Acm 302 Unit-1 Ay 2024-25

ACM 302 INCOME-TAX (AY 2024-25) UNIT-I
UNIT - I
Lesson - 1
An overview of Income-tax
Objectives:
▪ to introduce Income-tax Act
▪ to understand the different fundamental definitions of various terms used in
Income-tax Act.
Introduction:
Income tax is charged on income gains or profits earned by a person defined under
Income Tax act, 1961. However, every receipt does not constitute the taxable income
as per Income Tax Act, 1961. There is a difference between receipt and income. If a
person receives money on account of a transaction it would be called as receipt but it
will not be taxable fully unless no other expenses are incurred by the person to derive
such receipt. The receipt will be taxable when it converts into income. A receipt
converts into income by deducting expenses from receipt. For example a person sells
a house property for Rs.2 lacs, under Income-tax Act Rs.2 lacs will not be fully taxable
instead of his receipt of Rs.2 lacs, the cost of acquisition of the house property will be
deducted and remaining amount would be taxable. In case of salaried class person,
the entire amount of salary received from employer is not included under the head
‘salaries’, whereas some deduction available under this head will be allowed to
determine the income from salaries. With the help of the above discussion, it can be
concluded that income tax is charged on income not on receipt.
In India income tax is governed by Income-tax Act 1961 which came into force on
1.4.1962 in India. Income tax Rules 1962, The Finance Act and Central Board of Direct
Taxes (CBDT) circulars are also considered to solve the complications of income tax.
Fundamental Definitions:
(a) Income
The term ‘income’ infact, has not been defined in the Income tax Act, 1961, so as to
make a layman understand what it really means. According to the various courts
‘decision’ any sum received regularly with a definite source, is called as income.
However, section 2(24) of the Act, an interpretation clause , states as to what is
included in income for the purpose of taxation , to understand the meaning of the term
, the item included in ‘income’ may be looked upon at. They are:
(i) Profit and gain
(ii) Dividend
1
(iii) Voluntary contribution received by (a) a trust, created wholly or partly for charitable
or religious purpose; or (b) an institution established wholly or partly for such purposes;
or (c) a scientific research association; or (d) a sport and game association.
(iv) Perquisites or profit, available in lieu of salary that is taxable in the head of salary.
(v) Any allowances (a) to meet the expenses exclusively for the performance of his
duties; or (b) to meet his personal expenses at the place where he performs his duties.
(vi) Benefits or perquisites obtained by a director or by a person having substantial
interest in any company or relatives of a director or such a person.
(vii) Profit of business and profession, chargeable to tax.
(viii) Profit on sale of a license granted under the imports (control) order, 1955.
(ix) Cash assistance received against export under any scheme of the government of
India.
(x) Capital gain, chargeable to tax.
(xi) Profit and gain of a mutual insurance company or a co-operative society.
(xii) Any winning from lottery, cross-word puzzle, horse -races, card games or games
of gambling or betting.
(xiii) Any sum received by an assessee from his employees as contribution to any
provident fund and supper-annuation fund or any fund created for welfare of such
employee.
(xiv) Remuneration or interest, salary, bonus, commission received by a partner from
the firm under the limit of deduction, u/s 40(b).
(xv) Any sum realized in the previous year, which had been allowed as a deduction
earlier year.e.g., recovery of bad debt.
(xvi) Any duty of custom or excise repaid or repayable as drawback to any person
against exports under the custom and central excise drawback rules, 1971.
(xvii) Any sum received under a keyman insurance policy including the sum received
by way of bonus on such policy.
(xviii) ) Any sum received under an insurance policy issued after 31.03.2003 but
before 01.04.2012 in respect of which the premium payable for any of the years during
the term of the policy exceeds 20% of the sum assured. Any sum received under an
insurance policy issued after 31.3.2012 in respect of which the premium payable for
any of the years during the terms of the policy exceeds 10% of the actual capital sum
assured.
(xix) any sum received by an individual, or a Hindu undivided family from any person
in cash or by a cheque or draft or by any other mode or by way of credit, otherwise
than by way of consideration for goods and services if such income exceeds
Rs.50,000. Under this clause, amount received due to natural love and affection,
gratuity, pension, bonuses paid by the employer to the legal dependent of deceased
employee are not included.
(xx) If the assessee receives (in cash or kind), subsidy or grant or cash incentive or
duty drawback or concession, or reimbursement from central, State Governments or

from any agency or authority. If such subsidy or grant or reimbursement is considered
for determination of the actual cost of the asset it will not be treated as income. The
LPG subsidy and other welfare subsidies received by an individual shall not be
included in his income.
(xxi) Maturity proceeds of Life Insurance Policy shall be taxable income if premium
exceeds Rs. 5,00,000 p.a. and issued on or after 01-04-2023. Unit linked policy is not
included in this case.
Thus, it is evident from the item included in section 2(24) that the term ‘income’ is an
extensive term in the income-tax Act, 1961.Infact income means a monetary income
derived from definite source, such as
(1) Salaries;
(2) House property;
(3) Business or profession;
(4) Capital gain; and
(5) Other sources
These sources are known as ‘heads of income’.
Important rules regarding incomes

The following rules must be taken into consideration very carefully while calculating
the income under the Income-tax Act;
(1) Legality of income. Any income, whether legal or illegal, is taxable in the income
tax, provided it is a taxable income. It is immaterial that a particular income should not
be taxable if such income is derived from an illegal source. Any income earned from
an illegal source will also be treated as income, provided otherwise it is a taxable
income. For example, an income earned by a prostitute is also taxable under Income-
tax Act.
(2) Nature of receipt. Lump sum receipt is also considered as income. Arrears of pay
(salary) come into this category. It is not essential that income should be received at
regular interval like weekly, monthly, quarterly, or annually. If any income derived
occasionally, e.g. capital gain or any casual income, that will also be treated as income
as per rules of income tax.
(3) Source of income. Income should be received from outside. Only such incomes
are charged to tax in the Income-tax Act, 1961, that are derived from the outside
source. In other words, income earned on account of transaction made by an individual
or any assessee with some outsider, i.e., other than assessee, shall be chargeable to
income tax. For example, if a club refunds the subscription to its member this income
will not be taxable in the hand of member.
(4) Form of receipt. It is not necessary that income must be received in the form of
money, receipt in kind or service, having money equivalent, can also be income but
such form of income must be measured in term of money. For example, perquisites
taxable under the head of salary come into this category.
(5) Right to receive income. If there is a dispute regarding the title of the income,
the recipient of such income is liable to pay tax. For example, A and B claim the title
of a property which is let out, but A, receives the rent of this house. Although, the title
of the property is under dispute but as per the income tax rules, this income will be
taxable in the hand of A who is the receiver of the rent.
(6) Constitution of income. Personal gifts, presents, pin money, dharmada, etc., do
not constitute income.
(7) Relief as income. Mere relief from expenses is not income. As per the provisions
of Income-tax Act 1961, a person is not charged to tax on what his pocket saves but
on what goes into his pocket. For example, where the manager of accompany
foregoes his remuneration, it will not be treated as income in the hand of the company.
(8) Time of receipt. Whether a particular receipt is income or not, it would be decided
at the time of receipt, if an amount is not recognized as income at its first instance,
afterwards also it will not be considered as income, For example, advance money
whenever it is forfeited will not be included in the income on the basis of this concept.
(9) Earning of income. Under income tax, income is charged to tax on earned as
well as receipt basis. If an assessee has earned an income but it is not actually
received by the assessee it would also be taxable because he is entitled to receive it.
For example, interest on National Savings Certificate is taxable under the head
‘income from other sources’ on the basis as described above.
(10) Charge on income. Where under a legal obligation, a charge is created on the
income of a person, and then to the extent of such charges, it will not be considered
as his income provided charge is a legal one not voluntary created by the assessee to
avoid the tax.
(11) No double taxation: An income cannot be put to tax twice in the hands of same
person unless specifically provided in the Income Tax Act, 1961.
(b) Agricultural income
The term agricultural income has been defined in section 2(1A) of the Income-tax Act.
According to it, the agricultural income pertains to;
(1) Any rent or revenue derived from land, situated in India and used for agricultural
purposes.
(2) Any income derived from such land by;
(a) Agricultural operation; or
(b) Any activity ordinarily employed for making the agricultural produce fit for the
Market; or
(c) The sale of agricultural produce, raised.
(3) Any income derived from any building, in which any activity mentioned in above
Para 2(b) is carried on, provided that:
(a) The building is on or in the immediate vicinity of the land and is being used by
the cultivator or the receiver of rent as a dwelling house or as a store;
(b) (i)some rent or local tax is levied upon such land in India, which is assessed
by the government authorities and recovered by them; or
(ii) If no local tax is levied, then that land must be situated outside a maximum of
8 kms. of the local limit of any Municipality or Cantonment Board or within the local
limit of any Municipality or Cantonment Board having a population of not less than
10000.
Population (Municipality or Cantonments Board) Distance (in Km.) and

