DT Volume 1

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Income Tax – Volume 1
Index
Page
Topics Topic Name
Numbers
1 Direct Taxes at a Glance 1.1 – 1.13
2 Basics & Residential Status 2.1 – 2.36
3 Incomes Exempt from Tax 3.1 – 3.15
4 Income from Salaries 4.1 – 4.33
5 Income from House Property 5.1 – 5.14
6 Profits and Gains from Business & Profession 6.1 – 6.45
7 Capital Gains 7.1 – 7.31
Unique Academy CA Saumil Manglani

1. Direct Taxes at a Glance 1.1
Unique Academy - 8007916622 CA Saumil Manglani - Contact: 9921051593

Introduction
The word tax is based on the Latin word “taxo” which means “To
estimate”. To tax means to impose a financial charge or other levy upon
a taxpayer, an individual or legal entity, by a state or the functional
equivalent of a state such that failure to pay is punishable by law.
Taxation is a payment from natural persons or legal entity and it is levied

by Government for which no goods or services is received directly in
return, so taxes is that amount of money, the people pay which is not
related directly to the benefit of people obtained from the provision of a
particular goods or services.
Until the early 1930s, it was universally accepted in principle that

governments should balance their budgets. Thus, the principle reason for
taxation was to pay for government expenditures.
Definitions
There is no precise and accurate definition for the tax and the concept of tax has been defined
differently by different economists. Some definitions are as follows.
According to Prof Seligman – A tax is compulsory contribution from the person to the
government to defray the expense incurred in the common interest of all without reference to
special benefits conferred.
According to Bastable – A tax as a compulsory contribution of the wealth of a person, or body of
persons for the service of public powers.
Deviti. De Marco defines – A tax as a share of the income of citizens which the state
appropriate in order to procure for itself the means necessary for the production of general public
services.
Hugh Dalton – A tax is a compulsory charge imposed by a public authority irrespective of the
exact amount of service rendered to the tax payer in return and not imposed as a penalty for legal
offence.
Jom Bouvier defined a tax as “A pecuniary burden imposed for support of the government, the
enforced proportional contribution of persons and property of the government and for all public
needs”
From the above definitions we may conclude that a tax is compulsory contribution, levied by
government from owner of income without direct benefit but for public benefit, and taxes should be
arranged by the law.

Rationale to levy Tax
Question
What is the rationale behind to levy tax in India?
The taxes collected have been used by the government to carry out many functions. Some of
these include:
⚫ Expenditures on war,
⚫ The enforcement of law and public order,
⚫ Protection of property,
⚫ Economic infrastructure (such as roads, legal tender, enforcement of contracts, etc.),
⚫ Public works,
⚫ Social Engineering,
⚫ The operation of Government itself, and
⚫ To fund welfare and public services such as education systems, health care systems, pensions forthe
elderly, unemployment benefits, and public transportation, energy, water and waste management
systems, common public utilities, etc.
Modern social security systems are intended to support the poor, the disabled, or the retired
person by taxes on those who are still working. In addition, taxes are applied to fund foreign
aid and military ventures, to inflate the macroeconomic performance of the economy or to
modify patterns of consumption or employment within an economy, by making some classes of
transaction more or less attractive.
Thus, there is no doubt that most government expenditures must be paid through the taxation
system and it is reasonable to see this as the principle function of taxation. Yet there have
always been a variety of subsidiary objectives of taxation.
In the present time, taxation is not just a means of transferring money to the government to spend it for
meeting the public expenditures or raise revenue to the government, but taxes have become beside
that, a tool for reduced demand in the private sector, redistribution of income and wealth in the
societies in the countries.
It is also a means for economic development and for playing very important role in the case of
stabilization of income, protection of domestic industries from foreign ones. Taxation helps to find out
solutions for some economic problems that face the state, like unemployment, inflation, and
depression. Countries practice sovereign authority upon citizens, through levy of Taxes.

Questions
What are the characteristics of Good tax system?
Characteristics of Taxes
1. Tax is compulsory and not voluntary – A tax is imposed by law. So tax

is compulsory payment to the governments from its citizens. Tax is duty
from every citizen to bear his share for supporting the government
2. Tax is contribution – Contribution means in order to help or provide

something. Tax is contribution from members of community to the
Government. A tax is the duty of every citizen to bear their due share
for support to government to help it to face its expenditures.
3. Tax is for public benefit – Tax is levied for the common good of society
without regard to benefit to special individual.
4. Tax is paid out of income of the tax payer – Income means money
received, especially on regular basis, for work or through investment.
Tax is paid out of income as long as the income becomes realized, here
the tax is imposed. Income owner has profit from any business, so he
should pay his share for support to the government.
5. Government has the power to levy tax – Governments are practicing

sovereign authority upon its citizens through levying of taxes. Only Govt.
can collect tax from the people.
6. Tax is not the cost of the benefit – Tax is not the cost of benefit
conferred by the government on the public. Benefit and taxpayer are
independent of each other, and payment of taxation is of course
designed for conferring of benefits on general public.
7. Tax is for the economic growth and public welfare – Major
objectives of the government are to maximize economic growth and
social welfare.
Question
Income tax is progressive tax system? Explain with reasoning

Objectives
The primary purpose of taxation is to raise revenue to meet huge public

expenditure. Most governmental activities must be financed by taxation.
But it is not the only goal. In other words, taxation policy has some non-
revenue objectives
Objectives of taxes have been developed when the functions of the

Government are developed. The Objectives of taxation in brief are as
under -
• Source of Revenue to Government- Taxes are imposed so as to

produce the necessary amount of revenue to meet the requirement of the
government, as the public expenditures is increasing in scope and size
day by day. Therefore, the main objective of taxes is to raise revenue to
meet the Govt. expenditures adequately.
 Redistribution of income and wealth- Tax is a means of ensuring the

redistribution of income and wealth in order to reduce poverty and promote
social welfare. For achieving these goals, government adopts the following:
i. Imposition of high rate tax upon luxury commodities.
ii. Applying progressive tax system when levying taxes from taxpayers.
iii. Imposition of tax exemption to basic goods.
 Social welfare- The government functions have become very important to
the society, because the society needs saving, protection, education,
health, and so on. All these functions are necessary to make social welfare,
so the government receives revenue from tax, and expends it for those
functions. Therefore revenue from taxes is fuel to the government for social
welfare.
• Safety of society from bad and injurious customs- Imposition of very
high percentage on the goods like tobacco and alcohol is an effort to
reduce these habits.
• Economic significance of taxes- Taxes are used from economic point

of view, so taxation helps to encourage some economic activities, and as
a tool to solve some economics problems. Tax is also a means for
directing of scarce economic activities. Taxation helps to accelerate
economic growth, and taxation plays very important role in case of
economic stability.
• Economic growth: Taxes are considered as a tool for economic growth

and it helps to accelerate growth of economic development.
• Enforcing government policy: The Government can encourage

investment, saving, consumption, export, protection of home industry,
employment, production, protection of society from harmful customs, and
economic stability through suitable tax policy. Therefore, the government
gives tax exemption to the investment and saving.
• Economic stability: Maintaining economic stability is one of the tax

objectives. Economic stability is a very important factor for the sustained
economic growth. Government can effectively use taxes in the case of
inflation and depression.
Direct Vs Indirect Tax

Question
Distinguish with example the difference between Direct and Indirect Tax?
Direct and Indirect taxes
Point of Direct Tax Indirect Tax

Difference
Meaning Direct tax is a tax wherein the levy of In this the levy of tax is made on one
tax is made on a person and the person and the responsibility of paying
responsibility of paying such tax is the tax to the Government is fixed on
fixed on that person. some other person.
Levy Direct tax is levied on person. Indirect tax is levied on goods and
services.
Transfer of Tax The burden of direct tax cannot be The burden of indirect tax can be
Burden transferred to other person. transferred to the end users.
Effect The purpose of direct tax is to Indirect tax increases the price of goods
redistribute the wealth of a nation. or services.
Example Income Tax. Goods and Services Tax.
Penalty It is levied on the Assessee. It is levied on supplier of Goods &

Services.

Merits of DT Demerits of DT
1. Equity: - Direct taxes have equity of 1. Evasion: - Direct tax is lump sum
sacrifice, depend upon the volume of therefore tax payers try evasion.
income. They are based on the principle of
2. Uneconomical.:-Expenses of collection
progressive, so rates of tax increase as the
are larger in the case of direct taxes,
level of income of a person rises.
because they require
2. Elasticity and productivity: - Direct taxes
widely- spread staff for collection
have elasticity because when the
government faces some Emergency, like 3. Unpopular:-Direct tax is required to be
earthquake, floods and famine the paid in lump sum for the whole year, so
government can collect money for facing the tax payers feel the painful payment,
those Problems by direct tax. these taxes are therefore unpopular.
3. Certainty: - Direct taxes have certainty on 4. Little incentive to work and save:-In
both sides’ tax-payer and government. The direct taxes, rates are of progressive
taxpayers are aware of the quantity of tax. nature. A person with higher earning is
They have to pay and rate, time of payment, taxed more; in turn he is left little with
manner of payment, and punishment from amount. So the tax payer feels
the side of government is also certain about disincentive to work hard and save
the total amount they are getting. money after reaching a certain level of
income.
4. Reduce inequality: - Direct taxes follow
progressive principles so it is taxing the rich 5. Not suitable to a poor country: -
people with higher of taxation and the poor Direct taxes are not enough to meet its
people with a lower level of taxation. expenditure.
5. Good instrument in the case of inflation. -

Tax policy as fiscal instrument plays 6. Arbitrary:-Due to absence of logical or
important role in the case of the inflation, so scientific principle to determine the
government can absorb the excess money degree of progression in the taxation,
by arising in the rate of existing taxes or the direct taxes are arbitrary.
imposition of new taxes.
6. Simplicity: - Direct taxes are simplicity, while

levy the rules, procedures, regulations of
income tax are very clear and simple

Merits of Indirect Tax Demerits of Indirect Tax
1. High revenue production: - Indirect taxes 1. Regressive in effect:-Essential

cover a large number of essential goods and commodities are used from all members of
luxurious goods which are consumed by the community. No distinction is made between
mass both rich and poor people, these help in the rich and poor people.
collecting large revenue.
2. Uncertainty in collection- Discourage
2. No evasion. Nature of indirect tax is that, it is savings and Increase inflation:-Indirect
included in the price of commodity, so tax taxes are payable when people spent their
evasion or tax avoidance is difficult. income or when people buy goods and
services, so tax authorities cannot
3. Convenient: -Indirect taxes are small amount
accurately estimate the total yield from
and indirect taxes are hidden in the price of
different indirect taxes.
goods and service, hence the burden of these
taxes is not felt very much by the tax-payers, 3. Discourage savings- Increase inflation:-
and not lump sum like direct taxes. Indirect taxes are included in the price of
commodity, so people have to spend more
4. Economy - Indirect taxes are economical in
money on essential commodities, when
collection and the administrations costs of
levied indirectly. In this case that means the
collection are very low, also the procedure of
customers cannot save some of their
collection of these taxes is very simply.
money.
5. Wide coverage:-Indirect taxes cover almost
4. Increased inflation:-Indirect taxes
all commodities like essential commodities,
increase the cost of input and output,
luxuries, and harmful ones.
increase in production cost, push the
6. Elasticity:-Since a large number of commodities price of goods. These reflect an increase
and services are covered by indirect taxation in the wages of the workers.
there is great scope for modification of taxes,
goods and tax rate, much depends on nature of
goods and on its demands.
Taxation in India during Ancient Time
In India, the system of direct taxation as it is known today, have been in force in one form or another
even from ancient times. there are references both in Manu Smriti and Arthashastra to a variety of tax
measures
Manu, the ancient sage and law-giver He laid down that traders and artisans should pay 1/5th of their
profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce
depending upon their circumstances.

Background of Income tax in India
Income Tax Act, 1860 Income Tax Act, Income Tax Act, 1918 Income Tax Act, 1922
1886
Consequent upon the The Act of 1886 The Act of 1918 brought The organizational history of the
financial difficulties created levied a tax on the under change also income tax department dates
by the events of 1857. income of residents receipts of casual or back to the year 1922. “one of the
Income Tax was as well as non non recurring nature important aspects of the 1922 Act
introduced in India residents in India. pertaining to business was that, it laid down the basis,
for the first time by the The Act defined or professions. the mechanism of
British in the year 1860. agricultural income Although income tax in administering the tax and the
The Act of 1860 was passed and exempted it India has been a charge rates at which the tax was to be
only for five years and from tax liability in on net income since levied would be laid down in
therefore it lapsed in 1865. It view of the already inception, it was in the annual finance acts. This is
was replaced 1867 by a existing land revenue Act of 1918 that specific procedure brought in the much
licence tax on professions a kind of direct taxes. provisions were inserted needed flexibility in adjusting the
and trades and the latter was The Act of 1886 for the first time tax rates in accordance with the
converted into a certificate exempted life pertaining to business annual budgetary requirements
tax in the following year. It insurance deductions for the and in securing a degree of
was latter abolished in 1873. premiums paid by purpose of computing elasticity for the tax system.
Licence tax traders assesse policies of net income. Before 1922 the tax rate were
remained in operation till his own life. Another determined by the Income tax
important provision of The Act of 1918 act itself and to revise the
1886 when it was merged in
this Act Hindu remained in force for a rates, the act itself had to be
the income tax Act of that
undivided family short period and was amended. The Income tax Act,
year.
was treated as a replaced by new Act 1922 gave for first time a specific
distinct taxable (Act XI of 1922) in view nomenclature to various income
entity. of the reforms tax authorities and laid the
introduced by the Govt. foundation of a proper system of
of India Act, 1919 administration as per provisions of
income tax act 1922 thus, it is the
income tax act 1961, which is
currently operative in India.
Income Tax Act, 1961
The present law of income tax in India is governed by the Income Tax Act, 1961 which is
amended from time to time by the annual finance Act and other legislations pertaining to
direct tax. The act which came into force on April 1, 1962, replaced the Indian income
tax Act, 1922, which had remained in operation for 40 years. Furthermore, A set of rules
known as Income Tax Rules, 1962 have been framed for implementing the various
provisions of the Act.

Tax Structure in India
Constitution of India
The roots of every law in India lies in the Constitution, therefore understanding the provisions of
Constitution is foremost to have clear understanding of any law. Let us first understand what it
talks about tax:
• Article 265– No tax shall be levied or collected except by the Authority of Law.
• Article 246- Distributes legislative powers including taxation, between the Parliament of India
and the state legislature
Schedule VII- Enumerates powers under three lists
o Union List – Powers of Central Government
o Legislative List- Powers of State Government
o Concurrent List- Both Central and state Government have powers, in case of conflict; law
made by Union Government prevails.
Some of the major taxes under respective lists are:-
Central  Customs including export duties

government
 Excise on Tobacco and other goods manufactured in India except alcoholic liquors for
human consumption, opium, narcotic drugs
 Corporation Tax
 Taxes on inter-state trade of goods other than newspapers
 Taxes on inter-state consignment of goods
 Any other matter not included in List II or III
State  Taxes on agricultural income

government
 Excise duty on alcoholic liquors, opium and narcotics
 Octroi or entry Tax
 Tax on intra state trade of goods other than newspapers
 Tax on advertisements other than that in newspapers
 Tax on goods and passengers carried by road or inland waterways
 Tax on professionals, trades, callings and employment

ADMINISTRATION
The Central Board of Revenue or Department of Revenue is the apex body charged with the
administration of taxes. It is a part of Ministry Of Finance which came into existence as a result of
the Central Board of Revenue Act, 1924.
Initially the Board was in charge of both direct and indirect taxes. However, when the
administration of taxes became too unwieldy for one Board to handle, the Board was split up into
two, namely the Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC) now
CBIC Central Board of Indirect Taxes and Customs. This bifurcation was brought about by
constitution of the two Boards under Section 3 of the Central Boards of Revenue Act, 1963.
CBDT
The Central Board of Direct Taxes (CBDT) provides essential inputs for policy and planning of
direct taxes in India and is also responsible for administration of the direct tax laws through
Income Tax Department. The CBDT is a statutory authority functioning under the Central Board
of Revenue Act, 1963. It is India’s official Financial Action Task Force (FATF) unit.
Organizational Structure
The CBDT is headed by CBDT Chairman and also comprises six members. The Chairperson
holds the rank of Special Secretary to Government of India while the members rank of Additional
Secretary to Government of India.
• Member (Income Tax)
• Member (Legislation and Computerization)
• Member (Revenue)
• Member (Personnel & Vigilance)
• Member (Investigation)
• Member (Audit & Judicial)
The CBDT Chairman and Members of CBDT are selected from Indian Revenue Service (IRS), a
premier civil service of India, whose members constitute the top management of Income Tax
Department.

Income Tax Department
Income Tax Department functions under the Department of Revenue in Ministry of Finance. It is
responsible for administering following direct taxation acts passed by Parliament.
• Income Tax Act, 1961
• Various Finance Acts (Passed Every Year in Budget Session)
Income Tax Department is also responsible for enforcing Double Taxation Avoidance
Agreements and deals with various aspects of international taxation such as Transfer Pricing.
Income Tax Department has powers to combat aggressive Tax avoidance by enforcing General
Anti Avoidance Rules.
CBIC
Central Board of Indirect Taxes and Customs (CBIC) is a part of the Department of Revenue
under the Ministry of Finance, Government of India. It deals with the tasks of formulation of policy
concerning levy and collection of Customs & Central Excise duties and GST, prevention of
smuggling and administration of matters relating to Customs, Central Excise, GST and Narcotics
to the extent under CBIC’s purview.
GST Council
A GST Council consisting of representatives from the Centre as well as State has been
formulated under the GST Law of indirect taxes. The Council will make recommendations to the
Union and the States on Goods and Service Tax laws, on any other matter relating to GST.
Till date, numerous conclusive meetings of GST Council have been undertaken. Decisions have
been taken regarding rates, Composition Scheme, exemption schemes to North-Eastern and
hilly areas, compensation method for loss of revenue to states etc. Rules regarding return,
refund, registration, payment, invoicing and the like have been finalized by the same. However,
various other issues and modalities regarding the GST are constantly being discussed at the
GST Council Meetings for smoothening the law and making it easy to implement for society at
large.

2. Basics & Residential Status 2.1

Regulatory Framework
Sections (Income Details

Tax Act, 1961)
Section 14 Heads of income
Section 2(31) Person
Section 2(7) Assessee
Section 2(9) Assessment year
Section 3 Previous year
Section 2(25A) India
Section 2(10) Average rate of income-tax
Section 2(29C) Maximum Marginal rate
Section 2(24) Income
Section 2(45) Total income
Section 4 Charge of income tax
Section 6 Residential Status
Section 5 Meaning and Scope of total income
Section 9 Income are deemed to accrue or arise in India
Section 115BAC Special tax regime for individual and HUFs
Section 115BAd Special tax regime applicable to a Co-operative societies
Section 87A Rebate
Introduction
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, whereas Indirect tax is paid by the person other than the one
who utilizes the product or service e.g Custom duty, Goods and Service tax (GST).
Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of
law. Thus, the tax proposed to be levied or collected must be within the legislative competence of the
legislature imposing the tax. Further, the law imposing the tax, like other laws, must not violate any
fundamental right.
Income tax being direct tax happens to be the major source of revenue for the Central 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’).
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.
Overview of Income Tax Law in India

⚫ Finance Act: 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 in the Income-Tax Act and prescribes the rates of taxes. When the Finance Bill is
approved by both the houses of parliament and receives the assent of President, it becomes the
Finance Act.
Finance Bill Presented by Finance Minister

Recommendation / Suggestion considered and changes made to Finance Bill

Parliament Approval

President’s approval

Finance Act
Effective date of amendments in Finance Bill

Direct Tax

Indirect Tax

Usually Date if Notification

Usually midnight of date
in Official gazette or in of Presentation of Bill
the Finance Act.
Basic Concepts of Income Tax
Income Tax is levied on the Total Income of the previous year of every person. It is governed by the:
• Income tax Act, 1961 - Income tax contains section 1 to 298
• Income Tax Rules, 1962 - For implementation of the Act and for administration of the direct taxes
Central Board of Direct Taxes (CBDT) is empowered to frame these rules from time to time.
• Relevant Finance Act - Every year Budget is presented before the parliament by the Finance Minister.
One of the important components of the Budget is the Finance Bill. This Bill contains various
amendments in the Income- Tax Act and other tax laws to prescribe the additions and deletions therein.
When the Finance Bill is approved by both the houses of parliament and receives the assent of
President, it becomes the Finance Act.
• Notifications - Notifications are issued either by Central Government or by CBDT to take care of the
procedural aspects of the Act from time to time. These are binding on everyone i.e. on Income Tax
Authorities as well as on the assessees
• Circulars and Clarification issued by CBDT - Circulars and clarifications are issued by the CBDT to
clarify the doubts regarding the scope and meaning of certain provisions of the law and primarily to
provide guidance to the Income Tax officers. These circulars are binding on the Income Tax
Authorities but not on the assessee however an assessee can take benefit of these circulars
• Judicial pronouncements

To levy income tax, one must have an understanding of the various concepts related to the charge of tax
like previous year, assessment year, Income, total income, person etc.
Computation of Tax Liability include following steps:
⚫ Determine the category of person
⚫ Determine the residential status of the person as per section 6
⚫ Calculate the Total income as per the provisions
⚫ Calculate the tax on income
Provision for Computation of Taxable Income
Structure of ⚫ Chapter: I Preliminary

Finance Bill
⚫ Chapter: II Rates of Income Tax.
⚫ Chapter: III Direct taxes [Income Tax]
⚫ Chapter: IV Indirect Taxes [Custom/Excise/CGST/IGST/UTGST]
⚫ Chapter: V Misc.
Schedule-I of Part- I
⚫ Income-tax rates for different assessee
Finance Act
Part-II ⚫ TDS Rates applicable
Part-III ⚫ Advance Tax Rates
Note
⚫ Part-III of First schedule of Finance Act would become the Part-I
of the First Schedule of next Finance Act.
Charge of Income Tax (Section 4)

Section 4 of the Act is the charging section. It lays down the basis on which tax
is imposed. Accordingly, the section provides that:
a) Income tax shall be charged at the rate or rates prescribed in the finance act for the
relevant previous year,
b) the charge of tax is on various persons specified u/s 2(31);
c) the income sought to be taxed is that of the previous year and not of the of
assessment year
d)the levy of tax on the assessee is on his total or taxable income computed in
accordance with and subject to the appropriate provisions of the income tax Act,
including provisions for the levy of additional income-tax
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the
income of a period other than the previous year, income- tax shall be charged accordingly.
Determining category of persons
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:

Individual
Hindu Undivided Family (HUF)
Companies
Firms
AOP
BOI
Local Authorities
Every Artificial Juridical Person not covered above
➢ Individual: An individual is a natural human being i.e. male, female, minor or a person of sound or unsound
mind.
➢ HUF: It consists of all persons lineally descended from a common ancestor and includes their wives and
unmarried daughters and also a stranger who has been adopted by the family.
Types of HUF
No. Dayabhaga Mitakshara
1 West Bengal and Assam Rest of India i.e. except West

Bengal and Assam
2 Right to family property not by birth Right to family property by birth

Company: It include Domestic company, Foreign company, company in which public are substantially
interested. Section 2(17) defines the term company to mean:
(a) any Indian company, or
(b) any body corporate incorporated by or under the laws of a country outside India i.e. a foreign
company, or
(c) any institution, association or body, whether incorporated or not and whether Indian or non- Indian,
which is declared by general or special order of the Board to be a company only for such
assessment year or assessment years.
Firm: It includes a partnership firm whether registered or not and shall include a Limited Liability
Partnership as defined in the Limited Liability Partnership Act,2008.
According to Section 4 of the Partnership Act, 1932 persons who have entered into partnership with one another
are called individually, ‘partners’ and collectively ‘a firm’.
➢ Association of Person: Two or more persons join in for a common purpose or common action to produce
income, profits or gains.
HUF, companies, firms, etc. as members
The object must be to produce income. It is not enough that the persons receive the income jointly.
➢ Body of Individuals denote the status of persons who are assessable in like manner and to the same extent as
the beneficiaries individually.
Only individuals can be the members Individuals join together for common purposes
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)
Association of Person ‘AOP’ Body of Individual ‘BOI’
An association implies a voluntary getting Body of individuals would be just a body without an
together for a definite purpose intention to get-together
Members of an association of persons Members of body of individuals can be individuals

can be individual or non-individuals (i.e. only
artificial persons)
The object of the formation of AOP must The object of the formation of BOI is not to produce
be to produce income. income. It is formed for the social welfare.
➢ Local Authority
It means a municipal committee, 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.
➢ Artificial Juridical person

This is a residuary clause. 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.

Assessee [Section 2(7)]

“Assessee” means a person by whom any tax or any other sum of money is payable under this Act, and includes:
(a) every person in respect of whom any proceeding under this Act has been taken for the 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 ofrefund 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.
Assessee Example
Normal Assessee: An individual Mr. A is a salaried individual who has been paying taxes on time on
who is liable to pay taxes for the his income.
income earned during a financial
year is known as a normal assessee.
Representative Assessee: There Mr. X. He has been residing abroad for the past 7 years. However, he
may be a case in which a person is receives rent for two house properties he owns in India. He takes the
liable to pay taxes for the income help of a relative, Mr. Y, to file taxes in India. In this case, Mr. Y acts as a
or losses incurred by a third party. representative assessee. If the assessing officer plans to investigate the
Such a person is known as a tax filing, Mr. Y will be asked to provide the necessary documents as he
representative assessee. is the guardian of the property and represents Mr. X.
Deemed Assessee: An individual Deemed assessees can be:

might be assigned the responsibility
⚫ The eldest son or a legal heir of a deceased person who has
of paying taxes by the legal
expired without writing a will.
authorities and such individuals are
called deemed assessees. ⚫ The executor or a legal heir of the property of a deceased
person who has passed on his property to the executor in
writing.
⚫ The guardian of a lunatic, an idiot, or a minor.
⚫ The agent of a non-resident Indian receiving income from India.
Assessee in Default: Assessee-in- An employer is supposed to deduct taxes from the salary of his
default is a person who has failed employees before disbursing the salary. He is, then, required to pay
to fulfill his statutory obligations as the deducted taxes to the government by the specified due date. If
per the income tax act such as not the employer fails to deposit the tax deducted, he will be considered
paying taxes to the government or as an assessee-in-default.
not file his income tax return.

Previous Year [Section 3]

Previous year means the financial year immediately preceding the assessment year. Income earned in a year is
taxable in the next year. The year in which income is earned is known as previous year.
Examples for previous year in the case of newly set-up business/profession.
Example 1: Y sets up a new business on May 15, 2022. What is the previous year for the
assessment year 2023-2024
Answer: Previous year for the assessment year 2023-24 is the period commencing on May 15,
2022 and ending on March 31, 2023.
Example 2: A joins an Indian company on February 17, 2022. Prior to joining this Indian company
he was not in employment nor does he have any other source of income. Determine the previous
year of A for the Assessment Years 2022-23 and 2023-24
Answer: Previous years for the assessment years 2022-23 and 2023-24 will be as follows.
Previous year Assessment year
Feb. 17, 2022 to March 31, 2022 2022-23

April 1, 2022 to March 31, 2023 2023-24
Assessment year [Section 2(9)]

“Assessment year” means the period of twelve months commencing on 1st April every year.
Thus, it is normally period beginning on 1st April of one year and ending on 31st March of the
next year. Income of previous year of an assessee is taxed during the following assessment
year at the rates prescribed by the relevant Finance Act.
Exception to the General Rule: In the following situation, the Income of previous year of an assessee is
taxed in the previous year itself:
1. Income of Non-Resident from Shipping: [Section 172]- A non resident who is carrying on a shipping
business and earns income at any port in India, shall be charged to tax before the ship is allowed to
leave Indian Port. Hence income is deemed and computed at a presumptive rate of 7.5% of the amount of
the fare/ freight charged by the non-resident ship from the Indian port.
2. Income of persons leaving India either permanently or for long duration: [Section 174]- When it appears to
the Assessing Officer (A.O.) that an individual may leave India and has no intentions of returning back
during an assessment year, then the income is charged to tax during the same Assessment year.
3. Income of bodies formed for short duration: [Section 174A]- When it appears to the Assessing Officer
(A.O.) that any organization is formed for a particular event and is likely to be dissolved during the
current assessment year.
4. Income of person trying to transfer his assets with a view to avoid tax: [Section 175]- When it appears to
the Assessing Officer (A.O.) that during the current assessment year any person is likely to charge, sell,
transfer, dispose of or otherwise part with any of his assets to avoid payment of any liability under this
Act, the total income of such person for the period from the expiry of the previous year to the date, when
the Assessing Officer commences proceedings under this section is chargeable to tax in that
assessment year.
5. Income of discontinued business: [Section 176]- Where any business or profession is discontinued in any
assessment year, the income of the period from the expiry of the previous year up to the date of such
discontinuance may, at the discretion of the Assessing Officer, be charged to tax in that assessment year

Certain cases when income of a previous year will be assessed in the previous year itself:
India [Section 2(25A)]

The term ‘India’ means –
(i) the territory of India as per Article 1 of the Constitution,
(ii) its territorial waters, seabed and subsoil underlying such waters,
(iii) continental shelf,
(iv) exclusive economic zone, or
(v) any other specified maritime zone and the air space above its territory and territorial
waters.
Specified maritime zone means the maritime zone as referred to in the Territorial
Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act,
1976.
Income [Section 2(24)]

“Income is the consumption and savings opportunity gained by an entity within a specific timeframe,
which is generally expressed in monetary terms. However, for households and individuals, “income
is the sum of all the wages, salaries, profit, interests payments, rents, and other forms of earnings
received in a given period of time.”
In general terms, Income is a periodical monetary return with some sort of regularity. However, the
Income Tax Act, even certain income which does not arise regularly are treated as income for tax
purposes e.g. Winnings from lotteries, crossword puzzles.As per section 2(24), the term income
includes:

As per section 2(24), the term income includes:
S. Income Taxable Head

No.
1. Profits and gains PGBP
2. Dividend Other Sources
3. Voluntary contributions Generally exempt underSection

11 and 12
4. The value of any perquisite or profit in lieu of salary Salary
5. Any special allowance or benefit specifically granted to Salary (Generally exempt)

the employee to meet expenses wholly, necessarily and
exclusively for the performance of the duties of an office or
employment of profit
6. City Compensatory Allowance/ Dearness allowance Salary
7. Benefit or Perquisite to a Director / a person having substantial Salary (If as per employment
interest/ relative of director agreement)
Else under Other Sources (If not in
the terms of employment
agreement)
8. Any Benefit or perquisite to a Representative Assessee Other Sources
9. Deemed profits chargeable to tax under section 28 or section PGBP

41 or section 59.
10. Capital Gain Capital Gains
11. Insurance Profit PGBP
12. Banking income of a Co-operative Society PGBP
13. Winnings from Lottery Other Sources
14. Employees Contribution Towards Provident Fund PGBP if not deposited by the
assessee to the specified fund
15. Amount Received under Keyman Insurance Policy PGBP
16. Amount received for not carrying out any activity : Any sum PGBP
referred to in Section 28(va), i.e. any sum, whether received or
receivable in cash or kind, under an agreement for -
(i) not carrying out any activity in relation to any
business or profession
(ii) not sharing any know-how, patent, copyright, trade-
mark, license, franchise or any other business or
commercial right of similar nature or information or
technique likely to assist in the manufacture or
processing of goods or provision for services

17. Any sum referred to in clause (v) or (vi) of sub-section (2) of Other Sources
section 56
18. Gift received for an amount exceeding Rs. 50,000 Other Sources
19. Any consideration received for issue of shares as exceeds the Other Sources
fair market value of the shares referred in section 56(2) (viib)
20. Amount received as an advance or otherwise in the course of Other Sources

negotiation for transfer of a capital asset referred to in clause
(ix) of section 56(2)
21. Any sum of money or value of property received without Other Sources
consideration or for inadequate consideration as referred to in
clause (x) of Section 56(2)
22. Any compensation or payment in connection with termination Other Sources
of employment as referred under clause (xi) of Section 56(2)
23. Assistance in the form of a subsidy or grant or cash incentive PGBP

or duty drawback or waiver or concession or reimbursement
(by whatever name called) by the Central Government or a
State Government or any authority or body or agency in cash
or kind to the assessee other than the subsidy or grant or
reimbursement which is taken into account for determination of
the actual cost of the asset in accordance with the provisions
of Explanation 10 to clause (1) of section 43.
Question - Income may be legal as well as illegal for tax purposes. Explains.
Note: 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. In CIT v. Piara Singh
(1980) 3 Taxman 67, the Supreme Court has held that if smuggling activity can be
regarded as a business, the confiscation of currency notes by customs authorities
is a loss which springs directly from the carrying on of the business and is,
therefore, permissible as a deduction
Capital Vs Revenue Receipt

A receipt is taxable if it is of the nature of income. But receipts which are of
capital nature are generally not taxable. The basic scheme of income-tax is to
tax income not capital, and similarly to allow revenue expenditure. But this general
rule is subject to certain exceptions.

An amount referable to fixed capital is a capital receipt whereas a receipt

referable to circulating capital would be a revenue receipt. While the latter is
chargeable to tax, the former is not subject to income-tax unless otherwise
expressly provided.
The Income-tax Act does not define the term “Capital receipt” & “Revenue
receipt”.
Whether a particular receipt is of the nature of income or capital is explained

below by the following examples. The following test can be applied to determine
the nature of particular receipt
Factors that do not determine the nature or character of receipt

The capital or revenue nature of a receipt must be determined with reference to each
receipt on the basis of the facts and circumstances of each case, the ultimate
conclusion as to the capital or revenue character of the receipt would be of the High
Court or the Supreme Court and the principles laid down by the Court must be
followed for the purpose. However, while determining the question whether a
particular receipt is capital or revenue in nature, care must be taken to ensure that
the following are not taken as the basis for determination although these factors
may, to a certain extent, be helpful to arrive at the conclusion
a. Character and Source of Income b) Application of Income c) Allowance –
Disallowance of amount d) Treatment given in books e) Magnitude and method pf
payment f) Basis for measurement of receipt
Base Explanation Example
Type of capital The very same thing may An amount received on account of sale of trading goods
will depend upon be fixed capital in the or receipts in respect of circulating capital or of flowing
the nature of hands of one business capital is revenue receipt, for example sale of a motor
business but circulating capital in car by a dealer. On the other hand a receipt on account
the hands of another. of sale of fixed assets is a capital receipt, for example,
amount received on sale of a motor car by a person who
is not a car dealer.
Nature of receipt also Whether a particular receipt is  The reimbursement of capital outlay is a capital receipt
depends upon the capital or revenue in nature
even if the total amount received exceeds the cost of the
reference to the must be determined with
recipient reference to the recipient who outlay itself.
is sought to be taxed as the  Compensation received for the loss of a capital asset is a
assessee. For tax purposes the receipt of a capital nature whereas the compensation
capital or revenue character
received for damage to or loss of a trading asset is a
of the receipt must be
determined on the basis of the revenue receipt.
nature of the trade in the  A capital asset is converted into income and the price
course of which or in realized on its sale takes form of the periodic payments of a
connection with which it
revenue nature.
arises.
 Where a person sells his properties and the sale price is
payable to him by the purchaser in the form of annuities of
a fixed sum so long as the seller is alive or until he attains a
particular age.
Capital and Revenue Profits and gains arising from  Profits on purchase and sale of shares by a share broker
Receipts in Relation various transactions which are
on his own account
To business Activities entered into in the ordinary
course of the business of the  Profits arising from dealings in foreign exchange by a
tax payers or those which are banker or other financial institutions
incidental to or closely
associated with his business  Income from letting out buildings owned by a company to
would be revenue receipts its employees etc.
chargeable to tax. But even in For instance, profit on sale of shares and securities held by a
these cases the receipts may bank as investments would be of a capital nature. Where profits
be of a capital nature in arise from transactions which are outside the normal dealing of
certain circumstances. the assessee, although connected with his business, the taxable
nature or otherwise of the profits would depend upon the fact
whether or not the transaction(s) in question constitute(s) trading
activity.
Residential Status (Section 6)
Total income of an assessee cannot be computed unless the person’s residential

status in India during the previous year is known. Thus, determining residential
status of a person is important for calculating tax liability of a person.
Section 6 of the Income tax Act prescribes the tests to be applied to determine the
residential status of all tax payers for purposes of income-tax. An assessee’s
residential status must be determined with reference to the previous year in respect
of which the income is sought to be taxed. Residential status of a person could be:
Person
Individual Individual/HUF Others
In two
exceptional cases Resident Non Resident Resident Non Resident
Individual can be
directly
considered as
RNOR
Resident & Resident & Not

Ordinarily Ordinarily
Resident Resident
There are different test to be applied for different types of person, let us understand
test for each category of person:
1. Individuals
• First of all, an individual is classified as resident or non-resident and again a resident

individual may further be categorized as Ordinarily Resident or Not Ordinarily Resident in
India and In two exceptional cases Individual can be directly considered as RNOR.
Resident in India [section 6(1)]

An individual is said to be a resident in India, if he satisfies any one of the following
conditions -
(i) He is in India in the previous year for a period of 182 days or more [Sec. 6(1)(a)];
or
(ii) He is in India for a period of 60 days or more during the previous year and
for 365 or more days during 4 previous years immediately preceding the relevant
previous year [Sec. 6(1)(c)]
Tax point: Given Conditions are alternative in nature i.e. assessee needs to satisfy
any one condition.
Non-Resident in India
An assessee who is not satisfying sec. 6(1) shall be treated as a non-resident in India
for the relevant previous year.
EXCEPTIONS - In the following cases, condition (ii) of sec. 6(1) [i.e. sec. 6(1)(c)] is irrelevant:
1. An Indian citizen, who leaves India during the previous year for employment purpose.
Note: A person going abroad in connection with his employment in India, is not
covered by above exception
E.g. X is having business in India. During the previous year 2022-23, he visited to
Japan for purchasing raw-material for his business, from there he went to USA for
attending a business meeting. Since, X was outside India in connection with his
employment in India, he is not covered by the exception.
2. An Indian citizen, who leaves India during the previous year as a member of crew of an
Indian ship.
For the above exception of Crew member of an Indian Ship while calculating the number of days of
stay –
Period to be excluded
3. An Indian citizen or a person of Indian origin, who normally resides outside

India, comes on a visit to India during the previous year.
Tax point for all 3 above exceptions: Above assessee shall be treated as resident in India only if he
resides in India for 182 days or more in the relevant previous year.
#Person of Indian origin: A person is deemed to be of Indian origin if he or either of his parents or
grandparents were born in undivided India. Here, grand parents may be paternal or maternal.

