2042

POST GRADUATE DIPLOMA IN

FINANCIAL MANAGEMENT

SEMESTER - II
TAXATION
(DIRECT AND INDIRECT TAX)
 © UNIVERSITY OF MUMBAI

Prof. Suhas Pednekar

Vice-Chancellor,
University of Mumbai,

Prof. Ravindra D. Kulkarni Prof. Prakash Mahanwar

Pro Vice-Chancellor, Director,
University of Mumbai, IDOL, University of Mumbai,

Program Co-ordinator : Dr. Santosh Rathod

Associate Professor, Dept. of English,
IDOL, University of Mumbai, Mumbai

Course Co-ordinator : Samina Shaikh

IDOL, University of Mumbai, Mumbai
Course Writer & : CA Dr. Paras B. Jain
Editor B.Com. LL.M, ACS, FCA, PH.D,
Associate Professor,
Maharshi Dayanand College,
Parel, Mumbai 400 012.
Visiting Post-graduate Faculty:
Sydenham College of Commerce & Economics,
Mumbai-400 020

CA Komal Paras Jain

M.Com. ACS, ACA
Formerly Visiting Faculty:
H. R. College of Commerce & Economics,
Mumbai-400 020.

November 2021, Print - 1

Published by : Director,
Institute of Distance and Open Learning ,
University of Mumbai,
Vidyanagari, Mumbai - 400 098.
ipin Enterprises
Tantia Jogani Industrial Estate, Unit No. 2,
DTP composed & : Mumbai University
Ground Press Mill Compound,
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Printed by : Vidyanagari, Santacruz
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 CONTENTS

Unit No. Title Page No.

1. Introduction and Basic Concepts 1

2. Basic of Charge and Incidence of Tax 14

3. Salaries (15, 16 & 17) 41

4. Income from House Property (Sections 22 - 27) 68

5. Profits and Gains of Business or Profession

(Sections 28 to 44) 84

6. Capital Gains (Sections 45 to 55) 147

7. Income from Other Sources (Sections 56 - 59) 192

8. Exclusions and Deductions 208

9. Computation of Total Income 234

10. GST - an Overview 256

11. Registration Under GST 273

12. Place of Supply under IGST 292

13. Payment of GST 304

14. Collection of taxes under IGST ACT 2017 314


 P.G.D.F.M.
SEMESTER - II
TAXATION
(DIRECT AND INDIRECT TAX)

Modules at a Glance

1. Definitions and Basis of Charge

 Definitions: Person, Assessee, Income
 Basis of Charge: Previous Year, Assessment Year, Residential
Status, Scope of Total Income, Deemed Income

2. Heads of Income
 Income from Salary
 Income from House Property
 Profits and Gains from Business and Profession
 Income from Capital Gains
 Income from Other Sources

3. Deductions u/s 80 and Exclusions from the Total Income

 Deductions: 80C, 80CCF, 80D, 80DD, 80DDB, 80E, 80U
 Exclusions: Exemptions related to Specific Heads of Income to be
Covered with Relevant Provisions, Agricultural Income, Sums
Received from HUF by a Member, Share of Profit from Firm,
Income from Minor Child, Dividend

4. Computation of Income and Tax of Individual, Firm and Company

(Excluding MAT) and Provisions for Filing Return of Income - Sec
139(1) and Sec 139(5)
 Computation of Income & Tax of Individual and Partnership Firm

5. Overview of Goods and Service Tax

 Introduction and Meaning of GST and IGST
 Scope of GST
 Present/old Tax Structure v/s GST
 GST in Other Countries
 Existing taxes proposed to be subsumed under GST
 Principles adopted for subsuming the taxes
 Dual GST
 Benefits of GST
 GST Council
 GST Network (GSTN) and GST regime
 Integrated Goods and Services Tax Act, 2017: title and definitions,
administration.

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6. Registration under GST
 Rules and Procedure of registration
 Special provisions relating to casual taxable person and
nonresident
 taxable person
 Amendment of registration
 Cancellation of registration
 Revocation of cancellation of registration

7. Place of supply of goods or services or both under Integrated Goods

and Services Tax Act, 2017
 Sec 10 and Sec 12

8. Payment of GST
 Introduction
 Time of GST Payment
 How to make payment
 Challan Generation & CPIN
 TDS & TCS

9. Collection of Tax under Integrated Goods and Services Tax Act,

2017
 Sec 5 and Sec 6



II
 1
INTRODUCTION AND BASIC CONCEPTS
Unit Structure
1.1 Introduction and Objectives
1.2 Assessment Year
1.3 Previous Year
1.4 Person
1.5 Assessee
1.6 Assessment
1.7 Income
1.8 Gross Total Income
1.9 Total Income
1.10 Scheme of charging income tax
1.11 Self Examination Questions

1.1 INTRODUCTION AND OBJECTIVES :

Entry 82 of the Schedule VII to the Constitution of India

empowers the Central Government to levy ‘Tax on income other than
agricultural income in India’.

In exercise of its rights under this entry, the parliament enacted the
Income Tax Act, 1961 [“The Act”].

The Act provides for the scope and apparatus for levy and
collection of Income Tax in India. It is supported by the Income Tax
Rules,1962 and several other subordinate rules and regulations.

Under the Act, the Central Board of Direct Taxes (‘CBDT’) and
the Ministry of Finance, Government of India have been empowered to
issue from time to time circulars and notifications dealing with various
aspects of the Act.

Unless otherwise stated, references to the sections will be the

reference to the sections of the Income Tax Act, 1961.

Section 4 is the charging section. It defines the scope of any law

relating to ley of income tax in India. It states that income tax shall be
charged for any assessment year in respect of the total income of the
previous year of every person at the rates prescribed in the relevant
Finance Act for that year. Thus, as per the section, the study of law
relating to ley of income tax in India would cover the following: -
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(a) Meaning of person called assessee under the Act
(b) Concept of assessment year vis-à-vis previous year
(c) Meaning of income chargeable to tax under the Act.
(d) Income exempt from tax under the Act
(e) Taxable income, Gross total Income and Total Income
(f) Rates at which tax would be charged on income.

This lesson seeks to explain the above aspects in the context of the
basic framework for levy of income tax in India and explain the basic
concepts and terms used in the Act.

1.2 ASSESSMENT YEAR

1.2.1. Definition
As per section 2(9) an “Assessment year” is “the period of twelve
months starting from the first day of April every year”

1.2.2. Explanation
As per section 4 , income tax shall be charged for any assessment
year in respect of the total income of the previous year of every person.

In other words, income of an assessee during the previous year will

be taxable for assessment year relevant to the previous year. Assessment
year, is therefore, also called as the “tax year”

As per section 2(9) an assessment year is period of 12 months

which begins on 1st April every year and ends on 31st March of the next
year. Hence, the assessment year 2021-22 means the period of one year
beginning on 1st April, 2021 and ending on 31st March, 2022.

1.3 PREVIOUS YEAR

1.3.1 Definition
Section 3 defines “previous year” as “the financial year
immediately preceding the assessment year”.

1.3.2 Explanation
As per section 4, income tax shall be charged for any assessment
year in respect of the total income of the previous year of every person.

In other words , income earned by an assessee in one financial year

is taxed in the next financial year. The year in which income is earned is
called the “previous year” and the year in which it is taxed is called the
“assessment year”.

For instance income earned during the financial year 2020-21,

previous year will be the financial year 2020-21 and the relevant
assessment year will be the financial year 2021-22. Accordingly, for the

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assessment year 2021-22 previous year will be the immediately preceding
financial year 2020-21.

1.3.3 Common previous year for all source of income

The previous year will be common for all sources of income of a
person even if the sources are unrelated to each other and separate records
or books of accounts have been maintained for each such source and
aggregate income earned of all such source is chargeable to tax for that
assessment year.

Illustration
During the financial year 2020-21 In come of Ashok is as under :-
Salaries from A Ltd Rs 10,00,000
Salaries from B Ltd Rs 2,00,000
Professional Income Rs 2,00,000
Interest on fixed Deposits Rs. 3,00,000
Total Rs. 17,00,000

Financial year 2020-21 will be the previous year for all the four
different sources of income and the aggregate income of Rs 17,00,000
earned during the previous year 2020-21 will be chargeable to income tax
in the assessment year 2021-22.

1.3.4 New Business or Profession

In case where during a financial year :-
 a business is newly set up or
 a new source of income has arisen,
the previous year will be the period (obviously less than one year)
commencing from the date of setting up of the new business or the date of
new source of income arising, and ending on 31st March next.

Illustration
Ramesh sets up a new business in January, 2021. The period of
three months beginning on 1st January, 2021 and ending on 31st March,
20 21 will be the previous year 2020-21 relevant to assessment year 2021-
22. It is Immaterial that previous year is of a period of less than 12
months.

1.3.5 Exception:
Ordinarily, previous year is the financial year immediately
proceeding the assessment year and accordingly income earned in the
previous year is taxable in the assessment year, which is the financial year
next following the previous year.

The above rule is subject to some exceptions and where an

assessee is liable to pay tax on the income in the same previous in which
he earns it. In such cases, previous year and assessment year will be the
same.

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 These exceptional cases ensure safeguards for smooth collection of
income tax from a class of taxpayers who may not be traceable until the
commencement of the normal assessment year. Some of such exceptions
are as under:-
a) Vide Section 172, income of non-residents from shipping business
may be assessed in the same assessment year and the return is required
to be filed within a maximum time of thirty days from the date of
departure of the ship.
b) As per section 174 , income of person leaving India permanently or
for a long period of time and not likely to return back may be assessed
for the period between the expiry of last previous year and till the date
of his departure in the current assessment year.
c) Vide section 174A, income of association of persons, body of
individuals or artificial juridical persons formed for a particular event
or purpose and dissolved after such event or purpose may be assessed
in the same assessment year.
d) As per section 175, income of a person trying to sell , part with or
transfer his assets with a view to avoiding payment of tax may be
assessed in the same assessment year.
e) As per section 176, income of a discontinued business or profession
can be assessed at the discretion of the assessing officer in the same
assessment year.

1.4 PERSON

1.4.1 Definition
As per Section 2(31) “Person” includes:-
a) an individual’
b) a Hindu undivided family (HUF),
c) a company,
d) a firm,
e) an association of persons(AOP) or a body of individuals,(BOI)
whether incorporated or not
f) a local authority, and
g) every artificial juridical person not falling within any of the
preceding categories.

1.4.2 Inclusive definition

The definition of “person” is inclusive one, not exhaustive. Any
other entity not falling in the above seven categories may still be treated as
“person” attracting the provisions of the Act.

1.4.3 Profit motive not necessary

As per explanation to section 2 (31), an entity need not be formed
for profit. Non-profit organisations or charitable trusts are also covered by
the definition of “person” although their income is not taxable under the
Act on satisfying the certain terms and conditions.
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1.4.4 Types of entities included in the definition of person

a. Individuals
Individuals means all human beings or living persons of blood
and flesh e.g. Ramesh, Shyam, Gopal, Albert, Ibrahim, etc.

b. Hindu Undivided Families (HUF)

Hindu Undivided Families or Hindu joint families are entities
prevalent among the Hindus as per the specific law of succession
governing them and they are treated as separate tax entities.

c. Company
Company as defined in section 2(31) includes any Indian, foreign,
public or private company or a non- profit company incorporated u/s 8
of the Companies Act, 2013 (corresponding to section 25 of the
Companies Act, 1956) for charitable purpose. In addition, the CBDT has
the power to declare any institution as a company.

d. Partnership firms
Partnership firms formed under the Partnership Act, 1932 and
limited liability partnerships (LLPs) constituted under The Limited
Liability Partnership Act , 2008 are considered as distinct taxable entities
separate from their partners. Therefore, under the Act, firms are taxed
separately in their firm name partners are taxed separately in their
personal capacity.

e. BOI, AOP etc.

Body of individual (BOI) and association of persons (AOP) are
groups of persons carrying on some activities to earn income such as joint
venture.

Normally, an AOP is contractual in nature like a joint venture

agreement if such venture not formed as a partnership or a company ,
while, BOI owes its existence circumstances such as joint owner of a
estate. clubs, societies, charitable trusts etc.

f. Local Authorities
Municipal corporations, panchayats, cantonment boards, zila parishads
etc. are examples of Local authorities.

g. Residual
Residual category is the last category covering all such artificial
juridical persons which are not covered in any of the above six categories.

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Illustration
Determine the status in the following persons as per the Income
Tax Act, 1961:

Person Status
Ramesh Agrawal Individual
Asha Jain Individual
Reliance Industries Limited Company
Warna Co-operative Society Ltd AOP
Indian Red Cross society AOP
Legal heirs to receive property of BOI
late Shri Nusserwanji
Tata power Ltd Company
Sachin Tendulkar Individual
Board for Cricket Control in India AOP
Family of Shri PB Hindu HUF
Pune Cantonment Board Local Authority
Mumbai University Artificial Juridical
Person
Ramsay Brothers doing business in Firm
partnership

1.5 ASSESSEE
1.5.1 Definition
As per section 2(7) “assessee” means a person by whom income
tax or any other sum of money is payable under the Act and it includes:
a. Every person in respect of whom any proceeding under the Act has
been taken for the assessment of his income or assessment of
fringe benefits or of the income of any other person in respect of
which he is assessable, or of the loss sustained by him or by such
other person, or of the amount of refund due to him or to such
other person ;
b. Every person who is deemed to be an assessee under any provision
of this Act.
c. Every person who is deemed to be an assessee in default under any
provision of this Act.
1.5.2 The definition of “assessee” is also inclusive and broad in its scope.
The definition covers not only a person but also his representative such as
legal heir, trustee, liquidator of a company assessee etc. A person may be
not only the one by whom the amount of tax is payable but also the one to
whom any refund is due or against whom any proceedings are taken.
Further the definition includes any other person not covered in the above
categories.
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1.5.3 From the above definition, an assessees may be:-
a) A person by whom income tax or any other sum of money is
payable under the Act
b) A person in respect of whom any proceeding under the Act has
been taken for the assessment of his :
(i) income or
(ii) loss or
(iii) the amount of refund due to him
c) A person who is assessable in respect of income or loss of another
person or
d) A person who is deemed to be an assessee,
e) an assessee in default under any provision of the Act.

1.5.4 A minor child is a separate assessee, but his income is included in

the income of the parent having the higher income unless, such income is
from an asset assets acquired from the minor’s sources of income or
income generated out of activities performed by him like singing in radio
jingles, acting in films, tuition income, delivering newspapers, etc.

1.6 ASSESSMENT

As per section 2(8) “an assessment includes reassessment”.

The definition is an inclusive one, but it does not specify what is
an assessment. As per the scheme of the Act , assessment is the procedure
to determine the taxable income or loss of an assessee and the tax payable
by or refund due to him.

Under section 139 of the Act, every assessee is required to file a

self-declaration of his income and tax payable by him called “return of
income”.

The Income Tax Officer may accept the return summarily without
making any enquiry into its contents. This is called as the ‘summary
assessment’ under section 143(1).

Alternatively, the officer may call upon the assessee under section
143(2) to explain his return of income and after making necessary enquiry,
frame a reasoned order determining the total income or loss and the
amount tax payable by or refund due to the assessee. This is called the
“regular assessment” under section 143(3).

A completed assessment becomes final except in certain

circumstances. These circumstances are:
a. Under section 147, an assessment can be reopened to assess income
which has escaped assessment,

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b. Under section 263 , the Commissioner of Income Tax may ask an
assessment to be redone if the assessment order is erroneous and
prejudicial to the interest of the revenue ,
c. Under section 264, the Commissioner of Income Tax at the
application of an assessee or suo motu, may ask an assessment to be
redone. This is normally done to give relief to the assessee.
d. Under section 254, the Income Tax Appellate Tribunal (ITAT) in
appeal proceedings may pass an order directing the assessment to be
redone.

In all the above cases “reassessment” of the income is required to

be done. The definition of assessment includes the regular assessment and
reopened or reassessment.

1.7 INCOME

1.7.1 Definition :
Section 2(24) defines income in an inclusive manner. As per the
section “Income" includes—
(i) profits and gains.
(ii) dividend.
(iia) voluntary contributions received by
 a trust created wholly or partly for charitable for religious
purposes, or
 any institution , an association or a fund or trust or institution for
scientific research under section 10(21) / (23);
 any university or other educational institution referred to in section
10 (23)(iiiad) or(vi) (sports body);
 any hospital or other institution under section 10(23C) (iiiae) or
(via),
 by an electoral trust;
For this purpose, "trust" includes any other legal obligation;
(iii) the value of any perquisite or profit in lieu of salary taxable under
section 17(2) / (3) ;
(iiia) any special allowance or benefit, (other than perquisite) ,
specifically granted to the assessee to meet expenses wholly,
necessarily and exclusively for the performance of the duties of an
office or employment of profit.
(iiib) any allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or employment
of profit are ordinarily performed by him or at a place where he
ordinarily resides or to compensate him for the increased cost of
living( City Compensatory Allowance) ;
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(iv) 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, and any sum paid by any such company in
respect of any obligation which, but for such payment, would have
been payable by the director or other person aforesaid ;
(iva) the value of any benefit or perquisite, whether convertible into
money or not, obtained by any representative assessee mentioned in
section 160(1)(iii) or (iv) of or by any person on whose behalf or
for whose benefit any income is receivable by the representative
assessee (the "beneficiary") and any sum paid by the representative
assessee in respect of any obligation which, but for such payment,
would have been payable by the beneficiary ;
(v) any sum chargeable to income-tax(( Balancing charge) under section
28( ii) / (iii) or section 41 or section 59);
(va) Duty drawback under section 28 (iiia);
(vb) Cash Assistance under section 28 (iiib);
(vc) DEPB under section 28 iiic);
(vd) the value of any benefit or perquisite taxable under section 28 (iv);
(ve) any sum chargeable to income-tax under section 28 (v);
(vi) any capital gains chargeable under section 45;
(vii) the profits and gains of any business of insurance carried on by a
mutual insurance company or by a co-operative society, computed
in accordance with section 44 or any surplus taken to be such profits
and gains by virtue of provisions contained in the First Schedule;
(viia) the profits and gains of any business of banking (including
providing credit facilities) carried on by a co-operative society with
its members;
(viii) Omitted
(ix) 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 whatsoever;
For this purpose,—
(i) "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;
(ii) "card game and 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;
(x) any sum received by the assessee from his employees as contributions
to any provident fund or superannuation fund or any fund set up
under the provisions of the Employees' State Insurance Act, 1948 ,
or any other fund for the welfare of such employees;
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(xi) any sum received under a Keyman insurance policy including the
sum allocated by way of bonus on such policy;
(xii) any sum referred to in section 28 (va);
(xiii) any sum referred to in section 56 (2)(v);
(xiv) any sum referred to in section 56 (2)(vi);
(xv) any sum of money or value of property referred to in section
56(2)(viia);
(xvi) any consideration received for issue of shares as exceeds the fair
market value of the shares referred to section 56(2)(viib)
(xvii) any sum of money referred to in section 56 (2)(ix);
(xviia) any sum of money or value of property referred to in section 56
(2)(x)
(xviii) assistance by way a subsidy or grant or cash incentive or duty
drawback or waiver or concession or reimbursement (by whatever
name called) by the Central Government or a State Government or
any authority or body or agency in cash or kind to the assessee other
than,—
(a) the subsidy or grant or reimbursement which is reduced from the
actual cost of the asset under section 43 (1) Explanation 10; or
(b) the subsidy or grant by the Central Government for the purpose of the
corpus of a trust or institution established by the Central
Government or a State Government;
1.7.2 Sec 2(24) gives an inclusive definition of income; As per the section,
“income” covers not only the income in its natural and general sense but
also several items not otherwise considered as income;
Hence, Income means not only the revenue receipts arising or
accruing regularly but also capital receipts like gifts and even donations
and gifts. On the other hand, certain revenue receipts like agricultural
income are left out from the scope of the term income.
Some of the principles that have emerged out as a result of customs,
practices and judicial pronouncements to ascertain as to what does or does
not constitute income are as follows:-
1. Ordinarily Income is a regular periodical receipt, received or derived
from a certain source.
2. The source of income must be external. No one can earn income by or
from himself.
3. On this principle, income accruing to clubs, societies etc. from their
own members are not taken as taxable income on the ground of
mutuality.
4. Normally, only revenue receipts are regarded as income unless
specifically exempted.

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5. On the other hand, capital receipts are not treated as income unless the
law specifically provides e.g. capital gains, gifts, maturity proceeds of
keyman insurance policy, sales tax subsidy, voluntary contribution by
a donor to a trust, which are included in income in spite of being
capital receipts. Income is often compared to the fruit of a tree, where
tree is the source or the capital asset.
6. Income may be in cash or kind.
7. Income need not be legal; It may even be derived from illegal sources
like, smuggling, theft, bribery, corruption etc.
8. It is the receipt, which is income not its application or use.
9. Any receipt diverted at the origin or the source by overriding title will
not be regarded as income.
10. Any dispute in the title of the income does not take away its nature as
income.
11. A gift is a capital receipt given for personal considerations; However,
this is no longer a valid proposition as the law specifically provides for
taxation of gifts such as :-
 Gift by an employer to an employee is deemed to be taxable salary
u/s 17.
 Gift by a client or customer is deemed as the income under the
head profits and gains from business or profession u/s 28. Hence, a
gift given by a client to his lawyer or chartered accountant or a
patient to his doctor, or a disciple or pupil to his guru, will be
taxable as the income of the recipient (donee) from business or
profession u/s 28.
 Personal gifts in excess of Rs. 50,000 from all sources are taxable
as income from other sources u/s 56 subject to certain exceptions.
Further inadequate consideration on transfer of immovable or
movable assets is also considered as taxable gift u/s 56. This aspect
is dealt with in great detail in the lesson relating to income from
other sources.
12. Income may be recognised either on receipt basis or on accrual basis
depending upon the facts and circumstances and the method of
accounting applied in each case.
13. Income must be certain. Contingent income is not regarded as income
unless and until such contingency occurs and the income arises to the
assessee.
14. Income is the sum total of all receipts from all the sources and
considered accordingly.
15. Pin money received by a woman for personal expenses or even the
savings made by her from such receipts is not considered as income;
However, the husband will not get any credit from his income for
these payments.

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16. Income may be received in lump sum or in instalments; Thus, arrears
of salary received by a person in lump sum are regarded as his income.
17. Awards received by a professional sportsperson would be income,
unless the award is in nature of a gift for personal consideration.
18. Income of wife is taxable in the hands of the husband if the assets out
of which the income is arising have not been acquired out of the
sources of the wife or from an asset gifted by the husband except as
consideration for living apart.
19. Income of minor children is taxable in the hands of the parents having
higher income [ mother or father] except when the income is arising
from the efforts of the minor child say modeling charges.

1.8 GROSS TOTAL INCOME

Section 14 of the Act defines the gross total income as the

aggregate of the incomes computed under the five heads after adjusting for
set-off and carry forward of losses. The five heads of income are as
follows namely:
1; Income from Salaries
2; Income from House Property
3; Profits and Gains from Business & Profession
4; Capital Gains
5; Income from Other Sources

The gross total income is the aggregate of income computed in

accordance with the provisions of the Act under the five heads, before
making any deduction under sections 80C to 80U; It may be noted that
any income exempted from tax u/s 10 or other provisions e.g. conveyance
allowance, capital gains on sale of personal effects, dividend income, etc.
is not considered or excluded from the income computed under the
respective heads.

1.9 TOTAL INCOME

The total income of an assessee is computed by deducting from the

gross total income all permissible deductions available under the Chapter
VI A of the Income Tax Act, 1961; This is also referred to as the “Net
Income” or “Taxable Income”.

1.10 SCHEME OF CHARGING INCOME TAX

Income tax is a tax on the total income of an assessee for a
particular assessment year. This implies that:-
(i) Income-tax is an annual tax on income.
(ii) Income of previous year is chargeable to tax in the next following
assessment year at the tax rates applicable for the assessment; year
This rule is, however, subject to some exceptions discussed above.
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(iii) Tax rates are fixed by the annual Finance Act and not by the
Income-tax Act; For instance, the Finance Act, 2021 fixes tax rates
for the financial year 2021-22 relevant to assessment year 2022-23
Tax rates are given in the lesson dealing with computation of
income.
(iv) Tax is charged on every person if the total income exceeds the
minimum income chargeable to tax.

1.11 SELF ASSESSMENT QUESTIONS

1. Income of a previous year is chargeable tax in the immediately

following assessment year; is there any exception to this rule? Discuss
2. Define the term “person”
3. How would you calculate income tax for the assessment year 2021-
22 in the case of different assesses?
4. Explain how cess will be computed for the assessment year 2021-22?
[Ans: 4% ]
5. What will be the previous year for X, who starts his business on April
6, 2020[ [Ans: 2020-21]
6. Will the answer to Q 5 be different, if X starts his business on 28th
March, 2019? [ Ans: 2018-19]
7. Explain that a financial year is a previous year and also an assessment
year; Every financial year can also be an assessment year,
8. Previous year is a financial year immediately preceding the
Assessment year Comment
9. What will be the status of University of Mumbai?
[Ans: Artificial juridical person]
10. Indicate whether the following persons will be taxed as individuals:
a) X a partner of a firm
b) Y, a managing director of A Ltd;”
c) Z is the member of Z HUF
d) Municipal Commissioner of Mumbai in respect of the Income of the
Municipal Corporation
e) A minor acting in TV commercials
[Ans: All except (d) will be taxed, Firm X , A Ltd , Z HUF , Mun
Corpn; Separate tax entities ]




13
 2
BASIS OF CHARGE AND
INCIDENCE OF TAX
Unit Structure
2.1 Introduction and Objectives
2.2 Basic Charge of Income Tax
2.3 Residential Status
2.4 Residential status and incidence of tax
2.5 Income deemed to be received in India
2.6 Income deemed to accrue or arise in India
2.7 Receipt vs. Remittance
2.8 Actual receipt Vs. Deemed Receipt Total Income
2.9 Receipt vs. Accrual
2.10 Basis of Charge of Dividend Income
2.11 Heads of Income
2.12 Self-Examination Questions

2.1 INTRODUCTION AND OBJECTIVES

Section 4 to 9 provide for the basis of charging income tax,

income on which tax is to be levied, the persons from whom the tax is to
be levied, status of such persons and effect of the status on the incidence
of tax.

This lesson seeks to explain all these provisions, which define the
structure, basis, methodology, periodicity, extent and basis of charge of
income tax in India and other incidental matters.

2.2 BASIS OF CHARGE OF INCOME TAX

2.2.1. Charging Section

Section 4is the charging section. It says that income tax shall be
charged for any assessment year at any rate or rates prescribed in the
Finance Act for that year in respect of the total income of the previous
year of every person.

Accordingly, Income tax is charged:-

 from a person called assessee
 on the total income of
 earned for himself or in representative capacity such as legal heir of
estate, parent of a minor child etc.
14
  during the previous year or a period other than the previous year
(vide proviso to section 4 ).
 relevant to the assessment year.
 at the rate or rates prescribed in the Finance Act for that year.
 payable by way deduction at the source(TDS) , tax collection at
source (TCS) or Advance Tax or Self- assessment Tax or other
manner prescribed by the Act.

2.2.2. Scope of Total Income

Section 5defines the scope of total income of an assessee, which
would be chargeable to tax. It depends upon:-
a) the residential status of a person, and
b) place and time of accrual of such income.

2.2.3. Residential Status

Section 6prescribes the rules for determining residential status of
different types of persons

2.2.4. Income Accrued or Received in India

 Section 7 specifies the incomes not received in India butdeemed to
be received in India.
 Section 8 deals with the year of taxability of dividend income.
 Section 9 specifies the incomes though not accrued or arisen in
India but are deemed to accrue or arise in India.

2.3 RESIDENTIAL STATUS

2.3.1 Under section 5, total income ofis chargeable to tax depending upon
the residential status of a person (assessee), place and time of accrual of
such income.Section 6 prescribes the rules for determining residential
status of different categories of persons, viz.:-
a) Individuals;
b) Hindu Undivided Families (HUF)
c) Firms, Bodies of Individuals (BOI) or Associations of
Persons(AOP);
d) Companies; and
e) Every other person.

2.3.2 Residential Status of an Individual – RESIDENT

I. Basic conditions-
Under section 6(1), an individual is said to be a resident in India in
any previous year, if he satisfies at least one of the following two basic
conditions viz. : -
a) he is in India in that previous year for a period or periods amounting in
all to 182 days or more or

15
b) he has been in India for a period or periods amounting in all to 365
days or more during 4 years immediately preceding that previous year
AND for a period or periods amounting in all to 60 days or more
during that previous year.

Exception
The limit for stay in India for 60 days or more as per condition (b)
will be extended to:-
A. 182 days or morein case of :-
i. An Indian citizen LEAVINGIndia during the previous year
 for the purpose of taking up employment outside India ; or
 as a member of the crew of an Indian ship.
ii. An Indian citizen or a Person of Indian Origin (PIO) COMING to
India ON VISIT during the previous year.
B. 120 days or more in case of an Indian citizen or a Person of Indian
Origin (PIO)having total income, other than the income from foreign
sources exceeding 15 lakh rupees during the previous year.
A person is said to be of Indian origin (PIO) if either he or any of his
parents or grandparents was born in undivided India.

For a particular previous year an individual -

a) may satisfy any one condition or both of the above two basic
conditions; or
b) may not satisfy any of the above two conditions
Then status of the individual for thatyear shall be
a) a resident in India in case(a),
b) a non- resident in case (b).
c) With effect from A.Y.2021-22 , with the insertion of section 6(1A) an
Indian citizen , who is not resident in India in the previous year as per
section 6(1)shall be deemed to be resident in Indiainprevious year if
during that year -
(i) he has total income, other than the income from foreign sources,
exceeding 15 lakh rupees during the previous year, and
(ii) he is not liable totax in any other country or territory by reason of his
domicile or residence or any other criteriaof similar nature.
As per section 2(29A) “liable to tax”, in relation to a person, means
that there is a liability of tax on such person under any law for the time
being in force in any country, and shall include a case where subsequent to
imposition of tax liability, an exemption has been provided.

16
 For this purpose "income from foreign sources"means income
which accrues or arises outside India (except income derived from a
business controlled in or a profession set up in India) and which is not
deemed to accrue or arise in India.

Thus an individual, who does not satisfy any of the two conditions
given in section 6(1) but has Indian income of more than Rs 15 lakh and
who is not liable to pay tax in any other country or territory by reason of
his domicile or residence or any other criteria of similar nature, individual
shall still be a resident in India u/s 6(1A) for that particular assessment
year.

2.3.3 Resident and Ordinarily Resident [R & O R ]

Status of an individual, who is a resident of India within the
meaning of section 6(1) or 6(1A), will be further classified under section
6(6) whether or not such individual will be a resident and ordinarily
resident of India in that previous year.Section 6(6) provides that following
will be treated as Resident and Ordinarily Resident [R & O R ] in India in
any previous year:-
A. an individual, who
(a) has been a resident of India in two out of ten previous years
immediately preceding that previous year AND
(b) was in India for a period or periods amounting in all to730 days or
more during the seven previous years preceding that previous
year.
B. a citizen of India, or a Person of Indian Origin (PIO), having total
income, other than the income from foreign sources, exceeding 15
lakh rupees during the previous year, who has been in India for a
period or periods amounting in all to 180 days or more.

2.3.4 Resident and Not Ordinarily Resident [R &N O R ]

As per section 6(6),Resident and Not Ordinarily Resident [R &N
O R ] will include the following :-
A. an individual who
(a) has been a non-resident in India in nine out of the ten previous
years preceding that year, or
(b) has during the seven previous years preceding that year been in
India for a period of, or periods amounting in all to729 days or
less;
B. a citizen of India, or a Person of Indian Origin (PIO), having total
income, other than the income from foreign sources, exceeding 15
lakh rupees during the previous year, who has been in India for a
period or periods amounting in all to 120 days or more but less than
180 days; or
17
C. a citizen of India who is deemed to be resident in India under section
6(1A).
2.3.5 Non- Resident
Any person,who is not a resident in India for any previous year,
will be a non -resident in India for that year. Accordingly :-
1. An individual who does not satisfy any of the two basic conditions u/s
6(1) will be non- resident although such person may satisfy the two
additional conditions u/s 6(6).
2. An Indian citizen or PIO who has total income from domestic sources
of Rs 15 lakh or less , irrespective the number of days of his stay in
India will be a non-resident unless such person is covered u/s 6(1).
3. An Indian citizen or PIO who has income from domestic sources of
more than Rs 15 lakh but who is in India for 119 days or less.

2.3.6 The above provisions are summarised in the table below:

Status Conditions
Any individual satisfying any one of the conditions
of stay in India under section 6(1) viz.
 182 days or more during the relevant previous
year or
 365 days or more in 4 previous years prior to that
year and additional stay of 60 or 182 days in the
relevant previous year
An Indian citizen or PIO
Resident of India  who has total income from domestic sources of
more than Rs 15 lakh and
 who is in India for 120 days or more.
An Indian citizen or PIO
 who has total income from domestic sources of
more than Rs 15 lakh and
 who is not liable to pay tax in any other country
or territory by reason of his domicile or residence
or any other criteria of similar nature.
Any individual who satisfies
 either of the two conditions under section u/s
Resident 6(1)and
and Ordinarily  both of the additional Conditions under section
Resident u/s 6(1).

18
 An Indian citizen or PIO
 who has income from domestic sources of more
than Rs 15 lakh and
 who is in India for 180 days or more.
Any individual
 who satisfies either of the two conditions under
section u/s 6(1)but
 does not satisfy one or both of the additional
conditions under section 6(6)
An Indian citizen or PIO
Resident but Not  who has income from domestic sources of more
than Rs 15 lakh and
Ordinarily
Resident  who is in India for a period of 120 days to 179
days;
An Indian citizen who is
 having Indian income of more than Rs 15 lakh
and
 not liable to pay tax in any other country or
territory by reason of his domicile or residence or
any other criteria of similar nature.
Any person
 who does not satisfy any of the two basic
conditions under section 6(1).
 Satisfying the two additional conditions
irrelevant.
An Indian citizen or PIO
 who has income from domestic sources of Rs
Non- Resident
15 lakh or less , irrespective the number of days
of his stay in India
 unless covered u/s 6(1)
An Indian citizen or PIO
 who has income from domestic sources of more
than Rs 15 lakh but
 who is in India for 119 days or less.

2.3.7 Some Important points

(a) The day on which a person arrives in India and the day of departure
out of India both will be counted in computing the number of days
of stay ‘in India”even if such person may be in India only for a part
of the day.

19
(b) Stay may be at one or more places.
(c) Stay in India may be continuous or in intervals.
(d) Stay at different places or intervals will be aggregated.
(e) A person, who is in India for 182 days or more, will always be a
resident of India.
(f) Conversely, a person, who is in India for 59 days or less, will always
be Non-Resident of India.
(g) An Indian citizen must leave India for employment or as crew in a
ship to avail extended limit of 182 days instead of 60 days.
(h) The extended limit of 182 days is not available to
a. non- citizens,
b. Indian citizens leaving India for any other purpose such as
medical treatment , pilgrimage, tourism etc.
(i) Indian citizens or persons of Indian origin( PIO)
a. must come to India on visit for any purpose – pilgrimage,
medical treatment or tourism
b. but NOT business or job to avail extended limit of 182 days
c. Indian citizenship is not the requirement for this purpose.
(j) In computing days , leap years in 2008, 2012, 2016 and 2020with
one extra day February.
(k) the extended limit of 120-180 days available only to Indian citizens
or persons of Indian origin( PIO) with Indian total income of Rs 15
lakh or more,
(l) Indian citizens having Indian total income of Rs 15 lakh and liable
to tax will be only considered as Resident and Not Ordinarily
resident.

