Content

PART1- DIRECT TAX

Sr.no Name of chapter Page no:

1. BASIC CONCEPT OF INCOME TAX 1.1-1.25

2. RESIDENTIAL STATUS & SCOPE OF TOTAL INCOME 2.1-2.18

3. SALARY 3.1-3.46

4. HOUSE PROPERTY 4.1-4.18

5. PROFIT AND GAIN FROM BUSINESS AND PROFESSION 5.1-5.54

6. CAPITAL GAIN 6.1-5.57

7. INCOME FROM OTHER SOURCES 7.1-6.18

8. CLUBBING 8.1-8.8

9. SET OFF AND CARRY FORWARD 9.1-9.19

10. DEDUCTION 10.1-10.23

11. TDS AND TDS 11.1-11.17

12. RETURN AND ADVANCE TAX 12.1-12.13

13. CLASSIFICATION AND TAX INCIDENCE ON COMPANIES 13.1-13.7

COMPUTATION OF TOTAL INCOME AND TAX LIABILITY OF VARIOUS
14. 14.1-14.7
ENTITIES
 PART2----GST AND CUSTOMS

1. INTRODUCTION 1.1-1.15

2. CHARGE OF GST 2.1-2.15

3. SUPPLY 3.1-3.22

4. COMPOSITION SCHEME 4.1-4.11

5. TIME OF SUPPLY 5.1-5.13

6. VALUE OF SUPPLY 6.1-6.10

7. REGISTRATION 7.1-7.16

8. RETURNS 8.1-8.11

9. PAYMENT OF TAX 9.1-9.11

10. INVOICE 10.1-10.13

11. INPUT TAX CREDIT 11.1-11.7

12. CUSTOMS 12.1-12.30

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BASIC CONCEPTS OF TAX
WHAT IS TAX?
 Tax is NOT “Compulsory Extortion of Money” by the government.
 It is the financial charge (fee) imposed by the Government on income,
commodity or activity.

WHY ARE TAXES LEVIED?

 Taxes constitute the basic source of revenue to the Government which

are utilized for meeting the expenses of Government like defense,
provision of education, health-care, infrastructure facilities like roads,
dams etc.

TAXATION SYSTEM IN INDIA

 In India, Constitution of India is the parent law. All other laws should
be enacted (made) without exceeding the framework of Constitution
& subject to the norms (T&C) laid down in it.
 Article 265 of Constitution provides that no tax shall be levied or
collected except by authority of law. Further, the law imposing the tax
must not violate any fundamental right.
 Constitution empowers Central Government (CG) & State Government to levy
& collect tax on Income.
 Parliament (Union) & SG are empowered to levy taxes by virtue of Article 246
of Constitution.
 Entry 82 of Union List (List I to Seventh Schedule of Constitution) gives
power to Parliament to levy taxes on Income other than Agricultural
Income.
 Seventh Schedule to Article 246 contains three lists which enumerate the
matters under which the Union & SGs have the authority to make laws for
the purpose of levy of taxes.
The following are the lists:
1. Union List: CG has exclusive power to make laws on the matters
contained in Union List.
2. State List: SG has exclusive power to make laws on matters contained
in the State List.

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3. Concurrent List: Both CG & SG have power to make laws on matters contained in this
list.

PARTICULARS DIRECT TAX INDIRECT TAX

Levied on Income/wealth of the Price of Goods or
person Services
Examples Income tax, Tax on GST, Custom duty.
undisclosed foreign
Income or Assets.
Shifting of burden There is No Shifting of Tax burden is shifted
burden. to subsequent buyer
 Direct Taxes are /user.
directly borne by  Thus, whole burden
taxpayer falls on final
consumer.
Time of Collection Collected on yearly Collected at the time of
basis. sale/purchase of goods
or rendering of
services.

COMPONENTS OF INCOME TAX LAWS

A. INCOME TAX ACT, 1961

 It came into force on 1st April, 1962. The act contains 298 sections &
XIV schedules.
 A section may have sub-sections, clauses & sub-clauses.
 Ex: Clause (1A) of Section 2 defines “agricultural income”, Clause (1B) defines
“amalgamation”.
 Section 5 defining the scope of total income has two sub-sections (1) & (2).
 Sub-section (1) defines the scope of total income of a resident;
 Sub-section (2) defines the scope of total income of a non-resident.
 A Section may also have Provisos & Explanations.
 Proviso gives the exceptions to the provision contained in the
respective by sub-section/clause. (Proviso gives the cases where the
provision contained in the respective section/sub- section/clause

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would not apply or where the provision would apply with certain
modification).
 Explanation gives clarification relating to the provision contained in
that by sub-section/clause.
The Act (since it is Revenue-based Act) undergo changes every year with
additions & deletions brought by the Annual Finance Act passed by the
parliament ACT.

B. ANNUAL FINANCE ACT

 Every year, Finance Minister Introduces the Finance Bill in Parliament’s

Budget session .
 Part A of budget speech contains the proposed policies of government in
the area .
 Part B of budget speech contains the detailed tax proposals.
 When the Finance Bill is passed by both the houses of the Parliament
& gets the assent of the President, it becomes the Finance Act which is
incorporated in the Income- Tax Act.
 Amendments are made every year to the Act & other tax laws by the
Finance Act.

C. NOTIFICATIONS
 Notifications are subordinate legislation issued by CG to give effect to
the provisions of the Act.
 The CBDT is also empowered to make & amend rules by issuing
notifications.
 They are binding on everyone. [Assessee + Income Tax department]

D. INCOME TAX RULES

 The CBDT is empowered to make rules for proper administration of the

ACT.
Ex: Sec 32 states that depreciation will be allowed as deduction but the rates for
computation of depreciation are given by Rule 5.

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 Rules also have sub-rules, provisos and Explanations.
 The First Schedule to the Finance Act contains four parts which specify the rates of tax.
 Part I: Rate of Tax applicable for the current Assessment Year.
 Part II: Rate of TDS for the current Financial Year.
 Part III: Rate of Advance Tax & Rate of tax to be deducted from income u/h ‘Salaries’.
 Part IV: Rules for computing Net Agricultural Income.

E. CIRCULARS
 Circulars are issued by the CBDT to deal with certain specific problems &
to clarify the doubts regarding the scope & meaning of the provisions of
the law.
 Circulars provide guidance to the Income Tax officers & Assesses.
 These circulars are binding on the department but not on the assessee.
 However assessee can take advantage of beneficial circulars.

F. CASE LAWS (JUDICIAL DECISIONS)

 It is not possible for the parliament to provide for all possible issues that
may arise in the implementation of any act. Hence the judiciary will hear
the disputes between the assesses & the Income tax Department & give its
decisions.
 Supreme Court Decisions becomes Judicial Precedent (Law) & are binding
on all the courts, Appellate Tribunal, Income Tax Authorities & on
assesses.
 High Court decisions are binding on the assesses & Income Tax Authorities
which come under its jurisdiction unless it is overruled by a higher
authority (Supreme Court).
 Decision of a High Court cannot bind other High Court.

LEVY / CHARGE OF INCOME TAX [SECTION 4]

Income-tax is a tax levied on the total income of the Previous Year of every
person (Section 4).
Procedure for Computation of total income of person for levy of income tax is as
follows :

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Step 1 - Determination of Residential Status

Step 2 - Classification of Income under 5 different heads

Step 3 - Computation of Income under each head.

Step 4 - Clubbing of income of spouse, minor child etc.

Step 5 - Set-off or carry forward and set-off of losses.

Step 6 - Computation of Gross Total Income [Net Result of Step 1 – 5].

Step 7 - Deductions from Gross Total Income. [Payment based/Income

Based deductions].

Step 8 - Total income [GTI – Deductions under Step 7].

Step 9 - Application of Rates of Tax on the total income.

Step 10 - Surcharge / Rebate u/s 87A.

Step 11 - Health & Education Cess on Income Tax.

Step 12 - Advance tax & TDS.

Step 13 - Tax Payable/Tax Refundable.

We will study all the above steps in details in the respective chapters .

SOME IMPORTANT DEFINITIONS

 Terms defined in the Act: Section 2 gives definitions of various terms

used in the Act. If a particular definition is given in the Act itself, we will
have to use that definition only.
 Terms not defined under the Act: If a particular definition is not given
in the Act, reference is to be made to the General Clauses Act or
dictionaries, day to day meanings.

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1. INDIA [SECTION 2(25A)]

 The term 'India' means –

 Territory of India as per Article 1 of the Constitution,

 Territorial Waters of India (TWI), seabed and subsoil underlying such

waters,

 Continental Shelf,

 Exclusive Economic Zone

 Any other specified maritime zone & air space above its territory & TWI.
Specified maritime zone means the maritime zone as referred to in
Territorial Waters, Continental Shelf, Exclusive Economic Zone and other
Maritime Zones Act, 1976.

2. ASSESSEE - [SECTION 2(7)]

 Any person by whom any tax or any other sum of money is payable
under this Act.
 It includes –
a) Tax Payable: Every Person by whom any tax or any other sum of money
is payable under this Act whether or not any proceeding under this act
has started against him.
b) Proceeding started: Any Person in respect of whom any proceeding
under the act has been taken whether or not any tax, interest or penalty
is payable by him under this act. Proceeding may be taken for/of -
 Assessment of his income (or loss) sustained by him;
 Income (or loss) of any other person in respect of whom he is assessable;
 Refund due to him or to such other person.
 Assessment of Fringe Benefits.
c) Deemed Assessee: Sometimes, a person becomes assessable in respect of

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the income of some other persons. In such a case, he may be deemed as
an assessee.
d) Representative Assessee: Sometimes a person may be assessed for
Income of another person. Such person is known as representative
assessee.
Ex: Legal Heir is assessable for the income of deceased person.

e) Assessee in default: Any person who does not deduct tax at source or
after deducting tax, fails to pay deducted tax to the government or who
fails to pay advance tax is deemed to be assessee in default u/s
[201(1)]/218.

3. ASSESSMENT [SECTION 2(8)]

 This is the procedure by which the income of an assessee is determined by
AO.
 It may be normal assessment or by way of reassessment of an income
previously assessed .

4. PERSON [SECTION 2(31)]

AN INDIVIDUAL
Individual means only A Natural Human Being
(Male/Female/Minor/Unsound Mind).

Note: Income of Minor & Person of unsound Mind → Assessed in hands of

Manager/Guardian u/s 161(1).

COMPANY [SECTION 2(17)]

‘Company’ has a much wider meaning under Income Tax Act than Companies
Act.

It means:

 Any Indian Company defined in section 2(26);

 Any Body Corporate incorporated under the foreign laws [Foreign

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company];
 Any institution, association or body (incorporated/not) whether indian
or non-Indian,
 which is declared by general or special order of CBDT to be a company

A FIRM [SECTION 2(23)]

 A firm includes a partnership firm (registered or not) & shall include a
LLP.
 “Partnership firm” has same meanings as assigned to them in Indian
Partnership Act.
 However, for IT purposes, a minor admitted to the benefits of existing
partnership would also be treated as partner. This is specified u/s 2(23)
of the Act.
 Same Tax Treatment would be applicable for both General Partnerships &
LLPs.

ASSOCIATION OF PERSONS (AOP)

 When two or more persons combine together for promotion of joint
enterprise, they are assessable as an AOP when they do not constitute a
partnership legally.
 Conditions to form AOP: Persons must join in a common purpose,
common action & their object must be to produce Income, but they
should not form a partnership.
 Co-heirs, co-donees joining together for common purpose would be
chargeable as AOP.

BODY OF INDIVIDUALS (BOI)

Persons who merely receive the income jointly & who may be assessable in
like manner & to the same extent as the beneficiaries individually. (Ex:
Executors/trustees).
 Co-Executors/Co-trustees are assessable as BOI since their title & interest
are indivisible.
 Note: Tax is not payable by the assessee on share of Income received by

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him from BOI on which the tax has already been paid by such BOI. [To
avoid Double Taxation]

LOCAL AUTHORITY
Municipal committee, district board, Municipality, body of port
commissioners etc. legally entitled/entrusted by Government with control &
management of Municipal/ local fund.

Note: Income of LA is taxable only if it is derived from the business of supply

of commodity/service (other than water & electricity) outside its own
jurisdictional area. Income arising from supply of water & electricity even
outside its own jurisdictional areas → Exempt.

EVERY OTHER ARTIFICIAL JURIDICAL PERSON (not falling within above

categories)
 This is a residuary clause. If the assessee does not fall in any of the first
six categories, he is assessed under this clause.
Ex: An idol, or deity.

Q. What is the difference between AOP & BOI ?

Answer: The difference between AOP & BOI 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, members of BOI can be individuals only but members of AOP can
be individual or non-individuals (i.e. artificial persons).

5. CLASSES OF COMPANIES
HINDU UNDIVIDED FAMILY
 HUF is not defined under IT Act. However, it is treated as separate entity
under IT Act.
 As per Hindu Law, it consists of all males lineally descended from a

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common ancestor & includes their wives & unmarried daughters.
 The Status in HUF is received by birth & not by operation of law.
 Even a single male member can have HUF (w.e.f 6/9/2005).
 Only Co-parceners have the right to Partition.
Coparceners → HUF may contain many members, but only members within
4 degrees including KARTA are called co-parceners (including daughters
w.e.f 6/9/2005).
Note: wife/ daughter-in-law cannot be co-parceners; however they can be
members.
 Jain & Sikh undivided families would also be assessed as a HUF under IT
Act.

DOMESTIC COMPANY [SECTION 2(22A)]

 An Indian company or
 Any other company which has made prescribed arrangements for
declaration & payment of dividends within India payable out of the
taxable Income in India.

INDIAN COMPANY [SECTION 2(26)] - If the company satisfy the following

conditions:
 Company should have been formed & registered under any law in India
&
 Registered office or Principal office of the company should be in India.
‘Indian Company’ includes the following if their registered /
principal office is in India:
a) A corporation established by or under a Central, State or Provincial Act.
Ex: Financial Corporation/State Road Transport Corporation.
b) Institution/association/body → Declared by CBDT to be a company u/s
2(17)(iv).
c) For J&K → Company formed & registered under any law in force in J&K.
d) For Union territories of Dadra & Nagar Haveli, Goa, Daman & Diu, &
Pondicherry → Company formed & registered under any law in force in
that territory.

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FOREIGN COMPANY [SEC 2(23A)] - A Company which is not a domestic
company. COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED [SEC
2(18)]

1. Company owned by Indian Government/RBI.

2. Company in which ≥ 40% shares are held by Indian Government/RBI.
3. Company which is registered u/s 8 of the Companies Act, 2013.
4. Company having NO Share capital which is declared by CBDT to be a
company in which public is substantially interested for specified No. of AYs.
5. Company which is not a private company & which fulfill any of the following
conditions:
a) Equity shares should have been listed in RSE in India as on last day of
relevant PY or
b) Equity shares carrying at least 50% (40% in case of industrial companies)
voting power should have been unconditionally allotted to or acquired by
& should have been beneficially held throughout the relevant PY by -
- Government or
- Statutory Corporation or
- Company in which public are substantially interested or
- Any wholly owned subsidiary of company mentioned in (c).
- One or more co-operative societies.
c) Company which carries on its principal business of accepting deposits
from its members & which is declared by CG u/s 620A of the Companies
Act to be NIDHI/MUTUALK BENEFIT SOCIETY.

6. PERSON HAVING SUBSTANTIAL INTEREST IN THE COMPANY [Section 2(32)]

 Any person who is the beneficial owner of shares (not being shares
entitled to fixed rate of dividend), whether participating in profit or not,
carrying at least 20% of total voting power.

7. AVERAGE RATE OF TAX [SECTION 2(10)]

 Generally, the word ‘Income’ covers receipts in the shape of money or
money’s worth which arise with certain regularity.
 Average Rate of Tax = Amount of Income Tax calculated on Total Income using

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applicable slab rate/Total Income

8. MAXIMUM MARGINAL RATE OF TAX [SECTION 2(29C)]

 Rate of Income Tax (including SC) applicable in relation to Highest Slab
of Income specified in the Finance Act of the relevant Previous Year, in
the case of
(i) An Individual, or (ii) An AOP /BOI.

INCOME & ITS CONSTITUENTS [SECTION 2(24)]

1) MEANING & DEFINITION OF INCOME
 Income is a periodical monetary return with some sort of regularity.
However, all receipts do not form the basis of taxation under the Act.

Income for the purpose of Income Tax Act includes:

[Each of these will be covered in respective chapter]
1) Profits & gains.

2) Dividends.

3) Voluntary contributions received by charitable/religious trust or

institution or by certain research associations or universities & other
educational institutions or hospitals & other medical institutions or an
electoral trust.

4) Value of any perquisite or profit in lieu of salary taxable u/s 17.

5) Any special allowance or benefit other than the perquisite included

above.

6) Any allowance granted to the assessee to meet his personal expenses at

the place where the duties of his office or employment of profit are ordinarily
performed by him or at a place where he ordinarily resides or to compensate
him for the increased cost of living.

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7) The value of any benefit or perquisite whether convertible into money or
not, obtained from a company either by a director or by a person who has a
substantial interest in the company or by a relative of the director or such
person & any sum paid by any such company in respect of any obligation
which, but for such payment would have been payable by the director or
other person aforesaid.

8) The value of any benefit or perquisite, whether convertible into money

or not, which is obtained by any representative assessee or by any
beneficiary or any amount paid by the representative assessee for the
benefit of the beneficiary which the beneficiary would have ordinarily been
required to pay.

9) Profits & gains of business or profession chargeable to tax u/s 28.

10) Deemed profits chargeable to tax u/s 41 or u/s 59.

11) Any capital gains chargeable u/s 45.

12) Profits & gains of any insurance business carried on by Mutual Insurance
Company or by a cooperative society, computed in accordance with Section
44 or any surplus taken to be such profits & gains by virtue of provisions
contained in first Schedule to the Act.

13) The profits & gains of any business of banking (including providing credit
facilities) carried on by a co-operative society with its members.

14) Any winnings from lotteries, cross-word puzzles, races including horse
races, card games & other games of any sort or from gambling, or betting of
any form or nature whatsoever. For this purpose,
 “Lottery” includes winnings, from prizes awarded to any person by draw
of lots or by chance or in any other manner whatsoever, under any
scheme or arrangement by whatever name called;
 “Card game & other game of any sort” includes any game show, an
entertainment programme on television or electronic mode, in which
people compete to win prizes or any other similar game.

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15) Any sum received by assessee from his employee as contributions to any
PF/SAF/ESI.

16) Any sum received under a Keyman insurance policy including bonus on
such policy.

17) Any sum referred to clause (va) of section 28. Thus, any sum, whether
received or receivable in cash or kind, under an agreement for not carrying
out any activity in relation to any business or profession; or not sharing any
know-how, patent, copy right, trade- mark, license, franchise, or any other
business or commercial right of a similar nature, or information or technique
likely to assist in the manufacture or processing of goods or provision of
services, shall be chargeable to income tax u/h “PGBP”.

18) FMV of inventory which is converted into or treated as a capital asset

[Section 28(iva)].

19) Any consideration received for issue of shares exceeding their FMV [Section
56(2)(viib)].

20) Any sum of money received as advance, if such sum is forfeited consequent
to failure of negotiation for transfer of a capital asset [Section 56(2)(ix)].

21) Any sum of money or value of property received without consideration or

for inadequate consideration by any person [Section 56(2)(x)]. [Gift]

22) Compensation or other payment, due to or received by any person, in

connection with termination of his employment or modification of T & Cs
relating thereto [Section 56(2)(xi)].

23) Assistance in the form of subsidy or grant or cash incentive or duty

drawback or waiver or concession or reimbursement by CG or SG or any
authority or body in cash or kind. However, subsidy or grant or
reimbursement which has been taken into account for determination of
the actual cost of the depreciable asset in accordance with Explanation 10

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to section 43(1) shall not be included in the definition of income.

2) REGULARITY OF INCOME
 Income means periodical monetary return coming from definite source
with some sort of regularity.
 However, this does not mean that income which does not arise regularly
will not be treated as income for tax purposes. Ex: Winnings from
lotteries, card games, etc. which do not arise from definite source & do not
have element of regularity are specifically included in Income under IT
Act.
 Even a single transaction can constitute business. Repetition of such
transactions is not necessary under Income Tax Act.

3) CASH/KIND
 The income received by the assessee need not be in the form of cash only.
 It may also be some other property or right which has monetary value.
 Wherever income is received in kind (like perquisites), then their value
has to be found as per the prescribed rules & this value shall be taken to
be the income.

4) ILLEGAL/ TAINTED INCOME

 Income is income, though tainted. Thus, illegal Income is also taxed.
 For purposes of Income-tax, there is no difference between legal & tainted
income.
Case Law: If smuggling activity can be regarded as a business, confiscation of currency notes
by customs authorities is a loss which is directly relatable to carrying of business & thus is
permissible as deduction

5) DISPUTED INCOME
 Any dispute regarding the title of the income cannot stop the assessment
of the income in the hands of the recipient.
 Thus, disputed income is taxable in the hands of recipient though

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there may be rival claims to the income.

6) CONTINGENT INCOME
 A contingent income is not income. Until the contingency has
happened, it cannot be assumed that income has accrued or has arisen
to the assessee.

7) PERSONAL GIFTS
 Gifts of personal nature do not constitute income upto Rs. 50,000
received in cash
 However Gifts in kind having FMV > Rs. 50,000 is wholly taxable. [To be
studied in IFOS].

8) COMPOSITE INCOME
 Income-tax is a tax on all incomes received by or arising to a taxpayer
during a FY.

9) PIN MONEY
 Pin money received by a woman (Moneys given to a woman by her
husband for running the expenses of the kitchen) would not be
income in the eyes of the law.
 Any property acquired using such money/savings is a Capital Asset of
the lady.

10) LUMPSUM RECEIPT

 Receipt in lumpsum or in instalments would not affect its taxability.
Ex: If a person receives arrears of salary in a lump sum amount, it would still
be his income.

11) INCOME MUST COME FROM OUTSIDE

 A person cannot earn income from himself
 In case of mutual activities, where some people contribute to the common

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fund & are entitled to participate in the fund & a surplus arises which are
distributed to the contributors of the fund, such surplus cannot be called
income.

12) RELEVANCE OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE

HEADS Relevant Method of Accounting

Salaries (15- ▪ Taxable on due basis or on receipt basis whichever is earlier.

17) ▪ Method of accounting followed by the assessee is irrelevant

HP (22-27) Taxable on Accrual basis. Method of accounting of assessee is

irrelevant.

PGBP PGBP Income is taxable as per method of accounting

(28-44D) followed by assessee.
If assessee follows Accrual basis of accounting → Income taxed on
accrual basis. If assessee follows Cash basis of accounting → Income
taxed on Cash basis.
 Certain payments are allowable only on Payment basis. [Refer
PGBP]
Cap. Gain Taxable in the PY in which the capital asset is transferred.
(45 – 55A)  Method of accounting followed by the assessee is
irrelevant.
IFOS (56 – 59) Same as PGBP.

13) CAPITAL & REVENUE RECEIPTS

Particular Capital Receipts Revenue Receipts

Meaning  Receipt referable to fixed  Receipt referable to

capital. circulating capital.
 Receipts towards  Any receipt toward
substitution of source of substitution of Income.
income.  Any compensation received
 Amount received as for the Loss of future profit.
compensation for

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surrender of any right of
ownership

Tax Treatment  Not Taxable unless  Taxable.

expressly provided. Ex: Profits arising from sale of
Ex : Profit from Sale of Capital Trading Asset is taxable as
Asset is chargeable to tax u/h Business Income
Capital Gains u/s 45.

Q. How to determine whether a receipt is a Revenue receipt or Capital

receipt?

 If the Income-generating activity is within the normal dealing of the

assessee → Revenue receipt.
 If the Income-generating activity is outside the normal dealing of the
assessee (although connected to business) → Capital receipt.
Ex: Profit on sale of shares & securities held by a bank as investments would be of Capital
Nature. But Profit on sale of shares & securities held by a stock broker as SIT would be
of Revenue Nature.
Note: Where profits arise from transactions which are outside the normal
dealing of the assessee, although connected with his business, taxability would
depend upon the fact whether transactions constitute trading activity for the
Assessee.
CRUX: Only Revenue Receipt is taxable. Capital Receipts are normally
Exempt. But certain capital receipts which have been specifically included in
the definition of “Income u/s 2(24) are taxable.

14) CAPITAL EXPENDITURE & REVENUE EXPENDITURE

Capital Expenditure Revenue Expenditure

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1. Cost of acquisition & installation 1. Purchase price of a current Asset
charges of Fixed Asset. for resale or manufacture.

2. Incurred to increase operating 2. Incurred to maintain the asset.

capacity.
3. Expenditure incurred to free 3. Expenditure incurred to free
oneself form a Capital Liability oneself from a Revenue liability

4. Expenditure for acquisition of 4.Expenditure incurred for earning

source of Income income

Liquidated damages → Capital receipt. Amount received towards

compensation for sterilization of profit earning source is not in ordinary
course of business.

Compensation on Termination of Agency → Capital receipt. Receipt of

compensation on termination of the agency business being the only source of
income by the assessee. But if the assessee has several agencies and one of
them is terminated & compensation is received, the receipt would be revenue
receipt since taking agencies & exploiting the same for earning income is the
ordinary course of business & loss of one agency would be made good by
taking another.

Compensation received from the employer or from any person for

premature termination of the service contract is a capital receipt but is
taxable as profit in lieu of salary u/s 17(3) or IFOS u/s 56(2)(xi),
respectively .

Compensation received or receivable in connection with

termination/modification of T&Cs of any contract relating to its business
shall be taxable as business income

15) APPLICATION OF INCOME VS DIVERSION OF INCOME

Application of Income Diversion of Income

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 If assessee applies his income to  If there is an overriding charge on
discharge his obligation the source of such income which
 after the income reaches in the diverts the income, it is called
hands of the assessee, diversion of Income.
 it would be an application  In case of diversion of income
(apportionment) of income & before it reaches in the hands of the
 this would result in taxation of assessee,
such income in the hands of the  it cannot be treated as an income
assesse of the assessee & thus NO TAX in
the hands of the assesse .
▪ Conditions: ▪ Conditions:
1. Income accrues to the assessee 1. An overriding charge/title on income
2. Income reaches the assessee &
3. Income is applied to discharge 2. Income is diverted at source.
obligation (Self- 3. Charge is on sources of income &
imposed/gratuitous) not on the Receiver.

CONCEPT OF FINANCIAL YEAR, PREVIOUS YEAR & ASSESSMENT YEAR

Financial Year.
▪ Financial year means a year starting on 1st April & ending on 31st
March.

PY [Sec 3]
▪ FY in which the income is earned is called “Previous Year”.
▪ PY means the Financial Year immediately preceding the AY.
AY  The year in which income is assessed to tax is called
[Sec Assessment Year.
2(9)]  AY 2020-21will commence on 1.4.2020 & will end on 31.3.2021.
 Thus Income earned during PY 2019-20 will be assessed/taxed
in AY 2020-21.
CRUX: PY → Year in which Income is earned; AY → Next year in which income is
taxed is AY.
Ex: A is running a business from 2003 onwards. Determine PY for AY 2020-21.
[Ans: PY = 1.4.2019 - 31.3.2020].

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DUAL ROLE OF A FINANCIAL YEAR

▪ Each financial year is both Previous Year as well as Assessment Year.
▪ It is PY for income earned during that FY & AY for the income earned during
the preceding FY.
Financial PREVIOUS YEAR ASSESSMENT YEAR
year
2019-20 FY 2019-20 is PY for income FY 2020-21 is AY for incomes
received/accrued during 1 earned in PY 2019-20.
April 2019 to 31 March 2020

2020-21 FY 2020-21 is PY for income FY 2021-22 is AY for incomes

received/accrued during earned in PY 2020-21.
April 1, 2020 to March 31,
2021.

FIRST PREVIOUS YEAR FOR NEWLY SET-UP BUSINESS/PROFESSION DURING FY

 First PY = The period beginning from the date of setting up of the business
or from the date the new source came into existence & ending on the last
day of that FY (31st March).
 Therefore, first PY of a newly set-up business/ profession or a new source
of income will be either 12 months or less than 12 months. It can never
exceed a period of 12 months.
Note: The same provision will be applicable for the “New Source of
Income.”
QUESTIONS

CQ1. Mr. PC set up a new business on 24.2.2018, what will be the first PY for
that business?
Answer: From 24.02.2018 – 31.3.2018; PY 2017-18; AY 2018-19.

CQ2. What will be the 2nd PY for his business?

Answer: PY 2018-19; AY 2019-20.

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UNIFORM PREVIOUS YEAR

 Assessees are required to follow Financial year as Previous Year uniformly
for every year. [From 1st April to 31st March]
 An Assessee may maintain books of account on calendar year basis but for
Income Tax purpose, his previous year will be financial year & not the
calendar year.
Ex: Mr. PC can maintain books of accounts on calendar year basis, but tax
will be levied on the basis of financial year only.
A/cing Income as per Splitting of income as per FY Taxable Income
year books of A/c.
JAN-MARCH APRIL –DEC
2017 12 lacs 3 lacs 9 lacs PY 17-18 = 9L + 6L =
15L.
2018 24 lacs 6 lacs 18 lacs PY 18-19 = 18L +
9L = 27 L.

2019 36 lacs 9 lacs 27 lacs PY 19-20 = 27L + =

………L

CASES WHERE INCOME OF PREVIOUS YEAR IS ASSESSED IN SAME YEAR

 General Rule: Income earned during any PY is assessed to tax in
immediately succeeding AY.
 However, in following circumstances, income is taxed in PY in which it is
earned. Thus AY & PY in these exceptional circumstances will be the
same.
 These exceptions have been made to protect the interests of revenue.

FOLLOWING ARE THE EXCEPTIONS:

1. SHIPPING BUSINESS OF NON-RESIDENTS [SECTION 172]
 If a ship belonging to or chartered by NR carries
passengers/livestock/mail/goods shipped at a port in India,
 Such Ship is allowed to leave the port only when tax has been paid or
satisfactory arrangement has been made for payment thereof.
 Income = 7.5% of the freight paid/payable to the owner or his agent

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whether in India or o/s India for such carriage.
 Such income is charged to tax in the same year in which it is earned.

2. PERSONS LEAVING INDIA [SECTION 174]

 Where it appears to AO that any individual may leave India during the current
AY or shortly after its expiry &
 He has no present intention of returning to India,
Then Total Income of such individual for the period from the expiry of the
respective PY up to the probable date of his departure from India is
chargeable to tax in that AY
Ex: Suppose Mr. X is leaving India for USA on 10.6.2019 & it appears to AO
that he has no intention to return. Before leaving India, Mr. X will be required
to pay tax on the income earned during PY 2018-19 as well as the total
income earned during the period 1.4.2019 to 10.06.2019.

3. AOP/BOI/AJP FORMED FOR A PARTICULAR EVENT OR PURPOSE [SEC

174A]
 If AOP/BOI etc. is formed or established for a particular event or purpose
&
 AO apprehends that AOP/BOI is likely to be dissolved in the same year or
in next year
 he can make assessment of the income upto date of dissolution as income of
relevant AY.

4. PERSONS LIKELY TO TRANSFER PROPERTY TO AVOID TAX [SECTION 175]

 During the current AY, if it appears to AO that a person is likely to charge,
sell, transfer, dispose any of his assets
 to avoid payment of any liability under this Act,
Total income of such person for the period from the expiry of PY to the date
when AO commences proceedings is chargeable to tax in that assessment
year.

5. DISCONTINUED BUSINESS [SECTION 176]

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 If any business or profession is discontinued in any AY,
 Income of the period from the expiry of the PY up to the date of such
discontinuance may,
 at the discretion of AO may be charged to tax in that assessment year.
Note: Section 176 is a Discretionary power. The Assessing Officer has the
discretion of applying it. AO may choose not to apply it & wait till the end of
the Assessment Year

PREVIOUS YEAR FOR UNDISCLOSED SOURCES OF INCOME

1. CASH CREDITS [SECTION 68]

 Where any sum is found credited in books of the assessee & assessee
offers no explanation about the nature & source or explanation
offered is not satisfactory,
 Such Sum so credited may be charged as income of the assessee of that
PY.

2. UNEXPLAINED INVESTMENTS [SECTION 69]

 If in any FY assessee has made investments which are not recorded in
books of account & Assessee offers no explanation about nature &
source of investment or explanation offered is not satisfactory,
 Value of investments are taxed as income of assessee of such FY.

3. UNEXPLAINED MONEY ETC. [SECTION 69A]

 Where in any FY, assessee is found to be owner of any money, bullion,
jewellery etc. &
 Such asset is not recorded in books of account & the assessee offers no
explanation about nature & source or explanation offered is not
satisfactory,
 Money & Value of bullion etc. will be deemed to be income of the assessee for
FY.
 Ownership is important & mere possession is not enough. Thus if the
assessee si in possession of the above-mentioned things but he is not the
owner, then such other

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4. AMOUNT OF INVESTMENTS NOT FULLY DISCLOSED IN BOOKS [SECTION 69B]
 Where in any FY, assessee has made investments or is found to be the
owner of bullion, jewellery or other valuable article &
 AO finds that Amount spent on making such investments exceeds the
amount recorded in books of account of the assessee & assessee
offers no explanation for the difference or explanation offered is
unsatisfactory,
 Such excess may be deemed to be the income of the assessee for such FY.
Ex: If Assessee is found to be the owner of 100 gms of gold (market value =
Rs. 3,00,000) during FY ending 31.3.2020 but he has recorded to have spent
Rs. 1,50,000 in acquiring it, AO can add Rs. 1,50,000 as the income of the
assessee, if the assessee offers no satisfactory explanation thereof.

5. UNEXPLAINED EXPENDITURE [SECTION 69C]

 Where in any FY, Assessee has incurred any expenditure & he offers no
explanation about the source of such expenditure or the explanation
offered is unsatisfactory,
 AO may treat such unexplained expenditure as the income of the assessee
for such FY.
Such unexplained expenditure which is deemed to be income of the
assessee shall not be allowed as deduction under any head of income.

6. AMOUNT BORROWED OR REPAID ON HUNDI [SECTION 69D]

a) Where any amount is borrowed on hundi or is repaid (thereon) OTHER THAN
THROUGH AN ACCOUNT-PAYEE CHEQUE,
b) Amount so borrowed or repaid shall be deemed to be the income of the
person borrowing or repaying for the PY in which the amount was
borrowed or repaid.
c) Amount repaid shall include interest paid on the amount borrowed
d) But if any amount borrowed on hundi has been taxed as income of the
person, he will not be again liable to be assessed in respect of such amount
on repayment of such amount.
Ex: Mr. PC has borrowed Rs. 5 Lacs on Hundi from Mr. AC in cash. Since the
amount is borrowed by the mode other than account payee cheque, Rs. 5 Lacs
will be deemed to be the income of Mr. PC in the year of borrowing. Now

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when PC will repay the amount to Mr. AC (even if repaid in cash), it cannot be
taxed again to PC on repayment basis.

RATE OF TAX FOR THE DEEMED INCOME U/S 68 & 69 [SECTION 115BBE]
 Such Deemed Incomes are taxed @ 60% + surcharge @ 25% of tax. Thus,
Effective rate of tax (including SC @ 25% of tax & cess @ 4% of Tax & SC) is
78%. [Section 115BBE]
 Neither BEL nor any allowance nor set off of any loss shall be allowable
against such income .
 Tax rates are fixed by the Annual Finance Act & not by the Income Tax Act.
 For the purpose of A, B, C, D, E, F below, Total income means total income
from all sources after All Permissible Deduction Except Incomes Taxable
at Specified Rates.

Persons Rate of taxes

Individual
Total income (in `) Rate of Tax

(i) Upto ` 2,50,000 (below 60 years) Nil

(ii) Upto ` 3,00,000 (60 years or above
but less than 80 years and resident in
India)
(iii) Upto ` 5,00,000 (above 80 years and
resident in India)
` 2,50,001/ ` 3,00,001, as the case may be, 5%
to ` 5,00,000 [in cases (i) and
(ii) above, respectively]
` 5,00,001 to ` 10,00,000 20%
Above ` 10,00,000 30%

Hindu Undivided
Family(HUF)/ Total income (in `) Rate of Tax
Association of
Persons (AOP)/ Upto ` 2,50,000 Nil

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Body of Individuals ` 2,50,001 to ` 5,00,000 5%
(BOI)/ Artificial
` 5,00,001 to ` 10,00,000 20%
Juridical Person
Above ` 10,00,000 30%

Firm/LLP/local 30%
authority
Co-operative Total income (in `) Rate of Tax
Society Upto ` 10,000 10%
` 10,001 to ` 20,000 20%
Above ` 20,000 30%
Company Domestic Company Foreign
Company
Total turnover or Other
gross receipts in domestic
the P.Y. 2017-18 ≤ companies
` 400 crore
25% 30% 40%

Surcharge
Individual/ HUF/ AOP/ BOI/ Artificial juridical person
Where the total income > ` 50 lakh but is ≤ ` 1 crore 10%
Where the total income > ` 1 crore but is ≤ ` 2 crore 15%
Where the total income > ` 2 crore but is ≤ ` 5 crore 25%
Where the total income > ` 5 crore 37%

Firm/Limited Liability Partnership/Local Authorities/Co-operative societies

Where the total income > ` 1 crore 12%

Domestic company
Total income > ` 1 crore but is ≤ ` 10 crore 7%

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Total income is > ` 10 crore 12%
Foreign company
Total income > ` 1 crore but is ≤ ` 10 crore 2%
Total income is > ` 10 crore 5%
 Rebate under section 87A: Rebate of up to ` 12,500 for resident individuals
having total income of up to ` 5 lakh.
 “Health and Education cess” on Income-tax: 4% of income-tax and surcharge, if
applicable

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RESIDENTIAL STATUS AND SCOPE OF TOTAL INOME

 The Incidence of Tax of any Assessee depends upon his residential

status under the Act.But also upon the Assessee’s Residential Status .
 Residential status of the assessee must be determined separately
for each Previous Year.

RESIDENT
ORDINARY
RESIDENT RESIDENT

TYPES OF
RESIDENT NON-
RESIDENTIAL
ORDINARY
STATUS
RESIDENT
NON - RESIDENT

To determine whether assessee.

Point to Remember:
 Only Individuals & HUF can be resident & ordinarily resident (ROR).
 All other classes of assessees can be either a Resident or Non-Resident

DETERMINATION OF RESIDENTIAL STATUS OF DIFFERENT ASSESSEES

1. INDIVIDUAL CONDITIONS
BASIC An Individual is Resident in India if he satisfies ANY ONE of the
CONDITIONS following Basic Conditions:
(a) He has been in India for total period of 182 days or more
during PY OR
(b) (i) He has been in India for at least 60 days in the relevant PY
AND
(ii) He has been in India for at least 365 days during Last 4

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PYs. CRUX:
→ Individual satisfy ANY 1 Condition → Resident
[Additional Conditions].
→ If Both conditions are NOT satisfied → Non-Resident .
EXCEPTIONS Following Individuals will be Resident only if Period of Stay during
PY is 182 days or more. [2nd Condition → NA in the following cases]
(i) Indian Citizen who leaves India during PY as a Member of
Crew of Indian ship or for employment outside India;
(ii) Indian Citizen or Person of Indian Origin who comes on
visit to India in PY. [Such Person must be engaged in
employment/business o/s India]

ADDITIONAL Resident Individual can be ROR or RNOR: To determine

CONDITION whether Individual is ROR/RNOR, we need to check 2
Additional conditions.
(i) His Total Stay in India in Last 7 years is 730 days or more
AND
(ii) He is a Resident in Any 2 out of Last
10 years CRUX: If an Individual Satisfy:
→ Both Additional conditions → He is ROR.
→ None or one of the Additional conditions → He is RNOR.

Person of Indian Origin: If the person or his parents or his grandparents

were born in UNDIVIDED INDIA. Grandparents include both maternal &
paternal grandparents.

Points to Remember:
 Stay in India → Includes Stay in TWI.
 Continuous Stay in India → Not Necessary.
 Date of Arrival & Departure → Considered to be in India for counting
days stayed in India.
 Individual can be resident in more than 1 country, but he can be citizen
in ONLY ONE Country.

SOME CONCEPTUAL QUESTIONS

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Q1. Mr. B, a Canadian citizen, comes to India for the first time during PY
2015-16. During FYs 2015-16, 2016-17, 2017-18, 2018-19 & 2019-20, he
was in India for 55 days, 60 days, 90 days, 150 days & 70 days, respectively.
Determine his residential status for the PY 2019-20.
Solution: During PY 2019-20, Mr. B was in India for 70 days & during Last 4
years, he was in India for 355 days (i.e. 55 + 60 + 90 + 150 days). Thus, he does
not ANY of the basic condition. Thus he is a NR.

Q2. Mr. D, an Indian citizen, leaves India on 22.9.2019 for the first time, to
work as an officer of a company in France. Determine his residential status
for the PY 2019-20.

Solution: During PY 2019-20, Mr. D was in India for 175 days

(30+31+30+31+31+22 days). He does not satisfy the minimum criteria of 182
days. Also, since he is an Indian citizen leaving India for the purposes of
employment, the second basic condition is not applicable to him. Therefore, Mr. D
is NR.

Q3. R was born in Dhaka in 1945. He has been staying in Canada since 1974.
He comes to visit India on 13.10.2019 & returns on 29.3.2020. Determine
his residential status for PY 2019-20.

Solution: His stay in India during the PY 2019-20 is 168 days. He does not
satisfy 1st Basic condition & 2nd Basic condition is NA as he is a person of
Indian origin. Thus he is non-resident in India for PY 2019-20.

Q4. X is a citizen of Nepal. His grandfather was born near Multan (Now in
Pakistan) in 1945. He came to India for the first time since 1986 on 2.10.2018
for a visit of 294 days. Find his residential status for PY 2019-20.

Solution: X's stay in India during PY 2019-20 is 181 days. Thus he does not
satisfy 1st Basic Condition.
He is a person of Indian origin because his grandfather was born in
undivided India & thus 2nd basic condition is not applicable in his case.
Therefore He is NR.

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Q5. R is a foreign national. During PY 2019-20, he comes to India for 91
days. Determine his residential status for PY 2019-20 if during PY 2005-
2006 to PY 2018-19, he was present in India as follows:
Year Days
2006-07 315
2007-08 16
2008-09 40
2009-10 72
2010-11 179
2011-12 362
2012-13 22
2013-14 359
2014-15 180
2015-16 307
2016-17 67
2017-18 12
2018-19 134

Solution: During PY 2019-20, R is in India for 91 days & during Last 4

years, he is in India for 520 days (134+12+67+307 days). Thus, he satisfies
2nd basic condition & thus he is Resident

Additional conditions
PY Stay in India STATUS
2018-19 134 (566 days in last 4 PYs) Resident

2017-18 12 (866 days in last 4 PYs) Non-resident

2016-17 67 (868 days in last 4 PYs) Resident (for 2nd

time)
2015-16 307 Not necessary to
2014-15 180 determine
2013-14 359 further as

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2012-13 22 resident for 2
years
Total stay in 7 preceding PY is 1081 days. Thus R satisfies both the
additional conditions.

R satisfies one of the basic conditions & two additional conditions. Thus he is
ROR in India for PY 2019-20.

Q6. R comes to India, for first time on 14.4.2017. During his stay in India
up to 3.10.2019, he stays at Mumbai up to 8.4.2018 & then stays in Delhi
till his departure from India. Determine his residential status for PY 2019-
20
Solution: During PY 2019-20, R was in India for 186 days (1.4.2019 to
3.10.2019). Since, he satisfies 1st basic condition, he is a Resident. To
determine whether he is ROR/RNOR, we need to check additional
conditions.
(1) R is resident in India for PYs 2017-18 & PY 2018-19 since his stay was
more than 182 days.
(2) R is in India from 14.4.2017 to 31.3.2019 (i.e. 717 days).
R satisfies one of the basic conditions & only one of the two additional
conditions. Thus R is RNOR.

RULE 126: Clarification regarding FOREIGN BOUND SHIPS where

destination of the voyage is outside India [Explanation 2 to Section 6(1)]

➢ In case of Individual being Citizen of India & Member of Crew of

Foreign Bound ship leaving India, period of stay in India shall not include
following period in respect of an eligible voyage:
Period Commencing from Ending on

Date entered into CDC for joining the ship Date entered into the CDC for signing
off.
Continuous Discharge Certificate (CDC): It has the meaning assigned in
Merchant Shipping (CDS-cum Seafarer’s Identity Document) Rules, 2001
made under Merchant Shipping Act, 1958.

Eligible voyage: A voyage by a ship engaged in carriage of

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passengers/freight in international traffic:
a) For voyage having originated from any port in India → Destination
should be any port o/s India.
b) For voyage having originated from any port o/s India → Destination
should be any port in India.

Q7. Mr. Raja is an Indian citizen & a member of the crew of a Singapore
bound Indian ship engaged in carriage of passengers in international traffic
departing from Chennai port on 6th June 2018. From the following details
for PY 2019-20, determine the residential status of Mr. Raja for AY 2020-
21, assuming that his stay in India in last 4 PYs is 400 days & last 7 PYs is
750 days:
Date entered into CDC in respect of joining the ship by Mr. Raja 6th June
2019

Date entered into CDC in respect of signing off the ship by Mr. Raja 9th Dec
2019
Solution: Voyage is undertaken by Indian ship engaged in carriage of
passenger in international traffic originating from port in India (Chennai) &
having its destination at port o/s India (Singapore). Hence it is an eligible
voyage.
Therefore, period beginning from 6th June 2019 & ending on 9th Dec 2019,
has to be excluded for computing the period of his stay in India.
Accordingly, 187 days [25+31+31+30+31+30+9] have to be excluded from
period of his stay in India. Thus Mr. Raja’s period of stay in India during PY
18-19 would be 178 days [i.e., 365 days – 187 days].
Since his period of stay in India during PY 2019-20 is less than 182 days, he
is a NR for AY 2020-21.

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2. HUF Residential Status of HUF depends on the place where
C&M of HUF is situated If the control and management
is situated wholly/partly in india then residential
status of HUF will be resident.
But If the control and management is situated wholly
outside india then residential status of HUF will be
non-resident DETERMINATION OF ROR/RNOR
➢ Status of KARTA will determine whether
HUF is ROR/RNOR.
If KARTA is ROR → HUF is ROR & If KARTA is RNOR →
HUF is RNOR

3.FIRMS/AOP/LA/AJP If the control and management is situated

wholly/partly in india then residential status of
HUF will be resident.
But If the control and management is situated wholly
outside india then residential status of HUF will be
non-resident
4. COMPANY ➢ A Company shall be Resident in India if:
1. It is an Indian company;
2. POEM is in India in that PY (Other than Indian
Company).
Note: Indian Company is Always RESIDENT even if its
in India/not. Thus criterion of POEM is relevant for
Foreign Company only.
POEM: A Place where key management & commercial
decisions necessary for the conduct of the business of
entity as a whole are substantially .

Meaning of Control & Management (C&M)

➢C&M refers to Central C&M & not day-to-day business activities.

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Business may be done from outside India & yet its C&M may be within
India. C&M is situated at a place where “head & brain” is situated.
➢Place of Control → May differ from usual place of running business
& registered office. This is because C&M need not be necessarily done
from the place of business/from registered office.
➢C&M → Place where ‘Controlling & Directing power’ works (with some
permanence).

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2B. SCOPE OF TOTAL INCOME-SECTION 5
 The scope (taxability) of total income of an assessee depends upon the
following factors:
(a) Residential Status of the assessee.
(b) Place of Accrual/Receipt of Income.
(c) Point of time at which income had accrued/received by the assessee or
his agent. To understand the scope of Total Income, we must first
understand some terms
INDIAN INCOME 1. Income Received or deemed to be received in
India OR
2. Income Accrued or deemed to be accrued in
India.
FOREIGN INCOME Income which is NEITHER Received in India NOR
Accrued in India.

SCOPE OF TOTAL INCOME

(a) INDIVIDUAL/HUF
Nature of Income Tax Treatment

ROR RNOR NR
Indian Income TAXABLE TAXABLE TAXABLE

Foreign Income TAXABLE Only 2 types of Foreign Not

Incomes are taxable** Taxable
Others foreign incomes are not
taxable
in India.
** Following Foreign Incomes are taxable in the hands of RNOR:

1. Business Income which is controlled wholly/partly from India.

2. Income from Profession set up in India.

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Above 2 Incomes must be included in TI of RNOR even if they
accrues/arises outside India. Note: No other foreign Income (Salary,
Rent, Interest etc.) is taxable in India to RNOR.

(I) OTHER THAN INDIVIDUAL/HUF

Nature of Income Tax Treatment

ROR NR
Indian Income TAXABLE TAXABLE

Foreign Income TAXABLE NOT TAXABLE

Points to Remember:
❖ Indian Income → Taxable to EVERYONE (R/NR).
❖ ROR → Every Income (Indian/Foreign) is Taxable.

Circular: Clarification regarding liability to Tax in India of NR Seafarer

receiving Remuneration in NRE (Non-Resident External) A/c
maintained with an Indian Bank Income by way of salary, received by non-
resident seafarers, for services rendered outside India on a foreign going
ship (with Indian flag or foreign flag) & received into NRE bank A/c
maintained with an Indian bank shall not be included in the total income.

MEANING OF SOME IMPORTANT TERMS

I. RECEIPT OF INCOME
Income Received in ➢ Receipt → First occasion(time) when the recipient gets
India money
under his control.
➢ Any Further Remittance/Transmission of the
received amount to another place/person does not
result in “Receipt” in the hands of subsequent
recipient

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Income Deemed to a) Employer’s Contribution to RPF in excess of 12% of
be Received in salary.
India b) Interest credited to RPF of the Employee in excess of
9.5% p.a.
c) Amount transferred from URPF TO RPF
(Employer’s contribution & its interest).
d) Contribution made by CG/ other employer in PY under
Pension scheme [80CCD] to the account of employee.
e) Any Tax deducted at source

Q8. Discuss the taxability of the following items of receipt in the case of
RNOR:

i. Rs. 1,00,000 was earned from a business in the USA but the profit have
been remitted to India. The assessee used to attend to the business
only when he was in the USA.
ii. Remuneration of Rs. 20,000 due to him for services rendered in Russia
was credited to his bank account in Russia & immediately thereafter
remitted to India.
Solution:
(i) Remittance of profit to India does not mean that business is controlled
in India.
For RNOR, income accruing outside India is taxable only when it is
from a business controlled from India or from a profession set up in
India. Thus, income of Rs. 1,00,000 is not taxable in India.
(ii) Salary accrues where services are rendered. In the present case
services were rendered in Russia & income received there, it is
income accruing outside India & received outside India. Hence it is
not taxable in India.

II. ACCRUAL OF INCOME

➢Accrue means the right to receive income.

➢ Due means the right to enforce payment of the accrued income.

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Examples:
1. Salary for work done in December will accrue throughout the month,
day to day, but will become due on the salary bill being passed on 31st
Dec or 1st Jan.
2. Interest on Government securities payable on specified dates arise
during the period of holding but will become due for payment on specified
dates.
Explanation 1 to Section 5: Income accruing/arising outside India shall
not be deemed to be received in India merely because it is taken into
account in Balance Sheet prepared in India.
Class Note:
Explanation 2 to Section 5: Income taxed on Accrual basis cannot be
assessed again on Receipt basis, as it will amount to double taxation.

INCOMES DEEMED TO ACCRUE OR ARISE IN INDIA [SECTION 9]

➢ Some Incomes are deemed to accrue/arise in India even though they
actually accrue o/s India.

1. INCOME FROM BUSINESS CONNECTION IN INDIA

➢ Conditions for Taxability of Income from Business Connection:

(a) Assessed has a “Business Connection” in India.

(b) Income arises outside India by virtue of such Business Connection to
the assessee.

➢ Meaning of Business Connection: Business connection includes

any Business Activity carried out through a person acting on behalf of NR.
Person Acting on behalf of NR (Agent) must satisfy the following conditions:
Agent of NR must have Authority to conclude contracts on behalf of NR.
Such contract

 Should be in the name of NR.

 Should be for Provision of Services by that NR.

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 Should be for the transfer of ownership of Property owned by that NR.
 Should be for granting of Right to use Property owned by that NR/under
control of NR.

If agent does not have the above Authorities but he habitually maintains
stock of goods/ merchandise from which he regularly deliver
goods/merchandise in India on behalf of NR. Where he habitually secures
orders in India for NR.

 Examples of Business Connection:

(a)Branch office in India or Agent of a NR in India or An organization/factory

of a NR in India

(b) Appointing an agent in India for systematic & regular purchase of Raw
Material or for sale of NR’s goods for other business purpose.

(c)Formation of subsidiary company in India to carry on business of NR

parent company.

(d) Any profit of NR which can be reasonably attributable to such part of

operations carried out in India through business connections in India are
deemed to be earned in India.
NOTE: If agent’s authority is limited to purchase of goods or merchandise
for the non- resident, there will be NO business connection.
➢ There may be situations when a person acting on behalf of NR secures
order for another NR too.
In such situation, business connection for other NR is established if:
(a)such other NR controls the NR or
(b) such other NR is controlled by the NR or
(c)such other NR is subject to same control as that of NR.
In all 3 situations above, business connection is established where a
person habitually secures orders in India, mainly or wholly for such non-
residents.
➢Independent Agent: Agent who do not work mainly or wholly for the NR.
Where NR carries on business through broker/commission agent, there
will be NO business connection if such a person is acting in ordinary

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course of his business.

➢ Significant Economic Presence of NR in India Constitute Business

Connection [Amd]
[Explanation 2A to section 9(1)(i)]

Significant Economic Presence means

(a) Transaction in respect of any goods, Aggregate of payments arising
services or property carried out by NR in from such transactions during PY
India including provision of download of exceeds prescribed amount.
data or software in India
(b) Systematic & continuous soliciting of Prescribed number of users
business activities or engaging in
interaction with users in India through
digital means
Above transactions shall constitute significant economic presence in India,
whether or not
(i) Agreement for such transactions or activities is entered in India;
(ii) NR has a residence or place of business in India; or
(iii) NR renders services in India.

However, where a business connection is established by reason of

significant economic presence in India, only so much of income as is
attributable to the transactions or activities referred to in (a) or (b) above
shall be deemed to accrue or arise in India.
Note: This provision has been inserted to cover digitalized businesses,
which do not require physical presence of itself or any agent in India
within the scope of section 9(1)(i).

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FOLLOWING SHALL NOT BE TREATED AS BUSINESS CONNECTION IN INDIA
(a) Business whose All operations are not ▪ Part of Income attributable to
carried out in India the operations carried out in
India shall be deemed to accrue
or arise in India.
▪ Income which cannot be
attributed to the operations in
India shall not be deemed to
accrue/arise in India.
(b) Purchase of Goods in India for Export by ▪ No Income shall be deemed to
NR accrue in India from operations
which are confined to purchase of
goods in India for Export by NR.
(c) person engaged in business of News ▪ If a person engaged in
agency business of News agency etc,
Income from activities which are
confined to the collection of news
& views in India for transmission
out of India is not deemed to
accrue in India.

(d) Shooting of Cinematograph films in ▪ Income from operations

India by NR confined to shooting of any
cinematograph film in India, if
such NR is:
(a) Individual, who is not a citizen
of India or
(b) Firm which does not have any
partner who is a Citizen of India or
who is Resident in India;
(c) Company which does not
have any Shareholder who is a
Citizen of India or who
is Resident in India
Display of Rough Diamonds in SNZ ▪ Income from the activities carried

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by foreign company . out by Foreign Company which
are confined to display of uncut &
unassorted diamonds(without
any sorting or Sale) in any SNZ
notified by CG.

2. INCOME FROM PROPERTY OR ASSET OR SOURCE OF INCOME IN INDIA

➢ Income from Property/Asset situated in India → Deemed to accrue in
India.
Ex: (1) Rent paid o/s India for use of machinery/buildings situated in
India is deemed to accrue in India.
(2) Deposits with an Indian company for which interest is received o/s
India.

3. CAPITAL GAIN ON TRANSFER OF A CAPITAL ASSET SITUATED IN INDIA

➢ Capital Gain on Transfer of Capital Asset situated in India is deemed to
accrue in India even if:
▪ Place of Registration of Document of Transfer is in India or outside India;
&
▪ Place of Payment of consideration for transfer is in India or outside
India.
➢ Capital asset (being any Share/Interest in company
registered/incorporated o/s India) shall be deemed to be situated in
India, if Share/Interest derives its value substantially from the
assets located in India.
➢ Declaration of Dividend by a foreign company outside India does
not have the effect of transfer of any underlying assets located in India.
Thus Dividends declared & paid by Foreign Company outside India in

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respect of shares which derive their value substantially from assets
situated in India would NOT be deemed to be income accruing in
India.
4. DIVIDEND INCOME FROM INDIAN COMPANY
➢ Dividends paid by Indian company outside India → Deemed to Accrue
in India.

➢ Watch out for Section 10(34) & Section 115BBDA.

5. INCOME FROM SALARIES

➢ Salary is deemed to accrue/arise at the place where the services are
rendered.
➢ If the services are rendered in India, salary shall be deemed to accrue
in India.

➢ Salaries payable by Government to a citizen of India for services

rendered outside India would be deemed to accrue India (even if
services are rendered outside India).

However, Allowances & Perquisites paid outside India by Government are

Exempt u/s 10(7).
➢ Exception u/s 9(2): Pension payable outside India by the
Government to its officials & judges who permanently reside outside
India shall not be deemed to accrue or arise in India.

6. INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES PAID TO NON-

RESIDENT

➢ Interest, royalty, FTS is deemed to accrue/arise in India if it is

(i) Payable by Government of India (CG/SG)

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(ii) Payable by Resident
Exceptions: [In following cases, income is not deemed to accuse in India]
(a) If the borrowed money is used by the payer of Interest for a
business/profession carried on outside India or for earning any income from
the source outside India.
(b) Payment of Royalty or Technical fees related to a Business/profession
carried on by the payer outside India or for earning any income outside
India.
(iii) Payable by Non- Resident
(a) If borrowed money is used by the payer of Interest for a
business/profession carried on in India or for earning any income in India.
(b) Payment of Royalty or FTS related to a Business/profession carried on by
the payer in India or for earning any income in India.
Exception: Interest on money borrowed by NR for any purpose other than
business or profession in India will NOT be deemed to accrue or arise in
India.
Ex: If a NR ‘A’ borrows money from a non-resident ‘B’ & invests the same in shares
of an Indian company, interest payable by ‘A’ to ‘B’ will not be deemed to accrue or
arise in India.
Note: Income by way of Interest, Royalty, FTS from services utilized in India
would be deemed to accrue in India in case of a NR & be included in his total
income, whether or not such services were rendered in India & whether or
not NR has a residence or place of business or business connection in India
Q9. G, a national of Iraq received the following fees for technical services
during PY 2019- 20.
1 From Government of India 100000

2 From Government of Iraq 400000

3 From S, a ROI, services have been utilized for earning 40000

income in India
4 From V, a ROI, services have been utilized for earning 80000
income outside India

5 From J, a NR for services for a business carried on in India 70000

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Compute taxable income of G for PY 2019-20 assuming G has come for first
time in India during PY 2019-20 & stayed for 181 days.
Solution: Since G does not satisfy any of the two basic conditions, he is a NR for
PY 2019-20. For NR, only Indian Incomes are taxable.
Fees for technical services received from:
1 From Government of India 100000

2 From Government of Iraq

3 From S, a ROI, services have been utilized for earning 40000

income in India
4 From V, a ROI, services have been utilized for earning
income outside India

5 From J, a NR for services for a business carried on in India 70000

Total income 210000

Q10. What if in the above question ,G came to India on 15.6.2019 & stayed
upto. 31.12.2019, will his taxable income in India change?

solution: If G stays in India from 15.6.2019 to 31.12.2019, his stay in

India = 200 days. Thus he will be Resident in India. However, he shall be
"RNOR" as he does not satisfy both the additional conditions.
For RNOR, income earned & received o/s India is taxable only when it is
from a business or profession controlled or set up in India.
Assuming that this condition is not satisfied, fees for technical services
received from Government of Iraq as well as from V will still be exempt
from tax in India. Hence Total Income of G will remain at Rs. 2,10,000

TABULAR SUMMARY OF SCOPE OF TOTAL INCOME

SCOPE OF TOTAL INCOME ROR RNOR NR

Income Received or Deemed Taxable Taxable Taxable
to be Received in India during
PY

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Income Accrued or Deemed to Taxable Taxable Taxable
be Accrued in India during PY
Income Accrued outside India Taxable, even Taxable in 2 Not
during PY if Received Exceptional Taxable
outside cases only.
India
Illustration 1
Mr. X is a foreign citizen. His father was born in Mumbai in 1960 and mother was born in
USA in 1965. His grandfather was born in Chennai in 1935. Mr. X is coming to India to see
Taj Mahal and visit other historical places in India. He comes to India on 1st November,
2019 for 200 days. He has never come to India before. Determine his residential status for
PY 2019-20.
Solution :
Mr. X falls in exception to basic conditions as he is a Person of Indian Origin (as his
grandfather was born in undivided India) and he comes on a visit to India during relevant
Previous year. Therefore, only first basic condition of 182 days during relevant previous
year would be checked.
Stay during relevant PY 2019-20 = 1st Nov, 2019 to 31st March, 2020 = 30+31+31+28+31
= 151 days Mr. X is Non-resident in India for AY 2020-21 as he does not satisfy first basic
condition.
Illustration 2
An HUF, whose affairs of business are completely controlled from India. Determine its
Residential status for AY 2020-21 (a) if Karta is ROR in India for that year (b) If Karta is NR
in India but he satisfies both the additional conditions (c) If Karta is RNOR in India.
Solution :
HUF would be Resident in India as Control and Management is wholly situated in India.
Determination of whether HUF is ROR or RNOR :
a) HUF is ROR in India as Karta would be satisfying both the additional conditions (because
he is ROR).
b) HUF is ROR in India as Karta is satisfying both the additional conditions. Karta’s
Residential status during relevant previous year (i.e. resident/non-resident) is
irrelevant.
c) HUF is RNOR as Karta does not satisfy both the additional conditions

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INCOME UNDER THE HEAD SALARIES

[Chapter IV-A & Sections 15 – 17]

Income from Salary XXX
Add: Income byway of Allowances XXX
Add: Taxable Value of Perquisites XXX
Gross Salary XXX
Less: Deduction under section 16
(ia) Statutory Deduction 40,000 50,000
(Amended by Finance Act 2019)
(ii) Entertainment Allowances XXX
(iii) Professional Tax XXX XXX

INCOME UNDER THE HEAD “SALARIES” XXX

CONDITION FOR CHARGING INCOME UNDER THE HEAD OF “SALARIES”

Income is taxable under the head ‘salaries’ only if there exists employer-employee
relationship between the payer and the payee.

IMPORTANT FEATURES OF EMPLOYER-EMPLOYEE RELATIONSHIP:

1. Contract of Services (Salary) Vs Contract for services (PGBP)

2. Master servent relationship

3. Direct supervision and control of the employer.

4. It is distinct from principle-agent relationship.

1) Director of a company: In the case of a Director of a company, employer – employee

relationship cannot be presumed but should be ascertained based on the service
agreement, if any, executed or the Articles of Association of the company.

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2) MPs/MLAs: The CBDT has issued instructions that salaries of MPs and MLAs
[Member of legislative assemblies] is not chargeable under the head 'salaries' but it is
chargeable under the head 'income from other sources' since there is no employer –
employee relationship between them and the Government.

3) Paper-setters/Examiners: Where a teacher of college receives remuneration for

setting question paper for examination or works as an invigilator in University then
the remuneration received by him will be taxable under the head ‘income from other
sources’.

4) Judges: It was held that what the Judges receive is salary since there is employment
as created by the constitution of India.

SECTION 17(1) - ‘SALARY’ includes:

a) Wages,
b) any Annuity or Pension,
c) any Gratuity,
d) any Fees, Commission, Perquisite or Profits in lieu of or in addition to any Salary or
Wages,
e) any Advance of salary,
f) any payment received in respect of any period of leave not availed by him i.e. Leave
Salary or leave encashment,
g) the portion of the annual accretion in any previous year to the balance at the credit
of an employee participating in a recognised provident fund to the extent it is
taxable,
h) the aggregate of all sums that are comprised in the transferred balance of an
employee participating in a recognized provident fund to the extent it is taxable,
i) the contribution made by the Central Government or any other employer in the
previous year to the account of an employee under a pension scheme referred to in
section 80CCD.

SECTION 15 - BASIS OF CHARGE

The following Income shall be chargeable to income tax under the head “Salaries”

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 Salary Due: Any Salary due from an employer or a former employer to an assessee in
the previous year, whether paid or not.
 Advance Salary: Any salary paid or allowed to the assessee in the previous year by
or on behalf of an employer or a former employer though not due or before it became due
to him
 Arrears of Salary: Any arrears of salary paid or allowed to assessee in the previous
year by or on behalf of an employer or a former employer, if not charged to income-tax for
any earlier previous year.

Note:
1. Salary chargeable to tax either on ‘due’ basis or on ‘receipt’ basis whichever is earlier.
2. Accounting method of the employee is not relevant

TAX TREATMENT OF DIFFERENT FORM OF ‘SALARY’

Advance Salary:
Salary can’t be taxed twice i.e. where any salary paid in advance is taxed on receipt
basis (in the yr. of receipt) it can’t be taxed again on the due basis (in the yr. in which it
becomes due).

Arrear of Salary:

Arrear of Salary received by an assessee is charged to tax on receipt basis (if it was
not taxed earlier on due basis).

Salary to Partners {Explanation 2 to Section 15}:

Any salary, bonus, commission or remuneration received by a partner from his firm
is taxed as business income and not as salary income.

Fees & Commission:

Fees & Commission paid to an employee are taxed as salary income.

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Overtime Payment:

Overtime payment is a taxable salary income.

Annuity {Section 17(1) (ii)}:

Annuity received from present employer will be taxed as salary.

Bonus:

Bonus is taxed in the year of receipt, it is not taxed on due basis.

Salary from UNO {Sec. 2 of UN (Privileges & Immunities Act, 1947)}:

Salaries, emoluments & pension paid by UNO to its officials are exempt from tax.

Full-time or part-time employment:

It does not matter whether the employee is a fulltime employee or a part-time one. Once
the relationship of employer and employee exists, the income is to be charged under the
head “salaries”.

Foregoing of Salary:

Once salary accrues, the subsequent waiver by the employee does not absolve him from
liability to income-tax. Such waiver is only an application and hence, chargeable to tax.

Surrender of Salary:

If an employee [Govt/PSU/Pvt] surrenders his salary to the Central Government under

Section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act,
1961, the salary so surrendered would be exempt while computing his taxable income.

TDS on Salary:

As Per Section 192, every employer has to deduct Tax on the Taxable salary of his
employee if such salary is more than the basic exemption limit and handover the net salary
which is after TDS, to the employee. While calculating taxable Income of employee ‘Salary
before TDS’ has to be taken and not the net salary after TDS.

Salary Paid Tax-Free:

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In this arrangement, the employer bears the burden of the tax on the salary of the
employee. In such a case, the income from salaries in the hands of the employee will consist
of his salary income and also the tax on this salary paid and bears by the employer.

Loan or Advance Against Salary:

Loan is different from salary. When an employee takes a loan from his employer,
which is repayable in certain specified installments, the loan amount cannot be brought to
tax as salary of the employee.

Similarly, advance against salary is different from advance salary. It is an advance

taken by the employee from his employer. This advance is generally adjusted with his
salary over a specified time period. It cannot be taxed as salary.

PLACE OF ACCRUAL OF SALARY

> Section 9(1)(ii) provides that salary earned in India is deemed to accrue or arise in
India even if it is paid outside India or it is paid or payable after the contract of employment
in India comes to an end.

[Pension paid abroad in respect of services rendered in India & leave salary paid
abroad in respect of leave earned in India is deemed to accrue or arise in India]

> Section 9(1)(iii) provides that salaries payable by the Government to a citizen of
India for services outside India shall be deemed to accrue or arise in India.

Foreign Allowances by the Govt. Employer - Section 10(7) –Exempted

Any allowance or perquisite paid or allowed outside India, by the Indian Govt. to a citizen
of India, for rendering service outside India is fully exempt.

Example: If an employee gets pension paid abroad in respect of services rendered in

India, the same will be deemed to accrue in India. Similarly, leave salary paid abroad in
respect of leave earned in India is deemed to accrue or arise in India.
Example: A, a citizen of India is posted in the United States as our Ambassador.
Obviously, he renders his services outside India. He also receives his salary outside India.
He is also a non-resident. The same will be deemed to accrue or arise in India.

SECTION 17(3) – “PROFITS IN LIEU OF SALARY” INCLUDES

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(a) TERMINAL COMPENSATION:
The amount of any compensation due to or received by employee from his employer
or former employer in connection with the termination of his employment or the
modification of the terms and conditions relating thereto.

[Usually, such compensation is treated as a capital receipt. However, by virtue of this

provision, the same is treated as a revenue receipt and is chargeable as salary.]

(b) PAYMENT FROM AN UNRECOGNIZED PROVIDENT FUND:

Any payment due / received by an assessee from unrecognized Provident Fund
or other Fund to the extent to which it does not consist of employee’s contributions or
interest on such contributions.

(c) PAYMENT UNDER KEYMAN INSURANCE POLICY:

Any payment due to or received by an assessee under a Keyman Insurance policy
including the sum allocated by way of bonus on such policy.

(d) ANY AMOUNT, WHETHER IN LUMPSUM OR OTHERWISE, DUE TO THE ASSESSEE

OR RECEIVED BY HIM, FROM ANY PERSON
i. before joining employment with that person, or
ii. after cessation of his employment with that person.

(e) ANY OTHER PAYMENT due to or received by an assessee from an employer or a

former employer or any fund [Other than the payments exempt under section 10]

DEDUCTIONS FROM SALARY

The income chargeable under the head ‘salaries’ is computed after making the following
deductions:

ENTERTAINMENT ALLOWANCE [SEC.16 (ii)]

First the entire entertainment allowance received by an employee is added to the gross
salary. Then deduction u/s 16(ii) shall be allowed as under.

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Government (CG/SG) employees
Non-Government employees
Least of the following is deductible-

a. Amount actual received

b. 5,000
c. 20% of salary
(Salary=Basic Salary) (No deduction)

Note – Actual expenditure towards entertainment is not deductible. It is irrelevant.

PROFESSIONAL TAX [SEC. 16 (iii)]

Professional tax or taxes on employment levied by a State is allowed as deduction only

when it is actually paid by the employee during the previous year (deduction on paid
basis).

If professional tax is reimbursed or directly paid by the employer on behalf of the

employee, the amount so paid is first included as salary income and then allowed as a
deduction under section 16.

Question 1:
X is employed by A Ltd. (basic salary being 38,750 per month). Besides, he gets 3,000 per
month as entertainment allowance. He pays professional tax of 1,000. Find out the salary
chargeable to tax. Does it make any difference if the professional tax is paid by A Ltd.

Answer:

If professional tax is If professional tax is paid

paid by X by the employer A Ltd.
Basic Salary ( 38,750 x 12) 4,65,000 4,65,000
Entertainment allowance 36,000 36,000
Professional tax paid by the employer Gross— 1,000

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Salary 5,01,000 5,02,000
Less : Deduction under section 16
Standard deduction 50,000 50,000 —
Entertainment allowance [not allowed]— 1,000
1,000
Professional tax
Income under the head "Salaries" 4,50,000 4,51,000

Question 2
A furnishes the following particular for his remuneration from Delta Pvt. Ltd.
Basic salary 9,300 p.m.
Dearness Allowance (forming part of salary for retirement benefits) 4,500 p.m.
Entertainment Allowance 2,250 p.m.

He had paid 3,500 towards professional tax to State Government. Compute his income from
salary.

Question 3:
Mr. Goyal receives the following emoluments during the previous year ending 31.03.
Basic pay 40,000
Dearness Allowance 15,000
Commission 10,000
Entertainment allowance 4,000
Professional tax paid 3,000 ( 2,000 was paid by his
employer)

He has no other income. Determine the income from salary, if Mr. Goyal is a State
Government employee.

GRATUITY [SECTION 10(10)]

Any gratuity received by an Individual on his death or retirement is eligible for exemption
u/s 10(10) as under –

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IN CASE OF GOVT. EMPLOYEES (CG/SG), EMPLOYEE OF LOCAL AUTHORITY (BUT NOT
STATUTORY CORPORATION)

Gratuity received is FULLY EXEMPT

IN CASE OF OTHER EMPLOYEES

(a) If covered under Payment of Gratuity Act, 1972, then least of the following is exempt:-

(i) Actual Amount received

(ii) 10,00,000 20,00,000 (notified w.e.f. 29/03/2018)

(iii) 15 days * last drawn salary for each completed year of service or
part thereof 26 in excess of 6 months
Note:
1. Salary means Basic Salary and Dearness Allowance (Whether or not forming part of
retirement benefit) on DUE BASIS

2.In case of SEASONAL ESTABLISHMENT – “15 days” will be replaced with “7 days”.

(b) If not covered under Payment of Gratuity Act, 1972, then least of the following is exempt:-

(i) Actual amount received

(ii) 10,00,000 20,00,000 (notified on 08/03/2019 but effective from
29/03/2018)
(iii) Half month’s salary (based on last 10 months’ average salary
immediately preceding the month of retirement or death) for each
completed year of service (fraction to be ignored)
Note:

1. Salary means Basic Salary and Dearness Allowance, if provided in the terms of
employment for retirement benefits, forming part of salary and commission which is
expressed as a fixed percentage of turnover achieved by the employee. [Basic Salary + DA
(R) + Commission (Sales)] - [Gestetner Duplicators Pvt. Ltd (SC)]

2. It should be on DUE BASIS.

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3. Half Month Salary should be read as 15/30.

Notes on Gratuity:

1. Gratuity received during the period of service is always taxable for all employees.

2. If Employee receives gratuity from two or more employers, then aggregate amount of
gratuity exempt from tax cannot exceed 20,00,000.

3. Where the employee has received gratuity in any earlier year & also receives gratuity
from another employer in a later year, the limit of 20,00,000 will be reduced by the
amount of gratuity exempt from tax in any earlier year.

4. Exemption under this provision will be available only in case where employer employee
relationship exists.

Question 4:
Mr. Ravi retired on 15.6.2019 after completion of 26 years 8 months of service and
received gratuity of 12,00,000. At the time of retirement his salary was:

Basic Salary: 6,000 p.m.

Dearness Allowance: 4,000 p.m. (60% of which is for retirement benefits)
Commission : 1% of turnover (turnover in the last 12 months was 12,00,000)
Bonus: 20,000 p.a.

Compute his taxable gratuity assuming:

(a) He is non-government employee and covered by the Payment of Gratuity Act 1972.

(b) He is non-government employee and not covered by Payment of Gratuity Act 1972.

(c) He is a Government employee.

Question 5:
Mr. Hari retires on 15th October 2019, after serving 30 years and 7 months. He gets
3,80,000 as gratuity. His salary details are given below:

FY 2019-20 Salary 16,000 pm D.A. 50% of salary. 40% forms part of

retirement benefits.

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FY 2018-19 Salary 15,000 pm D.A. 50% of salary. 40% forms part of
retirement benefits

Determine his taxable gratuity in the following cases:

(i) He retires from government service
(ii) He retires from seasonal factory in a private sector, covered under Payment of Gratuity
Act, 1972.
(iii) He retires from non-seasonal factory, covered by Payment of Gratuity Act, 1972
(iv) He retires from private sector, not covered by payment of Gratuity Act

PENSION [SEC 10(10A)]

“Pension” may be defined as a periodic payment made especially by Government or a
company or other employers to the employee in consideration of past service payable after
his retirement.

Pension is of two types: Commuted and Uncommuted

Uncommuted Pension:
Uncommuted pension refers to pension received periodically. It is fully taxable in
the hands of both government and non-government employees.

Commuted Pension:
Commuted pension means lump sum amount taken by commuting the whole or part of the
pension.
EMPLOYEES OF THE CENTRAL/STATE GOVERNMENT/LOCAL AUTHORITIES/STATUTORY
CORPORATION

Any commuted pension received is fully exempt from tax. IN CASE OF OTHER EMPLOYEES:

Case I: If the Employee receives the Gratuity also:

Then Exemption = 1/3 * Full Commutable value of Pension.

Case II: If the Employee DOES NOT receive any Gratuity:

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Then Exemption = 1/2 * Full Commutable value of Pension.

Here, Full Commutable value of Pension = Commuted Amount

% of Commutation

Question 6:
Mr. Sagar retired on 1.10.2019 receiving 5,000 p.m. as pension. On 1.2.2020, he
commuted 60% of his pension and received 3,00,000 as commuted pension. You are
required to compute his taxable pension assuming:
a) He is a government employee.
b) He is a non-government employee, receiving gratuity of 5,00,000 at the time of
retirement.
c) He is a non-government employee and is in receipt of no gratuity at the time of
retirement.
LEAVE SALARY [SECTION 10(10AA)]

It provides exemption in respect of amount received by way of encashment of unutilised

earned leave by an employee at the time of his retirement whether on superannuation or
otherwise.

In case of Central or State Government Employees [Employee of Local Authority/Statutory

Corporation excluded]:

- Fully Exempt

In case of other Employees:

- Leave salary received at the time of retirement is exempt from tax to the extent of
least of the following:

i) 3,00,000
ii) Leave salary actually received
iii) 10 months X Average Salary
iv) Earned leave to the credit of employee x Average Salary Where:

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(1) ‘Average salary’ will be determined on the basis of the salary drawn during the
period of ten months immediately preceding the date of his retirement whether on
superannuation or otherwise.

(2) Salary means Basis Salary + DA (R) + Commission (Sales).

(3) Earned leave to the credit of the employee = {Annual Leave Entitlement (Not
exceeding 30 days) X Completed years of actual service rendered (Fractions will be
ignored)} – Leave availed during the service
Note:

(1) Leave salary received during the period of service (i.e. during continuity of
employment) is fully taxable.

(2) Leave encashment on retirement by way of resignation will also be eligible for
exemption.

(3) Where leave salary is received from two or more employers in the same year, then
the aggregate amount of leave salary exempt from tax cannot exceed 3,00,000.

(4) Where leave salary is received in any earlier year from a former employer and again
received from another employer in a later year, the limit of 3,00,000 will be reduced
by the amount of leave salary exempt earlier.

Question 7
Mr. G retired on 1.12.2019 after 20 years 10 months of service, receiving leave salary of
5,00,000. Other details of his salary income are:

Basic Salary: 5,000 p.m. ( 1,000 was increased w.e.f. 1.4.19)

Dearness Allowance: 3,000 p.m. (60% of which is for retirement benefits)
Commission: 500 p.m.
Bonus: 1,000 p.m.
Leave availed during service: 480 days

He was entitled to 30 days leave every year. You are required to compute his taxable leave
salary assuming:
(a) He is a government employee.
(b) He is a non government employee

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RETRENCHMENT COMPENSATION [SECTION 10(10B)]

Any compensation received by a workman at the time of his retrenchment, under the
Industrial Disputes Act, 1947, shall be exempt to the extent of least of the following:

(i) Actual amount received;

(ii) An amount calculated in accordance with Section 25F(b) of the Industrial Disputes
Act, 1947 i.e. 15 / 26 day’s average pay [3 months basis] for every completed year of
service or part thereof in excess of 6 months;
(iii) 5,00,000.

[In case where the retrenchment scheme is approved by the Central government, the entire
amount is exempt.]
Note: Pay will include Basic Salary + D.A (Whether or not forming part of retirement
benefit) etc.

Question 8:
Mr. Agrawal received retrenchment compensation of 10,00,000 after 30 years 4 months of
service. At the time of retrenchment, he was drawing basic salary 20,000 p.m.; Dearness
allowance 5,000 p.m. Compute his taxable retrenchment compensation.

COMPENSATION RECEIVED at the time VRS / VSS under Golden

Handshake Scheme – [SECTION 10(10C)]

Compensation received is exempt from tax if the following

(A) conditions are satisfied:
1) Compensation is received at the time of Voluntarily Retirement Scheme or
Voluntarily Separation Scheme.
2) Compensation is received by the employees of -
a. Central & State Govt.
b. Local Authority
c. Statutory Corporation
d. Co – Operative Society
e. Public Sector Company; or any other Company

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f. Approved University
g. I.I.T.
h. Notified Institution
i. Some Notified institute of management (i.e. IIM and IIFT)

3) Compensation is received in accordance with VRS / VSS framed in accordance with

guidelines.
4) Exemption u/s. 10(10C) shall be once for any assessment year [Means “in life”].
5) No Exemption if relief availed u/s 89:
Where any relief has been allowed to an assessee under section 89 for any AY in
respect of any amount received or receivable on his voluntary retirement or
termination of service or voluntary separation, no exemption under this section
shall be allowed to him in relation to such, or any other, AY.

Further, once relief is claimed u/s 89, the right to claim exemption in respect of
VRS compensation is lost forever.

(B) Quantum of Exemption: Least of the following is exempt:

1) Actual Compensation Received

2) Statutory Limit: 5,00,000

3) 3 months’ salary for each completed year of service

4) Salary at the time of retirement x balance months of service left [Salary =
Last drawn Basic Pay + DA (R) + Comm. (Sales)]

(C) Following guidelines should be noted for the purpose of claiming exemption [Rule
2BA]:

a) The employee must have completed 10 year of service or attained 40 years of

age except in the case of an employee of a PSU;
b) The employee must not be a director in a company or co-operative society;
c) The scheme results in overall reduction in the existing strength of the employees;
d) The vacancy caused on such VRS / VSS shall not be filled up.

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e) The retiring employee shall not be employed in another company or concern
belonging to the same management group; and

QUESTION 9 . Mr. A received voluntary retirement compensation of 8,00,000 after 30

years 4 months of service. He still has 6 year of service left. At the time of voluntary
retirement, he was drawing basic salary 20,000 p.m.; DA (which forms part of pay) 5,000
p.m.; compute his taxable VRS.

VALUATION OF LEAVE TRAVEL CONCESSION

[Section 10(5) read with Rule 2B]

1. An employee is entitled to exemption under section 10(5) in respect of value of travel
concession or assistance due to or received by him from his employer or former employer
for himself and his family, in connection with his proceedings-

a. on leave to any place IN INDIA, or

b. to any place in India after retirement from service or after the termination of his
service.

FAMILY MEANS: (Spouse + Children) & (Dependent Parents/Brothers/Sisters of

the individual)

2. Availability of Exemptions:

a. Exemption is available in respect of 2 journeys performed in a block of 4

calendar years. The current block is 2018-2021 (9th).

b. However, if individual does not avail such LTC during any such block then he can
claim the exemption of one journey in the calendar year immediately succeeding
the end of the said block.

c. Exemption shall not be available to more then 2 surviving children of an

individual after 1.10.1998. However, this restriction does not apply in respect of

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children born before 1.10.1998 & also in respect of multiple births after one
child.

4. Amount of exemption CANNOT EXCEED the amount of expenditure actually

incurred for the purposes of such travel. It is allowable only in respect of FARE.

5. VALUE OF TRAVEL CONCESSION: Exemption u/s. 10(5) is subject to the following

conditions:

Section 10(5) [Leave Travel Concession]

Exemption is available for 2 trips in a block of 4 calendar years.
S.
Journey performed by Exemption
No.
Amount not exceeding air economy fare by the
1 Air
shortest route.
Any other mode :
Amount not exceeding air conditioned first class
Where rail service is
(i) rail fare by the shortest route to the place of
available
destination
Where rail service is
(ii)
2 not available
a) and public Amount equivalent to air conditioned first class rail
transport does not fares by the shortest route, as if the journey had
exist been performed by rail
b) but public Amount not exceeding the first class or deluxe class
transport exists. fare by the shortest route to the place of destination
QUESTION 10.Mr. D went on a holiday on 25.12.2019 to Delhi with his wife and three
children (one son – age 5 years; twin daughters – age 2 years). They went by flight
(economy class) and the total cost of tickets reimbursed by his employer was 60,000 (
45,000 for adults and 15,000 for the three minor children).
Compute the amount of LTC exempt.

Question 11:

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In the above question, will be there be any difference if among his three children the twins
were 5 years old and the son 3 years old? Discuss.

Question 12:
Mr. J is working with ABC Ltd. getting the basic salary of 20,000 pm and DA of 5,000 pm. He
is given bonus of 5000 in the August 2020 which was due in March 2020. He has availed
the benefit of LTC during the current year and goes to Goa with his family. He takes along
with him his wife, one financially independent son, one married daughter, his dependent
mother, his financially independent father, his financially independent sister and
dependent father in law. The employer has spent 15,000 per head on tickets in Jet Airways’
Airlines where as the fare of Indian Airlines is 11,000 per head. Calculate his taxable Salary.

HOUSE RENT ALLOWANCE [Section 10(13A) read with Rule 2A]

If HRA is received by the assessee and he incurs the expenditure of rent on residential
accommodation, then an exemption of least of the following amount is allowed:
(1) Actual Amount received [HRA]
(2) Rent Paid Less 10% of Salary
(3) 50% of Salary (in Metro cities) OR 40% of Salary (in other cities)

Notes:
(a) If the employee receives HRA but does not incur any expenditure of Rent on
residential accommodation, then HRA received is fully taxable.
(b) Exemption is not available to an assessee who lives in his own house.

(c) The exemption shall be calculated on the basis of where the accommodation is situated.

(d) If Place of employment, Rent, HRA, Salary etc is the same for the whole year, then
exemption shall be calculated for the whole year.
(e) If there is a change in place, change in rent paid, Change in HRA or change in Basic
Salary structure during the previous year, then it shall be calculated on
monthly/periodic basis.

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(f) Exemption should be calculated in respect of the period during which rental
accommodation is occupied by the Employee during the previous year.
(g) Salary means Salary on Due Basis.

Question 13:
Mr. A working in Delhi, receives the following amounts:
(a)Basic salary 6,000 PM
(b) DA Rs. 2,000 pm (50% is forming part of salary)
(c) Commission based on production 30,000 annually
(d)Commission based on Sales @ 2% on sales of 6,00,000 achieved byA
(e) HRA 5,000 pm (Rent of 4,500 p.m. paid in Delhi). Compute Total Income.

Question 14:
Mr. Raj Kumar has the following receipts from his employer:
(1) Basic pay 3,000 p.m.
(2) Dearness allowance (D.A.) 600 p.m.
(3) Commission 6,000 p.a.
(4) Motor car for personal use (expenditure met by the employer) 500 p.m
(5) House rent allowance 900 p.m.

Find out the amount of HRA eligible for exemption to Mr. Raj Kumar assuming that he paid
a rent of 1,000 p.m. for his accommodation at Kanpur. DA forms part of salary for
retirement benefits.

ALLOWANCES U/S 10(14)

Different types of allowances are given to employees by their employers. Generally

allowances are given to employees to meet some particular requirements like house rent,
expenses on uniform, conveyance etc. Under the Income-tax Act, allowance is taxable on
due or receipt basis, whichever is earlier.

ALLOWANCES EXEMPT TO THE EXTENT ACTUALLY EXPENDED FOR THE OFFICIAL

PURPOSES [SECTION 10(14) (i)]

These allowances are given for official purposes and lower of the below two is the

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Exempted amount:

I. Amount of Allowance Actually Received from the Employer; OR

II. Amount Spent for official purpose.

SR. Nature Particulars

(a) Traveling Allowance To meet the cost of travel on tour or on transfers

(including any sum paid in
connection with transfer,packing and
transportation of personal effects on
such transfer.

(b) Daily Allowance For ordinary daily charges on account of

absence from his normal place of duty on tour
or journey

(c) Conveyace To meet the expenditure on local

Allowance conveyancein performance of
official duties if free conveyance is
not provided by the employer

(d) Helper Allowance (Servant Granted to meet the expenditure

Allowance is different) incurred on a helper engaged for the
duties.

(e) Academic/Research Granted for encouraging academic

allowance research & other professional pursuits.

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(f) Uniform Allowance Granted to meet the expenditure incurred on the
purchase or maintenance of uniform
for wears during the performance of
the employee

ALLOWANCES MEANT FOR PERSONAL EXPENSES EXEMPT TO THE EXTENT NOTIFIED

BY RULES [SECTION 10(14(ii)]
In these allowances, the actual amount spend by the assessee is not relevant.
Lower of the below two amount is Exempted amount:

I. Amount of Allowance Actually Received from the Employer OR

II. Limit specified in the Act

Taxability/Exemption of certain Allowances

Section Allowance Exemption
10(13A) House Rent Least of the following is exempt:
Allowance (a) HRA actually received
(b) Rent paid less 10% of salary
(c) 50% of salary, if accommodation is located in
Mumbai, Kolkata, Delhi or Chennai
40% of salary, if the accommodation is located in
any other city.

10(14)(ii) Children ` 100 per month per child upto maximum of two
education children
allowance

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Transport ` 3,200 per month for an employee who is blind or deaf
allowance for and dumb or orthopedically handicapped
commuting
between the
place of
residence and
the place of duty
Hostel ` 300 per month per child up to a maximum of two
expenditure of children
employee’s
children
Tribal or 200 P.M.
Scheduled Area
Allowance

Underground 800 P.M.

allowance (in
coal mines)

Allowances Lower ofbelow two is exempt :

granted to - 70 % of allowance received from the employer
employees of OR
transport - 10,000
system to
meet personal
expenditure
during his
duty, provided
he is not
in receipt of daily
allowances
Hill Compensatory 300 p.m.
Allowances

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ALLOWANCES WHICH ARE FULLY TAXABLE

1) City Compensatory Allowance:

City Compensatory Allowance is normally intended to compensate the
employees for the higher cost of living in cities. It is taxable irrespective of the
fact whether it is given as compensation for performing his duties in a particular
place or under special circumstances.

2) Entertainment Allowance:
This allowance is given to employees to meet the expenses towards hospitality
in receiving customers etc. The Act gives a deduction towards entertainment
allowance only to a Government employee. The details of deduction permissible
are discussed later on in this Unit.

3) Dearness Allowance:
It is fully taxable allowance. It is of following 2 types:
v' DA which is forming part of salary for computation of retiremental benefits as per
the terms of employment.
v' DA which is NOT forming part of salary for computation of retiremental benefits as
per the terms of employment.
Note: If the Question is silent, it is to be assumed that DA is not forming part of salary.

4) Medical Allowance: It is a fully taxable allowance.

5) Lunch Allowances / Tiffin Allowances / Cash Allowance / Deputation Allowance

6) Overtime Allowances / Servant Allowances / Warden Allowance / Family Allowance etc.

ALLOWANCES WHICH ARE EXEMPT IN CASE OF CERTAIN PERSONS

1) Allowances to a citizen of India, who is a Government employee, rendering services
outside India. [Section 10(7)]
2) Travelling Allowances to High Court judges
3) Sumptuary allowance to HC/SC judges & Serving member/Chairmen of UPSC.

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4) Allowance received by an employee of UNO from his employer.

Question 15:
Mr. Srikant has two sons. He is in receipt of children education allowance of 150 p.m. for
his elder son and 70 p.m. for his younger son. Both his sons are going to school. He also
receives the following allowances:
Transport allowance: 1,000 p.m. (amount spent 600 p.m.)
Tribal area allowance: 500 p.m. Compute his taxable allowances.

Question 16:

Mr. X receives Basic salary of 10,000 PM and DA of 4,000 PM. He retires on Oct
31st of the PY and pension is fixed at 3,000 PM. He receives the following amounts
as well:
(a)HRA 4,000 PM (he lives in his own house)
(b)Medical allowance 600 PM (Actual expenditure on medical treatment is more than 600
PM)
(c) Children Education allowance 250 PM per child for 3 children.
(d)Children hostel allowance 250 PM for 1 child.
(e)Travelling allowance 1,000 PM (60% spent on official duties)
(f) Transport allowance 900 PM (Actual expenditure 850 PM)
(g)Uniform allowance 1,000 PM

SECTION 7 – INCOME DEEMED TO BE RECEIVED

The following incomes shall be deemed to be received in India in the previous year:

I. Employer’s contribution to RPF in excess of 12% of the salary of the employee.

II. Interest credited to RPF balance in excess of 9.5% p.a.
III. The taxable transfer balance from URPF to RPF.
IV. Contribution made, by the any employer, to the account of an employee under a
pension scheme referred to in Sec. 80CCD.

Provident fund scheme is a scheme intended to give substantial benefits to an employee at

the time of his retirement. Under this scheme, a specified sum is deducted from the salary
of the employee as his contribution towards the fund. The employer also generally
contributes the same amount out of his pocket, to the fund. The contribution of the

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employer and the employee are invested in approved securities. Interest earned thereon is
also credited to the account of the employee. Thus, the credit balance in a provident fund
account of an employee consists of the following:

a) Employee’s Contribution
b) Interest on Employee’s Contribution
c) Employer’s Contribution
d) Interest on Employer’s Contribution.

The accumulated balance is paid to the employee at the time of his retirement or resignation.
In the case of death of the employee, the same is paid to his legal heirs. The provident fund
represents an important source of small savings available to the Government. Hence, the
Income-tax Act gives certain deductions on savings in a provident fund account.

STATUTORY PROVIDENT FUND SPF

The SPF is governed by Provident Funds Act, 1925. It applies to employees of government,
railways, semi-government institutions, local bodies, universities and all recognised
educational institutions.

(i) PUBLIC PROVIDENT FUND [PPF]

Public provident fund is operated under the Public Provident Fund Act, 1968. A
membership of the fund is open to every individual though it is ideally suited to self-
employed people. A salaried employee may also contribute to PPF in addition to the fund
operated by his employer. An individual may contribute to the fund on his own behalf as
also on behalf of a minor of whom he is the guardian.

(ii) RECOGNISED PROVIDENT FUND [RPF]

Recognised provident fund means a provident fund recognised by the Commissioner of
Income-tax for the purposes of income-tax. A fund constituted under the Employees’s
Provident Fund and Miscellaneous Provisions Act, 1952 will also be a Recognised
Provident Fund.