Resident and ordinarily resident

If a resident individual satisfies the both the following two additional conditions,
he will be treated as resident & ordinarily resident in India -
(a)He has been resident in India [as per sec. 6(1)] in at least 2 out of 10 previous
years immediately preceding the relevant previous year; and
(b)He has stayed in India for a period of 730 days or more during 7 previous
years immediately preceding the relevant previous year.
Resident but not ordinarily resident

If a resident individual does not satisfy any or both of the additional conditions as
given u/s 6(6), he is “Resident but not ordinarily resident in India”.
Now let’s understand the amendments made by Finance Act 2020 i.e. Applicable from AY 21-22
A. Amendment added in the exceptional point of Indian Citizen or Person of Indian Origin coming to
India for the purpose of Visit
✓ In case of the citizen or person of Indian origin
✓ having total income,
✓ other than the income from foreign sources
✓ Exceeding Rs. 15,00,000 during the previous year
Would be considered a resident if he stays in India for less than 182 days but minimum
120 days during the Relevant Previous Year
and
Stayed in India for minimum 365 days during the preceding 4 years
Now if such a person as stated above becomes a resident then he will be directly considered as
RNOR. Here preceding 7 and 10 years data would not be required to be checked
Note – "income from foreign sources" means income which accrues or arises outside India (except
income derived from a business controlled in or a profession set up in India) and which is not deemed to
accrue or arise in India.
B. Newly added concept of Deemed Resident (Clause (1A) shall be inserted after clause (1) of section 6 by
the Finance Act, 2020, w.e.f. 1-4-2021)
Clause (1A)
✓ Notwithstanding anything contained in clause (1)
✓ An individual, being a citizen of India
✓ Having total income, other than the income from foreign sources,
✓ Exceeding fifteen lakh rupees during the previous year
✓ Shall be deemed to be resident in India in that previous year, if
✓ He is not liable to tax in any other country or territory by reason of his domicile or residence or any
other criteria of similar nature
✓ Such a person will be directly considered as RNOR [Sec 6(6)]
Explanation—For the removal of doubts, it is hereby declared that this clause shall not apply in case
of an individual who is said to be resident in India in the previous year under clause (1).

Important Points
• The fact that an assessee is resident in India in respect of one year does not automatically
mean that he would be resident in the preceding or succeeding years as well. Consequently,
the residential status of the assessee should be determined for each year separately.
This is in view of the fact that a person resident in one year may become non-resident or not
ordinarily resident in another year and vice versa.
• The period of stay required in each of the conditions need not necessarily be
continuous or consecutive nor it is stipulated that the stay should be at the usual place of
residence, business or employment of the individual. Purpose of stay is immaterial in
determining the residential status.
• The stay may be anywhere in India and for any length of time at each place in cases
where the stay in India is at more places than one, what is required is the total period of stay
should not be less than the number of days specified in each condition.
• Where the exact arrival and departure time is not available then the day he comes to India and
the day he leaves India is counted as stay in India.


2. Hindu Undivided Families

The test to be applied to determine the residential status of a HUF is based upon the control and
management of the affairs of the assessee concerned. The tests based on the period of stay in India
applicable to individuals cannot be applied to these assessees for obvious reasons.
Meaning of place of control and management:

Control & management means -
• controlling & directive power;
• actual control & management (mere right to control & manage is not enough);
• central control & management and not the carrying out of day to day affairs.
• In other words, the Control and Management means taking policy decisions relating to business.
Policy decisions are concerning finance, marketing, production, advertising, personnel etc. It does not
mean day to day operations of the concern/assessee. The control and management is situated at
that place where policy decisions are taken.
• The business may be done from outside India and yet its control and management may be wholly
within India. Therefore, control and management of a business is said to be situated at a place where
the head and brain of the business is situated

An HUF can be “not ordinarily resident”

If manager/Karta has been a not ordinarily resident in India in the previous year in accordance with the
tests applicable to individuals.
Where, during the last ten years the kartas of the H.U.F. had been different from one another, the total
period of stay of successive kartas of the same family should be aggregated to determine the residential
status of the Karta and consequently the H.U.F.
In other words, if Karta of Resident HUF satisfies both the following additional conditions (as applicable
in case
of Individual) then Resident HUF will be ROR, otherwise it will be RNOR :
Additional Conditions:
(1)Karta of Resident HUF should be resident in at least 2 previous years out of 10 previous year
immediately preceding relevant previous year.
(2) Stay of Karta during 7 previous year immediately preceding relevant previous year should be 730
days or more.

2.Basics & Residential Status 2.20
Important Note:
• It is immaterial whether Karta is Resident or Non-Resident during relevant previous year, for the
purpose of determining whether HUF is ROR or RNOR. If Karta satisfies both the additional
conditions, then HUF will be ROR, otherwise RNOR.
• Firms, association of persons, local authorities and other artificial juridical persons can be either resident
ordinarily resident or non-resident in India but they cannot be not ordinarily resident in India.
• Even if negligible portion of the control and management of the affairs is exercised from India, it
will be sufficient to make the family, firm or the association resident in India for tax purposes.
A Hindu Undivided Family would generally be presumed to be resident in India unless the assessee
proves to the tax authorities that the control and management of its affairs is situated wholly outside India
during the relevant accounting year.
3. Companies [6(3)]
➢ All Indian companies within the meaning of Section 2(26) of the Act are
always resident in India regardless of the place of control and management
of its affairs.
➢ In the case of a foreign company the place of control and management of its
affairs is the basis on which the company’s residential status is determinable.
Accordingly a company shall be said to be resident in India in any previous
year, if –
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.

From Assessment Year 2017-18 a foreign company will be resident in India if its
Place of Effective Management (POEM) during the previous year is in India.
For this purpose, the Place Of Effective Management means a place where Key
management and commercial decisions that are necessary for the conduct of
the business of an entity as a whole are, in substance are made.

Question - Explain the term POEM ‘Place of Effective Management”?

The POEM concept is one of substance over form and since “residence” is to be determined for each year,
POEM will also be required to be determined on year to year basis. An entity may have more than one place
of management, but it can have only one place of effective management at any point of time.
Question - Explain the term ‘Active Business outside India’ as define in guiding principles of ‘POEM’
We need to understand the guiding principles for POEM but before it we need to understand the Phrase
Active Business Outside India.
Active Business outside India - A company shall be said to be engaged in “active business outside
India”
(i) if the passive income is upto 50% of its total income; and
(ii) less than 50% of its total assets are situated in India; and
(iii) less than 50% of total number of employees are situated in India or are resident in
India; and
(iv) the payroll expenses incurred on such employees is less than 50% of its total payroll
expenditure.
Explanation : For the aforesaid purpose :
The number of the number of employees shall be the average of the number of employees as at
employees the beginning and at the end of the year and shall include persons, who though
not employed directly by the company, perform tasks similar to those performed
by the employees.
Passive income “Passive income” of a company shall be aggregate of, income from the transactions
where both the purchase and sale of goods is from / to its associated enterprises;
and income by way of royalty, dividend, capital gains, interest or rental income.
Senior Management “Senior Management” in respect of a company means the person or persons who
are generally responsible for developing and formulating key strategies and policies
for the company. While designation may vary, these persons may include : (i)
Managing Director or Chief Executive Officer; (ii) Financial Director or Chief
Financial Officer; (iii) Chief Operating Officer; and (iv) The heads of various
divisions or departments.
The determination of POEM would be a two stage process as follows:

First Stage: Identification or ascertaining the person or persons who actually make the key management and
commercial decision for conduct of the company business as a whole.
Second Stage : Determination of place where these decisions are in fact being made.
Some of the guiding principles for determining the POEM

(a) The location where a company’s Board regularly meets and makes decisions
Mere formal holding of board meetings at a place would by itself not be conclusive for determination of
POEM being located at that place.
Note : A company’s board may delegate some or all of its authority
In these situations, the location where the members of the executive committee are based

(b) The location of a company’s head office will be a very important factor in the determination of the company’s
place of effective management because it often represents the place where key company decisions are made.
The following points need to be considered for determining the location of the head office of the company :
✓ If the company’s senior management and their support staff are based in a single location and
that location is held out to the public as the company’s principal place of business or
headquarters then that location is the place where head office is located.
✓ If the company is more decentralized (for example where various members of senior
management may operate, from time to time, at office located in the various countries) then the
company’s head office would be the location where these senior managers :
i. are primarily or predominantly based; or
ii. normally return to following travel to other locations; or
iii. meet when formulating or deciding key strategies and policies for the company as a whole.
✓ In situations where the senior management is so decentralised that it is not possible to
determine the company’s head office with a reasonable degree of certainty, the location of a
company’s head office would not be of much relevance in determining that company’s place
of effective management.
iv. The use of modern technology impacts the place of effective management in many ways
In such cases the place where the directors or the persons taking the decisions or majority of them
usually reside may also be a relevant factor. It may be clarified that day to day routine operational decisions
undertaken by junior and middle management shall not be relevant for the purpose of determination of
POEM.
If the above factors do not lead to clear identification of POEM then the following secondary factors can be
considered :
i. Place where main and substantial activity of the company is carried out; or
ii. Place where the accounting records of the company are kept.
The determination of POEM is to be based on all relevant facts related to the management and control of
the company, and is not to be determined on the basis of isolated facts that by itself do not establish
effective management, as illustrated by the following examples:
i. The fact that a foreign company is completely owned by an Indian company will not be conclusive evidence
that the conditions for establishing POEM in India have been satisfied.
ii. The fact that there exists a Permanent Establishment of a foreign entity in India would itself not be conclusive
evidence that the conditions for establishing POEM in India have been satisfied.
iii. The fact that one or some of the Directors of a foreign company reside in India will not be conclusive evidence
that the conditions for establishing POEM in India have been satisfied.
iv. The fact of, local management being situated in India in respect of activities carried out by a foreign
company in India will not, by itself, be conclusive evidence that the conditions for establishing POEM have been
satisfied.
v. The existence in India of support functions that are preparatory and auxiliary in character will not be
conclusive evidence that the conditions for establishing POEM in India have been satisfied.
vi. The place where day to day, operational decisions are taken would not be PoEM.
Further, based on the facts and circumstances if it is determined that during the previous year the
POEM is in India and also outside India then POEM shall be presumed to be in India if it has been
mainly /predominantly in India.

Active Business Outside India
Example 1: Company A Co. is a sourcing entity, for an Indian multinational group, incorporated in country X
and is 100% subsidiary of Indian company (B Co.). The warehouses and stock in them are the only assets
of the company and are located in country X. All the employees of the company are also in country X. The
average income wise breakup of the company’s total income for three years is,
i. 30% of income is from transaction where purchases are made from parties which are non-associated
enterprises and sold to associated enterprises;
ii. 30% of income is from transaction where purchases are made from associated enterprises and sold to
associated enterprises;
iii. 30% of income is from transaction where purchases are made from associated enterprises and sold to
non-associated enterprises; and
iv. 10% of the income is by way of interest.
Interpretation : In this case passive income is 40% of the total income of the company. The passive
income consists of :
i. 30% income from the transaction where both purchase and sale is from/to associated enterprises; and
ii. 10% income from interest.
The A Co. satisfies the first requirement of the test of active business outside India. Since no assets or
employees of A Co. are in India the other requirements of the test is also satisfied. Therefore company is
engaged in active business outside India.
Example 2 : The other facts remain same as that in example 1 with the variation that A Co. has a total of 50
employees. 47 employees, managing the warehouse, storekeeping and accounts of the company, are
located in country X. The Managing Director (MD), Chief Executive Officer (CEO) and sales head are
resident in India. The total annual payroll expenditure on these 50 employees is of Rs. 5 crore. The annual
payroll expenditure in respect of MD, CEO and sales head is of Rs. 3 crore.
Interpretation: Although the first condition of active business test is satisfied by A Co. as only 40% of its total
income is passive in nature. further, more than 50% of the employees are also situated outside India. All
the assets are situated outside India. However, the payroll expenditure in respect of the MD, the CEO and
the sales head being employees resident in India exceeds 50% of the total payroll expenditure. Therefore, A
Co. is not engaged in active business outside India.

Example 3 : The basic facts are same as in example 1. further facts are that all the directors of the A Co.
are Indian residents. During the relevant previous year 5 meetings of the Board of Directors is held of which
two were held in India and 3 outside India with two in country X and one in country Y.
Interpretation : The A Co. is engaged in active business outside India as the facts indicated in example 1
establish. The majority of board meetings have been held outside India. Therefore, the POEM of A Co. shall
be presumed to be outside India.
Now Determination of POEM if -
Determination
ABOI Outside India ABOI Not outside India
Majority Board Meetings outside India Majority Board Meetings Not outside India Identify persons who make the key
management and key commercial
Resident decisions
Non Resident
and
Determine the place where decisions are
being made
➢ Business and the whole of it may be done outside India and yet the control
and management of that business may be wholly within India.
➢ It is entirely irrelevant where the business is done and where the income has
been earned. What is relevant and material is from which place has that
business been controlled and managed.

Meaning and Scope of Total Income
The income is bifurcated into 5 categories

a. Income Received in India
b. Income accrued in India
c. Income deemed to be received in India
d. Income deemed to be accrued in India
e. Income accrued outside India
Explanation 1. - Income accruing or arising outside India shall not be deemed to be

received in India within the meaning of this section by reason only of the fact that it is
taken into account in a balance sheet prepared in India.
Income received in India

Tax point: Receipt is different from remittance. The receipt of income refers to the
first occasion when the recipient gets the money under his control. Once the amount
is received as income (at any place outside India), any subsequent remittance or
transmission of the amount to India does not result to receipt in India
Example: Mr. X, a non-resident, received dividend from an Italian company in Japan
on 15/12/2022. On 17/12/2022 he remitted such income in India. Such income shall
not be taxable in India as income has neither received in India nor accrued in India.
Income Deemed to be received in India

Following incomes shall be deemed to be received in India and taxable in hands of
all assessee irrespective of their residential status -
(a) The annual accretion in the previous year to the balance at the credit of an
employee participating in a recognized provident fund
• Employer’s contribution to the recognized provident fund in excess of
12% of salary.
• Interest credited on the above balance by a rate exceeding 9.5% [Sec.
7(i)]
(b) The transferred balance in recognized provident fund, to the extent liable to
income tax [Sec. 7(ii)]
(c) The contribution made, by the employer in the previous year, to the account of
an employee under a pension scheme notified u/s 80CCD [Sec. 7(iii)]
(d) Tax Deducted at source [Sec. 198]
(e) Income from undisclosed sources
Following incomes are deemed to accrue or arise in India.

Section 9(1) The following incomes shall be deemed to accrue or arise in India :—
(i)Income accruing or arising through -
a) Any asset or source of income in India.

b) Transfer of a capital asset situated in India.
c) Any Business connection in India
(Only for Understanding - In proportion to operations carried out in India)
Following Explanation 3A shall be inserted after Explanation 3 to clause (i) of sub-section (1) of
section 9 by the Finance Act, 2020, w.e.f. 1-4-2021:
Explanation 3A.— Income attributable to the operations carried out in India shall include income
from—
(i) such advertisement which targets a customer who resides in India or a customer who
accesses the advertisement through internet protocol address located in India;
(ii) sale of data collected from a person who resides in India or from a person who uses
internet protocol address located in India; and
(iii) sale of goods or services using data collected from a person who resides in India or from a
person who uses internet protocol address located in India.

Question - Define the term ‘Business Connection’?

Amendment in section 9 (AY 19-20)
(I) in Explanation 2, for clause(a) i.e. business connection shall include any business activity
carried out through a person who, acting on behalf of the non-resident –
“(a) has and habitually exercises in India, an authority to conclude contracts on behalf of
the non-resident or habitually concludes contracts or habitually plays the principal role
leading to conclusion of contracts by that non-resident and the contracts are––
(i) in the name of the non-resident; or
(ii) for the transfer of the ownership of, or for the granting of the right to use, property
owned by that non-resident or that non-resident has the right to use; or
(iii) for the provision of services by the non-resident
(b) Maintains Stock and delivers on behalf of the NR
(c) Secures orders on behalf of the NR
(II) Explanation 2A- the significant economic presence of a non-resident in India shall
constitute “business connection” in India and “significant economic presence” for this
purpose, shall mean––
a. transaction in respect of any goods, services or property carried out by a non-resident with
any person in India including provision of download of data or software in India, if the
aggregate of payments arising from such transaction or transactions during the previous year
exceeds Rs. 2 Crores; or
b. systematic and continuous soliciting of business activities or engaging in interaction with
number of users exceeding 3 lacs, in India -
Provided that the transactions or activities shall constitute significant economic presence in India, whether
or not -
(i) the agreement for such transactions or activities is entered in India;
(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India:
➢ Exceptions to the business connection, In case of Non Residents (Means in the following cases
the business connection is not formed for purpose of taxing the income)–
1. Tax Exemption for encouraging Export Operations confined to purchase of goods from India for
Export.
2. Person engaged in the business of running a news agency or of publishing newspapers,
magazines or journals and the activities are confined to the collection of news and views in
India for transmission out of India.
3. operations which are confined to the shooting of any cinematograph film in India provided if –
a) Assessee -> An Individual -> Not Citizen of India
b) Assessee -> A Firm -> No partner is Citizen of India
c) Company -> No Shareholder citizen of India or Resident of India
4. In the case of a foreign company engaged in the business of mining of diamonds no income
shall be deemed to accrue or arise in India to it through or from the activities which are confined
to the display of uncut and unassorted diamond in any special zone notified by the Central
Government in the Official Gazette in this behalf.

(ii) Income from Salary which is earned in India.

Salary payable for service rendered in India would be treated as earned in India. Amount earned for the
rest period or leave period which is preceded and succeeded by services rendered in India and forms
part of the service contract of employment.
(iii) Income chargeable under the head "Salaries" payable by the Government to a citizen of India for
service outside India (Other than Perquisites and allowances)
(iv) Dividends paid by an Indian company outside India.

(v) In Case of interest, royalty and technical fees following things should be kept in mind –
a) In case it is paid by Government of India, it shall always accrue in India.
b) In case it is paid by resident, it shall always accrue in India except where money borrowed is
used for
- The purpose of business or profession carried outside India or
- For making or earning income from any source outside India.
c) In case it is paid by the Non Resident person, where such person uses the money borrowed
for a business or profession carried on or in India.
vi) income arising outside India, being any gifts by a person resident in India to a non-resident, not being a
company, or to a foreign company.”
Residential Status and Scope of Total Income (Section 5)

Nature of ROR RNOR NR
Income
Income received in India (Whether accrued in or outside India) Taxed Taxed Taxed
Income deemed to be received in India (Whether accrued in or Taxed Taxed Taxed

outside India)
Income accruing or arising in India (Whether received in India or Taxed Taxed Taxed
outside India)
Income deemed to accrue or arise in India (Whether received in Taxed Taxed Taxed
India or outside India
Income received and accrued outside India from a business Taxed Taxed Not Taxed
controlled or a profession set up in India
Income received and accrued outside India from a business Taxed Not Not Taxed
controlled from outside India or a profession set up outside Taxed
India
Income earned and received outside India but later on remitted Not Not Not Taxed
to India (Whether tax incidence arises at the time of remittance) Taxed Taxed

COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF AN ASSESSEE
Income tax is a charge on the assessee’s income. Income Tax law lays down the provisions for computing
the taxable income on which tax is to be charged. Taxable income of an assessee shall be calculated in
the following manner.
1. Determine the residential status of the person as per section 6 of the Act.
2. For calculation of income, amount received is classified under 5 heads of income; it is then to
be adjusted with reference to the provisions of the Income Tax laws in the following manner.
Particulars Amount (Rs.)

Income under the head :
+ Income from Salaries XXX
+ Income from House Property XXX
+ Profits and gains of business or profession XXX
+ Capital gains XXX
+ Income from other sources XXX
Adjustment in respect of :
+ Clubbing of Income XXX
- Set off and carry forward of losses (XXX)
= Gross Total Income XXX

- Deductions under section 80C to 80U (or Chapter VIA) (XXX)
= Total Income XXX
TAX RATES for PY 2022-23 (AY 2023-24)
Calculation of Tax on Income

➢ Tax rate depends upon the category of person
➢ Amount of income
➢ Residential status of person
➢ Age of individual
➢ Type of Income

Components of Tax
Education Tax
Tax Surcharge SHEC
Cess Payable
Tax Rates for Different types of person depending upon various parameters:
1. For :
➢ Resident Individual of the age below 60 years
➢ Non Residents Individual
➢ Hindu undivided family
➢ Association of Persons
➢ Body of Individuals (other than Co-operative society)
➢ Artificial Juridical Person
Total Income (Rs.) Tax Rate Tax liability (Rs.)

up to 2,50,000 Nil Nil
2,50,001 – 5,00,000 5% 5% of (Total Income – 2,50,000)
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 12,500
Above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,12,500
2. Applicable for:
Resident individual of the age of 60 years or more but less than eighty years at any time during the previous year

3,00,001 – 5,00,000 5% 5% of (Total Income – 3,00,000)
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 10,000
3. Applicable for:
Resident Individual of the age of 80 years or more at any time during the previous year

5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000)
Clarification regarding attaining prescribed age of 60 years/80 years on 31st March itself, in case of
senior/very senior citizens whose date of birth falls on 1st April [Circular No. 28/2016, dated 27-07-
2016]
An individual who is resident in India and of the age of 60 years or more (senior citizen) and 80 years or more (very
senior citizen) is eligible for a higher basic exemption limit of Rs. 3,00,000 and Rs. 5,00,000, respectively.
The CBDT has, vide this Circular, clarified that a person born on 1st April would be considered to have attained a
particular age on 31st March, the day preceding the anniversary of his birthday. In particular, the question of
attainment of age of eligibility for being considered a senior/very senior citizen would be decided on the basis of
above criteria.
Therefore, a resident individual whose 60th birthday falls on 1st April, 2018, would be treated as having attained the
age of 60 years in the P.Y. 2017-18, and would be eligible for higher basic exemption limit of Rs. 3 lakh in computing
his tax liability for A.Y. 2018-19. Likewise, a resident individual whose 80 th birthday falls on 1st April, 2018, would be
treated as having attained the age of 80 years in the P.Y. 2017-18, and would be eligible for higher basic exemption
limit of Rs. 5 lakh in computing his tax liability for A.Y. 2018-19.

New Section 115BAC inserted for Individuals & HUF – (These rates Will be discussed after chapter 11)
115BAC. (1) Notwithstanding anything contained in this Act but subject to the provisions of this
Chapter, the income-tax payable in respect of the total income of a person, being an individual or a
Hindu undivided family, for any previous year relevant to the assessment year beginning on or after
the 1st day of April, 2021, shall, at the option of such person, be computed at the rate of tax given in
the following Table, if the conditions contained in sub-section (2) are satisfied, namely:—
TABLE
1. Up to Rs. 2,50,000 Nil
2. From Rs. 2,50,001 to Rs. 5,00,000 5 per cent.

7. Above Rs. 15,00,000 30 per cent.:
Note - The above option of rates is subject to various conditions which can be discussed only after you
have studied with the major part of Income Tax. So please have patience. “Sabra ka Fal Meetha hota hai”
4. For others:
Types of person Tax Rates

i. Firms (including LLP) 30% of total Income
ii. Local Authorities 30% of total Income
iii. Domestic Companies • A domestic company, whose Gross turnover or gross
receipt in the previous year 20 - 21 does not exceed Rs
400 crore, shall be taxable at rate of 25% for
assessment year 2023-24. (Amended by Finance Act
2022)
• 30% of total Income in all other cases
iv. Companies other than a domestic 40% of total income;
company
Special Tax rates for Companies (To be discussed in detail Chapter 15)
Section 115BA – Certain manufacturing companies may chose to pay taxes @ 25%
Section 115BAA - Certain companies may chose to pay taxes @22% (plus
surcharge@10% and HEC@4%)
Section 115BAB - Certain manufacturing companies or electricity generating domestic
may chose to pay taxes @15% (plus surcharge@10% and HEC@4%)

Surcharge
Sr. Rate of
No. Person Total Income Surcharge
upto Rs. 50 Lakhs No Surcharge
> Rs. 50 lakhs upto
Rs. 1 10%
crore
1 Individual/ HUF/ AOP/ BOI/ AJP > Rs. 1 crore upto Rs. 15%
2 crore
> Rs. 2 crore upto Rs. 25%
5 crore
> Rs. 5 crore 37%
Firm/ LLP/ Co-operative Society/ Local upto Rs. 1 Crore No Surcharge
2
Authority > Rs. 1 crore 12%
Domestic Company/Co-operative upto Rs. 1 Crore No Surcharge
society > Rs. 1 crore upto Rs.
3 10 7%
AY 23-24
crore
> Rs. 10 crore 12%
upto Rs. 1 Crore No Surcharge
> Rs. 1 crore upto Rs.
4 Foreign Company 10 2%
crore
> Rs. 10 crore 5%
Surcharge is an additional tax imposed on certain cases. It is imposed over the basic tax rate calculated
on the income.
For example : Suppose total taxable income of an individual of 45 years is Rs. 1,30,00,000, then Base
tax will be : Rs. 1,12,500 + 30% of (1,20,00,000)= Rs. 37,12,500.
Surcharge @15% of Rs. 37,12,500 = Rs. 5,56,875. There are different rate of surcharge prescribed in the
Following manner:
Marginal Relief in Surcharge: When an assesses taxable income exceeds Rs.50 lakhs, 1 crore, 2 crore, 5
crore / 10 crore , he is liable to pay Surcharge at prescribed rates mentioned above on Income Tax payable
by him. However, the amount of Income Tax and surcharge on total income shall not exceed the amount of
income that exceeds Rs. 50 lakhs, 1 crore, 2 crore, 5 crore , 10 crore.
Example : Suppose Mr. Ram an individual assessee of 42 years is having taxable income of Rs.
1,00,01,000/-
1. Income Tax on 1,00,01,000/- Rs. 28,12,800
2. Surcharge @15% of Income Tax Rs. 4,21,920
3. Income Tax including Surcharge Rs. 32,34,720
4. Income Tax on income of Rs. 1 crore Rs. 30,93,750
including 10% Surcharge
5. Increase in Tax – Rs. 1,39,970
Increase in income
6. Income Tax after marginal relief ( Rs. Rs. 30,94,750
32,34,720 - Rs. 1,39,970)

Thus, in the above case, though the surcharge @15% is Rs. 421920. However, since the income of Mr. Ram
exceeds Rs. 1 crore by just Rs. 1,000, Ram will be eligible for marginal relief and maximum surcharge will be
restricted to Rs. 1,000 only.
Health and Education cess

➢ Governments resort to imposition of cess for meeting specific expenditure
➢ Health and Education cess is an additional levy on the basic tax liability + surcharge, if applicable.
➢ Rate of HEC is 4% (Amended by Finance Act 2018).
Rebate u/s 87A

Rebate u/s 87A Applicable to: Resident Individual Conditions to be satisfied: Total income of the
assessee does not exceed ₹
5,00,000.
Quantum of Rebate: Lower of the following: (a) 100% of tax liability as computed above; or (b) ₹
12,500/-
Steps involved in calculation of Tax on Total Income
Particulars Amount Rs.
Tax on Special Incomes @ specified tax rates (Long term capital gains @ 20%; Casual Income @
XXX
30% and Short term capital gains (on Securities transaction tax paid securities) @ 15%;
Add : Tax on Balance Income @ Slab Rate/Flat Rate (as applicable) XXX
Total Tax XXX
XXX
Add : Surcharge, if any
(XXX)
Less : Marginal Relief, if applicable
Tax including Surcharge XXX
Add : HEC @ 4% on tax including surcharge XXX
Tax liability XXX
Add : Interest under Section 234A/234B/ 234C XXX

Net tax liability XXX
Less : Taxes paid by way of :
– Tax deducted at source (TDS) (XXX)

– Advance tax (XXX)
– Self Assessment Tax (XXX)
– Double Taxation Relief (XXX)
Tax Payable/Refundable
XXX

Question
Mr. Raghav aged 26 years, has a total income of ₹ 4,80,000, comprising his salary income and
interest on bank fixed deposit. Compute his tax liability for A.Y.2023-24
Solution
Computation of tax liability of Mr. Raghav for A.Y.2023-24
Tax on total income of ₹ 4,80,000
@5% of ₹ 2,30,000 (₹ 4,80,000 – ₹ 2,50,000) ₹11,500
Less: Rebate u/s 87A ₹ 11,500
Nil
Rounding Off of :
Income Tax payable (Including refund if applicable)

Section 288A Section 288B
Nearest multiple of ₹ 10 Nearest multiple of ₹ 10
Example: ₹4,52,554.94 To ₹4,52,550. Example: ₹52,554.94 To ₹52,550.
>=5 is rounded off to next multiple of 10
Application Vs Diversion of Income
Sno Application of Income Diversion of income
1. Obligation to apply the income Obligation to apply the income before it is received or accrued.
after it is received or accrued or
arisen.
2. Treated as income, hence taxable. Not treated as income. Hence, not taxable.

CASE LAWS
1. What is the nature of liquidated damages received by a company from the supplier of plant for failure
to supply machinery to the company within the stipulated time – a capital receipt or a revenue receipt?
CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)
Facts of the case: One of the conditions in the agreement was that if the supplier failed to supply the machinery
within the stipulated time, the assessee would be compensated at 0.5% of the price of the respective portion of the
machinery without proof of actual loss. The assessee received ₹ 8.50 lakhs from the supplier by way of liquidated
damages on account of his failure to supply the machinery within the stipulated time. The Department assessed the
amount of liquidated damages to income-tax. However, the Appellate Tribunal held that the amount was a capital
receipt and the High Court concurred with this view.
Supreme Court’s Decision: The Apex Court affirmed the decision of the High Court holding that the damages were
directly and intimately linked with the procurement of a capital asset i.e., the cement plant, which lead to delay in coming
into existence of the profit-making apparatus. It was not a receipt in the course of profit earning process. Therefore, the
amount received by the assessee towards compensation for sterilization of the profit earning source, is not in the ordinary
course of business, hence it is a capital receipt in the hands of the assessee.
2.
April 3, 2009 Manoj Kumar Reddy V. Income Tax Officer (International Taxation) ITAT
Facts of the Case: The case relates to AY 2005-06. The assessee was an employee of an Indian
company.
On 23.01.2004, the employer Indian company issued a deputation letter to the assessee and directed him to
work on some specified project in USA. As per the deputation order, it was mentioned that he will remain
continued to be employed under the Indian company only.
During the deputation period, he came to India and stayed in India from 18.08.2004 to 06.09.2004. After
completing his work he returned back to India on 31.01.2005 at 4 A.M. Summary of his stay in India is given below:-
Previous No. of days in
Year India
2000-01 365
2001-02 365
2002-03 365
2003-04 306
2004-05 78
Following contentions were observed by ITAT in this case:-
• During PY 2004-05, total stay of assessee in India was for a period less than 182 days. Hence, first limb of Section
6(1) shall not apply.
• As far as second limb of Section 6(1) is concerned. It is getting applicable as stay in India during the PY is for 78
days i.e. more than 60 days and total stay in all 4 PY preceding PY 2004-05 is exceeding 365 days. However,
benefit given in explanation 1 to the second limb also needs to be examined.
Explanation 1 clause (a) applies where assessee leaves India for employment purpose.
ITAT relied on decision of Authority of Advance Ruling in case of British Gas India (P) Ltd. [2006] 285 ITR
218 (New Delhi) where it was held that for purpose of “employment outside India”, even assessee on
deputation sent outside India by an Indian employer is also covered.
However, clause (a) of Explanation 1 shall apply for that year only in which the assessee is leaving India
for employment, i.e. PY 2003-04 in this case. Hence, Clause (a) of Explanation 1 is applicable for PY
2003-04 only not for PY 2004-05.
Clause (b) to Explanation 1: The assessee was for a “visit” in India from outside India during 18.08.2004
to 06.09.2004. However, he returned back to India on 31.01.2005. The period after 31.01.2005 cannot
be treated as “visit”. Hence, clause (b) to Explanation 1 cannot apply.

