuation of employer’s business or by reason beyond his control.
If he has found another employment, the balance due to him should have been
transferred to his account in the recognised provident fund of the new employer.

c) Unrecognized Provident Fund - Unrecognized provident fund is the provident

fund which is neither a statutory provident fund nor a recognised fund. This
scheme is started by an employer which is not approved by the Commissioner
of Income Tax. It is the provident fund which is not recognised by the
Commissioner of Income-tax. The employee and the employer both contribute
towards this fund. The employee’s contribution is added in this salary (if ‘net
salary’ or ‘salary after deduction of’ is given) and he will not be allowed any
deduction u/s 80C regarding this contribution while computing the total income
of the employee. The employer’s contribution and interest on the accumulated
credit balance of the fund are not to be included in employee’s salary income
from year to year. A payment received out of this fund is taxable so far it
represents the employer’s contribution and interest thereon. The employee is
entitled to relief under section 89(1). [The employee’s contribution is ignored
because it was taxed when it was contributed]. Interest on the employee’s
own contribution will be taxable as ‘Income from Other Sources’ and
not as salary income. When the unrecognised provident fund is recognised
for the first time, the credit balance in the employee’s unrecognised
provident fund is transferred to the recognised provident fund account.
This balance is known as transferred balance. In such case fund will be
treated as RPF from the day of its inception and exemption will be allowed
in same manner. Only excess of amount transferred to RPF over exempted,
amount shall form taxable portion of transferred balance.

Taxability as per the Income Tax Act, 1961:

• Employer’s contribution to provident fund – Exempt from tax

106
 • Deduction under Section 80C – Not Available

• Interest credited to provident fund – Exempt

• Payment at retirement – Employee’s own contribution is exempt but interest

on his own contribution is taxable

• Payment at retirement – Employee’s own contribution is exempt but interest

on his own contribution is taxable under the head “income from
other sources”. Payment received towards the employer’s contribution
and interest thereon is taxable under the head “Salaries”

Public Provident Fund (PPF) under Public Provident Fund Act, 1968 is another
system of contributing to the provident fund. Self-employed people can also
take part in this scheme. A minimum contributing limit of Rs. 500 per annum
and a maximum of Rs. 150000 per annum are set.

(d) Public Provident Fund. So far all these funds were for the salaried people.
On July 1, 1968 a new fund known as public provident fund was started so
that self-employed people may also enjoy the benefit of deduction u/s 80C.
Self-employed people are doctors, lawyers, accountants, actors, traders,
pensioners. This fund can suit all types of pockets and its working is also very
simple. The interested people can open their account in State Bank of India
and its subsidiaries. The subscription can be between ‘ 500 and ‘ 1,00,000
in one year. At one time one can deposit in multiples of 50 and in one month
only one deposit is possible and in the year minimum subscription should
be ‘ 500 and the maximum ‘ 1,00,000. Full withdrawal is possible after 15
years but in case of death of the subscriber full repayment will be made to the
legal heir of nominee. Partial withdrawal and loans are also possible. The
subscription towards this type of fund is eligible for rebate in the similar manner,
as in the case of statutory provident fund. Interest credited in this account is
fully exempted. Balances in the public provident fund are not liable to
attachment by any court.

107
(e) Superannuation fund: Superannuation Fund is a retirement benefit given to
employees by the Company. Normally the Company has a link with agencies
like LIC Superannuation Fund, where their contributions are paid. The
Company pays 15% of basic wages as superannuation contribution. There is
no contribution from the employee. Interest on contributions is credited to
the members account. Normally the rate of interest is equivalent to the PF
interest rate. On attaining the retirement age, the member is eligible to take
25% of the balance available in his/her account as a tax free benefit. The
balance 75% is put in a annuity fund, and the agency (LIC) will pay the member
a monthly/quarterly/periodic annuity returns depending on the option exercised
by the member. This payment received regularly is taxable. In the case of
resignation of the employee, the employee has the option to transfer his amount
to the new employer. If the new employer does not have a Superannuation
scheme, then the employee can withdraw the amount in the account, subject
to deduction of tax and approval of IT department, or retain the amount in the
Fund, till the superannuation age. Normally Companies do not extend the
Superannuation benefits to all employeesbut only to a specific category of
employees employees – like for example Level for example Level-1 of
Managers onwards.

Table 2.1:

Tax Treatment of Provident Fund

1. Taxable Portion = Employer’s contribution + Interest on this part. Interest on

employee’s own contribution is taxable under the head Income from Other Sources.

2.4 ALLOWANCES [ SECTION 17 (3)]

The term allowance has been derived from the word ‘to allow’. The word ‘Allowance’
means “any amount or sum allowed regularly”. These allowances are given to an employee
to meet some specific type of loss or expenditure of the employee or to help him to meet
certain type of expenses. For example, house rent allowance is given to help the employee

108
to pay house rent or to get a house on rent. An allowance is the financial benefit given to
the employee by the employer over and above the regular salary. These benefits are
provided to cover expenses which may be incurred to facilitate the discharge of service
for example Conveyance Allowance is paid to foot expenses incurred for commuting to
workplace. Some of these allowances are taxable under the head Salaries. A few of them
again could be partly taxable and few others are non-taxable or fully exempt from taxes.
These are divided into three categories on the basis of their tax treatment. These are:

Tax Treatment of Allowances for Computing Salary Income

Fund governed by P.F. Recognised Provident Unrecognised P.F.
Particulars Act 1925(S.P.F.) (For Fund (R.P.F.) (For (U.R.P.F.) (For
Govt. or Semi Govt. Private Sector) Private Sector)
Employees)
Employee’s
Fully qualifies for Fully qualifies for Does not qualify for
1. own deduction u/s 80C deduction u/s 80C deduction u/s 80C
contribution,

It is deemed to be
Employer’s received by employee.
Excess of Employer’s Ignore for the time
2. contribution Fully exempted
contribution to R.P.F. being.
over 12% of salary is
taxable

.
Exempted upto rate
Interest
. prescribed by the Ignore for the time
3. credited to
Fully exempted Government. Excess being.
Accumulated
over this amount is
Balance,
taxable (i.e. 9.5%)
In case of refund
Exempted in all cases taxable portion’ is
except when employee added in salary
leaves service of his income of the year
Refund/Trans
own accord before [Entitled to relief
ferred
completion of 5 years’ u/s 89(1)1. In case
4. Balance of Fully exempted
continuous service. In transferred balance
U.R.P.F. to
such case the amount amount which
R.P.F.
which has not been would have been
charged to tax is added taxable had the fund
in salary been RPF is added
in salary

109
A B C
Fully Exempted Fully Taxable Partially Taxable
1. Foreign Allowance 1. Dearness Allowance 1. House Rent Allowance
only in case of Government Additional Dearness
employees posted outside allowance 2. Entertainment Allowance
India High Cost of living for Govt. employees (see
allowance details)
2. House rent allowance given
to judges of High Court and 2. City Compensatory 3. Allowances covered u/s
Supreme Allowance 10(14)
Court. (i) Helper Allowance
3. Capital Compensatory
3. Sumptuary Allowance Allowance (ii) Uniform Allowance
given to judges of High Court (iii) Academic Allowance
and Supreme Court 4. Lunch Allowance
(iv) Conveyance Allowance

110
4. Allowances from U.N.O 5. Tif? n Allowance (v) Travelling Allowance
(vi) Any special allowance in
5. Allowance to teacher or 6. Marriage Allowance
the nature of Composite Hill
professor from SAARC
7. Family Allowance compensatory Allowance or
member States
High Altitud e Allowance or
8. Deputation Allowance Uncongenial Climate
6. Allowance to member of
Allowance or Snow Bound
Union Public Service
9. Wardenship Allowance Area Allowance or Avalanche
Commission
Allowance
10. Non practicing Allowance (vii) Any Special
Compensatory Allowance in
11. Project Allowance
the nature of border area or
remote area or dif? cult area or
12. Overtime Allowance
disturbed area Allowance
13. Fixed Medical Allowance (viii) Transport
Allowance (ix) Tribal Area
14. Entertainment Allowance Allowance
for non -
(x) Running Allowance given
Govt. employees
to employees of transport
15. Water and Electricity sector,
Allowance (xi) Children Education
Allowance
16. Servant Allowance (xii) Hostel Expenditure Allowance

17. Holiday Trip Allowance (xiii) Compensatory Field Area

Allowance

(xiv) Compensatory Modified Field

Area Allowance

(xv) Special Allowance in the

nature of counter insurgency
allowance given to the members of
armed forces operating in areas
away from their permanent
locations for a period of more than
30 days.

111
Taxable Allowances:

1. Dearness Allowance: Dearness Allowance (DA) is an allowance paid to

employees as a cost of living adjustment allowance paid to the employees
to cope with inflation. DA paid to employees is fully taxable with salary.
The IT Act mandates that tax liability for DA along with salary must be
declared in the filed return.

Sometimes , it is mentioned that:

D.A enters into pay for service benefits or

D.A enters into pay for retirement benefits or

D.A is given under the terms of employment or

Dearness pay

2. Entertainment Allowance: Employees are allowed the lowest of the

declared amount —one-fifth of basic salary, actual amount received as
allowance or Rs. 5,000. This is an allowance provided to employees to
reimburse the expenses incurred on the hospitality of customers. However,
Government employees can claim exemption in the manner provided in
section 16 (ii). All other employees have to pay tax on it.

Under section 16 (ii) a deduction is allowed to those persons who

receive this allowance. Till assessment year 2001-02, this deduction was
admissible both to government as well as the private sector employees.
But with effect from assessment year 2003-04, this deduction is admissible
only to government employees for an amount equal to least of followings:

(a) Statutory limit Rs 5,000

(b) 1/5 th of basic salary only or

(c) Actual entertainment allowance received during the previous year.

112
3. Overtime Allowance: Employers may provide an overtime allowance to
employees working over and above the regular work hours. This is called
overtime and any allowance received for this is fully taxable.

4. City Compensatory Allowance: City Compensatory Allowance is paid

to employees in an urban centre which may be highly expensive and to
cope with the inflated living costs in the cities. This allowance is fully
taxable.

5. Interim Allowance: When an employer gives any Interim Allowance in

lieu of final allowance, this becomes fully taxable.

6. Project Allowance: When an employer provides an allowance to

employees to meet project expenses, this is also fully taxable.

7. Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals

Allowance to the employees. This is fully taxable.

8. Cash Allowance: When the employer provides a cash allowance like

marriage allowance, bereavement allowance or holiday allowance, it
becomes fully taxable.

9. Non-Practicing Allowance: When physicians are attached to Clinical

Centers of the various Laboratories/Institutes, any non-practicing
allowance paid to them become fully taxable.

10. Warden Allowance: When an employer pays an allowance to an

employee working as a Warden i.e. Keeper in an educational Institute,
the allowance received is fully taxable.

11. Servant Allowance: When an employer pays an employee to engage

services of a servant, such an allowance is taxable.

113
Partly Taxable:

1. House Rent Allowance (HRA):   Sometimes the employer does not

provide rent free accommodation but instead makes a provision to pay
some amount in cash , so that the employee may be compensated to some
extent as far as rent is concerned. The amount of cash paid is known as
house rent allowance. Out of the total HRA received , an amount equal to
the minimum of the following three items is exempted from tax u/s 10
(13A) read with rule 2A and balance , if any, will be added in the salary
of the employee for tax purpose. Tax exemption under section 10 (13A)
can be claimed on whichever amount is lower of the three:

- HRA as per actuals received by the employee

- Rent paid as per actuals less 10% of Basic Salary

- In Metros i.e Delhi, Mumbai, Chennai or Kolkata, as much as

50% of basic salary or else 40% of it if the accommodation is in a
non-metro.

Any amount of House Rent Allowance received after claiming such

deduction is taxable.

Meaning of salary in case of HRA = basic + DA( enters)/DP +

Commission on turnover

Cases when HRA is fully taxable: If employee is living in his own house
or

If employee is living in a house for which he is not paying any rent or If

rent paid does not exceed 10 % of salary HRA fully exempted: In case
HRA is received by judges of high court under high court judges (
condition of service) act, 1954 and supreme court judges under supreme
court judges ( conditions of service ) act 1958 shall be exempted.

114
 The exemption of HRA u/s 10 (13A) read with rule 2A shall be available
even if employee is living in a rented houses at a place other than the
place of his employment.

Mr. Hari is employed at Amritsar on a salary of Rs 30,000 p.m. The employer is

paying HRA of Rs 8,000 p.m but the actual rent paid by him ( employee) is Rs
12,000 p.m. he is also getting 2 % commission on turnover achieved by him and
turnover is Rs 50 lakh.compute his gross salary
Computation of gross salary of Mr. Hari
Salary @ 30,000 p.m 360,000
Commission @ 2 % of turnover 100,000
House rent allowance received 96,000
Less :exempted u/s 10 (13A) 96,000 NIL
Taxable HRA NIL
Gross salary 460,000
Calculation of HRA
- Actual HRA received 96,000
- Excess of Rent paid over 10 % of salary (144,000 – 46,000) 98,000
- 40 % of salary ( Amritsar) 184,000

Fixed Medical Allowance: This  is  an  allowance  paid  by  the  employer
when the employee or any of his family members fall sick for the cost incurred
on their treatment. If any such reimbursement exceeds Rs.15,000 per year; the
same is taxable.

Special Allowance: A special allowance paid to employees is covered

under section 14(i) and does not fall within the purview of a perquisite. It is
essentially for performance of a duty is partly taxable.

115
 Non-Taxable or Exempted:

Some of the allowances, usually paid to Government servants, judges

and employees of UNO are not taxable. These are:

· Allowances paid to Govt. servants abroad: When  servants  of

Government of India are paid an allowance while serving abroad, such
income is fully exempt from taxes.

· Sumptuary allowances: Sumptuary allowances paid to judges of HC

and SC are not taxed.

· Allowance paid by UNO: Allowances received by employees of UNO

are fully exempt from tax.

· Compensatory allowance paid to judges: When a judge receives

compensatory allowance, it is not taxable.

Here’s a glance at allowances that are either taxable, partly taxable or non-
taxable given under Income Tax Act., 1961:

116
Table 2.2

ALLOWANCES AVAILABLE TO DIFFERENT CATEGORIES OF TAX

PAYERS
S. Sec. Particulars Limit of Exemption
N exemption available to
o
A. Under the head Salaries
1. 10(7) Any allowance or perquisite paid or allowed by Entire Individual-
Government to its employees posted outside Amount Salaried
India Employee
(being a citizen
of India)
2. - Allowances to Judges of High Court/Supreme Exempt, Individual -
Court subject to Judges of High
certain Court/Supreme
conditions. Court
3. - Compensatory allowance received by a Judge Fully Exempt Individual -
under article 222(2) of the Constitution Judges
4. - Salary and allowances received by a teacher Fully Exempt Individual -
/professor from SAARC member state (Subject Teacher from
to certain conditions). SAARC
member State
5. 10(45 Following allowances and perquisites given to Fully Exempt Individual -
) serving Chairman/Member of UPSC is exempt Chairman/Me
from tax: mber of UPSC
a) Value of rent free official residence
b) Value of conveyance facilities including
transport allowance
c) Sumptuary allowance
d) Leave travel concession
6. 10(45 Allowances to Retired Chairman/Members of Exempt Individual -
) UPSC subject to Retired
maximum of Chairman/Me
Rs. 14,000 per mber of UPSC
month for
defraying the
services of an
orderly and
for meeting
expenses

117
 for meeting
expenses
incurred
towards
secretarial
assistant on
contract basis.
7. - Allowances paid by the UNO to its employees Fully Exempt Individual -
Individual - Employees of
Government UNO
employee
8. 16 (ii) Entertainment Allowance received by the Least of the Individual -
Government employees (Fully taxable in case of following is Government
other employees) exempt from Employee
tax:
a) Rs 5,000
b) 1/5th of
salary
(excluding
any
allowance,
benefits or
other
perquisite)
c) Actual
entertainment
allowance
received
9. 10(13 House Rent Allowance (Sec. 10(13A) & Rule Least of the Individual -
A) 2A) following is Salaried
exempt: employee
a) Actual
HRA
Received
b) 40% of
Salary (50%,
if house
situated in
Mumbai,
Calcutta,
Delhi or
Madras)

118
 c) Rent paid
minus 10% of
salary
* Salary=
Basic + DA
(if part of
retirement
benefit) +
Turnover
based
Commission
Note:
i. Fully
Taxable, if
HRA is
received by an
employee
who is living
in his own
house or if he
does not pay
any rent
ii. It is
mandatory for
employee to
report PAN of
the landlord to
the employer if
rent paid is
more than Rs.
1,00,000 [Cir-
cular No. 08 /
2013 dated
10th October,
2013].
10 10(14 Children Education Allowance Up to Rs. 100 Individual -
. ) per month per Salaried
child up to a employee
maximum of
2 children is
119
 maximum of
2 children is
exempt
11 10(14 Hostel Expenditure Allowance Up to Rs. 300 Individual -
. ) per month per Salaried
child up to a employee
maximum of
2 children is
exempt
12 10(14 Transport Allowance is granted to an employee Individual -
. ) to meet expenditure on commuting between Salaried
place of residence and place of duty (Rs. 3,200 employee

With effect from AY 2019-20, the per

month for
exemption regarding Transport blind, deaf,
Allownce has been discontinued dumb and
for normal employees. handicapped
employees) is
exempt
13 Sec. Allowance granted to an employee working in Amount of Individual -
. 10(14 any t ransport business to meet his personal exemption Salaried
) expenditure during his duty performed in the shall be lower employee
course of running of such transport from one of following:
place to another place provided employee is not a) 70% of
in receipt of daily allowance. such
allowance; or
b) Rs. 10,000
per month.
14 10(14 Conveyance Allowance granted to meet the Exempt to the Individual -
. ) expenditure on conveyance in performance of extent of Salaried
duties of an office expenditure employee
incurred for
official
purposes
15 10(14 Any Allowance to meet the cost of travel on tour Exempt to the Individual -
. ) or on transfer extent of Salaried
expenditure employee
incurred for
official
purposes
16 10(14 Daily Allowance to meet the ordinary daily Exempt to the Individual -
. ) charges incurred by an employee on account of extent of Salaried
absence from his normal place of duty expenditure employee

120
 incurred for
official
purposes
17 10(14 Helper/Assistant Allowance Exempt to the Individual -
. ) extent of Salaried
expenditure employee
incurred for
official
purposes
1. 10(14 Research Allowance granted for encouraging the Exempt to the Individual -
) academic research and other professional extent of Salaried
pursuits expenditure employee
incurred for
official
purposes
2. 10(14 Uniform Allowance Exempt to the Individual -
) extent of Salaried
expenditure employee
incurred for
official
purposes
3. Sec. Special compensatory Allowance (Hilly Areas) Amount Individual -
10(14 (Subject to certain conditions and locations) exempt from Salaried
) tax varies employee
from Rs. 300
per month to
Rs. 7,000 per
month.
4. Sec. Border area allowance Remote Locality or Amount Individual -
10(14 allowance or Disturbed Area allowance or exempt from Salaried
) read Difficult Area Allowance (Subject to certain tax varies employee
with conditions and locations) from Rs. 200
Rule per month to
2BB Rs. 1,300 per
month.
5. Sec. Tribal area allowance in (a) Madhya Pradesh (b) Up to Rs. 200 Individual -
10(14 Tamil Nadu (c) Uttar Pradesh (d) Karnataka (e) per month Salaried
) Tripura (f) Assam (g) West Bengal (h) Bihar (i) employee
Orissa
6. Sec. Compensatory Field Area Allowance. If this Up to Rs. Individual -

121
6. Sec. Compensatory Field Area Allowance. If this Up to Rs. Individual -
10(14 exemption is taken, employee cannot claim any 2,600 per Salaried
) exemption in respect of border area allowance month employee
(Subject to certain conditions and locations)
7. Sec. Compensatory Modified Area Allowance. If this Up to Rs. Individual -
10(14 exemption is taken, employee cannot claim any 1,000 per Salaried
) exemption in respect of border area allowance month employee
(Subject to certain conditions and locations)
8. Sec. Counter Insurgency Allowance if this exemption Up to Rs. Individual -
10(14 is taken, employee cannot claim any exemption 3,900 per Members of
) in respect of border area allowance (Subject to month Armed Forces
certain conditions and locations)
9. Sec. Underground Allowance is granted to employees Up to Rs. 800 Individual -
10(14 working in uncongenial, unnatural climate in per month Salaried
) underground mines employee
10 Sec. High Altitude Allowance is granted to armed a) Up to Rs. Individual -
. 10(14 forces operating in high altitude areas (Subject to 1,060 per Members of
) certain conditions and locations) month (for Armed Forces
altitude of
9,000 to
15,000 feet)
b) Up to Rs.
1,600 per
month (for
altitude above
15,000 feet)
11 Sec. Highly active field area allowance is granted to Up to Rs. Individual -
. 10(14 members of armed forces (Subject to certain 4,200 per Members of
) conditions and locations) month Armed Forces
12 Sec. Island Duty Allowance is granted to members of Up to Rs. Individual -
. 10(14 armed forces in Andaman and Nicobar and 3,250 per Members of
) Lakshadweep group of Island (Subject to certain month Armed Forces
conditions and locations)
13 - City Compensatory Allowance Fully Taxable Individual -
. Salaried
employee
14 - Fixed Medical Allowance Fully Taxable Individual -
. Salaried
employee
15 - Tiffin/Lunch/Dinner/Refreshment Allowance Fully Taxable Individual -
. Salaried
employee
16 - Servant Allowance Fully Taxable Individual -
122
16 - Servant Allowance Fully Taxable Individual -
. Salaried
employee
17 - Dearness Allowance Fully Taxable Individual -
. Salaried
employee
18 - Project Allowance Fully Taxable Individual -
. Salaried
employee
19 - Overtime Allowance Fully Taxable Individual -
. Salaried
employee
20 - Telephone Allowance Fully Taxable Individual -
. Salaried
employee
21 - Holiday Allowance Fully Taxable Individual -
. Salaried
employee
22 - Any Other Cash Allowance Fully Taxable Individual -
. Salaried
employee
B. Under the head Income from house property
1. First Municipal tax levied Amount actually paid during the relevant All
proviso by local authority and previous year assessee
to section borne by owner in
23(1) respect of house
property
2. 24(a) Standard Deduction 30% of the Annual Value (Gross Annual All
Value- Municipal Taxes) assessee
3. 24(b) Interest incurred on Interest on borrowed capital is allowed as All
borrowed capital deduction from income from house assessee
property as under:
a) Up to Rs. 2,00,000 (if amount is
borrowed for construction/acquisition of
self-occupied house property on or after
01-04-1999), subject to certain other
conditions
b) Up to Rs. 30,000 (if amount is
borrowed for reconstruction, repair or
renewals of self-occupied house property)
c) Actual amount of interest paid or

123
 payable during the year (in case of let-out
property)
d) Pre-construction period interest is
allowed in 5 annual equal installments
(Subject to certain conditions)
4. Section 25A Standard Deduction 30% of arrears of rent or unrealized rent. All
from arrears of rent or assessee
unrealized rent
received subsequently

C. Under the head Profits and gains from business or profession

1. 32( Depreciation in respect of: Depreciation shall be Taxpayer engaged in
1) i) Tangible assets (buildings, allowed at prescribed business of generation
machinery, plant or furniture); percentage on actual or generation and
ii) Intangible Assets (know-how, cost of an asset. distribution of power.
patents, copyrights, trademarks, However, if asset is Note:
licenses, franchises, or any other acquired and put to use Taxpayer engaged in
business or commercial rights of for less than 180 days business of generation
similar nature) during the previous or generation and
year, the deduction distribution of power
shall be restricted to have the option to
50% of depreciation claim depreciation
computed above. either on straight line
basis or written down
value basis.
2. 32( Depreciation in respect of: Depreciation shall be All assessees
1) i) Tangible assets (buildings, allowed at prescribed
machinery, plant or furniture); percentage on written
ii) Intangible Assets (know-how, down value of each
patents, copyrights, trademarks, block of asset (as per
licenses, franchises, or any other WDV method).
business or commercial rights of However, if asset is
similar nature) acquired and put to use
for less than 180 days
during the previous
year, the deduction
shall be restricted to
50% of depreciation
computed above.

124
3. 32( Additional depreciation on new Additional depreciation All taxpayers engaged
1)(ii plant and machinery (other than to be allowed at 20 % in:
a) ships, aircraft, office appliances, of actual cost of new
second hand plant or machinery, plant and machinery. a) manufacture or
etc.) shall be allowed subject to However, if an asset is production of any
certain conditions. acquired and put to use article or thing; or
for less than 180 days b) generation or
during the previous transmission or
year, 50% of additional distribution of power
depreciation shall be (if taxpayer not
allowed in year of claiming depreciation
acquisition and balance on basis of straight
50% would be allowed line method)
in the next year.
4. Pro Additional depreciation on new Additional depreciation All taxpayers which
viso plant and machinery (other than to be allowed at 35 % set up an undertaking
to S ships, aircraft, vehicle, office of actual cost of new or enterprise for
ecti appliances, second hand plant or plant and machinery. production or
on machinery, etc.) shall be allowed However, if an asset is manufacture of any
32( subject to certain conditions. acquired and put to use article or thing in any
1)(ii for less than one 180 notified backward
a) days during the area in the state of
previous year, 50% of Andhra Pradesh,
additional depreciation Bihar, Telangana or
shall be allowed in year West Bengal.
of acquisition and Note:
balance 50% in next 1. Manufacturing unit
year. should be set-up on or
after April 1, 2015.
2. New plant and
machinery should be
acquired and installed
on or after April 1,
2015 but before April
1, 2020.

125
5. 32A Deduction under section 32AC is 15% of actual cost of Company engaged in
C available if actual cost of new new asset acquired and business or manuf-
plant and machinery acquired and installed acturing or production
installed by a manufacturing of any article or thing
company after 31-3-2013 but
before 1-4-2015 exceeds Rs.
25/100 Crores, as the case may
be.(Subject to certain conditions)
6. 32A Investment allowance for Investment allowance All taxpayers who
D investment in new plant and to be allowed at 15 % acquire new plant and
machinery (other than ships, of actual cost of new machinery for
aircraft, vehicle, office appliances, plant and machinery in purpose of setting-up
second hand plant or machinery, the year in which such manufacturing unit in
etc.) if manufacturing unit is set- asset is installed. notified backward
up in notified backward area in the areas in the State of
State of Andhra Pradesh, Bihar, Andhra Pradesh,
Telangana or West Bengal Bihar, Telangana or
(subject to certain conditions) West Bengal
Note:
1) New asset should
be acquired and
installed on or after
April 1, 2015 but
before April 1, 2020.
2) Manufacturing unit
should be set-up on or
after April 1, 2015.
3) Deduction shall be
allowed under Section
32AD in addition to
deduction under
Section 32AC if
assessee fulfils the
specified conditions.

126
7. 33A Amount deposited in Deduction shall be All assessee engaged
B Tea/Coffee/Rubber Development lower of following: in business of
Account by assessee engaged in a) Amount deposited in growing and
business of growing and account with National manufacturing
manufacturing tea/Coffee/Rubber Bank for Agricultural tea/Coffee/Rubber
in India and Rural
Development
(NABARD) or in
Deposit Account of
Tea Board, Coffee
Board or Rubber Board
in accordance with
approved scheme; or
b) 40% of profits from
such business before
making any deduction
under section 33AB
and before adjusting
any brought forward
loss.
(Subject to certain
conditions)
8. 33A Amount deposited in Special Deduction shall be All assessee engaged
BA Account with SBI/Site Restoration lower of following: in business of
Account by assessee carrying on a) Amount deposited in prospecting for, or
business of prospecting for, or Special Account with extraction or
extraction or production of, SBI/Site Restoration production of,
petroleum or natural gas or both in Account; or petroleum or natural
India b) 20% of profits from gas or both in India
such business before
making any deduction
under section 33ABA
and before adjusting
any brought forward
loss.
(Subject to certain
conditions)

127
9. 35( Revenue expenditure on scientific Entire amount incurred All assessee
1)(i) research pertaining to business of on scientific research is
assessee is allowed as deduction allowed as deduction.
(Subject to certain conditions). Expenditure on
scientific research
within 3 years before
commencement of
business (in the nature
of purchase of
materials and salary of
employees other than
perquisite) is allowed
as deduction in the year
of commencement of
business to the extent
certified by prescribed
authority.
10 35( Contribution to approved research 175% of sum paid to All assessee
. 1)(ii association, university, college or such association,
) other institution to be used for university, college, or
scientific research shall be allowed other institution is
as deduction (Subject to certain allowed as deduction.
conditions)
150% of sum paid to
such association,
university, college or
other institution is
allowed as deduction
(applicable from AY
2018-19)

Note:- From the AY

beginning on or after
the 1st day of April,
2021, the deduction
shall be equal to the
sum so paid.