2.3.8 Illustrations
1) Rajesh leaves India for the first time on December 20, 2010. During
the financial year 2020-21 he came to India on May 27,2020 for a period
of 45 days. Determine his residential status for the assessment year 2021-
22

Solution
During the previous year 2020-21, Rajesh is in India only for 45
days He does not satisfy any of the basic conditions laid down in section
6(1). Hence, Rajesh is a non-resident in India for the assessment year
2021-22.

2) Mahesh comes to India, for the first time, on April 16, 2018. He
stays in Chennai up to April 29, 2019 and thereafter shifts to Mumbai. He
departs from Mumbai for his native country on October 5, 2020.
Determine his residential status for the assessment year 2021-22
20
Solution
Mahesh is in India for more than 182 days* during the previous
year 2020-21. He satisfies the first basic condition under section 6(1).
Hence, he is a resident of India.

(*April 30+May 31+ June30+ July 31+ August 31+ Sept 30 +Oct. 5)= 188
days

Mahesh was in India for 350 days from 16-04-2018 to 31-03-2019

during the previous year 2018-19 and 366 days during the previous year
2019-20 (leap year). He was resident of India for these two years. Hence,
Mahesh satisfies the first additional condition under Section 6(6) of being
a resident of India in at least two year out of the ten preceding years.

Since he was in India only for a period of 716 days only i.e. 351
days (2015-16)+ 365 days (2016-17), which is less than the prescribe
period of 730 days’ stay required in the seven preceding years, he does not
satisfy the second additional condition as per Section 6(6).

Mahesh satisfies one of the basic conditions and only one of the
two additional conditions, he is, therefore, resident but not ordinarily
resident in India for the assessment year 2021-22

3) Determine residential statusof Udit, an Indian Citizen who leaves

India for employment in Canada on July 2, 2020for assessment year
2021-22.

Solution
Udit is an Indian citizen. During the previous year 2020-21 he was
in India for 93 days*
( * April 30+ May 31+June30+ July 2=93 days)

Uditwas in India for more than 365 days during the 4 years
preceding 2020-21. Sincehe left India to take up job in Canada, he will
get the extended limit of 182 days’ stay under section 6(1)(b).

Udit does not satisfy the first condition of stay in India for 182
days nor the second condition of stay in India for more than 365 days and
extended stay of 182 days during the previous year 2020-21.Hence,Udit
will be a Non -resident.

4) What will be the position in the above case, if Udit leaves India for
world tour?

Solution
Udit will be Resident and Ordinarily Resident of India as he
satisfies the second basic condition u/s 6(1)(b) of 365 days’ stay in the
preceding four years and 60 days stay during the previous year 2020-21.
He also satisfies both the additional condition under section 6(6), as being
21
a person born in India, of being resident in India for two years in
preceding 10 years and stay of 730years in seven preceding years.

5) What would be the last date upto which Uditshould leave India?

Solution
Udit is covered by the exception, he should depart latest by
September 28, 2020 so that his stay in India during the previous year
2020-21is of 181* days (less than 182 days).
*(April 30+May31+June30+July31+ July 28=181)

6) Will the residential status change in the above case if Udit is a

Nepali citizen settled in India?

Solution
Uditwill not be get the extend limit of stay for 182 days under
section 6(1)(b) as he is not an Indian citizen. He satisfies the basic
condition and both the additional conditions under section 6(6) of 730
days in 7 preceding years and 2 years resident in preceding 10 years, he
will be a resident and ordinary resident in India

7) Bret Lee an Australian Citizen plays for Mumbai Indians Indian

Premier League (IPL) since 2016-17. For all the five years he has been
coming to India every year for a period of 95 days.Determine his
residential status for assessment year 2021-22.

Solution:
Bret Lee was in India for 95 X4=380 days (which is more than 365
days) during the 4 years preceding2020-21 and 95 during the financial
year 2020-21, which is more than 60 days. Lee is not a person of Indian
origin nor he comes in India on visit. He is not eligible for extended time
limit of 182 days. Hence, he satisfies the second basic condition under
section 6(1)(b). He is Resident in India.

However, in none of the 4 years his cumulative stay for preceding

4 years exceeds 365 days. He is not a resident for at least two years out of
previous 10 years nor he was in India for 730 days during the preceding 7
years.

He does not satisfy any of the additional two conditions under

section 6(6).Hence, he will be Resident but not Ordinarily Resident of
India [RNOR] for the Assessment Year 2021-22

8) Will the position be different ifBret Lee is a resident of Bangladesh?

Solution
Since Lee comes to India for carrying on his vocation not on visit
but, he will not get the advantage of extended stay of 182 days. He will be

22
Resident but not Ordinarily Resident of India [RNOR]although
Bangladesh was part of undivided India.

9) Will the above position change If Lee is a Pakistani citizen and

visits India as a tourist?

Solution
Pakistan is part of undivided India; hence Lee will be a PIO
eligible for the extended limit of 182 days. Hence, he will be Non-
resident.

2.3.9 Residential status of HUF

2.3.9.1 Resident
Under section 6(2), a Hindu Undivided Family (HUF) will be
resident of India if control and management of its affairs is wholly or
partly situated in India and will be Non- resident in India only if control
and management of its affairs is situated wholly outside India.

2.3.9.2 Resident and Ordinarily resident (ROR)

Under section 6(6) , a HUF can will be Resident and Ordinarily
Resident if its Karta or manager satisfies both of the following two
conditions viz.the Karta or the manager :-
(a) has been a non-resident in India in 9 out of the10 previous years
preceding that year, and
(b) has during the 7previous years preceding that year been in India for a
period of, or periods amounting in all to 729 days or less

It may be noted that additional conditions are same as those

applicable to the individual but applicable on the Karta or the manager of
a HUF.

2.3.9.3 Resident and Not Ordinarily resident (ROR)

If the Karta does not satisfy both of the two additional conditions,
the HUF will be treated as a resident but not ordinarily
resident(RNOR)in India

2.3.9.4 Non-Resident
A HUF will be non- resident in India ONLY if control and
management of its affairs is situated wholly outside India
It is important that place of control and the management of HUF is
relevant to determine whether the HUF is Resident or Non-Resident.
To determine ROR status the two additional conditions under
section 6(6)will be applicable with reference to its Karta or Manager.

23
2.3.9.5 Summary
Like an Individual a HUF may be either:-
(a) Resident and ordinarily in India if control or management is wholly or
partly in India or
(b) Non-resident in India if its control or management is wholly outside
India.
(c) Resident and ordinarily in India if two additional conditions are
satisfied as per section 6(6) by the Karta / Manager.

2.3.10 Residential Status of Other Non-Company Persons

2.3.10.1 Resident
Under section 6(2), residential status of all non-company persons
viz a firm an Association of Persons (AOP) or a Body of Individuals
(BOI) and every other person also depends upon the place of control and
management like HUFs.
Any such person will be:
 Resident in India if control and management of its affairs is wholly
or partly situated in India, ;
 non-resident in India if control and management of its affairs is
situated wholly outside India.

2.3.10.2 Non- Resident

An AOP, BOI or a firm will be resident in India, if control and
management of its affairs is situated partly or wholly inIndia.
Any such entity shall be non-resident in India if control and
management of its affairs is situated wholly outsideIndia. any such entity
These persons can only be either resident or non- resident but not
ordinarily resident.
“Place of control and management”means the place, where
decision making of the entity as a whole is situated. “Control and
management means de facto (actual) control or management; not merely
the right to control or manage.

2.3.10.3 Illustrations
11) What will be the residential status of an entityXYZ, which operates
India on the instructions from London either wholly or partly if XYZ is (a)
HUF b) AOP c) BOI ord) Artificial juridical person?

Solution
De facto control of XYZ will be situated in London if it receives
instructions wholly from London and XYZ will be non-resident in all the
cases.

24
 However, de facto control of XYZ is only partly from London,
itwill be Resident and Ordinarily Resident in India.

12) What will be the status in the above cases if XYZ is wholly
controlled from Mauritius ?

Solution
De facto control of XYZ will be situated in Mauritius, it will be
non-resident in all the cases.

3.1. Residential Status of a Company

Under Section 6(3), a company will be resident of India in any previous
year, if—
(i) it is an Indian company; or
(ii) its Place of Effective Management(POEM), in that year, is in
India.
"Place of effective management" means a place where key
management and commercial decisions that are necessary for the conduct
of business of an entity as a whole are, in substance made.

Following important points emerge out from the above:-

1 Residential status of a company depends on the place of its registration
and the place of its control and management.
2 An Indian company will be residentof India irrespective of the place
where its control or management is situated.
3 Any other company( i.e. a foreign company ) will be a resident in India
if place of effective management (POEM) ) of such company is
situated in India.
4 A foreign company will be non-resident if place of effective
management (POEM) ) of such company is situated outside India.

The legal provisions are summarised in the following table.

Company Status
Indian company irrespective of POEM Resident
Foreign company if POEM situated in India Resident
Foreign company if POEM situated outside India Non resident

3.2. Illustrations
13) What will be the residential status of X Ltd. an Indian company
managed from India?

Solution
X Ltd. being an Indian company will be Resident in India. Place
of management is immaterial.

25
14) What will be the residential status of Y Ltd. an Indian company
managed from London?

Solution
Y Ltd. being an Indian company will be Resident in India . Place
of management is immaterial.

15) What will be the residential status of T Ltd. a British company

managed from India?

Solution
T Ltd. will be resident in India as its POEM is situated in India.
16) What will be the residential status of U Inc.a US Company managed
from London?

17) What will be residential status of U Inc. managed fully from New
York.

Solution
U Inc. will be Non-resident in India as its POEM is wholly situated
outside India.

3.3. Miscellaneous
Following points are noteworthy:
1. Residential status of a person is independently determined for each
previous year.
2. Residential status of a person may change from previous year to
previous year.
3. A person may have different residential status for different assessment
years. E.g. A takes up a job in UK for two years and thereafter he
comes back. It is possible that he may be non- resident for those two
years and resident for other years.
4. It is not necessary that a person, who is “resident” in India, will
necessarily be non-resident in all the other countries for the same
assessment year. A person may be “resident” or non-resident in two or
more countries in a particular year or “resident” in one or more
countries and non-resident in other county or countries as per
respective laws of the concerned countries.

In the modern times, this may be particularly true of a person changing

countries from time to time because of business or vacation etc. and he
may not fall in any category of residents anywhere in the world. Section
6(1A) inserted from A.Y. 2021-22 deals with such situation and deems a
PIO as R &NOR in certain cases.

26
5. As Section 6(5)]if a person is a resident for one source of income in a
previous year, he shall be deemed to be a resident for all other sources
of income.

2.4 RESIDENTIAL STATUS AND INCIDENCE OF TAX

Section 5 defines the scope of total income of an assessee, which

would be chargeable to tax. It depends upon:-

The residential status of a person, and place and time of accrual of

such income. Provisions of the section are explained below:-

4.1. Scope of total income for a Resident

Under section 5(1), total income of any previous year of a person
who is a resident includes all income from whatever source derived
which—
(a) is received or is deemed to be received in India in such year by or on
behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during
such year ; or
(c) accrues or arises to him outside India during such year.

4.2. Person not ordinarily resident in India

The section provides that total income of a person who is not
ordinarily resident in India within the meaning of section 6(6) shall not
include the income which accrues or arises to him outside India unless it is
derived from a business controlled in or a profession set up in India. Thus
the Income of such person shall include the following income from
whatever source derived which—
(a) is received or is deemed to be received in India in such year by or
on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India
during such year ; or
(c) accrues or arises to him outside India during such year if such
income is derived from a business controlled in or a profession set
up in India.

4.3. person who is a non-resident

As per section 5(2),total income of any previous year of a person
who is a non-resident includes all income from whatever source derived
which—
(a) is received or is deemed to be received in India in such year by or on
behalf of such person ; or
27
(b) accrues or arises or is deemed to accrue or arise to him in India
during such year.
Thus, total income of a non-resident shall not include income,
which accrues or arises to him outside India.

4.4. Important points

Following are some important points with regard to the scope of
total income as per the provisions of section 5:-
(a) Incidence of tax on a taxpayer depends on:-
 his residential status, and
 the place and time of accrual or receipt of income
(b) Income accruing or arising outside India shall not be deemed to be
received in India by reason only of the fact that it is considered in a
balance sheet prepared in India.
(c) Income which has been included in the total income of a person when
it accrues or arises or is deemed to have accrued or arisen to him shall not
again be so included when such income is received or deemed to be
received by him in India.
(d) Indian income will be included in the income of every person
regardless of his residential status whether resident, non-resident, or R &
ORor R & NOR.

Indian income means :-

 Income received or deemed to be received in India and such income
is also accrued or arisen or deemed to be accrued or arisen in India;
 Income received or deemed to be received in India but accrued or
arisen outside India; or.
 Income received outside India but accrued, arisen, or is deemed to
accrue or arise in India.

(e) “Foreign income” means income which is not Indian Income i.e.
Income not received, accrued or arisen in India nor deemed to be received,
accrued or arisen in India. Taxability of foreign income will be as under :-
 Foreign income is not included in the total income of a non-resident,
 Foreign Income is included in the total income of a resident and
ordinarily resident.
 Foreign income will not be included in the total income of a resident
but not ordinarily resident (RNOR) unless such income is derived
from:
(a) a business controlled in India or
(b) a profession set up in India.

28
 Non-business foreign income will not be included in the income of
a person who is resident but not ordinarily resident in India.
Thus foreign income taxable only by a ROR and conditionally by RNOR.
(f) Residents will be liable in respect of all income Indian or foreign
but Non- residents only for Indian income.

The Scope of total income is summarised as follows:

Scope of Total Income –Section 5

Income Status
Resident & Resident & Not Non Resident
Ordinarily Ordinarily Resident
Resident
Indian income Taxable Taxable Taxable
Foreign income Taxable Taxable if income Not Taxable
is from
 a business
controlled
from India or
 a profession
set up in India

2.5 INCOME DEEMED TO BE RECEIVED IN INDIA

As per Section7, following income will be included in the total

income even if such income is not actually received in India:
1. Annual accretion to the credit balance of an employee in the case of
recognized provident fund to the extent provided under rules
2. Excess contribution of employer in the case of recognized provident
fund to the extent as provided in the rules.
3. Transfer balance to a recognized provident fund from unrecognized
provident fund to the extent as provided under the rules.

2.6 INCOME DEEMED TO ACCRUE OR ARISE IN

INDIA

Under Section 9, which is a deeming section, following incomes

shall be deemed to accrue or arise in India although such incomes may
actually accrue or arise outside India:
1. All incomes accruing or arising whether directly or indirectly through
or from-
a. Any business connection in India or
b. Any property in India or
c. Any asset or any source of income in India or
d. The transfer of a capital asset situated in India.
29
Exceptions: No income is deemed to accrue or arise in following cases:
I. Purchase of goods India by a Non- resident for export
II. Collection of news by a non- resident running a new agency, or
publishing newspapers, magazines or journals
III. Shooting of film in India by a non- resident foreign citizen
individual or a company or firm in which no Resident Indian
citizen is a partner or shareholder
IV. Indian Income to be taken pro rata if all operations of a business
not carried in India

Explanation:” business connection” includes a person, who –

I. holds or habitually exercises holds an authority to conclude contract
on behalf of the non-resident, except for purchase of goods or
merchandises
II. has no such authority but maintains stock of goods and merchandise in
India, from which he regularly delivers stock or merchandise on behalf
of the non-resident.
III. Secures orders in India for the non-resident and other non-resident,
controlling, controlled by or subject to the same common control as
that of non-resident.
However, there will be no business connection as above if a non-
resident carries on a business through a broker, general commission agent
or any other agent of independent status, acting in ordinary course of
business.
For this purpose, a broker, general commission agent or an agent
shall be deemed to be of an independent status if he does not work mainly
or wholly on behalf of the non-resident.

Further, no income deemed to accrue or arise in India to a foreign

mining company (FMC) through or from the activities which are confined
to display of uncut and unassorted diamonds in a Special NotifiedZone
2. “Salary” earned or salary payable for services rendered in India
including salary paid for the rest period or leave period preceded and
succeeded by services rendered in India and forms part of service
contract of employment.
3. Salary received by Indian national from the government in respect
of services rendered out of India. However, any allowance or any
perquisite paid abroad is fully exempt from tax under section 10(7).
4. Any dividend paid by an Indian company outside India.
5. Interest payable by:-
a. Government or a resident person, unless such interest is payable in
respect of borrowed funds used for a business or profession carried out

30
 of India, or by a non-resident person on funds borrowed for the
business or profession carried in India.
b. the permanent establishment in India of a non- resident assessee
and engaged in the business of banking in India to such resident or its
head office or any permanent establishment or any other part of such
non-resident outside India.
6. Royalty payable by the government or a resident person unless such
royalty is in respect of any right of property or services utilised for a
business or profession carried out of India for the purpose of earning
any income out of India or by a non-resident person in respect of any
right of property or services utilised for the purpose of business or
profession carried in India or for the purpose of earning any income in
India.

Exception:
(i) Royalties payable for the transfer of any data, drawings, etc.
outside India or imparting of information outside India under an
approved agreement by the Central Government made before the
1st day of April, 1976.
(ii) Royalties paid In lump sum, by a resident for transfer of computer
software, supplied by a non-resident along with the computer or
computer-based equipment under a scheme duly approved by
Government of India.
7. Fees for technical services payable by the government or a resident
person unless such fees are payable in respect of services utilised in a
business or profession for earning any income out of India or by a non-
resident person for services utilised in a business or profession carried
on by him in India or for earning any income from any source in India.

Exception: fees are payable under agreement made before the 1st day of
April, 1976 and approved by the Central Government.
The income of a non-resident is deemed to accrue or arise in India
under any of the above clauses, shall be included in the total income of the
non-resident, whether or not, the non-resident has -
(i) a residence or place of business or business connection in
India; or
(ii) has rendered services in India.
Eligible Fund Managers in India will however not to constitute business
connection of offshore funds as per an exception inserted vide Section 9A.

2.7 RECEIPT VS. REMITTANCE

The “receipt” of income refers to the first occasion when the

recipient gets the money under his control. Once an amount is received as
31
income, any remittance or transmission of the amount to another place
does not result in “receipt” at the other place.

2.8 ACTUAL RECEIPT VS. DEEMED RECEIPT

It is not necessary that an income should be actually received in

India in order to attract tax liability. An income deemed to be received in
India in the previous year is also included in the taxable income of the
assessee. The Act enumerates the certain incomes which were dealt with
earlier. E.g. If a resident holds an immovable property in Delhi and the
rent received thereon is transferred to his bank account in Mauritius, the
rent would still be subject to income tax though the income has not been
received in India.

2.9 RECEIPT VS. ACCRUAL

Income is said to be received when it reaches the assessee; when

the right to receive the income becomes vested in the assessee, it is said to
accrue or arise.

2.10 BASIS OF CHARGE FOR DIVIDEND INCOME

Dividend is the shareholders’ share in the profit of the

company.Under the companies Act, 2013, dividend can be declared by a
company only at its Annual General Meeting (AGM). Hence, date of
AGM is the date on which dividend is declared.

Dividend declared at the AGM is popularly called the final

dividend. Dividend upon its declaration at the AGM become final and
can not be reduced or called back.

Interim dividend is dividend declared by the Board of Directors

during the year between two AGMs and hence the same can be reversed or
reduced later.

Accordingly, as per section 8 final dividend is deemed to be the

income of the previous year in which it is declared irrespective of the fact
when it was received by the shareholder.

However, interim dividend will be deemed to be the income of the

previous year in which the amount of such dividend is unconditionally
made available by the company to a shareholder irrespective of the date of
declaration of interim dividend.

Deemed Dividend under Section 2(22) is deemed to accrue or arise

in the year in which it was paid or distributed.

32
 In view of the express provisions regarding its taxability of
dividend, the method of accounting dividend is not relevant.
This can be summarised as follows:

Type Date of chargeability

Final Dividend Date of declaration
Interim Dividend Date of distribution
Deemed dividend Date of Distribution

Illustration
10) Determine the scope of total income in respect of the following
incomes if the assessee is (1) resident or (2) resident and ordinarily
resident or (3) resident but not ordinarily resident:

Income Rs
Interest from U.S. Growth Bonds received in India 10,000
Interest from U.S. Growth Bonds received in U.S. 60,000
Interest from U.S. Growth Bonds received in U.S but remitted 60,000
to India
Capital gain on house in Mumbai but sold in London 60,000
Capital gain on house in Mumbai but sold in Mumbai 60,000
Rent of a villa in Paris received in Paris 60,000
Rent of a villa in Paris received in Paris 60,000
Agricultural Income from Tea Gardens in Sri Lanka received in 60,000
Sri Lanka
Agricultural Income from Tea Gardens in Sri Lanka received in 60,000
Mumbai
Profit from a Branch in Sydney 60,000
Profit from a branch in Mumbai 60,000
Salary for working in Jaipur received in Jaipur 60,000
Salary for working in Jaipur received in Lahore 60,000
Salary for working in Lahore received in Jaipur 60,000
Salary for working in Lahore received in Lahore 60,000

33
Solution

Particulars R&OR R&NOR N R

Interest from Uncle Sam Bonds U.S.A. 60,000 60,000 60,000

received in India
Interest from Uncle Sam Bonds U.S.A. 60,000 ___ ___
received in U.S
Interest from Uncle Sam Bonds U.S.A. 60,000 ___ ___
received in U.S but remitted to India
Capital gain on house in Mumbai but 60,000 60,000 60,000
sold in London
Capital gain on house in Mumbai and 60,000 60,000 60,000
sold in Mumbai

Rent of a villa in Paris received in Paris 60,000 ___ ___

Rent of a villa in Paris received in 60,000 60,000 60,000
Mumbai
Agricultural Income from Tea Gardens 60,000 ___ ___
in Sri Lanka received in Sri Lanka

Agricultural Income from Tea Gardens 60,000 60,000 60,000

in Sri Lanka received in Mumbai

Profit from a Branch in Sydney 60,000 60,000* __

Profit from a branch in Mumbai 60,000 60,000 60,000

Salary for working in Jaipur received in 60,000 60,000 60,000
Jaipur
Salary for working in Jaipur received in 60,000 60,000 60,000
Lahore
Salary for working in Lahore received 60,000 60,000 60,000
in Jaipur
Salary for working in Lahore received 60,000 60,000 60,000
in Lahore
Total 9,00,000 6,60,000 6,00,000

*if controlled from India

34
2.11 HEADS OF INCOME

11.1. Classification of income

An assessee is liable to pay tax on his total income from all the
source of incomee.g. salary, interest, rent etc.Each source of incomehas its
own unique nature and features. Hence, the Act prescribes elaborate rules
and methods for computation of income from each such source.To begin
with section 14 classifies the sources under five broad heads of income,
viz:-
1) Salaries (Section 15 – 17);
2) Income from house property (Sections 22 – 27);
3) Profits&gains from business or profession (Sections: 28-44);
4) Capital gains (Sections 45 – 55); and
5) Income from other sources (Section 56 – 59)

11.2. Importance of different heads

Each head of income provides a different scheme of computation
of taxable income under that head depending upon the nature of income
and the complexities attached with that head of income. For this reason,
each of the head of income has its own deeming provisions and provisions
for exclusions and deductions and deductions of expenses etc.

It is therefore, necessary that an income belonging to a specific

head must be computed under that head only. If an income cannot be
placed under any of the first four heads, it will be taxed under the head
“Income from other sources”.

Aggregate of net income under various heads gives total income of

the assessee person, from which deductions are made under chapter VIA.
The net result is called the total income or sometimes taxable income.
Therefore, computation of income under different heads provides the
starting point of determining the tax liability.

11.3. Heads to be mutually exclusive

All the heads of income are mutually exclusive. Any income
considered under a particular head of income e.g. Income from house
property, will not be taken into consideration for another head e.g. profits
and gains from business and profession and vice versa. Sometimes, it may
not be possible to have water-tight compartmentalization because of the
nature of the income. In such cases the income is classified under the most
plausible head of income or as the residual income under the head income
from other sources.

Illustration
11) Under which head would the income of 3 offices, which are
compositely let out on rent by alongwith services like intercom, security
guard, telephone connection, furniture and fixtures, etc. of Swayam will
be taxable ?

35
Solution
The rent in respect of the commercial property is taxableunder the
head “Income from House Property”. However, income arising out of
rentals of the other services should be taxable under the head “Income
from Other Sources”. Alternatively, the entire income arising out of the
property as well as the services could be taxable as “Income from
Business or Profession”

As per departmental clarification, the income in respect of

properties should be taxed as “Income from House Property” and the
income out of rentals of the other services is taxable under the head
“Income from Other Sources”.

11.4. Tax on aggregate income under all the heads

Although the income is computed under five different heads of
income, tax will be computed on the aggregate or total income from all the
sources taken together at the prescribed rates. However, different tax
treatment is given to different items. For instance, long-term capital gains
(LTCG) are generally taxed at 20%. But LTCG on listed securities is
exempt from tax subject to some conditions. Similarly, short-term capital
gain on sale of equity shares is taxed at 15%. The amount of such short-
term capital gains would be deducted from the aggregate total income and
accordingly tax rates are applied. Similarly, shipping companies are taxed
based on tonnage of the shipping fleet. Lotteries, horse races , Income
from undisclosed sources cash credits etc. are taxed at the maximum rate
of tax @ 30% All such incomes are excluded and tax is computed on rest
of the total income.

11.5. Common residential status for all the heads

Section. 6 provides that where a person is resident for the purpose
of any particular head of income, he will also be considered as resident for
the purposes of computation of income under all the heads of income.

11.6. Separate sources of income under one head.

Income is classified for each head of income. That head of income
may have different sources of income falling under that head. For instance
a person may be in receipt of his salary from more than one employer or
rent from two or more house properties or more than one business. All
such sources will be clubbed together to arrive at the income from that
head.

11.7. Expenses under each head of income

There are different provisions for allowing expenses under each
head of income. The recent trend Is to restrict and standardize the
allowance of expenditure. For instance only professional tax and standard
deductionare allowed under the head salaries. Standard deduction of 30%
for repairs etc. is allowed from the income from house property. Similarly
cost of acquisition and improvement and transfer expenses are allowed
under the head Capital gains.
36
11.8. Expenditure incurred in relation to income not includible in
total income
Section 14A provides that no deduction shall be allowed in
respect of expenditure incurred by the assessee in relation to exempted
income that is the income which does not form part of the total income
under this Act

2.12 SELF ASSESSMENT QUESTIONS

1. Why determination of residential status is important to ascertain the

income tax liability?
2. Explain the legal provisions in respect of residential status of an
individual.
3. Briefly state the provisions for determination of the residential status
of an (a) AOP (b) Firm (c) Company.
4. What is meant by the control and management of business?
5. When the income is deemed to accrue or arise or be received in India?
6. Explain that the incidence of income-tax depends upon the residential
status of an assessee”.
7. Determine whether the following is true or false:
a. The business income received by X Ltd. an Indian company in
New York is foreign income of X.
b. The dividend received from a foreign company in India is Indian
Income
8. Write short notes on the following:
a. Income received in India
b. Income deemed to accrue or arise in India
c. Control and management of a business
9. Enumerate various heads of income.
10. State with reason that an Income be computed under two heads of
income.
11. How are the different heads mutually exclusive?
12. Would expenses in respect of collection of dividend be deductible
from income from other sources?
13. Ascertain residential status for the assessment years 2021-21 and
2020-21 of Greg, an Australian citizen, came to India as a
commentator during the following period:

37
 From To Purpose
10.2. 2019 20-04-2019 World Cup
6-10-2019 25-12-2019 England Tour
04-01-2020 12-01-2020 Training Camp
02-03-2020 29-03-2020 Triangular Cup

Greg was in India for 340 days in four previous years from 2014-15 and
2018-19 and 260 days in three previous years from 2011-12 to 2013-14 .
(Ans: 2021-22 Non-resident, 2020-21- R but RNOR)
14. Determine the residential status of Parthiv ,who made his debut in
international cricket on 11-03-2019. In the first match, he was
injured and had to be hospitalized. In U.S. He was discharged from
the hospital on 29-03-2020. He returned to India took over as coach
for Indian cricket team visiting Pakistan. .Parthiv submits the
following details of his stay outside India :
From To Purpose/ Place
10-042020 28-04-2020 World Cup in Dhaka
03-05-2020 09-07-2020 England Tour
27-08-2020 10-09-2020 Canada Tour
11-09-2020 01-10-2020 US holidays
04-01-2021 26-03-2021 Pakistan Tour

(Ans: Non-Resident)
15. Ashok, an Indian citizen, leaves India on May 22, 2019 for vacation
to Uganda and returns on April 9, 2020. Determine the residential
status of X for the assessment year 2021-22-19? (Ans: Non-Resident)
16. Determine the residential status for the assessment year 2021-22, of
Sheila, a foreign citizen , who visits India since 1985 every year for
a period of 100 days
(Ans: Non-Resident)
17. Fletcher, a foreign citizen comes to India, for the first time on March
20, 2018 On September 1, 2018, he leaves India for Nepal on a
business trip. He comes back on February 26, 2021 to permanently
stay in India . Determine the residential status of X for the
assessment year 2020-21 and 2021-22
( Ans Resident and Not Ordinarily Resident for both the years )
18. Determine residential status for the assessment year 2021-22 of
Marconi, an Italian citizen, who comes to India for the first time on
May 28, 2019.
(Ans: Resident and Not Ordinarily Resident)
38
 19. Determine the scope of total income in respect of the following
incomes if the assessee is a (1) resident or (2) a resident and
ordinarily resident or (3) a resident but not ordinarily resident

New York business income controlled from India Rs. 100000

Mumbai Business Controlled from Paris Rs. 40000
Salary in New York as Indian ambassador Rs. 90000
Profit on sale of shop in Kolkata paid in Karachi Rs. 50000
Acting in Indian film –fee received in Rome Rs. 70000
Past untaxed profits remitted to India from London Rs. 120000

(Ans. Resident 350000, R & OR 250000, R& NOR 350000/ past profits
not taxable)
20. Blair, a French Citizen had the following incomes during the year
ended 31-03-2021. Compute his Total Income for Asst. Year 2021-
22 if he is a (1) resident or (2) resident and ordinarily resident or (3)
resident but not ordinarily resident.

Income from House property in India Rs. 30000

Income from property in Rome Rs. 20000
Interest from Bank account in India Rs. 2400
Income from business in Bangladesh controlled from India Rs.32000
Interest from Bank account in U.S. Rs. 22000
Salary earned and received in Tokyo Rs. 24000
Income earned and received in London Rs. 26000
Dividend from British Company received in India Rs.34000

(Ans. Resident 19400, R&OR Rs. 98600 R but NOR Rs 66400)

21. Following are the particulars of income of X for the previous year
2020-21:
i. X is employed in India and receives Rs. 24,000 as salary.
ii. Dividend received in London on June 3, 2020 Rs. 31,000 from a
foreign company;
iii. Share of profit received in London on December 15, 2020 from a
business situated in Sri Lanka but controlled from India:
iv. Rs. 60,000; remittance from London on January 15, 2020 out of
past untaxed profit of 2013-14 earned and received there: Rs.
30,000 and interest earned and received in India on May 11, 2020
Rs. 76,000.

39
Find out his gross total income, if he is (a) resident and ordinarily
resident, (b) resident but not ordinarily resident, and (c) non-resident
for the assessment year 2021-22
(Ans: R&OR, his gross total income will be Rs. 105000i.e. Rs. 24,000
+ Rs. 31,000 + Rs. 60,000 R& N OR Rs. 84,000 i.e., Rs. 24,000 + Rs.
60,000). Non-resident, Rs.24,000.
The remittance from London of Rs. 30,000 is not taxable it is not
“receipt” of income. The interest of Rs. 76,000 earned and received
in India is taxable 2015-16. )




40
 3
SALARIES
(Sections 15, 16 & 17)
Unit Structure :

3.1 Introduction and Objectives

3.2 Basis of Charge
3.3 Scope of Salary income
3.4 Tax Treatment of Some Receipts:
3.5 Taxable Value of Cash allowances-
3.6 Taxable Value of Perquisites
3.7 Classification of Perquisites
3.8 Valuation of Perquisites
3.9 Profits in Lieu of Salary
3.10 Deductions -Entertainment Allowance, Profession Tax
3.11 Practical Illustrations
3.12 Self- Assessment Questions

3.1 INTRODUCTION AND OBJECTIVES:

“Salaries” is the first and most important of the five heads of

income given in section 14. Concept of “Salaries” under the tax laws
is very wide than what is understood in common parlance. It includes
not only the salary but also various other receipts, gifts, perquisites and
benefits.

The lesson takes up for detailed discussion these provisions

contained in sections 15, 16 and 17. Section 15 defines the basis of
charging salaries. Section 17 defines salaries and section 16 prescribes
the deductions to be made while computing the income under the head
“Salaries”

3.2 BASIS OF CHARGE, MEANING

2.1. Basis of charge

Section 15 provides that the following income shall be chargeable
to income tax under the head "Salaries":-
(a) any salary due from an employer or a former employer to an
assessee in the previous year, whether paid or not;
(b) any salary paid or allowed to him 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;

41
(c) any arrears of salary paid or allowed to him 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
Explanation 1.—For the removal of doubts, it is hereby declared that
where any salary paid in advance is included in the total income of any
person for any previous year it shall not be included again in the total
income of the person when the salary becomes due.
Explanation 2.—Any salary, bonus, commission or remuneration, by
whatever name called, due to, or received by, a partner of a firm from
the firm shall not be regarded as "salary" for the purposes of this
section.

2.2. Scope
The scope of section 15 is very wide and covers the following in
the ambit of what is taxable under the head "Salaries:-
1. Past salaries or arrears of salaries paid during the previous year,
if the same has not been taxed anytime in the past.
2. Present salaries whether paid or not.
3. Future salaries or salaries in the nature of advance. However
the section clarifies that where any salary paid in advance is
included in the total income of any person for any previous
year it shall not be included again in the total income of the
person when the salary becomes due.
4. Salaries received from a former employer of present employer.

The section by way of explanation clarifies that any salary, bonus,

commission or remuneration, by whatever name called, due to, or
received by, a partner from the firm is deemed to be the income under
the head profits and gains from business and profession under section
28, and accordingly the same shall not taxable under the head
“salaries”.

2.3. Meaning and Characteristics

Section 15 does not define “salaries”. Instead, it only says past,
present and future salary will be taxable under the head “salaries”.
Hence, it becomes imperative to ascertain with the help of common
practices, tests, norms, yardsticks, criteria and essential characteristics
whether any particular income is ‘salary” or not. Some of these criteria
are as under: -

1. Employer-employee relationship
In common parlance, salary means the remuneration paid by
an employer to the employee for rendering personal services to the
employer under an expressed or implied contract for rendering such
services.

Accordingly, the term salary implies existence of following

conditions namely:-
a) There are two parties – the employer and the employee.
b) The parties have an agreement of employment.

42
 c) The agreement can be express or implied.
d) Agreement is for rendering of personal services by the
employee to the employer.
e) In consideration of the services rendered, the employer makes
payment of remuneration to the employee.

2. Compensation for services rendered :

Salary is paid as a compensation for the services rendered in
his capacity of an employee, not in any other capacity. Remuneration
paid by a law firm to lawyer employee for representing cases of firm’s
clients before the courts, will be salary. But if the lawyer receives fees
from his personal clients for representing them before the courts, it will
not be salary but his professional income because he is not an
employee of the clients.

It will be true of services rendered by other professionals like

doctors, architects; lawyers, Chartered Accountants etc. to their clients
and the fee paid by their clients will be professional fees not salary.