However, to determine period of stay under second limb of Section 6(1) period of visit shall be excluded.
Hence, total stay during PY 2004-05 will be reckoned from 31.01.2005 to 31.03.2005.
Judgement: ITAT held that “Day” does not include “fraction of Day”.
Therefore, assessee’s total stay was for a period of 59 days only. 31.01.2005 was not included
because he arrived in India at 4 A.M. The residential status of assessee - Non-Resident
3. Income in respect of sale of flats accrued when possession of flat was given and not when allotment
letter was issued [Assessment year 2006-07] [in favour of assessee]
CIT v. Millennium Estate (P.) Ltd. [2018]
The assesse carried on business as a contractor and developer.
During scrutiny, the Assessing Officer found that an amount was shown as advances received
from its buyers.
The assesse submitted that aforesaid amounts were received as advance at time of allotment on
14-3-2007 and that further consideration was received on 1-4-2007, when possession of flat was
given, and, thus, said sum was chargeable to tax in next assessment year.
However, the Assessing Officer treated said sum as accrued income in subject assessment year
holding that sale of flats had taken place when they were allotted under an allotment letter.
Held that from the allotment letter and possession letter, it was very evident that possession of
flats was given on receipt of total consideration, i.e., only on 1-4-2007.
The said amount was an advance during subject assessment year and said income accrued as
income in assessment year 2008-09.
4. Income from Non Performing Assets (NPA) should be assessed on cash basis and not on mercantile basis,
despite assessee following mercantile system of accounting [Assessment year 2010-11] [in Favour of
assessee]
Principal CIT v. Davangere Urban Co-operative Bank Ltd. [2018]
Income from NPA should be assessed on cash basis and not on mercantile basis, despite the
assesse following mercantile system of accounting. In view of aforesaid legal positon, the Assessing
Officer was not justified in bringing to tax on interest on non-performing assets on accrual basis
just because the assessee followed hybrid system of accounting.
5. CIT v. PL. M. TT. Madras High Court
Proof of power or capacity to control and manage is not relevant for determining the control and management.
What is necessary is to test the actual power or control.
Where all partners of a firm were residing in India and they appointed a power of attorney in Ceylon (now Sri Lanka)
who was entirely in charge of the business and the partners did not play any role in control and management, it was
held that the firm was not tax resident in India. The High Court of Madras in CIT v. PL
M. TT. Firm3 held that as per the terms of the deed de jure control remained with the principal but defacto control
or actual control was with the agent. Thus, rather than mere proof of power or capacity to control and manage, the
actual power or control was relevant.
6. Saraswati Holding Corpn. Inc v. Dy. DIT (IT) ITAT
Day to Day affairs of the business is not sufficient for determining the Control and Management of affairs.
Interpreting the phrase ‘control and management of affairs’ in Saraswati Holding Corpn. Inc v. Dy. DIT(IT)4, the ITAT held
that control and management of affairs do not mean the control and management of the day-today affairs of the
business. The fact that discretion to conduct operations of business is given to some personin India would not be
sufficient. The words ‘control and management of affairs’ refer to head and brain, whichdirects the affairs of policy,
finance, disposal of profits and such other vital things consisting the general andcorporate affairs of the company. Thus,
where decisions on investments were taken by directors outside India, the income from investments made in India
could not be taxed in the hands of the company only because a few persons had been given authority to conduct the
affairs.
Descriptive Questions
1. Determining the Residential Status of an assessee is the First Step for computing the tax liability of an assessee.
How?
Answer Hint – Explain scope of Total Income Sec 5. Accrued in India, Received in India etc. depends on the
Residential status of a person.
2. Capital Receipt will also be taxable if it is expressly provided in the Act. Explain with examples.
3.Exempt Income 3.1

3. Exempt Income 3.2
Background
Tax is calculated on the total income of an individual for the previous year. For
providing relief to the tax payer, income Tax laws provides for exemption,
deduction and rebate. The exempt income is often confused with the deductions
and rebate. However there is difference between these concepts. The same has
been explained in the table below:
Exemption Deduction Rebate

⚫ Exemptions are claimed on the basis of ⚫ Deductions are allowed on ⚫ Rebate is a percentage
the source of income. the basis of the payments/ amount reduced from total
investments made during the income tax payable.
⚫ The exempted income is not included in
year.
the total Income of the assessee for ⚫ Tax rebate is allowed as a
computingGross Total Income. ⚫ The tax deductions are allowed reduction to the total tax
under different heads of income payable
as well as from the gross income.
There are several incomes that do not form part of the total income of the
assessees, which are entailed u/s 10 of the Act. Being exempt, these do not
enter the computation of taxable incomes therefore.
Incomes exempt u/s 10

will NOT be included at
all for computing Gross Deductions under Chapter
Total Income VI-A would call for first

including the items in the
Gross Total Income and
then the deductions would
be allowable

3.Exempt Income 3.3
INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME
Question - What is Agriculture Income? Explain its Tax Treatment under Income tax Act, 1961
Agricultural Income [Section 10(1)]
Section 10(1) states that agricultural incomes are not included in the total income
Broadly 3 sources
through agriculture
Rent or Revenue derived from
farm building required for
land situated in India and used or
agricultural operations
for agricultural purposes process ordinarily employed by a
cultivator or receiver of rent in
kind to render the produce fit
to be taken to the market
or
the sale of such agricultural
produce in the mar et.
Rent - The rent can either be received by the owner of the land or by the original tenantfrom the sub-tenant.
It implies that ownership of land is not necessary.
Note – Ownership of land is not necessary. Thus, the rent received by the original tenant
from sub-tenant would also be agricultural income.
Agriculture includes 2 operations
Basic Operations Subsequent operations
Those operations by agriculturists which Operations to be performed after the produce

are absolutely necessary for the purpose of sprouts from the land (e.g., weeding, digging
effectively raising produce from the land etc.) are subsequent operations. These
are the basic operations subsequent operations would be agricultural
operations only when taken in conjunction with
and as a continuation of the basic operations.
Income from farm building:

Income arising from the use of farm building would be considered as agricultural income if
the following conditions are satisfied –

(a) building should be on or in the immediate vicinity of the land; and
(b) It should be used as a dwelling house or as a store house for agricultural produce.
Following conditions are also to be satisfied –

a. The land should either be assessed to land revenue in India or be subject to a local rate assessed
and collected by the officers of the Government as such
Or
b. It has to be within the limits mentioned below –
• Population upto 9999 – whole of the land is Rural agricultural land
Population upto 2 kms. Urban इसके आगे का Rural Land

>= 10K
upto 1 Lac
Population >
1 Lacs upto upto 6 kms Urban इसके आगे का Rural Land
10 Lacs
Population >
upto 8 kms Urban इसके आगे का
10 Lacs
Rural Land
Examples:
Area Shortest aerial Population according to the Would income
distance from the last preceding census of derived from farm
local limits of a which the relevant figures building situated in
municipality or have been published before this area be treated as
cantonment board the first day of the previous agricultural income?
referred to in item a. year
(i) A 1 km 9,000 Yes

(ii) B 1.5 kms 12,000 No
(iii) C 2 kms 11,00,000 No
(iv) D 3 kms 80,000 Yes
(v) E 4 kms 3,00,000 No
(v) F 5 kms 12,00,000 No
(vi) G 6 kms 8,000 Yes
(vii) H 7 kms 4,00,000 Yes
(viii) I 8 kms 10,50,000 No
(ix) J 9 kms 15,00,000 Yes

3.Exempt Income 3.5
Whether Income from Nursery Constitutes Agricultural Income?

Yes, As Per Explanation 3 To Section 2(1A), Income Derived from Saplings Or Seedlings Grown In A
Nursery Would Be Deemed To Be Agricultural Income, Whether Or Not The Basic Operations Were
Carried Out On Land.
In order to render the produce, fit for being taken to market for sale, the activities would
include all activities, like cleaning, drying, winnowing, crushing etc. Example, let’s assume
the process being referred to is obtaining rice from paddy, the process
ordinarily employed by the cultivator would include:
⚫ Removing hay from basic grains
⚫ Removing chaff from the grains
⚫ Filtering the grain to remove stones
⚫ Packing the rice in gunny bags
Therefore, all activities, manual or otherwise, all the processes would be included in and therefore
constitute the activities deployed to render the produce fit for being taken to the market.
Reference Case Law - Dy. CIT v. Best Roses Biotech (P) Ltd., 49 SOT 277.
30.11.2011 Dy. CIT v. Best Roses Biotech (P) Ltd. ITAT Ahmadabad Bench
• Assessee acquired land from agriculturist on lease and constructed a greenhouse

floriculture project on said land. It started growing of rose flowers
/ plants on bridge of plastic trays erected with help of a stand 2.3 ft. above
land.
• The assessee claimed the income from rose flowers as exempt.
• The Assessing Officer held that the rose plants were not planted on earth land and
no basis operation was carried out by assessee on land hence, not eligible for
exemption.
• According to assessee, for plantation of roses a very well treated soil was
required, manures were mixed in soil for preparing a base for growing rose plants
trays were filed with mixture of soil, insecticides were sprinkled on plants to save
plants from any disease, mother plant was otherwise reared on earth,
subsequently saplings were planted on plastic trays which were kept at height of
2-3 ft. placed on a stand,
Purpose of growing rose plants at a height was primarily to avoid pest and to develop in a controlled
atmosphere and green house was used for various benefits so that sunlight and humidity level both could be
maintained. The Tribunal held that the claim of exemption was justified.
Manner of Calculating Agricultural Income
Rule 7 - Where the income is partially agricultural income and partially business income, the market
value of any agricultural produce so raised by the assessees, which has been further utilised /
processed in such business will be allowed as a deduction in such business.
Determination of market value - There are two possibilities here:

(I) The agricultural produce is capable of being sold in the market → either in its raw stage or after
application of any ordinary process to make it fit to be taken to the market → the value calculated
at the average price at which it has been so sold during the relevant previous year will be the market
value.
(II) It is possible that the agricultural produce is not capable of being ordinarily sold in the market in
its raw form or after application of any ordinary process. In such case the market value will be the
total of the following:—
• The expenses of cultivation;
• The land revenue or rent paid for the area in which it was grown; and
• Such amount as the Assessing Officer finds having regard to the circumstances in each case to
represent at reasonable profit.
Illustration
Mr. B grows sugarcane and uses the same for the purpose of manufacturing sugar in his
factory. 30% of sugarcane produce is sold for ₹ 10 lacs, and the cost of cultivation of such
sugarcane is ₹ 5 lacs. The cost of cultivation of the balance sugarcane (70%) is ₹ 14 lacs and
the market value of the same is ₹ 22 lacs. After incurring ₹ 1.5 lacs in the manufacturing
process on the balance sugarcane, the sugar was sold for ₹ 25 lacs. Compute B’s business
income and agricultural income
Solution: Income from sale of sugarcane gives rise to agricultural income and from sale of sugar gives
rise to business income.
Business income = Sales (–) Market value of 70% of sugarcane produce (–)
Manufacturing expenses
= Rs 25 lacs – Rs. 22 lacs – Rs. 1.5 lacs = Rs. 1.5 lacs.
Agricultural = Market value of sugarcane produce – Cost of cultivation

income
= [ Rs. 10 lacs – Rs. 5 lacs] + [ Rs. 22 lacs – Rs. 14 lacs]
= 5 lacs + 8 lacs = Rs. 13 Lacs
0 Lacs 14L 22L 25L

3.Exempt Income 3.7
Specified types of agricultural Incomes
Income tax Amount of

Amount of non-
Nature of income Rule
agricultural income agricultural
applicable income
Income from
sale of tea
Rule 8 40% of such
manufactured 60% of such income
income
or grown in India
Income from
growing and
Rule 7A 35% of such
manufacturing 65% of such income
income
of rubber
Income derived from sale of
Rule 7B(1) 25% of such
coffee 75% of such income
income
grown and cured in India
Income derived from sale of
coffee grown, cured, roasted
Rule 7B(1A) 40% of such
and grounded 60% of such income
income
is India

Scheme of Partial Integration
Calculation when there is a combination of Agricultural and Non - Agricultural

Income
This is applicable to Individuals, HUF, AOP, BOI & AJP and the conditions subject to the fulfilment
of which this is allowable are:
1) The net agricultural income must be > INR 5000/- p.a.; &
2) The non-agricultural income must be > the maximum amount not chargeable to tax (which is INR
250,000 for all individuals / HUF’s; INR 300,000 for senior citizens and INR 500,000 for very
senior citizens)
The manner of computation of Income in such cases would be as under:
Refer to the illustration below which will explain this better.
Particulars INR
Income from salary 2,50,000
Income from house 1,25,000

property
Net Agricultural Income 1,00,000
Total (A) 4,75,000
Tax Liability 11,250
Total (B) 3,50,000
Tax Liability 5,000
(A)-(B) 6,250
Less: Rebate 87A [12500 or 6,250

tax payable i.e. 6,250
whichever is lower]
Total tax payable Nil
Note:
1) The (A) would be the combined income and the tax liability is computed per the current slabs and rates
2) The (B) would be the net agricultural income as increased by the minimum exemption amount and the tax liability is computed per the
current slabs and rates
3) The (A)-(B) would be the tax liability on which cess is added to determine the total tax liability
4) Assumed tat the assessee has not opted for section 115BAC.

3.Exempt Income 3.9
Other Exempted Incomes
Amount received by a member of the HUF from the income of the HUF
[Section 10(2)]
As per section 10(2), amount received out of family income, or in case of impartible
estate, amount received out of income of family estate by any member of such HUF is
exempt from tax
Share of profit received by a partner from the firm [Section 10(2A)]
As per section 10(2A), share of profit received by a partner from a firm is exempt from tax
in the hands of the partner. Further, share of profit received by a partner of LLP from the
LLP will be exempt from tax in the hands of such partner. This exemption is limited only to
share of profit and does not apply to interest on capital and remuneration received by the
partner from the firm/LLP.
Amount paid on life insurance policy [Section 10(10D)]
As per section 10(10D), any amount received under a life insurance policy, including
bonus is exempt from tax. Following points should be noted in this regard:
✓ Exemption is available only in respect of amount received from life insurance

policy. Exemption under section 10(10D) is unconditionally available in respect of sum
received for a policy which is issued on or before March 31, 2003.
✓ However, in respect of policies issued on or after April 1st, 2003, the exemption is
available only if the amount of premium paid on such policy in any financial year does not
exceed 20% of the actual capital sum assured
✓ 10% in respect of policy taken on or after 1st April, 2012) of the actual
capital sum assured.
With effect from 1-4-2013, in respect of policy taken in the name of a person
suffering from diseases specified under section 80DDB or in the name of a person
suffering from disability specified under section 80U, the limit will be increased to
15% of capital sum assured.
Amount received on death of the person will continue to be exempt without
any condition.
✓ Insurance taken for disabled person but because of his death it is paid to the legal
guardian/family member → The amount received will be taxable.
Note : No exemption would be available in case of any sum received under Key man
insurance policy. Amount of Keyman Insurance policy is taxable under 3 heads, Salary,
PGBP or IOS depending upon the circumstances.

Explanation 1.—For the purposes of this clause, "Keyman insurance policy" means a life
insurance policy taken by a person on the life of another person who is or was the
employee of the first-mentioned person or is or was connected in any manner whatsoever
with the business of the first-mentioned person and includes such policy which has been
assigned to a person, at any time during the term of the policy, with or without any
consideration.
Amendment for ULIP

Provided also – Maturity amount will be taxable → If Unit linked insurance policy (ULIP) is taken →
, issued on or after the 1st day of February, 2021, if the amount of premium payable for any of the
previous year during the term of such policy > 2.5 Lacs
Also if more than one unit linked insurance policies are taken issued on or after 1st February, 2021,
then only the maturity amount of those policies will be exempt whose yearly premium does not exceed
Rs. 2.5 lacs.
In any case the amount received because of death of a person will be exempt.
Daily allowance to a Member of Parliament [Section 10(17)]

Are exempt from tax in the hands of a Member of Parliament and a Member of State Legislature.
Pension to gallantry award winner [Section 10(18)]
Pension received by an individual who was employee of the Central Government or State
Government and who has been awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or
any other notified gallantry award is exempt from tax.
After death, Family pension received by any member of such individual is also exempt.
Family
a) Spouse and children
b) Parents, brothers and sisters - wholly or mainly dependent
Family pension received by the family members of armed forces [Section 10(19)]
Received by
⚫ the widow or children or nominated heirs,
⚫ of a member of armed forces (including paramilitary forces) of the Union,
is exempt from tax in the hands of such family members, if
⚫ the death of such member of armed forces has occurred in the course of operational duty in
prescribed circumstances and subject to such conditions as may be prescribed.

Exemption of disability pension granted to disabled personnel of armed forces who have
been invalided on account of disability attributable to or aggravated by such service
[Circular No. 13/2019, dated 24.6.2019]
• The entire disability pension,

• to members of naval, military or air forces
• would be exempt from tax.
• available to all armed forces personnel (irrespective of rank)
• Bodily disability caused by such service
Income of a registered trade union [Section 10(24)]
Any income chargeable under the head “Income from house property” and “Income from
other sources” of a registered union formed primarily for the purpose of regulating the
relation between workmen and employers or between workmen and workmen is exempt from
tax.
Specified income of a Sikkimese Individual [Section 10(26AAA)]
(i) The following income, which accrues or arises to a Sikkimese individual, would be exempt
from income- tax –
(a) income from any source in the State of Sikkim; or
(b) income by way of dividend or interest on securities.
However, this exemption will not be available to a Sikkimese woman who, on or after 1st
April, 2008, marries a non-Sikkimese individual.
Reverse Mortgage [Section 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.
Other important exemptions

Section 10AA provides for exemption in respect of income of newly established
units in Special Economic Zones
Special Provision in respect of Newly established Units in SEZ [Sec. 10AA]
Applicable to: All assessee
Conditions to be satisfied
1. The undertaking has begun or begins to manufacture or produce articles or

things or provide services on or after 01/04/2005 but upto 31st March 2021
in any SEZ.
2. Clarification on issues relating to export of computer software
The profits and gains derived from on site development of computer software (including
services for development of software) outside India shall be deemed to be the profits

and gains derived from the export of computer software outside India
3. New Business: Business should not be formed by splitting up or reconstruction

of an existing business.
However, this condition is not applicable where the business has been revived
now due to the loss suffered in the past because of any natural calamities and
Such business is re-established, reconstructed or revived by the assessee at
any time before the expiry of 3 years from the end of previous year in which
such damage was caused.
3.Further Conditions
(i) It should not be formed by the transfer of machinery or plant previously used for any
purpose to a new business.
(ii) However, deduction under section 10AA will be available if total value of the machinery or
plant transferred does not exceed 20% of the total value of machinery or plant used in the
business.
(iii) For this purpose, any machinery or plant which was used outside India by any person
other than the assessee shall not be regarded as machinery or plant previously used for
any purpose if the following conditions are fulfilled:
(a) such machinery or plant was not at any time used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation has been allowed in respect of such
machinery or plant to any person earlier.
(iv) CA’s report is required

3.Exempt Income ` 3.13
Illustration to explain exemption u/s 10AA
Rajveer Turbines has 2 undertakings, one in a SEZ and one in a normal zone. The
summarised results are as under:
Particulars SEZ Normal
Domestic turnover 50 125
Export turnover 200 0
Gross Profit 75 25
Expenses & 15 10
Depreciation
Net profit 60 15
Compute the business income of the assessee. The treatment is as under:
Total profit 75
Less : Exempt u/s 48

10AA
Taxable profits 27
Few Clarifications
Meaning of Export turnover: It means the consideration received in India or brought into India by the
assessee in respect of export by the undertaking being the unit of articles or things or services.
However, it does not include
• freight
• telecommunication charges
• insurance
attributable to the delivery of the articles or things outside India or expenses incurred
in foreign exchange in rendering of services (including computer software) outside
India. These are to be excluded both from "export turnover" and "total turnover'
Miscellaneous Exemptions
1. Post Office Savings Bank Account be exempt from tax for any assessment year
only to the extent of:
i. Rs. 3,500 in case of an individual account.

ii. Rs. 7,000 in case of a joint account.

Case Laws
CASE LAW
1. Whether claim of assessee of exemption under section 10(1) on
proceeds from sale of coffee which was subjected to only
pulping and drying was accepted for several years and there
were hundreds of coffee growers whose income were also
exempted
re-opening notice issued only against assessee during relevant
assessment year was unjustified [Assessment year 2009-10] [In
favour of assesse]
Karti P. Chidambaram V. Asstt. CIT [2017] (mad.)
The assessee, owner of coffee estates, was engaged, in growing coffee
and after pulping and drying, sells coffee as raw coffee.
For several assessment years, the assessee had been granted exemption under section 10(1) on income from sale of
raw coffee. During relevant assessment year, reopening notice was issued against the assesse on ground that the
assessee sold cured coffee and not raw coffee and hence 25 percent of total receipts from sale of coffee was
eligible to tax.
Subsequently, a reassessment order was passed making additions to income of the assessee.
Held that since re-assessment order was passed without disposing of the assessee’s objections to re-opening of
assessment and without passing a speaking order, same was unjustified.
Further, where claim of the assessee of exemption of income under section 10(1) on proceeds from sale of coffee
subjected to only pulping and drying was accepted for several years and there were hundreds of coffee growers
whose income were also exempted, re-opening notice issued only against the assessee during relevant assessment
year was unjustified.
2. Retiring employees of ICICI under VRS was eligible for section 10(10C) exemption [Assessment year 2004- 05][In
favour of assesse]
R. Banumathy v. CIT [2018] (Madras High Court)
The assessee an employee of ICICI bank opted for Early Retirement Optional Scheme and received a consolidated payment.
According to the Income Tax Department, Voluntary Retirement Scheme issued by the ICICI Bank was not in conformity with
the Rules. Therefore, the employees were not entitled to any exemption under section 10(10CC) of the Income tax Act,
1961.
Held that the Supreme Court and the Bombay High Court have dealt with voluntary retirement scheme of the RBI and held
that retiring employees are eligible for section 10 (10C) exemptions. Section 10(10C) and rule 2BA, do not specifically
apply to the RBI alone and, therefore, benefit was applicable to the assessee also and thus, the assessee was entitled
to section 10(10C) benefit.
3. Merely because surplus earned by assessee educational institution was invested for expansion of school
building, it could not be held that assessee did not exist solely for educational purpose so as to deny
assessee exemption under section 10(23C)(vi) of the Income tax Act, 1961 [In favour of assesse]
Mallikarjun School Society v. Chief CIT [2018] (Uttarakhand)
The assessee, educational society, applied for exemption under section 10(23C)(vi) of the Income tax Act, 1961. Exemption
was denied to the assessee on grounds that surplus of society was utilized for expansion/addition of school building, thus,
it did not apply its funds for purpose of education.
Held that it was noted that main purpose, aim and object, as stated in Memorandum of Association of the assessee, was
to impart education along with ancillary objects. Merely because surplus earned by the assessee educational institution
was used for expansion of school building etc. it could not be held that the assessee did not exist solely for educational
purpose. Thus, the assessee was to be allowed exemption under section 10(23C) (vi) of the Income tax Act, 1961.
Self Test Questions
1. Justify the correctness of the statement “Exempt Income is not chargeable at all and therefore not
to be included in Total Income of the Assessee”.

3.Exempt Income ` 3.15
Answer
There are several incomes that do not form part of the total income of the assessees, which are
entailed u/s 10 of the Act. Being exempt, these do not enter the computation of taxable incomes. The
major difference between incomes exempt u/s 10 and the deductions under Chapter-VI-A, incomes u/s 10
do not enter into the computation of taxable income for assessees at all as they are exempt; whereas
Chapter for VI-A, first incomes are added and form part of Gross Total Income (GTI) and only then
these deductions under the Chapter are allowed.
Expenditure incurred in relation to any exempt income is not allowed as a deduction while computing
income under any of the Heads of Income. For getting deduction you have either to expense out or
invest in designated area in other words it is Cash outflow. On the other hand, Inflow of income is itself
exempt from tax i.e. Exemption. It results in increase in cash inflow. The government declares the
exemption through either circular or notification in public interest. The following are the receipts / income
which are exempt under Income tax Act, 1961.

4. Salaries 4.1
Salary got due, but when it will be received…….
Unique Academy – 8007916622 CA Saumil Manglani - Contact: 9921051593

4. Salaries 4.2
Introduction
The provisions related to “Salaries” are contained as under:
(Section 15)
Deductions
(Section 16)
Constituents
(Section 17)
• Employer – Employee relationship should exist for charging income under the head
Salary
• Employment could be full time or part time, that really doesn’t matter.
• But, if an employee receives 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.
▪ For instance, the allowance given by employer to a doctor employed
by him for not carrying on a profession in addition to the employment
would be be taxed as salary income.
▪ If an employee gets money from persons other than his employer and if
such money is not in any way related to the contract of services with
the employer under whom he is working, the receipts, if taxable as
income, must be assessed under the head “Income from other
sources”.
Let’s examine the following cases, whether payments are chargeable under head salaries;
a. Professor: The professor of university would be receiving income by way of monthly salary from the
university which is chargeable to tax under this head. But this does not mean that every item of income
received by the employee from his employer would be taxable under this head. Thus, 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.
This is because of the fact that the essential condition that the income in question must be received for
services rendered in the ordinary course of employment would not be fulfilled in the case of examinership
fees.
b. Director: A director of a company may, in some cases, be an employee of a company where there is a
specific contract of employment between him and the company. The fact that the same person has dual
capacity in his relationship with the company does not mean that he cannot be taxed under this head.
Every item of income arising to such a director who is also an employee of the company (e.g. a managing
director or other whole-time director) by virtue of his employment would be taxable as his income from
salary. Thus, income by way of remuneration received by a managing director would be taxable as
his salary income whereas the income

4. Salaries 4.3
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”.
c. Official Liquidator: An official liquidator appointed by the Court or by the Central Government would also
become an employee of the Central Government consequently the remuneration due to him would also be
assessable under the head ‘Salaries”.
d. Manager: 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.
e. Partner of a firm: Salary paid to a partner by a firm is nothing but appropriation of profits. Any salary,
bonus, commission, or remuneration by whatever name called due to or received by partner of a firm shall
not be regarded as salary but has to be charged as income from business. It is because of the fact that
the relationship between the firm and its partner is not of employer and employee.
f. Member of Parliament: According to a circular of the Board dated 22-5-1967, the salary received by a
person as Member of Parliament will not be chargeable to income-tax under the head “Salaries” but as
“Income from other sources” because a Member of Parliament is not an employee of the
Government but only an elected representative of the people.
g. Treasurer of a bank: The income received by a treasurer of a bank would be taxable as his salary income
if the treasurer is an employee of the bank. If he does not happen to be an employee, the income
received by him would be taxable as “Income from other sources”.
h. Person carrying on a profession or vocation: Income derived by any person from carrying on a
profession or vocation must be taxed as business income and not as salary income because
employment is different from profession.
i. Income from tips would be chargeable in the hands of the employees as income from other sources, as such tips
being received from customers and not from the employer, Section 192 (TDS on Salary Income) would not get
attracted. ITC Ltd. gurgaon Vs Commissioner of Income-tax (TDS) (SC).
j. Salaries received by Judges is taxable under the head salaries even though they have no employer. [Justice Deoki
Nandan Agarwala Vs Union of India (SC)]
Proforma for computation of income under the head “Salaries”

Particulars Amt
(i) Basic Salary XXX
(ii) Fees/Commission XXX
(iii) Bonus XXX
(iv) Allowances:
(a) Dearness Allowance XXX
(b) House Rent Allowance (HRA) xx
Less: Least of the following is exempt [Section 10(13A)] xx XXX
HRA actually received xxx
Rent paid (-)10% of salary for the relevant period xxx
50% of salary, if accommodation is located in

Mumbai, Kolkata, Delhi or Chennai or 40% of salary xxx
in any other city for the relevant period
(c) Children Education Allowance xx

Less: Rs. 100 per month per child upto maximum of two xx XXX
children
(d) Children Hostel Allowance xx
Less: Rs. 300 per month per child upto maximum of two xx XXX
4. Salaries 4.4
children
(e) Transport allowance xx
Less: Rs. 3,200 per month in case of blind/ deaf and dumb/ XXX
orthopedically handicapped employee only xx
(f) Entertainment Allowance XXX
(g) Other Allowances including overtime allowance, city compensatory allowance etc. XXX
(v) Taxable
Perquisites
(a) Valuation of rent free accommodation* XXX
I) Where the accommodation is provided by the Govt. to its employees
License fee determined by the Govt. xx

Less: Rent actually paid by the employer xx
II) Where the accommodation is provided by any other employer
If accommodation is owned by the employer

(i) Cities having population > 25 lakh as per 2001
census
15% of salary in respect of the period of occupation (–)
rent recovered from employee xx
(ii) Cities having population >10 lakh < 25 lakh as per

2001 census
10% of salary in respect of the period of occupation (–)
(iii) In other cities

7.5% of salary in respect of the period of occupation (–)
If accommodation is taken on lease by the employer

Lower of lease rental paid or payable by the employer (or) xx
15% of salary
Less: Rent actually paid by the employee xx
(b) Obligation of employee discharged by employer. For XXX
e.g. Professional tax paid by the employer
(c) Any sum payable by the employer to effect an assurance on the life of the XXX
employee or to effect a contract for annuity: Actual expenditure incurred by the
employer
(d) Value of use of motor car XXX

(e) Any other perquisite: For example, XXX
(1) Provision of services of a sweeper, gardener, watchman or personal
attendant : Actual cost to employer by way of salary paid or payable for such
services (-) amount paid by the employee
(2) Gas, electricity, or water supplied by employer for household

consumption of the employee: Amount paid on that account by the
employer to the agency supplying gas etc. (-) amount paid by the employee

4. Salaries 4.5
Specified (3) Provision of free or concessional education facilities for any member of
employees – employee’s household : Sum equal to the expenditure incurred by the
a. Director employer (-) amount paid or recovered from the employee
b. Employee having
Where educational institution is maintained and owned by employer: Cost
substantial interest
(i.e. minimum 20% of such education in similar institution in or near the locality (-) amount paid
share holding or recovered from employee [However, there would be no perquisite if the
c. Income under the value of benefit per child does not exceed Rs. 1,000 p.m.]
head Salaries > Rs. Note: Above perquisites including Motor car are taxable only in case of specified employees.
50,000 excluding
perquisites (4) Interest-free or concessional loan exceeding
Rs. 20,000 : Interest computed at the rate charged by SBI as on 1st day of
relevant PY in respect of loans for similar purposes on the maximum
outstanding monthly balance (-) interest actually paid by employee
(5) Value of gift, voucher: Sum equal to the amount of such gift [If
value of gift, voucher is below Rs. 5,000, there would be no
perquisite]
(6) Use of moveable assets
Asset given Value of benefit

a) Use of laptops and computers Nil
b) Movable assets, other than - 10% p.a. of the actual cost of such
(i) laptops and computers; and assets, or the amount of rent or
(ii) assets already specified charge paid or payable by the
employer, as the case may be
(-)
amount paid by/recovered from an
employee
(7) Transfer of movable assets: Actual cost of asset to employer – cost of normal
wear and tear – Amount paid or recovered from employee.
Assets transferred computation of cost of normal wear and tear
Computers and electronic items 50% on WDV for each completed year of usage
Motor cars 20% on WDV for each completed year of usage
Any other asset 10% of actual cost of such asset to employer for
each completed year of usage [on SLM basis]
(vi) Leave travel concession xxx

Less: Exempt u/s 10(5) xxx XXX
(vii) Gratuity
(a) Received during the tenure of employment (fully taxable) xxx
(b) Received at the time of retirement or otherwise xxx
Less: Exempt u/s 10(10) xxx XXX
(viii) Uncommuted pension (fully taxable) Commuted pension xxx
(ix) Less: Exempt u/s 10(10A) xxx
XXX
(x) Leave encashment
(a) Received during the employment (fully taxable) xxx
(b) Received at the time of retirement or otherwise xxx
Less: Exempt u/s 10(10AA) xxx XXX
(xi) Voluntary retirement compensation xxx
Less: Exempt u/s 10(10C) - Least of the following: xxx XXX

4. Salaries 4.6
(a) Compensation received/ receivable on voluntary xxx
retirement
(b) Rs. 5,00,000 xxx
(c) 3 months’ salary x completed years of service xxx
(d) Last drawn salary x remaining months of service left xxx
(xi) Retrenchment compensation etc. xxx

Less: Exempt u/s 10(10B)] – Least of the following: xxx XXX
(a) Compensation actually received xxx
(b) Rs. 5,00,000 xxx
(c) 15 days average pay x completed years of service and part
thereof in excess of 6 months xxx
Gross Salary XXX

Less: Deduction under section 16
Standard deduction u/s 16(ia) upto Rs. 50,000 XXX
Entertainment allowance u/s 16(ii) (only for Govt. employees) xxx
Least of the following is allowable as deduction: xxx XXX
(a) Rs. 5,000 xxx
(b) 1/5th of basic salary xxx
(c) Actual entertainment allowance received xxx
Professional Tax (paid by employer/ employee) under section 16(iii) XXX
Income under the head salary XXX
REGULATORY FRAMEWORK
Sections (Income Tax Act, 1961) Details
Section 15 Basis of Charge
Section 17(1) Salary
Section 10(13A) House rent allowance
Section 10(14) Special allowances
Section 10(10A) Commuted Pension
Section 10(10) Gratuity
Section 10(10AA) leave encashment
Section 17(2) Valuation of Perquisites
Section 17(3) Profits in lieu of Salary
Section 89 relief when salary is paid in arrears or advance
Section 16(ia) Standard deduction
Section 16(ii) entertainment allowance
Section 16(iii) Professional tax

4. Salaries 4.7
Basis of Charge
Section 15
• Salary is taxable on “due” or “paid” basis whichever is earlier.
• If it is due, it is included in taxable salary, irrespective of whether it is paid or not, and if it is paid, it is taxable,
irrespective of whether it is due or not.
• Therefore, it is only logical to note that if it has already been taxed on due basis, the same cannot be taxed again
when it is paid.
• Similarly, if a salary which was paid in advance, if it has already been taxed in the year of payment, it cannot
subsequently be taxed when it becomes due.
Nature of salary Is it taxable as income of
the previous year 2022-23
Salary becomes due during the previous year 2022-23 (whether paid during Yes
the same year or not)
Salary is received during the previous year 2022-23 (whether it becomes Yes
due in a subsequent year)
Arrears of salary received during the previous year 2022-23 although it Yes
pertains to one of the earlier years and the same were not taxed earlier on
due basis
Arrears of salary received during the previous year 2022-23 although it No

pertains to one of the earlier years but the same were taxed earlier on due
basis
Note 1 - Accounting method of the employee not relevant

The provisions of section 9(1)(ii)/(iii) are summarized below (it is assumed that salary is paid at the place where
service is rendered)
Situation Who is employee Who is Is it taxable in India
employer
Where service is Salary Allowance/
rendered perquisite
Case 1 Indian citizen (resident or non- Government Outside India Yes No (exempt)
resident) of India
Case 2 Non-resident (but not covered Any Outside India No No

by case 1)
Case 3 Resident and ordinarily resident Any Anywhere Yes Yes
(but other than case 1)
KEY POINTS
• Advance salary is taxable; however, an Advance against Salary is essentially loan which will be
recovered later from the Employee and therefore that is not taxable.
ILLUSTRATION
State whether the following receipts should be treated as salary or not?
• A teacher receives emoluments in kind from school in which he teaches.
Yes, it is immaterial whether salary has been received in cash or in kind.

• A teacher of a college receives fees from a University for checking answer sheets.
4. Salaries 4.8
No, as employer – employee relationship does not exist between payer and payee. (College-teacher is
not the employee of the University). Such receipt shall be taxable under the head ‘Income from other
sources’.
• A payment made to the Member of the Parliament or the State legislature.
No, as employer-employee relationship does not exist.

A member of the Parliament or the State legislature is not treated as employee of the Government.
Payment received by them shall be taxable under the head “Income from other sources.
Computation of Salary in Grade system – varying Pay Scale

In this concept the person gets an increment in Salary after every completion of duration of 12 months in
employment.

4. Salaries 4.9
Retirement Benefits
1. Gratuity 10(10)
Gratuity is normally paid in lieu of the long-term service of an employee (usually > 5 years),
but is a voluntary payment by the employer, as an appreciation of the long- standing services.
The Gratuity so received, is exempt as under:
Gratuity
Received during Received at the

service time of
Employee/ Defense Non-Government

services Employees
Fully Exempt
Covered under Not covered
Payment of under payment
Gratuity Act, of Gratuity Act,
1972 1972
Least of the following Least of the following

would be exempt: would be exempt:
- ₹20 lakh (AY 19-20) - ₹ 20 lakh
Gratuity received
- Gratuity received
½ * Salary *
- 15/26 * Last drawn completed number years of
Salary * Number of service (ignore fraction of
years of service (where years
> 6 moths = 1 year)

4. Salaries 4.10
Important Points:
1. If employee has received gratuity from any of his past employer, then the amount of gratuity exemptedearlier shall be
reduced from Rs. 20,00,000.
2. If employee has not received gratuity from any of his past employer, then the period of past employmentshall also be
considered for calculating years of service.
3. In case of death of the employee, it has to be paid to the nominee or the legal heir of the employee. Inthis case, the
exemption is calculated in the same manner as above and is taxed for the receiver underthe head “Income from Other
Sources”.
2. Annuity/ Pension 10 (10A)
Annuity is a yearly payment to an employee post his retirement on account of the funds that were
saved by him by way of subscription to the annuity fund vide his salary when he was in
employment.
Annuity received from the present employer is chargeable to tax as Salary and any amount
received from the past employer is chargeable to tax as Profits In lieu of Salary.
Pension however is generally paid by the Government or a Company to the employee for his
past service and this too is payable after the retirement.
This pension so received could be commuted / uncommuted, explained as under:
Sr Type of Remarks
no. Pension
1. Uncommuted 1. Received Periodically
2. Fully Taxable for all employees
2. Commuted 1. Received in Lumpsum (Whole/Part)
Pension
2. Future right to receive payments given up to receive
immediate lumpsum (refer below on the treatment)
Pension 10 (10A)
Pension
Commuted Uncommuted
Lumpsum)d (Monthly)
Employees of the Non-Government Fully taxable

Central Employees
Government/local
authorities/Statutory
Corporation/Members
of the Defence Services If the If the employee
employee is does not
in receipt of receive any
gratuity gratuity
1/3  (commuted ½  (commuted

pension received pension received
 commutation  commutation
%)  100, would %)  100, would
be exempt be exempt

4. Salaries 4.11
Few pointers
Sr. No. Different Situations Tax Treatments

1 Pension is received from UNO by the employee Not chargeable to tax
or his family members
2 Family pension received by family members of Exempt u/s 10(19)
armed forces
3 Family pension received by family members Taxable in the hands of recipient u/s 56 under
after the death of employee the head ' income from other sources'.
Standard deduction is available u/s 57 which
is 1/3 rd of such pension or ₹ 15000 whichever
is less
Note - Annuity received from the present employer is chargeable to tax as Salary and any amount received from the past
employer is chargeable to tax as Profits In lieu of Salary
3. Leave Encashment 10 (10AA)

Leave Encashment Salary received by employees of the Government, is fully exempt from tax.
For the Non-Government employees, the Leave Encashment Salary so received is exempt from
tax to the extent of least of the following:
a) INR 3,00,000
b) Leave Salary actually received
c) 10 month’s Salary on the basis of average Salary drawn in the last 10 months
d) Cash Equivalent of Leave standing to the credit of the employee at the time of
retirement / death, based on last 10 month’s average salary drawn. Earned leave
entitlement per year cannot exceed 30.
Note: Here Salary would mean Basic + DA (only to the extent of forming part of the retirement benefits) +
Commission as a % of Turnover and number of days in the month to be taken at 30.
Leave Encashment [Section 10 (10AA)
Leave Encashment
Received during Received on

the period of retirement whether
Service on Superannuation
or otherwise
Full Taxable
By a Government By any other

employee employee
Full Exempt Least of the

following
is exempt
Rs. 3,00,000 Leave salary 10 months’ salary (Total leaves allowed/

actually received (on the basis of Earned – Total leaves 10
average salary of Availed)  months
last 10 months) average
30 monthly
salary
Earned leave entitlement cannot

exceed 30 days for every year of
actual service
4. Salaries 4.12
Compensation on voluntary Retirement
Refers to compensation received on voluntarily retirement or termination of service before the date of actual retirement.
Voluntary retirement compensation to be included under the head Salary = Voluntary Retirement Compensation Less
Exemption u/s10(10C)
Exemption u/s 10(10C)
Types of Employee • Employees of Central or State government or Local Authority or
Statutory Corporation
• Company or Co-operative Society
• Declared University, IIT, Notified IIM or Notified institutions
Conditions to be satisfied • Compensation received on Voluntary Retirement and
• The scheme of Voluntary Retirement should be as per rule 2BA
Amount of • Actual Compensation received/receivable
Exemption Least of • Rs. 5,00,000
following • 3 months Total Salary * Completed years of service (Part of the
service to be ignored
• Current Salary per month * Balance months of service left
Salary = Basic + DA (retirement Benefits) + Commission % of turnover
Special Points:
1. [Rule 2BA]: The scheme of Voluntary Retirement should be framed in accordance with below guidelines.
i. Employee should have completed 10 years of service or 40 years of age. [This condition is not applicable
in the case of an employee of a public sector company].
ii. Scheme should be applicable to all employee (except Directors).
iii. Scheme should be drawn to result in overall reduction in existing strength of employees.
i. Vacancy caused by voluntary retirement should not be filled up.
ii. Retiring employee shall not be employed in other concern of same management.
If the guidelines are not followed, exemption shall not be available
2. Exemption under 10(10C) can be claimed only once by the Assessee.