128
11 35( Contribution to an approved 125% of sum paid to All assessee
. 1)(ii company registered in India to be the company is allowed
a) used for the purpose of scientific as deduction
research is allowed as deduction Entire sum paid to the
(Subject to certain conditions) company is allowed as
deduction (applicable
from AY 2018-19)
12 35( Contribution to approved research 125% of sum paid to All assessee
. 1)(ii association, university, college or such association,
i) other institution with objects of university, college, or
undertaking statistical research or other institution is
research in social sciences shall be allowed as deduction
allowed as deduction (Subject to Entire sum paid to such
certain conditions) association, university,
college or other
institution is allowed as
deduction (applicable
from AY 2018-19)
13 35( Capital expenditure incurred Entire capital All assessee
. 2) during the year on scientific expenditure incurred
research relating to the business on scientific research is
carried on by the assessee is allowed as deduction.
allowed as deduction (Subject to Capital expenditure
certain conditions) incurred within 3 years
before commencement
of business is allowed
as deduction in the year
of commencement of
business.
Note:
i. Capital expenditure
excludes land and any
interest in land;
ii. No depreciation
shall be allowed on
such assets.

129
14 35( Payment to a National Laboratory 200% of payment is All assessee
. 2AA or University or an Indian Institute allowed as deduction
) of Technology or a specified (Subject to certain
person is allowed as deduction. conditions).
The payment should be made with 150% of payment is
the specified direction that the sum allowed as deduction
shall be used in a scientific (applicable from AY
research undertaken under an 2018-19)
approved programme. Note:- From the AY
beginning on or after
the 1st day of April,
2021, the deduction
shall be equal to the
sum so paid.
15 35( Any expenditure incurred by a 200% of expenditure Company engaged in
. 2AB company on scientific research so incurred shall be as business of bio-
) (including capital expenditure deduction. technology or in any
other than on land and building) 150% of expenditure business of
on in-house scientific research and so incurred shall be manufacturing or
development facilities as approved allowed as deduction production of eligible
by the prescribed authorities shall (applicable from AY articles or things
be allowed as deduction (Subject 2018-19)
to certain conditions). Note:
Expenditure on scientific research i. Deduction shall be
in relation to Drug and allowed if company
Pharmaceuticals shall include enters into an
expenses incurred on clinical agreement with the
trials, obtaining approvals from prescribed authority for
authorities and for filing an co-operation in such
application for patent. research and
development and fulfils
conditions with regard
to maintenance of
accounts and audit
thereof and furnishing
of reports in such
manner as may be
prescribed.
ii. From the AY
beginning on or after
the 1st day of April,
2021, the deduction
shall be equal to the
expenditure so
incurred.

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16 35A Deduction in respect of 150% of capital All assessee
. D expenditure on specified expenditure incurred
businesses, as under: for the purpose of
a) Setting up and operating a cold business is allowed as
chain facility deduction provided the
b) Setting up and operating a specified business has
warehousing facility for storage of commenced its
agricultural produce operation on or after
c) Building and operating, 01-04-2012.
anywhere in India, a hospital with 100% of capital
at least 100 beds for patients expenditure will be
d) Developing and building a allowed to be deducted
housing project under a notified from the assessment
scheme for affordable housing year 2018-19 onwards
e) Production of fertilizer in India Note: If such specified
(Subject to certain conditions) businesses commence
operations on or before
31-03-2012 but after
prescribed dates,
deduction shall be
limited to 100% of
capital expenditure.
17 35A Deduction in respect of 100% of capital All assessee
. D expenditure on specified expenditure incurred Note: Such deduction
businesses, as under: for the purpose of is available to Indian
a) Laying and operating a cross- business is allowed as company in case of
country natural gas or crude or deduction provided following business,
petroleum oil pipeline network for specified businesses namely;-
distribution, including storage commence operations (i) Business of laying
facilities being an integral part of on or after the and operating a cross-
such network; prescribed dates. country natural gas or
b) Building and operating, crude or petroleum oil
anywhere in India, a hotel of two- pipeline network
star or above category; (ii) Developing or
c) Developing and building a maintaining and
housing project under a scheme for operating or
slum redevelopment or developing,
rehabilitation maintaining and
d) Setting up and operating an operating a new
inland container depot or a infrastructure facility.
container freight station
e) Bee-keeping and production of

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 container freight station
e) Bee-keeping and production of
honey and beeswax
f) Setting up and operating a
warehousing facility for storage of
sugar
g) Laying and operating a slurry
pipeline for the transportation of
iron ore
h) Setting up and operating a semi-
conductor wafer fabrication
manufacturing unit
i) Developing or maintaining and
operating or developing ,
maintaining and operating a new
infrastructure facility
(Subject to certain conditions)
18 35C Expenditure (not being cost of 150% of the All assessee
. CC land/building) incurred on notified expenditure (Subject to
agricultural extension project for certain conditions)
the purpose of training, educating Note:- 100% deduction
and guiding the farmers shall be shall be allowed from
allowed as deduction, provided the the 1st day of April,
expenditure to be incurred is 2021
expected to be more than Rs. 25
lakhs (Subject to certain
conditions).
19 35C Expenditure incurred by a 150% of the Company engaged in
. CD company (not being expenditure in expenditure (Subject to manufacturing of any
the nature of cost of any land or certain conditions) article or providing
building) on any notified skill Note: (i) No deduction specified services
development project is allowed as shall be allowed to a
deduction (Subject to certain company engaged in
conditions). manufacturing
alcoholic spirits or
tobacco products.
(ii) 100% deduction
shall be allowed for the
AY beginning on or
after 1st day of April,
2021

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Thus, allowances are given in cash along with salary by the employer. Allowance
is a fixed monetary amount paid by the employer to the employees for meeting
particular expense, whether personal or for the performance of duties. Allowances
are generally taxable and are included in the gross salary unless a specific
exemption has been provided in respect of any such allowance. Specific
exemption in respect of allowances are provided mostly under the two heads:

 House Rent Allowance

 Prescribed Special Allowances.

2.5 PEREQUISITIES [ SECTION 17 (2)]

U/s 17(1) ‘Salary’ includes the value of any perquisite allowed or amenity
provided by employer to employee. The world ‘perquisite’ has not been defined
under Income-tax Act 1961. Perquisite simply means any casual emolument
attached to an office. Perquisites may be given in a variety of forms. If the
perquisite does not accrue to the employee it will not be taxable.  They may be
received in cash or in kind. For income-tax purposes it is immaterial whether
the perquisites are paid voluntarily or under a contractual obligation.

Value of perquisites is chargeable to tax under the head salary only if

these perks are received by an employee from his or her employer and employer
may be a present, past or prospective one. In case any perk has been received
from a person other than employer, then also the value of perk is taxable but
either under the head ‘Business or Profession’ or ‘Income from other Sources’.

Any benefit derived by an employee from his employer whether received

in lump-sum or is being received every month and if such benefit comes out of
employment agreement and it is providing a personal benefit to the employee or
his family members, value of such a benefit is chargeable to tax under the head
salary.

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 “Perquisite” may be defined as any casual emolument or benefit attached
to an office or position in addition to salary or wages. In essence, these are usually
non-cash benefits given by an employer to employees in addition to cash salary
or wages. However, they may include cases where the employer reimburses
expenses or pays for obligations incurred by the employee. Perquisites are also
referred to as fringe benefits. Perquisites are benefits received by a person as a
result of his/her official position and are over and above the salary or wages.
These fringe benefits or perquisites clan be taxable or non-taxable depending
upon their nature. A lot of benefits and perks which come in addition to an
individual’s salary are grouped under fringe benefits or perks. These components
are taxed separately from the employer’s account so as to maintain transparency
and accountability.

Depending upon the tax that is levied on perquisites these can be classified
into the following three heads.

 Taxable Perquisites:

Some of the perquisites that are taxable in nat ure are rent-free
accommodation, supply of gas, water and electricity, professional tax of
employee, reimbursement of medical expense, and salary of servant
employed by employee. Taxable perquisites also include any other fringe
benefit provided by employer to employee like free meals, gifts exceeding
Rs.5000, club and gym facilities etc.

 Exempted Perquisites:

Non-taxable fringe benefits include travel allowance, computer or laptop

provided by the company for official use, refreshment provided by
employer during office hours, provision of medical aid, use of health
club, sports club, telephone lines, interest free salary loan provided by
employer to employees, contribution to provident fund by employers,
free medical and recreational facilities and so on.

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 Perquisites taxable only by employees:

This type of perquisites include car owned by company but sued by

employee, education facility for children, service of domestic servant
etc.

Broadly, “perquisite” is defined in the section 17(2) of the Income-tax

Act as including:

1) Value of rent-free or concessional rent accommodation provided by the

employer.

2) Value of any benefit/amenity granted free or at concessional rate to

specified employees etc.

3) Any sum paid by employer in respect of an obligation, which was actually

payable by the assessee.

4) Any sum paid by the employer for assurance on life of the employee or to
effect a contract for an annuity.

5) Value of any other fringe benefit as may be prescribed.

According to the Finance Act, 2005, perquisites are taxed by the

government in case these perks are provided or are deemed to be provided to
employees by employers. The rate at which perquisites are taxed is 30% of the
value of fringe benefits.

The perquisite tax is paid by the employer who furnishes these fringe
benefits to employees. It can be a company, a firm, an association of persons or
body of individuals.

Some of the most popular perquisites provided by a major percentage of

companies to their employees are accommodation, cars and stock options. Let
us see how these perks are taxed and how is this tax calculated ?

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Company provided Accommodation:

A lot of employees are provided leased accommodation option by their

employers. This cost of accommodation is taxable and is a perk offered by the
company. The tax will however depend upon whether the place is rented, owned
or leased by the employer.

The tax levied in the above listed cases is as depicted in the table below.
Type of Accommodation Population of the city Percentage of
tax
Owned by employer Greater than 25 lakhs 15%
Between 10-25 lakhs 10%
Below 10 lakhs 7%
Leased by the employer Actual rental paid or 15% whichever NA
is lower
Accommodation provided in a hotel 24%
or guest house for more than 15 days

C. Furnished Accommodation in a Hotel:  The value of perquisite shall be

determined on the basis of lower of the following

1 24% of salary paid or payable in respect of period during which the

accommodation is provided; or

2. Actual charges paid or payable by the employer to such hotel, for the period
during which such accommodation is provided as reduced by any rent actually
paid or payable by the employee.

However, nothing in C shall be taxable if following two conditions are

satisfied:

1. The hotel accommodation is provided for a total period not exceeding in

aggregate 15 days in a previous year, and

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2 Such accommodation is provided on an employee‘s transfer from one place
to another place.

It may be clarified that while services provided as an integral part of the

accommodation, need not be valued separately as perquisite, any other
services over and above that for which the employer makes payment or
reimburses the employee shall be valued as a perquisite as per the residual
clause. In other words, composite tariff for accommodation will be valued
as per the Rules and any other charges for other facilities provided by the
hotel will be separately valued under the residual clause.

D. However, the value of any accommodation provided to an employee working

at a mining site or an on-shore oil exploration site or a project execution site
or a dam site or a power generation site or an off-shore site will not be
treated as a perquisite if:

i) such accommodation is located in a ―remote area  or

ii)   where  it  is  not  located  in  a  ―remote  area  , the accommodation is of a
temporary nature having plinth area of not more than 800 square feet and
should not be located within 8 kilometers of the local limits of any
municipality or cantonment board.

A project execution site here means a site of project up to the stage of its
commissioning. A “remote area” means an area located at least 40 kilometers
away from a town having a population not exceeding 20,000 as per the latest
published all-India census.

Cars provided by Employer:

The tax on this type of perquisite depends upon two factors. First is whether
the car is owned or leased by the employer and second whether the car is being used
only for official purposes or partly for personal purposes and partly for official use.
In both the cases, the tax calculated will be different. The table below depicts the
corresponding rate of taxation in the various cases that may arise.

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Type of Car Rate of tax
Small cars below 1.6 litres Rs.1800 per month
Big cars above 1.6 litres Rs.2400 per month

Stock options made available to Employees by Employer:

Stocks or shares are the most common way of rewarding employees. Most
companies offer stock options to employees. The fair market value less the amount
recovered from employee is the amount of tax that is applicable on shares as
perquisites. The difference between FMV and selling price of the share is the net
capital gain in the hands of the employees and that is the amount that is taxable.

III Personal attendants etc. [Rule 3(3)]: The value of free service of all
personal attendants including a sweeper, gardener and a watchman is to
be taken at actual cost to the employer. Where the attendant is provided
at the residence of the employee, full cost will be taxed as perquisite in
the hands of the employee irrespective of the degree of personal service
rendered to him. Any amount paid by the employee for such facilities or
services shall be reduced from the above amount.

IV Gas, electricity & water for household consumption [Rule 3(4)]: The

value of perquisite in the nature of gas, electricity and water shall be the
amount paid by the employer to the agency supplying the gas, electric
energy or water. Where the supply is made from the employer’s own
resources, the manufacturing cost per unit incurred by the employer would
be taken for the valuation of perquisite. Any amount paid by the employee
for such facilities or services shall be reduced from the perquisite value.

V Free or concessional education [Rule 3(5)]: Perquisite on account of

free or concessional education for any member of the employee‘s
household shall be determined as the sum equal to the amount of
expenditure incurred by the employer in that behalf. However, where
such educational institution itself is maintained and owned by the

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 employer or where such free educational facilities are provided in any
institution by reason of his being in employment of that employer, the
value of the perquisite to the employee shall be determined with reference
to the cost of such education in a similar institution in or near the locality
if the cost of such education or such benefit per child exceeds Rs.1000/-
p.m. The value of perquisite shall be reduced by the amount, if any, paid
or recovered from the employee.

VI Carriage of Passenger Goods [Rule 3(6)]: The value of any benefit or

amenity resulting from the provision by an employer, who is engaged in
the carriage of passengers or goods, to any employee or to any member
of his household for personal or private journey free of cost or at
concessional fare, in any conveyance owned, leased or made available
by any other arrangement by such employer for the purpose of transport
of passengers or goods shall be taken to be the value at which such benefit
or amenity is offered by such employer to the public as reduced by the
amount, if any, paid by or recovered from the employee for such benefit
or amenity. This will not apply to the employees of any airline or the
railways.

VII Interest free or concessional loans [Rule 3(7)(i)]: It is common practice,

part icularly in financial inst it ut io ns, to pro vide int erest free o r
concessional loans to employees or any member of his household. The
value of perquisite arising from such loans would be the excess of interest
payable at prescribed interest rate over interest, if any, actually paid by
the employee or any member of his household. The prescribed interest
rate would be the rate charged per annum by the State Bank of India
as on the 1st day of the relevant financial year in respect of loans of
same type and for the same purpose advanced by it to the general
public. Perquisite value would be calculated on the basis of the maximum
outstanding monthly balance method. For valuing perquisites under this
rule, any other method of calculation and adjustment otherwise adopted
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 by the employer shall not be relevant. However, small loans up to Rs.
20,000/- in the aggregate are exempt.

Loans for medical treatment of diseases specified in Rule 3A are also

exempt, provided the amount of loan for medical reimbursement is not
reimbursed under any medical insurance scheme. Where any medical
insurance reimbursement is received, the perquisite value at the prescribed
rate shall be charged from the date of reimbursement on the amount
reimbursed, but not repaid against the outstanding loan taken specifically
for this purpose.

VIII Perquisite on account of travelling, touring, accommodation and any

other expenses paid for or reimbursed by the employer for any
holiday availed [Rule 3(7)(ii)]:

The value of perquisite on account of travelling, touring, accommodation

and any other expenses paid for or reimbursed by the employer for any
holiday availed of by the employee or any member of his household,
other than leave travel concession (as per section 10(5) ), shall be the
amount of the expenditure incurred by the employer in that behalf.
However, any amount recovered from or paid by the employee shall be
reduce from the perquisite value so determined.

Where such facility is maintained by the employer, and is not available

uniformly to all employees, the value of benefit shall be taken to be the
value at which such facilities are offered by other agencies to the public.
If a holiday facility is maintained by the employer and is available
uniformly to all employees, the value of such benefit would be exempt.

Where the employee is on official tour and the expenses are incurred in
respect of any member of his household accompanying him, the amount
of expenditure with respect to the member of the household shall be a
perquisite.

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IX Value of Subsidized / Free food / non-alcoholic beverages provided
by employer to an employee[Rule 3(7)(iii)]:
Value of taxable perquisite is calculated as under:
Expenditure incurred by the employer on the value of food / non-alcoholic beverages XXX
including paid vouchers which are not transferable and usable only at eating joints‘
Less: Fixed value of a sum of Rs. 50/- per meal XXX
Less: Amount recovered from the employee XXX XXX
Balance amount is the taxable as perquisites on the value of food provided to the XXX
employees

Note: Exemption is given in following situations

1. Tea/snacks provided in working hours.

2. Food & non-alcoholic beverages provided in working hours in remote area or in an offshore
installation.

X Membership fees and Annual Fees [Rule 3(7)(v)]: Any membership

fees and annual fees incurred by the employee (or any member of his
household), which is charged to a credit card (including any add-on card)
provided by the employer, or otherwise, paid for or reimbursed by the
employer is taxable on the following basis:

Amount of expenditure incurred by the employer XXX

Less : Expenditure on use for official purposes XXX
Less : Amount, if any, recovered from the employee XXX XXX
Amount taxable as perquisite XXX
However if the amount is incurred wholly and exclusively for official purposes it will be exempt
if the following conditions are fulfilled
i) Complete details of such expense, including date and nature of expenditure is maintained by
the employer.
ii) Employer gives a certificate that the same was incurred wholly and exclusively for official
purpose.

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XI Club Expenditure [Rule 3(7)(vi)]:

Any annual or periodical fee for Club facility and any expenditure in a club
by the employee (or any member of his household), which is paid or
reimbursed by the employer is taxable on the following basis:
Amount of expenditure incurred by the employer XXX
Less : Expenditure on use for official purposes XXX
Less : Amount, if any, recovered from the employee XXX XXX
Amount taxable as perquisite XXX

However if the amount is incurred wholly and exclusively for official purposes
it will be exempt if the following conditions are fulfilled

i) Complete details of such expense, including date and nature of expenditure

and its business expediency is maintained by the employer.

ii) Employer gives a certificate that the same was incurred wholly and
exclusively for official purpose.

Note: 1) Health club, sport facilities etc. provided uniformly to all classes of
employee by the employer at the employer‘s premises and expenditure
incurred on them are exempt.

2) The initial one-time deposits or fees for corporate or institutional

membership, where benefit does not remain with a particular employee
after cessation of employment are exempt. Initial fees / deposits, in such
case, is not included.

XII  Use of assets [Rule 3(7)(vii)]: It is common practice for a movable asset
(other than those referred in other sub rules of rule 3) owned by the
employer to be used by the employee or any member of his household.
This perquisite is to be charged at the rate of 10% of the original cost of
the asset as reduced by any charges recovered from the employee for

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 such use. However, the use of Computers and Laptops would not give
rise to any perquisite.

XIII Transfer of assets [Rule 3(7)(viii)]: Often an employee or member of

his household benefits from the transfer of movable asset (not being shares
or securities) at no cost or at a cost less than its market value from the
employer. The difference between the original cost of the movable asset
(not being shares or securities) and the sum, if any, paid by the employee,
shall be taken as the value of perquisite. In case of a movable asset, which
has already been put to use, the original cost shall be reduced by a sum of
10% of such original cost for every completed year of use of the asset.
Owing to a higher degree of obsolescence, in case of computers and
electronic gadgets, however, the value of perquisite shall be worked out
by reducing 50% of the actual cost by the reducing balance method for
each completed year of use. Electronic gadgets in this case means data
storage and handling devices like computer, digital diaries and printers.
They do not include household appliance (i.e. white goods) like washing
machines, microwave ovens, mixers, hot plates, ovens etc. Similarly, in
case of cars, the value of perquisite shall be worked out by reducing 20%
of its actual cost by the reducing balance method for each completed
year of use.

XIV Gifts [Rule 3(7)(iv)]: The value of any gift or vouchers or token in lieu
of which such gift may be received, given by the employer to the employee
or member of his household, is taxable as perquisite. However gift, etc
less than Rs. 5,000 in aggregate per annum would be exempt.

XV Medical Reimbursement by the employer exceeding Rs. 15,000/- p.a.

u/s 17(2) is to be taken as perquisite. It is pertinent to mention that benefits
specifically exempt u/s 10(13A), 10(5), 10(14), 17 etc. of the Act would
continue to be exempt. These include benefits like house rent allowance;
leave travel concession, travel expense/allowance on tour and transfer,

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 daily allowance to meet tour expenses as prescribed, medical facilities
subject to conditions.

Perquisites are taxed as per their nature and the provision of the same by
the employer. However, with the economy growing rapidly and
globalization seeping in, most employers have gone global and are
adapting to international ways of taking care of employees. Perquisites
paid as part of perks is an important component for employees and has
been segregated as a separate taxable component by the government of
India.
From the following information , explain the treatment of the following medical
benefits received by Mr. X an employee having monthly salary of Rs 60,000
(1) Received Rs 500 p.m as medical allowance
(2) During the year, Mr. X Met with an accident and his employer made
the following payments (a) directly paid to a private specialists
doctor’s hospital Rs 20,000 (b) reimbursement medical expenditure
incurred by employee in an approved hospital Rs 50,000 for a non-
notified disease
(3) Employee was referred to a specialist doctor in London and
employer met the following expenses in this connection
(i) Expenses on travelling of the employee and one attendant
Rs 60,000
(ii) Operation fees of the specialist doctor Rs 50,000
(iii) Expenses on medicines and hospitalization Rs 80,000
Reserve bank of India permitted an expenditure of Rs 100,000
(4) During the year, employer also reimbursed the following expenses
incurred on the medical treatment of members of employee’s family.
(5) During the year employer got the medical t

2.6 PROFITS IN LIEU or IN ADDITION OF SALARY

Any payment received or due in addition to your salary or wages from

your employer is called profit in lieu of salary.

Receipts treated as Profit in Lieu of Salary [ Section 17(3)]

Following types of receipts are treated as profits in lieu of salary :

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1. The amount of any compensation due to or received by an employee from
his employer or former employer at or in connection with the termination
of his employment.

2. Any amount of compensation due to or received by an employee from his

employer or former employer at or in connection with the modification
of the terms and conditions of contract of employment.

3. Any amount of payment due to or received by an employee from his or

her employer or former employer except the following types of payment
to the extent these payments are exempt u/s 10.

o Amount of payment received as gratuity exempted u/s 10(10).

o Amount of payment received as commuted pension exempted u/s

10(10A).

o Amount o f payment received as retirement compensation

exempted u/s 10(10B).

o Amount of payment of house rent allowance received and

exempted u/s 10(13A).

o Amount of payment received from an approved superannuation

Fund u/s 10(13).

o Amount of payment received from a recognized provided fund to

the extent it is exempt u/s 10(12).

o Amount of payment received from statutory provident fund or

Public Provident Fund Section u/s 10(11).

4. Any amount of payment received by employee from unrecognized

provident fund or any such other fund to the extent to which it does not
consist of employee’s own contribution and interest thereon.

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5. Any amount of sum received under a Keyman insurance policy including
the sum allocated by way of bonus on such policy.

6. Any amount due or received whether in lump sum or otherwise by any

employee from any person before his joining any employment with that
person; or after cessation of his/her employment with that person

Payment exempted u/s 10

Leave travel concession/ Assistance [ section 10 (5)]

Through this provision employees are encouraged to travel anywhere in

India alongwith their families and to help the employee the travel expenses are
given by employer which are exempt u/s 10 (5). The other details of this
exemption are as follows:

1. If journey is performed by air: Least of following two amounts shall

be exempted (i) economy class air face of the national carrier by the
shortest route .(ii) actual amount spent by the employee on journey by air
travel.

2. If journey is performed by rail: Least of the following two amounts

shall be exempted. (i) air conditioned first class rail fare by the shortest
route(ii) actual amount spent by the employee on journey by rail.

3. If place of origin of journey and place of destination is connected by

rail. In case , place of origin of journey and place of destination of journey
of employee is connected with rail but the employee uses any other mode
of transportation , the amount of exemption allowed shall be least of the
following 2 amounts (i) air conditioned first class rail fare by the shortest
route. (ii) actual amount spent by the employee on that journey.

4. If place of origin of journey and place of destination is not connected

by rail: (a) if a recognized public transport system is operating. Least of
the following 2 amounts shall be exempted – (i) first class or deluxe
146
 class fare by the shortest route. (ii) actual amount spent by the employee
on that journey. (b) if a recognized public transport system does not
exist. Least of the following 2 months shall be exempted- (i) air
conditioned first class rail fare by the shortest route. (ii) actual amount
spent by the employee on this journey.

Perquisities and allowance paid by Government to its employees

posted outside India [ Section 10 (7) ]

Any perquisite or allowance given by government to its employees who

are working outside India is fully exempt from tax. As such motor car provided
to employee working outside India or house rent allowance or any other such
benefit is fully exempted from tax.

Death cum retirement gratuity [ section 10 (10)]

Gratuity refers to a lumpsum payment made by an employer to his

employee at the time of leaving the job in appreciation of his long and loyal
services. Earlier, it was a voluntary payment but now it has become a sort of
compulsory payment for government employees, semi- government employees,
and all other employees working in banks, universities, colleges, factories,etc,.

I In this case, gratuity is received by employee on leaving job either due to

voluntary retirement or due to statutory retirement on reaching the super
annuation age. Gratuity so received by employee is taxable under the
head ‘ salary’ after claiming exemption as provided under section 10
(10).

II Gratuity can also be received by the legal heirs of an ex- employee in the
event of death of such employee. In this case, gratuity received shall be
taxable in the hands of legal heirs under the head ‘income from other
sources’ . In this case also, an exemption will be granted as provided
under section 10 (10)

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 Government employee: Any death cum retirement gratuity received by
government employee is fully taxable. Meaning of government employee means
employees of central government, state government, local authority, working in
defence, statutory corporations.

Non- Government employee: Non Government employee receiving

gratuity under payment of gratuity act, 1972 [ POGA]. Certain non- government
employees have been covered under the payment of gratuity act, 1972 by the
central government and thus non government employees are required to pay
gratuity as per the provisions of gratuity act, 1972 . An employee who works in
such organizations can be called as covered employee. Any gratuity received by
such an employee shall be exempted to the extent of lest of the following 3
amounts:

(1) 15 Days salary ( 7 days in case of employees working in seasonal factories)

for each completed year of service or part thereof in excess of six months
on the basis of monthly salary last drawn.

(2) Notified limit Rs 20 lakh - ( Rs 10 lakh for those who retired prior to
march 29, 2018)

(3) Gratuity actually received by the employee and balance shall be taxable.

Taxable gratuity = gratuity received – exempted.

Non Government employee receiving gratuity not covered under

payment of gratuity act. Least of the following 3 amounts shall be exempt:

(1) ½ month salary for every completed year of service on the basis of average
salary drawn during 10 months immediately preceding the month of
retirement.

(2) Maximum notified limit Rs 20 lakh

(3) Gratuity actually received by the employee and balance shall be taxable.

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Taxable gratuity = actual gratuity - exemption

Pension [ monthly and Commuted]

Tax treatment of uncommuted pension: Uncommuted pension refers

to the periodic/ regualre pension ( generally monthly) received by an employee
from ex- employer after retirement and until such an employee dies.

Tax treatment: Fully taxable whether the employee is a government

employee or non- government employee.

Tax treatment of commuted pension: Commuted pension refers to

lumpsum amount received by an employee from his employer in lieu of periodical
pension. When an employee receives such lumpsum amount, it is called
communtation of pension.

It is exempted for all types of government employees.

Meaning of government employee. It includes employees of central

government, state government , local authority, corporation under central state
or provincial act or under the civil pensions rules of the central government,
public sector undertaking, judges of supreme court or high courts of India.

For non – government employees

1 if employees receives gratuity also: This exemption amount shall be

commuted value of one- third of pension which he is normally entitiled
to receive.

2 if employee does not receive gratuity. The exmpted amount shall be

commuted value of one- half of such pension.

Leave encashment [ section 10 (10AA)]

As per the terms of employment, generally, an employee is granted certain

period of leave on yearly basis. Such leave (s) may be casual leaves, medical

149
leaves and privileged leaves or earned leaves. Generally, an employee can
accumulates his medical leaves and privileges leaves and can avail such leaves
in subsequent years as per his necessity. However, in some cases, an employee
can even encash his accumulated privileged/ earned leaves and can get salary for
the said period of leave. Such receipt of salary by an employee from his employer
in lieu of his accumulated leaves is called leave encashment.

Such encashment can be done by an employee either during the service

or at the time of leaving job due to retirement or any other reason. However, in
case of death of an employee, the salary for his / her accumulated leave is given
to his/her legal heirs.