(measured aerially)
[Not More than]
(i) 10,000 but not exceeding 1 Lac. 2 Kms.
(ii) morethan 1 Lac. But not exceeding 10 Lac. 6 Kms.
(iii) morethan 10 Lac. 8 Kms.
It has also been clarified that population shall mean the population according to last
preceding Census of which the relevant figures have been published before the first
day of the previous year.
Thus, it is evident from the above that the essential elements of ‘agricultural income’
are:
i. the income must have been received from the land
ii. the land must have been situated in India and
iii. The land must have been used for agricultural purpose.
Kinds of Agricultural income
The following are five kinds of agricultural income:
1. Rent or revenue derived from land used for agricultural purpose.
2. Income derived from cultivation of land.
3. Income derived from such land, used for the performance of any activity, ordinarily
employed to make the produce fit for the market.
4. Income derived from sale of produce by the cultivator or the receiver of rent in kind.
5. Income derived from any building used for agricultural operations.
6. Income from saplings or seedlings grown in a Nursery.
Non-agricultural Income
The following incomes, in spite of being concerned with land, are not treated to be
agricultural incomes as the land is not used for agricultural purpose in such cases.
These are:
1) income from dairy farms
2) Income from markets.
3) Income from sale of water for irrigation purpose.
4) Royalty income from mines, e.g, coal, stone, etc.
5) Income from fisheries.
6) Income from land used for storing agricultural products.
7) Remuneration received by manager of agricultural farms.
8) Income from sale of earth from making bricks.
9) Dividend from a company engaged in agricultural activities.
10) Income from self-grown grass, trees and bamboos.
11) Income from such grazing grounds whose cattle are not used for any purpose.
12) Income from butter and cheese making.
13) Income from poultry farming.
14) Maintenance allowance charged on agricultural land.
15) Income from interest on arrears of rent of agricultural land.
16) Income from supply of water.
17) Income from purchasing standing crop.
Partly agricultural income

Sometimes there is composite income, which is partially agricultural and partially non-
agricultural, for determining the non-agricultural income chargeable to tax, the market
value of any agricultural produce which has been raised by the assessee and which
has been utilized as a raw material in such business, shall be deducted. No further
deduction shall be made in respect of cost of cultivation incurred by the asessee as a
cultivator.
The rules for ascertaining share of agricultural income (partly agricultural income) in
total income are given below:
Sources of total income Agricultural Non-agricultural

income income
1. income from growing and 60% 40%
manufacturing of tea in India
2. Income from growing and 65% 35%

manufacturing of centrifuged
latex or cenex from rubber in
India
3. Income from sale of coffee 75% 25%

grown and cured by the seller in
India.
4. Income from the sale of coffee 60% 40%
grown, Cured, Roasted, and
grounded by the seller in India,
with or without mixing of
Chicory or other Flavorings
Ingredients,
Inclusion of agricultural income in total income

Agricultural income is totally exempted from liabilities to income tax. But, with effect
from the assessment year 1974-75, it has become a factor in computing tax on the
non-agricultural income of an individual, Hindu Undivided Family , association of
person and artificial juridical person whose total income (excluding agricultural
income) exceeds the minimum taxable limit (i.e. Rs.3,00,000 in case of senior citizens
(age of 60 years or more but less than 80 years), Rs. 5,00,000 in case of super senior
citizen (who is age of 80 years or more) and Rs.2, 50,000 in other case and the net
agricultural income exceeds Rs.5000. The agricultural income is included in the total
income for computing the rate of tax. However, as discussed earlier, such inclusion is
applicable only to the individual and HUF having non-agricultural income of more than
3,00,000; Rs. 5,00,000 or 2,50,000 as the case may be and the net agricultural income
exceeds Rs.5000.
Example:
A cultivator, whose non- agricultural income is Rs.1,00,000 and net agricultural income
is Rs.7000, will not pay tax. But a cultivator having non- agricultural income of
Rs.2,80,000, he is not a senior citizen and agricultural income of Rs.8000 will have to
pay income tax and his agricultural income shall be added to his total income for the
purpose of determining income tax rates.
Computation of net agricultural income

The various rules, pertaining to computation of net agricultural income, are here as
under:
(1) Rent received from agricultural land. It shall be determined like the income from
other source. Expenses which are incurred for earning such income will be
deducted.
(2) Calculation of agricultural income. This shall be calculated in the same way as
the computation of profit or gains from the business or profession are done and the
same deductions shall be permissible. It does not include the rent of agricultural
land and the income earned from the residential house used for the purpose of
agricultural activities.
(3) Income of the agriculturist’s house. If the cultivator uses the dwelling house for
the purpose of his personal residence, income from the cultivator’s house shall be
computed like the income from house property and the some deduction shall be
permissible.
(4) Agricultural income of association of person or body of individuals.
Where the assesse is a member of an association of person or body of individuals
(except H.U.F, a company and a firm) and the association and or body is not liable
to pay tax under this Act but has any association of person or body of individuals,
such income is computed in accordance with the rules and the share of the
asessee in the association of person or body of individuals or the loss is regarded
as the association of person or body of individuals of the assessee.
(5) Sustaining agricultural losses instead of income. If agricultural loss is
sustained in some year instead of income, it can be made up in the same previous
year from the other source of agriculture.
(6) Payment of income tax by an assessee to the government. If any income tax
is paid by an assessee to the state government, for the agricultural income earned
by him, shall be deducted while computing the agricultural income.
(7) Loss arrived at while calculating agricultural income. If, while calculating the
net agricultural income, some loss is occurred then agricultural income shall be
treated as NIL and this loss cannot be made up from the income of other source.
Self Check Questions