4. Salaries 4.13
Allowances
An allowance is defined as a fixed amount of money given periodically in addition
to the salary for the purpose of meeting some specific requirements connected with the
service rendered by the employee or by way of compensation for some unusual
conditions of employment. It is taxable on due/accrued basis whether it is paid in
addition to the salary or in lieu thereon. These allowances are generally taxable and are
to be included in the gross salary unless a specific exemption has been provided in
respect of allowances provided under the Act.
to prescribed
limits
Allowances partially Taxable

House rent allowance [Section 10(13A)]: HRA is a special allowance
specifically granted to an employee by his employer towards payment of rent
for residence of the employee. HRA granted to an employee is exempt to the
extent of least of the following:
Metro Cities (i.e. Delhi, Kolkata,
Other
Mumbai, Chennai)
Cities
1) HRA actually received. 1) HRA actually received
2) Rent paid -10% of salary for the 2) Rent paid - 10% of
relevant period salary for the relevant
period
3) 50% of salary for the relevant 3) 40% of salary for the
period relevant period
Notes:
a. Exemption is not available to an assessee who lives in his own house, or in

a house for which he has not incurred the expenditure of rent.
b. Salary for this purpose means basic salary, dearness allowance, if provided
in terms of employment and commission as a fixed percentage of turnovers.
c. Relevant period means the period during which the said accommodation
was occupied by the assessee during the previous year.
4. Salaries 4.14
2 Special Allowance u/s 10(14) (i) read with Rule 2BB- Exempt to the extent such
expenses are actually incurred
1. All special allowances specifically granted to meet expenses,
incurred, for the purposes of performance of duties -
a. Wholly
b. Exclusively &
c. Necessarily
These are exempt to the extent such expenses are actually incurred or the amount
received whichever is less.
Allowance exemption depends upon the actual expenditure
Sr. No. Allowance Purpose

To meet the ordinary daily charges incurred by an employee on
1 Daily allowance
account of absence from his normal place of duty
2 Uniform allowance. Given for Purchase, maintenance of uniform
3 Helper allowance Helper for official duties (But Servant allowance fully taxable)
Encouraging the academic research and training pursuits in research
4 Research allowance
institutions
5 Conveyance allowance Performance of duties of an office
6 Travelling Allowance Cost of travel on tour one city to another – Official tour
Transfer allowance –
7 Transfer, packing and shifting of personal effects on such transfer
Shifting city
1. Exemption subject to prescribed limits 10(14) (ii)
First Priority
S. Name of Allowance Extent to which
No. allowance is exempt
1 Special Compensatory (Tribal Areas / Schedule Areas / Agency Areas) Rs. 200 per month.
Allowance
2 Any allowance granted to an employee working in any transport system 70% of such allowance upto
to meet his personal expenditure during his duty performed in the a maximum of
course of running such transport from one place to another, provided Rs. 10,000 per month.
that such employee is not in receipt of daily allowance
3 Children Education Allowance Rs. 100 per month per child

upto a maximum of two
children.
4 Any allowance granted to an employee to meet the hostel expenditure Rs. 300 per month per child
on his child upto a maximum of two
children.

4. Salaries 4.15
5 Any transport allowance granted to an employee to meet his Rs. 1,600 per month
expenditure for the purpose of commuting between the place of his Withdrawn
from AY 19-20
residence and the place of his duty
6 Any transport allowance granted to an employee who is blind or deaf Rs. 3,200 per month.
and dumb or orthopedically handicapped with disability of the lower
extremities of the body, to meet his expenditure for commuting
between his residence and place of duty
7 Underground Allowance would be granted to an employee who is Rs. 800 per month
working in uncongenial, unnatural climate in underground mines. This
is applicable to whole of India.
Second Priority
Sr.
No Name of Allowance
. Exemption Limit
Rs. 800 or Rs. 300 per month

Any Special Compensatory Allowance in the nature of Special
depending upon the specified
Compensatory (Hilly Areas) Allowance or High Altitude
1 locations
Allowance or Uncongenial Climate Allowance or Snow Bound
Rs. 7,000 per month in Siachen
Area Allowance or Avalanche Allowance
area of Jammu and Kashmir
Rs. 1,300 or Rs. 1,100 or Rs. 1,050

Any Special Compensatory Allowance in the nature of border
or Rs. 750 or Rs. 300 or Rs. 200
2 area allowance or remote locality allowance or difficult area
per month depending upon the
allowance or disturbed area allowance
specified locations
Compensatory Field Area Allowance [Specified areas in

3 Rs. 2,600 per month
Specified States]
Compensatory Modified Field Area Allowance [Specified
4 Rs. 1,000 per month
areas in Specified States]
Any special allowance in the nature of counter insurgency
5 allowance granted to the members of the armed forces Rs. 3,900 per month
operating in areas away from their permanent locations.
Any special allowance in the nature of high Altitude allowance
granted to the member of the armed forces operating in high
6 altitude areas For altitude of
Rs. 1,060 per month
9,000 to 15,000 feet
Rs. 1,600 per month Rs.
For above 15,000 feet
Any special allowance in the nature of special compensatory 4,200 per month
7 highly active field area allowance granted to the member of
the armed forces
Any special allowance in the nature of Island (duty) allowance Rs. 3,250 per month
8 granted to the member of the armed forces in Andaman &
Nicobar and Lakshadweep Group of Islands

4. Salaries 4.16
2. Fully Taxable Allowance
FULLY TAXABLE ALLOWANCES
Sr. Heading Details

No.
1. Dearness Allowance, This is a very common allowance these days on account of high prices.
Additional Dearness Sometimes Additional Dearness Allowance is also given. It is included in
Allowance and the income from salary and is fully taxable. Sometimes it is given under
Dearness Pay the terms of employment and sometimes without it. When it is given
under the terms of employment it is included in salary for purposes of
determining the exemption limits of house rent allowance, recognised
provident fund, gratuity and value of rent free house and is also taken
into account for the purposes of retirement benefits.
2. Fixed Medical Fully Taxable.

Allowance
3. Tiffin Allowance It is given for lunch and refreshments to the employees. It is taxable.
4. Servant Allowance It is fully taxable even if it is given to a low paid employee, not being an
officer, i.e., it is taxable for all categories of employees.
5. Non-practicing It is generally given to those medical doctors who are in government
Allowance service and they are banned from doing private practice. It is to
compensate them for this ban. It is fully taxable.
6. Hill Allowance It is given to employees working in hilly areas on account of high cost of
living in hilly areas as compared to plains. It is fully taxable, if the place is
located at less than 1,000 metres height from sea level.
7. Warden allowance These allowances are given in educational institutions for working as
and Proctor Warden of the hostel and/or working as Proctor in the institution. These
Allowance allowances are fully taxable.
8. Deputation When an employee is sent from his permanent place of service to some
Allowance other place or institution or organisation on deputation for a temporary
period, he is given this allowance. It is fully taxable.
9. Overtime Allowance When an employee works for extra hours over and above his normal
hours of duty he is given overtime allowance as extra wages. It is fully
taxable.
10. Other Allowances Like family allowance, Project allowance, Marriage allowance, City
Compensatory allowance, Dinner allowance, Telephone allowance etc.
These are fully taxable.
3. Allowances Fully Exempt

• Allowance to High Court Judges and Supreme court Judges
• Allowance received from United Nations Organisation (UNO):

Allowance paid by the UNO to its employees is not taxable
• Allowances payable outside India [Section 10(7)] - By the Government to

a citizen of India for services rendered outside India.
Note: if the assessee opted concessional tax slab under section 115BAC of the income tax act,
1961, then assessee is not eligible to claim exemption from any allowances except:
1. Travelling allowances
2. daily allowances
3. Conveyance allowance
4. Transport allowance (For blind, handicapped, deaf or dumb employee)
4. Salaries 4.17
Profits in lieu of salary

Under this the following items are included:-
Sr. Heading Details
No.
1. Compensation The amount of any compensation due to or received by an assessee from the
received on employer or former employer at or in connection with the termination of his
termination of employment. The termination of employment means retirement, premature
employment termination of employment, termination by death or voluntary resignation.
Generally, under the Income- tax Act, the income that is chargeable to tax is
only a receipt which is revenue in nature; receipts of a capital nature are
not chargeable to tax but this provision constitutes an exception to this rule
because compensation received by an employee for termination of his
employment would be a capital receipt since it is received in replacement of
the sources of income itself.
2. Compensation The amount of any compensation due to or received by any assessee from
received on his employer in connection with the modification of the terms and conditions
modification of relating to employment. For example, where an employer wants to cut down
terms of the salary payable to the employee, the lump sum paid to compensate the
employment employee shall be treated as profit in lieu of salary. In the same way, where
the remuneration for services is paid at the end of the period of employment
or a lump sum remuneration is paid at the beginning of employment for a
number of years, such payment shall be treated as profit in lieu of salary.
3. Amount received Any amount due to or received, whether in lump sum or otherwise, by any
before joining / assessee from any person –
after cessation of
(a) before his joining any employment with that person; or
employment
(b) after cessation of his employment with that person.
4. Payment received Any payment other than the following payment due to or received by
by employee from assessee from an employer or a former employer or from a provident or other
Provident fund or fund, other than gratuity [Section 10(10)], Pension [Section 10(10A)], HRA
other fund [Section 10(13A)], Provident fund / Public Provident fund/ Recognised
Provident fund.
5. Compensation Any sum received under Keyman Insurance Policy including Bonus from
received under such policy.
Keyman insurance
policy
6. Any other sum Any other sum received by the employee from the employer
Perquisites
Perquisite may be defined as any casual emolument or benefit attached to an office or position in addition to
salary or wages. It also denotes something that benefits a man by going into his own pocket. Perquisites may be
provided in cash or in kind. However, perquisites are taxable under the head “Salaries” only if they are
a. allowed by an employer to his employee;
b. allowed during the continuance of employment;
c. directly dependent upon service;
d. resulting in the nature of personal advantage to the employee; and
e. derived by virtue of employer’s authority.
It is not necessary that a recurring and regular receipt alone is a perquisite. Even a casual and non-recurring
4. Salaries 4.18
receipt can be perquisite if the aforesaid conditions are satisfied.
Taxable Perquisites
Rent free accommodation (Reduce recovery from employer wherever done)
Valuation of accommodation only (Excluding furniture)
Taxable Perquisites
Rent Free Residential Accommodation
Interest Free / Concessional Loan
Use of movable assets by employee / any member of his household
Transfer of movable assets
Provision of gas / electricity / water
Provision of free / concessional educational facilities
Credit Card Expenses
Club expenditure
Health Club, Sports, Similar facilities
Sweat Equity
Tax-free Perquisites (in all cases)

Medical Facilities
Refreshment
Subsidized lunch or dinner
Recreational facilities
Telephone facility
Transport - for the journey between office and residence and back
at free of charge or at concessional rate.
Personal accident insurance
Refresher Course
Free rations – given to armed forces personnel
Computer/laptops
Rent free houses / conveyance to High Court & Supreme Court Judges
Employers’ Contribution to Group Insurance Schemes, to recognized Provident Funds

4. Salaries 4.19
Rent Free Accommodation
Govt. Employee (Central/State) Non-Govt. Employee
License fee determined by

Govt. would be the value of Accommodation Accommodation not
perquisite Owned by employer Owned by employer
Population# of Population# of City Population# of 15% of Salary*

City upto 10 Lac > 10 lac to 25 lacs City > 25 Lac or
Rent paid
Whichever
7.5% of Salary* 10% of Salary* 15% of Salary* is lower
Note – Calculate for only that number of months for which the house is occupied by the employee.
*Salary means
Basic Salary
⬧ DA (forming part of the retirement benefits)
⬧ Bonus
⬧ Fee
⬧ Commission (also includes fixed commission)
⬧ Taxable allowances i.e. only taxable portion of allowances
⬧ Monetary payment not being perquisties (e.g. Leave encashment) i.e. “Ignore ALL types of
perquisites in this calculation”)
# Population of the city as peer 2011 census.

Accommodation may be provided:
(1) Rent free; or
(2) At concessional rate.
Note: In case the house is provided at concessional rate, the value determined above shall be reduced
by the rent, if any, actually paid by the employee.
Accommodation provided by the employer in a hotel - Where the accommodation is provided by the
employer in a hotel (except where the employee is provided such accommodation for a period not exceeding in
aggregate 15 days on the transfer from one place to another): The perquisites value would be 24% of salary
paid or payable for the previous year or the actual charges paid or payable to such hotel, which is lower, for
the period during which such accommodation is provided as reduced by the rent, if any, actually paid or
payable by the employees.

4. Salaries 4.20
Other Taxable Perquisites: We need to understand the valuation of perquisites. The table
appended below, summarizes the taxable value of various perquisites in the hands of the
employee assessees.
Taxable Value of
Nature of Perquisite Note
Perquisite
Free Domestic Servant Actual cost of the employer
Service of sweeper, gardener or Less: Amount paid by
watchman or personal employee
attendant
Supply of gas, electricity or The amount determined shall be
water for household reduced by the amount, if any
consumption recovered from the employee for
a) Procured from outside Amount paid to outside such benefit.
agency agency
b) Resources owned by Manufacturing cost per unit
employer himself
Education Facilities for 1. Amount paid for free training of
Children the employee is not taxable
a) Free education to Cost to the Employer 2. Payment or reimbursement of
employee's own children in school fee is taxable in all cases
Less: Rs. 1,000 per month
the school 3. No restriction on number of
Less: Amount recovered children
owned/maintained by the
from employee
employer or the school
sponsored by the employer
b) Other Schools Cost to the Employer
Less: Amount recovered
from employee
c) For others (other than Cost of education to
assessees children i.e., Employer
grandchildren and other Less: Amount recovered
household members) from employee
Interest free or Concessional outstanding Balance for Note taxable if -
Loan each loan on last day of 1. Loan < 20,000
Provided to Employee or each month  Rate of 2. Loan for diseases specified in
household members Interest charged by SBI on the rule 3A (Cancer, TB, AIDS,
1st day of the relevant PY. Disease requiring surgical
Less: Interest charged operation, mental disorder,
caesarean operation). However,
not applicable to so much of the
loan as has been reimbursed to
the employee under medical
insurance scheme.

4. Salaries 4.21
Taxable Value of
Nature of Perquisite Note
Perquisite
Free food and Non-Alcoholic Working hours include extended
Beverages office hours (like working on
holidays, over time)
a) Tea or snacks provided during Nil

working hours
b) Free food and non- alcoholic Nil
beverages during working hours
provided in a:
(i) Remote area; or
(ii) An offshore installation.
c) Free food and non- alcoholic Cost to the employer in

beverages excess of Rs. 50 per meal
provided by the employer during Less: Recovery from the
working hours: employee
(i) at office or business premises;
or
(ii) Through paid vouchers which
are not transferable and
usable
only at eating joints
d) In any other case Actual amount of

expenditure incurred by
the employer Less:
Recovery from the
employee

4. Salaries 4.22
Value of any Gift, Voucher or Gifts made in cash or convertible
Token into money
The value of any gift, or Amount over and above of Rs. (like gift cheques) are not exempt.
voucher, or token received by 5,000 only shall be taxable
the employee or by member of [CircularNo.15/2001 dated
his household on ceremonial 12.12.2001]
occasions or otherwise from the Alternative view → proviso to Rule
employers 3(7)(iv)
If amount > Rs. 5,000, full amount
taxable.
Where the value of such gift, The value of perquisite shall be
voucher or token, as the case nil. As per proviso to Rule 3(7)(iv)
may be, is upto Rs. 5,000 in the
aggregate during the previous
year.
Expenses on Credit Cards
Expenses including The amount paid for or reimbursed
membership fees and annual by the employer.
fees are incurred by the Less: Expenditure on use for official
employee or any member of his purpose
household, which is charged to Less: Amount recovered from
a credit card, provided by the employee
employer or otherwise are paid
for or reimbursed by the
employer
Nature of Perquisite Taxable Value of Note
Perquisite
Club Membership However, in case the employee enjoys
Corporate Membership in a club, the
The payment or reimbursement The actual amount of expenditure value of benefit wouldn’t include the
initial membership paid by the
by the employer of any incurred or reimbursed by the
employer to acquire the corporate
expenditure incurred employer. membership.
(including the amount of Less: Expenditure on use for official
annual or periodical fee) in a purpose
club by the employee or by any Less: Amount recovered from
member of his household employee
9. Health Club, Sports, Similar All employees No perquisite if provided uniformly by the
employer to allemployees.
facilities

4. Salaries 4.23
Use of Moveable Assets
a) Use of laptops and Nil

computers
b) Moveable assets other than i) If owned by employer than 10% per The amount determined
Laptops and computers annum of the actual cost of such asset, shall be reduced by the
or reduced by the amount, if
ii) If taken on hire by employer the amount any paid or recovered from
of rent or charge paid, or payable by the the employee for such
employer as the case may be. benefit.
Transfer of any Moveable

Assets
a) Computers and Electronic Actual cost of such asset to the employer as
Items reduced by 50% for each completed year he amount determined shall
during which such asset was put to use by be reduced by the amount, if
the employer, on the basis of reducing any paid or
balance method. recovered from the
b) Motor Cars Actual cost of such asset to the employer as employee for such
reduced by 20% for each completed year benefit.
during which such asset was put to use by
Note – Completed year means
the employer, on the basis of reducing
ignore fraction
balance method.
of the year)
c) Any other Assets Actual cost of such asset to the employer as
reduced by 10% SLM of the actual cost to
the employer for each completed year
during which such asset was put to use by
the
employer.
10. Sweat equity On the date of exercising the option
1. Shares are listed → Fair market value (FMV) → Average of the opening and closing
price of the share on that date on the said stock exchange.
2. Listed on more thanone stock exchange → the FMV would be the Average of the
opening and closing prices of the share on the recognised stockexchange which
records the highest volume of trading in the share.
3. On the date of the exercising of the option, if there was no trading in the share → FMV
would be the closing price on the recognised stock exchange, on a date closest to
exercisingthe option, immediately before that date,
4. Listed on more than one stock exchange, the FMV would be the closing price of the
share on the recognised stock exchange which records the highest volume of trading in
the share.
5. Shares Not listed on anyrecognized stock exchange, the FMV would be that as
determined by the Merchant Banker on the specific date,i.e., the date of exercising
the option or any date earlier not exceeding 180 days prior to the date of exercise
of the option.

4. Salaries 4.24
Important Note
Some perquisites are taxable only in the hands of specified employees for example:
Provision of Sweeper, Gardener, Watchman Or Personal Attendant
Facility Of Use Of Gas, Electricity Or Water Supplied By Employer
Free Or Concessional Tickets
Use Of Motor Car when car is provided by the employer.
Free Or Concessional Educational Facilities.
Specified employees: Meaning 17(2)(iii)
(i) Director employee: An employee of a company who is also a director is a specified

employee. It is immaterial whether he is a full-time director or part- time director. It also does
not matter whether he is a nominee of the management, workers, financial institutions or the
Government. It is also not material whether or not he is a
director throughout the previous year.
(ii) An employee who has substantial interest in the company: An employee of a company
who has substantial interest in that company is a specified employee. A person has a
substantial interest in a company if he is a beneficial owner of equity shares carrying 20% or
more of the voting power in the company.
(iii) An employee other than an employee described in (i) & (ii) above, whose income
chargeable under the head ‘salaries’ exceeds ₹ 50,000 is a specified employee. The above
salary is to be considered exclusive of non-monetary benefits.
Motor Car- perquisite Valuation

4. Salaries 4.25
Exemption In Respect Of Leave Travel Concession [Section 10(5)]
(I) This Clause Exempts The Leave Travel Concession (LTC) received By Employees From Their
Employers For Proceeding To Any Place In India,
(A) Either On Leave Or
(B) After Retirement From Service Or
(C) After Termination Of His Service.
Means received from Former Employer is also taxable.
(ii) The Benefit Is Available To Individuals - Citizens As Well As Non-Citizens - In Respect Of
Travel Concession Or Assistance For Himself Or Herself And For His/Her Family- I.E., Spouse And
Children Of The Individual And Parents, Brothers And Sisters Of The Individual Or Any Of Them Wholly Or
Mainly Dependent On The Individual.
(iii) Limit Of Exemption - The Exemption In All Cases Will Be Limited To The Amount Actually Spent
Subject To Such Conditions As Specified In Rule 2B Regarding The Ceiling On The Number Of Journeys
For The Place Of Destination.
Under Rule 2B, Exemption Will Be Available In Respect Of 2 Journeys Performed In A Block Of 4
Calendar Years Commencing From The Calendar Year 1986. Where Such Travel Concession Or
Assistance Is Not Availed By The Individual During Any Block Of 4 Calendar Years, One Such unavailed
LTC Will Be Carried Forward To The Immediately Succeeding Block Of 4 Calendar Years And Will Be
Eligible For Exemption. Current Block 2022-2025
Carry over: In the current block if not taken any Leave or taken only 1 leave -Employe is entitled to carry
over 1 journey to the next block. However, to avail of this benefit, exemption in respect of journey should
be utilised in the first calendar year of the next block

4. Salaries 4.26
(iv) Monetary Limits - The Amount Exempted Under Section 10(5) In Respect Of The Value Of LTC
Shall Be The Amount Actually Incurred On Such Travel Subject To The Following Conditions:
Family means – Spouse, Children, Dependent Parents, Brothers & Sisters
S.No. Journey performed by Limit

1 Air Amount not exceeding the air economy fare of the
National Carrier by the shortest route to the place of destination
2 Any other mode:
(i) Where Rail Service Amount not exceeding the air- conditioned first class rail fare by the shortest
is available route to the place of destination
(ii)Where rail service is A) Recognized transport system exists amount not exceeding the 1st class or
not available deluxe class fare, as the case may be, on such transport by the shortest route
to the place of destination
B) Recognized transport system does not exists amount
equivalent to the air- conditioned first class rail fare, for the
distance of the journey by
the shortest route, as if the journey had been performed by rail
Tax Free Perquisites
The value of the following perquisites is not to be included in the salary income of an employee:
i)Medical Facilities
a. The value of any Medical facility provided to an employee or his family member in any
hospitals, clinics, etc. maintained by the employer.
b. Reimbursement of expenditure actually incurred by the employee on medical
4. Salaries 4.27
treatment for self or for his family members in any hospitals, dispensaries etc.
maintained by the Government or local authority or in a hospital approved under
the Central Health Scheme or any similar scheme of the state Government or in a
hospital, approved by the chief commissioner having regard to the prescribed
guidelines for the purposes of medical treatment of the prescribed diseases or
ailments.
c. Group medical insurance obtained by the employer for his employees (including
family members of the employees) or all medical insurance payments made directly
or reimbursement of insurance premium to such employees who take such insurance.
d. Any expenditure incurred or paid by the employer on the medical treatment of the
employee or any family member of the employee outside India, the travel and stay
abroad of such employee or any family member of such employee or any travel or stay
abroad of one attendant who accompanies the patient in connection with such
treatment will not be included in perquisites of the employee. However, the travel
expenditure shall be excluded from the perquisites only when the employee’s gross
total income as computed before including the said expenditure does not exceed two
lakh rupees and further to such conditions and limits as the Board may prescribe
having regard to guidelines, if any, issued by the Reserve Bank of India.
Family means – Spouse, Children, Dependent Parents, Brothers & Sisters
Covid 19 Relief
Reimbursement - in respect of any illness relating to COVID-19 subject to conditions notified by the Central
Government.
AY 23-24

4. Salaries 4.28
Provident Fund- Tax Treatment
1. SPF - Set up under the Provident funds Act, 1925 - Such as universities, Colleges or other educational
Institutions, Reserve Bankof India, State Bank of India, the Central government and State government would
constitute Statutory Provident funds.
2. RPF –
✓ Recognised by theCommissioner of Income-tax
✓ Also Providentfunds established under a scheme framed under the employees Provident funds Act,
195
Particulars Statutory Recognized PF Unrecognized Public PF

PF PF
Employer’s Fully Amount in excess of Not taxable N.A.
Contribution exempt 12% of salary is taxable yearly
Employee’s Eligible Eligible for deduction u/s Not eligible for Eligible
Contribution for 80C deduction for
deduction deduction
u/s 80C u/s 80C
Interest Fully Amount in excess of Not taxable Fully
Credited exempt 9.5% yearly exempt
On Employer’s p.a. is taxable
Contribution
Interest Exempt Amount in excess of Not taxable Fully
Credited upto 9.5% yearly exempt
On certainlimit p.a.is taxable“salary”
Employee’s of u/s
Contribution contribution 17(1) [See
[See Note 2 Note 2 below]
below]
Amount Fully Exempt from tax if Employer’s Fully
received on exempt employee served a contribution exempt u/s
retirement, u/s 10(11) continuous period of and interest 10(11)
etc. 5 years or more or thereon is
retires before taxable as salary.
rendering 5 years of Employee’s
service because of contribution
reason beyond the is not taxable.
control of the Interest on
employee. In other employee’s
case, it will be contribution is
taxable. taxable under
income from
other source.
Note 1 - For PF, Salary means – Basic + Conditional DA + Fixed % commission on Turnover
Note 2 - Interest credited on contribution by such person/employee
✓ Clause became applicable from 1.4.2021
✓ Interest over and above contribution taxable - Interest accrued on the
principal contribution made b y that person/employee during the
previous year to the extentit relates to the amount or the aggregate of
amounts of contribution made > exceeding Rs. 2,50,000

4. Salaries 4.29
✓ In case there is no employer’s contribution, then, a higher limit of `
5,00,000 would be applicable
✓ It may be noted that interest accrued on contribution to such funds upto
31st March, 2021 would be exempt without any limit, even if the accrual of
income is after that date.
Following sub-clauses (vii) and (viia) shall be substituted for the existing sub-clause (vii)
of clause (2) of section 17 by the Finance Act, 2020, w.e.f. 1-4-2021:
(vii) the amount or the aggregate of amounts of any contribution made to the account of the assessee
by the employer—
(a) in a recognized provident fund;
(b) in the scheme referred to in sub-section (1) of section 80CCD – National Pension
Scheme ; and
(c) in an approved superannuation fund,
to the extent it exceeds 7.5 Lacs rs. in a previous year;
(viia) the annual accretion by way of interest, dividend on the above amounts is also to be
included in value of 7.5 Lacs rupees.
Note – Previously, contribution of employer to Superannuation fund was exempt to employee upto
Rs. 1.5 lacs.Now this clause has been removed and an overall limit of 7.5 lacs is given.
Payment from approved superannuation fund in specified circumstances and

subject to certain limits [Section 10(13)]
Approved superannuation fund means superannuation fund which is

approved by the Commissioner of Income- tax.
Payments made from the fund are exempt from tax under section 10(13) in
following cases:
✓ Payment on death of beneficiary; or
✓ Payment to employee in lieu of, or in commutation of an annuity on his retirement

at or after the specified age or on his becoming incapable prior to such retirement;
or
✓ Refund of contributions on the death of a beneficiary
✓ Refund to employee on leaving job
Relief u/s 89(1)
Relief under section 89(1) for arrears of salary are available in the following cases:
⚫ Salary received in advance or as arrears
⚫ Gratuity
⚫ Compensation on Termination of employment
⚫ Commutation of Pension
Tax Liability in the PY in which adv / arrears are

received
a) Incl. adv / arrears A
b) Excl. adv / arrears B

4. Salaries 4.30
Differential A-B
Tax Liability of the PY to which such addl. salary
relates
a) Incl. adv / arrears C
b) Excl. adv / arrears D
Differential C-D
Relief u/s 89 (A-B)-(C-D)
Deductions from Salary

Standard Deduction Entertainment Allowance [Section Profession Tax [Section
[Section 16(ia)] 16(ii)] 16(iii)]
Standard deduction of Fully taxable in case of Non-Govt. Allowed as a deduction

Rs. 50,000 (fifty Employees. when paid by the
thousand) or the employee (recovered
In case of Government Employees, the
amount of the salary, from salary) during the
deduction is available, which would be
whichever is less is previous year
lower of:
allowed as deduction in
computing the Income a) 1/5th of Basic Salary or
under the head Salary.
b) INR 5000 or
c) Actual entertainment
Allowance received.
Note: The deduction u/s 16(ia), 16(ii), 16(iii) are not available for assesses opted for section
115bAC of the Income tax Act 1961.
CASE LAWS
1. Can notional interest on security deposit given to the landlord in respect of residential
premises taken on rent by the employer and provided to the employee, be included in the
perquisite value of rent-free accommodation given to the employee?
CIT v. Shankar Krishnan (2012) (Bom.)
Conclusion - On appeal by the Revenue, the Bombay High Court held that the Assessing Officer is
not right in adding the notional interest on the security deposit given by the employer to the
landlord in valuing the perquisite of rent- free accommodation, since the perquisite value has to be
computed as per Rule 3 and Rule 3 does not require addition of such notional interest. Thus, the
perquisite value of the residential accommodation provided by the employer would be the actual
amount of lease rental paid or payable by the employer, since the same was lower than 10% (now
15%) of salary.
2. Can the limit of INR 1,000 per month per child be allowed as standard deduction, while
computing the perquisite value of free or concessional education facility provided to the
employee by the employer?
CIT (TDS) v. Director, Delhi Public School (2011) (Punj. & Har.)
The Punjab and Haryana High Court held that on a plain reading of Rule 3(5), it flows that, in case
the value of perquisite for free/concessional educational facility arising to an employee exceeds
Rs. 1,000 per month per child, the whole perquisite shall be taxable in the hands of the employee
and no standard deduction of INR 1,000 per month per child can be provided from the same. It is
only in case the perquisite value is less than INR 1,000 per month per child, the perquisite value
shall be nil. Therefore, INR 1,000 per month per child is not a standard deduction to be provided
while calculating such a perquisite.

4. Salaries 4.31
3.
21.01.2009 Commissioner of Income tax & ANR v. M/s Larsen & Toubro Ltd. Supreme Court
Whether the assessee(s) was under statutory obligation under Income Tax Act, 1961, and/or the Rulesto collect
evidence to show that its employee(s) had actually utilized the amount(s) paid towards Leave Travel
Concession(s)/Conveyance Allowance?
Judgement: The Honourable Supreme Court of India has considered the question whether the employer has any obligation
under the Act/Rules to collect evidence to show that the employee had actually utilized the amount paid towards LTA.
The Hon’ble Supreme Court of India observed that the beneficiary of exemption under Section 10(5) is the individual
employee. It also referred to the annual circular issued by the CBDT under Section 192 where under guidance is given
to employers on the manner in which tax is required to be deducted from salary paid to employees. The Court has
held that the said Circular did not require an employer to examine the supporting evidence to the declaration submitted
by an employee as far as LTA isconcerned. Based on this, the Court has held that the employer has no obligation to
collect such evidence or to verify the claim.
In short - In CIT Vs. L&T Ltd. Court gave the verdict that employer has no obligation to collect the
evidence regarding the actual leave taken by the employee.
4.
2008 CIT v. Shyam Sundar Chhaparia High Court
Whether the amount received by the employee on cessation of employment with his Employer will beexempted
from tax under section 17(3)(i) of the Income-tax Act?
Facts of the Case: The assessee after his retirement was granted an amount of Rs. 27,50,000 as a special
Compensation in lieu of an agreement for refraining from taking up any employment activities Or consultationwhich would
be prejudicial to the business/interest of his employer.
The assessee claimed that it was a non-taxable receipt being the compensation for not taking up any competitive
employment under a restrictive covenant. The Assessing Officer did not accept the claim of the assessee on the
grounds that (i) the decision of the Supreme Court relied on by the assessee was that of an agency whereas the case
of the assessee was that of one who was in service, and (ii) section 17(3)(i) wassquarely applicable to the case of the
assessee.
The Commissioner (Appeals) held that as there was restriction for the assessee not to work in business of any type
and anywhere, the compensation was received in lieu of loss of future work and was a capital receipt. The Tribunal
held in favour of the assessee.
Judgement: The High Court held that the assessee retired from service on attaining the age of superannuation and hence
there was severance of the master-servant relationship and there was no material to suggest thatthere existed a service
contract providing therein a restrictive covenant preventing thereby the assessee from taking up any employment or
activities on consultation which would be prejudicial to the business/ interest of his employer.
Therefore, it could not be termed as profit in lieu of salary because it was not compensation due to or received by the
assessee from his employer or partner- employer at or in connection with the termination ofhis employment. Thus, the
Commissioner (Appeals) and the Tribunal rightly held that the amount could not be added for the purpose of income-tax.
5.
2008 CIT v. Shiv Charan Mathur High Court
Can reimbursement of expenditure on medical treatment taken by the assessee, who was a member of the
Legislative Assembly, be taxed as perquisite under section 17(2)(iv)?
Facts of the Case: Notice under section 148 was issued to the assessee, at the relevant time a sitting MLAand former
Chief Minister of the State, for the reason that he received a sum from the State Government asreimbursement of
medical expenses which amount was liable to be taxed under section 17 but had not beenoffered for taxation. The
contention of the assessee was that the amount received by MPs and MLAs was nottaxable under the head “Salary” but
under the head “Income from other sources”.
Judgement: The High Court held that MLAs and MPs are not employed by anybody rather they areelected bythe public,
their election constituencies and it is consequent upon such election that they acquire constitutionalposition and are in
charge of constitutional functions and obligations. The remuneration received by them, afterswearing in, cannot be said to
be“ salary” within the meaning of section 15 of the Income-tax Act, 1961.

4. Salaries 4.32
The fundamental requirement for attracting section 15 is that there should be a relationship of employer andemployee
whether in existence or in the past. This basic ingredient is missing in the cases of MLAs and MPs.When the provisions
of section 15 were not attracted to the remuneration received by the assessee, section17 could not be attracted as
section 17 only extends the definition of “Salary” by providing certain items mentioned therein to be included in salary.
Thus, the reimbursement of medical treatment taken by the assessee, who was a member of the Legislative Assembly for
open heart surgery conducted abroad was not taxable as perquisite under section 17(2)(iv).
6.
2021 State Bank of India v. ACIT ITAT Mumbai
No denial of LTC exemption even if travel is not undertaken through shortest route
The Mumbai ITAT held that a plain reading of Section 10(5) read with Rule 2B does not indicate any requirement of
taking the shortest route for travelling to any place in India. It does not restrict the route to be adopted for going to such
a destination. However, the statutory provisions do envisage the possibility of someone taking a route other than the
shortest route. It is implicit in the restriction that only an amount not exceeding the air economy fare of the national
carrier by the shortest route to the place of destination is eligible for exemption under section 10(5).
There is no specific bar in the law on the travel, eligible for exemption under Section 10(5), involving a sectorof overseas
travel. In the absence of such a bar, the assessee couldn’t be faulted for not inferring such a bar. The reimbursement
was restricted to airfare, on the national carrier, by the shortest route, as was the mandate of Rule 2B. As part of that
composite itinerary involving a foreign sector as well, the employee hadtravelled to the destination in India.
The guidance available to the assessee indicates that, in such a situation, the exemption under section 10(5) was
available to the employee. Such exemption shall be available only to the extent of farthest Indiandestination by the
shortest route, and that was what assessee had allowed.
Impact of Section 115BAC under the head Salaries [Amendment vide Finance Act, 2020]
• Finance act, 2020 has introduced a New Optional tax System for
• Individuals and HUFs u/s 115BAC of the income tax act, 1961 w.e.f. a/y 21-22 to provide for
concessional rate of Slab rates to be applied on total Income calculated without claiming specified
deductions and exemptions.
• Hence, from ay 2021-22 or FY 2020-21, there are two operative tax system –
1. One is the existing tax system where all the applicable deductions and exemptions are allowed
and the
tax rates are as per the Slab rates of tax specified in the Finance Act, 2020.
2. The second one is section 115BAC which is a Optional tax System and under which many
deductions and exemptions have not been allowed but lower slab tax rates are provided in the
section 115BAC itself.
• Individual and HUF opting for connectional tax regime under section 115BAC: the deduction under
Chapter Vi-a other than the provisions of sub-section (2) of section 80CCD or section 80JJAA; not
available to the individual and HUF opting to pay tax under connectional tax regime under section
115BAC of the income tax act, 1961.
• Many exemptions & deduction are not allowed under the new tax system. the below chart
contains the exemptions and deduction not available under the new system related to income
under the head Salary. Similarly, deductions & exemptions not available under the new tax system
and which are related to other heads are provided in other chapters

4. Salaries 4.33
Sr. Nature of Exemption/Deduction Relating to Head Salaries New System Existing
No of Tax u/s system of Tax
. 115BAC
a RETIREMENT BENEFITS EXEMPTIONS
leave Salary u/s 10(10aa) allowed allowed
Gratuity u/s 10(10) allowed allowed
Commutation of Pension u/s 10(10a) allowed allowed
retrenchment Compensation u/s 10(10B) allowed allowed
VRS Compensation u/s 10(10C) allowed allowed
leave travel Concession u/s 10(5) Not allowed allowed
B Allowances
Sr. Nature of Exemption/Deduction Relating to Head Salaries New System Existing
No of Tax u/s system of Tax
. 115BAC
exemption u/s 10(13A) and rule 2A from House rent allowance Not allowed allowed
1. Exemption u/s 10(14)(i) and Rule 2BB
Travelling allowance allowed allowed
Conveyance allowance allowed allowed
daily allowance allowed allowed
Helper allowance Not allowed allowed
any allowance granted for encouraging the academic, research and training Not allowed allowed
pursuits in educational and research institutions
uniform allowance Not allowed allowed
2. Exemption u/s 10(14)(ii) and Rule 2BB
Children education allowance Not allowed allowed
Hostel expenditure allowance Not allowed allowed
tribal area allowance Not allowed allowed
transport allowance to Handicapped/deaf/dumb/Blind employee allowed allowed
transport allowance to other than above employees Not allowed Not allowed
c Perquisites
Free food and beverage through vouchers provided to the employee upto Not allowed allowed
50/meal/tea & snacks
Other exemptions from perquisites e.g. use of Computers, laptops etc allowed allowed
d Deductions u/s 16
Standard deduction u/s 16(ia) Not allowed allowed
entertainment allowance u/s 16(ii) Not allowed allowed
Professional tax u/s 16(iii) Not allowed allowed
Clarification in respect of option under section 115BAC of the Income-tax Act, 1961 [Notification No.
38/2020] Section 115BAC of the income-tax act, 1961, inserted by the Finance act, 2020 w.e.f. the
assessment year 2021-22, inter alia, provides that a person, being
• An individual or a Hindu undivided family having income other than income from business or
profession”,
• may exercise option in respect of a previous year to be taxed under the said section 115BAC along
with his return of income to be furnished under sub-section (1) of section 139 of the act for each year.
• the concessional rate provided under section 115BAC of the act is subject to the condition that the total
income shall be computed without specified exemption or deduction, set-off of loss and
additional depreciation.