(iii) UNRECOGNISED PROVIDENT FUND [UPF]

A fund not recognised by the Commissioner of Income-tax is Unrecognised Provident
Fund.
THE TAX TREATMENT IS

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Particulars SPF PPF RPF URPF

Employer’s Fully Exempt N.A. in excess of 12% of Not taxable at the
Contribution salary* is taxable time of
contribution

Ded. u/s 80C Available Available Available Not Available

(Employee’s [500 – 150,000]
Cont)

Interest Fully Exempt Fully Exempt in excess of 9.5% p.a.

credited (IOS Head) is taxable (Salary)
----

Amount Fully Exempt Fully Exempt Fully Exempt sub. to > Interest on
received u/s. 10(11) u/s. 10(11) condition u/s. 10(12) Employee’s
on Contribution is
retireme taxable u/h.
nt, death “IOS”
etc. > Employer’s
Contribution and
interest. on
such
Contribution is
fully taxable

The payment from R.P.F. balance is fully exempt from tax in following
cases:
Accumulated balance in RPF payable to an employee (subject to certain following
conditions).
Condition 1– Employee has rendered continuous service for a period of at least 5 years;
or
Condition 2–Where employee could not complete 5 years of service by reason of

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- ill-health; or
- discontinuance of the employer’s business or
- other cause beyond the control of the employee.

In any other case, the payment from RPF is fully taxable in the manner given below:
(i) Interest on Employee’s contribution is fully taxable u/h Other Sources.
(ii) Employer’s contribution and Interest thereon is taxable as salary u/s 17(3).

Note: If employee gets transfer of balance of RPF with another employer who also
maintains RPF, then, the period of service under former employer shall also be
included in calculating the period of continuous service.

Question 17:
Mr. A, working in ABC Pvt. Ltd., receiving Basic Salary of ! 9,000 P.M. retires from
service on 31st dec of the P.Y. He contributes 15% of salary to his URPF balance to
which an equal amount is contributed by the employer. On retirement he receives
!1,00,000 from his URPF which consists of 60,000 as total of Employee and
Employer’s contribution and 40,000 as total interest. Compute TI if monthly pension
is fixed at 4,000 P.M.
CONVERSION OF URPF INTO RPF

When a URPF gets converted into RPF, then, the income that would have been taxed
had the fund been recognised from the date of its institution would be taxed as the
income of the employee during the P.Y. in which the funds gets such recognition. The
amount not transferred to RPF & paid out of URPF will be taxable in the same manner
as the lumpsum payment from URPF is taxed.
APPROVED SUPERANNUATION FUND

1. It means a superannuation fund which has been and continues to be approved by

the Commissioner in accordance with the rules framed in this regard.

2. The tax treatment of contribution and exemption of payment from tax are as
follows:
a) Employer’s contribution upto 150,000 is exempt from tax in the hands of
employee.
b) Employee’s contribution qualifies for deduction under section 80C;
c) Interest on accumulated balance is exempt from tax.

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3. Section 10(13) grants exemption in respect of payment from the fund—
a) Paid to legal heirs on death of the employee, or
b) Paid to employee on his retirement or
c) Paid to employee on his becoming incapacitated prior to such retirement.

4. Any payment from fund by way of transfer to the account of the employee under a
pension scheme (New Pension Scheme u/s 80CCD) shall be EXEMPT.

PERQUISITES

1) The term ‘perquisite’ indicates some extra benefit in addition to the amount that may
be legally due by way of contract for services rendered.
2) Perquisite may be provided in cash or in kind.
3) Perquisite may arise in the course of employment or in the course of profession. If it
arises from a relationship of employer-employee, then the value of the perquisite is
taxable as salary. However, if it arises during the course of profession, the value of
such perquisite is chargeable as profits and gains of business or profession.
4) Perquisite will become taxable only if it has a legal origin.
5) Reimbursement of expenses incurred in the official discharge of du ties is not a
perquisite.

(6) Perquisites taxable in the case of all employees

(7) Perquisites exempt from tax in the case of all employees
(8) Perquisites taxable only in the hands of specified employees.

TAXABILITY OF PERQUISITE

Section 17(2) of the Income Tax Act gives an inclusive definition of perquisite.
Perquisite includes:

i) VALUE OF RENT-FREE ACCOMMODATION [RFA] PROVIDED to the assessee by his

employer [Section 17(2)(i)].

ii) Value of CONCESSION IN RENT IN RESPECT OF ACCOMMODATION PROVIDED to the

assessee by his employer [Section 17(2)(ii)].

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iii) The value of any benefit or amenity GRANTED OR PROVIDED free of cost or at concessional rate
to SPECIFIED EMPLOYEES i.e.
a. by a company to an employee in which he is a director;

b. by a company to an employee being a person who has substantial interest in the

company (i.e. 20% or more of the voting rights of the company);

c. by any employer (including a company) to an employee to whom the provisions of

(a) & (b) do not apply and whose income under the head ‘salaries’ (whether due
from, or paid or allowed by, one or more employers) exclusive of the value of all
benefits or amenities not provided for by way of monetary benefits exceeds
50,000 - Section 17(2)(iii);
[i.e. Salary for this purpose = Basic Salary + D.A. + Commission, whether
payable monthly or turnover based + Bonus + Fees + Advance Salary +
Arrear Salary + Any other taxable payment + Any taxable allowances + Any
other monetary benefits – Deductions under section 16 (ia) / (ii) / (iii)]
Such benefits are:
1. Motor Car
2. Sweeper, Gardener, Watchman etc.
3. Gas, Electricity & Water
4. Free Education Facility
5. . Free / Concessional Fare

iv) AMOUNT PAID by an employer in respect of any obligation which otherwise

would have been payable by the employee [Section 17(2)(iv)].

v) AMOUNT PAYABLE by an employer directly or indirectly to effect an assurance on the life

of the assessee or to effect a contract for an annuity, other than payment made to RPF
or approved superannuation fund - Section 17(2)(v).

a. However, there are schemes like group annuity scheme, employees state
insurance scheme and fidelity insurance scheme, under which insurance premium

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is paid by employer on behalf of the employees. Such payments are not regarded
as perquisite in view of the fact that the employees have only an expectancy of the
benefit in such schemes.

b. In Case employer has paid life insurance premium on behalf of the employee then
it will be taxable for the employee and further employee can claim deduction
under section 80C from GTI

vi) The Value Of Any Specified Security Or Sweat Equity Shares ALLOTTED OR
TRANSFERRED, directly or indirectly, by the employer or former employer, free of
cost or at concessional rate to the assessee – Section 17(2)(vi).

vii) the amount of any CONTRIBUTION TO AN APPROVED SUPERANNUATION FUND by

the employer in respect of the assessee, to the extent it EXCEEDS 1,50,000 – Section
17(2)(vii).

viii) The value of any other fringe benefit or amenity as may be prescribed by the
CBDT – Section 17(2)(viii). They are

a) Concessional or Interest Free Loan

b) Travelling, touring & accommodation other than LTC
c) Free Food & Beverage to employees during office hours
d) Gift to the employees
e) Credit Card expenses
f) Club Expenses
g) Use of Movable assets by the employees
h) Transfer of any Movable Assets to the employees
i) Value of any other benefit or amenity, service, right / privilege

Exempted Perquisites
Following perquisites are exempted in hands of employee:

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1. Tea or snacks: Tea, similar non-alcoholic beverages and snacks provided during
working hours.
2. Food: Food provided by employer in working place upto Rs. 50 per meal. Remote area
– full exempt.
3. Recreational facilities: Recreational facilities extended to a group of employees.
4. Goods sold to employee at concessional rate: Goods manufactured by employer
and sold by him to his employees at concessional (not free) rates.
5. Conveyance facility: Conveyance facility provided -
 to employees for journey between office and residence and vice versa.
 to the judges of High Court and Supreme Court
6. Training. Amount spent on training of employees including boarding and lodging
expenses of the employees on such training.
7. Services rendered outside India: Any perquisite/allowances allowed outside India by
the Government to a citizen of India for rendering services outside India.
8. Contribution in some specified schemes
 Employer's contribution to staff group insurance scheme.
 Payment of annual premium by employer on personal accident policy affected by
him in respect of his employee.
9. Loans
 Loan given at nil or at concessional rate of interest by the employer provided the
aggregate amount of loan does not exceed 20,000.
 Interest free loan for medical treatment of the diseases specified in Rule 3A.
10. Medical facility
A provision of medical facility at office is exempt.
11. Periodicals and journals: Periodicals and journals required for discharge of work.
12. Telephone, mobile phones: Expenses for telephone, mobile phones actually
incurred on behalf of employee by the employer whether by way of direct payment or
reimbursement.
13. Free education facility: Free education facility to the children of employee in an
institution owned or maintained by the employer provided cost of such facility does
not exceed Rs.1000 per month per child.
14. Computer or Laptop: Computer or Laptop provided whether to use at office or at
home (provided ownership is not transferred to the employee).

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15. Movable assets: Sale or gift of any movable asset (covered under SLM method) to
employee after being used by the employer for 10 or more years.
16. Leave Travel Concession: Leave Travel Concession (LTC) to the extent of lowest
cost incurred.
17. Rent-free accommodation
 Rent-free official residence provided to a Judge of a High Court or the Supreme Court.
 Rent-free furnished residence (including maintenance thereof) to Official of
Parliament, a Union Minister or a Leader of opposition in Parliament.
18. Accommodation: Accommodation provided -
 on transfer of an employee in a hotel for a period not exceeding 15 days in aggregate.
 in a remote area to an employee working at a mining site or an onshore exploration
site or a project execution site or a dam site or a power generation site or an
offshore site.

19. Tax on non-monetary perquisite paid by employer on behalf of employee.

20. Health club. Sports club facility

VALUATION OF PERQUISITES

Rule 3 of the Income-tax Rules, 1962 contains the guidelines for the purpose of valuation of
perquisites

VALUATION OF RENT FREE UNFURNISHED ACCOMMODATION

IN CASE OF GOVT. EMPLOYEES [CG/SG] : As per License Fee determined by Govt.
(a) IN CASE OF NON – GOVT. EMPLOYEES:

(i) If Accommodation is not owned by Employer: Value shall be the lower of

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(i) Rent paid by
the Employer OR
(ii) 15% of salary

(ii) If Accommodation is owned by Employer: Value shall be

If population < 10 Lakhs : 7.5% of Salary

If 10 Lakhs < Population < 25 Lakhs : 10% of Salary

If Population > 25 Lakhs : 15% of Salary

If ACCOMODATION IS PROVIDED AT CONCESSIONAL RATE then value = Value

determine as above Less Rent actually paid by employee.
RENT FREE FURNISHED ACCOMMODATION

Value of unfurnished accommodation shall be calculated as above and shall be increased by

value of furnished accommodation, which is:

10% p.a. of the original COST OF FURNITURE if owned by employer and/or

The actual hire charges paid/payable, if hired from a third party

Note: The valuation shall be reduced by any amount recovered from the employee.

SALARY FOR THE PURPOSE OF VALUATION OF ACCOMMODATION

Basic Salary + DA (Forming Part of Salary) + Bonus + Fees + Commission + All other Taxable
Allowance + Any monetary payment by employer to employee, by whatever name called

[Above does not include Perquisites (Monetary or Non-Monetary) and Employer’s

contribution to PF + Arrear Salary + Advance Salary]
Note:
1. Salary are to be considered on due basis for the relevant period for which
accommodation is provided.

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2. If the employee receives salary from more than one employer, the aggregate of the salary
received from both the employers has to be taken into account for valuation of rent free
accommodation

VALUATION OF ACCOMMODATION PROVIDED IN A

HOTEL:

Where the accommodation is provided by the employer (Government or other employer)

in a hotel, the value of the perquisite will be lower of:

a. 24% OF SALARY paid or payable for the previous year OR

b. the actual charges paid or payable to such hotel for the period during
which such accommodation is provided.
The above value is reduced by the rent, if any, actually paid or payable by the
employee. Note:

The value of this perquisite will not be calculated if the employee is provided such
accommodation for a period not exceeding in aggregate 15 days on the transfer from
one place to another.
FOR FIRST 90 DAYS - ANY ONE

Where on account of his transfer from one place to another, the employee is provided with
accommodation at the new place of posting while retaining the accommodation at the
other place, the value of perquisite shall be determined with reference to ONLY ONE SUCH
ACCOMMODATION which has the lower value (as determined according to the above
provisions) for a period not exceeding 90 days and thereafter the value of perquisite shall
be charged for both such accommodations in accordance with the valuation rules.

EXCEPTIONS:
However, none of the above valuation rules would be applicable to any accommodation
provided to an employee working at a mining site/onshore oil exploration site/project
execution site/dam site/power generation site/offshore site which:

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a. being of a temporary nature and is located at least 8 kms away from the
local limits of any municipality or cantonment board; or

b. is located in a remote area.

[Remote area means an area that is located at least 40 kms away from a
town having a population not exceeding 20,000 based on latest published all
India census].

Question 18:
Ramnath is employed with Mega Limited and is paid Basic Salary 7 15,000/ – p.m.; – 7 2,000/ – p.m.
as Commission; D.A not forming part of retirement benefits 7 1,250/ – p.m. and travel allowances of
7 1,000/ – p.m. Bonus paid during the year is 7 12,000/ – 60% of the travel allowance is not spent and
the balance is spent for office purpose.
Compute the taxable salary by also taking into account the fact that he is provided rent free furnished
accommodation where population is 15 lakhs. Original cost of furniture provided in the house
7 30,000/ – (W.D.V. 7 6,000). Hire charges 7 450 pm for hired furniture provided.

Question 19:
Mr. Ritesh is provided with an accommodation in Kolkata since April 2019. Salary 7 40,000 p.m.
Cost of furniture provided 7 80,000. On 1st October, 2019, following a promotion with a increase
in Salary by 7 15,000, he was transferred to Nagpur (population less than 25 lakhs but more than
10 lakhs), and was also provided an accommodation there. Mr. Ritesh was allowed to retain the
Kolkata accommodation till March, 2020. Compute taxability.

Solution: Phase 1: Value of Furnished Accommodation (Kolkata) (April to September 2019)

Particulars 7
Value of unfurnished accommodation (15% of 40,000 × 6 months) 36,000
Add: Value of Furniture provided:
10%p.a. of original cost of such furniture
(10% of 7 80,000 x 6 / 12 months) 4,000
Value of Furnished Accommodation 40,000
Phase 2: Valuation of accommodation (October 2019 to December 2019)
(a) For the first 90 days of transfer: Where accommodation is provided both at existing place of
work and in new place, the accommodation, which has lower value, shall be taxable.
(b) After 90 days: Both accommodations shall be taxable.

Computation for the first 90 days of transfer: (October 2019 to December 2019) Lower of:
(i) Value of accommodation at existing place of work
(ii) Value of accommodation at new place

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Value of accommodation at existing place of work (Kolkata)
15% of salary for 3 months (i.e. 90 days) = 15% of 7 55,000 x 3 months =24,750
Add: Cost of furniture provided: 10% of 7 80,000 x 3 months / 12 = 2,000
Total Value of Perquisite 26,750

Value of accommodation at new work place (Nagpur)

10% of salary for 3 months (i.e. 90 days) = 10% of 7 55,000 x 3 months = 7 16,500 Therefore, the
assessee shall be assessed to tax on 7 16,500 (being the lower)

Phase 3: Valuation of accommodation (after 90 days) (January 2020 to March 2020)

For Kolkata accommodation: 15% of 7 55,000 x 3 months =7 24,750
Add: Cost of furniture provided: 10% x 7 80,000 x 3 months / 12 = 7
2,000
Total value of perquisite 7 26,750

For Nagpur accommodation: 10% of 7 55,000 x 3 months = 7 16,500

Total value of perquisite:

Particulars Taxable value of
perquisite
Phase 1: Accommodation in Kolkata 40,000
Phase 2: Accommodation in Nagpur (being the lower during 90 days) 16,500
Phase 3: Accommodation in Kolkata 26,750
Phase 4: Accommodation in Nagpur 16,500
Total Value of Taxable Perquisite 99,750

MOTOR CAR [RULE 3(2)] – SPECIFIED EMPLOYEE

Owner of Car Expenses Purpose Taxable Value of Perquisite

met by

Employer Employer Fully Official use Not a Perquisite, provided the

documents
specified in Rule 3(2)(B) are maintained.
[See Note 2 below]

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Employer Employer Fully Personal Aggregate of
use Actual expenditure on Car
Remuneration to Chauffeur
10% p.a. of the Cost of Car (normal wear &
tear)
Less: Amount charged from Employee

1(c)(i) Employer Partly for Cubic Capacity of Car Engine

Employer Official

upto 1.6 Litres: 1,800 p.m. + 900

partly for
p.m. for Chauffeur
Personal use
above 1.6 Litres: 2,400 p.m. + 900
p.m. for Chauffeur

1(c)(ii) Employee Partly for Cubic Capacity of Car Engine

Employer Official upto 1.6 Litres 600 p.m. + 900 p.m. for
partly for Chauffeur above 1.6 Litres 900 p.m. + 900
Personal use p.m. for Chauffeur

2(i) Employee Employer Fully Official use Not a Perquisite, provided the
documents
specified in Rule 3(2)(B) are maintained.
[See Note 2 below]
2(ii) Employee Employer Partly for Subject to Rule 3(2)(B)
Official Actual Expenditure incurred Less
partly for
Personal use

upto 1.6 Litres: 1,800 p.m. + 900

p.m. for Chauffeur
above 1.6 Litres: 2,400 p.m. + 900

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p.m. for Chauffeur

3(i) Employee Employer Fully Official use Not a Perquisite, provided the
owns other Documents specified in Rule 3(2)(B) are
automotive but maintained. [See Note 2 below]
not Car

3(ii) Employee Employer Partly for Subject to Rule 3(2)(B)

owns other Official Actual expenditure incurred by Employer
automotive but partly for Less: 900 p.m.
not Car Personal use
Notes:

1. Pool of Cars owned or hired by Employer: If the Employee is permitted to use any
or all Cars for both official and personal use, the treatment will be as under

For official use Valued as per 1(c)(i)

For personal use Valued as per 1(b), as if fully used for personal purpose

2. Documents required for claiming 'Not Taxable Perquisite' or higher deduction

wherever applicable. [Rule 3(2)(B)]:
(a) Employee should maintain complete details of journey undertaken for official
purpose, which includes date of journey, destination, mileage and amount of
expenditure incurred thereon.

(b) Certificate of supervising authority of the Employee, wherever applicable, to the

effect that the exp. was incurred for wholly and exclusively for performance of
official duties, should be provided.

PROVISION OF DOMESTIC SERVANTS [Rule – 3(3)] (Sweeper, Gardener,

watchman or a personal attendant)

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Servant Servant’s Value of perquisite Taxable in the hands of
appointed by salary paid by

Employee Employee Nil Not applicable

Employee Employer Actual cost incurred by All employees

the Employer on the
servant

Employer Employer Actual cost incurred by Specified employee

the Employer on the
servant

Employer Employee Nil Not applicable

Note:

1. Where the employee is paying any amount in respect of such servant

facility, the amount so paid shall be deducted from the value of perquisite
determined above.

2. Domestic Servant Allowance given to an employee is always chargeable to tax.

QUESTION 20:
Mr. E is employed with N Ltd. he also gets the services of sweeper and watchman. E
has paid employment tax of ! 1200. Determine his gross salary in the following
cases:
1) His salary is 7,600 pm. Employer provides the services of sweeper and watchman. N Ltd.
pays them 600 pm and 500 pm;
2) His salary is 7,600 pm. Sweeper and watchman are engaged by Mr. E at the rates given in
clause(1) above but their wages are reimbursed by the employer;
3) His salary is 8,000 pm. Employer provides the services of sweeper and watchman at the
above rates but he recovers from Mr. E 200 pm and 300 pm respectively

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SUPPLY OF GAS, ELECTRICITY OR WATER [Rule –

3(4)]
FACILITY

Facility in the VALUE OF PERQUISITE Taxable in the hands

name of of
Provided from own Provided from
source outside
Employer Mfg. cost to the employer Amount paid to the Specified employees
supplier
Employee Mfg. cost to the employer Amount paid to the All employees
supplier

Note:
1. Where the employee is paying any amount in respect of such above facility, the
amount so paid shall be deducted from the value of perquisite determined above.

2. Gas/Electricity/Water Allowance given to an employee is always fully chargeable to

tax.

QUESTION 21:
G Ltd. provides electricity to its employee, P. Annual consumption as per meter
reading comes to 2,250 units. Determine the value of the perquisite in the following
cases:
1) Electricity meter is in the name of P and the rate of electricity is 3 per unit
2) Electricity meter is in the name of G Ltd. the rate of electricity is 3 per unit.
3) G Ltd. is a power-generating company. Manufacturing cost is 90 paise per unit but supplied
to public @ 2 per unit. However, it charges 30 paise per unit from employees.

FREE OR CONCESSIONAL EDUCATION FACILITY [Rule – 3(5)]

The value of perquisite is determined as under:

Facility Value of perquisite Taxable

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provided To Provided in a school Provided in any in the
owned by the other school hands of
employer [Case 1] [Case 2]
Children [Any No.] Cost of such education in Cost of such education Specified
similar school* employee
(There would be no
Perquisite if the cost of
education does not exceed
1,000 child)
pm per
OTHER Cost of such education in Cost of such education Specified
HOUSEHOLD similar school incurred employee
MEMBER

Note:
1) If the employee incurs the expenditure of school fees and the same is reimbursed by
the employer, then the entire amount of reimbursement so made, shall be fully
taxable in the hands of all employees.
2) Child includes step child as well as the adopted child of the employee.
* If cost of education exceeds 1,000 p.m. then full amount is taxable. An alternate view
possible is that only the sum in excess of 1,000 per month is taxable.

VALUATION IN RESPECT OF FREE TRANSPORT [Rule – 3(6)]

In case of employees of Taxable value

Railways / Airlines Nil
Any other transport Value at which such benefit is offered by the xx
undertaking employer to the public
Less: Recovery from the employee
xx

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UNDER ESOP [SECTION 17(2)(vi)]
The value of any specified security or sweat equity shares allotted or transferred,
directly or indirectly, by the employer or former employer, free of cost or at
concessional rate to the assessee shall be taxable as perquisite.

The value shall be the FMV of such security or shares on the date on which the option
is exercised by the assessee, as reduced by any amount actually paid by. or
recovered from. the assessee.

FMV FOR LISTED SHARES:

Perquisite Value of listed sweat equity shares allotted or transferred free of cost or at
concessional rate shall be average of opening and closing price of shares listed on stock
exchange on date of exercise of option less any amount recovered from the employee

Question 22:
IT Limited, under its Employment Stock Option Plan, allotted 500 equity shares to its
finance manager, Pooja on 15th May, 2019, when she exercised her option. The option
was granted on 15th January, 2018 and the shares vested with her on 15th January,
2019. The company's shares are quoted in Bombay Stock Exchange, where the opening
price and closing price on the date of exercise of option were 250 and 256, respectively.
The company recovered 50 per share from Pooja. Compute the value of perquisite for
the previous year 2019-20.

SECTION 17(2)(viii) -VALUATION OF OTHER FRINGE

BENEFITS AND AMENITIES [Su b-rule (7) of Rule 3]

INTEREST FREE OR CONCESSIONAL LOAN [Rule 3(7)(i)]

1. Value of perquisite =
Interest computed as per SBI rates [as on 01.04.2019] on Maximum Outstanding
Monthly
Balance xxx
Less: Interest recovered by the employer from the employee xxx
2. “Maximum outstanding monthly balance” means the aggregate outstanding
balance for each loan as on the last day of each month.

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3. Nothing is taxable if-
- Amount of Such Loans are not exceeding in the aggregate 20,000
- Such loans are given for medical treatment in respect of diseases specified in rule
3A. - Where loans are made available for medical treatment, referred to above, the
exemption shall not apply to so much of the loan as has been reimbursed to the
employee under any medical insurance scheme.
Question 23:
Determine the taxable value of the perquisite in the following cases:
1. Z Ltd. gives an interest-free housing loan 10,00,000 to its employee on 1 October 2019.
Loan is repayable within 5 years. SBI lending rate, as on 1.4.2019 is 10% p.a.
2. A, an employee, takes a personal loan of 1,25,000 from Alfa Ltd. @ 6% p.a. on April 1,
2019, [SBI lending rate may be assumed, as on 1.4.2019 is 14% p.a.]

3. A purchased a Car on March 1, 2019 from a loan of 9,00,000 taken at concessional rate
of 7% p.a. from his employer. It is repayable in monthly installments of 25,000 starting
from January 1, 2020 Compute the taxable value of perquisite in respect of concessional
loan for the previous year 2019-20 SBI lending rate may be assumed, as on 1.4.2019 is
12.25% p.a.

Travelling, Touring & Accommodation [Rule 3(7)(ii)]

Valuation of perquisite in respect of traveling, touring, accommodation and any other

expenses paid / reimbursed by employer for any holiday availed by EMPLOYEE (OR ANY
MEMBER OF HOUSEHOLD) other than LTC (section 10(5) read with Rule 2B):

(a)Where such facility is maintained by the employer and available uniformly to all
employees, then value shall be:-

Expenditure incurred by the employer LESS Amount recovered from the employee.

(b)Where such facility is maintained by employer and not available uniformly to all
employees, then value shall be:-

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Value at which such facilities are offered by other agencies to the public LESS
Amount recovered from the employee.

Notes:
(1) Where the employee is on official tour & the expenses are incurred in respect of any
member of his household accompanying him, the amount of expenditure so incurred in
respect of such member only shall be liable to be tax as perquisite.

(2) Where any official tour is extended as vacation, then expenses incurred in relation to
such extended period of stay or vacation, shall be treated as perquisite.

Free LUNCH/refreshment/ Beverages etc [Rule 3(7)(iii)]

THE TAXABLE VALUE OF THIS PERQUISITE SHALL BE:

Cost incurred by the employer LESS Amount recovered from the employee
However, facility in the following cases is exempt from Tax:

I FREE FOOD AND NON-ALCOHOLIC BEVERAGES UPTO RS. 50 PER MEAL

provided by employer,
> during working hours at office or business premises; or
> through paid voucher which are not transferable and usable only at eating joints; I
Tea or snacks provided during working hours; or
I Free food and non-alcoholic beverages during working hours provided in a remote area
or an offshore installation.

Note:- Working hours includes extended office hours (like working on holiday, over-
time etc).

GIFT, VOUCHER OR TOKEN [Rule 3(7)(iv)]

I The Value of any gift, or any voucher/ token made by employer to THE EMPLOYEE OR
HIS HOUSEHOLD MEMBER, in excess of 5,000, is fully taxable.
I If the value of such gift, voucher or token is below 5,000 in the aggregate during the
previous year, the value of perquisite shall be taken as NIL.
I The aforesaid exemption of 5,000 shall be denied in case of cash gift.

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Note:
An alternate view possible is that only the sum in excess of 5,000 is taxable in view of the
language of Circular No. 15/2001 that such gifts upto 5,000 in the aggregate per annum
would be exempt, beyond which it would be taxed as perquisite. As per this view, the
value of perquisite would be difference between Gift Value & 5,000

CREDIT CARD [Rule 3(7)(v)]

 The amount of expenses including membership fees and annual fees incurred
by THE EMPLOYEE OR ANY MEMBER OF HIS HOUSEHOLD which is charged to a
credit card (including add on card) provided by the employer or otherwise, paid for
or reimbursed by the employer shall be taken to be the value of perquisite
chargeable to tax.
 Amount recovered from such employee will be reduced from the value
determined.
 However, such expenses incurred wholly and exclusively for official purposes
would not be treated as a perquisite if it is supported by necessary documents.
CLUB EXPENDITURE [Rule 3(7)(vi)]
 If employer reimburses or makes payment of any expenditure incurred in a club
including the amount of annual or periodical fee for the EMPLOYEE OR ANY
MEMBER OF HOUSEHOLD, the actual amount of such expenditure shall be the
value of perquisite.
 Amount recovered from such employee will be reduced from the value
determined. / Initial fee paid for acquiring corporate membership is not a taxable
perquisite
 No taxable perquisites in case health club, sports club and similar facilities
provided uniformly to all employees
 No taxable perquisite if the club expenditure is incurred wholly and
exclusively for business purposes.

USE of Employer’s MOVABLE ASSETS [Rule – 3(7)(vii)]

If the facility of usage of any movable asset (Except LAPTOP & Computers) is provided
by employer to EMPLOYEE OR ANY MEMBER OF HIS HOUSEHOLD, the taxable value
shall be:
- 10% P.A. OF THE ACTUAL COST of asset (if owned by the employer)

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or - Actual amount of hire charges (if taken on hire by the employer)
Note:
1. Where the employee is paying any amount in respect of such asset, the amount so
paid shall be deducted from the value of perquisite determined above.
2. Member of household shall include- (a) Spouse; (b) Children and their spouses; (c)
parents; and (d) Servants and dependents.

TRANSFER of any Movable Asset [Rule – 3(7)(viii)]

If any movable asset is transferred by the employer to employee, then, taxable value of
this perquisite shall be:

Actual cost of the asset to the employer

Less: Dep. for every completed year of usage by employer Less: The
amount charged from the employee.

The following will be the rate and method of depreciation:

S.N. Asset Rate Method

Computer & electronic items 50% W.D.V.

[Not covering Household appliances]
Motor Car 20% W.D.V.
Any other asset 10% Straight Line

Other Benefit or Amenity [Rule – 3(7)(ix)]

Residual Head- The value of any other benefit or amenity, service, right or privilege
provided by the employer shall be determined on the basis of cost to the employer under
an arms' lengtHh transaction as reduced by the employee's contribution, if any.

SECTION 10(10CC) – INCOME IN THE NATURE OF PERQUISITE –

Exempted
As per section 10(10CC), tax paid by employer on non-monetary perquisite income of
employee shall be exempt in the hands of employee

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TAX IMPLICATION IN HANDS OF EMPLOYER: Section 40(a)(v) disallows such expenditure
in the hands of the employer. Therefore, the tax so paid by the employer will not be
deductible expenditure in his hands.
Medical Facilities Provided by Employer [Proviso to Section 17(2)]
In the following cases, medical facilities/ reimbursement incurred for
employee/his family member are treated as tax FREE perquisites:-

I. Expenditure incurred in a HOSPITAL MAINTAINED BY THE EMPLOYER.

II. Sum paid by the employer for any expenditure for medical treatment: > in any
hospital maintained by
o the Govt. or local authority or
o an approved hospital under CGHS or
> of prescribed diseases/ ailment in a hospital approved by CCIT. [Certificate
is required]
III. Group Medical Insurance paid u/s 36(1)(ib).
IV. Medical Insurance paid u/s 80D.

V. Premium of Accidental Insurance Policy.

VI. Any other medical expenditure reimbursed to the extent of 15,000 in the
Previous Year. This exemption is not available from AY 19-20.

MEDICAL TREATMENT OUTSIDE INDIA:

The following expenditure incurred by employer on treatment of the employee/his

family members, outside India is also a tax-free perquisite:
1. EXPENSES ON MEDICAL TREATMENT OF THE EMPLOYEE OR ANY FAMILY
MEMBER: Exempt to the extent permitted by RBI.
2. EXPENSES ON STAY ABROAD OF THE PATIENT AND ONE ATTENDANT:
Exempt to the extent permitted by RBI

3. TRAVEL EXPENSES FOR ABROAD OF THE PATIENT AND ONE ATTENDANT:

Travel expenses shall be wholly exempt if the employee’s GTI before including
therein, the said travel expenditure ≤ 2,00,000.

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No t es
> Family = Spouse + Children + Dependent [Parents + Brothers + Sister]
> Hospital includes a dispensary or a clinic or a nursing home. > Fixed medical
allowance – always taxable.

MEANING OF SALARY FOR COMPUTATION

SECTION Purpose of computation Salary includes
16(ii) Entertainment allowance Basic salary
10(10) Gratuity [if gratuity Basic salary + DA
Act, 1972 is
Gratuity [it Act not
10(10) Basic salary + DA (R) + % Commission on Sales.
applicable]
10(10AA) Leave Salary DO
Retrenchment
10(10B) Basic salary + DA
Compensation
10(13A) HRA Basic salary + DA (R) + % Commission on Sales.
10(10C) VRS DO
10(12) RPF DO
17(2)(i) & RENT FREE ACC [RFA] OR Basic
17(2)(ii) ACCOMMODATION AT + Allowance +Bonus + Commission + DA(R)
CONFESSIONAL RATE money payment ( which in chargeable to tax)
But does not include –
Employer’s contribution to RPF
Value of perquisite specified in Sec 17(2)
[from one or more employer]
17(2)(iii) SPECIFIED EMPLOYEE Basic Salary + D.A. + Commission, whether
payable
monthly or turnover based + Bonus + Fees +
Advance
Salary + Arrear Salary + Any other taxable
payment +
taxable allowances+ Any other monetary benefits
–

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Deductions under section 16
[from one or more employer]

DEARNESS ALLOWANCE (DA)

If in question DA is given, then it will not be treated as forming part of salary

unless question specifically says that –
 If forming part of retirement benefit
 Under the terms of employment
 Consider for retirement benefit

It means it is forming part of retirement benefit unless question says otherwise.

MEMBERS OF HOUSEHOLD

= Spouse, Children, Spouse of children, Parents, Servants & all other Dependents.
FAMILY = Spouse + Children + Dependent [Parents + Brothers +Sister

Illustration 1:
Niteen is an employee of XYZ Ltd. He was appointed on 1st Mar 2019 at a scale of 50000 –
5000 – 70000. He is paid DA (which form part of retirement benefits) @ 15% of Basic Pay
and Bonus equivalent to 2 month’s salary at end of FY. He contributes 18% of his Basic +
DA to a recognised provident fund, and the contribution is matched by the employer.
He is provided rent free accommodation, hired by the employer, @ 25000 pm. He is also
provided the following benefits / amenities:
a) Medical Treatment of his dependant spouse INR 40000
b) Monthly salary to housekeeper INR 4000
c) Telephone Allowance INR 1200 pm
d) Gift Voucher of INR 4500 on account of his marriage anniversary
e) Medical Insurance Premium for Niteen, paid by his employer INR 15000
f) Motor Car owned and driven by Niteen, and engine capacity within 1.6 L; used
partly for official and partly for personal purposes. Running & maintenance
expenses borne by the employer INR 36,600/-.

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g) Lunch during office hours valued at INR 2200/-.
He was also allotted 2000 sweat equity shares in Sep 2019. The shares were allotted @ INR
227 per share against the FMV of INR 377 per share as on the date of exercise of the Option.
Compute the Salary Chargeable to tax.
Solution

Particulars INR
Basic 6,05,000
DA 90,750
Bonus 1,10,000
Employers’ Contribution to PF > 12% 41,745
Taxable Allowances
Telephone 14,400
Taxable Perquisites
Medical Reimbursement (Fully Taxable) 40,000
Housekeeper 48,000
Motor Car 15,000
Rent Free Accomodation 1,23,023
Sweat Equity 3,00,000
Gross Salary 13,87,918
Less: Standard Deduction under section 16(ia) (50,000)
Taxable Salary 13,37,918
Note:
1) Employer’s Contribution to Provident Fund in excess of 12% is chargeable to Income
Tax.
2) Rent Free Accommodation is valued as under:
a. Since the accommodation is hired, the actual hire charges subject to a cap of
15% of “salary” is considered
b. “Salary” for this purpose is Basic + DA + Bonus + all Taxable Allowances = INR
8,20,150
3) Medical Treatment is chargeable to Tax, as no more tax free perquisite.
4) Since the value of the gift voucher is below INR 5000, it is not taxable as perquisite.
5) Lunch during office hours is also not taxable as perquisite.
6) Medical Insurance Premium paid by the employer on behalf of Niteen is also not
taxable as perquisite.
7) The motor car is chargeable as under:

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If the If the Car is owned / hired by the employee; expenses met by the employer &
is used by the employee partly for Official and partly for Personal purposes, the
taxable value of the perquisite would be the actual expenditure incurred by the
employer as reduced by the taxable
value of the perquisite determined basis the engine capacity, i.e., INR 36600 – INR
(1800*12) = INR 15000
Illustration 2 :
Mr. Ram is employed at Bombay. His basic Salary is Rs. 5,000 per month. He receives Rs.
5,000 p.a. as house rent allowance. Rent paid by him is Rs. 12,000 p.a. Find out the amount of
taxable house rent allowance.
Solution:
As per Rule 2A, the least of the following is exempt from tax:
(i) the actual house rent allowance;
(ii) excess of rent paid over 10% of salary;
(iii) where the accommodation is situated at Bombay, Delhi, Calcutta or Madras, one-
half of the amount of salary due to the assessee for the relevant period;
(iv) Where the accommodation is situate at any other place, two-fifth of the salary due
to the assessee for the relevant period.
Accordingly, Mr. Ram would be entitled to the least of :
(i) Rs. 5,000 or
(ii) Rs. 6,000 being excess of rent over 1/10th of salary; or
(iii) Rs. 30,000 (being one-half of the salary of the assessee).
Rs. 5,000, being the least, would not be included in the total income of Mr. Ram. So the
entire amount of HRA would be exempt from tax.
Salary for this purpose includes basic salary as well as dearness allowance if the terms of
employment so provide. It also includes commission based on a fixed percentage of
turnover achieved by an employee as per terms of contract of employment but excludes
all other allowances and perquisites and these are determined on due basis for the
period during which rental accommodation is occupied by the employee in the pr evious
year.

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INCOME FROM HOUSE PROPERTY

SECTION
PARTICULARS
BASIS OF CHARGES 22
ANNUAL VALUE 23
DEDUCTION 24
INTEREST ON BORROWED CAPITAL (PAYABLE OUTSIDE INDIA) 25
RECOVERY OF UNREALIZED RENT & ARREAR RENT 25A
CO-OWNERSHIP 26
DEEMED OWNER 27

HOW TO COMPUTE INCOME FROM HOUSE PROPERTY:

Gross Annual Value [GAV] XXX

Less: Municipal Taxes PAID by owner during the P.Y. XXX

Net Annual Value (Sec 23) [NAV] XXX

Less: Deductions u/s 24

( a ) Statutory deduction @ 30 % o f NAV XXX

( b ) Interest on Loan XXX.

Income from House Property (Computed) XXX

CHARGEABILITY [SECTION 22]

The annual value of property consisting of any buildings or lands appurtenant thereto
of which the assessee is the owner shall be subject to Income-tax under the head
'Income from house property' provided such property, or any portion of such property
is not used by the assessee for the purposes of any business or profession, carried on by

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him, the profits of which are chargeable to Income-tax.

[The Basis of calculating income from House property is the Annual Value. This is the
inherent capacity of the property to earn income. Income from the head House Property is
the only head that is charged on a notional basis .

CONDITIONS FORCHARG EABILITY

1) Property should consist of any building or land appurtenant thereto:

(a) Buildings include not only residential buildings, but also factory buildings, offices,
shops, godowns and other commercial premises.

(b) Land appurtenant means land connected with the building like garden, garage etc.

(c) Temporary structures shall not be considered as buildings for the purpose of
Income from House property. Eg. Circus tents, exhibition structures, etc.

(d) Buildings do not include incomplete units or which are in not in a condition to use.

(e) Income from letting out of vacant land is, however, taxable under the head “Income
from other sources”.

2) Assessee must be the owner of the property

a) Owner is the person who is entitled to receive income from the property in his
own right.

b) The requirement of registration of the sale deed in the name of owner is not
necessary.

c) Ownership includes deemed ownership

d) The person who owns the building need not also be the owner of the land
upon which it stands.

e) Income from subletting is not taxable as income from house property [It will
be taxable in IOS]

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3) Property must not be used by the assessee for his own business/profession.

Special Situation
Annual value of house property will be charged under the head “Income from House
Property” in the following cases also:

(a) Where it is held by the assessee as Stock-in-Trade of a business;

(b) Where the assessee is engaged in the business of letting out of property on rent;

Exceptions to above Rules: Letting out is supplementary to the main business:

Where the property is let out with the object of carrying on the business of the assessee in an
efficient manner, then the rental income is taxable as business income, provided letting is not
the main business but it is supplementary to the main business. Related expenses are also
deductible in computing such business Income.

No Notional Income for House Property Held as Stock in Trade -Sec 23(5)

Where the property consisting of any building or land appurtenant thereto is held as stock-
in-trade and the property or any part of the property is not let during the whole or any part
of the previous year, the annual value of such property or part of the property, for the period
up to TWO one year (amended by Finance Act 2019 w.e.f. AY 2020-21) from the end of
the financial year in which the certificate of completion of construction of the property is
obtained from the competent authority, shall be taken to be NIL

[The Delhi High Court in case of CIT v. Ansal Housing & Construction Ltd. held that the
assessee engaged in business of construction and sale of flats is liable to pay tax on notional
rent in respect of unsold flats, owned by the assessee at the end of the relevant financial year if
these flats are not let for the whole of the previous year. Above amendment is introduced to
provide relief to builders for 1 year]

Assessee engaged in the Business of Letting out House Properties

“The income earned by an assessee engaged in the business of letting out of properties on rent
would be taxable as business income”

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Recently, the Supreme Court in case of “Rayala Corporation Pvt. Ltd. v. ACIT” held that
Income from Letting out of Property on rent by an assessee engaged in the business of
letting is assessable as “Business Profits” u/s 28 and not as “Income from House Property”
u/s 22 and there is no concept of notional rent under the head “Profits and Gains of Business
of profession”

Also, the Supreme Court in case of “Chennai Properties & Investment Ltd. v. CIT” held
that where the assessee company is incorporated with main objective, as stated in the MOA
to acquire the properties in the city & let out those properties and the assessee had rented
out such properties, rental income from such properties is a business income & cannot be
taxed as Income from House Property u/s 22.

In case of an undertaking which develops, develops and operates or maintains and operates a
notified Industrial Park/SEZ, the income from letting out of premises/developed space along
with other amenties/facilities in such park/SEZ is to be charged to tax under the head
‘PGBP’.

COMPOSITE RENT

The owner of a property may sometimes receive rent in respect of building as well as
–
1) other assets like say, furniture, plant and machinery.
2) for different services provided in the building, for eg. –
(a) Lifts;
(b) Security;
(c) Power backup;

The amount so received is known as “COMPOSITE RENT”.

T AX T RE ATM E NT O F CO M PO SITE RENT

Where composite rent includes rent of building and charges for different services
(lifts, security etc.) / Charges for other assets (furniture) & both are separable, the
composite rent is has to be split up in the following manner:

(a) the sum attributable to use of property is to be assessed under section 22 as

“Income from House Property”;

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(b) the sum attributable to use of services/assets is to charged to tax under the
head “PGBP” or under the head “IOS”

If the same is not separable, then whole such sum is taxable either as business income or
income from other sources;

IN CO M E FRO M HOU SE PRO PE RTY SI TU ATE D O U TSIDE INDIA

1. Taxability of Income from HP will depend upon the Residential Status of the
Assessee.

2. In case of a Resident in India (Resident and Ordinarily Resident in case of Individuals

and HUF), Income from property situated outside India is always taxable in India,
whether such income is brought into India or not.

3. In case of a NR or RNOR (in case of Individual/HUF), Income from a property

situated outside India is taxable in India only if Rent is received in India.

4. Any tax or expenditure (prescribed one) incurred towards earning such income
shall be allowed as a deduction.

5. Income accruing or received in Foreign Currency should be converted into Indian

Rupees in TT Buying Rate on the last day of the previous year. [Rule 115]

Question: X, an American national, is a ROR in India during the previous year ending on
31.3.2020. He was owner of a building located in New York. The same was let out on rent at
US $12,500 per month. The Municipal Corporation of New York was paid taxes on such
building of US $ 10,000 on 12.2.2020. Besides the above property, he purchased a piece of
land at Delhi for construction of a house. The said land was given on rent for running a
dairy @ r 3,000 per month with effect from 1.10.2019. The value of one US $ in Indian
rupee throughout the year remained at r 46.50. X wants to know his taxable income.

Answer: HP Income – r 45,57,000; Income from other Source: r 18,000

DETERMINATION OF ANNUAL VALUE [SECTION 23]

This involves 3 steps:

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Step 1: Determination of Gross Annual Value (GAV).

[Tax under the head “Income from House Property” is not a tax upon rent of a
property. It is a tax on inherent capacity of a building to yield income. {Section
23(1)}]

Step 2: From the GAV computed in step 1, we deduct municipal tax paid by the owner
during the previous year.

Step 3: The balance will be the Net Annual Value (NAV), which as per the Income-tax Act is
the annual value.

DETERMINATION OF ANNUAL VALUE IN DIFFERENT SITUATION

(1) Where the property is let out throughout the previous year [Section 23(1)(a)/(b)]

Where the property is let out for the whole year, then the Gross Annual Value (GAV) would
be the higher of–

(a) Annual Letting Value (ALV) OR EXPECTED RENT and

(b)Actual rent received or receivable during the year as reduced by Unrealised Rent.

(c) ALV (or Expected Rent) means Municipal Valuation or Fair Rent (Market Rent),
whichever is more, subject to maximum of Standard Rent. In brief,

(i) Municipal Valuation

Higher
(ii) Fair Rent
Lower (ALV)
(iii) Std. Rent
Higher will be GAV.
(iv) Actual Rent [Less Unrealised Rent]

NOTE:
1) As per section 23(1)(a), the annual value of any property shall be the sum for
which the property might reasonably be expected to be let from year to year.

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2) Municipal value is the value determined by the municipal authorities for levying
municipal taxes on house property.
3) Fair Rent means rent which similar property in the same locality would fetch.
4) The Standard Rent is fixed by the Rent Control Act.
5) Municipal Tax paid by Tenant is neither to be added to the Actual Rent, nor to be
allowed as deduction.
6) As per section 23(1)(a), ALV cannot exceed standard rent (SR)
7) Repair Expenses met by the Tenant shall not be added to Actual Rent.
8) Advance rent cannot be rent received / receivable of the year of receipt.
9) Commission paid by owner of a property to a broker for rental income is not
deductible.
10) A Non-Refundable Deposit will be included in rent received or receivable on pro-
rata basis.

Example 1: Find out the ALV

Municipal Value 50 60 70
Fair Rent 55 58 80
Standard Rent 54 75 50
ALV/Expected Rent

Example 2: Compute the GAV of each house:

Particulars House I House II House III House IV House V

Municipal Value 80,000 55,000 65,000 24,000 75,000
Fair Rent 90,000 60,000 65,000 25,000 80,000
Standard Rent N.A. 75,000 58,000 N.A. 78,000
Actual rent 72,000 72,000 60,000 30,000 72,000
(Received/Receivab
le)

(2) Where Let Out Property is vacant for part of the year [Section 23(1)(c)]

Where let out property is vacant for part of the year and owing to vacancy, the actual rent is

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lower than the ALV, then the actual rent received or receivable will be the GAV of the property.

NOTE:

1. If Actual Rent received or receivable (after Vacancy or Unrealised Rent) is higher

than ALV, than Section 23(1)(c) will not apply and Actual rent received/receivable
will be GAV.

2. If Actual Rent received or receivable (After Unrealised Rent) is lower than the ALV, than
Section 23(1)(c) will not apply even if there is Vacancy as lower rent is not due to
Vacancy.

Example 3: Compute the Gross Annual Value (Loss Due to Vacancy):

I II III IV
Municipal Value 60 68 70 75
Fair Rent 65 60 64 70
Standard Rent 63 70 45 72
Actual Rent (12 Months) 72 48 60 66
Vacancy 2 Months
GAV

Example 4: Compute the Gross Annual Value:

I II III IV
Municipal Value 60 68 70 75
Fair Rent 65 60 64 70
Standard Rent 63 70 45 72
Actual Rent (12 Months) 72 84 60 66
Unrealised Rent 10 12 14 16
Vacancy 2 Months

(3) In case of Self -Occupied Property or Unoccupied Property [Sec 23(2)]

(a) Where the property is self-occupied (one house) for own residence or
unoccupied throughout the previous year, its ANNUAL VALUE WILL BE NIL,

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provided no other benefit is derived by the owner from such property (Maximum 2
Houses). (Amended by Finance Act 2019 w.e.f. AY 2020-21)

(b) The benefit of exemption is available only to an individual/HUF.

(c) The expression “Unoccupied property” refers to a property which cannot

be occupied by the owner by reason of his employment, business or profession at
a different place and he resides at such other place in a building not belonging to
him.

(d) No deduction for municipal taxes is allowed in respect of such property.

(4) Where a house property is Let-out for Part of the year and Self-occupied for part
of the year

(a) If a single unit of a property is self-occupied for part of the year and let-out
for the remaining part of the year, then the ALV for the whole year shall be taken
into account for determining the GAV.

(b) The ALV for the whole year shall be compared with the actual rent for
the let out period and whichever is higher shall be adopted as the GAV.

(c) Further, Property taxes for the whole year is allowed as deduction
provided it is paid by the owner during the previous year.

(5) In case of Deemed to be Let Out Property [Section 23(4)]

a) Where the assessee owns more than TWO one properties for self-occupation, then
the income from any TWO one such property, at the option of the assessee, shall
be computed under the self occupied property category and its annual value will be
NIL. The other self occupied/ unoccupied properties shall be treated as “deemed
let out properties”. (Amended by Finance Act 2019 w.e.f. AY 2020-21)
b) This option can be changed year after year in a manner beneficial to the assessee.
c) In case of deemed let-out property, the ALV shall be taken as the GAV.

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d) The question of considering actual rent received/receivable does not arise.
Consequently, no adjustment is necessary on account of property remaining vacant
or unrealized rent.
e)Municipal taxes actually paid by the owner during the previous year can be claimed
as deduction.
(6) In case of a house property, a portion let out and a portion self -
occupied

(a) Income from any portion or part of a property which is let out shall be
computed separately under the “let out property” category AND the other
portion or part which is self occupied shall be computed under the “self-
occupied property” category.
(b) There is no need to treat the whole property as a single unit for
computation of income from house property.
(c) Municipal valuation/fair rent/standard rent, if not given separately,
shall be apportioned between the let-out portion and self-occupied portion
either on plinth area or built-up floor space or on such other reasonable basis.
(d) Property taxes, if given on a consolidated basis can be bifurcated as
attributable to each portion or floor on a reasonable basis.

PROPERTY TAXES [MUNCIPAL TAXES]

1. Property taxes levied are allowable as deduction from the GAV subject to the
following two conditions:
a) It should be borne by the assessee (owner); and
b) It should be actually paid during the previous year.
2. Deduction if Paid: If property taxes levied by a local authority for a particular
previous year is not paid during that year, no deduction shall be allowed in the
computation of income from house property for that year.
3. However, if in any subsequent year the arrears are paid, then the amount so paid is
allowed as deduction in computation of income from house property for that year.
Thus, we find that irrespective of the previous year in which the liability to pay

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such taxes arise according to the method of accounting regularly employed by
the owner, the deduction in respect of such taxes will be allowed only in the
year of actual payment.
4. In case of property situated outside India, taxes levied by local authority of the
country in which the property is situated is deductible.
5. Municipal Tax includes services related tax like Water Tax and Sewerage Tax
levied by any Local Authority.
6. Municipal Tax can be claimed as a deduction only in respect of let-out or
deemed to be let-out properties (i.e. more than one property self-occupied).

N O T IO N A L I N C O M E V s R E A L IN C O M E
Under this head of income, there are circumstances where notional income is charged
to tax instead of real income. They are:

1.Where the assessee owns more than one house property for the purpose of
self occupation, the annual value of any one of those properties, at the option of
the assessee, will be nil and the other properties are deemed to be let-out and
income has to be computed on a notional basis by taking the ALV as the GAV.

2. In the case of let-out property also, if the ALV exceeds the actual rent, the ALV
is taken as the GAV.

TREATMENT OF UNREALISED RENT [Explanation to Section 23(1)]

1) The Actual rent received/receivable used in calculating GAV should not include any
amount of rent which is not capable of being realised.

2) RULE – 4: However the conditions prescribed in Rule 4 should be satisfied. They

are

(a) the tenancy is bona fide;

(b) the defaulting tenant has vacated, or steps have been taken to compel him to
vacate the property;

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(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for
the recovery of the unpaid rent or satisfies the Assessing Officer that legal
proceedings would be useless.

DEDUCTIONS FROM ANNUAL VALUE [SECTION 24]

There are Two Deductions from Annual Value. They are:

(1) 30% of NAV; and

(2) interest on borrowed capital

(1) 30% of NAV is allowed as deduction under section 24(a)

( This is a flat deduction and is allowed irrespective of the actual expenditure
incurred.
( In case of self-occupied property where the annual value is nil, the assessee will
not be entitled to deduction of 30%, as the annual value itself is nil.
( No Deduction will be given in respect of Repairs, Land Revenue, Brokerage,
Recovery agent charges etc.

(2)Interest on borrowed capital is allowed as deduction under section 24(b)

(a) Interest payable on loans borrowed for the purpose of Acquisition, Construction,
Repairs, Renewal or Reconstruction can be claimed as deduction.
(b) Interest payable on a fresh loan taken to repay the original loan raised earlier for
the aforesaid purposes is also admissible as a deduction.
(c) ACCRUAL BASIS: Deduction under section 24(b) for interest is available on accrual
basis. Therefore interest accrued but not paid during the year can also be claimed as
deduction.
(d) Where a buyer enters into an arrangement with a seller to pay the sale price in
installments along with interest due thereon, the seller becomes the lender in
relation to the unpaid purchase price and the buyer becomes the borrower. In such a
case, unpaid purchase price can be treated as capital borrowed for acquiring
property and interest paid thereon can be allowed as deduction under section
24.
(e) Interest on unpaid interest is not deductible.

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(f) No deduction is allowed for any brokerage or commission for arranging loan.

(g) Interest payable outside India without deduction of tax at source and in respect
of which no person in India is treated as an agent u/s 163 shall not be an allowable
expenditure.
(h) The Assessee should furnish a certificate from the person from whom the amount is
borrowed, specifying the amount of Interest.
(i) Date of completion not relevant: Interest relating to the year of completion of
construction can be fully claimed in that year irrespective of the date of
completion.
(j) Interest may include Interest for the year (Current Year Interest) & 1/5 th of the
interest, if any, pertaining to the pre-acquisition orpre-construction period.

Pre-acquisition/pre-construction period = Period Starting from the date of borrowing

and ending on the,
(i) 31st March immediately prior to the date of completion of construction or
acquisition of property, or,
(ii) Date of repayment of loan, whichever is earlier.

Period of Deduction: 1/5th of the interest of pre-acquisition or pre-construction period, for 5

consecutive years starting from the previous year in which the property is acquired or
constructed.

Deduction of 5 installment will be available even if the loan outstanding is repaid before
5 year period

(k) Maximum Limit of deduction in respect of interest on capital borrowed in case of

one/two self-occupied property

In this case, the assessee will be allowed a deduction (or, as the case may be, the
aggregate of the amount of deduction) on account of Interest (including 1/5th of the

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Accumulated Interest of Pre-Construction Period) as under –

Where the property has been acquired, Actual interest payable

constructed, repaired, renewed or subject to maximum of
reconstructed with borrowed capital before 30,000
1.4.99.

Actual interest payable

Where the property is acquired or
subject to maximum of
constructed with capital borrowed on or after
2,00,000
1.4.99 and such acquisition or construction is
completed within 5 years from the end of the
financial year in which the capital was
borrowed.

Where the property is repaired, renewed or Actual interest payable

reconstructed with capital borrowed on or subject to a maximum of
after 30,000.
1.4.99.

Note: Total deduction for all loans cannot exceeds 200,000 in case of TWO one Self-
occupied Property.
(Amended by Finance Act 2019 w.e.f. AY 2020-21)

INADMISSIBLE DEDUCTIONS [SECTION 25]

Interest chargeable under this Act which is payable outside India shall not be deducted if
tax has not been paid or deducted from such interest or there is no person in India who
may be treated as an agent under section 163.

TAXABILITY OF RECOVERY OF UNREALISED RENT & ARREARS OF RENT

RECEIVE [SECTION 25A ]
Unrealised rent is deducted from actual rent in determination of annual value under
section 23, subject to fulfillment of conditions under Rule 4. Subsequently, when the amount
is realised it gets taxed under Section 25A in the year of receipt.

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(i) If the assessee has increased the rent payable by the tenant and the same has been in
dispute and later on the assessee receives the increase in rent as arrears, such arrears
is also assessable under section 25A.

S. No. Unrealised rent [Section 25A] Arrears of rent [Section 25A]

1 Taxable in the hands of the assessee Taxable in the hands of the assessee
whether he is the owner of that whether he is the owner of that
property or not. property or not.

2 Taxable as income of the previous year Taxable as income of the year in which
in which he recovers the unrealized he receives the arrears of rent.
rent.

3 30% of the amount of recovery shall be 30% of the amount of arrears shall be
allowed as deduction. allowed as deduction.

Example
Mr. Anand sold his residential house property in March, 2019. In June, 2019, he recovered
rent of r 10,000 from Mr. Gaurav, to whom he had let out his house for two years from
April 2012 to March 2014. He could not realise two months rent of rs. 20,000 from him
and to that extent his actual rent was reduced while computing income from house
property for A. Y. 2014-15.

Further, he had let out his property from April, 2014 to February, 2019 to Mr. Satish. In
April, 2017, he had increased the rent from r 12,000 to r 15,000 per month and the same
was a subject matter of dispute. In September, 2019, the matter was finally settled and
Mr. Anand received r 69,000 as arrears of rent for the period April 2017 to February,
2019.

Would the recovery of unrealised rent and arrears of rent be taxable in the hands of Mr.
Anand, and if so in which year?

Solution

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Since the unrealised rent was recovered in the P.Y. 2019-20, the same would be taxable in
the A.Y. 2020-21 under section 25A, irrespective of the fact that Mr. Anand was not the
owner of the house in that year. Further, the arrears of rent was also received in the P.Y.
2019-20, and hence the same would be taxable in the A.Y. 2020-21 under section 25A,
even though Mr. Anand was not the owner of the house in that year.

A deduction of 30% of unrealised rent recovered and arrears of rent would be allowed
while computing income from house property of Mr. Anand for A.Y. 2020-21.

Computation of income from house property of Mr. Anand for A.Y. 2020·21
S. No. Particulars
i. Unrealised rent recovered 10,000
ii. Arrears of rent received 69,000
iii. Total 79,000
iv. Less: Deduction@30% 23,700

v. Income from house property 55,300

TRAETMENT OF HOUSE PROPERTY INCOME IN CASE OF PARTNERSHIP FIRM

1. Where an immovable property or properties is included in the assets of a firm, the

income from such property should be assessed in the hands of the firm only.
2. Hence, the property income cannot be assessed as income of the individual partner in
respect of his share in the firm.

T R E A T M E N T O F IN C O M E F R O M CO - O W N E D P RO P E R TY [ S E C T I O N 2 6 ]

1. Where property is owned by two or more persons, whose shares are definite and
ascertainable, then the income from such property cannot be taxed as income of an AOP.

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2. Where the house property owned by co-owners is self occupied by each of the co-
owners, the annual value of the property of each co-owner will be NIL and each co-owner
shall be entitled to a deduction of r 30,000 or r 2,00,000, as the case may be.
3. Where the house property owned by co-owners is let out, the income from such
property shall be computed as if the property is owned by one owner and thereafter the
income so computed shall be apportioned amongst each co-owner as per their specific
share.

Question:
“Mr. Raman is a co-owner of a house property alongwith his brother:
Municipal value of the property r 1,60,000
Fair Rent r 1,50,000
Standard Rent under the Rent ControlAct r 1,70,000
Rent received r 15,000 p.m.
The loan for the construction of this property is jointly taken and the interest charged by the
bank is r 25,000 out of which r 21,000 have been paid. Interest on the unpaid interest is r 450.
To repay this loan, Raman and his brother have taken a fresh loan and interest charged on this
loan is r 5,000. The Municipal Taxes of r 5,100 have been paid by the tenant. Compute the
income from this property chargeable in the hands of Mr. Raman. [Income from HP- r
48,000]

DEEMED OWNERSHIP [SECTION 27]

The following persons, though not legal owners of a property, are deemed to be the owners
for the purposes of section 22 to 26:
(i) TRANSFER TO A SPOUSE [Section 27(i)]
In case of transfer of house property by an individual to his or her spouse otherwise than for
adequate consideration [Except in connection with an agreement to live apart], the transferor
is deemed to be the owner of the transferred property.

(ii)TRANSFER TO A MINOR CHILD

In case of transfer of house property by an Individual to his or her MINOR CHILD [Except a
transfer to Minor Married Daughter] otherwise than for adequate consideration, the
transferor would be deemed to be owner of the house property transferred.

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(iii)HOLDER OFAN IMPARTIBLE ESTATE
The impartible estate is a property which is not legally divisible. (iv) Member of a co-operative
society etc. [Section 27(iii)]
A member of a co-operative society, company or other association of persons to whom a
building or part thereof is allotted shall be deemed to be owner of that building allotted to
him although the co-operative society/company/ association is the legal owner of that
building.

(v)Person in possession of a property [Section 27(iiia)]

A person who is allowed to take or retain the possession of any building or part thereof in
part performance of a contract of the nature referred to in section 53A of the Transfer of
Property Act shall be the deemed owner of that house property.

(vi)Person having right in a property for a period not less than 12 years [Section
27(iiib)]:

A person [Lessee] who acquires any rights in any building or part thereof, by virtue of any
transfer by way of lease for not less than 12 years, shall be deemed to be the owner of that
building or part thereof.

Exception – In case of any rights by way of lease from month to month or for a period not
exceeding one year, Lessee shall not be treated as deemed owner.

(vii)DISPUTED OWNERSHIP:
If the title of ownership is disputed in a court of law, the income shall be taxable in the hands
of recipient.

CASES WHERE INCOME FROM HOUSE PROPERTY IS EXEMPT FROM TAX

S. No. Section Particulars

1 10(1) Income from any Farm House forming part of agricultural
2 10(19A) income.
Any one palace of an ex-ruler.
3 10(20) Income from house property of a local authority.

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4 10(21) Income from house property of an approved scientific research
association.
5 10(23C) Property income of universities, educational
6 10(24) institutions, etc. of any registered trade union.
Property income
7 11 Property held for charitable or religious purpose.
8 13A Property income of any political party.
9 22 Property used for own business or profession
10 23(2) One self-occupied property of an individual/HUF

Illustration 1
Mr. X is the owner of three houses, which are all let out and not governed by the Rent
Control Act. From the following particulars find out the gross annual value in each case:

Particulars I II III
Municipal Value 30,000 20,000 35,000
Actual (De facto) Rent 32,000 28,000 30,000
Fair Rent 36,000 24,000 32,000

Solution:
Gross Annual Value (GAV): Higher of Expected or Actual Rent

Expected Rent: Higher of Municipal Valuation or Fair Rent

House I: Rs. 36,000

House II: Rs. 24,000

House III: Rs. 35,000

Actual Rent (given)

GAV:

House I: Rs. 36,000 House II: Rs. 28,000 House III: Rs. 35,000

Illustration 2

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Mr. X is the owner of four houses, which are all let out and are covered by the Rent Control
Act. From the following particulars find out the gross annual value in each case, giving
reasons for your answer:

Particulars I II III IV
Municipal Value 30,000 26,000 35,000 30,000
Actual (De Facto) Rent 40,000 30,000 32,000 32,000
Fair Rent 36,000 28,000 30,000 36,000
Standard Rent 30,000 35,000 36,000 40,000

Solution
As all the houses are covered by the Rent Control Act, their gross annual value will be higher
of expected Rent or Actual Rent. Expected Rent Shall be higher of Municipal Value or Fair
rent but subject to Standard Rent:

Particulars I II III IV
Expected Rent 30,000 28,000 35,000 36,000
Actual (De Facto) Rent 40,000 30,000 32,000 32,000
G.A.V. 40,000 30,000 35,000 36,000

– Annual letting value of self occupied property, subject to Rent Control Act is to be
fixed on basis of standard rent and not on basis of open market Tilak Raj v. CIT
(1989) 45 Taxman 279/178 ITR 327 (Punj. & Har.).
– In determining annual value salary paid to caretaker cannot be taken into account CIT
v. Smt. Sreelekha Banerjee (1989) 45 Taxman 358/179 ITR 46 (Cal.).
– Loss relating to self occupied house property could be set off against income from
other sources CITv. K.K. Dhanda (HUF) (1989) 45 Taxman 346/178 ITR 602 (Punj.
& Har.).

Where let out property is vacant for part of the year [Section 23(1)]
In a scenario of vacancy for a part of the year, it is quite probable that the Actual Rent
received / receivable would fall lower than Expected Rent and in such an eventuality;
therefore the Actual Rent becomes the Gross Annual Value.

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PROFITS & GAINS OF BUSINESS/PROFESSION

Section Subject Matter

Section 28 Charging section for PGBP income

Section 30 Rent, rates, taxes, repairs and insurance for buildings
Section 31 Repairs and insurance of P&M and Furniture & Fixtures
Section 32 Depreciation, depreciation in case of power generating units,
depreciation in case of succession of business
Section 32(2) Treatment of unabsorbed depreciation
Section 32(1)(iia) Additional depreciation
Section 32AD Investment allowance for notified backward areas
Section 35 Expenditure on scientific research
Section 35AD Deduction for investment linked tax incentive for specified
business
Section 35CCA Expenditure by way of payment to associations for rural
development programmes
Section 35CCC Expenditure on agricultural extension project
Section 35CCD Weighted Deduction for expenditure on skill development
Section 35D Amortization of certain preliminary expenses
Section 35DDA Amortization of expenditure incurred under VRS
Section 36(1)(i) Deduction for premium paid for insurance of stock-in-trade
Section 36(1)(ib) Deduction for health insurance premium paid for employees

Section 36(1)(iii) Interest on borrowed capital

Section 36(1)(iv), (iva) & Employer's contribution to recognised provident fund, pension
(v) scheme, approved gratuity fund/ superannuation fund

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Section 36(1)(va) Employee's contribution to RPF, superannuation fund etc.

Section 36(1)(vii) Bad debts

Section 36(1)(ix) Expenditure on promoting family planning amongst employees

Section 36(1 )(xv) Securities transaction tax
Section 36(1)(xvi) Commodities transaction tax
Section 37(1) General deductions
Section 37(2B) Advertisement In newspapers of political parties, etc
Section 38 Assets partly used for business purposes & partly for personal
purposes
Section 40(a)(i) Interest, royalty, FTS etc payable outside India/ payable to non-
resident
Section 40(a)(ia) Deduction of TDS in case of payments made to resident
Section 40(a)(iii) Deduction of TDS in case of salary payable outside India/ payable
to non-resident
Section 40A(2) Payment to relatives/related persons
Section 40A(3); Rule 6DD Payments exceeding Rs 10,000 to be made by account payee
cheque/account payee draft
Section 40A(7) Employer’s contribution to gratuity fund
Section 40A(9) Employer's contribution to various other funds
Section 40(b) Remuneration to partners
Section 41 Deemed profits chargeable to tax
Section 43(1) Actual cost
Section 43 B Certain expenses allowed on actual payment basis
Section 43CA Special provision for property dealers
Section 44AA, Rule 6F Compulsory maintenance of books of accounts
Section 44AB, Rule 6G Compulsory audit of accounts
Section 44AD Presumptive Taxation (General Provisions)

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Section 44ADA Presumptive Taxation (Specified Profession)
Section 44AE Presumptive Taxation (Plying/Hiring/Leasing Goods Carriages)
Section 145 Method of Accounting

PROFITS & GAINS OF BUSINESS/PROFESSION

Section 28
CHARGING SECTION - INCOMES TAXABLE U/H BUSINESS/PROFESSION
As per Section 28, following incomes shall be chargeable u/h PGBP (the list is not
exhaustive):
• Profits and gains of any business/profession
• Export incentives:
Exporters of goods/services are provided additional benefits as rewards for bringing
foreign currency within India. Such export incentives are taxable u/h PGBP.
EXAMPLEs:
□ Profit on sale of import entitlement
□ Prof it on sale of Duty Entitlement Pass Book ('DEPB') scheme
□ Profit on sale of Duty Free Replenishment Certificate
□ Cash compensatory support and duty drawback (under duty drawback, indirect taxes
paid on the input leg such as customs duty are refunded back to the assessee if he exports
the final products out of India)
• Value of any benefit or perquisite arising from any business/profession:
If a person carrying any business/profession receives any gift/perquisite from his clients,
the value of such gift/perquisite shall be considered to be the income of the person u/h
’profits and gains of business/profession* whether such gift/perquisite is convertible into
money or not. EXAMPLE: A client is extremely happy with the work of his CA and apart
from the agreed upon fees, the client gives a wrist watch worth Rs 50,000 to the CA. The
value of such watch shall be included in the income of the CA u/h 'income from
business/profession'.
• Any interest, salary, bonus, commission or remuneration, by whatever name called,
received by a partner of a firm from such firm to the extent allowed u/s 40(b).
• Non-compete fee received/receivable for not carrying on a business/profession:
□ Any payment received by a person for not carrying out any particular
business/profession for a particular period or at a particular place is termed as non-
compete fee and taxable as PGBP income.

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□ Similarly, any sum received for not sharing any know-how, patent, copyright, trademark,
license, etc is also taxable as business income.
• Sum received under Keyman Insurance Policy:
□ A person may take a life insurance policy for any of its employees or any other person
who are extremely crucial for his business. Such insurance policy is known as Keyman
Insurance Policy.
The premium paid by the person is allowed to be debited to P&L A/c.
□ If any sum is received under such a policy by the assessee himself (ie the employer), such
income is taxable in his hands u/h PGBP. If such sum is received by the employee, such sum
is taxable in the hands of the employee u/h salary.
□ If such sum is received by any other person, such sum is taxable in the hands of the other
person u/h other sources.
Income chargeable under this head [Section 28]
(i) The profits and gains of any business or profession carried on by the assessee
at any time during the previous year.

(ii) Any compensation or other payment due to or received by a person, at or in

connection with -
(a) Termination of his management or modification of the terms and
conditions relating thereto, in case the person is managing the whole or
substantially the whole of the affairs of an Indian company.

(b) Termination of his office or modification of the terms and conditions

relating thereto, in case the person is managing the whole or substantially
the whole of the affairs in India of any other company.

(c) Termination of agency or modification of the terms and conditions relating

thereto, in case the person is holding an agency in India for any part of the
activities relating to the business of any other person.

(d) Vesting in the Government or in any corporation owned and controlled by

the Government, under any law for the time being in force, of the
management of any property or business.

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(e) Termination or the modification of the terms and conditions, of any contract
relating to his business
(iii) Income derived by a trade, professional or similar association from specific
services performed for its members.
(iv) In the case of an assessee carrying on export business, the following incentives
–
(a) Profit on sale of import entitlements;
(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 Free Replenishment Certificate.
(v) Value of any benefit or perquisite, whether convertible into money or not,
arising from business or the exercise of profession.

(vi) Any interest, salary, bonus, commission or remuneration due to, or received
by, a partner of a firm from such firm (to the extent allowed as deduction in the
hands of the firm).

(vii) Any sum, received or receivable, in cash or kind under an agreement for –
(a) not carrying out any activity in relation to any business or profession;
or
(b) not sharing any know-how, patent, copyright, trademark, licence, franchise or
any other business of commercial right of similar nature or information
or technique likely to assist in the manufacture or processing of goods or
provision of services.

(viii) Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy.
(ix) Fair market value of inventory as on date on which it is converted into or treated as a
capital asset.

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(x) Any sum, whether received or receivable, in cash or kind, on account of any capital
asset (other than land or goodwill or financial instrument) being demolished,
destroyed, discarded or transferred, in respect of which the whole of the
expenditure had been allowed as deduction under section 35AD.

Computation of income under the head “Profits and gains of business or profession”
The income referred to in section 28 has to be computed in accordance with the
provisions contained in sections 30 to 43D.

Section 145
METHOD OF ACCOUNTING
'Income u/h PGBP' and ’income u/h other sources' is computed by deducting the eligible
expenses from the gross revenue earned to arrive at the net income. Revenue and
expenses can be recognized in the books of accounts on either accrual basis or cash
basis. Section 145 of the Income Tax Act, 1961 allows an assessee to adopt either of
these two methods on a consistent basis.
Cash System • Receipts and payments are recorded in the year in which the amounts are
of received/paid irrespective of the year to which such payments/receipts
Accounting relate.
• Under cash system of accounting, valuation of opening stock and
closing stock carries no relevance.
• Depreciation is allowed as an expense under cash system of accounting in
the manner and to the extent prescribed u/s 32 of the Income Tax Act, 1961.
Accrual * Under accrual system of accounting, receipts and payments are recorded in
System of the year in which they accrue irrespective of the fact when the same are
Accounting received/paid.
(Mercantile « Valuation of opening stock and closing stock is an integral part of
System) accounting under mercantile system of book-keeping. The treatment of
undervaluation/overvaluation of opening stock and closing stock has been
provided in the table given below:
Particulars Opening Stock Closing Stock

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Treatment in The undervalued amount The undervalued amount
case of is to be deducted from the is to be added to the
undervaluation current year's profits current year's profits
Treatment in The overvalued amount is The overvalued amount is
case of to be added to the current to be deducted from the
overvaluation year's profits current year's profits
• Certain expenses listed u/s 43B are allowed to be deducted only on actual
payment basis. Such expenses are not allowed to be debited on accrual basis.
Change in A method once adopted by the assessee should be applied by him
Method consistently. However, in certain situations, the assessee can change the
method of accounting if the change has been approved by the Assessing
Officer.
Different • If an assessee is carrying on more than one business, he can follow cash
Methods for system of accounting for one business and mercantile system of accounting
Different for another business.
Business • If an assessee has more than one source of income u/h ’income from other
sources', he can follow cash system of accounting for one source and
mercantile system of accounting for other sources.

Section 38
ASSETS PARTLY USED FOR BUSINESS AND PARTLY USED FOR PERSONAL PURPOSES
Where any asset has been used by the assessee partly for business purposes and partly for
personal purposes, expenditure is allowed only to the extent the asset has been used
for business purposes.
EXAMPLE: A motor car is used by Mr A for business purposes to the extent of 60% and
balance 40% for personal purposes. In this case, expenditure shall be allowed to be debited
only to the extent of 60%.

Section 30
RENT, RATES, TAXES, REPAIR & INSURANCE OF BUILDINGS
The following expenses in respect of premises are allowed as deduction u/s 30. Such
expenses are allowed even if the assessee is not the owner of the premises provided such
premises are used for the purposes of business/profession:
□ Rent charges paid by the tenant (where the building is owned by the assessee, notional
rent in respect of such building is not allowed to be deducted)

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□ Revenue expenses on repairs
□ Insurance premium relating to the premises
□ Municipal taxes, land revenues, local rate, etc (subject to provisions of Section 43B)
Note: Capital expenditure on repairs incurred by the owner shall be added to the
cost of building.
Note: Capital expenditure on repairs incurred by the tenant is deemed as building in
the hands of the tenant on which depreciation is allowed to the tenant.

Section 31
REPAIRS AND INSURANCE OF PLANT & MACHINERY AND FURNITURE FIXTURES
The following expenses in respect of plant & machinery and furniture & fixtures are
allowed as deduction u/s 31 provided these assets are used for the purposes of
business/profession. The assessee need not be the owner of the assets:
□ Revenue expenses on repairs
□ Insurance premium relating to the asset
Note: Capital expenditure on repairs incurred by the owner shall be added to the
cost of the asset.
Section 32
DEPRECIATION
Conditions • Generally, the asset on which depreciation is to be claimed must be owned
to'be Fulfilled by the assessee either individually or jointly with any other person (in case
for Claiming of joint ownership, each co-owner will get depreciation on his share of the
Depreciation asset);
(Cumulative • The asset should be used for the purposes of business/profession; and
Conditions) • A rate of depreciation must be prescribed under the Income Tax Act in
respect of such asset (no deprecation can be claimed in respect of land
owned by an assessee and used for his business/profession as no rate of
depreciation has been prescribed for land under the Income Tax Act).
Assets on • Tangible Assets:
Which □ Buildings (the amount of buildings should not include the cost of land)
Depreciation □ Furniture and fittings
is Admissible
□ Plant & Machinery - As per Section 43(3), plant & machinery includes ships,
vehicles, books, scientific apparatus and surgical equipment used for the
purpose of the business or profession but does not include tea bushes,

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livestock, buildings or furniture and fittings.
• Intangible Assets:
Intangible assets would include goodwill, know-how, patents, copyrights,
trademarks, licenses, franchises or any other commercial rights of similar
nature.
Rates of • Tangible Assets:
Depreciation □ Buildings:
Residential building 5%
Commercial building including roads/bridges, etc 10%
Purely temporary erections such as wooden structures 40%
□ Furniture and Fittings: Furniture and fixtures are always depreciated
@ 10%
□ Plant 4 Machinery:
Plant 4 machinery other than those which are mentioned 15%
below (like machines, air-conditioner, generator)
Motor cars 15%
Motor buses, motor lorries and motor taxis used in a business 30%
of running them on hire
Computers including computer software 40%
Books (annual publications as well as other than annual 40%
publications)
Pollution control equipment 40%
• Intangible Assets:
The rate of depreciation for all intangible assets is 25%.
Manner of • Depreciation would be allowable to the owner even in respect of assets
Calculating which are actually worked or utilized by another person (such as lessee or
Depreciation licensee).
under • Under the Income Tax Act, depreciation is allowed only on WDV basis.
Income Tax Straight line method of depreciation is not allowed except in case of power
Act generating companies.
• Depreciation is not calculated on the basis of value of individual assets;
rather it is allowed on the basis of 'block of assets’ concept. Block of assets

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refers to a group of assets which belong to the similar class of assets and
carry the same rate of depreciation.
• Depreciation at full rate in some cases and at half rate in other cases:

Case I: If the asset has been put to use during the year of acquisition
(a) The asset has been put to use for 180 days Depreciation shall be
or more during the relevant previous year calculated at full rate
(b) The asset has been put to use for less than Depreciation shall be
180 days during the relevant previous year calculated at half rate
EXAMPLE: ABC Ltd has purchased one P&M for Rs 10,00,000 on
01.04.2019 but it was put to use on 01.07.2019. In this case,
depreciation for PY 2019-20 shall be computed at the full rate of 15%
and the depreciation amount would be Rs 1,50,000.
EXAMPLE: If in the above EXAMPLE the asset was put to use on
01.12.2019. depreciation for PY 2019-20 shall be computed at 7.57o
since the asset has been put to use for less than 180 days and therefore
the depreciation amount would come out to Rs 75,000.

Case II: If the asset has been acquired during one previous year and has
been subsequently put to use during a different year
Depreciation shall be calculated at the full rate in the year in which the
asset has been put to use. The number of days for which the asset has
been put to use during such year is irrelevant.
EXAMPLE: ABC Ltd has purchased one P&M for Rs 10,00,000 on
01.04.2019 but it was put to use on 31.03.2019. In this case, no
depreciation shall be allowed during PY 2019-20. However,
depreciation for PY 2020-19 shall be computed at the full rate of 15%
even though the asset has been used for less than 180 days and the
depreciation amount for PY 2020-19 would come out to Rs 1,50,000.

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• Meaning of ‘PUT TO USE':
‘Put to use' means making an asset ready for use (ie installing an asset so that
it is ready to be used). Actual use of the asset is not necessary.
• Amount on which depreciation is to be calculated (Section 43(6)):
Opening WDV as on 1st April of the relevant PY XXXX
Add: Actual cost of assets purchased during the year XXXX
(Meaning of 'actual cost' is given u/s 43(1)}
Less: Sale value of assets sold/ Insurance claim in case of (XXXX)
assets
destroyed/ Scrap value in case of assets discarded
Value of block of assets for the purpose of charging XXXX
depreciation
Less: Depreciation for the relevant PY (XXXX)
Opening WDV as on 1st April of the next PY XXXX
• Special point in respect of asset used for less than 180 days:
□ If any asset in the block has been put to use for less than 180 days during
the relevant PY, the actual cost of such asset shall be separated from the value
of block of assets for the purpose of charging depreciation'. Depreciation on
the actual cost so separated shall be charged at half rate. On the balance
amount, depreciation shall be charged at the full rate. (Refer Illustration 2
below)
□ If the value of block of assets for the purpose of charging depreciation' is
less than the actual cost of the asset used for less than 180 days, depreciation
shall be charged at half rate on the entire 'value of block of assets for the
purpose of depreciation’. (Refer Illustration 3 below)
• Special Cases:
□ If all assets in the block have been sold/destroyed/discarded and there still
remains some balance in the block, such balance would be treated as short
term capital loss as per Section 50 and no depreciation shall be allowed on
such balance. Further, such block would cease to exist with effect from next
previous year. (Refer Illustration 4 below)
□ If there is negative balance in the block, such negative balance would be
treated as short term capital gains as per Section 50. The opening WDV of
block of assets for the next previous year shall be taken to be 'NIL'. (Refer

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Illustration 5 below)

Illustration 1:
Particulars Amount (Rs)
Written down value of Plants A, B, C as on 01.04.2019 50,00,000
Add: Plant D purchased and put to use on 01.06.2019 20,00,000
Less: Sale value of Plant A (10,00,000)
Value of block of assets for the purpose of charging 60,00,000
depreciation
* Less: Depreciation for PY 2019-20 (15% of Rs 60L) (9,00,000)
Closing WDV of Plants B, C, D as on 31.03.2020 51,00,000
Illustration 2:

Particulars Amount (Rs)

Written down value of Plants A, B, C as on 01.04.2019 50,00,000
Add: Plant D purchased on 01.06.2019 & put to use on 20,00,000
01.12.2019
Less: Sale value of Plant A (10,00,000)

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Value of block of assets for the purpose of charging 60,00,000
depreciation
Less: Depreciation for PY 2019-20 (7.5% of Rs 20L and (7,50,000)
15% of Rs 40L)
Closing WDV of Plants B, C, D as on 31.03.2020 52,50,000
Illustration 3:
Particulars Amount (Rs)
Written down value of Plants A, B, C as on 01.04.2019 50,00,000
Add: Plant D purchased on 01.06.2019 & put to use on 20,00,000
01.12.2019
Less- Sale value of Plant A (58,00,000)
Value of block of assets for the purpose of charging 12,00,000
depreciation
Less: Depreciation for PY 2019-20 (7.5% of Rs 12L) (90,000)
Closing WDV of Plants B, C, D as on 31.03.2020 11,10,000
Illustration 4:

Particulars Amount (Rs)

Written down value of Plants A, B, C as on 01.04.2019 50,00,000
Less: Sale value of Plants A, B, C (42,00,000)
Short term capital loss u/s 50 8,00,000
Depreciation for PY 2019-20 (Block would cease to exist Nil
wef 1.4.2020)
Illustration 5:

Particulars Amount (Rs)

Written down value of Plants A, B, C as on 01.04.2019 50,00,000
Less- Sale value of Plant A (55,00,000)
Short term capital gain u/s 50 5,00,000
Depreciation for PY 2019-20 Nil

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Opening WDV of Plants B, C as on 01.04.2020 Nil
1

Section 32(2)
TREATMENT OF 'UNABSORBED DEPRECIATION'
Meaning of Assessee carrying business/profession are allowed to debit the depreciation
Unabsorbed expenditure while calculating their income u/h 'business/profession.
Depreciation However, such expenditure can be debited only to the extent income is
available u/h business/profession. The balance amount of depreciation that
cannot be debited is referred to as 'unabsorbed depreciation'.
EXAMPLE: PGBP income before debiting current year depreciation is Rs
1,00,000 and current year depreciation expenditure turns out to be Rs
1,60,000. In this case, depreciation to the extent of Rs 1,00,000 would be
debited to P&L A/c and balance Rs 60,000 would be referred to as
‘unabsorbed depreciation1.
Treatment • Unabsorbed depreciation of a particular year is allowed to be set-off in the
of same year against income under any other head except casual income.
Unabsorbed • If unabsorbed depreciation cannot be adjusted in the same year, it is
Depreciation allowed to be c/f for indefinite period of time (ie for an unlimited period)
and in the subsequent years, such unabsorbed depreciation shall be allowed
to be set-off against any income other than casual income.
• If any assessee has b/f business losses as well as b/f unabsorbed
depreciation, a rational taxpayer would first adjust business losses and
unabsorbed depreciation afterwards.
EXAMPLE: Mr X has business income of Rs 10,00,000 for PV 2019-20 and has
b/f business losses of Rs 8,00,000 and b/f unabsorbed depreciation for Rs
5,00,000 pertaining to past periods.
In this case, b/f business loss would be adjusted first and unabsorbed
depreciation would be adjusted subsequently to the extent of Rs 2,00,000.
Unabsorbed depreciation of Rs 3,00,000 would be carried forward to the
next AY.

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Section 32(1)(iia)
ADDITIONAL DEPRECIATION
Conditions • Deduction is available to all assessees who are engaged in the business
to be of:
Fulfilled □ manufacture or production of any article or thing; or
(Eligible □ generation, transmission or distribution of electricity.
Assessee)
• The assessee has purchased and installed 'new plant & machinery'.
Meaning of ‘New plant & machinery' does not include:
'New Plant & • Second hand plant & machinery whether Indian or imported (ie plant &
Machinery' machinery should be brand new)
• Any plant & machinery installed in any office premises or any residential
accommodation like guest houses (ie plant & machinery should be installed
at factory)
• Any office appliances including computers or computer software
• Any vehicle
• Ship or aircraft
• Any plant & machinery, the actual cost of which is allowed to be debited to
P&L A/c
(ie plant & machinery for which deduction is claimed u/s 35, 35AD, etc)
Amount of Case I: If new plant & machinery has been put to use during the year of
Additional acquisition:
Depreciation
(a) Put to use for 180 days or more: One-time additional depreciation is
allowed @ 20% of the actual cost of the plant & machinery.
(b) Put to use for less than 180 days: One-time additional depreciation is
allowed @ 10% of the actual cost of the plant & machinery. The balance 10%
is allowed in the next year.
Case II: If new plant & machinery has been acquired during one
previous year and has been subsequently put to use during a different
year:
In such cases, one-time additional depreciation is allowed @ 20% of the
actual cost of the plant & machinery in the year in which the asset has
been put to use. The number of days for which the asset has been put to use
during such year is irrelevant.

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Special • This special provision is applicable to all kinds of assessees provided all
Provision for the conditions listed below are fulfilled:
Units Set-up □ The assessee sets up an undertaking/enterprise for manufacture or
in Certain production of any article or thing on or after April 1, 2015.
States
□ Such undertaking must be set up in any backward area (notified by the
Central Government) in Andhra Pradesh, Bihar, Telengana and West
Bengal.
□ The assessee acquires and installs a new plant and machinery1 for the
purposes of such undertaking on or after April 1, 2015 but before April 1,
2020.
• If all the above conditions are fulfilled, the rate of additional
depreciation shall be taken to be 35% instead of 20%. Where the new
plant & machinery has been put to use for less than 180 days in the year of
acquisition, additional depreciation @ 17.5% shall be allowed in the first
year and the balance 173% shall be allowed in the next year.
Points to be • The amount of additional depreciation is in addition to the normal
Noted depreciation.
• Further, the amount of additional depreciation is reduced from the actual
cost of the plant & machinery to arrive at its WDV value.

Section 32
DEPRECIATION IN CASE OF POWER GENERATING UNITS
Choice of • Assessee engaged in the business of generation or generation and
WDV/ distribution of power shall have the option to claim depreciation as per:
SLM □ SLM method on each asset; or
□ WDV method on block of assets
• Where the assessee has opted for ’SLM method on each asset', the
following points also need to be taken care of:
□ Depreciation shall be calculated at half rate if the asset is put to use for less
than 180 days in the year of acquisition.
□ Additional depreciation shall not be available (ie additional depreciation
is available only where WDV method on block of assets is followed)
□ Rates of depreciation shall be prescribed separately under the Income Tax
Act.

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Treatment Where the assessee has opted for ‘SLM method on each asset', tax treatment at
in case of the time of sale of asset shall be as follows:
Sale of • If the sale price of the asset is less than its WDV:
Asset The difference between the sale price and WDV shall be allowed to be debited
to the P&L A/c (such difference is referred to as ‘terminal depreciation').
• If the sale price of the asset is more than its WDV but sale price of the
asset does
not exceed the actual cost of the asset:
The difference between the sale price and WDV shall be taxable as income u/h
PGBP as per Section 41(2) (such income is referred to as ‘balancing charge').
• If the sale price of the asset is more than its WDV and sale price of the
asset also
exceeds the actual cost of the asset:
□ The difference between the actual cost of the asset and its WDV shall be
taxable as income u/h PGBP as per Section 41(2) (such income is called as
'balancing charge).
□ The difference between the sale price of the asset and its actual cost shall be
taxable as capital gains as per Section 50A.
EXAMPLEs Tata Power Ltd is a power generating unit and the company has purchased
one P&M on 01.06.2014 for Rs 20 lakhs and the same was put to use on
01.12.2014. The company has opted to follow SLM method and the rate of
depreciation prescribed under the Income Tax Act is 8.4%. In this case, the
depreciation amount shall be:
For Py 2016-17: 20,00,000 × 8.4% × 50% = Rs 84,000
For PY 2017-18: 20,00,000 × 8.4% = Rs 1,68,000
For PY 2018-19: 20,00,000 × 8.4% = Rs 1,68,000
Let's assume that this P&M has been sold on 01.11.2019. WDV of this P&M as
on 01.04.2019 is Rs 15,80,000.
• Case 1: The plant has been sold for Rs 9,00,000: The difference of Rs 6.80,000
[Rs 15,80,000 (-) Rs 9,00,000] shall be debited to P& L A/c as terminal
depreciation.
• Case 2: The plant has been sold for Rs 18,00,000: In this case, the difference
of Rs 2,20,000 [Rs 18,00,000 (-) Rs 15,80,000] shall be termed as balancing
charge and would be deemed to be the PGBP income of the company u/s
41(2).

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• Case 3: The plant has been sold for Rs 23,00,000: In this case. Rs 4.20,000
shall be termed as balancing charge and would be deemed to be the PGBP
income of the company u/s 41(2). Rs 3,00,000 [Rs 23L - Rs 20L] would be
treated as 5TCG u/s 50A.

Section 32
DEPRECIATION IN CASE OF SUCCESSION OF BUSINESS
Situations • Amalgamation of companies;
Covered • Demerger of companies;
• Conversion of proprietary firm into a company (private/pubiic);
• Conversion of partnership firm into a company (private/pubiic);
• Conversion of private limited or unlisted public company into a LLP firm.
Treatment of If any of the above mentioned five situations has occurred during the
Depreciation previous year, depreciation shall be computed as if no such succession has
taken place and the total amount of depreciation shall be apportioned
between the predecessor and the successor in the ratio of the number of
days the asset was used by each one of them.
• Case I: Where the asset existed on the 1st day of the relevant previous year:
The total time period shall commence on 1 st April of the PY & end on 31st
March of PY.
• Case II: Where the asset was put to use during the relevant previous year:

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The total time period shall commence on the day when the asset was put to
use and end on 31st March of PY.

Section 32AD
INVESTMENT ALLOWANCE FOR NOTIFIED BACKWARD AREAS
Conditions • Benefit u/s 32AD is available to all kinds of assessees (corporate as
to be well as non-corporate assessees).
Fulfilled • The assessee sets up an undertaking/enterprise for manufacture or
(Eligible production of any article or thing on or after April 1, 2015.
Assessee) • Such undertaking must be set up in any backward area (notified by the
Central Government) in Andhra Pradesh, Bihar, Telengana and West
Bengal.
• The assessee acquires and installs a new plant and machinery’ for the
purposes of such undertaking on or after April 1, 2015 but before April 1,
2020.
Meaning of ‘New plant & machinery’ does not include:
‘New Plant • Second hand plant & machinery whether Indian or imported (ie P&M
& should be brand new)
Machinery’ • Any plant & machinery installed in any office premises or any residential
accommodation like guest houses (ie plant & machinery should be installed at
factory)
• Any office appliances including computers or computer software
• Any vehicle, ship or aircraft
• Any plant & machinery, the actual cost of which is allowed to be debited to
P&L A/c (ie plant & machinery for which deduction is claimed u/s 35, 35AD,
etc)
Quantum of An investment allowance of 15% of the aggregate investment in ‘new
Deduction plant & machinery’ acquired and installed is available in the year in which
such new asset is installed.
Note: The amount of investment allowance shall not be reduced to arrive
at the WDV of the plant & machinery.