Leave encashment during service: Any encashment of leaves by an

employee during continuance of service is fully taxable for all employees whether
government employees or non-government employees. Such encashment may
either be of current year leaves or of past accumulated leaves. It is taxable as
salary income of the employee for the previous year in which amount is received
by employee.

Leave encashment on leaving job/ retirement :

1. For government employee: Any payment received as leave encashment

at the time of retirement or on leaving job otherwise shall be fully
exempted u/s 10 (10 AA) (i)

2. For non- government employee: Any payment received as leave

encashment at the time of retirement or on leaving job otherwise shall be
exempt upto the least of following amounts u/s 10 (10AA) (ii)

(i) maximum 10 months salary on the basis of average salary drawn

during 10 months immediately preceding his retirement/ leaving
job otherwise.

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 (ii) Salary for approved period of leave standing to his credit at the
time of retirement/ leaving job otherwise.

(iii) Maximum notified limit Rs 3 lakh as specified by the central

government.

(iv) Actual amount received as leave encashment and balance shall be

taxable.

Taxable amount of leave encashment = amount of leave encashment

received – exempted amount out of least of 4 limits.

2.7 INCOME FROM SALARY

(Gross Salary, Deductions from Gross Salary, Income from Salary)

Salary is the remuneration received by or accruing to an individual,

periodically, for service rendered as a result of an express or implied contract.
The actual receipt of salary in the previous year is not material as far as its
taxability is concerned. The existence of employer-employee relationship is the
sine-qua-non for taxing a particular receipt under the head “salaries.” For instance,
the salary received by a partner from his partnership firm carrying on a business
is not chargeable as “Salaries” but as “Profits & Gains from Business or
Profession”. Similarly, salary received by a person as MP or MLA is taxable as “
Income from other sources”, but if a person received salary as Minister of State/
Central Government, the same shall be charged to tax under the head “Salaries”.
Pension received by an assessee from his former employer is taxable as “Salaries”
whereas pension received on his death by members of his family (Family Pension)
is taxed as “Income from other sources”.

For the purpose of Sections 15 and 16 of the Income Tax Act 1961 the
term ‘salary’ includes :

 Wages

 Any annuity or pension

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  Any gratuity

 Any fees, commissions, perquisites or profits in lieu of or in addition to

any salary or wages.

 Any advance of salary

 Any payment received by an employee in respect of any period of leave

not availed by him i.e., encashment of leave salary.

 The annual accretion to the recognized provident fund of a n employee to

the extent provided in the rules. This may take two forms.

a) Employer’s contribution to Provident Fund.

b) Interest credited on the accumulated balance of recognized

provident fund standing to the credit of the employee.

as per rules employer’s contribution to the P F in excess of 12%

of the salary of the employee and the interest credited to the PF
accumulations in excess of 9.5% will be considered as salary.

        Amount  of  the  transferred  balance  of  recognized  provident  fund  to  the
extent to which it is taxable.

        Tax-free  salary:  Sometimes  the  employer deducts  the  tax  at  source  and
pays net salary to the employee. In such cases the individual has to show
the aggregate salary i.e., net salary plus tax paid in his gross total income.

RULES REGARDING SALARY:

Relation between Payer and Payee: The  relation  between  payer  and

payee should be that of employer and employee. In other words for an income to
be taxed under head salaries the relation between payer and payee should be of
employer and employee. Employer may be an Individual, firm, AOP etc and an
employee may be full time or part time employee. If the relation between payer

152
and payee is not that of employer and employee income received cannot be
charged under head Salaries it would be charged under other heads.

Salary and wages: Income tax does not differentiate between salary and
wages.

Salary from more than one source: If an Individual receives salary from
more than one employer during same previous year, salary from each source is
taxable under the head Salaries.

Overtime payment: Any over time payment received by an employee is

added to Gross Salary.

Basis of Charge: As per section 15

 Any salary due from an employer, or former employer in the previous

year, whether paid or not

 Any salary paid or allowed to an employee in the previous year by or on

behalf of an employer though not due or before it becomes due to him

Hence salary is taxable on due or receipt basis whichever is earlier.

Fee and Commission: Any fee or commission paid by employer to his

employee on Net profit or Turnover is added to Gross Salary.

Grade system: Under this system the normal annual increments to be

given to the employee is already fixed. Annual increment is given on the
same date on which employee joins the employment.

Employer employee relation: Income can be charged under head Salaries

only if relation between receiver and giver of payment is of employee
and employer. Employer may be individual, firm, company, AOP, BOI,
Govt., etc.

153
 Income by way of examinership fees received by a professor from the
same university in which he is employed would not be chargeable to tax
under this head but must be taxed as Income from other sources under
Section 56.

 Income by way of remuneration received by a managing director would

be taxable as his salary income whereas the income received by him as
director‘s fees in his capacity as director for attending the meetings of
the Board would be assessable under the head Income from other sources.

 An official liquidator appointed by the Court or by the Central Government

would also become an employee of the Central Government under Section
448 of the Companies Act, 1956 and consequently the remuneration due
to him would also be assessable under the head Salaries.

 Remuneration received by a manager of a company even if he is wrongly

designated as a director or by any other name would be chargeable to tax
under this head regardless of the fact that the amount is payable to him
monthly or is calculated at a certain percentage of the company‘s profits.

 Any money from his employer as part of the terms of employment for not
carrying on any profession, such income must be taxed as salary income.

 Any salary, commission, bonus etc received by partner of a firm will be

charged under head PGBP.

 Salary received by Member of Parliament is to be charged under head

Other sources and not under head Salary.

Gross salary

Gross Salary is the amount paid before deduction of taxes or other

deductions and is inclusive of bonuses, over-time pay, holiday pay, and other
differentials. Gross Salary is the whole amount calculated after adding all the
benefits and allowances without deducting any tax.
154
 So you calculated everything in lump sum then it is called as Gross Salary,
it is aggregation of everything. Gross salary is the sum total of Basic pay +
Dearness allowance + House Rent Allowance + transport allowance + special
allowance + other allowance.

You can invest under the Section 80C to a maximum of Rs.1,50,000. Or

if you are in a higher tax bracket, you can save Rs.45,000 in tax.

Hence GROSS SALARY means :

1. Basic Salary or Wages, Bonus, Pension, Gratuity (beyond exempted limit),

Leave Salary or encashment, Advance Salary, Salary arrears, Fee or
Commission, Remuneration for extra work, Ex-gratia, Award for
excellence etc.

2. Allowances such as House Rent Allowance, Dearness Allowance, City

Compensatory Allowance, Children’s Education Allowance, Conveyance
Allowance, Fixed Medical Allowance and any other Special Allowances.

3. Perquisites - viz., Rent Free Accommodation, Amount spent or paid by

the Employer on behalf of the Employee in respect of Gas, Electricity,
Water Charges, Children’s School Fee, Club Fees, etc.

4. Benefit received in place of Salary which includes Retrenchment

Compensation (Amount given to an employee when his services are no
more required).

5. Pension received from former Employer is taxable as “Salaries”. However,

Family Pension is taxed as income from other sources and is eligible for
deduction up to Rs.15,000 or 33.33% whichever is less u/s 57 (ii a).

However Gross Salary does not include : 

(1) Retirement Gratuity / Death Gratuity u/s 10(10)

(2)  Sumptuary Allowance

155
(3) Medical treatment Reimbursement (with restrictions)

(4) Leave Travel Concession

(5) Uniform Allowance

(6) Leave encashment at retirement u/s 10(10AA)

(7)  Free Meals / Refreshment provided during office hours.

DEDUCTIONS OUT OF GROSS SALARY

i) Entertainment Allowance [Section 16(ii)]:

A deduction is also allowed under section 16(ii) in respect of any

allowance in the nature of an entertainment allowance specifically granted
by an employer to the assessee, who is in receipt of a salary from the
Government, a sum equal to one-fifth of his salary(exclusive of any
allowance, benefit or other perquisite) or five thousand rupees whichever
is less. No deduction on account of entertainment allowance is available
to non-government employees.

ii) Tax on Employment [Section 16(iii)]:

The tax on employment (Professional Tax) within the meaning of article

276(2) of the Constitution of India, leviable by or under any law, shall
also be allowed as a deduction in computing the income under the head
“Salaries”.

It may be clarified that “Standard Deduction” from gross salary income,

which was being allowed up to financial year 2004-05 is not allowable
from financial year 2005-06 onwards.

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 Computing Taxable Salary
Salary .....
Dearness allowance or Dearness pay .....
Bonus .....
Commission .....
Pension .....
Employer’s contribution in excess 12% to R.P.F. .....
Interest in excess of 9.5% on Recognised Provident Fund .....
Taxable Allowances .....
Taxable portion of partially exempted allowances .....
Perquisites (after proper valuation) .....
Taxable part of gratuity . ....
Taxable part of commutation of pension .....
Lump-sum received from Unrecognised Provident
Fund to the extent of Employer’s contribution .....
and interest on Provident fund
Taxable part of Compensation received .....
Gross Salary .....
Less : (i) Entertainment Allowance .....
(ii) Employment Tax/Professional Tax .....
Taxable Salary ----
Illustration 1:
Calculation of taxable house rent allowance :
Mr. Ram is employed at Bombay. His basic Salary is Rs. 5,000 per month. He receives `
5,000 p.a. as house rent allowance. Rent paid by him is Rs. 12,000 p.a. Find out the amount
of taxable house rent allowance.

Solution :

As per Rule 2A, the least of the following is exempt from tax :

(i) the actual house rent allowance;

(ii) excess of rent paid over 10% of salary;

(iii) where the accommodation is situated at Bombay, Delhi, Calcutta or Madras,

one-half of the amount of salary due to the assessee for the relevant period;

(iv) Where the accommodation is situated at any other place, two-fifth of the
salary due to the assessee for the relevant period.
157
Accordingly, Mr. Ram would be entitled to the least of :

(i) Rs. 5,000 or

(ii) Rs 6,000 being excess of rent over 1/10th of salary; or

(iii) Rs 30,000 (being one-half of the salary of the assessee). Rs. 5,000, being the
least, would not be included in the total income of Mr. Ram. So the entire
amount of HRA would be exempt from tax. Salary for this purpose includes
basic salary as well as dearness allowance if the terms of employment so
provide. It also includes commission based on a fixed percentage of turnover
achieved by an employee as per terms of contract of employment but excludes
all other allowances and perquisites and these are determined on due basis
for the period during which rental accommodation is occupied by the
employee in the previous year.

Illustration 2
Valuation of rent free unfurnished accommodation :
Mr. Shyam, employed at Mumbai, receives the following from his employer during the
previous year: Basic Salary Rs 60,000, Bonus Rs. 1,800, Entertainment allowance
(taxable) Rs. 6,000, Electricity expenses Rs. 2,000, Professional tax paid by the employer
Rs. 2,000,
Rent free house (owned by Employer): Fair rent 48,000, Salary of gardener Rs. 2,400,
Garden Maintenance Rs. 1,200, Salary of watchman Rs. 1,800. Determine the value of
taxable perquisites in respect of rent free house assuming (a) Mr. Shyam is a Government
Officer and the fair rent as arrived at by the Government is Rs. 6,000 p.a (b) Mr. Shyam is
a semi-Government employee, and (c) Mr. Shyam is employed by a private company.

Solution :

(a) If Mr. Shyam is a Government Officer : As per Rule 3(1) of Income-tax

Rules, ‘ 6,000 p.a being the rent of the house as per Government rules, will
be the taxable value of the perquisite.

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(b) If Mr. Shyam is a semi-Government employee : As per Rule 3(1) of the
Income-tax Rules, the value of the perquisite in respect of rent free
accommodation is taken at 15% of salary of the employee (as the house is
owned by the Employer and provided in Mumbai). Salary = ‘ 67,800 (Rs
60,000 + 1,800 + 6,000) , 15% of salary = Rs 10,170 and Therefore, Rs
10,170 is taxable value of the perquisite. Further, the value of Electricity
expenses and Professional Tax paid by the employer, being perquisites are
not included in the salary for valuation of Rent Free House Accommodation.

(c) If Mr. Shyam is employed in Private Company : The value of perquisite in this case
shall also be Rs 10,170. Under the new rules there is no difference between the
semi-Govt. and other employees.

Illustration 3

Mr. Ramamoorthy, an employee of M/s. Gopalkrishnan & Co. of

Chennai receives during the previous year ended March 31, 2020
the following payments : Basic Salary Rs 40,000, Dearness allowance
Rs 3,000, Leave Salary Rs 5,400, Professional tax paid by employer
1,000, Fair rent of the flat provided by employer Rs 6,000, Rent paid
for furniture Rs 1,000, Rent recovered by employer Rs 3,000,
Contribution to Statutory Provident Fund Rs 4,000, Employer’s
contribution to Statutory Provident Fund Rs 4,000. Compute his
taxable income for the Assessment Year 2020-21©.

159
Solution :

Computation of taxable income of Mr. Ramamoorty for the Assessment Year

2020-21
` Rs
Basic Pay 40,000
Dearness allowance 3,000
Leave salary 5,400
Professional tax paid by employer 1,000
Perquisite for House :
15% of salary (` 40,000 + 3,000 + 5,400) 7,260
Add: Furniture rent 1,000
Less: Rent recovered (–) 3,000 5,260
54,660
Less: Professional tax u/s 16 - 1,000
Gross Total Income 53,660
Less: Tax deduction under Section 80C -4,000
Tax on total income 49,660
Total tax payable NIL
Note: Assumed that dearness allowance forms part of the salary for the purpose of computation
of superannuation or retirement benefits.

Illustration 4

For the financial year 2019-20, ‘A’, a Central Government Officer

receives salary of Rs 77,000 (including dearness allowance of Rs
42,000) and entertainment allowance of Rs 18,000. His contribution
to provident fund during this period is Rs 7,200. In addition, he has
purchased National Savings Certificates (VIII Issue) for Rs 6,000.
He has been provided with accommodation by the Government for
which the rent determined is Rs 375 per month and this is recovered
from A’s salary. Compute A’s tax liability for the assessment year
2020-21 assuming that he has no other income.

160
Solution:
Name of assessee : Mr. A, Assessment Year : 2016-17, Status : Resident/Individual
Statement of assessable income
Salary from Central Government 77,000
Entertainment allowance 18,000 95,000
Less: Entertainment Allowance under Section 16(ii)
Rs 5,000 or [1/5th of salary exclusive of any
allowance, benefit or perquisite (Rs 35,000)] 5,000 (–) 13000
GROSS TOTAL INCOME 82,000
Less : Deduction under Section 80C (7,200 + 6,000) -13,200
Total Income 68,800
Tax liability Nil
Net tax payable Nil

Illustration 5:

Mr. A an employee of Ranchi [population 15 lakhs] based company

provides the following particulars of his salary income:

Basic salary Rs 12,000 p.m; profit bonus Rs 12,000; commission on

turnover achieved by Mr. A Rs 42,000, entertainment allowance 2,000
p.m; club facility 6,000; transport allowance Rs 1,800 p.m; free use
of car more than 1.6 lt capacity for both personal and employment
purposes and expenses are met by the employer’; rent free house
provided by employer.lease rent paid by employer 6,000 p.m; free
education facility for three children of the employee ( bills issued in
the name of the employer) 22,500; gas, water and electricity bills
issued in the name of employee but paid by the employer 16,800 ;
compute income from under salary.

Solution : Computation of salary income of Mr. A for the assessment year 2020-21

161
Salary 144,000
Profit bonus 12,000
Commission 42,000
Entertainment allowance 24,000
Club facility – taxable 6,000
Transport allowance – fully taxable 21,600
Car perquisite – big car @ Rs 2,400 p.m 28,800
Education facility for children 22,500
Gas, water and electricity bill paid by employer 16,800
Rent free house 36,540
Gross salary 354,240
Less: deduction u/s 16 40,000
Salary income 314,240

Calculation of rent free house

Salary for rent free house = salary + profit bonus+ commission + club facility +
transport allowance

= 144,000+ 12,000+ 42,000 + 24,000 +21,600 = 243,600

15 % of employee’s salary i.e., Rs 36,540 or rent paid by employer

Rs 72,000 w.e is less

Illustration 6

Mr. X , employee of a public ltd. Company at cuttack, received the

following emoluments for the previous year 2019-20

Basica slary @ Rs 30,000 p.m; D.A as per terms of employment Rs 3,000

p.m; Bonus equal to 1 month’s salary 33,000; commission Rs 60,000; advance
salary Rs 60,000; employee’s contribution in RPF Rs 48,000; employer’s
contribution in RPF Rs 48,000; special allowance @ Rs 2,000 p.m; house
rental allowance received @ Rs 10,000 p.m; rent paid by him @ Rs 12,000
p,m; entertainment allowance Rs 3,000 p.m;

162
 During the year employer has provided him a Honda city car of 1,600 cc
capacity with chauffeur which he uses for his personal purposes. Employer’s
expenditure of the running and maintenance of the car including salary of the
driver is Rs 120,000 during the car. Cost of the car is Rs 750,000.

Interest credited to his RPF @ 12 % is Rs 30,000

Employer company has provided him free club facility which costed the
company Rs 24,000 and free lunch for 300 days cost being Rs 150 per
day.

During the previous year he has been provided a interest free loan of Rs
18,000 to purchase a motor cycle . In November 2019, his father ill
(disease specified under Rule 3A) and he again got interest free loan of Rs
50,000 from his employer for the medical treatment of his father. Find out
salary income

Solution
Computation of salary income

Basic salary @ Rs 30,000 p.m 360,000

D.A @ Rs 3,000 p.m 36,000
Bonus 33,000
Commission 60,000
Advance salary 66,000
Employer’s contribution in RPF in excess over 12 % of his salary 480
(48,000 – 47,520)
Entertainment allowance 36,000
Special allowance 24,000
HRA 15,600
Car perks 195,000
Interest credited to RPF in excessof 9 .5 % ( 30,000 – 23,750) 6,250
Club facility 24,000
Free lunch ( 45,000 – 15,000) 30,000
Interest free loan to buy motor cycle ( exempted as less than Rs 20,000) -
Interest free loan for medical treatment ( exempted) -
Gross salary 886,330
Less: deduction u/s 16 40,000
Salary income 846,330

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Calculation of HRA

(i) HRA received Rs 120,000

(ii) 40 % of employee’s salary i.e. 158,400

(iii) Rent paid in excessof 10 % of his salary

( 144,000 - 39,600) = 104,400

HRA = 120,000 – 104,400 = 15,600

2.8 SUMMARY

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

to an assessee 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.

However it would not include:

– Any salary paid in advance and included in the total income of any person
for any previous year, shall not be included again in the total income of
the person when the salary becomes due.

164
– Any salary, bonus, commission or remuneration, by whatever name called,
due to, or received by, a partner of a firm from the firm shall not be
regarded as “salary” for the purposes of this section.

The salary of an employee is a separate source, distinct from other classes

of income. The basis of liability under the head salaries is the employer-employee
relationship. Before charging the particular income received by a person under
this head, care must be taken to ensure that there exists such a relationship of
employer and employee between the recipient and the payer of the income. The
payments chargeable under the head salaries must be made between the persons
who are in the relationship of employer and employee. Therefore, the amount
received by an individual shall be treated as salary only if the relationship between
payer and payee is of an employer and employee or master and servant. Employer
may be an individual, firm, and association of persons, company, corporation,
Central Government, State Government, public body or a local authority.
Likewise, employer may be operating in India or abroad. The employee may be
full time employee or part-time employee.

2.9 GLOSSARY

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 irrespectiveof 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.
165
 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:

1. Tax-free perquisites

2. Taxable perquisites

3. 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 .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: Omitted

(B) Entertainment allowance

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 (C) Tax on employment or Professional Tax

Provident Funds are grouped under these heads –

(a) Statutory provident fund.

(b) Recognised provident fund

(c) Unrecognised provident fund

2.10 SELF ASSESSMENT QUESTIONS

Define ‘Salaries’

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

Distinguish between statutory provident fund, recognized provident fund

and unrecognized provident fund.
_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

Define the term perquisite and how are they treated for income tax
purpose.
_________________________________________________________

_________________________________________________________

_________________________________________________________

167
 _________________________________________________________

Give the treatment of HRA under income tax purpose.

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

What is profit in lieu of salary ?

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

Write a short note on

i) Taxability of Allowances

ii) Gross salary

iii) Deductions out of gross salary

Taxability of provident funds

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

168
1. Savita submits the following information regarding her salary
income :

Basic salary Rs 11,000 per month, City compensatory allowance Rs

150 per month, children education allowance Rs 400 per month (for
3 children), Reimbursement of medical expenses Rs 25,000. She
was entitled to house rent allowance of Rs 6,000 per month from
1st April, 2015 to 31st August, 2015. However, she was paying a
rent of Rs 7,000 per month for a house in New Delhi. With effect
fro m 1 st S ep t e mb er, 2 0 1 5 , sh e wa s p ro v i d ed w i t h a n
accommodation by the company for which the company was
paying a rent of Rs 5,000 per month.

Compute her gross salary for the assessment year 2020-21

1. From the following particulars compute salary income

(i) Basic salary Rs 25,000 p.m

(ii) Dearness allowance Rs 5,000 p.m ( enters Rs 3,000 p.m into

pay for service benefits)

(iii) Bonus Rs 20,000

(iv) Salary in lieu of past accumulated leave Rs 15,000

(v) Entertainment allowance Rs 1,500 p.m

(vi) Reimbursement of conveyance expendi ture i ncurred in

performance of duties Rs 1,500 p.m

(vii) Furnished house at concessional rent of Rs 3,000 p.m in Chennai

[ population above 25 lakhs) fair rental value Rs 6,500 p.m .
cost of furniture Rs 350,000 . salary of garndener Rs 1,000
p.a

169
 (viii) Club bill paid by the employer Rs 7,200 p.a

(ix) Contribution by employee and employer to RPF – 13 % each of

salary

(x) Reimbursement of medical expenses in respect of treatment of

a notified disease Rs 20,000 ( Hospital is an approved one).

(xi) Life insurance premium paid by employee – own life Rs 20,000

p.a; wife’s life Rs 15,000 p.a; major son- Rs 12,000 p.a

(xii) ELSS deposit Rs 20,000

(xiii) Contribution to public PF Rs 24,000 p.a

2. Mr. P chaudhary is employed in a firm at Kolkata and he furnishes

the following particulars of his income for the assessment year
2020-21

(a) Salary received after deduction of his own contribution to RPF

and income tax at source Rs 420,000

(b) Income tax deducted at source Rs 18,000

(c) Own contribution to RPF Rs 42,000

(d) Employers contribution to RPF Rs 42,000

(e) Dearness allowance at 50 % of first Rs 200,000 and 25 % of

the remaining basic salary per year

(f) Interest credited to RPF @12 % p.a

(g) House rent allowance p.a [ rent Rs 10,000 p.m] 96,000

(h) Reimbursement of medical expenses for eye surgery of his wife

( notified disease) ( hospital is notified) Rs 62,000

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 (i) Free refreshment during working hours Rs 9,600

(j) Free services of sweeper and watchman – salary paid by

employer is Rs 600 p.m and Rs 9,600 p.a respectively.

(k) Free lunch during office hours , the cost of which is estimated
at Rs 200 per meal for 300 days

(l) Conveyance allowance Rs 24,000 and he does not spend

anything

(m) Premium paid on his policy of Rs 170,000 . He got LIC policy

on 10-8- 2015 Rs 20,000.

Compute his salary income

2.11 SUGGESTED READINGS

1. Singhanai V.K: Students’ Guide to Income Tax; Taxmann, Delhi.

2. Prasad, Bhagwati: Income Tax Law & Practice; Wiley Publication, New
Delhi.

3. Mehrotra H.C: Income Tax Law & Accounts; Sahitya Bhawan, Agra.

4. Study Material, Executive Programme, Tax Laws And Practice Module I,

Paper 4: The Institute Of Company Secretaries Of India, New Delhi,
Www.Icsi.Com

171
C. NO. : BCG -302 UNIT - III
SEMESTER -III LESSON 7-9

HOUSE PROPERTY

STRUCTURE

3.1 Introduction

3.2 Objectives

3.3 Annual Rental Value

3.4 Municipal Rental Value (MRV)

3.5 Fair Rental Value

3.6 Standard Rent

3.7 Expected Rental Value

3.8 Treatment of Unrealized Rent

3.9 Vacancy

3.10 Interest on loan

3.11 Deductions U/S 24

3.12 Income from House Property

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3.13 Summary

3.14 Glossary

3.15 Self assessment questions

3.16 Suggested Readings

3.1 INTRODUCTION

House property consists of any building or land appurtenant thereto of

which the assessee is the owner. The appurtenant lands may be in the form of a
courtyard or compound forming part of the building. But such land is to be
distinguished from an open plot of land, which is not charged under this head
but under the head “Income from Other sources” or “Business Income”, as the
case may be. Besides, “house property” includes flats, shops, office space, factory
sheds, agricultural land and farm houses. Further, house property includes all
type of house properties, i.e., residential houses, godowns, cinema building,
workshop building, hotel building, etc. Income from house property is taxable
in the hands of its legal owner in whose name the property stands. “Owner” for
this purpose means a person who can exercise the rights of the owner not on
behalf of the owner but in his own right. A person entitled to receive income
from a property in his own right is to be treated as its owner, even if no registered
document is executed in his name. The following three conditions must be
satisfied before the income of the property can be taxed under the head “Income
from House Property”:

 The property must consist of buildings and lands appurtenant thereto;

 The assessee must be the owner of such house property;

The property may be used for any purpose, but it 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. If the property is used for own business or

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profession, it shall not be chargeable to tax. Ownership includes both free-hold
and lease-hold rights and also includes deemed ownership. The provisions for
computation of Income from house property are covered under sections 22to 27.
This chapter deals with the provisions for computation of Income from house
property. Section 22 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. Therefore, 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 present chapter provides the basics of all the
important heads covered under the calculation of Income From House Property.

3.2 OBJECTIVES

After going through the lesson the students will be able to have

 The knowledge about the various provisions for computation of

Income from House Property

 An understanding of basic concepts covered under the head Income

from House Property

 The practical acquaintance about the calculation of Income from

House Property

3.3 ANNUAL RENTAL VALUE - Sec 2(2)

Inherent capacity of the property to earn income is termed as its “annual

value”, and has been defined as the sum for which the property may reasonably
be let out. Where a person owns more than one property, the annual value of any
one house property, as specified by her, will be considered “nil”. Other properties
will attract tax on their annual values.The Gross Annual Value (GAV), also called
the Annual  Rental  Value,  of  a  property  is  used  in  calculating  the  tax  or  rent

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which should be applied to the property. Annual value is determined to compute
income under the head Income from House Property. The annual value of property
consisting of any building or lands appurtenant thereto of which the assessee is
the owner shall be subject to Income-tax under the head “Income from House
Property” after claiming deduction under Sec. 24, provided such property or any
portion of such property is not used by the assessee for the purpose of any
business or profession, carried on by him, the profits of which are chargeable to
Income-tax.

Definition

Annual Rental value or Annual Value in relation to any property, means

its annual value as determined under Section 23 of Income Tax Act, 1961 defines
annual value as:

(1) For the purposes of section 22, the annual value of any property shall be
deemed to be—

(a) the sum for which the property might reasonably be expected to
let from year to year; or

(b) 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 the amount so received or receivable; or

(c) 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 t hereof is less than the amount so received or
receivable :

Provided that the taxes levied by any local authority in respect of the
property shall be deducted (irrespective of the previous year in which the
liability to pay such taxes was incurred by the owner according to the

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 method of accounting regularly employed by him) in determining the
annual value of the property of that previous year in which such taxes are
actually paid by him.

Explanation: For the purposes of clause (b) or clause (c) of this sub-
section , the amount of actual rent received or receivable by the owner
shall not include , subject to such rules as may be made in this behalf ,
the amount of rent which the owner cannot realize.

(2) Where the property consists of a house or part of a house which—

(a) is in the occupation of the owner for the purposes of his own
residence; or

(b) cannot actually be occupied by the owner by reason of the fact

that owing to his employment, business or profession carried on
at any other place, he has to reside at that other place in a building
not belonging to him, the annual value of such house or part of the
house shall be taken to be nil.

(3) The provisions of sub-section (2) shall not apply if—

(a) the house or part of the house is actually let during the whole or
any part of the previous year; or

(b) any other benefit therefrom is derived by the owner.

(4) Where the property referred to in sub-section (2) consists of more than
one house—

(a) the provisions of that sub-section shall apply only in respect of

one of such houses, which the assessee may, at his option, specify
in this behalf;

(b) the annual value of the house or houses, other than the house in
respect of which the assessee has exercised an option under clause
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 (a), shall be determined under sub-section (1) as if such house or
houses had been let.]

In general Income from house property is taxable on the basis of annual

value. Even if the property is not let out, notional rent receivable is
taxable as its annual value. As per Sec. 23(1) (a) the annual value of any
property shall be the sum for which the property might reasonably be
expected to be let out from year-to-year. In determining the annual value
there are four factors which are normally taken into consideration.