5. House Property 5.1
Chapter - 5

Sections Details
Section 22 Basis of Charge
Section 23(1) annual Value of House Property
Section 23(2) annual Value where property is self-occupied / unoccupied
Section 23(3) annual Value where the property is partly let out and partly self-occupied
Section 23(4) deemed to be let-out property
Section 23(5) Notional income from house property held as stock in trade
Section 24 deduction from Net annual Value
Section 24(a) Standard deduction
Section 24(b) interest on borrowed capital
Section 25 inadmissible deductions
Section 25A treatment of unrealized rent / arrear of rent
Section 26 income from Co-Owned Property
Section 27 deemed Ownership
CHARGEABILITY [SECTION 22]
The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner,
other than such portions of such property as he may occupy for the purposes of any business or profession carried on
by him, the profits of which are chargeable to income-tax, shall be chargeable to income- tax under the head Income from
House Property.
(i) The process of computation of income under the head “Income from house property” starts
with the determination of annual value of the property. The concept of annual value and
the method of determination is laid down in section 23.
(ii) The annual value of any property comprising of buildings or lands appurtenant thereto
of which the assessee is the owner is chargeable to tax under the head “Income from
house property”.
Exceptions: Annual value of the following properties are chargeable under the head
“Profits and gains of business or profession” -
(i) Portions of property occupied by the assessee for the purpose of any business or
profession carried on by him.
(ii) Properties of an assessee engaged in the business of letting out of properties.
Exceptions Income from letting out a vacant land is chargeable to tax under
the head “Income from Other Sources”
CONDITIONS FOR CHARGEABILITY

(i) Property should consist of any building or land appurtenant thereto.
(ii) Assessee must be the owner of the property during PY. AY Not necessary/
(iii) Use of 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.
The income earned by an assessee engaged in the business of letting out of properties
on rent would be taxable as business income(Supreme Court ruling in Rayala Corporation
(P) Ltd. v. Asstt. CIT)
(iv) Property held as stock-in-trade etc.
Annual value of house property will be charged under the head “Income from house
property”, where it is held by the assessee as stock-in-trade of a business also.
However, the annual value of property being held as stock in trade would be treated as
NIL for a period of two year from the end of the financial year in which certificate of
completion of construction of the property is obtained from the competent authority, if
such property is not let-out during such period. [Section 23(5)]
NAV = Nil
Example
1 April 22 31st March 23 31st March 25

On 15th
July 22
1st April 25 onwards
Certificate
treated as Deemed
received
Let out if not sold
by the contractor
Exceptions:
1. Letting out is a supplementary to the main business: If the property is let out with the object of carrying on
the business of the Assessee in an efficient manner, then Rental Income is taxable as Business Income.
Deductions or allowances have to be calculated as relating to Profits/Gains of Business, and not relating to
House Property.
2. Sublet receipts: In case of sub-letting, since the assessee is not the owner of the building sublet, hence the
income derived therefrom shall not be taxable as income from house property, but shall be taxable as
‘income from other sources’.
3. Assessee’s property used for his partnership firm : In case any property is owned by an assessee and the
same is given by him to the partnership firm, in which he is a partner, for carrying on the business of such
firm, then it will be treated as if the property is used by the assessee for his own business and thus, the
income from such property will not be taxable under this head.
However, if property owned by HUF is given on rent to a firm in which members of HUF are partners in their
personal capacity, then the rental income from such property shall be taxed as ‘income from house-property
in the hands of HUF.
4. Principle of Mutuality: When the assessee is governed by principle of mutuality, then the income
from property will also be governed by the said principle and hence, not taxable under the head ‘Income
from House Property’.
E.g. - Annual value of property of a social club will be outside the scope of the levy of income tax

Note - Even the Income of House property situated outside India is Taxable in
India under the head “Income from House Property.
Calculating GAV and NAV – Section 23 + Deductions u/s 24 – Pro forma
Sr.
Particulars
No. Amount
(i) Municipal value xxx
(ii) Fair rent xxx
(iii) Higher of (i) & (ii)
(iv) Standard rent xxx
(v) Expected rent [Lower of (iii) & (iv)
(vi) Annual/Actual rent received/ receivable xxx
(via) After above step – Deduct “Element of Vacancy”
(vii) GAV [Higher of (v) & (vi)] xxx
Municipal taxes paid/ Sewerage Tax in the current year

(It may be of the previous years as well but paid in the
current year & It must be paid by the owner)
Municipal taxes paid outside India are also allowed as

Less deduction (xxx)
(viiI) NAV xxx
Less Deductions u/s 24
(a) Standard Deduction @ 30% (xxx)
(b) Interest on borrowed Capital (xxx)
(ix) Income from house property xxx
Note – Always before comparing with expected rent - First deduct Unrealized rent from
actual/ annual rent
DETERMINATION OF ANNUAL VALUE
The process of determination of Annual Value is exhibited below.

Annual Value: The measure of charging income-tax under this head is the annual value of the
property, i.e., the inherent capacity of a building to yield income. The expression ‘annual value’
has been defined in Section 23(1) of the Income-tax Act. It is the sum for which the property
might reasonably be expected to be let from year to year.

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 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, i.e., municipal taxes
will be allowed only in the year in which it was paid.
• If assessee have only 2 house properties which are self-occupied then the Net Annual Value
of that property is considered as “Nil”
• Where the property consists of a house or part of a house which is in the occupation of the owner
for the purposes of his own residence; or 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. However, the above provisions 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.
• Where the assessee has more than 2 Self Occupied Property then - Only two houses
(any) will be considered as Self Occupied and
• The annual value of the house or houses, other than the house in respect of which the
assessee has exercised an option to claim benefit of Self Occupied, shall be determined \ as
if such house or houses had been let (Deemed to be let out).
Unrealized Rent: The amount of rent which the owner cannot realize 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 irrevocable
only if following conditions are satisfied:
(a) tenancy is bonafide;
(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 satisfied the Assessing Officer that legal proceedings would be
useless.

Where the property is let out for the whole year [Section 23(1)]
GROSS ANNUAL VALUE
HIGHER OF THE FOLLOWING
EXPECTED RENT ACTUAL RENT RECEIVED

(cannot exceed standard rent)
Higher of
FAIR RENT MUNCIPAL VALUE
The GAV is the higher of

o Expected Rent (ER) and
o Actual Rent received / receivable (AR)
Note:
✓ The Expected Rent is the higher of Fair Rent (FR) and the Municipal Value (MV), but capped
to Standard Rent (SR).
✓ Fair Rent is the rental fetched by a similar property in the adjoining neighborhood.
✓ The Municipal Value is the value determined by the Municipal Authorities.
✓ The Standard Rent is the rent fixed by the Rent Control Act.
Municipal Taxes: The taxes including service taxes (fire tax, conservancy tax, education, water tax, etc.)
levied by any municipality or local authority in respect of any house property to the extent to which such
taxes are borne and paid by the owner, and include enhanced municipal tax finally determined on appeal
and payable by assessee - Clive Buildings Cola Ltd. v. CIT (1989) 44 Taxman 160. However, deduction in respect
of municipal taxes will be allowed in determining the annual value of the property only in the year in which
municipal taxes are actually paid by the owner.
Advance Payment Advance Municipal Tax paid shall not be allowed as deduction in the year of
payment, but can be claimed in the year in which it falls due, because it is not a
tax levied and incurred as liability.
Foreign Property For a property situated outside India, Municipal Tax levied by Foreign Local Authority
can be claimed as a deduction.
Enhanced Where the tax on property is enchanced with retrospective effect by municipal or local
Municipal Tax authorities ahnd the enhanced tax relating to the prior year is demanded during the
demand assessment year, the entire demand is deductible in the assessment year [C.I.T. v. L.
Kuppu Swamy Chettiar (1981) 132 ITR 416 (Mad.)].

Where property is self-occupied / unoccupied [Section 23(2)]

Where the property consists of a house or part of a house in the occupation of the owner for
his own residence, and is not actually let during any part of the previous year and no other
benefit is derived therefrom by the owner, the annual value of such a house or part of the
house shall be taken to be nil. The only deduction available in respect of such house is
towards interest on borrowed capital in terms of Section 24(1)(vi) but subject to a
ceiling of Rs. 30,000 or Rs. 2,00,000 as the case may be. In other words, to this extent
there could be a loss from such house
The aggregate of amount allowed as deduction for both the houses (SOP) cannot
exceed Rs. 30,000/ Rs. 2,00,000
Concession for two houses only:
Where the assessee has occupied more than two houses for the purposes of residence for
himself and family members, he has to make a choice of any two houses in respect of which
he would like to claim exemption. Other self-occupied houses will be treated as if they were let
out and their annual value will be determined in the same manner as we have discussed in the
case of let out property.
✓ Annual Value would be taken as Nil
✓ It is imperative that the property is self-occupied OR unoccupied for the whole year
✓ This benefit is for two houses
✓
This benefit is for Individual / HUF only
✓ No deduction is allowed for Municipal Taxes for such property
Note: the deduction of Rs. 30,000 / Rs. 2,00,000 with respect to interest paid on borrowed capital
u/s 24(b) not allowed in case of Self occupied Property, if assessee opted for section 115BAC of
the income tax act, 1961
Where the property is partly let out and partly self-occupied during the PY [Section 23(3)]
(a)Property let out partially:
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.
(b) 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) i.e. SOP is not available and the income will be
computed as if the property is let out.

Deemed to be let-out property [Section 23(4)]
✓ Assessee given the choice of any two houses to be construed as self-occupied and for
that the Annual Value would be NIL
✓ For others, they would be treated as deemed to be let out
✓ The assessee is allowed by the Income Tax Act; the flexibility to change the option to
suit his needs / benefits
✓ In such as case, therefore, the Expected Rent becomes the Gross Annual Value
✓ Municipal Taxes paid by the owner for the whole year allowed as a deduction
Deductions from Net Annual Value (Section 24)
Standard Deduction: 30% of Net Annual Value
a. This is not available when the Annual Value is NIL
b. This is a flat deduction irrespective of the actual expenditure incurred

Interest on Borrowed Capital is also allowed.

Deductions
Allowed from NAV
Let out/deemed Self-occupied

Iet out properties
properties
Interest on
borrowed
Standard Interest on
capital u/s 24(b)
deduction borrowed
u/s 24(a) capital u/s
24(b)
loan for repair, loan for
30% renewal or acquisition or
Fully reconstruction construction of
Allowed of house house property
property
loan taken loan taken

Maximum before 1.4.99 on or after
Rs.30,000 1.4.99
Maximum
Rs.30,000
acquisition or construction
completed within 5 years
from the end of the FY in
which the capital was
borrowed
+
certificate from lender
specifying interest payable
No Yes
Maximum Maximum
Rs.30,000 Rs.2,00,000
1. Interest allowable on accrual basis

2. New loan taken for repayment of old loan then interest on new loan is allowed.
3. Interest on overdue interest is not allowed.
Pre-Construction period interest

Interest payable on borrowed capital for the period prior to the previous year in which the property
has been acquired or constructed (Pre-construction interest), can be claimed as deduction
over a period of 5 years in equal annual installments commencing from the year of
acquisition or completion of construction.
Note – Section 115BAC - Interest Deduction not allowed

Maximum interest allowed in one year

1. Cons. & Purchase -> Current year Cons. + Pre-cons. int. = Maximum Rs.
2,00,000
2. Only repairs - Max 30,000
3. Repairs + cons - 2,00,000
In short maximum Rs. 2 lacs only will be allowed in any year.
Summary on Allowability
Let out / Deemed to be let out property
1) Standard deduction of 30% of NAV is fully allowed [Section 24(a)]
2) Interest on borrowed capital is fully allowed [Section 24(b)]
Self-occupied properties
1) Since the Annual Value is nil, there is no Standard deduction available
2) In case the capital is borrowed – Refer flow diagram above.
Inadmissible Deductions (Section 25)
Interest under the Act, which is payable outside India, shall not be allowed as a
deduction, if tax has not been deducted from such Interest and there is no
person in India, who could be treated as an agent.
Unrealized/ Arrears of Rent received (Section 25A)
• Arrears of Rent and the unrealized rent received subsequently from a tenant by
an assessee, shall be deemed to be the income from House Property in the FY
in which such rental is received and shall be included in the Income from House
Property of that year; irrespective of whether he is the owner of the property any
more or not, in that FY.
• 30% of such arrears or unrealized rent received subsequently is allowed as a
deduction.
Income from Co-Owned Property (Section 26)
• The share of each co-owner should be determined in accordance with Section 22 –

25 and included in the respective individual assessments
• In a scenario, where the house property owned by co-owners is self-occupied by
them, the AV for each of them will be construed as NIL. Each Co-Owner shall be
allowed a deduction of INR 30000 / INR 200,000 as the case may be vis-à-vis
Interest on Borrowed Capital.
• In a scenario, where the house property owned by the co-owners is let out, the
income from the property will be computed as if the property is owned by one owner,
and thereafter such computed income would be apportioned amongst each of them
per their respective share.

Deemed Ownership
6. Person in possession of a property: A person who is allowed to take or retain the possessionof any building or
part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property
Act shall be deemed owner of that house property.
This would cover cases where the
(a) Possession of property has been handed over to the buyer,
(b) Sale consideration has been paid or promised to be paid to the seller by the buyer,
(c) Sale deed has not been executed in favour of the buyer, although certain other documents like
power of attorney/agreement to sell/will etc. have been executed. The buyer would be deemed
to be the owner of the property although it is not registered in his name.
Important Practical Issues
The House Property is owned by the Assessee, but it is used by the Firm PM Thomas 181 ITR 256 (Ker.),
in which he is a Partner, and he has not derived any benefit from the Firm. Sri Champalal Jeevaraj 215 ITR
It is deemed that the Partner is using the property for his own business, 289 (Mad.), D Srinivasan 248 ITR
and hence not taxable under Income from House Property. (Kar.), Mustafa Khan 145 Taxman
522 (AH.)
Where IT Authorities found that the Assessee had leased out his property [Maneklal Agarwal vs. DCIT
to his own family members to show lesser income in his hand and family [2017] (SC)
members had in turn sub-leased it to outsiders on much higher rentals,
Assessing Authorities could tax the said income in hands of the assessee.

HOUSE PROPERTY INCOMES – EXEMPTED FROM TAX
Rent from Farm buildings around Agricultural Land - 10(1)
Income from HP of Local Authorities - 10(20)
Income from HP of Political Parties - 10(13A)
Property belonging to an approved scientific research association -

10(21)
educational organizations, medical institutions - 10(23C)
property subjected to charitable or religious purpose - 11
Certified trade union - 10(24)
annual value of one palace possessed by an ex-ruler of Indian states

where other places comes under taxation - 10(19A)
NAV of 2 SOP's - 23(2)
Property used for own's business or profession - 22
Concept of Composite Rent

• Property is let out by the Assessee.
• Together with Services (e.g. electricity, gas, water etc.) or Assets (e.g plant, machinery or furniture).
• Rent charged by the assessee is a consolidated sum ( i.e. Rent for property + Rent for services/assets).
Treatment of Composite Rent is done as under:
where rent of property and rent of services / assets can where rent of property and rent of services /
be separated assets cannot be separated
Rent of letting of property Rent of service, assets Taxable under Other sources or Business
Taxable under Taxable under Other sources

House property or business
Impact of Section 115BAC under the head House Property [Amendment vide
Finance Act, 2020]
Sr. Nature of Exemption/Deduction Relating to New System of Tax Existing System of

No. Tax
House Property Section 115BAC
1. Deduction of Municipal Tax from GAV Allowed Allowed
2. Standard Deduction u/s 24(a) from NAV Allowed Allowed
3. Interest Deduction u/s 24(b) from NAV

(a) Let out properties u/s 23(1) Allowed Allowed
(b) Self Occupied Property u/s 23(2) Not Allowed Allowed
(c) Property which is stock in trade u/s 23(5) Allowed Allowed
4. Set off of brought forward House Property losses & Not Allowed if Allowed
brought forward Depreciation from Current year related to disallowed
House Property Income deduction &
exemptions
5. Set off current year House Property loss from other Not Allowed Allowed
Heads
Case Law
1. Would income from letting out of properties by a company, whose main object as per
its memorandum of association is to acquire and let out properties, be taxable as its
business income, or as income from house property, considering the fact that the entire
income of the company as per its return of income was only from letting out of
properties?
Chennai Properties and Investments Ltd. v. CIT (2015) (SC)
The Supreme Court opined that the judgment in Karanpura Development Co. Ltd.’s case
squarely applied to the facts of the present case, where letting of the properties is in fact the
business of the assessee. The main objective of the company as per its memorandum of
association is to acquire and hold properties in Chennai and let out these properties. Therefore,
holding of the properties and earning income by letting out these properties is the main
objective of the company. Further, in the return of income filed by the company and accepted
by the AO, the entire income of the company comprised of income from letting out of such
properties. The Supreme Court, accordingly, held that the assessee had rightly disclosed the
income derived from letting out of such properties under the head “Profits and gains of
business or profession”.
2. Canbenefit of self-occupation of house property under section 23(2) be denied to a Firm
on the ground that it, being a fictional entity, cannot occupy a house property? And Whether
HUF can claim such benefit?
CIT v. Hariprasad Bhojnagarwala (2012) (Guj.)
The Gujarat High Court observed that a firm, which is a fictional entity, cannot physically
reside in a house property and therefore a firm cannot claim the benefit of this provision,
which is available to an individual owner who can actually occupy the house.
However, the HUF is a group of individuals related to each other i.e., a family comprising
of a group of natural persons. The said family can reside in the house, which belongs to the
HUF. Since a HUF cannot consist of artificial persons, it cannot be said to be a fictional
entity.
Therefore, the Court held that the HUF is entitled to claim benefit of self-occupation of house property
under section 23(2).
3. Letting out is subservient and incidental to the main business

As per CIT v. Delhi Cloth & General Mills Co. ltd., if an assessee constructs residential quarter’s &
lets them out to his employees & letting out of residential quarter’s is only related to business, i.e. it
is not main business of assessee, then income is taxable as business income & not income from

house property.
In the same way it was held in CIT v. National News prints & Paper Mills ltd., that if the assessee
makes its accommodation available to Govt. for locating a branch of Nationalised bank, post
office, police station, central excise office etc., with the aim of carrying on its business efficiently and
smoothly, Rent collected is taxable as business income and not as house property income.
4. Principal CIT v. Karia Can Co. Ltd. [2018] (Bombay High Court)
Once interest on interest free security deposits received by assessee from tenant was offered to
tax as income from other sources, adding notional interest on interest free security deposits to
determine ‘Annual letting value’ of property under section 23(1)(b) of the Income tax act, 1961
would amount to double taxation [Assessment year 2004-05 to 2007-08] [In favour of assessee]
• Tenant gave security deposit to landlord.
• Lad lord earned interest on such deposit and showed it as income under IOS.
• The interest amount now should not be taken into account to consider annual value of
house
• It will result into double taxation.
5. Ansal Holding & Construction Ltd. v. Asstt. CIT [2018] (Delhi High Court)
Where flats constructed by assessee were held as stock-in-trade and same were not at all let out for
any previous years, there would be no question of availing vacancy allowance under section 23(1)(c);
assessee would be liable to pay tax on ALV of said that under section 23(1)(a) [Assessment year 2005-
06 and 2006-07][In favour of revenue]
6.
2010 Nutan Warehousing Company Limited v. Dy. Commissioner of Mumbai High Court
Income Tax
Income from letting of warehouse would constitute Business or Property Income?

Judgment: The question before the Bombay High Court was whether the income from warehousing activityreceived by the
assessee was assessable as “Income from House Property” or “Income from Business”. TheHigh Court held that the question
has to be resolved on the basis of the well settled decisions laid down bythe Law in decided cases. The primary object of
the assessee while exploiting the property is material. If thedominant intention to exploit commercial assets by carrying on
a commercial activity, the income would be treated as Income from Business and whether letting out of the property
constitutes a dominant aspect of the transaction or whether it was subservient to the main business of the assessee.
On the facts of the case before the Lordship it was found that the transactions of the warehousing agreements were not
considered by the Tribunal. Merely styling an agreement as warehousing agreement would notbe conclusive of the nature
of the transaction. The question that is to be answered by the Tribunal, it was noted, whether the transaction was a bare
letting out of the asset or whether the assessee was carrying on a commercial activity involving warehousing operations.
The matter was remanded to consider these aspects.
What is to be noted from the aforesaid decisions is that the transactions of the leasing deed and also the dominant intention
of the assessee was to exploit commercial asset by carrying out commercial activity. If the answer is in the positive, it is to
be assessed as business income subject to examination of the terms ofwarehousing agreements.
Please also refer to the decision of the Madras High Court in C.I.T. v. Indian Warehousing Industries Ltd. and also the judgement
of the Karnataka High Court in C.I.T v. Karnataka State Warehousing Corporation.

6. PGBP 6.1
CHAPTER - 6
Profits & Gains from Business & Profession

6. PGBP 6.2
Particulars (Rs)
Net profit as per statement of profit and loss A
Add: Expenses debited to statement of profit and loss but not allowable B
• Depreciation as per books of accounts
• 30% of sum payable to residents on which tax is not deducted at
source or after deduction has been remitted on or before the due date
u/s 139(1), would be disallowed u/s 40(a)(ia) [The same is allowable in
the year in which the tax is deducted and remitted]
• Income-tax paid disallowed u/s40(a)(ii)
• Any expenditure incurred, in respect of which payment is made for
goods services or facilities to a related person, to the extent the same
is excessive or unreasonable, in the opinion of the A.O., having regard
to its FMV [disallowed u/s 40A (2)]
• Any expenditure incurred in respect of which payment or aggregate of
payments to a person exceeding Rs. 10,000 in a single day is made
otherwise than by way of A/c payee cheque/bank draft or use of
ECS through bank A/c [disallowed u/s 40A (3)]
• Certain sums payable by the assessee which have not been paid during
the relevant P.Y. in which the liability was incurred or on or before the
due date for filing return u/s 139(1) in respect of that P.Y. [disallowed
u/s 43B]
• Personal expenses [not allowable as per section 37]
• Capital expenditure [not allowable as per section 37]
• Repairs of capital nature [not allowable as per sections 30 & 31]
• Amortization of preliminary expenditure u/s 35D/expenditure incurred
under voluntary retirement scheme u/s 35DDA [4/5th of such
expenditure to be added back]
• Fine or penalty paid for infringement or breach of law [However, penalty
in the nature of damages for delay in completion of a contract, being
compensatory in nature, is allowable]
• All expenses related to income which is not taxable under this head e.g.
municipal taxes in respect of house property.
• Any sum paid by the assessee as an employer by way of

6. PGBP 6.3
contribution to pension scheme u/s 80CCD exceeding 10% of the
salary of the employee
(A-B) C
Less: Expenditure allowable as deduction but not debited to statement of D
profit and loss
• Depreciation u/s 32 [computed as per Rule 5 of Income-tax Rules,
1962]
• Additional depreciation @20% of actual cost of new P & M acquired
by an assessee engaged in the business of manufacture or production
of any article or thing generation, transmission or distribution of power
(10% of actual cost, if put to use for less than 180 days in the year of
acquisition) [Balance additional depreciation can be claimed in the next
year]
• Weighted deduction for expenditure on/contribution for research u/s
35(1) (ii), 35(2AA), 35(2AB) in excess of the amount already debited to
sstatement of profit & loss.
(C-D) E
Less: Income credited in the statement of profit and loss but not F
taxable/taxable under any other head
• Dividend income taxable under IOS
• Agricultural income exempt u/s 10(1)
• Interest on securities taxable under the head "Income from other
sources"
• Profit on sale of capital asset taxable under the head "Capital Gains"
• Rent from house property taxable under the "Income from house
property"
• Interest on savings bank account/FD taxable under the head "Income
from other sources"
• Winnings from lotteries, house races, etc. taxable under the head
"Income from other sources"
• Gifts exempt or taxable under the head "Income from other sources"
• Income-tax refund not taxable
• Interest on income-tax refund taxable under the head "Income from
other sources"

6. PGBP 6.4
(E-F) G
Add: Deemed Income H
• Bad debt allowed as deduction u/s 36(1)(vii) in an earlier PY, now
recovered [deemed as income u/s41(4)]
• Remission or cessation of a trading liability [deemed as income u/s
41(1)]
(G+H) I
2. BUSINESS’ OR ‘PROFESSION
• ‘Business - Section 2(13) - 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.
• Length of time of running business does not matter.
• The expression ‘Profession’ has been defined in Section 2(36) of the Act to
include any vocation.
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.

6. PGBP 6.5
Regulatory Framework
Sections (Income Tax Act, Details

1961)
Section 28 income chargeable to tax under the head Business or Profession
Section 43(5) Speculation transaction
Section 145 Method of accounting
Section 145A Method of accounting in certain cases
Section 145B taxability of Certain income
Section 30-37 admissible deduction
Section 2(11) Block of assets
Section 43(1) actual Cost
Section 43(6) Written down Value (WDV)
Section 40 expenses disallowed
Section 43B disallowance of unpaid Statutory liability
Section 43A Changes in rate of exchange
Section 41 Deemed Profits
Section 43CA transfer of immovable Property
Section 43D Special provision in case of income of Public Financial institutions, etc.
Section 44AE Special provisions for computing profits and gains of business of plying,
hiring or leasing goods carriages
Section 44 Special provisions related to insurance Business
Section 44AA Compulsory maintenance of Books of account
Section 44AB Compulsory audit of Books of account
Section 44AD Special provision for computing profits and gains of business on
Presumptive Basis
Section 44ADA Presumptive taxation for Professionals
INCOME CHARGEABLE TO TAX UNDER THE HEAD BUSINESS OR

PROFESSION (SECTION 28)
The various items of income chargeable to tax as income under the head ‘profits
and gains of business or profession’ are as under:
(i) Income from business or profession
(ii) Any compensation or other payment due to or received by:
(a) Any person, by whatever name called, managing the whole or
substantially the whole of -
(i) the affairs of an Indian company or
(ii) the affairs in India of any other company
at or in connection with the termination of his management or office or the
modification of any of the terms and conditions relating thereto;

6. PGBP 6.6
(b) any person, by whatever name called, holding an agency in India for
any part of the activities relating to the business of any other person, at or in
connection with the termination of the agency or the modification of any
of the terms and conditions relating thereto;
(c) any person, by whatever name called, at or in connection with the
termination or modification of the terms and conditions, of any contract
relating to his business, whether revenue or capital. (AY 19 – 20)
(iii) Income from specific services performed for its members by a trade,
professional or business: Income derived by any trade, professional or similar
associations from specific services rendered by them to their members.
It may be noted that this forms an exception to the general principle of mutuality that
no one can make profit out of himself. It governs the assessment of income of
mutual associations such as chambers of commerce, stock brokers’ associations
etc.
Therefore any surplus arising to the mutual associations such as Labour Welfare
Association, Chamber of Commerce etc. by performing specific services to its
members is deemed as income earned as carrying on business in respect of these
services and accordingly chargeable to tax.
Trade association means an association of businessmen for the protection
and advancement of their common interest e.g. a Chamber of Commerce.
Section 28(iii) does not apply to other social associations e.g. a sports club
or cricket club etc.
(iv) Incentives received or receivable by assessee carrying on export
business:
(a) Profit on sale of import license
(b) Cash assistance against exports under any scheme of GOI
(c) Customs duty or excise re-paid or repayable as drawback:
(d) Profit on transfer of Duty Entitlement Pass Book Scheme or Duty-Free
Replenishment Certificate
(v) Value of any benefit or perquisite: The value of any benefit or perquisite
whether convertible into money or not, arising from business or the exercise of any
profession.
(vi) Sum due to, or received by, a partner of a firm: Any interest, salary,
bonus, commission or remuneration, by whatever name called, due to or received
by a partner of a firm from such firm will be deemed to be income from business.
(vii) Any sum whether received or receivable, in cash or kind, under an
agreement:
(a) for not carrying out any activity in relation to any business or
profession; or
(b) for not sharing any know-how, patent, copyright, trade mark, license,
franchise or any other business or commercial right of similar nature or
information or technique likely to assist in the manufacture or processing of
goods or provision for services.
6. PGBP 6.7
(viii) Any sum received under a Keyman insurance policy: Any sum
received under a Keyman insurance policy including the sum allocated by way of
bonus on such policy will be taxable as income from business.
(ix) Fair market value of inventory on its conversion as capital asset
(x) Sum received on account of capital asset referred under section
35AD
3. SPECULATION BUSINESS
✓ Section 43(5) → “speculative transaction” as “a transaction in which a contract for the
purchase or sale of any commodity including stocks and shares is periodically or
ultimately settled otherwise than by the actual delivery or transfer of the commodity or
scrips”.
✓ A company carrying on such business will be considered to engage in a speculative business
which will be treated as a separate business.
✓ However, the following will not be considered as engaging in speculative business –
a. Where a company whose gross total income consists mainly of income which is
chargeable under the heads “Interest on securities”, “Income from house property”,
“Capital gains” and “Income from other sources”, or
b. A company, the principal business of which is:
• the business of trading in shares or

• banking business or
• the granting of loans and advances
Accordingly, if these companies carry on the business of purchase and sale of shares of
other companies, the income from such business is not treated as income from
speculative business.

6. PGBP 6.8
4. Key points for consideration
Method of Accounting [Section 145]
Income earned in cash or in kind
Continuation of Business/Profession
Key Points
for Ownership of Business is not necessary for Taxability
Consideration
Business may be Legal or Illegal
Profit motive is not the sole consideration

for taxability
Computation of income separately for each business
Method of Accounting (Section 145)

An assessee may adopt either the cash system of accounting or the mercantile
system of accounting.
An assessee may also follow the hybrid system of accounting for his business or
profession. The hybrid system is the combination of the cash system and the
mercantile system. This is mostly done in the case of professional men who follow
cash system for their receipts and mercantile system for their payments.
A. Method of accounting – Section 145
✓ Income chargeable under the head PGBP or IOS
✓ Computed in accordance with either cash or mercantile system of accounting
✓ If AO is not satisfied about the
➢ correctness or c
➢ completeness or
➢ method of accounting has not been regularly followed by the assessee, or
➢ ICDS Not followed,
✓ The AO may make a Best Judgement assessment as provided in section 144.

B. The CG has notified 10 ICDS for the purpose of computation of income under the head PGBP or IOS
and not for maintaining books of accounts.
Some key features of ICDS are as under :
(i) ICDS applies to all tax payers except Individual and HUF who are not covered under
the tax audit under section 44AB.
(ii) ICDS applies only to tax payers following mercantile system of accounting.
(iii) ICDS shall apply irrespective of the accounting standards adopted by companies i.e.,
either Accounting Standards or Ind-AS.
(iv) ICDS shall also apply to the persons computing income under the relevant
6. PGBP 6.9
presumptive taxation scheme.
For example, for computing presumptive income of a partnership firm under section 44AD
of the Act, the provisions of ICDS on Construction Contract or Revenue recognition shall
apply for determining the receipts or turnover, as the case may be.
(v) The provisions of ICDS shall not apply for computation of MAT.
(vi) However it shall apply for computation of AMT as AMT is computed on adjusted total
income which is derived by making specified adjustments to total income computed as per
the regular provisions of the Act.
(vii) I.T ACT/ IT Rules Vs ICDS → Act/Rules shall prevail

(viii) judicial pronouncements/ judgements Vs ICDS – ICDS Shall prevail
C. Method of accounting in certain cases [Section 145A] - For PGBP

(i) Inventory – Value at Actual Cost or NRV whichever is lower.
(ii) Valuation of purchase and sale of goods or services and of inventory to
include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred
by the assessee to bring the goods or services to the place of its location and condition as on the
date of valuation.
(iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted
on a recognised stock exchange, shall be valued at actual cost as initially recognized in accordance
with the ICDS.
(iv) the inventory being securities listed and quoted on a recognised stock exchange, shall be valued at
lower of actual cost or net realisable value in accordance with the ICDS.
Provided that the inventory being securities held by a scheduled bank or public financial institution shall
be valued in accordance with the ICDS after taking into account the extant guidelines issued by the RBI
Guidelines in this regard.
D. Taxability of certain income [Section 145B]
• Interest on compensation or Enhanced compensation – Taxable on Receipt basis
• Subsidy or grant from Government - Taxable on Receipt basis
• Claim for escalation of price in a contract or export incentives → taxable when reasonable certainty
of its realization is achieved.
Income earned in Cash or in Kind
Continuation of business or Profession
Ownership of business is not necessary for Taxability

Even if the owner authorises some other person to carry on the business on his behalf or the
owner is deprived by the court under certain circumstances of the right to carry on his own
business, the owner will still be taxable under this head.
Similarly, it is not only the legal ownership but also the beneficial ownership that has to be
considered. In this connection it has to be kept in view, as to who is the actual recipient of the
income which is going to be taxed.