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Lock-in • New P&M in respect of which investment allowance has been claimed u/s
Period of 5 32AD must not be transferred for a period of 5 years from the date of its
Years installation.
• If such plant & machinery is sold/transferred within a period of 5 years
deduction allowed earlier shall be deemed as PGBP income of the
previous year in which such plant & machinery has been sold/transferred.
Section 43(1) - Latest Amendment Introduced Vide The Finance Act, 2019
• Under the existing provisions of the Income Tax Act, 1961, revenue expenditure incurred
in cash exceeding certain monetary threshold is not allowed to be deducted as per Section
40A(3) except in specified circumstances as referred to in Rule 6DD of the Income Tax
Rules, 1962. However, there is no corresponding provision elsewhere to disallow the
capital expenditure incurred in cash.
• In order to discourage cash transactions even for capital expenditure, it is proposed to
amend the provisions of Section 43 to provide that where an assessee incurs any
expenditure for acquisition of any asset in respect which a payment or aggregate of
payments made to a person in a day, otherwise than by an account payee cheque drawn on
a bank or account payee bank draft or use of electronic clearing system through a bank
account, exceeds ten thousand rupees, such expenditure shall be ignored for the purposes
of determination of actual cost of such asset.
• In other words, if in respect of any capital expenditure, payment or aggregate of
payments made to a person in a single day exceeds Rs 10,000, such expenditure shall
be treated as a part of actual cost of the asset only if such payment has been made by
way of account payee cheque, account payee draft or ECS through a bank account.
EXAMPLE (Covering Latest Amendment):
Mr X owns Plant A and Plant B on April 1, 2019 (depreciated value of the block is Rs
60,000; rate of depreciation is 15%).
On June 20, 2019, he purchases Plant C for Rs 5,25,000 (Rs 1,95,000 is paid in cash; balance
has been paid by way of RTGS transfer). Plant C has been put to use on the same day and it
is also to be depreciated @ 15%. Calculate allowable depreciation for PY 2019-20.
Section 43(1)
ACTUAL COST

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Meaning of Actual cost is the cost for which an asset is acquired by the assessee.
Actual Cost Note: Any part of the cost paid by any other person or any authority
directly or indirectly is not to be included.
EXAMPLE: Mr X has bought a machinery of Rs 10 lakhs. He has received a
government grant of Rs 3 lakhs for acquisition of the said asset and the
balance Rs 7 lakhs has been paid by him. In this case, actual cost u/s 43(1)
shall be Rs 7 lakhs only.
Items to be Actual cost would include the following:
Included in • Expenses directly related to the acquisition of the asset;
Actual Cost • Expenses necessary to bring the asset to site and install it (such as
carriage inwards, charges related to loading and unloading of the asset,
installation charges, etc);
• Expenses incurred to put the asset in use (such as cost of making a
support structure for the asset);
• Interest on capital borrowed for the acquisition of asset
commencing from the date of borrowing till the date the asset was
first put to use.
EXAMPLE: A loan was taken for purchase of machinery on April 1. 2019.
The asset was purchased on September 1, 2019 and was put to use on
November 1, 2019. Interest from April 1, 2019 to October 31, 2019 shall be
capitalized whereas interest for the period from November 1, 2019 to
March 31, 2020 shall be treated as revenue expenditure.
Assets Case (a): Buildings previously used for personal purposes
Initially Used subsequently used for the purposes of business/profession.
For Personal In such cases, actual cost shall be the actual cost of the building to the
Purposes assessee as reduced by an amount equal to the depreciation that would
have been allowable had the building been used for the
Subsequently business/profession since the date of its acquisition. In other words,
Used in notional depreciation would be allowed
Business/ EXAMPLE: Mr A bought a residential building for the purposes of his
Profession residence on 01.11.2017 for Rs 20,00,000. The residential building was
brought by him for his professional use on 01.12.2019, when its market
value was Rs 40,00,000. In this case, the actual cost of the asset u/s 43(1)
shall be computed as under:

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Cost of residential building 20,00,000
Less: Notional depreciation @ 2.5% for PY 2017-18 (Less (50,000)
than 180 days)
WDV as on 01.04.2016 19,50,000
Less: Notional depreciation @ 5% for PY 2018-19 (97,500)
Actual cost of residential building u/s 43(1) = WDV as on 18,52,500
01.04.2019
Depreciation for PY 2019-20 @ 5% 92,625
Case (b): Any other asset (such as P&M. furniture, etc) previously used
for personal purposes subsequently used for the purposes of
business/profession. (Buildings)
In such cases, the cost of acquisition of the asset shall be treated as actual
cost for the purposes of Section 43(1). In other words, no notional
depreciation shall be allowed
EXAMPLE (May 2012 Exam): A car was purchased by Dr Soman for Rs
5.25.000 on 10.08.2013 for personal use. It was subsequently brought by
him into professional use on 01.07.2019, when its market value was Rs
2,50,000. In this case, the actual cost of the car shall be Rs 5,25,000 and
depreciation for PY 2019-20 shall come out to Rs 78,750 (ie 15% of Rs
5,25,000).

Section 43B
CERTAIN DEDUCTIONS ALLOWED ON ACUTAL PAYMENT BASIS
Applicability • Section 43B is applicable where the assessee maintains his books of
of Section 43 accounts on the basis of mercantile system of accounting (ie accrual basis).
B • Section 43B cannot apply in situations where the assessee follows cash
basis of accounting (because under cash accounting system, all expenses are
allowed on actual payment basis)

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Types of • Any sum payable by way of tax, duty, cess or fee (by whatever name called
Expenses to under any law for the time being in force);
be Allowed • Any sum payable to the Indian Railways for use of the Railway assets;
on Actual • Employer's contribution to provident fund, superannuation fund or any
Payment other fund for the welfare of the employees;
Basis Only
• Bonus, commission or leave salary payable by the employer to his
employees; and
• Interest on loan taken from:
□ a scheduled bank including a co-operative bank;
□ public financial institution (ie, ICICI, IFCI, IDBI, LTC, UTI, etc);
□ state financial corporation; or
□ state industrial investment corporation.
Last Date of • The above mentioned expenses can be paid till the last date of filing of
Payment return of income relating to the previous year in which the expenditure
was incurred. If the payment is so made, expenditure is allowed in the
previous year itself.
• If the payment is made after the last date of filing of return of income,
expenditure is allowed in the year in which the payment was made.
EXAMPLE: ×VZ Ltd has taken a loan from SBI on which interest of Rs 5,000 is
payable for PY 2019-20. If this interest was paid to SBI on cr before
30.09.2020, such interest would be allowed to be deducted in PY 2019-20
itself. However, if this interest was paid on or after 01.10.2020, such interest
would be allowed to be deducted in the previous year in which such payment
was made.

Conversion Of Outstanding Interest Into A Fresh Loan/Advance

Where an assessee has taken a loan from scheduled banks, public financial institution,
state financial corporation or state industrial investment corporation and such assessee is
not able to pay any outstanding interest, the lenders may restructure the loan and convert
the outstanding interest into a fresh loan/advance.
Section 43B clarifies that the interest so converted and not "actually paid" shall not be
deemed as actual payment, and hence would not be allowed as deduction.
The unpaid interest, whenever actually paid to the above specified banks/financial
institutions, will be in the nature of revenue expenditure deserving deduction in the

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computation of income. Therefore, irrespective of the nomenclature, the deduction will be
allowed in the previous year in which the converted interest is actually paid.
In other words, if outstanding interest is converted into a fresh loan/advance, no
deduction shall be allowed in the year of conversion. Deduction shall be allowed in the year
in which such converted interest has been actually paid.

Section 35
EXPENDITURE ON SCIENTIFIC RESEARCH
PART 1: Scientific Research NOT Carried on by the Assessee - Deductibility of
Donations
Donation Given to Purpose of Donation Deduction
Allowed
National laboratory, UT, university or a Carrying out scientific 150% of
specified person approved by the prescribed research under an donation given
authority {Section 35(2AA)} approved
research programme
Approved research association, approved Carrying out scientific 150% of
college, approved university or approved research donation given
institution
Approved research association, approved Carrying out social 100% of
college, approved university or approved science or statistical donation given
institution research
An approved company registered in India Carrying out scientific 100% of
and having research & development as its research donation given
main object
Note 1: The person to whom donation is given can utilize the donation for the prescribed
research. There is no condition that such research should be related to the business of the
assessee.
Note 2: Where the assessee is not carrying any business/profession, such donations are
allowed as deduction u/s 80GGA to the extent of 100% of the amount of donation.

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PART 2: Scientific Research Carried on by the Assessee - Deductibility of Expenses

Provisions Where any assessee carries out any research of scientific nature related to the
Generally business carried on by him, expenses are deductible in the following manner:
Applicable Case (a) - Expenditure incurred BEFORE the commencement of business:
• Capital Expenditure:
□ Capital expenditure (other than expenditure on acquisition of land)
incurred during three years immediately preceding the date of
commencement of business shall be allowed as an expense in the year in
which the business commences.
EXAMPLE: If an assessee commences his business on 15.12.2019. entire
100% capital expenditure incurred during the period from 15.12.2016 to
14.12.2019 shall be allowed as an expense during PY 2019-20.
□ Such capital expenditure can be incurred on acquisition of P&M,
construction of building, acquisition of vehicles, etc for the purpose of
scientific research.
□ Where any assessee has purchased any land A building, expenditure is
allowed only for the building portion and not for the land portion.
• Revenue Expenditure:
□ Following revenue expenditure incurred during three years
immediately preceding the date of commencement of business shall be
allowed as an expense in the year in which the business commences:
Salary paid to employees engaged in scientific research (excluding
perquisites)
Purchase of materials used in scientific research
□ Pre-commencement revenue expenditure is allowed only to the extent it has
been certified by the prescribed authority.
□ EXAMPLE: An assessee commences his business on 15.12.2019. revenue
expenditure incurred during the period from 15.12.2016 to 14.12.2019 was
Rs 10 lakhs but the prescribed authority certified only Rs 8 lakhs. In this case,
Rs 8 lakhs shall be allowed as an expense during PY 2019-20. Any expenditure
incurred prior to 15.12.2016 shall not be allowed as deduction.

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Case (b) - Expenditure incurred AFTER the commencement of business:
• Capital Expenditure:
□ 100% of the capital expenditure incurred by an assesses on scientific
research in relation to his business is allowed as an expense in the year in
which the capital expenditure is incurred by the assessee.
□ Capital expenditure incurred on acquisition of land is not allowable as
deduction. Where any assessee has purchased any land A building,
expenditure is allowed only for the building portion and not for the land
portion.
* Revenue Expenditure:
Entire revenue expenditure incurred by an assessee on scientific research in
relation to his business is allowed as an expense in the year in which such
expenditure is incurred.
(Certification from prescribed authority not required)
Special • This special provision applies only to those companies which are engaged in
Provision the business of bio-technology or in any business of manufacture or
for Some production of any article/thing other than those specified in the Eleventh
Schedule. Following conditions are also required to be fulfilled:
Companies
□ Research and development facility should be approved by a prescribed
[Section authority.
35(2AB)] □ The company has entered into an agreement with the prescribed authority
for audit of accounts maintained for such facility.
• Deduction for post-commencement expenditure:
Capital Expenditure Revenue Expenditure
On land: Nil 150% of the expenditure
On building: 100% incurred can be claimed as
deduction
On other assets: 150%
Special • Depreciation not allowed:
Points No depreciation can be claimed u/s 32 in respect of those assets for which
deduction has been claimed u/s 35.
• Treatment of unabsorbed capital expenditure on scientific research:
□ The rules for set-off & carry-forward of unabsorbed capital expenditure
on scientific research are similar to set-off & carry-forward of unabsorbed

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depreciation.

□ Unabsorbed capital expenditure on scientific research of a particular year is

allowed to be set-off in the same year against income under any other head
except casual income.
□ If unabsorbed capital expenditure on scientific research cannot be adjusted
in the same year, it is allowed to be carried forward for indefinite period of
time (ie for an unlimited period) and in the subsequent years, such
unabsorbed expenditure shall be allowed to be set off against any income
other than casual income.
• Treatment of scientific research asset no longer used for scientific
research:
Asset sold without using for the purposes of Asset transferred to any
any other business other business
5ection 41(3) shall apply. Least of the The asset shall be added
following two amounts shall be taxable as to the existing block of
PGBP income: assets of the other
- Sale price of asset; or business.
- Deduction allowed u/s 35 Actual cost of the asset
Capital gains shall arise if the sale price so transferred shall be
exceeds the cost of the asset. Capital gains shall taken to be ’NIL'.
be long term if the asset was sold after a period
of 3 years; otherwise capital gains shall be
short-term.

Section 35AD
INVESTMENT LINKED TAX INCENTIVE FOR SPECIFIED BUSINESS
Business Section 35AD provides investment linked incentives to the following
Covered businesses:
• Setting-up and operating a cold chain facility
• Setting-up and operating a warehousing facility for storage of agricultural
produce
• Building and operating a hospital with minimum 100 beds for patients (the
hospital can

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be located anywhere in India)
• Developing and building a housing project under a scheme for affordable
housing
• Production of fertilizers in India
• Laying and operating a cross-country natural gas or crude oil or petroleum
oil pipeline for distribution, including storage facilities being an integral part of
such network.
• Building and operating, anywhere in India, a hotel of two star or above
category
(Where an assessee has built a hotel and has subsequently outsourced the
hotel operations to any other person, the assessee would still be eligible for
deduction u/s 35AO)
• Developing and building a housing project under a scheme for slum
redevelopment or rehabilitation
• Setting-up and operating an inland container depot or a container freight
station
• Bee-keeping and production of honey/beeswax
• Setting-up and operating a warehousing facility for storage of sugar
• Laying and operating a slurry pipeline for transportation of iron ore
• Setting-up and operating a semi-conductor wafer fabrication manufacturing
unit
• Developing or maintaining and operating or developing, maintaining and
operating a new infrastructure facility
Quantum Case (a) - Expenditure incurred AFTER the commencement of business:
of • Capital Expenditure:
Benefits □ On land, goodwill or financial instruments: Nil
u/s 35AD
□ Other capital expenditure: 100% of the capital expenditure shall be allowed
as deduction in the year in which such capital expenditure has been incurred.
• Revenue Expenditure:
100% of the revenue expenditure shall be allowed as deduction in the year in
which such revenue expenditure has been incurred.
Case (b) - Expenditure incurred BEFORE the commencement of business:

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Expenditure incurred before the commencement of business shall be allowed
as deduction in the year in which the business commences to the extent of
100% of such expenditure provided such expenditure has been capitalized in
the books of accounts on the date of commencement of business. However,
expenditure on acquisition of land, goodwill or financial instruments shall not
be allowed.
Latest Amendment Introduced Vide The Finance Act. 2019
If payment or aggregate of payments made to a single person in a single day in
respect of a particular expenditure exceeds Rs 10,000, deduction shall be
allowed for such expenditure only if payment has been made by way of
account payee cheque, account payee draft or by use of electronic clearing
system through a bank account. If payment has been made by any other mode,
deduction shall not be allowed in respect of such expenditure.
Other • Meaning of ‘Infrastructure Facility':
Points To A road including toll road, a bridge or a rail system;
Be Noted A highway project including housing or other activities being an integral part
of the highway project;
A water supply project, water treatment system, irrigation project, sanitation
and sewerage system or solid waste management system; and
A port, airport, inland waterway, inland port or navigational channel in the
sea.
• No other deduction possible:
If deduction has been allowed u/s 35AD, the assessee shall not be allowed any
deduction in respect of the specified business u/s 10AA, 80-1 A, 80-IAB, 80-IB,
80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80QQB and 80RRB.
• Sale of asset for which deduction has been claimed u/s 35AD to be
treated as business income:
If any asset, in respect of which deduction has been allowed u/s 35AD, is sold,
destroyed, demolished etc, the amount received on its sale, disposal, etc shall
be treated as income of the assessee u/h ’income from business/profession'.
• Assets cannot be used for other purposes for 8 years:
□ The assets, the cost of which has been claimed as deduction u/s 35AD, must
be used for the specified business for a period of at least 8 years.
□ If such asset is used for any purpose other than the specified business within
the period of 8 years, the following amount shall be deemed to be the income of
the assessee u/h 'income from business/profession for the previous year in

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which the asset has been so used.

Total deduction allowed u/s 35AD XXXX

Less: Amount of depreciation allowable u/s 32 (XXXX)
Amount deemed as income u/h PGBP XXXX
EXAMPLE: Seduction claimed u/s 35AD on a capital asset is Rs 100 lakhs
whereas depreciation eligible on such asset u/s 32 is Rs 15 lakhs. In this case,
an amount of Rs 85 lakhs would be deemed as the income of the assessee u/h
'income from business/pro fess ion.
• Set-off & carry-forward of losses of a specified business covered u/s 35AD
(Section 73A):
□ Intra-Head Adjustment: Losses of a business specified u/s 35AD are
allowed to be set-off only against the income of another business specified u/s
35AD.
□ Inter-Head Adjustment: Losses of a business specified u/s 35AD cannot be

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set-off against income under any other head.
□ Carry Forward of Losses: Unadjusted losses of a business specified u/s
35AD are allowed to be carried forward indefinitely for being set-off against
the income of a business specified u/s 35AD in future years.

Section 35D
AMORTIZATION OF CERTAIN PRELIMINARY EXPENSES
Eligible • Benefit u/s 35D is available to the following persons:
Assessee □ An Indian company
□ Any non-corporate assessee provided he is resident in India(ie resident
individual, resident HUF, resident firm, etc)
In other words, benefit u/s 35D is not available to a foreign company or a
non-resident
• Deduction is available if the eligible assessee incurs any expenditure on
specified purposes in
the following manner:
□ In case of new business: Eligible expenditure should be incurred before
the commencement of business.
□ In case of existing business: Eligible expenditure should be incurred for
extension of existing business or setting up a new unit.
Eligible a) The following four types of expenses are allowed if the work is carried on
Expenditure by the assessee himself or by a concern approved by CBDT:
(ie □ Expenditure on preparation of feasibility report
Purposes □ Expenditure on preparation of project report
For Which
Expenditure □ Conducting market survey any other survey necessary for the business of
Should Be the assessee;
Incurred) □ Engineering services relating to the business of the assessee.
b) Legal charges for drafting an agreement related to setting up the business.
c) The following expenditure in the case of a company:
□ Legal charges for drafting of MOA & AOA and expenses incurred on their
printing;
□ Registration fees of the company under the Companies Act;
□ Expenses incurred in connection with public issue of shares or debentures
of the company (like underwriting commission; brokerage; expenses related

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to drafting, printing and advertisement of the prospectus, etc)

Quantum of
Deduction
Assessee Maximum Deduction Period of Deduction
Indian Lower of the following two: Deduction is allowed in 5 equal
Company • Amount of eligible instalments in 5 years in the
expenditure following manner:
OR In case of new business:
• 5% of cost of project or The period of 5 years would start
5% of capital employed, from the previous year in which
whichever is higher the business commences.
In case of existing business:
Resident Lower of the following two:
Individual, • Amount of eligible The period of 5 years would start
Resident from the previous year in which
expenditure
Firm, etc the extension of the undertaking is
OR completed or the new undertaking
• 5% of cost of project commences operation.
EXAMPLE: XYZ Ltd has commenced a new business during PY 2019-20.
Eligible preliminary expenses are Rs 50,00,000. Cost of project & capital
employed as on 31.03.2020 is 3 crore and 4 crore respectively.
In this case, total amount of deduction permissible u/s 35b would come out
to Rs 20 lakhs. Deduction of Rs 4,00,000 shall be allowed annually starting
from PY 2019-20 and ending with PY 2021-22.
Meaning of • “Cost of project" means the actual cost of fixed assets as on the last day of
Certain the previous year in which the business commences/the extension of the
undertaking is completed or the new undertaking commences operation.
Terms
• “Capital employed' means the aggregate of issued share capital, debentures,
long term borrowing as on the last day of the previous year in which the
business commences/the extension of the undertaking is completed or the
new undertaking commences operation.

Sections 35CCA, 35CCC, 35CCD & 35DDA

MISCELLANEOUS DEDUCTIONS

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Section 35CCA Where a person runs any business/profession, donations given to any
Donations To notified organization for the purpose of rural development shall be
Associations allowed as deduction while computing income u/h business/profession.
For Rural Donations given to Rural Development Fund or National Urban
Development Poverty Eradication Fund shall also be allowed as deduction.
Programmes Note: If the person is not carrying out any business/profession, such
donations would be allowed as deduction u/s 80GGA.
Section 35CCC Where an assessee incurs any expenditure (other than cost of any land
Weighted or building) on notified agricultural extension project, then he will be
Deduction For eligible to claim a weighted deduction of 150% of such expenditure.
Expenditure
On Agricultural
Extension
Project
Section 35CCD Where a company incurs any expenditure (not being expenditure in
Weighted the nature of cost of any land or building) on any notified skill
Deduction For development project, then such company can claim a weighted
Expenditure deduction of 150% of such expenditure.
For Skill
Development
Section 35DDA Section 35DDA allows an employer to debit the expenditure incurred in
Amortization connection with any voluntary retirement scheme implemented by
Of Expenditure the employer. Such amount would be allowed to be deducted in 5 years
Under in 5 equal annual instalments starting with the previous year in
Voluntary which such amount was actually paid.
Retirement
Scheme

Section 36
OTHER DEDUCTIONS RELATED TO BUSINESS/PROFESSION
Premium for Premium paid for insurance of stock or stores is allowed as
Insurance of Stock- deduction.
In-Trade [36(1)(i)] Note: Insurance premium paid on life of owner/partner is a
personal expenditure and not allowed as deduction.

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Premium for Mediclaim premium paid by any mode other than cash for
Insurance on insuring the health of the employees is allowed as deduction.
Health of Premium paid by an employer for obtaining Keyman Insurance
Employees Policy is also allowed.
[36(1)(ib)]
Interest on • Interest on loans taken for the purposes of business/profession is
Borrowed Capital allowed as deduction.
[36(1)(iii)] • However, where loan is taken from scheduled banks, public
financial institution, state financial corporation or state industrial
investment corporation or any other person notified u/s 43B,
deduction for interest is available only if such interest has been
actually paid till the last date of filing of return of income.
• Interest on loan taken for the purpose of acquisition of an
asset is to be capitalized for the period commencing from the
date of borrowing till the date the asset was first put to use.
Note: Interest on capital to a proprietor is not allowed to be
deducted.
EMPLOYER’S • Employer’s contribution to recognized Provident Fund, approved
Contribution to Gratuity Fund and approved Superannuation Fund is allowed as
Recognized deduction provided such amount has been deposited till the last
Provident Fund, date of filing of return of income (Section 43B). (The amount should
Superannuation be within the limits prescribed under the respective Acts)
Fund, Pension • Employer’s contribution to Notified Pension Scheme ('NPS')
Scheme, Gratuity referred to u/s 80CCD is allowed as deduction. Maximum
Fund [Section 36(1 amount admissible as deduction cannot exceed 10% of salary
X'v), (iva) &(v)] of employee. (Discussed in detail u/h 'salary')
EMPLOYEE'S • Any sum received by the employer as employee's
Contribution to contribution towards PF, superannuation fund or any other
Recognized welfare fund is deemed to the business income of the employer
Provident Fund, u/s 2(24).
Superannuation • When such amount is subsequently paid by the employer to
Fund, etc [Section the respective authorities, such amount is allowed as deduction
36(1)(va)] u/s 36(1)(va) to the employer. The amount should be deposited on
or before the last date of filing of return of income. (Delhi HC's
decision in the case of AIMIL)

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Bad Debts [Section * Bad debts are allowed to be deducted on actual basis if all the
36(1)(v,i)] following conditions are satisfied:
□ Debt must be incidental to the business/profession of the
assessee;
□ Debt must have been taken into account while computing the
assessable income of the assessee for current year or for prior
years; and
□ Debt must have been written off in the books of accounts.
• Section 41(4): If a bad debt has been allowed as deduction u/s
36(1)(vii) and subsequently there is some recovery from such
bad debt, such recovered amount is deemed to be the income of
the assessee u/h PGBP for the year in which such amount is
recovered. Such recovery shall be taxable irrespective of the fact
whether the assessee carries on any business/profession or not.
Family Planning • This deduction is available only to companies (Indian as well as
Expenditure foreign).
[Section 36(1)(ix)] • Revenue expenditure is allowed fully. Capital expenditure is
allowed in five equal annual instalments starting with the previous
year in which such expenditure was incurred.
• Family planning expenditure (revenue as well as capital) is
allowed to be debited only to the extent profit is available u/h
PGBP. Unabsorbed family planning expenditure is set-off and c/f
just like unabsorbed depreciation.
Securities • If securities/commodities are held as investments:
Transaction Tax STT/CIT paid cannot be debited to the P&L A/c where the
(STT) securities/ commodities are held as investments.
[Section 36(1
)(xv)]
Commodities • If securities/commodities are held as stock-in-trade:
Transaction Tax 'STT/CIT paid is allowed to be debited to the P&L A/c where the
(CIT) [Section securities/ commodities are held as stock-in-trade (ie the dealer
36(1)(xvi)] has the business of buying/selling such securities/commodities).

Section 37 - GENERAL DEDUCTION

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Section 37: Section 37(1) is a residuary section. To avail deduction u/s 37, the following
Applicability conditions should be satisfied;
• The expenditure should not be of the nature described u/s 30 to 36.
• It should not be in the nature of capital expenditure.
• It should not be a personal expenditure of the assessee.
• It should be in respect of business carried on by the assessee. In other
words, it should be used wholly and exclusively for the purposes of such
business.
• It should not be incurred for any purpose, which is an offence or is
prohibited by any law.
EXAMPLEs • Salary & wages to employees, commission to agents, printing & stationery,
telephone expense and other business related expenses.
• Expenditure in connection with entertainment/amusement of employees
or customers.
• Expenditure incurred on occasion of various festivals like Diwali, Holi,
Karva Chauth for employees or customers.
• Expenditure in connection with advertisement like advertisement in
newspapers, television or other media, payment to ad agency for making
the advertisement, etc.
Section 37(2B) - Extremely Important
• No deduction is available for any expenditure incurred by assessee on
advertisement in any souvenir, pamphlet, publication or newspapers of
any political party.
Note: Such donation/expenditure is allowed as deduction u/s
80GGB/80GGC.
Deduction of various taxes, interest, penalty, etc shall be as follows:

Type of expenditure Direct Taxes (such Indirect Taxes (such

as income tax, AIT, as GST, service tax,
etc) VAT, etc)
Amount of tax Not allowed as it is Allowed as it is a
the personal liability business liability for the
of the assessee assessee
Interest paid/payable on Not Allowed Allowed

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delayed payment of tax

Interest on loan taken for Not Allowed Allowed

payment of tax liability
Penalty for failure to Not Allowed Not Allowed (as it
comply with the amounts to infraction of
applicable law law)
Refund of tax already Not treated as Treated as business
paid received by the income income
assessee
Interest on refund Treated as income Treated as business
received u/h other sources income
Litigation expenses Allowed Allowed
Filing returns and other Allowed Allowed
professional charges
Important Expenditure incurred by an assessee on Corporate Social Responsibility
Point ('CSR') activities as referred to in Section 135 of the Companies Act, 2013
CANNOT be deducted.

Section 40A(2)
PAYMENT TO RELATED PERSON
Applicability Section 40A(2) applies where a person has incurred any revenue
of Section expenditure on goods, services or facilities and payment for the same is
40A(2) made to:
• A related person; or
• A person who has substantial interest in the business of the assessee.
Assessee Related Person
(ie Payer)
Individual Any relative of the individual specified u/s 2(41) (ie
spouse, brother, sister, lineal ascendant or lineal
descendant of the individual)
Firm Partners and their relatives [2(41)]

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Company Directors and their relatives [2(41)]
Disallowance If the payment made for the expenditure specified above is excessive or
in case of unreasonable having regard to the Fair Market Value (FMV)of the
Unreasonable goods, services or facilities, that portion of the expenditure which is
Expenditure unreasonable or excessive shall be disallowed.
EXAMPLE: Mr A has taken a aodown on rent from his sister and has paid
rent of Rs 5 lakhs during PY 2019-20 whereas the FMV of such rent was
only Rs 4 lakhs. In this case, an amount of Rs 1 lakh shall be disallowed u/s
40A(2).

Section 40A(7)
EMPLOYER'S CONTRIBUTION TO GRATUITY FUND
• Employer's contribution towards gratuity fund is allowed as deduction if:
□ The gratuity fund is an approved gratuity fund; and
□ Requirements of Section 43B have been complied with (ie, the amount has been actually
deposited on or before the last date of filing of ROI).
• Provision for payment of gratuity:
In general, no provision is allowed as deduction. However, provision for payment of
gratuity is allowed as deduction if both the conditions given below are fulfilled:
□ The gratuity fund is an approved gratuity fund; and
□ The provision has been made on the basis of actuarial valuation (ie the amount has not
been arrived randomly but on a systematic basis).

Section 40A(9)
EMPLOYER'S CONTRIBUTION TO VARIOUS FUNDS
No deduction shall be allowed in respect of any sum paid by an assessee towards setting up
or formation of or as contribution towards any fund except the following:
• Where such sum is required to be paid under any law in force; or
• Where such contribution is towards an approved gratuity fund; or
• Where such contribution is towards an approved superannuation fund; or
• Where such contribution is towards a recognized provident fund; or
• Where such contribution is towards a notified pension fund.
Contribution to unapproved funds or any other staff welfare fund is not allowed as
deduction. However, staff welfare expenses are allowed as deduction.

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Section 40A(3)
PAYMENTS EXCEEDING Rs 10,000 TO BE MADE BY ACCOUNT PAYEE CHEQUE/DRAFT
Applicability • Section 40A(3) applies where all the following conditions are satisfied:
of Section □ The assessee has incurred any revenue expenditure; and
40A(3) □ Payment or aggregate of payments made in a single day to a single person
inrespect of such expenditure exceeds Rs 10,000.
• If both the conditions specified above are fulfilled and payment has been
made otherwise than by way of account payee cheque or account payee draft
or use of electronic clearing system ('ECS') through a bank account, the
amount of payment shall be disallowed (ie not allowed to be deducted).
• In other words, this section requires that payment to a single person in a
single day for expenditure incurred should be made by an account payee
cheque, account payee draft or by using ECS through a bank account if the
payment amount in a single day exceeds Rs 10,000.
• Where the payment is being made to a transport operator carrying on the
business of plying, hiring or leasing goods carriages, the limit of Rs 10,000
shall be taken as Rs 35,000.

ANY EXPENSE (+) SINGLE PERSON (+) TOTAL PAYMENT IN SINGLE DAY EXCEEDS Rs
10,000
Payment Exceeding Rs 10,000 Made After Claiming Deduction
• This special provision applies where all the following conditions are satisfied:
□ An expenditure has been allowed as deduction in earlier years on accrual basis;
□ Payment exceeding Rs 10,000 in respect of such expenditure is made in subsequent
years; and
□ Such payment has been made otherwise than by way of account payee cheque or account
payee draft or by using ECS through a bank account.
• If all the above conditions are fulfilled, the payment so made shall be deemed be to the
PGBP income of the assessee for the year in which the payment has been so made.
EXAMPLE: Mr X has claimed a deduction of Rs 25.000 for rent expenses during PY 2018-19
on accrual basis. Payment for this expenditure was made on 01/05/2019 in cash. The
amount of Rs 25,000 shall be deemed to be the PGBP income of Mr X for PY 2019-20.

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Non- Section 40A(3) is not applicable in the following situations even though
applicability payment exceeding Rs 10,000 is made otherwise than by way of account
of Section payee cheque or account payee draft or by using ECS. These situations are
40A(3) in given under Rule 6DD:
Certain • Where payment is made to the Reserve Bank of India, State Bank of India or
Situations - other banking institutions, LIC, UTI, Central Government, State Government,
Rule 6DD of etc.
the Income • Where payment is made in a village or a town which does not have any
Tax Rules, bank on the date on which the payment is made and the person to whom
1962 payment is made ordinarily resides at such place or has his
business/profession at such place.
• Where payment is made by transferring funds from one bank account to
the other or payment is being made by any credit card/debit card/letter of
credit, etc.
• Where payment is made by way of account settlement (eg, Mr B owes Mr A,
an amount of Rs 50,000. Further Mr A has to make a payment of Rs 30,000 to
Mr B for purchase of raw material. Mr A adjusted the payment of Rs 30,000
against the receivable appearing in the books of accounts).
• Where the payment is to be made on a particular day but banks are closed
on that day because of holiday or strike.
• Where products have been manufactured in a cottage industry without the
aid of power and the payment is being made to the producer of such
products.
• Where the payment is made for the purchase of
□ agricultural or forest produce; or
□ the produce of animal husbandry or dairy or poultry farming; or
□ fish or fish products; or
□ the products of horticulture or apiculture, to the cultivator, grower or
producer of such articles, produce or products.
• Where payment is made to an employee on his retirement or payment is
made to his family member after the employee's death and payment is in
connection with gratuity or any other retirement benefit and the payment
amount does not exceed Rs 50,000.
• Any other situation given under Rule 6DD.

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EXAMPLES FOR PRACTICE - Whether disallowance u/s 40A(3) will be attracted or
not:
• Salary of Rs 24,000 paid to an employee by bearer cheque:
• Audit fees of Rs 38,000 paid to a Chartered Accountant by crossed cheque:
• Bill of stationery of Rs 54,000 paid in cash:
• Payment for purchase of generator in cash amounting to Rs 50,000, where the assessee is
in the business of trading in generators:
• Payment of Rs 15,000 in cash on 03/01/2020 against two bills for Rs 8,000 and Rs 7,000:
• Three payments of Rs 8,000 in cash on 03/01/2020 against a single bill of Rs 24,000:
• Three payments of Rs 8,000 in cash on three consecutive days against a single bill of Rs
24,000:
• Payment of Rs 12,000 by crossed cheque to his brother for purchase of raw-material
which is excessive by Rs 4,000:
• Payment of sales tax in cash amounting to Rs 42,000:
• Payment to Mr X amounting to Rs 8,000 and to Mr Y Rs 33,000 by crossed cheque and
cash respectively for interest on loan taken for the business:
• Payment to PNB amounting to Rs 42,000 for interest on loan taken for the business.
Payment has been made by a bearer cheque:
• Bill of stationery of Rs 54,000 paid by cash on August 15, 2019:
DEDUCTIBILITY OF EXPENDITURE WHERE TDS HAS NOT BEEN DEDUCTED
Section 40(a)(i)
Interest, Royalty, FTS, etc Payable Outside India/Payable to Non-Resident
Applicability • The amount is paid/payable:
of Section □ to any person outside India; or
40(a)(i) - □ to a non-resident in India or a foreign company in India.
Conditions
• The amount paid is in the nature of interest, royalty, fees for technical
services or any other sum. (salary)
• Such amount is chargeable to income tax in the hands of the recipient
under the Income Tax Act, 1961 and TDS is required to be deducted u/s 195
or any other section.

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When Interest, royalty, etc would be disallowed in the following two cases:
Disallowance • Case 1: Tax has not been deducted at source in the current year; or
is Applicable • Case 2: Tax has been deducted at source during the current year but has
not been deposited with the government till the last date of submission of
return u/s 139(1).
Amount of The entire amount of interest, royalty, fees for technical services shall be
Disallowance disallowed in the current year if either of the above two cases gets attracted.
Reversal of The amount which is disallowed in the current year shall be allowed as
Disallowance deduction in the year in which tax deducted at source is deposited with the
government by the payer.
EXAMPLEs • XYZ Ltd has paid interest of Rs 50 lakhs outside India on 01.03.2020. Tax
was deducted to source on 15.03.2020 but the same was deposited with the
government on 30.09.2020. In this case, the interest would be allowed to be
deducted in PY 2019-20.
• If in the above EXAMPLE, TDS was deducted on 20.03.2020 and was
deposited with the government on 01.10.2020, the interest would be
allowed to be deducted in PY 2020-19.
• If in the above EXAMPLE, TDS was deducted on 01.05.2020 and was
deposited with the government on 01.06.2019, the interest would be
allowed to be deducted in PY 2019-20.
• If in the above EXAMPLE, TDS was deducted on 01.05.2020 and was
deposited with the government on 01.06.2020, the interest would be
allowed to be deducted in PY 2019-20.

Section 40(a)(iii)
Salary Payable Outside India/Payable to Non-Resident
Applicability • The amount is paid/payable:
of Section □ to any person outside India; or
40(a)(iii) - □ to a non-resident in India.
Conditions
• The amount paid is in the nature of salary. Such salary amount is
chargeable to income tax in the hands of the recipient under the Income Tax
Act, 1961 and TDS is required to be deducted under the Income Tax Act,
1961.

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When The entire amount of salary would be disallowed if tax has not been
Disallowance deducted at source and tax has not been deposited with the government.
is Applicable
Reversal of If salary amount has been disallowed once, such amount would be treated as
Disallowance disallowed forever even if tax deducted at source is subsequently deposited
with the government by the payer.

Section 40(a)(ia) Payment to a Resident

Applicability • The amount is paid/payable to a person resident in India.

of Section • All types of payment on which tax is deductible u/s 192 to 194LBA are
40(a)(ia) - covered under the purview of Section 40(a)(ia).
Conditions
When • Case 1: Tax has not been deducted at source in the current year: or
Disallowance • Case 2: Tax has been deducted at source during the current year but
is Applicable has not been deposited with the government till the last date of
submission of return u/s 139(1).
Amount of 30% of the expenditure shall be disallowed in the current year if either
Disallowance of the above two cases gets attracted.
Reversal of The amount which is disallowed in the current year shall be allowed as
Disallowance deduction in the year in which tax deducted at source is deposited with
the government by the payer.

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EXAMPLEs • XYZ Ltd has paid interest of Rs 50 lakhs to a resident in India on
01.03.2020. Tax was deducted to source on 15.03.2020 but the same was
deposited with the government on 30.09.2020. In this case, Rs 50 lakhs
would be allowed to be deducted in PY 2019-20.
• If in the above EXAMPLE, TDS was deducted on 20.03.2020 and was
deposited with the government on 01.10.2020, Rs 35 lakhs would be
allowed to be deducted in PY 2019-20 and Rs 15 lakhs would be allowed to
be deducted in PY 2020-19.
• If in the above EXAMPLE, TDS was deducted on 01.05.2020 and was
deposited with the government on 01.06.2019, Rs 35 lakhs would be
allowed to be deducted in PY 2019-20 and Rs 15 lakhs would be allowed to
be deducted in PY 2019-20.
• If in the above EXAMPLE, TDS was deducted on 01.05.2020 and was
deposited with the government on 01.06.2020, Rs 15 lakhs would be
disallowed in PY 2019-20 even if the amount has been deposited before the
due date of filing of return of income. The amount of Rs 15 lakhs shall be
allowed as deduction during PY 2019-20.
Disallowance W'here tax has not been deducted at source, but the resident recipient has:
Not to be paid the applicable tax after correctly computing his income; and
Done in filed his return of income within the time limit prescribed u/s 139(1),
Certain
Situations the payer would not be treated as an assessee in default if he furnishes a
certificate from a Chartered Accountant certifying the above position and
disallowance provisions would not be applicable in such cases.
(On the lines of Section 201 (1)}

Section 40(b)
REMUNERATION TO PARTNERS (Eg Salary, Interest on Capital/ etc)

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Deductibility • Remuneration paid/payable by a firm to its partners are deductible only
of Such if the conditions mentioned under Section 184 & Section 40(b) are
Remuneration complied with.
- Conditions • One of the conditions require that there should exist a legal document
which confirms the existence of a partnership firm (such as partnership
deed). Such legal document should give the firm the power to pay
remuneration to its partners.
• A copy of such legal document is also required to be filed at the time of
submission of income tax return for the first time.
Quantum of
Deduction
Type Of Payment To Maximum Permissible
Remuneration Deduction
Interest on Any partner Rate of interest shall be lower of
capital (working partner the two:
as well as sleeping - Rate specified in partnership
partner) deed; or
- 12% p.a.
(Calculation of interest on simple
interest basis)
Salary, bonus, Only working
commission or partner (such
Book Profits Maximum
any other remuneration is
Deduction
remuneration not allowed to be
paid to a sleeping First Rs 90% of Book
partner) 3,00,000 (or in Profits or Rs
the case of a 1,50,000,
loss) whichever is
higher
Balance 60% of Book
Profits
EXAMPLE: If book profits are Rs
10,00,000, maximum salary, etc
can be Rs 6,90,000.

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Calculation of Following adjustments should be made to the net profit u/h PGPB to arrive
Book Profits at book profits:
• Only income u/h PGPB is to be taken after including all incomes and
deducting all eligible expenses (ie, income after giving effect to the
provisions of Sections 30 to 38)
• Interest on capital is allowed to be deducted only to the extent it is
permitted u/s 40(b). Amount in excess of the permissible figure shall be
added back
• Salary, bonus, commission, etc to partners are not to be deducted.
• Current year depreciation as well as unabsorbed depreciation of previous
years are allowed to be deducted (because such expenditure is covered
under Sections 30 to 38)
• Brought forward business losses and Chapter VI-A deductions are not
allowed to be deducted (because such expenditure is not covered under
Sections 30 to 38)
Points to be • Interest on loan is not covered within the scope of Section 40(b).
Noted However, it is allowed to be deducted if provided for in the partnership
deed. The rate of interest would also be specified in the partnership deed.
• Share of profit received by a partner from a partnership firm is exempt in
the hands of the partners u/s 10(2A).
• Interest on capital and salary, bonus, etc are considered to be the income
of the partners u/h PGBP to the extent they are allowed to be deducted u/s
40(b).

Amounts not deductible

Section Particulars
In the hands of any assessee

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40(a)(i) Any interest, royalty, fees for technical services or other sum chargeable under the
Act, which is payable outside India or in India to a non corporate non-resident or
to a foreign company, on which tax deductible at source has not been deducted
or after deduction has not been paid on or before the due date specified under
section139(1).
However, if such tax has been deducted in any subsequent year or has been deducted in
the previous year but paid in the subsequent year after the due date specified under
section 139(1), such sum shall be allowed as deduction in computing the income of
the previous year in which such tax is paid.

40(a)(ia) 30% of any sum payable to a resident on which tax is deductible at source under
Chapter XVII-B and such tax has not been deducted or, after deduction has not
been paid on or before the due date for filing of return of income under section
139(1).
However, if such tax has been deducted in any subsequent year or has been
deducted in the previous year but paid in the subsequent year after the due date
specified under section 139(1), 30% of such sum shall be allowed as deduction in
computing the income of the previous year in which such tax is paid.

40(a)(ii) Any sum paid on account of income-tax

40(a)(iib) Any amount paid by way of royalty, licence fee, service fee, privilege fee, service
charge, or any other fee or charge, which is levied exclusively on, or any amount
appropriated, directly or indirectly, from a State Government undertaking, by the
State Government.

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

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.

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In case of partnership firms or LLPs -

40(b) (i) Salary, bonus, commission or remuneration, by whatever name called,
paid to any partner who is not a working partner;

(ii) Payment of remuneration or interest to a working partner, which is

not –
 authorized by the partnership deed; or
 in accordance with the terms of the partnership deed.

(iii) Payment of remuneration or interest to a working partner

authorized by and in accordance with the terms of the partnership
deed, but relates to a period falling prior to
the date of such partnership and is not authorized by the earlier
partnership deed.

(iv) Payment of interest to any partner authorised by and in accordance with

the terms of the partnership deed and falling after the date of the
partnership deed to the extent of the excess of the amount calculated at
12% simple interest per annum.
(v) Payment of remuneration to a working partner which is authorized by and
in accordance with the partnership deed to the extent the aggregate of
such payment to working partners exceed the following limits -
(a) On the first 3,00,000 of the 1,50,000 or 90% of the book-
book-profit or in case of a profit, whichever is more.
loss

(b) On the balance of 60%

book-profit

Expenses or payments not deductible in certain circumstances

Section Particulars

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40A(2) Any expenditure incurred in respect of which a payment is made to a related person or
entity, to the extent it is excessive or unreasonable by the Assessing Officer.
Few examples of related persons are as under:

Assessee Related Person

Individual Any relative of the individual
Firm Any partner of the firm or relative of such partner and the
member of the family or association
HUF or AOP Any member of the AOP or HUF or any relative of such
member
Company Director of the company or any relative of the director

Any assessee Any individual who has a substantial interest (20% or more
voting power or beneficial entitlement to
20% of profits) in the business or profession of the
assessee; or
A relative of such individual.

40A(3) Any expenditure, in respect of which a payment or aggregate of payments

made to a person in a single day otherwise than by account payee cheque or
account payee bank draft or ECS through bank account or through such other
prescribed electronic modes exceeds ` 10,000.
In case of payments made to transport operator for plying, hiring or leasing goods
carriages, an enhanced limit of ` 35,000 shall apply.
If the payment / payments exceed this limit, the entire expenditure would be disallowed.
However, disallowance would not be attracted if the cases and circumstances in
which payment is made otherwise than by way of an account payee cheque or bank draft
are covered in Rule 6DD.

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40A(3A) Where an expenditure has been allowed as deduction on accrual basis in any previous year,
and payment is made in a subsequent previous year otherwise than by account payee
cheque or account payee bank draft or ECS through bank account or through such
other prescribed electronic modes and such payment (or aggregate of payments
made to a person in a day is made in a subsequent previous year) is in excess of the limits of
` 10,000/ ` 35,000 specified above, the payment/aggregate of payments so made shall
be deemed as profits and gains of the business or profession and charged to tax as income of
the subsequent previousyear.
However, the deeming provision will not apply in the cases and circumstances
covered in Rule 6DD.

40A(7) Provision for payment of gratuity to employees.

However, disallowance would not be attracted if provision is made for contribution to
approved gratuity fund or for payment of gratuity that has become payable during the
year.

Section 41
DEEMED PROFITS CHARGEABLE TO TAX

The receipts under the following sections shall be taxable u/h PGBP whether or not the
business is in existence in the year of recovery.

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Section 41(1) - Recovery aaainst any deduction:
Recovery • This section applies if both the conditions listed below are fulfilled:
Against Any □ Any expenditure or loss or trading liability has been allowed as a
Deduction deduction in any previous year; and
□ Subsequently there is a recovery of such expenditure or loss or trading
liability either in cash or in any other manner (ie by way of remission of
liability).
• The amount of recovery is chargeable to tax in the year of receipt whether
the business is in existence or not in the year of recovery.
EXAMPLE: ABC Ltd has paid sales tax of Rs 5,00,000 under protest durinq
PY 2016-17. During PY 2019-20, the matter was finally decided by the
Supreme Court of India and the case was decided in favour of ABC Ltd and
the amount was refunded to ABC Ltd. The amount of Rs 5,00,000 shall be
treated as an income of ABC Ltd for PY 2019-20.
EXAMPLE: XYZ Ltd has recoqnized an expenditure of Rs 5,000 durinq PY
2018-19 towards purchases of raw materials on credit. During PY 2019-20,
the creditor allows a rebate of Rs 500 at the time of payment and only Rs
4,500 is actually paid to the creditor. The amount of Rs 500 shall be treated
as income of XYZ Ltd for PY 2019-20.
Section 41(2) Balancina Charqe:
- Already • This provision applies only to companies which are engaged in generation
Discussed or generation and distribution of power which have opted to charge
depreciation on SLM basis.
• The difference between the WDV of the asset and its sale price is taxable
u/h PGBP as balancing charge if the asset is subject to depreciation on SLM
basis.
• The excess of sale price over the actual cost of the asset is not treated as
balancing charge. Such excess amount is subject to capital gains.
Section 41(3) Scientific research asset sold without usina for the Purposes of any other
- Already business:
Discussed Where any asset which has been used for scientific research is sold without
using for the purposes of any other business, least of the following shall be
taxable as PGBP income:
Sale price of asset; or
Deduction allowed u/s 35

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Note: Capital gains shall arise if the sale price exceeds the cost of the asset.
Capital gains shall be long term if the asset was sold after a period of 3
years; otherwise capital gains shall be short-term.

Section 41(4) Recovery of bad debts:

- Recovery of Where any debt has been allowed as bad debts u/s 36(1)(vii) and
Bad Debts subsequently the assessee recovers any amount in respect of such bad debt,
(Already the amount of recovery shall be taxable in the year of recovery.
Discussed)
EXAMPLE: ABC Ltd has sold some qoods for Rs 1 lakh to Mr X on credit. The
debt has become bad during PY 2016-17 for which a deduction was
allowed during PY 2016-17. However, during PY 2019-20, there is a
recovery of Rs 5,000 from Mr X's estate. In this case, Rs 5,000 shall be
treated as business income of ABC Ltd for PY 2019-20.
Section 43A
SPECIAL PROVISION FOR CHANGES IN THE RATE OF EXCHANGE OF FOREIGN
CURRENCY
• Section 43A applies where an assessee has acquired any asset from outside India and has
taken a loan in foreign currency from outside India for purchasing this asset.
• Losses arising on principal repayments due to foreign exchange fluctuations shall be
added to the WDV of asset and depreciation shall be computed at the increased value in
future years.
EXAMPLE: Mr X has purchased a machinery from USA costing US $1,00,000 and for
purchasing this machine, loan of an equivalent amount was taken from Bank of America,
New York Branch. The exchange rate prevailing on the date of purchase of machinery was
$1 = Rs 65 and therefore, the asset and loan were recorded at an amount of Rs 65,00,000 in
the books of accounts. At the time of principal repayment, the value of $1 increased to Rs
68 and therefore Rs 68,00,000 had to be paid to acquire $1,00,000 and repay the principal
amount. Loss of Rs 3,00,000 arising due to foreign exchange fluctuations on account of
principal repayments shall be added to the WDV of the asset as per the provisions of
Section 43A.
• Similarly, gains arising on principal repayments due to foreign exchange fluctuations shall
be reduced from the WDV of asset and depreciation shall be computed at the reduced value
in future years.

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Section 43CA
SPECIAL PROVISION FOR PERSONS ENGAGED IN SALE/PURCHASE OF LAND OR
BUILDING
Section • This provision applies to persons who are engaged in the business of
43CA - sale/purchase of land or building. In other words, this provision applies to a
Applicability property dealer for whom land or building forms part of stock-in-trade.
• If any land or building is sold by the property dealer and the sale
consideration is less than the SDV of such land or building, in such cases the
SDV shall be deemed to be the sale consideration. In other words, in case of
property dealers, sale price to be credited to P&L A/c shall be higher of the
following:
□ Stamp Duty Value of land/building; or
□ Actual amount for which land/building has been transferred.
Special • This provision applies in case of agreement to sell land or building.
Provision • If SDV of land/building as on the date of booking is less than the SDV of
for land/building as on the date of registration, the SDV as on the date of booking
Agreement can be taken provided the booking amount has been received otherwise than
to Sell Land/ in cash.
Building
S.No Actual SDV on the Date of SDV on the Date of Sale Value
Consideration Booking/ Registration u/s 43CA
Agreement
1. Rs 200 lakhs Rs 250 lakhs Rs 300 lakhs Rs 250
(Booking amount (1/3/2020) lakhs
of Rs 50 lakhs
received by cheque
on 31/7/2019)
2. Rs 200 lakhs Rs 250 lakhs Rs 300 lakhs Rs 300
(Booking amount (1/3/2020) lakhs
of Rs 50 lakhs
received in cash on

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31/7/2019)

3. Rs 200 lakhs Rs 250 lakhs Rs 300 lakhs (Full Rs 300

(31/7/2019) amount received on lakhs
the date of
registration)
Section 44 A A - Latest Amendment Introduced Vide The Finance Act. 2019
(Increasing The Threshold Limit For Maintenance Of Books Of Accounts In Case Of
Individuals/HUF)
• The existing provisions of Section 44AA of the Income Tax Act, 1961 cast an obligation on
every person carrying on business or non-specified profession to maintain such books of
accounts and documents which would enable the Assessing Officer to compute his total
income if any of the following two conditions gets fulfilled:
Annual turnover for any of the preceding three financial years exceeds Rs 10,00,000; or
Annual PGBP income during any of the preceding three financial years exceeds Rs
1,20,000.
• In order to reduce the compliance burden on individuals and HUF carrying on business or
non-specified profession, Section 44AA has amended the above stated law by increasing
monetary limits of annual turnover from Rs 10,00,000 to Rs 25,00,000 and annual PGBP
income from Rs 1,20,000 to Rs 2,50,000.
• This amendment is applicable only in case of individuals and HUF. The other assessees
would continue to be governed by the old law. •
• In other words, with effect from PY 2019-20, individuals and HUF carrying on business or
non-specified profession shall be required to maintain such books of accounts and
documents which would enable the Assessing Officer to compute his total income if any of
the following two conditions gets fulfilled:
Annual turnover for any of the preceding three financial years exceeds Rs 25,00,000; or
Annual PGBP income during any of the preceding three financial years exceeds Rs
2,50,000.

COMPULSORY MAINTENANCE OF BOOKS OF ACCOUNTS

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Particulars Quantum of Income/Receipts/Turnover Type of Books of
Accounts to be
Maintained
Persons Gross receipts from such profession do not Such books of
Carrying on exceed Rs 1,50,000 in ANY of the three years accounts as may
Specified immediately preceding the relevant previous enable the Assessing
Profession year Officer to compute the
(In case of new profession, if gross receipts for first taxable income of the
year are not likely to exceed Rs 1,50,000) assessee
Gross receipts from such profession are more Books of accounts as
than Rs 1,50,000 in ALL three years immediately prescribed under Rule
preceding the relevant previous year 6F
(In case of new profession, if gross receipts for first
year are likely to exceed Rs 1,50,000)
Persons Income from such business/profession does not No books to be
Carrying on exceed Rs 1.20,000 AND aross turnover from maintained
Business/ such business/ profession does not exceed Rs
Non- 10,00,000 in ALL three years immediately
Specified preceding the relevant previous year
Profession (In case of new business/profession, if income for
(General first year is not likely to exceed Rs 1,20,000 and
Law - Not gross turnover for first year is not likely to exceed
Applicable Rs 10,00,000)
In Case Of Income from such business/profession exceeds Such books of
Individuals Rs 1,20,000 OR gross turnover from such accounts as may
& HUF) business/profession exceeds Rs 10,00,000 in enable the Assessing
ANY of the three years immediately preceding Officer to compute the
the relevant previous year taxable income of the
(In case of new business/profession, if income for assessee
first year is likely to exceed Rs 1,20,000 or gross
turnover for first year is likely to exceed Rs
10,00,000)

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• Specified Profession: Leoal. medical, enaineerina. architectural, accountancv. technical
consultancy interior decoration, authorized representatives, film artists, company
secretary, information technology or any other profession as may be notified by CBDT.
• The books of accounts are to be kept and maintained for a period of atieast 6 years
from the end of the relevant assessment year. Penalty of Rs 25,000 is payable u/s 271A
in respect of a failure to make the books of accounts or keep the books of accounts for the
specified period of 6 years.
• Presumptive Taxation - Provisions for Maintenance of Books of Accounts:
Section 44AD: If the provisions of Section 44AD(4'I are applicable in case of an eligible
∩ssessee ∩nrl total income of the assessee exceeds the exemption limit (2.5L/3L/5L), such
assessee would be required to maintain proper books of accounts as specified u/s 44AA.
Section 44ADA If income from specif ied profession is declared to be less than 5∩% ∩f
the grass receipts and the total income of the assessee for the relevant previous year
exceeds the exemption limit (2.5L/3L/5L), the assessee would be required to maintain
proper books of accounts as specified u/s 44AA.
Section 44AE: If the assessee has opted not to go for presumptive taxation becajjse his
income as per the normal provisions is lower than his presumptive income, then such
person is also required to maintain books of accounts as specified u/s 44AA irrespective of
the level of total income.

Section 44AB; Rule 6G

COMPULSORY AUDIT OF BOOKS OF ACCOUNTS
In the following situations, Section 44AB requires anassessee to get his books of
accounts audited from a Chartered Accountant and submit the tax audit report along
with his return of income:
• Where a person carrying on business declares income as per actual basis (ie such
person doesn't opt for Section 44AD), audit of books of accounts is required if turnover
from business exceeds Rs 1 crore.
• Where a person carrying on business has declared income on presumptive basis u/s
44AD for earlier years and the provisions of Section 44AD(4) get triggered for current
year,audit of books of accounts is mandatory if his total income for the current year
exceeds the exemption limit (2.5L/3L/5L).

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• Person Carrying on Profession:
Case 1: Gross receipts from Audit of books of accounts is mandatory irrespective of
profession exceeds Rs 50 the level of income/loss.
lakhs
Case 2: Gross receipts from a) If income is computed in accordance with the
profession don't exceed Rs provisions of Section 44ADA (ie income declared is 50% or
50 lakhs more of gross receipts), audit of books of accounts is not
required.
b) If income declared is less than the limit of 50% of
gross receipts as given u/s 44ADA and the total income of
the person for the relevant previous year exceeds the
exemption limit (2.5L/3L/5L), audit of books of accounts
is mandatory.
• If requirements of Section 44AB are not fulfilled, penalty is payable u/s 271B. The amount
1
of penalty shall be 2 % of turnover/gross receipts subject7to a maximum of Rs 1,50,000.
PRESUMPTIVE TAXATION - Section 44AE
PROFITS & GAINS OF BUSINESS OF PLYING, HIRING OR LEASING GOODS CARRIAGES
Applicability This scheme is applicable to all assessees who are engaged in the business
of Section 44 of plying, hiring or leasing goods carriages. The eligible assessee should
AE not own more than 10 goods carriages in his name at any time during
the year.
Income Goods Carriage Presumptive Income
Deemed as Heavy goods 1,000 per ton of gross vehicle weight during which such
PGBP or unladen weight, as the case may be, vehicle is owned
vehicle
for every month or part of a month by the assessee for
the previous year.

Other than heavy 7,500 for every month or part of a

goods vehicle month

• Where a person declares his business income in accordance with the

provisions of this section, requirements relating to maintenance of
books of accounts and audit of books of accounts shall not apply.
• Option to show lower income is available but the assessee would be
required to maintain proper books of accounts as per Section 44 A A and
get them audited as per Section 44 A B. Further, the assessee can change

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the option on year-to-year basis.

Deductibility • Any other expense u/s 30 to 38 is NOT ALLOWED to be deducted. However,

of Other a partnership firm can deduct salary and interest on capital payable to
Expenditure partners u/s 40(b).
• Moreover, current year depreciation as well as brought forward
unabsorbed depreciation are NOT ALLOWED to be deducted. (Section 32)
• B/f business losses are ALLOWED to be set-off against presumptive
income. (Section 72)
• Deductions u/s 80C-80U are ALLOWED to be deducted.
Illustration on Section 44AD(4)
Let us consider the following particulars relating to a resident individual, Mr A, being an
eligible assessee whose gross receipts do not exceed Rs 2 crore in any of the assessment
years between AY 2020-19 to AY 2020-21:
Particulars AY 2020-19 AY 2019-20 AY 2020-21
Gross receipts (Rs) 1,80,00,000 1,90,00,000 2,00,00,000
Income offered for taxation (Rs) 14,40,000 15,20,000 10,00,000
% of gross receipts 8% 8% 5%
Offered income as per presumptive Yes Yes No
taxation scheme u/s 44AD
In the above case, Mr A, an eligible assessee, opts for presumptive taxation u/s 44AD for AY
2020-19 and AY 2019-20 and offers income of Rs 14.40 lakhs and Rs 15.20 lakhs on gross
receipts of Rs 1.80 crore and Rs 1.90 crore respectively. However, for AY 2020-21, he offers
income of only Rs 10 lakhs on turnover of Rs 2 crore, which amounts to 5% of his gross
receipts. He maintains books of accounts u/s 44AA and gets the same audited u/s 44AB.
Since he has not offered income in accordance with the provisions of Section 44AD(1) for
five consecutive assessment years after AY 2020-19, he will not be eligible to claim the

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benefit of Section 44AD for next five assessment years succeeding AY 2020-21, ie from AY
2021-22 to AY 2025-26.

PRESUMPTIVE TAXATION - Section 44AD

SPECIAL PROVISION FOR COMPUTING PROFITS AND GAINS OF BUSINESS
Applicability • This scheme shall be applicable to a resident individual, resident HUF and
of Section 44 resident partnership firm. The eligible assessee should carry on any
AD business (excluding business covered u/s 44AE) and the turnover of the
business should not exceed Rs 2 crore.
• This scheme is not applicable to:
□ LLP firms, AOP/BOI and companies; or
□ A person whose turnover from business exceeds Rs 2 crore; or
□ A person carrying on specified profession (ie legal, medical, engineering,
accountancy, film artists, company secretary, etc): or
□ A person earning income in the nature of commission or brokerage; or
□ A person desirous of claiming deduction u/s 10AA, 80-IA, 80-IAB, 80-IB,
80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80QQB and 80RRB.
Amount • PGBP income shall be deemed to be 8% of gross turnover or any other
Deemed as higher sum as may be declared by the assessee (it would be deemed that
PGBP Income all expenses allowable u/s 30 to 38 have already been allowed).
* Where a person declares his business income in accordance with the
provisions of this section, requirements relating to maintenance of books of
accounts and audit of books of accounts shall not apply.
Latest Amendment Introduced Vide The Finance Act. 2019
In order to promote digital transactions and to encourage small
unorganized business to accept digital payments, Section 44AD has been
amended to reduce the existing rate of deemed total income from 8% to 6%
in respect of that portion of the turnover which has been received by
account payee cheque, account payee draft or use of electronic clearing
system through a bank account till the last date of filing of return of income
as specified u/s 139(1).
However, the existing rate of deemed profit of 8% shall continue to apply
in respect of that portion of the turnover which has been received by any
other mode.

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Deductibility • Any other expense u/s 30 to 38 is NOT ALLOWED to be deducted. Further,
of Other a partnership firm is NOT ALLOWED to claim deduction of remuneration to
Expenditure partners as given u/s 40(b).
• Moreover, current year depreciation as well as brought forward
unabsorbed depreciation are NOT ALLOWED to be deducted. (Section 32)
• B/f business losses are ALLOWED to be set-off against presumptive
income. (Section 72)
• Deductions u/s 80C-80U are ALLOWED to be deducted from presumptive
income.
However, deductions u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE,
80JJA, 80JJAA, 80QQB and 80RRB are not allowed.
Section 44AD(4) - Introduced vide the Finance Act. 2016
• Where an eligible assessee declares profit for any year as per Section 44AD, he is required
to declare his profit for the next five years as per Section 44AD only.
• If an eligible assessee declares profit for any year as per Section 44AD and he doesn't
declare profit for any of the next five consecutive years in accordance with the provisions
of Section 44AD, such assessee cannot claim the benefit of Section 44AD for the next 5
years.
EXAMPLE: An elidible assessee claims the benefit of Section 44A0 for PY 2019-20 and
declares income of Rs 8 lakhs on a turnover of Rs 1 crore. For PY 2020-19 & PY 2019-20, he
again offers income in accordance with the provisions of Section 44AO. However, for PY
2020-21, he offers income of Rs 6 lakhs on a

Combined Analysis of Section 44AA, Section 44AB & Section 44ADA

Gross Receipts From Specified Gross Receipts From Specified

Profession Exceeds Rs 50 Lakhs Profession Does Not Exceed Rs 50 Lakhs

□ Presumptive taxation scheme

specified u/s 44ADA cannot be
Income Declared ≥ Income Declared <
opted
50% of Gross 50% of Gross Receipts
□ Proper books of accounts to Receipts

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be maintained as per Section
44AA
□ Maintenance of Case 1 - Total Income of
□ Audit of books of accounts
books accounts u/s Assessee
mandatory as per Section 44AB
44AA Exceeds Exemption Limit:
□ Audit of books of □ Maintenance of books of
accounts mandatory accounts u/s 44 A A
u/s 44AB
□ Audit of books of accounts
mandatory u/s 44AB
Case 2 - Total Income of
Assessee
Does Not Exceed Exemption
Limit:
□ Maintenance of books of
accounts u/s 44AA
□ Audit of books of accounts
mandatory u/s 44AB
Illustration on Section 44ADA:
A partnership firm consisting of three partners X, Y, and Z is engaged in the profession of
accountancy.
Gross receipts of the profession for the year ended 31 st March 2020 amounts to Rs 48
lakhs.
The firm had business loss of Rs 50,000 and unabsorbed depreciation of Rs 1,50,000
carried forward from Assessment Year 2019-20. The firm opts for presumptive taxation
u/s 44AbA for Assessment Year 2020-19. Compute the total income of the firm for
Assessment Year 2020-19.
Solution:
Computation of PGBP income of the firm:

Particulars Amount (Rs)

Presumptive income u/s 44ADA (50% of Rs 48 lakhs) 24,00,000
Less: Brought forward loss u/s 72 (50,000)
Total Income 23,50,000
Working Notes:

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• A partnership firm falls within the definition of "eligible assessee" u/s 44ADA. In this case,
since the gross receipts of the profession of the firm does not exceed Rs 50 lakhs, the firm is
eligible to opt for presumptive taxation u/s 44ADA. Hence, 50% of the gross receipts would
be deemed to be the PGBP income of the firm.
• As per Section 44ADA, all deductions allowable u/s 30 to 38 shall be deemed to have been
allowed. Accordingly, no deduction shall be allowed for unabsorbed depreciation since the
same is deductible u/s 32(2).
• Further, business loss of AY 2019-20 can be set-off against current year professional
income as per Section 72.
turnover of Rs 1.5 crore (ie less than 8%). Now, the assessee will not be allowed to claim
the benefit of Section 44A D from PY 2021-22 to PY 2025-26.
• If the provisions of Section 44AD(4) as discussed above are applicable in case of an
eligible assessee and total income of the assessee exceeds the exemption limit
(2.5L/3L/5L), such assessee would be required to maintain proper books of accounts as
specified u/s 44AA and get them audited u/s 44AB.
Liability to • Where an assessee has opted for the scheme of presumptive taxation given
Pay u/s 44AD and the advance tax liability is Rs 10,000 or more, such assessee is
Advance required to pay the entire
Tax ■ advance tax in one instalment on or before the 15th March of the
relevant previous year. (Four instalments)
• Interest u/s 234C shall be calculated only for the last instalment, fRate: 1%
per month; Time period: 1 month; Amount: Advance tax liability (-) tax
actually paid till 15th March}
• Interest u/s 234B & 234A shall be calculated in the normal manner.

PRESUMPTIVE TAXATION - Section 44ADA SPECIAL PROVISION FOR COMPUTING

PROFITS AND GAINS OF PROFESSION

Applicability Section 44ADA shall apply if all the following conditions are satisfied:
of Section • The assessee is resident in India and he is engaged in a specified
44ADA profession (ie legal, medical, engineering, architectural, accountancy,
technical consultancy, interior decoration, authorized representatives, film
artists, company secretary, information technology or any other profession
as may be notified by CBDT); and
• The total gross receipts from such specified profession does not exceed
Rs 50 lakhs

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Amount • PGBP income shall be deemed to be 50% of gross receipts or any other
Deemed as higher sum as may be declared by the assessee. It would be deemed that
PGBP all expenses allowable u/s 30 to 38 have already been allowed. Where a
Income person declares his business income in accordance with the provisions
of this section, requirements relating to maintenance of books of
accounts and audit of books of accounts shall not apply.
• Option to 5how Lower Income: If income from specified profession is
declared to be less than 50% of the gross receipts and the total income
of the assessee for the relevant year exceeds the exemption limit
(2.5L/3L/5L), the assessee would be required to maintain proper books of
accounts as per Section 44AA and get them audited as per Section 44AB.
Further, the assessee can change the option on year-to-year basis.
Deductibility • Any other expense u/s 30 to 38 is NOT ALLOWED to be deducted. Further,
of Other a partnership firm is NOT ALLOWED to claim deduction of remuneration to
Expenditure partners as given u/s 40(b).
• Moreover, current year depreciation as well as brought forward
unabsorbed depreciation are NOT ALLOWED to be deducted. (Section 32)
• B/f business losses are ALLOWED to be set-off against presumptive
income. (Section 72)
• Deductions u/s 80C-80U are ALLOWED to be deducted.
Liability to • Where an assessee has opted for the scheme of presumptive taxation given
Pay Advance u/s 44ADA and the advance tax liability is Rs 10,000 or more, such assessee
Tax is required to pay the entire advance tax in one instalment on or before
the 15th March of the relevant previous year. (Four instalments)
• Interest u/s 234C shall be calculated only for the last instalment, fRate: 1%
per month; Time period: 1 month; Amount: Advance tax liability (-) tax
actually paid till 15th March)
• Interest u/s 234B & 234A shall be calculated in the normal manner.

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INCOME UNDER THE CAPITAL GAINS
Sections 45 to 55A of the Income-tax Act, 1961 deal with capital gains.
Section 45(1)

CHARGING SECTION FOR CAPITAL GAINS

LANGUAGE OF SECTION 45(1): Any profits or gains arising from the transfer of a capital asset
effected in the previous year, shall 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
unless such capital gain is exempt u/s 54, 54B, 54D, 54EC, 54EE, 54F, SAG, 54GA or 54GB.

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.

(v) Such capital gain should not be exempt under Sections 54, 54B, 54D, 54EC, 54EE, 54ED,
54F, 54G, or 54GA

Section 2(14) - DEFINITION OF ‘CAPITAL ASSET’

GENERAL MEANING- Capital asset means property of any kind held by an assessee,
whether or not connected with his business or profession (such property can be movable,
immovable, tangible, intangible, etc). Eg: Shares & securities, land & building, etc. Property
also includes any rights in Indian company, including rights of management or control
or any other rights whatsoever.

EXCLUSIONS: Following items shall NOT be treated as capital assets:

1. STOCK-IN-TRADE:

Any stock-in-trade, consumable stores or raw materials held by an assessee for the purposes of
his business or profession.

2. PERSONAL EFFECTS:

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Personal effects refer to movable property held for the personal use of the assessee or any
member of his family dependent on him. Examples• Personal motor car, household furniture,
electronic appliances meant for personal use, etc. However, the following assets shall not be
treated as personal effects even though these assets are movable and are held by the
assessee for personal use:

• Jewellery and bullion (jewellery includes ornaments of gold, silver, platinum or any other
precious metal; precious or semi-precious stones, whether or not set in any furniture, utensil
or other article or worked or sewn into any wearing apparel);

• archaeological collections (relating to past/ancient times);

• drawings & paintings;

• sculptures; or

• any work of art.

Note: If items likes motor car, electronic appliances, etc are held for business purposes, they
are treated as capital assets.

Note: Silver utensils like thalis, katoris, tumblers, etc held for personal use were held to be
personal effects. Thus, no capital gains would arise on sale of such silver utensils (Benarshilal v
CIT).

Note: Sale of silver coins, gold coins, silver bars, gold utensils, etc used for the purposes of
Mahalaxmi Pooja and other festivals was held to be liable to capital gains as such asset did
not qualify as personal effects (SC's judgement in the case of Maharaja Rana Hemant Singh v
CIT).

3. RURAL AGRICULTURAL LAND IN INDIA:

• Agricultural land outside India: Always a capital asset whether situated in rural area or
urban area.

• Agricultural land in India: Capital asset oniy if situated in urban area. If situated in rural
area, such agricultural land shall not qualify as a capita! asset.

Meaning of 'Urban Area'

The following two points define the scope of urban area':

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(i) any area situated within the local limits of a municipality/cantonment board having a
population of 10,000 or more;

(ii) agricultural land situated in any area within such distance, measured aerially, in
relation to the range of population as shown hereunder -
Population of the area as per the latest census Shortest aerial distance from the local
published before the commencement of relevant limits of the municipality/cantonment
PY

> 10,000 and ≤ 1,00,000 2 kilometers

> 1,00,000 and ≤ 10,00,000 6 kilometers

> 10,00,000 8 kilometers

4. Gold Deposit Bonds issued under the Gold Deposit Scheme. 1999 or Deposit
Certificates issued under the Gold Monetisation Scheme. 2015 notified by the Central
Government.

NOTE:Any security held by foreign institutional investor which has invested in such security in
accordance with the regulations made under the Securities and Exchange Board of India Act, 1992
would be treated as capital asset only so that any income arising from transfer of such security
by a Foreign Portfolio Investor (FPI) would be in the nature of capital gain.

The Supreme Court in the case of Vodafone International Holdings B.V vs. Union of India
[2012] 204 Taxman 408 held that influence/persuasion of a parent company over its
subsidiary could not be construed as a right in the legal sense.

SR.NO. Shortest aerial Population Is the land

distance from according to the situated in
the local limits last preceding this area a
of a census of which capital Asset
municipality or the relevant
cantonment figures have
board referred been published

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To to in item (a) before the first day
of the previous
year.

supersede this ruling with retrospective effect from 1st April 1962, an Explanation has been
inserted to clarify that “property” includes and shall be deemed to have always included any
rights in or in relation to an Indian company, including rights of management or control or any
other rights whatsoever.

(i) A 1 Km 9000 No
(ii) B 1.5 kms 12,000 Yes
(iii) C 2 kms 11,00,000 Yes
(iv) D 3 kms 80,000 No
(v) E 4 kms 3,00,000 Yes
(v) F 5 kms 12,00,000 Yes
(vi) G 6 kms 8,000 No
(vii) H 7 kms 4,00,000 No
(viii) I 8 kms 10,50,000 Yes
(ix) J 9 kms 15,00,000 No

Section 2(47)

DEFINITION OF ‘TRANSFER’

Transfer, in relation to capita! asset, includes:

□ the sale, exchange or relinquishment of the asset;

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□ the extinguishment of any rights therein (like forfeiture of shares, repayment in case of
liquidation of companies, etc);

□ the compulsory acquisition thereof under any law for the time being in force;

□ conversion of a capital asset into stock-in-trade;

□ the maturity or redemption of zero coupon bonds (Section 2(48) defines a ‘zero coupon
bond' to mean a bond in respect of which no benefit is received before maturity or redemption
and are generally redeemable after a period of minimum 10 years and maximum 20 years.
Such bonds are generally issued by infrastructure capital company or infrastructure capital
fund or any scheduled bank or public sector companies notified by the Central Government};

□ Any transaction allowing possession of any immovable property to be taken or

retained in part performance of a contract of the nature referred to u/s 53A of the
Transfer of Property Act, 1882 (Section 53A covers cases where possession of the property
has been handed to a proposed buyer and consideration has been paid/promised to be paid by
the proposed buyer to the proposed seller but the property has not yet been registered in the
name of the proposed buyer. Handing over the possession in such cases shall also be regarded
as transfer); and

□ Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-
operative society, company, AOP, etc or in any other manner whatsoever) which has the effect
of transferring, or enabling the enjoyment of any immovable property permanently.

Example:

Mr X enters into an agreement to sell his house property on 01.01.2019 to Mr Y for Rs

20,00,000. Mr X hands over the possession of house property to Mr Y on 15.02.2019. Mr Y
makes the payment of Rs 20,00,000 on 30.04.2019.

The house property is registered in the name of Mr Y on 30.06.2019. When has the transfer
taken place?

Answer

• As per Section 2(47), transfer takes place on the date on which possession of immovable
property is handed over in pursuance of agreement to sell. Therefore, in the present case, the
date of possession (ie 15.02.2019) shall be considered as the date of transfer and accordingly
capital gains shall be taxable in the hands of Mr X for PY 2018-19.

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• Further, as per Section 27, Mr Y shall be deemed as the owner of the house with effect from
15.02.2019 and income u/h house property shall be calculated in his hands with effect from
15.02.2019

Section 48 MODE OF COMPUTATION OF CAPITAL GAINS

Computation Computation of Short-Term Capital Gains |

of Full Value of Consideration (FVC) XXXX

Short-Term Less Expenditure incurred wholly and exclusively in (XXXX)

Capital Gains connection with transfer (like advertisement expenses,
brokerage, legal expenses, selling commission, etc)

Net Value of Consideration XXXX

Less: Cost of Acquisition (COA) (XXXX)

Less Cost of Improvement (COI) (XXXX)

Gross Short Term Capital Gains XXXX

Less: Exemption u/s 54B/54D (54/54EC/54EE/54F) (XXXX)

Taxable Short Term Capital Gains (’STCG’) XXXX

Fifth Proviso to Section 48 - STT Not Allowed As Deduction:

Securities Transaction Tax (’STT) paid on sale of shares/units shall not be

reduce from the sale proceeds and STT paid on purchase of shares/units shall
not be added to the cost of acquisition of shares/units held as capital assets.

Computation Computation of Long-Term Capital Gains

of Full Value of Consideration (FVC) XXXX

Long-Term Less. Expenditure incurred wholly and exclusively in (XXXX)

Capital Gains connection with transfer (like advertisement expenses,
brokerage, legal expenses, selling commission, etc)

Net Value of Consideration XXXX

Less: Indexed Cost of Acquisition (Indexed COA) (XXXX)

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Less: Indexed Cost of Improvement (Indexed COI) (XXXX)

Gross Long Term Capital Gains XXXX

Less: Exemption u/s 54/54B/54D/54EC/54EE/54F (XXXX)

Taxable Long Term Capital Gains (‘LTCG’) XXXX

Fifth Proviso to Section 48 - STT Not Allowed As Deduction: XXXX

Securities Transaction Tax (‘STT) paid on sale of shares/units shall not be

reduced from the sale proceeds and STT paid on purchase of shares/units
shall not be added to the cost of acquisition of shares/units held as capital
assets.

SHORT TERM AND LONG TERM ASSET

PERIOD OF HOLDING

STCA, if held for ≤ 12  Security (other than unit) listed in a recognized stock
month LTCA, if held for > exchange
12 months
 Unit of equity oriented fund/ unit of UTI

 Zero Coupon bond

STCA, if held for ≤ 24  Unlisted shares
month LTCA, if held for >
 Land or building or both
24 months
STCA, if held for ≤ 36  Unit of debt oriented fund
month LTCA, if held for >
 Unlisted securities other than shares
36 months
 Other capital assets

Proviso to Section 48 - INDEXATION

While computing long-term capital gains, ‘indexed cost of acquisition' shall be taken instead of
’cost of acquisition' and ‘indexed cost of improvement' shall be taken instead of ‘cost of
improvement'.

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Cost Inflation Index For The Year In Which The Asset Is
Indexed Transferred
Cost of
Cost of = ×
Acquisition Cost Inflation Index For The Year In Which The Asset Was
Acquisition Held By The Assessee OR For The Year Beginning On
01.04.2001, Whichever Is Later

Cost Inflation Index For The Year In Which The Asset Is

Transferred
Indexed Cost
Cost of
of = × Cost Inflation Index For The Year In Which The
Improvement
Improvement Improvement To The

Asset Took Place

IMPORT ANT POINT: As a general rule, benefit of indexation is not allowed in case of LT
CG arising from transfer of bonds or debentures issued by any company or government.
However, there are two exceptions to this general rule. In case of LT CG arising from
transfer of sovereign gold bonds and capital indexed bonds issued by government,
benefit of indexation is available.

INDEXATION TABLE

Financial Year CII Factor Financial Year CII Factor Financial CII Factor
Year

2001-02 100 2007-08 129 2013-14 220

2002-03 105 2008-09 137 2014-15 240

2003-04 109 2009-10 148 2015-16 254

2004-05 113 2010-11 167 2016-17 264

2005-06 117 2011-12 184 2017-18 272

2006-07 122 2012-13 200 2018-19 280

2019-20 289

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Section 55 - COST OF ACQUISITION (‘COA’)

General • Case (a): Capital Asset Has Been Purchased:

Provision Date of Purchase Before 01.04.2001 On or After

01.04.2001

Cost of Higher of the following two: Cost incurred by the

Acquisition assessee on the
 Cost incurred by the assessee on
purchase of capital
the purchase of capital asset; or
asset
 FMV as on 01.04.2001

• Case (b): Capital Asset Has Been Self-Generated:

As per the decision of the Supreme Court in the case of B.C.Srinivasa Setty, cost
of acquisition of any self-generated capital asset other than thqse given
under Category 2 below shall be INDETERMINATE. Therefore, no capital
gains would arise in such cases. Examples: Sale of spontaneously grown
trees, goodwill of profession, etc

Special • CATEGORY 1: Shares/Securities:

Cases Option to take FMV as on 01.04.2001 is available in respect of these capital

assets.

Capital Asset Cost of Acquisition Period of Holding

Starts from the date of

Original Shares/
Purchase price purchase/ allotment of
Securities
shares/securities

 If allotted before 01.04.2001: Starts from the date of

Bonus Shares/ FMV
allotment of bonus
Securities
 Otherwise – NIL shares/securities

Renouncement of
Right to
NIL Short-term (Always)
Subscribe
Shares/Securities

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Right Shares/
Period of holding to start
Securities Price actually paid under the
from the date of allotment
right issue
- Purchased by of right shares/securities
the person to
whom right is
issued Price paid to the person who
Period of holding to start
- Purchased by renounced the right and the from the date of allotment
the person to amount paid to the company of right shares/securities
whom right is under the right issue
renounced

• CATEGORY 2: Specified Capital Assets:

Option to take FMV as on 01.04.2001 is not available in respect of these

capital assets even if they are acquired before 01.04.2001.

Cost of Acquisition
Capital Asset Acquired Self-Generated Asset
Asset I

Goodwill of Business (Profession) Purchase Price NIL

Trademark/Brand Name associated with Purchase Price NIL

Business

Tenancy Rights Purchase Price NIL

Stage Carriage Permit (Route Permits) Purchase Price NIL

Loom Hours Purchase Price NIL

Right to Carry on any Business/Profession Purchase Price NIL

Right to Manufacture, Produce or Process Purchase Price NIL

any Article or Thing

Section 55 - COST OF IMPROVEMENT

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General Cost of improvement refers to any capital expenditure incurred by the assessee for
improving the capital asset. Eg - construction of additional floors, etc.
Meaning

Quantum • CATEGORY 1: Specified Capital Assets:

The cost of improvement of the following capital assets shall be taken to be NIL:

□ Goodwill of business;

□ Right to manufacture, produce or process any article or thing; and

□ Right to carry on any business/profession.

• CATEGORY 2: Other Capita! Assets:

Cost of improvement shall be the actual capital expenditure incurred by the

assessee on the improvement of the capital asset. However, cost of improvement
incurred before 01.04.2001 shall be ignored in all cases.

Q1 :Mr Nagendra Kumar converts his capital asset acquired for an amount of INR 125000 in
2005-06, into stock in trade in the FY 2016-17. He thereafter sells this asset for INR 10,00,000
in 2019-20.

Please advise on the taxability. (C.G.-467949 AND BUSINESS INCOME-250000)

Q2 :Mr Srinivasan, purchases 2000 equity shares in ABC Ltd., for INR 50 per share (Brokerage
1%), in Feb 1997. He gets 200 Bonus shares in Sep 2000. He again gets 2200 bonus shares in
Sep 2007. FMV of the Shares on 1st Apr’01 was INR 125. In Jan’20, he sells all the shares for
INR 500 per share (Brokerage 2%). Compute the Capital Gains Tax in the hands of Srinivasan in
FY 2019-20.(LTCG:RS.1361250)

Q3 :M & sons, HUF, had purchased a land for INR 150,000 in 2002-03. In the PY 2006-07, a
partition takes place and the Coparcener, Mr. B, gets this plot, valued at INR 200,000. In PY
2007-08, he incurs expenses of INR 250,000 on the plot towards fencing of the plot of land. Mr.
B then sells this plot at INR 15,00,000 in PY 2019-20. You are required to compute the capital
gains for AY 2020-21.(C.G.-527066)

Q4 :Mr. X purchases a property for INR 50000 on 3rd May 1975. The following expenses were
incurred by him:

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o Improvement of property in 1998-99 INR 250,000

o Construction of two floors in 2002-03 INR 800,000

o Reconstruction and refurbishment of property in 2012-13 INR 15,00,000

FMV of property on 1st Apr’01 is 10,00,000. He sells the house on 9th Sep’19 for INR 80,00,000
and incurs INR 250,000 on transfer. Compute the Capital Gains taxable in his hands in AY
2020-21.(LTCG-490595)

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COMPUTATION OF CAPITAL GAINS - SPECIAL CASES

Section 45(1A)

TAXABILITY OF INSURANCE COMPENSATION IN RE5EPCT OF CAPITAL ASSETS

Applicability Section 45(1A) applies if both the conditions listed below are fulfilled:
of Section
• Capital asset has been destroyed, damaged, etc on account of the following
45(1A)
reasons:

 Flood, typhoon, hurricane, cyclone, earthquake, etc; or

 Riot or civil disturbance; or

 Accidental fire or explosion; or

 Action by an enemy or action taken in combating an enemy (whether with or

without declaration of war).

• Money or any other asset has been received from an insurance company
as compensation under an insurance policy.

Full Value of The value of money/Fair Market Value of any other asset received shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed
accordingly.

Year of Capital gains shall be computed in the year in which the asset has been
Taxability of destroyed, damaged, etc but they shall be taxable in the year in which
Capital Gains money or any other asset has been received from the insurance company.

Section 45(2)

CONVERSION OF CAPITAL ASSETS INTO STOCK-IN-TRADE

Applicability Section 45(2) applies where an assessee converts his capital asset into
of Sec 45(2) stock-in-trade to be used by him for his business purposes.

Full Value of The Fair Market Value of the asset as on the date of conversion shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed

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accordingly.

Year of • Capital gains shall be computed in the year in which the capital asset has
Taxability of been converted into stock-in-trade but they shall be taxable in the year in
Capital Gains which such stock-in-trade has been sold by the assessee.

• The income arising from sale of stock-in-trade shall be taxable u/h PGBP.

Section 45(4) - TRANSFER OF CAPITAL ASSET BY FIRM/AOP/BOI

Section 45(3)
TO PARTNER/MEMBER BY WAY OF DISTRIBUTION ON DISSOLUTION
TRANSFER OF CAPITAL ASSET BY PARTNER/MEMBER TO FIRM/AOP/BOI
Applicability • Section 45(4) applies in case of transfer of capital asset by a
Applicability
of Sec 45(4) •firm/AOP/BOI
Section 45(3) to applies where a partner/member
its partner/member transfers
at the time any capital
of dissolution or
of Sec 45(3) asset to a firm/AOP/BOI as his capital contribution or otherwise. (Such
otherwise.
partner/member can be existing or new).
• Capital gains shall be computed in the hands of the firm/AOP/BOI
•transferring
Capital gains shall be
the capital computed
asset in the hands of the partner/member
to its partner/member.
transferring the capital asset.
Note: Provisions relatinq to capital aains do not apply where the firm/AOP/BOI
Full Value of The amount
transfers any recorded in the
stock-in-trade books
to its of accounts of
partner/member on the firm/AOP/BOI
dissolution shall
or otherwise.
Consideration be deemed to be the full value of consideration and capital gains shail be
Full Value of The Fair Market
computed Value(FMV)
accordingly. of the capital asset as on the date of transfer shall be
Consideration deemed to be the full value of consideration and capital gains shall be computed
Year of Capital gains shall be taxable in the year in which the capital asset is transferred
accordingly.
Taxability by the partner/member to the firm/AOP/BOI.
Year of Capital gains shall be taxable in the year in which the capital asset is transferred
Taxability Business Income = Sale
by the firm/AOP/BOI Price
to the (-) FMV of Asset on the Date of Conversion
partner/member.

Section 45(5)

TRANSFER OF CAPITAL ASSET BY WAY OF COMPULSORY ACQUSITION

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Applicability Section 45(5) applies in the following two situations:
of Sec 45(5)
* Capital asset has been compulsorily acquired by the Government or any
other similar agency under any law; OR

* Transfer of capital asset has taken place and consideration for such transfer
is to be determined or approved by the Central Government or RBI.

Full Value of . ORIGINAL COMPENSATION:

Consideration
Capital gains shall be computed in the year in which the transfer has taken
(+)
place but the entire capital gains shall be taxable in the year in which the
first instalment of

Year of the original compensation is received by the assessee. Cost of acquisition and
Taxability of cost of improvement shall be allowed to be deducted in the normal manner.
Capital
• ENHANCED COMPENSATION:
Gains
□ If the assessee is not satisfied with the amount of compensation, he can file a
case for receiving enhanced compensation. Such enhanced compensation is
taxable in the year in which it is received by the assessee- The nature of capital
gains (LT/ST) would be same as in case of original compensation.

□ Where enhanced compensation has been received on the basis of an interim

order of the Court, the amount of enhanced compensation shall be taxable only
when the final order has been passed by the Court.

□ While computing capital gains on enhanced compensation, the assessee will be

allowed to deduct legal expenses incurred to earn the enhanced compensation.

Cost of acquisition and cost of improvement shall be taken as Nil.

□ If the original assessee has died at the time of receipt of enhanced

compensation, such enhanced compensation shall be taxable in the hands of the
legal heir.

□ Interest received on original/enhanced compensation is taxable u/h ‘income

from other sources’ in the year of receipt irrespective of the year to which it
pertains (Section 145A). 50% of such interest is allowed as deduction u/s 57.

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Section 45(5A) - Latest Section Introduced Vide The Finance Act. 2017

• As per Section 45(1) of the Income Tax Act, 1961, capital gains are chargeable to tax in the
year in which transfer takes place except in certain cases. The definition of 'transfer' includes
any arrangement or transaction where any rights are handed over in execution of part
performance of contract, even though the iegal title has not been transferred. In such a
scenario, execution of Joint Development Agreement between the owner of immovable
property and the developer triggers capital gains tax liability in the hands of the owner in the
year in which the possession of immovable property is handed over to the developer for
development of a project.

• With a view to minimise the genuine hardship which the owner of iand may face in paying
capital gains tax in the year of transfer, Section 45(5A) has been newly introduced so as to
provide that in case of an assessee being individual or HUF, who enters into a specified
agreement for development of a project, the capital gains shall be taxable in the
previous year in which the certificate of completion for the whole or part of the project
is issued by the competent authority.

Section 45(5A)

TRANSFER OF CAPITAL ASSET UNDER JOINT DEVELOPMENT AGREEMENT

Applicability • Section 45(5A) applies where an individual/HUF owning land/building/both

of Sec 45(5A) enters into a registered agreement with a developer allowing the developer to
develop a real estate project on such land/building/both.

• As a consideration for receiving the right to develop the real estate project,
the developer shares a portion of land/building/both in the project with the
individual/HUF.

In some cases, the developer might also pay some additional consideration in
cash over and above the share in project.

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Year of • Capital gains shall be computed in the hands of individual/HUF in the year in
Taxability of which the possession of immovable property is handed over to the developer
Capital Gains for development of a project.

• Capital gains so computed shall be considered as income of the previous year

in which the certificate of completion for the whole or part of the project is
issued by the competent authority.

Full Value of SDV of land/building/both in the project handed over by the developer to
Consideration individual/HUF as his share as on the date of issue of the aforementioned
completion certificate

(+)

Cash received by the individual/HUF from the developer, if any

Note: The full value of consideration adopted for calculatina capital aains u/s
45(5 A) shall be deemed as the cost of acquisition of the share in the hands of
individual/HUF.

IMPORTANT NOTE: The beneficial provisions stated u/s 45(5A) shall not apply where
the assessee transfers his share in the project to any other person on or before the date
of issue of the aforementioned completion certificate. In such cases, capital gains would
be taxable in the year in which possession of immovable property is handed over to the
developer for development of project.

SPECIAL PROVISIONS RELATING TO COMPANIES

Section 46

Capital Gains On Distribution Of Assets By Companies In Liquidation

Section 46 applies in case of distribution of assets by a company to its shareholders in the

event of its liquidation. The tax treatment of this transaction have been explained below:

• IN THE HANDS OF THE COMPANY:Distribution of assets by a company to its shareholders in

the event of its liquidation is not regarded as transfer and thus no capital gain arises in the
hands of the company.

• IN THE HANDS OF THE SHAREHOLDERS:

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Capital gains shall be computed in the hands of the shareholders in the manner shown in the
table given below. For determining the period of holding, the period subsequent to the date on
which the company goes into liquidation shall not be considered.

Particulars Amount (Rs)

Sum of Money (+) FMV of Assets Received as on the Date of Distribution XXXX

Less: Deemed Dividend u/s 2(22)(c) (XXXX)

Full Value of Consideration for Caiculation of Capital Gains XXXX

Less: Sellinq Expenses (if any) (XXXX)

Less: Cost of Acauisition/Indexed Cost of Acquisition (as the case may be) (XXXX)

Capital Gains (ST/LT) XXXX

Note: If an asset received by a shareholder from a company in the event of its liquidation is
subsequently sold by him, the FMV of the asset as on the date of distribution shall be taken as
its cost of acquisition.

Section 46A

Capital Gains In Case Of Buy-Back Of Shares, etc

• BUY-BACK OF LISTED SHARES:

Capital gains shall be computed in the hands of the shareholders as per the normal provisions.

• BUY-BACK OF UNLISTED SHARES (DETAILED DISCUSSION IN CA-FINAL):

The company is liable to pay additional income tax on the amount of distributed income u/s
115QA @ 23.072% (20% plus 12% surcharge plus 3% cess). The manner of calculating
distributed income specif ied u/s 115QA shall be studied in detail at CA-Final Level.

Since tax has been recovered from the company in the form of additional income tax, income
arising to the shareholders due to buy-back of unlisted shares shall be exempt in their hands
u/s 10(34A).

Taxability in the Buy-back of Listed Shares by Buy-back of Unlisted Shares by

hands of the Domestic Companies Domestic Companies

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Company Not subject to tax in the hands of the Subject to additional income-tax @
company 23.072% in the hands of the company

Shareholders Income arising to shareholders Income arising to shareholders

taxable as capital gains u/s 46A exempt u/s 10(34A)

Section 47 (Most Important)

TRANSACTIONS NOT REGARDED AS ‘TRANSFER’

The following transactions shall not be regarded as "transfer and therefore no capital
gains would arise in the following circumstances: (the list is not exhaustive; only the
portions relevant for our syllabus have been included hereunder)

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 inheritance or under an irrevocable
trust;

3. Any transfer of a capital asset by a holding company to its subsidiary company or vice versa
provided the following two conditions are satisfied:

100% shares of the subsidiary company are held by the holding company; and

the transferee company is an Indian company.

Section 47A - Withdrawal of Exemption (Holding-Subsidiary Transaction):

• The above exemption will be withdrawn if before the expiry of 8 years from the date of
transfer of a capital asset:

a) the capital asset is converted into stock-in-trade by the transferee company; OR

b) the holding company ceases to hold 100% share capital of the subsidiary company.

• In the above two cases, the amount of capital gains exempt earlier shall be deemed to be the
income of the transferor company chargeable u/h ‘capital gains' of the year in which the
original transfer took place.

4. Any transfer of a capital asset by the amalgamating company to the amalgamated company
in a scheme of amalgamation provided the amalgamated company is an Indian company;

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5. Any transfer of a capital asset by the demerged company to the resulting company in a
scheme of demerger provided the resulting company is an Indian company;

6. Allotment of shares of the amalgamated company to a shareholder of the amalgamating

company in lieu of his shareholding in the amalgamating company provided the amalgamated
company is an Indian company;

7. Allotment of shares of the resulting company to a shareholder of the demerged company in

lieu of his shareholding in the demerged company provided the resulting company is an Indian
company;

8. Conversion of bonds, debentures, deposit certificates, etc of a company into shares or

debentures of that company;

9. Conversion of preference shares of a company into equity shares of that company;

10. Any transfer of any of the following capital assets to the Government, University, the
National Museum,

National Art Gallery, National Archives or any other public museum or institution notified by
the CG:

work of art;

archaeological, scientific or art collection;

book;

manuscript;

drawing/painting/photograph; or

print.

11. Any transfer of a capital asset in a transaction of reverse mortgage (meaning of

reverse mortgage has been given later in this chapter);

12. Transfer of sovereign gold bonds issued by RBI under Sovereign Gold Bonds Scheme,
2015 by an individual provided such transfer takes place by way of redemption (sale);

Combined Analysis of Section 56(2)(vii)/56(2)(x), Section 47, Section 49 and

Section 50

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CASE 1: Gift Is Exempt In The Hands Of The Recipient(EX:-Inheritance,Related party) {ie
No Amount is Taxable u/s 56(2)(vii)/56(2)(x)}

Transferee
Transferor

Any Person Any Person

Any Sum a) Shares or e)

of Money Immovable Archaeological

By Cheque Property Securities; Collections

Or Cash
b) Jewellery f) Sculptures

c) Drawings g) Any Work

of Art

d) Paintings h) Bullion

Exempt
Received Received for
Irrespectiv
Consideration
e of the Without
Less Than SDV of
Gift
Consideration the Property
Amount

Received Received for

Consideration
Without
Less Than
Consideratio FMV of
n Capital Asset

SELLER: Capital
SELLER: Section
Gains Exempt
50C Shall Apply
u/s 47

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SELLER: SELLER: Capital
Capital Gains Gains Taxable
BUYER: Exempt u/s 47 (Section 50C)

• Gift: Not
BUYER:
Taxable
• Gift: Not Taxable BUYER: • Gift:
• COA for New Not Taxable • BUYER:• Gift:
• COA for New Owner: Purchase COA for New Not Taxable •
Owner: COA of Price Owner: COA of COA for New
Previous Owner Previous Owner:Purchas
• Period of
Owner • e Price •
• Period of Holding Holding of
Period of Period of
of Previous Owner to Previous Owner
Holding of Holding of
be Considered NOT to be
Previous Previous Owner
Considered
• CIT v. Manjula Shah Owner to be NOT' to be
Applicable • CIT v. Manjula Considered • Considered• CIT
Shah NOT CIT v. Manjula v. Manjula Shah
Applicable Shah NOT Applicable
Applicable

POINTS TO BE NOTED:

□ Redemption of debentures, zero coupon bond as well as preference shares is treated

as ’transfer* and capital gains shall be computed in the hands of the holder of the
security in the normal manner.