These are: i) Actual rent

received or receivable,

ii) Municipal value,

iii) Fair rent of the property,

iv) Standard rent.

Computation of annual value of a property [Sec. 23(1)]

As per the Act the annual value is the value after deduction of Municipal
taxes, if any, paid by the owner. But for the sake of convenience, the annual
value may be determined in the following steps:

Step I: Determine the gross annual value.

Step II: From the gross annual value compared in Step I, deduct Municipal tax
actually paid by the owner during the previous year. The balance shall be the net
annual value which, as per the Income-tax Act is the annual value.

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ILLUSTARTION 1:

Mrs. X has let out one house property @ Rs. 62,000 p.m., Municipal Valuation Rs. 72,000 p.m.,
Fair Rent Rs. 90,000 p.m., Standard rent Rs. 1,00,000 p.m., Municipal Tax paid Rs. 40,000.
Compute Net Annual Value.
Solution:-
Computation of Income under the head House Property:
Particulars Rs.
Gross Annual Value 10,80,000
Working Note: Rs.
a) Fair Rent (Rs. 90,000 *12) 10,80,000
b) Municipal Value (Rs. 72,000 *12) 8,64,000
c) Higher of a) or b) 10,80,000
d) Standard Rent (Rs. 1,00,000 *12) 12,00,000
e) Expected Rent (Lower of c or d) 10,80,000
f) Rent received/receivable (Rs. 62,000 *12) 7,44,000
Gross Annual Value shall be higher of e) or f) 10,80,000
Less: Municipal Tax 40,000
Net Annual Value 10,40,000

The annual value has to be determined for different categories of properties

These categories are:

Category A. House property - Let out throughout the previous year.

Category B. House property- Let out and was vacant during the whole or part
of the previous year

Category C. House Property- Part of the year let out and part of the year
occupied for own residence

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Category A.:- House property- Let out throughout the previous year

Step 1: Determining the gross annual value:

According to Sec. 23(1), the annual value of any property shall be deemed to
be:-

(a) The sum for which the property might reasonably be expected to let out
from year-to- year (i.e., expected rent); or

(b) Where the property or any part of the property is let out 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,
i.e., the actual rent.

For calculating Gross Annual Value of the property which is let out, first
calculate expected rent as per clause (a) above and then compare the same with
the actual rent received or receivable as per clause (b). If the actual rent so
received or receivable as per clause (b) is more than the expected rent computed
as per clause (a), the Gross Annual Value shall be the actual rent so received or
receivable. On the other hand, if the actual rent so received or receivable is less
than the expected rent, then the Gross Annual Value shall be expected rent so
computed.

Step 2: Taxes levied by any local authority in respect of the property,

i.e., Municipal taxes (including taxes levied for services) to be deducted.
Municipal taxes, etc., levied by local authority are to be deducted from the
gross annual value calculated as above, if the following conditions are fulfilled:

a) the Municipal taxes have been borne by the owner, and

b) these have been actually paid during the previous year.

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 Therefore, deduction for Municipal taxes, etc., levied by any local
authority is allowed if they are borne and actually paid by the owner. It must be
noted that the taxes are allowed as deduction only in the previous year in which
these are paid. Municipal taxes, etc., due but not paid shall not be allowed as
deduction. However, Municipal taxes, etc., paid during the previous year are
allowable even if they relate to past years or future years.

GROSS ANNUAL VALUE

HIGHER OF THE FOLLOWING

EXPECTED RENT ACTUAL RENT RECEIVED

(cannot exceed standard rent)

HIGHER OF THE FOLLOWING

MUNCIPAL VALUE FAIR RENT

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Illustration
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: ` 36,000
House II: ` 24,000
House III: ` 35,000
Actual Rent (given)
GAV:
House I: ` 36,000
House II: ` 28,000
House III: ` 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

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 Rent 40,000 30,000 32,000 32,000
G.A.V. 40,000 30,000 35,000 36,000

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 Category B.:- House Property- Let out and was vacant during the whole
or part of the previous year:

According to Sec. 23(1), the annual value of such house property shall be
deemed to be:-

a) the sum for which the property might reasonably be expected to let out
from year-to-year, i.e., the expected rent; or

b) where the property or any part of the property is let out 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,
i.e., the actual rent; or

c) where the property or any part of the property is let out 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, i.e., the actual rent, if any. From the perusal of the above,
the following two scenarios emerge:-

Scenario1: Where the property is let out and was vacant for part of the
year and the actual rent received or receivable is more than the sum determined
under clause (a) in spite of vacancy period. In this case, clause (c) shall not be
applicable as it will be applicable only when actual rent received or receivable is
less than the sum referred under clause (a). Hence, the gross annual value in this
case shall be:

1) the sum for which the property might reasonably be expected to be let
out from year-to-year; or

2) actual rent received or receivable, whichever is higher

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 ILLUSTRATION 2
Municipal Value of house is Rs.1,00,000, Fair Rent Rs. 1,40,000, Standard Rent
Rs.1,30,000. The house property has been let out for Rs.13,000 p.m. and was vacant for one
month during the previous year 2018-19. Municipal taxes paid during the year were Rs.
50,000. Compute the annual value for assessment year 2020-21.
Solution:-
Particulars Rs.
Gross Annual Val ue
Working Note:
a) Fair Rent 1,40,000
b) Municipal Value 1,00,000
c) Higher of a) or b) 1,40,000
d) Standard Rent 1,30,000
e) Expected Rent (Lower of c or d) 1,30,000
f) Rent received/receivable 1,43,000
Gross Annual Value shall be higher of e) or f) 1,43,000
Less: Municipal Tax 50,000
Net Annual Value 93,000

Scenario 2: Where the property is let out and was vacant for whole or
part of the year and the actual rent received or receivable owing to such vacancy
is less than the sum determined under clause (a). The annual value of the property
shall be determined under this situation if all the following 3 conditions are
satisfied:

1) The property is let out;

2) It was vacant during the whole or part of the previous year;

3) Owing to such vacancy, the actual rent received or receivable is less

than the value determined under clause Sec. 23(1) (a).
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 In this case, both clause (a) and clause (b) shall not be applicable but
clause (c ) shall be applicable and the gross annual value shall be the actual rent
received or receivable.

ILLUSTRATION 3
Consider the above illustration 2 and assume that the property was vacant for 3 months.
Determine the annual value for the assessment year 2019-20
Solution:-
Particulars Amount (Rs.)
a) Expected rent (as determined above) 1,30,000
b) Actual rent received/receivable (Rs. 13,000 x 9) 1,17,000
As the actual rent received or receivable owing to vacancy is less than the sum
determined
under clause (a), it will fall under situation 2, i.e., Sec. 23 (1) (c) and, therefore, net annual
value shall be determined as under:

Particulars Amount (Rs.)

Actual rent receive or receivable 1,17,000
Less:- Municipal Taxes Paid 50,000
Net Annual Value 67,000

Category C.:- House Property- Let out for part of year and rest of the
year occupied for own residence

Where a house property is let out for part of the year and rest of the year
occupied for own residence, its annual value shall be determined as per the
provision of Sec. 23(1) relating to let out property. In this case the period of
occupation of property for own residence shall be irrelevant and the annual value
of such house property shall be determined as if it is let out for part of the year.
Hence, the expected rent as per Sec. 23(1) (a) shall be taken for full year but the

184
actual rent received or receivable shall be taken only for the period it is let out
and the gross annual value shall be higher of these two.

ILLUSTRATION
R has a house property in Delhi whose Municipal Value is Rs. 1,20,000 and the
Fair Rental Value is Rs. 1,40,000. It was self occupied by R. From 1.4.2018 to 31.7.2018.
W.e.f. 1.8.2018 it was let out at Rs.10,000 p.m. Compute the annual value of the house
property for assessment year 2020-21 if the Municipal taxes paid during the year were
Rs.40,000.
Solution:-
Particulars Amount (In Rs.)
The gross annual value
higher of the following two:
a) Expected rent
(Municipal Value Rs. 1,20,000 or FRV Rs. 1,40,000,
whichever is higher) 1,40,000
b) Actual rent received/receivable for let out period,
i.e., Rs. 10,000 x 8 = 80,000
Gross Annual Value a) or b), whichever is higher) 1,40,000
Less: Municipal Taxes 40,000
Net Annual Value 1,00,000

3.4 MUNICIPAL RENTAL VALUE (MRV)

For the purposes of levying local taxes the local taxes the local authority i.e.
Municipal corporation/Committee etc. conducts a periodical survey of the house
properties in their local limits. On the basis of such survey the rental values are
fixed which serves as the basis for levying tax. The rental value so fixed is
called MUNICIPAL RENTAL VALUE (MRV).

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3.5 FAIR RENTAL VALUE (FRV)

It is the rental value a house property can fetch. It is based on the rent
prevailing for similar type of accommodation in same or similar type of locality.
It is based on the principle that rent prevailing in same locality for similar sized
property is almost the same. Such rental value is called FAIR RENTAL VALUE
(FRV).

3.6 STANDARD RENT

The rent fixed under Rent Control Act is Standard rent.

3.7 EXPECTED RENTAL VALUE (ERV)

The expected rental value shall be determined as follows:

1) In case standard rent has not been fixed (higher of the following is ERV).

a) Municipal rental value

b) Fair rental value

c) Actual rent received

2) In case standard rent has been fixed

a) Municipal rental value

b) Fair rental value

c) Standard rent

In case standard rent has been fixed, the ERV cannot exceed standard
rent. In this cse firstly we have to compare MRV and FRV and find out the
higher one and the amount so calculate can not exceed the amount of standard
rent. In case actual rent recived is more than standard rent, then actual rental
value shall be treated as ERV.

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3.8 UNREALIZED RENT

As per section 23 of the IT act,1961, unrealized rent is the amount of

rent which the owner cannot realise shall be equal to the amount of rent payable
but not paid by a tenant of the assessee and so proved to be lost and irrecoverable
where,—

(a) the tenancy is bona fide;

(b) the defaulting tenant has vacated, or steps have been taken to compel
him to vacate the property;

(c) the defaulting tenant is not in occupation of any other property of the
assessee;

(d) 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.]

Unrealized rent is allowed to be deducted from actual rent received or

receivable only if the following conditions are satisfied:

1. The tenancy is bona fide;

2. The defaulting tenant has vacated, or steps have been taken to compel
him to vacate the property;

3. The defaulting tenant is not in occupation of any other property of the

assessee;

4. The taxpayer 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.

Existing provisions of sections 25A, 25AA and 25B relate to special

provisions on taxation of unrealised rent allowed as deduction when realised

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subsequently, unrealised rent received subsequently and arrears of rent received
respectively. Certain deductions are available tereon

It is proposed to simplify these provisions and merge them under a single

new section 25A and bring uniformity in tax treatment of arrears of rent and
unrealised rent. It is proposed to provide that the amount of rent received in
arrears or the amount of unrealised rent realised subsequently by an assessee
shall be charged to income-tax in the financial year in which such rent is received
or realised, whether the assessee is the owner of the property or not in that
financial year. It is also proposed that thirty per cent of the arrears of rent or the
unrealised rent realised subsequently by the assessee shall be allowed as
deduction. The amendment will take effect from first date of April, 2017 and
will, accordingly, apply in relation to the assessment year 2017-18 and subsequent
years.

Treatment of Unrealised Rent of House Property Income Treatment

Of Unrealised Rent Recovered [Upto Assessment Year 2001-02] [Section 25A]

1.  If amount of unrealised rent recovered is less than or equal to an amount,
which was disallowed earlier, it shall not be taxable.

2.  If amount unrealised rent recovered is more than the amount which was
disallowed earlier, excess of amount realised over amount disallowed
earlier shall be deemed as income from house property.

3.  No deduction shall be allowed out of such deemed income.

4. Such amount shall be taxable under the head ‘Income from House
Property’ even if the assessee does not own that house in the current
previous year.

Treatment Of Unrealised Rent Recovered [From A/Y 2002-03

Onwards] [Section 25AA]

It shall be deemed as income of the year in which recovered even if the

assessee does not own the house property during the previous year in which
such amount is realised.

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 While calculating deemed income from houses property for unrealised
rent recovered, it shall be seen that on how much amount the assessee had saved
tax in that previous year in which deduction was claimed. A comparison will be
made between the amount of rental value on which tax has been paid and the
rental value on which he would have paid tax, had there been no unrealised rent.

Special Provision For Arrears Of Rent Received [Section 25B]

In case any arrears of rent of any earlier years are recovered during the
previous year, these are deemed as income from house property after allowing
30% as Standard deduction. Such arrears of rent shall be taxable in the hands of
assessee even if he does not own the property (to which such arrears relate)
during the previous year in which such arrears are recovered.

While calculating deemed income from house property for arrears of rent,
it shall be seen that on how much amount the assessee had saved tax in that
previous year to which arrears the related. A comparison will be made between
the amount of rental value on which tax has been paid and the rental value on
which he would have paid tax, had he received full rent in that very year.

Property Owned By Co-Owners [Section 26]

If share of co-owners is determinate, the income of such house property

is calculated as one house and income is divided amongst the co-owners. They
shall be entitled to relief u/s 23(2) as if they are individually owners of such
property. Sec. 23(1) provides that unrealised rent should be deducted from clause
(b) or clause (c) of Sec. 23(1), i.e., the actual rent received or receivable. It does
not provide that it should be deducted from clause (a), i.e., from expected rent.
Thus, problem will arise when gross annual value is to be taken as expected
rent instead of actual rent received or receivable, as the assessee in that case
cannot take the deduction of unrealised rent. However, in the income-tax return
forms, unrealised rent has been shown as deduction from the gross annual value
(i.e., after taking expected rent or actual rent, whichever is higher). It is, therefore,

189
recommended that unrealised rent should be deducted after computation of gross
annual value. Similarly, where a house is vacant for part of the year, Sec.
23(1)(c) provides that gross annual value is to be taken as actual rent if the
same is less than the expected rent. In this case also unrealised rent should be
deducted after computation of gross annual value (i.e., the actual rent).
ILLUSTRATION:
ABC furnishes the following particulars in respect of a house property owned by
him in Delhi.
Particulars Amount (Rs.)
Municipal Value 1,00,0 00
Fair Rent 1,40,000
Actual rent (per month) 11,000
Municipal tax paid during the year 10,000
The tenant vacated the property on 31.10.2019 and thereafter the property was let out for Rs.
15,000 p.m. ABC could not realise the rent for the mo nths of September and October, 2019 due
to the death of the earlier tenant. i) Compute the annual value of the prope rty for the assessment
year 2020--21. ii) What will be your answer if the unrealised rent is for one month instead of two
months?
SOLUTION
Solution:- (i) (ii)
Particulars Amount (In Rs.)
Step I: Determine the value as per Sec. 23(1) (a)
It shall be Rs. 1,00,000 or Rs. 1,40,000,
whichever is higher 1,40,000 1,40,000
Step II: Actual rent received/receivable
(Rs. 11,000 x 7 + 15,000 x 5) 1,52,000 1,52,000
Gross Annual Value
1,52,000 1,52,000
(i) (ii)
Less: Unrealised Rent 22,000 11000
Less: Municipal Tax Paid 10,000 10000
32,000 21000
Net Annual Value 1,20,000 131000

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3.9 VACANCY

If you own more than one residential property, only one property can be
treated as self-occupied for income tax purposes. The other properties will either be
considered as let out or deemed to be let out, irrespective of whether you are occupying
them, letting them out or leaving them vacant partially or for the whole year. Also,
these properties will attract tax on their annual value. However, you are entitled to
claim standard deduction of 30% and interest payment if you have taken a home
loan to acquire that property, out of the annual value that will be taxed. Besides
these, you can also claim for vacancy allowance.If the property remained vacant
during the full or part of previous year, even after your best effort to let it out, you
can claim deduction as vacancy allowance under section 23(1)(c) of the income tax
Act. You will not have to pay tax on any notional rent for the period for which
property remained vacant. But you have to make sure that Best effort has been made
to make it rented.

3.10 INTEREST ON LOAN

Treatment of Pre-acquisition/Pre-construction Period Interest

Meaning of ‘Pre-acquisition / pre-construction period’. It means the

period starting from th date of borrowing and ending on March 31st immediately
preceding to the year of completion of construction/acquisition.For example, Mr.
A has taken a loan on 1-4-2010 for construction of a house and the construction
was completed on 1-07-2012.In this case, pre-construction period shall be the
period starting from 1-04-2010 and ending on 31-3-2012. –Important
point. The period  from  1-04-2012  to  30-06-12  shall  not  be  included  in  the
preconstruction period.Tax treatment. Interest  for  pre-acquisition/pre-
construction period shall be allowed as deduction in 5 equal installments starting
fromthe previous year in which the house is acquired or the construction is
completed and for the next 4 previous years.Important point. If the construction/
acquisition of house is completed during a particular previous year then whole

191
interest of that previous year shall be treated as post-construction period interest.
In other words, no part of that previous year’s interest shall be treated as ‘pre-
acquisition period interest’.

200000

Note. If  the  whole  or  any  part  of  pre-acquisition  /  construction  period
interest is claimed as deduction under any other provision of the Act then that
much interest shall not be allowed as deduction under the head house property.

Other Important Points

(i) Basis of allowability. Interest on housing loan is allowed as deduction

on accrual basis. Thus, interest accured/outstanding at end of the previous
year is also allowed as deduction for that previous year. Even if an assessee
maintains books of accounts on cash basis, the interest on housing loan
shall be allowed as deduction on accrual basis.

(ii) Loan taken to repay the original loan. Interest on new loan taken to
repay the original housing loan is also allowed as deduction.

(iii) Interest on delayed payment of interest. It is not allowed as a deduction.

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(iv) Who may be lender? Housing loan may be taken from any lender, i.e., the
lender may be a bank or any financial institution, or any company, or any
friend or relative of the assessee or any other person.

(v) Interest payable outside India (Section 25). If interest on loan is payable
outside India then deduction shall be allowed only if tax is deducted at
source out of such interest. In other words, if interest is paid without
deduction of tax at source then it shall not be allowed as deduction.
However, the requirement of TDS is not necessary if there is any person
in India who may be treated as an agent of the lender u/s 163 (who is
outside India) in respect of such interest.

(vi) Applicability of Maximum limit. In case of self-occupied house property,

the maximum limit of interest is in respect of both pre-acquisition period
interest and post-acquisition period interest.

(vii) Loan taken to repay outstanding interest on old housing loan. Interest
on such new loan is not allowed as deduction.

(viii) Interest on loan shall be allowed on deduction out of the Net annual value
of the house for which the loan has been taken. Thus, interest on loan
taken for house A shall not be allowed as deduction out of net annual
value of house B.

(ix) Interest on money borrowed for the payment of municipal tax etc. is not
allowed as deduction.

3.11 DEDUCTIONS U/S 24

Out of Net Annual Value (NAV) of House Property Income While

calculating house property income, deductions are allowed out of net annual
value (NAV). These deductions are as follows.

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(1) Standard Deduction [Sec. 24(a)]

It is an adhoc/flat deduction available out of. net annual value in respect

of certain expenses of the owner of the house property connected with
earning of rental income like rent collection charges, insurance of house,
repair of house, etc. It is allowed @ 30% of ‘net annual value’.

Note. (1) Actual expenses incurred by the owner of house property are

not to be considered. The Standard deduction is available even if the
owner has not incurred any expense for earning rental income.

(2) No Standard deduction is allowed in respect of self-occupied house

property because net annual value of self-occupied house is taken as NIL.
Thus,

Standard Deduction

194
(2) Interest on ‘Housing Loan’ [Section 24(b)]

Ho using lo an means loan taken/amo unt borrowed for purchase,

construction, repairs or renovation, etc. of house property. Interest paid/
payable on housing loan is allowed as deduction while computing house
property income. It is important to note that while calculating house
property income in respect of let out house property/deemed to be let out
house property, there is no maximum limit on interest, however, (while
calculating house property income) in respect of self-occupied house,
there is a maximum limit upto which interest can be claimed as deduction.
The tax treatment of interest on housing loan can be explained as follows

(A) Let Out/Deemed To Be Let Out House.

While calculating house property income in respect of such house property,

interest on loan taken for purchase / construction / repairs / renovation
etc. is allowed as deduction in full. There is no maximum limit in respect
of such interest.

IMPORTANT POINTS

1) Interest on housing loan is allowable as deduction on accrual basis not

on paid basis (even if account books are kept on cash basis) if capital is
borrowed for the purpose of purchase, construction, repair, renewal or
reconstruction of the house property. Deduction can be claimed for two
or more housing loans.

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2) Interest includes service fees, brokerage, commission, prepayment charges
etc.

3) Interest/penalty on unpaid interest shall not be allowed as deduction.

4) Deduction shall be allowed irrespective of the nature of loan whether it

is housing loan or personal loan from any person/institution.

5)  If a person instead of raising a loan from a third party pays sale price to
the seller in instalments along with interest than such interest is also
allowable.

6)  Interest on borrowed money which is payable outside India shall not be
allowed as deduction under section 24(b), unless the tax on the same has
been paid or deducted at source and in respect of which there is no person
in India, who may be treated as an agent of the recipient for such purpose.

7)  For claiming deduction under this section, assessee must be the owner or
deemed owner of the house property and loan shall be in the assessee
name.

Maximum Limit of deduction under section 24b

These limits of deduction is applicable assessee wise and not property

wise. Therefore if an assessee owns two or more house property then the total
deduction for that assessee remain same.

1) In Let Out Property/Deemed to be Let Out – No maximum limit

2) Self Occupied House (SOP) – Rs. 2,00,000.

In the following cases the above limit of Rs 2,00,000 for SOP shall be
reduced to Rs. 30,000

i) Loan borrowed before 01-04-1999 for any purpose related to house

property.

196
ii) Loan borrowed after 01-04-1999 for any purpose other than construction
or acquisition.

iii) If construction/acquisition is not completed within 5 years from the end

of the financial year (3 years till financial year 2015-16) in which capital
was borrowed. For example, a loan is obtained for construction/acquisition
on 28 Oct 2011 then the deduction limit should reduced to Rs 30,000 if
the construction/acquisition completes after 31 March 2017.

Extra Deduction of Rs. 50,000 on Home Loan Interest under Section 80EE

Interest on loan for pre construction/acquisition period

Interest for pre construction/acquisition period is allowable in 5 equal instalment

beginning from the year of completion of house property. This deduction is not allowable
if the loan is utilized for repairs, renewal or reconstruction.

Pre Construction/Acquisition period starts from the date of borrowing

and ends on the last day of preceding Financial Year in which the construction
is completed. For example, if house property is completed on 21st March 2012
then the deduction is allowed from Financial Year 2011-2012 to 2016-17.

Deduction in case of Co-borrower

If the home loan is taken on joint names then the deduction is allowed to
each co-borrower in proportion to his share in the loan. For taking such deduction
it is necessary that such co-borrower must also be co-owner of that property. If
the assessee is a co-owner but is repaying the full loan himself, then he can
claim the deduction of full interest paid by him.

The limit of deduction in case of Self occupied property applies

individually to each co-borrower . In other words, each co-borrower can claim
deduction upto Rs. 2 lakh/Rs. 30,000. No limit is applicable to let out property.

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Table: Deduction u/s 24b
Particulars Section 24b
Tax Deduction allowed only for Interest
Basis of Tax Deduction Accrual Basis
Amount of Deduction Self occupied property : Rs. 2,00,000 (From
assessment year 2019-20)
Other than Self occupied property : No limit
Purpose of loan Purchase/ Construction/ Repair/ Renewal/
Reconstruction of a Residential House Property.
Eligibility for claiming Tax deduction Purchase/ Construction should be completed
within 3 years
Restriction on Sale of Property NIL
Deduction during construction period Interest paid during the construction/acquisition
period shall be allowed in 5 equal installment
from the last day of preceding Financial Year in
which the construction is completed

Interest Deduction with HRA

HRA under section 10(13A) and interest deduction can be availed

simultaneously even if house property is in same city in which you resides on
rented property.

Form 12BB is  to  be  filed  with  employer  if  you  want  your  employer  to
take deduction under this section into consideration and thus deduct lower TDS.

3.12 INCOME FROM HOUSE PROPERTY

A) Self occupied for residential purposes or which could not actually be

self occupied owing to employment at other place [Sec. 23(2), (3) &
(4)]

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i) Where the annual value of such house shall be nil [Sec. 23(2)(a) &
(b)]:

Where the property consists of house or part of a house which:-

a) is in occupation of the owner for the purposes of his own

residence, or

b) canno t actually be occupied by the owner owing t o his

employment, business or profession carried on at any other place,
he has to reside at that other place in a building not belonging to
him, the annual value of such house or part of house shall be taken
to be NIL.

ii) Where the annual value of such house shall not be nil [Sec. 23(3)]

The annual value of self-occupied house shall not be nil:

a) if such house or part of the house is actually let out during the
whole or any part of the previous year, or

b) any other benefit thereon is derived by the owner from such house.
In the above cases, the annual value shall be determined as per
provisions applicable to let out properties

iii) Where assessee has more than one house for self occupation [Sec.
23(4)]

If there are more than one residential houses, which are in the occupation
of the owner for his residential purpose, then he may exercise an option
to treat any one of the houses to be self-occupied. The other house(s)
will be deemed to be let out and annual value of such house(s) will be
determined as per Sec. 23(1) (a), i.e., the sum for which the property
might reasonably be expected to be let out from year-to-year. The assessee
in this case, should exercise his option in such a manner that his taxable

199
 income is the minimum. Such option may changed from year-to-year.
However, if the assessee has a house property which consists of two or
more residential units and all such units are self occupied, the annual
value of the entire house property shall be taken as nil as there is only
one house property, though it has more than one residential units.

iv) Deduction in respect of one-self occupied house where annual value

in nil:

Where annual value of one self-occupied house is nil, the assessee will
not be entitled to the standard deduction of 30%, as the annual value
itself is nil. However, the assessee will be allowed deduction on amount
of interest (including 1/5th of the accumulated interest of pre-construction
period) as under:-

a) Where the property is acquired or Actual interest payable, subject to

constructed with capital borrowed on or maximum Rs. 1,50,000 if certificate
after 1.4.1999 and such acquisition or mentioned in point 2 in box given below
construction is completed within 3 years of is obtained.
the end of the financial year in which the
capital was borrowed.
b) In any other case, i.e., borrowed for repairs Actual interest payable subject to maximum
or renewal or conditions mentioned in of Rs. 30,000
clause (a) are not satisfied.

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Example: Y has two houses, both of which are self-occupied. The particulars of the houses
are as under:
Particulars Ist House
Amount (Rs.) IInd House
Amount (Rs.) Municipal Value 70,000 1,00,000
Fair Rental Value 82,000 1,30,000 Standard Rent - 1,10,000
Date of completion 1.1.1994 1.10.1994
Municipal taxes 7,000 and 10,000 paid during the year
Suggest which house should be opted by Y to be assessed as self-occupied so that his tax
liability is minimum.
Solution:- Assume both houses to be let out
Particulars Deemed to be let out Deemed to be let out
Ist House IInd House
Gross Annual Value 82,000 1,10,000
Less: Municipal Taxes 7,000 10,000
Net Annual Value 75,000 1,00,000
Less: Statutory Deduction @30% 22,500 30,000
Net Annual Value 52,500 70,000
If house I is opted to be self occupied the income of house property shall be :
Particulars Amount (Rs.)
House I Nil
House II 70,000
Income from House Property 70,000
If house II is opted to be self occupied the income of house property shall be:
Particulars Amount (Rs.)
House I 52,500
House II Nil
Income from House Property 52,500

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B) Computation of income of house property which is partly let out and
partly self occupied

In this case the annual value, deductions and the income of the part of the
property which is let out shall be computed separately under the let out
property e.g. Where one unit is let out and the other unit is self occupied,
the whole property cannot be taken as a single unit. Municipal value or
fair rent if not given separately, shall be apportioned between the let
out portion and self occupied portion on built-up area basis. Similarly,
where, in a building the ground floor is self-occupied and the first floor
is let out or vice-versa, such a property shall not be treated as a single
unit. Instead, income from first floor which is let out shall be computed
separately as per let out provisions and the floor which is self-occupied
shall be computed separately as per self-occupied provisions. Municipal
tax and interest shall also be apportioned on the basis of built-up/floor
area.

When a portion of the house is self-occupied for the full year and a portion
is self-occupied for whole year, the annual value of the house shall be determined
as under:

(i) From the full annual value of the house the proportionate annual value
for self-occupied portion for the whole year shall be deducted.

(ii) The balance under (i) shall be the annual value for let out portion for a
part of the year.

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Illustration

Mr. R. owns a house. The Municipal value of the house is ` 50,000. He paid `8,000 as local
taxes during the year. He uses this house for his residential purposes but lets out half of the
house @ ` 3,000 p.m. Compute the annual value of the house.