6. PGBP 6.10
Business may be Legal or Illegal

Profit Motive is not the Sole Consideration for Taxability
Computation of Income Separately for each business
5. COMPUTATION OF PROFITS OF BUSINESS OR PROFESSION (Section 29)

According to section 29, the profits and gains of any business or profession are
to be computed in accordance with the provisions contained in sections 30 to
43D.
Specific expenses given in section 30 to 36 & General expenses are allowed in
section 37.
General Commercial Principles are as under:

Computation of profits and
gains from business or
Profits should be computedprofession (section
according to the29)method of accounting regularly
employed by the assessee, provided that actual profit can be ascertained
by this method, whether on receipt basis or accrual basis.
Only those expenses and losses Expenses or
are allowed as deductions which were
Admissible
incurred or sustained during payments
the not
relevant Profits
previous year and related to
Inadmissible
business.
deductions deductible in chargeable to Other
deductions certain
[ 30 These
to 37] losses(section
and expenses tax (section provisions
should be incidental to the operation of the
40) circumstances 41) during the course
business. For example, embezzlement by an employee
(section 40A)
of business is a loss incidental to the business.
If a business has been discontinued before the commencement of the
previous year, it’s expenses cannot be allowed as deduction against the
income of any other running business of the assessee.
There are some essential expenses, though neither expressly allowed nor
disallowed, but are deductible while computing the profits of business or
profession on the basis of general commercial principles provided that
these are not expenses or losses of a capital nature or personal nature.
Any expenditure incurred in consideration of commercial expediency is
allowed as deduction.
Deduction can be made from the income of that business only for which the
expenses were incurred. The expenses of one business cannot be charged
against the income of any other business.
6. COMPUTATION OF INCOME UNDER THE HEAD “PROFITS AND GAINS FROM BUSINESS OR
PROFESSION”
Net Profit as per profit and loss account xxx

Add: Inadmissible expenses debited to profit and loss account xxx
Add: Deemed incomes not credited to profit and loss account xxx
Less: Deductible expenses not debited to profit and loss account (xxx)
Less: Incomes chargeable under other heads credited to Profit & Loss A/c (xxx)

6. PGBP 6.11
7. Rent, rates, repairs and insurance for buildings (Section 30)
This section allows the deduction in respect of rent, rates, repairs and insurance
for buildings that are used by the assessee for his business / profession.
• If the property is partly used, the deduction will be proportionate to the use.
• In case the property is sub-let, the differential, i.e., rent paid minus rent
recovered would be taxable.
• No notional rent is allowable for owned properties.
• Repairs undertaken, whether as an owner / tenant, are allowed.
• Municipal taxes, rates, insurance incurred by the assessee for the property is
also allowed.
8. Repairs and insurance for Plant & Machinery, Furniture (Section 31)
This section allows deduction in respect of expenses on current repairs and
insurance of Plant & Machinery, & furniture used for business / profession.
• Allowable in full, even if used for part of the year
• Current repairs which are of capital nature aren’t allowed
• Insurance premia paid to insure the assets against risks of losses owing to
damage / destruction,
provided that the assets are used for business / profession
are allowed, only if these premiums are paid/payable during the Previous Year.
9. Deduction of expenses on the basis of usage
Section 38 provides allowing expenses on proportionate basis depending upon
how much percentage has been spent for business & how much for non-business
purpose.
10. 10 Depreciation (Section 32)
This section provides for compulsory deduction on account of depreciation, that

is, diminution in the value of assets.
The provisions for allowing depreciation are contained in Section 32 and are
regulated under Rule 5 of the Income- tax Rules. The rates of depreciation are
also provided in the Income-tax Rules.
Conditions for claiming depreciation [Rule 5]
• Asset must be used for the business
• Asset should be owned by the Assessee. Registered ownership not required.
• Depreciation is allowed on Block of assets
• Asset must be Put to Use.
It’s not just use that’s important, it’s owned and used that’s mandatory, i.e., the assets should be
owned and used by the assessee in the Previous Year. In this context, even if owned by assessee
and then leased out and used by the lessee, even then depreciation can be claimed by the
assessee.
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,
6. PGBP 6.12
machinery, plant or furniture and intangible assets, being know-how, patents, copyrights,
trademarks, licenses, Franchises or any other business or commercial rights of similar nature, in
respect of which the same percentage of depreciation is prescribed”.
There are four classes of the assets which are further categorized into ten Blocks of assets
according to different rates of assets prescribed as under:
S. No. Class of asset Block of asset
1. Building 3 blocks (5%, 10% and 40%)
2. Furniture & Fixture 1 block (10%)
3. Plant and machinery 5 blocks (15%, 20%, 30%, 40%, 45%)
4. intangible assets 1 block (25%)
Written Down Value of Assets (W.D.V.) [Section 43(6)]
(1) W.D.V. of the block of assets on 1st April of the previous year xxx
(2) Add: Actual cost of assets acquired during the previous year (Not being xxx
goodwill of business or profession)
(3) Total (1) + (2) xxx
(4) Less: Money receivable in respect of any asset falling within the block which
is sold, discarded, demolished or destroyed during that previous year xxx
(5) W.D.V at the end of the year (on which depreciation is allowable) [(3) – (4)]
(6) Depreciation at the prescribed rate
(Rate of Depreciation × WDV arrived at in (5) above)
NOTE –V.V. Imp. - Asset is acquired in the previous year & Put to use for less than 180 days
(up to 179 days) during the same PY – only half depreciation is allowed.
Check Number of days of put to use only if acquisition and put to use are of same PY. If the
year of acquisition and year of put to use are different then full depreciation will be allowed.
Conditions in Detail:
In order that the depreciation is allowable, the following conditions must be
fulfilled:
(a) Classification of Assets – Few Pointers
✓ Roads within a factory compound form part of building and are
entitled to depreciation.
✓ Similarly, residential quarters provided to the employees are
incidental to the carrying on the business. Therefore, the roads to
such residential quarters are also entitled to depreciation.
However, the M.P. High Court has held that expenditure incurred on
construction of metal roads for approach to trenches to dump the waste and
night soil, is capital expenditure. Moreover, such roads are not plant and
machinery. Hence, the assessee is not entitled to depreciation on the cost of
the metal roads [Indore Municipal Corporation v. C.I.T. (1981) 132 I.T.R. p. 540
(MP)].
(b) Ownership v/s lease:
Note : As per the CBDT circular, irrespective of the accounting treatment, the lessor
shall be entitled to claim depreciation on leased assets, whether the lease is an
operating lease or a financial lease.
Note: As per the landmark judgment of CIT V/s Annamalai Finance Ltd.
(Madras HC) it is the end use of the specified asset which is relevant for
6. PGBP 6.13
determining the percentage of depreciation. For example, in case of business of
leasing out vehicle, if lessee is using the vehicle for running them on hire,
depreciation shall be allowable at Higher rate of 30% instead of 15% to the
lessor.
In the case of assets acquired on hire-purchase

a. 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.
b. 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:.
(d) 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.
(e) Cash Payments - Where an assessee incurs any expenditure for
acquisition of depreciable asset in respect of which a payment (or aggregate
of payments made to a person in a day), otherwise than by an account
payee cheque/draft or use of ECS through a bank account, exceeds Rs.
10,000 such payment shall not be eligible for normal/ additional
depreciation.
Also, such Payment will be ignored for the purpose of computation of Actual
Cost of such asset under section 43(1). [Amendment vide Finance Act, 2017]
w.e.f. AY 2018-19]
(f) Depreciation in case of amalgamation/Demerger etc. - Depreciation is
allowable in the hands of the predecessor and successor, in case of succession
of a firm, proprietary concern, by a company, or predecessor company and
successor LLP, in case of conversion of Pvt. Ltd. Co. to LLP., in case of
amalgamation or demerger, and that shall not exceed the depreciation that
would have been allowed if the succession, demerger, amalgamation had not
taken place and such depreciation shall be apportioned between them
proportionate to use (on the basis of number of days).
Depreciation Rates
Note –
• No depreciation allowed on land
• Depreciation not allowed on live stocks or tea bushes.
Rate of
Nature of Assets Depreciation
(WDV)
Buildings Residential (Other than hotels & Boarding houses) 5%
General 10%
Temporary Structure 40%

6. PGBP 6.14
Furniture & Fittings 10%
Plant & Machinery
General 15%
Motors cars other those used in a business of running them on hire 15%
Motors cars acquired on or after 23rd August 19 but upto 31st March 20 30%
and is put to use upto 31st March 2020.
Motor buses, lorries, vans and taxis used in a business of running them on 30%
hire acquired on or after 23rd August 19 but upto 31st March 20 and is 45%
put to use upto 31st March 2020
Books owned by assesses carrying on a profession

40%
Books owned by assesses carrying on a business
15%
Books owned by assesses carrying business of running libraries 40%
ships 20%
Airplanes
40%
Air Pollution control Equipments, Water Pollution Control Equipments,
40%
Surgical equipments, Gas Cylinder
Computers including Computer Software (Operating System only) 40%
Oil wells (P&M) 15%
Windmills installed up to 31.3.14 (पुराने ) (P&M) 15%
Windmills installed up to 1.4.14 onwards (नए) (P&M) 40%
Intangible Assets
Software, knowhow, patents, copy-rights, trade marks, licences, franchises 25%
or any other business or commercial rights of similar nature (Not being
goodwill of business or profession)
Actual Cost [Section 43(1)]

✓ The actual cost of an asset to the assessee is normally the amount incurred by
him to make the asset ready for the purpose of its use in the business.
✓ It is important to note that where, an assessee, in acquisition of an asset, makes
payment(s) in a day otherwise than by an a/c payee cheque / demand draft /
ECS, which is > INR 10000, such expenditure would not be a part of the actual
cost.
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. If an asset was first used for scientific research and then used
for business later, the actual cost would be Nil.
b. If the asset is acquired as a gift / inheritance, the actual cost is
the WDV of the previous owner.
c. If an asset was once in use, then transferred and later re-
acquired, the actual cost would be the WDV at the time of transfer
OR the price of re-acquisition, whichever is lower.
6. PGBP 6.15
d. Asset acquired at a higher price with a view to claim higher
depreciation – AO can decide the value (Generally FMV)
For instance, if ‘X’ transfers his machinery on 1.1.2023 to ‘Y’ for a sum of Rs.
6.00 lakhs while the actual cost of the asset and the written down value thereof
on that day to ‘X’ are Rs. 3.00 lakhs and Rs. 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 Rs. 6.00 Lakhs while the market value of the asset on the date
of sale by ‘X’ to ‘Y’ may be Rs. 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 Rs. 4.00 lakhs instead of Rs. 6.00 lakhs
as claimed by ‘Y’.
e. Any amount of interest paid / payable as interest till date of put to use is
capitalized and after that date is put into P&L.
Note: interest paid before the commencement of the production on amounts
borrowed by the assessee for acquisition and installation of the plant and
machinery shall form part of the actual cost u/s 43(1), as decided by the Supreme
Court in Challapalli Sugars Limited Vs CIT.
f. 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.
g. Capital Asset on which deduction has been allowed or allowable u/s
35AD shall be treated as nil.
h. Building used for private purpose by the assessee and subsequently brought
into business. – Cost will be the actual cost as reduced by the notional
depreciation.
i. Inventory converted into capital asset and used for business or
profession: The fair market value of such inventory as on the date of
its conversion into capital asset shall be the actual cost of such capital
asset to the assessee [Explanation 1A]) (AY 19-20)
j. Asset acquired by a non-resident outside 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 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.
Unabsorbed Depreciation
It’s the depreciation that couldn’t be consumed fully, that is, the profits were not sufficient to
absorb it.
Can be carried forward indefinitely. The current year depreciation and the brought forward
business losses get priority in the set off over the unabsorbed depreciation, in that order.

6. PGBP 6.16
Depreciation on Straight line basis
In the case of Power Units [Section 2(1)(i)] (optional to power generating

units)
• An undertaking engaged in generation or generation and distribution of
power can claim depreciation on straight line basis on the actual cost of
individual asset.
• 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 exercised before the due date of
furnishing return of income.
• Once this option is exercised, 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.
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
If sale value is more than the original cost of the asset then the amount which is
over and above the original cost is taxable under the head Capital Gains.
10. Additional Depreciation [Section 32(1)]

✓ The additional depreciation is available to assessee engaged in the business of
manufacture or production of any article or thing or engaged in the business of
generation or generation, distribution or transmission of power at the rate of 20% of
actual cost of eligible new machinery or plant (other than ships and aircrafts
acquired and installed in a previous year).

6. PGBP 6.17
Additional Depreciation shall not be allowed if -
Note: The funda of 180 days is also checked here.

Note – Additional Depreciation is not allowed under section 115BAC
11. Short Term Capital Gain/ Loss on block of Capital Assets
• If the net consideration of an asset out of the block is less than the
remaining balance of the block, there would be no capital gain.
• If the net consideration of an asset is more than remaining balance of
the block, then 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 remaining balance of the block then the
loss shall be deemed to be short term capital loss
• . If all the assets of the block are sold in the previous year and the net
consideration is more than the remaining balance of the block then the
gain shall be deemed short term capital gain.
Section 33AB (Tea, Coffee, Rubber Section 33ABA (Site Restoration Fund
Development Account) Account)
For Assessee engaged in tea, coffee, rubber For Assessee engaged in production of
plantation Petroleum, Natural Gas in India
Deposit amount in NABARD or any approved Deposit amount in SBI Account or any
account approved site restoration account

6. PGBPto be deposited within 6 months from
Amount Amount to be deposited before end of PY 6.18
the Year end or Due date of filing return
(Earlier)
Amount of deduction (Lower of) – Amount of deduction (Lower of) –
• Amount deposited or • Amount deposited or
• 40% of profits • 20% of profits
Lock in Period → Asset Acquisition → Year End + 8 Years
Amount van be withdrawn because of –

a. Closure of Business
b. Dissolution of Firm Taxable
c. Death of assessee
d. Partition of Firm
e. Liquidation of a Company
f. For use under
specific scheme
Assessee needs to get accounts audited & & file return of Income duly signed and verified by an
accountant.
The audit report is to be furnished at least 1 month prior to the due date for furnishing the return of
income under section 139(1).
Note – This deduction is not allowed under section 115BAC
Section 35 – Scientific Research
In house Research
Scientific
Research
Research - Maximum 3
years before date of Research after
commencement commencement
(100%)
Manufacturing
Capital exp.
Revenue exp. Company - Others
expl. to Research approved
35(1)(i)
35(2)(ia)
35(2AB)
Revenue - Capital - 100%
Only Salary
All exp. allowed
100%
(Excluding Land - Not
perquisites )& Except Land Revenue - 35(1)(i) allowed
Material allowed Capital-100 %
100%
Land - Not 35(1)(iv)
alowed

6. PGBP 6.19
Contribution to outsiders
Research
Scientific Social & Statistical
To approved To approved Research

To approved Research To IIT, National
Indian co. association, Institute,
association, Institute, Lab.
College, University engaged in R&D College, University
35(2AA) 35(1)(iii)
35(1)(ii) 35(1)(iia)
100% 100% 100% 100%

Note – Section 115BAC – Deduction of in house research allowed & and contribution to
outsiders is not allowed.
Further additions in section 35

• Provided also that every notification under clause (ii), (iii) or (iia)
• on or before the date on which this proviso has come into force,
• shall be deemed to have been withdrawn
• unless such research association, university, college or other institution
• makes an intimation to the prescribed income-tax authority
• within 3 months from the date on which this proviso has come into force,
• and subject to such intimation the notification shall be valid for a period of five consecutive assessment
years
• beginning with the assessment year commencing from AY 22-23.
• In other words – The benefits given to research institutes in the past will become ineffective if
such research institutions do not intimate the Income tax authorities that they have availed the
benefit of such notifications within3 months from the date this proviso came into effect.
• And instead of life time approval now this benefit shall be applicable for 5 years only starting
from AY 22-23 and after every 5 years approvals would have to be taken.
Provided also that any further notifications which will be issued issued will have the effect for maximum 5
years.

6. PGBP 6.20
Following sub-section (1A) shall be w.e.f. 1-4-2021 :

• Notwithstanding anything contained in sub-section (1),
AY 22-23 ✓ these outside agencies (donee) under section 35(1)(ii), (iia), (iii) are
✓ not entitled to deduction under section 35(1)
✓ unless they prepare and deliver the Statement of donation receipts by donee to cross
check claim of donation by donor for such period as may be prescribed to the said prescribed
income-tax authority in such form, verified in such manner and within such time, as may be
prescribed.
✓ And furnishes a certificate to the donor, specifying the amount of donation within such time
from the date of receipt of sum.
Note: Any failure by the done in preparing and delivering the Statement of donation to the income tax
Authority or in furnishing certificate to the donor within the time prescribed shall
• Section 234G - attract fee @Rs. 200 for every day during which the failure continues
+
• Section 271K - Penalty for a sum not less than rs. 10,000 which may be extended to rs. 1,00,000
15. Amortization of Spectrum Fees for Purchase of Spectrum for telecom

services 35ABA/ Telecom License 35ABB
The section provides:

i. Any capital expenditure incurred and actually paid by the assessee on
acquisition of any right to use spectrum for Telecom services by paying spectrum
fee will be allowed as deduction in equal instalments.
Deduction will start from the year in which payment is made (or the year of
commencement of business, whichever is later) and ending with the year in
which spectrum comes to an end, irrespective of the previous year in which
liability for expenditure was incurred according to the method of accounting
followed.
Where the spectrum is transferred and the proceeds of transfer are less than
the expenditure remaining unallowed, a deduction equal to the expenditure
remaining unallowed as reduced by the proceeds of transfer, shall be allowed
in the year of transfer of spectrum.
ii. If spectrum is transferred and proceeds of transfer exceed the amount of
expenditure remaining unallowed, the excess amount (to the extent it does not
exceed deduction claimed u/s 35ABA) shall be chargeable to tax as PGBP in the
previous year in which such spectrum has been transferred.
iii. Unallowed expenditure in a case where a part of spectrum is transferred would
be amortized.
16. Expenditure of capital nature incurred in respect of specified business (Section
35AD)
An assessee (if he opts) shall be allowed a deduction of capital nature
expenditure incurred for any specified business carried on by him during the
previous year in which such expenditure is incurred by him. This section talks
about investment linked incentives for specified businesses as under:
A) Setting up & operating cold chain facilities for specified products
6. PGBP 6.21
B) Setting up & operating warehousing facilities for agricultural produce
C) Laying and operating a cross-country natural gas or crude or petroleum
oil pipeline network for storage and distribution, as a part of the network
D) Building and operating a 2-star hotel or above, anywhere in India
E) Building and operating a hospital with minimum 100 beds, anywhere in India
F) Developing & building a housing project under a scheme for slum
redevelopment / affordable housing
G) Production of fertilizers in India
H) Setting up and operating an Inland Container Depot OR a Container
Freight Station, under Customs Act, 1962
I) Bee-keeping and production of honey and beeswax
J) Setting up and operating a warehousing facility for storage of sugar
K) Laying and operating a slurry pipeline for transportation of iron-ore
L) Setting up and operating a semi-conductor wafer fabrication
manufacturing unit
M) Developing / Maintaining & Operating / Developing & Maintaining &
Operating a new infrastructure facility in India
Other Pointers
✓ 100% of the capital expenditure incurred during the Previous Year will be
allowed.
✓ The expenditure incurred prior to the commencement of the
business, would be allowed as a deduction in the year of
commencement of business, and should also be capitalized in the
books of the assessee on the commencement of operations.
✓ The loss from specified businesses can be set off ONLY against
profits of specified businesses but can be carried forward
indefinitely for set off against one or more specified businesses.
✓ The losses of specified business can be carried forward only if the Tax
return is filed within the due date.
✓ Accounts needs to be audited by a Chartered Accountant and
✓ That any asset in respect of which the deduction is claimed, can be used
ONLY for the specified businesses for a period of 8 years beginning
with the PY in which the asset was acquired / constructed.
Exceptions
• Expenditure on acquisition of land, Financial instruments OR goodwill will
not be allowed as a deduction
• Any expenditure where the aggregate of payments made to a person
exceeding INR 10,000 per day, otherwise than by account payee cheque /
DD / ECS/ bank account or through such other electronic mode as may be
prescribed would not be eligible for a deduction.
• No deduction in respect of the expenditure under section 35AD (1) shall be

6. PGBP 6.22
allowed to the assessee under any other section in any previous year or
under this section in any other previous year, if the deduction has been
claimed or opted by the assessee and allowed to him under this section.
Note – Section 115BAC – Deduction u/s section 35AD is not allowed..
Note –
If any asset on which a deduction under section 35AD has been allowed, is used for any
purpose other than the specified business, the total amount of deduction so claimed and
allowed in one or more previous years in respect of such asset, as reduced by the amount of
depreciation allowable in accordance with the provisions of section 32 as if no deduction had
been allowed under section 35AD, shall be deemed to be income of the assessee chargeable
under the head “Profits and gains of business or profession” of the previous year in which the
asset is so used.
Example: Suppose a company purchased plant and machinery for Rs. 2 crores for a specified
business, and claimed deduction under section 35AD. However, the very next year the plant and
machinery purchased was put to use for unspecified business.
In this case, since the machinery has been used for unspecified business, the deduction claimed
under section 35AD will be disallowed. However, the amount of deduction to be disallowed will be
reduced by the depreciation allowable in accordance with the provisions of section 32.
Deduction claimed under section 35AD on a capital asset: Rs. 2,00,00,000
Depreciation eligible will be @15%: Rs. 30,00,000
Profit chargeable to tax in accordance with
the sub-section (7B) of section 35AD: Rs.1,70,00,000
17. Expenditure on Agricultural extension project (Section 35CCC)

Where an assessee incurs any expenditure on agricultural extension project
notified by the Board then, there shall be allowed a deduction of a sum equal to
100% of such expenditure
Note – Deduction of Land & Building is not allowed.
Note – This deduction is not allowed u/s 115BAC
18. Expenditure on skill development project (Section 35CCD)
Where a company incurs any expenditure (not being expenditure in the nature
of cost of any land or building) on any skill development project notified by the
Board then, there shall be allowed a deduction of a sum equal to100% of
such expenditure

6. PGBP 6.23
19. Amortization of Preliminary Expenses (Section 35D)

Under Section 35D, Indian companies and other non-corporate taxpayers’
resident in India would be entitled to amortization of certain preliminary
expenses incurred by them.
The expenditure which qualifies for amortization should have been incurred
by the assessee before the commencement of his business.
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.
The amount qualifying for amortization would be allowable as a deduction in 5
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.
• Eligible expenses - The following expenditure are eligible for amortization:
(i) Expenditure in connection with - (Mnemonics – MELFP)
(a) feasibility report
(b) project report;
(c) market survey
(d) engineering services
(e) legal charges for drafting any agreement between
(Above work must be carried out by the Assessee himself or by a concern
which is approved by the Board)
(ii) Where the Assessee is a company, in addition to the above,
expenditure incurred –
(f) by way of legal charges for drafting the MOA - AOA
(g) on printing MOA – AOA
(h) by way of fees for registering the company under the Companies
Act
in connection with the issue, for public subscription, of the shares in or
debentures of the company, being underwriting commission, brokerage and
charges for drafting, printing and advertisement of the prospectus;
Whichever
Amount of 5% of cost of
is higher
deduction project
5% of the cost of
1/5th of 5% of capital
the project
qualifying limit employed
In case of other for each of the
resident non- five successive In case of Indian
corporate assesses years companies

6. PGBP 6.24
Where
• Cost pf project = FA shown in the books on last day of the PY in which the
business commences
• Capital employed means Issued share capital + Debentures + Long term
borrowings (Min. 5 years and If borrowed from outside India – Min. 7 yrs.)
• Note: The audit report is to be furnished at least 1 month prior to the due date for
furnishing the return of income under section 139(1).
20. Amortization of Expenditure in the case of Voluntary Retirement Scheme

(Section 35DDA)
The object of this section is to provide amortization 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.
21. Other Deductions [Section 36]
Type & Section Deductions

Insurance Premia paid u/s Premia paid on insurance policy to cover risk of damage /
36(1)(i) destruction to stock / stores of the business.
Premia paid by employer for Premia paid by employer by any mode other than by cash,
health insurance of on health insurance of its employees.
employees u/s 36 (1) (ib)
Interest on Borrowed Capital Deduction allowed for any interest paid in respect of
u/s 36(1)(iii) capital borrowed for business.
In case the capital is borrowed for acquiring an asset, the
interest is capitalized from the date of borrowing until the
date when the asset is put to use.
Post the “put to use” date, it cannot be capitalized anymore
and then such interest becomes an allowable deduction
Discount on Zero Coupon Difference between the issue and the redemption values,
Bonds u/s 36(1) (iiia) as these are issued at a discount and redeemed at par.
Available to Infra. Companies / funds / Scheduled Banks,
starting from the date of issue of the bond, ending with the
maturity / redemption.
Contribution to Provident & Allowable if the fund is settled upon a trust, it should
Provident & Another funds be recognized / approved, and the contributions
u/s 36(1)(iv) & (v) should be periodic, and as long as the fund is for the
benefit of the employees
Employer’s contribution to Deduction is restricted to 10% of salary of employee in PY.
the a/c of the employee Salary, here, would include ONLY Basic & DA (if the terms of
under a pension scheme employment provide).
referred to in Section
80CCD [Section 36(1) (va)]

6. PGBP 6.25
Employee’s Contribution to Will be allowed as a deduction ONLY if the employee

Welfare Funds [Section contributions have been credited to the employees’ account by
36(1) (va)] the taxpayer in the fund, on or before the due date of the
respective act.
Bad Debts u/s 36(1)(vii) & Allowable if the debts debts written off as irrecoverable in
36(2) the accounts of the assessee pertain to the business /
profession carried on during the PY and as long as the debt
was considered in the income for the PY in which it was
earned. If on the final settlement, the amount recovered on
any debt falls short of the total debt minus the debt allowed,
the deficiency will be allowed as a deduction in the year of
recovery and if the amount so recovered is more than the
amount due after the allowance has been made, the excess
will be chargeable to tax in the year of recovery.
Expenses on family planning If the expenditure is capital in nature, allowable in five equal
[Section 36(1)(ix)] instalments beginning the PY in which it was incurred and if
revenue in nature, it shall be fully allowable in the PY in which it
was incurred. The deduction is allowable to corporate
assessees ONLY.
Securities Transaction Tax Allowable in respect of transactions entered in the course of
[Section 36(1)(xv)] business, as long as the income from the taxable securities’
transactions, in respect of which it was incurred, is included
under the heads “Profits / Gains from Business / Profession”
Commodities Transaction Allowable in respect of transactions entered in the course of
Tax [Section 36(1)(xvi)] business, as long as the income from the taxable commodities’
transactions, in respect of which it was incurred, is included
under the heads “Profits / Gains from Business / Profession”. In
futures & options other than agricultural commodities.

6. PGBP 6.26
22. Other Expenses (Section 37)

Section 37(1) of the Income-tax Act provides for allowance in respect of any other item of
expenditure not covered by any of the provisions contained in Sections 30 to 36 discussed
above and is limited to the amount actually expended during the Previous Year.
This deduction is subject to the following conditions:
Note:
1) Corporate Social Responsibility (CSR) expenditure is not construed
to have been incurred for the purposes of business / profession and hence
will be disallowed, and will be allowed aptly under the relevant Sec’s 30-36
2) Any advertisement expenditure in souvenirs of political parties,
representing contributions for political purposes, would be disallowed.
Explanation 3 AY 23-24
4
“Expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law”
under Explanation 1, shall include and shall be deemed to have always included the expenditure incurred
by an assessee —
(i) for any purpose which is an offence under, or which is prohibited by, any law for the time
being in force, in India or outside India; or
(ii) to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a
business or exercising a profession, and acceptance of such benefit or perquisite by such person is in
violation of any law or rule or regulation or guideline, as the case may be, for the time being in force,
governing the conduct of such person; or
(iii) to compound an offence under any law for the time being in force, in India or outside India.

6. PGBP 6.27
Some of the examples of allowable expenses under Section 37(1) are:
Various legal expenses incurred Expenses for the installation of Debentures/Convertible

defending monopoly rights new telephone debentures/ Loan/ Bonus issue
issuing related expenses allowed
(IPO/ FPO of shares not allowed
u/s 37)
Sales tax is an admissible deduction Loss through embezzlement
to avoid a business liability, e.g.
for alleged breach of a trading but not estate duty
contract;
defend the assessee’s title to his Bonus to employees under an Professional tax paid
assets, e.g. land, building, etc industrial award allowed
Interest on unpaid purchase price of Annual listing fee paid to stock
secure the termination of a
disadvantageous trading goods or capital assets exchange
relationship, e.g. removal of an
undesirable employee;
by a director of a company in Expenses incurred on the occasion Brokerage paid for raising loan to
defending validity of his election of festival or customary days finance business
to the directorship
to protect the capital asset of the Recurring expenses incurred on Stamp and registration charges
business which has already been imparting basic training to for obtaining overdraft facilities
acquired apprentices
company in resisting a winding Initial expenditure - first Security deposited with postal
up petition installation of fluorescent tube authorities However, when the
lights - Capital expenditure amount is returned treated as an
all subsequent expenditure - income
replacement of tubes revenue
expenditure
However, the expenses incurred Compensation payable cause of any Compensation to an employee for
in criminal proceedings are not business negligence any injury
allowable
Penalty paid by the assessee for Robbery or Dacoity in business Loss due to Non-recovery of
saving from confiscation goods allowed advances
had been illegally imported (The
buyer was unaware)
Not allowed – Gratuity Paid to a Not allowed – Voluntary Pension & Not allowed – Presents given to
single employee, Voluntary Lump Sum payments, for welfare of employees by way of gift and not
Pension & Lump Sum payments employees at the time of winding up. as perquisites for services
at the time of winding up. rendered

6. PGBP 6.28
Few More Examples

Particulars Deduction u/s 37 (1)
Penalties imposed for infraction of law Not allowed
Penalty paid on failure to deduct TDS Not allowed
Interest paid in respect of delayed payment on Not allowed
income tax
Any interest/penalty paid under Income Tax Not allowed
Interest paid under GST Law Allowed
Demurrage paid to port authorities in connection Allowed as it is not a fine paid for
with release of confiscated goods infraction of flaw
Interest paid under Employees Provident Fund Allowed
& Misc. provision Act 1952
Penalty paid by the assessee contractor for non- Allowed as it is not a fine paid for
completion of contract within stipulated time infraction of law
24. EXPENSES DISALLOWED (SECTION 40)
Amounts not deductible

Section Particulars
40(a)(i) Any interest, royalty, fees for technical services or other sum chargeable payable
• outside India or
• in India
to a non-resident or to a foreign company, on which TDS has not been deducted
or
after deduction not been paid on or before the due date specified under section 139(1).

6. PGBP 6.29
40(a)(ia) 30% of any sum payable to a resident on which
(i) TDS has not been deducted
or,
(ii) after deduction has not been paid on or before the due date for filing of return of
income under section 139(1).
However, in both the above cases 40(a)(i) & (ia), if TDS has been deducted in any
subsequent year or deducted, but paid after due date specified u/s 139(1), 100% / 30%
of such amount disallowed will be allowed in such subsequent year.
For both the above two clauses – (a) (i) and (a) (ia)
Provided further that where a Payer fails to deduct the TDS but the Payee whether
Resident or Non-Resident has –
• Considered the income in his calculation
• Paid the tax on such income
• Filed the return &
• Certified the same from a CA
Then Payer will not be considered as an assessee in default, means –

a. Amount of expenditure will be allowed in the year in which the return has been filed
by the payee
b. But will have to pay interest for non-deduction of TDS till the date return if filed by
the payee (whether Resident or Non-Resident)
40(a)(iii) Any payment chargeable under the head “Salaries”, if it is

• payable outside India or
• to a non-resident, if tax has not been paid thereon nor deducted therefrom till
due date of TDS
40(a)(ii) Any sum paid on account of income-tax (Includes Cess & Surcharge by whatever name
called) AY 23-24
4
Other point – Income tax refund is not taxable but interest from IT dept. is taxable under
IOS
40(a)(v) Tax paid by the employer on non-monetary perquisites provided to its employees,
which is exempt under section 10(10CC) in the hands of the employee.
25. Maximum Permissible Remuneration to Partner in Firm [Sec. 40(b)]

To allow remuneration the following specific conditions, as prescribed by section
40(b), should be satisfied:
1. Remuneration should be paid only to a working partner.
2. Remuneration must be authorized by the partnership deed.
3. Remuneration should not pertain to period perior to partnbership deed.
4. Remuneration should not exceed the permissible limit.
If the above conditions are satisfied remuneration to partners is allowable

6. PGBP 6.30
deduction in the hands of the firm. However, the maximum amount of such
payment to “all” the partners during the previous year should not exceed the
limits given below :
Book Profit Maximum amount deductible in respect of
remuneration to partners u/s 40(b)
If book profit is negative Rs. 1,50,000
In case book profit is positive
On first Rs. 3 lakh of book profit Rs. 1,50,000 or 90% of book profit, whichever
On the balance of the book profit is more
60% of book profit
Any remuneration above this limit is not allowed as deduction in the hands of firm and
also not taxable in the hands of partner.
Computation of Book Profit for Remuneration u/s 40(b)
Rs.
NP as per P/L A/c (before Income Tax) xx
Less: Income under all other head (except PGBP) xx
Add: Remuneration to Partner appearing in P/L xx
Add: Excessive Interest of Partner on Capital xx
Less: B/F Depreciation (not b/f loss) xx
Book Profit xx
Maximum Permissible Interest on Capital to Partner in Firm [Section 40(b)]
The following specific onditions should be fulfilled to obtain deduction of interest paid to the
partners :
1. Payment of interest should be authorized by the partnership deed.
2. Payment of interest should pertain to the period after the partnership deed.
3. Rate of interest should not exceed 12%.
Any interest exceeding this limit is not allowed as deduction to firm and also not
taxable in the hands of partner.
PAID BY THE FIRM TO ITS PARTNERS

Allowability of Remuneration Allowability of Interest
1. To working partner. 1. To working/non-working partner.
2. To an individual only. 2. To any partner.
3. Should be authorized by partnership 3. Should be authorized by partnership deed.
deed.
4. In the partnership deed : 4. Rate of interest should be specified in the
- either specify the amount of partnership deed.
remuneration payable to each partner
or
- lay down the manner of quantification of
remuneration to each partner.
5. Remuneration should not be 5. Interest should not be retrospective.
retrospective.

6. PGBP 6.31
26. EXPENSES OR PAYMENT NOT DEDUCTIBLE IN CERTAIN

CIRCUMSTANCES [SECTION 40A]
1. Payment to Relatives and Associates.
Section 40A (2) provides → any expenditure in respect of which a payment
has been or is to be made to a specified person [See column (2) of Table
below) so much of the expenditure as is considered to be excessive or
unreasonable shall be disallowed by the Assessing Officer. While doing so he
shall have due regard to:
(a) the fair market value of the goods, service of facilities for which the payment is
made; or
(b) the legitimate needs of the business or profession carried on by the assessee;
or
(c) the benefit derived by or accruing to the assessee from such a payment.
Note – The section is applicable to expenses only and not on selling at
lower prices.
Assessee Specified Person

(1) (2)
Individual 1. Any relative of the individual assessee
2. Any person who carries on a business or profession, if
• the individual assessee has a substantial interest in the business of that
person or
• any relative of the individual assessee has a substantial interest in the
business of that person
Company, 1. Any director of the company, partner of the firm or member of the family or
Firm,HUF association or any relative of such director, partner or member or
or AOP 2. In case of a company assessee, any individual who has substantial interest
in the business or profession of the company or any relative of such individual
or
3. Any person who carries on a business or profession, in which the Company/
Firm/ HUF/ AOP or director of the company, partner of the firm or member of
the family or association or any relative of such director, partner or member
has substantial interest in the business of that person
All The following are specified persons:
assessees Person who has substantial Other related persons of such person,
interest in the assessee’s who has a substantial interest in the
business assessee’s business
Company/ AOP/Firm • Any director of such company, partner
/HUF of
such firm or the member of such family
or association or
• any relative of such director, partner or
member or
• Any other company carrying on
business or profession in which the
6. PGBP 6.32
first mentioned company has a
substantial interest
• Company/ Firm/ AOP/

a director, partner or member HUF of which he is a
director, partner or
member or
• Any other
director/ partner/
member of the
such
Company/Firm/
AOP/ HUF or
• Any relative of such director, partner
or member
Relative in relation to an Individual means the spouse, brother or sister or any lineal
ascendant or descendant of that individual [Section 2(41)].
Substantial interest in a business or profession
A person shall be deemed to have a substantial interest in a business or profession if -
- in a case where the business or profession is carried on by a company, such person
is, at any time during the previous year, the beneficial owner of equity shares carrying
not less than 20% of the voting power and
- in any other case, such person is, at any time during the previous year, beneficially entitled to
not less than 20% of the profits of such business or profession.

6. PGBP 6.33
27. Cash Payments in excess of Rs. 10,000 - section 40A (3)
• Where the assessee incurs any expenditure,

• in respect of which payment or aggregate of payments made
• to a person
• in a day
• otherwise than by an account payee cheque drawn on a bank or by an account payee
bank draft or use of electronic system through bank account or through such other
electronic mode as may be prescribed
• exceeds Rs. 10,000,
• such expenditure shall not be allowed as a deduction.
• Example:
• If, in respect of an expenditure of Rs. 32,000 incurred by X Ltd., 4 cash payments of

Rs. 8,000 are made on a particular day to one Mr. Y – one in the morning at 10 a.m.,
one at 12 noon, one at 3 p.m. and one at 6 p.m., the entire expenditure of Rs. 32,000
would be disallowed under section 40A (3), since the aggregate of cash payments
made during a day to Mr. Y exceeds Rs. 10,000.
• Cash Payment made in excess of Rs. 10,000 deemed to be the income of the
subsequent year, if expenditure has been allowed as deduction in any previous year on
due basis
• Increase in limit of cash payment, where payment made to transport operator:

Payment or aggregate of payments up to Rs. 35,000 in a day can be made to a transport operator for
plying, hiring or leasing goods carriages otherwise than by way of account payee cheque or account
payee bank draft or use of electronic clearing system through a bank account or through such other
electronic mode as may be prescribed. In all other cases, the limit would continue to be Rs. 10,000.
Other electronic modes have been notified as per new Rule 6ABBA
For various sections under the income tax Act like 35AD,40A,43CA,44AD, 50C/ 269SU etc. the following shall
be the other electronic modes –
(a) Credit Card;
(b) Debit Card;
(c) Net Banking;
(d) IMPS (Immediate Payment Service);
(e) UPI (Unified Payment Interface);
(f) RTGS (Real Time Gross Settlement);
(g) NEFT (National Electronic Funds Transfer), and
(h) BHIM (Bharat Interface for Money) Aadhar Pay”;
Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the amount shall not
exceed Rs. 35,000 (thirty-five thousand rupees) instead of ten thousand rupees.
• Transaction of Loan: It does not apply to loan transactions because advancing of loans or repayment of the
principal amount of loans does not constitute an expenditure deductible in computing the taxable income. But
restriction will be there on payment of Interest.
• Payment made by commission agents: This requirement does not apply to payment made by commission’s agents for
goods received by them for sale on commission or consignment basis because such payment is not an expenditure
deductible in computing the taxable income of the commission agent.