□ Section 47 applies where any capital asset is gifted by a person to any other person.
The gift has to be a pure gift (ie no consideration should be involved at all).

□ Where a capital asset has been sold for a value less than its FMV/SDV, capital gains
shall be computed and Section 47 shall not apply.

□ In case of land or building or both, Section 5OC would apply where land or building or
both have been transferred for a value less than their respective SDV. Further, Section
50CA would apply where unlisted shares have been transferred for a value less than
their FMV.

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□ Where a person receives any ’property’ from any non-related person without
consideration (ie pure gift) or for inadequate consideration, provisions relating to
taxation of gifts as given u/s 56(2)(x)would apply. Section 56(2)(x) has been introduced
with effect from PY 2017-18. Till PY 2016-17, taxation of gifts was governed by Section
56(2)(vii) which was applicable only in case of individual/HUF.

SOVEREIGN GOLD BOND SCHEME, 2015

• Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold issued
by the RBI on behalf of Government of India. Investors have to pay the issue price in cash and
the quantity of gold for which the investor pays is protected, as he receives the ongoing market
price at the time of redemption/premature redemption.

• This scheme has been introduced by the Government of India to reduce the demand for
physical gold and thus reduce the foreign exchange outflow due to import of gold. The two-fold
benefits of this scheme are:

The gold bond would serve as a substitute for physical gold; and

The gold bond would provide security to the individual investor investing in gold for meeting
their social obligation.

• SGBs offer a superior alternative to holding gold in physical form. The risks and costs of
storage are eliminated. Investors are assured of the market value of gold at the time of
maturity and periodical interest. SGBs are free from issues like making charges and purity in
the case of gold in jewellery form. The bonds are held in the books of the RBI or in Demat form
eliminating risk of loss of scrip, etc.

• A fixed interest of 2.75% p.a. is payable on the amount of initial investment on semi-annual
basis.

Such periodical interest is fully taxable in the hands of the investor.

• Redemption at the time of maturity:

If an individual investor doesn't sell SGBs during their prescribed duration and waits for
their redemption, capital gains arising to the individual investor on redemption of SGBs
are exempt from capital gains tax. Section 47 provides that such redemption shall not be
treated as a ‘transfer’ for the purposes of levy of capital gains tax.

• Sale before maturity (premature redemption):

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If SGBs are transferred by an assessee to any other person before their maturity, such sale
would be liable to capital gains tax. However, benefit of indexation would be available in
respect of long-term capital gains arising from transfer of such SGBs.

Combined Analysis of Section 56(2)(vii)/56(2)(x), Section 47, Section 49 and Section

50C

CASE 2: Gift Is Taxable In The Hands Of The Recipient {ie Gift Provisions Given u/s
56(2)(vii)/56(2)(x) Apply}

Transferor Transferee

Any Person Any Person

Any a) Shares or e) Any Work of

Sum of Art.
Immovable
Money
Property Securities; f)
By Aggregat Aggregat
Archaeological
Cheque eeeEEEE e
Or Cash b) Jewellery Collections

c) Drawings g) Sculptures

d) Paintings h) Bullion
Aggregat
Taxable Received for
e
if Gift Received
Consideration
Amount
Without Less Than Received for
Exceeds Received
Rs Consideration
Consideration SDV of the
50,000 Without Less Than
Property
FMV of
Consideration Capital Asset

SELLER: Capital SELLER:

Gains Exempt Section 50C

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u/s 47 Shall Apply

SELLER:
SELLER: Capital Capital Gains
BUYER: Gains Exempt u/s 47 Taxable
BUYER:
• Gift: Taxable if (Section 50C)
• Gift: Taxable if
SDV of Property
Diff. b/w Purchase
Exceeds Rs
Price &. SDV
50,000 BUYER:
Exceeds Rs 50,000
• COA for New • Gift: Taxable if
• COA for New
Owner: SDV of BUYER: Diff. b/w
Owner: SDV of
Property Purchase Price &
Property • Gift: Taxable if FMV
FMV Exceeds Rs
• Period of of Property Exceeds
• Period of Holding 50,000
Holding of Rs 50,000
of Previous Owner
Previous Owner • COA for New
NOT to be • COA for New
NOT to be Owner: FMV of
Considered Owner: FMV of
Considered Property
Property
• CIT v. Manjula
• CIT v. Manjula • Period of
Shah NOT • Period of Holding of
Shah NOT Holding of
Applicable Previous Owner NOT
Applicable Previous Owner
to be Considered
NOT to be
• CIT v. Manjula Shah Considered
NOT Applicable
• CIT v. Manjula
Shah NOT
Applicable

Section 49 (Most Important)

ASCERTAINMENT OF COST OF ACQUISITION IN SPECIFIED CIRCUMSTANCES

Nature of Transaction Cost of Acquisition to the Period of Holding (For

Assessee Determining Whether Capital
Asset is ST/LT)

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Allotment of Shares in Cost of acquisition of shares of the Period of holding would also
the Amalgamated amalgamating company shall be include the time period for which
Company in a Scheme of treated as the cost of acquisition of the shares were held in the
Amalgamation shares of the amalgamated amalgamating company
company

Conversion of Cost of acquisition of debentures Period of holding would include

Debentures into Shares shall be treated as the cost of the time period for which
acquisition of shares debentures were held by the
assessee

Conversion of Preference Cost of acquisition of preference Period of holding would include

Shares into Equity shares shall be treated as the cost the time period for which
Shares of acquisition of equity shares. preference shares were held by
the assessee

Gift Transactions (Pure Gift/Inadeauate Consideration) (+) Other Transactions Covered u/s 47

• Property Gifted is SDV/FMV of the property Period of holdinq would not

Taxable in the hands of considered for determining the include the period of holding of
Recipient u/s taxable amount of gift u/s the previous owner
56(2)(vii)/56(2)(x) 56(2)(vii)/56(2)(x) shall be taken
as cost of acquisition in the hands
of the new owner

• Other Transactions Cost of acquisition of previous Period of holding would also

Covered u/s 47 owner shall be taken as cost of include the period of holding of
acquisition in the hands of the new the previous owner
owner

Note 1: Previous owner means the last previous owner of the capital asset, who acquired it
through a mode of acquisition other than those covered u/s 47. In other words, previous owner
means the last previous owner who actually paid for the asset.

Note 2: Where the capital asset has been acquired by the previous owner before 01.04.2001,
option to take FMV of the capital asset as on 01.04.2001 shall be available.

Note 3: Cost of improvement incurred by the previous owner on or after 01.04.2001 shall also
be taken into consideration at the time of computation of capital gains in the hands of the new
owner.

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Note 4: Indexation in case of transactions covered u/s 47:

• Cost of Improvement:

Proviso to Section 48 states that indexation in respect of cost of improvement shall apply from
the year in which improvement to the asset took place. Therefore, cost of improvement shall be
indexed from the year in which the expenditure was actually incurred by the previous owner
or the new owner. •

• Cost of Acquisition:

□ Proviso to Section 48 states that indexation in respect of cost of acquisition shall apply from
the year in which the asset was first held by the assessee.

□ However, in a recent decision given by the Bombay High Court in the case of CIT v Manjula
Shah, it was held that indexation in respect of cost of acquisition shall apply from the year in
which the capital asset was acquired by the previous owner as opposed to taking indexation
from the year in which the current owner acquires it.

□ ICSI’s / ICAI’s study material has solved the answer using both the approaches. For
examination purposes, we shall follow the judgement given by the Bombay High Court and
justify our approach with the help of a note to this effect.

Section 50 (Already Discussed u/h PGBP)

CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS

• Capital gains arising on sale of depreciable assets shall always be deemed to be short-term
capital gains irrespective of their period of holding (ie indexation benefit would not be
available even if the period of holding of such assets is more than 36 months).

• The manner of computation of capital gains in case of sale of depreciable assets has already
been discussed u/h PGBP. (To arrive at taxable capital gains, WDV of the block and expenses on
transfer shall be deducted from full value of consideration)

Section 50A (Already discussed u/h PGBP)

CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS OF ELECTRICITY COMPANIES

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• Section 50A applies to assessees engaged in the generation or generation A distribution
of power if they have opted to charge depreciation as per SLM method. The excess of sale
price over the actual cost of the asset shall be treated as capital gains as per Section 50A.

Section 50B - CAPITAL GAINS IN CASE OF SLUMP SALE

Meaning of Slump sale refers to sale of entire business of an undertaking as a whole for
Slump Sale a lumpsum consideration. In case of slump sale, the purchase consideration
should be arrived at without assigning individual values to individual
assets and individual liabilities.

Note: If the values of assets and liabilities have been determined individually
only for the purpose of payment of stamp duty, registration fees or other
similar taxes, such transaction would still be covered under the scope of ‘slump
sale'.

Computation • Capital gains shall be taxable in the year in which the undertaking has
of Capital been sold.
Gains
The amount of capital gains shall be computed as follows:

Particulars Amount (Rs)

Price at which Undertaking has been sold XXXX

Less: Expenses in connection with sale of (XXXX)

Undertakina

Less: Net-Worth of the Undertakina (XXXX)

Capital Gains (ST/LT) XXXX

• Short-term capital gains would arise if the undertaking was owned by the
assessee for a period of 36 months or less.

• Long-term capital gains would arise if the undertaking was owned by the
assessee for a period exceeding 36 months. Benefit of indexation would not
be available in such cases.

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How to Net Worth = Total Assets (-) Total Liabilities
Calculate Net-
• In case of depreciable assets, their WDV shall be taken into consideration
Worth of the
whereas for other non-depreciable assets, their book values shall be taken into
Undertaking
consideration.

• Revaluation of assets shall be completely ignored.

• Where the full cost of an asset has been allowed as deduction u/s 35AD, its
value shall be taken as NIL at the time of computation of net worth.

• All the liabilities payable shall be taken into consideration.

Q5 :Mohan is the proprietor of Photo Film Agencies which has 2 units, one for printing and
the other for binding. He transferred, by way of slump sale, one of the units (Unit 2) on 1st
Apr’19, for a total consideration of INR 50,00,000. Expenses on sale were 0.5%. This unit
was started in the year 2012-13.

Appended below is the Balance Sheet:

Particulars Unit 1 Unit 2

Building 7,50,000 15,00,000
Machinery 5,00,000 10,00,000
Debtors 2,50,000 5,00,000
Other Assets 1,00,000 2,00,000
16,00,000 32,00,000
Capital 40,00,000
Revaluation Reserve 2,50,000
Bank Loan 3,50,000
Creditors 2,00,000
48,00,000

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The Revaluation Reserve was created by upward revaluation of Buildings in Unit 2. Other
Assets of Unit 2 include, INR 100,000 of Patents acquired on 1st Jul’15, on which no
depreciation has been charged. 75% of Creditors and 25% of Bank Loan is for Unit 2.Compute
the Capital Gains on the slump sale for AY 2020-21.

Solution :

The Capital Gains from Slump Sale are as under:

Full Value of Consideration 50,00,000

Expenses on Sale 25,000
Net Sale Consideration 49,75,000
Net Worth 26,44,141
Long Term Capital Gains 23,30,859

Working Notes

1. The first note details the computation of net worth for Unit 2

Net Worth
Buildings 15,00,000
Less : Reval Reserve 2,50,000
Netfor Buildings 12,50,000
Machinery 10,00,000
Debtors 5,00,000
Other Assets 1,00,000
Patents 31,641
Total Assets 28,81,641
Less: Creditors 1,50,000

Bank Loan 87,500

Total Liabilities 2,37,500
Net Worth 26,44,141

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2. The second note details the valuation of WDV of Patents

Op Block 1,00,000
Dep Y1
Patents 25,000
WDV EOY1 75,000
Dep Y2 18,750
WDV EOY2 56,250
Dep Y3 14,063
WDV EOY3 42,188
Dep Y4 10,547
WDV EOY4 31,641

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Determination of Full Value of Consideration/SC

Value Of Consideration Received

Value Of Consideration Received CAN
CANNOT Be
Be Ascertained/Determined
Ascertained/Determined

Any Of The Special Cases Mentioned On

The Adjacent Page Is Applicable {Section
Section 50D shall apply and the FMV of 45(1A), 45(2), 45(3), 45(4), 45(5), 45(5A),
the asset transferred as on the date of 46(2)}
transfer shall be adopted as the full
vaiue of consideration

Determine the full value of consideration as

per the law stated under the applicable
section

Land/Building/Both Have Been

Transferred (Special Cases)

Section 50C shall apply and higher of sale

price and SDV shall be taken as full value of
consideration

Unlisted Shares Have Been Transferred

(Special Cases)

Section 50CA shall apply and higher of sale

price and FMV shall be taken as full value of

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consideration

Asset Transferred Is Other Than

Immovable Property & Unlisted Shares
(Special Cases)

No specific section applicable in this case.

Actual consideration received/receivable
shall be adopted as the full value of
consideration

FULL VALUE OF CONSIDERATION ('FVC')

General Full Value of Consideration (FVC) refers to the whole amount

received/receivable by the transferor in connection with the transfer of a
Meaning capital asset. In its general sense, FVC does not have any reference to the
market value of the capital asset.

Full Value of
Consideration
in Special Relevant Mode of Transfer Deemed Full Value of
Cases Section Consideration

45(1A) Money/asset received from an Money/FMV of asset received as

insurance company on damage, on the date of receipt
destruction, etc of a capital asset

45(2) Conversion of capital asset into FMV of the capital asset as on

stock-in- trade the date of conversion

45(3) Capital contribution in kind by a Amount recorded in the books of

partner or member into accounts of Firm/AOP/BOI to
Firm/AOP/BOI give effect to such capital
contribution

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45(4) Distribution of capital asset to FMV of the capital asset as on
partner or member on dissolution the date of dissolution
of Firm/AOP/BOI

46(2) Money/asset received by the [{Money + FMV of asset as on the

shareholders of a company in the date of distribution} - {Amount
event of liquidation of the company deemed as dividend u/s
2(22)(c)}]

Section 50CA (Introduced Vide The Finance Act, 2017)

FULL VALUE OF CONSIDERATION IN CASE OF UNQUOTED SHARES

• Section 50CA has been made applicable with effect from PY 2017-18 in case of transfer of
unquoted shares (ie unlisted shares). Section 50CA is not applicable in case of transfer of
listed shares.

• Section 50CA provides that where the consideration received for transfer of unlisted
shares is less than their Fair Market Value ('FMV'), the FMV of such unlisted shares shall
be deemed as the full value of consideration for the purposes of computation of capital
gains. The FMV of unlisted shares shall be calculated in such manner as may be prescribed.

Illustration: Mr X transfers 1,000 shares in A Ltd on June 28, 2019 to Mr Y for a consideration
of Rs 9,40,000 (FMV of shares as on the date of transfer is Rs 10 lakhs). These shares were
purchased by Mr X on July 19, 2018 for Rs 7 lakhs. Find out the tax consequences of the above
transaction in the following two cases:

• Case 1: Shares of A Ltd are not quoted on any stock exchange in India.

• Case 2: Shares of A Ltd are regularly quoted on B5E/NSE but Mr X has transferred the shares
to Mr Y privately and not through stock exchanges.

Solution: Section 50CA is applicable only in case of unlisted shares. In case of listed shares,
Section 50CA doesn't apply and the actual consideration received has to be taken as full value
of consideration.

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Computation of Capital Gains in the hands of Mr X:

Particulars Case 1 (Unlisted Shares) Case 2 (Listed Shares)

Full Value of Consideration 10,00,000 9,40,000

Less: Cost of Acquisition (7,00,000) (7,00,000)

Short-Term Capital Gains 3,00,000 2,40,000

Tax Treatment in the hands of Mr Y: Mr Y has acquired shares of A Ltd for Rs 9,40,000 whereas
their FMV is Rs 10,00,000. The difference of Rs 60,000 shall be taxable as gift in the hands of Mr
Y u/s 56(2)(x) regardless of the fact whether shares of A Ltd are listed or not.

COMPOSITE TRANSFER OF LAND & BUILDING:

• Land and building are treated as two separate assets under the Income Tax Act, however
there might be a case of composite transfer where both the assets are transferred
simultaneously. In such situations, it may be possible that the period of holding of land is more
than the period of holding of building.

• Transferor doesn't carry any business/profession:

Both land and building would be treated as long-term capital assets if their holding period is
more than 24 months. If their holding period doesn't exceed 24 months, they would be treated
as short-term capital assets.

• Transferor carries on business/profession:

If depreciation is claimed on building, the building would always qualify as a short-term

capital asset irrespective of the period of its holding.

Depreciation is not available in respect of land. Land would be treated as a long-term capital
asset if its holding period is more than 24 months. If its holding period doesn't exceed 24
months, it would be treated as a short-term capital asset.

• How to attempt practical questions?

If both land and building qualifies as long-term capita! assets, capital gains can be computed
combinedly where the cost of land can be taken as cost of acquisition and the cost of building
can be taken as cost of improvement. Same position can be adopted if both the assets qualify as
short-term capital assets.

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If land qualifies as long-term capital asset and building qualifies as short-term capital
asset, capital gains in respect of land and capital gains in respect of building should be
computed separately as per the decision of the Karnataka High Court in the case of CIT v.
C.R.Subramanian {(1999) 242 ITR 342}].

ADOPTION OF SDV IN CASE OF AGREEMENT TO SELL LAND/BUILDING/BOTH:

Section 43CA: Transfer of SDV on the date of agreement can be adopted if the
Land/Building/Both as advance amount has been received by any mode other
Stock-in-Trade than cash on or before the date of agreement.

Section 50C: SDV on the date of agreement can be adopted if the

Transferof advance amount has been received by account payee
Land/Building/Both as cheque or account payee draft or ECS through a bank
Capital Asset account on or before the date of agreement.

Illustration: SDV on the date of agreement = Rs 80 lakhs; and SDV on the date of registration =
Rs 90 lakhs.

Cases Mode Of Receipt Of Advance SDV To Be Adopted u/s SDV To Be Adopted u/s
43CA 50C

Case 1 Booking amount has been

received in cash

Case 2 Booking amount has been

received by a bearer/crossed
cheque

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Case 3 Booking amount has been
received by an account payee
cheque

Section 50D

FMV DEEMED TO BE FULL VALUE OF CONSIDERATION IN CERTAIN CASES

Where, on transfer of a capital asset, consideration received by an assessee is not

ascertainable or cannot be determined, then fair market value of the asset as on the date
of transfer shall be deemed as the full value of consideration received or accruing as a
result of such transfer.

Section 50C

FULL VALUE OF CONSIDERATION IN CASE OF REAL ESTATE TRANSACTIONS

Applicability Section 50C applies in case of transfer of land or building or both held as
of Sec 50C capital assets.

(Section 50C does not apply in case of transfer of land or building or both held as
stock-in- trade. Section 43CA applies in such cases.)

What does If full value of consideration for transfer of land/building/both as declared by the
Section 50C assessee is less than the Stamp Duty Value ('SDV') of such land/building/both,
say? such SDV shall be deemed as the full value of consideration for the purposes of
computation of capital gains.

Actual consideration ≥ Stamp Duty Actual consideration shall be taken as

Value FVC

Actual consideration < Stamp Duty Stamp Duty Value shall be taken as
Value FVC

SDV ON THE DATE OF AGREEMENT TO BE ADOPTED

(Most Important Amendment - Introduced vide the Finance Act, 2016):

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• Where land/building/both is transferred as stock-in-trade, Section 43CA permits adoption of
SDV on the date of agreement instead of the date of registration, if the date of agreement & the
date of registration are not the same and the booking amount has been received by any mode
other than cash.

• However, there was no corresponding provision u/s 50C til! AY 2016-17 to provide relief to
the seller where land/building/both is transferred as capital asset and the seller has entered
into an agreement to sell the property much before the actual date of transfer of the immovable
property.

• In order to ensure parity in tax treatment, the Finance Act, 2016 has included a specific
provision u/s 50C so as to provide that where the date of the agreement fixing the amount of
consideration for the transfer of immovable property and the date of registration are not the
same, SDV as on the date of the agreement may be taken for the purposes of computing the
full value of consideration. This benefit is available only in cases where the booking
amount has been received by way of an account payee cheque or account payee bank
draft or use of electronic clearing system through a bank account.

Section 55A - Reference To The Valuation Officer (Only for Immovable Property)

• Circumstances Where Valuation Can Be Referred To The Valuation Officer:

The Assessing Officer can refer the matter to the Valuation Officer u/s 55A if both the following
conditions are satisfied:

The assessee claims that the SDV so adopted exceeds the FMV of the property as on the date
of transfer; and

The assessee has not disputed the SDV so adopted in any appeal or revision before any court
or any other authority.

• Consequences Of Referring The Matter To The Valuation Officer:

If value ascertained by the Valuation Officer is less Value ascertained by the Valuation
than Stamp Duty Value adopted u/s 50C Officer shall be taken as FVC/SC

If value ascertained by the Valuation Officer is greater Stamp Duty Value shall be taken as FVC
than or equal to (≥) Stamp Duty Value adopted u/s
50C

□ Advance Money Received and Forfeited by the Previous Owner is Ignored.

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Section 55A: Reference To Valuation Officer (Important)

With a view to ascertain the Fair Market Value ('FMV') of a capital asset for the purposes of
computing capital gains, the Assessing Officer may refer the valuation matter to a
Valuation Officer appointed by the Income Tax authorities. Reference can be made to the
Valuation Officer in the following cases:

□ Where the Assessing Officer believes that FMV of the asset exceeds the value declared by
the assessee by more than Rs 25,000 or 15%, whichever is less; or

□ Where the value declared by the assessee has been determined by a registered private valuer
and the Assessing Officer is of the opinion that FMV of the asset is at variance with the value
determined by the registered private valuer; or

□ Where the Assessing Officer believes that such reference is necessary having regard to the
nature of the asset and other relevant circumstances.

Reverse Mortgage [Transaction of Reverse Mortgage Exempt u/s 47]

• Regular Mortgage: The assessee mortgages his house with the bank for taking a loan, which
will be repaid by him along with applicable interest.

• Reverse Mortgage:

□ Under reverse mortgage, an individual (generally a senior citizen) mortgages his house with
a bank under the relevant scheme and the bank agrees to pay him a specif ied value of the
property in lumpsum or installments. The borrowed money is not required to be repaid by the
individual during his lifetime.

□ On the death of the individual, the bank shall release the mortgaged property to his legal
heirs if they repay the principal amount along with the applicable interest. In case the legal
heirs are unable to repay the amount, the bank can sell the property and recover its dues.

□ Tax on capital gains arising on such sale shall be paid by the bank to the government and the
leftover balance (if any) shall be handed to the legal heirs of the individual.

□ As per Section 47, mortgage of property by the individual with the bank shall not be
treated as transfer and thus not liable to capital gains. Further, as per Section 10(43),
any money received by individual from the bank on mortgage of property in lumpsum or
in installments is exempt from tax.

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MISCELLANEOUS TOPICS

Section 51 {Read Along With Section 56}: Forfeiture Of Advance Money

• General Meaning: A person initially enters into an agreement for sale of any capital asset
and receives the advance money from the proposed buyer but subsequently the proposed
buyer refuses to purchase the said capital asset and the proposed seller forfeits the advance
money received.

• Treatment:

□ Advance Money Received and Forfeited by the Assessee on or after 01.04.2014:

As per Section 56, the advance money so forfeited by the assessee is treated as the income of
the assessee u/h ’income from other sources'.

□ Advance Money Received and Forfeited by the Assessee upto 31.03.2014:

Advance money so forfeited shall be reduced from the cost of acquisition of the capital asset
while computing gains when the capital asset is finally transferred or sold. In case of long-term
capital gains, indexation would be calculated on the cost so reduced.

Example: Mr A, a recently married individual, buys a house for Rs 10 lakhs on 01.07.2012. His
wife runs away with his neighbour shortly after moving into this house. He agrees to sell his
house to Mr B and an advance money of Rs 2 lakhs has been received by Mr A from Mr B on
01.10.2012. After coming to know about the tragedy which happened with Mr A, Mr B cancels
this deal and the advance money is forfeited. Mr A ultimately sells the house to Mr C for Rs 13
lakhs on 01.06.2013. In this case, cost of acquisition shall be taken to be Rs 8 lakhs (Rs 10 lakhs
- Rs 2 lakhs) and STCG of Rs 5 lakhs would arise to Mr A.

CAPITAL GAINS EXEMPT UNDER SECTION 10

Section 10(37): Exemption From Capital Gains In Case Of Urban Agricultural Land

• Section 10(37) provides that capital gains arising on transfer of urban agricultural land are
exempt if all the following conditions are fulfilled:

□ Capital gains have been earned by an individual/HUF from the transfer of an agricultural
land situated in urban area.

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□ The agricultural land is used for agricultural purposes by such individual or his parents or
such HUF for at least 2 years immediately preceding the date of transfer.

□ The transfer takes place by way of any of the two modes prescribed u/s 45(5):

1) Agricultural land has been compulsorily acquired by the Government or any other similar
agency under any law; OR

2) Consideration for transfer of agricultural land has been determined or approved by the
Central Government or RBI.

• Capitals gains computed with reference to original compensation as well as enhanced

compensation are exempt.

Further, both STCG as well as LTCG are exempt.

 Tax on long-term capital gains in case of specified securities [Section - 112A New
section Inserted by Finance Act of 2018](IMP)

Applicable on sale of equity share listed on a recognised Stock exchange or unit of equity
oriented fund or unit of business trust, where such sale transaction is chargeable to securities
transaction tax (STT).

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.

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. 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.

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:

a) The actual cost of acquisition of such asset; or

b) Lower of following :

(i) Fair market value of such shares as on January 31, 2018; or

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(ii) Actual sales consideration accruing on its transfer

Note: The Fair market value of listed equity share shall mean its highest price quoted on the
stock exchange as on January 31, 2018.

Illustration: Mr. Raman is a salaried employee. In the month of January, 2014 he purchased 100
shares of X Ltd. @ Rs. 1,400 per share from Bombay Stock Exchange. These shares were sold
through BSE in April, 2018

@ Rs. 2,600 per share. The highest price of X Ltd. share quoted on the stock exchange on
January 31, 2018 was Rs. 1,800 per share. What will be the nature of capital gain in this case?

Solution : Shares were purchased in January, 2014 and were sold in April, 2018, i.e., sold after
holding them for a period of more than 12 months and, hence, the gain will be long-term capital
gain (LTCG). In the given case, shares are sold after holding them for a period of more than 12
months, shares are sold through recognised stock exchange and the transaction is liable to STT.
Therefore, section 112A is applicable in this case.

The cost of acquisition of X Ltd. shares shall be higher of:

a) Cost of acquisition i.e., 1,40,000 (1,400 × 100)

b) Lower of:

i). Highest price quoted as on 31-1-218 i.e., 1,80,000 (1,800 × 100);

ii). Sales consideration i.e., 2,00,000 (2,000 × 100)

Thus, the cost of acquisition of shares shall be Rs. 1,80,000.Accordingly, Long-term capital
gains in hands of Mr. Raman would be Rs. 80,000 (i.e., 2,60,000 – 1,80,000). Since long-term
capital gains doesn’t exceed Rs. 1,00,000, nothing is taxable in hands of Mr. Raman.

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TAXABILITY OF CAPITAL GAINS

Section 111 A: Tax On Short Term Capital Gains On Sale Of Equity Shares And Units Of
Equity Oriented Funds On Which STT Is Chargeable

• As per Section 111 A, short-term capital gains arising on sale of equity shares and units of
equity oriented fund are taxable @ 15% if STT has been paid on sale of such shares/units.
(STCG not covered u/s 111A are taxable at normal rates applicable to the assessee).

• Deductions u/s 80C-80U are not allowed from STCG u/s 111 A. However, in case of resident
individuals and resident HUF, adjustment of def iciency is allowed from STCG u/s 111 A.

Section 112: Tax On Long Term Capital Gains

• Long-term capital gains other than those covered u/s 10(38) are taxable @ 20%.

• Deductions u/s 80C-80U are not allowed from LTCG. However, in case of resident individuals
and resident HUF, adjustment of deficiency is allowed from LTCG.

• In case of long-term capital gains arising from the transfer of following capital assets, the
assessee has the option to pay tax at the rate of 20% with indexation benefit or 10% without
indexation benefit:

Listed shares (Listed-units)

Listed securities (such as debentures, bonds, etc)

Zero Coupon Bond

(In case of bonds and debentures, benefit of indexation is not available. Accordingly, it is
beneficial for the assessee to pay tax @ 10% on LTCG arising on transfer of listed bonds and
listed debentures.)

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 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. But such adjustment is possible only after making adjustment of other

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income first. In other words, first other incomes are to be adjusted against the exemption limit
and then the remaining limit (if any) can be adjusted against LTCG U/s 112, U/s 112A and
STCG U/s 111A.

CASE STUDY 1

Mr. Kapoor (age 67 years and resident) is a retired person earning total pension of Rs. 1,00,000.
He purchased gold in December, 2010 and sold the same in April, 2019. Taxable LTCG
amounted to Rs. 2,80,000. What will be his tax liability for the A.Yr. 2020- 21?

Solution : Computation of tax liability for the A.Yr. 2020- 21 is as under :

Gross Salary (pension income) Rs. 1,00,000

Less: Standard deduction U/s 16 Rs. 50,000
(ia)
Income under the head Salary Rs. 50,000
LTCG on sale gold Rs. 2,80,000
Total income Rs. 3,30,000
Tax on LTCG U/s 112 on Rs. 30,00020% Rs. 6,000
@
Less : Rebate as per section 87A * Rs. 2,500
Tax after Rebate Rs. 3,500
Add : Health & education cess @ Rs. 140
4%
Net tax payable Rs. 3,640

* Resident individual above 60 years but below 80 years of age has basic exemption limit of Rs.
3,00,000. Which can be adjusted against LTCG of Rs. 2,80,000 but after the adjustment of salary
income of Rs. 50,000. Hence, the balance LTCG taxable will come to Rs. 30,000 @ 20%.

Case Study 2
Mr. Gagan (age 69 years and non-resident) is a retired person earning total pension of Rs.
1,00,000 from Indian employer. He purchased a piece of land in Delhi in December, 2010 and
sold the same in April, 2019. Taxable LTCG amounted to Rs. 2,30,000. What will be his tax
liability for the year 2019-20?

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Solution : Computation of tax liability for the A.Yr. 2020-21 is as under :
Gross Salary (pension income) Rs. 1,00,000
Less: Standard deduction U/s 16 (ia) Rs. 50,000

Income under the head Salary Rs. 50,000

LTCG on sale gold Rs. 2,30,000
Total income Rs. 2,80,000
Tax on LTCG U/s 112 on Rs. 2,20,000 @ 20%* Rs. 44,000
Less : Rebate as per section 87A (Not available to non resident) NIL
Tax after Rebate Rs. 44,000
Add : Health & education cess @ 4% Rs. 1,760
Net tax payable Rs. 45,760

*Non-Resident individual (of any age) has basic exemption limit of Rs. 2,50,000. Which cannot
be adjusted against LTCG of Rs. 2,20,000 but the same can be adjusted against salary income of
Rs. 60,000. Hence, the whole amount of LTCG is taxable @ 20%.

Case Study 3
Priyanka furnishes the following data for the PY ended 31st Mar’ 20.

– She had unlisted shares of XYZ Ltd., 100,000 in number, which she sold on 30th Jun’19 for
INR 750 per share.

– The above shares were acquired as under:

– Gift from father: 50000 shares on 3rd May’ 99 (FMV on 1st Apr’01 is
INR 300) – Bonus Shares on 21st Jun’ 09: 20000 shares

– Purchased 30000 shares on 1st Jan’11 @ INR 525 per share

Thereafter, she invested the proceeds to buy a residential house at INR 4,00,00,000 on 3rd
May’20 and she was already owing a residential house prior to the purchase of this one.

You are required to compute the taxable

capital gains.
Solution :

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Particulars Number Rate Amount Date

per
Full Value of 1,00,000 750Shar 7,50,00,000 30th Jun’19
Consideration e
Less: Indexed COA
Gift from father 50,000 300 4,33,50,000 3rd May’99
Bonus 20,000 0 - 21st Jun’09
Purchased 30,000 525 2,72,55,988 1st Jan’11
Total Indexed COA 7,06,05,988
LTCG 43,94,012
New Residential House 4,00,00,000
LTCG exempt 23,43,473
Taxable LTCG 20,50,539

Note:

a) The bonus shares were granted after 1st Apr’01 and hence the cost of acquisition is NIL
b) For the shares gifted by her father prior to 1st Apr’01, the FMV as on 1st Apr’01 would
be considered as the Cost of Acquisition

c) Indexed COA for the gifted shares therefore is 50000*300/100*289

d) Indexed COA for the acquired shares therefore is 30000*525/167*289

e) In the case above the necessary conditions u/s 54F have been fulfilled and therefore
she is entitled to a proportionate exemption from LTCG (i.e. INR 4 Crores/INR 7.50
Crores * 43,94,012)

CASE STUDY 4 ;- Mrs. Shanti Devi, a resident individual, sold her residential property on 18th
Jul’19 for INR 75,00,000. She had purchased the same for INR 25,00,000
on 3rd May 2006. She paid INR 1,00,000 towards brokerage for the sale. The
stamp duty valuation was INR 100,00,000.She bought another property for INR 20,00,000 on
14th Dec’19 and deposited another INR 5,00,000 on 21st Jun’20 in the capital gain deposit
scheme with SBI for construction of an additional floor in the property. She also deposited INR
13,50,000 on 30th Nov’19 in the NHAI Bonds. Compute the Capital Gains and Tax Liability.

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Solution :

Particulars INR
Full Value of Consideration 1,00,00,000
Brokerage 1,00,000
Net Sale Consideration 99,00,000
Less: Indexed COA 59,22,131
LTCG 39,77,869
Exemption u/s 54 25,00,000
Exemption u/s 54EC 13,50,000
Taxable LTCG (Total Income) 1,27,869
Tax Payable –
Rebate u/s 87A –
Tax Payable –
Cess –
Total Tax Liability –

Notes:

As Per Section 50C, in case the actual sale consideration is less than the stamp duty value, the
stamp duty valuation would be the full value of the consideration. B) Indexed COA = 25,00,000
/ 122*289. C) Exemptions u/s 54 are towards purchase of another house within 2 years of date
of transfer and Deposit in Capital Gains Accounts Scheme (CGAS) on or before the due date of
filing return of Income. D) Exemption u/s 54EC is towards investment in specified bonds
(NHAI) within 6 months from date of transfer. E) Since the Taxable LTCG, which is less than
basic exemption limit of Rs. 2,50,000, therefore no tax will be payable. Summary of
Exemptions Available u/s 54, 54B, 54D, 54EC, 54EE & 54F

Particulars Section 54 Section 54B Section 54D Section Section Section 54F
54EC 54EE

Eligible • Individual • Individual Any Person Any Any Person • Individual

Person
Assessee • HUF • HUF • HUF

Eligible CG Long-Term LT/ST LT/ST Long-Term Long-Term Long-Term

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Any Long-
Any Long-
Term
Term Any Long-
Transfered. Residential Urban Capital
Capital Term Capital
HP Agricultural Land A Asset
Asset Asset except
Land Building
Residential
Eligible
HP
Asset 1 Residential LT Bonds
Notified
HP/ OR 2 R Agricultural Land A of NHAI,
Bonds of
H/P UPTO 2 Land Building RECL or
Specified Residential
Purchased CRORES (Urban/Rural) Any Other
Start-up HP
Notified
Fund
Bonds

Time Period • Purchase: 2 Years After 3 Years After 6 Months 6 Months • Purchase:
for Purchase the Date of the Date of After the After the
1 Year of 1 Year
of New Asset Transfer Receipt of Date of Date
Before; or Before; or
Compensation Transfer Transfer
2 Years After 2 Years After
the Date of the Date of
Transfer Transfer

• •
Construction: Construction:

3 Years After 3 Years After

the Date of the Date of
Transfer Transfer

Amount of 100% 100% 100% 100% 100% Investment x

Exemption Investment Investment Investment Investment Investment LTCG Net
Allowed as Allowed as Allowed as Allowed as Allowed as Consideration
Exemption Exemption Exemption Exemption Exemption
(No (No Maximum (No Maximum (Max Rs 50 (Max Rs 50
Maximum Limit) Limit) Lakhs) Lakhs)
Limit)

Applicability Applicable Applicable Applicable Not Not Applicable

of CGAS Applicable Applicable

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Withdrawal 3 Years Lock- 3 Years Lock- 3 Years Lock- 3 Years 3 Years 3 Years Lock-
of in Period; in Period; in Period; Lock-in Lock-in in Period;
Exemption Period; Period; Exemption
Exemption Exemption Exemption
Exemption Exemption Allowed
Allowed Allowed Allowed Allowed Allowed Earlier
Earlier to be Earlier to be Earlier to be
Earlier Earlier Taxable as
Reduced Reduced from Reduced from Taxable as Taxable as LTCG when
from COA COA when the COA when the
LTCG LTCG when the New
when the New Asset is New Asset is
when the the New Asset is Tfd.
New Asset is Tfd. Tfd.
New Asset Asset is Tfd.
Tfd.
is Tfd.

Section 54B: URBAN Section 54D: L&B transferred Section 54F: On the date of transfer,
AGRI.LAND trfd should should be used for the the individual/HUF should not own
be used for purposes of industrialmore than 1 Residential HP.
agricultural purposes undertaking for Exemption shall also be withdrawn
for at least last 2 years in cases where any additional
at least 2 years immediately Residential HP is purchased (within
before the transfer
before the date of
date by the individual a period of 1 year before and 2 years
himself (or his transfer and the transfer of after) or constructed (within a
parents) or HUF. L&B should take place by way period of 3 years).
of compulsory acquisition.

Section 54

EXEMPTION ON TRANSFER OF HOUSE PROPERTY USED FOR RESIDENCE

Eligible Individual or HUF

Assessee

Nature of Asset • The asset transferred should be a residential house, the income from which
Transferred & is chargeable u/h 'income from house property'.
Period of its
• The residential house so transferred should be a long-term capital asset.
Holding
• Therefore, exemption u/s 54 is available in respect of long term capital

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gains arising from transfer of a residential house.

Qualifying Asset The assessee should purchase/construct one residential /OR TWO
& Time Limit Residential houses in India at the option of the assessee, where capital
for its gains do not exceed Rs.2 crores within the following time limits:
Acquisition
• In case of purchase: 1 year before or 2 vears after the date of transfer

• In case of construction: 3 vears after the date of transfer

Amount of Lower of the following two shall be available as exemption:

Exemption
• Amount of long-term capital gains; or

• Amount invested in purchase/construction of one residential house

Capital Gains • The amount of capital gains, which is not utilized by the assessee for
Account purchase/ construction of a new house till the due date of furnishing of ROI,
Scheme, 1988 should be deposited by him under Capital Gains Account Scheme till the last
date of furnishing ROI. If the amount is not so deposited, capital gains would
become taxable.

• The amount deposited in Capital Gains Account Scheme should be

withdrawn and utilized for the specified purpose within the prescribed time
period. Otherwise, the unutilized amount shall be considered to be LTCG of
the previous year in which such prescribed time period has expired.

Example: Mr A has transferred a Iong-term residential house on 01.10.2019.

The time limits for acquiring one residential house for availing exemption
u/s 54 are:

In case of purchase: 01.10.2018 to 30.09.2021

In case of construction: 01.10.2019 to 30.09.2022

Let's suppose that 31.07.2020 is the due date of filing ROI for PY 2019-20 in

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Mr A's case. If Mr A has not invested any amount till 31.07.2020 and he wants
to claim exemption u/s 54, he should deposit the amount in CGAS by
31.07.2020.

If the amount deposited in CGAS is not utilized by 30.09.2022, the unutilized

amount shall be taxable as LTCG during PY 2022-23.

Withdrawal of • The new house so purchased/constructed should not be transferred for a

Exemption period of 3 years from the date of its purchase/construction.

• Otherwise, at the time of computation of capital gains on the transfer of the

new house, the cost of acquisition of the new house shall be reduced by the
amount of exemption allowed earlier u/s 54. Accordingly, the amount of
capital gains would increase.

Example: Mr A transferred a Long-term residential house on 01.10.2019. He

bouaht a new house for Rs 20 lakhs on 01.02.2020 and an exemption of Rs 15
lakhs was allowed to him u/s 54. The new house is transferred by Mr A on
01.05.2021 for Rs 45 lakhs. The COA of the new house shall be recomputed as
Rs 5 lakhs (20L - 15L). Accordingly, an amount of Rs 40 lakhs (45L - 5L)
would be taxable as STCG during PY 2021-22.

Note: Exemption can be claimed only in respect of one residential house property
purchased/constructed in India.

The Finance Act, 2019 has amended to extend the benefit of exemption in respect of
investment made by way of purchase or construction of two residential house
properties in India. This benefit can be exercised subject to the following conditions:

a. Benefit shall be available if the amount of long term capital gains does not exceed
Rs. 2 crores.
b. This benefit is available once in a lifetime of the assesse for a particular
assessment year in relation to which this option is exercised.
If till the date of filing the return of income, the LTCG on such transfer of the house is not
utilised (in whole or in part) to purchase or construct another house, then the benefit of
exemption can be availed by depositing the unutilised amount into Capital Gains Deposit
Account Scheme (CGAS) with any scheduled bank.

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If the amount deposited in the Capital Gains Account Scheme in respect of which the
assessee has claimed exemption under section 54 is not utilised within the specified
period for purchase/construction of the residential house, then the unutilised amount
(for which exemption is claimed) will be taxed as income by way of long- term capital
gains of the year in which the specified period of 2 years/3 years gets over.

If the new house is also transferred within 3 years from date of acquisition, the cost of
new house would be reduced by the capital gains exempted earlier under section 54.

Illustration :

Mr. Khan purchased a residential house in the previous year 2005-06 for Rs. 2 crores. The
house property is sold for Rs. 10 crores in the previous year 2019-20 and the capital gain is
invested in two residential house properties worth Rs. 4 crores each. Can he claim the benefit
of section 54 in respect of both houses ?

Solution :

Exemption under section 54 can be claimed in respect of capital gains arising on transfer of
capital asset, being long-term residential house property. With effect from Assessment Year
2020-21, an assessee has an option to make investment in two residential house properties in
India to claim section 54 exemption. This option can be exercised by the assessee only once in his
lifetime provided the amount of long-term capital gain does not exceed Rs. 2 crores. Since, the
gain arising in hands of Mr. Khan is Rs. 5.06 crores which is more than Rs. 2 crore, he cannot
claim the benefit of section 54 by making investment in both the house properties. However he
can claim the benefit only in respect of one residential property invested.

Computation of Long Term Capital Gains (LTCG)

Sale Consideration 10 Crores

Less Indexed Cost of Acquisition (2*289/117) 4.94 Crores
Long Term Capital Gains (LTCG) 5.06 Crores
Less Deduction U/s 54 4 Crores
Taxable LTCG 1.06 Crores

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Section 54 B

EXEMPTION ON TRANSFER OF URBAN AGRICULTURAL LAND

Eligible Individual or HUF

Assessee
Nature of • The asset transferred should be an urban agricultural land used
Asset by the assessee or his parents (in case of an individual) or HUF for
Transferred agricultural purposes for a minimum period of 2 years
A Period of immediately preceding its transfer.
its Holding • The urban agricultural land so transferred can be short-
term/long-term.
[Transfer of urban agricultural land is exempt in certain cases u/s
10(37)]
Qualifying The assessee should purchase another agricultural land
Asset A Time (rural/urban) within 2 years from the date of transfer of original
Limit for its agricultural land.
Acquisition Section 54H: Where an asset has been compulsorily acquired by
the Government, the period of investment shall be computed with
reference to the date of receipt of compensation (date of
compulsory acquisition).
Amount of Lower of the following two shall be available as exemption:
Exemption • Amount of capital gains; or
• Cost of new agricultural land
CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 to apply in the
normal manner.
Withdrawal The new agricultural landshould not be transferred for a period of
of Exemption 3 years from the date of its purchase. Otherwise, at the time of
computation of capital gains on thetransfer of new agricultural
land, the cost of acquisition ofsuch land shallbe reduced by the
amount of exemption allowed earlier u/s 54B.

Section 54D

EXEMPTION ON COMPULOSRY ACQUSITION OF LAND & BUILDING

Eligible All assessees (individual, HUF, firms, companies, etc)

Assessee

Nature of • The asset should be land A building forming part of an industrial

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Asset undertaking and the transfer should take place by way of
Transferred A compulsory acquisition of such undertaking.
Period of its
• Further, the land A building so transferred should be used for
Holding
industrial purposes for a minimum period of 2 years immediately
preceding its transfer.

• The land A building so transferred can be short-term/long-term.

Qualifying The assessee should invest the amount in new land A building to
Asset A Time be used in new industrial undertaking within 3 years from the
Limit for its date of receipt of compensation from the government.
Acquisition

Amount of Lower of the following two shall be available as exemption:

Exemption
• Amount of capital gains; or

• Cost of new land A building

CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 to apply in the
normal manner.

Withdrawal of The new land A building should not be transferred for a period of 3
Exemption years from the date of its purchase. Otherwise, at the time of
computation of capital gains on the transfer of new land A
building, the cost of acquisition of land A building shall be reduced
by the amount of exemption allowed earlier u/s 54D.

Section 54 EC

EXEMPTION ON TRANSFER OF ANY LONG-TERM CAPITAL ASSET

Eligible All assessees (individual, HUF, firms, companies, etc)

Assessee

Nature of The asset transferred can be any type of long-term capital asset. In other
Asset words, LTCG from any capital asset are eligible for exemption u/s 54EC.

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Transferred

Qualifying The assessee should invest the amount in long-term specified asset
Asset A Time within a period of 6 months from the date of transfer of original long-
Limit for its term capital asset.
Acquisition
Meanina of Iona-term specified asset: Bonds redeemable after 3 years
issued by:

• National Highways Authority of India ('NHAI')

• Rural Electrification Corporation Limited (’RECL')

• Any other bond notified by the Central Government in this behalf.

Section 54H: Where an asset has been comDulsorilv acauired by the

Government, the period of investment shall be computed with reference
to the date of receipt of compensation (date of compulsory acquisition).

Amount of Lower of the following two shall be available as exemption:

Exemption
• Amount of long-term capital gains; or

• Amount invested in long-term specified asset

However, maximum exemption available u/s 54EC per financial year is

limited to Rs 50 lakhs.

CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 do not apply.

Withdrawal If the long-term specified asset is transferred or converted into money

of Exemption within 3 years from the date of its purchase, the amount of exemption
allowed earlier u/s 54EC shall be deemed to be LTCG of the year in
which such asset is transferred or converted. (Converting long-term
specified asset into money refers to a situation where any loan or
advance has been taken on the security of long-term specified asset)

Section 54 EE (Introduced Vide The Finance Act, 2016)

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EXEMPTION ON INVESTMENT IN NOTIFIED UNITS OF SPECIFIED FUND

Eligible All assessees (individual, HUF, firms, companies, etc)

Assessee

Nature of The asset transferred can be any type of long-term capital asset. In other
Asset words, LTCG from any capital asset are eligible for exemption u/s 54EE.
Transferred

Qualifying For promoting the start-up culture in India, the Government of India has
Asset A Time launched a ’Start-up India Action Plan' which envisages establishment of
Limit for its a fund to raise Rs 2,500 crores annually for four years to finance
Acquisition existing/upcoming start-ups. The assessee should invest the amount in
notified units of such a fund which has been set-up for financing start-
ups. The investment should be made within a period of 6 months from
the date of transfer of original long-term capital asset.

Amount of Lower of the following two shall be available as exemption:

Exemption
• Amount of long-term capital gains; or

• Amount invested in notified units of specified fund

However, maximum exemption available u/s 54EE per financial year is

limited to Rs 50 lakhs.

CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 do not apply.

Withdrawal If the notified units are transferred or converted into money within 3
of Exemption years from the date of their purchase, the amount of exemption allowed
earlier u/s 54EE shall be deemed to be LTCGof the year in which such
asset is transferred or converted.

(Converting notified units into money refers to a situation where any

loan or advance has been taken on the security of such units)

Section 54 F

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EXEMPTION ON TRANSFER OF ANY CAPITAL ASSET OTHER THAN RESIDENTIAL
HOUSE

Eligible Individual/HUF provided on the date of transfer of original asset, the

Assessee individual/HUF does not own more than one residential house.

Nature of The asset transferred can be any type of long-term capital asset
Asset other than a residential house.
Transferred

Qualifying The assessee should purchase/construct one residential house in

Asset A Time India within:
Limit for its
• In case of purchase: 1 vear before or 2 vears after the date of
Acquisition
transfer

• In case of construction: 3 vears after the date of transfer

Section 54H: Where an asset has been compulsorilv acquired bv the

Government the period of investment shall be computed with
reference to the date of receipt of compensation (date of-compulsory-
acqtus+t+on).

Amount of Long-Term Investment in New Residential House

Exemption
Capital Gains × Net Consideration (Gross Consideration - Selling
Expenses)

CGAS, 1988 Provisions of Capital Gains Account Scheme, 1988 to apply in the
normal manner. In respect of unutilized amount, exemption
proportionate to the unutilized amount allowed earlier u/s 54F shall
be considered to be LTCG of the year in which such prescribed time
period has expired.

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Example: Mr A has transferred a Iong-term capital asset other than
residential house on 01.10.2019. The time limits for acquiring one
residential house for availing exemption u/s 54F are:

* In case of purchase: 01.10.2018 to 30.09.2021

* In case of construction: 01.10.2019 to 30.09.2022

Let's suppose that 31.07.2020 is the due date of filing ROI for PY
2017-18 in Mr As case. If Mr A has not invested any amount till
31.07.2020 and he wants to claim exemption u/s 54F, he should
deposit the amount in CGAS by 31.07.2020.

If the amount deposited in CGAS is not utilized by 30.09.2022, the

exemption which is proportionate to the unutilized amount shall be
taxable as LTCG during PY 2022-23. Let us say amount deposited in
CGAS was Rs 40L and exemption allowed u/s 54F in respect of such
deposit was Rs 24L and Rs 15L was not utilized till the expiry of the
prescribed period. Rs 9L (15L*24L/40L) would be deemed as LTCG of
PY 2022-23.

Withdrawal of • If the new residential house is transferred within 3 years from the
Exemption date of its purchase/construction, the amount of exemption allowed
earlier u/s 54F shall be deemed to be LTCG of the year in which the
new residential house is transferred.

• Exemption shall also be withdrawn where the assessee

purchases/constructs any additional residential house other than
the new house purchased/constructed within the following
period. Exemption shall be withdrawn in the year in which the new
house is purchased/constructed:

□ In case of purchase:

1 year before or 2 years after the date of transfer of original asset

□ In case of construction:

3 years after the date of transfer of asset

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OTHER EXEMPTION NOT MUCH IMP

Exemption of capital gain on transfer of assets of shifting of industrial
undertaking from urban area to a Special Economic Zone [Section 54GA]
The exemption is available to all categories of assesses in respect of capital gain arising
on the transfer of fixed assets other than furniture and fittings of industrial undertaking
effected in the course of shifting of such industrial undertaking to any Special Economic
Zone.

The conditions for claiming exemptions are as under:

(i) The transfer is effected in the course of or in consequence of shifting the undertaking
from an urban area to any Special Economic Zone. The special Economic Zone may be
developed in any urban area or any other area.

1. Any other area means an area not declared as an urban area.

2. ‘Urban Area’ means any such area within the limits of a municipal
corporation of municipality, as the Central Government may, having regard to the
population, concentration of industries, need for proper planning of the area and
other relevant factors, by general or special order, declare to be an urban area for
the purposes of this sub-section.

3. “Special Economic Zone” means each Special Economic Zone notified

under the proviso to Sub¬section (4) of Section 3 and Sub-section (1) of Section 4
of the Special Economic Zone Act, 2005 (including Free Trade and Warehousing
Zone) and includes an existing Special Economic Zone. [Section 2(za) of the
Special Economic Act, 2005].
(ii) Asset transferred is machinery, plant, building, land or any right in building or
land used for the business of industrial undertaking in an urban area;
(iii) The capital gain arising on the asset transferred may be short-term or long-term
capital gain. Normally, it will be short-term capital gain because most of the assets of the
industrial undertaking will be depreciable assets;
(iv) The capital gain is utilized within 1year before or 3 years after the date of
transfer for the specified purpose.
Specified purpose includes the following:

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(a) for purchase of new machinery or plant for the purpose of business of the
Industrial Undertaking in the Special Economic Zone to which the said
undertaking is shifted;
(b) acquisition of building or land or construction of building for the purposes of the
assessee’s business in the Special Economic Zone;
(c) expenses on shifting of the old undertaking and its establishment to the Special
Economic Zone; and
(d) incurring of expenditure on such other purposes as specified by the Central
Government for this purpose.

Capital Gain on Transfer of Residential House Property. If inserted in a new

manufacturing SME Company/Eligible Startup [Section 54GB]

Who can claim exemption An Individual or a Hindu undivided family.

Which specified asset is On transfer of a long term residential property (a house or a
eligible plot of land) if transfer takes place during April 1, 2012 and
March 31, 2017. (in case of eligible start up, residential
property can be transferred up to March 31, 2021.

Which asset the taxpayer Equity shares of 25% of share capital or voting rights in an
“eligible company
should acquire to get benefit
of exemption
What is the time-limit for Equity shares in an “eligible company” should be acquired on
or before the due date of furnishing of return of income under
acquiring the new asst. section 139(1). The “eligible company” should utilize this
amount for the purchase of a “new asset” within one year from
the date of subscription in equity shares.
How much is exempt Investment in “new asset” by the eligible company net sale
consideration x capital gain. Exemption cannot exceed capital
gain.
It is possible to revokethe In the following cases, exemption will be taken back and the
amount of exemption (or proportionate exemption) given
earlier under section 54 GB will become long-term capital gain

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exemption of the assessee (i.e. transferor of residential property). It shall
be taxable in the year in which the assessee or the eligible
company commits the following defaults-

1. If the equity shares in the eligible company are sold or

otherwise
transferred by the assessee within 3 years from the date of
acquisition
2. If the “new asset” is sold or otherwise transferred by the
eligible company
within 3 years from the date of acquisition.

3. If the deposit account is not utilized fully or partly by the

eligible company for purchasing the new asset within 1 year
from the date of subscription in equity shares (by the assessee).

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.

Illustration 1 :
Mr Srinivasan, purchases 2000 equity shares in ABC Ltd., for INR 50 per share
(Brokerage 1%), in Feb 1997. He gets 200 Bonus shares in Sep 2000. He again gets 2200
bonus shares in Sep 2007. FMV of the Shares on 1st Apr’01 was INR 125.

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In Jan’20, he sells all the shares for INR 500 per share (Brokerage 2%). Compute the
Capital Gains Tax in the hands of Srinivasan in FY 201920.

Solution

Cost of Acquisition Nos. Per Share Total INR

Original 2,000 50.50 1,01,000
Bonus Shares prior to 1st 200 - 25,000
Apr’01
Bonus Share post 1st Apr’01 2,200 - -
Full value of Consideration 4,400 490.00 21,56,000
Indexed Cost of Acquisition
Original (2000 x 125 x 7,22,500
289/100)
Bonus (200 x 125 x 289/100) 72,250 7,94,750

Capital Gains (Long Term) 13,61,250

Note:
– The brokerage is netted against the costs and sales vales
– The Cost of Acquisition of Bonus Shares acquired prior to 1st Apr’01 is the FMV on
1st Apr’01 and for the ones acquired post 1st Apr’01 is NIL
– For the Original Shares, since the acquisition cost (INR 50) is less than the FMV
(INR 125) as on 1st Apr’01, the FMV as on 1st Apr’01 is considered for computing the
indexed cost of acquisition
– Refer to the tables for the Indices used in the computation
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

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b) Cost of improvement shall be all expenditure of a capital nature, incurred in
making additions / alterations on or after 01.04.2001.

Illustration 2:
M & sons, HUF, had purchased a land for INR 150,000 in 2002-03. In the PY 2006-07, a
partition takes place and the Coparcener, Mr. B, gets this plot, valued at INR 200,000. In
PY 2007-08, he incurs expenses of INR 250,000 on the plot towards fencing of the plot
of land. Mr. B then sells this plot at INR 15,00,000 in PY 2019-20. You are required to
compute the capital gains for AY 2020-21.
Solution :

Cost of acquisition 1,50,000

Cost of Improvement 2,50,000
Full Value of Consideration 15,00,000
Indexed Cost
Acquisition 4,12,857
Improvement 5,60,077
Capital Gains 5,27,066
Note:
a) Although the cost of acquisition for the land, in case of partition of HUF would be
the cost to the previous owner, the year would be the year in which he gets the
asset upon partition, that is FY 2006-07
b) Indexed Cost of Acquisition therefore is INR (150,000/105) * 289
c) Indexed Cost of Improvement therefore is INR (250,000/129) * 289

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INCOME UNDER THE HEAD OTHER SOURCES
Income chargeable under Income-tax Act, which does not specifically fall for assessment
under any of the heads discussed earlier, must be charged to tax as “income from other
sources”. This head is thus a residuary head of income under which income can be computed
only after deciding whether the particular item of income is otherwise assessable under any
of the first four heads. In addition to the taxation of income not covered by the other heads,
Section 56(2) specifically provides certain items of incomes as being chargeable to tax under
the head in every case.

The following shall be chargeable to Income Tax under the head “Income from other
sources”-

a) Dividends [Section 56(2)(i)] : Dividend income other than divided referred under
section 10(34) not exceeding Rs. 10 lakh shall be included under income from other
sources.
b) Keyman Insurance policy : Amount received under a Keyman insurance Policy,
including bonus on such Policy, if it is not taxable under any other head of income shall
be chargeable under Income from other sources.
c) Winnings from lotteries [Section 56(2)(ib)] : Any winnings from lotteries, crossword
puzzles, races including horse races, card games and other games of any sort or from
gambling or betting of any form or nature shall be chargeable to tax under Income from
other sources.
d) The entire income of winnings, without any expenditure or allowance or deductions
under Sections 80C to 80U, will be taxable. However, expenses relating to the activity of
owning and maintaining race horses are allowable.
e) Further, such income is taxable at a special rate of income-tax i.e., 30% + surcharge + cess
@ 4% [Section115BB]

f) Income by way of interest on securities : if the income by way of interest on securities

is not chargeable to income-tax under the head,” Profits and gains of business or
profession”, then such income shall be taxable under Income from other sources.
g) Income from hiring of machinery, etc. [Section 56(2)(ii)] : Income from machinery,
plant or furniture belonging to the assessee and let on hire; if the income is not
chargeable to income-tax under the head “profits and gains of business or profession”
shall be taxable under Income from other sources.

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h) Hiring out of building with machinery etc. [Section 56(2)(iii)] : Where an assessee
lets on hire machinery, plant or furniture belonging to him and also building and the
letting of the building is inseparable from the letting of the said machinery, plant or
furniture, the income from such letting, if it is not chargeable to income-tax under the
head “Profits and gains of business or profession” shall be taxable under Income from
other sources.
i) SHARES ISSUED BY A PRIVATE COMPANY AT A PRICE EXCEEDING THEIR FMV
(Section 56(2)(viib))

Relevant  Section 56(2)(viib) applies if all the following conditions are

Provisions satisfied:
 Shares are issued by a closely held company (ie a private company)
to an Indian resident. In other words, Section 56(2)(viib) does
not apply in case of issue of shares by a public company.
 Shares should be issued at premium (ie the issue price of shares is
higher than their face value). In other words, Section 56(2)(viib)
does not apply in case of issue of shares at par or at discount.
 The issue price of shares should be more than their fair market value.
 If all the above conditions are fulfilled, the difference between
the issue price of shares and their fair market value shall be
taxable as income u/h other sources in the hands of the company

Illustration:

The following are the details of the shares issued by the following closely held
companies. Discuss the applicability of provisions of Section 56(2)(viib) in the hands
of these companies:
Compa No. of Face FMV OF Issue Applicability of section 56(2)(viib)
ny shares value of SHARES price of
shares shares

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A Pvt 10,000 100 120 130  The provisions of Section 56(2)(viib) are
Ltd attracted in this case since the shares are
issued at premium and the issue price is
also more than FMV.
 The excess of the issue price of the shares
over the FMV would be taxable u/h income
from other sources in the hands of A Pvt
Ltd.
B Pvt 20,000 100 120 110  Taxable
Althoughamount = Rs
the shares are 1,00,000 [10,000
issued at premium
Ltd but the issue price of shares is less than
their FMV.
 Therefore, no sum shall be chargeable to
tax in the hands of B Pvt Ltd u/s
C Pvt 30,000 100 90 98  56(2)(viib).
Since the shares are issued at discount, the
Ltd provisions of Section 56(2)(viib) are not
attracted.
 No sum shall be chargeable to tax in the
hands of the company even though the
issue price is greater than the FMV.
D Pvt 40,000 100 90 No  The provisions of Section 56(2)(viib) are
Ltd attracted in this case since the shares are
issued at premium and the issue price is
also more than FMV.
 The excess of the issue price of the shares
over the FMV would be taxable u/h income
from other sources in the hands of D Pvt
Ltd.
 Taxable Amount = Rs 8,00,000 [40,000

j) Income by way of interest received on compensation or on enhanced compensation

referred to in clause (b) of section 145A shall be chargeable to tax under Income from
other sources. [Section 56(2) (viii)].
k) Advance money received- any sum of money, received as an advance or otherwise in
the course of negotiations for transfer of a capital asset is chargeable to income-tax under

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the head “Income from other sources”, if such sum is forfeited and the negotiations do
not result in transfer of such capital asset. [Section 56(2)(ix)].

TAXATION OF GIFTS [Section/56(2)(x)]

INTRODUCTION:

 Gift of sum of money and other valuable properties was used as a tool to convert black
money into white money. The Finance Act, 2009 introduced provisions relating to
taxation of gifts vide Section 56(2)(vii) wef October 1, 2009 to regulate the conversion
of black money into white money via the medium of gifts
 Section 56(2)(vii) was applicable where gifts were received by individuals/HUF. Gifts
received by any other person were still kept out of the ambit of income tax. To tax gifts
received by any person on or after 1st April 2019, the Finance Act, 2019 has introduced
Section 56(2)(x) in place of Section 56(2)(vii).
Taxation of Gifts
{Section 56(2)(×)}

Gift of Specified Moveable Gift of Any Other

Gift of Sum of Gift of Moveable Property
Money (Cash, Immovable Property (Shares &
(Watches, Mobiles, Car,
Cheque, etc) Property Securities, Jewellery,
Laptops, etc)
Bullion, Paintings, etc)

No Tax
0Gift Taxable in the Hands of the Treatment
Recipient u/h ‘Income From Other
Sources' in the Manner Provided u/s of Such Gifts
56(2)(x) {Section
56(2)(x)}

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Part 1 - GIFT OF 'SUM OF MONEY
Relevant If a person receives any 'sum of money* from any other person without
Provisions consideration (ie in the form of a gift), such sum would be taxable as follows:
 If the aggreaate value of such gifts received during the relevant previous
year does not exceed Rs 50,000: No tax treatment in the hands of the
recipient.
 If the aggregate value of such gifts received during the relevant previous
year exceeds Rs 50,000: The sum total of all the gifts received would be
taxable in the hands of recipient u/h 'income from other sources'.
Note: The limit of Rs 50,000 would apply to the aggregate value of all gifts
received during the year and not individually for each gift.
Examples  Mr A has received a gift of Rs 45,000 from his friend during PV 2019-20.
Since the aggregate value of gifts received during PY 2019-20 does not
exceed Rs 50,000, the gift of Rs 45,000 is not taxable.
 Mr A has three friends (Ms B, Ms C & Ms D). All the three ladies have gifted
a sum of Rs 45,000 each to Mr A during PY 2019-20. Since the aggregate
value of gifts received during PY 2019-20 exceeds Rs 50,000, the entire
amount of Rs 1,35,000 is taxable.
Meaning The phrase 'sum of money' has to be understood as any form of money such
of 'Sum of as cash, cheque, draft, etc.
Money'

Part 2 – GIFT OF ‘IMMOVABLE PROPERTY’

Relevant If a person receives any immovable property from any other person
without consideration or for inadequate consideration, such sum would
Provisions
be taxable as under:

Case (a) - Gift of immovable property without consideration (i.e pure

gift):

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 If the stamp duty value of immovable property does not exceed Rs
50,000:

No tax treatment in the hands of the recipient.

 If the stamp duty value of immovable property exceeds Rs 50,000:

Such stamp duty value would be taxable in the hands of the recipient u/h
'income from other sources'.

 Example: Mr A has gifted his house to Mr B. If the SDV of such house does
not exceed Rs 50,000, no amount would be taxable in the hands of Mr B in
respect of such gift. In case the SDV of such house is Rs 1,00,000, the entire
amount of Rs 1,00,000 would be taxable in the hands of Mr B.

Case (b) - Gift of immovable property for inadequate consideration:

 If the difference between the stamp duty value of immovable property

and its sale price does not exceed Rs 50,000:

No tax treatment in the hands of the recipient.

 If the difference between the stamp duty value of immovable property

and its sale price exceeds Rs 50,000:

The entire difference would be taxable in the hands of the recipient u/h
'income from other sources’.

 Example: Mr Rani ha has one house whose SbV is Rs 10,00,000. Such

house is sold by Mr Ranjha to Ms Heer. If the house is sold by Mr Ranjha
for Rs 9,60,000, no tax treatment would be there in respect of the gift of
Rs 40,000. However, if it was sold for Rs 9,00,000, the gift of Rs 1,00,000
would be taxable in the hands of Ms Heer.

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Limit of Rs The amount of gift has to be seen transaction-wise and not aggregately
50,000 for the entire year. In other words, the limit of Rs 50,000 would be applied
Considered in respect of gift of each immovable property individually and not in
Separately aggregate for all the gifts of immovable property received during the year.
for Each
Example: Katrina Kaif has two friends: Salman Khan & Ranbir Kapoor.
Property
Salman Khan sells a house at Juhu to Katrina for Rs 4,60,000 whereas its SDV
Received as
is Rs 5,00,000. Ranbir Kapoor sells a house at Marine drive to Katrina for Rs
Sift
3,70,000 whereas its SDV is Rs 4,00,000. In this case, no amount would be
taxable in the hands of Katrina Kaif even though the total gift amount exceeds
Rs 50,000.

Meaning of ’Stamp Duty Value' means the value adopted by any authority of the
SDV CG/SG for the purpose of payment of stamp duty in respect of an
immovable property.

Special Provision (Important):

Where the date of agreement fixing the amount of consideration for the transfer of
immovable property and the date of registration are not the same, the stamp duty
value as on the date of agreement can be taken into consideration provided the
booking amount has been paid by account payee cheque, account payee bank draft
or by use of electronic clearing system through a bank account.

Example: ABC Ltd sold a house to Mr X for Rs 10 lakhs. SDV of the house property as on
the date of booking (1/5/2019) was Rs 15 lakhs whereas SDV as on the date of
registration (1/11/2019) was Rs 17 lakhs. The booking amount of Rs 2 lakhs was paid by
Mr X by account payee cheque. In this case, the amount taxable as gift in the hands of Mr X
would be Rs 5 lakhs (15 lakhs - 10 lakhs)

Part 3 – GIFT OF PROPERTY OTHER THAN IMMOVALE PROPERTY

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Meaning of “Property" means any of the following capital assets:
Property
(i) immovable property being land or building or both;

(ii) shares and securities;

(iii) jewellery (jewellery includes ornaments of gold, silver, platinum or any

other precious metal; precious or semi-precious stones, whether or not set
in any furniture, utensil or other article or worked or sewn into any
wearing apparel);

(iv) archaeological collections (relating to past/ancient times);

(v) drawings;

(vi) paintings;

(vii) sculptures;

(viii) any work of art; or

(ix) bullion (ie gold and silver in its purest form)

Applicability • This provision applies in case of gift of any of the above-mentioned

of Provisions property other than immovable property [ie, from (ii) to (ix)].
of Part-3
• Gift of any other asset such as motor cars, mobile phones, watches,
laptops, etc is not taxable in the hands of the recipient.

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Relevant If a person receives any property (other than immovable property)
from any other person without consideration or for inadequate
Provisions
consideration, such sum would be taxable as under:

Case (a) - Gift of property without consideration (i.e pure gift):

 If the fair market value of such property does not exceed Rs

50,000:

No tax treatment in the hands of the recipient.

 If the fair market value of such property exceeds Rs 50,000:

Such fair market value would be fully taxable in the hands of the
recipient u/h 'income from other sources’.

 Example: Mr A has gifted a necklace to Ms C. If the FMV of the necklace

does not exceed Rs 50,000, no amount would be taxable in the hands of
Ms C in respect of such gift. However, if its FMV is Rs 1,00,000, the entire
amount of Rs 1,00,000 would be taxable in the hands of Ms C.

Case (b) - Gift of property for inadequate consideration:

 If the difference between the fair market value of such property

and its sale price does not exceed Rs 50,000:

No tax treatment in the hands of the recipient

 If the difference between the fair market value of such property

and its sale price exceeds Rs 50,000:

The entire difference would be taxable in the hands of the recipient

u/h ’income from other sources'.

 Example: Mr Rani ha has one necklace whose FMV is Rs 10,00,000. Such

necklace is sold by Mr Ranjha to Ms Heer. If the necklace is sold by Mr
Ranjha for Rs 9,60,000, no tax treatment would be there in respect of
the gift of Rs 40,000 in the hands of Ms Heer. However, if the necklace
has been sold for Rs 9,00,000, the gift of Rs 1,00,000 would be taxable in
the hands of Ms Heer.

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Limit of Rs The limit of Rs 50,000 would apply to the aggregate value of all the
50,000 gifts of property (other than immovable property) received during the
Considered year and not individually for each transaction.
Aggregately
Example: Katrina Kaif has two friends: Salman Khan 4 Ranbir Kapoor.
for All Gifts
Salman Khan sells a jhumka' to Katrina for Rs 4,60,000 whereas its FMV is
Rs 5,00,000. Ranbir Kapoor sells a 1payal' to Katrina for Rs 3,70,000
whereas its FMV is Rs 4,00,000. In this case, Rs 70,000 would be taxable in
the hands of Katrina Kaif even though individually the gift amount did not
exceed Rs 50,000 for both the gifts.

GIFT NOT TAXABLE IN CERTAIN CASES

Gifts are not taxable in the following situations (ie in the following cases, the provisions
already discussed would not apply):

 Gifts received from any relative are not taxable at all.

 Gifts received by an individual on the occasion of his marriage from relatives
/non-relatives are not taxable. (Gifts received by the parents of the individual on the
occasion of the marriage of the individual are taxable in the hands of the parents.
Further, gifts received on marriage anniversary are also taxable.)
 Gifts received under a will or by way of inheritance are not taxable.
 Gifts received in contemplation of the death of the donor or payer (contemplation
of death refers to a situation where a person starts believing that he would die in the
immediate future due to a particular illness, etc).
 Gifts received from any approved local authority, approved charitable institution,
approved charitable trust, approved charitable hospital, approved university etc.
 Shift of property in connection with amalgamation/demerger of certain companies.
 Any other situation prescribed u/s 56(2)(x).

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Meaning  In case of Individual:
of a) Spouse of the individual;
'Relative1 b) Brother or sister of the individual;
c) Brother or sister of the spouse of the individual;
d) Brother or sister of either of the parents of the individual;
e) any lineal ascendant or descendant of the individual (ascendant
refers to mother/ father/grandmother/grandfather and so on;
descendant refers to son/daughter/ grandson/granddaughter and so
on);
f) any lineal ascendant or descendant of the spouse of the individual;
and
g) spouse of the person referred to in items (b) to (f).
 In case of HUF:
Gifts received by HUF from any of its members are not taxable in
the hands of HUF because for a HUF, all its members are treated as
relatives. Example: Mr X has gifted debentures of Rs 10 lakhs to XYZ
HUF (Mr X is a member of XYZ HUF). Gift received by XYZ HUF shall not
be taxable in the hands of XYZ HUF. However, income from such
debentures would be clubbed in the income of Mr X as per the
provisions of Section 64(2) [Section 64(2) would be discussed under the
Chapter - 'Clubbing of Income']

PROVISIONS RELATINS TO TAXATION OF GIFTS NOT APPLICABLE WHERE GIFT IS

RECEIVED AS STOCK-IN-TRADE (Most Imp)

 The provisions of taxation of gifts given u/s 56(2)(x) shall not be applicable
where the recipient receives the gifts as stock-in-trade. In other words, gift
taxation would apply only where the recipient receives the goods as capital assets
not used in connection with business/profession.
 Any immovable property received by any person without consideration or for
inadequate consideration shall not be treated as gift if such person carries on
business as a property dealer.
 All other properties (such as jewellery, bullion, etc) received by any person
without consideration or for inadequate consideration shall not be treated as gift
if such person has a business of buying and selling of such property.

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 Example: Mr X has a business of buying and selling of shares. Mr X has purchased shares
from Mr Y for Rs 10 lakhs whereas their FMV is Rs 15 lakhs. In this case, the amount of
Rs 5 lakhs shall not be treated as gift in the hands of Mr X. Instead, the cost of shares in
the books of accounts would be shown as Rs 10 lakhs and the entire profit on sale in
excess of Rs 10 lakhs shall be taxed u/h PGBP.

SPECIAL CASES

Gifts Received  Gifts received in kind/voucher received against which gift can be
by Employees claimed:
from
Gifts received in kind by an employee from his employer are exempt upto
Employers -
Rs 5,000 and amount in excess of Rs 5,000 is taxable in the hands of the
Section
employee u/h 'income from salary'. Example: ABC Limited has given a gift
17(2)(viii)/
of Rs 17,000 in kind to Mr X, an employee working in ABC Limited. An
Rule 3(7X'v) amount of Rs 12,000 (17K - 5K) would be taxable in the hands of Mr X u/h
'income from salary'.

 Gifts received in cash or convertible into cash (e g draft, cheque. etc):

Gifts received in cash or convertible into cash are fully taxable in the hands
of employee u/h 'income from salary'.

Gifts Received  If a person carrying any business/profession receives any

in Connection gift/perquisite from his clients, the value of such gift/perquisite shall
with Business/ be considered to be a business receipt.
Profession -  Such gift/perquisite has to be considered while calculating the income
Section 28 of the person u/h 'profits and gains of business/profession' whether
such gift/perquisite is convertible into money or not.
 Example: A client is extremely happy with the work of his CA and apart
from the agreed upon fees, the client gives a wrist watch worth Rs
50,000 to the CA. The value of such watch shall be included in the
income of the CA u/h PGBP.

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Taxability of  Scholarship - Section 10(16):
Scholarship/
Any scholarship received by a person for meeting the cost of education is
Award/Reward
exempt from income tax.
- Section 10
 Award/Reward - Section 10(17A):

Any award or reward received by a person from CG/SG is exempt from

income tax whether such award/reward is in cash or in kind. Any private
award/reward shall be exempt if the same has been approved by the
Government.

k) Any compensation or other payment, due to or received by any person, by whatever

name called, in connection with the termination of his employment or the
modification of the terms and conditions relating thereto. If the same is not taxable
under the head Salary. [Section 56(2)(xi)]

Besides the above, there are some other incomes which are also chargeable under the
head “Income from Other Sources”. For example:

1) Any fees or commission received by an employee from a person other than his employer.
2) Any annuity received under a Will. It does not include an annuity received by an
employee from his employer.
3) All interest other than interest on securities, e.g. interest on bank deposits, interest on
loan, etc.
4) Income of a tenant from sub-letting the whole or a part of the house property.
5) Remuneration received by a teacher or a lawyer for doing examination work.
6) Income of Royalty.
7) Director’s fees.
8) Rent of land not appurtenant to any building.
9) Agricultural Income from land situated outside India.
10) Income from leasehold property.
11)Remuneration received for writing articles in Journals.
12) Income from undisclosed sources.
13)Interest received by an employee on his own contributions to an unrecognised provident
fund.
14) Casual income

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15) Salary of a Member of Parliament, Member of Legislative Assembly or Council.
16) Interest received on securities of co-operative society.
17) Gratuity received by a director who is not an employee of the company.
18) Director’s commission for giving guarantee to bank
19)Director’s commission for underwriting shares of a new company.

CASUAL INCOME [SECTION 56(2)(IB)]

Casual income includes income by way of winnings from lotteries; crossword puzzles; races
including horse races; gambling and betting of any nature or form; card games, game show
or entertainment program on television or electronic mode and any other game of any sort.
All these incomes are chargeable to tax under the head income from other sources. However,
following income are not chargeable under the head “income from other sources”:

a) Lottery held as stock in trade: Winning from lottery to an agent or trader out of its
unsold stock of lottery tickets shall be treated as incidental to business and taxed under
the head “profit and gains of business or profession “.
b) Income of jockey: Income of jockey from such profession is not treated as winning from
the horse races.
c) Winning from a motor car rally: Winning from a motor car rally is a return for skill and
effort and cannot be created as casual income, these are taxable as normal income.
 No deduction or exemption is provided in respect of the casual income. [Section 58 (4)].
 No deduction can be claimed from such income even if such expenditure is incurred
exclusively and wholly for earning such income.
 Further, deduction under section 80C to 80U is also not available from such income.

Taxation of Casual Income: Casual income is liable to TDS. The casual income is taxed at a
flat rate of 30% plus surcharge (if any), plus health and education cess.

When the TDS has already been deducted from the income, then in order to calculate the tax
liability on such income, the income is to be grossed up. [Section 115BB]

However, the following incomes are not liable to TDS:

1) Winning from lottery upto amount Rs.10,000

2) Winning from racing other than horse race
3) Winning from horse race upto Rs. 5000

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INCOME FROM FAMILY PENSION

Family pension is a regular amount payable by the employer to a family member of a deceased
employee. It is taxable under the head income from other sources. The income by way of family
pension is eligible for a standard deduction under section 57(iia) which is either 1/3rd of such
pension or Rs. 15000 whichever is lower.
Family pension received by the widow or children or nominated heirs, as the case may be, of
a member of the armed forces (including paramilitary forces) of the Union, where the death
of such member has occurred in the course of operational duties, in such circumstances and
subject to such conditions, as may be prescribed, shall be exempt from tax. Further, income
by way of family pension received as family pension of an individual who has been in the
service of Central/State Government and has been awarded Param Vir Chakra or Maha Vir
Chakra or Vir Chakra or such other gallantry award as may be notified is also exempt from
tax.
FAMILY PENSION

EXEMPTION FULLY EXEMPT

a) 1/3rd of such pension a) received by widow or children
b) 15000 or nominated heir of armed
whichever is lower member (death of officer incours
of profession )
b) awardee of param vir chakra,
mahavir chakra(2nd after paramvir
vir chakra,or such gallantry award .

TAXATION OF DIVIDENDS
Section 10(34) exempts dividend as defined in Section 115-O from tax in the hands of
recipients thereof. Section 115-O, the main operative provision in the Chapter XII-D,
however, calls upon a company declaring/ distributing dividend to pay 15% plus surcharge
plus Health and Education Cess by way of Dividend Distribution Tax (DDT) on distributed
profits in addition to what it is liable by way of tax on its income in the normal course. This

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tax on distribution paid by a company is not available for deduction under any provision of
the Act. Grossing up the dividend for computing the tax liability on account of dividend
distribution tax. With the grossing up, the effective tax rate will be 20.555% as under:

Grossed Up 117.647
DDT @ 15% 117.647
Dividend 1,00,000
DDT 17,647
SC @ 12% 2,117
Agg 19,764
Cess @ 4% 791
Total 20,555

Under the existing provisions of clause (34) of section 10 of the Act, dividend which suffer
dividend distribution tax (DDT) under section 115-O is exempt in the hands of the
shareholder. Under section 115-O dividends are taxed only at the rate of fifteen percent at the
time of distribution in the hands of company declaring dividends.

This creates vertical inequity amongst the tax payers as those who have high dividend
income are subjected to tax only at the rate of 15% whereas such income in their hands
would have been chargeable to tax at the rate of 30%.

With a view to rationalise the tax treatment provided to income by way of dividend, it is
provided by amending the section of the Income-tax Act that any income by way of dividend
in aggregate exceeding INR 10 lakh shall be chargeable to tax in the case of an individual,
Hindu undivided family (HUF) or a firm who is resident in India, at the rate of 10%
(+SC+EC+SHEC). The taxation of dividend income in aggregate exceeding ten lakh rupees
shall be on gross basis. However, this rule is not applicable in case of deemed dividend under
section 2(22)(e).

Scope of section 115BBDA has been increased: Earlier this section was applicable to an
Individual/HUF/ Firm. However, from AY 2018-19 this section is applicable to
individual/HUF/firm or any person (not being a domestic company, or a
fund/institution/trust/university/educational institution/hospital/medical institution

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referred to in section 10(23C) (iv)(v)(vi) (via), or a trust/institution registered under section
12A/12AA).

Illustration

ABC Ltd. declared a dividend of INR 200,00,000 for the FY 2017-18 and distributed the same
on 15th Jul’18. Mr. A holds 10% shares and therefore receives INR 20,00,000 as dividend. Mr
B hold 4% shares and therefore receives INR 8,00,000 as dividend.

The tax treatment would be as under:

 Mr A would be taxed on the amount exceeding INR 10,00,000, that is, on INR 10,00,000
he would be taxed at 10% + SC (if any) + Cess
 Mr B has received dividends < INR 10,00,000 and therefore this would entirely be exempt
from tax under section 10(34)
 The company however would have to pay DDT on the dividend so distributed u/s 115O

Meaning of the term “Dividend” [Section 2(22)] : The term “dividend” is ordinarily used
to refer to any distribution made by a company to its shareholders out of its profits in
proportion to the number of shares held by the shareholder concerned in the company.

Apart from that dividend paid by a company to its shareholders, the definition of dividend
includes deemed dividend as laid down under section 2(22) of the Act, which is inclusive but
not exhaustive. Accordingly the following payments or distribution made by a company to its
shareholders are deemed as dividends to the extent of accumulated profits of the company
whether capitalised or not (i.e. bonus shares issued is the capitalisation of profit). It may be
noted that these payments may not be covered as dividend under Companies Act, 2013:

a) Any distribution if such distribution entails the release of all or any part of the assets of
the company. Such accumulated profits are distributed in cash or in kind. For in kind
distribution, the market value of assets shall be the deemed dividend in hands of
shareholders.
b) Any distribution of debentures, debenture-stock, or deposit certificates in any form,
whether with or without interest to Equity shareholders. Any distribution of bonus shares
to its preference shareholders. However bonus shares allotted to equity shareholders does
not amount to deemed dividend.
c) Any distribution made on liquidation of a company
d) any distribution on the reduction of capital of a company

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 Deemed dividend under clause (c) and clause (d) does not include :

 Any distribution by to shareholders on liquidation or reduction of capital of the company

in respect of full cash consideration, where the shareholder is not entitled to participate
in the surplus asset in the event of liquidation.
 Any payment made by a company on purchase of its own shares from a shareholder in
accordance with the provisions of section 77A of the Companies Act.
 Any distribution of shares made in accordance with the scheme of demerger by the
resulting company to the shareholders of the demerged company (whether or not there
is a reduction of capital in the demerged company).

e) Any payments in the form of loans or advances to the extent of accumulated profits
(excluding capitalised profit) made by a closely-held company (i.e. a company in which
public are not substantially interested) to:
i. its shareholder who is the beneficial owner of shares holding not less than 10% of
voting power in such company.
ii. to any concern (HUF, Firm, AOP, BOI or Company) in which such shareholder is a
member or a partner and which he has a substantial interest (20% of voting power or
share of profit)
iii. any person on behalf of such shareholder for his/her individual benefit. Deemed
dividend under clause (e) does not includes:
 Any dividend paid by a company which is set off by the company against the whole or
any part of any sum previously paid by it and treated as a dividend within the meaning
of sub-clause (e), to the extent to which it is so set off.
 Vide CBDT circular No. 19/2017, any trade advance in the nature of commercial
transactions would not fall within the ambit of advance.

With amendments by the Finance Act, 2018

 All dividends under section 2(22) are exempt in the hands of shareholders and company
is liable to pay Dividend Distribution Tax (DDT) u/s 115-O @ 15% (gross) on Dividend
under section 2(22) (a) to (d) and @ 30%(Gross) on Dividend under section 2(22)(e) .

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 In case of an amalgamated company, accumulated profit or loss shall be increased by the
accumulated profit of amalgamating company (whether capitalized or not) on the date of
amalgamation.

Illustration

Suppose, X is holding 29% shares in a company and he took a loan of INR 10,00,000 from the
Company and on the date, the loan was granted, the accumulated profits stood at INR
800,000. The tax treatment would be as under:

 In case the company is one, where the public is substantially interested, the loan would
not be taxable as deemed dividend in hands of X
 However, in case the company is a private limited company, since X holds > 10% stake,
this loan would be taxable in the hands of X as deemed dividend, but only to the extent of
accumulated profits on the date of grant of loan, i.e., INR 800,000.

The income chargeable under the head “Income from other sources” is the income
after making the following deductions

1) From interest on securities [Section 57(i) and (iii)]: any reasonable sum paid by way of
commission or remuneration to a banker or any other person for the purpose of realising
such interest on behalf of the assessee. Interest on money borrowed for investment in
securities can be claimed as a deduction.
2) From the contributions received by employer from employees towards
P.F./Superannuation/ other funds [Section 57(ia)]: In the case of income of the nature
referred to in Section 2(24(x), which is chargeable to income-tax under the head “Income
from other sources” deduction shall be allowable in accordance with the provisions of
Section 36(1) (va), i.e., if the employer has credited the employee’s accounts in the
respective funds with the amounts of contributions received, the employer shall be
allowed credit thereof.
3) Income derived from letting [Section 57(ii)]: Where income is derived from letting out of
machinery, plant or furniture on hire and also buildings where the letting of building is
inseparable from the letting of such machinery, plant or furniture and the income from
such letting is not chargeable to Income-tax under the head “Profits and Gains of Business
or profession”, the following expenses incurred in respect of those assets:

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(a) Current repairs of buildings.

(b) Insurance premium against risk of damage or destruction of the premises.

(c) Repairs and insurance of machinery, plant or furniture.

(d) Depreciation.
Where the expenses referred to at (a) to (d) hereinabove are incurred on property used
partly for the business of the assessee, a proportionate deduction shall be allowed.

4) Income in the nature of family pension [Section 57(iia)]: Where a regular monthly
amount is payable by an employer to a person belonging to the family of an employee in
the event of his death, i.e., “family pension”, a sum equal to 33-1/3% of the income orRs.
15,000, whichever is less, is allowable as a deduction.

All these expenses will be allowed only when the prescribed particulars are furnished by the
assessee.

5) Interest on compensation or enhanced compensation [Section 56(2)(viii)]: a deduction of

a sum equal to 50% of such income and no deduction shall be allowed under any other
clause of this section.
6) Other deductions [Section 57(iii)]: Any other expenditure (not being in the nature of
capital expenditure) laid out or expended wholly and exclusively for the purpose of
making or earning such income. [Smt. Virmati Ramkrishna v. C.I.T. (1981) 131 ITR
659(Guj)]

AMOUNTS NOT DEDUCTIBLE [SECTION 58]

The following amounts shall not be deducted in computing income chargeable under the
head “Income from other Sources”.

In the case of any assessee:

(i) Any personal expenses of the assessee.

(ii) Any interest chargeable under the Income-tax Act which is payable outside India and
from which income- tax has not been paid or deducted at source.
(iii) Any payment which is chargeable under the head “Salaries” if it is payable outside India
unless tax has been paid thereon or deducted therefrom at source.

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Note: The disallowance provisions pertaining to TDS defaults covered by section
40(a)(ia) will be applicable for computing the Income chargeable under the head Income
from Other Sources.

(iv) Any expenditure referred to in Section 40A of Income-tax Act.

No deduction is allowed in respect of any expenditure or allowance in computing the income

by way of winnings from lotteries crossword puzzles races (including horse races) card
games and other games of any sort or from gambling or betting of any form or nature
whatsoever. The prohibition however will not apply in respect of income of an assessee who
is owner of horses maintained for running in horse races [Section 58(4)]. The winnings are
now taxed at the rate of 30%. The amount is taxable at source and it does not matter whether
amount goes to one or more recipients. Similarly, the amount spent in buying of in fructuous
tickets is not deductible as the gross amount will be taxed.

CASE STUDY 1

Nikhil, a dealer in shares received from his friend Anshul, the following without any
consideration:
Cash Gift INR 100,000 on his birthday (14th April)
Bullion, FMV INR 75,000 on his anniversary (22nd April)

Plot of land at Gurgaon on 1st Jun’17, stamp duty value INR 750,000 on that date. Advise
on tax treatment.

Answer

a) Cash Gift is > INR 50000, therefore, the entire amount of INR 100,000 is chargeable to tax
as Income from Other Sources
b) Bullion received without consideration is taxable too in full as it is received without
consideration, therefore, the entire amount of INR 75000 is chargeable to tax as Income
from Other Sources
c) Plot of land received without consideration is taxable too in full as it is received without
consideration, therefore, the entire amount of INR 750,000 is chargeable to tax as Income
from Other Sources

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CASE STUDY 2

Nisha, on 1st Dec’19 took possession of a flat booked by her 2 years back, at INR 25,00,000.
The Stamp Duty of the flat on the date of possession was INR 40,00,000 and on the date of
booking was INR 29,00,000. She had paid INR 200,000 by account payee cheque, on date of
booking.

Advise tax treatment.

Answer

It is to be noted that where the date of the agreement fixing the amount of consideration for
the transfer of immovable property and the date of registration are not the same, the stamp
duty value on the date of the agreement (in this case booking) may be taken. However, this
exception shall apply only in a case where the amount of consideration referred to therein,
or a part thereof, has been paid by any mode other than cash on or before the date of the
agreement for the transfer of such immovable property.

Therefore, the difference between the Stamp Duty Value on date of booking (INR 29,00,000)
and the actual consideration (INR 25,00,000); i.e. INR 400,000 would be taxable under the
head “Income from Other Sources”.

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CLUBBING OF INCOME
APPLICABILITY OF CLUBBING PROVISIONS

Transfer of Clubbing provisions would apply where a person transfers any income to
Income any person without transferring the asset from which such income is
Without generated.
Transferring Example: Mr X has a Fixed Deposit with State Bank of India from which
the Asset - an annual interest income of Rs 2 lakhs is generated. Mr X transfers such
Section 60 annual interest income to Mr Y, however the FD remains in the name of
Mr X. In this case, the annual interest income would be clubbed in the
income of Mr X.
Revocable Meaning of irrevocable transfer:
Transfer/ A transfer of an asset is said to be irrevocable if both the following
Irrevocable conditions are satisfied:
Transfer -
□ The transfer cannot be revoked during the life-time of the
Sections 61,
beneficiary/transferee;
62 & 63
AND
□ The transferor of the asset should not derive any benefit (directly or
indirectly) from the asset/the income generated from the asset during
the life time of the beneficiary.
Meaning of revocable transfer:
A transfer of an asset is deemed to be revocable if any of the following
conditions listed
below is satisfied:
□ The transfer deed contains a provision in terms of which the
asset/income generated from the asset can be re-transferred to the
transferor during the life time of the beneficiary;
OR
□ The transfer deed allows the transferor to re-assume power of the
asset/income generated from the asset (actual exercise of power is not
necessary).
Note: Such re-transfer/re-assumption of power can take place directly
or indirectly for the whole of the asset/income or any part thereof.

Treatment in case of irrevocable Treatment in case of revocable

transfer transfer

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Income from the asset so transferred Income from the asset so
shall not be clubbed in the hands of transferred shall be clubbed in the
the transferor. Such income shall be hands of the transferor. Such
taxable in the hands of the income shall not be taxable in the
transferee. hands of the transferee.
Example: Mr X has transferred one Fixed Deposit f'FD')to Mr Y with the
condition that the FD shall be retained by Mr Y till the time Mr Y is alive
ano1 after that the FD shall be taken back by Mr X. This is a case of
irrevocable transfer and clubbing provisions shall not apply in this case.
Income from the FD shall be taxable in the hands of Mr Y.
Example: However, if in the above example. Mr X had reserved a riaht to
aet back the FD or the income generated from the FD during the lifetime
of Mr Y, then such transfer would be deemed as a revocable transfer and
clubbing provisions would apply in such case. Resultantly, income from
the FD shall be taxable in the hands of Mr X (ie the transferor).

Clubbing of Income of
Different Persons

Section 64(1) Section 64(1) Section 64(1 A)

Section 64(1)
Income from Income from Assets Tfd. Income of a Minor
Income from
Assets to Any Person for the Child (Including
Assets Transferred
Transferred to Benefit Minor Married
to Spouse
Son's Wife of Spouse/Son's Wife Daughter)

Section 64(1)
INCOME FROM ASSETS TRANSFERRED TO SPOUSE WITHOUT CONSIDERATION
Relevant Where any person transf ers any asset other than house property to
Provision his/her spouse without consideration or for inadequate
consideration, income from such asset shall be clubbed with the income
of such person (ie the transferor) in the manner given below:
Case (a) - Transfer of asset without consideration (ie pure aift):
The entire income from the asset shall be clubbed with the income of
the transferor. Example: Mr A has transferred a FD to his wife, Mrs A
without consideration. There is an interest income of Rs 15,000 from such

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FD. The interest amount shall be clubbed with the income of Mr A.
Case (b) - Transfer of asset for inadequate consideration- Only that
portion of income from the asset shall be clubbed which relates to the
amount of inadequate consideration. Example: Mr A has transferred an
asset of Rs 20,00,000 to his wife, Mrs A for Rs 15,00,000. There is an
income of Rs 4,00,000 from such asset. The amount of income that shall
be clubbed with the income of Mr A shall be Rs 1,00,000 only.
Note: Where a person transfers any house property to his/her spouse for
inadequate consideration, Section 27 (Deemed Ownership) would apply
and income from such house property shall be taxable in the hands of the
transferor u/h ‘House Property’.