3. Name or form not important

Any remuneration paid as compensation for services rendered
by an employee to his employer will be treated as salary regardless of
name given such as salary or wages or otherwise so long as -
 the relationship between the payer and payee is that of employer
and employee; and
 the payment is made as a compensation for the services rendered
by the employee
Section 17 specifically provides that salary includes payment made in
other forms like gift, perquisites etc.
4. Mode of Payment
Salary may be paid in cash or kind.
5. More than One Source
Salary may be from more than one employer.
6. Type of Employment
Salary may be in any capacity like part-time employment or full
time employment.
7. Past, Present and prospective employer
Salary may be received from not just the present employer but also
a prospective employer and in some cases even from a former
employer for example pension received from a former employer.
8. Real intention to pay
Salary income must be real and not fictitious. There must exist an
intention or an obligation to pay and `receive salary.
9. Subsequent Surrender of Salary not tax-free
Salary is taxed on due basis. A subsequent surrender of salary will
not be tax-free except where an employee surrenders his salary to the
43
central government, and then the salary so surrendered will not be
treated as taxable income of the employee.
10. Tax- Free salary
Salary paid as tax-free is also taxable in the hands of the employee,
though contractually income tax on such is borne not by the employee
but by the employer.
11. Time of taxability;
Salary is taxable in the year of receipt or in the year of earning or
accrual of the salary income, whichever is earlier. Therefore, method
of accounting employed by the employee is not relevant to determine
the taxability of salary. Taxability of salary in different situations will
be as under :
 Current salary will be taxable on accrual basis, as it will be
payable later.
 Past salary or arrears will be taxable, when they are actually
received, if they were not taxed earlier.
 Advance salary will be taxable at the time of receipt, but it will
not be taxed again when it is accrued.
12. Salary received by individuals only
Only an individual can earn salary because it is a compensation for
personalised services. Other persons such as firm, HUF, company,
AOP, BoI, Artificial Juridical Person (AJP) or a body corporate cannot
earn salary as they are incapable of rendering personal service.
13. Voluntary payments taxable as salary
Voluntary payments like gift by an employer to an employee also
form the part of taxable salary as per section 17.
14. Salary in respect of services rendered in India
Salary leave salary and pension paid outside India including salary
paid to Indian diplomats by the Government of India are deemed to
accrue and arise in India under section 9 and are taxable in India
although the same is exempted u/s 10.
15. Gross salary Taxable
Compulsory deductions from salary such as professional tax,
income tax, employees’ contribution to provident fund, medical
scheme or staff welfare scheme etc. are instances of application of
income. While computing total income, these deductions are added
back in the net salary received and gross salary will be taxable.

3.3 SCOPE OF SALARY INCOME

Section 15 defines the scope and basis of taxation of salaries.

Section 17 gives an inclusive definition of salary.
Salary includes:-
a. Wages;
b. Any Pension or Annuity;
c. Any Gratuity;
44
 d. Any fees, commission, perquisites or profits in lieu of or in
addition to salary or wages;
e. Any advance of salary;
f. Any encashment of leave salary;
g. Annual accreditation to provident fund above the prescribed
limits; and
h. Any amount of credit to provident fund of employee to the
extent it is taxable.

The term “salary" includes not only the basic salary but also
fees, commission, bonus, taxable value of cash allowances and
perquisites, retirement benefits, encashment of leave salary, advance of
salary, arrears of salary, various allowances such as dearness
allowance, entertainment allowance, house rent allowance, conveyance
allowance, value of perquisites by way of free housing, free car, free
schooling for children of employees, etc. Tax treatment of all such
receipts is given later in this lesson.

3.4 TAX TREATMENT OF CERTAIN RECEIPTS

3.4.1 Basic Salary

Basic salary is the amount of salary fixed as per the terms of
employment. It may be a pre-determined fixed sum or a graded amount
enhanced by pre-fixed annual increment. Under the graded system, the
terms of employment fix the salary at say Rs.12000-300-15000-500-
20,000. This means that the employee begins his job with a basic
salary of Rs 12,000 per month. Next year the salary will be raised to Rs
12,300 p.m. after an annual increment of Rs. 300. The annual
increment will continue till he reaches level of Rs 15,000 p.m.
Thereafter, the annual increment will be Rs 500 per annum till he
reaches level of Rs 20,000 p.m. Once his salary becomes Rs 20,000
p.m. , his annual increment will be frozen. No further increment will
be given thereafter, unless he is promoted and placed in other grade.

3.4.2 Fees, Commission and Bonus

Any fees, commission, bonus, or incentive paid or payable to
an employee by an employer is taxable and is included in salary. Such
Commission etc. may be payable as a fixed amount or as a percentage
of turnover or partly fixed and partly as a percentage of turnover.
When commission is based on fixed percentage of turnover achieved
by employee, it is included in basic salary for the purpose of grant of
retirement benefits and for computing, certain exemptions discussed
later

3.4.3 Arrears of salary:

Arrears of salary are taxed on receipt basis, if the same has not
been taxed earlier. However, the employee will be entitled to claim
relief u/s 89 in respect of such arrears.

3.4.4 Advance Salary:

Salary received in advance is taxable on receipt basis in the
year of receipt. There will be no tax again in the year in which the
salary actually accrues. The employee can claim relief under section 89
45
in respect of advance salary. It is important to note that salary received
in advance is taxable not advance or loan against salary . For example,
salary for three months is given in advance, it will be taxable when
received. But loan or advance is granted against three months’ salaries
will not be taxable.

3.4.5 Gratuity
Gratuity is a lump-sum payment to reward an employee for his
past services, on his retirement or termination. Amount received as
gratuity on termination is exempt under section 10(10) as under:-
1 Employees of Central or State governments or local authorities
fully exempt
2 Employees in a concern covered under the Payment of Gratuity
Act, 1972 is exempt subject to the lowest of the following
amounts :
a. Amount of gratuity received,
b. Rs 20,00,000
c. 15 days’ salary for every completed or part thereof in
excess of six months, year of service computed based
on last salary drawn taking numerator of 26.
*Completed year of service X 15 days X Last Drawn Salary
26
3 Employees in a concern NOT covered under the Payment of
Gratuity Act, 1972 is exempt subject to the lowest of the
following amounts :
a. Amount of gratuity received,
b. Rs 10,00,000
c. Half month’s salary for every completed year of service
in excess of six months (ignoring the fraction)
computed based on average salary of last 10 months
preceding the retirement.
*Completed year of service* ½* Avg Salary for last 10 months
[*Completed year of service includes a year or part thereof in excess of
six months]

Illustrations
1. Ashik, a government servant, retires 1 June 2020 after 22 years and
9 months’ service. He receives gratuity of Rs 15,00,000. Determine the
Determine the amount of exemption of gratuity if he was drawing a
basic Salary for 10 months preceding the month of his retirement at Rs
40,000 p.m.

Solution
Since Ashik is a government employee, amount received as
gratuity on retirement is fully exempt U/s 10(10).

46
2. In the above case, what will be the effect if Ashik was working with
ABC Limited, covered under the Payment of Gratuity Act, 1972?

Solution:
Since Ashik is the employee of a private employer ABC
Limited covered under the Payment of Gratuity Act, 1972, exempt
amount will be Rs 5,30,769 being the least of the following:
I. Actual amount received 15,00,000
II. Notified amount 10,00,000
III.15-day’s salary based on last drawn salary 5, 30,769
Rs.40, 000* 15/26 *23 years
Taxable 9,69,231

3. In the above case, what will be the effect if ABC Limited is NOT
covered under the Payment of Gratuity Act, 1972?

Solution:
Ashik is the employee of a private employer ABC Limited not
covered under the Payment of Gratuity Act, 1972. Exempt amount will
be the lowest of the following:

I. Actual amount received 15,00,000

II. Notified amount 10,00,000
III.15-day’s salary based on last drawn salary 4,40,000
Rs.40, 000 X (11) = 23*0.5 -fraction ignored)
Taxable 10,60,000

3.4.6 Commuted Pension

Pension is a regular payment made at monthly or annual
intervals by an en employer to his employee on his retirement as a
reward for his past services. When an employee is allowed to forgo a
portion of pension in lieu of a lump sum amount called commutation of
pension. Tax treatment of these two kinds of pension as per (Section
10(10A) is as under:
a) Regular payment of pension, monthly or quarterly or at some
other interval, periodical or uncommuted pension is fully taxable in the
hands of all employees, whether government or non-government.
b) Lump sum payment received by an employee on commutation of
pension as per service rules will be-
i. fully exempt for employees of the Central or State Government
or a Local Authority or a Statutory Corporation
ii. partially exempt for other employees to the extent of -
a. One half of the total value of pension If the employee has
not received any gratuity on termination of employment,
and
b. One-third of the total value of pension, if the employee has
received any gratuity on termination of employment.
47
Illustrations
4. Determine the amount of taxable pension, if A receives a monthly
pension of Rs 50,000 from the government.

Solution:
Regular monthly payment of pension received from
government will be fully taxable.

5. Determine the amount of taxable pension, if A receives a monthly

pension of Rs 50,000 a private limited company.

Solution:
Regular monthly payment of pension received from
government will also be fully taxable. It is immaterial who the
employer is.

6. A retires from government service on 01-06-2020. He receives a

pension of Rs 5000 p.m. till 31-12-2020.

On 01-01-2021, A opts for commutation of 40 per cent of the value of

his pension for a lump sum amount of Rs 1,20,000. After
commutation, A gets Rs 3,000 per month being 60% of the total
pension.

Determine the taxability of pension if no gratuity is paid to A.

Solution:
a) Lump sum amount of Rs. 1,20,000 received on commutation of
pension will be exempt as A is a government employee
b) Regular pension Received during the year 2020-21 Rs 44,000
*will be fully taxable
Period Rate Total
Rs Per Month Pension Rs.
01-06-2020 to 31-12-2020 5,000 35000
01-01-2021 to 31-03-2021 3000 9000
44000

7. What will be the position if A is a private employee?

Solution
Commutation of Pension Rs.
Amount Received on commutation of 40% of salary 1,20,000
Full Value of Pension = 1,20,000 /40% 3,00,000
Amount Received on commutation 1,20,000
½ of full value of pension Rs 3,00,000* ½ 1,50,000
Exempted Amount - being the lower of the two 1,20,000
Taxable Amount [1,20,000-1,20000] NIL

Regular pension of Rs 44,000 will be taxable irrespective of the fact

that A is government employee or a private employee or whether or
not he is in receipt of any gratuity.
8. Ascertain taxability, if A also receives Rs 50,000 as gratuity.

48
Solution:
a. Regular pension of Rs. 44,000 fully be taxable in all cases.
b. If A is a government employee, the amount received on
commutation of pension will be fully exempt regardless of the fact
that he also receives gratuity.
c. If A is a non- governmental employee and is in receipt of gratuity
and he receives Rs 1,20,000 on commutation, he will be entitled to
exemption of Rs 1,00,000 being 1/3 of full value of pension (1/3 of
Rs 3,00,000). Balance Rs 20,000 will be taxable.

3.4.7 Encashment of Leave Salary {Section 10(10AA)}

When an employee, instead of enjoying leave at his credit, gets
the same encashed, following tax treatment will be given:-
a. Amount received on encashment of leave during the continuity of
employment by all the employees, will be taxable in the year of
receipt. However, the employee will be entitled to relief u/s 89.
b. Amount received on encashment of leave at the time of retirement
by way of superannuation or otherwise, will be-
i. fully exempt in case of an employee of the Central or State
Government ; and
ii. Partially exempt in case of any other employee including
employees of a local authority or a statutory corporation to the
extent of the lowest of the following and only the balance will
be taxable:-
i. Actual amount received
ii. Notified Amount currently Rs 3,00,000;
iii. 10 months’ average salary or
iv. Cash equivalent of leave to be encashed
i.e. (Leave Entitlement - Leave Availed) X Average Salary

Other Points
a) Salary for the purpose of calculating the exempt leave encashment
means total of basic salary, dearness allowance and commission on
sales achieved by salesmen.
b) Average salary means average salary of 10 months immediately
preceding the retirement.
c) Leave entitlement is to be taken at 30 days for each completed
year of service. Part of the year will be ignored and not considered
as completed year of service.
d) If leave is encashed from more than one employer, the exemption
limit will be taken in respect of all the employers.
e) Superannuation means retirement on attaining a certain age e.g. 60
years. Courts have held that termination and even resignation of the
employee will entitle them to exemption under this section.
f) Leave to the credit of the employee means total leave available as
reduced by total leave availed.

49
Illustration
9. A retires from his job with the Government of Maharashtra on 01-
06-2020 after rendering services for 22 years and 9 months. He was
drawing a basic Salary for 10 months preceding the month of his
retirement at Rs 8000 p.m. Under the service rules, A was entitled to 2
months’ leave for every year of service or part thereof against which A
availed total earned leave of 10 months. On Retirement, A received
Leave entitlement of Rs 2,88,000 i.e. 36 months @ Rs 8000 p. m
worked out as Leave entitlement - 23 years @ 2 months 46 months for
every year of service or part thereof less -leave availed 10 months.
Compute amount of exemption of encashment of leave salary

Solution:
Since A is a government employee amount, received as leave
encashment on retirement is fully exempt U/s 10(10AA).

10. What will be the exempt amount if A was employed with

MSFC?

Solution:
MSFC is a statutory corporation not regarded as government.
Hence, exemption would be at par with a private employee and worked
out as the least of the following:
Rs.
Amount Received on leave encashment 2,88,000
Notified Amount 3,00,000
10 months’ average pay@ Rs. 8,000 p. 80,000
Encashment of unavailed leave 12 months 96,000
Exempted Amount - being the lower of the two 80,000
Taxable Amount [2,88,000-80,000] 2,08,000
*Leave entitlement – 22 months – Leave availed 10 Months ignoring
fractional period of service of 9 months as it is not rounded off.
11. What will be the exempt amount if A receives the leave
encashment while in service?

Solution
Leave encashment during continuance of employment is fully
taxable regardless of who the employer is.

3.4.8 Retrenchment compensation

Any compensation received by a workman at the time of
retrenchment or closure or transfer of undertaking including change of
management resulting in interruption of service is exempt fully if it is
paid under a scheme of closure approved by the central government
and in other cases, least of the following amounts would be exempt
under section 10(10B):
 Notified amount presently Rs. 5,00,000
 15 days’ average pay for every completed year of service or any
part thereof in excess of six months
 Actual amount.

Other points;
 Compensation under a Voluntary Retirement Scheme is exempt
under section 10(10C).
50
 Where an assessee has to pay higher tax on account of such lump
sum receipts, he is entitled to relief u/s 89.
 If an assessee claims exemption under this section, then he can not
claim relief under section 89[1].

Illustration
12. A workman was retrenched after 20 year and 10 months service
His average salary was Rs 15,000 per month. He was paid Rs 1,80,000
as the retrenchment compensation. Calculate the exempt amount.

Solution
The exempt amount will be least of the following:
Rs.
Actual Amount Received 1,50,000
Notified Amount 5,00,000
#10-1/2 months’ average salary 1,42,500
Rs 15,000 per month
Exempted ( Lowest of the above 1,42,500
Taxable 1,50,000-1,42,500 7,500
#(15 days for 20 years and 10 months rounded off to next number.
Relief u/s 89 not available if he claims the above exemption.

3.4.9 House Rent Allowance

House Rent Allowance or HRA paid by the employer to the
employee to meet the housing expenses of the employee, is exempt
from tax under section 10(13A) being the least of the following :
 HRA actually received.
 Rent paid by employee in excess of 10 per cent of salary during the
previous year.
 50 per cent of salary, if employee is residing in the 4 metro cities of
Mumbai, Delhi, Chennai or Kolkata and 40 per cent of salary, if
the employee is residing at any other place.
Salary for the purpose of calculating the amount of deduction
from HRA means the aggregate of Basic Salary, Dearness Allowance
and Commission received by salesman on sales achieved by him but it
does not include other receipts such as overtime pay, conveyance
allowance, etc.
In simple words, so long, the rent paid is upto 10% of the
salary, no HRA will be exempt. It is only if the rent paid is more than
10 % , then the actual HRA may be exempt to the extent of 40% or
50% of the salary.

Illustrations:
13. Calculate the amount of HRA exempt under section 10(13A)
in respect of an employee residing in Mumbai who was in receipt of
basis salary of Rs. 65,000 Dearness allowance of Rs. 35,000 and HRA
of Rs 25,000.and he paid the actual rent of Rs 15,000 per annum.

51
Solution:
Exemption of HRA will be the least of the following:

Rs.
Actual HRA Received 25,000
Rent paid in excess of 10 % of salary 5,000
15,000- {10 %( 65,000+35,000)}
50% of salary 50,000
Exempted ( Lowest of the above) 5,000
Taxable 25,000-5,000 20,000

14. Compute the exempt HRA If rent paid is Rs. 50,000.

Solution:
Rs.
Actual HRA Received 25,000
Rent paid in excess of 10 % of salary 40,000
50,000- {10 %( 65,000+35,000)}
50% of salary 50,000
Exempted ( Lowest of the above 25,000
Taxable 25,000-25,000 NIL

15. Calculate the amount of HRA exempt under section 10(13A)

in respect of an employee residing in Agra who was in receipt of basis
salary of Rs. 65,000 Dearness allowance of Rs. 35,000 and HRA of Rs
60,000 and he paid the actual rent of Rs 50,000 per annum .
Solution: Rs.
Actual HRA Received 60,000
Rent paid in excess of 10 % of salary 40,000
50,000- {10 %( 65,000+35,000)}
40% of salary 40,000
Exempted ( Lowest of the above) 40,000
Taxable 60,000-40,000 20,000
Note - The time and notified amounts , wherever applicable in this
lesson, are technically not in syllabus but given to keep the text
logically complete. These should be available in question.

3.5 TAXABLE VALUE OF CASH ALLOWANCES

Most employers give different types of allowances or fixed monetary

amounts to the employees over and above basic salary. These
allowances are paid to meet some personal expenses like house rent,
conveyance etc. or for performance of his duties such as entertainment
or telephone allowance or partly for personal and partly for official
purpose.

All such allowances are taxable and included in gross salary

unless specific exemption is provided in respect of such allowance.
Accordingly, the allowances are of four categories –
a) Allowances, which are fully taxable;
b) Allowances, which are wholly and unconditionally exempt
c) Allowance, which are tax-free or taxable subject to certain
conditions or limits.

52
d) Allowances, in respect of which exemption is allowed only for a
sum prescribed on ad hoc basis.

Some of these allowances are dealt with as under:-

3.5.1 Allowances Fully Taxable :

a. Dearness Allowance a compensatory allowance paid to meet
high prices and increased cost of living.
b. City compensatory allowance also a compensatory allowance
paid to employees posted in big cities like Delhi, Mumbai to
compensate the high cost of living in such cities
c. Non- practicing allowance normally paid to compensate
professionals in government service like doctors, chartered
accountants, engineers, scientists etc., who are prohibited from
doing private practice.
d. Warden or proctor allowance paid in educational institutions for
working as a Warden of the hostel or as a Proctor in the
institution.
e. Deputation allowance paid to an employee sent from his
permanent place of service to some place or institute on
deputation for a temporary period.
f. Overtime allowance paid as extra wages paid to an employee
putting in extra working hours over and above his normal hours of
duty.
g. Servant allowance, if paid in cash even if the employee may
have employed servants.
h. Other allowances by whatever name called such as family
allowance, project allowance, marriage allowance, education
allowance, holiday allowance etc. as these allowances are not
specifically exempt.

3.5.2 Wholly and unconditionally exempt Allowances

a. Allowances paid to Judges of the High Courts and the Supreme
Court.
b. Allowances paid by the Unites Nations organization to its
employees.
c. Foreign allowance paid by the government to its employees
being Indian citizen posted out of India for rendering services
abroad
d. Pension to gallantry award winners like Paramvir Chakra,
Mahavir Chakra , Vir Chakra etc. - section 10(18).

3.5.3 Wholly or partly tax-free Allowances:

Following allowance are wholly or partly tax -free. Some of
the exemptions are conditional. Most of the conditions and monetary
limits, though prescribed in rules are incorporated in brief to make the
subject comprehensive. Brief description of these allowances is as
follows:-

53
a. Entertainment allowance
Entertainment allowance received by the private sector
employees for entertaining the business relations and clients of the
employer is fully taxable by even if the entire amount may have been
spent by them.

For the Government employees, the allowance is partially

exempt by way of deduction under section 16(ii) upto 20 per cent of
basic salary, or Rs 5,000 per annum, whichever is lower. Full amount
is first included in the salary and then the exempted amount is reduced.

b. Fixed medical allowances

Fixed medical allowance is taxable but reimbursement of
medical expenses is exempt upto Rs 15,000

c. Tiffin / lunch allowance

Tiffin / Lunch Allowance paid in cash is fully taxable but Cost
of lunch provided to employees on their workplace or even lunch
coupons redeemable with restaurants is a tax-free perquisite subject to
fulfillment of certain conditions prescribed by the CBDT.

d. Transport allowance
Any allowance or benefit given to meet the expense wholly and
necessarily in the course of employment is fully exempt under section
10(14) subject to the assessee presenting the proof in this regard.

Under Rule 2BB ,Transport or conveyance allowance paid to

meet conveyance expenses of the employee from place of residence to
place of work and back is exempt upto Rs 1600 per month ( Rs 3,200
in case of a handicapped employee) .

For example, if A is in receipt transport allowance @ Rs 2,000

per month, Rs 400 per month (Rs 2000-Rs 1,600) will be included in
total income of A

e. Other allowances for official purposes

Under section 10(14) allowances (other than conveyance
between residence and office) are exempt to the extent of amount
actually spent from those allowances by the employee in meeting the
official expenses.

For example, where an employee receives uniform allowance

of Rs 5000 and sends Rs 4000 on uniforms, then Rs 4,000 actually
spent will be exempt and unspent sum of Rs 1000 will be taxable in the
hands of the employee.

Some other examples of the allowances paid for meeting

expenses incurred exclusively in performance of official duties are
travelling allowance, daily allowance, conveyance allowance, helper
allowance, research allowance.

f. Education allowance:
Education Allowance given to meet the education expenses of
the employee’s is taxable in hands of employee. However, under rule
54
2BB a sum of Rs 100 per month per child per year (Rs 300 if the child
stays in a hostel) subject to maximum of two children is allowed as
exemption from such allowance received by the employee.

g. Out of station allowance

An allowance granted to an employee working in a transport
system to meet his personal expenses in performance of his duty in the
course of running of such transport from one place to another is
exempt upto 70% of such allowance or Rs.6000 per month, whichever
is less.

3.6 TAXABLE VALUE OF PERQUISITES

1. Definition and Meaning of Perquisites

Under section 17(2), value of perquisites allowed to an employs
is chargeable to tax, but it does not define the term. In normal
commercial parlance, perquisites denote any casual emoluments or
benefits attached to an office or position in addition to salary or wages.
Perquisites are normally allowed in kind - not in cash; and are
measurable in monetary terms.

2. Taxability of perquisites
Perquisites are included in taxable salary only if they are:
-allowed by an employer to an employee,
-allowed during the continuation of employment,
-directly dependent on service,
-resulting in personal advantage to the employee; and
-derived by virtue of employer’s authority.

3. Taxable perquisites
Sec. 17 (2) provides the following list of taxable perquisites:
i. Value of rent-free accommodation provided to the employee by
the employer.
ii. Value of concession in rent in respect of accommodation provided
to the employee by his employer.
iii. Value of any benefit or amenity granted free of cost or at a
concessional rate in any of the following cases:
a) by a company to an employee who is a director thereof
b) by a company to an employee who has substantial interest in
the company
c) by any employer to an employee who is neither is a director,
nor has substantial interest in the company, but his monetary
emoluments under the head ‘Salaries’ exceeds 50,000 rupees.
iv. Any sum paid by the employer towards any obligation of the
employee
v. Any sum payable by employer to effect an assurance on the life of
assessee
vi. The value of any other fringe benefit given to the employee as may
be prescribed.
55
4. Classification of Perquisites
As per section 17(2), perquisites are of three broad categories :
 Perquisites taxable in all cases
 Perquisites not taxable at all
 Perquisites taxable only in the hands of specified employees.

A. Perquisites taxable in all cases:

The following perquisites are taxable u/s 17(2) in the hands of all
type of employees, whether specified or not:
1. Value of Rent free house provided by employer
2. Value of house provided at concessional rate
3. Any obligation of employee discharged by employer e.g. payment
of club or hotel bills of employee, salary to domestic servants
engaged by employee, payment of school fees of employees’
children etc.
4. Any sum paid by employer in respect of insurance premia on the
life of employee

B. Perquisites, which are tax-free for all the employees

Section 17 specifically states that the following will not be
taxable in the hand of the employees :-
a. Medical benefits within India
Exempted medical benefits within India, include:-
i. Medical treatment provided to an employee or any member
of his family in a hospital maintained by the employer.
ii. Any sum paid by the employer in respect of any expenditure
incurred by the employee on medical treatment of himself
and members of his family:
iii. In a hospital maintained by government or local authority or
approved by the government for medical treatment of its
employees.
iv. In respect of the prescribed diseases or ailments in any
hospital approved by the Chief Commissioner.
v. If the ordinary medical treatment of the employee or any
member of his family is done at any private hospital, nursing
home or clinic, the exemption is restricted to Rs.15000.
b. Medical benefits outside India
Exempted medical Treatment outside India includes :
i. Any expenditure incurred by employer on the medical
treatment of the employee or any member of his family
outside India.
ii. Any expenditure incurred by employer on travel and stay
abroad of the patient being the employee or member of his
family and one attendant who accompanies the patient in
connection with such treatment, shall be exempt to the
following extent :
56
 (i) The expenditure on medical treatment and stay abroad shall
be exempt to the extent permitted by the Reserve Bank of
India.
(ii) The expenditure on travel shall be exempt in full provided
the gross total income of the employee (including this
expenditure) does not exceed Rs.2,00,000.
c. Medical Health Insurance within India
Exempted perquisites in respect of medical Health Insurance
include:-
i. Premium paid by the employer on health insurance of the
employee under an approved scheme u/s 36(1)(ib)
ii. Premium on insurance of health of an employee or his
family members paid by employer on any scheme approved
under section 80D (Mediclaim).
d. ESOP or Sweat Equity
Any benefit provided by a company free of cost or at a
concessional rate to its employees by way of allotment of shares,
debentures or warrants directly or indirectly under any Employees
Stock Option Plan or Scheme ESOP/ESOS of the company offered
to such employees in accordance with the guidelines issued in this
behalf by the Central Government. However, the difference
between the fair Market Value and the issue price will be treated,
when such equity is issued at concessional price, as the taxable
perquisite value of ESOP
e. Transport
Amenity or benefit granted or provided free of cost or at
concessional rate for use of any vehicle provided by a company or
an employer for journey by the assessee from his residence to his
office or other place of work, or from such office or place to his
residence,
f. Refreshments
Refreshment provided by an employer to the employee during
working hours in office environment.
g. Others
a. Value of Leave Travel Concession in India.
b. Amount spent by the employer as its contribution to staff
welfare schemes.
c. Laptops and computers provided for personal use.
d. Rent free official accommodation provided to a Judge of High
Court or Supreme Court or an official of Parliament including
Minister and Leader of Opposition in Parliament.
e. Recreational facilities extended not to a particular employee but
to a class of employees.
f. Amount spent on training of employee or fees paid for refresher
course.

57
 g. Telephone provided to an employee at his residence.
h. Goods manufactured by the employer sold to employees at
concessional rates
i. Allowances to employees of UNO
Since FBT has been discontinued, value of cars and other
perquisites will be taxable in the hands of the employees.
C. Perquisites taxable by specified employees only
Under section 17(2)(iii) the value of any benefit or amenity
granted or provided free of cost or at concessional rate specified
employees only will be taxable. Specified employee means an
employee who is-
 a director of the employer ;or
 who has a substantial interest i.e. more than 20 % voting
power in the company; where he is employed or
 any other employee (of any employer including a company)
whose income under the head salaries exceeds fifty
thousand rupees
Salary for this purpose means salary 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 payment,
The taxable perquisites are:-
1. Free supply of gas, electricity or water supply for household
consumption;
2. Free or concessional educational facilities to the members of
employee’s household;
3. Free or concessional transport facilities;
4. Sweeper, watchman, gardener, personal attendant; and
5. Any other benefit or amenity

3.7 VALUATION OF PERQUISITES:

Perquisites are benefits granted in kind. Hence, monetary value

of the perquisites taxable in the hands of the employee is required to be
determined. Broad principles for determining the value of taxable
perquisites are stated as under:-
a) The amount actually spent by the employer will be the f taxable
value of perquisite allowed entirely for personal benefits of the
employee.
b) Taxable value of the perquisite allowed to an employee for
official purposes only shall be nil and perquisites will not be
taxable in the hands of employee.
c) Taxable value of the perquisites allowed partly for personal and
partly for official purpose, will be an amount of perquisites
reasonably used for personal purposes.

58
 Actual valuation rules NOT IN the syllabus, general principles
for valuation of perquisites are given for information

a. Accommodation & Furniture

Valuation of furnished and unfurnished accommodation is
made according to Valuation Rules. If the employer owns the
furnishings, then 10 per cent of the cost will be added to the value of
accommodation.

b. Transport
Broadly, no perquisite value is taken in the hands of individual
employees in case where :-
 common transport such as bus provided to all the employees;
or
 the employer is in the transport business; or
 a car is provided only for official use or for the purpose of
travel from residence to office.

In other cases, a reasonable cost of such transport facilities will

be treated as taxable value of perquisites in respect of such facilities

In case of a car owned by the employer is provided to an

employee exclusively for his personal uses, the taxable amount will be
determined by taking reasonable expenses incurred by the employer on
the car maintenance and depreciation on the car as per income tax
rules.

If such car is used both for private and official purposes, then a
reasonable proportion of the perquisite value relatable to the personal
use will be taken as the taxable value of the car perquisite in the hands
of the employee.

c. Domestic servant
Salary of domestic servants of employer paid by the employer,
perquisite value will be taken as per rules.

d. Gas, water or electricity:

i. Taxable perquisite of providing supply of gas, water, or
electricity will be nil, if the employer himself is engaged in the
business providing these facilities.
ii. If the employer is not in the business of supply of gas, water or
electricity, then the amount spent by the employee in providing
the facilities to the employee will be the taxable value of
perquisites in the hands of the employee provided the entire
facilities are for the personal use of the employees only. Any
amount recovered from the employee will be reduced from the
perquisite value.
iii. Where the connection for gas, electricity, water supply is in the
name of employee and the bills are paid or reimbursed by the
employer, it is an obligation of the employee discharged by the
employer. Such payment is taxable in case of all employees
under Section 17(2)(iv)
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e. Educational facilities:
i. Taxable perquisite value of education provided by an employer
being a school, college or educational institution, will be nil.
ii. If the employer is not a school, college or educational institution,
but is engaged in some other business or profession, the value of
school fees or colleges fees of the children of the employee paid by
the employer will be the taxable value of perquisites in respect if
such facility.
iii.If the children of the employee are allowed free education in an
institute run by the employer where the employer is engaged in
other activities, then the value of the perquisites is reasonable cost
of education and deemed by the income tax officer in the hands of
specified employees.

f. Medical facilities
(i) A sum up to Rs 15000 paid by the employer to the employee by
way of reimbursement of medical expenses of the employee and
his family will be exempt perquisite in the hand of the employee.
Any payment made in excess of Rs 15000 will be taxable.
(ii) If the treatment is taken in a government approved hospital or
recognized hospital, or in government hospital, no value will be
taken as the perquisite value in respect of such medical treatment
reimbursement.
(iii) If the medical treatment is done outside India, then up to the
amount approved by the RBI for such treatment, no perquisite
value will be added to the taxable income of the employee. If
payments made by the employer to the employee in this
connection exceed the amount approved by the RBI, then such
excess will be treated as taxable salary in the hands on of the
employee.
(iv) If the employer himself is a medical institution, provision of
medical facilities will not attract any tax in the hands of the
employee.
In other words, if an employer’s own institution provides
transport, education or medical facilities, there will be no taxable
perquisite value in the hands of the employee.

3.8 PROFITS IN LIEU OF SALARY

As per section 17 (3), profit in lieu of salaries includes:

1. Compensation for Termination of Employment or modification
of Terms & Conditions

The amount of any compensation due to or received by an assessee

from his employer or former employer at or in connection with the
termination of his employment or the modification of the terms and
conditions relating thereto;

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2. Payment from Employer from PF or Other Fund
Any payment (other than any pension, gratuity, HRA,
Retrenchment compensation, etc) due to or received by an assessee
from an employer or a former employer or from a provident or other
fund , to the extent to which it does not consist of contributions by the
assessee or interest on such contributions.

3. Keyman Insurance Policy

Any sum received under a Keyman insurance policy including
the sum allocated by way of bonus on such policy.

4. Sums Received from Future or Former Employer

Any amount due to or received, whether in lump sum or
otherwise, by any assessee from any person -
(A) before his joining any employment with that person or
(B) after cessation of his employment with that person.

5. Payment of Employee’s Obligation Employer

Any sum paid by the employer in respect of any obligation
which, but for such payment, would have been payable by the
assessee;

6. Payments from Certain Funds :

Any sum payable by the employer, whether directly or through
a fund, other than a recognised provident fund or an approved
superannuation fund or a Deposit-linked Insurance Fund established
u/s 3G of the Coal Mines Provident Fund and Miscellaneous
Provisions Act, 1948 or u/s 6C of the Employees Provident Fund and
Miscellaneous Provisions Act, 1952 to effect an assurance on the life
of the assessee or to effect a contract for an annuity;

7. Treatment of Annual Accretion to Provident Fund;

Provident Funds are established to provide for the retirement
benefits of the employees. The Scheme of funds envisages annual
contributions from both the employer and the employee and the
accumulation of interest on the balances. The funds are of three types,
Viz.
i. Statutory Provident Fund set up or established and administered
by the Government.
ii. Recognised Provident Fund set up by others but recognised by the
Commissioner of Income Tax
iii. Unrecognised Provident Fund set up by others but not recognised
by the Commissioner of Income Tax due to non- compliance
with the guidelines laid down for recognition.

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The above position is summarised in the following table:

Tax Treatment under Different Provident Fund Schemes(PF)

Type of Employer’s Interest on PF Payment on
Fund Contribution Retirement
Statutory Exempt Exempt Exempt
Recognised Exempt upto 12% of Exempt up to Exempt
Basic Salary, Excess notified rate. subject to
taxable Excess rules
Taxable
Unrecognised Exempt Exempt Employers’
Contribution
& interest
taxable
Other Points
1. Employer’s Contribution to all the three funds is exempt at the time
of contribution.
2. If the P.F. is deducted from the salary of the employee, salary will
have to be grossed up in all the three cases.
3. Employees’ Contribution when received back on retirement is
exempt in all the three above mentioned cases.
4. Interest on Employees’ Contribution from Unrecognised Provident
Fund will be treated as Income from Other Sources.

8. Transferred Balance:
When an unrecognised provident fund is subsequently
recognised, the balance standing in the unrecognised provident fund
are transferred to the Recognised Provident Fund is called transferred
balances and deemed to be the salary income of that year as per
section 17 (1). Such amount to the extent such balance comprises of
employees’ contribution in excess of 12% of basic salary and interest
credited in excess of 8.5% p.a.

3.9 DEDUCTIONS FROM SALARIES

The income chargeable under the head "Salaries" i.e. the

aggregate of taxable amounts chargeable as taxable salary viz. salary,
bonus , allowances and perquisites shall be computed after making the
following deductions under section 16:—

a) Standard Deduction
A deduction of rupees 50,000 or the amount of the salary,
whichever is less; (With effect from A.Y. 2020-21)

b) Entertainment Allowance
A deduction in respect of any entertainment allowance specifically
received by a government employee, a sum equal to one-fifth of
his basic salary or Rs. 5,000 whichever is less;

62
c) Profession Tax:
A deduction of any sum paid by the assessee on account of a
tax on employment ( profession tax) leviable by or under any law by
the state government.

Other than that, no further deductions are allowed under this head.