6. PGBP 6.34
Exceptions – Cash payments more than 10,000 allowed [Rule 6DD]:
(a) where the payment is made to -
(i) the Reserve Bank of India or any banking company;
(ii) the State Bank of India or any subsidiary bank;
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit
society;
(v) the Life Insurance Corporation of India;
(b) where the payment is made to the Government and, under the rules framed
by it, such payment is required to be made in legal tender;
(c) where the payment is made by -
(i) any letter of credit arrangements through a bank;
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other
account in that or any other bank;
(iv) a bill of exchange made payable only to a bank;
(v) a credit card;
(vi) a debit cards.
(d) where the payment is made by way of adjustment against the amount of any
liability incurred by the payee for any goods supplied or services rendered by
the assessee to such payee;
(e) where the payment is made for the purchase of -
(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat,
hides and skins) or dairy or poultry farming; or
(iii) fish or fish products; or
(iv) the products of horticulture or apiculture,
to the cultivator, grower or producer of such articles, produce or
products;
(f) where the payment is made for the purchase of the products manufactured
or processed without the aid of power in a cottage industry, to the producer of
such products;
(g) where the payment is made in a village or town, which on the date of such
payment is not served by any bank, to any person who ordinarily resides, or is
carrying on any business, profession or vocation, in any such village or town;
(h) where any payment is made to an employee of the assessee or the heir of
any such employee, on or in connection with the retirement, retrenchment,
resignation, discharge or death of such employee, on account of gratuity,
retrenchment compensation or similar terminal benefit and the aggregate of
such sums payable to the employee or his heir does not exceed fifty thousand
rupees;
(i) where the payment is made by an assessee by way of salary to his employee
after deducting the income-tax from salary in accordance with the provisions of
6. PGBP 6.35
section 192 of the Act, and when such employee -
(i) is temporarily posted for a continuous period of fifteen days or more
in a place other than his normal place of duty or on a ship; and
(ii) does not maintain any account in any bank at such place or ship;
(j) where the payment was required to be made on a day on which the
banks were closed either on account of holiday or strike;
(k) where the payment is made by any person to his agent who is required to
make payment in cash for goods or services on behalf of such person;
(l) where the payment is made by an authorized dealer or a money changer
against purchase of foreign currency or travelers’ cheques in the normal course
of his business.
Will the provision of section 40A(3) be attracted in the following cases:

Questions Answers A.Y. 2023-24
(a) Ashni purchases goods worth ` 60,000 from Section 40A(3) shall be applicable and ` 60,000
Ruchira against one bill but makes payment of shall be disallowed
` 18,000, 18,000, 12,000 & 12,000 at different
times on the same date.
(b) Ashni makes a payment of ` 50,000 as donation Section 40A(3) shall not be applicable.
by cheque to National Defence Fund.
As donation is not allowable as deduction under
section 30 to37 but allowable under section 80G
from GTI
(c) Kiara makes a purchase of goods of ` 80,000 Section 40A(3) will be applicable as the payment
and makes payment of ` 65,000 by account in cash exceeds ` 10,000. Hence, ` 15,000 shall be
payee cheque and ` 15,000 in cash. disallowed.
(d) Sarika, a dealer of machines purchases a Entire ` 1,50,000 shall be disallowed as payment is
machine for ` 1,50,000 and makes the payment not by account payee cheque
by crossed cheque.
(e) Nitin pays a salary of ` 12,000 by crossed ` 12,000 shall be disallowed as the payment
cheque to an employee. exceeds ` 10,000 and it has been made by a
crossed cheque.
(f) Sachin purchases goods in cash from his brother ` 5,000 will be disallowed under section 40A(2)
for ` 60,000, whose market value is ` 55,000. and ` 55,000 shall be disallowed under section
40A(3)
(g) Pooja purchases goods in cash for ` 40,000 No. As per rule 6DD, it is permissible.
from Nitin, a villager and makes payment to
Nitin in his village where no banking facility is
available.
(o) Big B makes a payment in cash amounting to ` Nothing shall be disallowed as payment is made to
35,000 to a transporter on 5.11.2022. a transporter which can be made otherwise than by
an account payee cheque upto ` 35,000.
28. Provision for Gratuity [Section 40A (7)]:

No deduction shall be allowed for provision made by the assessee for the
payment of gratuity to his employees on their retirement or termination of their
6. PGBP 6.36
employment for any reason.
However, any provision made by the assessee for the payment of a sum by
way of any contribution towards an approved gratuity fund or for the purpose of
payment of any gratuity that has become payable during the previous year
shall be allowed.
29. Restriction on contribution by employers to non-statutory funds [Sections 40A
(9), (10) and (11)]
30. Disallowance of unpaid statutory liability (Section 43B)
a) Any sum payable by way of tax, duty, cess or fee. in the P.Y.
Deduction in
b) Any sum payable as an employer by way of in which the
respect of such In the P.Y. of
contribution to any PF or superannuation fund or liability to pay
sums shown in such sum actual
gratuity fund etc. the table was payment
c) Any sum payable to an employee as bonus or incurred
commissions for services redndered.
d) Any sum payable as interest on any loan or
borrowing from any public financial institution or a
State financial corporation or a State industrial
investment corporation.
In any other case
da any sum payable by the assessee as interest If payment was made
on any loan or borrowing from a deposit - in the same P.Y.

(or)
taking non-banking financial company
or systemically important non-deposit - on or before the due date of
filing
taking non-banking financial company, in
return u/s 1391)
accordance with the terms and conditions
of the agreement governing such loan or
borrowing
(Clarified – If already expenditure claimed
on accrual basis then can’t again claim
deduction under this clause)
e) Any sum payable as interest on any loan or
advance from a scheduled bank or co-operative
bank.
f) Any sum payable as an employer in lieu of any
leave at the credit of his employee.
g) Any sum payable to the Indian Railways for use of
Railway assets.
Where there is default in the payment of such interest, such interest can be converted in
to a loan. Such conversion of the unpaid interest in to loan or debenture or any other
instrument by which the liability to pay is deferred to a future date, by itself, does not constitute
AY 23-24
the payment, for purposes of Section 43B. This shall be allowed proportionately, as and 4
when these are paid.
It must also be noted that where the assessee has not paid any tax, duty, Cess, or fee by whatever name
called, under any law for the time being in force, or any sum payable by the assessee as an employer by
way of contribution to Provident / Super-annuity / Gratuity fund, on or before the “due date” but if he
deposits such sums before the due date for furnishing the return u/s 139(1), no disallowance can be
made u/s 43B.

6. PGBP 6.37
Poem
नही दिया Railways or सरकारी Tax - Bonus – Commission भी नहीीं बाीं टा
PF – Leave Encashment को भी कर दिया काटा
Bank- NBFC – Financial institutions के ब्याज भुगतान में चूक की नही
दमलेगा इन सब का deduction लगेगा section 43B
Return ki due date तक pay िकय तो इस ही साल में

दमल जाये गा नही तो बेटा दजस साल pay करोगे उस साल में
दमल जायेगा
31. Profits Chargeable to tax (Section 41)

(i) Remission or cessation of trading liability/expenditure -
Suppose an allowance or deduction has been made in any assessment year in
respect of loss, expenditure or trading liability incurred by A. Subsequently, if
A has obtained, whether in cash or in any manner whatsoever, any amount in
respect of such loss or expenditure of some benefit in respect of such trading
liability by way of remission or cessation thereof, the amount obtained by A, or
the value of benefit accruing to him shall be taxed as income of that previous
year.
It does not matter whether the business or profession in respect of which the
allowance or deduction has been made is in existence in that year or not.
It is possible that after the above allowance in respect of loss, expenditure, or
trading liability has been given to A, he could have been succeeded in his
business by another person. In such a case, the successor will be liable to
be taxed in respect of any such benefit received by him during a subsequent
previous year.
Remission or cessation of a trading liability includes remission or cessation of
liability by a unilateral act of the assessee by way of writing off such liability in his
accounts.
(ii) Brought forward losses of defunct business –
In cases where a receipt is deemed to be profit of a business under section 41
relating to a business that had ceased to exist and there is an unabsorbed loss,
not being a speculation loss, which arose in that business during the previous year
in which it had ceased to exist, it would be set off against income that is
chargeable under this section.
(iii) Capital expenditure on Scientific Research – Asset sold and Money Recovered.
(iv) Recovery of Bad Debts:

6. PGBP 6.38
32. STAMP DUTY VALUE OF LAND AND BUILDING TO BE TAKEN AS THE FULL
VALUE OF CONSIDERATION IN RESPECT OF TRANSFER, EVEN IF THE SAME
ARE HELD BY THE TRANSFEROR AS STOCK-IN-TRADE [SECTION 43CA]
Section 43CA has been inserted as an anti-avoidance measure to provide that where the
consideration for the transfer of an asset (other than capital asset), being land or building or
both, is less than the stamp duty value, the value so adopted or assessed or assessable (i.e.,
the stamp duty value) shall be deemed to be the full value of the consideration for the purposes of
computing income under the head “Profits and gains of business of profession”.
However, if the stamp duty value does not exceed 110% of the consideration received
or accruing then, such consideration shall be deemed to be the full value of
consideration for the purpose of computing profits and gains from transfer of such
asset. (AY 19-20)
Further, where the date of an agreement fixing the value of consideration for the transfer of
the asset and the date of registration of the transfer of the asset are not same, the stamp
duty value may be taken as on the date of the agreement for transfer instead of on the date
of registration for such transfer, provided at least a part of the consideration has been received
by way of an account payee cheque/ account payee bank draft or use of ECS through a
bank account or through such other electronic mode as may be prescribed on or before the date of the
agreement.
(ii) The Assessing Officer may refer the valuation of the asset to a valuation officer as
defined in section 2(r) of the Wealth-tax Act, 1957 in the following cases -
(1) Where the assessee claims before any Assessing Officer that the value adopted or
assessed or assessable by the authority for payment of stamp duty exceeds the fair
market value of the property as on the date of transfer and
(2) the value so adopted or assessed or assessable by such authority has not been disputed
in any appeal or revision or no reference has been made before any other authority,
court or High Court.
Where the value ascertained by the Valuation Officer exceeds the value adopted or assessed or
assessable by the Stamp Valuation Authority, the value adopted or assessed or assessable shall be
taken as the full value of the consideration received or accruing as a result of the transfer.
Demand booster for Residential Real Estate Income Tax relief for Developers & Home Buyers
in Atmanirbhar Bharat Package 3.0
• Economic slowdown has led to decline in prices of residential unit

• Presently Section 43CA of IT Act restricts differential between circle rate & agreement value @ 10% –
Prices may actually be lower than this.
• Decided to increase the differential from 10% to 20% (under section 43CA) for the period from
12th November 2020 to 30th June 2021 for only primary sale of residential units of value up to Rs
2 crores.
• Consequential Relief up to 20% shall also be allowed to buyers of these units under section
56(2)(x) of IT Act for the said period. - IOS
This measure will reduce hardships faced by both home-buyers and developers and help in clearing the
unsold inventory.
6. PGBP 6.39
[Explanation—For the purposes of this section, "residential unit" means an independent housing unit
with separate facilities for living, cooking and sanitary requirement, distinctly separated from other
residential units within the building, which is directly accessible from an outer door or through an interior
door in a shared hallway and not by walking through the living space of another household.]
33. Compulsory maintenance of books of accounts – Section 44AA
Books to
maintain
(a) Specified (b) Indi - Other than

professionals HUF (a) and (b)
Gross receipts > G.R upto 1.5

lacs in all 3 Existing Newly Set up Existing Newly set up
1.5 lacs in all 3
preceeding PY's preceeding PY's
TI > 2.5 lacs Likely to TI . 1.2 lacs

cash book, Journal or T.over/sakes exceed the or T Over/
Such books Likely to exceed
, Ledger, ccopes of > 25 lacs in limits of Sales > 10 the limits of
to enable AO
bills issued . 25rs, any 3 previous lacs in any 3
to compute previous block
preceeding PY block preceeding
Original bills, Pay taxable
PY
vouchers . 50rs income
Notified professions: The professions notified so far are as the profession of authorized representative; the
profession of film artist (actor, camera man, director, music director, art director, editor, singer, lyricist, story writer,
screen play writer, dialogue writer and dress designer); the profession of company secretary; and
information technology professionals.
Note - The books of accounts and other documents shall be kept and maintained for a period of 6 years
from the end of relevant assessment year.

6. PGBP 6.40
34. Section 44AB - Audit of accounts (+ element of books of accounts)
Audit
44AE + 44AD(4) & 44ADA
Business Profession Claiming + Claims lower
lower profits profits
cash receipts Audit + Income Income doesnt

Gross Rec.
upto 5% and applicable (In exceeds exceed exemption
>50 Lacs limit
cash payments this case exemption limit
upto 5% of total monetary
limits doesnt
apply) Books maintain + Check 44AA & 44AB
Yes No audit applicable individually
TO during PY > 10 TO During PY > 1
Crores Crore
Section 44AB - Audit of Accounts (+ element of books of accounts)
Note – For the above clause the cheque which is not account payee cheque shall be considered as cash
receipt only.
The assessee needs to furnish audit report 1 month before the due date of return filing specified in section
139(1) –
S. Type of Assessee Due Date u/s 44AB Due Date u/s 139(1)
No. for furnishing Tax for furnishing
Audit report Return of Income
1. Where the assessee is required to 31st October of the 30th November of the
furnish a report of a CA u/s 92E relevant assessment relevant assessment
relating to international transaction or year year
specified domestic transaction
(transfer Pricing cases)
2. Any other case 30th September of the 31st October of the
relevant assessment relevant assessment
year year

6. PGBP 6.41
35. Presumptive Income

Particulars Section 44AD Section 44ADA Section 44AE
1) Eligible Resident individual, HUF Resident Individual & An assessee
Assessee Partnership firm (but not LLP) Partnership firm (but owning not more
engaged in eligible business and not LLP) engaged in than 10 goods
who has not claimed deduction any profession carriage at any time
under section 10AA or Chapter specified u/s 44AA (1), during the P.Y.
VIA under the heading "C"- namely, legal, medical,
AY 22-23
Deductions in respect of engineering,
certain architectural profession
incomes" or profession of
Non-applicability of section accountancy or
44AD - technical consultancy or
A person carrying on profession interior decoration or
specified u/s 44AA (1); notified profession
A person earning income in (authorised
the nature of commission or representative, film
brokerage; agency business. artist, company
secretary, profession of
information technology).
2) Eligible business/ Any business, other than Any profession specified Business of Plying,
profession business referred to in section under section 44AA (1), hiring or leasing
44AE, whose total whose total gross goods carriages.
turnover/gross receipts in the receipts < Rs. 50 lakhs
P.Y. < Rs. 200 lakhs in the relevant P.Y.
3) Presumptive 8% of total turnover/gross 50% of total gross *
income receipts or a sum higher than receipts of such Given separately
the aforesaid sum as received profession or a sum after this table
in cash/ crossed/ bearer higher than the because of AY 19-
cheque. aforesaid sum claimed 20
6% of total turnover/gross to have been earned by
receipts in respect of the the assessee.
amount of total turnover/gross
receipts received by A/c payee
cheque/bank draft/ECS during
the P.Y. or before due date of
filing of return
u/s 139(1) in respect of that
P.Y.
4) Non- Deductions allowable under sections 30 to 38 shall be deemed to have been
allowability given full effect to and no further deduction shall be allowed.
of Even in case of a firm, salary and Even in case of a firm, In case of a
deductions interest paid to partners is not salary and interest firm, salary and
while deductible. paid to partners is not interest paid to
computing deductible. partners is
presumptive deductible
income subject to the
conditions and
limits in section
40(b)

6. PGBP 6.42
5) Written WDV of any asset of an eligible business/profession shall be deemed to
down have been calculated as if the eligible assessee had claimed and had been
value of actually allowed depreciation for each of the relevant assessment years.
asset
6) Requirement After declaring profits on presumptive If the assessee claims If the assessee
of basis u/s. 44AD, say, for A.Y. 2018- his profits to be lower claims his
maintenance 19, non-declaration of profits on than the profits profits to be
of presumptive basis for any of the 5 computed by applying lower than the
books of successive AYs thereafter (i.e., from the presumptive rate, he profits
account A.Y. 2019-20 to A.Y. 2023-24), say, has to maintain books of computed by
u/s 44AA for A.Y. account and other applying the
and audit 2020-21, would disentitle the documents u/s 44AA (1) presumptive
u/s 44AB assessee from claiming profits on and get his accounts rate, he has to
presumptive basis for five successive audited u/s 44AB, if his maintain books
AYs subsequent to the AY relevant to total income > basic of account u/s
the PY of such non- declaration (i.e. exemption limit for that 44AA (2) and
from A.Y. 2021-22 to A.Y. 2025-26). year. get his
In such a case, the assessee would accounts
have to maintain books of account audited u/s
and other documents u/s 44AA (2) 44AB.
and get his accounts audited u/s
44AB, if his total income > basic
exemption limit in those years.
7 Advance Tax Single Instalment – 15th March Single Instalment – 15th 4 Instalments –
Instalment March 15th June
15th September
15th December
15th March
a. Light Weight Vehicles – Rs. 7,500 per month per vehicle for a month or for a part of the
month
b. Heavy Weight Vehicle - Rs. 1,000 per ton per vehicle for a month or for a part of the
month
Regarding section 44AE - Meaning of certain terms –
S.No Term Meaning

(1) Heavy goods Any goods carriage, the gross vehicle weight of which > 12,000
vehicle kilograms.
(2) Gross vehicle Total weight of the vehicle and load certified and registered by the
weight registering authority as permissible for that vehicle.
(3) Unladen The weight of a vehicle or trailer including all equipment ordinarily
weight used with the vehicle or trailer when working but excluding the weight
of driver or attendant
and
where alternative parts or bodies are used the unladen weight of the
vehicle means the weight of the vehicle with the heaviest such
alternative body or part
6. PGBP 6.43
Rule 6dd
37. Case Laws
1. “Actual write off” of individual debtor’s account is not necessary under 36(1)(vii) Bad
Debt, of the Income-tax Act, 1961
Vijaya Bank v. Commissioner of Income Tax [2010] [323 ITR 166]
Supreme Court referring to its judgement in Southern Technologies Limited v. Joint CIT
held that in order to understand the term “write-off” one has to see how the write off has
been effected. If an assessee debits an amount of doubtful debtors to profit and loss
account and credits the asset account (i.e., sundry debtors) it would constitute an actual
write off of a debt.
On the contrary, if the amount is credited to “current liabilities and provisions”, then it would be
a provision. In the latter case the assessee would not be entitled to the
Reference may also be made to the Supreme Court decision in TRF Limited vs CIT10 wherein
it was held that bad debts need not be proven to be irrecoverable under section 36(1)(vii). It is
sufficient if they are written off.
2. Remission of a liability under section 41(1) of the Income Tax Act

Commissioner of Income-tax v. Smt. Sita Devi Juneja [2010] [325 ITR 593, Punjab and
Haryana High Court]
The High Court held that merely because liability was outstanding for the last six years, it
could not be presumed that the said liability had ceased to exist. It was also conceded that
there was no bilateral act between the assessee and the creditors, which indicated that the said
liability had ceased to exist. In absence of any bilateral act, the said liability could not have
been treated as ceased.
3. Is interest income on margin money deposited with bank for obtaining bank guarantee
to carry on business, taxable as business income?
CIT v. K and Co. (2014) (Del)
The High Court held that the interest income received on funds kept as margin money for
obtaining the bank guarantee would be taxable under the head “Profits and gains of business or
profession”.
4. Is
expenditure incurred for construction of transmission lines by the assessee for
supply of power to UPPCL by the assessee deductible as revenue expenditure?
Addtl. CIT v. Dharmpur Sugar Mill (P) Ltd (2015 Allahabad HC)
Following the principle of law laid down by the Supreme Court in Empire Jute Mills’ case, the
Allahabad High Court, in this case, held that the expenditure which was incurred by the
assessee in the laying of transmission lines was clearly on the revenue account. The
transmission lines, upon erection, vested absolutely in UPPCL. The expenditure which was
incurred by the assessee was for aiding efficient conduct of its business since the assessee
had to supply electricity to its sole consumer UPPCL. This was not an advantage of a capital
nature.

6. PGBP 6.44
5. What is the nature of expenditure incurred on glow-sign boards displayed at dealer

outlets - capital or revenue?
CIT v. Orient Ceramics and Industries Ltd. (2013) (Delhi)
The Delhi High Court held that such expenditure on glow sign boards displayed at dealer outlets
was revenue in nature.
6. Would the expenditure incurred on issue and collection of convertible debentures be

treated as revenue expenditure or capital expenditure?
CIT v. ITC Hotels Ltd. (2011) (Kar.)
The Karnataka High Court held that the expenditure incurred on the issue and collection of
debentures shall be treated as revenue expenditure even in case of convertible debentures,
i.e., the debentures which had to be converted into shares at a later date.
7.Can the commission paid to doctors by a diagnostic centre for referring patients for
diagnosis be allowed as a business expenditure under section 37 or would it be treated
as illegal and against public policy to attract disallowance?
CIT v. Kap Scan and Diagnostic Centre P. Ltd. (2012) (P&H)
The demanding as well as paying of such commission is bad in law. It is not a fair practice and
is opposed to public policy and should be discouraged. Thus, the High Court held that
commission paid to doctors for referring patients for diagnosis is not allowable as a business
expenditure.
8. In a case where payment of bonus due to employees is paid to a trust and such amount
is subsequently paid to the employees before the stipulated due date, would the same be
allowable under section 36(1)(ii) while computing business income?
Shasun Chemicals & Drugs Ltd v. CIT (2016 - SC)
The Apex Court held that section 36(1) contains various kinds of expenses which are
allowable s deduction while computing the business income. The amount paid by way
of bonus is one such expenditure which is allowable as deduction under section
36(1)(ii).
Note: In this case, the Supreme Court has held that the bonus was allowable as
deduction under section 36(1)(ii), even though it was initially remitted to the trust
created for this purpose, from which the payment was ultimately made to the
employees before the due date. The Supreme Court has applied the concept of
“substance over form” in allowing the deduction of bonus paid under section
36(1)(ii) by considering that the payment of bonus was ultimately made to employees
before the stipulated due date.

6. PGBP 6.45
9.Income from Rent out Business is ‘Profits & gains of business’ not ‘Income from
House property. M/s. Rayala Corporation Pvt. Ltd vs. Assistant Commissioner of Income
Tax
In a recent case between M/s. Rayala Corporation Pvt. Ltd vs. Assistant Commissioner of
Income Tax, the Supreme Court of India has declared that, Income which was arises from Rent
out business should be taxed under the Head “Profits and gains of business or profession’ not
‘Income from House property.
The appellant-assessee, a private limited company, is having house property, which has been
rented and the assessee is receiving income from the said property by way of rent.
The division bench comprising of Justice Anil R Dave and Justice L Nageshwar Rao has relied
the case Chennai Properties and Investments Ltd. v. Commissioner of Income Tax [2015] 373
ITR 673 (SC) that if an assessee is having his house property and by way of business he is
giving the property on rent and if he is receiving rent from the said property as his business
income, the said income, even if in the nature of rent, should be treated as “Business Income”
because the assessee is having a business of renting his property and the rent which he
receives is in the nature of his business income.
10. CIT v. Mahindra and Mahindra Ltd. [2018] 404 ITR 1 (SC)
Issue - Whether the waiver in respect of loan taken for purchase of plant & Machinery and tooling
equipment , would the same be taxable in the hands Mahindra and Mahindra Ltd. under section
28(iv) or 41(1)
Conclusion – Such waiver would not be taxable under both the sections. because section 28(iv)
applies if, income arises from business or profession and the benefit received is in non-monetary form
and 41(1) applies when assess claims an allowance or deduction and debits the amount to the
trading account or to the profit and loss account. Both the elements were missing in this case.

7. Capital Gains 7.1
Chapter - 7
Unique Academy - 8007916622 CA Saumil Manglani - 9921051593

Sections (Income Tax Act,

Details
1961)
Section 2(14) Capital assets

Section 2(42A) Short term Capital assets
Section 2(42B) Short term Capital Gains
Section 2(47) Transfer
Section 45(5A) Taxability of capital gains in case of Specified Agreement
Section 46 Capital Gains on distribution of assets by Companies in liquidation
Section 46A Capital Gains on Buy Back of Shares or Specified Securities
Section 48 Mode of Computation of Capital Gains
Section 55 Cost of improvement
Section 49 Ascertainment of Cost in Specified Circumstances
Section 50 Capital Gains in respect of depreciable assets
Section 50B Capital Gains in respect of Slump Sale
Section 2(42C) Meaning of Slump Sale
Section 50C Computation of Capital Gain in real estate transaction
Section 50CA Capital Gain on transfer of unlisted Shares in a Company
Section 50D Fair Market Value to be Full Value of Consideration in Certain Cases
Section 55A Reference to Valuation Officer
Section 51 Advance Money received
Section 54 Profit on sale of property used for residence
Section 54B Transfer of land used for agricultural purposes
Section 54D Compulsory acquisition of lands and buildings
Section 54EC No tax on long-term capital gains if investments made in specified bonds
Section 54EE Tax incentives for Start-ups
Capital gain on the transfer of certain capital assets not to be charged in
Section 54F
case of investment in residential house
Exemption of capital gain on transfer of assets of shifting of industrial
Section 54GA
undertaking from urban area to a Special economic Zone
Section 54GB Capital Gain on transfer of residential Property (a house or a plot of land)
Extension of time for acquiring New asset or depositing or investing
Section 54H
amount of Capital Gain
Section 112A Tax on long-term capital gains in case of specified securities
Impact of Section 115BAC
Under the head Capital Gains, all exemptions and deductions are allowed even under the New tax
system. So computation of Capital Gain Income will not be effected under the new tax system.

1. CAPITAL
GAINS
Sections 45 to 55A of the Income-tax Act, 1961 deal with capital gains.
Section 45 of the Act, provides that any profits or gains arising from the transfer
of a capital asset effected in the previous year shall, save as otherwise provided
in various sections of Sec. 54, be chargeable to income-tax under the head
“Capital Gains” and shall be deemed to be the income of the previous year in
which the transfer took place.
The requisites of a charge to income-tax, of capital gains under Section 45(1)

are:
(i) There must be a capital asset.
(ii) The capital asset must have been transferred.
(iii) The transfer must have been effected in the previous year.
(iv) There must be a gain arising on such transfer of a capital asset. These
requisites are briefly analyzed below.
(v) Such capital gain should not be exempt under Sections 54, 54B, 54D, 54EC,
54EE, 54ED, 54F, 54G or 54GA

2. CAPITAL ASSET [Section 2(14)]
Definition 2(14)
Property of ⚫ Fixed / Circulating / Movable / Immovable / Tangible / Intangible whetherconnected with his
any kind business or profession
Securities ⚫ Any securities held by a Foreign Institutional Investor which has investedin such securities as per
by FII SEBI Act,1992
Any ULIP ⚫ Any Unit Linked Insurance Policy (ULIP) to which exemption under section 10(10D) does not
apply. (i.e. Payment / aggregate payment of premium > Rs 250000 made in any PY in case of
ULIP issued on or after 1.2.2021. (w.e.f AY 2021-22)
Includes ⚫ Any rights of management / control
⚫ Jewellery, Drawings, Paintings, Scruptures, Work of art
⚫ Archaeological collections
Excludes ⚫ Stock in trade, Consumable store, and Raw material held for business/ profession.
⚫ Personal Effects (Wearing apparel & Furniture)
⚫ Movable personal effects
⚫ Agriculture land situated in rural area
⚫ Gold deposit bonds issued under Gold Deposit Scheme, 1999 or Deposit certificate issued
under Gold Monetization scheme, 2015 and 2019 as notified by CG
⚫ Special Bearer Bonds, 1991
Rural Area ⚫ It refers outside jurisdiction of municipality (M) / cantonment board (CB) having population
more than equal to 10,000 and also does not fall within below:
From local limit of M / CB Population of M / CB
≤ 2 Km > 10,000- Not > 1,00,000
> 2 km-≤ 6 Km > 1,00,000 - Not > 10,00,000
> 6 km-≤ 8 Km > 10,00,000

3. SHORT-TERM & LONG-TERM ASSETS
• Section 2(42A) defines short term capital asset as a capital asset held by the
assessee for not more than 36 months immediately preceding the date of
transfer. Therefore, an asset which is held by the assessee for period of > 36
months immediately preceding the date of transfer is a long- term capital asset.
• However, a security (other than a unit) listed in a recognized stock exchange or a unit
of an equity oriented fund, or of UTI or a Zero-Coupon Bond, will be considered as a
long-term asset if it is held for period of > 12 months immediately preceding the date
of transfer.
• A share of a company not being a share which is listed on a recognized stock

exchange in India, would have a holding period of 24 months.
• Capital asset, being Immoveable property (land or building or both) is transferred on

or after April 1, 2017, then it will be treated as Long Term Capital Asset if it is held
for more than 24 months immediately prior to the date of its transfer. [Amendment
vide Finance Act, 2017 w.e.f. AY 2018-19]
• Assets other than short-term capital assets are known as ‘long-term capital assets’
and the gains arising therefrom are known as ‘long-term capital gains’.
In determining the period for which a capital asset is held by an assessee, the following
must be noted:
(i) In the case of shares held in a company in liquidation, the period subsequent to the
date on which the company goes into liquidation shall be excluded;
(ii) In the case of the shares in an Indian Company which become the property of the
assessee in a scheme of amalgamation, the period for which the shares in the
amalgamating company were held by the assessee shall be included;
(iii) In the case of a capital asset, being a share or shares in an Indian company, which
becomes the property of the assessee in consideration of a demerger, there shall be
included the period for which the share or shares held in the demerged
company were held by the assessee;
(iv) Where preference shares are converted into equity shares, the period of holding
shall be considered from the date of acquisition of preference shares. Cost of
acquisition of preference shares shall be taken as cost of
acquisition of equity shares in the hands of assessee. [Amendment vide Finance Act,
2017 w.e.f. AY 2018-19]

4. TRANSFER
The distribution of capital assets on the dissolution of a firm, body of individuals or other
association of persons, is also regarded as transfer liable to capital gains tax. For the purposes
of computing capital gain in such cases, the fair-market value of the capital asset on the date of
such distribution will be deemed to be the full value of consideration received or
accruing as a result of transfer of the capital asset.

5. What doesn’t constitute Transfer?

Section 47 specifies certain transactions which will not be regarded as a transfer, as below:
Transactions not regarded as transfer [Section 47]: Some Examples
1. Any distribution of capital assets on the total or partial partition of a HUF
2. Any transfer of capital asset under a gift or will or an irrevocable trust
3. Any transfer of capital asset by a holding company to its 100% subsidiary Indian company or by
a subsidiary company to its 100% holding Indian company
4. Any transfer of capital asset by amalgamating company to amalgamated company if

amalgamated company is an Indian company
5. Any transfer of capital asset by demerged company to resulting company if resulting company
is an Indian company
6. Any transfer or issue of shares by the resulting company, in a scheme of demerger to the
shareholders of the demerged company
7. Any transfer by a shareholder in a scheme of amalgamation of shares held by him in the

amalgamating company
8. Any transfer, made outside India, of a capital asset being rupee denominated bond of an
Indian company issued outside India, by a non-resident to another non- resident
9. Any transfer of a capital asset, being a Government Security carrying a periodic payment
of interest, made outside India through an intermediary dealing in settlement of securities,
by a non-resident to another non-resident
10. Any transfer by an individual of sovereign gold bonds issued by RBI by way of redemption
11. Any transfer by way of conversion of bonds, debentures, debenture stock, deposit
certificates of a company, into shares or debentures of that company.
12. Any transfer by way of conversion of preference shares of a company into equity shares
of that company
13. Any transfer of specified capital asset the University or the National Museum, National Art
Gallery, National Archives or any other public museum or institution notified by the Central
Government to be of national importance or to be of renown throughout any State – work of art,
archaeological, scientific or art, collection, book, manuscript, drawing, painting, photograph or
print.
14. Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made
and notified by the Central Government
15. Transfer by a unit holder under consolidation plans / schemes of Mutual Fund
Note – Regarding Cost of assets

For points 1 -2 - 3 – 4 – 5 - Cost of asset is to be considered as cost to the previous owner
For points 7 -11- 12-15 - Cost of the previous asset is to be treated as the cost of the newly acquired asset.
Cost of acquisition of shares received in the resulting company, in the scheme of demerger: In the
case of a demerger, the cost of acquisition of the shares in the resulting company shall be the amount
which bears to the cost of acquisition of shares held by the assessee in the demerged company the same
proportion as the net book value of the assets transferred in a demerger bears to the net worth of the
demerged company immediately before such demerger [Section 49(2C)].

B
Cost of acquisition of shares in the resulting company = A x
C
A = Cost of acquisition of shares held in the demerged company B = Net book value of the assets
transferred in a demerger
C = Net worth of the demerged company i.e. the aggregate of the paid up share capital and general reserves
as appearing in the books of account of the demerged company immediately before the demerger.
Cost of acquisition of the shares held in the demerged company: The cost of acquisition of the original
shares held by the shareholder in the demerged company shall be deemed to have been reduced by the
amount as so arrived under the sub-section (2C) [Section 49(2D)].