Note: Clubbing provisions would not apply where any person has given a
loan to his/her spouse.

Existence of Clubbing provisions would apply only when the relationship b/w
Relationship husband and wife exists:
□ on the date of transfer of asset
as well as
□ on the date of accrual of income
Example: Ranveer Sinah aifts an asset to his would-be-wife (Deepika
Padukone) on 1.1.2020. Both of them got married on 1.2.2020 and an
income of Rs 5,000 got accrued from the asset transferred by Mr Ranveer
on 1.3.2020. In this case, clubbing provisions would not apply.
Clubbing • Clubbing provisions would not apply where an asset has been
Provisions transferred by a person to his/her spouse under an agreement to live
Not to Apply apart (ie divorce).
in Certain • Clubbing provisions would not apply where an asset has been
Cases transferred by a person to his/her spouse for adequate consideration.
Example: Mr A has transferred an asset of Rs 20,00,000 to his wife, Mrs A
for Rs 20,00,000. There is an income of Rs 4,00,000 from such asset. The
clubbing provisions would not apply in the present case.
Asset Case 1 - Amount is invested in a proprietorship business:
Invested by Where any asset has been transferred by a person to his/her spouse
Spouse in without adequate consideration and such asset has been invested by the
Business - spouse in a proprietorship business, income from such business shall be
Income clubbed in the income of the transferor.

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From Such (𝐀𝐦𝐨𝐮𝐧𝐭 𝐢𝐧𝐯𝐞𝐬𝐭𝐞𝐝 𝐛𝐲 𝐭𝐫𝐚𝐧𝐬𝐟𝐞𝐫𝐞𝐞 𝐢𝐧 𝐭𝐡𝐞 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬
Business to 𝐓𝐨𝐭𝐚𝐥 𝐚𝐬 𝐨𝐧 𝟏𝐬𝐭 𝐀𝐩𝐫𝐢𝐥 𝐨𝐟 𝐏𝐘 𝐨𝐮𝐭 𝐨𝐟 𝐚𝐬𝐬𝐞𝐭𝐬 𝐫𝐞𝐜𝐞𝐢𝐯𝐞𝐝
be Clubbed 𝐂𝐥𝐮𝐛𝐛𝐞𝐝
= 𝐈𝐧𝐜𝐨𝐦𝐞 𝐨𝐟 ×
𝐟𝐫𝐨𝐦 𝐬𝐩𝐨𝐮𝐬𝐞 𝐟𝐨𝐫 𝐢𝐧𝐚𝐝𝐞𝐪𝐮𝐚𝐭𝐞 𝐜𝐨𝐧𝐬𝐢𝐝𝐞𝐫𝐚𝐭𝐢𝐨𝐧)
𝐈𝐧𝐜𝐨𝐦𝐞 𝐓𝐨𝐭𝐚𝐥 𝐚𝐦𝐨𝐮𝐧𝐭 𝐢𝐧𝐯𝐞𝐬𝐭𝐞𝐝 𝐢𝐧 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 (𝟏𝐬𝐭 𝐀𝐩𝐫𝐢𝐥 𝐨𝐟 𝐏𝐘)
𝐁𝐮𝐬𝐢𝐧𝐞𝐬𝐬
Example: Mrs X started one business on 01.04.2019 with a total capital of
Rs 10 lakhs out of which Rs 5 lakhs were given by Mr X as gift on
01.04.2019 itself. Mrs X earned Rs 2 lakhs as profits during PY 2019-2020.
In this case, profit of Rs 1 lakh shall be clubbed in the hands of Mr X.
Example: Mrs X started one business on 01.04.2019 with a capital of Rs 5
lakhs. On 10.04 2019 Mr X gifted a sum of Rs 5 lakhs to Mrs X which she
invested in her proprietorship business on the same day. The total profits
for PY 2019-2020 amounted to Rs 2 lakhs. In this case, income from the
business shall not be clubbed in the hands of Mr X for PY 2019-2020
because the amount was not invested in the business on the first day of
the relevant previous year (ie 1.4.2019).
Case 2 - Amount is invested in a partnership firm:
Where any asset has been transferred by a person to his/her spouse
without adequate consideration and such asset has been invested by the
spouse in a partnership firm, interest on capital received from the firm
shall be clubbed in the income of the transferor.
(𝐀𝐦𝐨𝐮𝐧𝐭 𝐢𝐧𝐯𝐞𝐬𝐭𝐞𝐝 𝐛𝐲 𝐭𝐫𝐚𝐧𝐬𝐟𝐞𝐫𝐞𝐞 𝐢𝐧 𝐭𝐡𝐞 𝐟𝐢𝐫𝐦
𝐓𝐨𝐭𝐚𝐥 𝐚𝐬 𝐨𝐧 𝟏𝐬𝐭 𝐀𝐩𝐫𝐢𝐥 𝐨𝐟 𝐏𝐘 𝐨𝐮𝐭 𝐨𝐟 𝐚𝐬𝐬𝐞𝐭𝐬 𝐫𝐞𝐜𝐞𝐢𝐯𝐞𝐝 𝐟𝐫𝐨𝐦
𝐂𝐥𝐮𝐛𝐛𝐞𝐝 𝐬𝐩𝐨𝐮𝐬𝐞 𝐟𝐨𝐫 𝐢𝐧𝐚𝐝𝐞𝐪𝐮𝐚𝐭𝐞 𝐜𝐨𝐧𝐬𝐢𝐝𝐞𝐫𝐚𝐭𝐢𝐨𝐧)
= 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 ×
𝐈𝐧𝐜𝐨𝐦𝐞 𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐓𝐨𝐭𝐚𝐥 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐜𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 𝐨𝐟 𝐭𝐫𝐚𝐧𝐬𝐟𝐞𝐫𝐞𝐞 (𝟏𝐬𝐭 𝐀𝐩𝐫𝐢𝐥 𝐨𝐟 𝐏𝐘)

• Salary received by the spouse from partnership firm is not to be

clubbed.
• Share of profits in a partnership firm is exempt in the hands of
partners u/s 10(2A).
Note: If profit/interest is further invested to earn fresh profit/interest. then such fresh
profit/interest shall not be clubbed.
Asset Sold Where a person transfers any asset to his/her spouse for inadequate
by Spouse - consideration and the spouse has further transferred/sold this asset,
Capital capital gains accruing to spouse shall be clubbed in the income of the
Gains to be first transferor.
Clubbed Example: Mr X has pifted shares to Mrs X. Mrs X has sold the same shares
to Mr Y on which she has earned capital gains of Rs 2 lakhs. Such capital
gains of Rs 2 lakhs shall be clubbed in the income of Mr X.

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Change in Example: Mr X has aifted shares to Mrs X. Mrs X sells this shares at 'no
the Form of profit no loss basis1 to Mr Y and deposits the cash received on such sale in
Asset a bank account. Interest received from the bank on such deposit shall be
clubbed in the income of Mr X.
Clubbing • If there are two transfers which individually do not get covered
Provisions under the clubbing provisions but the combined effect of these two
to Apply in transfers is to evade the taxes, in such cases clubbing provisions
Case of would still apply.
Cross • Example: Ram aifts an asset worth Rs 10.000 to Shvam's wife & Shvam
Transfers/ also aifts an asset worth Rs 10,000 to Ram's wife, then the combined effect
Indirect of these two transactions is Ram & Shyam transferring an asset worth Rs
10,000 to their respective wives indirectly without adequate consideration.
Transfers
In this case, income from the asset accruing to Ram's wife would be added
to Ram's income & income from the asset accruing to Shyam's wife would
be added to Shyam's income.
• Example: Aman aifts an asset of Rs 50,000 to Raman's wife. Raman aifts
shares of a foreign company worth Rs 50,000 to A man's minor son. In this
case, income accruing from the asset transferred to Raman's wife would be
clubbed in the income of Raman, bividend received by Aman's minor son
on the shares gifted to him would be clubbed in the income of Aman. [SC's
Judgement - Keshavji Morarji]
Income • Where a person has transferred any asset to his/her spouse without
From adequate consideration and there is an accretion to the said asset,
Accrued income from such additional asset (ie accretion) shall not be clubbed.
Assets, etc Example: Mr X aifted 100 shares of a foreian company to Mrs X and Mrs X
received 50 bonus shares. In this case, dividend income and capital gains in
respect of 100 original shares shall be clubbed in the income of Mr X.
However, dividend income and capital gains in respect of bonus 50 shares
shall not be clubbed in the income of Mr X.
• Where a person has transferred any asset to his/her spouse without
adequate consideration and the income received from such asset is
invested by the transferee to earn fresh income, then such fresh income
(ie income on income) shall not be clubbed. Example: Mr X aifted 100
shares of a foreian company to Mrs X without adequate consideration. Mrs
X received a dividend of Rs 1,00,000. Mrs X invested this dividend income
to earn a fresh income of Rs 20,000. In this case, dividend of Rs 1,00,000
shall be clubbed with the income of Mr X and the fresh income of Rs 20,000
shall not be clubbed with the income of Mr X.
Section 64(1)
INCOME FROM ASSETS TRANSFERRED TO SON’s WIFE WITHOUT CONSIDERATION

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Where a person transfers any asset including house property to his/her son's wife
without adequate consideration, clubbing provisions would apply in the same
manner as they apply in respect of an asset transferred to spouse for inadequate
consideration. (Asset should be transferred on or after 01.06.1973)
Section 64(1)
ASSETS TRANSFRD. TO ANY PERSON FOR THE BENEFIT OF SPOUSE/SON’s WIFE
• Where a person transfers any asset including house property to any person for
the benefit of his/her spouse or for the benefit of his/her son's wife, clubbing
provisions would apply even in such cases.
• Income from the asset transferred shall be clubbed in the income of the transferor.
• The benefit can arise to spouse/son’s wife directly or indirectly. The benefit can be
immediate/deferred.

Section 64(1 A)
CLUBBING OF INCOME OF A MINOR CHILD

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Relevant • Income of a minor child shall be clubbed in the hands of the father or the
Provision mother, whose total income is higher before such clubbing.
• In case the parents are divorced, income shall be clubbed in the hands of
the mother or the father, whosoever maintains the minor child.
• Where a minor attains majority during the relevant previous year, only the
income earned before the date of attaining the age of majority shall be
clubbed u/s 64(1A).
• If in respect of a particular year, income of a minor child has been clubbed
in the income of one parent (let's say father), then in the next year such
income cannot be clubbed in the income of the other parent (ie, mother)
unless the Assessing Officer is satisfied that it is necessary to do so.
• Minor child, for the purposes of this section, includes an adopted child as
well as a step child. Even a married minor daughter is considered as a minor
child and her income is clubbed in the hands of her parent (father/mother).
However, a minor child suffering from a permanent disability, blindness or
subject to mental retardation as specified u/s 80U is not considered as a
minor child for the purposes of Section 64(1A).
Exemption If income of a minor child is clubbed in the income of the parent
u/s 10(32) (father/mother), an exemption of Rs 1,500 p.a. per child is available to the
parent.
(No limit on number of minor children).
Section 64(1) – REMUNERATION RECEIVED FROM A CONCERN IN WHICH SPOUSE
HAS SUBSTANTIAL INTEREST
• This provision is applicable if all the following conditions are satisfied:
□ Remuneration is received by a person from a concern (such remuneration can be
in the form of salary, commission, fee, etc);
□ Such person does not have any technical or professional qualification (technical
or professional qualification does not necessarily mean that a person should have
degree or membership of a professional body; technical & professional qualification
would also include experience, expertise or natural talent without any professional
degree) {SC's Judgement in CIT v/s Batta Kalyani};
□ The spouse of such person has substantial interest in the concern (substantial
interest means holding 20% or more of the total voting power in case of a company or
20% or more profit share in case of a partnership firm at any time during the relevant
previous year);
□ The spouse can have substantial interest either individually or along with any
relative (relative u/s 2(41) means husband, wife, brother or sister or any lineal
ascendant or lineal descendant). Example: Mrs A holds 15%> shares of XYZ Ltd and her
brother holds 7% shares of XYZ Ltd. For the purposes of this section, Mrs A would be
deemed to have a substantial interest in XYZ Ltd.

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• If all the above conditions are fulfilled, the remuneration received by the person
from the concern shall be clubbed in the income of the spouse having substantial
interest in such concern.
• Example: Mr A is not a professionally & technically qualified person. He has received a
remuneration of Rs 5,00,000 during PY 2019-20 from XYZ & Co, a partnership firm in
which Mrs A has a profit share of 35%>. In this case, the remuneration of Rs 5,00,000
received by Mr A shall be clubbed in the income of Mrs A. However, if Mr A would have
been a professionally & technically qualified person, clubbing provisions would not
have applied.
• Where both husband and wife have substantial interest in a concern and both are in
receipt of income by way of salary etc from the said concern and both of them don't
possess any technical/professional qualification, such income will be includible in the
hands of that spouse, whose total income, excluding such income is higher.
Section 64(2)
CONVERSION OF SELF-ACQUIRED PROPERTY INTO COMMON PROPERTY OF HUF
If any member of HUF has gifted any asset to the HUF, income from such asset shall be
clubbed in the income of such member in the manner given below:
□ Case (a) - Partition of HUF has not taken place:
The entire income from the asset so transferred shall be clubbed in the income of the
member. Example: Mr A is a member of ABC HUF. He has gifted a sum of Rs 5,00,000 to
the ABC HUF. Such sum is invested by HUF in securities from which an income of Rs
75,000 has been earned. Such income shall be clubbed in the income of Mr A.
□ Case (b) - Partition of HUF has taken place:
Only that portion of the incomeshall be clubbed which relates to the part of the asset
received by the spouse of the transferor on the partition of HUF.
Example: Mr A is a member of ABC HUF. He has gifted a sum of Rs 5,00,000 to the ABC
HUF. Such sum is deposited in a bank @ 15% interest rate. Partition of HUF has taken
place and Mrs A has received a sum of Rs 3,00,000. In this case, income of Rs 45,000
(3,00,000 * 15%) shall be clubbed in the income of Mr A.
Section 65
If any particular income of one person has been clubbed in the income of a second
person but tax cannot be recovered from the second person, then the income tax
authorities can demand the tax from the first person only to the extent his income was
clubbed in the income of the second person.
Example; Mr A has gifted a sum of Rs 10,00,000 to Mrs A from which an income of Rs
1,20,000 has been earned during PY 2019-2020. Mr A has a total income of Rs 50,00,000
before the clubbing of the income of Rs 1,20,000 mentioned above. Mr A has got bored
with Mrs A and he has absconded to Mauritius with the sister of Mrs A for spending his
rest of life there. In this case, the income tax authorities can demand tax from Mrs A but
such demand should not exceed the differential amount of tax that would have been
payable on the clubbed income of Rs 1,20,000.

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RULES FOR CLUBBING OF INCOME (HOW TO CLUB INCOME)

Clubbing of income will also include clubbing of loss. Income shall be clubbed in the
following manner:
• Step 1:
Calculate the income/loss in the hands of the recipient as if it is the income of the
recipient. All deductions under the relevant head will be allowed while calculating the
income.
• Step 2:
The income or loss calculated as above will then be clubbed with the income of the
transferor under the same head (ie the head to which such income belongs). Exemption
upto Rs 1,500 per annum per child is available uIs 10(32) in respect of clubbing of
income of a minor child.
• Step 3:
Such clubbed income is the income of the transferor and provisions relating to set-off &
carry forward of losses shall apply in the normal manner. Deductions u/s 80C-80U shall
also be allowed in the normal manner.

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SET-OFF CARRY-FORWARD OF LOSSES

Section 70 - INTRA-HEAD ADJUSTMENT (Adjustment Within The Same Head)

General Within a particular head of income, loss from one source can be set-off against
the income from any other source. This is known as intra-head adjustment or
Rule inter-source adjustment.

Exceptions □ Losses from speculative business can be set-off only against the income from
any other speculative business (Section 73);

□ Losses from business specified u/s 35AD can be set-off only against the
income from any other business specified u/s 35AD (Section 73A);

□ Losses from owning and maintaining of race horses can be set-off only
against the income from owning and maintaining of race horses (Section 74A);
and

□ Long-term capital losses cannot be-set-off against STCG (Section 70).

Section 71 - INTER-HEAD ADJUSTMENT

General Where in respect of any assessment year, there is a loss under any head of
income, it can be set-off against income under any other head for that
Rule
assessment year.

Exceptions □ Losses from speculative business can be set-off only against the income from
any other speculative business (Section 73);

□ Losses from business specified u/s 35AD can be set-off only against the
income from any other business specified u/s 35AD (Section 73A);

□ Losses from owning and maintaining of race horses can be set-off only
against the income from owning and maintaining of race horses (Section 74A);

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□ PGBP losses cannot be set-off against salary income (Section 71); and

□ Capital losses (ST/LT) cannot be set-off against income under any other head
(Section 71)

SPECIAL POINTS:
□ Order of Set-off: Losses need to be first set-off intra head (Sec 70), then inter head (Sec
71) and then the b/f losses are to be set-off as per the provision of Sections 71B .to 79.

□ Under the Income Tax Act, 1961, no particular mode has been prescribed for set-off of
losses. In the absence of any specific provision, theassessee may choose to set-off the losses
in the manner which is most beneficial to him.

□ Set-off A c/f of losses is MANDATORY: The assessee does not have an option to set-off or
not to set-off a loss. If income is there, then the loss needs to be mandatorily set-off in that
year itself, otherwise the option of c/f of such loss is lost.

□ If income from a particular source is exempt, benefit of set-off & c/f cannot be availed in
respect of losses from such exempt source. In other words, losses from an exempt source
have no tax treatment. (Example - Agricultural loss u/s 10(1), LT capital loss on sale of
equity shares covered u/s 10(38) and other such similar exempted losses have no
treatment while computing total income).

SET-OFF & CARRY-FORWARD OF LOSSES - SUMMARY

Income Head Intra-Head Inter-Head Carry-Forward of
Adjustment (Section Adjustment Unadjusted Losses
70 in General) (Section 71 in
General)

Salary No loss can arise u/h Salary

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House Property Loss from one house Net loss u/h House Sec 71B: Net unad justed
can be set off against Property can be set loss u/h House Property can
income from any off against income be c/f for a period of 8
other house. under any other head years.
other than casual
In future years, loss to be set
income. (Max
Adjustment - Rs 2 off only against income u/h
House Property.
lacs)

• Normal Loss from one Net loss u/h PGBP Sec 72: Net unad justed loss
Business business can be set off can be set off against u/h PGBP can be c/f for a
against income from income under any period of 8 years. In future
any other business. other head other years, loss to be set off only
than salary and against income u/h PGBP.
casual income.

• Sec 73: Loss from Sec 73: Net Sec 73: Unad justed loss of
BUSINESS/PROFESSION

Speculative speculative business speculative business speculative business can be

Business can be set off only loss cannot be set off c/f for a period of 4 years.
against income from against income In future years, loss to be set
any other speculative under any other off only against income from
business. head. speculative business.

• Business Sec 73A: Loss from a Sec 73A: Net loss Sec 73A: Net unad justed
u/s 35AD business specified u/s from a business loss of a business specified
35AD can be set off specified u/s 35AD u/s 35AD can be c/f for an
only against income cannot be set off unlimited time. In future
from any other against income years, loss to be set off only
business specified u/s under any other against income from a
35AD. head. business specified u/s
35AD.

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Capital Sains □ ST Capital Loss can Capital losses cannot Sec 74: Unadjusted capital
be set off against STCG be set off against losses can be c/f for a period
A LTCG. income under any of 8 years. In future years,
other head. ST Capital Loss can be set
□ LT Capital Loss can
off against STCG A LTCG. LT
be set off only against
Capital Loss can be set off
LTCG. only against LTCG.

• Casual Casual loss is not Not allowed to be set Casual loss is not allowed to
Loss allowed to be set off at off aqainst income be carried forward at all.
all. It's a dead loss under any other
with no tax treatment. head.

• Losses Sec 74A: Loss from Sec 74A: Net loss Sec 74A: Unadjusted loss
from O&M owninq A maintaining from owninq A from OAΛA race horses can
Race race horses can be set maintaining race be c/f for a period of 4
OTHER SOURCES

Horses off only aqainst horses cannot be set years. In future years, loss
income from owning A off against income to be set off only against
maintaining of race under any other income from owning A
horses. head. maintaining race horses.

• Other Loss from one source Other losses u/h Other losses u/h other
Losses can be set off aqainst other sources' can be sources' cannot be carried
any other income set off against forward.
under the same head income under any
other than casual other head.
income.

Sections 70, 71 & 71B

SET-OFF & CARRY FORWARD OF LOSSES UNDER THE HEAD ‘HOUSE PROPERTY*

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Infra-Head As per Section 70, losses from one house property can be set-off
Adjustment against income from any other house property.
(Section 70)
Example: If Mr A has loss of Rs 60,000 from one house and income of Rs
1,00.000 from another house, the loss of Rs 60,000 can be set-off against
the income of Rs 1,00,000 and the net income u/h house property would
come out to Rs 40,000.

Inter-Head □ As per Section 71, losses u/h house property can be set-off against
Adjustment income under any other head. However, no such adjustment is
(Section 71) allowed from casual income

(ie house property loss cannot be set-off against casual income).

□ However, with effect from PY 2019-2020, such adjustment is

allowed maximum to the extent of Rs 2 lakhs and the excess loss
shall be carried forward for being set-off in future years as per the
provisions of Section 71B.

Carry Forward □ Unadjusted house property losses are allowed to be carried

of Losses Under forward for a period of 8 years. The period of 8 years would start from
the Head 'House the year subsequent to the year in which the loss was incurred.
Property’
□ Example: House property loss pertaining to PY 2019-2020 (AY 2020-
(Section 71B)
21) can be c/f from PY 2020-21 to PY 2025-26 (AY 2020-21 to AY 2026-
27).

□ In future years, such loss shall be allowed to be set-off from income

u/h house property only.

□ There is no condition that the house in respect of which loss is being

carried forward should be owned by the assessee in the year in which
such b/f loss is being set-off.

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Sections 70, 71 & 74

SET-OFF & CARRY FORWARD OF LOSSES UNDER THE HEAD ‘CAPITAL GAINS’

Intra-Head □ Short-term capital losses (u/s 111A or others) are allowed to be set-off
Adjustment against short-term capital gains as well as long-term capital gains.
(Section 70 A
□ Long-term capital losses are allowed to be set-off only against long-
Section 74)
term capital gains. (Long term capital loss set off against short term
capital gain)

Example: If Mr A has short-term capital loss of Rs 50.000 and LTCG of Rs

1.00.000. set-off is allowed.

Example: If Mr A has Iona-term capital loss of Rs 50.000 and 5TCG of Rs

1.00.000. set-off is not allowed.

Inter-Head A combined reading of Section 71 A Section 74 provides that losses u/h

Adjustment capital gains cannot be set-off against income under any other head.
(Section 71)

Carry □ Unadjusted losses u/h capital gains are allowed to be carried forward
Forward of for a period of 8 years. The period of 8 years would start from the year
Losses Under subsequent to the year in which the loss was incurred.
the Head
□ Example: Capital losses pertaining to PY 2019-2020 (AY 2020-21) can be
'Capital Gains'
(Section 74) carried forward from PY 2020-21 to PY 2025-26 (AY 2020-21 to AY 2026-
27).

□ In future years, short-term capital losses are allowed to be set-off

against short-term capital gains or long-term capital gains. However,
long term capital losses can be set-off only against long term capital
gains.

SET-OFF & CARRY FORWARD OF LOSSES UNDER THE HEAD ‘PGBP’

The pre-condition for carry-forward and set-off of losses u/h business/profession is that
the assessee who has incurred the loss and the assessee who claims carry-forward and set-
off of losses should be same. Certain exceptions to this general rule have been discussed

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later in this chapter.

Case 1: Normal Business (Non-Speculative) - Sections 70, 71 A 72

Intra-Head As per Section 70, losses from one business can be set-off against income
Adjustment from any other business.
(Section 70)
Example: If Mr A runs two businesses and he has loss of Rs 60,000 from
Business X and income of Rs 1,00,000 from Business Y, then loss of
Business X can be set-off against the income of Business y and the net PGBP
income would come out to Rs 40,000.

Inter-Head As per Section 71, losses u/h business/profession can be set-off against
Adjustment income under any other head except casual income and salary income (ie
(Section 71) business losses cannot be set-off against casual income and salary income).

Carry □ Unadjusted losses u/h business/profession are allowed to be carried

Forward of forward for a period of 8 years. The period of 8 years would start from the
Losses Under year subsequent to the year in which the loss was incurred.
the Head
□ Example: Business losses pertaining to PV 2019-2020 (AY 2020-21) can
’Business/
be carried forward from PY 2020-21 to PY 2025-26 (AY 2020-21 to AY
Profession’
2026-27).
(Section 72)
□ In future years, such loss shall be allowed to be set-off from income u/h
business/ profession only.

□ There is no condition that the business in respect of which loss is being

c/f should be carried on by the assessee in the year in which such b/f loss is
being set-off.

Case 2: Losses of Business Specified u/s 35AD - Section 73A

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Intra-Head Losses from a business specified u/s 35AD are allowed to be set-off only
Adjustment against income from any other business specified u/s 35AD.
(Section 73A)
Example: If Mr A runs two businesses specified u/s 3 5 AD and he has loss
of Rs 60.000 from Business X and income of Rs 1,00,000 from Business Y,
then loss of Business X can be set-off against the income of Business Y and
the net income under the head business/ profession would come out to Rs
40,000.

Example: Mr A runs two businesses - Business X (specified u/s 3 5 AD) and

Business Y (not specified u/s 35AD). If there is a loss from Business X, it
cannot be set-off against the income of Business Y.

Example: Mr A runs two businesses - Business X (specified u/s 35AD) and

Business Y (not specified u/s 35AD). If there is a loss from Business Y, it can
be set-off against the income of Business X as per Section 70.

Inter-Head Losses from a business specified u/s 35AD cannot be set-off against income
Adjustment under any other head.
(Section 73A)

Carry □ Unadjusted losses of a business specified u/s 35AD are allowed to be

Forward of carried forward for being set-off against income of a business specified u/s
Losses of a 35AD in future years.
Business
□ Losses of a business specified u/s 35AD are allowed to be carried forward
Specified u/s
indefinitely till they are set-off against the income of a business specified
35AD
u/s 35AD. (8 years)
(Section 73A)

Section 73

SET-OFF & CARRY FORWARD OF LOSSES OF ‘SPECULATIVE BUSINESS’

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Meaning of □ Speculative transaction means a transaction in which:
Speculative
a contract for sale or purchase of any commodity (including stocks &
Business/
shares) is periodically or ultimately settled
Speculative
Transaction - otherwise than by the actual delivery or transfer of commodity (including
Section 43(5) stocks and shares).

□ In speculative transactions, the sale and purchase of commodities are set-

off against each other and actual delivery of shares, securities and
commodities never takes place. Example: A person enters into multiple
contracts for sale of securities and purchases of securities. He does not
actually buy/sell any securities. On the settlement date, all the purchases
are set-off against sales and the differential position is settled in cash.
Income from such transactions is considered as income from speculative
business.

□ Section 28 provides that prof it/losses from speculative transactions are

taxable u/h ‘income from business/profession". Income of a speculative
business is to be calculated in the normal manner and it shall be taxable at
the normal rates.

Intra-Head Losses from a speculative business are allowed to be set-off only against
Adjustment income from any other speculative business.
(Section 73)
Example: If Mr A runs two speculative businesses and he has loss of Rs
60.000 from Business X and income of Rs 1,00,000 from Business Y, then
loss of Business X can be set-off against the income of Business Y and the
net PGBP income after set-off of losses would come out to Rs 40,000.

Example: Mr A runs two businesses - Business X (speculative business) and

Business Y (non-speculative business). If there is a loss from Business X, it
cannot be set-off against the income of Business Y.

Example: Mr A runs two businesses - Business X (speculative business) and

Business Y (non-speculative business). If there is a loss from Business Y, it
can be set-off against the income of Business X as per Section 70.

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Inter-Head Losses from a speculative business cannot be set-off against income under
Adjustment any other head.
(Section 73)

Carry □ Unadjusted losses of a speculative business are allowed to be carried

Forward of forward for a period of 4 years. The period of 4 years would start from the
Losses of a year subsequent to the year in which the loss was incurred.
Speculative
□ Example: Losses from a speculative business pertaining to PY 2019-2020
Business
(AY 2020-21) can be carried forward from PY 2020-21 to PY 2021-22 (AY
(Section 73)
2020-21 to AY 2022-23).

□ In future years, the losses from a speculative business can be set-off

against income of a speculative business only.

□ There is no condition that the speculative business in respect of which

loss is being carried forward should be carried on by the assessee in the
year in which such b/f loss is being set-off. Such loss can be set-off against
the income of any other speculative business.

SET-OFF & CARRY FORWARD OF LOSSES UNDER THE HEAD ‘OTHER SOURCES’

Case 1: Losses from Owning A Maintaining Race Horses - Section 74A

Income □ Income from a business of owning and maintaining race horses is taxable
Taxable u/h u/h 'income from other sources'.
Other Sources
□ Income from a business of owning and maintaining any other race animal
is taxable u/h 'income from business/profession'. Losses from such
business are not dealt under this section - such losses are treated as losses
from any other business and have to be dealt as per the provisions of
Sections 70, 71 A 72.

Example: Losses from the business of owning and maintaining race camels
are to be treated as 'business losses' and their treatment would be carried
out according to Sections 70, 71 & 72.

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Intra-Head Losses from business of owning A maintaining race horses are allowed to
Adjustment be set-off only against income from any other business of owning A
(Section 74A) maintaining race horses.

Example: If Mr A runs two business of owning and maintaining race horses

and he has loss of Rs 60,000 from Business X and income of Rs 1,00,000
from Business y, then loss of Business X can be set-off against the income of
Business y and the net income u/h other sources would come out to Rs
40,000.

Example: Mr A runs two businesses - Business X (business of owning and

maintaining race horses) and Business Y (any other business). If there is a
loss from Business X, it cannot be set-off against the income of Business Y.

Example: Mr A runs two businesses - Business X (business of owning and

maintaining race horses) and Business Y (any other business). If there is a
loss from Business Y, it can be set-off against the income of Business X as
per Section 71.

Inter-Head Losses from the business of owning and maintaining race horses cannot be
Adjustment set-off against income under any other head.
(Section 74A)

Carry □ Unadjusted losses from the business of owning and maintaining race
Forward of horses are allowed to be carried forward for a period of 4 years. The period
Losses From of 4 years would start from the year subsequent to the year in which the
Owning A loss was incurred.
Maintaining
□ Example: Losses from a business of owning and maintaining race horses
Race Horses
pertaining to PY 2019-2020 (AY 2020-21) can be c/f from PY 2020-21 to PY
(Section 74A)
2021-22 (AY 2020-21 to AY 2022-23).

□ In future years, the losses from the business of owning and maintaining
race horses can be set-off only against the income from business of owning
and maintaining race horses.

Case 2: Other Incomes (Such as Interest Income. Dividend Income, etc)

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Intra-Head As per Section 70, if an assessee has loss under the head other sources, such
Adjustment loss can be set-off against any income under the same head except casual
(Section 70) income.

Inter-Head As per Section 71, unadjusted losses u/h other sources are allowed to be
Adjustment set-off against income under any other head.
(Section 71)

Carry Unadjusted losses u/h other sources are not allowed to be carried forward.
Forward of
Losses

Section 32(2)

TREATMENT OF ‘UNABSORBED DEPRECIATION’

Meaning of □ Assessee carrying business/profession are allowed to debit

depreciation expenditure while calculating their income u/h
Unabsorbed
‘business/profession. However, such expenditure can be debited only to
Depreciation the extent income is available u/h business/profession.
□ The balance amount of depreciation that cannot be debited is referred
to as ’unabsorbed depreciation'.

Example: PGBP income before debitina current year depreciation is Rs

1.00,000 and the current year depreciation expenditure turns out to be Rs
1,60,000. bepreciation to the extent of Rs 1,00,000 can be debited to P&L
A/c and the balance Rs 60,000 would be referred to as 'unabsorbed
depreciation'.

Treatment of □ Unabsorbed depreciation of a particular year is allowed to be set-off in

the same year against income under any other head except casual income.
Unabsorbed
□ If unabsorbed depreciation cannot be adjusted in the same year, it is
Depreciation
allowed to be carried forward for an indefinite period of time (ie for an
unlimited period) and in the subsequent years, such unabsorbed
depreciation shall be allowed to be set-off against any income other than

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casual income.

□ If any assessee has b/f business losses as well as b/f unabsorbed

depreciation, a rational taxpayer would first adjust b/f business losses
and b/f unabsorbed depreciation afterwards.

Example: burina PY 2019-2020. Mr X has earned PGBP income of Rs

10.00.000. He has brought forward Rs 8,00,000 as business losses and Rs
5,00,000 as unabsorbed depreciation pertaining to past periods eligible
for set-off during PY 2019-2020. In this case, b/f business loss would be
adjusted first and unabsorbed depreciation would be adjusted
subsequently to the extent of Rs 2,00,000. Balance unabsorbed
depreciation of Rs 3,00,000 would be c/f to the next assessment year.

ORDER OF SET-OFF OF LOSSES FOR A PERSON CARRYING ON BUSINESS/PROFESSION

 Current year business expenses

Current year depreciation/Current year capital expenditure on scientific

research/Current year capital expenditure on family planning

B/f business loss from previous years

B/f unabsorbed depreciation/B/f unabsorbed capital expenditure on scientific

research/B/f unabsorbed capital expenditure on family planning

Section 72A – Special Cases (Amalgamation, Demerger & Reorganisation of Business)

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Set-off A Carry □ The accumulated business losses (ie losses u/h business/profession)
Forward of of the amalgamating company shall be allowed to be carried forward
Losses in Case and set-off in the hands of the amalgamated company for fresh eight
of years if certain conditions mentioned u/s 72A are fulfilled (ie b/f
Amalgamation business losses would be considered as a loss incurred in the year of
amalgamation & 8 years would be calculated accordingly).

□ Similarly, unabsorbed depreciation of the amalgamating company

shall be allowed to be carried forward and set-off in the hands of the
amalgamated company for an indefinite period of time.

□ Example: ABC Ltd has b/f business losses of Rs 10.00.000 pertaining to

AY 2014-15. During AY 2020-21, ABC Ltd gets amalgamated with XYZ Ltd.
The business loss of ABC Ltd would be allowed to be c/f in the hands of
XYZ Ltd for a fresh period of eight years (ie, PGBP loss of Rs 10,00,000
shall be considered to be a loss of AY 2020-21 and it shall be allowed to be
c/f from AY 2020-21 to AY 2026-27).

Set-off A Carry □ The accumulated business losses (ie losses u/h business/profession)
Forward of of the demerged company shall be allowed to be carried forward and
Losses in Case set-off in the hands of the resulting company for the balance
of Demerger unexpired period if certain conditions mentioned u/s 72A are fulfilled.

□ Similarly, unabsorbed depreciation of the demerged company shall

be allowed to be carried forward and set-off in the hands of the
resulting company for an indefinite period of time.

□ Example: ABC Ltd has three divisions - Division A. Division B. Division C.

ABC Ltd has b/f business losses of Rs 10,00,000 pertaining to Division A
for AY 2014-15. During AY 2020-21, Division A gets demerged and a new
company A Ltd is formed. The business loss shall be allowed to be c/f in
the hands of A Ltd till AY 2022-23

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Set-off A Carry □ This provision applies in the following three cases:
Forward of
Conversion of a proprietary concern into a company;
Losses in Case
of Conversion of a partnership firm into a company; and
Reorganisation
of Business Conversion of a private company/unlisted public company into a
limited liability partnership firm (ie LLP firm)

□ The accumulated business losses (ie losses u/h business/profession)

of the predecessor shall be allowed to be carried forward and set-off
in the hands of the successor for fresh eight years (ie b/f business
losses would be considered as a loss incurred in the year of conversion
and 8 years would be calculated accordingly).

□ Unabsorbed depreciation of the predecessor shall be allowed to be

carried forward and set-off in the hands of the successor for an
indefinite period of time.

□ Adjustment is allowed subject to the following conditions:

Proprietary Concern to Company: The proprietor should hold at least

50% of the shares of the company for at least 5 years from the date of
conversion.

Partnership Firm to Company: The partners should hold at least 50%

of the shares of the company for at least 5 years from the date of
conversion.

Pvt Co/Unlisted Public Co to LLP: The shareholders should hold at

least 50% profit share in LLP for at least 5 years from the date of
conversion. Total assets of the company during the past 3 years should
not exceed Rs 5 crores at any time and its annual turnover during the past
3 years should not exceed Rs 60 lakhs.

Section 78

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CHANGE IN CONSTITUTION OF PARTNERSHIP FIRM - CARRY FORWARD OF LOSSES

Applicability of □ This provision applies where a partnership firm has unadjusted losses
Section 78 pertaining to past periods and any partner expires/retires from the
partnership firm.

□ This provision covers losses under all heads but this provision
does not apply in case of unabsorbed depreciation. Resultantly,
entire amount of unabsorbed depreciation can be carried
forward even though a change in the constitution of partnership
firm has occurred.

Carry Forward □ Case 1 - Partner has expired/retired at the beainnina of the year:
of Losses
Where a partner has expired/retired at the beginning of the year,
Where Section
his share of losses in the partnership firm shall not be allowed to
78 Applies
be carried forward and setoff by the partnership firm.

IMPORTANT THEORY QUESTION:

Exception to the rule that losses can be carried Exception to the rule that losses
forward only by the person who has incurred can be carried forward only for a
the loss period of eight years (8 years)
In the following cases, losses can be carried forward In the following cases, losses get
by a person other than the person who has incurred carried forward for a period more
the loss: than 8 years:

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• Section 72 A: • Section 72A:
□ Business losses of the amalgamating company can □ Amalgamation of companies
be earned forward by the amalgamated company □ Demerger-ef companies
□ Business losses of the demerged company can be □ Conversion of a proprietorship
carried forward by the resulting company concern into a company
□ In case of conversion of a proprietorship concern □ Conversion of a partnership firm
into a company, business losses of the into a company
proprietorship concern can be carried forward by □ Conversion of a private company/
the company (ie successor) unlisted public company into a LLP
□ In case of conversion of a partnership firm into a firm
company, business losses of the partnership firm
can be carried forward by the company (ie
successor)
□ In case of conversion of a private • Section 73 A:
company/unlisted public company into a LLP firm, Loss from business specified u/s
business losses of the predecessor can be carried 35AD can be carried forward
forward by the LLP firm (ie successor) indefinitely.
• Succession by Inheritance - Section 78:
Where any person carrying on any business/
profession has been succeeded in such capacity by
any other person by way of inheritance, such other
person (ie the successor of business) is allowed to
carry forward and set-off the losses of the
predecessor for the balance unexpired period
against his own income.
Example: Mr X runs a business and he has brouaht
forward business losses of PY 2013-14. He expires
during PY 2019-2020 and the business is inherited
by his son Mr Chotta X. In this case, Mr Chotta X
would be allowed to carry forward and set-off such
losses against his own income till PY 2021-22.

Question 1

Ms Geeta, a resident individual, provides the following details of her income & losses for
the year ended 31.3.2020:

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(i) Salary received as a partner from a partnership firm Rs 7,50,000.

(ii) Loss on sale of shares listed in BSE Rs 3,00,000. Shares were held for 15 months and
GTI paid on their sale.

(iii) Long-term capital gain on sale of land Rs 5,00,000.

(iv) Rs 51,000 received in cash from friends in party.

(v) Rs 55,000 received towards dividend on listed equity shares of domestic companies.

(vi) Brought forward business loss of Assessment Year 2019-20Rs 12,50,000.

Compute gross total income of Ms Geeta for AY 2020-21 and ascertain the amount of loss
that can be c/f.

Question 2

Calculate gross total income of Mr Soohan from the following details submitted by him for
AY 2020-21 and show the losses eligible to be carried forward.

Particulars Amount (Rs)

Income from salary 3,00,000

Loss from let out house property 40,000

Income from sugar business 50,000

Loss from iron ore business b/f (discontinued in PY 2014-15) 1,20,000

Short term capital loss 60,000

Long term capital gain 40,000

dividend 5,000

Income received from lottery winning (Gross) 50,000

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Winnings from card games 6,000

Agricultural income 20,000

Long term capital gain from shares (GTI paid) 10,000

Short term capital loss u/s 111A 10,000

Bank interest 5,000

ANSWERS

Answer 1

Computation of Gross Total Income of Ms Geeta for Assessment Year 2020-21:

Particulars Amount (Rs) Amount (Rs)

PGBP Income:

Salary received as a partner from a partnership firm is 7,50,000

taxable u/h PGBP

Less: β/f business loss of AY 2019-20 to be set-off against (7,50,000) Nil

business income

Capital Sains: LTCG on sale of land (See Note 2) 5,00,000

Income from Other Sources:

• Cash gift received from friends 51,000

• Dividend received from a domestic company is exempt u/s Nil 51,000

10(34)

Gross Total Income 5,51,000

Notes:

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1. Balance b/f business loss of AY 2019-20 of Rs 5,00,000 has to be carried forward to the
next year.

2. Long-term capital loss on sale of shares cannot be set-off against LTCG on sale of land
since loss from an exempt source cannot be set-off against profit from a taxable source.
Since LTCG on sale of listed shares on which GTI is paid is exempt u/s 10(38), loss on sale
of listed shares is a loss from an exempt source. So, it cannot be set-off against LTCG on sale
of land, which is a profit from a taxable source.

Answer 2

Computation of Gross Total Income of Mr Soohan for AV 2020-21:

Particulars Amount (Rs) Amount (Rs)

Salaries: 2,60,000

Income from salary 3,00,000

Less: Loss from house property set-off against salary income (40,000)
as per Section 71

Profits and Sains of Business/Profession: Nil

Income from sugar business 50,000

Less: B/f loss from iron-ore business set-off as per Section 72 (50,000)
[Balance business loss of Rs 70,000 of PY 2014-15 c/f to AY
2021-22}

Capital Sains: Nil

Long Term Capital Sain 40,000

Less: Short term capital loss set-off. Balance short-term capital (40,000)
loss of Rs 20,000 to

be carried forward. Short-term capital loss of Rs 10,000 u/s

111 A also to be c/f.

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Income from Other Sources: 61,000

• Winnings from lottery 50,000

• Winnings from card games 6,000

• Bank interest 5,000

Gross Total Income 3,21,000

Losses to be c/f to AY 2021-22:

 Loss of iron-ore business = Rs 70,000

 Short term capital loss (Rs 20,000 + Rs 10,000) = Rs 30,000

Note 1: The following incomes are exempt u/s 10:

(i) Dividend income [Exempt u/s 10(34)], assuming that dividend is received from a
domestic company.

(ii) Agricultural income [Exempt u/s 10(1)].

(iii) Long-term capital gains on which GTI is paid [Exempt u/s 10(38)].

Note 2: It is presumed that loss from iron-ore business relates to PY 2014-15(ie the year of
discontinuance of business).

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DEDUCTIONS

DEDUCTIONS FROM GTI

MOST IMPORTANT POINT:

Deductions given u/s 80C-80U are never allowed from the following special incomes earned
by an assessee:

□ Long term capital gain (LTCG) u/s 112

□ Short term capital gain (STCG) covered u/s 111A

□ Casual income

Section 80C
DEDUCTIONS IN RESPECT OF CERTAIN INVESTMENTS (LIC, PPF, ETC)

1. Eligible • Individual (Resident/Non-resident)

Person • HUF (Resident/Non-resident)
2. Quantum of As per Section 80CCE, maximum deduction cumulatively u/s 80C, 80CCC
Deduction & 80CCD cannot exceed Rs 1,50,000.
3. Eligible Investments
A. National • Amount invested in NSC is allowed as deduction (NSCs are generally
Savings issued for 5 years/10 years).
Certificate • An individual can invest in the name of self, spouse or minor child
('NSC) whereas HUF can invest in the name of any of its member.
• The principal amount received on maturity is exempt from tax,
however interest amount is taxable on accrual basis u/h 'income from
other sources'.
• Deduction of Interest Amount:
□ Annual interest accrued:
Amount allowed as deduction u/s 80C (since the same is reinvested)
□ Interest received on maturity (ie interest for last year):
No deduction available (since the same is not reinvested)

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B. Public • Amount invested in PPF is allowed as deduction (PPF Account is
Provident opened with a Bank/Post Office; maturity takes place after 15 years).
Fund • An individual can invest in the name of self, spouse or children (minor
(‘PPF*) or major) whereas HUF can invest in the name of any of its member.

• The principal amount as well as the interest amount are exempt from
tax.
C. Fixed • Amount invested in a FD with a scheduled bank for a term of 5 years or
Deposits more is allowed as deduction.
with • An individual can invest only in his own name (spouse, children)
Scheduled whereas HUF can invest in the name of any of its member.
Banks • The principal amount received on maturity is exempt from tax
(5 years or wherea≤ the interest amount is taxable on accrual basis (no deduction
more) for interest).
• If FD is encashed before the expiry of 5 years, the amount of deduction
allowed earlier would become taxable in the year of encashment.
D. Five-Year • Amount invested in Five Year Post Off ice Time Deposit A/c is allowed
Post Office as deduction.
Time • An individual can invest only in his own name (spouse, children)
Deposit whereas HUF can invest in the name of any of its member.
Account • The principal amount received on maturity is exempt from tax whereas
the interest amount is taxable on accrual basis (no deduction for
interest).
• If the deposit is encashed before the expiry of 5 years, the amount of
deduction allowed earlier would be come taxable in the year of
encashment.
E. Repayment Repayment of the principal amount of loan is allowed as deduction if all
of Principal the
Amount of following conditions are satisfied:
Housing • The loan is taken from notified organizations (like CG, SG, banks,
Loan financial institutions, LIC, National Housing Bank etc) or from a specified
employer (specified employer does not include a private limited
company).
• The loan is taken for purchase or construction of a residential house to
be used for residential purposes only (no deduction is allowed in respect
of loan taken for addition, alteration, repairs, etc of a house property).
Note 1: Interest payable on loan is not allowed as a deduction u/s 80C;
the same is allowed as deduction u/s 24(b) u/h ’income from house
property'.
Note 2: The house so purchased/constructed should not be transferred
for a period of 5 years from the end of the financial year in which the
house was purchased/constructed; otherwise the amount of deduction
allowed earlier would be taxable in the year in which such house has

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been transferred.

F. Life • An individual can take the life insurance policy in the name of self,
Insurance spouse and children (dependent/independent, minor/major,
Premium married/unmarried) whereas HUF can take the policy in the name of
(Most Imp) any of its member.
• The maximum amount of deduction available u/s 80C in respect of life
insurance premium depends upon the status of the assessee and the
date of issue of policy. The amount of premium paid is allowed as
deduction u/s 80C subject to the maximum limits which have been
specified in the table given below:
Case 1 - Insured Person Doesn't Suffer From Any Disability:
• Policy has been taken before April 1. 2012:
Maximum limit of 20% of sum assured
• Policy has been taken on or after April 1. 2012:
Maximum limit of 10% of sum assured
Case 2 - Insured Person Suffers From Disability Specified u/s 80U:

• Policy has been taken before April 1. 2013: Maximum limit of

20% of sum assured
• Policy has been taken on or after April 1. 2013:
Maximum limit of 15% of sum assured
• Treatment of amount receivable on maturity of insurance policy:
□ Amount receivable on death of the policy holder is always
exempt.
□ In other cases, the amount receivable on maturity is exempt if the
annual premium is upto the specified limit of 10%, 15% or 20% (ie
if the annual premium is more than the specified limit of 10%, 15%
or 20%, the amount receivable on maturity is fully taxable).

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G. Payment of Tuition fees (excluding donation or development fee, etc) payable at the
Tuition time of admission or thereafter is allowed as deduction provided all the
Fees (Only conditions are satisfied:
to an • Education is full time (no deduction for part-time or vocational
Individual) education).
• Tuitions fees of any two children of the individual is allowed as
deduction.
• Tuition fees is payable to any university, college, school or any other
educational institution situated in India.
H. Investment • Amount can be invested by an individual as guardian in the name of a
in Sukanya girl child who is of the age of 10 years or less.
Samridhi • The account can be closed once the girl child attains the age of 21 years
Scheme (18 years in case of marriage of the girl child).
• The principal amount received on maturity as well as the interest
amount is exempt from tax.

I. Investment • Amount contributed towards National Savings Scheme, 1987 as well as

in National National Savings Scheme, 1992 is allowed as deduction u/s 80C.
Savings • Withdrawals from National Savings Scheme:
Scheme □ National Savinas Scheme. 1987: Both principal as well as interest
(NSS) components are chargeable to income tax in the year in which the
amount is withdrawn.
□ National Savinas Scheme. 1992: Only interest component is charaeable
to income tax in the year in which the amount is withdrawn.
J. EMPLOYEE’S contribution to statutory provident fund or recognized provident fund or
approved superannuation fund
K. Investment in notified bonds of NABARD or National Housing Bank (NHB)
L. Investment in units of a mutual fund notified u/s 10(23D)
M. Investment in notified Equity Linked Savina Scheme CELSS’) of Unit Trust of India
• Example: Unit Linked Insurance Plan
• Investment can be made in the name of self, spouse or children
(dependent/independent, minor/major, married/unmarried) whereas HUF can take
the policy in the name of any of its member.
N. Subscription of equity shares or debentures issued by an Indian Public Company,
Public Financial Institution, etc provided the funds collected are used for the purposes
of developing, operating and maintaining an infrastructural facility - such investments
should not be sold for a period of 3 years from the date of their acquisition
O. Amount paid in an account under the Senior Citizens Savings Scheme
P. Stamp duty, registration fee and other expenses paid by an individual/HUF for the
purchase of a residential house property.

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Section 80CCC
DEDUCTION IN RESPECT OF CONTRIBUTION TO CERTAIN PENSION FUNDS
1. Eligible Person • Deduction is available only to an individual (Resident/Non-
Resident).
• The policy should be in the name of the individual himself and
the premium should also be paid by him only.
2. Eligible Annuity plan of any insurance company for receiving annuity or
Investment pension (eg Jeevan Suraksha Policy)
3. Quantum of Premium paid is available as deduction, subject to a maximum of
Deduction Rs 1,50,000. Further as per Section 80CCE, maximum deduction
cumulatively u/s 80C,80CCC & 80CCD cannot exceed Rs 1,50,000.
4. Taxability of Annuity received from insurance company is taxable in the hands
Annuity of the policyholder u/h 'income from other sources'.
Received

Section 80CCD
(i) Pension Scheme of Central Government: As per the “Restructured Defined Contribution
Pension System” applicable to new entrants to Government service, it is mandatory for persons
entering the service of the Central Government on or after 1st January, 2004, to contribute 10% of
their salary every month towards their pension account. A matching contribution is required to
be made by the Government to the said account. The benefit of this scheme is also available to
individuals employed by any other employer as well as to self-employed individuals.
(ii) Deduction: Section 80CCD provides deduction in respect of contribution made to the pension
scheme notified by the Central Government.
Accordingly, in exercise of the powers conferred by section 80CCD(1), the Central Government has
notified the ‘Atal Pension Yojana (APY)’ as a pension scheme, contribution to which would qualify for
deduction under section 80CCD in the hands of the individual..
(iii) Quantum of deduction:
(A) Section 80CCD(1) provides a deduction for the amount paid or deposited by an employee
in his pension account subject to a maximum of 10% of his salary. The deduction in the case
of a self- employed individual would be restricted to 20% of his gross total income in the
previous year.
(B) Section 80CCD(1B) provides for an additional deduction of up to 50,000 in respect of
the whole of the amount paid or deposited by an individual assessee under NPS in the previous
year, whether or not any deduction is allowed under section 80CCD(1).
(C) Whereas the deduction under section 80CCD(1) is subject to the overall limit of ` 1.50 lakh
under section 80CCE, the deduction of upto 50,000 under section 80CCD(1B) is in addition to
the overall limit of 1.50 lakh provided under section 80CCE.

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(D) Under section 80CCD(2), contribution made by the Central Government or any other
employer in the previous year to the said account of an employee, is allowed as a deduction in
computation of the total income of the assessee.
(E) The entire employer’s contribution would be included in the salary of the employee. However,
deduction under section 80CCD(2) would be restricted to 14% of salary, in case of
contribution made by the Central Government, and to 10% of salary, in case of
contribution made by any other employer
(iv) Deemed Income: The amount standing to the credit of the assessee in the pension account (for
which deduction has already been claimed by him under this section) and accretions to such
account, shall be taxed as income in the year in which such amounts are received by the assessee
or his nominee on -
(a) closure of the account or
(b) his opting out of the said scheme or
(c) receipt of pension from the annuity plan purchased or taken on such closure or opting
out.
However, the amount received by the nominee on the death of the assessee under the circumstances
referred to in (a) and (b) above, shall not be deemed to be the income of the nominee.
Further, the assessee shall be deemed not to have received any amount in the previous year if such amount
is used for purchasing an annuity plan in the same previous year.
Notes:
Exemption on payment from NPS Trust to an employee on closure of his account or on
his opting out of the pension scheme [Section 10(12A)]
As per section 80CCD, any payment from National Pension System Trust to an employee on account of
closure or his opting out of the pension scheme is chargeable to tax.
Section 10(12A) provides that any payment from National Pension System Trust to an assessee on account
of closure or his opting out of the pension scheme referred to in section 80CCD, to the extent it does not
exceed 60% of the total amount payable to him at the time of closure or his opting out of the scheme,
shall be exempt from tax.
Exemption on payment from NPS Trust to an employee on partial withdrawal [Section
10(12B)]
To provide relief to an employee subscriber of NPS, section 10(12B) provides that any payment from
National Pension System Trust to an employee under the pension scheme referred to in section
80CCD, on partial withdrawn made out of his account in accordance with the terms and conditions
specified under the Pension Fund Regulatory and Development Authority Act, 2013 and the
regulations made there under, shall be exempt from tax to the extent it does not exceed 25% of amount of
contributions made by him.

80 CCE

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This section restricts the aggregate amount of deduction under section 80C, 80CCC and 80CCD(1) to `
1,50,000. It may be noted that the deduction of upto 50,000 under section 80CCD(1B) and employer’s
contribution to pension scheme, allowable as deduction under section 80CCD(2) in the hands of the
employee, would be outside the overall limit of ` 1,50,000 stipulated under section 80CCE.
The following table summarizes the ceiling limit under these sections –

Section Particulars Ceiling limit (`)

80C Investment in LIP, Deposit in PPF/SPF/RPF etc. 1,50,000

80CCC Contribution to certain pension funds 1,50,000

80CCD(1) Contribution to NPS of Government 10% of salary Or

20% of GTI, as the
case may be.

80CCE Aggregate deduction under sections 80C, 80CCC & 1,50,000

80CCD(1)

80CCD(1B) Contribution to NPS notified by the Central 50,000

Government (outside the limit of ` 1,50,000 under
section 80CCE)

80CCD(2) Contribution by the Central Government to NPS 14% of salary

A/c of its employees (outside the limit of `
1,50,000 under section 80CCE)

Contribution by any other employer to NPS A/c of 10% of salary

its employees (outside the limit of 1,50,000 under
section 80CCE)

Note: For computation of limit under section 80CCD(1) and (2), salary includes
dearness allowance, if the terms of employment so provide, but excludes all other
allowances and perquisites.

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ILLUSTRATION

The basic salary of Mr. A is ` 1,00,000 p.m. He is entitled to dearness allowance, which is 40%
of basic salary. 50% of dearness allowance forms part of pay for retirement benefits. Both Mr.
A and his employer, ABC Ltd., contribute 15% of basic salary to the pension scheme referred
to in section 80CCD. Explain the tax treatment in respect of such contribution in the hands of
Mr. A.

SOLUTION

Tax treatment in the hands of Mr. A in respect of employer’s and own contribution to
pension scheme referred to in section 80CCD

1) Employer’s contribution to such pension scheme would be treated as salary since it is specifically
included in the definition of “salary” under section 17(1)(viii). Therefore, ` 1,80,000, being 15% of
basic salary of ` 12,00,000, will be included in Mr. A’s salary.
2) Mr.A’scontribution to pension scheme isallowable asdeduction under section 80CCD(1). However, the
deduction isrestrictedto 10% ofsalary.Salary, forthis purpose,meansbasicpayplusdearness allowance,if
itformspartofpay.
Therefore, “salary” for the purpose of deduction under section 80CCD for Mr. A would be –

Particulars `

Basic salary = ` 1,00,000 × 12 = 12,00,000

Dearness allowance = 40% of ` 12,00,000 = ` 4,80,000

50% of Dearness Allowance forms part of pay = 50% of 2,40,000

` 4,80,000

Salary for the purpose of deduction under section 80CCD 14,40,000

Deduction under section 80CCD(1) is restricted to 10% of 1,44,000

` 14,40,000 (as against actual contribution of ` 1,80,000,
being 15% of basic salary of ` 12,00,000)
As per section 80CCD(1B), a further deduction of upto 36,000
` 50,000 is allowable. Therefore, deduction under section
80CCD(1B) is ` 36,000 (` 1,80,000 - ` 1,44,000).

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1,44,000 is allowable as deduction under section 80CCD(1). This would be taken into consideration and be
subject to the overall limit of ` 1,50,000 under section 80CCE. ` 36,000 allowable as deduction under
section 80CCD(1B) isoutside theoverall limit of ` 1,50,000 under section 80CCE.

In the alternative, ` 50,000 can be claimed as deduction under section 80CCD(1B). The balance ` 1,30,000
(` 1,80,000 - ` 50,000) can be claimed as deduction under section 80CCD(1).

Employer’s contribution to pension scheme would be allowable as deduction under section 80CCD(2), subject
to a maximum of 10% of salary. Therefore, deduction under section 80CCD(2), would also be restricted to `
1,44,000, even though the entire employer’s contribution of ` 1,80,000 is included in salary under section
17(1)(viii). However, this deduction of employer’s contribution of ` 1,44,000 to pension scheme would be
outside the overall limit of ` 1,50,000 under section 80CCE i.e., this deduction would be over and above the
other deductions which are subject to the limit of ` 1,50,000.

Section 80CCG

INVESTMENT MADE UNDER RAJIV GANDHI EQUITY SAVINGS SCHEME (RGESS)

1. Eligible Following conditions to be satisfied cumulatively:

Person • A resident individual (ROR/NOR);
• A new retail investor; and
• Gross Total Income of such individual does not exceed Rs 12 lakhs.
2. Eligible • Notified listed equity shares; or
Investment • Notified units of an equity oriented fund
3. Quantum • Deduction is allowed for 3 consecutive years starting with the year in
of which investment is made.
Deduction • In each year, deduction allowed shall be 50% of the investment made
subject to a maximum of Rs 25,000 per year.
4. Conditions Investment shall be locked-in for a minimum period of 3 years from the
for date of acquisition. If investment is sold within the said lock-in period of
Claiming 3 years, the amount of deduction allowed earlier shall be considered as
Deduction the income of the assessee in the year in which such shares/units have
been soid.

Deduction in respect of medical insurance premium [Section 80D]

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1. In case of an Individual
(i) Deduction in respect of insurance premium paid for family: A deduction to the extent
of ` 25,000 is allowed in respect of the following payments –
a. premium paid to effect or to keep in force an insurance on the health of self, spouse and
dependent children or
b. any contribution made to the Central Government Health Scheme or
c. such other health scheme as may be notified by the Central Government. Contributory
Health Service Scheme of the Department of Space has been notified by the Central
Government.
(ii) in respect of insurance premium for parents: A further deduction up to ` 25,000 is
allowable to effect or to keep in force an insurance on the health of parents of the assessee
(iii) Deduction in respect of payment towards preventive health check-up: Section 80D
provides that deduction to the extent of ` 5,000 shall be allowed in respect payment made on
account of preventive health check-up of self, spouse, dependent children or parents during the
previous year. However, the said deduction of ` 5,000 is within the overall limit of ` 25,000 or ` 50,000,
specified in (i) and (ii) above.
(iv) Mode of payment: For claiming deduction under section 80D, the payment can be made:
a. by any mode, including cash, in respect of any sum paid on account of preventive health
check-up;
b. by any mode other than cash, in all other cases.
(v) Deduction for medical expenditure incurred on senior citizens:As a welfare measure
towards SENIOR CITIZEN i.e., person of the age of 60 years or more and resident in india ,who are
unable to get health insurance coverage , deduction of upto 50,000 would be allowed in respect of
any payment made on account of medical expenditure in respect of such person(s) ,if no payment
has been made to keep in force an insurance on the health of such person(s) .
2. In case of a HUF
Deduction under section 80D is allowable in respect of premium paid to insure the health of any
member of the family. The maximum deduction available to a HUF would be ` 25,000 and in case any
member is a senior citizen, ` 50,000.

Further, the amount paid on account of medical expenditure incurred on the health of any member(s) of a
family who is a resident senior citizen would qualify for deduction subject to a maximum of 50000
provided no amount has been paid to effect or keep in force any insurance on the health of such person(s).
3. Other conditions
The other conditions to be fulfilled are that such premium should be paid by any mode, other than cash,
in the previous year out of his income chargeable to tax. Further, the medical insurance should be in
accordance with a scheme made in this behalf by-
4. the General Insurance Corporation of India and approved by the Central Government in this

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behalf; or
5. any other insurer and approved by the Insurance Regulatory and Development Authority.
The following table summarizes the provisions of section 80D –

SR.NO. NATURE OF EXPENDITURE ON DEDUCTION

PAYMENT/EXPENDITURE BEHALF OF
I A) Any premium paid in case of self ,spouse 25,000
,otherwise than by way and dependent
of cash, to keep in force individual children
an insurance on the
health in case of FAMILY
B) Contribution to central HUF MEMBER
government health
scheme(CGHS)
C) Preventive health check
ups expenditure in case any of the above
50,000
persons is of the age of
60 years or more +
resident in india

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II a) Any premium paid PARENTS 25,000
,otherwise than by way
of cash, to keep in force
an insurance on the IN CASE EITHER OR
health
b) Preventive health check BOTH the parents is of
ups the age of 60 years or
more + resident in india

50,000

Maximum 5000 allowed as deduction for aggregate of preventive health

check –up expenditure, by any mode including cash ,mentioned in I AND
II(subject to overall limit of 25000 or 50000 as the case may be)

III Amount paid on For

account of medical self/spouse/parents +
expenditure who is of the age of 60
years or more +
Resident in India + no 50,000
payment has been
made to keep in force
an insurance on the
health of such person
Note: In case the individual or any of his family members is a senior citizen, the aggregate of deduction, in
respect of payment of premium, contribution to CGHS and medical expenditure incurred, as specified in (I)
AND (III) above cannot exceed 50,000.
In case one of the parents is a senior citizen who is covered under mediclaim policy and another is
also a senior citizen but not covered under mediclaim policy, the aggregate of deduction, in respect of
payment of medical insurance premium and medical expenditure incurred, as specified in (II) and (III)
Above cannot exceed 50000.

ILLUSTRATION

Mr. A, aged 40 years, paid medical insurance premium of ` 20,000 during the P.Y.2019-20 to
insure his health as well as the health of his spouse. He also paid medical insurance premium of

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` 47,000 during the year to insure the health of his father, aged 63 years, who is not dependent
on him. He contributed ` 3,600 to Central Government Health Scheme during the year. He has
incurred ` 3,000 in cash on preventive health check-up of himself and his spouse and ` 4,000 by
cheque on preventive health check-up of his father. Compute the deduction allowable under
section 80D for the A.Y.2020-21.

ANSWER

Deduction allowable under section 80D for the A.Y.2020-21

Actual Maximum
Particulars Payment deduction
` allowable
`
A. Premium paid and medical expenditure
incurred for self and spouse
(i) Medical insurance premium paid for self and spouse 20,000 20,000

(ii) Contribution to CGHS 3,600 3,600

(iii) Exp. on preventive health check-up of self & spouse 3,000 1,400
26,600 25,000
B. Premium paid or medical expenditure
incurred for father, who is a senior citizen
(i) Mediclaim premium paid for father, who is over 60 47,000 47,000
years of age
(ii) Expenditure on preventive health check-up of father 4,000 3,000

51,000 50,000
Total deduction under section 80D (` 25,000 + 75,000
` 50,000)

Notes:
(1) The total deduction under A.(i), (ii) and (iii) above should not exceed 25,000. Therefore, the
expenditure on preventive health check-up for self and spouse would be restricted to ` 1,400,
being (` 25,000 – ` 20,000 – 3,600).
(2) The total deduction under B. (i) and (ii) above should not exceed ` 50,000. Therefore, the
expenditure on preventive health check-up for father would be restricted to ` 3,000, being (`
50,000 – ` 47,000).

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(3) In this case, the total deduction allowed on account of expenditure on preventive health check-
up of self, spouse and father is ` 4,400 (i.e., ` 1,400+ `3,000), which is within the maximum
permissible limit of ` 5,000

Section 80DD
MEDICAL TREATMENT OF DEPENDENT DISABLED / HANDICAPPED
.
1. Eligible Deduction is available to the following persons:
Person • A resident individual (ROR/NOR)
• A resident HUF (ROR/NOR)

2. Eligible Deduction is allowed if the assessee:

Expenditure • has incurred any expenditure for the medical treatment, training,
rehabilitation, etc of a dependent disabled person; or
• has deposited any amount with LIC or any other insurer for the benefit
of such dependent disabled person.

3. Meaning of • In respect of Individual: Spouse, children, parents, brothers and sisters

Dependent of the individual who are dependent on him.
Person • In respect of HUF: Any member of the HUF dependent on such HUF.

4. Quantum of • Deduction allowed shall be Rs 75,000 irrespective of the expenditure

Deduction incurred by the assessee.
• Where the handicapped person suffers from a severe disability (ie a
disability of 80% or more), the amount of deduction shall be Rs 1,25,000.

5. Conditions • A certificate from the prescribed medical authority needs to be

for furnished with the return.
Claiming • If the handicapped person himself claims deduction u/s 80U, then no
Deduction deduction shall be allowed to the guardian/HUF u/s 80DD.

Section 80U
DEDUCTION TO THE DISABLED / HANDICAPPED PERSON HIMSELF
1. Eligible A resident individual (ROR/NOR) suffering from disability at any time
Person during the relevant PY.
2. Quantum of • Deduction allowed shall be Rs 75,000 irrespective of the
Deduction expenditure incurred
by the assessee.
• Where the handicapped person suffers from a severe disability (i.e.

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a disability
of 80% or more), the amount of deduction shall be Rs 1,25,000.

3. Conditions A certificate from the prescribed medical authority needs to be furnished

for with the return.
Claiming
Deduction

Section 80DDB
DEDUCTION IN RESPECT OF MEDICAL TREATMENT OF SPECIFIED DISEASES

1. Eligible Deduction is available to the following persons:

Person • A resident individual (ROR/NOR)
• A resident HUF (ROR/NOR)
2. Eligible • Deduction is allowed if the assessee incurs any expenditure on medical
Expenditure treatment of diseases specified under Rule HDD.
• Expenditure can be incurred by the assessee for himself or for a
dependent person.
3. Meaning of • In respect of an individual: Spouse, children, parents, brothers and
Dependent sisters of the individual who are dependent on him.
Person • In respect of HUF: Any member of the HUF dependent on such HUF.

4. Quantum of
Deduction Person Suffering From Quantum of Deduction
Specified Disease is
Not a senior citizen (< 60 Lower of Rs 40,000 or Expenditure
years) Incurred
A senior citizen (≥ 60 years) Lower of Rs 1,00,000 or Expenditure
Incurred

Note: Where any such expenditure is reimbursed by a mediclaim

insurance company/ employer, such reimbursement would be deducted
from the eligible amount of deduction.
Example: Mr X has incurred Rs 75,000 on the treatment of a specified
disease suffered by him. Rs 40,000 is allowable as deduction. However, if
Rs 10,000 is received as claim under a mediclaim policy, deduction
allowed u/s 800DB shall be Rs 30,000.

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5. Conditions A certificate from the prescribed medical authority needs to be furnished
with the return.

Section 80E
DEDUCTION OF INTEREST PAID ON LOAN TAKEN FOR HIGHER EDUCATION
1. Eligible • Deduction is available to an individual (Resident/Non-Resident)
Person provided he has paid interest on a loan taken by him from any financial
institution/approved charitable institution.
• Such loan should be taken for pursuing higher education (ie any
course after Class 12th).
• The higher education may be undertaken by the assessee himself, or
his spouse or children, or any other person for whom the assessee
acts as the legal guardian.
2. Quantum • The amount of interest paid is allowed as deduction without any
of limit.
Deduction • No deduction is available in respect of the repayment of the principal
amount of loan anywhere in the Income Tax Act.
3. Conditions « Deduction is allowed for a maximum period of 8 years starting from
for the year in which the payment of interest begins •
Claiming * No deduction is allowed after the expiry of 8 years-
Deduction

Section 80EE (Introduced Vide The Finance Act, 2016)

DEDUCTION IN RESPECT OF INTEREST ON LOAN TAKEN FOR RESIDENTIAL HP

1. Eligible Deduction is available to an individual. The individual may be

Person resident or non-resident.
2. Eligible • Deduction is available in respect of the interest paid by the assessee
Expenditure on a loan taken from bank/housing finance company for acquisition
of residential house property.
• Interest paid is available as deduction subject to a maximum of Rs
50,000 p.a.
3. Conditions Following conditions should be satisfied cumulatively for claiming
for deduction u/s 80EE:
Claiming • Loan should be sanctioned by the bank/housing finance company
Deduction during the period starting from April 1, 2016 and ending with March
u/s 80EE 31,2017;
• The amount of loan sanctioned should not exceed Rs 35 lakhs;
• The value of residential house property should not exceed Rs 50
lakhs; and
• The assessee should not own any residential house on the date of

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sanction of loan.

4. Additional • Where deduction is allowed u/s 24(b) in respect of any interest

Points while calculating income from house property, no deduction shall be
allowed u/s 80EE in respect of such amount of interest. Only that
portion of interest will be eligible for deduction u/s 80EE for which
no deduction is available u/s 24(b).
• A 'housing finance company’ means a public company formed or
registered in India with the main object of carrying on the business of
providing long-term finance for construction or purchase of
residential houses in India.

Section 80EEA
Eligible Assessee : Individual

Eligible Payments : Deduction in respect of interest payable on loan taken from a FI (bank
or HFC) for acquisition of residential house property
(In case the property is self-occupied, the deduction would be over and above the deduction of ` 2
lakhs under section 24)
For example, if the interest payable is, say, ` 3,80,000 on loan taken from FI for acquisition of residential
house, ` 2 lakh can be claimed as deduction u/s 24(b) and ` 1.50 lakhs as deduction u/s 80EEA. Even
though for let-out property, there is no limit u/s 24, by virtue of section 71(3A), set-off of loss from house
property against any other head of income is restricted to `2 lakh. Hence, the excess interest payable
can be claimed u/s 80EEA, subject to fulfillment of prescribed conditions.
Further, deduction under section 80EEA can be claimed during the pre- construction period, when
deduction under section 24 is not permissible. Such interest on which deduction under section 80EEA
has been claimed cannot be included in pre- construction interest for deduction under section 24 later
on in instalments).

Permissible Deduction : Deduction of upto 1,50,000 would be allowed in respect of interest

payable on loan taken from a FI for acquisition of house property.
Conditions:
Loan should be sanctioned by a FI during P.Y.2019-20
Stamp Duty Value of house ≤ ` 45 lakhs
The individual should not own any residential house on the date of sanction of loan.

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The individual should not be eligible to claim deduction u/s 80EE.

Section 80EEB
Eligible Assessee : Individual

Eligible Payments : Deduction in respect of interest payable on loan taken from a FI (bank
or certain NBFCs) for purchase of electric vehicle

Permissible Deduction : Deduction of upto 1,50,000 would be allowed in respect of interest

payable on loan taken for purchase of electric vehicle.
Loan should be sanctioned by a FI during the period from 1.4.2019 to 31.3.2023

Section 80G
DEDUCTION FOR DONATIONS TO FUNDS CHARITABLE INSTITUTIONS

1. Eligible All assessees having income under any head are eligible for deduction
Person u/s 80G.
The donation should be of a sum of money. Donations in kind do not
qualify for deduction. Deduction is not available where donation is
made for particular benefit of a religious community.
2. Mode of • Donations upto Rs 2.000: Any mode (cash/cheque/draft. etc)
Giving • Donations exceeding Rs 2.000: Anv mode other than cash
Donations

3. Eligible Donations:
A. Donations to following funds are eligible for 100% deduction without any
qualifying amount:

 The Prime Minister's National Relief Fund

 The Prime Minister’s Armenia Earthquake Relief Fund
 The National Foundation for Communal Harmony
 The National Defence Fund
 The National Children's Fund
 The Africa Fund
 Notified university or any educational institution of national eminence
 The Chief Minister's Earthquake Relief Fund, Maharashtra

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 The Andhra Pradesh Chief Minister's Cyclone Relief Fund, 1996
 Any fund set up by the State Government of Gujarat for providing relief to the victims
f earthquake
 The Chief Minister's Relief Fund
 The Lieutenant Governor's Relief Fund in respect of any Union territory
 Zila Saksharta Samiti
 The National Blood Transfusion Council
 The State Blood Transfusion Council
 The National Illness Assistance Fund
 The Army Central Welfare Fund
 The Air Force Central Welfare Fund
 The Indian Naval Benevolent Fund
 The National Sports Fund
 The National Cultural Fund
 The Fund for Technology Development and Application
 Any fund set up by a State Government to provide medical relief to the poor
 The National Trust for Welfare of Persons suffering with Autism, Cerebral Palsy,
Mental Retardation and Multiple Disabilities.
 Swachh Bharat Kosh
 Clean Ganga Fund
 National Fund for Control of Drugs

B. Donations to following funds are eligible for 50% deduction without any qualifying
amount:

□ Prime Minister's Drought Relief Fund

□ Jawaharlal Nehru Memorial Fund

□ Indira Gandhi Memorial Trust

□ Rajiv Gandhi Foundation

C. Following donations are eligible for 100% deduction subject to qualifying amount
(ie 100% of the qualifying amount):

□ Donation to government, local authority or any other notified institution for the purposes
of promoting family planning.

□ Donation made by a company to Indian Olympic Association or a notified institution for

development of infrastructure for sports in India.

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D. Following donations are eligible for 50% deduction subject to qualifying amount
(ie 50% of the qualifying amount):

Donations given to any other charitable institutions, social organizations or religious

organizations for purposes other than promoting family planning provided they have been
approved under this section.

4. Meaning of Qualifying amount means lower of the following two amounts:

Qualifying • 10% of the adjusted gross total income

Amount • Donations given (Category C & Category D only)

5. Calculation of Gross Total Income

Adjusted
Gross Total (-) Long Term Capital Gain/112/112A
Income (-) Short Term Capital Gain u/s 111A

(-) All Deductions u/s 80C-80U except Section 80C

(-) Any income on which Income tax is not payable.

Section 80GGA - DEDUCTION FOR DONATIONS TO SCIENTIFIC RESEARCH/ SOCIAL

SCIENCE / STATISTICAL RESEARCH INSTITUTIONS, ETC

1. Eligible All assessees except an assessee whose GTI includes income

Person chargeable u/h PGBP
(because such assessee would debit donations to PAL A/c).
2. Eligible • Donations given to an institution notified under Section 35 for
Donations scientific research/ social science research/statistical research.
• Donations given to an institution notified under Section 35AC for
eligible project (ie, projects of social or economic importance like
construction of houses for poor, providing drinking water, etc).
• Donations given to an institution notified under Section 35CCA for
rural development including donation to Rural Development Fund
setup by the CG or donation to National Urban Poverty Eradication
Fund.
3. Quantum of Deduction is equal to the amount of donation given (100%).
Deduction

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4. Mode of • Donations uoto Rs 10.000: Any mode (cash/cheaue/draft. etc)
Giving • Donations exceeding Rs 10.000: Any mode other than cash
Donations

Section 80GGB/80GGC
DEDUCTION FOR DONATIONS TO POLITICAL PARTIES OR ELECTORAL TRUST

1. Eligible Person Section 80GGB: Companies; Section 80GGC: Anv person

2. Eligible Donations • Donations given to any political party

• Donations given to an Electoral Trust

3. Quantum of Deduction is equal to the amount of donation given (100%).

Deduction
4. Mode of Any mode other than cash (Deduction not available for cash
Donations donations)

Section 80GG
DEDUCTION FOR PAYMENT OF RENT

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1. Eligible Following conditions to be satisfied cumulatively:
Person • The assessee is an individual (Resident/Non-resident);
• The assessee neither gets House Rent Allowance nor Rent Free
Accommodation from his employer; and
• The assessee does not have any house in his name or in the name of his
spouse or minor child or in the name of the HUF of which he is a
member, in the city where he resides or normally works.
• The assessee may have a house at any other place but it should not be
self-occupied. It may be let out or vacant.
Note: Deduction u/s 80GG is also available to a self-employed individual
enqaqed in
carrying on his own business or profession.
2. Eligible Rent paid by an eligible individual for a residential accommodation taken
Expenditure by him

3. Quantum of The amount of deduction shall be least of the following:

Deduction • Rent paid over 10% of Adjusted 6ross Total Income (’Adjusted GTI')
• 25% of Adjusted GTI
• Rs 5,000 per month
4. Calculation Gross Total Income
of Adjusted (-) Long Term Capital Cain
GTI (-) Short Term Capital Cain u/s 111 A
(-) All Deductions u/s 80C-80U except Section 80CC

Section 80TTA
DEDUCTION FOR INTEREST RECEIVED ON DEPOSITS

1. Eligible • Individual (Resident/Non-resident)

Person • HUF (Resident/Non-resident)
2. Deduction • Deduction is available in respect of interest income on saving bank
& its account with any bank/co-operative bank/post office.
Quantum • No deduction is available in respect of interest on time deposits
(FDs/RDs).
• Maximum amount of deduction allowed is Rs 10,000.

80TTB

INTEREST ON DEPOSITS IN CASE OF SENIOR CITIZENS

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80TTB Interest on deposits in case of senior citizens upto Rs. Senior Citizen
50,000 Individulas

Section 80QQB
DEDUCTION FOR ROYALTY ON BOOKS
1. Eligibility Resident Individual (ROR/NOR) who is an author

2. Nature of • Deduction is available in respect of royalty income from assignment of

Deduction copyrights of any book (such royalty can be received from India or from
outside India). Such book should be a work of literary, artistic or scientific
nature but not textbooks for schools, guides, commentaries, newspapers,
journals, pamphlets and other publication of similar nature.
• In respect of royalty earned from outside India, deduction shall be
admissible in respect of only that portion of royalty which has been
received in India in convertible foreign currency within:
□ 6 months from the end of the relevant PY; or
□ Such extended period as may be specif ied by the competent authority.
3. Quantum • Royalty received is allowed as deduction, subject to a maximum of Rs
of 3,00,000.
Deduction • However, no deduction shall be admissible in respect of royalty received
in excess of 15% of the price of the books (i.e, deduction for royalty is
limited upto 15% of the price of the books).

Section 80RRB
DEDUCTION FOR ROYALTY ON PATENTS

1. Eligible Resident Individual (ROR/NOR)

Person
2. Nature of • Deduction is available in respect of income by way of royalty on patents
Deduction (such royalty can be received from India or from outside India).
• In respect of royalty earned from outside India, deduction shall be
admissible in respect of only that portion of royalty which has been
received in India in • convertible foreign currency within:

□ 6 months from the end of the relevant PY; or

□ Such extended period as may be specif ied by the competent authority.

3. Quantum of Royalty received is allowed as deduction, subject to a maximum of Rs

Deduction 3,00,000.

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SPECIAL DEDUCTIONS TO SEZ UNITS/SEZ DEVELOPERS

Section 80-IAB: Section 10AA:

Deduction to SEZ Developers Deduction/Exemption to SEZ Units

Section 80-IAB
DEDUCTION IN CASE OF DEVELOPER OF SEZ

1. Eligible All types of assessees engaged in the business of developing a Special

Person Economic Zone notified under the SEZ Act.
2. Quantum 100% of the profits of such business for any 10 consecutive years out of
& Period the first 15 years starting from the year in which such Special Economic
of Zone has been notified by the Central Government.
Deduction
3. Audit of Deduction is allowed only if accounts have been audited by a Chartered
Accounts Accountant and such audit report has been submitted along with the
return.
4. Transfer If the business is transferred to any other developer, then deduction shall
of be allowed to the transferee for the remaining unexpired period.
Business

Section 10AA (Very Imp)

DEDUCTION / EXEMPTION TO UNITS ESTABLISHED IN SEZ
1. Eligible All types of assessees having their unit in Special Economic Zone.
Person
2. Quantum Deduction is available for a continuous period of 15 years in the
& Period of following manner:
Deduction Period Quantum of Deduction/Exemption
For the first 5 100% of export profits
years
For the next 5 50% of export profits

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years
For the last 5 years 50% of export profits provided such prof its
have been credited to the SEZ Reinvestment
Reserve A/c

Export Turnover of SEZ Unit

EXPORT PROFIT = Total Profits of SEZ Unit × Total Turnover of SEZ Unit

3. Utilization • The amount credited to the Special Economic Zone Reinvestment

of Amount Reserve A/c should be utilized for acquiring a new plant & machinery
Credited to within a period of 3 years from the end of the year in which such amount
Reserve was transferred.
• If this amount is not utilized within the said period of 3 years, such
amount would be taxable in the fourth year.
4. CA Report The assessee is required to furnish a report from a Chartered
Accountant (in the prescribed form) certifying that the deduction has
been correctly claimed.

QUESTION 1

Following are the particulars of income of Mr. Ram, who is 70 years old resident in India, for
the Assessment year 2020-21:

Gross Total Income Rs. 8,10,040 which includes long-term capital gain of Rs. 2,55,000, Short-
term capital gain of Rs. 88,000, interest income of Rs. 12,000 from savings bank deposits
with banks. Mr. Ram invested in PPF Rs. 1,40,000 and also paid a medical insurance premium
Rs. 31,000. Compute the total income of Mr. Ram

Solution

Computation of Total Income for the Assessment Year 2020-21

Rs.
Gross total income 8,10,040
Less: Deductions:
Under section 80C 1,40,000
Undersection80D 31,000
Undersection80TTA 10,000
Total income 6,29,040

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Question
Mr. Rajmohan whose gross total income was ` 6,40,000 for the financial year 2019- 20,
furnishes you the following information:

(i) Stamp duty paid on acquisition of residential house (self-occupied) - ` 50,000.

(ii) Five year post office time deposit - ` 20,000.
(iii) Donation to a recognized charitable trust ` 25,000 which is eligible for deduction
under section 80G at the applicable rate.
(iv) Interest on loan taken for higher education of spouse paid during the year -
` 10,000.

Compute the total income of Mr. Rajmohan for the Assessment year 2020-21.

Answer
Computation of total income of Mr. Rajmohan for the A.Y.2020-21

Particulars ` `
Gross Total Income 6,40,000
Less: Deduction under Chapter VI-A
Under section 80C
Stamp duty paid on acquisition of residential house 50,000

Five year time deposit with Post Office 20,000

70,000
Under section 80E

Interest on loan taken for higher education of spouse, being a 10,000

relative.
Under section 80G (See Note below)
Donation to recognized charitable trust (50% of `
25,000) 12,500 92,500

Total Income 5,47,500

Note: In case of deduction under section 80G in respect of donation to a charitable trust, the
net qualifying amount has to be restricted to 10% of adjusted total income, i.e., gross total
income less deductions under Chapter VI-A except 80G. The adjusted total income is,
therefore, ` 5,60,000 (i.e. 6,40,000 – ` 80,000), 10% of which is ` 56,000, which is higher than

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the actual donation of ` 25,000. Therefore, the deduction under section 80G would be `
12,500, being 50% of the actual donation of ` 25,000.

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Tax Deducted at Source (TDS)/Tax Collected at Source (TCS)
• Case 1: In case of Resident Payee:
Payee Applicability of Surcharge & Cess
Resident Companies Surcharge and cess shall not be added to TDS rates.
Any Other Assessee □ Surcharge and cess shall not be added to the prescribed rates of TDS.
Resident in India □ However, surcharge and cess shall be added while computing TDS u/s
192 on salary (surcharge shall be added only where the total income as
computed by the employer exceeds Rs 50 lakhs)

• Case 2: In case of Non-Resident Payee:

Payee Applicability of Surcharge & Cess

Foreign The rate of TDS shall be increased by:

Companies □ Surcharge of 2% (if total payments during the entire year exceeds Rs 1 crore
but does not exceed Rs 10 crores and such payments are subject to tax
deduction)
□ Surcharge of 5% (if total payments during the entire year exceeds Rs 10 crores
and such payments are subject to tax deduction)
□ Cess of 3% in all cases (PEC of 2% and SHEC of 1%)
Others The rate of TDS shall be increased by:
□ Surcharge of 10%/12%/15% (if total payments made during the entire year
exceeds Rs 50 lakhs/Rs 1 crore and such payments are subject to tax deduction)
□ Cess of 3% in all cases (PEC of 2% and SHEC of 1%)

Section 192
TDS ON SALARY INCOME

Payment BY Any employer (individual, HUF, firm, company, etc)

Payment TO Any employee (resident as well as non-resident)
Nature of Income earned by an employee by way of salary
Payment
Time of At the time of payment
Deduction

TDS Rate TDS is to be deducted at the slab rates applicable to the estimated income of
the employee. In other words, the total tax liability of the employee should be
calculated on the basis of his estimated income and such tax liability shall be
deducted in 12 equal monthly instalments.

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Manner of • While computing the estimated income of the employee, income under any
Computation other head may also be considered. Any TDS on such other income shall also be
of Estimated considered.
Income of • The employee is allowed to report deductions u/s 80C-80U as well as loss
Employee under any other head provided the employee furnishes adequate proof of
such deduction/loss to the employer.
• Where an employee is working with two or more employers, he has the option
to furnish the Particulars of his income to a single employer who would deduct
TDS after taking into consideration income from all employers.
Example Mr A is employed in XYZ Ltd and he earns a salary of Rs 8,00,000 p.a. Rs
1,00,000 was invested in NSC and the same was reported to the employer. His
estimated income would be Rs 7 lakhs on which tax liability of Rs 54,080 would
arise. An amount of Rs 4,506.67 (54,080/12) would be deducted as TDS on
monthly basis at the time of payment of salary.

Question (IPCC Nov 2016 Exam - 4 Marks): Discuss the provisions relating to the
premature withdrawal from Employees Provident Fund u/s 192A for AY 2020-21.
Section 192 A
TDS ON PREMATURE TAXABLE WITHDRAWAL FROM EPF

Payment The trustees of the Employees Provident Fund Scheme, 1952 or any other
BY authorized person who makes payment of accumulated balance kept in
Provident Fund ('PF')
Payment Any person
TO
Nature of TDS is required to be deducted if there is premature withdrawal of balance
Payment kept in PF and such premature withdrawal is taxable under the Income Tax
Act.
(What is premature withdrawal and in which circumstances it is taxable would
be studied under the chapter ‘income u/h salary')
Threshold No tax is required to be deducted at source if the amount of taxable
Limit premature withdrawal paid during a financial year is less than Rs 50,000.

Time of At the time of payment of accumulated balance kept in PF

Deduction
TDS Rate TDS is required to be deducted @ 30%

Illustration on Section 194A (IPCC May 2019 Exam - 4 Marks)

Pallavi Bank Ltd, has paid interest of Rs 9,000 to Mr A, a resident Indian, from its Chennai
branch and Rs 8,000 from Bangalore branch. If there are no core banking services in the
bank, is tax required to be deducted at source from such interest payments made on
31.03.2020? Will your answer be different if there is core banking service present in the
bank? Also, explain the provisions of the Income Tax Act, 1961 in this regard.

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Section 193
TDS ON INTEREST ON SECURITIES

Payment Any person responsible for making payment of interest on securities

BY
Payment Any RESIDENT (Nen--Resident)
TO
Nature of Income by way of interest on securities such as debentures, bonds, etc
Payment
Threshold • No tax is required to be deducted at source if the amount of interest
Limit paid/payable during a financial year does not exceed Rs 10,000.
• No tax shall be deducted in the following cases:
□ Interest on listed securities if such securities are held in dematerialized
form;
□ Interest payable by Central Sovt/State Sovt on securities issued by them;
and
□ Interest paid to LIC, GIC or any other insurer in respect of securities
owned by such insurers.
Time of At the time of credit or payment, whichever is earlier
Deduction
TDS Rate TDS is required to be deducted @ 10%

Section 194 A
TDS ON INTEREST OTHER THAN INTEREST ON SECURITIES
Payment • Individuals A HUF if tax audit is required for the preceding financial year
BY • Any other person irrespective of the fact whether audit is required for the
preceding financial year or not
Payment Any RESIDENT (Non-Resident)
TO
Nature of Income by way of interest other than interest on securities such as interest
Payment received from banks, post offices, etc.
Threshold • No tax is required to be deducted at source if the amount of interest
Limit paid/payable during a financial year does not exceed the following limits:
□ Rs 40,O00) if the interest is being paid by a bank including a cooperative
bank or post office;
□ Rs 50,000 if the interest is being paid to SENIOR CITIZEN.

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Time of At the time of credit or payment, whichever is earlier (Tax to be deducted
Deduction irrespective of the fact whether loan has been taken for personal purposes or
business purposes)
TDS Rate TDS is required to be deducted @ 10%

Section 194
TDS ON DIVIDEND

Dividends [Section 194] – Not applicable w.e.f. Financial Year 2018-19

Now closely held company is liable to DDT @ 30% on gross basis.

Section 194 B
TDS ON WINNINGS FROM LOTTERY, CROSSWORD PUZZLES, ETC
Payment Any Person
BY
Payment Any Person (Resident A Non-Resident)
TO
Nature of Prize money earned from winning lottery, crossword puzzies, card games and
Payment other games of any sort
Threshold No tax is required to be deducted at source if the amount of winnings paid does
Limit not exceed Rs 10,000.

Time of At the time of payment

Deduction
TDS Rate TDS is required to be deducted @ 30%.

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Special Where the winnings are in kind, the person giving the prize should first deduct
Provision the applicable amount of TDS and thereafter release the prize.
for • If TDS amount is to be recovered from the winner, the amount of TDS would
Winnings in be calculated taking the value of prize given in kind as the basis.
Kind
• If TDS amount is not to be recovered from the winner, the sum total of value
of prize and the TDS amount would become the winnings and the amount of
TDS would be determined accordingly.
Example: Alia Bhatt participated in a quiz competition meant for kids. She won
an extremely advanced toy of boraemon which was valued at Rs 2,00,000.
• Case (i): If the amount of TDS is to be recovered from Alia Bhatt, the amount
of TDS would come out to Rs 60,000 (Rs 2 lakhs * 30%).
• Case (ii): If the amount of TDS is not to be recovered from Alia Bhatt, the
amount of TDS would come out to Rs 85,714.29 [(Rs 2,00,000 * 30%)/70%].

Section 194 BB
TDS ON WINNINGS FROM HORSE RACES
Payment BY Any Person (such person generally holds license for organizing horse
races)
Payment TO Any Person (Resident Non-Resident)
Nature of Prize money earned from winning horse races
Payment
Threshold Limit No tax is required to be deducted at source if the amount of winnings
paid does not exceed Rs 10,000.
Time of At the time of payment
Deduction
TD5 Rate TDS is required to be deducted @ 30%

Section 194 C
TDS IN CASE OF PAYMENT TO CONTRACTORS - (Most Imp)
Payment • Individuals A HUF if tax audit is required for the preceding financial year
BY • Any other person irrespective of the fact whether audit is required for the
preceding f inancial year or not
Payment Any RESIDENT Contractor (Nefv Resident)
TO
Nature of Payment made by a contractee to a resident contractor for carrying out any
Payment “WORK" under a contract

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Threshold No tax is required to be deducted at source if the amount paid/payable during
Limit a financial year does not exceed:
• Rs 30,000 in case of a single contract
• Rs 1,00,000 in case of aggregate of contracts
Question (Study Material): The details of payments made by A Ltd to Mr Z. a
contractor during PY 2019-20 in connection with contract work are as follows:
 Rs 25,000 on 30.06.2019 > Rs 25,000 on 31.08.2019 > Rs 30,000 on
31.12.2019 A payment of Rs 28,000 due to Mr Z was also recognized in the
books on 01.03.2020. biscuss TDS implications u/s 194-C.

Solution:
• The individual payments do not exceed Rs 30,000 but since the aggregate
payments during PY 2019-20 exceeds Rs 1,00,000 (payment of Rs 28,000
when recognized in the books of accounts on 01.03.2020 took the total from
Rs 80,000 to Rs 1,08,000), TDS provisions u/s 194C would get attracted.
• Tax has to be deducted @ 1% on the entire amount of Rs 1,08,000 from the
last payment of Rs 28,000 and only Rs 26,920 (28,000 - 1,080) would be paid
to Mr Z.
• TDS liability would arise on 01.03.2020 since the expense has been credited
to Mr Z's account in the books of accounts.
Exemption • Special Provision for Transporter:
from No tax is required to be deducted if all the conditions listed below are fulfilled:
Deduction □ The transporter is engaged in the business of plying, hiring or leasing goods
of TDS carriages;
□ The transporter owns ten or less goods carriages at any time during the PY;
and
□ The transporter has furnished a declaration to this effect along with his PAN.
* No tax is required to be deducted at source where the payment is to be made
by individuals/HUF for personal purposes, even if such individuals/HUF are
subject to tax audit.
Time of At the time of credit or payment, whichever is earlier
Deduction
TDS Rate > TDS rate shall be 1% where the payment is to be made to individuals/HUF-
 TDS rate shall be 2% where the payment is to be made to any other person.