3.10 ILLUSTRATIONS

1) R, a Chartered Accountant was appointed as Finance Manager with

ABC Bank on 01/04/2012 in the Salary grade of Rs. 12000 – 500 –
20000 – 1000 – 30000.
He was entitled to Leave Travel Concession for proceeding on
leave of Rs. 4000. His actual expenditure on this account amounted to
Rs. 5000.
As the bank is situated at a place where home food is available,
R was offered Tiffin Allowance Rs. 6000, His actual lunch expenses
amounted to Rs.10,000
Reimbursement of medical expenses for treatment of R and his
family in private clinic was Rs. 50,000
The Bank has provided free unfurnished flat at Mumbai (rent
paid by Bank: Rs.80,000). However, the perquisite value of that Flat
was Rs. 30000.
The employer provided two watchmen (salary Rs. 2000 per
month each).
Free use of car for official use, car can be used for journey
between office and residence.
Free refreshments provided at place of work (Rs. 100 per day
for 200 days).
Compute Salary Income for the assessment 2021-22
Solution:
Computation of Salary Income of R for AY 2021-22 (F.Y. 2020-21)
Particulars Rs.
Basic salary (Rs 12,000 + 8 increments of Rs 500 p.a. 1,92,000
Leave Travel Concession (Exempt) NIL
Tiffin Allowance ( Taxable) 6,000
Medical Expenses Reimbursed (50000 – 15000) 35,000
Rent Free Accommodation (Given) 30,000
Watchmen’s Salary (2000 * 2 *12) 48,000
Santro Car only for Office use NIL
Free Refreshments at workplace NIL
Taxable salary 3,11,000

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2) X is in negotiation with two employer A &B, who have made the
following offers to X. Help him in making an appropriate choice.

Particulars Rupees
A B
Basic Salary 500000 50,0000
HRA – Actual Rent Rs. 200000 25,0000 0
Free House –fair rental value 50000 0 250000
Transport Allowance 100000 0
Free Use of Car – Amount spent 100000
Education Allowance for one child 5,0000 0
Free Education for 1 child. Amount spent 0 50000

Gardener Allowance 60000 0

Gardener’s salary paid by employer 60000
Salary 960000 960000

Solution

Taxable salary from employer A

Basic Salary 500000

HRA (Actual) 250000
Less : Exempt 150000 100000
(HRA or 50 per cent of salary or Rent paid less
10 per cent of salary 200000- 10% of 500000)

Education Allowance 50000

Less : Exempt (100*12) 1200 48800
Gardener Allowance 60000
Transport Allowance 100000
Less : Exempt (800*12) 9600 90400
Taxable Salary 799200

Taxable salary from employer B

Basic Salary 500000

Free House Value 50000
Free Education for 1 child 50000
Gardener's Salary(120 * 12) 1440
Free Car 100000
Taxable Salary 851440

Taxable salary will be less with B, He should be preferred to A .

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3) XY Ltd offers a job with following options to M, who is neither a
director nor he has substantial interest in the company:

I II
PARTICULARS
Rs. Rs.
Basic Salary 1,70,000 1,70,000
Bonus 6,000 6,000
Education Allowance for 2 children 10,200 --
Education facility for 2 children in an
Institution maintained by the employer -- 10,200
Sweeper Allowance 10,000 --
Free Sweeper -- 10,000
Entertainment Allowance 6,000 --
Club Facility -- 6,000
Conveyance Allowance for personal use 12,000 --
Free Car Facility for Personal Use -- 12,000
Medical Allowance 18,000 --
Medical Facility for M and Family Members
in own hospital -- 18,000
Free gas, electricity and water supply -- 4,500
Fair Rent Rent-free unfurnished house: 24,000 24,000

Which option M must choose on the assumption that he and XY Ltd.

will both contribute 10% of salary towards unrecognised PF?
SOLUTION:
I II
PARTICULARS
Rs. Rs.
Income from Salary
Basic Salary 1,70,000 1,70,000
Bonus 6,000 6,000
Education Allowance (10,200 - 2,400) 7,800 Exempt
Education Facility -- Exempt
Sweeper Allowance/Facility 10,000 --
Entertainment Allowance/Club Facility 6,000 6,000
Conveyance Allowance/Car Facility 12,000 Exempt
Medical Allowance/facility 18,000 --
Allowance for gas/electricity/water/free
facility 4,500 --
Rent free unfurnished house 13,430 7,600
Gross Salary 2,47,730 1,89,600
Taxable income is lower in option II, it should be preferred.
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3.11 SELF ASSESSMENT QUESTIONS

1. What is Salary?
2. Discuss the difference profits in lieu of salary and perquisites.
3. Discuss various deductions available under the head salary.
4. Discuss the tax treatment of the perquisites for different employees.
5. Non- specified employees pay less tax than specified employees.
Comment.
6. Rajesh is an employee of ABC Ltd. Since 1997, he is receiving
entertainment allowance of Rs. 500 p.m. He submits following
further information as on 31.03.2021 with the request to compute
his taxable salary.
a) Net Salary of Rs. 4,000 p.m. (including entertainment
allowance of Rs. 500 p.m. but after deducting income tax Rs.
500, Provident Fund Rs. 500 and Profession tax Rs. 70)
b) He is provided car for his exclusive use during office hours for
office work. The petrol and other maintenance expenses come
to Rs. 12,000 p.a.
c) Receives Leave travel concession for himself and his family for
proceeding on leave to hometown of Rs. 5,000 as prescribed,
while actual amount spent by him was Rs. 3,500.
d) During the year, he received free services of a cook. (Cost to
the employer Rs. 4,400)
e) Received Rs. 8,000 on encashment of leave to his credit.
7. Rita , an employee of R India Ltd covered by the Payment of
Gratuity Act, 1972, retired on 31 January 2021 after 35 years and 7
months’ service. At the time of retirement her employer paid
gratuity of Rs. 65,000 (exempt u/s 10(10) Rs. 51,000). She
received Rs. 50,000 being the accumulated balance of recognised
Provident Fund. The due date of salary etc was 1st day of the next
month and were paid on due date. She was entitled to a monthly
pension of Rs. 400 with effect from 1st day of February 2021,
which becomes due on the last day of the month. Compute her
total income for A.Y. 2021-22.
8. Compute the taxable income of Hitesh for the AY 2021-22.on the
basis of the following further information:
(A) Basic Salary Rs. 2,5000 p.m.
(B) House Rent Allowance Rs. 4000 p.m. Taxable value is 50% of
the amount received.
(C) Project Allowance paid during the year Rs. 12,000.
(D) Bonus paid during the year Rs. 3,6000.
(E) In retirement, on encashment of earned leave at his credit of 15
months he received Rs. 37,500. (Exempt u/s 10(10AA) Rs.
24,600)

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9. Suhas submits the following information pertaining to the year
31.3. 2021 and asks you to compute his income from salaries for
the AY 2021-22.
a) Basic Salary Rs. 5,000 p.m.
b) Dearness Allowance Rs. 3,000 p.m.
c) Bonus @ 20% on salary plus Dearness Allowance
d) Employee contribution 12.5% of basic salary +DA to RPF
Employer also contributes an equal sum.
e) Interest on balance credited to his RPF @ 14% p.a. Rs. 17,500
f) House Rent Allowance Rs. 10,000 p.a.
g) Profession tax paid by employee Rs. 840.
He retired from services on 31.3.2021 opting for commutation of
pension @ 60% and received Rs. 2,40,000 as the only terminal benefit.



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 4
INCOME FROM HOUSE PROPERTY
(SECTIONS 22- 27)

Unit Structure
4.1 Introduction and Objectives
4.2 Basis of Charge
4.3 Deemed Owner
4.4 Income Exempt U/s 10
4.5 Computation of Income from House Property
[GAV, NAV SOP, deemed let out partly let-out and partly self-occupied
Co-ownership, deductions]
4.6 Miscellaneous- Arrears, Losses, TDS and other deductions
4.7 Illustrations
4.8 Self - Examination Questions

4.1 INTRODUCTION AND OBJECTIVES

This lesson explains the complex provisions related to “Income

from house property”. Income from house Property is significantly
different from the other heads of income unlike the other heads as it
covers not only the actual income but also the notional income.

4.2 SCOPE AND BASIS OF CHARGE

2.1 Sections 22 to 27 prescribe the law in relation to taxation of

income from house property. Brief gist of these provisions is as follows :
 Section 22 defines the scope of Income from House Property.
 Section 23 gives the mode of computation of income,
 Section 24 specifies the amounts deductible therefrom.
 Section 25 deals with the amounts not deductible.
 Section 26 deals with the income of co-owners of a property.
 Section. 27 gives the cases where a person not being an owner of
the property will be taxed as the deemed owner of such property.

2.2 Section 22 provides that Annual Value of property consisting of

any building or lands appurtenant thereto of which the assessee is the
owner, shall be chargeable under the head Income from House Property.
The section specifically excludes property occupied for the purpose of
assessees own business or profession.

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2.3 An analysis of the section brings about the following attributes to
attract chargeability under the head the income from house property :-

(a) The head “Income from House Property” extends to a property

being a building or land appurtenant or adjacent thereto.

‘Building means any habitable four-wall structure covered by a

roof. It is immaterial whether the building is residential or commercial
such as warehouse, office or factory godown, wedding hall, auditorium,
business centre, etc.

‘Land appurtenant’ means the land connected or adjacent to the

building e.g. open space, approach roads, courtyard, compounds,
courtyards, backyards, playgrounds, parking spaces, etc.

(b) Income from any other property e.g. rental Income from a vacant
plot of land is not chargeable to tax under this head unless it is
appurtenant to a building.

(c) The assessee owns the property. Only owner or deemed owner of
house property is liable to tax on income under this head.

Following points are important in this regard:

(i) Any person may be the owner whether an individual, HUF, firm,
company, cooperative society or an association of persons.
(ii) Such person is the owner of the property in the previous year.
Any subsequent change in the ownership of the property is
immaterial.
(iii) A tenant is not the owner of a property. Hence, income of a
tenant from sub-letting a rented property to another tenant is also
not covered under this head. It will be taxable as business income
or income from Other Sources.

(d) The property is either let-out or used for own residence. The
section specifically excludes a property used for assessee’s own business
or profession.

4.3 DEEMED OWNER

Section 27 provides exceptions to the principle that ownership is

the basis of charging income under the head ‘Income from House
Property” The section states that following classes of persons shall be
deemed to be the owner of a property although they may not be the legal
owner thereof.
a) When an individual transfers any property to his spouse or a
minor child other than a married daughter for inadequate consideration,
such individual shall be treated as deemed owner of that property.

69
 In such cases although the legal owner of the property is the spouse
or the minor child, the transferor shall be treated as owner for the purpose
of charging income under the head income from house property.
b) The holder of an impartible estate is deemed to be the owner of
the entire property. E.g., an HUF jointly holding a property on behalf of
all its members shall be deemed to be the owner of such property although
the property may be in the name of an individual member of family.
c) A member of co-operative society, company or other
association of persons to whom a building has been allotted under a
house building scheme of society will also be deemed to be the owner of
that property.
d) A purchaser, who has received possession of a property in part
performance of a contract within the meaning of section 53A of the
transfer of property Act is deemed to be the owner of that property
despite the fact that the agreement for buying of property has not been
registered with the appropriate authority.
e) A person being a lessee, who has acquired right by way of long-
term lease of property for period of more than 12 years, is deemed to be
the owner of such property and income from that property will be
chargeable as the income from house property. This provision is not
applicable on any right by way of a lease renewable from month to month
or for a period not exceeding one year.

4.4 HOUSE PROPERTY INCOME EXEMPT U/S 10

Section 10, 11 and 13 prescribe exemptions in respect of Income

from house property of certain institutions, organisations or persons or in
certain circumstances. Some of such exemptions are as under:
i. A farmhouse used for agricultural purpose section- 10(1)
ii. Income of one Palace of an ex- Ruler - section 10(19A)
iii. A local authority section - 10(20)
iv. A scientific research association -section 10(20),
v. An Institution for development of Khadi & Village Industries -
section 10(23BB)
vi. Khadi & Village Industries Board -section 10(23BB)
vii. A body for administration of charitable & religious trusts &
endowments -section 10(23BBA)
viii. Approved funds, educational institutions or hospitals -section
10(23C),
ix. A trade union or association of trade union- section 10(24)
x. Resident of Ladakh district -section 10(26A)

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 xi. Statutory corporations/ other institution or association finance by the
government for promoting the interests of the members of the
scheduled caste and scheduled tribes- section 10(26B)
xii. Co-operative society for promoting the interests of the members of
the scheduled caste and scheduled tribes- section 10(27)
xiii. A Property held for charitable purposes -section 11
xiv. A political party -Section 13

Besides , under Section 22 a property used for own business or

profession such as letting out property to paying guests, employees’
quarters, residence of partners or directors is excluded from the income.
If such property yields any income, it will be chargeable as business
income and not house property income.

Under section 23(1) one self- occupied property of an individual or

a HUF assessee is exempt. This benefit is not available to a property
which is let out nor to non-living entities like firms, companies, etc.

4.5 COMPUTATION HOUSE PROPERTY INCOME

Section 23 lays down the methodology for computing the income

from house property. Under the section, first step is to determine the
annual value of the house property.

Section 24 provides for deductions to be made from the annual

values determined u/s 23,

These provisions are explained below:

5.1 Annual Value

Section 2(22) defines annual value “as the annual value
determined under Section 23. The section assigns no definitive meaning
to the term annual value. Hence, the term annual value is to be construed
in common parlance.

‘Annual value’ refers to the inherent capacity of a property to earn

income or the amount for which the property may reasonably be expected
to be let out from year to year.

Thus, it is not the receipt of the actual rent but the capacity of the
property to fetch rent which is determinant of its annual value. This
implies that a property need not necessarily be let out. Annual value of a
property depends the use of the property- self occupied, let out or partly
vacant etc.

The provisions of section 23 for determination of annual value are

given below:

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5.2 Determination of Gross Annual Value [GAV]
As per section 23(1)(a), Annual value of a property is higher of the
two viz.:-
a) Actual rent (AR), or
b) Reasonable lettable value (RLV).

Actual rent [AR] means the rent received or receivable if the property is
actually let out by the owner ; and
Reasonable lettable value [RLV] means the expected rent, which the
property might reasonably be expected to yield from year to year. It is not
necessary that a property must be let out. Where a property is not let out ,
RLV may be estimated based on the following factors:
i. Fair rent or the rent of similar properties in the same locality. The
fair rent may be different in different circumstances or different
contractual obligations.
ii. Municipal ratable value is the value of the property fixed by the local
authorities for the purposes of assessment of local taxes payable. It is
normally based on the market rent receivable in respect of a property
and is therefore considered as a reliable yardstick to determine the
reasonable letting value of the property.
iii. Standard Rent is the rent fixed under the Rent Control Act to control
or limit the prevailing rents in a locality. The landlord cannot charge
more rent than the limit fixed under the law. However, the landlord
is free to charge lower rent than the rent fixed under the law. Thus,
actual rent can be more or less than the fair rent but can never exceed
the standard rent.

The following diagram depicts the legal position:

Gross Annual Value-GAV
Higher of the two
Actual rent Reasonable lettable value -RLV
Higher of the two
Fair rent Municipal value
Cannot exceed Standard Rent

Illustrations
1. Find out the Gross Annual Value from the details given in respect of a
premises:
Actual Rent: Rs 10,000 per month.
Rent of similar premises in the area Rs. 15,000 per month.
Municipal ratable value Rs. 8000 per month
Standard Rent fixed under the Rent Control Act. Rs. 12,000 p.m.

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Solution:

Rs Rs
Actual rent :Rs 10,000 p.m. 1,20,000
(a) Fair rent: Rs. 15,000 p.m. 1,80,000
(b) Municipal ratable value @8000 p.m. 96,000
Higher of the (a) and (b) – fair rent 1,80,000 z
Standard Rent Rs 12,000 p.m. 1,44,000
Fair rent cannot exceed the Standard Rent. Reasonable lettable
value RLV restricted to: 1,44000
Gross Annual Value Higher of two 1,44,000

2. What will be the GAV if the Standard rent Rs. 18,000 p.m.?

Solution:

Rs Rs
Given Actual Rent: Rs 10,000 p.m. 1,20,000
(a) Fair rent - Rs. 15,000 p.m. 1,80,000
(b) Municipal ratable value: Rs. 8000 p.m. 96,000
Higher of the (a) and (b) – Fair Rent 1,80,000
Standard Rent Rs 18,000 p.m. 2,16,000
Reasonable Lettable Value RLV 1,80000
Gross Annual Value Higher of the Two 1,80,000
Standard rent being only a limiting factor is ignored.

3. What will be the annual value of the property if the Actual rent in the
above case is Rs. 20,000 per month; fair rent, ratable value and standard
rent remain at the same level of Rs. 15,000, 8000 and 12,000 per month
respectively.

Solution: Rs Rs.
Given Actual Rent -Rs 20,000 per month 2,40,000
(a) Fair rent - Rs. 15,000 per month 1,80,000
(b) Municipal ratable value@8000 p.m. 96,000
Higher of the (a) and (b) – Fair Rent 1,80,000
Standard Rent Rs 12,000 per month 1,44,000
Fair rent cannot exceed the Standard Rent Reasonable Lettable 1,44000
Value RLV restricted to
Gross Annual Value (Higher of two ) 2,40,000

5.2. Comparison of RLV and AR

Gross annual value is the higher of the two values, namely the rent
received or receivable as compared with the reasonable letting value.
Such comparison may throw two possibilities viz:- Actual rent received/
receivable is more than the reasonable letting value. In such a case, actual
rent will be the Gross Annual Value u/s 23(1) (b). OR

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(a) Conversely, the reasonable letting value is more than the actual rent
received/ receivable. In this case if the reason for deficiency or
shortfall between the actual rent the reasonable letting value is :
I. Vacancy only and no other reason, such lower rent will be taken as
the gross annual value u/s 23(1)(c) or and
II. Any other reason, reasonable letting value will be the gross annual
value.

The above position is shown in the following diagram:

Situation Gross Annual Value
Actual Rent > RLV Actual Rent
RLV > Actual Rent Reason Vacancy Actual Rent = GAV
Other reason RLV =GAV

5.3. Other Important points:-

(i) Actual rent is relevant only if the property is let out. For a property,
which remains vacant or is nor let out at all or a self- occupied
property cannot have any actual rent, reasonable letting value alone
will be the guiding factor.
(ii) The amount of rent actually received/ receivable during the previous
year will be arrived after deducting rent for the period for which the
property was vacant and unrealised rent or bad debts,
(iii) In case of composite rent, expenses on providing amenities to the
tenant such as water will be deducted to find out the actual rent.
(iv) For determining the Annual value, the actual rent shall not include
the rent, which cannot be realised by the owner. However, the
following conditions need to be satisfied for this:
(a) The tenancy is bona fide;
(b)The defaulting tenant has vacated, or steps have been taken to
compel him to vacate the property.
(c) The defaulting tenant is not in occupation of any other property
of the assessee;
(d)The assessee has taken all reasonable steps to institute legal
proceedings for the recovery of the unpaid rent or satisfied the
Assessing Officer that legal proceedings would be useless.

Illustration
4. Find out the annual value of a house let out for @ Rs 2,000 per month.
Reasonable Lettable Value is Rs 20,000.

Solution:
Annual value will be the actual rent of Rs 24,000 because it is
higher than the reasonable lettable value of Rs 20,000.

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5. What will be the GAV if the reasonable lettable value is Rs 30,000 but
the actual rent is Rs 2,000 per month?

Solution:
Annual value will be the reasonable lettable value i.e. Rs. 30,000
being higher than the actual rent of Rs. 24,000,

6. A house was let out on a monthly rent of Rs. 20,000 for 8 months only.
Remaining 4 months it remained vacant. Reasonable lettable value of the
house is Rs. 2,40,000. What would be its annual value?

Solution:
Actual rent is Rs. 1,60,000 for 8 months . However, RLV is Rs.
2,40,000 for the full year. There is a shortfall of Rs. 80,000 compared to
the reasonable lettable value.

Actual rent for full year will Rs. 2,40,000, if there is no vacancy .
Since the shortfall of Rs .80,000 is solely on account of vacancy, the gross
annual value will be Rs. 1,60,000 being the actual rent.

6.1 Computation of net annual value:

Section 23 classifies the house properties into different categories
as discussed below:

A) Self-occupied business properties:

Income from house property used for own business or profession is
exempt from tax. If any rent or other income is generated from such
property, the same should be treated as business income. Similarly,
municipal taxes, repairs, insurance premium, and other expenses incurred
on such property etc. will be admissible as business expenses.

B) Self-occupied Residential Properties (SOP):

Following are the provisions in respect of the annual value of a self-
occupied residential property .

a) Annual value to be taken as NIL

Under Section23(2) annual value of a house or part of a house
which is in the occupation of the owner( self- occupied property) for the
purposes of his own residence shall be taken to be nil.
The exemption will be available in respect of a property which
cannot actually be occupied by the owner by reason of the fact that owing
to his employment, business or profession carried on at any other place
and he has to reside at that other place in a building not belonging to him

b) Exceptions- Section 23(3)

The exemption will not be available in following two cases:-
a) If the house or part of the house is actually let during the whole or
any part of the previous year; or
b) any other benefit therefrom is derived by the owner.

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c) More than one properties – Section 23(4)
Where the self-occupied property consists of more than one house,
then the exemption shall be available only in respect of one of such
houses, which the assessee may, at his option, specify in this behalf.

The annual value of the other house or house shall be determined if

such house or houses had been let out.

In other words, where the assessee owns more than one self-
occupied properties, the assessee, at his option, may choose any one
property as self-occupied by him.

The remaining properties will be deemed or assumed to have been

let-out (DLP) even if they are occupied by him and not actually let out.
Annual Value of such properties deemed to have been let-out will be
determined based on their notional rental value as if the properties were
let-out even if no rent has actually been received by the assessee.
Deductions u/s 23 & 24 will be allowed in the normal manner on such
property.

d) Exemption only to individuals and HUFs:

This exemption is available only to individuals and HUFs. Other
non- living persons cannot avail this exemption.

e) No Deductions allowed from SOP except Interest:

Where the annual value of a SOP is taken as nil, no deduction will
be allowed from such annual value u/s 23 or 24 except in respect of
interest paid or payable on borrowed funds. In other words, municipal
taxes will not be allowed as deduction while computing, nor repair
allowance of 30% of annual value will be allowed u/s 24.

f) Provisions regarding deduction of interest : -

Following is the gist of provisions in respect of deduction of
interest on borrowed capital from income from house property:-

i) Amount of deduction
Deduction in respect of the amount of any interest payable on capital
where the property has been acquired, constructed, repaired, renewed or
reconstructed with borrowed capital will be allowable .The amount of
deduction will be restricted to actual amount subject to following limits:-
a) Rs 30,000 if the amount was borrowed prior to 01-04-1999 to acquire,
construct, renew or restructure the property.
b) Rs 30,000 if the amount is borrowed after 01-04-1999 for repairs of
the house property
c) Rs 2,00,000 if the amount was borrowed after 01-04-1999 to
borrowed
(i) to acquire or construct the property and

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 (ii) such acquisition or construction of the property is completed
within 3 years from the end of the financial year in which
capital was borrowed,

ii) Pre-construction interest

Interest payable on capital borrowed to acquire or construct the house
property , for the period prior to the previous year in which the property
has been acquired or constructed, will be allowed as deduction in five
equal instalments beginning from that previous year and for each of the
four immediately succeeding previous years:

iii) Interest allowed under other provisions :

Amount of interest will be reduced to the extent it is allowed under
any other provision of the Act.

iv) Interest on new loan to pay old loan

Where the assessee, subsequent to the capital borrowed for
construction or acquisition etc. of property takes a new loan to make
repayment of old loan, interest payable on such new loan will also be
allowed. However, any interest payable on interest will not be allowed as
deception .

v) Accrual basis
Interest on capital borrowed is allowed as deduction when it is
accrued. Actual payment during the previous year is not necessary.

vi) Other provisions:

a) Brokerage or commission paid to arrange a loan for house
construction is not allowed as deduction.
b) Interest payable on loan taken for construction etc. of a property is
allowed and not on any loan taken for payment of interest.
c) Any loss arising under the head ‘income from house property’ may be
set-off against the other heads in the same assessment year for a
period of 8 years from the year of loss.
d) The assessee is required to furnish a certificate, from the person to
whom any interest is payable on the capital borrowed, specifying the
amount of interest payable by the assessee for the purpose of such
acquisition or construction of the property, or, conversion of the whole
or any part of the capital borrowed which remains to be repaid as a
new loan.

INTERST ALLOWABLE ON LOANS TAKEN

Before AFTER 01/04/199
01/04/1999
Rs 30,000 For Acquisition or For Renovation or Repairs
Construction
Rs 2,00,000 Rs 30,000

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Illustrations
7. Find out the interest deductible U/s 24 for A.Y. 2021-22, if A borrows
Rs. 25,00,000 @ 6% p.a. on 01-04-2017 to construct a Bungalow for own
residence completed in May ,2020.

Solution:
The Bungalow is constructed within three years of taking the loan,
Rs.1,50,000 will be allowed out of interest payable Rs. 2,50,000. Interest
paid in F.Y 2017-18, 2018-19 and 2019-20 Rs 4,50,000 will be allowable
in five equal instalments of Rs 90,000 for five years beginning from A.Y.
2021-22 Total deduction will be limited to Rs 2,00,000.

8. Determine the amount of interest allowable in the above illustration if

the money was borrowed in 1998.

Solution
The deduction would be restricted to Rs. 30.000.
9. What would be amount of deductible interest if the loan was used for
repairs of the bungalow?

Solution
The deduction would be restricted to Rs. 30.000.
10. If the construction of the Bungalow was completed in June 2015,
what would be the amount of deductible interest?

Solution:
The construction is not completed within three years of taking
loan, the deduction will be restricted to Rs 30,000.

1) Let-out Properties (LOP)

Following principles will be applicable for determination of annual
value of properties let out including deemed to be let out self-occupied
properties (DLP)

5.5.1 Net Annual Value (NAV)

Net annual value of a let-out property value (NAV) is arrived at
by deducting Municipal taxes paid by the owner from GAV- (Proviso to
S. 23(1). Municipal taxes paid or borne by the tenant are not deductible.
Municipal taxes are taken on cash basis and not accrual basis.

NAV= [GAV] - [Municipal Taxes paid by the Owner ]

5.5.2 Deductions under section 24:

a) Standard deduction
From the net annual value (NAV), a standard deduction in respect
of repairs and collection charges is allowed to the extent of 30% of the net
annual value irrespective of whether the assessee has actually incurred the
expenses or not. However, if the repairs are borne by the tenant, this
deduction will not be allowed in the hands of the owner of the property.

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(b) Interest on funds borrowed
Interest on loan taken for acquisition, construction, renewal,
repairs or reconstruction is allowed on let-out properties without limit of
Rs 30,000/ 2,00,000 unlike in case of a SOP. The interest on loans, is
allowable on accrual basis. Similarly, pre-construction interest from the
date of the loan to the end of the previous year before the previous year in
which the house was acquired is amortized 1/5th per year for 5 years as in
case of SOP from the financial year in which the construction was
completed. .

Illustration
11. A took a loan on 01/10/ 2010 of Rs 10,00,000 @ 10% interest p.a
for the construction of his house. The house was finally constructed on
March 31, 2013. Calculate the pre-construction period interest and also
mention the AYs in which the deduction for such interest may be allowed.

Solution
 Loan was taken on 01/10/2014
 the house constructed in F.Y. 2016-17 (A.Y. 2017-18)
 Interest for preconstruction period 01-10-2014 to 31-03-2017
2-1/2 years X Rs 10,00,000 X 10% = Rs 2,50,000.
 Interest to be amortized in five equal instalments of Rs 50,000 each
from A.Y 2017-18 till 2021-22.

6. Property let-out and self-occupied for part of the year

A property is let-out for whole or any part of the year and self-
occupied for the remaining part of the year, shall be treated as let-out
property and computation will be made accordingly by comparing actual
rent with the fair rent for the whole property u/s 23(1). It will not be
treated as SOP as section 23(3) makes it clear the SOP shall not be let-out
for any part of the year nor should any benefit be derived from it.
7. Property partly let-out and partly self-occupied:
If a part of the property – say one or two floors or few rooms have
been let out and another part of the property is self- occupied, then for
each portion the calculation will be made separately. Relevant expenses
like property taxes and interest will be allocated suitably for each portion
and deductions will be allowed separately for each portion.
Note the difference between properties let out /SOP for split period
and with split portion used for letting out/SOP.

8. Co-ownership
Vide section 26 , property owned by more than one owners having
definite and ascertainable share therein, will not be assessed as an
association of persons but share of each owner shall be included in his
individual income. Supposing the co-owners themselves occupy the
property, share of each owner will be treated as nil. Each of the co-owners
would be entitled to the deduction in respect of interest subject to the limit
of Rs 30,000 or Rs 1,50,000, as the case may be.

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4.6 MISCELLANEOUS:

A. Recovery or realization of past arrears/ unrealsied rent.

As per the section 25A, which has been introduced in place of the old
sections 25A, 25AA and 25B, arrears of rent/ or any unrealised rent will
be taxable in the year when it is realised or recovered regardless of
whether the assessee does or does not own the property in the that year
and 30% deduction is allowable in that year.

B. TDS
Interest paid to a non-resident outside India without deduction of tax
at source will not be allowed as deduction.

C. Set off and carry forward of losses :

Any loss arising under the head “Income from House Property” in
respect of interest only can be set off against income arising from other
heads and the remaining loss will be allowed to be set off and carried
forward for a period of 8 assessment years

D. No other Deductions allowed;

No deduction would be available in respect of charges like electricity,
land revenue, ground rent, insurance, etc. even though they may be actual
outgoings since the standard deduction of 30% is supposed to take care of
all expenses.

4.7 ILLUSTRATIONS:

Find out the Gross Annual Value in the following cases:-

Property
Particulars I II III IV VV
Municipal Value 5000 5000 5000 5000 5000
Rent Received 5200 5200 5700 5700 6000
Fair Rental Value 5600 5600 5600 5800 6100
Standard Rent under NA 5500 5500 5500 7300
[Rent Control Act]

Solution:
I II III IV V
Municipal Value 5000 5000 5000 5000 5000
Rent Received 5200 5200 5700 5700 6000
Fair Rental Value 5600 5600 5600 5800 6100
Standard Rent under NA 5500 5500 5500 7300
Rent Act
Gross Annual Value 5600 5500 5700 5700* 6100*

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 House I- Fair Rent being highest
 House II- fair rent Rs 5,600 limited to Standard Rent Rs 5,500
 House III : Actual Rent being higher Rs 5700
 House IV Actual rent Rs 5,700 being higher than RLV i.e. Fair Rent
Rs 5800 limited to Standard rent RS 5,500
 House V – Fair rent being the highest Rs 6100. Standard rent is only a
limiting factor, hence ignored.
12. A owns two houses, I & II. House I is let-out throughout the
previous year. House II is self-occupied for nine months and let-out for
three months on a monthly rent of Rs 5,000. Determine Taxable income,
given the following details:-

House I House II
Municipal Value 40,000 50,000
Fair Rent 50,000 48,000
Rent Received 48,000 15,000
Municipal Taxes paid 4,000 5,000
Insurance Premium (not yet paid) 2,000 2,500
Ground Rent 1,000 1,500
Maintenance Charges 3,000 3,500
Electricity Bill 5,000 6,000

Solution:
House I House II
Gross Rental Value (fair rent for house I and 50,000 50,000
municipal value for house –II
Less : Municipal Taxes paid 4,000 5,000
Net Rental Value 46,000 45,000
Less : Deduction u/s 24
Repairs & Collection Charges 30% 13,800 13,500
Taxable Income 32,200 31,500

4.8 SELF EXAMINATION QUESTIONS:

1. What is annual value? How is it determined?

2. Discuss briefly the various expenses and allowances that are deductible
under the head “Income from House Property”
3. Mention the amounts which are not deductible from Income from
House Property
4. Write a short note on property owned by co-owners
5. Explain briefly (a) Owner of a house property (b) A member of a co-
operative society (c) Annual Value

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6. What do you mean by “Self-Occupied house property”? How is the
annual value of such property determined?
7. Explain briefly, house property “deemed to be let-out” and how the
income from such house property is determined?
8. Is interest paid on a housing loan out of India allowable as a deduction?
9. Explain with reason if the Interest paid by the assessee on borrowed
capital in the construction of the property, till the date of letting out an
admissible expenditure.
10. Discuss the provisions of Income Tax Act regarding unoccupied
residential house?
11. Enumerate and explain if any , the exceptions to the rule that
Ownership is the criterion for assessment of Income from house
property under Section 22”
12. Discuss tax liability of arrears of rent.
13. Explain the provisions of the Income Tax Act with respect to the
computation of income from a self-occupied house property.
14. Explain the tax treatment of unrealized rent.
15. Lakdawala completed construction of a residential house on 1.4.1999.
Interest paid on loans borrowed for construction during the 2 year
prior to completion was Rs 20,000/- and for the current years was Rs
10,000 The house was let out on a monthly rent of Rs. 4,000/-. Annual
Municipal tax was Rs. 6,000/-. Interest paid during the year is Rs.
15,000/-. Amount spent on repairs is Rs. 2,000/-. Fire insurance
premium paid is Rs. 1,500/- p.a. The property was vacant for 3
months. Annual letting value is Rs. 30,000/-. Compute the ”Income
from House Property” for AY 2021-22 (Ans. Rs. 8,500)
16. Ram owned a house property at Chennai which was occupied by him
for the purpose of his residence. He was transferred to Mumbai in June
2017 and therefore he let-out the property with effect from July 1,
2017 on a monthly rent of Rs. 3,000/-. The municipal tax payable in
respect of the property was Rs. 6,000/- of which only 50% was paid by
him before 31.3.2018. Interest on money borrowed for the construction
of the property amounted to Rs. 20,000/- Compute the income from
house property for the AY 2021-22( Ans. Loss Rs 8250 )
17. Arvind commenced his construction of a residential house intended
exclusively for his residence on 1.11.2012. He raised a loan of Rs.
5,00,000/- at 10% interest for the purpose of construction on
1.11.2006. Finding that there was an overrun in the cost of
construction he raised a further loan of Rs.8 lakh at the same rate of
interest on 1.10.2014. What is the interest allowable under Section 24
assuming that the construction was completed on 31.3.2016?
(Ans. Loss Rs. 1,50,000 pre- construction interest 1/5th)
18. From the following particulars of his property furnished by S,
compute income from house property . S owns a residential house

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 actually let out for 10 months for total rent of Rs. 25,000. Fair rent of
this house is Rs. 27,000 and municipal ratable valuation is Rs. 24,000.
Total outgo on account of this house included repairs of Rs. 9,000,
Municipal taxes of 18 months Rs. 9,000 and insurance premium of Rs.
1,500. Interest on funds borrowed amounted to Rs. 1,75,000.
He also owns another residential house at Andheri, which is used for
own residence. Fair rent of this house is Rs. 80,000 and municipal
ratable valuation is Rs. 75,000. Total outgo on account of this house
included repairs of Rs. 6,000, Municipal taxes Rs. 18,000 and
insurance premium of Rs. 1,500. Construction of this house was
complete in 2016 from the funds borrowed from HDFC. During the
current year, interest amounting to Rs. 90,000 was paid for the current
year and Rs. 60,000 for the last year. A further interest of Rs. 65,000
was paid on loans taken for renovation necessitated due to heave rains.
The interest pertains equally to this year as well as the last year. ((Ans:
L.O.P - loss 1,63,000 , SOP 1,50,000 –interest paid )
19. State with reason whether the following incomes will be taxable as
income from house property.

a) R lets out his house to Y for using it as his office.

b) R uses his house as the godown to store his factory goods .
c) R rents out his property as residential quarters to the workers in his
factory at a nominal rent of Rs.500 p.m.
d) R enters into a written agreement to purchase a property from Y for Rs.
5,00,000 . He has paid the consideration and taken the possession of
the property but the property is yet to be registered in the name of R.
e) R owns a property, which is given on lease to Y for a period of 6 years,
lease rent being Rs.10,000 per month. Y has a right to get the lease
renewed for a further period of 6 years.
f) R owns a property, which is given on lease to Y for a period of one
month, Y has a right to get the lease renewed for a period of one
month, in each subsequent month, and such renewal is possible with
mutual consent till 2020.
g) R owns a property, which is given on rent to Y. Y annually pays
Rs.1,50,000 as rent of the building as well as the charges for different
services ;lift, security, etc. provided by R.
h) R owns an air-conditioned furnished lecture hall. It is let out, annual
rent being Rs 5,00,000, which includes rent of building as well as rent
of air conditioner and furniture.
(Ans : a, d, e, f, and g]




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 5
PROFITS AND GAINS OF BUSINESS
OR PROFESSION
(Sections 28 to 44)
Unit Structure
5.1 Introduction and Objective
5.2 Concept of Business & Profession
5.3 Scheme of Computation
5.4 Deductions Expressly Allowed
5.5 General Deductions
5.6 Specific Disallowances
5.7 Chargeability of Profits
5.8 Miscellaneous Provisions
5.9 Presumptive Income
5.10 Typical Illustrations
5.11 Self-Assessment Questions

5.1 INTRODUCTION AND OBJECTIVE

This lesson deals with the third and most important head of income
“Profits and Gains of Business and Profession”.