Solution

Annual rent or Municipal valuation (which is higher) 72,000

Less : Local taxes paid 8,000

Annual value of House Property 64,000

Less : Half of annual value regarding self occupied portion for

the whole year 32,000

Annual Value of let out portion 12,000

House let out during any part of the previous year and self occupied for
the remaining part of the year. In this case the benefit of Section 23(2) is not
available and the income will be computed as if the property is let out.

Illustration
M is the owner of a house. The municipal value of the house is ` 40,000. He paid ` 8,000 as
local taxes during the year. He was using this house for his residential purposes but let out
w.e.f. 1.1.2013 @` 4,000 p.m. Compute the annual value of the house.

203
Solution

Annual rent or municipal valuation (whichever is higher) 48,000

Less : Local taxes 8,000

Annual value of the house 40,000

(No benefit shall be given for self occupied period as the house did not remain vacant
during the previous year). Note: If fair rent is not gives, then assume actual rent as fair
rent.

C) Interest when not deductible from “Income from House Property” [Sec.
25]

Interest on borrowed money which is payable outside India shall not be

allowed as deduction u/s 24(b), unless the tax on the same has been paid
or deducted at source and in respect of which there is no person in
India, who may be treated as an agent of the recipient for such purpose.

D) Unrealised rent received subsequently to be charged to income-tax [Sec.

25AA]. Where the assessee could not realise rent from a property let to
a tenant and the same was allowed as deduction and, subsequently, the
assessee has realised any amount in respect of such rent, the amount so
realised shall be deemed to be the income chargeable under the head
“Income from house property” and, accordingly, charged to income-tax
as the income of thatprevious year in which such rent is realized, whether
or not the assessee is the owner of that property in the previous year.

E) Special provisions for arrears of rent received [Sec. 25B]

Where the assessee:

a) is the owner of an property consisting of any buildings or lands

appurtenant thereto which has been let out to a tenant; and

204
b) has received any amount, by way of arrears of rent from such property,
not charged to income-tax for any previous year; the amount so received,
after deducting a sum equal to 30% of such amount, shall be deemed to
be the income chargeable under the head income from house property.
Further, it will be charged to income-tax as the income of that previous
year in which such rent is received, whether the assessee is the owner
of that property in that year or not.

F) Property owned by co-owners [Sec. 26]

Sometimes the property consisting of buildings or the buildings and land

appurtenant thereto is owned by two or more persons, who are known
as co-owners. In such cases, if their representative shares are definite
and ascertainable, such persons shall not be assessed as an AOP in respect
of such property, but the share of each such person in the income from
the property, as computed in accordance with Sec. 22-25, shall be included
in his total income as under:-

a) Where house property is self occupied by each co-owner:- Where

the house property owned by the co-owners is self occupied by
each of the co-owner, the annual value of the property for each of
such of co-owner shall be nil and each of the co-owner shall be
entitled to the deduction of Rs. 30,000/ 1,50,000 under Sec. 24(b)
on account of interest on borrowed money.

b) Where the entire or part of the property is let out:- As regard, the
property or part of the property which is owned by co-owners is
let out, the income from such property or part thereof shall be first
computed as if this property or part thereof is owned by one
owner and thereafter the income so computed shall be apportioned
amongst each co-owner as per their definite share. The Annual
Value (NAV) can be negative only when Municipal taxes paid by
the owner are more than the gross annual value.
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 TABLE 2: Income from house prpoerty
s.no Property Gross
Type AV Deduction
of for Net AV
the municipal of the Standard Standard
property taxes property Deduction Deduction
1 Two self-occupied
House NIL NIL NIL NIL NIL
2 House property could
not be occupied by the
owner due to
employment or
business carried on at
any other place
NIL NIL NIL NIL NIL
3 To be
computed
as per Gross
provision Allowed on annual
s of actual value less: 30% of Net 30% of Net
Section payment Municipa Annual Annual
Let out property 23(1) basis l taxes Value Value
4 Only one property selected by the taxpayer will be considered as
self occupied house property and all other properties shall be
More than one Self deemed to be let -out for the purpose of computation of income
occupied Property under the head house property.
5 A self-occupied The house will be taken as let -out property and no concession
property let-out for the shall be available for the duration during which the property was
part of the year self-occupied.
6 One part of the Each part of the property shall be considered as separate property
property is let -out and and income will be computed accordingly

206
Chart Showing Computation of Taxable Income from House Property
Gross Annual Value of the house XXX
Less: Local Taxes paid by the owner during the previous year XXX
Annual Value XXX
Less: Deduction under Section 24:
For house let out or deemed to be let out:
(i) Repairs and Collection Charges (30% of Annual Value) XXX
(ii) (a) Interest on loan, taken for purchase, construction of repair of
the house, relating to previous year XXX
(b) Interest on loan for the period prior to the previous year in which
the house is completed is also allowable in five equal annual
instalments XXX XXX
Taxable Income from House Property XXX
ILLUSTRATION

ABC is a marketing officer at Lucknow. He owns two residential houses. The first is in
Delhi and was constructed on 31.12.1991. This has been let out on a rent of Rs. 3,000 p.m.
to a company for its office. The second house is in Lucknow which was constructed on
1.3.2011 and has been occupied by him as his own residence since then. He took a loan of
Rs. 90,000 on 1.8.2009 @ 8% per annum interest for the purpose of construction of this
house. The entire loan is still outstanding. Other relevant particulars in respect of these
houses are given below:
Particulars Ist House IInd House
Amount (Rs.):- Amount (Rs.)
Municipal Valuation 24,000 18,000
Municipal Tax 10% of Municipal Value 8% of Municipal Value
Expenses on repairs 2,000 6,000
Fire Insurance Premium 200 --
Ground Rent 175 130
Land Revenue 1,000 650
Interest on Loan -- 7,200

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The ground rent of the Delhi house and Municipal tax and land revenue of the Lucknow
house are unpaid. ABC was transferred to Mumbai on 1.12.2011 where he resides in a
house at a monthly rent of Rs. 4,000 and his house at Lucknow was let out on the same day
on rent of Rs. 2,000 per month. Compute the “Income from house property” in respect of
Mr. ABC.
Solution:
Particulars Amount (Rs) . Amount (Rs.)
Ist House (Let Out)
Gross Annual Value (Rent Received) 36,000
Less:- Municipal Taxes 2,400
Net Annual Value 33,600
Less:- Deduction u/s 24
Statutory Deduction @ 30% 10,080
(I) Income from House Property 23,520
IInd House (Part of the year let out and part Of the year self occupied)
Particulars Amount (Rs.) Amount (Rs.)
Gross Annual Value higher of the following two:
a) Municipal value or Fair rent, whichever is more, 24000
i.e., Rs 18,000 or Rs. 24,000
b) Actual rent received or receivable 2,000 *4 8000 24000
(higher of fair rent of actual rent)
Less:- Municipal taxes nil
Net Annual Value 24000
Less:- Deduction u/s 24
a) Statutory Deduction @30% 7200
b) Interest on Loan (7,200+960) 8160 15360
(II) Income from House Property 8640
Total income from house property = I + II = 32160 (23520+8640)

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Illustration:
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.
House No. 2 is let out for business, construction was completed on 1.3.92 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 ` 30,000. Find out the income of X from house property for the
assessment year 2019-20
Solution
Computation of income from house property for the assessment year 2019-20
Gross annual value: to be higher of the following: Rs Rs
(a) Municipal valuation ` 80,000 or
(b) De facto rent (` 1,20,000 less value of amenities)
i.e 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 1,500
(iii) Lift maintenance 1,500
(iv)Salary of gardener 1,800

209
(v) Lighting of stairs 1,200
(vi)Maintenance of swimming pool 750 (6,750)
Gross annual value 1,13,250
Less: Local tax `16,000:
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)
Income from house property 79,275

ILLUSTRATION
Mr. and Mrs. O.P. Gupta are co -owners of a property having equal shares. The construction of
the property was begun in July 1993 and completed in September 1998. They furnished the
following particulars for the assessment year 2019-20 in respect of the property.
One-third of the property is occupied by the co -owners and the remaining two -thirds is let for
residential purposes.The let out portion which constitutes two units fetches rent of ` 27,000 per
annum. The letting value of the property as per municipal records is ` 36,000. Municipal taxes of
Rs 4,050 have been paid by the co-owners.
Besides, they paid Rs 1,350 as ground rent and Rs 900 as insurance premium. The co -owners
also paid Rs 9,000 as interest on loan taken for the construction of the house.
Compute the income from the house property from the assessment year 2020-21 if other incomes
of Mr. and Mrs. O.P. Gupta are Rs 60,000 and Rs 22,500 respectively during the same period.
Solution
Computation of income from house property for the assessment year 2020-21
LET OUT PORTION
Gross annual value: To be higher of the following:
a) Notional income based on municipal valuation
2/3 x ` 36,000 = ` 24,000 or
(b) Annual rent = ` 27,000
Gross Annual Value 27,000
Less: Full municipal taxes paid by the co-owners

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Less: Full municipal taxes paid by the co-owners
2/3 x ` 4,050 = ` 2,700 (2,700)
Net Annual Value 24,300
Less: Deduction from net annual value:
(i) 30% of Net Annual Value 7,290
(ii) Interest on loan taken for the construction
of the house 2/3 x ` 9,000 = ` 6,000 6,000 (13,290)
Taxable income 11,010
Share of Mr. Gupta = Rs 5,505
Share of Mrs. Gupta = Rs 5,505

SELF-OCCUPIED PORTION

Gross annual value: to be higher of the following:

(i) Municipal valuation:

1/3 x ` 36,000 = ` 12,000 or

(ii) Fair rent (` 27,000 x 3/2 x 1/3) ` 13,500

Gross Annual Value 13,500

Annual Value 13,500

Share of Share of Mr. Gupta Mrs. Gupta

Apportionment of Annual value

among the co-owners 1 : 1 6,750 6,750

Annual value of self-occupied property for each

co-owner is taken to be [Section 23(2)(a)(i)

read with explanation to Section 26] Nil Nil

Less: Deduction from net annual value:

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 Less: Deduction from net annual value:

Interest on loan 1,500 1,500

Loss: under the head house property ( - )1,500 ( - )1,500

Statement of total income from house property:

5,505 5,505

Let out portion ( - )1,500 ( - )1,500

Self-occupied portion Loss:

4,005 4,005

3.13 SUMMARY

Sec.22 defines the term house property as follows: house property consists
of any building or land appurtenant thereto of which the assessee is the owner.
The appurtenant lands may be in the form of a courtyard or compound forming
part of the building. But such land is to be distinguished from an open plot of
land, which is not charged under the head but under the head „Income from
Other Sources or „Business Income , as the case may be. Besides, house property
includes flats, shops, office space, factory sheds, agricultural land and farm
houses.Income from house property is taxable in the hands of its legal owner
in whose name the property is registered. “Owner” for this purpose means a
person who can exercise the rights of the owner not on behalf of the owner but
in his own right. Sec.22 defines the term house property as follows: house property
consists of any building or land appurtenant thereto of which the assessee is the
owner. The appurtenant lands may be in the form of a courtyard or compound
forming part of the building. Besides, house property includes flats, shops, office
space, factory sheds, agricultural land and farm houses. Thus, Any income which

212
needs to be taxed under the head “Income from House Property” needs to satisfy
following three conditions:

· The property must consist of buildings and lands appurtenant thereto;

· The assessee must be the owner of such house property;

· The property may be used for any purpose, but it should not be used by
the owner for

· the purpose of any business or profession, the profit of which are

chargeable to tax.

If the property is used for own business or profession, it shall not be

chargeable to tax. Income chargeable under the head “Income from house
property” shall be computed after making the following deductions, namely:-

a. Standard Deduction

b. Interest on borrowed capital

From the net annual value computed, the assessee shall be allowed a
standard deduction of a sum equal to 30% of the net annual value. As per Sec. 24
interest payable in India on borrowed capital, where the property has been
acquired, constructed, repaired, renovated or reconstructed with borrowed capital
is allowable as a deduction. Interest amount paid/payable will be deducted. Same
will be aggregated first and allowed in five successive financial years starting
from the year in which the acquisition/construction was completed. Income
from house property is taxable on the basis of annual value. Even if the property
is not let out, notional rent receivable is taxable as its annual value Sec. 23(1)(a).
In determining the annual value there are four factors which are normally taken
into consideration. These are: i) Actual rent received or receivable, ii) Municipal
value, iii) Fair rent of the property, iv) Standard rent. Fair rent is the rental
value which the property is expected to fetch, depending on the prevailing
rents in the neighborhood and other market conditions. Municipal value is the
213
rateable value of the property determined for the purpose of levy of Municipal
taxes. Standard rent is the maximum rent for a property which its owner can
legally charge from a tenant, as per the Rent Control Act. The reasonable rent
for a property can be said to be the higher of its Municipal value or the fair
rental value, but it shall not be, in any case, more than the standard rent for
such property. As per Sec. 23(2) (a) & (b) where the property consists of house
or part of a house which:- a) is in occupation of the owner for the purposes of his
own residence, or b) cannot actually be occupied by the owner owing to his
employment, business or profession carried on at any other place, he has to
reside at that other place in a building not belonging to him, the annual value of
such house or part of house shall be taken to be NIL. For getting deduction of
interest of maximum of Rs. 1,50,000, it will be necessary to obtain a certificate
from the person to whom such interest is payable specifying the amount of interest
payable by the assessee for the purpose of acquisition/construction of property
or conversion of whole or any part of the capital borrowed which remains to be
repaid as a new loan.As per Sec. 27, the following persons, though not the legal
owners of the property, get are deemed to be the owners :

i) to spouse

ii) Holder of an impartible estate

iii) Member of a co-operative society

iv) Person in possession of property.

v) Person having right in a property for a period of not less than 12 years.

3.14 GLOSSARY

Annual Rental Value: Inherent capacity of the property to earn income

is termed as its “annual value”, and has been defined as the sum for which the
property may reasonably be let out.

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 Municipal Rental Value (MRV): For the purposes of levying local taxes
the local taxes the local authority i.e. Municipal corporation/Committee etc.
conducts a periodical survey of the house properties in their local limits. On the
basis of such survey the rental values are fixed which serves as the basis for
levying tax. The rental value so fixed is called MUNICIPAL RENTAL VALUE
(MRV)

Fair Rental Value (FRV): It is the rental value a house property can
fetch. It is based on the rent prevailing for similar type of accommodation in
same or similar type of locality. It is based on the principle that rent prevailing
in same locality for similar sized property is almost the same. Such rental value
is called FAIR RENTAL VALUE (FRV).

3.15 SELF ASSESSMENT QUESTIONS

Define ‘Annual Value’. How is it determined ?

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

What deductions are allowed from the annual value in computing income from
house property ?

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

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Write short notes on:

i) MRV

ii)FRV

iii) ERV

iv) Unrealised rent

Deductions U/S 24b

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

1. Sanjay owns a house property. Municipal value of house: ‘72,000 per

annum. Fair rent of house : Rs 66,000 per annum. Standard rent of house:
Rs. 60,000 per annum. The house was let out at Rs. 6,000 per month but
was sold on 1st January, 2019. Find out income from house property for
the assessment year 2020-21.

2. Nayan owns a house at Indore. Its municipal valuation is ‘24,000. He incurred

the following expenses in respect of the house property :

Municipal tax @ 20%,

fire insurance premium ‘2,000 and land revenue ‘2,400.

He took a loan of Rs 25,000 @16% per annum on 1st April, 2010. The whole
amount is still unpaid. The house was completed on 1st April 2015. Find out
the income from house property for the assessment year 2020-21 in respect
of the following options :

216
(a) If the house is used by the assessee throughout the previous year for his
residential purpose;

and

(b) If the house is let-out for residential purposes on monthly rent of Rs 2,000
from 1st April, 2015 to 31st January, 2016 and self-occupied for the
remaining period.

3.16 SUGGESTED READINGS

1. Dr. V.K. Singhania : Students Guide to Income-tax; Taxmann

Publications Pvt. Ltd., New Delhi.

2. Girish Ahuja and Ravi Gupta : Systematic Approach to Income-tax

and Sales-tax; Bharat Law House, New Delhi.

3. V.P. Gaur, D. B. Narang, Puja Ghai and Rajeev Puri: Income Tax
Law and Practice: Kalyani Publishers, New Delhi.

4. Income Tax Law & Accounts by Dr. H C Meharotra and Dr S P Goyal:

Sahitya Bhawan Publications.

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C. NO. : BCG -302 UNIT - IV
SEMESTER -III LESSON 10-12

GAINS FROM BUSINESS AND PROFESSION

STRUCTURE

4.1 Introduction 1

4.2 Deductions allowed u/s 30 to 44A

4.3 Expenses expressely disallowed

4.4 Treatment of depreciation

4.5 Computation of taxable business income

4.6 Computation of professional income

4.7 Summary

4.8 Glossary

4.9 self assessment questions

4.10 Suggested readings

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4.1 INTRODUCTION

The provisions for computation of Income from Business and Profession are
covered under sections 28 to 44D. Section 28 defines the scope of income which can
be taxed under this head. 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. The most
important head of income is the head ‘Profits and gains of Business or Profession’.
While the provisions of Sections 28 to 44D deal with the method of computing
income under head “Profits and Gains of Business or Profession”. The meaning of
the expression ‘ Business, has been defined in Section 2(13) of the Income-tax Act.
According to this definition, business includes any trade, commerce or manufacture
or any adventure or concern in the nature of trade, commerce or manufacture. The
concept of business presupposes the carrying on of any activity for profit, the definition
of business given in the Act does not make it essential for any taxpayer to carry on
his activities constituting business for a considerable length of time. In other words,
for even a single or isolated transaction entered into with the idea of making profit
would be a business within the meaning of the definition given in Section 2(13).The
concept of business presupposes the existence of the assessee’s intention to make a
profit out of his transactions. The object to make profit must be inherent in the
transaction although the ultimate result of the transaction may be such that the assessee
had to incur loss. Thus, the assessability of profits and gains from business under
this head does not in any way depend upon the ultimate outcome of the venture or
transaction yielding income or loss. A loss incurred from business is as much
assessable under this head as profit which is chargeable to tax. There may be cases
where a tax payer may acquire an asset not with the idea of selling it at a profit but to
retain it as his own investment. In such cases the profit or gain derived from the sale
or other transfer of such an investment would constitute a capital profit which cannot
be charged to tax under the head ‘income from business or profession’. However, if
the same assessee who holds some investments, decides at a later point of time to
convert this investment into stock-in-trade and deals with them as part of his business

219
assets in the normal course of his business, the profit or gain derived from the sale of
the same asset in the ordinary course of the business would constitute income
assessable under this head. The fact that the asset concerned was originally acquired
without the idea of making profit on sale, is immaterial for the purpose of assessment.
Thus, the concept of business presupposes an operation consisting substantially of
production or sale or purchase and sale or making arrangements for the production,
sale etc. of commodities. Thus, an agency which does not involve actual purchases
or sale but acting as intermediary would also constitute the carrying on of a business.
The definition of business given in Section 2(13) is wide enough to cover every case
of transaction entered into with the idea of earning income. The expression
‘Profession’ has been defined in Section 2(36) of the Act to include any vocation. In
the case of a profession, the definition given in the Act is very much inadequate
since it does not clearly specify what activities constitute profession and what activities
do not. According to the generally accepted principles, the meaning of the term
‘profession’ involves the concept of an occupation requiring either intellectual skill
or manual skill controlled and directed by the intellectual skill of the operator. For
instance, an auditor carrying on his practice, the lawyer or a doctor, a painter, an
actor, an architect or sculptor, would be persons carrying on a profession and not a
business. The common feature in the case of both profession as well as business is
that the object of carrying them out is to derive income or to make profit. The process
of making the profit would be the main area of difference between the two while the
ultimate object is common to both.

4.2 OBJECTIVES

After going through the lesson students will be able to

 Understand about the basic terms covers under Gains from Business and
Profession comes under the purview of Income Tax Act, 1961.

 Have practical knowledge about the computation of taxable business

income and professional income for the purpose of Income Tax Act,
1961.
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4.3 DEDUCTIONS ALLOWED U/S 30 TO 44A

Deductions from Gross Income of Business or Profession [ Section 30 to 44DB]

Section 29 says that the profits under the head ‘Profits and Gains of Business
or Profession’ are calculated in accordance with the provisions contained in Sections
30 to 44DB, which provide for the deductions to be made from the gross income.
These deductions are :
S. Particulars Sections
No.

1 Rent, rates, taxes, repairs and insurance for building, 30

used for the purpose of the assessee’s business

2 Repairs and insurance premium paid in connection with 31

the plant, machinery, furniture etc. used in business or
profession
3 Depreciation of buildings, machinery, plant or furniture 32

4 Tea Development Account and Reserve for Shipping

33AB and 33AC
companies
5 Expenditure on scientific research 35
6 Expenditure on patents and copyrights 35 A

7 Expenditure on know-how 35 AB

8 Expenditure on eligible projects or Schemes 35 AC

9 Expenditure by way of payment to associations and
institutions carrying out Rural Development Programme & 35 CCB
10 Amortisation of certain preliminary expenses 35 D
11 Expenditure on demerger or amalgamation 35 DD
12 Expenditure incurred under voluntary retirement scheme 35 DDA

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S. Particulars Sections
No.
13 Deduction for expenditure on prospecting; etc. for
certain minerals 35E
14 Other Deductions
- Insurance premium of Stock-in-trade 36
- Bonus or commission to employees
- Interest on borrowed capital
- Employer’s contribution to provident and other funds
- Employer’s contribution to the approved gratuity funds
- Loss of animals
- Bad debts
- Transfer of money to special reserve in case of
financial institutions only
- Expenditure incurred on family planning case of
companies only
15 General Deductions
Any other type of expenses incurred but not covered 37
under- sections 30 to 36
16 Buildings partly used for business premises 38

17 Expenses expressly disallowed while computing

income under business or profession 40
18 Expenses not allowed to be deducted under certain
circumstances 40A

19 Deemed profits 41

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 Deductions in case of oil mining concerns 42

Definitions of certain terms 43

Certain deductions to be allowed only on actual

payments 43B

Insurance Business Profits 44

Maintenance of Accounts by certain Professionals 44AA & 44AB

a. RENT, RATES, TAXES, REPAIRS AND INSURANCE FOR

BUILDINGS (SECTION 30).

A deduction is allowed regarding rent, rates, taxes, repairs and insurance

premium paid for the building premises where the assessee is carrying
on his own business or profession.

Rent :

(1) The full amount of rent will be an admissible deduction in case

the building premises are taken on rent.

(2) In case on rent is paid or the assessee owns the business premises,
then no deduction shall be allowed because the landlord cannot
be a tenant also. If it is so, the assessee will not be taxed for the
building income under the head house property.

(3) If business premises belong to one of the partners of the firm, the
rent paid to the landlord – partner shall be an admissible expense
of the firm’s business or profession.

Repairs:

(1) incase the assessee is a tenant, and the agreement of rent provides
that the tenant will bear the cost of repairs, the amount paid or
spent on account of such repairs, is allowed as deduction.
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 (2) Otherwise than as a tenant, e.g., the assessee is the owner of the
premises, the amount which the assessee spends on repairs will
again be allowed as deduction.

Local taxes,etc.

Any sums paid on account of land revenue, local rates or municipal taxes
in respect of the premises used for the assessee’s business, if the assessee
is the owner of the building , are allowed under this category, in case the
building is on rent then such part of these expenses which the assessee is
supposed to pay under the contract of rent entered between the landlord
and assessee are also allowed.

Insurance premium

The amount of any premium paid in respect of insurance against risk of

damage or destruction on the premises of the assessee used for his business
or profession is allowed as expenditure. Insurance may be against fire,
earthquake,etc.

Where the assessee has sub –let a part of the premises, the deduction
under section 30 will be limited to the difference between the rent paid
and the rent received from sub- letting. Section 38 (i) deals with the cases
where the part of the house is used for the business purpose and the
remaining part for residence of the assessee. In such case the deduction
will be limited to that part of the building which is used for the business
purpose.

b. REPAIRS AND INS URANCE O F PLANT, MACHINARY,

FURNITURE (Sec. 31): -Any amount spent on repairs, insurance or
hire charges, etc. On Plant, machinery, furniture by a business
organisation is allowed as a deduction.

(i) The amount paid on account of current repairs thereto.

224
 (ii) The amount of any premium paid in respect of insurance against
the risk of damage or destruction thereto.

The plant and machinery and furniture ,etc. on which this destruction is
to be claimed must be used for the business of the assessee. The repairs
must be in the ordinary course to replace or to compensate the wear and
tear of the asset, i.e., to keep the asset in the working order only and
these should not be of capital nature.

c. DEPRECIATION (Sec. 32): -

Under Section 32 depreciation on assets is allowed as deduction while

computing income from business or profession. To claim this deduction
following conditions should be satisfied :

1) Assessee should be owner of the asset. 

2) Asset must be used for the business. 

3) Such use must be in the previous year. 

Depreciation  is  allowed  not  on  individual  asset  items,  but  on  block 
of  assets  under  following categories:   

1) Buildings  

2) Plant & Machinery 

3) Furniture 

4) Intangible Assets acquired after March 31, 1998 such as know

how, Patents, Trademarks, licenses, franchises or any other business or
commercial rights of similar nature. The term plant includes ships,
vehicles, books, scientific apparatus and surgical equipments used for
the business but excludes tea bushes or live stock. If any asset falling in
block of assets is acquired during the year and put to use during the

225
 previous year for less than 180 days depreciation on such asset shall be
restricted to 50% of the normal depreciation No depreciation is allowed
on motor car which is manufactured outside India and acquired on or
after 28th of February 1975 but before 1 st April 2001. However, this
restriction does not apply if:

1) Assessee carries on a business of running the car on the hire for tourist, or

2) If assessee is using the car outside India for his business in another country.
If business is carried on in a building not owned by the assessee but acquired
on lease or any other occupancy right and any capital expenditure is incurred
by him in respect of this building, such expenditure will be considered as
cost of asset as if he is the owner of such property.

A. METHOD OF CALCULATING DEPRECIATION 

1. Consider total W.D.V. of assets falling in a particular block of assets at

the beginning of the year.

2. Add cost of assets purchased during the previous year.

3. Deduct Sale Price (or Scrap value) of asset sold, discarded, demolished or
destroyed during the year.

4. On the balance amount i.e. 1+2 3, calculate depreciation at the given rate. If
WDV becomes negative, no depreciation is allowed. If all assets in the block
are sold depreciation is not allowed even if block has any balance WDV.

B. In the first year if asset acquired is used for less than 180 days depreciation
is restricted to 50% of normal depreciation.

C. W.e.f. A.Y. 1998 99 an undertaking engaged in generation / distribution

of power has an option to claim depreciation on Straight Line Method.
Once option is exercised it will apply to all subsequent years.

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Additional depreciation [ Section 32 (1) (iiA)]

With effect from assessment year 2006-07 an additional depreciation @

20% of actual cost of P&M is allowed if following conditions are fulfilled:

(a) The assessee is engaged in the business of manufacture or

production of any article or thing or goods.

(b) In case any new plant and machinery is acquired and installed on
or aft er 1-04-2005 , it shall qualify for additional / intial
depreciation. In case new plant and machinery is acquired before
1-04-2005 but installed on or after 1-4-2005 , then additional
depreciation is not available.

(c) It is allowed in addition to normal depreciation and shall be taken

into consideration for calculating written down value.

(d) To claim additional depreciation @ 20 % of actual cost the

condition of use for 180 days during the relevant previous year
shall be applicable for this depreciation also. If used for less than
180 days in the previous year in which it is acquired, additional
depreciation shall be allowed @ 10 % ( i.e., for half year and
remaining 10 % additional depreciation shall be allowed in the
next previous year.

(e) The plant and machinery is new and it has not been used earlier
either in India or outside India.

(f) The plant and machinery is not eligible to be written off @ 100 %
of its actual cost in any one previous year.

(g) The plant and machinery is not in the nature of office appliances
or road transport vehicles.

(h) The return of income must be accompanied by the details of plant

and machinery and expansion of installed capacity.

227
 The return of income must be accompanied by a report by the charatered
accountant that the deduction has been correctly claimed.

Additional depreciation is not allowed in case of following assets:

(i) Ships and aircrafts

(ii) Old plant and machinery used either in India or outside India by
any other person.

(iii) Any plant and machinery installed in office premises,residential

accommodation and guest house.

(iv) Office appliances or road transport vehicles.

(v) Any other plant and machinery the whole of cost of which is going
to be debited to this profit and loss account by way of depreciation
or otherwise in any one previous year.

Grant of additional depreciation in succeeding previous year

In case new plant and machinery is put to use for less than 180 days in
the previous year or its acquisition and installation, then additional depreciation
shall also be allowed only upto 50 % i.e., 50 % of 35 % in that year and balance
50 % will be allowed in the immediate succeeding previous year.