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Meaning The expression ‘work' has been defined to include the following:
of ’Work’ • advertising;
• broadcasting & telecasting;
• carriage of goods or passengers by any mode of transport other than by
railways;
• catering;
• manufacturing or supplying a product according to the requirement or
specification of a customer using material purchased from such customer. But
work' does not include manufacturing or supplying a product according to the
requirement/specification of a customer using material purchased from a
person other than such customer.
Manufacturing or supplvina a product according to the requirement or
specification
of a customer using material purchased from such customer:
□ If the amount of material component is separately indicated on the
invoice, TDS shall be deducted on the total invoice amount excluding the
material component-
□ If the amount of material component is not separately indicated on the
invoice, TDS shall be deducted on the total invoice amount-

Example 1:
Mr Prem purchases cloth from 'Raymonds' for Rs 60,00,000. He stitches
shirts as per specifications of ‘Wills Lifestyle' and raises an invoice as
under:
Material charges - Rs 60,00,000 Stitchina charpes - Rs 15.00,000 Rs
75.00.000
The above transaction is not covered within the scope of the expression
'work' and therefore TDS provisions u/s 194C would not apply.
Example 2
Mr Prem receives an order for stitching of shirts from 'Wills Lifestyle'. Mr
Prem purchases cloth from ‘Wills Lifestyle' for Rs 60,00,000 and invoices
as under: Material charges - Rs 60,00,000 Stitchino charpes - Rs
15.00.000 Rs 75.00.000
The above transaction is covered within the scope of the expression 'work'
and therefore TDS provisions u/s 194C would apply. Further, TDS would
be calculated only on the stitching charges of Rs 15,00,000.

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Example 3:
□ Mr Prem receives an order for stitching of shirts from ‘Wills Lifestyle’. Mr
Prem buys cloth from ’Wills Lifestyle' for Rs 60,00,000 and raises a
consolidated invoice for Rs 75,00,000 without separately indicating the
material charges.
□ The present transaction is covered within the scope of the expression
'work' and therefore TDS provisions u/s 194C would apply. Further, TDS
would be calculated on the entire invoice amount of Rs 75,00,000.

Section 194 D - TDS ON INSURANCE COMMISSION

Payment BY Any Person

Payment TO Any RESIDENT (Non Resident)
Nature of Payment in the nature of insurance commission (such commission is
Payment generally paid by the insurance company to the insurance agent)
Threshold Limit No tax is required to be deducted at source if the commission, brokerage,
etc to a particular agent paid/payable during a financial year does not
exceed Rs 15,000
Time of At the time of credit or payment, whichever is earlier
Deduction
TDS Rate TDS is required to be deducted @ 5%

Section 194 DA
TDS ON PROCEEDS RECEIVED ON MATURITY OF LIFE INSURANCE POLICY
Payment Any Life Insurance Company
BY
Payment Any RESIDENT (Non Resident)
TO
Nature of TDS is required to be deducted if the proceeds received on maturity of life
Payment insurance policy are taxable under the Income Tax Act. In other words, if the
maturity proceeds are exempt u/s 10(10D), no TDS is required to be deducted
on such maturity proceeds.
(Maturity proceeds are taxable if the premium amount exceeds the prescribed
percentage of 10%, 15% or 20% - already discussed under the 'deductions'
chapter)
Threshold No tax is required to be deducted at source if the amount paid during a financial
Limit year is less than Rs 1,00,000.

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Time of At the time of payment of maturity amount
Deduction
TDS Rate TDS is required to be deducted @1%

194EE

SECTION 194EE
INCOME TYPE PAYMENT OF NSS DEPOSITS
LIMIT 2500
RATE The prescribed rate is 10%. No surcharge, cess shall be added. When
the payee does not furnish his PAN to deductor, tax will be deducted
@ 20%.

SECTION 194 IB - Latest Section Introduced Vide The Finance Act. PAYMENT OF
RENT BY CERTAIN INDIVIDUALS OR HINDU UNDIVIDED FAMILY
• Section 194I requires individuals/HUF to deduct TDS on rent only if such individuals/HUF
are required to get their books of accounts audited for the preceding financial year.
• In cases where individuals/HUF are not required to get their books of accounts audited for
the preceding financial year, TDS is not deductible u/s 194I irrespective of the amount of rent
paid/payable.
• In order to widen the scope of TDS on rent payments, Section 194 IB has been newly
introduced vide the Finance Act, which requires individuals/HUF to deduct TDS on
rent payments in certain cases even though they are not required to be get their
books of audited for the preceding financial year.
• Provisions of Section 194IB:
Where individuals/HUF are not required to get their books of accounts audited for the
preceding financial year and the amount of rent paid/payable exceeds Rs 50,000 per
month, TDS is to be deducted u/s 194IB @ 5%. Such TDS is not required to be deducted
on monthly basis. Instead, the law requires the deductor to deduct tax only once in the
entire previous year.
• Time of Deduction of TDS:
a) If the tenant occupies the property till the end of the relevant previous year;
TDS shall be deducted at the time of credit or payment of rent pertaining to the last month of
the relevant previous year, whichever is earlier.
b) If the tenant has vacated the property before the expiry of the relevant previous year:
TDS shall be deducted at the time of credit or payment of rent pertaining to the last month of
tenancy, whichever is earlier.
• In order to reduce the compliance burden, it has been further provided that the
deductor shall not be required to obtain Tax Deduction Account Number (TAN) as per
Section 203A.

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• Rate of TDS Where Payee Doesn't Furnish His PAN:
If the person receiving rent doesn't furnish his PAN, then TDS is deductible at the rate of
20% subject to the maximum limit of amount of rent payable for the month of March or last
month of tenancy, as the case may be.

Section 194G
TDS ON COMMISSION ON SALE OF LOTTERY TICKETS
Payment BY Any Person
Payment TO Any Person (Resident as well as Non-Resident)
Nature of Commission, brokerage, etc in connection with sale of lottery tickets.
Payment
Threshold Limit No tax is required to be deducted at source if the amount of commission
for sale of lottery tickets paid/payable during a financial year does not
exceed Rs 15,000.
Time of At the time of credit or payment, whichever is earlier
Deduction
TDS Rate TDS is required to be deducted @ 5%

Section 194H
TDS ON COMMISSION/BROKERAGE
Payment • Individuals & HUF if tax audit is required for the preceding financial year
BY • Any other person irrespective of the fact whether audit is required for the
preceding financial year or not
Payment Any RESIDENT (Non Resident)
TO
Nature of Any payment in the nature of commission or brokerage.
Payment However, it is to be noted that payment of commission to employees is covered
u/s 192 whereas payment of insurance commission is covered u/s 194D.
Further, commission on sale of lottery tickets is covered u/s 1946.

Threshold No tax is required to be deducted at source If the amount of commission or

Limit brokerage paid/payable during a financial year does not exceed Rs 15,000.

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Time of At the time of credit or payment, whichever is earlier (Tax to be deducted
Deduction irrespective of the fact whether the commission relates to personal purposes or
business purposes)

TDS Rate TDS is required to be deducted @ 5%

Section 194I TDS ON RENT

Payment • Individuals & HUF if tax audit is required for the preceding financial year
BY • Any other person irrespective of the fact whether audit is required for the
preceding financial year or not
Payment Any RESIDENT (Non Resident)
TO
Nature of Rent charges for any property, whether movable or immovable. It is not
Payment necessary that the property is owned by the person to whom rent is paid.
Threshold • No tax is required to be deducted at source if the amount of rent paid/payable
Limit during a financial year does not exceed Rs 240000
• In case of property co-owned by multiple owners, the limit of Rs 240000
would apply to each co-owner separately if their share is def inite A
ascertainable.
Time of At the time of credit or payment, whichever is earlier (Tax to be deducted
Deduction irrespective of the fact whether the rent relates to personal purposes or
business purposes)
TDS Rate • For use of plant & machinery: Tax to be deducted @ 2%
• For use of land, buildina. furniture, etc: Tax to be deducted @ 10%
When the payee does not furnish his PAN to deductor, tax will be deducted
@ 20%.

Section 194IA
TDS ON PAYMENT FOR TRANSFER OF CERTAIN IMMOVABLE PROPERTY
Payment Any Person (other than person referred to u/s 194LA)
BY
Payment Any RESIDENT (Non Resident)
TO

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Nature of Payment should be in the nature of sale consideration received on transfer
Payment of any immovable property.
Immovable property has been defined to mean any land or building or both but
agricultural land situated in rural area is not considered as immovable property
for the purposes of Section 194IA. In other words, no TDS is required to be
deducted in case of transfer of agricultural land situated in rural area even if the
sale consideration is Rs 50 lakhs or more.
Threshold No tax is required to be deducted at source if the sale consideration for
Limit transfer of immovable property is less than Rs 50,00,000. (The limit of Rs
50 lakhs has to be taken individually for each immovable property and not
aggregately for all the immovable properties transferred during the year)
Time of At the time of credit or payment, whichever is earlier
Deduction
TDS Rate TDS is required to be deducted @ 1% on the total consideration for transfer of
immovable property. Further the purchaser is not required to obtain TAN as
per Section 203A.

194LB

SECTION 194LB

INCOME TYPE INTEREST FROM INFRA BONDS

THRESHILD LIMIT NA

RATE 5%

194LD

SECTION 194LD

INCOME TYPE INTEREST ON CERTAIN BONDS AND GOVT. SECURITIES

THRESHILD LIMIT NA

RATE 5%

Section 194J
TDS ON FEES FOR PROFESSIONAL SERVICES, TECHNICAL SERVICES, ETC

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Payment BY • Individuals A HUF if tax audit is required for the preceding financial
year
• Any other person irrespective of the fact whether audit is required for the
preceding financial year or not
Payment TO Any RESIDENT (Non Resident)
Nature of a) Fees for professional services; or
Payment b) Fees for technical services; or
c) Royalty; or
d) Non-compete fees referred u/s 28; or
e) Any remuneration or fees or commission paid/payable to directors of a
company provided such remuneration is not covered u/s 192 (eg- sitting fees
to independent directors, retainership fees to independent directors)
Threshold • No tax is required to be deducted at source if the amount paid/payable
Limit during a financial year does not exceed the limits given below:
 For items (a) to (d): Rs 30.(XX) (the limit of Rs 30.000 is applicable
separately for each of the above items)
 For item fe): Nil (Tax is to be deducted even if the remuneration to
directors durina the entire financial year does not exceed Rs 30,000)
• No tax is required to be deducted by individuals/MUF in respect of
professional fees paid exclusively for personal purposes even if such
individuals/HUF are subject to tax audit for the preceding financial year.
Time of At the time of credit or payment, whichever is earlier
Deduction
TDS Rate TDS is required to be deducted @ 10% (TDS @ 2% for payments made to
call centers)
Meaning of Professional services would include services rendered by a lawyer, engineer,
'Professional architect, accountant, etc. CBDT has notified that professional services would
Services' also include services provided by sportspersons, umpires, sports columnists,
commentators, anchors, trainers, etc.

Section 194 LA
TDS ON PAYMENT OF COMPENSATION ON ACQUISITION OF IMMOVABLE
PROPERTY
Payment BY Any Person (Generally such person is Government or other similar
agency)
Payment TO Any RESIDENT (Non Resident)
Nature of Compensation in relation to compulsory acquisition of any immovable
Payment property other than agricultural land situated in rural area. In other
words, Section 194LA would not apply where compensation relates to
compulsory acquisition of agricultural land situated in rural area.

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Threshold Limit No tax is required to be deducted at source if the compensation
amount paid during a financial year does not exceed Rs 2,50,000.
Time of At the time of payment of compensation
Deduction
TDS Rate TDS is required to be deducted @ 10%

Section 195
TDS ON PAYMENTS MADE TO NON-RESIDENTS OR FOREIGN COMPANY
Payment BY Any Person
Payment TO Any Non-Resident or any Foreign Company
Nature of Payment can be in the nature of interest or any other sum (other than
Payment salary) which is chargeable to income tax under the Income Tax Act,
1961. TDS on salary payable to non-residents is covered u/s 192.
Time of At the time of credit or payment, whichever is earlier
Deduction
TDS Rate TDS is required to be deducted at the rates prescribed under the
Income Tax Act.

Payment by Individual/HUF to contractors and professionals [Section 194M]

Any sum or the aggregate of sums(exceeds INR 50 lacs in a year) paid or credited in a
year by Individual/HUF (who are not required to deduct tax at source under section
194C and 194J of the Act) to contractors or professionals on account of contractual
work or professional fees are required to deduct TDS at the rate of 5%. To deposit the
tax deducted, assessee shall not be required to obtain Tax deduction Account Number
(TAN).
TDS on cash withdrawal to discourage cash transactions [Section 194N]
Every person, being a banking company including any co-operative bank or a post
office, who is responsible for paying any sum in cash, in excess of 1 crore rupees during
the previous year, to any person (herein referred to as the recipient) from an account
maintained by the recipient with it shall, at the time of payment of such sum, deduct an
amount equal to 2% of sum exceeding 1 crore rupees. Provided that nothing contained
in this sub-section shall apply to any payment made to Government, banking company,
cooperative society engaged in carrying on the business of banking, post office, banking
correspondents and white label ATM operators

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Individuals/HUF to Deduct TDS EVEN IF IndividualsHUF to Deduct TDS ONLY IF
NOT LIABLE TO TAX AUDIT U/S 44AB LIABLE TO TAX AUDIT U/S 44AB for the
for the preceding financial year preceding financial year

All remaining sections other than 194A, 194A, 194C, 194H, 194I, 194J
194C, 194H, 194I, 194J

REALSING PAYMENTS WITHOUT TDS/TDS AT LOWER RATES

• Section 197 - Deduction of Tax at Lower Rates:
Under Section 197, the recipient of payment can approach the Assessing Officer in advance
with an application in Form No 13 to get an order directing the payer to release the payment
without TDS or with lower TDS. Benefit of Section 197 can be availed by the recipient in
respect of all payments to be received other than Section 194B, 194BB, 194E and
194IA. It is mandatory for the recipient to furnish his PAN in Form No 13.
• Section 197A - Self-declaration for Not Deducting TDS:
If the tax liability of any individual/HUF is nil, he can furnish a self-declaration in Form No
15G for nondeduction of tax u/s 192A, 193, 194, 194A, 194D, 194DA & 194I provided the
aggregate amount of payment covered under these sections does not exceed the exemption
limit (2.5L/3L/5L).
Note: A senior citizen (resident + age 60 years or more) can furnish a self-declaration in
Form No 15H even if the payment amount exceeds the exemption limit but his total tax
liability should be nil.
TDS PROCEDURES
• Person Deducting TDS to obtain TAN - Section 203A: (Registration of Deductor)
Every person deducting TDS shall make an application for allotment of Tax Deduction
Account Number (TAN') in Form No 49B Such application needs to be made within one
month from the end of the month in which tax was deducted at source for the first time.
Example: Mr A has deducted tax at source for the first time on April 15, 2019. He needs to
make an application for obtaining TAN by May 31, 2019.
• Time Limit for Depositing TDS with Government – Section 200 & Rule 30
Amount Credited/Paid Last Date for Depositing TDS
In March April 30th of next financial year
In any other month 7th of the succeeding month (Eg, tax deducted during
April 2019 needs to be deposited by May 7, 2019)

•Note : Any sum deducted u/s 194IA shall be paid to the credit of the central
government within a period of 30 days (w.e.f. 01.06.2016) from the end of the month in
which the deduction is made and shall be accompanied by a challan-cum-statement in
Form No. 26QB.
The Due date to submit Form 24G extended from 10 days of the end of the relevant
month to
– 30th day of April where the statement relates to the month of March and

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– 15 days from the end of relevant month
It is furnished electronically under digital signature or electronically along with the
verification of the statement.
Filing of TDS Returns on Quarterly Basis - Section 200 & Rule 31A
Quarter Last Date for Furnishing TDS Returns

First Quarter (April - June) July 31st of the financial year

Second Quarter (July - September) October 31st of the financial year
Third Quarter (October - December) January 31st of the financial year
Last Quarter (January - March) May 31st of the next financial year (April 30**)

• Time Limits for Issue of TDS Certificates by the Deductor to the Deductee
- Section 203:
Particulars TDS on Salary TDS on Non-Salary Payments

Form Form 16 Form 16A

Periodicity Annual Quarterly
Last Date upto which TDS June 15th of the 15 days from the due date of furnishing TDS
certificate should be issued next financial returns (ie Aug 15th, Nov 15th, Feb 15th & June
year 15th)
• Statement of TDS Deducted to be Furnished by Govt to the Deductee - Section
203AA:
The Income Tax Authorities are required to preparean annual statement in Form 26-AS in
respect of each person for whom tax has been deducted by different Deductors. Such
statement is prepared on the basis of quarterly TDS returns filed by each Deductor. The last
date by which the Income Tax Authorities are required to send Form 26-AS is July 31st of
the Assessment Year. Tax credit can be claimed by the Deductee on the basis of Form 26-
AS.
• Requirement to Furnish Permanent Account Number (‘PAN’) - Section 206AA
(Important):
Any person entitled to receive any sum or income or amount on which tax is deductible
under the Income Tax is required to furnish his PAN to the Deductor. If the Deductee fails to
furnish his PAN to the Deductor, tax would be deducted at the HI6HER of the following two
rates:
 The specific rate given under the relevant section; or
 20%.
Examples:
- TDS is to be deducted u/s 194J. The Deductee fails to furnish his PAN. TDS rate would
now be 20%.
- TDS is to be deducted u/s 194B. The Deductee fails to furnish his PAN. TDS rate would
remain 30%.

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CONSEQUENCES OF FAILURE TO DEDUCT OR PAY TDS - Section 201
• Where the person responsible for deducting and paying TDS to the government fails to do
so, such person shall be deemed to be an assessee in default.
• If the assessee proves to the satisfaction of the Assessing Officer that the default was for
good and sufficient reasons, no penalty shall be charged. The amount of penalty shall
not exceed the amount of tax payable.
• Further, an assessee in default shall also be liable to pay simple interest as under:
□ Simple interest @ 1% p.m. or part of the month on the amount of default from the date
on which such tax was deductible to the date on which such tax was actually
deducted; and
□ Simple interest @ 1.5% p.m. or part of the month on the amount of default from the
date on which such tax was actually deducted to the date of actual payment of such
deducted tax.
Example 1: ABC Ltd has paid professional fees of Rs 2,00,000 to Jolly on 10.10.2019
without deducting tax. ABC Ltd deducts TDS on 05.03.2020 and pays such Tb5 to the
government on the same day. In this case, ABC Ltd would be liable to pay interest of Rs
1,000 (Rs 20,000 * 1% * 5) fRate - 1°% p.m. or part of the month; Amount - Rs 20,000 (10%
of Rs 2,00,000); Period - 10.10.2019 to 05.03.20201
Example 2: ABC Ltd has paid professional fees of Rs 1,80,000 to Jolly on 10.10.2019 after
deducting TDS of Rs 20,000 @ 10%. The amount of TDS is deposited with the government
on 15.04.2020. In this case, ABC Ltd would be liable to pay interest of Rs 2,100 (Rs 20,000 *
1.5% * 7) fRate - 1.5% p.m. or part of the month; Amount - Rs 20,000 (10% of Rs 2,00,000);
Period - 10.10.2019 to 15.04.2021
Example 3: ABC Ltd has paid an amount of Rs 4,00,000 to Jolly on 01.07.2019 towards fees
for legal services without deducting tax. Later, another payment of Rs 6,00,000 was due to
Jolly on 28.02.2020, from which tax @ 10% on the entire amount of Rs 10,00,000 was
deducted. The total TDS of Rs 1,00,000 was deposited with the government on 23.05.2020.
In this case, interest would be computed as under:
Particulars Amount (Rs)
Interest @ 1% on Rs 40,000 for 8 months (01.07.2019 to 28.02.2020) 3,200
Interest @ 1.5% on Rs 1,00,000 for 3 months (28.02.2020 to 23.05.2020) 4,500
Total Interest Payable u/s 201 7,700

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PART II:
TAX COLLECTION AT SOURCE (TCS) - Sections 206C
General  Every person, being a seller shall,
Provisions  at the time of debiting the amount payable by the buyer to the account of the
buyer, or
 at the time of receipt of such amount from the said buyer,
 whichever is earlier,
 collect from the buyer,
 a sum equal to the following percentage of the purchase price as income
tax.
Nature of Goods TCS Rates
Alcoholic liquor for human consumption 1%
Indian made foreign liquor 1%
Tendu leaves 5%
Timber obtained under a forest lease 2.5%
Timber obtained by any mode other than under a 2.5%
forest lease
Any other forest produce not being timber or tendu 2.5%
leaves
Scrap 1%
Minerals, being coal or lignite or iron ore 1%
Note: The buyer shall be allowed credit of TCS collected
by seller.

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Special • Lease/License of Parkina Lot. Toll Plaza and Mine/Quarry:
Provisions TCS provisions also apply where any contract is entered for leasing/licensing
of any parking lot, toll plaza and mine/quarry for the purposes of carrying on
such business. TCS in such cases is to be collected @ 2%.
• Special Provision for Sale of Motor Vehicles:
Where a person sells a motor vehicle for an amount exceeding Rs 10,00,000,
he shall collect TCS @ 1% on the amount of total sale price at the time of
receipt of sale price from the buyer. The mode of payment of sale
consideration is irrelevant.
• Collectee to Furnish Permanent Account Number (Section 206CC):
Where the Collectee (ie any person paying any sum/amount on which tax is
collectible at source)fails to furnish his PAN to the Collector, tax shall be
collected at HIGHER of the following two rates:
 twice the rate specified under the Income Tax Act, 1961; or
 five per cent.
Applicability Individuals/HUF shall be required to collect TCS only if such individuals/HUF
of TCS are required to get their accounts audited u/s 44AB of the Income Tax Act,
Provisions 1961 for the preceding financial year (ie financial year immediately preceding
to the financial year in which the goods are sold).
Individuals
& HUF

TDS FORMS

Form No. Particulars

Form 24Q Statement for tax deducted at source from salaries

Form 26Q Statement for tax deducted at source on all payments except salaries

Form 27Q Statement for deduction of tax from interest, dividend, or any other sum
payable to nonresidents
Form 27EQ Statement of collection of tax at source

Form 26QB For section 194IA separate return is not required, challan cum return to be
filed on Form 26QB to be deposited within a period of 30 days (w.e.f.
01.06.2016) from the end of the month in which the deduction is made.

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RETURNS
Section Particulars
139(1) Assessees required to file return of income compulsorily
(i) Companies and firms (whether having profit or loss or nil income);
(ii) a person, being a resident other than not ordinarily resident, having any asset
(including any financial interest in any entity) located outside India or signing
authority in any account located outside India, whether or not having income
chargeable to tax;
(iii) Individuals, HUF, AOPs or BOIs and artificial juridical persons
whose total income before giving effect to the provisions of Chapter VI-A and
sections 54, 54B, 54B, 54EC or 54F exceeds
the basic exemption limit.
(iv) Any person who during the previous year –
- has deposited more than ` 1 crore in one or more current accounts
maintained with a banking company or a co- operative bank
- has incurred expenditure of more than ` 2 lakh for himself or any
other person for travel to a foreign country;
- has incurred expenditure of more than ` 1 lakh towards
consumption of electricity
- fulfils such other conditions as may be prescribed
Due date of filing return of income
30th September of the assessment year, in case the assessee is:
(i) a company;
(ii) a person (other than company) whose accounts are required to be
audited; or
(iii) a working partner of a firm whose accounts are required to be
audited.
31st July of the assessment year, in case of any other assessee (other than
assessees who are required to furnish report under section 92E, for whom
the due date is 30th November of the assessment year).

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234A Interest for default in furnishing return of income
Interest under section 234A is payable where an assessee furnishes the
return of income after the due date or does not furnish the return of
income.
Assessee shall be liable to pay simple interest @1% per month or part of
the month for the period commencing from the date immediately following
the due date and ending on the following dates –

Circumstances Ending on the following dates

Where the return is the date of furnishing of the return
furnished after due date

Where no return is The date of completion

furnished of assessment

However, where the assessee has paid taxes in full on or before the due date, interest
under section 234A is not leviable.
234F Fee for default in furnishing return of income
Where a person who is required to furnish a return of income under section 139, fails
to do so within the prescribed time limit under section 139(1), he shall pay, by way
of fee, a sum of –
(I) ` 5,000, if the return is furnished on or before the 31st December of the
assessment year;
(II) ` 10,000 in any other case
However, if the total income of the person does not exceed ` 5 lakhs, the fees
payable shall not exceed ` 1,000
Consequently provisions of Section 271F relating to penalty in respect of
failure to furnish return of income shall not apply from assessment year
2019-20.

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139(3) Return of loss
An assessee can carry forward or set off his/its losses provided he/it has filed his/its
return under section 139(3), within the due date specified under section 139(1).
Exceptions
Loss from house property and unabsorbed depreciation can be carried forward
for set-off even though return has not been filed before the due date.

139(4) Belated Return

A return of income for any previous year, which has not been furnished within the
time allowed u/s 139(1), may be furnished at any time before the:
(i) end of the relevant assessment year; or
(ii) completion of the assessment,
whichever is earlier.
Example : For the previous year 2019-20, Mr. X did not file the return of
income on the due date. Can Mr. X file the return of income after the due
date?
Correct answer. Yes, As per section 139(4), Mr. X can file a belated return.
Mr. X may file the return of income at any time on or before 31st of March
2021 (anytime before the end of the relevant Assessment Year 2020-21.

An assessee is liable to pay interest @ 1% for every month or part thereof

comprised in the period intervening between the expiry of 30 days w.e.f.
serving of the notice of demand and actual payment of tax for the delay in
making the payment of tax demanded beyond 30 days from the date of receipt
of the demand notice.

139(5) Revised Return

If any omission or any wrong statement is discovered in a return furnished u/s
139(1) or belated return u/s 139(4), a revised return may be furnished by the
assessee at any time before the:
(i) end of the relevant assessment year; or
(ii) completion of assessment, whichever is
earlier.
Thus, belated return can also be revised.

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139A Permanent Account Number (PAN)
Quoting of PAN is mandatory in all documents pertaining to the following
prescribed transactions :
(a) in all returns to, or correspondence with, any income-tax authority;
(b) in all challans for the payment of any sum due under the Act;
(c) in all documents pertaining to such transactions entered into by him,
as may be prescribed by the CBDT in the interests of revenue. For
example, sale or purchase of a motor vehicle, payment in cash of an
amount exceeding ` 50,000 to a hotel against a bill or bills at any one
time, etc.
Inter-changeability of PAN with the Aadhaar number
Every person who is required to furnish or intimate or quote his PAN may
furnish or intimate or quote his Aadhar Number in lieu of the PAN w.e.f.
1.9.2019 if he
- has not been allotted a PAN but possesses the Aadhar number
- has been allotted a PAN and has intimated his Aadhar number to
prescribed authority in accordance with the requirement contained in
section 139AA(2).
139AA Quoting of Aadhar Number
To be quoted by every person on or after 1/7/2017 in the application for
allotment of PAN and in Return of Income
If a person does not have Aadhar Number, the Enrolment ID of Aadhar
application form issued to him at the time of enrolment shall be quoted.
Aadhar Number to be intimated to prescribed authority on or before a date
notified by the Central Government

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140A Self-Assessment
Where any tax is payable on the basis of any return required to be
furnished under section 139, after taking into account –
(i) the amount of tax, already paid,
(ii) the tax deducted or collected at source
(iii) any relief of tax claimed under section 89
(iv) any tax credit claimed to be set-off in accordance with the provisions
of section 115JD.
the assessee shall be liable to pay such tax together with interest and fee
payable under any provision of this Act for any delay in furnishing the
return or any default or delay in payment of advance tax before furnishing
the return.
Where the amount paid by the assessee under section 140A(1) falls short
of the aggregate of the tax, interest and fee as aforesaid, the amount so paid
shall first be adjusted towards the fee payable and thereafter, towards
interest and the balance shall be adjusted towards the tax payable.

E-filing of Return
Filing of Income Tax Returns is a legal obligation of every person who total for the previous
year exceeds the exemption limit provided under the Income Tax Act, 1961. The Income Tax
Department has introduced on line facility in addition to conventional method to file return
of income. The process of electronically filing of Income Tax return through the mode of
internet access is called e-filing of return. E-filing offers convenience of the tax payers. The
only obligation for the user of this facility is to have a PAN number. There are different
forms from ITR- I to ITR-7 for e-filing of returns. There is a provision e-filing for digital
signature by the assessee.
All ITR Forms are to be filed electronically. However, where return is furnished in
ITR Form-1 (SAHAJ) or ITR-4 (SUGAM), the following persons have an option to file

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return in paper form:
1) an Individual of the age of 80 years or more at any time during the previous
year; or
2) an Individual or HUF whose income does not exceed five lakh rupees and who
has not claimed any refund in the Return of Income.

Bulk Filing of Return

Finance Act, 2002 has introduced a new scheme of Bulk Filing of Return vide new Section
139(1A). According to the new provisions, any person, being an individual who is in receipt
of income chargeable under the head “Salaries” may, at his option, furnish a return of his
income for any previous year to his employer, in accordance with such scheme as may be
specified by the Board in this behalf. The employer shall furnish all returns of income
received by him on or before the due date, in such form (including on a floppy, diskette,
magnetic cartridge tape, CD-ROM or any other computer readable media) and manner as
may be specified in that scheme, and in such case, any employee who has filed a return of his
income to his employer shall be deemed to have furnished a return of income under
Section 139(1) and the provisions of this Act shall apply accordingly.
However, the following returns of employees cannot be submitted under the above
schemes :
I. return of a year other than the current year;
II. return without PAN;
III. return under Block assessment;
IV. return of an employee having more than one employer.

Power to Central Government

Section 139(1C) empower the Central Government to exempt any class or classes of
persons from the requirement of furnishing a return of income by issue notification in the
Official Gazette.

Return of Income of charitable trust and institutions [Section 139(4A)]

Sub-section (4A) of Section 139 also makes it incumbent of “every person in receipt of
income derived from property held under trust or other legal obligation wholly for
charitable or religious purposes or in part only for such purposes or of income being
voluntary contributions within the meaning of Section 2(24)(iia)” to furnish a return of
income in case the total income exceeds the maximum amount not chargeable to tax.

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Further, one who is assessable as a representative assessee for the receipt of income
derived from property held under Trust or other legal obligation wholly for charitable or
religious purposes or in part only for such purposes or of income being voluntary
contributions shall furnish a return of income of the previous year in the prescribed
form and get it verified in such manner as prescribed under Section 139(1), if the total
income (without giving effect to the provisions of Sections 11 and 12) exceeds the
amount not chargeable to tax.

Return of Income of Political Party [Section 139(4B)]

It is also incumbent on the political parties to file their return of income [if the income
(without giving effect to the provisions of Section 13A) exceeds the maximum amount not
chargeable to tax], duly signed by the Chief Executive Officer of the party

DEFECTIVE RETURN
 If return filed by an assessee is found to be defective, assessing officer may intimate the
defect to the assessee and give him an opportunity to rectify the defect within a period
of fifteen days from the date of such intimation or within such further period which, the
Assessing Officer may, allow and if the defect is not rectified within the said period, then
the return shall be treated as an invalid return i.e. it will be presumed that the assessee
has not filed any return of income.
 If the assessee rectifies the defect after the expiry of the said period of fifteen days or the
further period allowed, but before the assessment is made, the Assessing Officer may
condone the delay and treat the return as a valid return.
 A Return of income shall be regarded as defective unless all the annexures, statements
and columns in the return of income relating to computation of income chargeable
under each head of income, computation of gross total income and total income have
been duly filled in.
 An unsigned return is not a valid return at all i.e. it will not be considered to be defective
return rather it is an invalid return.

Section 140
:

VERIFICATION OF RETURNS

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Individual • Return shall be verified by the individual himself.
• If the individual is mentally incapacitated from attending to his affairs,
return shall be verified by his guardian or any other person competent
to act on his behalf.
• If the individual cannot verify the return because he is absent from
India, return shall be verified by his duly authorized agent.
• If the individual cannot verify the return because of any other
reason whatsoever,
return shall be verified by his duly authorized agent.
(Where the return is verified by an agent, furnishing Power of Attorney
along with return is a mandatory requirement)
HUF • Return shall be verified by the Karta.
• If the Karta is mentally incapacitated or absent from India, return
shall be verified by any other adult member (male/female) of such
family.
Companies • Return shall be verified by the Managing Director. If the Managing
Director is not available, return shall be verified by any other Director.
• Return shall be verified by the agent in case of non-resident company.
• If the company is in liquidation, return shall be verified by the Official
Liquidator.
Partnership • Return shall be verified by the Managing Partner.
Firm * • If the Managing Partner is not available, return shall be verified by any
other Partner.
LLP Firms • Return shall be verified by the Designated Partner.
• If the Designated Partner is not available, return shall be verified by
any other Partner.

Others Political Return shall be verified by the Chief Executive Officer.

Party
Local Return shall be verified by the Principal Officer.
Authority
Any Other Return shall be verified by the Principal Officer. If the
Association Principal Officer is not available, return shall be
verified by any other member.

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Any Other Return shall be verified by such person or by any
Person person who is competent to act on behalf of such
person.

Section 139B
SUBMISSION OF RETURNS THROUGH TRPs
Meaning of • Tax Return Preparer (TRP) is a person appointed by the Income Tax
TRPs Department to assist people with low income/low tax liability in:
□ Preparation of income tax returns; and
□ Filing of income tax returns.
• A person can get himself enrolled as a TRP provided he holds a
graduation degree from a recognized Indian university or any other
specified qualification. However, the following persons are ineligible for
becoming a TRP:
□ A Chartered Accountant;
□ A legal practitioner;
□ any officer of a scheduled bank in which the assessee maintains a
current account or has regular dealings.
 Educational qualification for Tax Return Preparers(TRP) notified
vide Notification No. 4/2018, dated 1901-2018 :
An individual, who holds a bachelor degree from a recognised Indian
University or institution, or has passed the intermediate level
examination conducted by the Institute of Chartered Accountants of India
or the Institute of Company Secretaries of India or the Institute of Cost
Accountants of India, shall be eligible to act as TRP.

Compensation • The Department pays lower of the following two amount as commission
to TRPs to a TRP:
□ 3% of the tax paid by the assessee on the income declared in the
return; or
□ Rs 1,000.
• A TRP is entitled to receive a minimum commission of Rs 250 in total.
Where the commission received from the department is less than Rs
250, the deficit is payable the assessee for whom the TRP files the

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return.
Examples:

Tax on Income Declared in Rs 80,000 Rs 30,000 Rs 5,000

Return
Compensation Payable to
TRP

Persons Who Any person except the following persons can file his ROI through a
Cannot File TRP:
Their Returns □ A non-resident;
Through TRPs □ A company;
□ Any other person whose books of accounts are required to be
audited u/s 44AB of the Income Tax Act, 1961 or any other law.

II Advance Payment of Tax

Liability for payment of advance tax [Sections 207 & 208]
 Tax shall be payable in advance during any financial year in respect of the total income(TI) of
the assessee which would be chargeable to tax for the
A.Y. immediately following that financial year.
 Advance tax is payable during a financial year in every case where the amount of such tax
payable by the assessee during the year is ` 10,000 or more.
 However, an individual resident in India of the age of 60 years or more at any time during
the previous year, who does not have any income chargeable under the head “Profits
and gains of business or profession”
(PGBP), is not liable to pay advance tax.

Instalments of advance tax and due dates [Section 211]

Advance tax payment schedule for corporates and non-corporates (other than an
assessee computing profits on presumptive basis under section
44AD or section 44ADA) – Four instalments
Due date of instalment Amount payable
On or before 15 June
th Not less than 15% of advance tax liability.

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Onorbefore15th Not less than 45% of advance tax liability (-) amount
September paid in earlier instalment.
Onorbefore15th Not less than 75% of advance tax liability (-) amount
December paid in earlier instalment or instalments.
On or before 15th March The whole amount of advance tax liability (-) amount
paid in earlier instalment or instalments.
Advance tax payment by assessees computing profits on presumptive basis
under section 44AD(1) or section 44ADA(1)
An eligible assessee, opting for computation of profits or gains of business or profession on
presumptive basis in respect of eligible business referred to in section 44AD(1) or in respect of
eligible profession referred to in section 44ADA(1), shall be required to pay advance tax of
the whole amount on or before 15th March of the F.Y.
However, any amount paid by way of advance tax on or before 31st March shall also be treated
as advance tax paid during the F.Y. ending on that day.

Interest for defaults in payment of advance tax [Section 234B]

(1) Interest under section 234B is attracted for non-payment of advance tax or payment of
advance tax of an amount less than 90% of assessed tax.
(2) The interest liability would be 1% per month or part of the month from
1st April following the F.Y. upto the date of determination of total income under
section 143(1) and where regular assessment is made,
upto the date of such regular assessment.
(3) Such interest is calculated on the amount of difference between the assessed tax and
the advance tax paid.
(4) “Assessed tax” means the tax on total income determined u/s 143(1)/under regular
assessment, as the case may be, less TDS & TCS, any relief of tax allowed u/s 89, any
tax credit allowed to be set off in
accordance with the provisions of section 115JD.
(5) Where self-assessment tax is paid by the assessee under section 140A or otherwise,
interest shall be calculated upto the date of payment of such tax and reduced by the
interest, if any, paid under section 140A
towards the interest chargeable under this section.

Interest for deferment of advance tax [Section 234C]

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(a) Manner of computation of interest u/s 234C for deferment of
advance tax by corporate and non-corporate assessees:
In case an assessee, other than an assessee who declares profits and gains in accordance
with the provisions of section 44AD(1) or section 44ADA(1), who is liable to pay advance
tax u/s 208 has failed to pay such tax or the advance tax paid by such assessee on its current
income on or before the dates specified in column (1) below is less than the specified
percentage [given in column (2) below] of tax due on returned income, then simple
interest@1% per month for the period specified in column
(4) on the amount of shortfall, as per column (3) is leviable u/s 234C.

Specified Specified Shortfall in advance tax Period

date %
(1) (2) (3) (4)
15th June 15% 15% of tax due on returned 3
income (-) advance tax paid up to months
15th June
15th 45% 45% of tax due on returned 3
September income (-) advance tax paid up to months
15th September

15th 75% 75% of tax due on returned 3

December income (-) advance tax paid up to months
15th December
15th March 100% 100% of tax due on returned income 1month
(-) advance tax paid up to
15th March
Note – However, if the advance tax paid by the assessee on the current income, on or
before 15th June or 15th September, is not less than 12% or, as the case may be, 36% of the
tax due on the returned income, then, the assessee shall not be liable to pay any interest on
the amount of the shortfall on those dates.
Tax due on returned income = Tax chargeable on total income declared in
the return of income – TDS – TCS - any relief of tax allowed u/s 89 - any tax credit
allowed to be set off in accordance with the
provisions of section 115JD

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(b) Computation of interest under section 234C in case of an assessee who
declares profits and gains in accordance with the provisions of section
44AD(1) or section 44ADA(1):
In case an assessee who declares profits and gains in accordance with the provisions of
section 44AD(1) or section 44ADA(1), who is liable to pay advance tax u/s 208 has failed
to pay such tax or the advance tax paid by the assessee on its current income on or
before 15th March is less than the tax due on the returned income, then, the assessee shall
be liable to pay simple interest at the rate of 1% on the amount of the
shortfall from the tax due on the returned income.

(c) Non-applicability of interest under section 234C in certain cases: Interest under
section 234C shall not be leviable in respect of any shortfall in payment of tax due on
returned income, where such shortfall is on account of under-estimate or failure to
estimate –
(i) the amount of capital gains;
(ii) income of nature referred to in section 2(24)(ix) i.e., winnings from lotteries,
crossword puzzles etc.;
(iii) income under the head “Profits and gains of business or profession” in cases
where the income accrues or arises under the said head for the first time.
(iv) income of the nature referred to in section 115BBDA(1) i.e., dividend in
aggregate exceeding of ` 10 lakhs including in the assessee’s total income.
However, the assessee should have paid the whole of the amount of tax payable in respect of
such income referred to in (i), (ii), (iii) and (iv), as the case may be, had such income been a
part of the total income, as part of
the remaining instalments of advance tax which are due or where no
such instalments are due, by 31st March of the financial year.

ILLUSTRATION
Calculate Advance Tax Payable by Arun from the following estimated incomes for the
previous year 2019-20 :
– Business Income : Rs. 4,75,000;
– Rent from house property : Rs. 36,000 per month;
– Municipal taxes : Rs. 27,000;

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– Winning from games : Rs. 70,000 (net of TDS);
– Life insurance premium paid for himself (sum assured : Rs. 5,00,000) : Rs. 30,000;

Solution
Computation of Advance Tax payable by Arun for Previous Year 2019-20
(Assessment Year 2020-21) Step 1 : Compute Estimated Total Income for the year :

Particulars Rs. Rs.

Income from house property :
Gross Annual Value [Rental Income (36,000 x 12)] 4,32,000
Less : Municipal taxes paid by owner (27,000)
Net Annual Value (NAV) 4,05,000
Less : Standard Deduction @ 30% of NAV (1,21,500) 2,83,500
Profits and gains of Business or Profession 4,75,000
Income from other sources :
Winning from games (gross) [70000 x 100/100 - 30%] 1,00,000
Gross Total Income (GTI) 8,58,500
Less : Deductions under Section 80C (30,000)
Total Income 8,28,500

Step 2 : Computation Estimated of Tax Liability and Advance Tax Payable

Particulars Rs. Rs.
Tax on :
Winning from Games @ 30% [1,00,000 x 30%] 30,000
Balance Income @ Slab Rate [12,500 + 20% of (7,28,500 - 5,00,000)] 58,200
Tax Payable 88,200
Add : Surcharge, if any Nil
Add : Cess @ 4% 3,528

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Tax Liability Less : TDS 91,728
Advance Tax Liability (30,000)
Advance Tax 61,728
Advance Tax (Rounded off) 61,730

Step 3 : Advance tax instalments - Advance tax is payable as follows :

Upto % (Rate) Cumulative (Rs.) Each instalment
(Rs.)
15.06.2019 15 9,259 [61,730x15%] 9,259
15.09.2019 45 27,778 [61,730x45%] 18,519
15.12.2019 75 46,297 [61,730x75%] 18,519
15.03.2020 100 61,730 15,433
[61,730x100%]

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CLASSIFICATION AND TAX INCIDENCE ON COMPANIES

MINIMUM ALTERNATE TAX

S ect io n 1 15 JB Notwithstanding anything contained in any other provision of the
(1): Charging income tax act,
Section Where in case of a company,
The income tax payable on the total income as computed under
the income tax act in respect of any previous year,
Is less than 15% of its book profit,
Such book profit shall be deemed to be the total income of the
assessee
And the tax payable on such total income shall be the amount of
income tax at the rate of 15% (plus surcharge and cess as applicable)

Tax liability of any company shall be higher of the following

 Tax on total income computed according to normal
provisions of the act + surcharge + education cess
 15% of book profit + Surcharge + Education cess
Section 115JB Every assessee:
(2): Preparation a) Being a company, other than a company referred to in clause
of Profit & Loss (b), shall for the purposes of this section, prepare its profit
A/c and loss A/c for the relevant previous year in accordance with
the provisions of Part I of Schedule III to the Companies
Act,2013; or
b) Being a company, to which the Companies Act, 2013 is
applicable shall for the purpose of this section, prepare its
profit and loss account for the relevant previous year in
accordance with the provisions of the act governing such
company.
Provided that while preparing the annual accounts including profit
and loss account –
i) The accounting policies
ii) The accounting standards adopted for preparing such
accounts including profits and loss accounts
iii) The methods and rates adopted for calculating the

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depreciation

EXPLANATION TO SECTION 115JB: COMPUTATION OF BOOK PROFIT

Particulars Amount

Net profit as shown in profit & loss A/c prepared according to part II & III of
schedule VI Add: following items if these are debited in profit & loss A/c.
1. Amount of income tax paid or payable, and the provisions thereof xxx
(refer analysis 1)

Note: For this purpose income tax includes.

a) Any tax on distributed profits under section 115-O or on distributed
income under section 115R;
b) Any interest charged under this act
c) Surcharge
d) Education cess
e) Secondary and higher Education cess Xxx
2. Amount carried to any reserve by whatever name called

Note:
a) All kind of reserve shall be added back, whether mandatory or not
b) Transfer made to reserve u/s 10A(1A) / 80IA (6) shall be added back Xxx
c) Transfer made to reserve as per direction of RBI, shall be added back.
3. Provision made for meeting unascertained liabilities

Note:
a) Provision of gratuity/leave encashment made on scientific basis is an
ascertained liability as per Supreme court in Bharat earth movers and is not
to be added back.

b) Provision for gratuity made on ad-hoc basis is unascertained liability and

is to be added back.
c) Provision for gratuity made as per actuary is ascertained liability and is Xxx
not to be added back.
d) Provision for warranty / Losses / Contingency is unascertained liability

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and is to be added back.
4. Any provision made for diminution in the value of asset
Xxx
Note: Provision for doubtful debts is an ascertained liability as Delhi high
court in case of EICHER ltd. and is not to be added back. (In order to
overruled the above Judgement FA 2009 insert the above provision. Bad Xxx
debts actually written off shall not be added back while computing book
profit.
5. Provision for losses of subsidiary companies
Xxx
Note: Even the actual loss to subsidiary companies debited to profit and loss
A/c shall be added back.
6. Amount of dividend paid or proposed

Note:
a) Dividend means both equity and preference dividend
b) Dividend includes both interim and final.
7. Amount of expenditure relating to income to which section 10 (other
than 10(38), 10A, 10B), or 10AA, 11 or 12 apply.
xxx
Note: xxx
a) The amount of expenditure relatable to any income to which section xxx
10BA applies shall not be added back. The income referred to in section
10BA is liable to MAT
b) The amount of expenditure relatable to any income to which section
10(38) applies shall not be added back. The income referred to in section
10(38) is liable to MAT
c) With effect from AY 2008-09 the amount of expenditure relatable to any
income to which section 10A and 10B applies shall not be added back. Now
the income referred to in section 10A and 10B is liable to MAT.
8. The amount of depreciation
9. The amount of deferred tax and provision there for
10. The amount of standing in revaluation reserve relating to revalued
asset on the retirement or disposal of such asset, (Inserted by finance
act, 2012)

DEDUCT FROM THE ABOVE xxx

1. Amount withdrawn from any reserve or provisions, if any such Xxx

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amount is credited in Profits & losses A/c
2. Amount of income to which section 10 [other than 10(38), 10A, 10B], Xxx
10AA, 11 or 12 apply
3. Amount of depreciation debited to Profit & loss A/c (excluding the Xxx
depreciation on account of revaluation of asset)

4. Amount of loss brought forward or unabsorbed, depreciation, Xxx

whichever is less. As per books of account

EXPLANATION For the purpose of this clause:

a) Loss shall not include depreciation
b) If the amount of loss brought forward or unabsorbed depreciation is NIL Xxx
then nothing shall be deducted under this clause. Xxx
5. The amount of deferred tax
6. Amount of profit of sick industrial company

From: P.Y. in which company declared as sick company To: P.Y. in which net
worth of such company becomes equal to or exceeds the accumulated
losses.
BOOK PROFIT xxx

OTHER PROVISIONS

Section 115jb(3):  Nothing contained in section 115JB shall affect the

Carry Forward of determination of the amounts in relation to the relevant
Losses & previous year to be carried forward to the subsequent year or
Depreciation years under the provisions of section 32 or section 72, 73, 74 or
section 74A.
 The company can carry forward losses and depreciation to
the extent it could have carried forward had section 115JB not
been there.

Section 115jb(4):  Every company to which this section applies shall furnish a
Furnishing or Report report from a Chartered accountant in the prescribed form
certifying that the book profit has been computed in accordance

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with the provisions of section 115J8 and such report shall be
furnished along with the return of income.

Section 115jb(5):  Save as otherwise provided in the section, all other

Applicability of provisions of the act shall apply to every company, mentioned
Other Provisions of in this section. (Therefore the company to which MAT applies
Income Tax Act shall be liable to pay advance tax, interest under sections
234A, 234B and 234C. the company shall also be liable to pay
penalty for concealment of income.)

Mat Credit Section Credit shall be allowed of the following: Tax paid u/s 115JB –
115jb tax payable in accordance with the other provisions of the act Tax
credit shall be allowed to be carried forward and set off for a
maximum of 15 A.Y. succeeding the A.Y. in which credit becomes
allowable.

Illustration
A domestic Company, ABC Ltd., furnishes the following particulars in respect of AY 2020-21
and solicits your advice on the application of Section 115 JB. You are also required to
compute the total income tax payable.

Particulars INR
Profits per P&L Account as per Cos. Act, 2013 2,15,00,000
This includes:
a) Credit of Dividends from Indian Cos. 20,00,000
b) Excess realized on sale of land held as investment 30,00,000
c) Depreciation on SLM basis 1,00,00,000
d) Provision for losses of subsidiaries 60,00,000

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Depreciation allowable per Income Tax Rules, 1962 1,50,00,000
STCG on sale of land mentioned above 40,00,000
B/f losses 50,00,000
Unabsorbed Depreciation 60,00,000

Solution:

Computation of Total Income per Income Tax Act, 1961

Net Profit per P&L Account 2,15,00,000
Less: Dividends from Indian Cos. (exempt u/s 10(34) ) 20,00,000
Excess realized on sale of land (treated separately) 30,00,000
50,00,000
1,65,00,000
Add: Depreciation on SLM Basis 1,00,00,000
Provisions for losses of subsidiaries 60,00,000
1,60,00,000
3,25,00,000
Less: Depreciation allowable per Income Tax Act 1,50,00,000
Business Income 1,75,00,000
Less: Set-off of B/f losses 50,00,000
Net Business Income 1,25,00,000
Capital Gains 40,00,000
Total Income 1,65,00,000
Less: Unabsorbed Depreciation 60,00,000
Total Income per as Income Tax Act, 1961 1,05,00,000

Computation of Book Profit u/s 115JB

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Net Profit per P&L Account 2,15,00,000
Less: Dividends from Indian Cos. (exempt u/s 10(34) ) (20,00,000) (20,00,000)
1,95,00,000
Add: Depreciation on SLM Basis 1,00,00,000
Provisions for losses of subsidiaries 60,00,000 1,60,00,000
3,55,00,000
Less: Depreciation 1,00,00,000
Business Income 2,55,00,000

Less: B/f Business Loss as it’s less than Unabsorbed 50,00,000

Depreciation
Book Profits 2,05,00,000
Note that the profit on sale of land held as investment
is not excluded from the P&L for purposes of
computing the Book Profits!
Note that the least of the B/f loss and the
Unabsorbed Depreciation is reduced to compute
Book Profits

Income Tax Liability under Normal Provisions

Tax Liability @ 25% as the Turnover is < 400 Crores 26,25,000
Add Surcharge @ 7% as the Income is > 1 Cr. 1,83,750
:
Total Tax Payable 28,08,750
Add Health and Education Cess @ 4% 1,12,350
:
Total Income Tax Liability 29,21,100

Income Tax Liability per MAT Provisions

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15% of Book Profits 30,75,000
Add Surcharge @ 7% as the Income is > 1 Cr. 2,65,475
:
Total Tax Payable 33,40,475
Add Health and Education Cess @ 4% 1,33,619
:
Total Income Tax Liability 34,74,094
Note:

a) Since 15% of book profits exceeds the tax payable per Income Tax Act, 1961, the
book profit would be deemed to be the total income and the tax payable on such
total income, which is INR 34,74,090 (rounded off) would become the liability for
AY 2020-21 for the Co.
b) With regards to the company’s representation, in respect of the capital gains,
whether liable for book profit tax u/s 115JB, it may be noted that since the excess
realised on sale of land which was held as investment, has been included in the net
profit computed per Sch. III of the Companies Act, 2013, it shall form part of Book
Profits (Bombay HC Judgement in CIT vs. Veekay Lal Investment Co Pvt Ltd.)

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COMPUTATION OF TOTAL INCOME AND TAX LIABILITY OF VARIOUS
ENTITIES

HINDU UNDIVIDED FAMILY

Structure A Hindu Undivided Family consists of two
types of members:
(a) Members who are entitled to
maintenance only, e.g., female members of
the family.
(b) Members who are entitled to demand
their share on a partition of the family.
These persons are called coparceners. These
being the sons, grandsons and great
grandsons of the holders of the property for
the time being.

For income tax purposes a Hindu Undivided

Family is one which has a common property
of the family and at least two members.
Common property of the family
(a) The common property of a Hindu
Undivided Family consists of the following:
Ancestral Property; and/or
(b) Any other property of the family
acquired with the aid of ancestral property;
and/or
(c) Any property acquired by a member of
the family by his personal efforts without
the aid of ancestral property, but treated by
him as the property of the family.

H.U.F. may consist of

(a) All persons lineally descended from a common ancestor and includes their wives and
unmarried daughters
(b) A male and widow or widows of deceased male member or members;
(c) Husband and Wife;
(d) Brothers only;
(e) Widows of the members of the family.

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TAXATION OF FIRMS AND ITS PARTNERS: PROVISIONS IN BRIEF

1. Income of the partnership firm is assessed at a flat tax rate of 30% (+ 4% cess).

LTCG are taxed under section 112 and STCG are taxed under section 111A. LTCG referred in
section 10(38) are exempt in hands of the firm.
2. Shares of partners in the total income of the firm is EXEMPT in the hands of partners under
section 10(2A)
3. Remuneration and interest paid to the partners is allowed as deduction to the firm subject to
the limits and conditions specified in section 40(b),
4. Remuneration and interest received by the partners shad be taxed in their hands as P/G/B/P
under section 28(v). However, salaries and interest which have not been allowed under section
40(b) or section 184(5) or section 185 shall not be added to the income of the partners under
section 28(v).
5. Losses of the firm shall be carried forward by the firm and shall not be allocated to the
partners.

SECTION 40(b): PAYMENT OF INTEREST, SALARY, BONUS, COMMISSION OR

REMUNERATION MADE BY FIRM TO ITS PARTNERS
Interest and remuneration paid to the partners by a firm are not deductible. However, the
interest and remuneration paid to partners by a firm are deductible if all the following
conditions are satisfied:
(i) Payment of salary, bonus, commission or remuneration, by whatever name called
(hereinafter referred as remuneration) is to a working partner, if it is paid to a non-working
partner, the same shall be disallowed.

Explanation: Working Partner means an Individual who is actively engaged in conducting the
affairs of the business or profession of the firm of which he is a partner.
(ii) The payment of remuneration to a working partner and payment of interest to any partner
should be authorised by and should be in accordance with the terms of the partnership deed.
(iii) The payment of remuneration and interest should relate to a period falling after the date of
partnership deed. That means, the partnership deed should not provide for payment of
remuneration and interest from retrospective effect (i.e. any earlier period prior to the date of
partnership deed).
(iv) The payment of interest to a partner should not exceed the amount calculated at the rate of
12% per annum simple interest (any amount in excess will be disallowed).
(v) The payment of remuneration should not exceed the following amounts (Any amount in
excess will be disallowed).

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(a) On the first ₹ 3,00,000 of book profit ₹ 150,000 or at the rate of 90%

or In case of a loss of the book profit, whichever is more

(b) On the balance of book profits. at the rate of 60%

Explanation:"Book Profit" means the net profit as shown in the profit and loss account for the
relevant previous year, computed in the manner laid down in sections 28 to 440 as increased by
the aggregate of the remuneration paid or payable to all partners of the firm if such amount has
been deducted while computing the net profit.

TAXATION OF LIMITED LIABILITY PARTNERSHIP

Introduction
The concept of Limited Liability
Partnership (LLP) has been bought in India
in 2008 with the introduction of the Limited
Liability Partnership Act, 2008. However,
there was no clarity on the taxation of the
same since the LLPs have the limited
liability of the partners like the shareholders
of the company. There was no clarification
in the Income Tax Act, 1961 about the status
of the LLPs whether they will be considered
as Firms or a Company.
It has been clarified by the Finance Act,
2009 that the LLP shall have the same status
as that of partnership firms formed under
the Indian Partnership Act, 1932. The
definition of firms, partner and partnership
has been amended to include the LLPs
within its purview.
Definitions (i) "firm" shall have the meaning assigned
to it in the Indian Partnership Act, 1932, and
shall include a limited liability partnership
as defined in the Limited Liability
Partnership Act, 2008;
(ii) "Partner" shall have the meaning
assigned to it in the Indian Partnership Act,
1932, and shall include:
(a) Any person who, being a minor, has been

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admitted to the benefits of partnership; and
(b) A partner of a limited liability
partnership as defined in the Limited
Liability Partnership Act, 2008
(iii) "Partnership" shall have the meaning
assigned to it in the Indian Partnership Act,
1932, and shall include a limited liability
partnership as defined in the Limited
Liability Partnership Act, 2008.
Taxability 1. The income of the Limited Liability
Partnership (LLP) shall be taxable at the flat
rate of 30%.
2. LTCG and STCG shall be taxable as per
section 112 and 111A.
3. The remuneration and interest paid by
LLP to its partners shall be allowed as per
section 40(b).
4. The share of profit received by the
partner of LLP shall be exempt under
section 10(2A).
5. The remuneration and interest received
by partner of LLP shall be taxable as per
section 28.
6. There will be no implication under the
Income Tax Act, where a partnership firm is
converted into a LLP as clarified in the
Memorandum Explaining Finance Bill, 2009.
7. Capital gains shall be exempt when a
company is converted into a LLP as per
Finance Act, 2011.
8. The ROI shall be signed by designated
partner or where designated partner is not
able to sign due to unavoidable reasons, any
partner shall sign ROI.
9. The liability of the partners of LLP shall be
joint and several for the payment of such tax
unless he proves that the non-recovery
cannot be attributed to any gross neglect,
misfeasance or breach of duty on his part in
relation to the affairs of the limited liability

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partnership.
10. Section 44AD is not applicable to a LLP.

ALTERNATE MINIMUM TAX

In order to preserve the tax base vis-a-vis profit-linked deductions, the provisions for
levy of AMT have been introduced from A.Y. 2012-13.

Applicability All Non Corporate Assessee w.e.f. AY 2013-14 (Previously it was

applicable only to LLP)
Exceptions However Individual, HUF, AOP, BOI or Artificial or Juridical person (AJP)
are not liable to AMT if their adjusted total income does not exceed ₹ 20
lacs
Theme Tax payable by the assessee shall be higher of two -

Tax payable under the normal provisions of Income Tax Act or

18.5% of the adjusted total income.
Note: This is further subject to education cess.
Here Adjusted total income shall be the
Total income as per IT Act as assessed by AO ***
Add: Deductions claimed under any section included in Chapter ***
VI-A under "C (i.e. 80HH to 80RRB etc.) but excluding 80P
the heading
Add: Deduction claimed if any u/s 10AA ***
Adjusted total income ****
1. Here Deduction under chapter VIA shall be considered as
claimed by assessee whether allowed or not by AO.
2. Here Deduction u/s 10AA shall be considered as claimed by assessee
whether allowed or not by AO.
Stress Deduction u/s 80C to u/s 80GGC shall not be adjusted.
CA report A CA report (in Form 29C) must be attached certifying that the adjusted total
income and
the alternate minimum tax have been computed in accordance with the
provisions of this

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Chapter. Such report need to be furnished on or before the due date of
filing of return u/s 139(1).
Tax credit for Tax credit for Tax credit for alternate minimum tax = Excess of
alternate alternate Alternate
minimum tax paid over the regular income-tax payable
minimu minimum of any year.
m tax
[Sec.115JD] tax
Carry forward Such tax credit can be carry forward for a maximum
of tax credit period of 15 years.
Adjustment of In any assessment year in which the regular income-tax
exceeds the
tax credit alternate minimum tax, the tax credit shall be allowed to
be set off

to the extent of the excess of regular income-tax over the

alternate minimum tax and the balance of the tax
credit, if any, shall be carried forward.
Interest No interest shall be payable on tax credit.

Illustration

Mr. X, carrying on the business of operating a warehousing facility for storage of sugar, has a
total income of Rs. 80 lakh. In computing the total income, he had claimed deduction under
section 35AD to the tune of Rs. 70 lakh on investment in building (on 1.4.2019) for operating
the warehousing facility for storage of sugar. Compute his tax liability for A.Y. 2020-21. Show
the calculations of Alternate minimum Tax also.
Answer

Computation of Tax payable by Mr. X for AY 2020-21

Computation of Normal Tax

Particulars Amount (Rs. in

lakh)
Tax liability under the normal provisions of the Income-tax Act, 1961 22.125
Add: Surcharge @ 10% of Total income > 50 lacs 2.2125
Add: Health and Education Cess @ 4% of 24.3375 0.9735

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Total Tax Liability 25.311
Computation of Alternate Minimum Tax

Particulars Amount (Rs. in lakh)

Adjusted Total Income 80.00
Add : Deduction under section 35AD 70.00
Less : Depreciation under section 32 (7.00)
Adjusted Total Income 143.00
AMT @18.5% 26.46
Surcharge @ 15% (since adjusted total income> Rs. 100 lakh) 3.97
Tax 30.43
Add: Health and Education Cess @ 4% 1.217
Total tax Liability 31.647

Since the regular income tax payable is less than the AMT payable, the adjusted total
income of Rs. 143 lakhs shall be deemed to be the total income of Mr. X and tax is payable
@18.5% thereof plus surcharge @ 15% and cess @4%. Therefore, tax liability is 31.647
lakhs.
However, Mr. X would be eligible for credit in 15 subsequent years to the extent of
difference between the AMT and Normal Tax i.e. Rs. 6.336 lakhs.

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GST IN INDIA – AN INTRODUCTION
> Under indirect taxes, the incidence of taxes is
borne by the consumers who ultimately INTRODUCTION
consume goods or Services while the
immediate liability to pay may Fall upon In any welfare state, it is the prime
another person such as a provider of service responsibility of the government to fulfil
Or manufacturer/seller of goods. the increasing developmental needs of the
counter and its people by way of public
> Indirect taxes are regressive in nature expenditure. India, being a developing
because they are not based on the principle
of ability to pay. All the Consumers, including economy, has been striving to fulfil the
the economically challenged bear the brunt of obligations of a welfare state with its
indirect taxes equally. limited resources with levy of revenue.

PRE-GST SCENARIO IN INDIA: Prior to the introduction of GST in INDIA ,

A number of indirect taxes were levied in
Before the introduction of GST in India, the major India such as excise duty , customs duty ,
indirect taxes applicable in Indian were: service tax , VAT/CST ,entertainment tax ,
entry tax , etc .
> EXCISE DUTY:
Tax on manufacture of goods However, indirect taxation in India has
witnesses a paradigm shift with effect
> SERVICE TAX: from July 1, 2017 with usherance into a
unified indirect tax regime wherein a large
Tax on provision of services
number of central and state indirect taxes
have been amalgamated into a GST .
> CUSTOMS DUTY:
Tax on import/export of goods

> State-Level VAT:

Tax on intra-state sale of goods

> Central Sales Tax:

Tax on intra-state sale of goods

To understand the indirect taxes structure prevailing in India prior to introduction of GST, it is
important to analyse certain provisions incorporated in the Constitution of India which govern
the levy and Collection of all kinds of taxes in India.

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CONSTITUTION FRAMEWORK (PRE-GST SCENARIO):
> INDIA has a three-tier federal structure, comprising:
 the Union Government;
 the State Government; and
 the Local Government.

The power to levy taxes and duties is distributed among the three tiers of Governments, in
accordance with the provisions of the Indian Constitution.
> The Constitution of India is the supreme law of India. It consists of a Preamble, 22 parts
containing 12 Schedules. Power to levy and collect taxes (whether direct or indirect)
emerges from the constitution of India. Any tax law which is not in conformity with the
constitution is ultra vires the constitution and is illegal and void .

> Thus, a study of the basic provisions of the constitution is essential for understanding the
genesis of the various taxes being imposed in India. The significant provisions of the
Constitution relating to taxation are :

 ARTICLE 265:
Article 265 of the constitution of India prohibits arbitrary collection of tax. It starts
that “no tax shall be levied or collected except by authority of law”. The term
“authority of law” means that tax proposed to be levied must be within the legislative
competence of the Legislature imposing the tax.
 ARTICLE 245:
Article 245 provides that the parliament may make laws for the whole or any part of
territory of India, and the Legislature of a state may make laws for the whole or any
part of the State.

 ARTICLE 246:
Articles 246 bifurcates the power of levying taxes between the Union Government
and the State Government. Seventh Schedule to the constitution of India contains
three lists which enumerate the matters under which the union government and the
State Government have the authority to make laws.

THREE LISTS GIVEN UNDER 7TH SCHEDULE TO THE CONSTITUTION OF

INDIA:
 Entries 82 to 92C of List I (ie Union List) enumerate the subjects where the Central
Government has the power to levy taxes.
 Entries 45 to 63 of List II (ie Union List) enumerate the subjects where the State
Government have the power to levy taxes.

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 The Concurrent List does not contain any matter related to taxation. In other words,
the Union and the states have no concurrent power of taxation.
The Central Government (ie the parliament of India) has a further power to make any law of
any part of India not comprised in a State even if such matter is included in the State List. This
power assumes importance in case of Union Territories where there is no State Government .

LIST I LIST II LIST III

It contains the It contains the It contains the matters

matters in respect matters in respect in respect of which
of which the Of which the State the both the central &
Parliament (Central Government has the sate Governments
Government) has
exclusive right to have power to makes
the exclusive right
to make laws. make laws. Laws.

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RELEVANT ENTRIES OF UNION LIST AND STATE LIST (PRE- GST):

UNION LIST (LIST I) STATE LIST (LIST II)

Customs Duties State Level VAT
Entry 83: Duties of customs including Entry 54: Taxes on intro-state sale or
export duties purchase of goods (excluding
newspapers)

Central Excise Duties State Excise Duties

Entry 84: Duties of excise on tobacco and

other good manufactured or produced in
India

> Except alcoholic liquors for human Entry 51: Duties of excise on alcoholic
consumption, opium, Indian hemp and liquors for human consumption,
other narcotic drugs and narcotics. opium, Indian hemp and other
narcotic drugs and narcotics.
> But including medicinal and toilet
The entry does not include duties of
preparations containing alcohol/ excise on medicinal and toilet
opium/ Indian hemp/narcotic preparations containing
drugs/narcotics. alcohol/opium/Indian hemp/ narcotic
drugs/narcotics.
Central Sales Tax
Entry 92A: Taxes on sale or purchase of
goods
(other than newspapers) taking place
in the course of inter-state trade or
commerce.

Service Tax

Entry 97: Any other matter not enumerated

in List II or List III including any tax not
mentioned in either of those Lists.

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DEFICIENCIES IN EARLIER INDIRECT TAXES REGIME
> The earlier indirect taxes framework in India suffered from various shortcomings.
Although CENVAT (ie excise duty) and State-Level VAT were essentially value added
taxes, set-off of one against the credit of another was not possible as CENVAT was a
central levy and State-Level VAT was a State levy. Moreover, CENVAT was applicable
only at manufacturing level and not at distribution levels .
> Despite the introduction of the principles of value added taxation system in India (in the
form of CENVAT at the central level and in the form of State VAT at the state level), its
application remained piecemeal and fragmented. Businesses continued to face
multiple difficulties because of the shortcomings of the indirect tax mechanism
prevailing in India:
 No integration of VAT on goods with tax on services/manufacture.
 Continued imposition of Central Sales Tax (CST), which was non-creditable,
leading to cascading effect thereby adding to the cost of goods.
 Problems relating to distinguishing between goods and services had been a major
cause of concern as the distinction between the two was often blurred.
 Non-inclusion of several State and local levies in State VAT such as luxury tax,
entertainment tax, etc.
 Cascading effect of taxes as CENVAT on the goods remains included in the value of
goods taxed under State VAT.

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GST- A CURE FOR ILLS OF EXISTING INDIRECT TAX REGIME

> Before we proceed with the finer nuances of Indian GST, let us first understand the basic
concept of GST.

 VALUE ADDED TAX:

GST is a value added tax levied on manufacture, sale and consumption of goods and
services.

 CONTINUOUS CHAIN OF TAX CREDITS:

GST offers comprehensive and continuous chain of tax credits from the producer's
point/service provider's point upto the retailer's level/consumer’s level, thereby taxing
only the value added at each stage of supply chain.

 BURDEN BORNE BY FINAL CONSUMER:

The supplier at each stage is permitted to avail credit of GST paid on the purchase of goods
and/or services and can set-off this credit against the GST payable on the supply of goods
and services to be made by him. Thus, only the final consumers bear the GST charged by
the last supplier in the supply chain, with set-off benefits at all the previous stages.

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 NO CASCADING OF TAXES: Since, only the value added at each stage is taxed under
GST, there is no tax on tax or cascading of taxes under GST system. GST does not
differentiate between goods and services and thus, the two are taxed at a single rate.

> India has adopted a dual GST which is imposed concurrently by the Centre and States. In
the GST regime, the major indirect taxes have been subsumed within the ambit of GST. The
erstwhile concepts of manufacture or sale of goods or rendering of services are no longer
applicable since tax is now levied on "supply of goods and/or services".

> Introduction of GST at both centre and

state levels has intergrated taxes on
goods and services for the purpose of
set-off relief and ensure that both the
cascading effects of CENVAT and
service tax are removed and a
continuous chain set-off from the
original producer's point/service
provider's point up to the retailer's
level/consumer's level is established.

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BENEFITS OF GOODS SERVICES TAX

GST is a win-win Situation for the entire country. It brings benefits to all the stakeholders of
industry, government and the consumer, It is expected that with the introduction of GST in
India, the cost of goods and services will go down, thus giving a boost to the country and
making the products and services globally competitive. The significant benefits of GST are
as follows:
 CREATION OF UNIFIED NATIONAL MARKET:
GST aims to make India a common market with common tax rates and procedures and
remove the economic barriers thus paving the way for an integrated economy at the
national level.
 MITIGATION OF ILL EFFECTS OF CASCADING:

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By subsuming most of the central and state taxes into a single tax and by allowing a set-off of prior
stage taxes for the transactions across the entire value chain, it would mitigate the ill effects of
cascading, improve competitiveness and improve liquidity of the business.

 ELIMINATION OF MULTIPLE TAXES AND DOUBLE TAXATION:

GST will subsume majority of existing indirect tax levies at both central and state level into one tax.
This will make doing business easier and will also tackle the highly disputed issues relating to double
taxation of a transaction as both goods and services.

 BOOST TO 'MAKE IN INDIA' INITIATIVE :

GST will give a major boost to the 'Make in India' initiative of the government of India by making
goods and services produced in India competitive in the national as well as international market.

 BUOYANCY TO THE GOVERNMENT REVENUE:

GST is expected to bring buoyancy to the government revenue by widening the tax base and
improving the taxpayer compliance.

GOODS AND SERVICES TAX

to maximise ECONOMIC GAIN
& minimise COMPLIANCE PAIN

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GENESIS OF GOODS & SERVICES TAX

 The idea of a country-wide GST was first mooted by Kelkar Task Force in 2004. The
Task Force strongly recommended fully integrated GST on national basis.
 Subsequently, the then Union Finance Minister, Dr P. Chidambaram, while presenting
Union Budget for FY 2007-08 announced that GST would be introduced in India from
April 1, 2010. Since then, GST missed several deadlines and continued to be shrouded
by the clouds of uncertainty.
 The talks of ushering in GST gained momentum in 2014 when the NDA Government
tabled the Constitution (122" Amendment) Bill, 2014 on GST in the Parliament on 19th
December 2014. The Lok Sabha passed the Bill on 6th May 2015 and Rajya Sabha on
3rd August 2016.
 Once the Bill was ratified by more than 50% of states, the Constitution (122'
Amendment) Bill received the assent of the President on 8th September 2016 and
became Constitution (101' Amendment) Act, 2016 which paved the way for
introduction of GST in India.

CONSTITUTION (101st AMENDMENT) ACT, 2016

NEED FOR CONSTITUTIONAL AMENDMENT:

Introduction of GST required amendment in the Constitution of India so as to enable

integration of central excise duty including additional duties of customs, State VAT and
certain state specific taxes and service tax levied by the Centre into a comprehensive

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Goods and Services Tax and to empower both Centre and States to levy and collect it.
Consequently, Constitution (101st Amendment) Act was passed.

SIGNIFICANT AMENDMENTS MADE BY CONSTITUTION AMENDMENT ACT:

 ARTICLE 246A - POWER TO MAKE GST LAWS:

 Power to levy GST originates from Article 246A of the Constitution. Article 246A has an
over-riding effect over Article 246 of the Constitution.
 'Goods and Services Tax' has been defined under Article 366(12A) of the Constitution of
India to mean any tax on supply of goods, or services or both except taxes on supply of
alcoholic liquor for human consumption. Consequently, GST can be levied on supply of all
goods and services except alcoholic liquor for human consumption.
 Where supply of goods and/or services takes place in the course of inter-state trade or
commerce, the Parliament of India shall have the exclusive power to make laws with
respect to &ST on such supplies.
 Where supply of goods and/or services takes place in the course of intro-state trade or
commerce, the Parliament of India as well as the Legislature of every State shall have the
power to make laws with respect to GST on such supplies.
 In other words, Article 246A grants power to Central and State Governments to make
laws with respect to &ST imposed by Centre or such State. However, the Central
Government has the TION -- exclusive power to make laws with respect to GST in case of
inter-state supply.
 However, in respect of -the following goods, GST shall apply from a date to be
recommended by the 65T Council:

 Petroleum crude;
 High speed diesel;
 Motor spirit (commonly known as petrol);
 Natural gas; and
 Aviation turbine fuel.

ARTICLE 269A: LEVY AND COLLECTION OF GST ON INTER-STATE SUPPLY

 Article 269A stipulates that GST on supplies in the course of inter-state trade or
commerce shall be levied and collected by the Government of India and such tax shall

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be apportioned between the Union and the States in the manner as may be provided by
the Parliament of India through a law made on the recommendations of GST Council
 In addition to above, import of goods and/or services into India will also be deemed to
be supply of goods and/or services in the course of inter-state trade or commerce. This
will give power to Central Government to levy IGST on the import transactions which
were earlier subject to countervailing duty under the Customs Tariff Act, 1975.

 RELEVANT ENTRIES OF UNION LIST AND STATE LIST (POST -65T):

UNION LIST (LIST I) STATE LIST (LIST II)

Customs Duties State Excise Duties
Entry 83: Duties of customs including export Entry 51: Duties of excise on alcoholic
duties liquors for human consumption, opium,
Indian hemp and other narcotic drugs and
Central Excise Duties narcotics .
Entry 84: Duties of excise on the following
goods manufactured or produced in India: The entry does not include duties of excise
on medicinal and toilet preparations containing
> Petroleum crude;
alcohol/opium/Indian hemp/ narcotic
> High speed diesel
drugs/narcotics.
> Motor spirit (ie petrol);
> Natural gas
State Level VAT
> Aviation turbine fuel; and
Entry 54: Taxes on intro-state sale of the
> Tobacco and tobacco products.
following goods:
> Petroleum crude;
Central Sales Tax
> High speed diesel;
Entry 92A: Taxes on sale or purchase of
> Motor spirit (ie petrol);
goods (other than newspapers) taking place
> Natural gas;
in the course of inter- state trade or
> Aviation turbine fuel;
commerce )
> Alcoholic liquor for human
consumption.

Illustration (Computation of GST Liability - RTP May 2018 Attempt)

Tirupati Traders, a registered supplier of goods, pays GST. (CGST & SGST or IGST, as the
case may be) under regular scheme. It has furnished the following particulars for a tax
period:

PARTICULARS AMOUNT (RS)

Value of intra-state supply of goods 12,000
Value of intra-state purchase of goods 10,000

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Compute the net GST payable by Tirupati Traders during the given tax period
assuming that there is no opening balance of input tax credit (ITC). Make suitable
assumptions wherever required.
NOTES:
 Rates of COST, SOST and IGST are 9%, 9% and 18% respectively.
 Both inward and outward supplies are exclusive of taxes, wherever applicable.
 All the conditions necessary for availing the input tax credit have been fulfilled.

ILLUSTRATION

Govind, a registered supplier, is engaged in providing services in the neighbouring states

from his registered office in Mumbai. He has furnished the following details in respect of
the inward and outward supplies made F during a tax period:
PARTICULARS AMOUNT (RS)
Inter-state supply of services 1,80,000
Receipt of goods and services within the state 1,00,000
Both inward and outward supplies are exclusive of taxes, wherever applicable. All the
conditions necessary for availing the input tax credit have been fulfilled. Assume the
rates of taxes to be as under:
Particulars Rate
CGST 9%
SGST 9%
IGST 18%

GOODS & SERVICES TAX (COMPENSATION TO STATES) ACT

The Goods and Services Tax (Compensation to States) Act, 2017 provides for a mechanism
to compensate states for a period of 5 years On account of loss of revenue which may arise
due to implementation of GST. The following are some of the important takeaways from
this Act:

 FY 2015-16 shall be taken as the base year and 14% p.a. shall be taken as the growth
rate of revenue for the purpose of calculating compensation amount payable to the states.
 A cess to be levied over and above normal &ST (named as &ST Compensation Cess) on
notified goods to compensate states for 5 years on account of revenue loss suffered by
them. The proceeds of such cess will be utilized to compensate states that warrant payment
of compensation.
> Some of the goods which have been notified for levy of GST Compensation Cess are:

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 Pan Masala;
 Aerated water;
 Tobacco & tobacco products;
 Motor vehicles;
 COAL ,ETC .

> 50% of the remaining amount unutilized in the fund at the end of the fifth year will be
transferred to the Centre and the balance 50% would be distributed amongst the State
and Union Territories in the ratio of total revenues from SGST/UTGST of the fifth year.
> GST Compensation Cess shall be levied on supplies of the above-mentioned goods
irrespective of the fact whether supply is an intro-state supply or an inter-state supply.
> GST Compensation Cess is not leviable on supplies made by a person who has opted for
composition levy. > ITC of GST Compensation Cess can be utilized only for payment of GST
Compensation Cess.

GOODS & SERVICES TAX COUNCIL ('GST COUNCIL')

(Article 279A of the Constitution of India)

COMPOSITION OF GST COUNCIL:

Article 279A of the Constitution of India empowers the President to constitute a joint
forum of Centre and States namely, Goods & Services Tax Council (GST Council).
Composition of GST Council has been discussed below:

> Union Finance Minister - Chairperson of GST

Council; > Union Minister of State in charge of
Revenue or Finance Member of GST Council; and
> Ministers in charge of Finance/Taxation or any
other Minister nominated by States/Union
Territories With State Legislature - Members of
GST Council,
SCOPE OF WORK OF GST COUNCIL:

GST Council shall make recommendations on the

following aspects:
> Taxes, cesses and surcharges levied by the Centre, the States and the local bodies which
may be subsumed under GST.

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Illustration (IGST Mechanism)

Mr X, located in Rajasthan, purchases goods worth Rs 20,000 locally from a vendor in

Rajasthan. The goods so purchased by Mr X are sold by him for Rs 30,000 to Mr Y, located
in Punjab. Mr Y further sells these goods locally to a customer in Punjab for Rs 50,000.

Compute the GST payable at all stages. Also make a statement showing revenue earned by
Central & State Governments. You may assume the rates of CGST, SGST and IGST to be 9%,
9% and 18% respectively.
> Goods/services which may be subjected to or exempted from GST;
> Date on which GST shall be levied on petroleum crude, high speed diesel, motor spirit
(commonly known as petrol), natural gas and aviation turbine fuel;
> Threshold limit of turnover below which goods/services may be exempted from GST;
> Tax rates on various goods/services:
> Special provisions with respect to North-East States, J&K, Himachal Pradesh and
Uttarakhand, and
> Any other matter relating to 65T, as the Council may decide.

DECISIONS OF GST COUNCIL:

> Every decision of the GST Council shall be taken by majority of not less than 3/4' of the
weighted votes of the members present and voting.
> The vote of the Central Government shall have a weightage of 1 /3"' of the votes cast and
the votes of all the State & government token together shall have a weightage of 2/3 rd of
the total votes cast in that meeting.

QUORUM FOR MEETINGS OF GST COUNCIL:

The quorum at the various meetings shall be constituted by one half of the total number of
members of the GST Council present and voting.

FRAMEWORK OF GST AS INTRODUCED IN INDIA

> DUAL GST:

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GST has been implemented in India on a dual structure basis, ie the Centre and the States
have concurrent powers to levy, collect and administer GST. GST extends to the whole of
India including the state of Jammu and Kashmir.

> CGST /SGST / UTGST / IGST:

 GST is a destination based tax applicable on all transactions involving supply of goods
and services for a consideration subject to exceptions thereof.
 In case of intra-state supplies of taxable goods and/or services, the following taxes are
leviable:

 Central Goods and Services Tax (‘CGST’) levied by central Government;

 State Goods and Services Tax (‘SGST’) levied by State Government/Union Territories
with State Legislatures; and
 Union Territory Goods and Service Tax (‘UTGST’) levied in case of Union Territories
without State Legislatures.

 Inter-state supplies of taxable goods and/or services are subject to Integrated Goods
and Services Tax (IGST). IGST is approximately the sum total of CGST and SGST/UTGST
and is levied by the Central Government on all inter-state supplies.

LEGISLATIVE FRAMEWORK
There are total 35 GST Acts in India:
 1 - The Central Goods and Services Tax Act. 2017 for levying CGST:
 31 - State Goods and Services Tax Act, 2017 for levying SGST;
 Tax Act, 2017 for levying CGST'; Act, 2017 for levying SGST-;

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CHAPTER 2 CHARGE OF GST

> Power to levy any tax is drawn from the Constitution of India.
Introduction of GST necessitated the amendment of Constitution of India to enable
integration of central excise duty including additional duties of customs, State VAT and
certain state specific taxes and service tax levied by the Central Government into a
comprehensive Goods Services Tax.

> The very basis for the charge of tax in any taxing statute is the taxable event, ie the point
of time at which the levy of tax gets attracted. Under the erstwhile indirect taxes regime,
each indirect tax levy had a separate taxable event (such as manufacture in case of excise,
provision of services in case of service tax, sale of goods in case of VAT/CST, etc). Under
the GST regime, the taxable event is supply of goods and/or services. The scope of the
word 'supply' has been discussed in detail in the next chapter.

EXTENT OF CGST ACT / SGST ACT / UTG5T ACT / IGST ACT

> Central Goods and Services Tax Act, 2017 extends to the whole of India including the
State of J&K.
> Integrated Goods and Services Tax Act, 2017 extends to the whole of India including the
State of J&K.
> State GST law of the respective State/Union Territory with State Legislature (ie Delhi
and Puducherry) extends to the whole of that State/Union Territory.
> Union Territory Goods and Services Tax Act, 2017 extends to the following Union
Territories of India where there is no State Legislature:
 the Andaman and Nicobar Islands;
 the Lakshadweep Islands;
 Dadra and Nagar Haveli;
 Daman and Diu; and
 Chandigarh.

INTRODUCTION

In order to understand the scope of any taxation law, the first and the foremost step is a
careful analysis of the charging section. Section 9 of CGST Act prescribes the charge of CGST

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on all intra-state supplies of taxable goods and/or services whereas Section 5 of IGST Act
prescribes the charge of IGST on all interstate supplies of taxable goods and/or services.

Along with CGST, SG5T/UTGST is also chargeable on all intra-state supplies of taxable goods
and/or services. However, analysis of any state specific law never forms a part of any
academic curriculum.
The basis for classifying any supply as intra-state supply or inter-state supply is articulated
u/s 7 & 8 of IGST Act, which have been discussed adequately in this chapter.

Section 9(1): Subject to the provision of sub-section (2), there shall be levied a tax the
central goods and services tax on all intra-state supplies of goods or services or both, except
on the supply of alcoholic liquor for human consumption, on the value determined under
Section 15 and at such rates, not exceeding twenty per cent, as may be notified by the
Government on the recommendations of the Council and collected in such manner as may
be prescribed and shall be paid by the taxable person.

Section 9(2): The central tax on the supply of petroleum crude, high speed diesel, motor
spirit (commonly known as petrol), natural gas and aviation turbine fuel Shall be levied
with effect from such date as may be notified by the Government on the recommendations
of the Council.

Section 9(3): The government may, on the recommendations of the Council, by notification,
specify categories of supply of goods or services or both, the tax on which shall be paid on
reverse charge basis by the recipients of such goods or services or both and all the
provisions of this Act shall apply to such recipients as if he is the person liable for the
paying the tax in relation to supply of such goods or services or both.

Section 9(4): The government may, on the recommendations of the Council, by notification,
specify a class of registered persons who shall, in respect of supply of specified categories
of goods or services or both received from an unregistered supplier, pay the tax on reverse
charge basis as the recipient of such supply of goods or services or both, and all the
provisions of this Act shall apply to such recipient as if he is the person liable for paying the
tax in relation to such supply of goods or services or both.

Section 9(5): The Government may, on the recommendations of the Council, by notification,
specify categories of services the tax on intra-state supplies of which shall be paid by the
electronic commerce operator if such services are supplied through it, and all the
provisions of this Act shall apply to such electronic commerce operator as if he is the
supplier liable for paying the tax in relation to the supply of such services.

Provided that where an electronic commerce operator does not have a physical presence in
the taxable territory, any person representing such electronic commerce operator for
any purpose in the taxable territory shall be liable to pay tax.

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Provided further that where an electronic commerce operator does not have a physical
presence in the taxable territory and also he does not have a representative in the said
territory such as electronic commerce operator shall appoint a person in the taxable
territory for the purpose of paying tax and such person shall be liable to pay tax.

LEVY & COLLECTION OF CGST/ IGST (Sections 9(1) & 9(2) of CGST Act (+)
SECTIONS(1) & 5(2) OF IGST ACT)

LEVY OF CGST / SGST UTGST

/IGST:
> Central Goods and Services Tax
(CGST) shall be levied on all intra-
state supplies of goods or services
or both.
> State Goods and Services Tax
(SGST) is levied on those intra-
state supplies of goods or services
or both where the transaction
takes place within a State/Union
Territory with State Legislature.
Union Territory Goods and Services
Tax (UTGST) is levied on those intra-
state supplies of goods or services
where the transaction takes place within a Union Territory without State Legislature

> Integrated Goods and Services Tax (IGST) shall be levied on all inter-state supplies of
goods or services or both

MEANING OF INTRA-STATE SUPPLY (Section 8 of IGST Act}

Where the location of the supplier and the place of supply of goods or services are in the
same State/Union Territory, the supply is treated as intra-state supply of goods or services.

MEANING OF INTER-STATE SUPPLY

(Section 7 of IGST Act)

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 Where the location of the supplier and the place of supply of goods or services are
in:
 two different States; or
 two different Union Territories; or
 a State and a Union Territory,
the supply is treated as inter-state supply of goods or services.

 Section 7 of IGST provides that the following supplies shall be deemed as inter-state
supplies:
 Supply of goods or services imported into the territory of India;
Supply of goods or services when the supplier is located in India and the place of supply is
outside India; and Supply of goods or services to or by a SEZ Developer/ SEZ Unit.

LEVY & COLLECTION OF IGST {SECTION 5 OF IGST ACT}

 Section 5(1):Subject to the provisions of sub-section (2), there shall be levied a

tax called the integrated goods and services tax on all inter-state of goods or services or
both; except on the supply of alcoholic liquor for human consumption, on the value
determined under section 15 of central Goods and Services Tax Act and at such rates,
not exceeding forty per cent, as may be notified by the Government on the
recommendations of the Council and collected in such manner as may be prescribed and
shall be paid by the taxable person.

Provided that the integrated tax on goods imported into India shall be levied and
collected with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as
determined under the said Act at the point when duties of customs are levied on the said
goods under section 12 of the Customs 1962.

 Section 5 2 : The integrated tax on the supply of petroleum crude, high speed diesel,
motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be
levied with effect from such date as may be notified by the Government on the
recommendations of the Council.
 Section 5 (3): The Government may, on the recommendations of the Council, by
notification, specify categories of supply of goods or services or both, the tax on which shall
be paid on reverse charge basis by the recipient of such goods or services or both and all
the provisions of this Act shall apply to such recipient as if he is the person liable for paying
the tax in relation to the supply of such goods or services or both.

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 Section 5(4): The Government may, on the recommendations of the Council, by
notification, specify a class of registered persons who shall, in respect of supply of specified
categories of goods or services or both received from an unregistered supplier, pay the tax
on reverse charge basis as the recipient of such supply of goods or services or both, and all
the provisions of this Act shall apply to such recipient as if he is the person liable for paying
the tax in relation to such supply of goods or services or both.

 Section 5(5): The government may, on the recommendations of the Council, by

notification, specify categories of services, the tax on inter-state supplies of which shall be
paid by the electronic commerce operator if such services are supplied through it, and all
the provisions of this Act shall apply to such electronic commerce operator as if he is the
supplier liable for paying the tax in relation to the supply of such services.
Provided that where an electronic commerce operator does not have a physical presence in
the taxable territory, any person representing such electronic commerce operator for any
purpose in the taxable territory shall be liable to pay tax.

Provided further that where an electronic commerce operator does not have a physical
presence in the taxable territory and also does not have a representative in the said
territory, such electronic commerce operator shall appoint a person in the taxable
territory for the purpose of paying tax and such person shall be liable to pay tax.

GOODS PERMANENTLY EXCLUDED FROM THE PURVIEW OF GST LAW:

Supply of alcoholic liquor for human consumption is outside the purview of CGST as well as
IGST law.

GOODS TEMPORARILY EXCLUDED FROM THE PURVIEW OF GST LAW

(To Be Taxed Under GST At A Later Point of Time):

 Presently, CG5T/SGST/UTG5T/IG5T is not applicable on the supply of the following

items:
U Petroleum crude;
U High speed diesel;
U Motor spirit (commonly known as petrol);
U Natural gas; and
U Aviation turbine fuel.
 The above-mentioned products shall be brought under the ambit of GST law with
effect from such date as may be notified by the Government on the recommendations of the
GST Council.

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VALUE FOR LEVY OF CGST/IGST: Transaction Value u/s 15 of CGST Act

RATES OF CGST/IGST:

 IGST is approximately the sum total of CGST and SGST/UTGST. Maximum rate of CGST
is 20% whereas maximum rate of IGST is 40%.
 Multi-tier rate structure has been introduced under GST. The following are the different
types of
GST rates which are applicable presently {These rates are the sum total of CGST (+) SGST
/UTGST in case of intro-state supplies}:
U 0% (Exempted Supplies)
U 5%
U 12%
U 18%
U 28%

Note: GST rate of 0.25% has been prescribed for supply of raw/unprocessed precious
stones. GST rate of 3% has been prescribed for supply of gold, gold jewellery, precious
metals, etc.

REVERSE CHARGE ON NOTIFIED GOODS/SERVICES

{Section 9(3) of CGST Act (+) Section 5(3) of IGST Act)

 Generally, the supplier of goods or services is liable to pay GST. However, in

specified cases like imports and other notified supplies, the liability may be cast on the
recipient under the reverse charge mechanism. Reverse charge means the liability to pay
tax is on the recipient of supply of goods or services instead of the supplier of such goods or
services in respect of notified categories of supply. There are two type of reverse charge
scenarios provided in GST law:
„ First is dependent on the nature of supply and/or nature of supplier. This scenario is
covered by Section 9(3) of CGST Act and Section 5(3) of IGST Act.
„ The second scenario is covered by Section 9(4) of CGST Act and Section 5(4) of IGST Act
where specified supplies by any unregistered person to a registered person are covered.

Section 9(3) of CGST Act and Section 5(3) of IGST Act empowers the Government to notify,
on the recommendations of the G5T Council, specific categories of supply of goods or
services or both, the tax on which shall be paid on reverse charge basis by the recipient of
such supply and all the provisions of GST law shall apply to such recipient as if he is the
person liable for paying tax in relation to the supply of such goods or services or both.

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SUPPLIES OF SERVICES UNDER REVERSE CHARGE MECHANISM (AS NOTIFIED):
In exercise of the powers conferred u/s 9(3) of CGST Act and 5(3) of IGST Act, the following
transactions have been notified from time to time where GST will be payable by the
recipient of services under reverse charge:

S.NO. Description Of Supply Of Services Supplier Of Services Recipient Of Services

1 Sponsorship services Any person Any body-corporate
or partnership firm
located in the taxable
territory
2 Services supplied by a director of a A director of a A company or a body-
company or a body-corporate to the company or a body- corporate located in
said company or the body-corporate corporate the taxable territory

3 Services supplied by an insurance agent An insurance agent Any person carrying

to any person carrying on insurance on insurance
business business located in
the taxable territory
4 Services supplied by a recovery agent A recovery agent A banking company or
to a banking company or a financial a financial institution
institution or a NBFC or a NBFC located in
the taxable territory
5 Supply of services by an author, music Author or music Publisher, music
composer, photographer, artist or the composer, company, producer or
like by way of transfer or permitting photographer, the like located in the
the use or enjoyment of a copyright artist, or the like taxable territory
relating to original literary, dramatic,
musical or artistic works to a
publisher, music company, producer or
the like
6 Supply of services by the members of Members of Overseeing Reserve Bank of India
Overseeing Committee to Reserve Committee
Bank of India constituted by the
Reserve Bank of
INDIA

S.NO. Description Of Supply Of Services Supplier Of Services Recipient Of Services

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7 GTA Services Goods Transport Any of the following
Agency which has not persons located in
paid CGST @ 6% taxable territory: >
Factory
> Co-operative society
> Person registered
under GST law >
Body-corporate >
Partnership firm
> Casual taxable
person

8 Legal services An individual Any business entity

advocate, including located in the taxable
a senior advocate or territory
a firm of advocates

9 Services supplied by an arbitral tribunal Arbitral tribunal Any business entity

to a business entity located in the taxable
territory
10 Central Government, Any business entity
Any service supplied by CG/SG/ Union State Government, located in the taxable
Territory/Local Authority to a business Union Territory or territory
entity excluding: Local Authority
> renting of immovable property;
> services by the Department of Posts
by way of speed post, express parcel
post, life insurance and agency
services provided to a person other
than CG/SG/Union Territory or
Local Authority;
> Services in relation to an aircraft or
a
vessel, inside or outside the
precincts of a port or an airport;
and > Transport of goods or
11 passengers.
Services supplied by CG/SG/ Union Central Government, Any person registered
Territory/Local Authority by way of State Government, under GST law
renting of immovable property to any Union Territory or
person registered under GST law Local Authority

12 Any service supplied by any person who Any person located in Any located in taxable
is located in a non-taxable territory to non-taxable territory territory

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any person located in taxable territory

13 Services supplied by a person located in A person located in a Importer located in the

non-taxable territory by way of non-taxable territory taxable territory
14 transportation
Services supplied of goods by a vesselDirect
by Individual from Individual Direct (Meaning
A bankingof importer
company or
a placeAgents
Selling outside(DSAs)
India upto the customs Selling Agents (DSAs) atoNBFC
be borrowed from
located in the
15 station of clearance
Services providedin India
by a business other
A than afacilitator
business body Section
taxable
A banking2(26) of the
territory
company
facilitator to a banking company corporate, partnership CustomsinAct,
located the1962)
taxable
16 Services provided by an agent of or LLP firm
A agent of business territory
A business
business correspondent to business correspondent correspondent located
correspondent in the taxable territory

State the person liable to pay GST in the following independent cases provided the
recipient is located in the taxable territory:

a) Services provided by an arbitral tribunal to any business entity.

b) Sponsorship services provided by a company to an individual.

c) Services by way of renting of immovable property provided by CG to a business entity

registered under GST law.