State whether the following are the agricultural income or not:
(i) Income derived from grazing of cattle, in agricultural land, required for
agricultural activities.
(ii) Income derived from sale of forest trees of spontaneous growing nature.
(iii) Income from interest on arrear of rent, payable in respect of agricultural land.
(iv) Income received as dividend amounting to Rs.50,000 from a company whose
entire profits constitute agricultural income.
(v) Income received as dividend of Rs.20,000 from the tea company, whose 40%
profit was charged to income tax and the 60% constituted agricultural
income.
(vi) Income derived from leasing of land assessed to land revenue in India for
agricultural purpose.
ANSWER
(i) It is agricultural income as it is directly concerned with agricultural activities.
(ii) As none of the agricultural operations are performed on trees and they are self
grown, income from sale of such trees shall not be agricultural income.
(iii) As the income is not directly linked with the agricultural land, thus it is not an
agricultural income.
(iv) It is not an agricultural income as the dividend arises out of holding of shares and
not from the land, used for the agricultural purposes.
(v) As the dividend arise out of holding of shares, no matter whether the company,
declaring profit, earned them from agricultural land or not.
(vi) This income is completely of agricultural nature, as it is directly related with land,
leased out of agricultural purpose.
(c) Person
According to section 2(31) of the Income-tax Act ‘person’ includes;
(1) an individual, a natural human being, e.g., male or female, minor, etc;
(2) a Hindu undivided family ;
(3) a company ;
(4) a firm;
(5) an association of person or a body of individuals whether incorporated or not;
(6) a local authority
(7) every artificial juridical person, not falling any of the priding sub-clauses, e.g., a
statutory corporation, university, etc.
(d) Assessee
Sec. 2(7) of the Income-tax Act deals with the term assessee. Assessee means a
person who is liable to pay tax or any other sum of money, such as penalty, etc. under
the Income-tax Act. The tax or any such sum may be payable on the persons own
income or for minor, insane, deceased, successor or any foreigner. In general any tax
payer under this act is an assessee. The term assessee under Income-tax Act
includes:
(1) The person who is liable to pay any tax.
(2) The person who is liable to any other sum of money, such as penalty, fines interest
etc.
(3) The person taking up legal formalities for any other person’s income and paying
tax on it.
(4) The person who is deemed to be assessee under any provision of the income tax
act.
(5) The person who is deemed to be defaulter under any provision of the income tax
act.
(6) The person who has proceeds with the refund of tax, paid by themselves or on
account of some other.
Deemed Assessee
A deemed assessee is liable to pay income tax on income of other person. For
example, legal representative, who inherit the property on the death, is deemed
assessee in respect of his assessment.
Assessee in Default
A person has to fulfill the legal obligation under income tax act to pay tax on behalf of
other. If he fails in it due to which income tax department suffers a loss of revenue,
such person has to compensate this loss. For this loss, he is called assessee in
default.
(e) Casual income
Casual income is that income the receipt of which is accidental and without any
stipulation. It is in nature of an expected wind fall. The examples of such income are;(a)
winning from lottery, (b) winning from cross-word puzzles, (c) winning from card
games,(d) winning from other games of any sort, (e) winning from gambling or betting
of any form of nature.
Exceptions of casual income. The casual income does not include;
(i) Capital gain
(ii) Receipt arising from business or profession or occupation.
(iii) Bonus, gratuity, perquisites, etc.
(iv) Amount received on account of voluntary retirement.
Other provisions.
(i) No expenses are deductible for casual income
(ii) Instead of casual income, if it is a loss then set off losses is not permitted.
(iii) If the winning from horse- race exceeds Rs. 10,000, tax will be deducted at
source as per prescribed rates.
(iv) If the winning from any lottery, cross-word puzzles, card games etc. exceeds Rs.
10,000, tax will be deducted at source as per prescribed rates.
(v) Rate of Tax on winning lottery crossword puzzle races gambling, betting etc. as
casual income is 30%.
Self Check Questions
State whether the following receipt are casual income:
(i) Mr. X received Rs.5000 for acting once as an arbitrator without any
stipulation as to remuneration.
(ii) Mr. Y received Rs.5000 for acting as an arbitrator with a clear and definite
stipulation for the said remuneration.
(iii) Mr. X a decree holder, received interest of Rs.5000 under an order of court
granting stay of execution of the decree on judgment- debtor Mr. Y.
(iv) Mr. X is in the service of Mr.Y. Mr Y’s son was lost and Mr. X traced him out
without any stipulation of reward but Mr. Y gave him a reward of Rs. 5000.
Answer
Examining casual income
(i) The receipt is of a casual and non recurring nature as there was no stipulation for
remuneration.
(ii) Mr. Y was offered a definite remuneration for acting as an arbitrator and he
accepted the work of the remuneration, hence the receipt is not of a casual income.
(iii) Interest of Rs.500 received by the decree- holder is not a casual income.
(iv) It is of casual income and non-recurring nature as there was no stipulation for the
reward.
(f) Assessment Year
According to section 2(9) of the income tax act ‘an assessment year means the period
of 12 months commencing on 1st day of April every year and ending on 31st day of the
March of the next year. This period is fixed by law and the income tax is charged upon
the income of the previous year. For instance, the current assessment year 2024-2025
which commenced on 1st April 2024 will end on 31st March 2025.
(g) Previous year
Section 3 of the income tax act defines this term as the duration of 12 months
immediately preceding the assessment year. The previous year will be uniform for all
the assessee, with effect from the assessment year 1989-90. Before it, the assesse
used to maintain their previous year at their Will, e.g., Diwali year, calendar year, etc.
Further if any business or profession commence on any date, falling during the
financial year, the previous year will commence from such date of setting up and will
end on the next coming 31st March. In such a case the term of previous year may be
less than 12 months.
For example, a business started on 23rd November 2023 in this case the previous year
shall commence on 23rd November 2023 and shall end on 31st March 2024. It will
include only 4 months and 8 days.
At present also there is no compulsion on any assessee to close the account on 31 st
March only. Assessee may close the account on a date different from 31st March.
However, he would be required to present his account on 31 st March also, for the
income tax purpose. If any assessee closes the account at the different date from 31 st
March, he would be required to find out income as per accounting year and financial
year separately.
Exception to the Rule
The following are some exceptions to the rule that income tax is charged on the income
of the previous year during the assessment year.
(1) Income of non-resident shipping companies - In case of non-resident being
shipping companies if they do not have any agent in India. 7.5% of the amount
paid or payable on account of such carriage would be deemed to be the income of
such shipping companies.
(2) Income of person going abroad - In case of person going abroad from India and
with no intention to return during current assessment year, the tax shall be levied
on his income during current assessment year.
(3) Transfer of property - Every transfer of property with the intention to avoid
payment of any tax liability shall be liable to pay tax in the current year, in which
such transfer took place.
(4) Closure of business - In case of the closure of business during the current
assessment year, the tax on the income of such business, shall be payable in the
current year of its earning.
(5) Income AOP, BOI or an artificial juridical person- formed for a particular
purpose and purpose is fulfilled during current financial year.
(h) Gross total income [Sec. 80B (5)]
It is a general concept that before computing the total income the gross total income
has to be computed. The term is meant with that income which is computed in
accordance with the provisions of the income tax act, before making any deduction
under section 80C to 80U. In other words, the Net income arrived at under various
heads of income is called gross total income.
(i) Total income [Sec. 2 (45)]
Total income is also known as the taxable income. Total income refers to the income
arrived at after deducting the permissible deduction under section 80 from the gross
total income. It is calculated by adding incomes of all Heads and then allowing
deduction from 80C to 80 U.
Income from Salaries+ Income from House property+ Income from Business or
Profession+ Income from Capital gain+ Income from Other sources- deduction under
section 80C to 80U.
Distinguish between gross total income and total income
S.NO. Basis Gross Total Income Total Income
1 Deduction The total of various heads of The total income is computed
income is gross total income. after deducting the deduction
explained under sec. 80C to
80U from the gross total
income.
2 Computation Tax is not computed on gross Tax is always computed on
of tax total income. total income.
3 Rounding Gross total income is not Total income is calculated up
off brought to the nearest rupee of to the nearest rupee of ten-
ten-rupee unit. rupee unit.
4 Amount Gross total income is more Total income is mostly less
than the total income than the gross total income or
may be equal if deductions
from 80 C to 80 U are Nil.
5. Agricultural Agricultural income is not If agricultural income exceeds
Income included in GTI. Rs. 5000 and non -agricultural
income exceeds minimum
taxable limit then such income
will be included in the total
income of an individual or
HUF.
Practical Exercise
Exercise 1.
Mr. Tilok Chand Bothra commenced the following business on the following dates
and accounting period was under;
(1) Readymade cloth business: 1st October, 2022 (Diwali year),
(2) Iron business 1st April, 2023 (financial year).
(3) Sugar business: 1st July, 2023 (1st July to 30th June).
(4) Cement business: 1st January, 2024 (calendar year).
In each case, what will be the assessment year and what period will be treated as the
previous year for the relevant assessment year.
Solution
Case Period of previous year Assessment year
no.
1 1st October, 2022 to 31st March 2023 2023-2024
2 1st April, 2023 to 31st March 2024 2024-2025
3 1st July, 2023 to 31st March 2024 2024-2025
4 1st January 2024to 31st March 2024 2024-2025
Exercise 2.
Which period will be treated as the previous year for the income purpose for the
assessment year 2024-2025 in the following cases?
(1) Amit starts a new business on 1st November, 2023 and prepares final account on
30th June, 2024.
(2) Amita joined service in a company on 1st January, 2024 at Rs.12000 per month.
Her increment in salary will be on 1st January, 2025.
(3) Ashish maintains his account based on financial year.
(4) Abhay is a registered doctor and keeps his income & expenditure account on
calendar year.
(5) Aruna bought a house on 1st August, 2023 and let-out at Rs.6000 per month.
Solution:
Case Period of previous year Assessment
no. year
1 1st November, 2023 to 31st March 2024 2024-2025
2 1st January, 2024 to 31st March 2024 2024-2025
5 1st August ,2023 to 31st March 2024 2024-2025
Exercise 3.
A sugar factory crushed 41000 quintal of sugarcane during the previous year out of
which 6000 quintal of cane was produced on its own farm at a cost of Rs.13,20,000.
The remaining sugarcane was purchased from the market at the following rates:
20000 quintal @ Rs.279 per quintal 5000 quintal @ Rs.282 per quintal 10000 quintal
@ Rs.288 per quintal
During the previous year, the factory earned a total profit of Rs.5,00,0000. You are
required to determine separately the agricultural and non-agricultural income.
Solution:
Computation of Agricultural and Non-Agricultural incomes.
Rs.
Cost of sugarcane purchased from the market:
(1) 20000 quintal @ Rs.279 per quintal 55,80,000