6. Year of Chargeability as “Capital Gains”
Sec. Profits or gains arising from the P.Y. in which Deemed Full Value of
following transactions chargeable as income is consideration (FVC)
income chargeable to tax u/s 48
45(1A) Money or other asset received under an The P.Y. in which such The value of money or
insurance on account of damage / money or other asset the FMV of other asset on
destruction of any capital asset, as a is received. the date of receipt.
result of, flood, typhoon,hurricane,
cyclone, earthquake, riot, civil
disturbance accidental fire, explosion,
enemy actionetc.
45(2) Transfer by way of conversion of a The P.Y. in which such The FMV of the capital
capital asset into stock-in-trade (SIT) of SIT is sold or asset on the date of
a business carried on by him otherwise such conversion.
transferred.
Components of income Manner of

arising on subsequent Computation of capital
sale of stock-in-trade gains and business
income
FMV on the date of

conversion (-)
Cost/Indexed Cost of
acquisition/
improvement
Capital Gains
Indexation benefit
would be considered in
relation to the year of
conversion of capital
Conversion of capital asset into stock-in-
asset into stock-in- trade
trade
Sale price of stock-in-

trade (-) FMV on the
Business date of conversion
Income

Sec. Profits or gains arising from the P.Y. in which Deemed Full Value of
following transactions chargeable income is consideration (FVC)
as income chargeable to tax for computation of
CG u/s 48
45(3) Transfer of a capital asset by a person to The P.Y. in which The amount recorded
a firm or other AOPs or BOIs in which he is such transfer in the books of
or becomes a partner or member, by way takes place. account of the firm,
of capital contribution or otherwise. AOPs or BOIs as the
value of the capital
asset.
45(4) Transfer of a capital asset by way of distribution The P.Y. in which The FMV of the
of capital assets on the dissolution of a firm or such transfer capital asset on the
other AOPs or BOIs or otherwise, is chargeable
to taxes the income of the firm, AOPs or BOIs. takes place. date of such
transfer.
45(5) Transfer of capital asset by way of The P.Y. in which Compensation
compulsory acquisition under any law, or a the consideration determined in the first
transfer, the consideration for which was or part thereof is instance by the
determined or approved by the Central first received. Central Govt. or RBI.
Government or RBI.
If the compensation or consideration is further The P.Y. in which Amount by which the
enhanced by any court, Tribunal or other the amount was compensation/
authority, the enhanced amount deemed to received by the consideration is
be the income. assessee. enhanced or further
However, compensation received in enhanced. For this
pursuance of an interim order of a
court/Tribunal deemed to be income of the purpose, cost of
P.Y. in which the final order is made. acquisition and cost of
improvement shall be
- Litigation exp, incidental exp for addition taken as ‘Nil’.
are deductible Death of the transferor
– Taxable to person to
whom it is received.
45(5A Transfer of a capital asset, being land or The P.Y. in which The stamp duty value
) building or both, by an individual or HUF, the certificate of of his share in the
who enters into a specified agreement for completion for the project, being L or B
development of a project, provided he whole or part of or both, on the date of
does not transfer his share in project on or the project is issued issue of completion
before the date of issuance of completion by the competent certificate
certificate. authority (+)
Consideration
received in cash, if
any
45(1B) Unit Linked Insurance Policy Receipts [Section 45(1B)] The P.Y. in which
Where any person receives any amount, under a the amount is
ULIP issued → on or after 1.2.2021 to which received
exemption under section 10(10D) does not apply
on account of
(i) premium payable > Rs. 2,50,000 for any
of the previous years during the term of
such policy; or
(ii) the aggregate amount of premium > Rs.
2,50,000 in any of the previous years
during the term of any such ULIP(s), in a
case where premium is payable by a person
for more than one ULIP issued on or
after 1.2.2021
7. Section 45(2A) – Transfer of security in Demat Form -
• Beneficial owner of shares/ securities is chargeable to tax

• FIFO method is applied in case of demat holdings.
• FIFO method is applied account wise
Tax implications on receipt of money or capital assets or both on reconstitution of firm/AOP or BOI [Section 45(4)]
(i) Deemed income in the hands of specified entity – Where a specified person receives during the previous year any
money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity,
then any profits or gains arising from such receipt by the specified person shall be chargeable to income-tax as income of
such specified entity under the head “Capital gains”.
(ii) Year of taxability – Such profits and gains shall be deemed to be the income of specified entity of the previous
year in which such money or capital asset or both were received bythe specified person.
(iii) Computation of such profits and gains from such receipt – Notwithstanding anything to the contrary contained
in this Act, such profits or gains shall be determined in accordance withthe following formula –
A= B+C - D
A= Income chargeable to income-tax u/s 45(4) as income of the specified entity under thehead "Capital gains"
B = Value of any money received by the specified person from the specified entity on the date of such receipt;
C = The amount of fair market value of the capital asset received by the specified person from the specified entity on
the date of such receipt; and
D = The amount of balance in the capital account (represented in any manner) of the specified person in the books of
account of the specified entity at the time of its reconstitution.
Balance in the capital account of the specified person in the books of account of the specified entity is to be calculated
without taking into account the increase in the capital account of the specified person due to the following
- revaluation of any asset or
- self-generated goodwill or
- any other self-generated asset.
** If the value of "A" in the above formula is negative, its value shall be deemed to be zero.
(iv) Definition of certain terms commonly used under both section 9B and 45(4):
Terms Meaning
Specified person a person, who is a partner of a firm or member of AOPs or BOIs (notbeing a company or a co-
operative society) in any previous year.
Specified entity a firm or other AOPs or BOIs (not being a company or a co-operativesociety)
Reconstitution Where
of the specified (a) one or more of its partners or members, as the case may be, of such specified entity ceases
entity to be partners or members; or
(b) one or more new partners or members, as the case may be, are admitted in such specified entity
in such circumstances that one or more of the persons who were partners or members, as
the case may be, of the specified entity, before the change, continue as partner or partners
or member or members after the change; or
(c) all the partners or members, as the case may be, of such
specified entity continue with a change in their respective share or in the shares of some
of them
Example
Let’s suppose there are three partners in firm “FR” namely “A”, “B” and “C”. Capital balance of each
partner is Rs.10 lakhs. There are three pieces of land ‘S’, ‘T’ and ‘U’ at a book value of Rs.10 lakhs each.
Partner ”A” decides to exit the firm for which he will be paid Rs.11 lakhs and shall also be given land
‘U’. FMV of land ‘U’ on such date is Rs.50 lakhs. Let’s assume Indexed cost of acquisition of land ‘U’
is Rs.15 lakhs.
Assuming land ‘U’ is a long term capital asset the long term capital gain arising on such transfer shall
be Rs.35 lakhs [FMV of Rs.50 lakhs (-) Indexed cost of acquisition of Rs.15 lakhs]. Firm “FR” needs to pay
long term capital gain tax of Rs.7 lakhs [ Rs.35 lakhs X 20% tax rate] ignoring surcharge and cess.
9. MODE OF COMPUTATION
Computation of Capital Gain
Short Term Capital Assets Long Term Capital Assets
Sale Consideration Sale Consideration

Less: Expense on transfer Less: Expense on transfer
Net sale consideration Net sale consideration

Less: Less:
 Cost of Acquisition  Indexed Cost of Acquisition
 Cost of Improvement  Indexed Cost of Improvement
Short Term Capital Gain Long Term Capital Gain

Less: Exemption under section 54B, 54D, 54G, Less: Exemption under section 54,54B, 54D,
54GA 54EC, 54EE, 54F, 54G, 54GA, 54GB
STCG/STCL LTCG/LTCL
*No deduction will be allowed in respect of Securities Transaction Tax (STT) paid

-Expenses on Transfer
Meaning:
It means any expenditure incurred wholly and exclusively in connection with such transfer. It also refers
to expenses incurred which is necessary (Absolutely necessary) to effect the transfer
Examples: Brokerage or commission incurred for securing buyer, cost of stamp and registration fee by the
vendor, traveling expenses, Litigation exp etc.
Points to be considered:
 Expenses in connection with transfer before/after passing of title shall be considered.
 Legal expense for getting compensation for compulsory acquisition of his/her land (including expense
on enhanced compensation) shall be considered.
 Payment made to co-operative society for getting NOC is considered to be “Expense on transfer”.
Damodar G. Nagalia v. CIT [2007] 12 SOT 600 (Mum)
Cost of Acquisition (COA) [Section 55(2)]

Meaning:
Cost of acquisition includes expenditure incurred for acquiring the asset or completing the title of the Asset.
It includes the following:
 Interest on borrowed capital for purchase of assets.
 Expenses on amendment of AOA and a part of shares.
 Litigation expense on registration of shares etc.
 Advocate fees, brokerage in relation to acquisition of property.
 Cost of Estate duty for inherited property shall be not being considered as “Cost of Acquisition” or
“Cost of Improvement”.
 When at the time of acquisition of land, it was agriculture and later on it is being sold after converting
into Non Agriculture land, then Cost of Acquisition of Agriculture land shall be considered as “Cost of
Acquisition”.
 In case of Waiver of loan by associate company, then amount of waiver shall be reduced from Cost of
Acquisition. (i.e. COA less Waiver amt.)
Cost of Improvement (COI) [Section 55(1)(b)]

Meaning:
 Cost of improvement means expenditure incurred to increase the productive quality of the asset. It
includes all expenditures of a capital nature incurred in making any additions or alterations to the
capital asset.
 Any improvement took place before 1.4.2001 shall be ignored.
 Any Capital Expenditure (CAPEX) incurred by previous owner shall also be considered as Cost of
improvement if assets acquired after 1.4.2001.
 Capital assets such as Goodwill of business or profession or right to manufacture, produce or

process any article or thing or right to carry on business or profession (Self Generated), cost
improvement shall be NIL.
 Only CAPEX (Not routine Expenses) shall be considered as Cost of Improvement.
 COI excludes any expenses which is deductible while computing income chargeable under head
“House property”, “PGBP” or “Other Source”.

Indexed Cost of Acquisition (ICOA)
Meaning:
 The COA is indexed on the basis of certain % of Consumer Price Index (CPI) keeping in the mind of
rice in prices due to inflation.
 Base year for Indexation is PY2001-02, hence CII for 2001-02=100
Cases where indexation benefit is not available even on transfer of Long Term
Capital Asset
 Debenture or Bonds
 Depreciable assets other than power generating units providing SLM.
 Slump Sale
 Equity shares and equity oriented fund, unit of business trust – Sec 112A
 Transfer of Global Depository Receipt
 Transfer of securities by FII (Section 115AD)
 Transfer of Forex by NRI (Section 115D)
 Transfer of unlisted securities by NR under section 115(1)(c)
 Shares or debentures acquired by NR in foreign currency
Financial Cost Inflation Financial Cost Inflation

Year Index Year Index
2001-02 100 2010-11 167
2002-03 105 2011-12 184
2003-04 109 2012-13 200
2004-05 113 2013-14 220
2005-06 117 2014-15 240
2006-07 122 2015-16 254
2007-08 129 2016-17 264
2008-09 137 2017-18 272
2009-10 148 2018-19 280
2019-20 289 2020-21 301
2021-22 317 2022-23 331

10. Cost of Acquisition of certain assets – Section 55
✓ Goodwill of a business or profession or

✓ a trademark or
✓ brand name associated with a business or profession or
✓ a right to manufacture, produce or process any article or thing, or
✓ right to carry on any business or profession
✓ tenancy rights
✓ stage carriage permits and
✓ loom hours
(i) In case of acquisition from previous owner: Actual purchase price
If A purchases a stage carriage permit from B for ` 2 lacs, ` 2 lacs will be the cost ofacquisition for A.
However, in case of a capital asset, being goodwill of a business or profession, in respect of which
depreciation under section 32(1) has been obtained by the assessee in any previous year (upto
P.Y.2019-20), the cost of acquisition of such goodwill would be the amount of the purchase price as
reduced by the total amount of depreciation (upto P.Y.2019-20) obtained by the assessee under section
32(1).
(ii) In case of circumstances mentioned under section 49(1)(i)/(ii)/(iii)/(iv): Cost to the previous owner
In cases where the capital asset became the property of the assessee by any of the following modes from
the previous owner, and such capital assets were acquired by the previous owner by purchase, cost of
acquisition to the assessee will be the amountof the purchase price for such previous owner:-
(1) On any distribution of assets on the total or partial partition of a Hindu undivided family.
(2) Under a gift or will.
(3) By succession, inheritance or devolution.
(4) On any distribution of assets on the liquidation of a company.
(5) Under a transfer to a revocable or an irrevocable trust.
(6) Under any transfer of a capital asset referred to in section
47(iv)/(v)/(vi)/(via)/(via)/(viaa)/(viab)/(vib)/(vic)/(vica)/(vicb)/(vicc)/(viiac)/(viiad)/ (viiae)/(viiaf)/(xiii)/(xiiib)/(xiv) –
Transactions not regarded as transfer.
(7) Where the assessee is a Hindu undivided family, by the mode referred to in section 64(2) i.e.,
conversion of self-acquired property of a member of a HUF into the property of the HUF.
However, in case of a capital asset, being goodwill of a business or profession, in respect of which depreciation
under section 32(1) has been obtained by the assessee in any previous year (upto P.Y.2019-20), the cost of
acquisition of such goodwill would be the amount of the purchase price as reduced by the total amount of
depreciation (upto P.Y.2019-20) obtained by the assessee under section 32(1).
(iii) In any other case [i.e., in case of self-generated assets]: In case of self-generated assets namely, goodwill of a
business or profession or a trademark or brand name associated with a business or profession or a right to
manufacture, produce or process any article or thing, or right to carry on any business or profession, tenancy
rights, stage carriage permits, or loom hours, the cost of acquisition will be taken tobe Nil.

Cost of Acquisition Cost of Improvement

Capital
Acquired Self -
Asset Generated
Goodwill of a Business Nil – Goodwill of
or Profession business
(profession not
mentioned)
Right to manufacture, Nil
produce or process any Purchase
Nil
article or thing Price
Right to carry on Nil
Business or profession
Trademark or Brand name Actual
associated with a Business
Tenancy Rights Actual
Stage Carriage permits (Route Actual
Permits)
Loom Hours Actual
For Cost of Acquisition -> In above cases, FMV as on 1.4.2001 is not available
Note – For Cost of improvement -
a. The Cost of improvement before 1.4.2001 is to be ignored
b. As the cost of improvement before 1.4.2001 is to be ignored, the question of considering
FMV for cost of improvement as on 1.4.2001 does not arise
c. In case of Bonus and Right Shares
Bonus Shares Cost of acquisition

If bonus shares are allotted before 1.4.2001 Fair Market Value on
1.4.2001
If bonus shares are allotted on or after 1.4.2001 Nil
Rights Shares Cost of Acquisition Period of Holding
Original shares (which forms the basis of Amount actually From date of
entitlement of rights shares) paid for acquiring allotment
the original shares
Rights entitlement (which is renounced by the Nil From Date of offer by
assessee in favor of a person) company to date of
renouncement
Rights shares acquired by the assessee Amount actually From date of
paid for acquiring allotment
the rights shares
Rights shares which are purchased by the Purchase price paid From date of
person in whose favor the assessee has to the renouncer of allotment
renounced the rights entitlement rights entitlement +
amount paid to the
company which has
allotted the rights
shares.

Section 49(9)]
Cost of acquisition of a capital asset which was used by the assessee as an inventory
Where the capital gain arises from the transfer of a capital asset which was used by the assessee
as inventory earlier before its conversion into capital asset, the cost of acquisition of such
capital asset shall be the fair market value of the inventory as on the date on such conversion
determined in the prescribed manner.
Section 2(42A)(ba)
Period of Holding of a capital asset which was used by the assessee as an inventory
Where inventory of business Period from the date of

is converted into or treated as conversion or treatment as
a capital asset by the a capital asset shall be
assessee considered.
11. Cost of Improvement

Section 55 mentions that in relation to a capital asset, being goodwill, or a right, the cost of
improvement will be taken as NIL.
For any other capital asset:
a) Cost of improvement, prior to 1st Apr’ 01 shall be Nil
b) Cost of improvement shall be all expenditure of a capital nature, incurred in making
additions / alterations on or after 01.04.2001.
12. Capital Gains for Depreciable Assets (Section 50)
– If the Full Value of Consideration is > than the WDV of the Block of Assets, then the
differential is the Short-Term Capital Gain (STCG)
– If the full Value of Consideration falls short of the WDV and the Block continues to exist,
the differential is the WDV and if it doesn’t exist, the differential becomes the Short-
Term Capital Loss (STCL)
13. Capital Gains in respect of Slump Sale (Section 50B)
Meaning of slump sale [Section 2(42C)]

Slump sale’ means the transfer of one or more undertaking, by any means, for a lump sum
consideration without values being assigned to the individual assets and liabilities in such
sales. In other words it is a sale where the assessee transfers one or more undertaking as a
whole including all the assets and liabilities as a going concern. The consideration is fixed for
the whole undertaking and received by the transferor it is not fixed for each of the asset of the
undertaking as a whole by way of such sale. Thus it may be noted that the undertaking as a
whole or the division transferred shall be a capital asset.
– Every assessee, in the case of slump sale, shall furnish a report of a Chartered accountant before the
specified date referred to in section 44AB indicating the computation of the net worth of the undertaking or
division, as the case may be, and certifying that the net worth of the undertaking or division, as the case
may be, has been correctly arrived at in accordance with the provisions of this section. [Amended by
Finance Act, 2020]


14. Computation of Capital Gain in Real Estate Transaction [Section 50C]
Section 50C makes a special provision for determining the full value of consideration in
cases of transfer of immovable property. It provides that where the consideration declared
to be received or accruing as a result of the transfer of land or building or both, is less
than the value adopted or assessed by any authority of a State Government (i.e. “stamp
valuation authority”) for the purpose of payment of stamp duty in respect of such transfer,
the value so adopted or assessed shall be deemed to be the full value of the
consideration, and capital gains shall be computed on the basis of such consideration
under Section 48 of the Income-tax Act.
However, where the stamp duty value does not exceed 110% of the sale
consideration received or accruing as a result of the transfer, the consideration so
received or accruing shall be deemed to be the full value of the consideration.
Rationalization of section 50C in case sale consideration is fixed
under agreement executed prior to the date of registration of
immovable property (w.e.f. AY 2017-18)
– Section 50C of the Act has been amended in line with section 43CA to
provide that where the date of the agreement fixing the amount of
consideration and the date of registration for the transfer of the capital
asset are not the same, the value adopted or assessed or assessable by
the stamp valuation authority on the date of agreement may be taken for
the purposes of computing full value of consideration for such transfer.
It is further provided that this provision shall apply only in a case where the amount of consideration
referred to therein, or a part thereof, has been received by way of an account payee cheque or
account payee bank draft or by use of electronic clearing system through a bank account or through
such other electronic mode as may be prescribed, on or before the date of the agreement of
transfer
15.Capital Gain on Transfer of Unlisted Shares in a Company [Section 50CA]

If an assessee transfers shares in a company (other than quoted shares)
at less than the fair market value, In such case, the FMV of such shares
shall deemed to be the full value of consideration.
–
The above provision should not apply if the transfer of such unquoted
shares have taken by the approval of Tribunal on application moved by
CG and the old BOD have been removed and new management has been
appointed.
16.Fair Market Value to be Full Value of Consideration in Certain Cases (Section 50D)
Where the consideration in respect of transfer of an asset is not
determinable under the existing provisions of the Income-tax Act, then, as
the machinery provision fails, the gains arising from the transfer of such
assets is not taxable.
– Section 50D has been inserted to provide that fair market value of the
asset on the date of transfer shall be deemed to be the full value of
consideration if actual consideration is not attributable or determinable.

17.REFERENCE TO VALUATION OFFICER (SECTION 55A)
With a view to ascertaining the fair market value of a capital asset, the concerned
Assessing Officer may refer the valuation of the capital asset to a Valuation Officer
appointed by the Income-tax Department in the following cases:
(a) Where the value of the asset as claimed by the assessee is in accordance with the
estimate made by a registered valuer but the Assessing Officer is of the opinion that the
value so claimed is less than its fair market value the Assessing Officer is enabled to
make a reference to the Valuation Officer where in his opinion the value declared by the
assessee is at variance from the fair market value [Section 55A(a)].
(b) Where the Assessing Officer is of the opinion that the fair market value of the asset
exceeds the value of the asset by more than Rs. 25,000 or 15 per cent of the value
claimed by the assessee whichever is less [Section 55A(b)(i) read with Rule 111AA].
(c) Where the Assessing Officer is of the opinion that, having regard to the nature of an asset
and relevant circumstances, it is necessary so to make a reference to the Valuation
Officer [Section 55A(b)(ii)].
18. ADVANCE MONEY RECEIVED [SECTION 51]
Tax treatment of advance money

forfeited on failure of negotiations
for transfer of a capital asset
[Sections 51 & 56(2)(ix)]
If advance was If advance was

received and received and
forfeited before forfeited on or
after 1-4-2014
1-4-2014
Advance forfeited to be
deducted while determining Advance forfeited to be taxed
Cost of acquisition for under 56(2)(ix) as
computing capital gains income from other sources
Taxability is postponed to the year

Tax liability is attracted in the
of actual transfer of capital asset.
Note – IMP year of forfeiture of advance
✓ The advance forfeited upto 31.3.2014 is to be adjusted from the actual cost if the amount
forfeited by the Assessee and the person selling the asset are the same.
✓ If advance has been received and retained by the previous owner and not the assessee himself, then
the same will not go to reduce the cost of acquisition of the assessee

19. EXEMPTION OF CAPITAL GAINS
Relevant for Section 54 mentioned in the next page
'Provided that where the amount of the capital gain does not exceed two crore rupees, the
assessee may, at his option, purchase or construct two residential houses in India, and where
such option has been exercised,—
(a) the provisions of this sub-section shall have effect as if for the words "one
residential house in India", the words "two residential houses in India" had been substituted;
(b) any reference in this sub-section and sub-section (2) to "new asset" shall be
construed as a reference to the two residential houses in India:
Provided further that where during any assessment year, the assessee has exercised the option
referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the
same or any other assessment year.
S. No. Situation Investment
1. Where the amount of One Residential house in India should be –

capital gains exceeds Rs.
 Purchased within 1 year before or 2 years after the date of
2 crore
transfer (or)
 Constructed within a period of 3 years after the date of transfer.
2. Where the amount of

 Purchase two residential houses in India within 1 year before
capital gains does not or 2 years after the date of transfer (or)
exceed Rs. 2 crore
 Construct two residential houses in India within a period of 3
years after the date of transfer.

S.No. Particulars Section 54 Section 54B Section 54D Section 54EC 54EE Section 54F
1 Eligible Assessee Individual/HUF Individual/HUF Any assessee Any assessee Any assessee Individual/HUF
2 Asset transferred Residential House (LTCA) Urban Agricultural Land Land & building Land or
Long term Any LTCA Any LTCA other than
forming part of an Residential House
Building or both
industrial undertaking (AY 19-20)
3 Other Conditions Income from such house Land has been used for L & B have been used for - - Assessee should not own
should be chargeable agricultural purposes by business of undertaking more than one residential
under the head "Income assessee or his parents for at least 2 years house on the date of
from house property". or HUF for 2 years immediately preceding transfer. He should not
immediately preceding the date of transfer purchase within 2 years
the date of transfer. or construct within 3 years
The transfer should be by after the date of transfer,
way of compulsory another residential house.
acquisition of the
industrial undertaking
4 Qualifying asset i.e. asset One Residential House Land for being used for Land or Building or right Bonds of NHAI or RECL Unit issued before One Residential House
in which capital gains has situated in India agricultural purposes. in land or building of or any other bond notified 1.4.2019 of Specified situated in India.
to be invested purchased by assessee industrial undertaking by Central Govt. (PFC, Fund notified by Central
or Legal Representatives IRFC) (Redeemable after Govt.
5 years)
5 Time limits for purchase / Purchase within 1 year Purchase with period of 2 Purchase construct within Purchase with a period of Purchase within a period Purchase within 1 years
construction before or 2 years after the years after the date of 3 years after the date of 6 months after the date of of 6 months after the date before or 2 years after the
date of transfer transfer. transfer. for shifting or re- transfer of such transfer. date of transfer or
(or) establishing the existing Construct within 3 years
construct with 3 years undertaking or setting up after the date of transfer.
after the date of transfer a new industrial
undertaking
6 Amount of Exemption Cost of new Residential Cost of new Agricultural Cost of new asset or CG, CG or amount invested in CG or amount invested in Cost of new Residential
House or CG, whichever Land or CG, whichever is whichever is lower. specified bonds, notified units of specified House > Net sale
is lower, is exempt. lower, is exempt. whichever is lower. fund, whichever is lower. consideration of original
Maximum permissible Maximum permissible asset, entire CG is
investment out of CG investment in such units exempt.
arising in any FY is Rs. 50 out of CG arising in any Cost of new Residential
lakhs, whether such FY is Rs. 50 lakhs, House < Net sale
investment is made in the whether such investment consideration of original
current FY or next FY or is made in the current FY asset, proportionate CG is
both. or next FY or both. exempt.
7 Lock in period of not 3 years from date of 3 years from date of 3 years from date of 5 years form the date of 3 years from date of 3 years from date of
transferring the newly acquisition/ purchase acquisition acquisition acquisition (Don’t transfer acquisition acquisition/ purchase
acquired asset or convert into money)

S.no. Particulars 54G 54GA 54GB

1 Eligible Assessee Any assessee being an Any assessee being an Individual/ HUF
Industrial undertaking Industrial undertaking
2 Asset transferred Land, Building, P&M Land, Building, P&M Long term residential
property (house or plot of
land)
3 Other Conditions Transferred from Urban Transferred from For eligible start up – Long
area to Non-Urban area Urban area to SEZ term residential property
should be transferred upto
31.3.22
4 Qualifying asset Land, Building, P&M + Land, Building, P&M + Subscribe to > 25% of equity
i.e. asset in which Shifting charges Shifting charges shares of start- up company
capital gains has upto 139(1)
to be invested & then Company should use
the amount for purchasing
P&M within one year from
the date of subscription in
equity shares.
5 Time limits for 1 year before or 3 years 1 year before or 3 years New assets should be
purchase / after date of transfer after date of transfer purchased by due date of
construction return filing
6 Amount of Cost of new asset or CG, Cost of new asset or Amount of CG x (Amount
Exemption whichever is lower. CG, whichever is lower. Invested/ Net Consideration)
7 Lock in period of 3 years from date of 3 years from date of 5 years from date of
not transferring acquisition/ purchase acquisition/ purchase acquisition/ purchase
the newly (Shares & P&M)
acquired asset
However, in case of a new
asset, being computer or
computer software the lock
in period is 3 years

25%

20. Few other pointers

Capital Gains Account Scheme (CGAS)
Under sections 54, 54B, 54D, 54F, 54G and 54GA, capital gains is exempt to the extent of investment of
such gains/ net consideration (in the case of section 54F) in specified assets within
the specified time. If such investment is not made before the date of filing of return of income, then the
capital gain or net consideration (in case of exemption under section 54F) has to be deposited under the
CGAS.
Time limit
Such deposit in CGAS should be made before filing the return of income or on or
before the due date of filing the return of income, whichever is earlier.
Consequences if the amount deposited in CGAS is not utilized within the stipulated time of 2
years / 3 years
If the amount deposited is not utilized for the specified purpose within the stipulated period, then
the unutilized amount shall be charged as capital gain of the previous year in which the
specified period expires. In the case of section 54F, proportionate
amount will be taxable.
Consequence of breaching the lock in period i.e. if the assets are sold before the
stipulated time limit
Under section 54,54B, 54D, 54G, 54GA – In these sections the cost of acquisition of new assets shall
be reduced by the amount of capital gains exempt earlier under respective sections.
Under Section 54F –
Consequences where the assessee “purchases” any other residential house within a period of 2
years or “constructs” any other residential house within a period of 3 years from the date of
transfer of original asset:
The capital gains exempt earlier under section 54F shall be deemed to be taxable as long-term
capital gains in the previous year in which such residential house is purchased or constructed.
Consequences if the new house is transferred within a period of 3 years from the date of its
purchase
• Capital gains would arise on transfer of the new house; and
• The capital gains exempt earlier under section 54F would be taxable as
long-term capital gains.
Under Section 54EC/EE - Capital Gains exempt earlier shall be shall be LTCG of the PY in which
the asset is transferred.
Extension of Time for Acquiring New Asset or Depositing or Investing Amount of Capital
Gain (Section 54H)
This section states that where the transfer of the original asset is by way of compulsory acquisition under
any law and the amount of compensation awarded for such acquisition is not

received by the assessee on the date of such transfer, the period of acquiring the new asset by the
assessee referred to in Sections 54, 54B, 54D, 54EC and 54F or for depositing or investing the amount
of capital gain shall be extended. This extended period shall be reckoned from the date of receipt of
such compensation.
21. Tax on long-term capital gains in case of specified securities [Section - 112A
(Finance Act of 2018]
1. Section 112A (Very Important) [New Section Inserted]
a. Applicability
Applicable on sale of equity share listed on a recognized Stock exchange or unit of
equity- oriented fund or unit of business trust, where such sale transaction is chargeable
to securities transaction tax (STT).
b. Conditions:
The conditions for availing the benefit of this concessional rate are–
(a) In case of equity share in a company, STT has been paid on acquisition and
transfer of such capital asset
(b) In case of unit of an equity-oriented fund or unit of business trust, STT

has been paid on transfer of such capital asset.
Further, LTCG arising from transaction undertaken on a recognized stock
exchange located in an International Financial Service Centre (IFSC) would be
taxable at a concessional rate of 10%, where the consideration for transfer is
received or receivable in foreign currency, even though STT is not leviable in
respect of such transaction.
c. Position before amendment

Prior to 01.04.2018 any LTCG on sale of such specified securities was exempt
under Section 10(38). This exemption has been withdrawn by the finance Act,
2018 w.e.f. Assessment Year 2019-20 and a new section 112A is introduced in the
Income-tax Act.
d. Amount chargeable to tax as per the Finance Act 2018
As per this new section, where the total income of an assessee, includes any
LTCG income [which was earlier exempt under section 10(38) upto 31.03.2018]
shall now be taxed at the rate of 10% on such capital gains exceeding Rs.
1,00,000 i.e. tax will be applicable only on the amount which is over & above
Rs. 1 Lacs
Note
1. Point of taxation - Section 112A is applicable if Specified long term Capital Asset
is sold on or after 1.4.2018.
If Capital Asset is sold on or after 1st Feb 2018 but upto 31st March 2018, full
exemption u/s 10(38) will be available

e. Cost of Acquisition
The cost of acquisitions for computing LTCG in respect of a listed equity share
acquired by the assessee before February 1, 2018, shall be deemed to be the
“higher” of following:
The actual cost of acquisition of such In case the specified asset

has been acquired before
or 1.4.2001, then FMV as on
1.4.2001 can be considered
as the Cost of Acquisition.
Lower of following:
Fair market value of such shares as on January 31,

2018;
or
Actual sales consideration accruing on its transfer
Please remember – Through above comparison we are just ascertaining the cost. For
calculation of Capital Gains, the cost has to be deducted from the Sale Consideration.
Illustration
A B C D E F
Cases Actual FMV Sale Lower of Cost of Capital Gain/ Loss
Cost as on Value FMV & acquisiti
(C – E)
31.1.18 Sale on
Value (Higher
(B&C) of D & A)
I 100 200 250 200 200 50
II 100 200 150 150 150 Nil
III 100 50 150 50 100 50
IV 100 200 50 50 100 (50)
[This Capital Loss can be
set off & C/f normally]
Meaning of Fair Market value - The highest price of the capital asset quoted on such
exchange on the said date.
f. Few important points
• The benefit of indexation shall not be allowed on such LTCG.
• Deductions under chapter VIA (section 80C to 80U) not to be allowed from such
LTCG.
• Rebate of tax under section 87A not to be allowed from the tax payable on such
LTCG.
• Section 112A is available to all assessee’s including Non-Residents and Foreign
Institutional Investors.
• Section 112A is available to those assessee’s who holds the shares/ units as
capital assets and not as Stock in Trade.
• Losses u/s 112A can be normally carried forward/ set off.
• Losses (LT/ST) can be set off against the LTCG referred to u/s 112A.
g. Adjustment of Unexhausted Basic Exemption Limit: In the case of resident individuals or

HUF, if the basic exemption is not fully exhausted by any other income, then such long-term
capital gain exceeding Rs. 1 lakh will be reduced by the unexhausted basic exemption limit
and only the balance would be taxed at 10%.
However, the benefit of adjustment of unexhausted basic exemption limit is not available in the
case of non-residents.
22. TAX RATES
Short-term Capital Gains (STCG)
– STCG is clubbed with Total Income and therefore charged to tax at normal rates
– However, STCG on transfer of listed equity shares / unit of an equity-oriented
fund / unit of a business trust, where STT has been paid, STCG is taxable @
15% under section 111A.

Long-term Capital Gains (LTCG)
Long term Capital gain

Section 112
Resident N.R. + Foreign

Indi/HUF AOP/BOI/ Firm/Cos. Companies
Normal assets
Assets, other Unlisted
than unlisted securities or
@ 20% Securities or shares of Pvt.
shares of Cos.
ZCB & Listed
securities PVT. Cos.
(other than @ 10%
units) @ 20% (without benefit)
of indexation &
Foreign
lower of
currency
Fluctuation
20% or 10%
without
indexation
.
Note:
• If STT has been paid for listed shares or a unit of equity-oriented fund / business
trust, the LTCG is taxable @10%, if such LTCG is > Rs. 1,00,000 under section 112A.
• STT is not allowed as a deduction in the computation of Capital Gains.
• No deduction under Chapter VI-A against incomes which are taxable at a lower
rate.
Adjustment of LTCG u/s 112, u/s 112A and STCG u/s111A against the basic exemption
limit
Only a resident individual/HUF can adjust the basic exemption limit (i.e. Rs. 2,50,000 or
3,00,000 or Rs. 5,00,000 limits) against LTCG u/s 112, u/s 112A(if amount > 1,00,000)
and STCG u/s 111A. Thus, a non-resident individual/ HUF cannot adjust their basic
exemption limit (Rs. 2,50,000) against such capital gains.
23.Case Laws
1. Whether, for the purpose of computing the period of holding of the property, the date of allotment
letter issued by the builder of the flat or the date of registration of the property has to be
considered for determining the nature of capital asset – long-term or short-term?
CIT v. S.R. Jeyashankar (2015 Madras HC)
In effect, the P&H HC (in a similar case) held that the allottee gets the title to the property on
issuance of allotment letter and payment in installments is only a consequential act upon which delivery of
possession to the property flows. The Madras HC also noted that the Punjab &
Haryana HC had taken a similar view in Vinod Kumar Jain’s case Accordingly, the Madras HC held that
the assessee had rightly claimed the benefit of long-term capital gain, since the holding period exceeded
36 months (i.e., from 22.02.2005, being the date of agreement, to 10.04.2008, being the date of sale of
property).
2. What would be the period of holding to determine whether the capital gains on renunciation of
right to subscribe for additional shares is short-term or long-term?
Navin Jindal v. ACIT (2010) (SC)
For determining whether the capital gains on renunciation of right to subscribe for additional
shares is short term or long-term, the period of holding would be from the date on which such right to
subscribe for additional shares comes into existence upto the date of renunciation of such right.
3. Whether indexation benefit in respect of the gifted asset shall apply from the year in which the
asset was first held by the assessee or from the year in which the same was first acquired by the
previous owner?
CIT v. Manjula J. Shah (2013) (Bom.)
The indexed cost of acquisition in case of gifted asset has to be computed with reference to the year in
which the previous owner first held the asset and not the year in which the assessee became the owner of
the asset.
4. Would an assessee be entitled to exemption under section 54 in respect of purchase of two flats,
adjacent to each other and having a common meeting point? CIT v. Syed Ali Adil (2013) (A.P.)
The Andhra Pradesh High Court, on the basis of the above rulings of the Karnataka High Court, held that in
this case, the assessee was entitled to investment in both the flats purchased by him, since they were
adjacent to each other and had a common meeting point, thus, making it a single residential unit.
5. Can exemption under section 54EC be denied on account of the bonds being issued after six
months of the date of transfer even though the payment for the bonds was made by the assessee
within the six month period?
Hindustan Unilever Ltd. v. DCIT (2010) (Bom.)
For the purpose of the provisions of section 54eC, the date of investment by the assessee must be regarded
as the date on which payment is made. The High Court, therefore, held that if such payment is within a period
of six months from the date of transfer, the assessee would be eligible to claim exemption under section 54EC.
6. Sale of a Running Business with all Assets and Liabilities is a Slump Sale, would not attract Sec
50(2) of Income Tax Act
CIT v. Equinox Solution Pvt. Ltd
Concurring with the orders of the lower authorities, the bench comprising Justice R.K agarwal and Justice
Ajay Manohar Sapre held that the transaction was rightly treated as slum sale under section 48. “Section
50 (2) applies to a case where any block of assets are transferred by the assessee but where the entire
running business with assets and liabilities is sold by the assessee in one go, such sale, in our view, cannot
be considered as “short-term capital assets”. In other words, the provisions of Section 50 (2) of the Income
Tax Act would apply to a case where the assessee transfers one or more block of assets, which he was
using in running of his business. Such is not the case here because in this case, the assessee sold the
entire business as a running concern.”
7. Shankar Dalal & others v/s CIT (Bom.)

Provisions of local land laws should be considered while determining the land as agricultural land.
the Court held that if activities performed by assessee on the land are recognised as ‘agricultural’ activities
under the local land law, then the land can be treated as agricultural land, even if actual growing does
not take place.

8. Can exemption under section 54F be denied solely on the ground that the new residential house is purchased
by the assessee exclusively in the name of his wife?
CIT v. Kamal Wahal (2013) [Delhi High Court]
High Court’s Decision: The Delhi High Court, having regard to the rule of purposive construction and the
object of enactment of section 54F, held that the assessee is entitled to claim exemption under section
54F in respect of utilization of sale proceeds of capital asset for investment in residential house property
in the name of his wife.
9. Can advance given for purchase of land, building, plant and machinery tantamount to utilization of capital gain
for purchase and acquisition of new machinery or plant and building or land, for claim of exemption under
section 54G?
Fibre Boards (P) Ltd v. CIT (2015) [Supreme Court]
Supreme Court’s Decision: To avail exemption under section 54G in respect of capital gain arising from
transfer of capital assets in the case of shifting of industrial undertaking from urban area to non-urban
area, the requirement is satisfied if the capital gain is given as advance for acquisition of capital
assets such as land, building and / or plant and machinery.

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At Unique Academy For Commerce it is not just about teaching a subject,

Unique Academy For Commerce

1 Direct Taxes at a Glance 1.1 – 1.13

2 Basics & Residential Status 2.1 – 2.36

3 Incomes Exempt from Tax 3.1 – 3.15

4 Income from Salaries 4.1 – 4.33

5 Income from House Property 5.1 – 5.14

6 Profits and Gains from Business & Profession 6.1 – 6.45

7 Capital Gains 7.1 – 7.31

Unique Academy CA Saumil Manglani

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Taxation is a payment from natural persons or legal entity and it is levied

Until the early 1930s, it was universally accepted in principle that

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Rationale to levy Tax

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1. Tax is compulsory and not voluntary – A tax is imposed by law. So tax

2. Tax is contribution – Contribution means in order to help or provide

5. Government has the power to levy tax – Governments are practicing

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The primary purpose of taxation is to raise revenue to meet huge public

Objectives of taxes have been developed when the functions of the

• Source of Revenue to Government- Taxes are imposed so as to

 Redistribution of income and wealth- Tax is a means of ensuring the

• Economic significance of taxes- Taxes are used from economic point

• Economic growth: Taxes are considered as a tool for economic growth

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• Enforcing government policy: The Government can encourage

• Economic stability: Maintaining economic stability is one of the tax

Direct Vs Indirect Tax

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Direct and Indirect taxes

Point of Direct Tax Indirect Tax

Example Income Tax. Goods and Services Tax.

Penalty It is levied on the Assessee. It is levied on supplier of Goods &

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5. Good instrument in the case of inflation. -

6. Simplicity: - Direct taxes are simplicity, while

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Merits of Indirect Tax Demerits of Indirect Tax

1. High revenue production: - Indirect taxes 1. Regressive in effect:-Essential

Taxation in India during Ancient Time

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Background of Income tax in India

Income Tax Act, 1961

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Tax Structure in India

Schedule VII- Enumerates powers under three lists

o Union List – Powers of Central Government

o Legislative List- Powers of State Government

Some of the major taxes under respective lists are:-

Central  Customs including export duties

State  Taxes on agricultural income

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• Member (Income Tax)

• Member (Legislation and Computerization)

• Member (Personnel & Vigilance)

• Member (Audit & Judicial)

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