Answer

a) GST on services provided or agreed to be provided by an arbitral tribunal to any

business entity located in the taxable territory is payable under reverse charge.
Therefore, in the given case, GST is payable by the recipient, i.e. the business entity.
b) GST on sponsorship services provided by any person to any body-corporate or
partnership firm located in the taxable territory is payable under reverse charge. Since
services have been provided to on individuals, reverse charge provisions will not apply.
Thus, G5T is payable under forward charge by the supplier (i.e. the company).
c) GST on services by way of renting of immovable property provided by Central
Government, State Government, Union Territory, or local authority to any person
registered under GST law is payable under reverse charge. Thus, reverse charge
provisions will get attracted and the recipient would be liable to pay GST.

SUPPLIES OF GOODS UNDER REVERSE CHARGE MECHANISM (AS NOTIFIED):

In exercise of the powers conferred u/s 9(3) of CGST Act and 5(3) of IGST Act, the following
transactions have been notified from time to time where GST will be payable by the recipient
of goods under reverse charge. However, ICAI has excluded this topic for examination

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purposes and the same has been incorporated in the book just for the sake of knowledge of
the students.

S NO. Description Of Supply Of Goods Supplier Of Goods Recipient Of Goods

1 > Unshelled/Unpeeled Cashew Nuts Agriculturist Any Registered
> Bidi Wrapper Leaves (Tendu) Person
> Tobacco Leaves
> Raw Cotton

2 Supply Of Lottery State Government, Lottery

Union Territory Or Distributor Or
Any Local Authority Selling Agent
3 Silk Yarn Any person Who Any Registered
Manufactures Silk Yarn Person
Form Raw Silk Or Silk
Worn Cocoons For
Supply Of Silk Yarn
4 Used Vehicles; Old & Used Goods; Seized Central Government, Any Registered
& Confiscated Goods; Waste & Scrap State Government, person
Union Territory Or
Any Local Authority

REVERSE CHARGE ON SUPPLIES BY UNREGISTERED PERSONS

{Section 9(4) of CGST Act (+) Section 5(4) of IGST Act}

> The initial version of Section 9(4) of CGST Act and Section 5(4) of IGST Act which was
drafted at the time of introduction of GST law provided that where a supply of taxable
goods or services or both is made by an unregistered person to a registered person, tax on
such transaction shall be paid by the registered recipient on reverse charge basis and all
the provisions of GST law shall apply to such recipient as if he is the person liable for
paying tax in relation to the supply of such goods or services or both. Accordingly, as per
the initially introduced law, whenever a registered person procures supplies from an
unregistered supplier, he needs to pay GST on reverse charge basis.

> However, to minimize inconvenience in case of low value transactions, supply of taxable
goods or services or both by an unregistered supplier to a registered person were

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exempted from GST provided the aggregate value of such supplies of goods and/or services
received by a registered person from any or all the unregistered suppliers does not exceed
Rs 5,000 in a day. This benefit was available since the introduction of GST on intra-state
supplies as well as inter-state supplies. For giving effect to this benefit, separate
notifications were issued under CGST Act as well as IGST Act.

> With the introduction of GST, it became very apparent that the above-mentioned
provisions casted a lot of burden on registered persons because a lot of their suppliers had
not got themselves registered under GST law. After considering numerous representations
filed by the industry and trade, the GST Council, in its 22nd meeting held on 6th October
2017, decided to suspend the reverse charge mechanism u/s 9(4) of CGST Act and 5(4) of
IGST Act.

> However, in order to reduce the scope of this provision and finally make it effective, an
amendment has been carried out recently. The objective behind this is to empower the
Central Government to notify classes of registered persons to pay the tax on reverse charge
basis in respect of receipt of supplies of certain specified categories of goods or services or
both from unregistered suppliers.

TAXATION OF ELECTRONIC COMMERCE OPERATORS

{Section 9(5) of CGST Act (+) Section 5(5) of IGST Act)

INTRODUCTION:

> Electronic Commerce Operators ('ECO') display products as well as services on their
electronic portal which are actually supplied by some other person to the consumer. The
consumers buy such goods/services through these portals.

> On placing the order for a particular product/service, the actual supplier supplies the
selected product/service to the consumer. The price/consideration for the
product/service is collected by the ECO from the consumer and passed on to the actual
supplier after the deduction of commission by the ECO.

LIABILITY OF ECO TO PAY GST:

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> The Government may notify specific categories of services, on the recommendations of
the GST Council, the tax on which shall be paid by the ECO if such services are supplied
through it .
> The following services have been notified by the Government in this regard and thus in
case of
the following notified services, the provisions of GST law shall apply to such ECO as if he is
the supplier liable for paying tax in relation to the supply of such services:

> Services by way of transportation of passengers by a radio -taxi, motorcab, maxicab and
motor cycle; and

> Services by way of providing accommodation in hotels, inns, guest houses, clubs,
campsites or other commercial places meant for residential or lodging purposes, except
where the person supplying such service through Electronic Commerce Operator is liable
for registration u/s 22(1) of CGST Act.

> Services by way of house-keeping such as plumbing, carpentering, etc except where the
person supplying such service through Electronic Commerce Operator is liable for
registration u/s 22(1) of CGST Act.

PERSON LIABLE TO PAY GST FOR ABOVE SPECIFIED SERVICES WHEN SUPPLIED
THROUGH ECO:

> If the Electronic Commerce Operator is located in India, tax is to be paid by the Electronic
Commerce Operator.
> If the Electronic Commerce Operator does not have any physical presence in the taxable
territory, tax is to be paid by the Electronic Commerce Operator's representative located in
the taxable territory.
> If the Electronic Commerce Operator neither has physical presence nor any representative
in the taxable territory, the Electronic Commerce Operator would be required to appoint a
person in India who would discharge tax liability on its behalf.

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CHAPTER 3 SUPPLY UNDER GST

> The incidence of tax is the foundation stone of any taxation system. It determines the point
at which tax would be levied (ie, the taxable event). The earlier framework of taxable
event across various areas of indirect taxes was subject to varying interpretations
resulting in endless litigation since decades.

> Broadly, the controversies related to issues like whether a particular process amounted to
manufacture or not, whether a particular transaction was sale of goods or rendering of
services, etc. The GST laws resolve these issues by laying down one comprehensive
taxable event, ie 'supply of goods or services or both'.

> GST law, by levying tax on the 'supply of goods and/or services', departs from the
historically understood concepts of 'taxable event' under the erstwhile indirect tax laws
(ie sale under state VAT lows, manufacture under excise laws and provisioning of
service under service tax laws).
> For a better understanding of this topic, it is imperative to understand the meaning of a
few important terms which have been explained in the ensuing paragraphs.

Introduction

The concept of 'supply' is the key stone of the GST architecture. In the GST regime, the entire
value of supply of goods and/or services is taxed in an integrated manner, unlike the earlier
indirect taxes, which were charged independently either on manufacture or sale of goods,
or on rendering of services.

Supply has been defined in an inclusive manner to include all forms of supply of goods or
services or both such as sale, transfer, barter, exchange, license or disposal made or
agreed to be made for consideration in the course or furtherance of business.
Sections 7 & 8 of CGST Act read along with Schedules I, II & III given under the said Act
explain the meaning and scope of supply, By virtue of Section 20 of IGST Act, these
provisions have also been made applicable for IGST law.

> MEANING OF 'GOODS' (Section 2(52) of CGST Act):

'Goods' means every kind of movable property other than money and securities but includes:

 Actionable claim;

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 Growing crops, grass and things attached to/forming part of the land which
are agreed to be severed before supply or under a contract of supply.

> MEANING OF 'SERVICES' Section 2 102 of CGST Act:

 The expression 'services' has been defined to mean anything other than goods, money
and securities.

 The expression 'services' includes activities relating to the use of money or its conversion
of money by cash or by any other mode, from one form, currency or denomination to
another form, currency or denomination for which a separate consideration is charged. It
has been further provided that the expression 'services' would also include facilitating or
arranging transaction in securities.

MEANING OF 'CONSIDERATION' Section 2 31 of CGST Act}

 The scope of the word 'consideration' in relation to the supply of goods or services
or both would include.

 any payment made or to be made, whether in money or otherwise, by the

recipient or by any other person; and
 the monetary value of any act or forbearance by the recipient or by any other
person.
 Any subsidy given by Central Government or State Government shall not be
treated as a part of consideration.
 A deposit given in respect of supply of goods or services or both shall not be
considered as payment made for such supply unless the supplier applies the
deposit as consideration for the said supply.

MEANING OF 'MONEY' (Section 2(75) of CGST Act):

 Money means Indian legal tender or any foreign currency, cheque, promissory note, bill
of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or
electronic remittance or any other instrument recognised by the Reserve Bank of India
when used as a consideration to settle an obligation or exchange with Indian legal
tender of another denomination.
 However, money shall not include any currency that is held for its numismatic value.

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MEANING OF 'BUSINESS' {Section 2(17) of CGST Act):

Business includes:

a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other
similar activity, whether or not it is for a pecuniary benefit;
b) Any activity or transaction in connection with or incidental or ancillary to (a) above;
c) Any activity or transaction in the nature of (a) above, whether or not there is volume,
frequency, continuity or regularity of such transaction;
d) Supply or acquisition of goods including capital assets and services in connection with
commencement or closure of business;
e) Provision by a club, association, society, or any such body (for a subscription or any
other consideration of the facilities or benefits to its members, as the case may be;
f) Admission, for a consideration, of persons to any premises;
g) Services supplied by a person as the holder of an office which has been accepted by
him in the course or furtherance of his trade, profession or vocation;
h) Activities of a race club including by way of totalisator or a licence to book maker or
activities of a licenses book maker in such club; and
i) Any activity or transaction undertaken by the Central Government, a State Government
or any local authority in which they are engaged as public authorities.

MEANING OF 'PERSON' (Section 2(84) of CGST Act):

Person includes:
 An individual (i.e. a natural human being);
 A Hindu Undivided Family ('HUF') (The meaning of HUF has not been given under the tax
laws. As per the Hindu law, it means a family which consists of all persons lineally
descended from a common ancestor including their wives and daughters. Married
daughters are no longer treated as a member of HUF after they get married in other
families);
 a firm;
 a limited liability partnership firm;
 a company;
 a trust;
 a body-corporate incorporated by or under the laws of a country outside India;
 an association of persons (AOP), whether incorporated or not (an AOP refers to a
situation where two or more persons join hands to carry on any business);

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 a body of individuals (BOI), whether incorporated or not (a BOI is similar to AOP;
however, all the participants of BOI are only individuals whereas in case of AOP, one or
more participant is a non-individual);
 government (Central Government as well as State Government);
 a local authority (ie, panchayat, municipality, cantonment board, etc); and
 a co-operative society registered under any law relating to cooperative societies;
 a society as defined under the Societies Registration Act, 1860;
 a corporation established by/under any Central, State or Provincial Act or Government
company as defined u/s 2(45) of Companies Act, 2013;
 every artificial juridical person not covered above (artificial juridical persons are entities
which are not natural persons but are separate entities in the eyes of law. Though they
may not be sued directly in a court of law, but they can be sued through persons
managing them. Examples are universities, ICAI, ICSI, etc);

MEANING OF RELATED PERSONS (Explanation to Section 15 of CGST Act)

Persons shall be deemed to be 'related persons' if:
 such persons are officers or directors of one another's businesses;
 such persons are legally recognised partners in business;
 such persons are employer & employee;
 a third person directly or indirectly owns, controls or holds 25% or more of the
outstanding voting stock or shares of both of them;
 one of them directly or indirectly controls the other;
 both of them are directly or indirectly controlled by a third person;
 together they directly or indirectly control a third person;
 they are members of the same family; or
one of them is the sole agent, sole distributor or sole concessionaire of the other

SCOPE OF SUPPLY {SECTION 7 OF CGST ACT}

 Section 7(1): For the purpose of this Act, the expression “supply” includes:

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange,
licence, rental, lease or disposal made or agreed to be made for consideration by a person
in the course or furtherance of business;
b) Import of services for a consideration whether or not in the Course or furtherance of
business; and
c) The activities specified in schedule I, made or agreed to be made without a consideration.

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 Section 7(1A): Where certain activities or transactions, constitute a supply in
accordance with the provisions of sub-section (1), they shall be treated either as supply
of goods or supply of services as referred to in Schedule II
 Section 7(2); Notwithstanding anything contained in sub-section (1),

a) Activities or transactions specified in schedule III; or

b) such activities or transactions undertaken by the Central Government, a State
Government or any local authority in which they are engaged as public authorities, as
may be notified by the Government on the recommendations of the Council, Shall be
treated neither as a supply of goods nor a supply of services

Section 7(3): Subject to the provisions of sub-sections (1), (1A) and (2), the Government
may, on the recommendations of the Council, specify, by notification, the transactions that
are to be treated as:

a) a supply of goods and not as a supply of services; or

b) a supply of services and not as a supply of goods.

OVERVIEW OF SUPPLY:

INCLUSIONS EXCLUSIONS

Activities to Be Treated Neither As Supply Of

„ Supply for Consideration in Course or Goods Nor Supply Of Services {Section 7(2) +
Furtherance of Business (Section 7(1) (a)} Schedule III}

„ Importation of Services for Consideration

`Whether Or Not in Course or Furtherance of
Business {Section 7(1) (b)}

„ Supply Without Consideration {Section

7(1)(c) + Schedule I}

„ Activities to Be Treated As Supply Of Goods

Or Supply Of Services {Section 7(1A) +
Schedule II}

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SUPPLY FOR CONSIDERATION IN COURSE OR FURTHERANCE OF

BUSINESS
{Section 7(1) (a) of CGST Act)

Section 7(1) (a) of CGST Act provides that a supply of goods/services should be carried out
for consideration in the course or furtherance of business,

MODES OF SUPPLY:
>Section 7(1)(a) of CGST Act includes all forms of supply of goods or services or both
such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or
agreed to be made for consideration in the course or furtherance of business

> Sale and Transfer:

Earlier, VAT was levied by State Governments on sale of goods within their respective
states wherein 'sale' was defined to mean transfer of property in goods for
consideration Under CGST Act, sale has been treated as a form of supply leviable to
GST,
> Barter and Exchange:
 Barter transactions involve only exchange of goods or services whereas exchange
may cover a situation where the goods are partly paid for in goods and partly in
money.

 When there is a barter of goods or services, same activity constitutes supply as well
as consideration. By making a specific inclusion in the definition of supply, all barters
and exchanges have been made liable to GST.

> Licence, Lease, Rental etc:

 Licences, leases and rentals of goods were earlier treated as services where the
goods were transferred without transfer of right to use (effective possession and control
over the goods) and were treated as sales where the goods were transferred with
transfer of right to use.
TAXABILITY OF ART WORKS SENT BY ARTISTS TO GALLERIES FOR
EXHIBITION:

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 Artists gives their art works to galleries where it is exhibited for supply However,
no consideration flows from the gallery to the artist when the art works are sent to the
gallery for exhibition and therefore, the same is not a supply
 It is only when a buyer selects a particular art work displayed at the gallery, that
the actual supply takes place and applicable GST would be payable at the time of such
supply.

Illustration

State the necessary elements for a supply to be chargeable to GST.

Answer

The fallowing elements are required to be satisfied for a supply to be chargeable to GST:

> The activity involves supply of goods or services or both;

> The supply is for a consideration unless otherwise specifically provided for;
> the supply is made in the course or furtherance of business;
> the supply is a taxable supply; and
> the supply is made by a taxable person,
 Under the GST regime, such licences, leases and rentals of goods with or without
transfer of right to use are covered under the scope of 'supply of services' because
there is no transfer of title in such supplies. Such transactions are specifically treated
as 'supply of services' under Schedule II of CGST Act.

CONSIDERATION:

> One of the essential conditions for the supply of goods and/or services to fall within
the ambit of GST is that the supply should have been made for a consideration.

> However, consideration does not always mean money. It covers anything
which might be possibly done, given or made in exchange for something
else.

> Further, consideration need not always flow from the recipient of the supply. It can
also be made by a third person.

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IN THE COURSE OR FURTHERANCE OF BUSINESS:

> GST is essentially a tax on only commercial transactions. Hence, only those
supplies which are made in the course or furtherance of business qualify as
'supply' under GST.

> Resultantly, any supplies made by an individual in his personal capacity do not
come under the ambit of GST unless they fall within the definition of business.

> Example: Rishabh buys a car for his personal use and after a year sells it to a car
dealer. Sale of car by Rishabh to car dealer is not a supply under CGST Act because
supply is not made by Rishabh in the course or furtherance of business.

> Example: Radhika sold her old gold bangles and earrings to 'Bhola Jewellers'. Sale of
old gold
jewellery by an individual to a jeweller will not constitute supply as the same
cannot be said to be in the course or furtherance of business of the individual.

> In order to understand the term 'in the course or furtherance of business', we need to
understand the term 'business'. Business has been defined u/s 2(17) of CGST Act to
include, inter-alia, any trade, commerce, manufacture, profession, vocation etc
whether or not undertaken for a monetary benefit. Business also includes any
activity or transaction which is incidental or ancillary to the afore-mentioned listed
activities.

IMPORT OF SERVICES FOR CONSIDERATION {Section 7(1)(b) of CGST Act)

> Section 7(1)(b) of CGST Act expands the scope of the term 'supply' by including
importation of services for a consideration within its ambit irrespective of the fact
whether such importation is in the course or furtherance of business or not

> Section 7(1) (b) of CGST Act (ie importation of services for consideration) is
the only exception to the condition of supply being in the course or furtherance
of business.
Example: Mr M, a proprietor, has received designing services for his house from an
architect located in New York at an agreed consideration of US $5,000. The import of
services by Mr M shall be treated as a supply u/s 7(1) (b) of CGST Act even though it is
not in the course of or furtherance of business.

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Illustration (RTP May 2018 Attempt)

Sahab Sales, an air-conditioner dealer in Janakpuri, Delhi, needs 4 air-conditioners for

his newly constructed house in safdarjung Enclave. Therefore, he transfers 4 air-
conditioners (on which ITC has already been availed by it) from its stock for the said
purpose. Examine whether the said activity amounts to supply u/s 7 of CGST Act, 2017.

Further, a janakpuri resident, Aakash, approached Sahab Soles. He sold an air-

conditioner to Sahab Sales for Rs 5,000. Aakash had bought the said air-conditioner six
months before for his residence. Does sale of the air-conditioner by Aakash to Sahab
Sales amount to supply u/s 7 of CG5T Act, 2017?

Illustration
Modest Ltd, registered in Delhi, dealing in supply of electronic items transferred some of
its stock to its another unit located in Haryana (inter-state transfer). Whether such self-
supplies are taxable under GST?
SUPPLY WITHOUT CONSIDERATION - DEEMED SUPPLY {Section 7(1)(c) of
CGST
Act (+) Schedule I of CGST ACT}

As a general rule, for an activity to qualify as supply, the some should have been
provided for consideration. However, Section 7(1)(c) of CGST Act read along with
Schedule I of CGST Act lists down the following four cases where existence of
consideration is not a pre-requisite for an activity to qualify as supply:

1. PERMANENT TRANSFER/DISPOSAL OF BUSINESS ASSETS:

 Transfer/disposal of business assets by an entity on permanent basis without

consideration shall be regarded as supply if input tax credit has
been availed on procurement of such assets.

 This clause is wide enough to cover transfer of business assets from holding to
subsidiary company or vice versa without consideration.
 Example: Donation of old laptops to charitable schools by XYZ & Co at the time of
purchase of new laptops will qualify as supply provided input tax credit has been
availed by XYZ & Co on such laptops.

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 Example: A cloth retailer gives clothes from his business stock to his friend free of
cost. In this case, transfer of business stock would amount to supply if he had
claimed input tax credit on his procurement of such business stock.

2. SUPPLY BETWEEN RELATED PERSONS / DISTINCT PERSONS:

Transactions involving supply of goods/services/both without consideration between

related persons or distinct persons as specified u/s 25 of CGST Act will qualify as supply
provided such supply has been made in the course or furtherance of business.

(The meaning of 'related persons' has been discussed earlier in this topic whereas the
concept of 'distinct persons' has been discussed in detail under 'Chapter 9 - Registration`)

TAXABILITY OF STOCK TRANSFERS / BRANCH TRANSFERS:

 Under the earlier law, no tax was applicable on stock transfers/branch transfers since
such transaction do not involve transfer of property in goods. However, under the GST
regime, stock transfers/branch transfers between different locations (with separate GST
registrations) of same legal entity will qualify as 'supply'.

Example: Raghubir Fabrics transfers 1,000 shirts from his factory located in Lucknow to
his retail showroom in Delhi so that the same can be sold from there. The factory and
retail showroom of Raghubir Fabrics are registered in the states where they are located.
Although no consideration is charged, supply of goods from factory to retail showroom
constitutes supply.

PARA 3 OF SCHEDULE I -SUPPLY OF GOODS BETWEEN PRINCIPAL &

AGENT:
 Section 7(1)(c) of CGST Act read along with Schedule I of CGST Act lists down four
cases where existence of consideration is not a pre-requisite for an activity to
qualify as supply.
 In other crucial point is whether or not the agent as the authority to pass or receive
the title of the goods on behalf of the principal.

„ Where the invoice for further supply is being issued by the agent in his name then, any
provision of goods from the principal to the agent would fall within the ambit of Para
3 of Schedule I would be regarded as 'supply'.

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„ Where the invoice is issued by the agent to the customer in the name of the principal,
such agent does not fall within the ambit of Para 3 of Schedule I and thus the transaction
would not be regarded as 'supply'.

 Similarly, where the goods being procured by the agent on behalf of the principal
are invoiced in the name of the agent, then further provision of the said goods by the agent
to the principal would be covered by Para 3 of Schedule I
.
 The above clarification can be understood with the help of following examples:

Example: Mr A appoints Mr B to procure certain goods from the market. Mr B identifies

various suppliers who can provide the goods as desired by Mr A, and asks the supplier (Mr
C) to send the goods and issue the i invoice directly to Mr A. In this scenario, Mr B is only
acting as the procurement agent, and has in no way involved himself in the supply or receipt
of the goods. Hence, in accordance with the provisions of this Act, Mr B is not an agent of Mr
A for supply of goods in terms of Para 3 of Schedule I.

Example: M/s XYZ, a banking company, appoints Mr B (auctioneer) to auction certain

goods. The auctioneer arranges for the auction and identifies the potential bidders. The
highest bid i sold to the highest bidder by M/s XYZ. The invoice for the supply of the goods
is issued by M/S XYZ to the successful bidder. In this scenario, the auctioneer is merely
providing the auctioneering services with no role played in the supply of the goods. Even in
this scenario, Mr B is no agent of M/s XYZ for the supply of goods in terms of Para 3 of
Schedule I.

Example: Mr A, an artist, appoints M/s B (auctioneer) to auction his painting. B arranges

for the auction and identifies the potential bidders. The highest bid is accepted and the
painting sold to the highest bidders the invoice for the supply of the painting issued by M/s
B on the behalf of Mr A but in his own name and the painting is delivered to the successful
bidder. In this scenario, M/s B is not merely providing auctioneering services, but is also
supplying the painting on behalf of Mr A to the bidder, and has the Schedule I. authority to
transfer the title of the painting on behalf of Mr A. This scenario is covered under Para 3 of
Schedule I.

 Para 3 of Schedule I provides that supply of goods by a principal to his agent, without
consideration, when agent undertakes to supply such goods on behalf of the principal
is considered as supply. Similarly, Supply of goods by an agent to his principal,

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without consideration, where the agent undertakes to receive such goods on behalf of
the principal is also considered as supply.

 In order to determine whether a particular principal-agent relationship falls within the

ambit of Para 3 of Schedule I, the deciding factor is whether the invoice for the further
supply of goods on principal is being issued by the agent or not.

EMPLOYER-EMPLOYEE TRANSACTIONS:

 The definition of 'related persons' covers employer-employee relationship within its

scope. Accordingly, all employer-employee transactions should be regarded as
supply irrespective of the fact whether consideration is involved or not.
 However, Schedule I of CGST Act provides that gifts given by an employer to
an employee shall not be treated as supply if the amounts of gifts given during a
financial year does not exceed Rs 50,000. However, gifts exceeding Rs 50,000
shall be subject to GST.

 Moreover, Schedule III of CGST Act clearly states that services provided by an
employee to the employer in the course of or in relation to his employment shall
not be treated as supply of services. Therefore, any kinds of benefits given by an
employer to his employee in terms of contractual agreement entered into between
the employer and the employee will not be subject to GST.

 Example: Where an employer provides free housing to his employee, when the same
is provided in terms of the contract between the employer and employee and is part
and parcel of the employee's remuneration package, no GST implications should arise
on such free housing.

3. SUPPLY OF GOODS BETWEEN PRINCIPAL & AGENT:

Supply of goods by a principal to his agent, without consideration, where the agent
undertakes to supply such goods on behalf of the principal is considered as supply.
Similarly, supply of goods by an agent to his principal, without consideration,
where the agent undertakes to receive such goods on behalf of the principal is also
considered as supply.

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Example: ABC Manufacturers Ltd engages Raghav & Sons as an agent to sell goods
on its behalf. For this purpose, ABC Manufacturers Ltd has supplied the goods to
Raghav & Sons. Supply of goods by ABC Manufacturers Ltd to Raghav & Sons will
qualify as supply even though no consideration has been recovered from Raghav &
Sons.

4. IMPORT OF SERVICES FROM RELATED PERSONS LOCATED OUTSIDE

INDIA:

Import of services by a person from a related person or from any of his

establishments located outside India in the course or furtherance of business shall
be treated as supply irrespective of the presence of consideration.

Example: ABC Associates received legal consultancy services from its head office
located in Malaysia. The head office has rendered such services free of cost to its
branch office. Since ABC Associates and the branch office are related persons,
services received by ABC Associates will qualify as supply even though the head
office has not charged anything from it.

Example: Sumit, a proprietor registered in Delhi, has sought architect services

from his brother located in US, with respect to his newly constructed house in
Delhi. Although services have been received by Sumit without consideration from
a related person, the transaction will still not qualify as supply since the same has
not been received in the course or furtherance of business.

TAXABILITY OF TENANCY RIGHT/PAGADI UNDER GST:

 In Pagadi system, the tenant acquires tenancy rights in the property against
payment of tenancy premium (pagadi) The landlord may be owner of the
property, but the possession of the same lies with the tenant. The tenant Pays'
periodic rent to the landlord as long as he occupies the property. The tenant also
usually has the option to sell the tenancy right of the said property and in such a
case has to share a percentage of the proceeds with the land, as laid down in
their tenancy agreement. Alternatively, the landlord pays to tenant the

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prevailing tenancy owner of premium to get the property vacated. Such
properties in Maharashtra are governed by Maharashtra Rent C Act, 1999.

 Pagadi system, ie transfer of tenancy rights against tenancy premium, is

prevalent in some states. The activity of transfer of tenancy right against
consideration (ie, tenancy premium) is squarely covered under supply of
service liable to GST. It is a form of lease or renting of property and such activity
has been specifically declared to be a service as per Schedule II of CGST Act.

 Although stamp duty and registration charges have been levied on such transfer
of tenancy rights, it shall be still subject to GST since merely because a
transaction/supply involves execution of documents which may require
registration and payment of registration fee and stamp duty, it would not
preclude them from the 'scope of supply' and from payment of GST.

 To sum up, transfer of tenancy rights to a new tenant against consideration in

the form of tenancy premium is taxable. Further, services provided by
outgoing tenant by way of surrendering the tenancy rights against
consideration in the form of a portion of tenancy premium is liable to GST.

Illustration:

State Government has exclusive power to notify a transaction to be supply of goods

or services. Discuss the correctness of the statement.

Answer:

The said statement is not correct. State Government can notify a transaction to be supply
of goods or services but only on the recommendations of the GST Council. Further,
Central Government or State Government, both on the recommendations of the GST
Council, can notify an activity to be the supply of goods and not supply of services or
supply of services and not supply of goods or neither a supply of goods nor a supply of
services.

Illustration:

ABC Consultancy, registered in Mumbai, supplies technical consultancy services to its

clients. It has been providing technical services to XY Ltd, Mumbai since past two years.

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Consideration is settled by XY Ltd assignment-wise. XY Ltd paid Ps 45 lakhs to ABC
Consultancy on 10th January 2018 on ABC Consultancy agreeing to not provide similar
technical services to any other business entity in India or abroad for a period of 8 years.
ABC Consultancy is of the view that Rs 45 lakhs is not chargeable to GST.

You are required to examine whether the view taken by ABC Consultancy is valid in law.
ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS/SERVICES {Section 7(1
A) of
CGST Act (+) Schedule II of CGST Act)

 Section 7(1A) of CGST Act read along with Schedule II of CGST Act enlists various
matters/transactions which are to be treated as supply of either goods or services,
 The matters listed under Schedule II are primarily those which had been entangled in
litigation in the earlier regime owing to their complex nature and susceptibility to double
taxation.

S.No. Nature Of Transaction Nature Of

Supply
a) Transfer of title in goods Supply of Goods
b) Transfer of right in goods/undivided share in goods Supply of Services
without transfer of title in goods
1
c) Transfer of title in goods under an agreement which stipulates Supply of Goods
that property shall pass at a future date

 Lease, tenancy, easement, license to occupy land Supply of Services

 Lease or letting out of the building including a commercial,
2 industrial or residential complex for business or commerce,
either wholly or partly

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Any treatment or process which is applied to another person's Supply of Services
3 goods Example: Job work performed by a job worker like dyeing
of fabric in various colours
a) Goods forming part of business assets are transferred or disposed- Supply of Goods
off by/under directions of person carrying on the business so as no
longer to form part of those assets, whether or not for consideration

b) Goods held/used for the purposes of the business are put to Supply of Services
any private use or are made available to any person for use, for
any purpose other than business, by or under the direction of a
person carrying on a business, whether or not for consideration
4 Example: A director using company's car for personal travels
c) Goods forming part of assets of any business carried on by a Supply of Goods
person who ceases to be a taxable person, shall be deemed to
be supplied by him, in the course or furtherance of his business,
immediately before he ceases to be a taxable person
EXCEPTIONS:
3/4 Business is transferred as a going concern to another person; or
3/4 Business is carried on by a personal representative who is
deemed to be a taxable person
5  Renting of immovable property Supply of
 Construction of a complex, building, civil structure or a part Services
thereof, including a complex or building intended for sale to
a buyer before its completion provided some part of the
consideration is received before the issuance of completion
certificate.
 Temporary transfer or permitting the use or enjoyment of
any intellectual property right.
 Development, design, programming, customization,
adaptation, upgradation, enhancement, implementation of
information technology software.
 Agreeing to the obligation to refrain from an act, or to tolerate
an act or a situation, or to do an act
 Transfer of right to use any goods for any purpose (whether or
not for a specified period) for cash, deferred payment or other
valuable consideration

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FOLLOWING COMPOSITE SUPPLIES:

Supply of
Services
6 a) Works Contract {Works contract has been defined u/s 2(119) of
fgr:
CGST Act to mean a contract for building, construction,
fabrication, completion, erection, installation, fitting out,
improvement, modification, repair, maintenance, renovation,
alteration or commissioning of any immovable property wherein
transfer of property in goods (whether as goods or in some other
form) is involved in the execution of such contract}
b) Supply of food or any other article for human consumption or
any drink by way of or as part of any service or in any other Supply of Goods
manner whatsoever
7
7 Supply of goods by any unincorporated association or body SUPPLY OF
of persons to a member thereof for cash, deferred payment GOODS
or other valuable consideration.

Supply of goods by any unincorporated association or body of persons

to a member thereof for cash, deferred payment or other valuable
ACTIVITIES TO BE TREATED NEITHER AS SUPPLY OF GOODS NOR AS
consideration.
SUPPLY OF SERVICES {Section 7(2) of CGST Act (+) Schedule III of CGST
Act)

Section 7(2)(a) - ACTIVITIES COVERED UNDER SCHEDULE III:

Following activities covered under Schedule III of CGST Act can be termed as
'Negative List' under the GST regime as such activities are neither to be treated as a
supply of goods nor a supply of services.
1. Services By An Employee To His Employer In The Course Of Or In Relation To His
Employment Services provided by an employee to his employer during the course of
employment are not taxable under GST law.

Services provided outside the course of employment for a consideration would

qualify as a supply and thus liable to GST.

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Example: If an employee provides private coaching to his employer's children,
such services would not get covered under the above exclusion and would be liable
to GST.

Amounts paid by the employer to the employee for premature termination of a

contract of employment are treated as amounts paid in relation to services provided
by the employee to the employer in the course of employment. Thus, such amount
would not be liable to GST.

Nature of Transaction Whether regarded as 'services carried out during the course of
employment'?

Services provided by a Yes. These are services provided by the worker in the course of
casual worker to employer employment.
who gives wages on daily
basis to the worker

In case the casual  Yes. Services provided by the casual workers to the contractors are
workers are employed by in the course of employment.
a contractor, like a
building contractor or  However, services provided by the contractor to his client by
security agency services, deploying such workers would not be a service provided by the
who deploys them for workers to the client in the course of employment. The consideration
execution of a contract or received by the contractor would therefore be taxable if other
for provision of security conditions of taxability are present.
services

Services provided on No. Services provided on contract basis (ie principal-to-principal

contract basis by a person basis) are not services provided in the course of employment.
to another

2. Services by Any Court or Tribunal Established Under Any Law for the Time Being In
Force.

3. Functions/Duties Performed By Following Persons:

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 the functions performed by the Members of Parliament, Members of State
Legislature, Members of Panchayats, Members of Municipalities and Members of other
local authorities;
 the duties performed by any person who holds any post in pursuance of the
provisions of the Constitution in that capacity; or
 the duties performed by any person as a Chairperson or a Member or a Director
in a body established by the Central Government or a State Government or local
authority and who is not deemed as an employee before the commencement of this
clause,

4. Services of Funeral, Burial, Crematorium or Mortuary Including Transportation of The

Deceased

5. Sale of Land (+) Sale of Building Subject To Paragraph 5(b) Of Schedule II

6. Actionable Claims, Other Than Lottery, Betting and Gambling

7. Supply of Goods from A Place in the Non-Taxable Territory To Another Place In The
Non-Taxable Territory Without Such Goods Entering Into India

8. (a) Supply Of Warehoused Goods To Any Person Before Clearance For Home
Consumption

(b) Supply Of Goods By The Consignee To Any Other Person, By Endorsement Of

Document Of Title To The Goods, After The Goods Have Been Dispatched From The Port
Of Origin Located outside india but before clearance for home consumption.

DETERMINATION OF NATURE OF SUPPLY

(SUPPLY OF GOODS /SUPPLY OF SERVICES)

S.No. Particulars Nature of Transaction (Supply

Of Goods/Supply Of Services)
1 Servicing of cars involving supply of both goods
(spare parts) and services (labour) where the value of
goods and services are shown separately

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Printing of books, pamphlets, brochures, annual

reports, and the like, where only content is supplied
2 by the publisher or the person who owns the usage
rights to the intangible inputs while the physical inputs
including paper used for printing belong to the printer

Supply of printed envelopes, letter c boxes, tissues,

napkins, wallpaper, etc by the printer using its
3 physical inputs including paper to print the design, of
goods logo etc supplied by the recipient of goods.

4 Retreading of tyres

Supply of retreaded tyres, where the old tyres

5 belong to the supplier of retreaded tyres

Section 7 (2) (b) ACTIVITIES NOTIFIED BY GOVERNMENT:

Section 7(2)(b) of CGST Act provides that activities undertaken by Central Government,
State Government or Local Authority in which they are engaged as public authorities, as
may be notified by the Government on the recommendations of the GST Council, shall be
treated neither as supply of goods nor as supply of services.

 In terms of the above provision, services by way of any activity in relation

to a function entrusted to a Panchayat under Article 243G of the Constitution has
been notified.
 Further, CBIC has also clarified that following activities/transactions shall
be treated neither as supply of goods nor as supply of services:

 Inter-State Movement Of Various Modes Of Conveyance: Inter-state movement

of various modes of conveyance (such as trains, buses, trucks, tankers, trailers,
vessels, containers, aircrafts, etc) carrying goods or passengers or both or for
repairs and maintenance, shall be treated 'neither as a supply of goods nor a supply
of services' and therefore not be leviable to IGST. However, applicable
CGST/SGST/IGST, as the case may be, shall be leviable on repairs and
maintenance done for such conveyance.

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 Inter-State Movement Of Rigs, Tools And Spares, And All Goods On Wheels
(Like Cranes): Inter-state movement of rigs, tools and spares, and all goods on
wheels (except in cases where movement of such goods is for further supply of the
same goods), such inter-state movement shall be treated 'neither as a supply of
goods or supply of service,' and consequently, no IGST would be applicable on
such movements.

TAXABILITY OF COMPOSITE AND MIXED

SUPPLIES
{Section 8 of CGST Act}

 GST is payable on supply of goods/services at the rates notified by the government

for the
respective goods/services. Determination of applicable rate of tax poses no problem
if the supply is of individual goods/individual services which are clearly identifiable.

 However, some of the supplies are a combination of goods/combination of

services/combination of both goods and services wherein each individual component
of such supplies may attract a different rate of tax.
 In such cases, determination of the applicable rate of tax to be levied on such
supplies may be a challenge. To address this problem, the GST law categorizes such
supplies into composite supplies and mixed supplies, thereby providing certainty in
respect of tax treatment under GST for such supplies.

PART 1: COMPOSITE SUPPLIES

MEANING OF 'COMPOSITE SUPPLY’ {Section 2(30) of CGST Act}:
A transaction of supply is said to be a 'composite supply' if all the following conditions are
fulfilled:

 Such transaction comprises of two or more taxable supplies of goods/services/both

or any combination thereof;
 Various supplies involved in the transaction are naturally bundled and supplied in
conjunction with each other in the ordinary course of business; and
 Out of all supplies, one of the supplies should be a principal supply.

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In other words, in a composite supply, goods or services or both are bundled owing
to natural necessities. The elements in a composite supply are dependent on the
'principal supply'.

MEANING OF PRINCIPAL SUPPLY {Section 2(90) of CGST Act}:

Principal supply refers to the predominant element of a composite supply for which other
supplies forming part of such composite supply play an ancillary role.

DETERMINATION OF TAX LIABILITY OF COMPOSITE SUPPLIES: A composite supply

comprising of two or more supplies, one of which is a principal supply, shall be treated as a
supply of such principal supply.

Example: Suvarna Manufacturers entered into a contract with XYZ Ltd for supply of
readymade shirts packed in designer boxes at XYZ Ltd.’s outlet. Further, Suvarna
Manufacturers would also get them insured during transit. In this case, supply of goods,
packing materials, transport & insurance is a composite supply wherein supply of goods is
principal supply.

Example: When a consumer buys a television set and he also gets warranty and a
maintenance contract with the TV, this supply is a composite supply. In this example, supply
of television is the principal supply whereas warranty and maintenance services are
ancillary.

Example: A travel ticket from Mumbai to Delhi may include services of food being served
on board, free insurance and use of airport lounge. In this case, transport of passengers
constitutes the pre-dominant element of composite supply and is treated as the principal
supply and all other supplies are ancillary.

GUIDELINES TO ASCERTAIN WHETHER SUPPLIES ARE NATURALLY

BUNDLED IN THE ORDINARY COURSE OF BUSINESS:
Determination of the fact whether supplies of individual goods/services are bundled in the
ordinary course of business or not would depend upon the normal or frequent practices
followed in the area of business to which such supplies relate. Such normal and frequent
practices adopted in a business can be ascertained from several indicators some of which
are listed below:

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PERCEPTION OF CONSUMERS/RECIPIENTS OF SUPPLY:
If large number of recipients of such bundle of supplies reasonably expects such services to
be provided as a package, then such a package could be treated as naturally bundled in the
ordinary course of business.

PERCEPTION OF SUPPLIERS:
Where a majority of suppliers in a particular area of business provide similar bundle of
supplies, such supplies are to be treated as naturally bundled in the ordinary course of
business.
Example: Catering on board during the course of transportation of passengers by air is a
bundle offered by a majority of airlines.
NATURE OF SUPPLIES:
Nature of individual supplies in a bundle of supplies also helps in determining whether
supplies are bundled in the ordinary course of business or not. If the nature of supplies is
such that one of the supplies is the main supply and the other supplies combined with such
supply are in the nature of incidental or ancillary supplies which help in better enjoyment of
the main supply, the entire bundle of supplies shall be regarded as naturally bundled in the
ordinary course of business.
Example: Services of stay in hotels is often combined with a service or laundering of 3-4
items of clothing free of cost per day. Such service is an ancillary service to the provision of
main service of hotel accommodation and the resultant package would be treated as
services naturally bundled in the ordinary course of business.

OTHER ILLUSTRATIVE INDICATORS:

Other illustrative indicators, not determinative but indicative of bundling of services in the
ordinary course of business, are:

 There is a single price or the customer pays the same amount, no matter how much
package they actually receive or use;
 T h e e l e m e n t s ar e n o r m a l l y ad v e r t i s ed a s a p ac k ag e ;
 T h e d i f f e r e n t e l e m e n t s a r e no t av a i l a b l e s e p ar a t e ly ;
 T h e d i f f e r e n t e l e m e n t s a r e i nt eg r a l t o o n e ov e r a l l s u p p l y . I f o n e o r
m o r e is r e m o v e d , t h e n a t u r e o f t h e s u p p ly w ou l d b e a f f ec t ed , et c .

CONCLUSION:

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A thumb rule cannot be laid down to determine whether a service is naturally bundled in
the ordinary course of business or not. Each case has to be individually examined in the
backdrop of several factors some of which are outlined above. The above principles can be
adopted to determine whether a particular supply constitutes a composite supply under G5T
and if so what constitutes the principal supply so as to determine the right classification and
rate of tax of such composite supply.

PART 2: MIXED SUPPLIES

MEANING OF 'MIXED SUPPLY' {Section 2 (74) of CGST Act}:

 A transaction involving two or more individual supplies of goods/ services/both or

any combination thereof, made in conjunction with each other for a single price is said to
be a 'mixed supply' if the individual supplies are independent of each other and are not
naturally bundled.
 In other words, where a transaction consists of supplies which are not naturally
bundled in the ordinary course of business. then such transaction does not qualify as a
'composite supply' and should therefore be regarded as a 'mixed supply'.

DETERMINATION OF TAX LIABILITY OF MIXED SUPPLIES:

A mixed supply comprising of two or more supplies shall be treated as supply of that
particular supply which attracts highest rate of tax.

Example: A supply of a package consisting of canned foods, sweets, chocolates, cakes,

dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed
supply if the package has been customized on the basis of customer's preferences.
Since each of these items can be supplied separately and its supply is not dependent on
any other, the supply of the entire package shall be regarded as a mixed supply.

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CHAPTER 4

COMPOSITION SCHEME

The GST law casts a lot of compliance and procedural burden on assessees on regular basis which
increases the compliance cost of the assessees. Some of the
procedural hassles have been listed hereunder:

INTRODUCTION
Ascertaining the correct classification of
goods/services for correctly determining the applicable Every tax system requires compliance with
rate of tax; statutory provisions in a time bound
Determining the correct value of supply on which tax has to manner such as periodic tax payments,
be paid;
filing of returns, maintenance of prescribed
Raising proper invoice for each transaction; records, etc. which many a time pose a
Maintaining proper records for availing credit of taxes paid challenge to small businesses. Provisions
on inward supplies, to protect the interest of such small
Ensuring that credit has been availed and utilized as per the businesses are often found in the taxing
manner prescribed under the law; statutes. Under the GST law, this benefit
Discharging the applicable tax liability on monthly basis; for small businesses has been in the form
Filing applicable returns on monthly basis, etc. of composition scheme.

Section 10 of CGST Act read along with

Such cumbersome procedures are not in the bests interests of ‘Chapter II–Composition Rules’ of CGST
small taxpayers as the corresponding increase in compliance Rules prescribe the regulations governing
cost may not always be commensurate with the benefits taxation of persons opting for composition
received. Resultantly, an alternative manner for discharging scheme.
tax liability has to be prescribed keeping in mind the interests
of small taxpayers. The GST law seeks to simplify the
compliance procedures for small taxpayers through
composition scheme.

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The objective of composition scheme is to bring simplicity and to reduce the compliance cost for
small taxpayers. Suppliers opting for composition levy need not worry about the classification of
their goods or services, the rate of tax applicable on the same, etc. They are not required to raise any
tax invoice, but simply need to issue a 'Bill of Supply' wherein no tax will be charged from the
recipient At the end of a quarter, the composition dealer is required to pay a specified percentage of
his turnover for the quarter as tax without availing the benefit of input tax credit.
Illustration

Pepper & Salt Ltd, registered in Madhya Pradesh, has a turnover amounting to Rs 80 lakhs in FY 2018-
19. It wants to avail the benefit of composition scheme in FY 2019-20. You are required to advise Pepper
and Salt Ltd regarding the availability of composition scheme in FY 2019-20.

Will your answer change, if Pepper di Salt Ltd is registered in Arunachal Pradesh?

INTRODUCTION TO COMPOSITION SCHEME

Section 10 of CGST Act prescribes a 'composition scheme' for small dealers wherein they are freed
from a large number of compliances and procedures which a regular taxpayer is otherwise expected to
comply with
Composition scheme is an alternative option allowed to small taxpayers whose turnover is within the
limits prescribed u/s 10 of CGST Act. A dealer opting for composition levy is required to pay the
following amounts as composition tax.
Category Of
Registered Persons Total GST

Manufacturers Eligible 1% Of Aggregate Turnover

For Composition Levy

Supplier of Restaurant/ 5 % Of Aggregate Turnover

Catering Services

Any Other Supplier Eligible 1% Of Taxable

For Composition Levy (i.e. Turnover
Traders)

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PERSONS ELIGIBLE TO OPT FOR COMPOSITION SCHEME

ELIGIBILITY CRITERIA:
A person who does not get covered under any of the disqualifications discussed later in this chapter can
opt for composition scheme if his turnover during the preceding financial year doesn't exceed Rs 1.5
crore.
However, in case of EIGHT STATES (i.e. Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Sikkim,
Nagaland, Tripura and Uttarakhand), the limit of Rs 75 lakhs shall apply instead of Rs 1.5 crore.

CALCULATION OF AGGREGATE TURNOVER:

Aggregate turnover of preceding financial year is the determining factor for ascertaining whether a
dealer is eligible for composition scheme or not. Therefore, it becomes important to know the items
which are to be included/excluded at the time of computation of aggregate turnover.

Turnover of all the entities which are registered under a common Permanent Account Number ('PAN')
across India has to be aggregated to determine the eligibility of an assessee to opt for composition
scheme.

Example: A dealer has two offices in Delhi. In order to determine whether he is eligible to avail
composition scheme or not, turnover of both the offices would be taken into account and if the same does
not exceed Rs 1.5 crore, only then the dealer can opt to avail the composition levy (subject to fulfilment
of other prescribed conditions).

Illustration (MTP May 2018 Attempt)

Ramaswamy, a registered supplier, is an interior decorator. His registered office is located in Gujarat and
he is not engaged in making any inter-state supply of services. His aggregate turnover in FY 2018-19 is
Rs 90 lakhs. With reference to the provisions of CGST Act, 2017, examine whether Ramaswamy can opt
for composition scheme in FY 2019-20?

Will your answer be different if Ramaswamy is engaged in supplying restaurant services and procures food
items required for his restaurant from neighbouring state of Maharashtra?

INCLUSIONS EXCLUSIONS

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Value of all outward supplies -- CGST / SGST / UTGST / IGST / CESS

-- Value of inward supplies on which tax is

payable under reverse charge
 TAXABLE SUPPLIES
 EXEMPT SUPPLIES
 EXPORTS
 INTER – STATE SUPPLIES
Of persons having the same
PAN be computed on all
India basis

Illustration Trend Footwear, a registered supplier in Jaipur dealing in local supply of loafers and
wedges, wants to opt for composition scheme with effect from April 1, 2019. Its aggregate turnover in the
preceding financial year is Rs 78 lakhs. Besides dealing in supply of loafers and wedges, he also has a
rental income of Rs 1,35,000 per month from the basement of a commercial building located in Jaipur.
You are required to discuss, whether Trend Footwear can opt for composition scheme?

Illustration

Determine whether the suppliers in the following cases are eligible for composition levy provided their
turnover in preceding year does not exceed Rs 1.5 crore:
a) Mohan is engaged in providing legal services in Rajasthan and is registered in the same State.

b) Sugam Manufacturers has registered offices in Punjab & Haryana and supplies goods in
neighbouring States.

All kinds of outward supplies (taxable as well as exempt) made during the preceding financial year
have to be considered at the time of computation of aggregate turnover. It is immaterial whether tax is
payable under forward charge or reverse charge on such supplies.

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Vide Order No 01/2017-Central Tax Dated October 13, 2017, CBEC has clarified that
while computing aggregate turnover in order to determine the eligibility for
composition scheme, value of supply of any exempt services including services by way
of extending deposits, loans or advances in so far as the consideration is represented by
way of interest or discount shall not be taken into account.

However, any tax chargeable under GST law as well as value of inward supplies on which tax is
payable by the registered person under reverse charge shall be excluded at the time of computation of
aggregate turnover.

PERSON NOT ELIGIBLE TO OPTION FOR COMPOSITION SCHEME

The following persons cannot opt for composition scheme and therefore, such persons are required to
discharge their tax liability, if any, in the normal manner:
Supplier of any taxable services other than supplier of restaurant/catering services;
Supplier of goods which are not taxable under the CGST/SGST/UTG5T/IGST Act;
Supplier of inter-state outward supplies of goods (However, it should be noted that a composition
supplier is free to procure goods from inter-state suppliers);
Person supplying goods through an electronic commerce operator;
Manufacturer of goods notified u/s 10(2) (e), i.e. ice cream, pan masala, tobacco and other
manufactured tobacco substitutes; and
Causal taxable person as well as non-resident taxable person

Vide Order No 01/2017-Central Tax Dated October 13, 2017, CBEC has clarified that a supplier
of any exempt services including services by way of extending deposits, loans or advances in so
far as the consideration is represented by way of interest or discount shall be eligible to opt for
composition scheme.

 A recent amendment allows supplier of goods to supply taxable services upto 10% of
turnover of preceding financial year or Rs 5,00,000, whichever is higher and still be eligible to
claim the benefit of composition scheme.

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Composition Scheme Taxpayers permitted to render services other than RESTAURANT SERVICES
(referred to in clause (b) of paragraph 6 of Schedule !! of the CGST Act) up to a specified limit
Under the erstwhile provisions, only a supplier of restaurant service was eligible for composition
scheme. A person engaged in the supply of any service other than restaurant service was not eligible
for composition scheme.
However, there are cases where a manufacturer/ trader is also engaged in supply of services other than
restaurant service though the percentage of such supply of services is very small as compared to the
supplies of goods. There may also be cases where a restaurant service provider is also engaged in
supplying a small percentage of other services.
(a) 10% of the turnover in a State / UT in the preceding F/Y or
(b) 5,00,000
whichever is higher.
Example: Ramsewak has opted for composition scheme in the financial year 2019-20. His aggregate turnover in
F/Y 2018-19 is 60 lakh. !n F/Y 2019-20, he can supply services [other than restaurant services] up to a value of
not exceeding:
(a) 10% of 60 lakh, i.e. 6 lakh or (b) 5 lakh, whichever is higher. Thus,
he can supply services up to a value of 6 lakh in F/Y 2019-20.
Consequently, eligibility to opt for composition scheme as contained in section 10(2)(a) has also been
amended to provide that the registered person shall be eligible to opt for the composition scheme
provided:
(i) either he is not at all engaged in supply of services other than restaurant services or
(ii) in case he supplies services other than restaurant services, value of such services does not exceed
10% of the turnover in a State/UT in the preceding F/Y or 5 lakh, whichever is higher.

Illustration (MTP May 2018 Attempt)

Examine whether the following statements are true or false giving brief reasons:

a) It is mandatory to issue a tax invoice in case a registered person has opted for composition levy
scheme.

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b) A composition tax payer, who has not rendered any taxable supply during a quarter, is
not required to file any return.

Illustration

Mohan Enterprises has two registered business verticals in Delhi. Its aggregate turnover for the preceding
year for both the business verticals was Rs 70 lakhs. It wishes to pay tax under composition levy for one
of the vertical in the current year while under normal levy for the other vertical. You are required to
advice Mohan Enterprises whether he can do so?

RESTRICTIONS IMPOSED ON A COMPOSITION SUPPLIER

Multiple restrictions have been imposed on a person who opts for composition levy which have been
described below:

> The goods held in stock by a composition dealer should have been purchased from a registered supplier.
Where any goods have been purchased from an unregistered supplier, the composition supplier should
have paid the applicable tax under reverse charge u/s 9(4) of CGST Act;

> Where the composition dealer is required to pay tax under reverse charge u/s 9(3) and 9(4) of CGST
Act on any inward supply of goods or services or both, the composition dealer should have paid the
same,

> A dealer opting for composition levy should not have been engaged in manufacture of goods notified
u/s 10(2) (e) of CGST Act. Presently, the following goods have been notified u/s 10(2)(e): Ice
cream and other edible ice, whether or not containing cocoa;
Pan Masala; and
Tobacco and other manufactured tobacco substitutes.

> A composition dealer shall mention the words "COMPOSITION TAXABLE PERSON, NOT
ELIGIBLE TO COLLECT TAX ON SUPPLIES" at the top of every bill of supply issued by him;

> A compositing dealer shall mention the words "COMPOSITION TAXABLE PERSON" on every
notice or signboard displayed at a prominent place at his principal place of business and at every
additional place or places of business;

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> Composition scheme has to be adopted uniformly by all the registered persons having the same
Permanent Account Number (PAN). If one such registered person opts for normal scheme, others
become ineligible for composition scheme.

Example: A dealer 'X' has two offices in Delhi and is eligible for composition levy, If 'X' opts for
composition scheme, both the offices would have to pay tax under composition scheme and abide by
all the conditions as may be prescribed for the composition scheme,

> A taxable person opting for composition scheme shall not collect any tax from the recipient on
supplies made by him. It implies that a composition scheme supplier cannot issue a tax invoice. A
composition dealer is required to issue a bill of supply instead of a tax invoice in respect of any
supply made by him (Provisions relating to bill of supply have been discussed under 'Chapter 10:-
Documentation Under GST');

> A taxable person opting for composition scheme is not entitled to any credit of input tax.
Illustration

A person availing composition scheme in Haryana during a financial year crosses the turnover of Rs 1.5
crore during the course of the yew, i.e. he crosses the turnover of Rs 1.5 crore in December. Will he be
allowed to pay tax under composition scheme for the reminder of the year, i.e. till 31st March?

Answer

> The option to pay tax under composition scheme lapses from the day on which the aggregate turnover
of the person availing composition scheme during the financial year exceeds the specified limit (Rs 1.5
crore in the existing case).

Therefore, the person cannot claim the benefit of composition scheme once his turnover has crossed Rs
1.5 crore in December. He is required to file an intimation for withdrawal from the scheme in prescribed
form within 7 days from the day on which the threshold limit has been crossed.

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TAX PAYMENTS & RETURN FILING PROCEDURES

> A dealer who has opted for composition scheme is required to pay tax and furnish a statement on
quarterly basis containing the details of payment of such self-assessed tax till the 18th day of the
month succeeding such quarter.

> Further, the composition dealer is required to furnish a return for every financial year in FORM
GSTR-4 on or before the 30th day of April following the end of such financial year.

INTIMATION OF OPTING FOR COMPOSITION LEVY

Unregistered Person Opting For Composition Levy (ie New Assessee):

> Any person who is not registered under GST law and who wishes to register himself under
composition scheme shall indicate the same in Part B of the registration form (ie GST REG-01)

> As and when registration is granted to the applicant, it shall be deemed that he has given an
intimation to pay tax under composition levy and his option to pay tax under composition levy
shall be effective from the date from which registration is effective.

Regular Tax Paying Person Opting For Composition Levy (ie Existing Assessee):
> A registered person who opts to pay tax under composition levy scheme shall electronically file an
intimation in prescribed form on the common portal prior to the commencement of the financial
year for which said option is exercised.
> Section 18(4) of CGST Act requires reversal of input tax credit when a registered person who has
availed ITC switches to composition levy. The details of input tax credit reversed by such a person
are required to be furnished in a prescribed form within 90 days from the Commencement of the
relevant financial year. (To be studied in detail under Chapter 7 -Input Tax Credit)

> Any intimation in respect of any place of business in a State/Union Territory shall be deemed to be an
intimation in respect of all other places of business registered on the same PAN,

> The option to pay tax under composition levy shall be effective from the beginning of the financial year
for which intimation has been filed.

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VALIDITY OF COMPOSITION LEVY

> The option exercised by a registered person to pay tax under composition scheme shall remain valid till
the time he satisfies all the conditions mentioned u/s 10 and the supporting law.

> The option to pay tax under composition scheme shall lapse from the day on which the aggregate
turnover during the current financial year exceeds the specified limit (Rs 75 lakhs/Rs 1.5 crore)
Example: A person availing composition scheme in Delhi during a financial year crosses the
turnover of Rs 1.5 crore on 9th of December. The option availed shall lapse from the day on which
his aggregate turnover during the financial year exceeds Rs 1.5 crore, ie 9 th December in this case

> Such person has to pay normal tax from the day he ceases to satisfy any of the conditions prescribed for
composition levy. He shall issue tax invoice for every taxable supply made thereafter

> Further, he is required to file an intimation for withdrawal from the scheme in prescribed form within 7
days of the occurrence of such event.

> Further, ITC shall be allowed in respect of the stock of inputs and inputs contained in semi - finished
or finished goods held in stock by him and on capital goods held by him on the date of withdrawal.
For availing such credit, a statement has to be furnished within 30 days of withdrawal of option in
prescribed form on GSTN portal containing the details of such stock held

Illustration

Mr Zaid, registered in Himachal Pradesh is engaged in making inter-state outward supplies of apparels.
The aggregate turnover of Mr Zaid in FY 2018-19 is 70 Iakhs. He opted for composition levy in FY
2019-20 and paid tax for the quarter ending June 2019 under composition Levy. The proper officer has
levied penalty on Mr Zaid in addition to the tax payable by him. You are required to examine the validity
of the action taken by proper officer.

PENALTY ON WRONG AVAILMENT OF COMPOSITION SCHEME

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> Where a taxable person pays tax under composition scheme even though he was not eligible for the
scheme, the person would be liable to pay penalty. The amount of penalty and differential tax payable by
him shall be determined in the manner prescribed u/s 73 and 74 of CGST Act.

> Further, where the proper officer has reasons to believe that the registered person was not eligible to
pay tax under composition levy or has contravened any provisions of GST law, he may issue a show
cause notice to such person in prescribed form.

> The proper officer shall consider the reply filed by such person and thereafter shall pass an order in
prescribed form within 30 days of receipt of such reply. Where the proper officer is not satisfied with
the reply submitted by the assessee, the order passed by the officer shall deny the option to pay tax
under composition levy from the date of the option or from the date of the event concerning such
contravention, as the case may be.

SIMPLIFIED SCHEME FOR SMALL SERVICE PROVIDERS

> A simplified scheme has been introduced with effect from 1st April 2019 for small service providers
(and those who are supplier of goods as well as services) whose aggregate turnover during preceding
financial year doesn't exceed Rs 50 lakhs. This scheme has been introduced vide Notification No
2/2019-CT (Rate) dated 7th March 2019.

> The taxable person opting for this scheme is required to pay GST @ 6% on supplies made on or after
1st April 2019 (3% CGST + 3% SGST).

> A person who has opted to pay under this scheme is required to issue a bill of supply for supplies made
instead of tax invoice. On the top of each bill of supply, the following words need to be added
"Taxable person paying tax in terms of Notification No 2/2019 - CT (Rate) dated 7th March 2019;
not eligible to collect tax on supplies".

> Various conditions are required to be fulfilled by a dealer who opts for composition scheme as
prescribed u/s 10 of CGST Act, 2017. Such conditions shall also apply where a dealer opts to pay tax
under this scheme.

Conditions:
(1) Supplies are made by a registered person who is:
 Not engaged in making any supply which is not leviable to tax under the said Act.
 Not engaged in making any inter-State outward supply – neither of goods nor of services.

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 Neither a casual taxable person (CTP) nor a non-resident taxable person (NRTP).
 Not engaged in making any supply through an ECO who is required to collect tax at source u/s.
52.
 Not engaged in making supplies of notified goods, namely, ice cream and other edible ice,
whether or not containing cocoa [2105 00 00], Pan masala [2106 90 20] and all goods of
Chapter 24, i.e. Tobacco and manufactured tobacco substitutes.

Effective date for composition levy [Rule 4]

(1) The option to pay tax under section 10 shall be effective from the beginning of the financial year, where
the intimation is filed under sub-rule (3) of rule 3 and the appointed day where the intimation is filed under
sub-rule of the said rule.
The intimation under sub-rule (2) of rule 3, shall be considered only after the grant of registration to the
applicant and his option to pay tax under section 10 shall be effective from the date fixed under sub-rule
(2) or of rule 10.

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TIME OF SUPPLY

TIME OF SUPPLY WHERE TAX IS PAYABLE UNDER FORWARD CHARGE

TIME OF SUPPLY OF GOODS [SECTION TIME OF SUPPLY OF SERVICES [SECTION
12(2)] 13(2)]

Earliest of the following: (a) Invoice issued within the time

(a) Date of issue of invoice by the supplier period prescribed under section 31
or the last date on which he is required Earliest of thefollowing:
under section 31, to issue the invoice
with respect to the supply  Date of issue of invoice by the
supplier
(b) Date on which the supplier receives the
 Date of receipt of payment
payment (entering the payment in books of
(entering the payment in books of
account or crediting of payment in bank
account or crediting of payment in
account, whichever is earlier) with respect to
bank account, whichever is earlier)
the supply
No GST on advances received for supply (b) Invoice not issued within the time
of goods: In case of supply of goods by a period prescribed under section 31
registered person (excluding composition supplier), Earliest of thefollowing:
GST is to be paid on the outward supply of goods on  Date of provision of service
the date of issue of invoice or the last date on which  Date of receipt of payment (entering
invoice ought to have been issued in terms of the payment in books of account or
section 31 [Notification No. 66/2017 CT crediting of payment in bank
dated 15.11.2017]. account, whichever is earlier)
(C)When the above events are
unascertainable
 date on which the receipient
shows the receipt of services
in his books of accounts

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GENERAL TIME LIMIT FOR RAISING INVOICES

Supply of goods [Section 31(1)] Supply of services [Section 31(2)]

Before or at the time of,- Before or after the provision of

(a) removal of goods for supply to the service
recipient, where the supply but within 30 days [45 days in case of
involves movement of goods,or insurance companies/banking and
financial institutions including NBFCs]
(b) delivery of goods or making
available thereof to the from the date of supply of services
recipient, in any othercase

TIME OF SUPPLY WHERE TAX IS PAYABLE UNDER REVERSE CHARGE

Time of supply of goods [Section Time of supply of services

12(3)] [Section 13(3)]

Earliest of the following: Earliest of the following:

(a) Date of receipt of goods, or (a) Date of payment as entered in the
(b) Date of payment as entered in the books of account of the recipient or
books of account of the recipient or the date on which the payment is
the date on which the payment is debited from his bank account,
debited from his bank account, whichever is earlier, or
whicheveris earlier, or (b) 61st day from the date of issue of
(c) 31st day from the date of issue invoice by the supplier
of invoice by the supplier

Where the above events are not ascertainable, the time of supply shall be
the dateof entry in the booksof account of the recipient of supply

- Import of service from associated

enterprise Dateof entry in the
books of account of the recipient or
the date of payment,whichever is
earlier

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TIME OF SUPPLY OF VOUCHERS EXCHANGEABLE FOR GOODS AND

SERVICES
Supply of vouchers exchangeable for goods and services [Sections 12(4) and 13(4)]

(a) Supply of goods or services is identifiable at the time of issue of voucher

Date of issue of the voucher
(b) Other cases
Date of redemption of the voucher

TIME OF SUPPLY OF GOODS AND SERVICES IN RESIDUAL CASES

Supply of goods and services in residual cases [Sections 12(5) and 13(5)]

(a) Where a periodical return is required to be filed

Due date of filing such return
(b) Other cases
Date of payment of tax

TIME OF SUPPLY FOR ADDITION IN VALUE BY WAY OF INTEREST/ LATE

FEE/PENALTY FOR DELAYED PAYMENT OF CONSIDERATION

Time of Supply : Date on which the supplier receives such addition in

value

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The provisions relating to time of supply of goods as contained in section 12
time of supply
of goods
under reverse
charge

Date of issue/ Date of

due date of issue receipt of Date of issue of
of tax invoice goods voucher, if the
under supply is
section31 identifiable at
that time
Date of recording
Date of
the payment in the
recording the books of accounts of
the recipient
payment in the Date of
books of redemption of
accounts of the voucher
supplier Date on which in other cases
payment is debited
from the bank
Date on which account of the
payment is recipient
credited in the
bank account of
the supplier
31st day from
supplier’s
invoice
whichever is
earlier

whichever is earlier

No GST on advances
received for supply of
goods: GST to be paid on If the above events are
date of issue/due date of UNASCERTAINABLE
issue of tax invoice under Time of supply = Date of entry of
section 31 good in books of account of
recipient of goods

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Residual case (If

all of the above Where a periodical return is
do not work for a to be filed, due date of such
situation) return OR
In any other case, the date on
which tax is paid .

Addition in value Date on which the supplier

by way of interest, receives such addition in
late fee/penalty for value
delayed payment of
consideration for
services .

provisions relating to time of supply of services as contained in section 13 are

summarised in the diagram given below

Time of supply of
Time of supply services under
of Time of supply
services under forward time of supply of
forward charge charge when the of services vouchers
when invoice is not exchangeable
under reverse for services
the invoice is issued charge
issued within the time
within the time
specified u/s 31

date of recording date of issue of

date of the payment in the voucher if the
date of issue of
provision of books of accounts supply is
tax invoice
service of the recipient of identifiable at
services that point

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date of recording date of recording date on which
the payment in payment is date of
the payment in
debited from the redemption of
the books of the books of
accounts of the bank account of voucher in other
accounts of the
supplier the receipient of cases
supplier
services

date on which date on which

payment is payment is
61st day from the
credited in the credited in the
suppliers invoice
bank account of bank account of
the supplier the supplier

whichever is earlier whichever is earlier

whichever is earlier

If the above events are UNASCERTAINABLE if the above events are

Time of supply =date of receipt of services in UNASCERTAINABLE
the books of account of the receipient of TIME OF SUPPLY =date of entry of
supply services in books of account of the
recipient of supply

where a periodical return is to be filed, due date

of such return
residual case (if all the above do
time of supply or
not work for a situation)
in any other case, the date on which tax is paid

addition in value by way of

interest,late fee/penalty for
delayed payment of time of supply date on which the supplier receives payment
consideration for services

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Time of Supply in case of change in rate of tax [Section 14 of CGST Act,
2017]

Section 14 of the CGST Act, 2017 defines the time of supply, where there is a change
in the rate of tax in respect of goods or services or both.

Section 14(a): In case the goods or services or both have been supplied before the change
in rate of tax, the time of supply can be determined as follows:
1) where the invoice for the same has been issued and the payment is also received after
the change in rate of tax, the time of supply shall be the date of receipt of payment or
the date of issue of invoice, whichever is earlier; or
2) where the invoice has been issued prior to the change in rate of tax but payment is
received after the change in rate of tax, the time of supply shall be the date of issue of
invoice; or
3) where the payment has been received before the change in rate of tax, but the invoice
for the same is issued after the change in rate of tax, the time of supply shall be the
date of receipt of payment.
Section 14(b): In case the goods or services or both have been supplied after the change in
rate of tax, the time of supply can be determined as follows:

1) where the payment is received after the change in rate of tax but the invoice has been
issued prior to the change in rate of tax, the time of supply shall be the date of receipt
of payment; or
2) where the invoice has been issued and payment is received before the change in rate
of tax, the time of supply shall be the date of receipt of payment or date of issue of
invoice, whichever is earlier; or
3) where the invoice has been issued after the change in rate of tax but the payment is
received before the change in rate of tax, the time of supply shall be the date of issue
of invoice:
Provided that the date of receipt of payment shall be the date of credit in the bank
account if such credit in the bank account is after four working days from the date of
change in the rate of tax.
ILLUSTRATION Supply was made on 10th May, 2018. From the following particulars,
find out the rate of GST applicable.
Event Date of event Rate applicable
Change of rate 31st May, 2018 Rate changed from 18% to
Issue of Invoice 5th June, 2018 12%
12%
Payment received 6th July, 2018 12%
Applicable rate is 12%. i.e. which is applicable on earlier of the two events, date of invoice
and date of receipt of payment which in this case would be 5th June, 2018.

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Illustration
Supply was made on 10th May, 2018. From the following particulars, find out the rate of
GST applicable.
Answer: Applicable rate is 18%. i.e. date of invoice i.e. 5th June, 2018 because it is earlier
than the date of receipt of payment.
Event Date of event Rate applicable
Change of rate 30th June, 2018 Rate changed from 18% to
Issue of Invoice 5th June, 2018 12%
18%
Payment received 6th July, 2018 12%
Note: When supply is made before change in rate, the principle of ‘whichever is earlier’ is
followed. Similarly, where supply is made after the change in rate, ‘whichever is later’
principle is followed
Forward Charge Mechanism
Illustration
ABC Ltd. supplied goods to XYZ Ltd., under a contract for the goods to be delivered to the
factory of XYZ Ltd *Date of payment not to be considered – notification no. 66/2017 CT
DATED 15.11.2017

The goods were removed from the factory of ABC Ltd. on 9th September, 2018 and the
goods were delivered to the factory of XYZ on 15th September, 2018.
The invoice was issued on 18th September, 2018 and the payment was credited to ABC’s
a/c on 20th October, 2018 although the entry in the books was made on 19th September,
2018 when the cheque was received.
Please advise on the time of supply.
In the above case, the dates are as under:
 Date of issue of invoice: 18th September, 2018
 Due date for issue of invoice: 9th September, 2018 (as the supply involved movement of
goods)
 Date of receipt of payment: 19th September, 2018 (earlier of the entry in the books
and the credit in the bank a/c) [Date of payment not to be considered - Notification No.
66/2017 - CT dated 15.11.2017]
Hence, the time of supply will be the earliest of the above dates, i.e., 9th September, 2018.
Illustration
A supplier delivers consignments of bricks on a continuous supply basis to various
contractors. With respect to one of the supplies, the following details are available:

Invoice Date Statement of Account Receipt of Payment Time of Supply

(Due Date) Date
1st November 5th November 1st November 1st November

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11th December 5th December 11th December 5th December
1st January 5th January 1st January 1st January

Illustration
X Ltd. receives payment of INR 100,000 in advance while the invoice was issued for INR
99,000.
Advise the treatment on the excess payment.
In this case, the INR 1000/- for which the invoice would be subsequently issued, the time of
supply can be taken to be the date of the issue of the next invoice, for this amount, even
though the payment was received earlier.

Reverse Charge Mechanism

Illustration
Mr.A, an agriculturist supplies raw cotton (under reverse charge) to Mr. B who
manufactures cotton shirts.
The date wise turnout of events is given below:
01.04.2019- Mr.B approaches Mr.A and places an order for 1 ton of cotton
10.05.2019- Mr.B receives the goods
15.05.2019- Mr.A issues an invoice
20.05.2019- Mr.B makes a payment by cheque and accordingly records it in his books of
accounts.
25.05.2019- The payment gets debited from Mr.B’ s bank account
In this case, the time of supply shall be the earlier of the following dates:
a. the date of receipt of goods i.e. 10.05.2019
b. the date of payment as recorded in the books of Mr. B i.e. 20.05.2019 or the date when
the payment gets debited in the books of the recipient i.e. 25.05.2019 whichever is
earlier c. the date immediately following thirty days from the date of issue of invoice, i.e.
15.05.2019+30days+1day=15.06.2019
Therefore, the time of supply will be 10.05.2019.

Vouchers
Illustration
ABC Ltd., enters in to an arrangement with “Hush Puppies”, buys the vouchers, these
vouchers were issued on 14th December, 2018. The Company then distributes these
vouchers with denomination INR 4,000/- to all its employees on 24th December, 2018
valid until 31st January, 2019, so that they can use these vouchers for buying shoes of

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their choice. The employees make the most of it and redeem these vouchers on the New
Year’s, i.e., on 1st January, 2019.
In this case, the supply is identifiable at the point of issue of the voucher and hence the time
of supply would be construed as 14th December, 2018.
Illustration
Nisha buys a voucher from Shoppers Stop for INR 10,000 and gifts itto Tarun on 14th
February. The voucher was valid until 29th February. Tarun redeems the vouchers at the
nearby Shoppers Stop store on 29th February.
In this case, the supply was not identifiable at the point of issue of the voucher as Tarun
was open to purchase anything from Shoppers’ Stop, therefore the time of supply would be
construed as the date of redemption of the voucher, that is 29th February.
All other instances
In all other instances, the time of supply as per Section 12(5) is fixed as under:
a) Due-date for filing periodic returns or
b) In other cases, the date of payment of GST

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Q1. Determine the time of supply in the following cases assuming that GST is payable under
reverse charge:

S. Date of payment by the recipient for Date of issue of invoice by

No. supply of services the supplier of services
(1) (2)
(i) August 10 June 29
(ii) August 10 June 1
(iii) Part payment made on June 30 and June 29
balance amount paid on September 1
(iv) Payment is entered in the books of June 1
account on June 28 and debited in
recipient’s bank account on June 30
(v) Payment is entered in the books of June 29
account on June 30 and debited in
recipient’s bank account on June 26

Q2. An order is placed on Ram & Co. on 18th August for supply of a consignment of customized
shoes. Ram & Co. gets the consignment ready and informs the customer and issues the invoice
on 2nd December. The customer collects the consignment from the premises of Ram & Co. on
7th December and electronically transfers the payment on the same date, which is entered in the
accounts on the next day, 8th December.
What is the time of supply of the shoes for the purpose of payment of tax?

ANSWERS:
(1) DO YOURSELF.
(2) As per Notification No. 66/2017 CT dated 15.11.2017, a registered person (excluding
composition supplier) has to pay GST on the outward supply of goods at the time of supply as specified in
section 12(2)(a), i.e. date of issue of invoice or the last date on which invoice ought to have been issued in
terms of section 31.
In this case, the invoice is issued before the removal of the goods and is thus, within the time limit prescribed
under section 31(1). Therefore, the time of supply for the purpose of payment of tax is the date of issue of
invoice, which is 2nd December.

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VALUE OF SUPPLY
VALUE OF TAXABLE SUPPLY [SECTION 15 OF THE CGST ACT 2017]
Section 15 of the CGST Act when read in conjunction with Chapter IV: Determination of
Value of Supply of the CGST rules, states that the value of taxable supply under GST is
the transaction value. Transaction value is defined as the price actually paid or payable
for the said supply of goods or services or both, where the supplier and the recipient of
the supply are not related, and the price is the sole consideration for the supply.
[Section 15(1)]

price actually paid where supplier the price is the sole

/payable for supply of and receipient of consideration for the
goods/services or both supply not related supply
and

Section 15 is applicable to interstate supplies under IGST also.

Transaction value means

INCLUSIONS IN DETERMINATION OF VALUE OF SUPPLY [Section 15(2)]

(a) any taxes, duties, cess, fees and charges levied under any law for the time being in
force other than this Act, the State Goods and Services Tax Act, the Union Territory
Goods and Services Tax Act and the Goods and Services Tax (Compensation to
States) Act, if charged separately by the supplier;
(b) any amount that the supplier is liable to pay in relation to such supply but which
has been incurred by the recipient of the supply and not included in the price
actually paid or payable for the goods or services or both;
(c) incidental expenses, including commission and packing, charged by the supplier
to the recipient of a supply and any amount charged for anything done by the
supplier in respect of the supply of goods or services or both at the time of, or
before delivery of goods or supply of services;
(d) interest or late fee or penalty for delayed payment of any consideration for any
supply; and
(e) subsidies directly linked to the price excluding subsidies provided by the
Central Government and State Governments

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Note: Interest or late fee or penalty for delayed payment of any consideration for any
supply was not taxable under Central Excise or Sales Tax laws. Now they are all part of
value.

EXCLUSIONS IN DETERMINATION OF VALUE OF SUPPLY [SECTION

15(3)]
a) Any discount which is given before or at the time of the supply if such discount has
been duly recorded in the invoice issued in respect of such supply; and
b) any discount given after the supply has been affected, if –
i) such discount was known and agreed at the time of supply, that is, established in
terms of an agreement entered into at or before the time of such supply and
specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document issued by
the supplier has been reversed by the recipient of the supply.
Where the value of the supply of goods or services or both cannot be determined under
sub-section (1), the same shall be determined in such manner as may be prescribed.
[Section 15(4)]
Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of
such supplies as may be notified by the Government on the recommendations of the
Council shall be determined in such manner as may be prescribed. [Section 15(5)]
For the purposes of this Act persons shall be deemed to be “related persons” if–
(i) such persons are officers or directors of one another’s businesses;
(ii) such persons are legally recognized partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or
more of the outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or
(viii) they are members of the same family;
The term “person” also includes legal persons and persons who are associated in the
business of one another in that one is the sole agent or sole distributor or sole
concessionaire, howsoever described, of the other, shall be deemed to be related
VALUATION RULES : CHAPTER IV, CGST RULES 2017
RULE 27: VALUE OF SUPPLY OF GOODS OR SERVICES WHERE THE
CONSIDERATION IS NOT WHOLLY IN MONEY

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Where the supply of goods or services is for a consideration not wholly in money, the
value of the supply shall-
(a) be the open market value of such supply;
(b) if the open market value is not available under clause (a), be the sum total of
consideration in money and any such further amount in money as is equivalent
to the consideration not in money, if such amount is known at the time of
supply;
(c) if the value of supply is not determinable under clause (a) or clause (b), be the
value of supply of goods or services or both of like kind and quality;
(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be
the sum total of consideration in money and such further amount in money that
is equivalent to consideration not in money as determined by the application of
rule 30 or rule 31 in that order.
For example :
(1) Where a new phone is supplied for twenty thousand rupees along with the
exchange of an old phone and if the price of the new phone without exchange is
twenty-four thousand rupees, the open market value of the new phone is
twenty-four thousand rupees.
(2) Where a laptop is supplied for forty thousand rupees along with the barter of a
printer that is manufactured by the recipient and the value of the printer known at
the time of supply is four thousand rupees but the open market value of the laptop
is not known, the value of the supply of the laptop is forty-four thousand rupees.

RULE 28: VALUE OF SUPPLY OF GOODS OR SERVICES OR BOTH

BETWEEN DISTINCT OR RELATED PERSONS, OTHER THAN THROUGH
AN AGENT
The value of the supply of goods or services or both between distinct persons as
specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are
related, other than where the supply is made through an agent, shall
(a) be the open market value of such supply;
(b) if the open market value is not available, be the value of supply of goods or
services of like kind and quality;
(c) if the value is not determinable under clause (a) or (b), be the value as
determined by the application of rule 30 or rule 31, in that order
Provided that where the goods are intended for further supply as such by the recipient,
the value shall, at the option of the supplier, be an amount equivalent to ninety percent
of the price charged for the supply of goods of like kind and quality by the recipient to
his customer not being a related person:

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Provided further that where the recipient is eligible for full input tax credit, the value
declared in the invoice shall be deemed to be the open market value of the goods or
services.

RULE 29: VALUE OF SUPPLY OF GOODS MADE OR RECEIVED THROUGH

AN AGENT
The value of supply of goods between the principal and his agent shall
(a) be the open market value of the goods being supplied, or at the option of the
supplier, be ninety percent. of the price charged for the supply of goods of like
kind and quality by the recipient to his customer not being a related person,
where the goods are intended for further supply by the said recipient.
(b) For example: A principal supplies groundnut to his agent and the agent is supplying
groundnuts of like kind and quality in subsequent supplies at a price of five thousand
rupees per quintal on the day of the supply. Another independent supplier is supplying
groundnuts of like kind and quality to the said agent at the price of four thousand
five hundred and fifty rupees per quintal. The value of the supply made by the
principal shall be four thousand five hundred and fifty rupees per quintal or where he
exercises the option, the value shall be 90 per cent of five thousand rupees i.e., four
thousand five hundred rupees per quintal.
(c) where the value of a supply is not determinable under clause (a), the same shall be
determined by the application of rule 30 or rule 31 in that order.

RULE 30: VALUE OF SUPPLY OF GOODS OR SERVICES OR BOTH BASED

ON COST
Where the value of a supply of goods or services or both is not determinable by any of
the preceding rules of this Chapter, the value shall be one hundred and ten percent of
the cost of production or manufacture or the cost of acquisition of such goods or the
cost of provision of such services.

RULE31: RESIDUAL METHOD FOR DETERMINATION OF VALUE OF

SUPPLY OF GOODS OR SERVICES OR BOTH
Where the value of supply of goods or services or both cannot be determined under
rules 27 to 30, the same shall be determined using reasonable means consistent with
the principles and the general provisions of section 15 and the provisions of this
Chapter:
Provided that in the case of supply of services, the supplier may opt for this rule,
ignoring rule 30.

RULE 31A: VALUE OF SUPPLY IN CASE OF LOTTERY, BETTING,

GAMBLING AND HORSE RACING

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(1) Notwithstanding anything contained in the provisions of this Chapter, the value in
respect of supplies specified below shall be determined in the manner provided
hereinafter.
(2) (a) The value of supply of lottery run by State Governments shall be deemed to be
100/112 of the face value of ticket or of the price as notified in the Official Gazette by
the organising State, whichever is higher.
(b) The value of supply of lottery authorised by State Governments shall be deemed to be
100/128 of the face value of ticket or of the price as notified in the Official Gazette by the
organising State, whichever is higher.
Explanation: – For the purposes of this sub-rule, the expressions-
(a) “lottery run by State Governments” means a lottery not allowed to be sold in any
State other than the organizing State;
(b) “lottery authorised by State Governments” means a lottery which is authorised
to be sold in State(s) other than the organising State also; and
(c) “Organising State” has the same meaning as assigned to it in clause (f) of sub-
rule (1) of rule 2 of the Lotteries (Regulation) Rules, 2010.
(3) The value of supply of actionable claim in the form of chance to win in
betting, gambling or horse racing in a race club shall be 100% of the face value of
the bet or the amount paid into the totalisator.

RULE 32: DETERMINATION OF VALUE IN RESPECT OF CERTAIN

SUPPLIES
(1) Notwithstanding anything contained in the provisions of this Chapter, the value
in respect of supplies specified below shall, at the option of the supplier, be
determined in the manner provided hereinafter
(2) The value of supply of services in relation to the purchase or sale of foreign
currency, including money changing, shall be determined by the supplier of
services in the following manner, namely: -
(a) for a currency, when exchanged from, or to, Indian Rupees, the value shall be
equal to the difference in the buying rate or the selling rate, as the case may be, and the
Reserve Bank of India reference rate for that currency at that time, multiplied by the
total units of currency:
Provided that in case where the Reserve Bank of India reference rate for a currency is
not available, the value shall be one per cent of the gross amount of Indian Rupees
provided or received by the person changing the money:
Provided further that in case where neither of the currencies exchanged is Indian
Rupees, the value shall be equal to one per cent of the lesser of the two amounts the
person changing the money would have received by converting any of the two

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currencies into Indian Rupee on that day at the reference rate provided by the Reserve
Bank of India.
Provided also that a person supplying the services may exercise the option to ascertain
the value in terms of clause (b) for a financial year and such option shall not be
withdrawn during the remaining part of that financial year.
(b) at the option of the supplier of services, the value in relation to the supply of
foreign currency, including money changing, shall be deemed to be
(i) one per cent. of the gross amount of currency exchanged for an amount up to one
lakh rupees, subject to a minimum amount of two hundred and fifty rupees;
(ii) one thousand rupees and half of a per cent of the gross amount of currency
exchanged for an amount exceeding one lakh rupees and up to ten lakh rupees; and
(iii)five thousand and five hundred rupees and one tenth of a per cent of the gross
amount of currency exchanged for an amount exceeding ten lakh rupees, subject to a
maximum amount of sixty thousand rupees.
(3) The value of the supply of services in relation to booking of tickets for travel by air
provided by an air travel agent shall be deemed to be an amount calculated at the rate
of five percent of the basic fare in the case of domestic bookings, and at the rate of ten
per cent of the basic fare in the case of international bookings of passage for travel by
air.
Explanation. - For the purposes of this sub-rule, the expression “basic fare” means that
part of the air fare on which commission is normally paid to the air travel agent by the
airlines.
(4) The value of supply of services in relation to life insurance business shall be, -
(a) the gross premium charged from a policy holder reduced by the amount allocated for
investment, or savings on behalf of the policy holder, if such an amount is intimated to
the policy holder at the time of supply of service;
(b) in case of single premium annuity policies other than (a), ten per cent. of single
premium charged from the policy holder; or
(c) in all other cases, twenty-five per cent. of the premium charged from the policy
holder in the first year and twelve and a half per cent. of the premium charged from
the policy holder in subsequent years:
Provided that nothing contained in this sub-rule shall apply where the entire premium
paid by the policy holder is only towards the risk cover in life insurance
(5) Where a taxable supply is provided by a person dealing in buying and selling of second
hand goods i.e., used goods as such or after such minor processing which does not change
the nature of the goods and where no input tax credit has been availed on the purchase of
such goods, the value of supply shall be the difference between the selling price and the
purchase price and where the value of such supply is negative, it shall be ignored:

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Provided that the purchase value of goods repossessed from a defaulting borrower, who is
not registered, for the purpose of recovery of a loan or debt shall be deemed to be the
purchase price of such goods by the defaulting borrower reduced by five percentage points
for every quarter or part thereof, between the date of purchase and the date of disposal by
the person making such repossession.
(6) The value of a token, or a voucher, or a coupon, or a stamp (other than postage
stamp) which is redeemable against a supply of goods or services or both shall be
equal to the money value of the goods or services or both redeemable against such
token, voucher, coupon, or stamp.
(7) The value of taxable services provided by such class of service providers as may
be notified by the Government, on the recommendations of the Council, as referred to
in paragraph 2 of Schedule I of the said Act between distinct persons as referred to in
section 25, where input tax credit is available, shall be deemed to be NIL.

RULE 33: VALUE OF SUPPLY OF SERVICES IN CASE OF PURE AGENT

Notwithstanding anything contained in the provisions of this Chapter, the expenditure
or costs incurred by a supplier as a pure agent of the recipient of supply shall be
excluded from the value of supply, if all the following conditions are satisfied, namely, -
(i) the supplier acts as a pure agent of the recipient of the supply, when he makes
the payment to the third party on authorization by such recipient;
(ii) the payment made by the pure agent on behalf of the recipient of supply has
been separately indicated in the invoice issued by the pure agent to the recipient
of service; and
(iii) the supplies procured by the pure agent from the third party as a pure agent of
the recipient of supply are in addition to the services he supplies on his own
account.
Explanation. - For the purposes of this rule, the expression “pure agent” means a
person who
(a) enters into a contractual agreement with the recipient of supply to act as his
pure agent to incur expenditure or costs in the course of supply of goods or
services or both;
(b) neither intends to hold nor holds any title to the goods or services or both so
procured or supplied as pure agent of the recipient of supply;
(c) does not use for his own interest such goods or services so procured; and
(d) receives only the actual amount incurred to procure such goods or services in
addition to the amount received for supply he provides on his own account.
For example: Corporate services Firm A is engaged to handle the legal work pertaining
to the incorporation of Company B. Other than its service fees, A also recovers from B,
registration fee and approval fee for the name of the company paid to the Registrar of
Companies. The fees charged by the Registrar of Companies for the registration and

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approval of the name are compulsorily levied on B. A is merely acting as a pure agent in
the payment of those fees. Therefore, A’s recovery of such expenses is a disbursement
and not part of the value of supply made by A to B.

RULE 34: RATE OF EXCHANGE OF CURRENCY, OTHER THAN INDIAN

RUPEES, FOR DETERMINATION OF VALUE
(1) The rate of exchange for determination of value of taxable goods shall be the
applicable rate of exchange as notified by the Board under section 14 of the
Customs Act, 1962 for the date of time of supply of such goods in terms of
section 12 of the Act.
(2) The rate of exchange for determination of value of taxable services shall be the
applicable rate of exchange determined as per the generally accepted
accounting principles for the date of time of supply of such services in terms of
section 13 of the Act.

RULE 35: VALUE OF SUPPLY INCLUSIVE OF INTEGRATED TAX, CENTRAL

TAX, STATE TAX, UNION TERRITORY TAX
Where the value of supply is inclusive of integrated tax or, as the case may be, central
tax, State tax, Union territory tax, the tax amount shall be determined in the following
manner, namely, –
Tax amount = (Value inclusive of taxes X tax rate in % of IGST or, as the case may be,
CGST, SGST or UTGST) ÷ (100+ sum of tax rates, as applicable, in %)
Explanation. - For the purposes of the provisions of this Chapter, the expressions
(a) “open market value” of a supply of goods or services or both means the full value
in money, excluding the integrated tax, central tax, State tax, Union territory tax
and the cess payable by a person in a transaction, where the supplier and the
recipient of the supply are not related and the price is the sole consideration, to
obtain such supply at the same time when the supply being valued is made;
(b) “supply of goods or services or both of like kind and quality” means any other
supply of goods or services or both made under similar circumstances that, in
respect of the characteristics, quality, quantity, functional components,
materials, and the reputation of the goods or services or both first mentioned, is
the same as, or closely or substantially resembles, that supply of goods or
service or both .
Illustration
Isha Enterprises had made supplies of INR 750,000 to Tee Kay Services. There was a tax
levied by Municipal Authorities on such sale of INR 75,000/-. CGST and SGST chargeable
on the supply was 37500/-. Packing charges, not included in the price above amounted
to INR 15,000.

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Isha Enterprises received a subsidy of INR 30000/- from an NGO on the sale of such
goods, and the price mentioned above is after taking in to account the subsidy.

Discount offered is @ 1% and that’s

mentioned on the Invoice. Determine the
Value of Supply.

Price Charged 7,50,000

Add: Tax charged by Municipal Authorities 75,000
Packing Charges 15,000
Subsidy from NGO 30,000
Total after all inclusions 8,70,000
Less: Discount @ 1% 7,500
Notes
1. CGST and SGST is not included in the determination of value of supply, rather
taxed post determination on the same
2. Subsidy since received from a non-governmental body is added back to determine
the value of supply
3. Discount on basic price is an exclusion

QUESTION 1. Crunch Bakery Products Ltd sells biscuits and cakes through its dealers,
to whom it charges the list price minus standard discount and pays GST accordingly.
When goods remain unsold with the dealers, it offers additional discounts on ihe stock
as an incentive to push the sales.Can this additional discount he reduced from the price
at which the goods were sold and concomitant tax adjustments made?

Answer: The discounts were not known or agreed at the time of supply of goods to the
dealers. Therefore, such discounts cannot be reduced from the price on which tax had
been paid in terms of section 15(3).
QUESTION2. Black and White Pvt. Ltd. has provided the following particulars relating
to goods sold by it to Colourful Pvt. Ltd.

Particulars Rs.

List price of the goods (exclusive of taxes and discounts) 50,000

Tax levied by Municipal Authority on the sale of such goods 5,000

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Packing charges (not included in price above) 1.000

Black and White Pvt. Ltd. received Rs.2000 as a subsidy from a NGO on sale of such
goods. The price of Rs.50,000 of the goods is after considering such subsidy. Black and
White Ltd. offers 2% discount on the list price of the goods which is recorded in the
invoice for the goods.
Determine the value of taxable supply made by Black and White Pvt. Ltd. and also
amount of GST payable if Rate of CGST @ 10% and SGST Ca: 10%.
Answer:

Computation of value of taxable supply

Particulars Rs.