Income under this head includes “profits” and “gains” of “Business

“and “Profession” including different types and forms viz. vocation,
trade, commerce, manufacture or any adventure in the nature of trade or
profession.

Sections 28 to 44 contain detailed provisions dealing with various

aspects of the income under this head including inter alia computation of
income, general and specific items allowable or not allowable as
deduction under this head to the extent contained in Sections 28 to 32,35,
36,37, 40,40A, 43B etc.

5.2 CONCEPT OF BUSINESS AND PROFESSION :

2.1 Definitions
2.1.1. Business :
Section 2(13) gives an inclusive definition of business- “Business
includes any trade, commerce, manufacture or any adventure or concern
in the nature of trade, commerce or manufacture.”

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 The definition of “business” includes not only “business” in its
general commercial sense but also trade, commerce, manufacture or any
adventure in the nature of trade, commerce or manufacture.

Business, trade and commerce refer to buying and selling of goods

or providing services for profit and other incidental activities.
Manufacturing means producing new goods or articles.

2.1.2. Profession
Section 2(36) gives an inclusive definition of “profession” viz.
“Profession" includes vocation”.

“Profession’ in common parlance means rendering of skilled

services like those by doctors, architects, lawyers, chartered accountants or
other professionals.

Vocation mean a specified occupation calling or career

especially a religious one such as services of priests, preachers delivering
sermons or discourses, management gurus, yoga gurus, palmists and
astrologers, tarot readers, plumbers, mechanics, priests performing havan
or pooja etc.

2.1.3. Adventure
The definition also alludes to the phrase “Adventure in the nature
of trade, commerce or manufacture”. The definition indicates that an
adventure need not necessarily be organised, systematic or regular. A
single act may constitute a business or profession. A single act of an
assessee , who purchased land, developed and subdivided it in smaller
plots and sold the plots was held to be an adventure in the nature of trade
or commerce or manufacture.

2.1.4. Provisions to apply uniformly

Income under this head will be uniformly chargeable to tax
regardless of the following considerations:-
a) Type or description of an activity although there are provisions
dealing with some specific cases such as presumptive tax applicable
to different activities.
b) Legality or illegality of the activity will not affect the chargeability of
income. Accordingly, income from illegal activities like theft,
bribery or smuggling or other crimes will be chargeable to tax as
much as the income of a legal and legitimate business or profession.
c) Regularity or irregularity of the business or profession. The business
or profession may be regular, irregular or occasional. Even a single
activity or adventure may be chargeable under this head if it is in the
nature of a business or a profession
d) Organised or unorganised ; and
e) Whether or not requires personal talents or skill.
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5.3 SCHEME OF COMPUTATION

3.1. Chargeable income

Under section 28 following income are chargeable to income-tax
under the head "Profits and gains of business or profession"—
(i) the profits and gains of any business or profession which was carried
on by the assessee at any time during the previous year;
Compensation for termination or modification of contracts
(ii) any compensation or other payment due to or received by any person
at or in connection with the termination of contract modification of
the terms and conditions relating thereto for ;
a. managing the whole or substantially the whole of the affairs of
an Indian company;
b. managing the whole or substantially the whole of the affairs in
India of any other company;
c. holding an agency in India for any part of the activities relating
to the business of any other person by any person;
d. vesting in the Government, or in any corporation owned or
controlled by the Government, under any law, of the
management of any property or business;
e. the 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;

Export incentives
(iiia) profits on sale of an import licence ;
(iiib) cash assistance received or receivable by any person against
exports under any scheme of the Government of India ;
(iiic) duty drawback in respect of customs or excise duty person
against exports ;
(iiid) any profit on the transfer of the Duty Entitlement Pass Book
Scheme (DEPB);
(iiie) any profit on the transfer of the Duty Free Replenishment
Certificate;
(iv)value of any benefit or perquisite, whether convertible into money or
not, arising from business or the exercise of a profession;
(v) any interest, salary, bonus, commission or remuneration due to or
received by a partner of a firm as adjusted by any amount not allowed
to be deducted under section 40(b);

86
Non- compete agreement
(va) 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,
copyright, trade-mark, licence, franchise or any other business or
commercial right of similar nature or information or technique
likely to assist in the manufacture or processing of goods or
provision for services if such amount is -
 chargeable under the head "Capital gains" or
 received as compensation, from the multi-lateral fund of the
Montreal Protocol on Substances that Deplete the Ozone layer
under the United Nations Environment Programme(UNEP), in
accordance with the terms of agreement entered into with the
Government of India.
(vi) any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy.
(via) the fair market value of inventory as on the date on which it is
converted into, or treated as, a capital asset determined in the
prescribed manner;".
(vii) any sum, whether received or receivable, in cash or kind, on account
of any capital asset (other than land or goodwill or financial
instrument) being demolished, destroyed, discarded or transferred, if
the whole of the expenditure on such capital asset has been allowed
as a deduction under section 35AD (scientific research) in earlier
years;
(viii) Amount recovered on account of bad debts allowed in the earlier
years;
(ix) Speculation Business
A business is deemed to be speculation business distinct and separate
from any other business, carried on by an assessee if transactions are of
such a nature to constitute a business , where the transactions are settled
by payment of difference in price of goods or securities and not by actual
delivery.

3.2. Scheme of Computation

1. Section 28 is the charging section. As per the section,
 aggregate of Income of all sources or business or profession
 carried on by the assessee
 any time during the previous year.
constitutes income under the head profits and gains of business or
profession.

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2. Section 29 prescribes the mode of computation that is by deducting ,
from the aggregate income under the head profits and gains of
business or profession, expenses
 incurred by the assessee
 during the previous year
 for earning such income in accordance with the provisions of -
(i) Sections 30 to 35, which provide expressly for deduction of
expenses in some cases
(ii) Sections 36 and 37, which provide for general deductions.
(iii) Section 40, 40A and 43B, which provide for non- deduction in
certain circumstances; of expenses, which are otherwise
deductible.
3. The expenses will be allowed the basis of the following principles or
conditions:-
(i) Expenses should be incurred in respect of a business or
profession carried on by the assessee.
(ii) Expenses incurred in respect of a business which is closed down
during the previous year will not be allowed.
(iii) Expenses incurred before setting of the business unless
specifically provided by law, also will not be allowed.
(iv) Barring some specific exceptions, only revenue expense are
allowed as deduction.
(v) Weighted deduction is allowable in some specific cases e.g.
scientific research under section 35 .
(vi) Some expenses are allowable in full but the other may be
allowed only partially.
(vii) Some deductions are assessee -specific, allowed only to specific
classes of assessees e.g. company or firm but not to others.
(viii)Some expenses are allowable without specific conditions while
others are subject to fulfillment of conditions attached with the
deduction
4. Section 44A to 44D provide for computation of income on
presumptive basis in case of smaller assessees like insurance agents
retailers, construction contractors, transporters etc.

3.3. Method of Accounting

As per section 145(1), income chargeable under the head “Profits
gains of business or profession” or income from other sources may be
computed according to either cash or mercantile system of accounting
regularly employed by the assessee.

88
a) Mercantile or accrual system of accounting
Under the mercantile or accrual system of accounting, income and
expenditure accrued during the previous year will be recorded in the books
and the taxable income from profits or gains from such a business or
profession will be the difference between the expenses or income accrued
during that previous year.

Actual receipt of the income or payment of expenses during the

year is not mandatory. Instead, such income may be received, or expenses
may be paid in the previous year or in a year preceding or following the
previous year.

b) Cash system of accounting

Under the cash system of accounting, incomes actually received, and
expenses actually paid during a particular previous year will be recorded
and considered for computing taxable profits or gains from a business or a
profession. Net profit under the cash system will be equal to the
difference of incomes received and expenses paid during the accounting
year whether such receipts and payments relate to that particular year or
some other year or years.

c) Hybrid system of accounting

Hybrid system of accounting combines features of both the
methods. Under this system, accounts of some items of income or
expenses are maintained according to accrual or mercantile system and
some items of income or expenses on cash or receipt basis e.g. specified
statutory dues are allowed to be deducted on payment basis although the
method of accounting employed may be mercantile.

Illustration
1. A earns commission in financial year 2019-20, which is paid in the
financial year 2020-21. In this case:
 Under the mercantile system, the commission will be taxed in the
financial year 2019-20 being the year of earning although it was
not actually received during that year.
 Under the cash system, it would be taxable in the year of actual
receipt 2020-21 (assessment year 2021-22) although it was not
earned in that year.

3.4. Income Computation & Disclosure Standards

As per section 145(2), the Central Government may notify in the
official gazette from time to time Accounting Standards to be followed by
any class of assessees or in respect of any class of income. Such
accounting standards are called Income Computation and Disclosure
Standards (ICDS). So far , the CBDT has notified 10 Income Computation
and Disclosure Standards (ICDS), effective from A.Y. 2017-18 onwards.

89
5.4 DEDUCTIONS EXPRESSLY ALLOWED

In computing income under the head profits and gains of business

or profession, following expenses are expressly allowed as deductions :

4.1. Rent, Rates, Taxes, Repairs & Insurance for Building

Section 30 provides for deductions of the following amounts paid
towards rent , repairs etc. :-
a) As rent or for repairs of the premises occupied by the assessee as
tenant.
b) for current repairs to the premises occupied by the assessee otherwise
than as a tenant,
c) for land revenue, local rates or municipal taxes subject to the
provisions of section 43B ; and
d) as insurance premium paid against risk of damage or destruction of
the premises .

The deduction is subject to the following modifications:-

(i) Only revenue expenses will be allowed. Capital expenses are not
allowed as deduction under this section.
(ii) Where any premises is partly used as dwelling house by the assessee,
only proportionate amount of rent or repairs determined by the
assessing officer will be allowed as per section 38.

4.2. Repairs & Insurance of Machinery, Plant & Furniture

Section 31 provides for deductions of payments of following sums
towards repairs and insurance of machinery, plant or furniture “-
(i) Payment for current repairs of machinery, plant or furniture if such
expenses are revenue expense and not capital expenses;
(ii) Payment for insurance premium paid against risk of damage or
destruction such machinery, plant or furniture.

The deduction is subject to the following modifications:-

(i) Where any machinery, plant or furniture is only partly used for
business or profession of the assessee , only proportionate amount of
above payments determined by the assessing officer will be allowed.
(ii) Machinery hire charges are not allowed under section 31 but under
section 37 as residual expenses.

4.3. Depreciation
4.3.1. Conditions for claiming depreciation:
Section 32 provides for deduction in respect of depreciation
subject to certain conditions given below :-
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(i) Claim not necessary
Depreciation will be allowed as deduction irrespective of whether
or not the assessee makes a claim for deduction so long as the conditions
for the allowance of depreciation are satisfied.
(ii) Depreciation allowed on eligible assets only:
Depreciation will be allowed only on the following assets called
depreciable assets:
a) buildings, machinery, plant or furniture, being tangible assets;
b) Know-how, patents, copyrights, trademarks, licences, franchises or
any other business or commercial rights of similar nature, being
intangible assets .
“Building” means only the superstructure, not the land on which it is
constructed.
“Plant” includes ships, vehicle, books including technical know-how,
scientific apparatus and surgical equipment used for the purpose of
business or profession but does not include tea bushes or livestock or
buildings or furniture and fittings.
(iii) Assets not eligible for depreciation
Following assets are not eligible for depreciation:
a) Foreign car when acquired between 01-03-1975 and 31-03- 2001
and
b) Any machinery or plant if the actual cost thereof is allowed as a
deduction in one or more years under an agreement entered into by
the Central Government under section 42.
(iv)Ownership – Partial ownership:
Assessee must own the depreciable asset wholly or partly as the
sole owner or the co-owner thereof. In case of an asset owned by different
assessees, each co-owner will be entitled to depreciation on his
contribution to the cost of asset.

Exception
Depreciation will be allowed on capital work or renovation or
construction of any structure in building though not owned by the
assessee, which is held on lease or other right of occupancy and the new
structure is owned by the assessee
(v) Purpose or user of the assets
The assessee must use the asset for the purpose of his business or
profession.
(vi) User of the assets during the previous year:

91
The assessee will entitled to claim deprecation
a. at full rate prescribed in respect of an asset acquired by the
assessee during the previous year and is put to use for the
purposes of his business or profession for a period of 180 days or
more.
b. at 50% of the rate prescribed, if the asset is put to use during the
previous year for a period of less than 180 days; i.e. 179 days or
less.
The condition is applicable on an asset acquired during the year
and no other asset. This is because the machinery would undergo wear and
tear even if it was not put to actual use
Illustration
2. A Machine purchased on 31-03-2020, is put to use on 01-04-2021.
Depreciation will not be allowed in the previous year 2019-20 as
the machine is acquired but not put to use. However, full depreciation will
be allowable in the previous year 2021-22 (Assessment Year 2022-23)
4.3.2. Additional Depreciation
Section 32(1)(iia) and section 32AD allow deduction of additional
depreciation over and above the normal depreciation as per the following
scheme:-
(a) Eligibility assessee
Any assessee being an industrial undertaking engaged in the business
of manufacture or production of any article, thing or transmission of
power.
(b) Rate of additional depreciation allowable
(i) 20% of the actual cost of new plant or machinery (not being
ships or aircrafts) acquired and installed after 31st March,
2005.
(ii) 35% of the actual cost in case of the assessee being a
manufacturing undertaking or enterprise set up in the notified
backward areas of the States of Andhra Pradesh, Bihar,
Telangana and West Bengal on or after 1st April, 2015 and the
Assessee acquires and installs new plant & machinery between
01-04 2015 & 31-03-2020.
(iii) 50% of the above rates i.e. 10% or 17.5%, where the plant or
machinery is acquired and installed for less than 180 days of
the relevant previous year and the balance 50% will be allowed
in the immediately succeeding previous year
(c) Assets not eligible for additional depreciation
a. Ships and aircrafts;
b. Second hand machinery used by any other person in or out of
India;
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 c. Machinery installed in a residential premises or a guesthouse;
d. Any office appliances or road transport vehicles;
e. Any plant or machinery, actual cost of which is already allowed
as a deduction e.g. asset for scientific research; and
f. Buildings, furniture & fittings and old plant
4.3.3 Important Terms :
(i) Block of Assets
As per Sec 2(11) “block of assets” means a group of assets falling
within a class of assets comprising of —
a) Tangible assets being buildings, machinery, plant or furniture;
b) Intangible assets being know-how, patents, copyrights, trademarks,
licenses, franchises or any other business or commercial rights of
similar nature, in respect of which the same percentage of depreciation
is prescribed.
Thus, “block of assets” is a classification of assets based on the
twin criteria viz :-
(a) Class of asset viz. building, plant, furniture or machinery to which
the asset belongs to ; and
(b) Rate applicable on the asset within that class .
The assets within a class eligible for same rate will form a block of
assets but not assets from different groups having same rate nor the
assets from different classes having same rate. A block may have
a single asset in it.
(ii) Written Down Value (WDV) of an asset
Written down value of an asset means:
a. actual cost to the assessee of the asset acquired in the previous
year, and
b. the actual cost to the assessee less all depreciation actually allowed
thereafter.
(iii) Written Down Value (WDV) of block of assets
Written down value of any block of assets, means
a. the opening WDV of the block of assets of
 the assessee or
 the previous owner or entity, in case of slump sale,
amalgamation, succession of business , demerger, conversion
into company etc. or holding /subsidiary company )
b. adjusted by: -
(i) the increase by the actual cost of any asset falling within that block,
acquired during the previous year; and

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(ii) the reduction of the moneys payable in respect of any asset falling
within that block, which is sold or discarded or demolished or
destroyed during that previous year together with the amount of the
scrap value, if any, so, however, that the amount of such reduction
does not exceed the written down value as so increased.

This is depicted in the following chart :

Opening W.D.V. of the block as on 01-04-2020

ADD
Actual cost of new assets acquired falling within the block of assets
in the financial year 2020-21
DEDUCT
Money received/ receivable / scrap value of the asset falling within the
block sold, discarded, demolished or destroyed
during the financial year 2020-21
RESULT ( BALANCE)
Negative : Zero: Balance but no assets
Taxable as No depreciation left in block:
short term capital No depreciation
gain short term capital
Loss
Balance of adjusted block with assets
DEDUCT
Depreciation at applicable rate
RESULT
Closing W.D.V. of the block as on 31-03-2021

(iv) Other important points:

a. Any other things or benefit which can be converted in terms of
money cannot be deducted
b. If the resultant block value figure is negative because the sale
proceeds exceed the original block value plus increases, it will be
treated as short term capital gain.
Illustration
3. Opening balance of a block of assets comprising of 4 machines
(depreciation @ 25%) is Rs 5,00,000 as at 01-04-2020. A new machine
with depreciation @ 25% was purchased On 01-06-2020 for Rs 2,00,000
and an existing machine was sold for Rs 4,00,000.
Ascertain the closing value of block as on 31-03-2021 depreciation
for the Assessment Year .Y. 2021-22.
Solution Rupees
WDV as on 1/4/2020 5,00,000
Add: Purchase during the year 2,00,000
7,00,000
Less: Sales during the year 4,00,000
Adjusted Block 3,00,000
Depreciation @ 25 per cent 75,000
WDV of block as on 31 /3/2021 2,25,000
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 (v) Actual Cost
Actual cost is determined on the following principles
(a) Subsidy or grant to be reduced to determine actual cost
As per section 43(1) , actual cost means the actual cost of the assets to
the assessee as reduced by that portion of the cost thereof, if any, as has
been met directly or indirectly by any other person or authority by way of
subsidy or grant and expenses incurred for acquiring the asset or
installation.

Grant /subsidy whether of revenue nature or of capital nature are

taxable as income, unless it has been reduced from the actual cost of a
depreciable asset.

Illustration
4. ABC purchases a machine for Rs 10 lakh with non- refundable subsidy
of Rs. 4 lakh from SIDBI. Actual cost of the machine will be Rs. 6 lakh
i.e. Rs. 10 lakh-Rs 4 lakh.

(b) Scientific Research Asset

Actual cost of asset purchased for scientific research and brought
into business use will be Actual Cost minus deduction available under
section 35.

Illustration
5. A purchases a machine for scientific research for Rs 10 lakh with the
non- refundable subsidy of Rs. 5 lakh from SIDBI. The machine is eligible
for deduction under section 35 to the extent of Rs. 3 lakh. Actual cost of
the machine will be Rs. 2 lakh i.e. Rs. 10 lakh- Rs 5 lakh - Rs. 3 lakh

(c) Gift , inheritance etc.

Actual cost of asset acquired by way of gift or inheritance will be
the WDV to the previous owner.

Illustration
6. If A gifts away to B the machinery in the above illustration, the cost
of machine to B will also be Rs. 2 lakh, which was the cost to A.

(d) Enhanced cost

Where in the opinion of the assessing officer, an asset is acquired
at an enhanced cost to claim more depreciation and reduce tax liability,
actual cost will be equal to the actual cost of asset used and transferred
earlier but now reacquired or cost of repurchase, whichever is less.

Illustration
7. A sold a machinery having WDV of Rs 2 lakh for Rs. 3 lakh and
repurchased it after two years at the prevailing market value of Rs. 10
lakh. If the assessing officer is of the opinion that the machine is
repurchased for claiming more depreciation, he can ignore the enhanced
purchase value of Rs. 10 lakh and treat Rs. 2 lakh as the actual cost.

95
4.3.3 Mode of computation
Depreciation is calculated on the WDV of the block after adjusting
the sales and purchase during the year in that block.
Rates of depreciation for different assets are taken as prescribed in
rules.

Depreciation will not be allowed on a block if-

(i) WDV of that block comes to zero, even if some assets in that block
may be existing.
(ii) no assets are left in the block and the become empty, or ceases to
exist, . WDV of the block will be treated as short term loss.

Depreciation will be allowed at 50% of the prescribed rate, if the

asset is put to use for less than 180 days in the year of acquisition.
Straight Line Method (SLM) method is applied in case of the
assets of the power companies i.e. undertakings engaged in generation or
generation and distribution of power at the prescribed rates of depreciation
on the actual cost of the assets.
Additional depreciation of 20% or 35% on actual cost is allowable
as discussed above.
Different treatment is given to depreciation on foreign cars
purchased between 1975- 2001 as depreciation has been denied to such
cars subject to some exceptions discussed earlier.
Depreciation will not be allowed on scientific research assets,
entire cost of which is allowed as deduction under section 35.

4.3.4 Succession of Business

In case of succession or takeover of a business of one entity by
another entity, aggregate depreciation for a year will not exceed the
amount of depreciation, had such event not taken place and such
depreciation shall be apportioned between the old and new entity . Some
cases of succession are as under :-
a. conversion of a firm or sole proprietor into a company -section
47(xiii)/(xiv),
b. conversion of a private or unlisted public company, into a limited
liability partnership- section 47(xiiib), and
c. amalgamation, demerger or succession of business - section 170.

Illustration
8. Under a scheme of amalgamation, A Ltd, transfers to B Ltd,
machinery having WDV of Rs 3,65,000 on 1-09-2020. Calculate the
depreciation in the hands of A Ltd. & B Ltd. if rate of depreciation is 20%.

96
Solution:
a. Depreciation for the full year if the amalgamation has not taken place:
Rs. 73000 [20% on Rs. 3,65,000 ]
b. Aggregate depreciation for A.Y. 2021-22 cannot exceed Rs. 73000
c. Pro rata allocation of depreciation for the two periods :
Pre amalgamation – 153/365 X 73000 = Rs 30,600
[01-04-2020 to 31-08-2020-= 153 days]
Post amalgamation – 212-365 X 73000 = Rs 42,400
[01-09-2020 to 31-03-2021=212 days]

4.3.5 Depreciation to be allowed even if no claim made

As per explanation 5 to section 32, depreciation will be allowed
whether or not the assessee has claimed the deduction in respect of
depreciation in computing his total income

4.3.6 Loss on Sale of Machinery

When an asset is sold, discarded, demolished or destroyed in the
previous year following rules apply:

a) When the block does not become empty, assets are still existing
therein and some value is left in the block, sales proceeds/ scrap value will
be deducted from the value of the block and depreciation will be allowed
on the on the resultant value of the block after adding actual cost of
assets acquired ,if any .

Illustration
9.One of the assets from a block with depreciation @ 30% having WDV
of Rs. 5 Lakh is sold for Rs. 1 Lakh; the resultant value of the block will
be Rs. 4 Lakh and the depreciation will be Rs. 1.20 Lakh
b) When the block does not become empty, assets are still existing
therein but no value is left in the block, depreciation will not be
allowed.

Illustration
10. One car from a block of four cars having opening WDV of Rs 5 lakhs
is sold for Rs. 5 Lakh. The value of the adjusted block will be zero. No
depreciation will be allowed although three cars still exist in the block.
c) Where the sale proceeds are more than the adjusted WDV of the
block, the resultant surplus will be treated as short term capital gain
regardless of the fact that assets are still left in the block or the block
is empty.

Illustration
11. In the above example, the car is sold for Rs 8 Lakh, the resultant
surplus of Rs 3 lakh will be taxable as short- term capital gain.
d) Where no assets are left in the block and the block becomes empty
but the WDV is not fully written off, then
97
 there will be no depreciation allowance and
 existing WDV will be treated as terminal loss or short term capital loss
due to cessation of the block as result of sales,

Illustration
12. All assets in a block having opening WDV of Rs 5 lakh sold for Rs 3
Lakh. The block becomes empty as there are no assets in it. No
depreciation will be allowed and the balance of Rs 2 lakh will be treated as
terminal depreciation or short term capital loss
e) When the depreciation is allowed on the actual cost/ WDV of the
assets of the undertakings engaged in generation or destitution of
power called power companies, following rules will apply:
 When an asset viz. any building, machinery, plant or furniture in
respect of which depreciation is allowed, is sold, discarded,
demolished or destroyed in the previous year not being the year in
which it is first brought into use, terminal depreciation will be allowed.
 Terminal depreciation is the deficiency or shortfall between the written
down value and the sales proceeds / or moneys payable including
scrap value, insurance, salvage or compensation moneys payable in
respect thereof.
 Terminal depreciation is not allowed in the year in which it was first
brought to use.
 Such deficiency must be actually written off in the books of the
assessee.
 Any surplus arising therefrom is called the balancing charge and taxed
as income under section 43.
 Any moneys received over and above the depreciation allowed will be
treated as capital gains under section 50A.
 Under the old laws , actual cost motor cars was restricted to Rs.
25,000, although the actual cost could be higher. In such a case actual
cost/deficiency will be taken proportionately in the ratio of actual cost
and Rs. 25,000
 Sale includes a transfer by way of exchange or a compulsory
acquisition under any law for the time being in force but does not
include a transfer, in a scheme of amalgamation.

Illustrations
13. A machine costing Rs 1 lakh is sold for Rs 15,000. Depreciation
of Rs 80,000 was written off on it.
The Written down value of the machine
Rs.1,00,000 - 80,000 = Rs 20,000.
The deficit ( 20,000-15,000) = Rs 5,000
Terminal depreciation = Rs 5,000.

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14. If the machine is sold for Rs. 90,000,
Surplus- (Rs 90,000-20,000) = Rs 70,000
Balancing charge Rs 70,000
Maximum to the extent of depreciation allowed.

15. If the sale price is Rs.1,05,000,

Surplus (1,05,000-20,000)= Rs 85,000
Balancing Charge= Rs. 80,000 ( to the extent of depreciation allowed ) ,
Balance Rs 5,000 Capital Gain

4.3.7 Unabsorbed Depreciation

Vide Section 32 (2) , amount of depreciation not deducted in any
previous year due to lack or inadequacy of profits or gains is treated as
unabsorbed depreciation.

Unabsorbed depreciation will be carried forward to the next

following previous year and deemed to be part of allowance for that year.

If there is no deprecation allowance for that previous year, the

carried forward unabsorbed depreciation shall be deemed to be the
allowance for that previous year, and so on for the succeeding previous
years for indefinite period. In other words, the unabsorbed depreciation
is treated as part of the current depreciation and can accordingly be set-off
against any other head of income even where the business has been
discontinued.

Illustrations
16. If the depreciation allowable is Rs 80,000 but the profits before
depreciation is Rs 50,000 , then depreciation of Rs 50,000 will be
deducted and the balance of Rs 30,000 will be unabsorbed depreciation.

17. Determine taxable income &unabsorbed depreciation :

Particulars Rs.
Business Income (before depreciation) 10,00,000
Depreciation allowable as per Income Tax Act 16,00,000
Income from other sources 8,00,000

Solution:
Particulars Rs.
Business Income before depn. 10,00,000
Less: Depn. to the extent of profits 10,00,000 NIL
Income from other sources 8,00,000
Balance of the current depreciation 6,00,000 2,00,000
(16,00,000 -10,00,000 )
Taxable Income Rs. 2,00,000

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18. Assume depreciation of Rs. 20,00,000 in above case.

Solution:
Particulars Rs.

Business Income before Depn. Depreciation to 10,00,000 NIL

the extent of profits 10,00,000
Income from other sources 8,00,000
Unabsorbed Depreciation for the current year to 8,00,000 NIL
the extent of income
Taxable Income NIL
Unabsorbed Depreciation to be carried forward 2.00.000

19. Find value of block on 31-03-2021 from the following:

A. Written down value on April 1, 2020

Particulars & Dep Rate) Rs.

Plant A,B & C -15% 1,00,000

Plant D & E – 40% 2,60,000
Plant F – 50% 70,000
Building A & B -10% 2,00,000
Building C&D - 5% 7,00,000
Building E -Temporary Sheds E -100% 8,00,000

B. Purchase during the previous year 2020-21

Date Particulars Rs.

02-04-2020 Plant G -50% 60,000

01-05-2020 Plant H-15% 18,000
01-06-2020 Furniture-10% 60,000
01-08-2020 Building G- 5% 5,00,000
01-09-2020 Computer-60% 1,00,000
01-10-2020 Franchise Rights -25% 10,00,000

C. Sales during the previous year 2015 -16

DATE PARTICULARS (RS.)

31-10-2020 Plant C 25,000
31-01-2020 Plant D 15,000
01-06-2020 Furniture 50,000
06-03-2021 Building E 2,00,000

Temporary sheds were put to use in the previous year.

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Solution
Computation of Depreciation / Cost of Block

Block Rate Block Purchase Sales Block Dep. Block

01-04-2020 3-03-2018

Plant A/B/C 15% 1,00,000 18,000 25,000 93,000 13,950 79,050

Plant D/E 40% 2,60,000 - 15,000 2,45,000 98,000 1,47,000

Plant F/ G 50% 70,000 60,000 - 1,30,000 65,000 65,000

Building A& B, 10% 2,00,000 - - 2,00,000 20,000 1,80,000

Building C/D /G 5% 7,00,000 5,00,000 - 12,00,000 60,000 11,40,000

Building E 100% 8,00,000 - 2,00,000 6,00,000 0 0

Furniture 10% - 60,000 50,000 10,000 0 0

Computer 60% - 1,00,000 -- 1,00,000 60000 40,000

Franchise rights 25% - 10,00,000 - 10,00,000 2,50,000 7,50,000

Note: The block of temporary sheds ceases to exist. Hence, no

depreciation will be allowed and the balance of Rs 6,00,000 will be
treated as short term capital loss.

No deprecation will be allowed on furniture purchased and sold in the

same year.

20. Opening balance in a block of assets consisting of three cars (rate of

depreciation @ 20%) is Rs. 18,00,000. During the year 2020-21, new car
is purchased for Rs. 6,00,000 and an old vintage car was sold for Rs.
24,00,000. Compute depreciation for A.Y. 2021-22.

Solution
Computation of the value of Net Block

Particulars Rs.
Opening WDV of block-3 Cars) 18,00,000
Add: cost of new car purchased 6,00,000
Total-4 cars 24,00,000
Less: sales price -1 car Sold 24,00,000
Closing Balance of block -3 cars 0
Depreciation allowable 0
Because WDV is Nil although three
cars still exist in the block

21. What would be the position, if all of the above four cars were sold for
Rs. 2,00,000 ?

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Solution

Computation of the value of Net Block

Particulars Rs.
Opening WDV of block-3 Cars) 18,00,000
Add: cost of new car purchased 6,00,000
Total-4 cars 24,00,000
Less: sales price -4 cars sold 20,00,000
Closing Balance -No Cars 4,00,000
Depreciation allowable ( empty block) 0
Short term capital loss on sale of cars 4,00,000

4.4. Expenditure on Scientific Research

Scientific research as per section 43(4) means
“any activity for the extension of knowledge in the fields of natural
or applied sciences including agriculture, animal husbandry or fisheries”.
Under section 35, the expenditure on scientific research will be
allowed as deduction as under:-

A. Expenditure on inhouse Research relating to own business

Under sections 35(1)(i), 35(1)(iv) and 35(2), deduction of
expenditure is allowed as under :- -
i. The expenditure must be incurred by the assessee on in-house
research relating to own business
ii. Expenses not related to assessee’s own business would not be
allowed
iii. Expenditure may be revenue in nature or capital such as plant or
equipment for research or construction of building for research
(excluding cost of land) or other expenses of capital nature connected
with the research.
iv. Expenses whether capital or revenue incurred up to three years prior
to the commencement of business including salaries of the research
staff or research material used in scientific research will be allowed
in the previous year in which the business is commenced.
v. Deduction is available, even if the relevant asset is not put to use for
research and development during the previous year.
vi. No depreciation will be allowed on an asset used in scientific
research covered under this section. However, when the asset is put
to use for business after cessation of scientific research, depreciation
will be allowable.
vii. As per section 41(3), the cost price of a scientific research asset or
amount allowed as deduction under this section, will be treated as
business income of the previous year in which a scientific research
asset is sold and the excess of sale price over cost( or indexed cost) of
acquisition will be treated as “Capital gains”.
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Illustration
22. AB Ltd incurs expenses on scientific research related to its
business during the financial year 2015-16 onwards @ Rs 1 Lakh per
year. It commences the business during the financial year 2020-21.
Ascertain the deduction of scientific research expenditure.

Solution
The aggregate expenditure incurred in financial year 2020-21 ,
the year in which the businesses commenced and three years prior to that
i. e. 2017-18, 2018-19 and 2019-20, works out to Rs 4 lakh, which will be
allowable as deduction under section 35 in assessment year 2021-22.
Expenditure incurred in prior to the financial year 2017-18 will be
ignored.

23. A scientific research asset having cost of Rs 5 lakh, which was fully
allowed as deduction in assessment year 2015-16, is sold on 31-03-2021
for Rs. 7 lakh. Then the amount of rupees 5 lakh originally deducted will
be treated as the business income and the balance of Rs 2 lakh over the
cost will be chargeable as capital gain in assessment year 2021-22.

B. Sum paid for research to others

Under section 35(1)(ii), weighted deduction equal to one and one
half times will be allowed in respect of any sum paid to any research
association having object of undertaking of scientific research or to any
university, college or other institution approved to be used for scientific
research.

C. Sum paid to a R &D company

Under section 35(1)(ia), deduction will be allowed in respect of
any sum paid to a scientific R&D company registered in India and
approved by the prescribed authority to be used by it for scientific
research.

D. Sum paid for social sciences etc.

Under section 35(1)(iii), deduction will be allowed in respect of
any sum paid to any approved research association which having object
of undertaking of research in social science or statistical research or to a
university, college or other institution to be used for research in social
science or statistical research is allowed.

E. Sum paid for approved research

Under section 35(1)(iii), weighted deduction equal to one and one
half times will be allowed in respect of any sum paid to a National
Laboratory or a University or an Indian Institute of Technology or a
specified person with a specific direction that the said sum shall be used
for scientific research undertaken under a programme approved in this
behalf by the prescribed authority.

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F. Approved inhouse Research in drugs, bio- technology etc.
A sum equal to one and one-half times will be allowed as
deduction under section 35(2AB)(a) in respect of the capital or revenue
expenditure (except on land & Building) incurred on scientific research
clinical drug trial, obtaining approval from any regulatory authority under
law and filing an application for a patent;
 by a company (not allowed to other assesses)
 engaged in the business of
 bio-technology or
 manufacture or production of any article or thing, not being an
article or thing specified in the XI Schedule,
 in-house research & development facility approved by the
prescribed authority
 subject to the condition that the company enters into an agreement
with it for co-operation in such research and development facility and
fulfils such other prescribed conditions with regard to maintenance of
accounts and audit thereof and furnishing of reports.