UNABSORBED DEPRECIATION SECTION 32 (2) 

If profit for the year is not sufficient to absorb depreciation either fully or
partially, unabsorbed depreciation can be deducted from any other head of income.
If it still remains unabsorbed it can be carried forward to subsequent assessment
years to be adjusted against future taxable income. It can be carried forward for
unlimited period.

The unabsorbed depreciation can be adjusted in the following manner:

228
 (1) depreciation allowance is deductable out of profits and gains of
the business or profession for that assessment year.

(2) If any portion of depreciation remains unadjusted it will be set off

from any other income of the year except income from other
sources.

(3) Depreciation which remains unadjusted as either there is no income

or less income in the relevant previous year, it can be carried
forward till it is fully adjusted from any income except salary
income during the succeeding previous years. It shall be treated as
depreciation for such succeeding previous year.

For setting off brought forward depreciation allowance, following order

should be followed :

(i) firstly depreciation of current year

(ii) secondly, brought forward business loss/ speculation loss

(iii) thirdly, brought forward unabsorbed depreciation.

e. Tea/Coffee/Rubber Development Account (Section 33AB)

With effect from the assessment year 1991-92, the substituted Section
33AB is applicable to an assessee carrying on the business of growing
and manufacturing tea in India. For claiming the deduction u/s 33AB the
assessee has to satisfy the following conditions:

(1) Deposit of amount :

Where an assessee, carrying on business of growing and manufacturing

tea or coffee or rubber in India has, before the expiry of six months from
the end of the previous year or before the due date of furnishing the return
of his income, whichever is earlier :

229
 (a) Deposited with the National Bank any amount or amounts in an
account (hereinafter in this section referred to as the special
account) maintained by the assessee with the Bank in accordance
with and for the purposes specified in a scheme (hereafter in this
section referred to as the scheme) approved in this behalf by the
Tea Board of India or the Coffee Board of India or the Rubber
Board.

(b) Amount of Deduction:

(a) a sum equal to the amount or the aggregate of the amounts

so deposited; or

(b) Forty per cent of the profits of such business (computed

under the head “Profits and gains of business or profession”
before making any deduction under Section 33AB),
whichever is less.

Special account defined: It is an account to be opened with national bank

for agriculture and rural development (NABARD)

This benefit shall also be available if such amount is deposited in an

account to be opend in accordance with and for the purpose specified in
a scheme framed by the tea, coffee or rubber board with the prior approval
of central government . This benefit is to be made available only in relation
to assessment years 1995-96 and afterwards.

When to deposit

Amount has to be deposited

(a) before the expiry of six months from close of previous year; or

(b) before date of furnishing of return ; which ever is earlier.

230
 Withdrawal of amount [ Section 33 AB (3)]

Withdrawal from this account will not be allowed except on :

(a) closure of business

(b) death of assessee

(c) partition of HUF

(d) dissolution of firm or

(e) liquidation of company

in case any amount is withdrawn due to closure of business or dissolution

of firm, before 8 succeeding previous years the whole of such amount
shall be deemed as income taxable under the head profits and gains of
business or profession of the previous year in which amount is withdrawal
[ 33AB (5)]

In case any amount is withdrawn and utilized for the business during the
previous year and expenditure shall not be debited to profit and loss
account of that previous year [ 33 AB (6)]

In case any amount is released by the bank in connection with a scheme

approved by bank such amount must be utilized within same previous
year. Any amount remaining unutilized is deemed as income taxable under
profits and gains of business or profession [ 33AB (7)]

Compulsory audit

In case of an assessee who is not subject to audit under any provision of

income tax act, and such assessee wants to claim this deduction ,it must
get its accounts audited and the report of such audit must accompany the
return [ 33 AB (2)].

231
No deduction

No deduction shall be allowed in respect of any amount utilized for the

purchase of :

(i) any plant and machinery installed in office premises, residential

houses and guest houses,

(ii) any office appliances except computers

(iii) Any plant and machinery whose full actual cost has been allowed
as deduction

(iv) any new plant and machinery installed for production of an article
specified in 11th schedule [ 33 AB (4)]

Deemed profit

In case an asset acquired under this scheme is sold/ transfeered before

expiry of 8 previous years, the amount of cost which was met out, amount
released from special account shall be deemed to be profit and gain from
the business [ 33 AB (8)]

Expenditure incurred in the field of scientific research [ Section 35]

Section 43 (4) defines the scientific research as activities for the extension
of knowledge in the fields of natural or applied sciences including
agriculture, animal husbandry or fisheries

References to expenditure incurred on scientific research includes all

expenditures incurred for the prosecution , or the provision of facilities
for persuing the scientific research, but does not include any expenditure
incurred on the acquisition of rights in or arising out of scientific research.
References to scientific research related to a business or class of business
include:

232
 (a) Any scientific research which may be lead to or facilitate an
extension of that business or , as the case may be , all business of
that class;

(b) Any scientific research of a medical nature and which has a special
relation to the weldfare of workers employed in that business or
as the case may be, all businesses of that class.

All expenses incureed by assessee on promotion of research can be divided

into two broad categories.

(A) Expenses on research carried on by the assessee himself. ( In house

research).

(B) Research activities carried on by an outside agency or body and

the assessee helps such a body through finance.

Broadly, expenditure on scientific research can be divided in the following

two categories:

Expenditure on scientific research

On research carried on by assessee himself On research carried on by outsiders
A-1 For all assesses except those covered in B-1 Contribution to an approved research
point A-II association, university , college or other
- Revenue expenditure [section 35 (1)(i)] institutions [ section 35(1) (ii) (iii)]
- Capital expenditure [ Section 35 (2)]
A-2 Expenditure on in-house research and
development by specified companies [sec. 35 B -2 Contribution to national laboratory
(2AB)] [section 35 (2AA)]
Condition: Research must relate to the
business of the assessee.

B-3 Contribution to an Indian company whose

main objective is scientific research and
development [sec. 35 (1) (iii)]
Condition: Research may or may not be related
to the business of the assessee.

233
Extract from the eleventh schedule ( List of articles or things)

 Bear, wine and other alcoholic spirits

 Tobacco and tobacco preparations such as cigar and cheroots, cigarettes,

biris, smoking mixtures for pipes and cigarettes chewing tobacco and
snuff.

 Cosmetic and toilet preparations

 Toothpaste, dental cream, tooth powder and soap

 Aerated waters in the manufacture o f which blended flavouring

concentrations in any form are used.

 Confectionery and chocolates

 Gramophones, including record players and gramophones records.

 Projectors

 Photographic apparatus and goods.

 Office machines and apparatus such as typewriters, calculating machines,

cash registering machines, cheque writing machines, intercom machines
and teleprinters.

 Steel furniture, whether made partly or wholly of steel.

 Safes, strong boxes, cash and deed boxes and strong room doors.

 Latex foam sponge and polyurethane foam.

 Crown corks, or other things of cork, rubber, polythene or any other

material.

 Pilfer proof caps for packaging or other fittings of cork, rubber,polythene

or any other material.

234
f. EXPENDITURE ON ACQUISITION OF PATENT RIGHTS OR
COPYRIGHTS (SECTION 35A)

Capital expenditure incurred by all assessees at any time after 28.2.1966

but before 1st April, 1998 for the purpose of acquisition of patent rights
or copyrights for the purposes of his business, would be allowed to be
amortised over a period of 14 years in equal instalments beginning with
the previous year in which such expenditure is incurred or where such
expenditure is incurred before the commencement of the business, the
fourteen previous years would be calculated from the previous year in
which the business commenced. With effect from 1.4.98 depreciation on
intangible assets has been introduced. It is charged @25%. In view of
this change expenditure under this section need not be amortised if
incurred after the given date. However, where the rights became effective
in a year prior to the one in which the expenditure is incurred, the
deduction would be allowable to the assessee in respect of that period as
remains unexpired. In other words, if at the time of acquisition (incurring
the expenses) of the patent, say, the patent has already been utilized for
10 years by the assessee, the cost of the patent would be allowed as a
deduction in four equal instalments in the remaining four years. In cases
where the assessee acquires the patent or copyright at a time when only
one year of its life remains, the entire cost of the patent to the assessee
would be allowed in the year of acquisition itself.

\ Any instalments of such expenditure incurred before 1-4-98 shall not be

left for claiming as deduction during the previous year commencing from
the previous year 2011-12 . hence , section 35 A is not applicable w.e.f
Previous year 2011-12.

235
g. DEDUCTION IN RESPECT OF EXPENDITURE ON KNOW-HOW
(SECTION 35AB)

(a) When technical know how is acquired in any previous year the
lump sum consideration paid shall be allowed to be deducted in 6
equal instalments commencing from the previous year in which
such consideration is paid.

(b) in case technical know how acquired was developed in any Indian
laboratory , university or institution referred under section 32 A ,
the consideratio n paid shall be writ ten off in t hree equal
instalments.

Note: Any instalments of such expenditure incurred before 1-4-98 shall

not be for claiming as deduction during the previous year 2000-01 onwards
commencing and hence , section 35 A is not applicable w.e.f Previous
year 2000- 01.

Note: Any expenditure incurred on acquiring know- how shall qualify

for depreciation @ 25 % with effect from 1-4-98.

Amortization of expenditure for obtaining right to use spectrum for

telecommunication services [ Section 35 ABA] [ w.e.f A.Y 2017-18]

Any capital expenditure incurred and actually paid by an assessee on the

acquisition of any right to use spectrum for telecommunication services
shall be allowed as a deduction in equal instalments over the period
starting from the year in which such payment has been made and ending
in the year in which the useful life of spectrum comes to an end.

Expenditure for obtaining licence to operate telecommunication services

[ Section 35 AAB]

1. In case any capital expenditure is incurred for acquiring a license

to operate telecommunication services and actual payment has been
made , a deduction of an amount equal to appropriate fraction

236
 shall be allowed in every previous year during which the license
shall be in force.

Appropriate fraction = actual payment made x 1/ Number of

previous years for which the fee is paid.

“ Actual payment has been made” means the actual payment of

expenditure irrespective of the previous year in which liability for
the expenditure was incurred according to the method of
accounting regularly employed by the assessee.

2. Any expenditure incurred to acquire any right to operate

telecommunication services in India before the commencement
of business shall be deemed to have been incurred in the method
of accounting regularly employed by the assessee.

3. In case the licence is sold and capital sum realized from transfer
is less than the expenditure remaining unallowed shall be fully
allowed to be debited in the year in which it is sold.

4. In case the capital sum realized is more than the amount of

expenditure remaining unallowed, the difference between the
mo ney realized and amount remaining unallowed shall be
chargeable to tax as income under the head profits and gain of
business and profession in the previous year in which license is
transferred but it shall not exceed the amount which has been
written off so far. In case the license is transferred in the year in
which business is not in existence, even then this provisions shall
be applicable as if business is in existence.

5. In case license is transferred wholly or in part and capital sum

realized is not less than the expenditure incurred remaining
unallowed, no deduction for such expenditure shall be allowed in

237
 the year in which such license is transferred and in any subsequent
previous year.

6. In case any part of the license is sold and money realized is more
than the unallowed amount and the excess amount does not exceed
the amount allowed so far, such excess shall be taxable as business
profit. In case, the amount realized does not exceed the unallowed
value, the difference can be written off in remaining number of
years.

7. Where under a scheme of demerger, the license is sold by demerged

company to resulting Indian Company the sub clauses (2) , (3)
and (4) shall not be applicable .

Note: In case deduction of any expenditure is allowed under this

section, such asset shall not qualify for depreciation under section
32 (1)

h. EXPENDITURE ON ELIGIBLE PROJECTS OR SCHEMES

(SECTION 35AC)[ Omitted w.e.f A.Y 2018-19]

Section 35AC has been inserted by Finance (No. 2) Act, 1991 from the
assessment year 1992-93 onwards. Under this section an assessee is
allowed a deduction in computing profits of business or profession in
respect of any expenditure by way of payment of any sum to a public
sector company or a local authority or to an association or institution
approved by the National Committee for carrying out any eligible project
or scheme.[ Omitted w.e.f A.Y 2018-19]

Deduction in respect of capital expenditure incurred on setting up of

a specified business [ Sec 35 AD]

With effect from assessment year 2010-11 , a new deduction u/s 35 AD

was introduced to provide incentive to those assesses who sets up new

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business units in certain specified areas/ fields. This deduction shall be
available if following conditions are satisfied:

1. A unit is set up in specified businesses.

2. Unit of the specified business should be a new one.
3. Books of the assessee are audited.

This new section shall apply in case of following business:

(i) Setting up and operating a cold chain facilities for specified

products on or after 1-4-2009.

(ii) Setting up and operating a warehousing facilities for storage of

agricultural produce on or after 1-4-2009.

(iii) Laying and operating a cross country natural gas or crude or

petroleum oil pipeline network for distribution including storage
facilities being an integral part of such network on or after 1-4-
2007.

(iv) Building and operating a hotel of two star or above category

anywhere in India on or after 1-4-2010.

(v) Building and operating a hospital with atleast 100 beds for patients
anywhere in India on or after 1-4-2010.

(vi) Developing and building a housing project for slum redevelopment

or rehabilitation scheme framed by central or a state government
and notified by board as per guidance as may be prescribed on or
after 1-4-2010.

(vii) Developing and building a housing project under a scheme for

afforadable housing framed by the central or a state government
and notified by board as per guidance as may be prescribed on or
after 1-4-2011.
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 (viii) Production of fertilizer in India on or after 1-4-2001.

(ix) Setting up and operating an Inland container depot or a container

freight station notified or approved under the customs act, 1962
on or after 1-4-2012.

(x) Bee- keeping and production of honey and bees wax on or after 1-
4-2012.

(xi) Setting up and operating a warehousing facility for storage or sugar

on or after 1-4-2012.

(xii) Laying and operating a slurry pipeline for the transportation of

iron ore or on after 1-4-2014.

(xiii) setting up and operating a semiconductor wafer fabrication

manufacturing unit on or after 1-4-2014 , if such unit is notified
by the board in accordace with the prescribed guidelines.

(xiv) Developing or operating and maintaining or developing , operating

and maintaining any infrastructure facility on or after 1-4-2017 ,
i.e., assessment year 2018-19.

i. EXPENDITURE BY WAY OF PAYMENT TO ASSOCIATIONS AND

INSTITUTIONS FOR CARRYING OUT RURAL DEVELOPMENT
PROGRAMMES (SECTION 35CCA)

Any sum paid to a rural development fund set up and notified by the
Central Government and to the National Urban Poverty Eradication Fund
similarly set up and notified qualifies for deduction on fulfillment of
certain conditions.

Conditions

Deductions under this section shall be allowed only if following conditions

are also satisfied:
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(i) The assessee has obtained the approval of the prescribed authority
in respect of such programme before the 1 st day of march, 1983

(ii) such programmes involves work by way of construction of any

building or other structure whether for use as dispensary , school
, training or welfare centre, workshop or any other purpose or the
laying of any road or the construction or boring of a well or
tubewell or the installation of any plant and machinery and such
work has commenced before the 1 st day of march, 1983;

(iii) the expenditure on such programmes is incurred in a case where

the approval of the prescribed authority

Amount of deduction : 100 % of the amount contributed.

Expenditure on notified agricultural extension project [ section 35

CCC]

(i) Eligible assessee: Any [ i.e., Individual , HUF, Firm, Company,

etc.]

(ii) Nature of expenditure: The expenditure must have been incurred

on agricultural extension project notified by the board in this behalf
in accordance with the prescribed guidelines.

(iii) Amount of deduction: 150 % of such expenditure [ w.e.f

assessment year 2021- 22, rate of deduction shall be only 100 %]

(iv) No deduction under any other section: Where such expenditure

is claimed and allowed under this section for any assessment year,
no deduction shall be allowed in respect of such expenditure under
any other provisions of the income tax for the same or any
assessment year.

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 Expenditure on notified skill development project [ Section 35 CCD]

(i) Eligible assessee: Company

(ii) Nature of expenditure : The expenditure must have been incurred

on any skill development project notified by the board in this behalf
in accordance with the prescribed guidelines.

(iii) Amount of deduction: 150 % of such expenditure [ w.e.f

assessment year 2021- 22, rate of deduction shall be only 100 %]

(iv) No deduction under any other section: Where such expenditure

is claimed and allowed under this section for any assessment year,
no deduction shall be allowed in respect of such expenditure under
any other provisions of the income tax for the same or any
assessment year.

j. AMORTISATION OF PRELIMINARY EXPENSES (SECTION 35D

and Rule 6AB]

Under Section 35D, Indian companies and other non-corporate taxpayers

resident in India would be entitled to amortisation of certain preliminary
expenses incurred by them at any time after 31.3.1970. The expenditure
which qualifies for amortisation should have been incurred by the
assessee:

(i) before the commencement of his business,

(ii) if however, the expenditure is incurred after the commencement

of business, it is essential that the expenditure should be in
connection with the extension or expansion of the undertaking of
the assessee or in connection with the setting up of a new unit by
the assessee.

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Amount of Deduction:

The amount qualifying for amortisation would be allowable as a deduction

in five equal instalments beginning with the previous year in which the
business of the assessee actually commences or the previous year in which
the extension of the present undertaking is completed or the new unit
commences production or operation, as the case may be.

Qualifying amount of expenses:

The following items of expenses qualify for amortisation under this section
as preliminary expenses:

(i) expenditure incurred by the assessee in connection with the

preparation of feasibility report or project report;

(ii) expenses for conducting market survey or any other survey

necessary for the purpose of the business of the assessee;

(iii) expenditure for getting engineering services related to the business

of the assessee;

(iv) expenses by way of legal charges for drafting any agreement

between the assessee and any other person for any purpose relating
to the setting up or conduct of the business of the assessee;

(v) in the case of a company

(a) expenses by way of legal charges fo r draft ing the

Memorandum and Articles of Association of the Company;

(b) expenses for printing the Memorandum and Articles of

Association;

(c) expenses by way of fees for registration of the company

under Companies Act, and

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 (d) expenditure incurred in connection with issue for public
subscription of shares or debentures of the

(vi) company, being underwriting commission, brokerage and

the charges of drafting, typing, printing and advertisement
of the prospectus; and

(vii) (vi) such other items of expenses not covered by the list
specified above which the Central Board of Direct Taxes
may prescribe for the purpose of amortisation under this
section.

k. EXPENDITURE IN THE CAS E OF AMALGAM ATIO N/

DEMERGER (SECTION 35DD)

The section provides that where an assessee, being an Indian company,

incurs expenditure on or after April 1, 1999 wholly and exclusively for
the purpose of amalgamation or demerger, the assessee shall be allowed
a deduction equal to one fifth of such expenditure for five successive
previous years beginning with the previous year in which amalgamation
or demerger takes place. No deduction shall be allowed in respect of the
above expenditure under any other provisions of the Act.

l. AMO RTIS ATIO N OF EXPENDITURE IN THE CASE OF

VOLUNTARY RETIREMENT SCHEME (SECTION 35DDA)

The object of this section is to provide amortisation of one-fifth every

year from the year in which the expenditure is incurred, of expenditure
by way of payment of any sum to an employee in connection with his
voluntary retirement. It also provides that no deduction would be allowed
in respect of such expenditure under any other provision of the Act.

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m. DEDUCTION IN RESPECT OF EXPENDITURE ON
PROSPECTING ETC. FOR CERTAIN MINERALS (SECTION 35E)

Section 35E of the Income-tax Act provides allowance to amortise the

capital expenditure incurred by an assessee towards prospecting for certain
minerals. The benefit of amortisation under this section is available to
Indian companies and other non-corporate entities resident in India.

The assessee would not be entitled for amortisation under this section in
respect of the following three items of expenses namely,

(i) Expenditure incurred on the acquisition of the site of the source

of any mineral or group of associated minerals or of any right in
or over such site.

(ii) Expenditure on the acquisition of the deposits of such minerals or

group of associated minerals or of any right in or over such
deposits; or

(iii) Expenditure of a capital nature in respect of any building, machinery,

plant or furniture for which depreciation allowance is available
under Section 32 of the Income-tax Act.

n. DEDUCTION U/S. 36: 

1. Insurance:  Section  36(1) 

(a) The assessee is entitled to the deduction of the amount of any

premium paid in respect of insurance against risk of damage or
destruction of stocks or stores used for the purposes of the business
or profession.

(b) The amount of premium paid by 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

245
 society engaged in supplying milk raised by its members to such
federal milk co-operative society.

(c) The amount of any premium paid by cheque by the assessee as an

employer to effect or to keep in force an insurance on the health
of his employees under a scheme framed in this behalf by –

A. the General Insurance Corporation of India formed under Section

9 of the General Insurance Business (Nationalisation) Act, 1972
and approved by the Central Government; or

B. any other insurer and approved by the Insurance Regulatory and

Development Authority established under Sub-section (1) of
Section 3 of the Insurance Regulatory and Development Act, 1999.

2. Bonus or commission paid to Employees: Section 36(1) (ii): It is allowed

as deduction so far as they are not paid as profit or dividend.

3. Interest  on  borrowed  capital:  Section  36(1)  (iii):    It  is  allowed  as
deduction However, interest paid by firm to its partners is allowed subject
to provisions of Sections 40(b). Discount on zero coupon bonds is
deductible by issuing Company on pro rata Basis Sec.36(1)(iii a)

4. Contribution to recognised Provident fund or an approved super annuation

fund: Section 36(1)(iv). Any sum paid by the assessee as an employer by
way  of  contribution  towards pension scheme. 

5. Contribution to Pension Scheme: Sectlon 36(1)(iva) Any contribution by

an employer by way of contribution towards a pension scheme for an
employee up to 10% of salary shall be allowed as deduction.

6. Contribution to approved Gratuity Fund Section 36(1)(v): Amount

 contributed   to  the  fund  which  is  for  the  exclusive  benefit  of  the
employees will be allowed as deduction. Contributions received from
employees (when deposited) Section 36(1)(va): Any contribution received
246
 from employees towards any funds for the welfare of the employees e.g.
P. F. will be allowed as deduction when such contribution is credited to
employees a/c on or before the due date. It is allowed as deduction not
because it is an expenditure of the assessee. In fact, it is not at all an
expenditure of the assessee. But when this amount is deducted from salary
of employees, it is treated as an income under section 2(24)(x). Therefore,
deduction is allowed when payment is made by the due date.

7. Animals used for the business: Section 36 (1) (vi):   Deduct  ion   is a  l

lowed  when  animals  have died  or have become  permanently use less.
 Amount  of  deduction  will  be  difference  between  actual cost of the
animals and amount realised if any in respect of carcasses of the animals.
Deduction is allowed only if animals are used for the purpose of business
but not as stock in trade.

8. Bad   debts:   Section   36(1)(vii)   and   Section   36(2):   Deduction   is

allowed on this account if debts have arisen out of business transaction.
It is the responsibility of the assessee to prove to the satisfaction of income
tax officer that such debts are irrecoverable.

9. Expenditure for promoting family planning: Section 36(1)(ix): Only a

company can claim this deduction. Any expenditure incurred by a company
to promote family planning among its employees is allowed as deduction
fully, provided it is revenue expenditure. Any capital expenditure on this
account is allowed as deduction in 5 equal instalments. If profit is not sufficient
to absorb this expenditure it can be carried forward to be set off in future. No
depreciation can be claimed under section 32 on capital assets used for
promoting family planning and allowed as deduction under section 36(1)(ix).

o. GENERAL   EXPENDITURE   FOR    THE   PURPOS E   O F 

BUSINESS  OR  PROFESSION  SECTION  37:   

Section 37 (1) Says that any expenditure ( not being expenditure of the
nature described in sections 30 to 36 and not being in the nature of capital
247
 expenditure or personal expenses of the assessee), laid out or expended
wholly and exclusively for the purposes of the business or profession
shall be allowed in computing the income chargeable under the head, “
Profits and Gains of Business or Profession”.

The deduction are to be allowed in respect of those expenses which shall

satisfy the following conditions:

1. The expenditure should not be of the type of expenses already

covered under sections 30 to 36 of this act.

2. Expenses should have been incurred in the relevant accounting

year.

3. Expenses should be in respect of the business carried on by the

assessee and the profits of which are to be computed and assessed,
and should be incurred after the business is set up.

4. Expenses should not be in the nature of personal expenses of the

assessee.

5. The expenses should have been incurred totally and exclusively

for the purposes of the business of the assessee.

6. Expenses are not of capital nature.

7. The expenses are incidental to the business of the assessee and

directly spring from the carrying of it.

Allowable deductions u/s 37 (1)

The following are some of the examples of expenses allowable as

deduction u/s 37:

1. All expenses and payments made for purchasing of raw materials,

manufacture and sale of goods.

248
2. All expenses in the nature of advertisement to push up sales.

3. Sales tax and expenses incurred in relation to sales tax appeal

4. Day to day expenses to carry on business.

5. Some subscription to be paid compulsorily and to protect the

business interests.

6. Reasonable expenses incurred on Diwali /Puja or other festivals,

etc.

7. Reasonable expenses incurred at the time of mahurat, dewali, etc.

but no monetary ceiling has been fixed by board.

8. Royalty paid in connection with the use of trade marks, patents,

copyrights, etc.

9. Commission paid to procure orders.

10. Compensation paid to an agent in connection with the termination

or modifications in the terms and conditions of his agency.

11. Installation expenses of new telephone and payment made under

‘Own Your Telephone’ (OYT scheme).

12. Expenses incurred to oppose the threatened nationalization of the

business.

13. Legal expenses incurred to claim damages or compensation in case

of non- fulfillment of a contract.

14. Pension, Gratuity and any other voluntary payment given to the
employees.

15. Gifts given to the employees but such gifts should not fall in the
category of perquisites.

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 16. Bonus paid on the basis of an industrial award.

17. Any compensation paid to an employee on the termination of his

service and also compensation paid to a managing agent on the
termination of his agency.

18. Insurance premium paid to get insurance of employees against

injury, accident while working and also any compensation paid to
employees due to such injury or accident. Payment received from
insurance company, if any, shall be treated as taxable income and
credited to p/l a/c.

19. Expenses incurred on employees welfare activities.

20. Embezzlement by an employee during the normal course of the

business.

21. Any payment given by the assessee to business rivals agreeing

not to compete with the assessee.

22. Any compensation payable in the usual course of business

including compensation paid as a result of negligence of the
assessee of the assessee or his employees.

23. Amount paid to the preserve and protect business assets, interest
and reputation.

24. Amount spent or preserve and protect business assets, interest and
reputation.

25. Amount spent or payable to the govt. in case of short fall in the
export target.

Illustrations of losses which are treated as business losses

1. loss by theft and embezzlement by employee

250
2. loss of cash due to robbery while being carried by cashier for
disbursement.

3. Loss of cash by dacoity in case of a banking company.

4. Brokerage, commission and stamp duty incurred on rent deed

for hiring office premises.

5. Loss due to accidental fire in stock in trade.

6. Loss caused by white ants.

7. Loss caused due to theft of pledged goods.

8. Loss on sale of securities held by assessee as a trading asset.

9. Loss due to fire of hired machinery.

10. Loss of stock in trade due to enemy action.

11. Loss of stock due to natural calamities.

12. Loss due to non- realization of amount given as advance for

purchases in the usual course of business.

13. Loss due to fluctuations in the rate of foreign currency.

14. Loss due to breach of contract.

15. Loss due to non- acceptance of delivery of goods.

Illustrations of loses which are not treated as business losses

1. Any loss which is not incidental to carrying on the business such

as withdrawal of cash from bank by a forged cheque and then if
cash is misappropriated by the employee.

2. Loss incurred on transfer of business assets.

251
 3. Loss incurred due to sale of shares or securities held by the assessee

4. Loss incurred due to closure of business.

5. Loss suffered due to infringement of any law of the land.

6. Any loss which the assessee is likely to suffer in future years.

7. Any loss which does not belong to the current previous year i.e,
past losses.

p. DEEMED PROFITS (SECTION 41) 

Section 41 of the Income-tax Act enumerates items of notional income

which are deemed to be income from business or profession chargeable
to tax. The liability to tax in respect of deemed profits would arise not
only during the existence of the business but also after its discontinuance.
The items of deemed profits are enlisted below:

(i) Deduction allowed earlier but recovered later on: [Section 41 (1)].
The finance act , 1992 has submitted the sub- section 41 (i) by the
following with effect from assessment year 1993-94.

Where any allo wance or deduction has been made in t he

assessment for any year in respect of losses, expenditure or trading
liability incurred by the assessee and subsequently during any
previous year.

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 value of benefit accruing to him shall be deemed
to be profits and gains of business or profession and accordingly
chargeable to tax as the income of that previous year whether the

252
 business or profession in respect of which the allowance or
deduction has been made , is in existence in that year or not.

In case such benefit or cash is obtained by successor in business

in manner whatsoever in respect of which loss or expenditure was
incurred by first mentioned person the provisions mentioned above
shall be applicable against such successor in business and he shall
be liable to pay tax on such deemed profit.

The words successor in business means:

In case of amalgamation – the amalgamated company.

In case of succession – the successor.

In case of a firm is succeeded by another firm, such other firm.