List price of the goods (exclusive of taxes and discounts) 50.000

Tax levied by Municipal Authority on the sale of such goods 5,000

[Includible in the value as per section 15]

Packing charges [Includible in the value as per section 15] 1.000

Subsidy received from a non-Government body 2,000

[Since subsidy is received from a non-Government body, the same is

included in the value in terms of section 15]

Total 58,000

Less: Discount @ 2% on Rs.50,000 [Since discount is known at the time (1,000)

of supply,

it is deductible from the value in terms of section 15]

Value of taxable supply 57,000

CGST @10% 5,700

SGST@ 10% 5,700

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REGISTRATION

BENEFITS OF REGISTRATION:

Under any taxation law, the first compliance that a taxpayer is required to fulfil is to get
himself registered with the appropriate tax
authorities. All taxpayers are identified from INTRODUCTION
the unique number allotted to them by the
concerned tax authorities at the time of Registration is the most prime requirement
obtaining registration. A formal registration under any tax system for identification of
with the concerned tax authorities confers taxpayers undertaking tax compliances in
the following benefits to a taxpayer: the economy. Without registration, a person
can neither collect tax from his customers
 Completion of registration procedures
nor claim any credit of tax paid by him.
formally recognizes a taxpayer as supplier
of goods/services; Sections 22 to 30 of CGST Act combinedly
read along with 'Chapter III - Registration'
 A registered taxpayer is formally entitled of CGST Rules prescribe the provisions
to collect taxes from his customer and pass governing registration of a person under
on the credit of such taxes to the GST law. By virtue of Section 20 of IGST Act,
purchaser/recipient on goods/ services these provisions have also been made
supplied to them; applicable for IGST law.
 the intention of government to allow
seamless flow of input tax credit from
suppliers to recipients at pan-India level
can be achieved only if the concerned taxpayers have got themselves
Registered formally

REGISTRATION REQUIREMENTS UNDER ERSTWHILE INDIRECT TAXES

LAW :

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Name of Tax Format of Registration Number

Premises-wise registration if aggregate 15-Digit Alpha-Numeric STP

Service Tax turnover of taxable services of a person Number
exceeded
lakhs Rs 9of centralized registration was
(Option > First 10 Digits - PAN;
available under service tax laws) > Next 2 Digits - ST;
> Next 3 Digits - 001,002,003
and so on

Excise Duty Factory-wise registration if turnover of a person 15-Digit Alpha-Numeric

exceeded Rs 150 lakhs Number
> First 10 Digits-PAN
> Next 2 Digits - XM;
> Next 3 Digits - 001,002,003
and so on

State VAT Laws State-wise registration if turnover of a dealer 11- Digit Numeral TIN
exceeded the threshold limit prescribed under (Taxpayer's Identification
the respective VAT law (Rs 10 lakhs in Number)
maximum states)

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THERESOLD LIMIT FOR EXEMPTION FROM REGISTRATION UNDER GST

States with threshold limit

States with threshold
of RS 10 lakh for both goods
limit of RS 20 lakh for both
& services
goods and services
Manipur
Arunachal Pradesh
Mizoram
Meghalaya
Nagaland
Sikkim
Tripura
Uttarakhand
States with threshold limit of RS 20
Puducherry
lakh for services and RS 40 lakh for
TELANGANA
goods**

Jammu & Kashmir

Assam

Himachal Pradesh

Others

**persons engaged exclusively in

supply of goods

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Supplier engaged Aggregate Applicable Whether liable to
turnover threshold obtain registration?
Prithivi of exclusively in supply of shoes limit for registration
r 22 lakh r40 lakh X
Assam
exclusively in supply of pan
r 22 lakh r20 lakh √
masala
exclusively in supply of taxable
r 22 lakh r20 lakh √
services
in supply of both taxable goods r 22 lakh r20 lakh √
and services
Shiv of
exclusively in supply of toys r 22 lakh r20 lakh √
Telangana
exclusively in supply of ice r 22 lakh r20 lakh √
cream
exclusively in supply of taxable
r 22 lakh r20 lakh √
services
in supply of both taxable goods &
r 22 lakh r20 lakh √
services
Ashok of
exclusively in supply of paper r 12 lakh r10 lakh √
Manipur
exclusively in supply of tobacco r 12 lakh r10 lakh √

exclusively in supply of taxable

r 12 lakh r10 lakh √
services
in supply of both taxable goods &
r 12 lakh r10 lakh √
services

PERSONS LIABLE FOR REGISTRATION {Section 22 of CGST Act)

Section 22 Persons liable for registration

Sub-section Particulars

(1) Every supplier shall be liable to be registered under this Act in the
State or Union territory, other than special category States, from
where he makes a taxable supply of goods or services or both, if his

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aggregate turnover in a financial year exceeds twenty lakh rupees.
Provided that where such person makes taxable supplies of goods
or services or both from any of the special category States, he shall
be liable to be registered if his aggregate turnover in a financial year
exceeds ten lakh rupees.
Provided further that the Government may, at the request of a
special category State and on the recommendations of the
Council, enhance the aggregate turnover referred to in the
first proviso from ten lakh rupees to such amount, not
exceeding twenty lakh rupees and subject to such conditions
and limitations, as may be so notified.

(2) Every person who, on the day immediately preceding the appointed
day, is registered or holds a license under an existing law, shall be
liable to be registered under this Act with effect from the appointed
day.

(3) Where a business carried on by a taxable person registered under

this Act is transferred, whether on account of succession or
otherwise, to another person as a going concern, the transferee or
the successor, as the case may be, shall be liable to be registered
with effect from the date of such transfer or succession.

(4) Notwithstanding anything contained in sub-sections (1) and (3),

in a case of transfer pursuant to sanction of a scheme or an
arrangement for amalgamation or, as the case may be, de-
merger of two or more companies pursuant to an order of a High
Court, Tribunal or otherwise, the transferee shall be liable to be
registered, with effect from the date on which the Registrar of
Companies issues a certificate of incorporation giving effect to
such order of the High Court or Tribunal.

Explanation––For the purposes of this section, ––

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(i) the expression “aggregate turnover” shall include all

supplies made by the taxable person, whether on his

own account or made on behalf of all his principals

the expression “special category States” shall mean the

States as specified in sub-clause (g) of clause (4) of
article 279A of the Constitution except the State of
Jammu and Kashmir and States of Arunachal
Pradesh, Assam, Himachal Pradesh, Meghalaya,
Sikkim and Uttarakhand.

CALCULATION OF AGGREGATE TURNOVER:

 Aggregate turnover is the determining factor for ascertaining whether a

dealer is liable for registration or not. Therefore, it becomes important to know
the items which are to be included/excluded at the time of computation of
aggregate turnover.

Turnover of all branches across India having a common Permanent Account

Number (PAN') has to be aggregated to determine whether a dealer is liable for
registration or not.

Example: A dealer 'X' has two offices - one in Delhi and another in Haryana. In order to
determine whether X is liable for registration or not, turnover of both the offices would be
taken into account and only if the same exceeds Rs 40 lakhs, Mr X is liable for registration.

IMPORTANT NOTE: Where a person having multiple places of business across

different states of India has one branch in any of the specified states for which lower
limits have been prescribed, the threshold limit for GST registration will be reduc ed
to the lower limit.

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All kinds of outward supplies (taxable as well as exempt) made during the financial year have to be
considered at the time of computation of aggregate turnover. It is immaterial whether tax is payable under
forward charge or reverse charge on such supplies.

Example: Rohan Oils, Punjab, is engaged in supplying machine oil as well as petrol. Supply of petrol is
not leviable to GST, but supply of machine oil is liable to GST. In order to determine whether Rohan Oils
is liable for registration, turnover of taxable as well as non-taxable supplies would be taken into account
and if the same exceeds Rs 40 lakhs, Rohan Oils is liable for registration.

 However, any tax chargeable under GST law as well as value of inward supplies on which tax is
payable by the person under reverse charge shall be excluded at the time of computation of aggregate
turnover .

INCLUSIONS EXCLUSIONS
Following Outward Supplies Made By All Entities 1. CGST
Registered Under Same PAN across India: 2. SGST/UTGST
3. IGST
1. Non-Taxable Supplies (Goods) 4. GST Compensation Cess
2. Exempt Supplies (Goods/Services) 5. Value of Inward Supplies on Which Tax Is
3.Taxable Supplies (Goods/Services) Payable By the Person under Reverse Charge
4. Export supplies (goods/servces)

PERSONS NOT LIABLE FOR REGISTRATION

(Section 23 of CGST Act)

Person engaged
Agriculturist limited to
exclusively in supplying
supply of produce out of
goods /services/both not
liable to tax / wholly cultivation of land
exempt from tax
Persons making inter state
taxable supplies of notified
handicraft goods upto 20
lakhs Casual Taxable persons
Persons making inter making inter state
state supplies of
taxable supplies of
taxable services upto notified handicraft
20 lakhs
goods upto 20 lakhs

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COMPULSORY REGISTRATION IN CERTAIN CASES
{Section 24 of CGST Act}

Person receiving
Casual taxable supplies on which tax is
Inter - state person payable by recipient on
Supplier reverse charge basis

A person who
Person/class supplies on behalf
Non-resident taxable of persons
persons of some other
notified by the taxable person (i.e.
Central/State an Agent of some
Government Principal)

PROCEDURE FOR REGISTRATION

(Section 25 of CGST Act)

TIME LIMIT FOR OBTAINING REGISTRATION:

> Every person who is liable for registration has to apply within 30 days from the date on
which he becomes liable for registration, in such manner and subject to such
conditions, as may be prescribed.
> Further, every person who makes a supply from the territorial waters of India shall
obtain registration in the coastal State/Union Territory where the nearest point of the
appropriate base line is located.
Example: Sugam Services Ltd is engaged in taxable supply of services in Madhya Pradesh.
The turnover of Sugam Services Ltd exceeded Rs 20 lakhs on 1st November .the effective
date of registration of Sugam Services Ltd shall be 1st November. It is liable to get itself
registered by December in the State of Madhya Pradesh.

EFFECTIVE DATE OF REGISTRATION:

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If an application for registration is submitted within the prescribed time period of 30 days,
the effective date of registration shall be the date on which he becomes liable for
registration.
Example: Sugam Services Ltd is engaged in taxable supply of services in Madhya Pradesh.
The turnover of Sugam Services Ltd exceeded Rs 20 lakhs on 1 November, If an application
for registration is made on 28 November (ie within the prescribe period of 30 days), the
effective date of registration of Sugam Services Ltd shall be 1st November.

 If an application for registration is submitted after the prescribed time period of 30

days, the effective date of registration shall be the date of grant of registration
Example: If in the above example sugam services ltd applies for registration on 3rd
December (ie after the prescribed time of 30 days)and registration certificate is granted on
10th December ,the effective date of registration of Sugam services ltd shall be 10 th
December.
Where and by when to apply for registration?

Person who is liable to be registered A casual taxable person or a non-

under section 22 or section 24 resident taxable person
• in every such State/UT in which he is
so • in every such State/UT in which he is so
liable liable
• within 30 days from the date on • at least 5 days prior to the
which he becomes liable to commencementofbusiness
registration

STATE-WISE REGISTRATION
ONE REGISTRATION PER STATE:
 Under GST, there is no concept of centralized registration as registration needs to be
taken state-wise. A business entity having its branches in multiple states will have to take
separate state-wise registration for all it’s branches.
 However, if an entity has multiple branches within a particular state, a single
registration can be obtained wherein one branch has to be declared as principal place of
business whereas the other branches can be declared as additional places of business.

DISTINCT PERSONS / ESTABLISHMENTS OF DISTINCT PERSONS:

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Where a person has obtained/is required to obtain registration in any State/Union
Territory in respect of an establishment and such person has another establishment in any
other State/Union Territory, such establishments shall be treated as establishments of two
distinct persons for the purposes of GST law and both the establishments shall be required
to be registered separately.

Example: A businessman has a head office in Delhi and he has a branch office in Mumbai
and goods are supplied to various customers from the head office as well as the branch
office. In such a situation, both the head office and the branch office are to be registered
separately under the Delhi SGST & Maharashtra SGST law respectively.

SEPARATE REGISTRATION FOR MULTIPLE PLACES OF BUSINESS

WITHIN A STATE /UNION TERRITORY:
 Generally, only a single registration is required for one State/Union Territory.
However, Section 25 of CGST Act provides a dealer an option to obtain separate
registrations for each place of business within a State/Union Territory.
 Any person having multiple places of business within a State or a Union Territory,
requiring a separate registration for any such place of business shall be granted separate
registration in respect of each such place of business subject to the following conditions:
 Such person shall not pay tax under composition scheme provided u/s 10 for any
of his places of business if he is paying tax as per regular scheme for any other place of
business_

 All separately registered places of business of such person shall pay tax on supply of
goods or services or both made to another registered place of business of such
person and issue a tax invoice or a bill of supply, as the case may be, for such supply.
 Where any place of business of a registered person that has been granted a separate
registration becomes ineligible to pay tax as per composition scheme, all other
registered places of business of the said person shall also become ineligible to pay
tax as per composition scheme.

REGISTRATION - SPECIAL CASES:

REGISTRATION UNDER COMPOSITION LEVY:
Already Discussed Under 'Chapter 4 - Composition Scheme'

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VOLUNTARY REGISTRATION:
Person not liable to be registered under sections 22/24 may get himself registered voluntarily.

UNIQUE IDENTITY NUMBER (UIN):

• In respect of supplies to some notified agencies of United Nations organisation, multinational
financial institutions and other organisations, a UIN is issued.
• The proper officer may, upon submission of an application in prescribed form or
after receiving a recommendation from the Ministry of External Affairs, Government of
India, assign a UIN to the said persons and issue registration certificate within 3 working
days from the submission of application.

SUO-MOTO REGISTRATION BY PROPER OFFICER:

 Where, pursuant to any survey, enquiry, inspection, search or any other
proceedings under CGST Act, the proper officer finds that a person liable to registration
under the Act has failed to apply for such registration, such officer may suo-moto
register the said person on a temporary basis and issue an order in prescribed form.

Such person shall either:

 submit an application for registration in prescribed form within 90 days from the
date of grant of temporary registration: or
 file an appeal against such temporary registration (If the appellate authority rejects
the appeal so filed, application for registration shall be submitted within 30 days from
the date of issuance of such order).
REGISTRATION OF SEZ DEVELOPER / SEZ UNITS:
 SEZ is a geographically bound zone where the economic laws relating to export and
import are more liberal as compared to other parts of the country. SEZ is considered
to be a place outside India for all tax purposes.
 SEZ Developer/SEZ Units are required to make a separate application for
registration as a business vertical distinct from their other units located outside SEZ.

Example: Suvarna Industries is engaged in manufacturing activities in Uttar Pradesh. It has

two manufacturing units in Uttar Pradesh - one in SEZ and another outside SEZ. Under GST,
one registration per state is required. However, since in this case, one of the two units of
Suvarna Industries is located in SEZ, it will make a separate application for registration as a
business vertical distinct from unit located outside SEZ.

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STEPS INVOLVED IN OBTAINING REGISTRATION CERTIFICATE:
Step 1: Every person liable to get registered and a person seeking voluntary registration
shall, before applying for registration, declare his Permanent Account Number (PAN),
mobile number, e-mail address, State/UT in Part A of Form GST REG-01 on GST Common
Portal (www,gst,gov.in).

Step 2: Verification Of PANE-mail Address & Mobile Number:

 E-mail address and mobile number declared by the person shall be verified through
an OTP.
 PAN declared by the person shall be validated online through CBDT
database.

Once the above-mentioned particulars are verified, a Temporary Reference Number (TRN')
is generated and communicated to the applicant on the validated mobile number and e-
mail address,
Step 3: The applicant shall make use of the TRN so generated to electronically submit
application in Part B of Form GST REG-01 on GST Common Portal, along with specified
documents.
Step 4: On receipt of such application, an acknowledgement in the prescribed form shall be
issued to the applicant electronically, Thereafter, the application shall be forwarded to the
proper officer.

Step 5: The proper officer shall examine the application and accompanying documents and
if the some are found in order, he shall approve the application within 3 working days from
the date of submission of application and grant registration certificate in FORM GST REG-
06.

Step 6: If the proper officer is of the opinion that the documents areincomplete/inaccurate,
he shall issue a notice electronically within 3 working days from the date of receipt of
application seeking clarification, information or documents from the applicant.

 Where the applicant furnishes requisite clarification/information/documents to the

satisfaction of the proper officer within 7 working days from the date of receipt of
notice, the proper officer shall approve the application and grant registration certificate
in FORM GST REG-06 within 7 working days from the date of receipt of
information/clarification/documents.
 Where the applicant fails to furnish requisite clarification/information/documents
within 7 working days from the date of receipt of notice or

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clarification/information/documents furnished by him are not found to be satisfactory,
the proper officer shall reject the application for reasons to be recorded in writing.
 Where the proper officer fails to take any action:
 within 3 working days from the date of submission of the application; or
 within 7 working days from the date of receipt of clarification, information or
documents furnished by the applicant,
the application for grant of registration shall be deemed to have been approved.

Special procedure for registration of CTD and NRTD

CASUAL TAXABLE PERSON NON RESIDENT TAXABLE PERSON

A Casual taxable person is one who has a
registered business in some State in India, but
wants to effect supplies from some other State
in which he is not having any fixed place of A Non Resident Taxable person is one who
business. is a foreigner and occasionally wants to
effect taxable supplies from any state in
Such person needs to register in the State India and for that he needs GST registration.
from where he seeks to supply as a Casual
taxable person.

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Cancellation or suspension of registration and revocation of

cancellation of registration

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Procedure for cancellation

Where the registered person Where the proper officer cancels

applies for cancellation the registration

Revocation of cancellation

**Period and manner of suspension of registration

Further, w.e.f. 01.02.2019, new rule 21A of the CGST Rules, 2019 has been inserted vide NNo.
03/2019

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CT dated 29.01.2019 which lays down the period and manner of suspension of registration
as follows:
(1) Where registered person has applied for cancellation of registration: Where a
registered person has applied for cancellation of registration, the registration
shall be deemed to be suspended from:
(a) the date of submission of the application or
(b) the date from which the cancellation is sought,
whichever is later, pending the completion of proceedings for cancellation of
registration.
(2) Where cancellation of the registration has been initiated by the Department on
their own motion: Where the proper officer has reasons to believe that the
registration of a person is liable to be cancelled, he may, after affording the said
person a reasonable opportunity of being heard, suspend the registration of such
person w.e.f. a date to be determined by him, pending the completion of the
proceedings for cancellation of registration.
(3) A registered person, whose registration has been suspended as above: I shall not
make any taxable supply during the period of suspension and I shall not be
required to furnish any return under section 39.
(4) The suspension of registration shall be deemed to be revoked upon completion of
the cancellation proceedings by the proper officer. Such revocation shall be
effective from the date on which the suspension had come into effect.

Amendment of Registration

(c)

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RETURNS

Modes of filing returns

All the returns are to be filed online.
Modes of filing return

LIST OF STATEMENTS / RETURNS UNDER GST

RETURN PERIODICITY/DESCRIPTIO WHO FILES? DATE FORFILING

N
Monthly Statement of Registered person 10th of the next
Outward supplies of with annual aggregate month
goods and/or services turnover greater than
` 1.5 crore
GSTR-1
th
Quarterly Statement of Registered person 10 of the month
Outward supplies of with annual aggregate succeeding the
goods and/or services turnover up to ` 1.5 quarter
crore
Monthly return for a Registered person 20th of the next
GSTR-3B
normal taxpayer month

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Return for a financial Registered person 18TH of the
year paying tax under month
composition scheme/ succeeding the
GSTR-4
Notification quarter
No.2/2019 CT (R)
dated 07.03.2019
GSTR-5 Monthly return Non-resident Taxpayer 20th of the next
month or within
7 days after
expiry of
Registration,
whichever is
earlier.
GSTR-9 Annual return Registered person 31st December
other than an ISD, of the next
tax deductor/tax financial year
collector, casual
taxable person and a
non-resident
taxpayer
GSTR-10 Final return Taxable person Within three
whose registration months of the
has been date of
surrendered or Cancellation or
date of order of
cancelled cancellation,
whichever is
later.

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DUE DATE OF PAYMENT OF TAX

 Payment should be made on or before 20th of

Due date
every month
of
payment  for registered persons paying tax under
composition scheme/Notification CT(R) dated
of tax
07.03.2019, payment for a quarter should be made
on or before 18th of the month succeeding the
quarter.

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Annual return

Annual Return

Revision of returns

There is no mechanism of filing revised returns for

any correction of errors / omissions.

The rectification of errors / omissions is allowed in

the subsequent returns .

However, no rectification is allowed after the due date for

furnishing the return for the month of September following the
end of financial year to which such details pertain or furnishing of
the relevant annual return whichever is earlier.

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Late fee for delay in filing of returns

Any registered person

who fails to furnish is liable to pay subject to a maximum
statements, returns u/s a late fee of of 5000 under CGST
39 and final return by 100 per day Act
the due dates

subject to a

Any registered person maximum of

shall be liable
who fails to furnish the 0.25% of his
to pay a late
annual return by the turnover in the
fee of 100 per
due date state / union
day.
territory, under
the CGST Act.

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Who is required to furnish the details of outward supplies?

all registered
PERSONS persons
REQUIRED including
TO FILE casual
GSTR-1 registered
person

What is the form for submission of details of outward supplies?

The details of outward supplies are required to be furnished electronically,
Form GSTR-1. Such details can be furnished through the common portal, either
directly or from a notified Facilitation Centre.

What is the due date of submission of GSTR-1?

AS MENTIONED ABOVE CHART.

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What are the contents of GSTR-1?

CONTENTS OF GSTR-1

BASICS AND OTHER DETAILS DETAILS OF OUTWARD SUPPLIES

• GSTIN
• Legal name and Trade
• B2B
name
• Aggregate turnover in • B2C
previous year ZERO RATED AND
• Tax period DEEMED EXPORTS
• HSN-wise summary • DEBIT/CREDIT NOTE
of outward ISSUED
supplies
• NIL RATED /EXEMPTED/
• Details of documents
issued NON GST

• Advances • AMENDMENTS FOR PRIOR

adjusted PERIOD

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What kind of details of outward supplies are required to be
furnished in GSTR-1?

SR. NO INVOICE WISE CONSOLIDATED DEBIT AND

DETAILS DETAILS OF ALL CREDIT NOTES

(i) Inter-State and Intra-State Issued during the

Intra-State supplies made to month for
supplies made to unregistered invoices issued
registered persons for each previously
persons rate of tax
(ii) Inter state Inter state
supplies made supplies made
to unregistered to unregistered
persons with persons with
invoice value invoice value
exceeding upto 2,50,000
2,50,000 for each rate
of tax
separately for
each state.
Indication of HSN details

Annual turnover in the preceding Number of Digits

financial year of HSN Code

Upto ` 1.5 core NIL

More than ` 1.5 crore and upto ` 5 crore 2

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More than 5 crore 4

Communication of details of GSTR-1 to the recipient of supply

The details of outward supplies for a month furnished by the supplier are
communicated and made available electronically (auto populated) to the respective
recipient(s) in Part A of Form GSTR- 2A/ Form GSTR-4A (in case of registered person
opting for composition levy/Notification No. 2/2019 CT(R) dated 07.032019)
through the common portal after the 10th day of the succeeding month (due date
of filing of GSTR-1).

How are the details of outward supply furnished in prior periods amended?
[Section 37(3)]

(a) Scope of amendment/ correction entries

Tables 9, 10 and 11(II) of GSTR-1 provide for amendments in details of taxable outward supplies
furnished in earlier periods (hereinafter referred to as “Amendment Table”). The details of original
debit notes/ credit notes / refund vouchers issued by the tax-payer in the current tax period as also
the revision in the debit notes/ credit notes / refund vouchers issued in the earlier tax periods are
required to be shown in Table 9 of the GSTR-1.

Ordinarily, in Amendment Table, the suppler is required to give details of original invoice (No and Date),
the particulars of which have been wrongly entered in GSTR-1 of the earlier months and are now
sought to be amended. However, it may happen that, a supplier altogether forgets to include the
entire original invoice while furnishing the GSTR- 1 for a particular month.

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In such cases also, he would be required to show the details of the said missing invoice which was issued
in earlier month in the Amendment Table only, as such type of errors would also be regarded as data
entry error.

by way of

GSTR-1
of GSTR-1 of

periods

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(b) Rectification of errors
If the supplier discovers any error or omission, he shall rectify the same in the tax period during which
such error or omission is noticed, and pay the tax and interest, if any, in case there is short payment,
in the return to be furnished for such tax period.

(c) Time limit for rectification

Suppose for some reason, supplier could not make correction at the time of filing of GSTR-1 for the
month of October then he can make such amendments in the subsequent periods.

However, the maximum time limit within which such amendments are permissible is
earlier of the following dates:
Date of filing of monthly return u/s 39 for the month of September following
the end of the financial year to which such details pertain or
Date of filing of the relevant annual return .

Basic Details Other details relating to

supplies
GSTIN Summarised details of outward
Legal name of the supplies and inward supplies
liable to reverse charge
registered person
Summarised details of inter-
Tax period State supplies made to
unregistered
composition taxable persons
and UIN holders
Eligible ITC
Values of exempt, nil-rated and
non-GST inward supplies
Payment of tax
TDS/TCS credit

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CONTENTS OF GSTR- 4

Details regarding Inward and

Basic & Other Details
Outward Supplies

GSTIN Invoice-wise details of all

Legal name and Trade name inward supplies (i.e., intra and
TDS/TCS credit received inter-State supplies and from
[Table 7] registered and unregistered
Tax, interest, late fee persons) including reverse
payable and paid [Table 8] charge supplies and import of
Refund claimed from services [Table 4]
Summary of self assessed
Electronic cash ledger
liability as per GST CMP-08
[Table 9] (Net of advances, credit & debit
notes and any other
adjustments due to
amendments etc.) [Table 5]
Tax rate wise details of outward
up nw
reverse charge (Net
of advances,, credit & debit
notes and any other
adjustments due to
amendments etc.) -
Consolidated details of outward
supplies [Table 6]

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Time limit for making rectification

account
of
ion in

activities

Maximum time limit for rectification

DUE date for filing return for
September of next FY

OR

Whichever is earlier

The maximum time limit within which the rectification of errors/omissions is permissible is earlier
of the following dates:
Due date of filing of return for the month of September following the end of the financial
year [i.e., 20th October of next financial year] or
Actual date of filing of the relevant annual return.

The last date of filing of annual return for a financial year is 31st December of next financial year. Hence, if annual
return for the year 2017-18 is filed before 20th October 2018, then no rectification of errors/omissions in
returns pertaining to FY 2017-18 would be permitted thereafter.

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PAYMENT OF TAX

DEFINITIONS OF CERTAIN KEY TERMS

Output
Tax

excludes

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Payments to be made in GST regime

For Intra-state supply

For Inter-state supply

Wherever applicable

Key Features of Payment process

Electronically generated challan from GSTN common portal in all modes of
payment and no use of manually prepared challan;
Facilitation for the tax payer by providing hassle free, anytime,
anywhere mode of payment of tax;
Convenience of making payment online;
Logical tax collection data in electronic format;
Faster remittance of tax revenue to the Government Account;
Paperless transactions;
Speedy Accounting and reporting;
Electronic reconciliation of all receipts;

Simplified procedure for banks;

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warehousing digital challan
What are E-Ledgers/register?

Electronic Ledgers or E-Ledgers are statements of cash and input tax credit in
respect of each registered taxpayer. In addition, each taxpayer shall also
have an electronic tax liability register.

Types of Electronic ledgers/register

ELECTRONIC
CASH LEDGER

ELECTRONIC
LEDGERS

ELECTRONIC ELECTRONIC
LIABILITY CREDIT
LEDGER LEDGER

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A. Electronic Cash Ledger

Modes of Deposit in Electronic Cash Ledger

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Major and Minor Heads of Payment

OF THESE MAJOR HEADS

HAVE THE FIVE
FOLLOWING MINOR
MAJOR HEADS
HEADS
IGST MINOR HEADS
CGST  TAX
SGST/UTGST  INTEREST
CESS  PENALTY
 FEES
 OTHERS

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Date of deposit of tax dues

Which date is considered as date of depositof tax dues ?

1 Date of presentation of cheque ×

2 Date of payment ×

3 Date of credit of amount in the account of √

government

A. Electronic credit ledger

Order of utilisation of input tax credit available in electronic credit
ledger

ITC Order of utilisation

(1) (2)

IGST IGST CGST/SGST/UTGST- any proportion

ITC of IGST to be completely exhausted mandatorily

CGST CGST IGST

ITC of CGST has been utilized fully

SGST/UTGST SGST/UTGST IGST

The CGST credit cannot be utilized for payment of SGST/UTGST. The

SGST/UTGST credit cannot be utilized for payment of CGST.

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Electronic liability register

Manner of making payment

Through debit of Electronic In cash, by debit in the

Credit ledger Electronic cash ledger

Through debit of Credit Ledger Payment can be made in cash, by debit in

of the tax payer maintained on the Cash Ledger of the tax payer
the Common portal – ONLY Tax can maintained on the common portal.
be paid.

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E-Ledgers/Register

ELECTRONIC CASH 
LEDGER

ELECTRONIC 
CREDIT LEDGER


ELECTRONIC
LIABILITY LEDGER

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Interest on delayed payment of tax [Section 50]

Payment of Tax via Electronic Ledger

A. Electronic Cash Ledger

(Assume it as an account statement provided by bank, for easy understanding)

Debit Amount (DR) Credit Amount (CR)

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 Credit amount of this ledger may be  Any deposit made towards tax,
used for payment of tax, interest, interest, penalty, late fee
fees etc. etc. via internet banking,
 Remaining credit balance amount after RTGS, fund transfer etc.
payment of above tax etc. will be  TDS/TCS claimed
refunded to taxable person.

Electronic Credit ledger

Debit Amount (DR) Credit Amount (CR)

 Credit amount of this ledger may  Input Tax credit as self-

be used for payment of output assessed in the return in the
tax viz IGST, CGST, SGST, form of IGST, CGST, SGST,
UTGST in the prescribed order. UTGST

Electronic Liability Register

Debit Amount (DR) Credit Amount (CR)

 Amount payable towards tax,

interest, fees etc.
 Tax or interest payable  Electronic cash ledger

 Any other dues

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 Amount payable towards output tax  Electronic credit ledger

Transfer of input tax credit [Section 53 of CGST Act & section 18 of IGST Act]

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USED FOR
PAYMENT
OF CGST

USED FOR
PAYMENT
OF UTGST

ITC OF IGST

Amount
equivalent to
USED FOR
ITC so used is
PAYMENT
transferred by
OF SGST
CG from IGST
account to the
respective
SGST amount
of state
government.

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TAX INVOICE , CREDIT / DEBIT NOTE , E-WAY BILL
WHO CAN RAISE A TAX INVOICE ?
1) SUPPLYING TAXABLE GOODS OR SERVICES

2) RECEIVING TAXABLE GOODS OR SERVICES FROM UNREGISTERED SUPPLIER

Time limit for issuance of invoice

TAXABLE
SUPPLY

SERVICES
GOODS

SALE OR WITHIN 30
INVOLVING NO
RETURN DAYS FROM
MOVEMENT MOVEMENT
SUPPLIES SUPPLY OF
OF GOODS OF GOODS
SERVICES

AT THE AT THE BEFORE OR AT

THE TIME INSURANCE,BANK
TIME OF TIME OF
DELIVERY SUPPLY OR ING - 45 DAYS
REMOVAL
WITHIN 6
MONTHS FROM
THE REMOVAL,
WHICHEVER IS
EARLIER
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IN CASE OF
• before/at the time each
CONTINUOUS
successive statements of
SUPPLY OF accounts is issued or
GOODS each successive payment
is received

due date of payment is

on/before due date of
ascertainable from the
payment
contract

IN CASE OF
CONTINUOUS
SUPPLY OF before/at the time of
not so ascertainable
SERVICES receipt of payment

payment is linked to the on/before the date of

completion of an event completion of that event

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Important contents of tax invoice

Consecutive
Serial Name and
GSTIN of address of
GSTIN of Number &
receipient,if receipient,
supplier date of issue
registered if not
registered

DESCRIPTION
HSN OF GOODS QUANTITY TOTAL
OR SERVICES IN CASE VALUE OF
OF SUPPLY
GOODS

TAXABLE TAX RATE-

VALUE OF CENTRAL
SUPPLY AMOUNT
TAX AND PLACE OF
OF TAX
STATE TAX SUPPLY
CHARGED
AND
INTEGRATED
TAX,CESS

ADDRESS
OF TAX SIGNATURE
DELIVERY PAYABLE OF
WHERE ON AUTHORISED
DIFFERENT REVERSE SIGNATORY
THAN CHARGE
PLACE OF BASIS
SUPPLY

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MANNER OF ISSUING THE INVOICE

Supply of Goods Supply of services

Triplicate Duplicate
Original copy for recipient Original copy for recipient; and
Duplicate copy for transporter; and Duplicate copy for supplier
Triplicate copy for supplier

The serial number of invoices issued during a month / quarter shall be

furnished electronically in FORM GSTR-1.

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Revised Tax
Revised Tax Invoices to be issued in respect of taxable
supplies effected during this period

Date of issuance of
certificate of registration

Consolidated Revised Tax Invoice (CTRI) may be issued in respect of taxable supplies made to
an unregistered recipient during this period

In case of inter-State supplies, CTRI cannot be issued in respect of all unregistered recipients if
the value of a supply exceeds 2,50,000 during this period.

PARTICULARS OF DEBIT AND CREDIT NOTE ARE ALSO SAME AS REVISED TAX INVOICE

CONSOLIDATED TAX INVOICE

TAX INVOICE IS NOT REQUIRED TO

VALUE OF SUPPLY < 200 CONSOLIDATED TAX

INVOICE SHALL BE
ISSUED FOR SUCH
SUPPLIES AT THE CLOSE
BE ISSUED

RECIPIENT IS UNREGISTERED OF EACH DAY IN

RESPECT OF ALL SUCH
SUPPLIES

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RECEIPIENT DOES NOT
REQUIRED SUCH INVOICE

Reverse Charge Mechanism

A registered person, who is liable to pay tax under the Reverse Charge Mechanism, shall issue an
invoice in respect of the goods / services so received by him from the supplier, who is not
registered on the date of receipt of goods / services / both, and he shall issue a payment voucher
at the time of making payment to such supplier.

BILL OF SUPPLY

SUPPLYING EXEMPTED GOODS

OR SERVICES OR BOTH
REGISTERED PERSON

TAX BILL OF
INVOICE SUPPLY
PAYING TAX UNDER
COMPOSITION LEVY

PAYING TAX UNDER

CONCESSIONAL RATE UNDER
NOTIFICATION NO.02/2019
CT(R)

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RECEIPT VOUCHER

Advance payment

Receipt Voucher

Where at the time of receipt of advance, rate of tax/ nature of supply is not determinable

Where at the time of receipt of

advance

(i) rate of tax is not tax shall be paid at the rate of

determinable 18%

(ii) nature of supply is not same shall be treated as inter-

determinable State supply

REFUND VOUCHER

Advance payment

Receipt Voucher
Supply

Tax Invoice
Refund Voucher

Credit / Debit Notes

Under Section 2(37) of Central goods & Services tax Act, 2017, “credit note” means a document issued
by a registered person under sub-section (1) of section 34.

Under Section 2(38) of Central goods & Services tax Act, 2017, “debit note” means a document issued by
a registered person under sub-section (3) of section 34.

Where a tax invoice has been issued for supply of goods / services / both, and where the taxable value in the
invoice is greater than the taxable value of supply; the tax charged per invoice is greater than the tax payable in

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respect of such supply; OR where the goods so supplied have been returned by the recipient OR where the goods
/ services have been found to be deficient; in these cases, the registered supplier may issue a credit note to the
recipient.

Where a tax invoice has been issued for supply of goods / services / both, and where the taxable value in
the invoice is less than the taxable value of supply; the tax charged per invoice is less than the tax
payable in respect of such supply; the registered supplier may issue a debit note to the recipient.

Declaration

Any registered person who has issued a credit note, in relation to supply of goods / services / both, must declare
the details of such credit note, in the return for the month during which such credit note was issued, but not later
than:

a) September following the end of Financial Year in which the supply was made OR
b) Date of furnishing the relevant annual
return whichever is earlier.
No reduction in tax liability of the supplier shall be permitted, if the incidence of tax on such supply has
been passed on to any other person.

Any registered person who has issued a debit note, in relation to supply of goods / services / both, must
declare the details of such debit note, in the return for the month during which such debit note was
issued. The tax liability can be adjusted upwards appropriately.

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CREDIT NOTE

or
both

found to be
deficient

Registered Supplier
of goods or services
or both credit notes for
supplies made in a
FY

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DEBIT NOTE

services or both

Registered Supplier may issue one or more

of goods or services debit notes for
or both supplies made in a
FY

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ELECTRONIC WAY BILLS [SECTION 68 OF CGST ACT, 2017]

Meaning of e-way E-way bill is an electronic document generated on the GST

bill and why is it portal evidencing movement of goods.
required? Section 68 mandates that the Government may require the
person in charge of a conveyance carrying any consignment
of goods of value exceeding such amount as may be
specified to carry with him such documents and such
devices as may be prescribed. Rule 138 of CGST Rules, 2017
prescribes e-way bill as the document to be carried for the
consignment of goods in certain prescribed cases.

E-way Bill is mandatory in case of movement of goods of

When is required to
consignment value exceeding ` 50,000.
be generated?
Movement should be:
(i) in relation to a supply; or
(ii) for reasons other than supply; or
(iii) due to inward supply from an unregistered person,
Registered person causing movement of goods shall furnish
the information relating to the said goods in Part A of Form GST
EWB-01 before commencement of such movement.

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Exceptions to minimum consignment value of `

50,000
 Inter-State transfer of goods by principal to job- worker
 Inter-State transfer of handicraft goods by a person
exempted from obtaining registration

Details of conveyance In case of intra-State movement of goods upto 50 km

may not be furnished distance:
 from place of business (PoB) of consignor to PoB of
in Part- B
transporter for further transportation or
 from PoB of transporter finally to PoB of the
consignee.

Transfer of goods to In such cases, the transporter or generator of the e-way bill
another conveyance shall update the new vehicle number in Part B of the EWB
before such transfer and further movement of goods.

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Consolidated E-way After e-way bill has been generated, where multiple
consignments are intended to be transported in one
Bill in case of road
conveyance, the transporter may indicate the serial number of
transport e-way bills generated in respect of each such consignment
electronically on the common portal and a consolidated e-way bill
in Form GST EWB-02 may be generated by him on the said
common portal prior to the movement of goods.
Where the consignor/consignee has not generated the e- way bill in
Form GST EWB-01 and the aggregate of the consignment value of
goods carried in the conveyance is more than ` 50,000, the
transporter shall generate individual Form GST EWB-01 on the
basis of invoice or bill of supply or delivery challan and may also
generate a consolidated e-way bill in Form GST EWB-02
prior to the movement of goods [This provision is not yet
effective].

Cancellation of e- E-way bill can be cancelled if either goods are not

way bill transported or are not transported as per the details
furnished in the e-way bill. The e-way bill can be
cancelled within 24 hoursfrom thetime of generation.

Validity period of e- SR.NO. DISTANCE WITHIN VALIDITY PERIOD

COUNTRY FROM RELEVENT
way DATE
bill/consolidated e-
way bill 1. Upto 100 km Onedayincasesother
than Over Dimensional
Cargo**

2. FOR EVERY 100 KM Oneadditionaldayin

OR PART THEREOF cases other than Over
THEREAFTER Dimensional Cargo

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3. Upto 20 km One day in case of
Over Dimensional
Cargo
4. For every 20 km One additional
or part thereof day in case of Over
thereafter Dimensional
Cargo
Acceptance/rejection The person causing movement of goods shall generate the
of e-way bill e-way bill specifying the details of other person as a
recipient who can communicate the acceptance or
rejection of such consignment specified in the e-way bill. If the
acceptance or rejection is not communicated within 72hours
from the time of generation of e-way Bill orthe time of
delivery of goods whichever is earlier, it will be deemed
that he has accepted the details.

Documents/ devices  invoice or bill of supply or delivery challan

to be carried by a
person-in-charge of a  copy of the e-way bill in physical form or the e-way bill
conveyance number in electronic form or mapped to a RFID**
embedded on to the conveyance
Verification of Commissioner or an officer empowered by him in this behalf
documents and may authorise the proper officer to intercept any

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conveyances

Inspection and
verification of goods

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INPUT TAX CREDIT

INPUT TAX CREDIT

 Taxes paid on inward supply of inputs,
capital goods and services are called input
taxes.
 These may be Integrated GST, Central
GST, State GST or Union Territory GST.
Taxes paid under reverse charge
mechanism are also input taxes.
 The credit of the above taxes is called input
tax credit, that is, the taxes paid on inputs
Introduction
are available as a set off against the taxes
payable on outward taxable supplies.
 An unregistered person is not eligible to
take the benefit of ITC.
 Where any person claims that he is eligible
for input tax credit under this Act, the
burden of proving such claim shall lie on
such person.

ELIGIBILITY AND CONDITIONS FOR TAKING INPUT TAX CREDIT (

SECTION 16)

To be used in • Every registered person shall, subject to such conditions and

the course & restrictions as may be prescribed and in the manner specified in
furtherance section 49, be entitled to take credit of input tax charged on any
of his supply of goods or services or both to him which are used or
business intended to be used in the course or furtherance of his business.
and the said amount shall be credited to the electronic credit
in ledger of such person.
or
of

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Possession A registered person shall be entitled to the credit of any input tax in respect
invoice of any supply of goods or services or both to him if
 he is in possession of a tax invoice or debit note issued by a supplier
registered under this Act, or such other tax paying documents as may be
prescribed;
Goods of • he has the
Where received
goodsthe goodsanorinvoice
against services
areorreceived
both. in lots or instalments, the
received in
registered person shall be entitled to take credit upon receipt of the last
installments lot or installment.

Payment not • Where a recipient fails to pay to the supplier of goods or services or both,
made by other than the supplies on which tax is payable on reverse charge basis,
recipient the amount towards the value of supply along with tax payable thereon
within a period of one hundred and eighty days from the date of
issue of invoice by the supplier, an amount equal to the input tax
credit availed by the recipient shall be added to his output tax liability,
along with interest thereon, in such manner as may be prescribed:

• Provided also that the recipient shall be entitled to avail of the credit of
input tax on payment made by him of the amount towards the value of
supply of goods or services or both along with tax payable thereon.
No ITC if • Where the registered person has claimed depreciation on the tax
depreciation component of the cost of capital goods and plant and machinery under the
claimed provisions of the Income-tax Act, 1961, the input tax credit on the said tax
component shall not be allowed.

last date for A registered person shall not be entitled to take input tax credit in respect of
availing ITC
any invoice or debit note for supply of goods or services or both after
Section 16(4)
the due date of furnishing of the return under section 39 for the month of
September following the end of financial year to which such invoice or
invoice relating to such debit note pertains or
Date of furnishing of the relevant annual return,
whichever is earlier.

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Documents for
claiming ITC The input tax credit shall be availed by a registered person, including the
Input Service Distributor, on the basis of any of the following documents
(a) an invoice issued by the supplier of goods or services or both in
accordance with the provisions of section 31;
(b) an invoice issued under reverse charge
(c) a debit note;
(d) a bill of entry
(e) an Input Service Distributor invoice or Input Service Distributor credit
note.

Fraud etc.
No input tax credit shall be availed by a registered person in respect of any
tax that has been paid in pursuance of any order where any demand has been
confirmed on account of any fraud, wilful misstatement or suppression of facts.

Utilisation of IGST 1.IGST

ITC 2.CGST
3.SGST
CGST 1.CGST
2.IGST
SGST 1.SGST
2.IGST

1. The CGST shall not be utilised towards payment of SGST or UTSGT, and
2. The SGST/UTGST Tax shall not be utilised towards payment of CGST.
3. SGST /UTGST Credit shall be utilised towards payment of IGST, only when
the balance of the input tax credit on account of CGST is not available for
payment of integrated tax.
4. ITC of CGST & SGST/UTGST should be utilized for payment of IGST, CGST,
SGST/UTSGST only after the credit of IGST has been fully utilized towards
such payment.

APPORTIONMENT OF CREDIT AND BLOCKED CREDITS (Section 17)

Goods or services used

partly for the purpose of Where any such goods or services are partly used in the course
any business and or furtherance of the business and partly used for other purpose,
partly for other purposes. only proportionate credit to the extent used for the purpose of

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business shall be available

.
Goods or services used Where the goods or services or both are used by the registered
partly for effecting person partly for effecting taxable supplies including zero-rated
taxable supplies and partly supplies under this Act or under the Integrated Goods and
for exempt supplies. Services Tax Act and partly for effecting exempt supplies under
the said Acts, the amount of credit shall be restricted to so much
of the input tax as is attributable to the said taxable supplies
including zero-rated supplies.

Section 17 (4) Special

options for Banking Banking company or a financial institution including a non-banking
companies etc. financial company, engaged in supplying services by way of
accepting deposits, extending loans or advances shall have the
option to either comply with the provisions of sub-section (2), or
avail of, every month, an amount equal to fifty per cent. of the
eligible input tax credit on inputs, capital goods and input services
in that month and the rest shall lapse:
Provided that the option once exercised shall not be withdrawn
during the remaining part of the financial year:
Provided further that the restriction of fifty per cent shall not
apply to the tax paid on supplies made by one registered person to
another registered person having the same Permanent Account
Number.

Section 17 (5) Blocked

Credits- Cases when ITC Motor vehicles used to transport persons, having a seating
shall not be allowed capacity of less than or equal to 13 persons (including the
driver) and Services of general insurance, servicing, repair and
maintenance of aforesaid motor vehicles except when they are
used––
(i) for making the following taxable supplies, namely:
(a) further supply of such vehicles; or
(b) transportation of passengers; or
(c) imparting training and driving of such vehicles;
(d) for transportation of goods.

Vessels and Aircraft including leasing, renting or hiring thereof.

Services of general insurance, servicing, repair and maintenance of

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aforesaid vessels and aircrafts. except when they are used––
for making the following taxable supplies, namely:
(a) further supply of such vessels or aircrafts ; or
(b) transportation of passengers; or
(c) imparting training on driving, flying, navigating such vessels or
aircrafts
(d) for transportation of goods.

the following supply of goods or services or both:

(a) food and beverages, outdoor catering, beauty treatment,
health services, cosmetic and plastic surgery except where an
inward supply of goods or services or both of a particular category
is used by a registered person for making an outward taxable

supply of the same category of goods or services or both or as an

element of a taxable composite or mixed supply;
(b) membership of a club, health and fitness centre;
(c) rent-a-cab, life insurance and health insurance except where:
the Government notifies the services which are obligatory for an
employer to provide to its employees under any law for the time
being in force; or
such inward supply of goods or services or both of a particular
category is used by a registered person for making an outward
taxable supply of the same category of goods or services or both
or as part of a taxable composite or mixed supply; and

(d) travel benefits extended to employees on vacation such as

leave or home travel concession;

works contract services when supplied for construction of an

immovable property (other than plant and machinery) except
where it is an input service for further supply of works contract
service;

goods or services or both received by a taxable person for

construction of an immovable property (other than plant or
machinery) on his own account including when such goods or
services or both are used in the course or furtherance of business.

goods or services or both on which tax has been paid under

section 10;(Composition Supply Scheme)

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goods or services or both received by a non-resident taxable
person except on goods imported by him;
goods or services or both used for personal consumption;
goods lost, stolen, destroyed, written off or disposed of by way
of gift or free samples.
Any tax paid in accordance with the provisions of sections 74
(Tax not / short paid due to fraud etc), 129 (Detention , seizure
and release of goods and conveyance in transit) and 130
(confiscation of goods or conveyance and levy of penalty

AVAILABILITY OF CREDIT IN SPECIAL CIRCUMSTANCES [SECTION 18]

Sec. Persons eligible Goods entitled as on Conditions

18(a) Person who has applied He can claim the ITC on inputs ITC must be availed
for registration within 30 held in the form of Raw within one year from
days from the date on Materials /WIP the date of issue of tax
which he becomes liable / Finished Goods as on the day invoice by the supplier
to registration, and has immediately preceding the date
been granted such from which he becomes liable to
registration pay tax

18(b) Person who isn‘t liable to He can claim the ITC on inputs ITC must be availed
Register as per prescribed
section,but obtains held in the form of Raw within 1 year from the
voluntary registration Materials/ WIP/ Finished Goods as date of issue of tax
on the day immediately preceding invoice by the supplier
the date of registration

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18(c) Registered person who He can claim the ITC on inputs ITC on Capital Goods
ceases to be held in the form of Raw
under will be reduced by 5%
Materials/ WIP / Finished Goods &
composition levy and Capital Goods as on the day per quarter of year /
switches to the regular immediately preceding the date part thereof of usage
scheme
from which he becomes liable to from the date of
pay tax under the regular scheme
invoice.

18(d) Registered person whose He can claim the ITC on inputs ITC on Capital Goods
exempt supplies held in the form of
become will be reduced by 5%
Raw Materials/WIP/ Finished Goods
taxable per quarter of year /
& Capital Goods relatable to such
exempt supply as on the day part thereof of usage
immediately preceding the date from the date of
from which the supply becomes
taxable invoice.

1 Sec. 18 GST ITC – 01 Declaration for claim of ITC

2 Sec. 18 GST ITC – 02 Declaration for transfer of ITC in case of sale, merger,
demerger, amalgamation, lease or transfer of a
3 Sec. 18 GST ITC – 03 business
Declaration for intimation of ITC reversal/payment of
tax on inputs held in stock, inputs contained in semi-
finished and finished goods held in stock and capital
4 Sec. 19 GST ITC – 04 goods
Details of goods/capital goods sent to job worker and
received back

ILLUSTRATION 1
Mr. A orders 30000 tonnes of goods which are to be delivered by the supplier via 3 lots of
10000 each. The lots are sent under a single invoice with the first lot and the payment is
made by the recipient for Value of Supply plus GST and the supplier has also deposited the
tax with the Government.

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The 3 lots are supplied in May, June and July 2018. The ITC is available to Mr. A only after
the receipt of the 3rd lot. The reason is simple, one of the conditions to avail ITC is the
receipt of goods which is completed only after the last lot is delivered.
ILLUSTRATION 2
For an Invoice dated 31st July 2018, the same pertains to the financial year 2018-19.
Hence the return for month of September following the end of the financial year to which
such invoice relates is due on 20th October, 2019.
Let’s say that the annual return is filed on 12th August, 2019.
The ITC therefore needs to be claimed within 12th August, 2019, which is the earlier of the
two dates.

ILLUSTRATION 3
Mr. C acquired a Capital Asset on 1st April, 2017 and used it for production of exempt
supplies only. Now, in November 2018, his supplies become taxable. The cost of the asset
was INR 250,000 and GST 18% was charged on it.
Hence the ITC applicable is INR 250,000*18%, which is INR 45,000.
Now, number of quarters of usage that have elapsed between April 2017 to
November 2018 are: seven. Hence, there would be a reduction of 5% per quarter for
7 quarters, that is 35%.
Therefore, ITC available would be as under.
Total ITC 4500
Less: Redn for 7 0
1575
quarters
Net ITC available 0
2925
0
Note that this ITC would be available from the date immediately preceding the date from
which the supply becomes taxable.
Rule 40(2) of CGST RULES, 2017, states that the amount of credit shall be calculated by
reducing the input tax @ 5% for every quarter or part thereof. It shall be calculated from
the date of issue of invoice for the capital goods

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CUSTOMS
RULES AND REGULATION
The rule making power is delegated to the Central Government while the regulation
making power delegated to the Central Board of Indirect Taxes and Customs (CBIC).
Differences between Rules and Regulations

Parameter Rules Regulations

Power to make Section 156 Section 157
Content Transaction The form
Value;Chargeability of of Bill of Entry; shipping
bill; bill of export; import & export
accessories & Repairs & manifest; form & manner of making
Maintenance Spare Parts; application for refund of duty;
Detention & Confiscation conditions for transhipment &
removal of good without payment of
of Goods; Goods mentioned in the
duty; manner of conducting audit of
shipping bill / Bill of Export but
duty assessment of imported /
either not exported OR exported
exported goods
and subsequently re-landed;

DEFINITION (SECTION 2)

Section 2 of the Customs Act, 1962 contains the definitions of various terms used at
various places in the Act. Conveyance : Section 2(9) :- Includes vessels (by sea), an
aircraft (by air), and a vehicle (by land).

Customs Area : Section 2(11) :- Area of a customs station or a warehouse and includes
any area in which imported goods or export goods are ordinarily kept before clearance by
Customs Authorities.
Customs Station : Section 2(13) :- Any customs port, customs airport, international
courier terminal, foreign post office or land customs station.
Foreign going Vessel / Aircraft : Section 2(21) :-Vessel or aircraft for carriage of goods /
passengers between any port / airport in India and any port / airport outside India
whether touching any intermediary location or not, and includes :
a) Any naval vessel of any foreign government taking part in any naval exercises;

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b) Any vessel engaged in fishing or any other operations outside the territorial waters
of India;
c) Any vessel or aircraft proceeding to a place outside India for any
purpose whatsoever. Import : Section 2(23) :- Bringing in to India from a
place outside India.
Imported Goods : Section 2(25) :-Any goods brought into India from a place outside India
but doesn’t include Goods which have been cleared for home consumption.
Importer : Section 2(26) :- Importer, in relation to any goods, at any time between their
importation, and the time when they are cleared for home consumption, includes any
owner, beneficial owner or any person holding himself out to be the importer.
Prohibited Goods : Section 2(33) :- Any goods, the import or export of which is
prohibited by the Customs Act or any law for the time being in force, but doesn’t include
any goods, in respect of which the conditions subject to which the goods are permitted to
be imported or exported have been complied with.
Warehouse : Section 2(43) :- A public warehouse licensed under section 57 or a private
warehouse licensed under section 58 or a special warehouse licensed under section 58A.

LEVY AND COLLECTION OF CUSTOM DUTIED

Levy of and Exemption from Customs Duty
Goods become liable for import OR export duty when Goods are Imported into India OR
Exported out of India. Levy is the stage where the declaration of such liability is made and
the persons / properties in respect of which the duty is to be levied is identified. If the
Central Government is satisfied that it is necessary in the public interest to do so, it may, by
notification in the Official Gazette, exempt generally either absolutely or subject to such
conditions (pre-clearance) as may be specified in such notification, goods of the specified
description, from the whole or any part of the customs duty leviable thereon. An exemption
notification cannot be withdrawn and duty cannot be demanded with retrospective
method.

TYPE OF CUSTOM DUTIES

Import Duty
a) Basic Customs Duty
i) Levied as a percentage of value as determined under section 14(1)
ii) Could be levied at “Standard” OR “Preferential Rates” (where imported from a
preferential area as may be specified by the Government)

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iii) Onus is on the person (owner) to substantiate with the supporting evidence
that the goods are chargeable with a preferential rate of duty
b) Additional Customs Duty / Countervailing Duty (CVD)
i) It is equivalent to the amount of excise duty on like goods manufactured /
produced in India
ii) Under the GST regime, this duty is subsumed under GST and additional duty /
IGST is payable on assessable value plus basic customs duty
iii) In case of alcoholic liquor for human consumption is imported into India, the same
is still under state excise which has not been subsumed under GST. Therefore,
IGST is not leviable under Import
iv) In case inward taxable supplies are in the nature of Imported Goods, which
have been taxed and have been consumed in the manufacture of outward
taxable supplies, Input Tax Credit is available to the extent of IGST paid
c) Additional Duty / Special Additional Duty (SAD)
i. It used to be levied to offset the Sales Tax / VAT
ii. However, this has now been subsumed under GST and as such is leviable only
on imported goods for which GST is not applicable (example : Petroleum
Products)

PROVISION UNDER GOODS & SERVICES TAX(GST)

The goods imported in to India, are now subject to IGST and not CVD or SAD. However,
petroleum is outside the scope of GST, and hence CVD and SAD are applicable to them. IGST
is now payable on Assessable Value + Basic Customs Duty.

TYPES OF DUTIES
BCD is the Revenue Duty, others were always protective duties to protect the indigenous
industry. Schedule I defines the rates for imports and Schedule II defines the rates for
Exports (Custom Tariff Act).
Social Welfare Surcharge (SWS) on imported goods [Section 110 of Finance Act,2018
w.e.f 02-02-2018] It is a duty of customs levied for the purpose of the Union on the goods
specified in the First Schedule to the Customs tariff Act,1975,being goods imported into India. It
is levied @10% on the aggregate of duties, taxes and cesses which are levied and collected by
the Central Government under section 12 of the Customs Act, 1962.It is not applicable on
safeguard duty, countervailing duty, antidumping duty, IGST and GST Compensation cess.
Road and Infrastructure Cess on imported goods [Section 111 of Finance Act,2018 w.e.f
02-02-2018]

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It is levied as duty of custom @ rupee 8 per litre on motor spirit(petrol) and high speed
diesel(HSD) imported into India for the purpose of financing infrastructure projects.

CLASSIFICATION AND VALUATION OF IMPORT AND EXPORT GOODS

CLASSIFICATION
Classification enables categorising the goods into groups / sub-groups, in order to apply a
single rate of duty on each group / sub-group. This classification is based on the concept of
Harmonised System of Nomenclature (HSN).
HSN is an internationally accepted coding system and the same was formulated and
thereby enunciated under the General Agreement on Tariffs & Trade (GATT).

Customs Tariff Act, 1975

The rates for Customs Duty alongside the classification (Groups / Sub-groups) are laid
down as under :
a) First Schedule : applicable on Imports
b) Second Schedule : applicable on Exports

INTERPRETATION RULES UNDER THE CUSTOMS TARIFF ACT,1975

General Rule for Classification [Rule 1]
The essence of this rule is that the reference to the rules may be made in case of ambiguity,
that is, the reference to the six rules of interpretation is not required when classification of
the goods is possible on the basis of description in the heading, sub-heading etc.
Unfinished Articles & Mixtures [Rule 2]
a) Any reference in a heading to an article, shall be deemed to include a reference to
that article in an unfinished stage too, as long as in the present stage, the
incomplete article exhibits the essential character of that article in complete /
finished form
Example : Car without tyres or without seats would be still construed as Cars, but
not Cars without engines
b) Any reference in a heading to a material or substance, shall be deemed to include a
reference to the mixtures and combinations of that material / substance with other
materials / substances

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Example : natural rubber would include its mixture with synthetic or
other forms of rubber Classification of Goods classifiable under more than
one head [Rule 3]

a) “Specific Identification”, i.e., the goods shall be classified under the heading which is
closest to the specific description
Example : Mint Tea is not separately classified, but the classification should be tea
as the product is closest to the one under the heading “tea”, mint is only a flavour
b) “Essential Character Principle”, i.e., if composite goods cannot be classified as per
Rule 3(a), then, shall be classified on the basis of material / substance that defines
the essential character
Example : If one imports “Liquor Gift Sets” that have both, liquor and glasses, it
should be classified under the heading, “Liquor”, as the essential character of the
composite item is the liquor itself and the glasses are pure ancillaries
c) “Latter the Better Principle”, i.e., when goods can’t be classified under rules 3(a) or
3(b), the goods would be classified under the heading that appears last in the
numerical order amongst those which equally merit consideration
Example : A gift set, which has socks and ties, can be classified under any of the
above rules, and therefore should be classified as ties (heading 6117) over socks
(heading 6115)
Akin Principle [Rule 4]
This rule states that the goods which cannot be classified in accordance with Rules 1, 2 or 3,
shall be classified under the heading which includes goods that are the most “akin or
similar”. An example would be anti-glare films used for car windows, venetian blinds, all of
these are not separately classified, they would be classified under the heading for “builders’
ware of plastic”, as that’s the closest these fit into.
Cases / Containers for packaging of goods [Rule 5]
Goods which are in the nature of containers / packages such as necklace boxes, camera
cases, musical instrument cases, will be classified with the specific article which are
generally sold within these packages. However, this is applicable to containers, which are
fitted for the article they will contain, are suitable for long term use, protect the article
when not in use, and are of a kind normally sold with such articles.
Sub-headings [Rule 6]
Only sub-headings at the same level are comparable.

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VALUATION RULES
The Customs Value fixed as per Section 14 is the value that would be used for
calculating the Customs Duty Payable. This is also called Assessable Value.
provisions of rule 10; as under :
For Imports
Price paid / payable for delivery at the time and place of Importation, which
essentially implies that the price up to a port in India when goods are imported has
to be considered (i.e. C.I.F. Value)
For Exports
Price paid / payable for delivery at the time and place of Exportation, which
essentially implies that the price up to a port in India when goods are exported has
to be considered (i.e. F.O.B. Value)
– C.I.F. = F.O.B. + Cost of Transport (Freight) and Insurance
– Freight to be taken at actuals capped to a maximum of 20% of F.O.B.
– Insurance to be taken at actuals capped to a maximum of 1.125% of F.O.B.
– Exchange rate as applicable on date of presentation of a shipping bill or bill of
export, as determined by Central Board of Indirect Taxes (CBIC) or ascertained in
manner determined by CBIC should be considered
If the valuation as above cannot be determined, then sequentially, the following
rules will be applied. Identical Goods / Comparison Method [Rule 4]

Transaction Value (TV) of identical goods will be used in determining the value of imported
goods, only when such identical goods are sold at the same commercial level, and these
goods are substantially the same quantity as the goods being valued. TV of goods exported
would be based on the transaction value of the goods of like kind and quality exported at or
about the same time to the same destination country, or in absence, another destination
country.
In applying this rule, if more than one transaction value of identical goods is found, the
lowest such value shall be used to determine the value of imported goods.

Similar Goods for Imports and Computed Value Method for Exports [Rule 5]
The TV for Imported Goods would be based on that of the similar goods (i.e., like
characteristics & country of production). The TV of goods exported, would be taken at
computed value, i.e., Cost of Production + Charges for design/brand + Reasonable profit.

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Residual Method [Rule 6]
For exports, the TV would then be arrived at by reasonable and consistent means by
Customs Officer. For Imports, Rule 7 and 8, as below would be invoked.

Deductive Value [Rule 7]

Unit price at which the imported goods (or) identical (or) similar imported goods are sold
in the greatest aggregate quantity
Less : - Commission, Selling Expenses, and Profit made, Transport & Insurance &Taxes
within India.
The goods at or about same time can be considered, if not at the earliest date of
importation but before the expiry of 90 days after such importation

Computed Value [Rule 8]

This would be the cost of materials used in producing the imported goods, including
fabrication costs, and usual profits commensurate with sale of goods of same class in India,
including specific additions as per Rule 10 (i.e., Insurance, Freight and Landing Charges)

Valuation Terminologies
FOB : This is also known as “Free on Board” OR “Freight on Board”. It signifies the cost of
delivering the goods to the nearest port and thereafter the Buyer is responsible to ship
from there to the buyer’s address.
CIF : This is known as “Cost, Insurance & Freight” Value. This would add on the Insurance
and Freight to the FOB Values, as explained below.

Cost of Transport @ Cost of Insurance @

20% of FOB if the actual 1.125% of FOB if actual
cost is not ascertainable is not ascertainable

Specific Additions

These would include expenses incurred by the buyer and not included in the price. Any
payments made to the seller as a condition of sale

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Template for Calculation of Import Duties

INR
Assessable Value (AV) 1000
Basic Custom Duty (BCD) 100 Taken at 10% of AV
Safeguard Duty 300 Taken at 300% of AV
Social Welfare Surcharge (SWS) 10 Taken at 10% of BCD
Anti Dumping Duty 200
Total 1610
IGST 289.8 Taken 18% of Total
GST Compensation Cess(GCC) 241.50 Taken 15% of Total
Total Taxes and Duties 1141.30

Illustration
Ms. Nisha imported 2500 Tonnes of goods and materials valued at USD 50 per tonne
(C.I.F.). Exchange Rate per notification (CBIC) was $1= INR 63.84. The Basic Customs Duty
was chargeable @ 10% and over and above, there was an anti-dumping duty levied on the
goods, which was the differential between the amount so calculated as the Landed Value
Incl. Basic Customs Duty and Cess is INR 100,00,000/-. Calculate the Anti-Dumping Duty.

Description Tonnes Rate USD INR

C.I.F Value 2,500 50 1,25,000 79,80,000
Assessable Value 79,80,000
Basic Custom Duty(BCD) @ 10% 7,98,000
Social Welfare Cess @ 10% of BCD 79,800
Landed Value 88,57,800
Landed value as per Notification 1,00,00,00
0
Anti Dumping duty 11,42,200
Note : Anti-Dumping duty is levied to promote the local industry and to curb imports, and
to ensure that India is not used as a dumping ground, which could otherwise have serious
repercussions on the economic growth of the Nation. This Anti-dumping duty is continued
even under the GST regime.

SAFEGAURD DUTY

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Safeguard duty is a duty paid on import of goods into India. This is levied on goods
imported into India, when such goods are already manufactured in India, but the costs
are higher as compared to import prices. It is levied to ensure that the Indian
manufacturers don’t suffer owing to import of cheaper goods from outside and therefore
aims to create a level playing field for the Indian manufacturers and importers, thereby
with the intent of safeguarding the National interest. The main difference with Anti-
dumping duty being, while the Anti-dumping duty prevents the predatory pricing
measures / discriminatory pricing, that could be unfair for the local goods and markets,
Safeguard duties promote enabling a fair ground for the local manufacturers.

Illustration
Determine the Customs Duty payable including the safeguard duty of 20%, for Goods with
Assessable Value of INR 50,00,000 considering BCD @ 10%, IGST @ 18%
Item INR
Assessable Value 50,00,000
Basic Custom Duty` 5,00,000 A
Social Welfare Surcharge 50,000 B
Safeguard Duty 10,00,000 C
Total for IGST(AV + All Custom Duties) 65,50,000
IGST 11,79,000 D
Total Duty & Taxes payable(A+B+C+D) 27,29,000

EXEMPTIONS

EXEMPTIONS UNDER THE CUSTOMS ACT

If the Central Government is satisfied that it is necessary in the public interest to do so, it
may, by notification in the Official Gazette, exempt generally or subject to such conditions
as may be specified in the notification, which would need to be fulfilled before / after
clearance, goods of the specified description from the whole or any part of the duty of
customs.
It may, by special order, exempt from duty, any goods, on which duty is leviable only under
exceptional circumstances. Further, no duty is to be collected, if the amount of duty leviable
is less than or equal to INR 100.

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Both the general and specific exemptions mentioned above, may be granted by providing
for the levy of duty at a rate expressed in a form which is different from the statutory rate.
An exemption notification cannot be withdrawn and the duty cannot be demanded with
retrospective effect.

OFFICERS OF CUSTOMS LAW

POWER OF CUSTOMS OFFICER

The Customs Officers are authorised to :
a) Declare warehousing stations
b) Allow setting up warehouses (Public / Private)
c) Power to search any vessel / conveyance / person
d) Power of Seizure of Goods
e) Power to Arrest

ADMINISTRATION OF CUSTOMS LAW

Person in Charge : Master (in case of a Vessel), Commander or Pilot (in case of an aircraft), Conductor,
guard or any other person having the chief direction of the train (in case of a train), Driver or other person
in charge of the conveyance (any other conveyance).

RESPONSIBILITIES OF PERSON IN CHARGE (PIC)

Submitting the Import / Export Manifest

Ensuring that the conveyance comes through the proper route

Ensuring that the conveyance lands at the appropriate place

Ensure that the Goods are loaded / unloaded only after proper permissions / orders

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The Import Manifest means the report which is required to be delivered under section 30,
which states that the PIC, in the case of a vessel / an aircraft, shall deliver to the proper
officer an import manifest PRIOR to the arrival of vessel / aircraft and in case of a vehicle,
within 12 hours post the arrival at the customs station, in the prescribed format.
Also, it’s imperative to note that the import is completed only when the goods so imported
are cleared for home consumption.

ESTABLISHMENT UNDER CUSTOMS

CBIC MAY APPOINT BY NOTIFICATION IN OFFICIAL GAZETTE

Customs Internatio
Ports OR Land nal
Coastal
Airports Customs Courier
Ports
Stations Terminals
Foreign
Inland Post
Routes
Container Offices
Depots / Air

The CBIC will appoint all such places which alone shall be either Customs’
Ports / Airports / Inland Container Depots / Routes / Coastal Ports / Foreign
Post Offices / International Courier Terminals

FOR

A)The unloading of Imported Goods AND / OR Loading of Exported Goods

B)Routes for Imports in to India OR Exports out of India C)Clearance of such
Goods
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These areas Supported

Customs Customs
would then by Jt. / Dy. /
regulate the designate be Asst. /
Imports & areas within earmarked Appraisers &
Exports ports for Loading Inspectors
/ Unloading

Imports & Customs

Exports Government
appoints a
Officers Commissioner
allowed only
City as a port appointed to
at designated
Ports administer of Customs

ADMINISTRATION

Types of Ports

a) Sea Ports
b) Airports
c) Land Customs Stations (LCS)
d) Inland Container Depots (ICD)
e) Container Freight Stations (CFS) attached to ports

Mode of Clearance
a) Regular Cargo
b) Courier
c) Foreign Post Office

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d) Baggage

IMPORT & EXPORT PROCEDURES UNDER CUSTOMS LAW

Procedure for Import through Sea Route (Cargo Clearance)

For the Carrier

Section 30 : Filing the Import General Manifest (IGM) prior to the arrival of the vessel
IGM is generally filed on the basis of Bill of Lading / Airway Bill and is issued by the Carrier.
It contains details around the shipper, consignee, no. of packages, description of goods,
date, vessel details etc.
Section 31 : Entry Inward granted by the Customs
It acts as permission for unloading the Goods. The date herein would be construed as the
relevant date for arrival of goods in India
For the Custodian
Section 45 : Custodian is appointed by the Customs
The custodian would be responsible for keeping proper record of unloaded goods. The
custodian is also responsible to ensure that the goods don’t leave the customs area (that is
clearance) without proper authorisation from the Customs Officer
For the Importer
Section 46 : The importer needs to submit the bill of entry. This Bill of Entry needs to be
signed by the Importer. The Bill of Entry contains the details of goods along with :
– Bill of Lading
– Invoice
– Packing List
– Product Literature
– Licence
– Import Permit
– GATT declaration form duly signed by the Importer
For the Customs
The Customs Authorities note the Bill of Entry by assigning a number and date stamp. This
date is then construed as the date of presentation of Bill of Entry.

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Post the above procedures, the assessment as described above is undertaken, and once the
assessed duty is paid vide TR6 Challan, this Challan is submitted as evidence of payment to
the Customs authorities, and the Out of Charge Order is issued, and on the basis of this
Order, the Custodian allows the Clearance of Goods from the Customs Area.
Demurrage is the charges levied by the port authorities, if not cleared within 3 days of
unloading.

Procedure for Export through Sea Route (Cargo Clearance)

For the Carrier

Section 41 : Filing the EGM prior to the departure of the vessel
Export General Manifest (EGM) is generally filed on the basis of Bill of Lading / Airway Bill
and is issued by the Carrier. It contains details around the shipper, consignee, number of
packages, description of goods, date, vessel details etc.
Section 39 : Entry Outward granted by the Customs
It acts as permission for loading the Goods. The date herein would be construed as the
relevant date for exportation of goods out of India
For the Exporter
Section 50 : The Exporter needs to submit the Shipping Bill. This Shipping Bill needs to be
signed by the Exporter. The Shipping Bill contains the details of goods along with :
– Invoice
– Packing List
– Product Literature
– Licence
– Export Permit

– Softex / other compliances

For the Customs
The Customs Authorities note the Shipping Bill by assigning a number and date stamp. This
date is then construed as the date of presentation of Shipping Bill.
Post the above procedures, the assessment as described above is undertaken, and once the
assessed Duty is paid vide TR6 Challan, this Challan is submitted as evidence of payment to
the Customs authorities, and the Let Export Order is issued, and post that the loading can
commence.

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TRANSPORTATION & WAREHOUSING

Transit and Transhipment

A conveyance/vessel may reach a port but may not unload the goods at that port. It may
halt at the port for any other purpose such as repairs, replenishment of supplies, refuelling
etc. Once the purpose is over, it may start sailing to the destination port. In this case two
ports are involved :-
1) the halting port(known as transit port) and
2) the destination port (called as port of clearance).
Such a phenomenon of temporary stay at a port other than a destination port is called
transit.
In transit; the goods remain in the same vessel and consequently reach the port of
clearance.
In transhipment, however, the vessel after reaching an intermediate port, transfers the
goods to another vessel and the second vessel into which the goods are transferred
(loaded) from the first vessel, carries the goods to the destination port.

Transit of Goods without payment of duty [Section 53)

Section 53 : Accordingly, any goods imported in a conveyance and mentioned in the

import manifest or the import report, as the case may be, for transit in the conveyance to
any place outside India or any Customs station may be allowed to be so transited without
payment of duty, subject to such conditions, as may be prescribed.

TRANSHIPMENT OF GOODS WITHOUT PAYMENT OF DUTY [SECTION 54]

In case any goods imported into a Customs station are intended for transhipment, a bill of
transhipment shall be presented to the proper officer in the prescribed form.
However, where the goods are being transhipped under an international treaty or bilateral
agreement between the Government of India and Government of a foreign country, a
declaration for transhipment instead of a bill of transhipment shall be presented to the
proper officer in the prescribed form.
Where any goods imported into a Customs station are mentioned in the Import Manifest or
import report as the case may be, as for transhipment to any place outside India, such
goods may be allowed to be so transhipped without payment of duty.
Differences between Transit & Transhipment

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Transit Transhipment
Goods remain in the same vessel at the Goods are transferred to a different
intermediate port vessel at the intermediate port
Only import manifest has to be submitted for Bill of Transhipment / declaration is also
entry required to be submitted
No supervision is required at the Intermediate Transhipment process is conducted
Port under the supervision of the Customs
Officer
A different vessel reaches the
The same vessel reaches the destination port
destination port

WAREHOUSING

Warehouses allow goods to be stored and thus deferment of duty. The Goods are to be
released from the Warehouse, subject to “clearance”; i.e.; post assessment and payment of
Duty.
Public Bonded Warehouse
1) These are owned and managed by Government / Governmental Bodies / Agencies
2) Only dutiable goods can be warehoused therein
3) Availability of space certificate from the warehouse keeper would be required
4) A double duty bond would also be required to be furnished for deposit of goods
5) Also, the person seeking warehousing would need to pay rental / warehousing
charges to the warehouse keeper
Private Bonded Warehouse
1) These are owned and managed by private entities
2) These aren’t generally allowed where the public bonded warehouses are available
3) Only dutiable goods can be warehoused therein
4) Availability of space certificate from the warehouse keeper would not be required in
this case
5) Double bond duty would still be required but, customs officers would need to be
posted at the expense of the warehouse keeper

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The Goods so warehoused, can vary, depending on whether these are for 100% Export
Oriented Units (EOU’s) or otherwise, as explained by the diagram below (up to a period of
5 years / 3 years / 1 year) :

DUTY DRAWBACK

DEMAND & RECOVERY

DEMAND OF DUTY

The notice of demand, must be served in writing, clearly mentioning the reasons, and
providing the party an opportunity of being heard.

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Generally, the Show Cause Notice, should be served within 1 year from the relevant date;
that is; 1 year from the date of assessment / payment of duty.
However, in specific cases, where the duty or interest is not paid, or short paid, by reason of
collusion, wilful suppression of facts, or misstatement, then the notice could be served
within a period of 5 years.
The demand of duty provisions also calls for attachment of property for upto 6 months, for
protection of interest of revenue and that could be extended for another period of 6
months, but the attachment period cannot exceed 2 years.
Post which the duty must be collected, in the name of customs duty and paid to the credit of
the Government.

CONFISCATION OF GOODS & CONVEYANCES

CONFISCATION OF GOODS

Confiscation would generally tend to connote the forceful seizure / repossession of goods
by the Government, without any compensation to the owner, as the possession of the goods
was contrary to the law.
Section 111 states that the following improperly imported goods, shall be liable to
confiscation
1) those which are imported by sea / air and offloaded / attempted to be offloaded in a
port other than the appointed customs’ port
2) those which are imported by land / inland water, through a route other than a
specified route
3) any dutiable / prohibited goods brought in to any bay / creek / gulf etc. for the
purpose of being landed at a place other than customs’ port
4) any dutiable / prohibited goods, found concealed in a conveyance
5) any dutiable / prohibited goods which should have been disclosed in the Import
General Manifest but were not
6) any dutiable / prohibited goods removed / attempted to be removed from a
warehouse / customs station, without permission
7) goods which do not match the description in the documents, vis-à-vis value / any
other particulars
8) any goods, which were exempted from duty subject to a condition, which was
eventually not met

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Section 113 states that the following improperly exported goods, shall be liable to
confiscation
those which are exported by sea / air and loaded / attempted to be loaded in a port other
than the appointed customs’ port
those which are exported by land / inland water, through a route other than a specified
route
any dutiable / prohibited goods brought near any bay / creek / gulf etc. for the purpose of
being exported from a place other than customs’ port
any dutiable / prohibited goods, found concealed in a conveyance
any goods loaded in a wrongful manner without necessary permissions
goods which do not match the description in the documents, vis-à-vis value / any other
particulars
any goods, on which import duty wasn’t paid and entered for export under a claim for
drawback
Section 115 deals with Conveyances which are liable to confiscation
 Any vessel which has been within the Indian customs waters, any aircraft in India,
or any vehicle, which has been adapted or fitted or structured in a manner that it
purports or enables the concealment of goods
 Any conveyance from which the goods are destroyed to prevent seizure
 Any conveyance which had to stop / land but didn’t do so except for sufficient cause
 Any vessel from which goods which have been cleared for exportation, under a
claim for drawback, were unloaded without necessary permissions
 Any conveyance which carried goods into India, but which were later missing
without any account for the loss

Any conveyance / animal used for smuggling

Section 118 deals with confiscation of packages
Where the goods imported / exported are liable to confiscation, the packages within which
they are cased and carried, are also liable for confiscation
Section 119 states that any goods used to conceal the smuggled goods are also liable to
confiscation
Section 120 & 121 state that where the smuggled goods undergo a change in their
physical form, post smuggling, even then they would be liable for confiscation
(example : gold bars, later converted to ornaments). Also, where the smuggled

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goods are mixed in a manner with other goods such that they are inseparable, entire
goods would be liable to confiscation, and if the smuggled goods are sold off, the sale
proceeds thereof are liable to confiscation
Section 122 states that the adjudicating authorities shall be give an opportunity of being
heard to the party concerned
Section 123 clearly states that if goods are seized, the onus is on the owner to prove that
they were not smuggled
Section 124 clearly states that before confiscation, it is necessary that a show cause notice
(SCN) is issued to the owner, citing grounds and he should be given an opportunity
to make a representation / of being heard. The SCN can be issued by a person not
below the rank of Assistant Commissioner of Customs
Section 125 states that the authorised officer may allow the owner an option to pay fine in
lieu of confiscation
Section 126 mentions that confiscated goods vest with the Central Government
Section 127 clarifies that any award of confiscation / penalty shall not interfere with or
prevent the owner from being punished under any other provisions of this or any other law
for the time being in force.

REFUND

Refund of Export Duty

Where on the export of goods; any duty has been paid, such duty shall be refunded to the
person by whom or on whose behalf it was paid, if -
(a) the goods are returned to such person otherwise than by way of re-sale;
(b) the goods are re-imported within one year from the date of exportation; and
An application for refund of such duty is made within 6 months from the date on which the
proper officer makes an order for the clearance of the goods when they are imported back.

Refund of Import Duty

Where on the import of any goods, duty has been paid upon clearance for home
consumption, such duty can be refunded to the person by whom or on whose behalf it was
paid, if -
a) The goods are found to be defective or not in conformity with the specifications
b) The importer does not claim any duty draw back with respect to these goods

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c) If the goods are exported back / importer relinquishes his title to the goods / they are
destroyed in the presence of the proper officer

An application for refund of duty is to be made within 6 months from the relevant date, i.e.,
a) The date when the proper officer makes an order for clearance of goods when they are
exported back
b) Date of relinquishment if the importer relinquishes his title to the goods
c) Date of destruction, where the goods are destroyed
Moreover, for all general refunds of duty, apart from the ones covered above, have a
limitation period of 1 year, that is, the refund application must be filed within 1 year from
the date of payment of such duty.

MISCELLANEOUS

PROHIBITIONS

Central Government may prohibit, either absolutely or subject to such conditions specified
in the notification, the import / export of goods of the specified description, for :
a) Maintenance of national security
b) Maintenance of public order / decency
c) Prevention of smuggling
d) Conservation of exchange
e) Safeguarding the balance of payments
f) Protection of human lives / animals
g) Protection of national treasures
h) Protection of Patents & Trade Marks
i) Prevention of contravention of any laws or in the interest of the public

OFFENCES

The following would constitute offences under the Act.

a) Any mis-declaration in respect of the goods vis-à-vis its value or description or weight or
origin
b) Violation of allied acts, example, Violation of wild life, Drug & Cosmetics Act, Food laws
etc.

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c) Landing of Goods at unauthorised ports
Such offences could result in civil or criminal liabilities or both and both could run
simultaneously. Criminal prosecution could result in imprisonment + fines, and civil
prosecution could result in alienation of wealth and penalties.
Criminal Liabilities
Punishment up to 7 years
Offences involving duty evasion of more than INR 50 Lakhs, or prohibited goods, are
non-bailable
Fraudulent duty drawback claims, exceeding INR 50 Lakhs is also non bailable
Civil Liabilities
Recovery of duties short paid
Interest charge
Penalties
Confiscation of import / export goods
Confiscation of conveyances used for smuggling
Up to 200% duty for unaccounted goods
Up to 5 times the value of goods for forged documents
The normal limit for the above prosecution is one year, whereas for intended fraud, the
time limit is 5 years.

ADVANCE RULING

This refers to the determination, by the authority, of a question of law / fact specified in the
application, regarding the liability to pay duty in relation to an activity proposed to be
undertaken by an applicant.
In the context of Customs Act, the activity above in the definition would imply import /
export.
The application is made in quadruplicate with the fees specified, and can be withdrawn
within 30 days of the application. It is imperative to note that, for matters already pending
before the Tribunal / Court, would not be admissible under Advance Ruling separately.
The ruling must be made within 90 days of the application.

Settlement Commission

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The cases can be referred by applicants with the Commission. However, no application for
determining the classification can be filed. Even outright fraud cases cannot be referred.
Once the case is submitted before it, it enjoys exclusive jurisdiction over it and then can
consequently perform the functions of a customs officer, and thereafter the customs officer
cannot investigate, adjudicate or issue notice / corrigendum.
The application will be disposed effectively and suitable orders would be issued by the
Commission.
The orders of the Commission are non – appealable, however, amenable to writ jurisdiction
of High Court.
The appellants can also take the route of Tribunal / High Court and Supreme Court under
the litigation mode.

The brief procedure for import of goods has been depicted in the diagram below

GOODS ARRIVED AT THE INDIAN CUSTOMS STATION

(delivered by person –in-charge to proper officer)

IMPORT/MANIFEST
REPORT

ENTRY INWARDS
(granted by proper officer to person-in-charge)

 under the supervision of proper

UNLOADING OF GOODS
officer
AT THE CUSTOMS PORT
 at the approved places
 on working days at working hours

GOODS UNDER THE

CUSTODY OF CUSTODIAN

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ELECTRONIC FILING OF
(FILED BY IMPORTER WITH PROPER OFFICER)
BILL OF ENTRY

FOR HOME CONSUMPTION FOR TRANSHIPMENT FOR WAREHOUSING

(without payment of duty)

PAYMENT OF DUTY SELF- BILL OF ENTRY FILED FOR

ASSESSED HOME CONSUMPTION

ORDER FOR CLEARACE FOR HOME-CONSUMPTION

DATE FOR DETERMINING THE RATE OF DUTY AND TARIFF VALUATION OF IMPORTED GOODS
(SECTION 15)

IN CASE OF THE RATE OF DUTY AND TARIFF

VALUATION SHALL BE THE RATE
AND

DATE OF PRESENTATION OF
BILL OF ENTRY OR
GOODS ENTERED FOR HOME
CONSUMPTION DATE OF ENTRY INWARDS OF
THE VESSEL/ARRIVAL OF THE
AIRCRAFT/VESSEL WHICHEVER
IS LATER.

GOODS CLEARED FOR HOME DATE ON WHICH A BILL OF ENTRY

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CONSUMPTION FROM THE FOR HOME CONSUMPTION IN
WAREHOUSE RESPECT OF SUCH GOODS IS
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TECHNICAL TERMS RELATING TO VALUE IN THE COURSE OF IMPORT OR
EXPORT – INTERNATIONAL COMMERCIAL (INCO) TERMS
(1) Ex-Factory Price It is the price of the goods at the factory gate. It includes
cost of production and manufacturer’s margin of profit.

(2) F.A.S (Free Alongside) It is the cost at which the export goods are delivered
alongside the ship, ready for shipment. It includes ex-
factory +local freight + local taxes.

(3) F.O.B. (Free on Board) Technically there is not much of a difference between
FAS and FOB cost. FOB means the stage at which the
goods are placed on board the conveyance carrying the
vessel. It can be said to include FAS + loading charges +
export duty cess.

(4) C.I.F. (Cost Insurance It is the cost at which the goods are delivered at the
Freight) Indian port (F.O.B. +Insurance + Freight). It covers cost
of goods. Sometimes there is referred as CFC also.

VALUATION OF GOODS BASED ON SECTION 14

Section 14 of the Customs Act, 1962 prescribes the mode of identifying the value of imported or export
goods for the purpose of payment of customs duty. The provisions of section 14 are discussed below:
-

TRANSACTION VALUE
(i) Sub-section (1) lays down that for the purposes of the Customs Tariff Act, 1975, or any other
law for the time being in force, the value of the imported goods and export goods shall be the
‘transaction value’ of such goods.
(ii) In case of export goods, the transaction value shall be
 the price actually paid or payable for the goods
 when sold for export from India
 for delivery at the time and place of exportation
 where the buyer and seller of the goods are not related and
 price is the sole consideration for the sale.

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However further conditions may be specified in the rules made in this behalf.
(iii) In case of imported goods, the transaction value shall be
 the price actually paid or payable for the goods when sold for export
to India

 for delivery at the time and place of importation

 where the buyer and seller of the goods are not related and
 price is the sole consideration for the sale.
However, in this case also further conditions may be specified in the rules made in this behalf.
Such transaction value shall also include in addition to the price as aforesaid, any amount
paid or payable for costs and services, including:
 commissions and brokerage,
 engineering,
 design work,
 royalties and licence fees,
 costs of transportation to the place of importation,
 insurance
 loading,
 unloading and
 handling charges
to the extent and in manner specified in the rules made in this behalf.
(iv) Such rules may provide for:
(a) the circumstances in which the buyer and the seller shall be deemed to be related;
(b) the manner of determination of value in respect of goods when there is no sale, or the
buyer and the seller are related, or price is not the sole consideration for the sale or
in any other case;
(c) the manner of acceptance or rejection of value declared by the importer or
exporter, as the case may be, where the proper officer has reason to doubt the truth or
accuracy of such value, and determination of value for the purposes of this
section.

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CONVERSION DATES
(v) For imported goods, the conversion in value shall be done with reference to the rate of
exchange prevalent on the date of filing bill of entry under section 46.
(vi) For export goods, the conversion in value shall be done with reference to the rate of
exchange prevalent on the date of filing shipping bill (vessel or aircraft) or bill of export
(vehicle) under section 50.
In case of Samar Timber Corporation v. ACC 1995 (79) E.L.T. 549 (Bom.), it was held that
relevant date in respect of rate of duty payable is the date of presentation of Bill of Entry and
not date of re-presentation after correction.

CURRENCY CONVERSION RATE

(vii) The rate of exchange is notified by three agencies- the Central Board of Indirect taxes and
Customs (Board), the Reserve Bank of India and the Foreign Exchange Dealers’ Association
of India. For the purpose of customs valuation, “rate of exchange” means the rate of
exchange-
(i) determined by the Board, or
(ii) ascertained in such manner as the Board may direct,
for the conversion of Indian currency into foreign currency or foreign currency into
Indian currency. Thus, for the purpose of valuation under customs laws, rate notified by
CBIC (Board) shall be taken into account.
The CBIC notifies the rates periodically, generally every fortnight. There are separate rates for
importedgoods (sellingrate) andexport goods (buyingrate).
(viii) “Foreign currency” and ‘‘Indian currency” have the meanings respectively assigned to them
in clause (m) and clause (q) of section 2 of the Foreign Exchange Management Act, 1999.
TARIFF VALUE
(i) Sub-section (2) provides that the Board may fix tariff values for any class of imported goods
or export goods, having regard to the trend of value of such or like goods by notification in
the Official Gazette if it is satisfied that it is necessary to do so.
(ii) Where any such tariff values are fixed, the duty shall be chargeable with reference to such
tariff value. Provisions of sub-section (2) have an overriding effect on the provisions of
sub-section (1).

DATE FOR DETERMINATION OF RATE OF DUTY AND TARIFF VALUE

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FOR IMPORTED GOODS [SECTION 15]
Section 15 of the Customs Act, 1962 specifies the relevant date for determining the rate of duty and
tariff valuation of imported goods. They are different for different situations as given below:
(a) Goods are entered for home consumption under section 46 – The relevant
date for the three modes of transport as laid down by section 15(1)(a) read with
proviso would be as follows:
(i) For goods imported by vehicle at land customs station – the relevant date is the date of
filing the B/E under section 46 or date of arrival of vehicle, whichever is later.
(ii) For goods imported by a vessel at a customs port – the relevant date is the date of filing
the B/E under section 46 or date of entry inwards to vessel under section 31,
whichever is later.
(iii) For goods imported by aircraft at a customs airport – the relevant date is the date of
filing the B/E under section 46 or date of arrival of aircraft, whichever is later.
(b) Goods cleared from a warehouse under section 68 – the relevant date is the date
on which a bill of entry for home consumption in respect of such goods is presented.
(c) In the case of any other goods – the relevant date is the date of payment of duty.
These provisions relating to determination of relevant date do not apply to baggage and
imports by post, in which sections 78 and 83 apply respectively.
FOR EXPORT GOODS [SECTION 16]
The relevant date for export goods is determined as per section 16. However, the provisions do not
apply to baggage and imports by post.
The provisions are as follows:
(a) In case of goods entered for export (irrespective of the mode of transport)
– the relevant date is the date of the ‘let export’ order of the proper officer permitting
export and loading of cargo on board under section 51.
(b) In case of any other goods – the relevant date is the date of payment of duty.

Illustration

A material was imported by air at CIF price of 5,000 US$. Freight paid was 1,500 US$ and insurance
cost was 500 US$. The banker realized the payment from importer at the exchange rate of ` 71 per
dollar. Central Board of Indirect taxes and Customs notified the exchange rate as ` 70 per US$. Find
the value of the material for the purpose of levying duty.

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Answer

Computation of assessable value

Particulars Amount
CIF value 5000 US $
Less: Freight 1500 US $
Less: Insurance 500 US $
Therefore, FOB value 3000 US $
Assessable value for Customs purpose
FOB value 3000 US $
Add: Freight (20% of FOB value) [Note 1] 600 US $
Add: Insurance (actual) 500 US $
CIF for customs purpose 4100 US $
Exchange rate as per CBIC [Note 2] ` 70 per US $
Assessable value (` 70 x 4100 US $) ` 2,87,000

Notes:

1. If the goods are imported by air, the freight cannot exceed 20% of FOB price [Fifth
proviso to rule 10(2) of the Customs (Determination of Value of Imported Goods) Rules,
2007].
2. Rate of exchange determined by CBIC is considered [clause (a) of the explanation to
section 14 of the Customs Act, 1962].

Illustration

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Compute export duty from the following data:
(i) FOB price of goods: US $ 1,00,000.
(ii) Shipping bill presented electronically on 26.04.20XX.
(iii) Proper officer passed order permitting clearance and loading of goods fo
export (Let Export Order) on 04.05.20XX.
(iv) Rate of exchange and rate of export duty are as under:
Rate of Exchange Rate of Export Duty

On 26.04.20XX 1 US $ = ` 70 10%

On 04.05.20XX 1 US $ = ` 72 8%

(v) Rate of exchange is notified for export by Central Board of Indirect taxes and
Customs.
(Make suitable assumptions wherever required and show the workings.)

ANSWER

Computation of export duty

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Particulars Amount (US $)

FOB price of goods [Note 1] 1,00,000
Amount (`)
Value in Indian currency (US $ 1,00,000 x ` 70) [Note 2] 70,00,000
Export duty @ 8% [Note 3] 5,60,000

Notes:

1. As per section 14(1) of the Customs Act, 1962, assessable value of the export goods is the
transaction value of such goods which is the price actually paid or payable for the goods
when sold for export from India for delivery at the time and place of exportation.
2. As per third proviso to section 14(1) of the Customs Act, 1962, assessable value has to be
calculated with reference to the rate of exchange notified by the CBIC on the date of
presentation of shipping bill of export.
3. As per section 16(1)(a) of the Customs Act, 1962, in case of goods entered for export, the
rate of duty prevalent on the date on which the proper officer makes an order permitting
clearance and loading of the goods for exportation, is considered.

Illustration

Foreign trade international limited has imported one machine from England. It has
given the following particulars

(i) Price of machine 8,000 UK Pounds

(ii) Freight paid (air) 2,500 UK Pounds

(iii) Design and development charges 500 UK Pounds

paid in UK

(iv) Commission payable to local agent

of exporter @ 2% of price of
machine, in Indian Rupees

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(v) Date of bill of entry 24.10.20XX (Rate BCD 10%;
Exchange rate as notified by CBIC
` 100 per UK Pound)

(vi) Date of arrival of aircraft 20.10.20XX (Rate of BCD 20%;

Exchange rate as notified by CBIC
` 98 per UK Pound)
(vii) Integrated tax is 12%

(viii) Insurance charges have been actually paid but details are not available.
Compute the total customs duty and integrated tax payable by Foreign Trade International Ltd.

Note: Ignore GST Compensation Cess.

Answer

Computation of total duty and integrated tax payable

Particular Amount
Price of machine 8,000 UK pounds
Add: Design and development charges [Note 1] 500 UK pounds
Total 8,500 UK pounds

(`)
Total in rupees @ ` 100 per pound [Note 2] ` 8,50,000.00
Add: Local agency commission [Note 1]
(2% of 8000 UK pounds) = 160 UK pounds × ` 100 ` 16,000.00

FOB value as perCustoms 8,66,000.00

Add: Air freight (8,66,000 x 20%) [Note 3] 1,73,200.00
Add: Insurance @ 1.125% of customs FOB [Note 4] 9,742.50
CIF Value 10,48,942.50
Assessable value (rounded off) 10,48,942.00

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Add: Basic custom duty @ 10% [Note 5] 1,04,894.20
Add: Social Welfare Surcharge @ 10% on ` 1,04,894.20 10,489.42
Total 11,64,325.62
Add: Integrated tax @ 12% [Note7] 1,39,719.07

Total duty and integrated tax payable (Rounded 2,55,102

off)
(` 1,04,894.20+ ` 10,489.42+ ` 1,39,719.07)

Notes:

1. Design and development charges paid in UK and commission paid to local agent (since it is
not buying commission) are includible in the assessable value [Rule 10 of the Customs
(Determination of Value of Imported Goods) Rules, 2007]
2. The rate of exchange notified by the CBIC on the date of presentation of bill of entry has been
considered [Section 14 of the Customs Act, 1962].
3. If the goods are imported by air, the freight cannot exceed 20% of FOB price [Fifth
proviso to rule 10(2) of the Customs (Determination of Value of Imported Goods) Rules,
2007].
4. Where the insurance charges are not ascertainable, such cost is taken as 1.125% of FOB
value of the goods [Third proviso to Rule 10(2) of the Customs (Determination of value
of Imported Goods) Rules, 2007].
5. Section 15 of the Customs Act, 1962 provides that rate of duty shall be the rate in force on the
date of presentation of bill of entry or the rate in force on the date of arrival of aircraft,
whichever is later.
6. Integrated tax is levied on the sum total of the assessable value of the imported goods,
customs duties and applicable social welfare surcharge.

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