98,70,000
Rs.98,70,000
Average market price = = Rs.282 per quintal
35000
Market value of cane produced (6000 quintal × Rs.282) 16,92,000
Less: cost of cane grown on own farm 13,20,000
Agricultural Income 3,72,000
Total profit 5,00,000
Less Agricultural Income 3,72,000
Non- Agricultural Income 1,28,000
Self Check Question

Q.1 What is income tax? What are the basis and procedure of charging income tax?
Or
Income tax is charged on income but there is no definition of the term income under the
income tax act; rather it only provide as to what is included in income. Discuss
Or
Income tax is a tax on income and not on receipt. Discuss this statement and explain
the main characteristics of the term income.
Or
What is income? Explain the fundamental principal of determining income.
Or
What is income? How can you divide heads of income?
Q2. Explain the following terms
(i) Person
(ii) Assessee
(iii) Deemed Assessee
(iv) Assessee in Default as per the income tax act , 1961
Q3. "Income tax is charged on the income of the previous year during the assessment
year.” State the exception to this general rule.”
Or
What is the previous year? Under what circumstances income of a person can be
assessed in the same year in which it is derived?
Or
What do you mean by term ‘assessment year’ and previous year? Explain.
Or
Distinguish between previous year and assessment year. State the exemption of
previous year.
Q4. Define the term ‘gross total income’ and ‘total income’. Also distinguish between
them.
Or
What do you understand by income? Distinguish between gross total income’ and ‘total
income.
___________
18
Lesson - 2
Determination of Residential Status & Tax Liabilities
Objectives
1. To determine the residential status of an assessee
2. To discuss the tax liabilities based on residence
Residence and tax liabilities
I. Residence of An Individual Assessee
As per the income tax act, tax assessed on the individual assessee’s income based on
his residential status according to the residence, there are three categories of assessee:
(1) Resident
(2) Not ordinarily resident and
(3) Non-resident
To decide upon the residential status of an assessee, the Act holds certain conditions
divided as under:
i.Basic Condition [SEC. 6(1)]
(A) A person has lived for total number of 182 days or more in the previous year, in India.
OR
(B) A person has during the preceding 4 years, lived in India for a total period of 365
days or more and has lived for 60 or more days, during the previous year, in India.
OR
(C) An individual being a citizen of India having total income, other than the income from
foreign sources exceeding Rs. 15,00,000 during the previous year shall be deemed
to be resident in India is that previous year, if he /She is not liable to tax in any other
country by reason of his domicile or residence or any other criteria of similar nature.
Exceptions
(i) if a person (Indian citizen), as a member of the crew of an Indian ship, goes outside
India in the previous year for the purpose of employment, then the limit of 60 days
(as stated in B above) is extended to 182 days. For this purpose, employment
includes self-employment or profession, or business provided work has been done
outside India. [CIT Vs O. Abdul Rasak (2011) 198 Taxman I (Kerala)]
19
(ii) if an Indian citizen or a person of Indian origin, living outside India, comes on a visit
to India in the previous year, (a) he must have stayed in India for at least 120 days
[in case total income, other than income from foreign sources, exceeding Rs. 15
lakhs during the previous year and (b) if total income, other than income from foreign
sources, is up to 15 lakhs during the previous year, he must have stayed in India for
at least 182 days during the relevant previous year instead of 60 days (as stated in
B above).
ii.ADDITIONAL CONDITIONS
(A) A person has satisfied, at least one basic condition for at least 2 years, out of the
immediately preceding 10 years.
and
(B) A person has stayed for 730 days or more during the immediately preceding 7 years,
in India.
Deemed to be Resident—An Indian citizen who is not liable to pay tax in any other
country or territory by reason of his domicile or residence or any other criterion of
similar nature, shall be deemed to be resident in India. The condition for deemed
residential status applies only if the total income, other than income from foreign
sources, exceeds Rs. 15 Lakhs during the relevant previous year.
II. Residential status of various types of Assessee
Residential status may easily be decided upon with the help of following chart:
Assessee Resident Not ordinarily Non-resident
resident
Individual If any one of the If any one of the If none of the basic
basic conditions A or basic conditions and condition is
B or C and both the none of the satisfied.
additional conditions additional condition
are satisfied. are satisfied.
Hindu Undivided (1) If the business is (1) If the business is If the business is
Family controlled and controlled and controlled and
managed by partially managed by in India. managed by wholly
or wholly in India. outside India.
20
(2) The Karta of the (2) The Karta of the

H.U.F. satisfies both H.U.F does not
additional conditions satisfy none of the
applicable in case of additional conditions
individual. as in case of
individuals.
Partnership firm or If the control and It is never a not If the entire control
association of management is ordinarily resident. and management is
persons situated wholly or situated outside
partially in India India.
during the previous
year.
Company If it is an Indian It is never a not If it is not Indian
company; or If its ordinarily resident company; and its
place of effective place of effective
management is in management is not
India during the in India during the
previous year in previous year or
case of Non-Indian Non-Indian
Company having Company having
turnover is more turnover is less than
than Rs. 50 Crores. Rs. 50 Crores
Incidence of residence on tax liability