(ii) Where any building, machinery plant or furniture owned by the

assessee and used for t he purpose of business fo r which
depreciation under Section 32(1)(i) is claimed, is sold, discarded,
demolished or destroyed and the money payable together with scrap
value in respect of such assets exceeds the written down value,
the excess to the extent of difference between the actual cost and
the written down value shall be taxable as business income in the
previous year in which the moneys payable become due.

(iii) Capital expenditure on Scientific Research: Where an assessee

incurs capital expenditure on scientific research, the entire amount
of such expenditure is allowable as a deduction in computing the
business income of the assessee in the same year in which the
expenditure is incurred. If subsequent to the incurring of the
expenditure, the asset representing the capital expenditure is sold,
without having been used for other purposes, the assessee would
be liable to pay tax on the excess of sale proceed together with the

253
 deduction allowed earlier over the amount of capital expenditure
or the amount of deduction allowed earlier whichever is less.

(iv) Recovery of Bad Debts: Where the assessee claims a deduction in

any year in respect of a debt which has become bad or irrecoverable
and the Assessing Officer allows a deduction to the extent of the
bad debts.

(v) Withdrawal of any amount from special reserve: Where a deduction

has been allowed in respect of any special reserve created and
maintained under clauses (viii) of Sub-section (1) of Section 36
any amount subsequently withdrawn from such special reserve
shall be deemed to be the profits and gains of business or profession
and accordingly be chargeable to income tax as the income of the
previous year in which such amount is withdrawn.

(vi) Setting off loss from deemed profit [ section 41(5)]: Any loss of a
business incurred during the year in which it ceased to exist and
which could not be set off against any other income of that previous
year shall be set off against the above mentioned deemed incomes.
This does not apply to speculation loss.

q. SPECIAL PROVISION FOR DEDUCTIONS IN THE CASE OF

BUSINESS FOR PROSPECTING ETC. FOR MINERAL OIL
(SECTION 42)

For the purpose of computing the profits and gains of any business of
prospecting for or the extraction or production of mineral oils in relation
to which the Central Government has entered into an agreement with any
person for the association or participation in such business of the Central
Government, the assessee is entitled to an allowance over and above the
various items of allowances and deductions permissible under the
IncomeTax Act.

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r. DEFINITION OF CERTAIN TERMS (43)

Deduction of certain payments only if actually paid [ section 43 B]

any payment of sales tax, employer’s contribution to any provident fund,

superannuation fund or gratuity fund, or any other fund for the welfare
of employees will be allowed only in computing the income of that
previous year in which such sum is actually paid by him. In case a
deduction has already been claimed on accrual basis in any earlier previous
year, it will not be allowed again in the year in which it is actually paid.

These payments are:

(1) Any sum payable by the assessee by way of tax, duty, cess or fee
by whatever name called , under any law for the time being in
force.

(2) Any sum payable by the assessee as an employer by way of

contribution of any provident fund or superannuation fund or
gratuity fund or any other fund for the welfare of employees.

(3) Any sum referred to in clause (ii) of sub section (1) of section 36,
i.e., bonus or commission payables to employees.

(4) Any sum payable by assessee as interest on any loan or borrowing

from any public financial institution or a state financial corporation
or a state industrial investment corporation in accordance with
the terms and conditions governing such loans or borrowing .
deduction regarding these payments shall be allowed if such
payments are actually made before filing of return u/s 139 (1).

(5) Any sum payable by the assessee as interest on any term from a
scheduled bank in accordance with the terms and conditions of
the agreement governing such loan.

255
(6) Any amount payable by the assessee to the Indian railways for the
use of railway assets.

(7) Payment of interest to a co-operative bank to be allowed as

deduction on actual payment basis. Co-operative bank excludes a
primary agricultural credit society or a primary co- operative
agricultural and rural development bank [ w.e.f AY 2018-19]

(8) Any amount payable by the assessee as an employer in lieu of

any leave at the credit of employee shall be allowed to be debited
only if it is made in accordance with the provisions of section 43
B.

U/s 43 B provisions , the above payments shall be allowed in following

manner:

1. If all these provisions, as mentioned above, are actually paid by

the end of the previous year i.e., 31 st march, such payments shall
be fully allowed.

2. If payments as mentioned above at (2) above of provident fund

or employees state insurance contribution is paid before due date
prescribed under P.F act or ESI corporation act, such payment shall
be fully allowed. In case, these payments are made after due date,
these shall never be allowed.

3. If all the above payments are paid after 31 st March but before
prescribed date of filing of return, it shall be allowed to be debited
in the year to which these payments belong. If it paid after
prescribed date, the payment shall be allowed to be debited in the
year in which payment is made.

4. In case payments as mentioned above are made by cheque, the

proof of their encashment must be submitted within 15 days from
the due date / prescribed date.

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SPECIAL PROVISION FOR COMPUTATION OF COST OF
ACQUISITION OF CERTAIN ASSETS (SECTION 43C)

Where an asset [other than those referred to in Section 45(2)] which

becomes the property of an amalgamated company under a scheme of
amalgamation, is sold after February 29, 1988 as stock in trade the cost
of acquisition of the asset to the amalgamated company shall be the cost
of acquisition of the asset to the amalgamating company as increased by
the cost, if any, of any improvement made thereto and the expenditure if
any, incurred wholly and exclusively in connection with such transfer.

Valuation of consideration on sale of immovable property held as

stock in trade at a price below stamp value [ Section 43 CA]

If 105 % of the sale consideration for transfer of land and building held
as stock in trade is less than the stamp duty value, such stamp duty value
shall be considered as full value of consideration for the purposes of
computing income U/H ‘ Income from Business or Profession’[ Section
43 CA (1)].

Where the date of agreement and the date of registration of transfer are
different , stamp duty value on the date of agreement may be considered
provided full or partial consideration has been received by way of an
account payee cheque or an account payee draft or by use of electronic
clearing system through a bank account. [ W.e.f A.Y 2019-20] on or before
the date of agreement [ Section 43 CA (3) & (4)].

Computation of income from construction or service contracts. [ Insertion

of section 43 CB in A.Y 2019- 20] [ w.r.e.f A.Y 2017-18].

1. Profits and gains from construction contract shall be computed

by applying percentage of completion method .

257
2. Profits and gains from service contracts to be determined by
applying percentage of completion method with following
exceptions.

 If the project duration is upto or more than 90 days, project

completion method to be used.

 If the project involves indeterminate number of acts over a

specific period of time, straight line method would have to
be used.

SPECIAL PROVISION IN CASE OF INCOME OF PUBLIC

FINANCIAL INSTITUTIONS, ETC. (SECTION 43D)

Section 43D has been inserted by Finance (No. 2) Act, 1991 w.e.f.
1.4.1991. This section provides that in the case of a public financial
institution or a scheduled bank or a state financial corporation or a state
industrial investment corporation, the income by way of interest on such
categories of bad and doubtful debts as may be prescribed having regard
to the guidelines issued by the Reserve Bank of India in relation to such
debts shall be chargeable to tax in the previous year in which it is credited
to profit and loss account by such institution referred above for that year
or in the previous year in which it is actually received by them whichever
is earlier.

Taxation of foreign exchange fluctuations [ Insertion of Section 43

AA] [ w.r.e.f A.Y 2017-18]

Subject to the provisions of section 43 A , any gain or loss arising on

account of any change in forgin 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 section 145 (2).

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s. INSURANCE BUSINESS (SECTION 44)

The profits and gains of any business of insurance must, according to

Section 44, be computed in accordance with the rules contained in the
First Schedule to the Income-tax Act. For the purpose of the computation,
it is immaterial whether the insurance business is carried on by mutual
insurance company or by a co-operative society or by any other person.
The rules contained in the Schedule would apply notwithstanding anything
to the contrary contained in the provisions of the Income-tax Act relating
to the computation of income chargeable under the head ‘Interest on
Securities’, ‘income from house property’, ‘capital gains’, or ‘income
from other sources’ or under the head ‘income from business or
profession’.

t. SPECIAL PROVISIONS FOR DEDUCTION IN CASE OF TRADE,

PROFESSIONAL OR SIMILAR ASSOCIATIONS (SECTION 44A)

Section 44A of the Income-tax Act provides for a special deduction in

the case of any trade, professional or similar association which is not
exempt from Income-tax under Section 10(23A). This deduction is
allowable in cases where the amount received during the accounting year
by the trade, professional or other associations from its members, whether
by way of subscription or otherwise, falls short of the expenditure actually
incurred by such association during that accounting year solely for the
purpose of protection or advancement of the common interest of the
members. Moneys received by way of remuneration for running any
specific services to the members would not, however, be treated as forming
part of income of the association for this purpose. Consequently, in
calculating the amount of deficiency, these receipts would be taken into
account and would be allowed as deduction so as to reduce the amount
of deficiency. Similarly, capital expenditure and also expenditure
deductible in computing the income of the assessee under any other

259
 provision of the Act, would not be taken into account in determining the
amount of deficiency. The amount of deficiency would be allowable as a
deduction in computing the income of the association assessable for the
relevant assessment year under the head ‘profits and gains from business
or profession’. If there is no income assessable under this head or the
amount of deficiency allowable to the assessee exceeds the income under
this head, the whole or the balance of the amount of deficiency, as the
case may be, shall be allowed as a deduction in computing the income of
the association assessable for that assessment year under any other head.
The amount of deficiency shall not, however, be allowed to be carried
forward for any subsequent year. The amount of deficiency to be allowed
as deduction under Section 44A should not, in any case, exceed 50% of
the total income of the association computed before making any allowance
under this section. This section, however, applies only to that trade,
professional or other similar associations, the income of which or any
part thereof is not distributed to its members except as grants to any
institution or association affiliated to it. In computing the income of the
association for the relevant assessment year in which the deficiency falls
allowable, the other provisions of the Act granting deductions and
allowances must be given effect to before the deficiency under this section
could be allowed. Likewise, losses from any earlier year which are brought
forward and qualify for being set off, must be allowed to be set off before
the deficiency under this section is sought to be allowed as deduction.

4.4 EXPENSES EXPRESSELY DISALLOWED WHILE COMPUTING

GAINS FROM BUSINESS AND PROFESSION

Following amounts shall not be deducted while computing income under the head
Profits & gains of business or profession.

1. Interest, royalty, fees for technical services etc payable to a non-resident or

outside India without deducting TDS & its payment;

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2. Interest, commission or brokerage,

3. fees for professional services or fees for technical services payable to any
resident person without TDS & its payment.

4. Fringe Benefit Tax;

5. Income-tax;

6. Wealth-tax;

7. Any payment which is chargeable under the head “Salaries”, if it is payable

outside India, or to a non-resident, and the tax has neither been paid in India
nor deducted there from;

8. Any payment to a provident fund or any other fund established for the benefit
of employees of the assessee in respect of whom the assessee has not made
effective arrangement to secure that tax shall be deducted at source from any
payment made from the fund, which are taxable under the head ‘Salaries’;
and

9. Any tax on non-monetary perquisite actually paid by employer on behalf of

employee.

10. 40A(2):Any payment made by an assessee to a related person shall be

disallowed to the extent it is excess or unreasonable as per the Assessing
Officer. Related person includes both “Relative” and “Person having
substantial interest”

11. 40A(3) Where any expenditure in respect of which payment is made in excess
of Rs.20000 at a time otherwise than by a A?c payee cheque or draft, 100%
of such payment shall be disallowed.

12. No deduction shall be allowed in respect of any provision made by assessee

for the payment of gratuity to his employees provided such contribution is

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 not towards an approved gratuity fund or for the purpose of payment of
gratuity, that has become payable during the previous year.

13. No deduction shall be allowed in respect of any sum paid by the assessee as
an employer towards setting up or formation of, or as contribution to, any
fund, trust, company, AOP, BOI, society or other institution for any purpose
provided such sum is not by way of contribution towards approved
superannuation fund, recognised provident fund, approved gratuity fund.

Deduction in respect of following expenses are allowed only if payment is

made on or before the due date for furnishing return of income –

14. section 43A - following sum not paid before due date of filing return of
income

1. Any sum payable by way of tax, duty, cess, fee, etc.

2. Bonus or commission to employees.

3. Interest on loan or borrowing from any public financial institutions,

etc.

4. Interest on any loans and advances from a scheduled bank.

5. Leave encashment.

6. Contribution to any P.F., superannuation fund, gratuity fund, etc.

4.5 TREATMENT OF DEPRECIATION

Depreciation (Section 32)

In computing income from business, one of the most important items of

allowances is the allowance for depreciation provided by Section 32 of the
Income-tax Act. The deduction towards depreciation is very essential to arrive
at the income of the assessee and also to amortise the capital cost of the amount
invested in buildings, machinery, plant and furniture. The purpose of allowing

262
depreciation is to provide in course of time for the replacement of asset with the
help of the capital cost of the asset which is allowed to be amortised over a
period of time. Theprovisions for allowing depreciation are contained in Section
32 and are regulated under Rule 5 of the Incometax Rules. The rates of
depreciation are also provided in the Income-tax Rules.

(a) Classification of Assets:

The assets in respect of which depreciation is claimed must be buildings,

machinery, plant or furniture. In addition to these tangible assets intangible
assets like know how, patent rights, copy rights, trade marks, licences,
franchises or any other business or commercial right of similar nature
acquired on or after 1.4.1998 are eligible for depreciation. These intangible
assets will form a separate block of assets. As and when any capital
expenditure is incurred by an assessee on acquiring such intangible assets,
the amount of such expenditure will be added to the block of intangible
assets and depreciation will be claimed on the written down value at the
end of financial year. While taking into account the depreciation allowance
in respect of a building, only the cost of the building is to be taken into
account but not the cost of the land on which the building is erected
because the land does not suffer any depreciation as a result of wear and
tear or its usage. Thus, the term building used in this context refers only
to the super- structure and not the land on which it is erected. Roads
within a factory compound form part of building which is used for the
purpose of the business and as such are entitled to depreciation. Similarly,
residential quarters provided to the employees are used for the business
in the sense that they are used for and such user is incidental to the carrying
on the business. Therefore, the roads to such residential quarters are also
entitled to depreciation at the rates applicable to first class building.

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 Plant

The term ‘plant’ for the purpose of allowance of depreciation has been
defined in Section 43(3) to include ships, vehicles, books, scientific
apparatus and surgical equipments used for the purposes of the business
or profession. However, on the basis of cases decided by the courts, the
following are also included in the term ‘plant’:

(i) In the case of a hotel, pipe and sanitary fittings

(ii) (ii) In the case of electric supply company, mains service lines
and switch gears

However, following are some of the instances which are not held as plant:

1. Warehouses for storage purposes

2. Horses

3. Human body

4. Bed of River

5. Water storage tanks used for storing water by the supplier for
irrigation purposes.

6. Cinema Theaters

7. Hotel Building

Moreover, ‘tea bushes’, ‘livestock’, buildings or furniture and fittings

have been excluded from the definition of plant.

(b) Ownership Vs. lease:

Depreciation is allowable to the assessee only in respect of those capital

assets which are owned by him. In case of a building, the assessee must
be owner of the super-structure and not necessarily of the land on which

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 it is constructed. If the assessee is only a tenant of the building but not its
owner he is not entitled for allowance in respect of depreciation thereof.
Where the land on which the building is constructed has been taken on
lease by the assessee, the allowance of depreciation would be admissible
only if, according to the lease deed, the assessee is entitled to be the
owner of the super-structure. The fact that as part of the terms of the
lease deed, the building, after expiry of the lease is to be transferred to
the lessor of the land would not affect the allowance for depreciation. In
the case of assets acquired on hire-purchase e.g., plant and machinery
taken on hire, the assessee would not be the owner thereof and
consequently would not be entitled for depreciation in respect of the same.
But if the plant and machinery had been acquired on instalment basis,
the assessee becomes the owner of the assets the moment the purchase or
sale is concluded and consequently is entitled to depreciation although a
part or whole of the price is payable in future.

(c) Used for the purpose of Business or Profession:

The allowance for depreciation is subject to the condition that the assets
on which depreciation is claimed are actually used by the assessee for
the purposes of his business or profession during the accounting year.
The allowance for depreciation, however, is not subject to the condition
that the asset in question must be used throughout the relevant accounting
year in order to enable the assessee to claim depreciation. Thus, even if
the asset is used for a very small fraction of the accounting year, the
assessee would be entitled to depreciation in respect of the full amount
allowable as if the asset had been used throughout the accounting year.
Even in the case of seasonal factories (e.g., sugar manufacturing
companies), the full amount of depreciation is allowable if the asset had
been used at any time during the accounting year in the factory. In cases
where the depreciable asset is used partly for business purposes and partly
for other purposes, the deduction towards depreciation allowable under
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 Section 32 would be of a sum proportionate to the depreciation allowance
to which the assessee would have otherwise been entitled, in the year in
which the depreciable asset is sold, destroyed, discarded or demolished,
no depreciation at the rates

prescribed in the Income-tax Rules would be allowable.

(d) Amount of deduction shall not exceed actual cost: The total amount of
all items of depreciation allowance allowed to the assessee from year to
year shall not exceed the actual cost of the block of assets to the assessee.

(e) No deduction on sold assets: No depreciation is allowable in respect of

the depreciable asset if the asset concerned is sold, destroyed, discarded
or demolished in the same year in which it was acquired.

(f) In order to be entitled to allowance towards depreciation, the assessee

must furnish the prescribed particulars contained in Annexure ‘B’ attached
to the Form of the Return of Income-tax. Any failure on the part of the
assessee to furnish fully and truly all material facts, including the
particulars prescribed for this purpose, would entitle the income-tax
authorities to refuse to allow deduction towards depreciation.

(g) The Finance Act, 1995 has deleted w.e.f. assessment year 1996-97 the
provision pursuant to which one could write off the entire cost of plant
and machinery in the very first previous year in which it was put to use
provided its actual cost did not exceed‘ 5,000, to prevent the widespread
misuse of the concession.

(h) The Finance (No. 2) Act, 1996 has rationalised the depreciation provisions,
inter alia as follows:

In case of joint ownership of an asset, depreciation would be allowed to

each of the owner in proportion to the contribution to the total cost of the
asset; and In case of amalgamation during the course of a previous year,

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 the amalgamating company and the amalgamated company shall share
the depreciation in proportion to the number of days during which assets
remained under their respective ownership. Similarly, in case of demerger
during the course of a previous year (w.e.f. 1.4.2000), the demerged
company and the resulting company shall share the depreciation in
proportion to the number of days during which the assets remained under
their respective ownership.

Meaning of Block of Assets

The depreciation is provided in respect of “Block of assets”. As per Section

2(11) Block of assets means “a group of assets falling within a class of assets,
being tangible assets such as buildings, machinery, plant or furniture and
intangible assets, being know-how, patents, copyrights, trademarks, licences,
Franchises or any other business or commercial rights of similar nature, in respect
of which the same percentage of depreciation is prescribed”.

Moreover depreciation is now allowed on the written down value of all

types of assets. Again, no deduction shall be allowed under this clause in respect
of any motor car manufactured outside India, where such motor car is acquired
by the assessee after the 28th day of February, 1975, and is used otherwise than
in a business of running it on hire for tourists or,

(a) outside India in his business or profession in another country, and

(b) in respect of any machinery or plant if the actual cost thereof is allowed
as a deduction in one or more years under an agreement entered into by
the Central Government under Section 42 of the Act.

Important Terms

For the purposes of depreciation, the following terms are important:

(i) Actual Cost

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(ii) Written Down Value

(iii) Classification of Depreciation

(i) Actual Cost [Section 43(1)]

For computing depreciation, actual cost is the basis in the case of all
assets for the first year when the assets are put to use for the purpose of
the business. Subsequently, even in the case of depreciable asset when
the written down value is to be ascertained for the purpose of allowing
depreciation, the written down value should be taken to be the book value
of the asset after allowing deduction in respect of the depreciation
allowable under the Income-tax Act from the actual cost of the asset
concerned. The actual cost of an asset is essential for the purposes of
allowing depreciation also because of the fact that the aggregate of all
the items of depreciation allowable to an assessee in respect of any
depreciable asset shall not exceed the amount of its actual cost. The actual
cost of an asset to the assessee is normally the amount of capital
expenditure incurred in respect of the acquisition, installation, etc., of
the asset and also the expenses, if any, incurred by him to make the asset
ready for the purpose of its use in the business. Thus, capital expenditure
relating to the installation of machinery or plant, its design, etc., would
form part of the actual cost of the machinery although such expenses
may be incurred by the assessee subsequent to the date of its acquisition.
It has been held that preliminary expenses of revenue nature necessary
for putting plant and machinery in working condition are part of actual
cost of plant and machinery.

Definition of Actual Cost

The expression ‘actual cost’ has been defined in Section 43(1) of the Act
to mean that actual cost of the asset to the assessee as reduced by that
portion of the cost thereof, if any, as has been met directly or indirectly

268
 by any other person or authority. For instance, if an assessee gets a subsidy
from the Government for the purchase of a particular item of machinery,
the actual cost of the machinery to the assessee would be total of the
purchase price and the expenses in regard to installation etc. minus the
subsidy received from the Government. However, where any amount has
been received as compensation for low output of defective machinery, it
will be a revenue receipt and assessed to tax but it will not be deducted
in computing actual cost of machinery.

Thus, the actual cost of the asset as shown in the books will be different
from the actual cost on the basis of which depreciation is allowable. The
provisions of Section 43(1) of the Act clarify that the actual cost of
depreciable.

The provisions of Section 43(1) of the Act clarify that the actual cost of
depreciable asset should be determined in the following circumstances
as indicated below:

(a) Assets used in business after it ceases to be used for Scientific Research
In cases where the depreciable asset is used for the business after it ceases
to be used for scientific research related to that business and a deduction
has been allowed in respect of expenditure on scientific research under
Section 35, the actual cost of the asset to the assessee should be taken to
be the original cost to the assessee minus the amount of any deduction
under Section 35 of the Act, originally allowed.

(b) Assets acquired by way of gift or inheritance In cases where the

depreciable asset is acquired by the assessee by way of gift or inheritance,
the actual cost of the asset to the assessee shall be the actual cost to the
previous owner, as reduced by –

(a) the amount of the depreciation actually allowed to the donor or

predecessor in respect of any previous year relevant to the

269
 assessment year commencing before the 1st day of April, 1988,
and

(b) the amount of depreciation that would have been allowable to the
assessee for any assessment year commencing on or after the Ist
day of April, 1988, as if the asset was the only asset in the relevant
block of assets.In case where a portion of the cost of an asset is
acquired by the assessee has been met directly or indirectly by the
Central Government or State Government or any authority
established under any law, or by any other person, in the form of
subsidy or grant or reimbursement, then in case where the subsidy
is directly relatable to the asset such subsidy shall not be included
in the actual cost of the asset. In case where such subsidy or grant
or reimbursement is of such a nature that it cannot be directly
relatable to any particular asset, the amount so received shall be
apportioned in a manner that such asset bears to all assets in respect
of or with reference to which the subsidy or grant or reimbursement
is so received and such subsidy shall not be included in the actual
cost of the asset.

(c) Assets transferred to reduce tax liability In cases where prior to the date
of acquisition by the assessee the depreciable asset was at any time used
by any other person for the purpose of his business or profession and the
Assessing Officer is satisfied that the main purpose of the transfer of the
asset directly or indirectly to the assessee was to secure a reduction of
liability to income- tax by claiming depreciation with reference to the
enhanced cost, the actual cost of the asset to the assessee should be taken
at such amount as the Assessing Officer may, with the prior approval. of
the Deputy Commissioner, determine having due regard to all the
circumstances of the case. For instance, if ‘X’ transfers his machinery on
1.1.1990 to ‘Y’ for a sum of` 6.00 lakhs while the actual cost of the asset

270
 and the written down value thereof on that day to ‘X’ are` 3.00 lakhs
and` 1.00 lakh respectively, it may be inferred that the transfer by ‘X’ to
‘Y’ is made with idea to enable ‘Y’ to claim depreciation on` 6.00 Lakhs
while the market value of the asset on the date of sale by ‘X’ to ‘Y’ may
be` 4.00 lakhs only. In such a case, the Assessing Officer would be entitled
to allow depreciation to ‘Y’ on the basis of the cost which may be
determined by him to be` 4.00 lakhs instead of` 6.00 lakhs as claimed by
‘Y’.

(d) Assets earlier transferred re-acquired by the Assessee : There may be

cases where depreciable asset would have once belonged to the assessee
and had been used by him for the purposes of his business or profession
and thereafter it might have ceased to be his property by reason of its
transfer or otherwise. If such a depreciable asset is re-acquired by the
assessee himself, the actual cost of the asset should be taken to be the
least of either

(a) actual cost of the asset to the assessee when it was first acquired
by him minus (i) the depreciation actually allowed to him in respect
of any previous year relevant to the assessment year commencing
before the 1st day of April, 1988, and (ii) t he amount of
depreciation that would have been allowable to the assessee for
any assessment year commencing on or after the 1st day of April,
1988, as if the asset was the only asset in the relevant block of
assets or.

(b) the actual price for which the asset is re-acquired by him.

(e) Building brought into use for business purpose subsequent to its
acquisition: In cases where a building which was previously the property
of the assessee is brought into use for the purpose of his business or
profession after 28-2-1946, the actual cost of the building to the assessee

271
 should be taken to be the original cost of the building minus the amount
equal to the depreciation calculated at the rate in force at that date which
would have been allowable had the building been used for purposes of
the business or profession ever since the date of its acquisition by the
assessee.

(f) Asset transferred by holding company to 100% subsidiary company or

vice-versa: In cases where any depreciable asset is transferred by an Indian
holding company to its wholly owned subsidiary or vice versa, then the
actual cost of the transferred asset to the transferee company shall be
taken to be the same as it would have been if the transferor company had
continued to hold the transferred capital asset for the purposes of its own
business.

(g) Asset transferred under a Scheme of Amalgamation: In the case of an

amalgamation as defined in Section 2(1B) of the Act, if any depreciable
asset is transferred by the amalgamating company to the amalgamated
company, which is an Indian company as defined in Section 2(26) of the
Act, the actual cost of the transferred capital asset to the amalgamated
company must be taken to be the same as it would have been if the
amalgamating company had continued to hold the capital asset for the
purposes of its own business.

(h) Asset transferred to the resulting company in case of demerger: In case

of demerger, any capital asset is transferred by the demerged company to
the resulting company and the resulting company is an Indian company,
the actual cost of the transferred capital asset to the resulting company
shall be taken to be the same as it would have been if the demerged
company had continued to hold the capital asset for the purpose of its
own business. Provided that such actual cost shall not exceed the written
down value of such capital asset in the hands of the demerged company.

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(i) Interest Pertaining to Post Acquisition Period: Where any amount is paid
or is payable as interest in connection with the acquisition of an asset, so
much of such amount as is relatable to any period after such asset is first
put to use shall not be included, and shall be deemed never to have been
included, in the actual cost of such asset.

(j) Actual Cost of Cenvetable Asset: Where an asset is or has been acquired
on or after the 1st day of March, 1994 by an assessee, the actual cost of
asset shall be reduced by the amount of duty of excise or the additional
duty leviable under section 3 of the Customs Tariff Act, 1975 (51 of
1975) in respect of which a claim of credit has been made and allowed
under the Central Excise Rules, 1944.

(k) Asset acquired where portion of cost met by some other person: Where a
portion of the cost of an asset acquired by the assessee has been met
directly or indirectly by the Central Government or a State Government
or any authority established under any law or by any other person, in the
form of a subsidy or grant or reimbursement (by whatever name called),
then, so much of the cost as is relatable to such subsidy or grant or
reimbursement shall not be included in the actual cost of the asset to the
assessee :

Provided that where such subsidy or grant or reimbursement is of such

nature that it cannot be directly relatable to the asset acquired, so much
of the amount which bears to the total subsidy or reimbursement or grant
the same proportion as such asset bears to all the assets in respect of or
with reference to which the subsidy or grant or reimbursement is so
received, shall not be included in the actual cost of the asset to the (l)
Asset acquired by non-resident outside India but for business or profession
in India

Where an asset which was acquired outside India by an assessee, being a

non-resident, is brought by him to India and used for the purposes of his
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 business or profession, the actual cost of the asset to the assessee shall be
the actual cost to the assessee, as reduced by an amount equal to the
amount of depreciation calculated at the rate in force that would have
been allowable had the asset been used in India for the said purposes
since the date of its acquisition by the assessee.

(m) Asset acquired under scheme of corporatisation of Recognised Stock

Exchange: Where any capital asset is acquired by the assessee under a
scheme for corporatisation of a recognised stock exchange in India,
approved by the Securities and Exchange Board of India established under
section 3 of the Securities and Exchange Board of India Act, 1992 (15 of
1992), the actual cost of the asset shall be deemed to be the amount which
would have been regarded as actual cost had there been no such
corporatization.