G. Some relevant points

1. Goods specified in Schedule XI include beer, wine & other alcoholic
spirits, tobacco products like cigars , cheroots, cigarettes, biris,
smoking mixtures for pipes and cigarettes, chewing tobacco, snuff ,
cosmetics and toilet preparations, tooth paste, dental cream, tooth
powder, soap, aerated waters, confectionery, chocolates, gramophones,
record-players, projectors, photographic apparatus and goods , office
machines and apparatus such as typewriters, calculating machines,
cash registering machines, cheque writing machines, intercom
machines and teleprinters but NOT Computers, furniture, made partly
or wholly of steel , safes, strong boxes, cash and deed boxes, strong
room doors, latex foam sponge, polyurethane foam, crown corks, and
other fittings of cork.
2. Cost of building will be eligible for deduction under section 35(2).
3. The expenditure, on which weighted deduction is allowed under this
section will not be eligible for deduction under any other provisions of
the Act.
4. "Expenditure on scientific research", in relation to drugs and
pharmaceuticals, shall include expenditure incurred on clinical drug
trial, obtaining approval from any regulatory authority under any
Central, State or Provincial Act and filing an application for a patent .

5. Other important provisions

(a) Scientific research by at the approved institutes need not be related
to the business of the assessee

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 (b) Contribution eligible for weighted deduction under this section will
not be eligible for deduction under other provisions of the Act.
(c) In case of any subsequent cancellation or withdrawal of approval
to a notified university, college, research association or other
institution or any approved programme is withdrawn, weighted
deduction will not be denied to the assessee.
(d) Any violation of condition for approval will result into withdrawal
of the deduction as a mistake apparent from record.
(e) On amalgamation the provisions will continue to apply to the
amalgamated company as if the amalgamating company had not
sold or otherwise transferred the asset.

(f)
(g) Bottom of Form

(h)
4.5. Amortisation of Spectrum Fee
As per section 35ABA, any capital expenditure incurred for
acquisition of any right to use spectrum for telecommunication services
will be deducted equally over a period of the expenditure .

4.6. Amortisation of licences Fee

Under section 35ABB,any capital expenditure incurred for obtaining
licence by a telecommunication operator will be deducted equally over a
period of the expenditure and the deduction so granted in respect of
licence fees or spectrum fees may be withdrawn as wrongly allowed as a
mistake apparent from record in case of non-compliance of provisions
like transfer of spectrum or licence.

 On amalgamation the provisions will continue to apply to the

amalgamated company as if the amalgamating company had not sold or
otherwise transferred the asset

Illustration
24. Vodafone pays 5G fees of Rs 50 Cr. with a validity of 10 years.
Vodafone will be allowed to amortize the fees 1/10 X50 or Rs 5 Cr
every year beginning from the year of actual payment or commencement
of business whichever is later. In case of amalgamation with Idea, the
deduction will be allowed to Idea as if no transfer has taken place.

4.7. Specified infrastructure projects

Under section 35AD(1), capital expenditure incurred by an assessee
wholly and exclusively for any specified business carried on by him will
be allowed to be deducted in the year in which such expenditure is
incurred or the year of commencement of operations in the case of the
expenditure incurred prior to the commencement of its operations if the
amount is capitalised in his books of account.
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 The provisions like continuance of application of provisions on new
entity in case of amalgamation , transfer of hotels etc. and withdrawal of
deduction for non-compliance are applicable *mutatis mutandis ( with
necessary changes).
One additional condition is that the business must be new not
restructure of old business.
Specified business includes:
i) setting up and operating a cold chain facility;
(ii) setting up and operating a warehousing facility for storage of
agricultural produce;
(iii) laying and operating a cross-country natural gas or crude or petroleum
oil pipeline network for distribution, including storage facilities
being an integral part of such network;
(iv) building and operating, anywhere in India, a hotel of two-star or
above category;
(v) building and operating, anywhere in India, a hospital with at least one
hundred beds for patients;
(vi) developing and building a notified housing project under a scheme
for slum redevelopment or rehabilitation framed by the
Government;
(vii) developing and building a housing project under a notified
Government scheme for affordable housing;
(viii) production of fertilizer in India;
(ix) setting up and operating notified or approved an inland container
depot or a container freight station;
(x) bee-keeping and production of honey and bees wax;
(xi) setting up and operating a warehousing facility for storage of sugar;
(xii) laying and operating a slurry pipeline for the transportation of iron
ore;
(xiii) setting up and operating a notified semi-conductor wafer fabrication
manufacturing unit ;
(xiv) developing or maintaining and operating or developing, maintaining
and operating a new infrastructure facility viz.:-
(i) a road including toll road, a bridge or a rail system;
(ii) a highway project including housing or other activities being an
integral part of the highway project;
(iii) a water supply project, water treatment system, irrigation project,
sanitation and sewerage system or solid waste management
system;

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 (iv) a port, airport, inland waterway, inland port or navigational
channel in the sea;

4.8. Expenditure on Agricultural Extension Project.

W.e.f. A.Y. 2021-22 under section 35CCC,an assessee shall be
allowed a deduction* equal to the expenditure incurred on notified
agricultural extension project. The amount so deducted be deduction shall
not be allowed again under any provisions of the Act for the same or any
other assessment year. ( *Before that 1-1/2 times)

4.9. Expenditure. on Skill Development project

W.e.f. A.Y. 2021-22 , under section 35CCD a company assessee
(other assessees excluded)shall be allowed a deduction *equal to the
capital or revenue expenditure (not being cost of land & building)
incurred on notified skill development project. The amount so deducted
shall not be allowed again under any provisions of the Act for the same or
any other assessment year.
( *Before that 1-1/2 times)

4.10. Amortisation of Preliminary Expenses

Section 35 D allows amortisation of preliminary expenses subject
to following conditions :-
A. Eligible assessee
a) an Indian company, or
b) a resident non-corporate assessee.
A foreign company regardless of its residential status and a non-
resident or N.O.R non company entity are not eligible under this section
B. Time and purpose of preliminary expenses
i. For Setting up an undertaking or business before commencement
of business; or
ii. in connection with:
a) extension of an industrial undertaking; or
b) setting up a new industrial unit
Expenses incurred after commencement of business, in connection
with extension of or setting up a non-industrial undertaking will not be
eligible under this section.
C. Eligible Expenditure
(a) Expenditure in connection with:
 preparation of feasibility report,
 preparation of project report,
 conducting a market survey (or any other survey necessary for
the business of the assessee) or

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  engineering services related to the business of the assessee,
carried out by the assessee himself or by a concern approved
by the CBDT.
(b) Legal charges for drafting any agreement for setting up or conduct
of the business.
(c) Legal charges for drafting the Memorandum and Articles of
Association. (M/A)
(d) Printing expenses of the Memorandum and Articles.
(e) Registration fees of a company under the Companies Act.
(f) Expenses in connection with the public issue of shares or
debentures of a company, underwriting commission, brokerage and
charges for drafting, typing, printing and advertisement of the
prospectus, and
(g) Any other prescribed expenditure.
D. Qualifying Expenditure
The aggregate expenditure exceeding the following limits will not be
eligible for deduction under this section :-
a) corporate assessee
 5% of cost of project; or
 capital employed, whichever is more
b) non-corporate assessee: 5 per cent of cost of project
E. Definitions of the terms
(i) Cost of project
Cost of project means the aggregate of actual cost of fixed assets
appearing in the books of the assessee as on the last day of the previous
year in which the business of the assessee commences.

Fixed assets include land, buildings, leaseholds, plant, machinery,

furniture, fittings and railway sidings (including expenditure on
development of land and buildings),or additional cost incurred after
commencement of business in connection with extension or setting up an
industrial undertaking) of fixed assets,

(ii) Capital employed

Capital employed means
a. the aggregate of the
 issued share capital,
 debentures, and
 long-term borrowings
as on the last day of the previous year in which the business of the
company commences, or

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 b. Additional capital borrowings etc. brought after
commencement of business in connection with extension or
setting up an industrial undertaking,

Long term borrowings for this purpose means moneys borrowed in

India by any company from the Government or Financial institutions like
ICICI, IFCI etc. or banks or foreign borrowings in connection with
acquisition of plant and machinery repayable after a term of seven years or
more.

F. Amount of deduction
One-fifth of the qualifying expenditure is allowable as deduction in
each of the five successive years beginning from the year of -
 commencement of the business, or
 completion of extension of industrial undertaking , or
 commencement of production or operations by the new industrial
unit.

G. Other Points
1. Non- corporate assessees are required to get their account audited
before the due date of filing return for claiming deduction under this
section.
2. On amalgamation/ demerger of the assessee company with other
company, deductions can be claimed by the amalgamating or demerged
company.
3. Amount deducted under this section will not be eligible for deduction
under any other provision of the Act.

Illustration
25. ABC Ltd is an existing Indian company engaged in developing and
providing computer software services. It incurs the following expenditure
in connection with the setting up of a new unit. The project completed in
March 2021. Determine the amount deduction admissible under section
35D.

Particulars Rs
Preparation of project report 2,00,000
Market Survey 6,00,000
Legal charges for additional capital for new unit 3,00,000
Engineering services not approved by CBDT 5,00,000
Cost of the Project as on 31/03/2018* 60,00,000
Capital employed as on 31 -03-2018 50,00,000
Last day of the year of commencement of project.

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Solution:
Eligible Expenditure
Particulars Rs
Preparation of project report 2,00,000
Market Survey 6,00,000
Legal issue of additional capital for new unit 3,00,000
Engineering services not approved- ineligible 0
Total 11,00,000

Gross Qualifying Amount

5% of cost of the project- (5% X 60,00,000) 3,00,000
5% of the capital employed (5% X 50,00,000) 2,50,000
Gross Qualifying Amount ( higher of the two ) 3,00,000

Net Qualifying Amount

Rs 3,00,000 being the lower of the following:
I. Gross qualifying amount :Rs 3,00,000 or
II. Actual amount of preliminary expenses: Rs 11,00,000
Amount of Deduction
1/5th of the net qualifying amount (1/5 X 3,00,000) Rs. 60,000 each for 5
assessment from A.Y. 2021-22 onwards.

4.11. Expenditure on amalgamation/ demerger

Under section 35DD, any expenditure incurred wholly and
exclusively for the purposes of amalgamation or demerger of an
undertaking, the assessee, being an Indian company shall be allowed a
deduction of an amount equal to one-fifth of such expenditure for each of
the five successive previous years beginning with the year of the
amalgamation or demerger. No deduction shall be allowed in respect of
such expenditure under any other provision of this Act.

4.12. Expenditure under voluntary retirement Scheme

Under section 35DDA one fifth of the payment made to an
employee in connection with his voluntary retirement under any voluntary
retirement Scheme(VRS) by an assessee is deducted in the year and four
consecutive years each thereafter.

In case of amalgamation/ demerger/ reorganisation from one entity

to another of a company assessee, the deduction will be available to the
amalgamated / resultant company or the successor entity .

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 No deduction shall be allowed in respect of such payment under any
other provision of this Act

4.13. Expenditure on prospecting, etc., for minerals

Under section 35E, expense incurred on prospecting of specified
minerals or any deposits thereof incurred by an Indian company or a
resident non-company assessee engaged in mining operations are debited
equally in 10 instalments beginning from the year of commencement of
the commercial production .
Other relevant points:
(i) Such expenses should be incurred in the year of commercial
production or immediately preceding four years.
(ii) Expense will not include the following;
a. Any part of expenses met directly or indirectly by any other person
or authority
b. any sale, salvage, compensation or insurance moneys realised by
the assessee in respect of any property or rights brought into
existence as a result of the expenditure
c. any capital expenditure for acquisition of the mines or deposits of
such mineral or any rights therein
(iii) operation include exploring, locating or proving deposits of any
mineral, and includes any such operation which proves to be
infructuous or abortive.
(iv) Non- company assessees are required to get their account audited
before the due date of filing return and furnish the report thereof
along with the return of income
(v) Provision for continuance in case of amalgamation, merger, demerger,
restructure of business or conversion of one entity to another are also
applicable as per the section mutatis mutandis
(vi) In case of inadequacy of profits , the unabsorbed amount will be
added in next year’s claim and so on up to the tenth previous year
from the year of commercial production.

4.14. Specific deductions

Section 36(1) expressly allows the following specific deductions in
computing taxable income under the head profits and gains of business or
profession:

4.14.1. Insurance premium

Any amount of insurance premium paid
 to cover risk of damage or destruction of business stocks used in
business or profession; - Section 36(1)(i)
 on the life of the cattle owned by the milkmen being member of a
primary co-operative society, by a federal milk co-operative society-
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 Section 36(1)(ia)
 on the health of his employees by an employer , paid by any mode of
payment other than cash (e. g. cheque) an approved scheme framed
by the GIC or other insurer approved by the IRDA)- Section 36(1)(ib)

4.14.2. Bonus or commission-

Any sum paid to an employee as bonus or commission for services
rendered, where such sum would not have been payable to him as profits
or dividend if it had not been paid as bonus or commission.- Section
36(1)(ii)

Under section 43B, bonus or commission will be deducted only

on payment thereof on or before the due date of furnishing return under
Section 139.

4.14.3. Interest on capital borrowed

Interest paid or payable on borrowed funds used for the purpose of
business or profession - Section 36(1)(iii)
Recurring subscriptions paid periodically by shareholders /
subscribers in Mutual Benefit Societies, which fulfill the prescribed
conditions is deemed to be capital borrowed.
Interest (paid/payable in respect of capital borrowed for acquisition
of an asset for extension of existing business or profession whether
capitalized in the books of account or not) will be allowed only when an
asset is put to use.
Interest for the period from the date of borrowing till the date
when the asset is put to use will not be allowed but be added to the cost of
the asset. This is in harmony with ICDS- IX, which mandates
commencement of capitalization of interest from the date of borrowing of
funds till the asset is first put to use, irrespective of whether acquisition of
the asset is for extension of existing business or not.

4.14.4. Zero Coupon Bonds

Discount on notified (by Central Government) Zero Coupon Bonds
issued by an infrastructure capital company or infrastructure capital fund
or a public sector company is allowable on pro rata basis provided no
other benefit or payment is received in respect of such bonds before their
maturity- Section 36(1)(iiia)

Zero Coupon Bonds are the bonds, which do not carry coupon
rate of interest. Instead, the bonds are issued at a price lower than their
redemption value. The difference between issue price and redemption
value or the discount is allowed as deduction on pro rata basis having
regard to the period of life i.e. date of issue to the date of maturity or
redemption of such bonds. Discount on Zero Coupon is amortised over the
life time of the Bonds.

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 Illustration
26. Infrastructure Capital Company issues 1 Crore duly notified Zero
Coupon Bonds of Rs. 1000 each at a price of Rs. 640 on 01-1-2018. The
bonds are redeemable at par on 31-12-2020. Show how the discount would
be deducted from the total income of the company.

Solution:
Face value of Bond- Rs 1,000
Issue price - Rs 640
Discount offered Rs 1000-640 = Rs 360
Total discount offered on 1 Crore bonds- Rs. 360 Crore
The tenure of the coupon is three years or 36 months.
Pro rata deduction to be allowed
A.Y. Period Working Amt
2018-19 01-01-2018- 3/36X360Cr Rs.30Cr.
- 3 months 31-03-2018

2019-20 01-04-2018 12/36X360Cr Rs120Cr.

-12 Months 31-03-2019
2020-21 01-04-2019 12/36X360Cr Rs120Cr.
-12 Months 31-03-2020
2021-22 01-04-2020 9/36X360Cr Rs 90Cr.
- 9 months 31-12-2020

4.14.5. Contribution towards RPF / Approved Superannuation Fund

Any contribution paid by the assessee as an employer towards a
recognised provident fund/ approved superannuation fund, subject to
prescribed limits and conditions - section 36(1)(iv) subject to the
provisions of section 43B.

4.14.6. New Pension Scheme

Any contributions by employer to a pension scheme referred to in
section 80CCD(2) on account of employee to the extent of 10% of his
salary plus dearness allowance but excluding all other all other allowances
and perquisites - Section 36(1)(iva)

4.14.7. Approved Gratuity Fund)

Any sum paid by the assessee as an employer by way of
contribution towards an approved gratuity fund created by him for the
exclusive benefit of his employees under an irrevocable trust -Section
36(1)(v).

4.14.8. PF / ESIC
Contribution received by an employer from his employees for
crediting in any fund e.g. provident fund or employee’s state insurance
scheme and credited by the assessee to the employees’ account in the
relevant fund or funds on or before the due date prescribed under the
relevant law -Section 36(1)(va).

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 Such contributions from employees are treated as income of the
employer under section 2(24(x) when received and allowed as deduction
when paid by the due date in terms of section 43B.

4.14.9. Death of animals

The difference between the actual cost to the assessee of the
animals and the amount, if any, realised in respect of the carcasses or
animals used for the purposes of the business/ profession otherwise than as
stock-in-trade but died or become permanently useless for such purposes

Where the animals are treated as stock in trade, the loss or profit is
the part of normal sales and purchase, therefore this provision is not
applicable-Section 36(1)(vi).

4.14.10. Bad debts

Any amount of bad debt or part thereof, which is written off as
irrecoverable in the accounts of the assessee for the previous year-
Sections 36(1)(vii) and 36(2) , subject to following conditions:
(a) There is relationship of debtor and creditor.
(b) The debt is incidental to the business or profession.
(c) The debt has been considered in the computation of income, or it
represents money lent in ordinary course of the business of
banking or money-lending.
(d) Bad debt is written off as irrecoverable in assessee’s accounts in
the previous year
(e) Any debt written off but not allowed earlier may be deducted as
bad debts
(f) Bad debts will not include any provision for bad and doubtful
debts made in the accounts of the assessee;
(g) Any deficiency will be deductible in the previous year in which
the ultimate recovery is made;
(h) any such debt or part of debt written off as irrecoverable in an
earlier previous year may be deducted if the deduction was not
allowed on the ground that it had not been established to have
become a bad debt in that year;
(i) The assessing officer may deduct bad debts written off in the
current year in an earlier previous year under section155(6) with in
a period of 4 years if he is satisfied that the debt had become
irrecoverable in earlier years .
(j) A bad debts can be claimed without recording in books of account
as irrecoverable or bad as per second proviso to section 36(1)(vii)
if the debt was considered in the computation of income as per the
notified ICDSs.

4.14.11. Provision by banks

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 Provision for bad and doubtful debts Under made by Indian
schedule & non-scheduled banks, financial institutions and non-banking
financial companies upto the following limits namely:-
 8.5% of total income by a scheduled Indian bank other non-scheduled
bank,

 5% of total income a public financial institution or a state financial

corporation or a state industrial investment corporation and a foreign
bank of the total income (computed before making any deduction
under this clause and Chapter VI-A) and
 10% of the aggregate average advances made by the rural branches of
such bank computed in the prescribed manner, and subject to certain
conditions or
 5% of total income of a non- banking financial company;
 5% of Non-Performing Assets or NPAS in accordance with the RBI
guidelines shown in the books of account of the bank on the last day
of the previous year a bank at the option of the bank.- Section
36(1)(viia),

The deduction is subject to two conditions :

(a) Assessee has debited the amount of such debt or part of debt in that
previous year to the provision for bad and doubtful debts account .
(b) Deduction relating to any such debt or part thereof shall be limited to
the amount by which such debt or part thereof exceeds the credit
balance in the provision for bad and doubtful debts account.

4.14.12. Special reserve

40% of profits of financial institutions in respect of amounts
transferred to a special reserve created and maintained by them subject to
a ceiling of twice the amount of the paid-up share capital and of the
general reserves- Section 36(1)(viii).
Financial corporation mean:-
 a corporation which is engaged in providing long-term finance for
industrial, agricultural development or development of infrastructure
facility in India, or
 a public company formed and registered in India with the main object
of carrying on the business of providing long-term finance for
construction or purchase of houses in India for residential purposes,
Profit means profits derived from such business of providing long-
term finance computed under the head Profits and gains of business or
profession before making any deduction under this clause

4.14.13. Promotion of family planning -

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 Expenditure incurred bona fide by a company for promotion of
family planning amongst employees -
 in full if the expenditure is of revenue nature; and
 One fifth of capital expenditure for each of the five years beginning
from the year in which it was incurred.

Unabsorbed family planning expenditure will be allowed to be carried

forward and set off in the same manner as depreciation- section
36(1)(ix).

4.14.14. Expenditure by Statutory bodies

Revenue expenditure incurred by any statutory corporation or a
body corporate for the objects and purposes authorised by the Act under
which it is constituted or established - section 36(1)(x).

4.14.15. Cash Transaction Tax

Any amount of banking cash transaction tax paid by the
assessee- section 36(1)(xii).

4.14.16. Credit Guarantee Fund

Any sum paid by a public financial institution by way of
contribution to a specified credit guarantee fund trust for specified small
industries - section 36(1)(xiv).

4.14.17. Security Transaction Tax)

The security transaction tax(STT) paid by the assessee if the
income arising from taxable securities transactions is included in the
income computed under the head "Profits and gains of business or
profession.- section 36(1)(xv),

4.14.18. Commodity Transaction Tax

The commodity transaction tax paid by the assessee, if the
income arising from such taxable commodity transactions is included in
the income computed under the head "Profits and gains of business or
profession.- section36(1)(xvi).

4.14.19. Expenditure by Co-operative Society for purchase of

Sugarcane
The expenditure incurred by a co-operative society engaged in the
business of manufacture of sugar for purchase of sugarcane at a price,
which is equal to, or less than the price fixed or approved by the
Government. -section 36(1)(xvii).

4.14.20. Losses as per ICDS

Marked to market loss or other expected loss as computed in
accordance with the notified income computation and disclosure
standards -section 36(1)(xviii).

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5.5 GENERAL DEDUCTIONS

Section 37 is the residual section. It allows deduction of all the

expenditure not claimed specifically under the other provisions, subject to
the condition that such expenses must be incurred :-
(a) wholly and exclusively for the purposes of the business/ profession
carried on by the assessee, in respect of which income is computed
under this head.
(b) during the previous year , subject to the provisions of section 43B,
(c) after the business or profession is set up
(d) as revenue expenses in nature e.g. expenses by way of cost of raw
materials, tools, spares , cost of labour, salary , brokerage,
commission, legal fees, litigation expenses, professional tax, trade
mark registration, lease rent or other business expenses.

However, following expenses will not be allowed under this

section:-
i. Capital expenditure e.g. expenditure on acquisition or renovation of
assets , conveyance or registration of land, eviction of a tenant etc. ;
ii. Personal expenses e.g. income tax or wealth tax, drawings or
household expenses of the assessee;
iii. Expenses expressly allowed in sections 30 to 36;
iv. Expenses incurred for any purpose which is an offence, or which is
prohibited by law, e.g. penalty, bribery, composition money paid in
respect of any offences or breach of law or penal interest under any
law etc.
v. Expenses on advertisement in any souvenir, brochure, tract,
pamphlet or the like published by a political party specifically
excluded from the purview of the section 37(2B)
vi. any expenditure incurred by an assessee on the activities relating to
corporate social responsibility referred to in section 135 of the
Companies Act, 2013.

5.6 SPECIFIC DISALLOWANCES

6.1. Some expenses are not allowed be deducted, while computing profits
and gains from business and profession for a number of reasons such as :
 Not satisfying the inherent conditions attached with the allowance.
E.g. personal and capital expenses will be disallowed under section
37, which allows only revenue expenses incurred wholly and
exclusively in the course of business or profession.

117
 Absolute disallowances for policy reasons such as political
advertisement and CSR expense, which are expressly disallowed
under section 37.
 Defaults such as non-deduction of tax at source.
 Deferment or time factor. E.g., Unpaid taxes, bonus etc. covered
under section 43B are disallowed in the year of accrual .
 Personal element, e.g., drawings by an individual, interest and
remuneration in case of a firm.
 Reasonableness e.g. unreasonable payments to relative under section
40A(2),
 Mode for payment e.g. Cash payments under section 40A (3)
 Partial disallowance due to ceilings, e.g. interest and remuneration
payable to partners.
 Express disallowance , e.g. CSR expenses

These disallowances are discussed below

6.2. Disallowance in case of any assessee
(i) Payments to Non-Residents without TDS Under section 40(a)(i)
any interest, royalty, fees for technical services or other sum chargeable
under this Act, which is payable,—
(A) outside India; or
(B) in India to a non-resident, not being a company or to a foreign
company, on which tax is deductible at source and such tax has not
been deducted or, after deduction, has not been paid on or before the
due date for filing return of income under section139 (1).
The amount disallowed as above will be allowed as a deduction in
computing the income of a subsequent previous year in which such tax has
been paid.

Illustration
27. During the financial year 2020-21, A makes payment of commission
of Rs. 1,50,000 to B, who is a non -resident, Tax of Rs 30,000 is required
to be deducted at source from the commission.
Show whether the commission will be allowable in the following
situations when A -
(i) does not deduct tax at source .
(ii) deducts the tax but not does not pay it to the Government in time.
(iii) deducts the tax and pays it to the Government in time.
(iv) deducts the tax but pays it to the Government late in financial year
2021-22.

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Solution:
In cases (a) and (b) commission will be disallowed under section 40(a) (i)
because the assessee fails to deduct the TDS or pay the amount of TDS to
the Government.
In case(c) deduction will be available in in A.Y. 2021-22.
In case(d), deduction will be allowed in A.Y. 2022-23.

(ii) Payments made to residents without TDS

When any sum is paid or payable to a resident, on which tax is
deductible at source and the assessee does not deduct such tax or,
after deduction, does not pay the same to government on or before
the due date for filing return of income under section 139 (1), 30%
of such sum shall be disallowed under section 40(a)(ia).
However , such disallowance will not be made if the recipient of
the income has paid the due tax thereon and as a result thereof the
assessee is not deemed to be an assessee in default under section
201(1).
30% of the sum disallowed under this section will be deductible in
computing the income of subsequent previous year in which such
tax has been paid.
(iii) Payment of fringe benefit tax -Section 40(a)(ib)]:
(iv) Any sum paid on account of any rate or tax levied on the profits or
gains of any business/ profession or assessed at a proportion of, or
otherwise on the basis of, any such profits or gains i.e. income tax -
Section 40(a) (ii);
(v) Payment of wealth-tax. - Section 40(a) (iia)
(vi) Any amount paid by way of royalty, licence fee, service fee,
privilege fee, service charge or any other fee or charge, by
whatever name called, which is levied exclusively on; or which is
appropriated, directly or indirectly, from, a State Government
undertaking by the State Government.- Section 40(a) (iib)
(vii) Salary payable outside India or to a non-resident, if the tax has not
been deducted or deducted and has not been paid therefrom under
Chapter XVII-B.
However, such salaries will be allowed as a deduction in the year
in which the tax has been paid in respect of the salary. - Section
40(a) (iii)
(viii) Any payment to a provident or other fund established for the
benefit of employees of the assessee, unless the assessee has made
effective arrangements to secure that tax shall be deducted at
source from any payments made from the fund, which are
chargeable to tax under the head Salaries. Such payment will not
be allowed as a deduction if tax has not been deducted in the year
in which such payments have been made. However, these

119
 payments will be allowed as a deduction in the year in which tax
has been paid - Section 40(a) (iv).
(ix) Any tax actually paid by an employer on perquisites under
section10 (10CC)- Section 40(a) (v)

6.3. Disallowances in the case of any firms

a. Remuneration to Partners : As per section 40(b), any payment of
remuneration to any partner of a firm assessable as such ,
i) who is not a working partner; or
ii) who is a working partner, but such payment of remuneration is not
authorised by or is not in accordance with the terms of the partnership
deed;
iii) a working partner but payment of remuneration though authorised,
relates to any period falling prior to the date of such partnership deed
or
iv) “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;
v) any payment of remuneration, to a working partner though authorised
and otherwise allowable, if the remuneration to all partners in
aggregate exceeds the following limits:
Book Profits Remuneration allowable
on the first Rs. 3,00,000 of the Rs.1,50,000 or 90 % of the book-
book profit or in case of a loss profit, whichever is more;
on the balance of the book-profit 60 % of the book profits
“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 Chapter IV-D as increased by the aggregate amount of the remuneration
paid or payable to all the partners of the firm if such amount has been
deducted while computing the net profit. In other words, Book Profit
means net profit before providing for remuneration to partners.
“Remuneration means “any payment of salary, bonus, commission or
remuneration by whatever name called.

b. Interest to Partners
As per section 40(b), any payment of interest to any partner of a firm
assessable as such
(i) which is not authorised by or is not in accordance with, the terms of
the partnership deed; or
(ii) which , thought authorised, relates to any period falling prior to the
date of such partnership deed or

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(iii)Which is in accordance with the deed of partnership but in excess of
the amount calculated at the rate of twelve per cent simple interest per
annum.

Following points are also relevant in this regard:-

(i) A partnership deed at any time during the previous year may be
amended to provide for payment of interest but such amendment will
be applicable only prospectively. Retrospective effect cannot be given
to such terms.
(ii) The interest will be considered in the same capacity in which it is paid.
Illustrations
28. A is a partner in a firm as a trustee of B. A advances his personal
money as well as B’s money to the firm. The firm pays interest to A in his
personal capacity and as the representative or trustee of B.
Interest payable to A in his capacity of trustee will be considered under
section 40(b). Interest paid in his individual capacity will be ignored. On
the other hand, if A is a partner in his individual capacity, then interest
paid to him in his representative capacity shall be ignored.
29. For the financial year 2020-21 a firm shows net profit of Rs 50,000
after debiting the following amounts:
 Remuneration to A ( not a working partner) Rs 50,000.
b) Remuneration to B- Rs 5,00,000 for the full year. The firm has made
provision for his remuneration by a partnership deed dated 01/7/2020
c) Interest to partners @ 18% p.a. Rs. 90,000.
Compute the business profits for A.Y. 2021-22

Solution:
Computation of Profits and gains from Business & Profession -
Assessment Year- 2021-22
Particulars Rupees
Business Profits as per Profit & Loss A/c 50,000
Add back- Salaries & Interest paid to partners 6,40,000
(50,000+5,00,000+90000)
Book Profits before interest & remuneration 6,90,000
Less: Interest authorised by partnership deed 60,000
restricted to 12% i.e. 90,000 X 12/18
Book Profit Before Remuneration 6,30,000
Remuneration to Partners 3,75,000
( Lowest of the following )
A –Not working partner NIL
B- Actual Remuneration 5,00,000
Remuneration allowed from the date 3,75,000
of deed - 9 months from 01-07-
2020 to 31-03-2021

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5,00,000 X9/12
Maximum allowable 4,68,000
90% of Rs 300000 of book profit
Rs 2,70,000
60% of the balance book profit of Rs
(6,30,000-3,00,000)- 1,98,000
Profits and gains from Business & Profession 2.55,000

c. Remuneration/Interest by an association of persons(AOP) /body of

individuals (BOI)
Any payment of interest, salary, bonus, commission or remuneration,
by whatever name called, made by an association of persons (AOP) /body
of individuals (BOI) to a member of such association or body. -Section.
40(ba)

“Association or “body” does not include a company or a co-operative

society or a society registered under the Societies Registration Act, 1860,
or other registered charitable trusts.

Following points are also relevant:-

a. Unlike a firm, no part of interest paid to a member is allowable in case
of an association or a body. Hence , capacity or status of the member
in such AOP or BOI is relevant . Accordingly –
i. Interest paid by a member in his representative capacity to the
association or body or vice versa shall be ignored if he is a member
in his individual capacity.
ii. Conversely , Interest paid by a member in his individual capacity
to the association or body or vice versa shall also be ignored if he
is a member in his representative capacity
iii. Interest paid by a member in his representative capacity to the
association or body or vice versa shall be considered if he is a
member in his representative capacity.
iv. Interest paid by a member in his individual capacity to the
association or body or vice versa shall be considered if he is a
member in his individual capacity
b. Where, interest is paid to a member on funds borrowed by him, the
disallowances will be only on the net amount receivable by such
members.
c. Remuneration or interest to members of AOP/BOI are not allowed to
be deducted for computing income from business and profession

Illustration

122
30. X is a member of BOI. X borrows a sum of Rs. 1,00,000 from market
with interest rate of 12% and advances it to the BOI. BOI pays Interest @
15% p. a. to X. Determine the amount to be disallowed.

Solution:
Particular Rs
Interest payable by BOI to X 15,000
15% on Rs 1,00,000
Interest payable by X on his borrowing 12,000
12% on Rs 1,00,000
Disallowable under section40(b) ( Net) 3,000
6.4. Disallowances In the case of all assesses
Section 40A (1) provides for disallowance of certain expenses in
certain circumstances. These disallowances are anti-avoidance measures
in nature and are overriding and prevailing over the normal provisions
relating to the computation of income under the head "Profits and gains of
business or profession".

The disallowances are discussed as under:-

i. Excessive payment to relatives
Under section 40A(2)(a), any expenditure resulting in any payment
to any specified person may be disallowed to the extent it is excessive or
unreasonable in the opinion of the assessing officer having regard to the
market value of the goods or services and the benefit to the business or
profession. However, the section is not applicable to domestic
transactions , which are at arm's length price as defined in 92F(ii).

Section 40A(2) (b) gives a long list of specified persons , which

is summarised as under :-

A. Persons connected with the assessee

Status of assessee Specified person
Individual any relative of the assessee;
Company any director or his relative
Firm any partner or his relative
Association of Persons any member or his relative
Hindu Undivided Family any member or his relative
B. Entity holding substantial interest of the assessee
(sister concerns)
Person holding a substantial Specified person
interest in the business or
profession of the assessee
Individual Individual or his relative
Company any director or his relative
Firm any partner or his relative
Association of Persons any member or his relative
Hindu Undivided Family any member or his relative
C. Persons connected with the sister concerns
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 If partner of a firm, or director of company or member of a HUF , AOP
hold substantial interest , then such company , firm, AOP or HUF will
be the specified person also other directors, partners , members and
their relatives will be the specified persons ( The above table will be
applicable to the concerns of where such persons are partners directors
or members)
D. Reverse connection .
Where assessee or his relatives, or if the assessee is a company, firm,
HUF, AOP- its directors , members or partners etc. or their relatives ,
hold substantial interest in the business of other individual, company,
firm, AOP or HUF, the latter will be treated as the specified persons
“Relative” in this context means husband, wife, and brother, sister
or any lineal ascendant or descendent of the individual.

A person holding “Substantial interest” means a person holding

20% voting power in a company at any time during the previous year or
twenty per cent of the profits of other concern viz proprietary concern,
HUF, AOP, BOI etc.

Illustrations
31. Examples of specified persons under section 40A(2):

Assessee Specified Person

A - an individual A, Mrs. A , parents , brothers,
sisters and children of A
Firm A having B,C & D as B ,C & D and their relatives
partners
HUF A having B,C & D as B, C & D and their relatives
members
AOP A with B, C & D as B, C & D and their relatives
members
Company A with B, C & D as B, C & D and their relatives
directors
Assuming B is a company B and all Directors of B
Assuming C is a firm C and all Partners of C
Assuming D is a HUF or AOP D and all Members of D

ii. Cash payments exceeding Rs 10,000 /35,000

Under section 40A(3) / (3A), no deduction shall be allowed in respect
of any expenditure in respect of which payment exceeding Rs. 10,000 (Rs.
35,000 in cases of payments made for plying, hiring or leasing goods
carriages) during a single day is made otherwise than by an account payee
cheque drawn on a bank or account payee bank draft, or use of electronic
mode or clearing system (ECS) through a bank account. .