The scope of total liabilities, according to the residential status, is as under:
(1) Tax liabilities of resident. The following incomes form part of total income in case
of resident in India:
(i) Income received in India like income from business situated in India.
(ii) Income deemed to be received in India like interest accrued on debentures of Indian
company.
(iii) Income accrued or arisen in India like service rendered in India, but amount received
outside India.
(iv) Income deemed to be accrued or arisen in India like service rendered outside India
in case of government employee.
(v) Income accrued outside India like rent from house property situated outside India.
21
(2) Tax liabilities of not-ordinarily resident. The following incomes form part of total
income in case of not-ordinarily resident in India:
(i) Income received in India
(ii) Income deemed to be received in India
(iii) Income accrued or arisen in India
(iv) Income deemed to be accrued or arisen in India
(v) Income accrued outside India from a business or profession controlled from India.
(3) Tax liabilities of non- resident. The following incomes form part of total income in
case of non- resident in India.
(i) Income received in India
(ii) Income deemed to be received in India
(iii) Income accrued or arisen in India
(iv) Income deemed to be accrued or arisen in India
The following table may be of great use in highlighting the tax incidence in brief:
Items of income Resident Not Non

ordinarily resident
resident
(i) Income received in India whether Taxable Taxable Taxable
earned anywhere.
(ii) Income earned in India whether Taxable Taxable Taxable
received anywhere
(iii) Income from business or profession Taxable Taxable Not
outside India which is controlled from Taxable
India.
(iv) Income earned and received outside Taxable Not Taxable Not
India. Taxable
(v) Income from business or profession Taxable Not Taxable Not
outside India which is controlled from Taxable
22
outside India.
(vi) Past untaxed income brought to India. Not Not Taxable Not
Taxable Taxable
Practical Exercise
Exercise 1.
Shri Krishna was born in Lahore in 1946. He is residing in America since June 1965. He
came to India on 1st October 2023 for visiting purpose and left India on 28th March, 2024.
Determine the residential status of Shri Krishna for the assessment year 2024-2025.
Solution:
There is an exception of the basic condition in case of a person of ‘Indian origin’. It means
that either assessee or either of his parent or any of his grand parent was born in un-
divided India, the exception is related to days of stay of the person during the visited
period, i.e., at least 182 days .
Shri Krishna stayed in India for 180 days during the previous year (31 +30+31 +31
+29+28) hence; he is a non-resident for the assessment year 2024-2025.
Exercise 2.
Shri Amitabh Bachchan went to America on April 1, 2023 a film shooting. Due to ill health
he had to stay there just after shooting. He came back to India on 25th September, 2023.
He had to go again on 8th December, 2023 and return India on 15th February, 2024. Is
Shri Amitabh Bachchan resident in India for the assessment year 2024-2025?
Solution
Shri Amitabh Bachchan was not in India for at least 182 days (actual stay 121 days)
during the previous year but has been in India at least 365 days for four years
immediately preceding the relevant previous year. Hence, he is non-resident in India.
He went out of India for employment purpose; therefore, he is entitled to the benefit of
182 days instead of 60 days.
23
Exercise 3.
Mr. Shiva has the following income for the previous year ending on 31 st March, 2024:
(1) Income from salary from govt. of India (taxable) Rs.60,000
(2) Interest from a foreign company received in
America and deposited in a bank there Rs.20,000
(3) Income from house property in India received in
America Rs.10,000
(4) Interest on debentures from an Indian company
Received in New York and spent there Rs.15,000
(5) Income was earned in America and received there
but brought in India Rs.18,000
(6) Income from business in Mumbai managed in America Rs.22,000
(7) Income from business in New York (controlled from
Delhi head office Rs.10,000
(8) His brother gifted him from New York Rs.10,000
(9) Dividend from a domestic company (gross) Rs. 2,000
Compute his taxable income, if he is (a) resident,(b) not ordinary resident and (c) non-
resident.
Solution: Computation of taxable income of Mr. Shiva
Assessment year 2024-2025
Items of income Resident Not Non
ordinary resident.
resident
Rs. Rs. Rs.
(1) Income from salary from govt. of India (taxable) 60000 60000 60000
(2) Interest from a foreign company received in 20000 - -

America and deposited in a bank there
(3) Income from house property in India received in 10000 10000 10000
America
(4) Interest on debentures from an Indian company 15000 15000 15000
24
Received in New York and spent there
(5) Income was earned in America and received 18000 - -

there But bought in India
(6) Income from business in Mumbai managed in 22000 22000 22000
America
(7) Income from business in New York (controlled 10000 10000 -
from Delhi head office)
(8) His brother gifted him from New York - - -
(9) Dividend from a domestic company (gross) 2000 2000 2000
Taxable income 157000 119000 109000
Self Check Question
Q1. How is residence of assessee determined, for the purpose of income tax ? Explain
the incidence of residence on tax liability?
Or
What are the different categories of assessee according to their status? Discuss
each of them in brief.
Or
The incidence of income tax depends on the residential status of a person. Explain.
Or
How is the tax liabilities of an assessee determine with reference to his residence?
Explain.
Q2.
(1) Mr. Anand living in America was appointed executive engineer in India on 1st April
2012. On 28th October 2023 he proceeded to Nepal. Where under the government
of Nepal, in a technical directorate, he worked on deputation for three years. In this
duration his family remained in India. In the tax assessment year 2024-2025,
describe his position regarding residence.
(2) American resident Mr. Johnson was appointed executive engineer in India 1 st
April 2010. On 28 Feb., 2018 he returned to America but left his family in India. He
came back to India on 31st January, 2024 and on 1st March, 2024, shifted his family
too, from America. On coming back to India he took up his post on 1 st February, 2024.
For the previous year 2023-2024, describe his position regarding residence.
Ans: (1) Resident, (2) Non-resident
25
Q 3. Following are the income of Mr. Ajay, for the previous year 2023-2024:
Rs.
(1) Profit of a business in New York received in India 8000
(2) Income from house property in Iran received in India 12000
(3) Income from house property in Pakistan deposited in a
bank there 15000
(4) Income from business in Pakistan (controlled from
India ) deposited in a bank 8500
(5) Out of the business profit (mentioned in item no.4)
Profit brought to India 6500
(6) Income accrued in India but received in England 8000
(7) Income from business in Indore 22000
(8) Agriculture income in India 6200
(9) Income from agriculture in England (the entire income
spent on the education of children in London) 6800
(10) Past untaxed foreign income brought to India in the
previous year 3000
You are required to compute taxable income of Mr. Ajay for the assessment year 2024-
2025 if he is (a) resident,(b) not ordinary resident and (c) non-resident.
Ans: (i) Rs. 80,300 (ii) Rs. 58,500 (iii) Rs. 50,000
Q4. Following are the income of Shri Kamal Anand, for the previous year 2023-2024:
Rs.
(1) Dividend from the Indian company 10,000
(2) Profit from business in Japan received in India 12,000
(3) Profit from business in Pakistan deposit in a bank there. This
business is controlled from India 20,000
(4) Profit from business in Indore (controlled by London head office) 11,000
(5) Interest received from a non-resident Mr.Abdul on the loan
provided to him for a business carried on in India 5,000
(6) Income was earned in America and received there, but brought
in India 8,000
(7) Share of income from Indian partnership firm 15,000
26
(8) Income from house property in India received in America

(calculated) 12,000
(9) Interest on debentures of Indian company received in Dubai 5,000
(10) Capital gain on sale of agriculture land situated in Ajmer 8000,
Compute his taxable income if he is: (a) ordinarily resident (b) not ordinarily resident
(c) non-resident
Ans: (i) Rs. 91,000 (ii) Rs. 83,000 (iii) Rs. 63,000
27
Lesson -3
Exempted incomes
Objectives
1. To explain the exempted incomes from tax
In the Income tax Act, some of the incomes have been exempted from tax liability.
These are known as the Exempted incomes. These may be divided into the
following categories:
I. Fully Exempted incomes
Such incomes which neither are included in the total income, nor any income tax is
levied upon them are known as fully exempted incomes e.g., income from
agriculture, casual income, income of the educational institute not for profit, bravery
awards, etc.
II. Incomes that are included in total income but no tax is payable on them.
Share of profit received by a member of an association of persons, or body of
individuals computed as per the section 67 A, shall not be liable to tax.
Fully Exempted Incomes
The following incomes are neither included in total income nor income tax is
payable on them:
(1) Agricultural income {sec.10 (1)}. Any income from land, situated in India which
is used for agricultural purpose is fully exempt.
(2) Receipt from Hindu undivided family [sec. 10(2)]. The share of income of an
individual as member of H.U.F. received from H.U.F. is fully exempt from tax
except in case of converted property.
(3) Share of a partner in firm’s income [sec. 10(2A)]. The share of profit of a
partner in the firm shall be exempt. The share of a partner in the firm will be
computed by dividing the taxable profit of the firm in the same proportion in the
profit-sharing ratio mentioned in the partnership deed. If a partner receives
interest, salary, commission, or other remuneration from his firm, it will be taxable
under business or profession.
(4) Leave travel concession [sec. 10(5)]. Any leave travel concession to an Indian
citizen from his employer in connection with his proceeding to any place in India
28
will be exempt as per the following provision:

(a) The maximum limit permitted by government is first class A.C. train fare or actual
amount spent, whatever is less.
(b) The exemption stated above, can be availed for two journeys performed in a
block of four calendar years.
(c) If such exemption is not availed in a block of four years, whether for both
journey or one journey then the amount of one journey will be exempt in the first
year of the next block of four year. In other words, maximum one year journey can
be carried forward.
(d) If the journey is not performed after taking leave travel concession the entire
amount received by employee shall be taxable.
(e) The amount exempt under this clause shall not exceed the amount of expenses
actually incurred for the purpose of such travel.
(f) For leave travel concession family includes the spouse and children of the
individual and the parents, brother and sisters of the individual or any of them,
entirely or mainly dependent on the individual.
(g) Leave travel concession shall be allowed for maximum of two children with effect
from 1-10-1998. However, this rule shall not be applicable to those children
whose birth are before 1-10-1998 and in case of multiple birth after one child.
(5) Allowance and perquisites outside India in case of government employee
(sec. 10(7) ). Any amount received by any Indian citizen from the government of
India for rendering the service outside India are fully exempted. The exemption
is available only for Indian citizen and the employee of the government of India.
(6) Gratuity [sec (10(10)]. Gratuity is a kind of retiring benefit. It means a gift or
present for service. Income tax is not concerned with whether an employee is
getting gratuity according to the provisions of respective Act, made for the same
or not. It is concerned only whether the sum received by the employee on
account of gratuity is taxable or not.
For the purpose of calculating taxable and tax-free portion of gratuity, the employees
are divided into the following three categories:
29
(a) Government employees. In case of central and state or local government

employees but excluding employees of statutory corporation, entire amount
received on death cum retirement gratuity is exempt.
(b) Employees covered by the Payment of Gratuity Act, 1972. The Payment of
Gratuity Act,1972 is applicable to workmen of government, semi-government,
private organization, mines, oilfield, and such private organizations where 10 or
more workers are employed. The amount of such gratuity is exempt from tax as
per the following option:
15 days average salary × completed years of service
Or
Maximum amount Rs. 20,00,000
Or
Actual amount of gratuity received.
The least amount among the above options will be exempted and remaining amount
shall be taxable.
Explanation:
(i) salary include for this purpose basic pay and dearness allowance (whether it is
under the terms of employment or not) but does not include any other item in the
salary e.g. any bonus, commission, house rent allowance, overtime wages or any
other taxable allowances. Salary last drawn (or say basic pay and dearness
allowance, last drawn) by the employee is considered for this purpose, for
calculating average salary, salary last drawn is divided by 26 i.e., maximum number
of working days in a month. Completed year of service is calculated by rounding of
6 or more months into a full year service. (ii) The ceiling limit is Rs.10,00,000 it
means this is the maximum amount which may be exempted.
(iii) Gratuity received by the employee is the final option.
(c) Employees not covered by the Payment of Gratuity Act, 1972. In case of other
non-government employee, the least of the following shall be exempt:
Actual gratuity received.
Or
Half months’ of salary × completed year of service
30
Or
Maximum amount Rs. 20,00,000
Explanation of half month salary and completed years of service. Salary
includes basic pay, dearness allowance (if DA is under the terms of employment)
and fixed percentage of commission on turnover but excludes all other components
of salary like bonus, H.R.A.,etc.
Here completed year of the service shall be calculated by ignoring month served
over completed year. Half month salary shall be calculated based on salary drawn
in preceding 10 months of retirement or death, leaving the month of retirement or
death.
(7) Pension [10(10A)]. Usually there are two types of pension, viz.,
superannuated and family pension. Former is taxable under the head of ‘income
from salary’ while family pension is taxable under the head of ‘ income from other
sources,’ Superannuated pension is received by employee who is alive after
retirement but family pension is made for the dependent of deceased employees.
Monthly pension is taxable in case of all types of employee whether government or
non- government while pension or family pension received from U.N.O. is exempt,
The person, who is entitled to get pension can commute the same instead of getting
monthly. When an employee gets commuted his pension, the lump sum received on
this occasion is taxable as per following provision -
(a) Government employees. Any sum received in commutation of pension by all
types of Central, State, Local government employees including
Statutory Corporations and Public Sector employees is fully exempted from tax.
(b) Non -government employees.
(1) if employee receives any gratuity, the commuted value of 1/3 of the total pension
will be exempted, and
(2) if employee does not receive gratuity, the commuted value of 1/2 of the total
pension will be exempt.
(c) with effect from the assessment year 1997-98 or previous year 1996-97 (i.e.,
from 1st August, 1996), any payment received by any employee in commutation
of pension from a fund set-up by Life Insurance Corporation of India or any other
31
insurer since 1st August 1996 under a pension scheme to which contribution is
made by the individual receiving pension would be exempt from income tax.
(8) Encashment of earned leave [sec. 10(10AA)]. Amount received on account
of earned leave is exempt as per the following rules:
(a) For central or state government employees such amount would be fully exempt.
(b) For non- government employees (including employees of local authorities,
statutory corporation, and public sector organization):
(i) Actual amount received
Or
(ii) Rs.25,00,000
Or
(iii) 10 × average monthly salary
Or
(iv) Number of months for which leaves are due or un-availed earned leave ×
average monthly salary.
Among the above four, whichever is least shall be exempt.
Further number of months leaves due shall not exceed one month for a completed
year of service period and the term salary and average monthly salary shall be same
as given in case ‘c’ of gratuity topic under item no.6.
Leave encashment received during the service period will be fully taxable in case of
all employees.
(9) Compensation for retrenchment [sec 10(10B)]. Any compensation at the time
of retrenchment as per the Industrial Dispute Act, 1947 shall be exempt to the extent
of the least of the following:
Actual amount received
Or
Rs.500000
Or
Total years served × 15 days average salary.
Here more than 6 months are rounded off to one year to calculate ‘total years served’
and average monthly salary’ is calculated based on salary drawn in preceding 3
32
months, if salary is payable on monthly basis. Further, salary includes basic pay, all
monetary receipts and monetary value of perquisites.
(10) Income on account of voluntary retirement [sec. 10(10c)]. The amount
received by an employee form public sector company or any other company or any
authorities established under any act or any corporation or co-operative society or
university or Indian institute of technology and specified institute of management at
the time of their voluntary retirement is exempt from tax. The compensation under
sec. 10(10c) is available up to Rs.500000. The voluntary retirement scheme must
be approved by the chief commissioner or Director General. Under this section the
least amount from the following four options will be exempted:
Completed years of service × 3 × monthly salary
or
Salary of balance months of service left before voluntary retirement
or
Amount received under VRS;
or
Maximum limit Rs.500000
Explanation of salary: Salary includes basic pay, D.A (if it is under the term of
service) and fixed % of commission on sales.
(11) (a) Payment from Provident Fund [sec. 10(11) and 10(12)]. If any
employee gets any amount from recognized provident fund if employee served at
least 5 years on regular basis or not terminated from the services or statutory
provident fund at any time, it will be exempted.
(11) (b) Interest on Provident Fund – If employee’s contribution on or after
1-4-2021, in his Statutory or Recognised Provident fund exceeds Rs. 2,50,000 per
year (in case where employer also gives his contribution) or Rs. 5,00,000 per year
(in case where employer has no contribution) in such ‘a’ case Interest accrued or
received on excess contribution shall not be exempt.
(12) House Rent Allowance [sec. 10(13A)]. The following amount shall be
exempted:
33
Actual H.R.A.
or
Rent paid -10 % of salary
or
1/2 of salary (if house is situated at Mumbai, Kolkata, Delhi, Chennai);
or
2/5 of salary (if house is situated in any other city other than mentioned above).
Here salary means total of basic pay, dearness allowance (if under the terms of
employment) and percentage of commission fixed on sales.
The house rent allowance paid to High Court and Supreme Court judges is fully
exempt. But in following cases the house rent allowance is fully taxable -
(i) If the residential accommodation occupied by the employee is owned by him;
(ii) If the employee has not actually incurred expenses of rent regarding residential
accommodation occupied by him.
(iii) Finally, the employee pays rent which is not more than the 10% of his salary.
(13) Special allowance [sec.10 (14)]. If any special allowance is given for
performance of official duties, then it will be fully exempt. However, if any amount is
saved then it will be taxable. Example of such allowances are conveyance
allowance, travelling allowance, daily allowance, uniform allowance, etc.
(14) Life insurance money [sec. 10(10D)] Any sum received at the time of maturity
of the policy (either lapse of time or death) including bonus money shall be exempt.
However, the amount shall not be exempt in the following cases -
(i) Amount received under a keyman insurance policy.
(ii) Any sum received under an insurance policy issued after 31.03.2003 but before
01.04.2012 in respect of which the premium payable for any of the years during
the term of policy exceeds 20% of the actual sum insured. However, in this case if
the sum is received on the death of a person it shall be exempt.
(iii) Any sum received under an insurance policy issued after 31.3.2012 in
respect of which the premium payable for any of the years during the terms of the
policy exceeds 10% of the actual capital sum assured. This limit has been
increased to 15 percent for insurance (if policy is issued on or after April 01, 2013)
34
on the life of any person who is -