(n) Capital Asset on which deduction has been allowed or allowable u/s 35AD:
The actual cost of any capital asset on which deduction has been allowed
or is allowable to the assessee under section 35AD, shall be treated as
nil:

(a) in the case of such assessee; and

(b) in any other case if the capital asset is acquired or received:

(i) by way of gift or will or an irrevocable trust;

(ii) on any distrbution on liquidation of the company; and

(iii) by such mode of transfer as is referred to in clauses (i),

(iv), (v), (vi), (vib), (xiii) and(xiv) of section 47. Depreciation is
not allowed in case of a foreign car acquired by the assessee after
28th day of February, 1975 and used otherwise than in a business
of running it on hire for tourists or is not used outside India in
business or profession carried on by the assessee in another country.

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 In cases where the assessee acquires the business of another, the
original cost of the depreciable asset to the assessee would be the
value at which assets are taken over by him and not the original
cost of those assets to the previous owner of the business. However,
in case of succession by inheritance or gift where the actual cost
to the assessee is taken to be the actual cost to the previous owner
as reduced by the amount of depreciation actually allowed under
the Act. In cases of partition of a HUF, if depreciable assets are
divided amongst the members thereof at a genuine valuation, the
cost of the asset to the member who, after the partition, uses the
asset for the purposes of his business should be taken to be the
value at which he takes over the asset.

(ii) Written down value [Section 43(6)]

The written down means: In the case of assets acquired in the previous
year, the actual cost of the assets to the assessee. In the case of assets
acquired before the previous year the actual cost of the assets to the
assessee less all depreciation actually allowed to him in that Previous
Year. In the case of any block of assets the written down value will be
determined as under:
Total of written down value of all the assets falling within a block at the beginning of the
previous year relevant to the assessment year .............
Add: The actual cost of, any new assets falling in the block, acquired
during the previous year ............
Less: Moneys payable in respect of any asset, falling within that block
which is sold, discarded, demolished or destroyed during the
previous year together with the amount of scrap value in respect
of any asset. The amount of deduction cannot exceed the written
down value as so increased ------------
Written down value for the assessment year ............
Less: Depreciation during the previous year relevant to the assessment
year ............
Written down value at the beginning of the previous year relevant to the next
assessment year .............

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 The addition/deduction as aforesaid may be made for calculating written
down value for the concerned previous year.

The written down value of any block of assets may be reduced to nil in
the following cases:

(i) Where money receivable in respect of assets sold or otherwise transferred

during the previous year plus the amount of scrap value is more than the
written down value at the beginning of the previous year as increased by
the actual cost of any new asset acquired.

(ii) Where all the assets in the relevant block are transferred during the year.

Classification of depreciation

(a) Normal Depreciation [Section 32(1) Rule 5]

Normal depreciation is calculated at the specified percentage on the

written-down value of block of assets (including ocean going ships).
Further, where any new machinery or plant is installed during the previous
year for the purposes of manufacture or production of any article or thing,
and such article or thing (a) is manufactured or produced by using any
technology or know-how developed in, or (b) is invented in, a laboratory
owned or financed by the Government or owned by a public sector
company or university or a duly recognised institution, then such plant
or machinery shall be treated as part of block of assets qualifying for
depreciation @ 50% of written down value subject to the fulfillment of
the following conditions:

(i) the right to use such technology or know-how or to manufacture

such article or thing has been acquired from the owner of the
laboratory or from any person who has derived the right from such
owner;

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 (ii) the return furnished by the assessee for his income or the income
of any other person for which he is assessable for any previous
year in which the said machinery or plant is acquired is
accompanied by a certificate from the prescribed authority
(Secretary, Department of Scientific and Industrial Research,
Government of India) to the effect that such technology or know-
how is developed in, or the article or thing is invented in such
laboratory; and the machinery or plant is not used for the purposes
of business of manufacture or production of any article listed in
the Eleventh Schedule (i.e. low priority articles).

(b) Depreciation on Straight line basis

In the case of Power Units [Section 2(1)(i)] (optional to power generating

units) From the assessment year 1998-99, an undertaking engaged in
generation or generation and distribution of power can claim depreciation
on straight line basis on the acctual cost of individual asset. But the
aggregate depreciation can not exceed the actual cost. Alternatively, such
undertaking can claim depreciation, at its option, according to written
down value method like any other assessee. The option for this purpose
shall be excercised before the due date of furnishing return of income.
Once this option is excercised, it shall be final and shall apply to all the
subsequent years.

Terminal depreciation

If any asset, on which depreciation is claimed on basis of SLM, is sold

and the amount by which money payable together with scrap value, fall short of
WDV of such asset, depreciation shall be allowed equal to such deficiency in
the year of sale.

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Balancing Charge Section 41(2)

If any asset, on which depreciation is claimed on basis of SLM, asset is

sold and the amount by which moneys payable together with scrap value, exceeds
WDV of such asset, then the least of the following shall be taxable under the
head PGBP.

(i) difference between the actual cost and WDV

(ii) difference between aggregate of moneys payable and WDV

(c) Additional Depreciation [Section 32(1)(iia)]: With effect from

Assessment year 2006-07 existing clause (iia) has been substituted
by new Clause (iia) to provide additional depreciation in certain
circumstances. The additional depreciation shall be allowed @20%
of the actual cost.

(iv) Calculation of Written Down Value of a block of asset [Section 43(6)]

(a) Find out the written down value on the first day of the previous
year (WDV) relevant to the assessment year, o f all t hose
depreciable assets on which the depreciation is allowed at the same
rate. All such assets are known as “block assets”

(b) The increase in the WDV by the actual cost of any asset falling
within that block, acquired during the previous year;

(c) Reduce from the above, the moneys payable in respect of any asset
falling within that block, which is sold or discarded or demolished
or destroyed during that previous year together with the amount
of the scrap value, if any, so that the amount of such reduction
does not exceed the written down value as so increased; and

(d) In the case of a slump sale, decrease by the actual cost of the asset
falling within the block as reduced by the amount of depreciation

278
 that would have been allowable to the assessee for any assessment
year, so that the amount of such decrease does not exceed the
written down value. It means if the net consideration of an asset
out of the block is less than the balance under (ii), there would be
no capital gain. If the net consideration of an asset is more than
the balance under (ii) (the value of all assets in the block) the
excess shall be deemed to be short term capital gain. If all the
assets of the block are sold in the previous year and the net
consideration is less than the balance under (ii), the loss shall be
deemed to be short term capital loss.Where any capital asset is
acquired by the assessee under a scheme for corporatisation of a
recognised stock exchange in India, approved by the Securities
and Exchange Board of India established under Section 3 of the
Securities and Exchange Board of India, 1992 (15 of 1992), the
actual cost of the asset shall be deemed to be the amount which
would have been regarded as actual cost had there been no such
corporatisation.

Treatment of Depreciation in the case of Succession, Amalgamation

& Demerger

The fifth proviso to Section 32(1) provides that in cases of succession in

business or profession, in the case of amalgamation of companies or in
the case of demerger of companies depreciation of plant and machinery,
buildings and furniture in any previous year shall not exceed the
depreciation calculated at the prescribed rate as if the succession,
amalgamation or demerger had not taken place. It also seeks to allow the
deduction to the predecessor and the successor or the amalgamating
company and the amalgamated company or the demerged company and
the resulting company in the same proportion as the number of days for
which they used the asset in the business or profession. Section 38(2)

279
 provides that where any building, machinery, plant or furniture is not
exclusively used for the purposes of the business or profession, the
deduction under Sections 30(a) & (c), 31(i) & (ii) and 32(1)(ii) shall be
restricted to a fair proportionate part thereof as may be determined by
the Assessing Officer.

4.5 COM PUTATION OF INCO ME FROM BUSINESS OR

PROFESSION

a. Computation of business profits

For computation of business profits, the profit & loss account serves as the
basis. The profit & loss account shows certain expenses and losses which
are either fully or partly disallowed under the provisions of Income tax Act.
On the credited side there are certain incomeswhich are either tax free or are
not taxable under this head. The following table can help to compute the
business income of an assessee:

Balance as per P& L a/c Profit

(+)
Loss
(-)
1 Add expenses claimed but not allowed under the act
i All provisions and reserves (bad debts/dep/income tax etc.) except xx
creation of reseves by financial corp. u/s 36
ii All taxes(income tax, wealth tax, advance income tax etc. except sales xx
tax, excise duty and local taxes of premises used for business
iii Rent paid to self xx
iv All capital expenses except on scientific research xx
V All capital losses xx
Vi All charities and donations xx
vii All expenses related to other heads of income (house property etc.) xx
viii Cultivation expenses xx
ix Any interest on capital unless the amount is borrowed xx
x All personal expenses xx
xi Any depreciation if wrongly debited xx
280
xi Any depreciation if wrongly debited xx
xii Gifts and presents xx
xiii Any type of fine or penalty xx
xiv Any payment to a partner (by way of salary, interest, commission etc. xx
under prescribed limits)
xv Any salary or interest payable out-side India unless tax is deducted at xx
source or is paid according to the law
xvi Past year losses xx
xvii Any other expenses which is not incurred according to the provisions of xx
law
xviii Salary paid to self or any other family menber xx
xix Personal life insurance premium xx
xx Amount invested in NSC, NSS,PPF etc xx
xxi Rent for residential portion xx
xxii Speculation loss xx
xxiii Bad debt still recoverable xx
xxiv Legal expenses on criminal case, acquiring of assets, curing title of xx
assest
xxv Loss by theft from residence xx
xxvi Expenses on illegal business xx
xxvii Employers contribution to unrecognised PF xx
xxviii Difference in trial balance xx
xxix Difference due to under crediting of stock xx
xxx Cost of patent rights xx
xxxi Cost of technical know how xx
xxxii Preliminary expenses xx
xxxiii Total (after adjustment if there is loss balance) A
B Deduct from total A any expenditure which is allowable under the act , but has not
been debited to P&L a/c
i Actual bad debts xx
ii Depreciation xx
iii Any other expenditure incurred according to the provision of law xx
iv Difference due to under debiting of stock xx (xxx)
v Balance B

281
C Deduct out of the amount balance B any income which is either exempt or not taxable
under this head
a) Incomes exempted from tax xx
i Post office saving bank interest xx
ii Agriculture receipt xx
iii Gifts from relatives xx
iv Income tax refund xx
v Bad debts recovered xx
vi Life insurance maturity amount xx
vii Any capital receipt xx
viii With drawl from PPF xx
b) Income taxable under other heads xx
i Part time salary xx
ii Interest on securities xx
iii Rent from house property let xx
iv Capital gain xx
v Dividend, bank, interest, winnings from lotteries, race course xx
(xxx)
Taxable profit from business xxx
Add income from other business legal or illegal xx
income taxable under the head profit and gains from business xxxx

b. Computation of professional income

Professionals do not prepare profit and loss account but they prepare income
and expenditure account from the receipts and payment account. To compute
the professional income it is easier to take professional receipts of the previous
year and deduct out of these the professional expenses incurred during the
year.

282
1) In case of doctor or medical practitioner

Professional receipts
I Consultation fees xx
Ii Operation fees xx
Iii Visiting fees xx
Iv Sale of medicines xx
V Gifts from patients xx
Vi Value of any perquisites xx
vii Examiner’s fees xx
viii Nursing home receipts xx
Ix Any other professional receipts xx
Total receipts xxx
Less: Professional expenses
X Dispensary expenses like rent, water etc, salary to staff, telephone xx
expenses etc
Xi Cost of medicines xx
a) If accounts are maintained on cash basis: cost of actual
medicines purchased during previous year
b) If accounts are maintained on mercantile basis: op stock+
new purchases-closing stock

xii Depreciation on surgical equipment and x ray, machines etc xx

xiii Cost of books for professional purposes xx
xiv Motor car expenses: dep. relating to professional work xx
Xv Expenditure incurred to increase professional knowledge xx
xvi Nursing home expenses xx
xvii Any other expenditure incurred during the year xx -(xxx)
xviii Professional income xxx

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1) In case of chartered accountant
Professional Receipts
I Audit fees xx
Ii Income from accountancy work xx
Iii Institute fees xx
Iv Examiner’s fees xx
V Gifts from clients xx
Vi Consultancy services xx
vii Any other receipt xx
Total receipts xxx
Less Professional expenditure
I Office expenses xx
Ii Institute expenses xx
Iii Cost of books xx
Iv Motor car expenses xx
V Membership fees xx
Vi Depreciation on office equipments etc. xx
vii Any other expenditure to increase professional knowledge xx
viii Stipend to trainees xx
Ix subscriptions xx
X Dep. on office furniture xx
Total expenses (xxx)
Professional income xxx

3. In case of a lawyer or an advocate

Professional receipts
I Practising fees xx
Ii Legal fees xx
Iii Special commission xx
Iv Presents from clients xx
V Examiner’s fees xx
Vi any other receipts xx
Total professional receipt xxx
Less Professional expenses
I Office expenses xx
Ii salary of staff xx
Iii Cost of books xx
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Ii salary of staff xx
Iii Cost of books xx
Iv Depreciation of office equipments xx
V Expenditure incurred to increase professionalknowledge xx
Vi subscription xx
vii Purchase of stamp paper and court fee xx
viii Travelling expenses xx
Total professional expenses (xxx)
Professional gain xxx

ILLUSTRATION

285
Solution:

Computation of Total Income for the Assessment Year 2020-21

Income from house property: Rs Rs
– Income from property 850
Less: 30% under Section 24 (255)
Income from house property 595
Income under the head Business or Profession
Net Profit 15,970
Add: Inadmissible items:
– Income tax 1,400
– Household Expenses 2,000
– Life Insurance Premium 1,000
– Interest on Capital 500
– Provision for gratuity 4,000
– Provision for bad debts 2,000
– Provision for Income-tax 1,800
Less: Income to be shown separately:
– Dividends from a cooperative society 3,000
– Income from property 850
– Interest from Government Securities 2,000
Taxable Profits from Business 22,820
Income from other sources:
Dividends from cooperative society 3,000
Interest from Government Securities 2,000
Income from other sources 5,000
Gross Total Income: 28,415

Notes:

1. Provision for gratuity is not admissible. However, payment of actual

gratuity is allowed.

2. It is assumed that income from property is by way of rent received and as

per the provision of Section 24 of the Act, thirty percent thereof has been
deducted as repair allowance.

286
ILLUSTRATION

Following particulars are supplied by a textile unit situated in Mumbai for the
assessment year 2020-21:
Block of Assets WDV as on Additions Sale Rate of
1.4.2018 Dep.
1 2 3 4 5

Factory building 20,50,000 8,00,000 — 10%

(completed on
15.1.2019)
Residential buildings 50,00,000 5,00,000 — 5%
(completed on
31.7.2018)
Plant and Machinery 90,00,000 3,00,000 11,00,000 15%
(on 5.10.2018)
Furniture and fittings 10,30,000 1,00,000 3,50,000 10%
(on 10.10.2018)
You are required to calculate the amount of allowable depreciation under the Income-tax Act,
1961
Solution:
Computation of Depreciation
Factory Building Rs @ Amount (Rs)
WDV as on 01.04.2018 20,50,000 10% 2,05,000
Addition on 15.01.2019 8,00,000 50% of 10% 40,000
2,45,000
Residential Building
WDV as on 1.4.2018 50,00,000 5% 2,50,000
Addition as on 31.7.2019 5,00,000 5% 25,000
2,75,000
Plant and Machinery
WDV as on 1.4.2018 90,00,000
Less: Sale (11,00,000)
79,00,000 15% 11,85,000
Addition as on 5.10.2018 3,00,000 50% of 15% 22,500
Additional depreciation on new 20% of 3,00,000 60,000
investment 12,67,500

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investment 12,67,500
Furniture
WDV as on 1.4.2018 10,30,000
Less: Sale (3,50,000)
6,80,000 10% 68,000
Addition as on 10.10.2018 1,00,000 50% of 10% 5,000
73,000

Note:In the case of assets which are put to use in the business for a period
of less than 180 days, the depreciation permissible is @ 50% of the normal rate

Illustration

Profit and loss account of M/s Raj & Company

General expenses 107,000 Gross profit 540,000
Fire insurance premium 2,000 Bad debts, recovered but 4,000
Bad debts 1,000 disallowed earlier
Salaries 165,000 Interest from govt. securities 4,000
Advertisement in cash 22,250 Rent received from employees 12,000
Proprietor’s salary 112,500 Interest from debtors for delayed 6,000
Interest on capital 2,000 payment
Income tax 1,000
Depreciation 2,000
GST due 5,000
Advance income tax paid 1,000
Donations 500
Motor car expenses 750
Municipal taxes of quarters let to 5,000
employees
Net profit 139,000
566,000 566,000

General expenses include Rs 4,000 paid as compensation to an old employee whose

services were terminated in the interest of the business and Rs 2,200 by way of help
to a poor student. Depreciation calculated according to the rates to Rs 2,900 . GST
was paid on 1-5-2020. Date of filing of return is 31-7-20120. 50 % of motor car
expenses are for proprietor’s personal use. Compute business income.

288
Solution. Computation of business income
Net profits as per P/L a/c 139,000
Add: Inadmissible expenses
Advertisement in cash 22,250
Proprietor’s salary 112,500
Interest on capital 2,000
Income tax 1,000
Advance income tax 1,000
Donation 500
Motor car expenses 375
Help to poor student 2,200
Depreciation 2,000 143,825
282,825
Less: expenses allowed but not debited
Depreciation 2,900
279,925
Less: incomes not taxable under this head
Bad debt recovered disallowed earlier 4,000
Interest on govt. securities 4,000 8,000
Taxable business income 271,925

Illustration

From the following profit and loss account of a manufacturer, calculate the income
under the head profits and gains of business or profession for the year ending on 31st
march, 2020.

Salaries to employees 195,000 Gross profit 580,000

Advertisement expenses in cash 24,000 Interest on securities 14,000
General expenses 16,000 Income from house property 25,000
Entertainment expenses 22,000 Bad debts recovered( allowed 12,000
Bad debts 1,500 earlier)
Drawings by the proprietor 24,000
GST due and paid on 1-7-2018 6,000
Interest on proprietor’s capital 7,000
Repairs 2,500
Rent 21,000
Legal expenses 5,000
Depreciation 15,000
Bonus due 6,000
Bonus to the proprietor 4,000
Car purchased 72,000
Expenses on car during the year 12,000
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 Car purchased 72,000
Expenses on car during the year 12,000
Donations 2,000
Provisions for bad debts 6,000
Net profits 190,000
631,000 631,000

From the examination of books of accounts, the following other information are
available:

1. Advertisement expenses were spent on insertions in news papers.

2. Rs 3,000 were spent on purchase of land and are included in legal expenses.

3. Half of the repair expenses were on let out building

4. Depreciation allowable on all assets including car is Rs 14,400

5. Bonus was paid to employees on 30-06-2020 and date of filing of return is 31-
07-2020

Solution: computation of business income of a cycle manufacturer

Profit as given in the profit and loss a/c 190,000

Add: Inadmissible expenses
Drawings 24,000
Interest on proprietor’s capital 7,000
Return to proprietor 4,000
Car purchased 72,000
Donations 2,000
Provisions for bad debts 6,000
Legal charges ( Being capital expenses) 3,000
Repairs on let out building 1,250
Depreciation 15,000
Advertisement expenses paid in cash 24,000 158,250
348,250
Less: Income to be treated under separate heads:
Income from interest on securities 14,000
Income from house property 25,000 39,000

Less: Allowable depreciation 14,400

Income from business 294,850

290
Illustration :

From the following statement, compute the income from profession of

Dr. S.K.Kapoor if accounts are maintained on cash and receipt system:
To dispensary rent 36,000 By visiting fees 45,000
To electricity and water charges 6,000 By consultation fees 125,000
To telephone expenses 6,000 By sales of medicines 72,000
To salary to nurse and compounder 36,000 By dividends 5,000
To dep. On surgical equipment 6,000
To purchase of medicines 36,000
To depreciation of X ray machine 4,000
To income tax 5,500
To donation to rama Krishna mission 4,000
To motor car expenses 9,600
To dep. On car 4,800
To net income 93,100
247,000 247,000
Notes;
1. electricity and water charges include domestic bills of Rs 2,500
2. half of motor car expenses are for professional use.
3. Telephone expenses include 40 % for personal use
4. Opening stock of medicines was Rs 6,000 and closing stock Rs 4,000
Solution:
Computation of professional income of Dr. S.K Kapoor
Professional receipts:
Visiting fees 45,000
Consultation fees 125,000
Sale of medicines 72,000 242,000

Less: Professional expenses

Dispensary rent 36,000
Electricity and water charges ( 6,000- 2,500) 3,500
Telephone expenses ( 6,000 x 60 %) 3,600
Salary to staff 36,000
Depreciation on surgical equipment 6,000
Cost of medicines [ 6,000 + 36,000 -4,000] 38,000
Depreciation on X ray machine 4,000
Motor car expenses [ 9,600 – 4,800] 4,800
Depreciation on car [ 4,800 – 2,400] 2,400 134,300
Professional gains 107,700

291
Illustration : The following is the profit and loss of a merchant for the year ending
31-3-2020

Profit and loss account

To office salary 206,500 By gross profit 436,750
To bad debts written off 1,700 By commission 1,250
To provision for bad debts 3,000 By discounts 500
To advertisement 53,800 By sundry receipts 200
To fire insurance premium (H.P) 550 By rent of building 3,600
To general expenses 52,750 By profit on sale of investments 3,000
To depreciation 1,200
To interest on capital 2,000
To interest on bank loan (due) 1,300
To net profit 122,500
445,300 445,300
Compute the taxable profits from business . The amount of depreciation is Rs 1,000.
Interest on bank loan was paid on 1-8-2019 . Due date of filing of return is
31-3-2020.

Solution:

Computation of business profits

Net profits as per P/L a/c 122,500
Add: Expenses not allowed
Provision for bad debts 3,000
Fire insurance premium 550
Depreciation 1,200
Interest on capital 2,000
Interest on bank loan paid on 1-8-2019 1,300 8,050
130,550
Less: allowable depreciation 1,000
129,550
Less: Incomes chargeable to tax under other heads
Rent of building 3,600
Profit on sale of investments 3,000 6,600
Business income 122,950

292
Illustration

Mr. D.D Dewan and company are charatered accountants in Delhi. They have
submitted the following income and expenditure account for the year. Compute the
income from profession.
Expenses Incomes
To drawings 48,000 By audit fees 224,000
To office rent 42,000 By financial consultancy service 98,000
To telephone installation charges 15,000 By dividends from an Indian 6,000
under OYT scheme company ( Gross)
To electricity bill 4,200 By dividend on units of UTI 4,000
To salary to staff 66,000 By accountancy works 24,000
To charaties 1,200
To gifts given to relatives 9,600
To car expenses 21,000
To subscription for journals 2,500
To institute fee 1,200
To stipends given to trainees 12,000
To net income 133,300
356,000 356,000
Notes:
1. Depreciation of car during the year amounts to Rs 5,000
2. 30 % of the time car is used for personal purposes.
Solution:
Computation of income from profession of M/s D.D. Dewan and Co
Professional receipts
Audit fees 224,000
Financial consultancy works 98,000
Accountancy works 24,000
346,000
Less: Professional expenses
Office rent 42,000
Telephone installation charges 15,000
Electricity bill 4,200
Salary to staff 66,000
Car expenses [ 21,000 x 70 %] 14,700
Subscription for journal 2,500
Institute fees 1,200
Stipends to trainees 12,000
Depreciation 3,500 161,100
Professional gain 184,900

293
Unsolved problems

Problem 1 :Following is the profit and loss account of Bappi Lehri for the previous year
2019 -20
To salaries 25,650 By gross profit 80,000
To rent 1,000 By bank interest 450
To commission on sales 100 By bad debts recovered last year 2,000
To income tax 2,600 allowed
To entertainment expenses 600 By rent from house property 4,800
To commission paid to collect 25 By interest on commercial 2,000
interest on securities securities
To embezzlement by cashier 1,000
To municipal tax of H.P 600
To bad debts ( Allowed) 450
To repairs to house 1,625
To office expenses 9,180
To depreciation 5,000
To LIC premium 1,320
To net profit 40,100
89,250 89,250

Problem 2: The following is the P/L a/c of Chetan on the basis of which compute his gross
total income for the assessment year 2020-21:
To salaries and wages 12,000 By gross profit 48,200
To rent rates and taxes 3,200 By rent from house property 6,000
To trade expenses 1,450 By dividend from an Indian co. 2,400
To advertisements 950
To household expenses 3,500
To discount and rebate 1,250
To postage and stationery 275
To fire insurance premium ( let out 300
house property)
To reserve for bad debts 1,000
To LIC premium 1,000
To donation to an approved school 1,000
To income tax 3,300
To repairs ( House property) 500
To audit fees 300
To loss of stock in trade 1,000
To depreciation 1,000
To interest on capital 200
To net profit 24,375
56,600 56,600

294
4.7 SUMMARY

- 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.

– 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.

– Section 44B laid down special provisions for computing profits and gains
of shipping business in case of non-residents.

– Section 44D prescribed for special provisions for computing income by

way of royalties etc, in case of foreign companies.

4.8 GLOSSARY

Plant : The term ‘plant’ for the purpose of allowance of depreciation has been
defined in Section 43(3) to include ships, vehicles, books, scientific apparatus
and surgical equipments used for the purposes of the business or profession.

295
Block of Assets: The depreciation is provided in respect of “Block of assets”.
As per Section 2(11) Block of assets means “a group of assets falling within a
class of assets, being tangible assets such as buildings, machinery, plant or
furniture and intangible assets, being know-how, patents, copyrights, trademarks,
licences, Franchises or any other business or commercial rights of similar nature,
in respect of which the same percentage of depreciation is prescribed”.

4.9 SELF ASSESSMENT QUESTIONS

1. What are the provisions for the treatment of depreciation u/s 32 ?

_________________________________________________________

_________________________________________________________

_________________________________________________________

2. What are the expenses expressely disallowed under the computa-

tion of income from business or profession?

_________________________________________________________

_________________________________________________________

_________________________________________________________

1. Give a brief account of the deductions allowed u/s 30-40A of Income tax
Act?

2. From the following Statement compute the income profession of Dr. S.

K. Kapoor if accounts are maintained on mercantile system:

296
 particulars Rs particulars Rs
To dispensary rent 30000 By visiting fees 35000
To electricity and water charges 3000 By consultation fees 115000
To telephone expenses 6000 By sale of medicines 72000
To salary to nurses and compounder 35000 By dividends 5000
To depreciation on surgical equipments 2000
To purchase of medicines 36000
To depreciation on X-ray machine 4000
To income tax 3500
To donation to Rama Krishna Mission 4000
To motor car expenses 7600
To depreciation on car 2800
To net income 93100
227000 227000

 electricity and water charges includes domestic bill of Rs 2500

 Half of motor car expenses are for professional use.

 Telephone expenses include 40% for personal use

 Opening stock of medicines was Rs 6000 and closing stock was Rs 4000

Problem 3 :Following is the profit and loss account of Bappi Lehri for the previous
year 2019 -20.
To salaries 25,650 By gross profit 80,000
To rent 1,000 By bank interest 450
To commission on sales 100 By bad debts recovered last year 2,000
To income tax 2,600 allowed
To entertainment expenses 600 By rent from house property 4,800
To commission paid to collect 25 By interest on commercial 2,000
interest on securities securities
To embezzlement by cashier 1,000
To municipal tax of H.P 600
To bad debts ( Allowed) 450
To repairs to house 1,625
To office expenses 9,180
To depreciation 5,000
To LIC premium 1,320
To net profit 40,100
89,250 89,250

297
Problem 4: The following is the P/L a/c of Chetan on the basis of which compute his
gross total income for the assessment year 2020-21:
To salaries and wages 12,000 By gross profit 48,200
To rent rates and taxes 3,200 By rent from house property 6,000
To trade expenses 1,450 By dividend from an Indian co. 2,400
To advertisements 950
To household expenses 3,500
To discount and rebate 1,250
To postage and stationery 275
To fire insurance premium ( let out 300
house property)
To reserve for bad debts 1,000
To LIC premium 1,000
To donation to an approved school 1,000
To income tax 3,300
To repairs ( House property) 500
To audit fees 300
To loss of stock in trade 1,000
To depreciation 1,000
To interest on capital 200
To net profit 24,375
56,600 56,600

4.10 SUGGESTED READINGS

1. Dr. V.K. Singhania : Students Guide to Income-tax; Taxmann

Publications Pvt. Ltd.,New Delhi.

2. Girish Ahuja and Ravi Gupta : Systematic Approach to Income-tax

and Sales-tax; Bharat Law House, New Delhi.

3. Study Material, Executive Programme, Tax Laws And Practice

Module I, Paper 4: The Institute Of Company Secretaries Of India,
New Delhi, www.icsi.com.

4. V.P. Gaur, D. B. Narang, Puja Ghai and Rajeev Puri: Income Tax
Law and Practice: Kalyani Publishers, New Delhi.

298