Following points require attention:

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1. The disallowance is on total payment, if it crosses the limit of Rs.
10,000/ 35,000. All payment of Rs 10,001 / 35,001 and more will
face disallowance under this section .
2. All payments made in a single day will be considered in aggregate to
ascertain limit of Rs. 10,000/ 35,000.
3. If cash payment in excess of Rs. 10,000/ 35,000 is made subsequently
in respect of an expenditure, which was allowed in past on its accrual ,
the such excess payment will be deemed to be the business profit in
the year of payment.
4. Under rule 6D ome exceptions are provided from disallowance of
payments exceeding Rs 10,000 / 35000 and otherwise than by way of
crossed cheque/ bank draft etc. some of these circumstances are new
buyer, bank holiday, lack of banking facility, etc.
5. Under section 40A (4), no person can raise an issue in a suit for being
offered payment by account payee cheque or draft and not in cash.

Illustration
32. Audit fee provided during the financial year 2015-16 for Rs. 50,000 is
paid by cash on 31.03.2021.

Solution
Audit fee of Rs 50,000 allowed as deduction in A.Y. 2015 -16 will be
deemed be the profit of the A.Y. 2021-22 , when it was paid cash.

Illustration
33. A makes a payment of Rs. 15,000 by a bearer cheque for purchase of
goods and claims that disallowance under section40A(3) is not applicable
and even if it is applicable, it will be restricted only on Rs. 5,000 being,
the amount exceeding Rs. 20,000. Examine his claim.

Solution
If payment in excess of Rs 15,000 is made otherwise than by an
account payee cheque or draft etc., entire payment of Rs 15,000 will be
disallowed without any basic limit. Bearer cheque and cash are not
acceptable modes of payment.

iii. Provision for Gratuity

Any provision for payment of gratuity to employee on their
retirement or termination of their services for any reason will not be
allowed under section 40A (7) unless such provision is made by
contributing to an approved gratuity fund or for payment of gratuity that
has become payable during the previous year.

Hence, gratuity is allowed as a deduction only when it has

become due and payable. However, once the provision for gratuity has
been allowed as deduction in any year, then any subsequent payment
thereof will not be deductible again.
iv. Provision for non- statutory funds
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 Under section 40A (9), deduction will not be allowed in respect of
any sum paid by the assessee as an employer towards the setting up or
formation of, or as contribution to, any fund, trust, company, association
of persons, body of individuals, society or other institution for any
purpose, except where such sum is paid for the purposes and to the extent
provided by or under section 36(1)(iv)/ (v) or as required by or under any
other law for the time being in force like approved provident/gratuity
funds etc. However, any bona fide sum actually spent out of such fund
will be allowed as deduction Under section 40(10). Further, under section
40 (11) assessee will be entitled to receive back the unutilised part of any
such fund/assets.

v. Unpaid Liabilities
Section 43B provides an exception to the mercantile system of
accounting in respect of taxes and other specified expenses. It states that
these expenses will be allowed on payment basis not accrual basis
irrespective of method of counting regularly employed by the assessee.

The section covers any sums payable by the assessee:-

(a) by way of tax duty, cess or fee, by whatever name called, under any
law for the time being in force,
(b) as an employer by way of contribution to any provident fund or
superannuation fund or gratuity fund or any other fund for the
welfare of employees,
(c) as bonus or commission to employees under section 36(1)(ii) ;
(d) as interest on any loan or borrowing from any public financial
institutions i.e. ICICI, IFCI, UTI, IDBI LIC or a state financial
corporation or a state industrial investment corporation or in
accordance with the terms and conditions of the agreement governing
such loan or borrowing, or financial arrangement ;
da) as interest on any loan or borrowing from any a non-banking financial
company or, systemically important non-deposit taking non-banking
financial company;
Conversion of interest into loan will not be treated as payment for this
purpose.
(e) as interest on any loan or advances from a scheduled bank, a co-
operative bank other than a primary agricultural credit society, a
primary co-operative agricultural or rural development bank
accordance with the terms and conditions of the agreement governing
such loan or advances,
(f) as an employer in lieu of, any leave at the credit of his employee, or
(g) as user , to Indian Railways for use of railway assets.

Previsions of section 43B will not be applicable if :-

126
a) The payment is actually made on or before the due date of submission
of return of income; and
b) the evidence of such payment is submitted along with the return of
income.

Provisions of section 43B may be summarised as under:-

a) Sums accrued and paid within the same previous year would be
allowed in that year.
b) Sums accrued in one year and paid in the following year but before
the due date of filing will also be allowed on accrual basis on
submission of proof of payment .
c) Other sums will be allowed only on cash basis and not on mercantile
basis.

Following table summarises the position:

Application of Section 43B
Case Year of Deduction
Accrued and paid in same year Year of payment/
accrual ; as both are same
Paid after the end of the year in which it is year of accrual
accrued but on or before the due date of
submission of return of income for that year
and the proof of deposit is submitted along
with the return of income

Any other time not covered above, or proof Year of payment

not attached with return

Illustration
34. ABC Limited pays GST for the financial year 2020-21 before 30-09-
2021. Determine the assessment year in which the sales tax may be
claimed as deduction.

Solution
Tax is paid before due date for filling return of income viz. 30-09-
2021. Hence, it will be allowed on accrual basis in A.Y. 2021-22.

Illustration
35. ABC Ltd pays excise duty for the previous year 2020-21 on 01-10-
2021 In which assessment year will it be allowed?

Solution
ABC Ltd. pays tax after the due date for filling return of income.
Deduction will be allowed only in the year of actual payment in 2021-22
relevant to assessment year 2022-23.

Illustration

127
36. Determine the year in which GST will be deducted from the business
profits of X Ltd., who made following payment of excise duty
S. No. Date of payment Rupees
1 02-05-2020 25,000
2 20-07-2020 65,000
3 16-08-2020 80,000
4 05-12-2020 20,000
5 12-06-2021 40,000
6 02-12-2021 10,000
7 Unpaid 10,000
Total 2,50,000

Solution
 First 4 items will be as deduction in assessment year 2021-22 as
they fell due and were paid in the same financial year 2020-21.
 Item 5, Rs. 40,000 paid on 12-06-2021 paid before the due date of
filing return will be allowed as deduction in assessment year 2021-
22 if proof of payment is furnished along with return of income.
 Item 6-Rs. 10,000 is paid on 02-12-2021after the due date for filing
of return for assessment year 2021-22, will be allowed in the year
of payment i.e. assessment year 2022-23.
 Item 7 -unpaid amount of Rs. 10,000 will not be allowed as
deduction until it is actually paid.

5.7 CHARGEABILITY OF PROFITS

Section 41 provides for taxation of the following : -

a. Cessation of liability
As per section 41(1) , any amount received or the value of any
benefit accruing to the assessee or his successor in business, whether in
cash or in any other manner or by way of remission or cessation such
liability whether by a unilateral act or otherwise, in respect of any loss,
expenditure or trading liability incurred by the assessee and allowed as a
deduction in any year will be chargeable as the income of the assessee or
the successor in business in the year of receipt of accrual of benefit .

"successor in business" means amalgamated company in case of

amalgamation with another company , the resulting company in case of
demerger , the other firm in case of a firm carrying on a business or
profession is succeeded by another firm,

Illustrations
37. Defective stock written off in books and allowed as deduction in
early years is now sold for Rs 10,000. The sales proceeds of the stock Rs

128
10,000 will be taxable under section 41(1) even though the business is not
in existence.

38. A has converted his business into a company. The new company
received sales proceeds of the defective stock , the company being the
successor in business will be liable in respect of that income.

b. Receipts from depreciable asset

Under section 41(2) , where any depreciable asset being building,
machinery, plant or furniture is owned by the assessee , who uses the same
for the purposes of business and in respect of which depreciation is
claimed under section 32(1)(i), is sold, discarded, demolished or destroyed
and the moneys payable in respect of such building, machinery, plant or
furniture, as the case may be, together with the amount of scrap value, if
any, exceeds the written down value thereof, so much of the excess as
does not exceed the difference between the actual cost and the written
down value shall be chargeable to income-tax as income of the business of
the previous year in which the moneys payable for the building,
machinery, plant or furniture became due.

Illustration
39. A printer costing Rs 15,000, on which depreciation of Rs 8,000 was
allowed, is sold for Rs.10,000.

Surplus of Rs 3,000 *will be reduced from the block of assets and if the
bock does not exist, it will be taxable as STCG.
* 10000-( Rs 15,000-8000 )

c. Scientific Research Asset

Under section 41(3) ,where an assessee claims and gets deduction
under section 35 (1)(iv) or 35 (2B) in respect of any capital asset used for
scientific research and subsequently sells the asset without having been
used for other purposes, then the excess of sale proceeds together with
any amount of insurance claim and the amount allowed as deduction ,
which is in excess of the actual cost of the asset shall be chargeable as the
income of the business or profession of the previous year in which the sale
took place.

"Sold" includes a transfer by way of exchange or a compulsory

acquisition under any law for the time being in force but does not include
a transfer, in a scheme of amalgamation, of any asset by the amalgamating
company to the amalgamated company, where the amalgamated company
is an Indian company.

Illustration
40. A machine costing Rs 20,000 fully allowed as deduction under
section 35 in the earlier years is sold for Rs 60,000 in financial year 2020-
21. Rs 20,000 earlier allowed as deduction will be the business income
and Rs 40,000 will be taxed as capital gains in the assessment year 2021-
22.
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d. Recovery of Bad debts
Under section 41(4), amount of any debt or part of debt allowed as
bad debt under section 36 (1) vii ) and recovered in subsequent years shall
be deemed to be profits and gains of business or profession in the year in
which it is recovered.

e. Reserve for bad debts

Under section 41(4A), any amount withdrawn from the special
reserve for bad debts by banking companies allowed as a deduction under
section 36(1)(viii) shall be deemed to be the profits and gains of business
or profession and accordingly be chargeable as the income of the previous
year in which such amount is withdrawn notwithstanding that the business
or profession is no longer in existence in that year.
However , any loss, (except speculation loss) arising in the
previous year in which such business or profession ceased to exist, and
which could not be set off against any other income of that previous year
will be set off against the income chargeable to tax under this section as
aforesaid.

5.8 MISCELLANEOUS PROVISIONS

1. Prospecting etc., for mineral oil

As per Section 42, in addition to the normal expenses , following
expenses will be allowed in computing the profits or gains of any
business of the prospecting for or extraction or production of mineral oils
including petroleum or natural gas under agreement between the central
government and the assessee :-
(a) expenditure by way of infructuous or abortive exploration expenses in
respect of any area surrendered prior to the beginning of commercial
production by the assessee;
(b) after the beginning of commercial production, to expenditure incurred
by the assessee, whether before or after such commercial production, in
respect of drilling or exploration activities or services or in respect of
physical assets used in that connection,
(c) the depletion of mineral oil in the mining area in respect of the
assessment year relevant to the previous year in which commercial
production is begun and for such succeeding year or years as may be
specified in the agreement.
If the assessee transfers the business wholly or in part or any
interest therein as per the agreement, the unallowed expenditure as
reduced by the proceeds of the transfer so far as they consist of capital
sums, shall be allowed in the previous year of the transfer of the business
or interest therein the surplus, if any, arising as result of such transfer hall
be chargeable as the income of that year even if the business is no longer
in existence in that year. The provision of the section will be applicable to

130
the amalgamated or the resulting company in case of amalgamation or
demerger of the assessee or its business.

2. Definitions of some relevant terms

Section 43 defines the meaning of certain terms used in sections 28 to
41 unless the context requires otherwise as under. These definitions have
been dealt with at their appropriate places.

3. Changes in rate of exchange of currency

As per Section 43A, in case of any increase or reduction in the liability
as result of change in exchange rate of Indian rupee at the time of payment
at new rate, the same will be adjusted by increasing/ decreasing the cost /
liability due. Such adjusted cost will be reckoned for the purposes of
computing actual cost or expenditure on scientific research under section
35 or 35A or under section 36(1)(ix) or cost of acquisition of a capital
asset under section 50.

No adjustment will be made when the whole or any part of the liability is
met, not by the assessee, but, directly or indirectly, by any other person or
authority.,

Any exchange rate under a future contract under FEMA to provide

with a specified sum in a foreign currency on or after a stipulated future
date at the rate of exchange specified in the contract to enable him to meet
the whole or any part of the liability aforesaid, the amount, will also be
adjusted accordingly.

4. Taxation of foreign exchange fluctuation 4

Under section 43AA, any gain or loss arising on account of any
change in foreign exchange rates shall be treated as income or loss,
computed as per the income computation and disclosure standards in
respect of all foreign currency transactions including those relating to—
(i)monetary items and non-monetary items;
(ii) translation of financial statements of foreign operations;
(iii)forward exchange contracts;
(iv)foreign currency translation reserves

5. Cost of acquisition of certain assets

Amalgamation
Under section 43C ,Where an asset other than the asset defined
under section 45(2), becomes the property of an amalgamated company,
and the amalgamated company sells the asset as its stock-in-trade of the
business carried on by it, then the cost of acquisition of the said asset to
the amalgamated company in computing the profits and gains from the
sale of such asset shall be –
- the cost of acquisition of the said asset to the amalgamating company,
- as increased by the cost, if any, of any improvement made thereto,
and the expenditure, if any, incurred, wholly and exclusively in
connection with such transfer by the amalgamating company.

131
Partition , gift, will etc.
Under section 43C , where an asset becomes the property of the
assessee on the total or partial partition of a Hindu undivided family or
under a gift or will or an irrevocable trust, and the same is sold by the
assessee as stock-in-trade of the business carried on by him, then the cost
of acquisition of the said asset to the assessee in computing the profits and
gains from the sale of such asset shall be the cost of acquisition of the said
asset to the transferor or the donor, as increased by the cost, if any, of any
improvement made thereto, and the expenditure, if any, incurred, wholly
and exclusively in connection with such transfer by way of effecting the
partition, acceptance of the gift, obtaining probate in respect of the will or
the creation of the trust, including the payment of gift-tax, if any, incurred
by the transferor or the donor, as the case may be.

6. Consideration for transfer of assets other than capital assets

As per section 43 CA different provisions of Section 50C/50CA will
be applicable to business assets and the consideration received or accruing
as a result of the transfer by an assessee of an asset (other than a capital
asset), being land or building or both, is less than the stamp duty value
adopted ,assessed or assessable stamp duty authorities for levy of stamp
duty on such transfer , then the stamp duty value shall be deemed to be the
full value of the consideration received or accruing as a result of such
transfer.

Where the date of agreement fixing the value of consideration for

transfer of the asset and the date of registration of such transfer of asset are
not the same, the value may be taken as the stamp duty value assessable
on the date of the agreement , only if the amount of consideration or a
part thereof has been received by any mode other than cash on or before
the date of agreement for transfer of the asset.

7. Computation of income from construction and service contracts.

Under section 43CB., the profits and gains arising from a construction
contract or a contract for providing services other than a contract for
providing services with duration of not more than ninety days shall be
determined on the basis of percentage of completion method in accordance
with the income computation and disclosure standards . Further, a contract
involving indeterminate number of acts over a specific period of time shall
be determined on the basis of straight line method. The contract revenue
shall include retention money the contract costs shall not be reduced by
any incidental income in the nature of interest, dividends or capital gains.

8. Income of public financial institutions etc.

Vide section 43D, Income by way of interest in relation to such
categories of bad or doubtful debts in case of a public financial institution
or a scheduled bank or a state financial corporation or a state industrial
investment corporation, or a public company, whose main object is
carrying on the business of providing long-term finance for construction or
purchase of houses in India for residential purposes shall be chargeable to
tax in the previous year in which it is credited by the as per the guidelines
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issued by the Reserve Bank of India or the National Housing Bank in
relation to such debts, or which is actually received by that institution or
bank or corporation or company, whichever is earlier.

9. Insurance business
Under section 44 , profits and gains of any business of insurance,
including any such business carried on by a mutual insurance company or
by a co-operative society, shall be computed in accordance with the rules
contained in the First Schedule overriding the normal provisions of the
Act for computation of income under different heads of income.

10. Trade, professional or other association

Section 44A deals with certain trade, professional or similar
association formed solely for the purposes of protection or advancement of
the common interests of their members and the income of which or any
part thereof is not distributed to its members except as grants to any
association or institution affiliated to it.

When the receipts of such associations by way of subscription or

otherwise falls short of the expenditure, not being capital expenditure,
incurred by such association during that previous year, such deficiency
shall be allowed to be deducted from the normal income of that
association under the head "Profits and gains of business or profession and
if there is no income assessable under that head or the deficiency
allowable exceeds such income, the whole or the balance of the
deficiency, shall be allowed as a deduction in under any other head while
computing the income of the association .

The amount of deficiency to be allowed as a deduction under this

section shall in no case exceed one-half of the total income of the
association. In computing the income of the association for the relevant
assessment year. Effect shall first be given to any other provision of this
Act under which any allowance or loss in respect of any earlier assessment
year is carried forward and set off against the income for the relevant
assessment year.

11. Compulsory maintenance of accounts

Under section 44AA it is mandatory for the following persons to keep
and maintain such books of account and other documents as may enable
the Assessing Officer to compute his total income in accordance with the
provisions of this Act :-
(a) Every person who carries on legal, medical, engineering or
architectural profession or the profession of accountancy or technical
consultancy or interior decoration or any other notified profession,
(b) Every person who carries on business or profession other than the
above professions , whose income from business or profession
exceeds Rs 1,20,000 (2,50,000 for Individual and HUFs ) or total
sales, turnover or gross receipts, in business or profession exceeds Rs
10 lakh ( Re 25 lakh for Individual and HUFs ) in any one of the
133
 three years immediately preceding the previous year in case of an
existing business or profession .
(c) Every person, in case of a business or profession newly set up in any
previous year, if his income from business or profession is likely to
exceed Rs 1,20,000/2,50,000 or his total sales, turnover or gross
receipts, in business or profession are or is likely to exceed Rs 10
lakh. Rs 25 lakh during such previous year;
(d) Every assessee, who has claimed his income to be lower than the
profits or gains of his business during a previous year than the
prescribed presumptive income under sections 44 AE, 44BB or
44BBB.
(e) Every person, who has claimed his income to be lower than the
deemed presumptive income under section44AD and his income
exceeds the maximum amount which is not chargeable to income-tax
during such previous year.

Other Points
(i) The Board may, having regard to the nature of the business or
profession carried on by any class of persons, prescribe, by rules, the
books of account and other documents , including inventories,
wherever necessary, to be kept and maintained, the particulars to be
contained therein and the form and the manner in which and the place
at which they shall be kept and maintained.
(ii) The Board may prescribe, by rules, the period for which the books of
account and other documents to be kept and maintained shall be
retained.
(iii)In case of professionals opting for presumptive tax up to income of Rs
50 lakh and other assessees turnover limit of Rs 5 Cr, if cash
transactions do not exceed 5% of turnover, are also exempt from this
provision.

12. Compulsory Audit of accounts

Under section44AB, every person carrying on -
a) business shall, if his total sales, turnover or gross receipts, in business
exceed or exceeds Rs.one crore in any previous year; or
(b) profession shall, if his gross receipts in profession exceeds Rs 50 lakh
in any previous year; or
(c) carrying on the business shall, if the profits and gains from the business
are deemed to be the profits and gains of such person under
section44AE, 44BB, OR 44BBB and he has claimed his income to be
lower than the profits or gains so deemed to be the profits and gains of
his business, as the case may be, in any previous year; or
(d) the business shall, if the profits and gains from the business are
deemed to be the profits and gains of such person under section44AD

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 and he has claimed such income to be lower than the profits and gains
so deemed to be the profits and gains of his business and his income
exceeds the maximum amount which is not chargeable to income-tax
in any previous year get his accounts of such previous year audited by
an accountant one month before the specified date for furnishing the
return of income under section139(1) and furnish by that date the
report of such audit in the prescribed form duly signed and verified by
such accountant and setting forth such particulars as may be prescribed
The limit of turnover has been increased or Rs 5 Cr (Rs 10 Cr
w.e.f A.Y. 2022-23) if the cash transactions of sale or purchase doe not
exceed 5% of turnover.
This section does not apply to a person, who derives income of the
nature referred to in Section 44B or Section 44BBA.
In a case where such person is required by or under any other law
to get his accounts audited, it shall be sufficient compliance with the
provisions of this section if such person gets the accounts of such business
or profession audited under such law before the specified date and
furnishes by that date the report of the audit as required under such other
law and a further report by an accountant in the form prescribed under this
section.

5.9 PRESUMPTIVE INCOME

A. Profits and gains of business

Under section44AD, a new presumptive income has been devised for
small eligible assessees having turnover of less than Rs 2 Crore from and
eligible business. The Scheme is open to
(a) Any Eligible Assessee being an individual, Hindu undivided
family or a partnership firm, who is a resident, but not a limited
liability partnership firm (LLP) ,
(b) who is engaged in an eligible business being a business any
business except the business of plying, hiring or leasing goods
carriages covered under section 44AE) ; and
(c) whose total turnover or gross receipts in the previous year does not
exceed an amount of two crore rupees, and
(d) who has not claimed deduction under sections 10, 10AA, 10B or
10BA or deduction under any provisions of Chapter VIA under the
heading "C. - Deductions in respect of certain incomes" in the
relevant assessment year.

Under the scheme, following sum shall be deemed to be the profits and
gains of such business chargeable to tax:-
 8% of gross receipts or total turnover or

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  6% of the turnover or gross receipts which is received by an
account payee cheque/ bank draft / use of electronic clearing
system through a bank account or other electronic mode ;
during the previous year or
a sum higher than the aforesaid sum claimed to have been earned
by the eligible assessee.
Other points
(a) Any deduction in respect of expense (including depreciation,
remuneration and interest payable to partners) allowable under the
provisions of sections 30 to 38 shall be deemed to have been
already given full effect to and no further deduction under those
sections shall be allowed.
(b) The written down value of any asset of an eligible business shall be
deemed to have been calculated as if the eligible assessee had
claimed and had been actually allowed the deduction in respect of
the depreciation for each of the relevant assessment years
(c) This provision will not apply to
(i) a person carrying on profession specified in section 44AA like
doctor, architect, lawyer, Chartered Accountant, engineer etc.;
(ii) a person earning income in the nature of commission or brokerage;
or
(iii) a person carrying on any agency business.
(d) Such assessee has to opt for the scheme of presumptive tax under
section 44AD, for five consequent years.
(e) If the assessee does not opt for the scheme, during the five
assessment years, he cannot again opt for the scheme for next five
years from that year.
(f) The eligible assessee is to pay advance tax by 15th March of the
financial year.
(g) An eligible assessee who has opted for the scheme shall not be liable
for compliance of the provisions of sections 44AA and 44AB in
respect of maintenances and audit of account etc. .
(h) An eligible assessee ,whose total income is above the taxable limit,
may claim his profits to be lower than 6% or 8% Such assessee shall
be liable to comply with the provisions of Section 44AA and 44AB in
respect of maintenances of books and other documents and audit of
account and submission thereof.

Illustration :
41. Ashok , an eligible assessee has turnover of an eligible business is
150 lakh for assessments year 2020-21 and Rs 180 lakh 2021-22. Under
the presumptive scheme under section 44AD his profit from the eligible
business will be assumed to be Rs 12 lakh and Rs 14.40 lakh respectively
@ 8% of the turnover of that business. All the expenses including
136
 depreciation will be deemed have been allowed. However Ashok will be
exempted from maintenance and audit of boos of account.
After opting for the scheme, Ashok does not opt for the scheme for
five consecutive assessment years, then under section 44AD (1), he will
not be eligible to again opt for it for next five assessment years
succeeding assessment years 2022-23 to 2026-27.
B. Profits and gains of profession
Under section 44ADA, In case of an eligible Assessee
(a) who is engaged in any profession referred to in section 44AA(1) such
as legal, medical, engineering or architectural profession or the
profession of accountancy or technical consultancy or interior
decoration or any other notified profession and ,
(b) whose total gross receipts does not exceed 50 lakh rupees in a
previous year, deemed Income will be 50% of the total gross
receipts, or any higher Income claimed by the assessee.
In case of less income the assessee will have to have his accounts
audited. Such an assessee will have to pay advance tax by 15 March and
all expenses will be deemed to have been allowed. Provisions relating to
declaring lower income and other matters will be applicable under this
section also.

C. Plying, hiring/ leasing goods carriages

Under section 44AE, an assessee, who
(a) owns not more than ten goods carriages at any time during the
previous year and
(b) who is engaged in the business of plying, hiring or leasing such goods
carriages, the income of such business chargeable to tax under the
head "Profits and gains of business or profession" shall be deemed to
be the aggregate of the profits and gains, from all the goods carriages
owned by him in the previous year, computed at Rs 7,500 per month
or part of a month during which the goods carriage is owned by the
assessee in the previous year or an amount claimed to have been
actually earned from the vehicle, whichever is higher.
All other provisions like compulsory audit declaring low income or
loss, all expense including depreciation, remuneration etc. deemed as
allowed , are applicable under this section also. Further the section applies
on hired goods carriages also.

D. Shipping business of a non-resident

Under section 44B, an assessee, being a non-resident, engaged in
the business of operation of ships, a sum equal to 7.5% of the aggregate of
the amounts paid or payable (whether in or out of India) to the assessee or
to any person on his behalf on account of the carriage of passengers,
livestock, mail or goods shipped at any port in India and the amount
received or deemed to be received in India by or on behalf of the assessee

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on account of the carriage of passengers, livestock, mail or goods shipped
at any port outside India including amount received by way of demurrage
charges or handling charges or any other amount of similar nature shall be
deemed to be the profits and gains of such business chargeable to tax
under the head "Profits and gains of business or profession".
E. Exploration, etc., of mineral oils
Section 44BB, applies to a non-resident assessee who is engaged in the
business of providing services or facilities in connection with, or
supplying plant and machinery including ships, aircraft, vehicles, drilling
units, scientific apparatus and equipment, used for the purposes of the said
business; on hire used, or to be used, in the prospecting for, or extraction
or production of, mineral oils, In such cases presumed income shall be
10% of the aggregate of the amounts : -
 paid or payable (whether in or out of India) to the assessee or to
any person on his behalf on account of the provision of services
and facilities in connection with, or supply of plant and machinery
on hire used, or to be used, in the prospecting for, or extraction or
production of, mineral oils including petroleum and natural gas in
India; and
 received or deemed to be received in India by or on behalf of the
assessee on account of the provision of services and facilities in
connection with, or supply of plant and machinery on hire used, or
to be used, in the prospecting for, or extraction or production of,
mineral oils outside India shall be deemed to be the profits and
gains of such business chargeable to tax under the head "Profits
and gains of business or profession except in a case where the
provisions of Section 42, 44D, 44DA, 115A or 293A are
applicable for the purposes of computing profits or gains or any
other income.

An assessee may claim lower income than 10%, if he keeps and

maintains such books of account and other documents as required under
section 44AA and gets the accounts audited and furnishes a report of such
audit under section 44AB and thereupon , the Assessing Officer shall
proceed to make an assessment of the total income or loss of the assessee
under section143(3) and determine the sum payable by, or refundable to,
the assessee.

F. Operation of aircraft of non-residents

Section 44BBA provides that in the case of an assessee, being a
non-resident, engaged in the business of operation of aircraft, a sum equal
to 5% of aggregate of the amounts the amount paid or payable (whether in
or out of India) to the assessee or to any person on his behalf on account of
the carriage of passengers, livestock, mail or goods from any place in
India; and the amount received or deemed to be received in India by or on
behalf of the assessee on account of the carriage of passengers, livestock,
mail or goods from any place outside India shall be deemed to be the

138
profits and gains of such business chargeable to tax under the head
"Profits and gains of business or profession".

G. Foreign companies engaged civil construction, turnkey power

projects etc.
Under section 44BBB, a sum equal to 10% the amount paid or
payable, whether in or out of India to an assessee, being a foreign
company, engaged in the business of civil construction or the business of
erection of plant or machinery or testing or commissioning thereof, shall
be deemed to be the profits and gains of such business chargeable to tax .

The assessee is at liberty to declare lower income by maintaining

accounts and other documents under section 44AA and getting the same
audited under section 44AB and submitting the audit report in prescribed
form and thereupon , the Assessing Officer shall proceed to make an
assessment of the total income or loss of the assessee under section143
(3)and determine the sum payable by, or refundable to, the assessee.

H. Head office expenditure - non-residents

Section 44C provides that deduction in respect of the expenditure in
the nature of head office expenditure incurred by a non-resident assessee
shall not exceed 5% of the adjusted total income; or the amount of head
office expenditure as is attributable to the business or profession of the
assessee in India, whichever is less. In case of loss, the deduction shall be
computed @ 5% of the average adjusted total income of the assessee.
 "Adjusted total income" means the total income computed without
giving effect to the allowance under section 32, 32A 33, 33A, 36(1)
(ix), any loss carried forward under section72(1), 73(2),74(3) or
74A(3)or the deductions under Chapter VI-A;
 "Average adjusted total income" means one third of the aggregate
adjusted total income of last three years or one half of the aggregate
adjusted total income of last two years or , the amount of the adjusted
total income in respect of the previous year relevant to that assessment
year , as the case may be depending upon the number of year the
assessee has been assessed in India
 "head office expenditure" means executive and general administration
expenditure incurred by the assessee outside India, including
expenditure incurred in respect of
(a) rent, rates, taxes, repairs or insurance of any premises outside India
used for the purposes of the business or profession;
(b) salary, wages, annuity, pension, fees, bonus, commission, gratuity,
perquisites or profits in lieu of or in addition to salary, whether paid or
allowed to any employee or other person employed in, or managing
the affairs of, any office outside India;
(c) travelling by any employee or other person employed in, or managing
the affairs of, any office outside India; and

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 (d) such other matters connected with executive and general
administration as may be prescribed.

I. Royalties, etc., in case of non-residents

Under section 44DA the income of non-residents or foreign companies
in receipt of income by way of royalty or fees for technical services from
Government or an Indian concern under an agreement with them and
such non-resident carries on business or performs professional services in
India through a permanent establishment or from a fixed place of
profession situated therein, shall be computed under the head "Profits and
gains of business or profession". No deduction shall be allowed, in
respect of
(i) any expenditure or allowance which is not wholly and exclusively
incurred for the business of such permanent establishment or fixed
place of profession in India; or
(ii) any amounts, (otherwise than towards reimbursement of actual
expenses paid) by the permanent establishment to its head office or to
any of its other offices:

Every such non-resident (not being a company) or a foreign

company shall keep and maintain books of account and other documents
in accordance with the provisions contained in Sec 44 AA get his accounts
audited and furnish along with the return of income, the report of such
audit in the prescribed form.

J. Reorganization of co-operative banks

Section 44DB (1) deals with reorganization of co-operative banks
due to amalgamation or demerger etc. The section provides for pro rata
deduction under section 32, 35D, 35DD or 35DDA to the predecessor
bank in the ratio of number of days upto the date of reorganisation and
correspondingly, the amount of deduction allowable to the successor co-
operative bank the number of days comprised in the period beginning with
the date of business reorganisation and ending on the last day of the
financial year; and the total number of days in the financial year, in which
the business reorganisation has taken place.

Illustration
42. Total amount of deduction allowable to a Bank under different
sections works out to Rs 50,000. Reorganization of a bank takes place on
01-09-2020. The deduction will be allowed to he predecessor bank and
the resultant bank pro rata for 153 days (from 01-04-2020 to 31-08-2020
and 212 days i.e. from 01-09-2020 to 31-03-2021 respectively.

The predecessor bank will be able to deduct Rs 20,959 being Rs

50,000 X 153/365 and the resulting bank will get Rs 29,041 being 50,000
X 212 / 365.
This is subject to some conditions namely :-

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(i) all the assets and liabilities of the undertaking or undertakings
immediately before the transfer become the assets and liabilities of
the resulting co-operative bank;
(ii) the assets and the liabilities are transferred to the resulting co-
operative bank at values (other than change in the value of assets
consequent to their revaluation) appearing in its books of account
immediately before the transfer;
(iii) the resulting co-operative bank issues, in consideration of the transfer,
its membership to the members of the demerged co-operative bank on
a proportionate basis;
(iv) the shareholders holding 75% or more in value of the shares in the
demerged co-operative bank (other than shares already held by the
resulting bank or its nominee or its subsidiary immediately before the
transfer), become shareholders of the resulting co-operative bank,
otherwise than as a result of the acquisition of the assets of the
demerged co-operative bank or any undertaking thereof by the
resulting co-operative bank;
(v) the transfer of the undertaking is on a going concern basis; and
(vi) the transfer is in accordance with the conditions specified by the
Central Government, by notification in the Official Gazette, having
regard to the necessity to ensure that the transfer is for genuine
business purposes.

5.10 ILLUSTRATIONS

43. From the following Income & Expenditure account of Law Bros. for
the year ending March 31, 2021 , compute the total income of the firm.
To Expenses 150,000 Professional 480,000
Receipts
To Depreciation 20,000
To Remuneration to partners 250,000 By Other fees 90,000
Interest on Capital to partners @ 20 per 20,000
cent
To Net Profit 130000
Total 570000 570000

Other Information:
1. Expenses include Rs. 18,000 and Rs. 12,000 paid in cash as brokerage
to a single party on a single day .
2. Depreciation calculated as per section 32 is Rs. 40,000

Solution
Computation of Total Income of Law Bros. ( A. Y.2021-22)

Net profit as per Income & Exp account 1,30,000

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Add: Expenses not allowable
40A(3)- Cash paid to broker over Rs. 10,000 30,000
40(5) Excess interest to partners -20,000 *8/20 8,000
1,68,000
Less: Depreciation Under section32 (40,000-20,000) 20,000
1,48,000
Add: Remuneration to partners debited in PLA 2,50,000
Book Profits before remuneration 3,98,000
Remuneration to partners 2,98,920
Actual Rs 2,50,000 or
150000 +60% of Rs 398200-150000) = 2,98,920
Total Income 99,080
44. From the given Trading and P & L A/c of A&B for the year ended
31st March 2021 , compute taxable income of the firm for the assessment
year 2021-22,

Particulars Rs. Particulars Rs.

To Opening Stock 75,000 By Sales 20,00,000
To Purchases 15,00,000 By Closing Stock 85,000
To Gross Profit 5,10,000
Total 20,85,000 Total 20,85,000
To Salaries 2,50,000 By Gross Profit 5,10,000
By Bad Debts
To Sales Commission 40,000 Recovery 25,000
To Sales Tax 35,000
To General Expenses 5,000
To Advance Income Tax 54,000
To Interest on Loan 42,000
To Interest on Capital 18,000
To Depreciation on
Furniture & Fittings 4,000
To Advertisement 16,000

To Free Distribution of Samples 3,000

To Insurance premium on Life of
Partners 8,500
To Printing & Stationery 3,500
To Net Profit 56,000
Total 5,35,000 Total 5,35,000

Additional information:

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1. Salaries include Rs. 40,000/- paid to partners, as per partnership deed
and well within the limits under section 40(b).
2. General Expenses are incurred for the purposes of pleasure tour of
partners with their family members to Goa.
3. Income Tax includes Rs. 14,000 paid for the partners.
4. Bad Debts recovered were earlier allowed as a deduction.
5. Interest on Capital to partners is in excess of limits specified under
section 40(b) by Rs. 1,500/- but as per partnership deed.
6. Cash expenses over Rs 35,000 for carriage of Rs. 40,000.

SOLUTION:

Computation of Total Income of X & Y Co. for A.Y. 2020-21

Particulars Rs. Rs.
Profit as per Profit and Loss Account 56000
Add: Exp. disallowed /considered separately
Salaries to Partners 40000
General Expenses incurred for
personal purpose by the partners 5000
Cash expenses 40A(3) 40000
Income Tax (Advance) 54000
Interest on Capital 18000
Insurance on Life of Partners 8500 165500
221500
Less: Interest to partners (18000-1500) 16500
Book Profit 205000
Less: Salaries to partners 40000
Business income 165000

5.11 SELF-EXAMINATION QUESTIONS:

1) Define and explain the term “Business”.