(a) A person with disability or a person with severe disability as referred
to in section 80U or
(b) Suffering from disease or ailment as specified in the rules made under section
80DDB.
(iv) Amount received with respect to any life insurance policy other than a unit linked
insurance policy on or after 01-04-2023 if amount of premium payable for any
previous year during the term of such policy exceeds Rs. 5,00,000.
(15) Interest on certain securities [sec. 10(15)] Interest income on certain
securities, bonds, saving certificates, as notified by central government is fully
exempt. For example interest on post office saving bank account, interest on 7%
capital investment bond ; interest on post office cumulative time deposited; interest
on special bearer bonds, 1991; interest on national defense gold bonds,1980 ;
interest on national plan certificate ; interest on relief bond ; post office cash
certificates; etc.
(15A) Interest on Post Office Savings Bank Account – if interest income is from
individual account – Maximum exemption limit Rs. 3500 and if it is from joint account
– maximum exemption limit is Rs. 7000.
(16) Education scholarships [sec. 10(16)]. Any scholarships to meet the cost of
education are fully exempt, whether received from any government or private
organization.
(17) Allowances to M.Ps., M.L.As. and M.L.Cs. [sec. 10(17)].
(a) In case of M.Ps. all allowances (Including daily allowance) are exempt from
tax.
(b) Daily allowance to any M.L.As. and M.L.Cs is fully exempt. Any constituency
allowance received by a member of any state legislature under any act or rules made
by that state legislature will also be exempted from tax.
(18) Award or Reward [ sec.10(17A)]. Any reward by any government or approved
institution is fully exempt.
(19) Income of local authority [sec. 10(20)]. Entire income of local authority
(village Panchayat, Municipality Corporation and Nagar Nigam, etc.) is exempt from
35
tax except that arising from the supply of commodity or service other than water and
electricity outside its jurisdiction area.
(20) Income of registered trade union [sec. 10(24)]. Any income of registered
trade union arising from the house property or other sources is fully exempt.
(21) Income of schedule tribes [sec. 10(26)]. Income of member of schedule
tribes, residing in Nagaland, Manipur, Tripura, Sikkim, Arunachal Pradesh and
Mizoram from any source is fully exempt.
(22) Subsidy from tea-board [sec. 10(30)]. Any subsidies receive by an assessee
indulged in the business of growing and manufacturing tea in India, is fully exempt.
(23) Subsidy received by planter [sec. 10(31)]. If an assessee gets any subsidy
from rubber board, coffee or spices board in connection with growing and
manufacturing rubber coffee cardamom or any other commodity in India under any
scheme for explanation or replacement of rubber plants, coffee plants, etc. is
exempt.
(24) Income of a Minor Child [sec. 10(32)]. From the tax assessment year 1993-
94 every individual, on inclusion of his minor children’s income in his income, shall
be entitled to a basic exemption of Rs.1500 per annum per child or actual income
whichever is less .
(25) Income from units of unit scheme, 1964 [sec. 10(33)]. Any income from
transfer of unit of the unit scheme 1964 of the unit trust of India, where the transfer
takes place on or after 01.04.2002, is fully exempt. The benefit of exemption is
available to an investor and not to a person holding units as a stock in trade in
business.
(26) Income from transfer of listed equity share [sec. 10(36)]. Any income
arising from the transfer of a long- term capital assets being an eligible equity share
in company purchased on or after 1st March 2003 and before 1st March,2004 and
held for period of 12 months or more is fully exempt.
(27) Long term capital gain on transfer of listed equity share or a unit [sec.
10(38)]. If the following conditions are satisfied the capital gain shall be exempt:
(i) Equity share in a company or units of an equity oriented fund are long term
capital assets.
36
(ii) The transfer or sale of such equity share or units is entered into after 30 th
September, 2004.
(iii) Such transaction is chargeable to securities transaction tax.
(28) Claim under Bhopal gas leak disaster [sec10 (10BB)]. Any such claim
received is exempt from tax.
(29) Exemption to the shareholder on account of Buy-back of shares [10 (34A)]
- Income arising to a shareholder in respect of buy-back of unlisted shares by the
company will be exempt from tax. This exemption is available only in those cases
where additional income tax is payable on distributes income U/S 115 QA by the
company opting for buy-back of unlisted shares.
(30) Income received from Securitization trust [10 (35A)] - Any income received
by an investor from a securitization trust will be exempt. The exemption is however,
available only in respect of distributed income referred to in section 115TA.
(31) Exemption of remuneration of an employee of the consultant – in case
where employee is not a citizen of India or being citizen of India but is not ordinarily
resident and contract of service is approved by the prescribed authority before the
commencement of service of the employee.
(32) Payment from National Pension System Trust – Any payment from National
Pension System Trust to an employee on closure of account or his opting out of the
Pension Scheme upto 40% of the total amount payable to him shall be exempt.
(33) Any payment from Sukanya Samriddhi Account.
Important Note: Few Incomes discussed above (in item no. 1 to 33) will not be
exempt in new tax regime U/S 115 BAC. The details are given under computation
of Tax liabilities in Unit V.
Practical Exercise
Exercise 1.
After serving for 28 years and 7 months in Laxmi enterprises, Gwalior, Mr.
Raghuvans, who is covered under Payment of Gratuity Act 1972, retires from the
service on 30th June. 2023. The company paid him gratuity of Rs.1,00,000, his
monthly basic salary at the time of retirement was Rs.1600 and D.A. Rs.480.
You are required to calculate the amount of gratuity exempt as per the provisions of
37
income tax act, for the assessment year 2024-2025.
Solution:
In this case, 29 years will be taken as completed year of service.
The amount of gratuity exempt will be the least of the following:
(i) 15 days average salary × completed year of service
Here, salary = B.P.1600 + D.A.480 = Rs.2080
15 days average salary = 2080 × 15/26 = Rs.1200
Total salary = 1200 × 29years = Rs.34800
(ii) Maximum amount Rs.20,00,000
(iii) Actual amount of gratuity received = Rs.1,00,000
Hence out of Rs.1,00,000 recieved as gratuity, Rs.34800 will be exempt and
Rs.1,00,000 - Rs.34800 = Rs.65,200 will be taxable.
Exercise 2.
Mr. K.G. Hajela retired on 1st January, 2024 after serving for 30 years and 11months.
He received salary Rs.4800 p.m. from 1-2-2023 to 31-12-2023. He received D.A. @
Rs.1200p.m. (forming part of salary for computation of retirement benefit) and 2.5%
commission on turnover achieved by him. Turnover achieved by Mr. Hajela during
last 10 months preceding the month in which he retired was Rs.5,00,000. He
received a gratuity of Rs.450000. Compute the exempted amount of gratuity for the
assessment year 2024-2025.
Solution:
Calculation of average monthly salary:
(i) 10months salary (4800 × 10) Rs.48000
(ii) D.A. (under the term of employment) (1200 × 10) Rs.12000
(iii) Fixed commission on turnover [500000 × 5/200] Rs.12500
Rs.72500
Average monthly salary= Rs.72500 /10 months= Rs.7250.
The amount of gratuity exempt will be the least of the following alternative
(i) Actual amount of gratuity received =Rs.450000
38
(ii) Maximum amount Rs.20,00,000

(iii) Half months salary × completed year of service
Rs.7250/2 × 30years = Rs.3625 × 30years = Rs.108750
Hence, Rs.108750 will be exempt and remaining Rs.450000 - Rs.108750=
Rs.341250 will be taxable.
Exercise 3.
Mr. Shekhawat is getting a pension of Rs.2000 per month from a company. During
the previous year 2023-24, he received Rs.123000 on account of his 2/3 pension
commuted. You are required to calculate the exempted amount of commuted
pension if (a) he also received gratuity; and (b) he did not receive gratuity.
Solution:
(a) When Mr. Shekhawat did not receive gratuity:
Commuted value of 2/3 pension= Rs.123000
Value of full pension= Rs.123000 × 3/2= Rs. 184500
Exempted amount= 1/3 of full pension,i.e., Rs.61500
(b) When Mr. Shekhawat did not receive gratuity
Commuted value of 2/3 pension= Rs.123000
Value of full pension= Rs.123000 × 3/2= Rs. 184500
Exempted amount= 1/2 of full pension,i.e., Rs.92500
Exercise 4.
Find out the amount of H.R.A., which shall be taxable under the head of ‘income
from salary’ in each of the following cases for the assessment year 2024-2025.
(a) Basic Pay Rs.2500 p.m., commission Rs.10000 for the full year calculated as
fixed percentage on sales. H.R.A. is Rs.600p.m. actual rent paid by the assessee
Rs.500p.m. house is situated at Gwalior.
(b) Basic Pay Rs.2000 p.m., D.A. is 50% of Basic Pay (considered for retiring
benefits) H.R.A. is Rs.700 p.m., actual rent paid by the assessee Rs.1000 p.m.,
house is situated at Delhi.
39
Solution:
(a) Rs.
(i) H.R.A. (Rs.600×12) 7200
(ii) rent paid over 10% of salary (6000-4000) 2000
(iii) 50% of salary because house is situated at Gwalior
[(2500×12) +10000] ×40% 16000
The least amount Rs.2000 will be exempt and remaining amount Rs.7200-
Rs.2000= Rs.5200 will be treated as income under the head ‘income from salary’
(a) Rs
(i) H.R.A. (Rs.700×12) 8400
(ii) Rent paid over 10% of salary (12000-3600) 8400
(iii) 40% of salary because house is situated at Delhi
[(2000×12) +24000] ×50% 18000
The least amount Rs.8400, this is the actual H.R.A. received hence entire H.R.A.
will be exempted.
Exercise 5.
Mr. D.S. Thakur is employed in a public company and is paid a sum of Rs.700000
on VRS approved by the government. The normal age of retirement in the company
is 60 years and Mr. D.S. Thakur who was 48 years at time of retirement had
completed 20 years of service. His monthly salary at the time of retirement was as
follows:
B.P. Rs.10000; D.A. Rs.8000 ;( 50% included for retiring benefits); H.R.A. Rs.2000;
T.A. Rs.600.
What would be the exempted amount of compensation under the Income Tax Act?
Solution:
Salary =Rs.10000 + Rs.4000 = Rs.14000.
(a) Completed years of service × 3 × monthly salary
= 20 × 3 × 14000 = Rs.840000.
Or
40
(b) Salary of balance months service = 14000×144 = Rs.2016000

Or
(c) Amount received under VRS = Rs.700000
Or
(d) Maximum limit = Rs.500000
The least amount is Rs.500000. therefore exempted amount would be Rs.500000
and taxable amount will be Rs.700000- Rs.500000 = Rs.200000.
Exercise 6.
Shri Prakash retired on 1st January 2024 after serving 34 years 9 months in
accompany. From the following detail, compute taxable amount of earned leave:
(a) Salary per month Rs.15000 from 1st January 2023 to 31st December 2023.
(b) Leave granted 1.5 month for each year of service.
(c) Leave taken during service 30 months.
(d) Balance of leave in account 21 months.
(e) Rs.168000 received for encashment of earned leave on retirement.
Solution:
(a) Leave (one month for leave for each completed year of service = 34 months
(b) Leave availed = 30 months
(c) Leave due (34 months - 30 months) = 4 months
Now the exempted amount would be least amount of the following:
(a) Amount of encashment received Rs. 168000
(b) 10 months average salary (Rs.15000*10 months) Rs.150000
(c) Cash equivalent to 4 months average salary(Rs.15000*4) Rs. 60000
(d) Maximum limit of exemption Rs.25,00,000
Least amount is Rs.60000 therefore taxable amount of encashment earned leave
will be (Rs.168000- Rs.60000), i.e. Rs.108000.
41
Self Check Question

1. State the incomes to which the Income- tax Act does not apply.
2. Describe the exempted incomes for the employee and also give an account of
exempted income for the institution.
3. Under the income tax act some income are fully exempt from tax while some
incomes are partially exempt. Discuss this statement.
For more Study: Refer following books for A.Y. 2024-25 –

1. Income Tax Law & Accounts by Dr. H.C. Mehrotra
2. Income Tax Law by Dr. Vinod Singhania
3. Income Tax Law & Practice by Dr. D. B. Narang & Dr. V.P. Gaur
42

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ACM 302 INCOME-TAX (AY 2024-25) UNIT-I

duty drawback or concession, or reimbursement from central, State Governments or

Important rules regarding incomes

Population (Municipality or Cantonments Board) Distance (in Km.) and

Partly agricultural income

Sources of total income Agricultural Non-agricultural

2. Income from growing and 65% 35%

3. Income from sale of coffee 75% 25%

Inclusion of agricultural income in total income

Computation of net agricultural income

Self Check Questions

(1) 20000 quintal @ Rs.279 per quintal 55,80,000

Self Check Question

(2) The Karta of the (2) The Karta of the

Incidence of residence on tax liability

Items of income Resident Not Non

(2) Interest from a foreign company received in 20000 - -

Received in New York and spent there

(5) Income was earned in America and received 18000 - -

(8) Income from house property in India received in America

will be exempt as per the following provision:

(a) Government employees. In case of central and state or local government

on the life of any person who is -

income tax act, for the assessment year 2024-2025.

(ii) Maximum amount Rs.20,00,000

(b) Salary of balance months service = 14000×144 = Rs.2016000

Self Check Question

For more Study: Refer following books for A.Y. 2024-25 –

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