2) Explain any six deductions which are specifically allowed as a
deduction while computing income from business or profession.
3) Give a detailed note on depreciation
4) Is depreciation always allowed on written down value ?
5) What happens, when block ceases to exist?
6) Discuss the tax treatment when block comes to zero.
7) What are the incomes chargeable under the head “Profits and Gains of
Business or Profession”?

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8) Explain the items of expenses, which are expressly not allowed as
deductions while computing income from “Profits and Gains of
Business or Profession.
9) Explain section 37(1) is the residuary section to claim deduction,
while computing Profits and Gains of Business or Profession
10) Explain expenses allowed on payment basis Under section 43B.
11) State the disallowance under Section 40A (3) if a purchase bill of Rs
45,000 was immediately paid by cash. ( Ans: Rs. 45,000)
12) State whether following expenses are allowed as a deduction or not
while computing income from business or profession, if not, give
reasons:
a. Interest paid outside India wherefrom no tax has been deducted nor
there is any representative assessee.
b. Income tax paid by the firm.
c. Salary paid outside India wherefrom no tax has been deducted nor
there is any representative assessee.
d. Salary paid to a partner.
e. Guest House expenses.
f. Advertisement expenses.
g. Contribution to Gratuity Fund.
h. Interest on borrowed capital.
(Ans: Item f & h only allowable, d allowed subject to book profits)
13) State with reason, whether the deduction will be available or not in
respect of the following expenses.
a. Fee of Rs 20,000 paid to a technical consultant in cash.
b. Fee of Rs 20,000 paid by cheque to A senior advocate for
conducting proceeding before the Income Tax authorities.
c. Provision made for gratuity as per actuary valuation of Rs
1,00,000.
d. A sum of Rs 1,30,000 paid towards GST liability for the financial
year 2017-18 on 01-04-2021
e. Stock-in-trade lost to fire amounting to Rs 10,000 and was debited
to Profit and Loss Account.
( Ans : b & e allowable, a, c & d not allowed , d allowed in A.Y.2022-23)
14) Discuss the implication of the following transactions in the case of a
doctor running a nursing home
a. Received from its employees contribution towards Provident
Fund for the month of March 2021 paid and paid to Provident
Fund Account on 15-04-2021 – Rs 25,000
b. Cash purchase of medicines –Rs 50,000
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 (Ans. 25000 Income Under section/43 B (2) Rs 50,000 disallowed under section
40A(3)
15)Are the following expenses allowable as deduction under section
37(1)
(a) Litigation expenses for official purposes.
(b) Expenses relating to purchase of stationary for official purpose
and
c) interest on loan taken for paying income-tax. ( Ans; a& b allowable)
16) From the P/L A/c of X for the year ending 31-03-2021, ascertain
total income for the assessment year 2021-22.:

Expenses Rs. Income Rs.

General expenses 13,400 Gross profits 3,64,500
Bad debts 22,000 Commission 8,600
Advance tax 21,000 Brokerage 37,000
Insurance 600 Sundry receipts 2,500
Salary to staff 26,000
Salary to X 32,000
Interest on overdraft 4,000
Interest on loan to Mrs. X 42,000
Interest on capital of X 23,000
Depreciation 48,000
Advertisement exp. 7,000
Contribution to RPF 13,000
Net profit 1,60,600
Total 4,12,600 Total 4,12,600

Other information:
(A) Depreciation allowable is Rs. 37,300 as per the I.T. Rules.
(B) Gen. exp. include Rs. 500 for arranging a party to a friend
(Ans 160600+21000+32000+23000+48000-37300+500 = 247800)
17) From the following data, calculate the depreciation admissible to an
individual carrying on business, for A.Y. 2021-22
Particulars % WDV
Factory Building 10 5,00,000
Plant & Machinery 20 8,00,000
Addition to Plant 1,00,000
Sale proceeds of Plant (cost 1 lakh) 5,00,000
Furniture & Fixtures 10 1,00,000
Motor Car 20 60,000
New computer 60 60,000

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 (buildg. Rs. 50,000, P&M . 60,000, Comp. Rs.36000, Furni. Rs.10,000 & Car
Rs.12,000)

18) From the following, ascertain depreciation admissible and other

liabilities, if any. In respect of the previous year relevant to the AY
2021-22
Particulars Plant & Mach Building
Rate of Depreciation 25% 10%
WDV at the beginning of the year Rs2,50,000 Rs 5,00,000
Additions during the year Rs 3,00,000 Nil
Sales during the year Rs10,00,000 Rs 2,00,000
(Ans. P&M Rs. Nil Rs. 2,00,000 Short term capital gain, Building Rs. 5,000)
19) X Ltd. owns two plants A & B on 1-4- 2020 (depreciation-15% per
cent) with opening depreciated value of the block Rs. 2,37,000. It
purchases Plant C with depreciation -15% on 31-5- 2020 for Rs.
20,000 and sells Plant A on 10-04-2020 for Rs 10,000, Plant B on
12-12-2020 for Rs. 15,000 and Plant C on1-03-2021 for Rs. 24,000.
Determine the WDV of the block as on 31-03-2021 and also the
depreciation
{Ans. 237000+20000-49000 = 208000 Short Term Capital Loss,
block empty, Depn –NIL})
20) Compute depreciation for A.Y. 2021-22 from the following:
Plant & Machinery A, B & C – WDV on 1-4- 2020 Rs. 5,00,000
rate of dep.15%. Plant D purchased on 12-06-2020 Rate of dep. 15%
for Rs. 40,000. Plant A sold on 8-12- 2020 for Rs. 1,60,000.
(Ans Value of Block 500000+40000- 160000 = 380000 Dep. 57000)



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 6
CAPITAL GAINS
(Section 45 to 55)
Unit Structure
6.1 Introduction and Objectives
6.2 Basis of Charge
6.3 Capital Asset
6.4 Transfer
6.5 Types of assets – Short Term & Long Term
6.6 Types of Capital Gains
6.7 Period of Holding
6.8 Computation of Capital Gains
6.9 Value of Consideration
6.10 Cost of Transfer
6.11 Cost of Acquisition
6.12 Fair Market Value
6.13 Transactions covered under section 49(1)
6.14 Cost of Improvement
6.15 Indexed cost of Acquisition/ Improvement
6.16 Transactions not regarded as transfer
6.17 Typical Illustrations
6.18 Self Assessment Questions

6.1 INTRODUCTION AND OBJECTIVES

Income tax is primarily a tax on income. Capital gains arises on

transfer of “capital asset”, which is acquired with the money saved from
the tax paid income. Hence, prima facie tax on capital gains is not in
consonance with income tax. Moreover, capital gain is not income in itself
but represents only a rise in the value of the asset as a result of reduction
in purchasing power of money over a long period due to inflation. Be it as
it may, globally, capital gain is a precious source of revenue, which no
government could ignore. The result is a complex tax regime seeking to
tax capital gains.

The lesson explains different aspects of tax treatment of capital

gains, concept of “Capital Asset”, “Transfer”, what constitutes a capital
asset and what is not a capital asset, types of capital gains, concept of
indexation, computation of capital gain and other machinery provisions
dealing with contained in sections 45 to 55.
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6.2 BASIS OF CHARGE

2.1 Capital Gains Defined

Section 45 is the charging section. It says that “any profits or gains
arising from the transfer of a capital asset effected in the previous year
shall be the income of the previous year in which the transfer took place”

Thus the section comes into play when there is any gain or profit
arising on transfer” of a “capital Asset” during the “previous year”.
Hence, the section will apply if:-
(i) a capital asset ,
(ii) is transferred by the assessee,
(iii) during the previous year and
(iv) it results in some gain or loss.

Section 2(14) defines “capital asset” and section 2(47) defines

“transfer”. Every asset may not be a ‘capital asset” nor every movement of
a capital asset from one person to another can be called “transfer”. If the
two ingredients do not co-exist simultaneously, there will be no liability
for tax under section 45.

For instance, motorcar is a personal effect not a ‘capital asset’

within the meaning of section 2(14). Hence, profit on transfer of a
personal motorcar will not be chargeable as capital gain.

Similarly, devolution or transmission of an asset unto heirs by

succession is not transfer within the meaning of section 2(47). Hence,
where the shares are registered in the name of a legal heir on the death of a
shareholder, there will not be a transfer and provisions of section 45 will
not be attracted.

2.2 Other receipts chargeable to capital tax

Section 45 extends the term “capital gain” to cover several other
receipts, discussed below:-

a) Insurance money
Money or other assets received during the previous year from an
insurer on account of damage to or destruction of a capital asset, as a
result of:
i) Flood, typhoon, hurricane, cyclone, earthquake or other convulsions of
nature;
ii) Riot or civil disturbance;
iii) Accidental fire or explosion; or
iv) Action by an enemy or action taken in combating an enemy

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b) Conversion of capital asset into stock
Transfer by way of conversion, by the owner of a capital asset into, or
its treatment by him as stock-in-trade of a business carried on by him but
is chargeable to tax in the previous year in which such stock-in-trade is
sold or otherwise transferred by him.
c) Interest in securities
Transfer made by a depository or a participant of beneficial interest in
any securities during the previous year in which such transfer takes place.
d) Transfer of asset as capital to firm , AOP or BOI
Transfer of a capital asset made by a person to a firm or other
association of persons or body of individual (not being a company or a co-
operative society) in which he is or becomes a partner or member by way
of capital contribution or otherwise; in the previous year , in which the
transfer takes place.
e) Transfer of asset on dissolution of firm , AOP or BOI
Transfer of a capital asset by way of distribution of capital assets on
dissolution of a firm or association of persons or body of individuals (not
being a company or co-operative society) or otherwise, in the previous
year in which the transfer takes place.
f) Compulsory Acquisition
Transfer of capital asset by way of compulsory acquisition under any
law is chargeable to tax in the previous year in which such compensation
or part thereof is received.
Any additional compensation shall be taxable in the previous year,
in which it is actually received.
If any court, tribunal or any authority subsequently reduces the
initial compensation, the capital gains assessed in the year of receipt of
initial compensation or enhanced compensation will be amended to re-
compute the capital gains with reference to such reduced compensation.
g) Repurchase of Units of Mutual Funds
Transfer of capital asset being the units of Unit Trust of India (UTI) or
other mutual funds issued under the equity-linked savings scheme on the
repurchase thereof by the mutual fund will be taxed in the year of such
repurchase.
h) ESOP -ESOS
Sale value of the shares issued to employees under an equity stock
option plan(ESOP) or equity stock option scheme (ESOS) as reduced by
the cost of acquisition or indexed cost of acquisition of the shares will be
taxed in the year of such issue.
i) Buyback
Vide section 46A, the value of a consideration received by the
shareholder from a company under a scheme to buyback its own shares
under section 77A of the Companies Act, 1956 as reduced by the cost of
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acquisition or indexed cost of acquisition will be taxed in the year of
buyback.
j) Joint Development Agreement(JDA)
Vide section 45(5A), the value of the capital asset (land or building or
both) transferred by an individual or a HUF under a registered specified
agreement called Joint Development Agreement(JDA) to develop real
estate for a consideration of a share being land and building or both,
whether with or without or part payment of consideration in cash shall be
the stamp duty valuation on the date on which the competent authority
issues a completion certificate for the entire property and capital gain will
be chargeable accordingly on that date.

6.3 CAPITAL ASSET

Section 2(14) defines capital asset as:

“Property of any kind held by an assessee, whether or not
connected with his business or profession,” but does not include -
a. any stock-in-trade, consumable stores or raw materials held for the
purposes of his business or profession.
b. personal effects i.e. movable property including wearing apparels and
furniture held for personal use by the assessee or any member of his
family dependent on him, but excludes-
(a) Jewellery;
b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.

For this purpose, “Jewellery" includes:

(a) ornaments made of gold, silver, platinum or any other precious metal
or any alloy containing one or more of such precious metals, whether
or not containing any precious or semi-precious stone, and whether or
not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture,
utensil or other article or worked or sewn into any wearing apparel;
Although jewellery is a movable property held for personal use, it is
deemed to be “capital asset”. The definition covers only ornaments,
not other articles like silver or gold utensils, which are neither
“jewellery nor ornaments”.
c. Agricultural land in India, not being land situate in :
a. areas not in the jurisdiction of a municipality, municipal
corporation notified area committee, town area committee, town
committee, or by any other name or a cantonment board or
cantonment board having population of 10000 or more and
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 b. in any area within the distance, measured aerially, from the local
limits from any area of municipality etc. as above-
Distance not more than Population of the area of
municipality etc. as per last
published census
2 KM 10,001 – 1,00,000
6 KM 1,00,001 – 10,00,000
8 KM More than 10,00,000
d. Special Bearer Bonds, 1991
e. 6 1-2 per cent Gold Bonds, 1977
f. 7 per cent Gold Bonds, 1980
g. National Defence Gold Bonds 1980
h. Gold deposit Bonds under old Deposit Scheme 1999

The section clarifies that “property” shall include any rights in or

in relation to an Indian company, including rights of management or
control or any other rights whatsoever;

6.4 TRANSFER

Section 2(47) defines “Transfer” in an inclusive definition:

“Transfer in relation to capital assets includes the following:-
(1) sale, exchange or relinquishment of the asset ;
Relinquishment of a right means transfer of a right in favour of
another person e.g. sale of right to subscribe shares.
(2) extinguishment of rights on the capital asset;
Extinguishment of rights results in cessation or destruction or
cancellation of rights in a capital asset like surrender of tenancy right
for e.g. buyback of shares results in extinguishment of shares.
(3) compulsory acquisition under any law;
(4) conversion of capital asset into stock in trade of a business.
(5) maturity or redemption of a zero coupon bond issued by an
infrastructure capital company, a fund or a public sector company
notified by the central government in respect of which, no payment
or benefit is received before maturity or redemption;
(6) any transfer involving the allowing the possession of an immovable
property under section 53A of Transfer of Property Act,1882 in part
performance of the contract for transfer of that property;
(7) any transaction involving transfer of membership of a group,
association housing society, company, etc., which have the effect of
transferring or enabling enjoyment of any immovable property or
any rights therein in any manner whatsoever;
(8) distribution of assets on the dissolution of a firm, body of individuals
or association of persons;

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(9) transfer of a capital asset by a partner or member to the firm or
AOP, whether by way of capital contribution of otherwise;
(10) transfer under a gift or an irrevocable trust of shares, debentures or
warrants allotted directly or indirectly to its employees under the
ESOP scheme of the company as per the guidelines of the Central
Government.

Sections 47 and 47A list out transactions, which are not regarded as
“transfer” e.g. transfer upon reorganisation of business entitles like
amalgamation, demerger, gift, will etc.

6.5 TYPES OF CAPITAL ASSETS

A capital asset may be classified as short term or long term

capital asset depending upon the period for which it is held by the
assessee before its transfer, that is to say :-
a) Short Term Capital Asset (STCA)
 As per section 2(42A), short-term capital asset means a capital asset
held by an assessee for less than 36 months before it is transferred.
 The period of 36 months is taken as 12 months in the following cases:
(i) Equity or Preference shares whether quoted or not,
(ii) Securities like debentures, government securities and notified
derivatives, which are listed in recognised stock exchange under
section 10(23D),
(iii)Units of UTI
(iv)Units of equity oriented mutual funds
(v) Zero coupon bonds
 the period of holding is taken as 24 months in the case of
- unlisted Shares,
- immovable property ( land, building or both)
(reduced from 36 months).
Hence, period of holding is 12, 24 or 36 months depending upon the
asset.
b) Long Term Capital Assets (LTCA)
As per section 2(29A) , a long term capital means a capital asset,
which is not a short-term capital asset. In other words, a capital asset will
be a long term asset if it is held for more than 12, 24 or 36 months before
it is transferred.

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6.6 TYPES OF CAPITAL GAINS

Capital gains arising on the transfer of a capital asset will be

short term capital gain or long term capital gain depending upon the type
of the asset which is transferred that is:-
(i) Short Term Capital Gain (STCG)
As per section 2(29B ), capital gain arising on transfer of a short term
capital asset (asset held by an assessee for less than 36, 24 or 12 months)
will be short term capital gain and any loss arising on the transfer of short
term asset will be short term capital loss.
Further, capital gains arising on sale of long term business, assets in a
block in case of a slump sale under section 50 and surplus or deficit left in
a block on transfer of all depreciable assets in the block, would be treated
as a short term capital gain or loss.
(ii) Long Term Capital Assets (LTCG)
As per section 2(42B ), long-term capital gain is the gain arising on
transfer of a long-term asset or an asset held by an assessee for 36, 12 or
24 months or more. Conversely, any loss arising on transfer of long-term
asset will be long-term capital loss.

6.7 PERIOD OF HOLDING

Holding of an asset is the yardstick to determine whether the type

of capital gains arising on transfer of the capital asset as per section 2
(42A ). Some important principles to determine the holding of an asset are
given as under:-

1. In case of shares held in a company in liquidation, the period

subsequent to the date of liquidation will not be included. Period of
holding will stop running on date of liquidation.

Illustration
1. A company goes into winding up on 01-01-2018. The liquidator
settles the claim on 01- 01-2021. In computing the period of holding, the
period after 01-01-2018 will not be included.

2. In case capital assets have become the property of the assessee in

circumstances mentioned in section 49(1) in determining the period, the
period for which the previous owner held the capital asset will also be
included.

Illustration
2. A dies on 01-01-2020, leaving his house, which was purchased on
15-02-2003 to his son B. B sells this house on 20-03-2021. The resultant
gain (loss) will be long term because holding of the house will be
reckoned from15-02-2003 , being the date of acquisition, on which , the
previous owner A held the house.
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3. In case of shares of an amalgamated company allotted to a shareholder
against the shares in an Indian company, which was amalgamated, the
period for which the assessee held the shares in the amalgamated
company will also be included.

Illustration
3. R purchased shares of S Ltd on 12-11-2010. S Ltd amalgamated with H
Ltd. on 31-10-2020. Under the scheme of amalgamation, original 1000
shares in S Ltd were converted into 300 shares of H Ltd. R sells these 300
shares of H Ltd. on 01-01-2021. The capital gain will be treated as long
term as the period of holding will be reckoned from 12-11-2010 and not
31-10-2020.
4. In case of rights issue of shares or other securities subscribed to by the
assessee on the basis of his rights to subscribe, the counting of the period
shall start from the date of allotment by such person or other person in
whose favour such right has been renounced.
5. In case of renunciation of a right, for the person who has acquired the
rights, the period shall be reckoned from the date of the offer of such
rights by the company or institution.
6. In case of a bonus issue, allotted without payment on the basis of
holding of any other financial asset, period shall be reckoned form the
date of allotment of such financial asset.
7. In case of shares in a resulting company received under a scheme of
demerger of a company, the period for which the shares in the demerged
company were held by the assessee will also be included.
8. In case of shares of trading or clearing rights of a recognised stock
exchange acquired by a person under its demutualisation or
corporatisation, the period for which, such person was a member will also
be included.
9. In case of equity shares allotted under demutualisation or
corporatisation of a recognised stock exchange in India, the period for
which such person was a member will also be included.
10. Period of holding of other capital assets will be decided according to
the rules framed by the CBDT in that regard.
The CBDT has clarified that date of transfer- acquisition of shares will be
considered on the basis of the brokers’ note - date of contract or date of
allotment and FIFO (First in First Out Basis) in the case of Demat
Accounts.
11. In case of security or sweat equity, allotted or transferred by the
employer free of cost or at concessional rate to this employees including
former employees, popularly called as ESOP, the period shall be
reckoned from the date of their allotment or transfer.
12. The period of holding of units acquired in the consolidated scheme of
mutual fund shall include the period for which the units in consolidating
schemes were held by the assessee.

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13. The period of holding of a capital asset, being share or shares of a
company, acquired by a non-resident assessee on redemption of GDRs
would be reckoned from the date on which a request for such redemption
was made.

6.8 COMPUTATION OF CAPITAL GAINS

8.1. General Rule

Under section 48 the income under the head “Capital Gains” shall be
computed. by deducting from the full value of the consideration received
or accruing as a result of the transfer of the capital asset the following
amounts, namely :-
(i) Expenditure incurred wholly and exclusively in connection with such
transfer.
(ii) The cost of acquisition of the asset and the cost of any improvement
thereto:

8.2. Long Term Capital Gains

Under section 55 Where the capital gain is to be computed in respect
of a long term asset, instead "cost of acquisition" and "cost of
improvement", "indexed cost of acquisition" and "indexed cost of
improvement" are to be deducted subject to following exceptions, when
benefit of indexation of cost will not be available, viz.-
a. On capital gain on transfer of shares or debentures of Indian company
by a non-resident will be computed by converting the cost of acquisition,
full value of consideration and expenses incurred for transfer into
originally utilised foreign currency and reconverting capital gain into
Indian currency.
b. On transfer of bonds and debentures even though they may qualify
to be called long term capital assets. This is because bonds and debentures
are normally issued and redeemed at par and if benefit of indexation is
given, it will always give capital loss, and
c. In case of slump sale under section 50B.
d. Treatment of long term assets in shares etc.
On transfer of listed shares and equity-oriented mutual funds, higher
of the following :-
(i) .The actual cost of acquisition of such investments; and
(ii) The lower of-
a. Fair Market Value of such investments as on 31-01-2018 ; and
b. Full Value of Consideration received or accruing as a result of
the transfer of the capital asset i.e. the Sale Price

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This is called the grandfathering rule It is implication is as under :-
(i) Where the investments has been purchased prior to 31-01-2018 and
a. sold before 01-04-2018 , Long term capital gain would be
exempt under section 10(38)
b. sold after 01-04-2018, Long term capital gain accrued upto
31-01-2018 would be exempt under section 10(38), and the
remaining long term capital gain will be taxable @ 10% under
section 112 if aggregate gains exceed 1 lakh rupees.
c. Where the investments has been purchased and sole after 31-
01-2018 i.e. from 01-02-2018 long term capital gain will be
taxable @ 10% under section 112

Illustration
14. Radha sold purchased 100 equity shares on 31-05-2020 for Rs
2,10,00 which were purchased on 01-04-2016 for Rs 1,50,000 . Fair
market value of these shares as on 31-01-2018 was Rs 2,80,000.What
will be the long-term capital gain/ loss?

Solution
Cost of Acquisition actual on 01-04-2016 Rs 2,50,000
Fair Market Value on 31-01-2018 Rs 2,80,000
Sales Price Rs 4,10,000

Hence cost will be taken Rs 2,80,000 , which is higher the actual cost and
FMV as 31-01-2018 and LTCG will be Rs 1,30,000 i.e. Rs 410000-
2,80,000)

15. Assume that the share were purchased on 01-02-2018 for Rs

2,50,000 and sold on 31-05-2020 for Rs 4,10,00 , then the taxable long
term capital gain will be of Rs 1, 60,000
16.
Mode of computation can be depicted as under:
COMPUTATION OF CAPITAL GAINS

Sales Consideration
Less
Expenses on Transfer
Less
Indexed cost of Indexed Cost of Cost of Cost of
acquisition Improvements acquisition Improvement
Long Term [LTCG] Short Term [STCG]
Note: The STCG / LTCG computed above are subject to deductions-exemptions
under sections 54, 54B, 54D and 54EC, 54ED, 54F 54G etc.

8.3. Depreciable Capital Assets

As per section 50 , where a capital asset has been sold or
transferred and in respect of such capital asset depreciation had been
allowed, the position will be as shown in the diagram below :
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 Depreciable Capital Assets
Sales Consideration
LESS Expenses on Transfer
LESS Opening WDV + Cost of New Purchase

WDV Surplus WDV still Remains

becomes Left
ZERO

No Taxable If Block Empty Block Not Empty

Depreciation as
STCG Short Term capital Claim
Loss depreciation on
No Depreciation Balance WDV

The detailed rules are as follows:-

A. When there is no sale of assets from the block
 Written down value(WDV) of the block at the beginning of
the year increased by
o the cost of acquisition of any new asset falling in the
same block purchased during the year and
o incidental expense on transfer the asset purchased.
 The balance will be the WDV of the block.
 Work out depreciation on WDV
 There will be no capital gain.
B. In case of sale of asset from the block
 Written down value(WDV) of the block at the beginning of
the year increased by
o the cost of acquisition of any new asset falling in the
same block purchased during the year and
o incidental expense on transfer the asset purchased.
 The balance will be the WDV of the block
 If sales consideration exceeds the WDV, such excess
consideration will be treated as short term capital gain. There
will be no depreciation
C. If the resulting figure is negative, it will be treated as short term
capital loss, no Depreciation .
D. If block ceases to exist, i.e., all assets in a block are sold, the
WDV in the block will be short-term capital loss. No depreciation
will be allowed.
Thus, capital gain will arise only if the full value of sale price
exceeds the aggregate of the following:-
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  Incidental expenses on transfer
 The written down value of the block at the beginning of the
previous year.
 Cost of acquisition of the asset falling in that block of assets during
the previous year
The resulting figure will be short term capital gain or short term
capital loss. If block cease to exist, no further deduction will be available,
nor any further deduction will be allowed.

Illustration
17. From the following particulars in respect of a block of assets
a. Opening WDV Rs 50,000
b. Cost of new asset purchased Rs 20,000
c. Rate of depreciation 20%
Compute the depreciation or capital gain if:-
1. No asset was sold during the year , or
2. value of the consideration for asset sold was
b. Rs 70,000
c. Rs. 40,000
d. Rs. 1,00,000
3. All assets in the block sold
e. Rs 40,000

Solution:
Particulars a b c d d
Rupees
Opg WDV 50,000 50,000 50,000 50,000 50,000
Add-New 20,000 20,000 20,000 20,000 20,000
Purchase
Total 70,000 70,000 70,000 70,000 70,000
Sales 0 70,000 40,000 1,00,000 40,000
WDV -Gain 70,000 0 30,000 (30,000) 30,000
Depreciation 14,000 0 6,000 0 0
STCG - - - 30,000 -
STCL - NA - NA- 30,000
Clos. WDV 56,000 0 24,000 0 0
Notes: No depreciation in case b as WDV in block comes to zero and in case e ,
all the assets are sold, hence the block ceases to exist. Residual WDV of Rs.
30,000 will be short term capital loss.

8.4. Depreciable assets of power undertaking:

Vide Section 50A, in respect of a depreciable assets of an
undertaking engaged in generation or distribution of power or energy,
short-term gain-loss will be computed with reference to the cost of
acquisition as adjusted under section 43(6).
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 In case of a composite agreement for sale of a factory building
along with the land, depreciable asset will be building not the land because
land is not a depreciable asset.

Land will be considered as general capital asset giving rise to long

term or short term capital gain depending upon the period for which it is
held.

8.5. Assets in Slump Sale

As per section 50B , slump sale means the transfer of one or more
undertakings by way of sale for a lump sum consideration without
assigning values to individual assets and liabilities of the undertaking.
In case of slump sale the undertaking itself will be treated as a capital
asset and any profit on sale thereof shall be treated as long term or short
depending upon the period of holding of such undertaking .
Vide section 50B (2), for the purposes of slump sale, ‘net worth’ of
the undertakings shall be the cost of acquisition and improvement and no
indexation under section 48 is allowed in respect of such cost.
Net worth means the aggregate value of total assets i.e. WDV of
depreciable assets and book value of other assets (excluding any
revaluation of assets) as reduced by the value of liabilities of such
undertaking or division
Such net worth must be audited and submitted before the due date of
filing return.

8.6. Sale of Land or building

Under section 50C, in case of transfer of a capital asset being
land or building or both , the sales consideration will be the higher amount
of the following.
 the actual consideration received or accruing or
 value adopted or assessed or assessable by stamp duty authorities or
the purpose of payment of stamp duty in respect of such transfer as
on the date of transfer.
 Where the date of agreement and date of transfer are not same ,stamp
duty value on the date of agreement may be adopted as consideration,
if whole or part of the consideration is paid by Account payee
cheque, bank draft or ECS through a bank Account or other
electronic mode on or before the date of agreement.
 However, where the value adopted or assessed or assessable by the
stamp valuation authority does not exceed 110% of the consideration
received or accruing as a result of the transfer, the consideration so
received or accruing as a result of the transfer shall, be deemed to be
the full value of the consideration.".

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 If the assessee does not accept the stamp duty valuation and prefers
appeal with the appellant authorities, the value finally determined shall be
treated as the value of consideration.

However, if the assessee does not prefer any appeal but claims that
agreement value is much lower than the valuation adopted by the stamp
duty-registration authorities, the assessing officer may refer it for
valuation. The consideration will not exceed the value adopted by the
stamp[ duty authorities.

Illustrations
18. Agreement value of a land is Rs 5 Lakh, which is valued at Rs 4 lakhs
only by the stamp duty authorities. Agreement Value Rs 5 lakhs will
be taken as the consideration accruing for computing capital gains.
19. Agreement value of a land is Rs 5 Lakh, which is valued at Rs 5.25
lakh by the stamp duty authorities. Agreement Value Rs 5 lakhs will
be taken as the consideration accruing for computing capital gains.
20. Assuming the above land sold for Rs 5 lakh is valued at Rs 6 lakh by
the stamp duty authorities, the consideration will be taken at Rs 6 lakh,
if the assessee does not dispute it.
21. If in the above case, the assessee, files an appeal with the stamp duty
authorities, the consideration will be taken at the amount finally
determined by those authorities.
22. If in the above case, the assessee, does not file an appeal with the
stamp duty authorities, but disputes the stamp duty valuation, the
assessing officer will refer the valuation to the Departmental Valuation
Officer. However, such valuation cannot be more than Rs 6 lakhs.

8.7. Transfer of unquoted shares – Section 50CA

Under Section 50CA from A.Y. 2018-19, where the consideration
received or accruing as a result of the transfer by an assessee of unquoted
shares of a company, is less than the fair market value(FMV) determined
in the prescribed manner as per rule 11UAA, shall be deemed to be the
full value of consideration received or accruing as a result of such transfer.
This section read with sections 56 and 50C , will result into buyer and
seller both having to pay the tax on difference of the FMV and the actual
consideration. To help the startups, Rules may provide exemption to a
class of people.

Illustration
23. A transfers to B , unquoted shares costing Rs. 4 lakh for Rs. 8 lakh,
while the FMV works out to Rs 10 lakh. As per section 50CA, FMV of
Rs 10 lakh will be the amount of consideration. Capital gain of Rs. 6
lakh will be chargeable in the hands of A, while the inadequate
consideration of Rs 6 lakh will attract section 56 (deemed gift) for B.

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6.9 VALUE OF CONSIDERATION

As per section 48, “Full total value of consideration” means the

value received or accruing because of the transfer.
It indicates the whole of the price in terms of money or money’s
worth or both; bargained for between the parties inter se, which accrues or
arises upon transfer of a capital asset.
The Capital gains will be chargeable on accrual basis and not on
cash basis Actual receipt of the value is irrelevant.
Further, “full value of consideration” does not refer to the market
value of the asset transferred or the adequacy of the price. However, under
some specific provisions fair market value accruing or arising on transfer
of a capital asset is required to be ascertainment e.g. under section 50C,
50CA etc.
If the consideration can not be expressed in money’s worth, it will
not form part of full value of the consideration for the transfer. Subject to
the provision of Section 56, there will no capital gain in such a case. Some
of such cases are as follows:-
(i) In case of transfer of a property without consideration or out of
natural love and affection; subject to the provisions of section 56,
there will no capital gain.
(ii) in case transfer by a company as a gift or under an irrevocable trust
of any shares, debentures, or warrants allotted directly or indirectly
to its employees under employees’ stock option scheme ( ESOP-
ESOS ) as per the guidelines issued by the Central Government, full
value of the consideration will be the fair market value of shares on
the date of transfer
(iii) In case of a transfer resulting in exchange of two or more assets, full
value of consideration of the assets transferred will be equal to the
fair market value of the asset received.

Illustration
24. A exchanges his flat for B’s shop. In this case “Full total value of
consideration of A’s flat will be the fair market value of the shop
transferred by B and vice versa.

(iv)Amount of any insurance claims received in respect assets destroyed in

natural conditions like tsunami, floods, earthquakes, would be deemed the
full value of consideration.

Section 45 specifies the year of the capital gain liability and the value of
consideration arising or accruing in some cases, which are given in the
following table :

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Sub Section and the Previous year when Value of consideration
nature of the transaction taxed
year of -
(1) Sale or Transfer Sale or transfer Sales consideration
(1A) Damage or Receipt of claim Money received or fair
Destruction money market value
(2) Conversion into stock Sale of stock Market value on the date of
conversion
(2A) Transfer of securities Transfer determined Consideration for transfer
by depository on FIFO basis
(3) Transfer as capital Transfer Value credited in capital
contribution in firm - account
AOP - BOI
(4) Transfer on dissolution Transfer Fair market vale on date of
of firm-AOP-BOI transfer
(5)Compulsory acquisition Receipt of Initial compensation or
compensation enhanced compensation as
the case may be
(6)Repurchase of mutual Receipt or Repurchase price
fund units discontinuation of
scheme

Illustration
25. A jeweller bought personal gold ornaments for Rs 2,00,000 on 01-04-
2001. On 01-01-2010, he converted the same into his business stock,
when the fair market value of the ornaments was Rs. 7,00,000. He sold
the ornaments on 31-03-2021 for Rs. 12,00,000. Find out the tax
incidence on this transaction.

Solution
Transfer takes place on 01-01-2010 being the date of conversion
of personal gold into stock -in- trade and the amount of Capital gain will
be:
Rs
Full values of consideration [FMV 01-01-2010] 7,00,000
Less-Indexed Cost of Acquisition( revised) 2,96,000
[2,00,000 X 148/100]
Long Term Capital Gain as on 01-01-2010 4,04,000

LTCG of Rs 4,04,0000 will arise on 01-01-2010 but will be

chargeable in assessment year 2021-22, when actual sales of the
ornaments took place .
Assessment year 2021-22- business profit :Rs 12 lakh- 7lakh= Rs 5 lakh
will be taxable and LTCG of Rs 4,04,0000 , which arose on 01-01-2010.

6.10 COST OF TRANSFER

Under section 48(1) , expenditure incurred wholly and exclusively

in connection with the transfer of asset will be deducted from the total
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value of consideration while computing the capital gain. This is subject to
the following conditions:
(i) The expenses should be incurred wholly and exclusively in
connection with the transfer.
Lawyers’ fee for transfer, brokerage, travelling expenses for
transfer, advertisement, stamp duty and registration fee, if paid by the
seller etc. will be allowable but normal administrative expenses like salary
of staff for upkeep or maintenance of property will not be allowable .
(ii) The expenses must not be claimed as deduction as expenditure under
any other head.
(iii) No expenses will be allowed in respect of share transactions covered
under the securities transaction tax.

6.11 COST OF ACQUISITION

Cost of acquisition is the sum total of amounts spent for acquiring a

capital asset including the following-
(i) price paid by the assessee for purchase of property ; or
(ii) fair value on the date of exchange , of the asset transferred in
exchange, where the asset is acquired in exchange for another asset ;
and .
(iii) expenses incurred on transfer, registration, stamp duty etc.

The relevant provisions are given as under:-

Cost of Acquisition
Date of Acquisition of Assets
Prior to April,1,2001 April, 1,2001 onwards
Fair market value of asset as on Actual cost paid for acquisition of
01-04-2001 –Optional asset

A. (1) Where the asset becomes the property of the assessee by a

mode referred to in section 49(1) before 1.4.2001:
i. Cost of acquisition is the actual cost to the previous owner or the
fair market value as on 1.4.2001 at the option of the assessee.
ii. Actual cost to the previous owner cannot be ascertained fair market
value on the date on which the asset became the property of the
assessee will be taken
iii. Where there are successive transfers under this mode, the reference
to the previous owner will mean last of such previous owners who
has acquired the assets by a mode otherwise than any of the modes
under section 49(1).
iv. In these case the period for which asset was held by the previous
owner is also taken into consideration to determine the period for
which the asset was held
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A. (2) Where the asset becomes the property of the assessee by a
mode referred to in Section 49(1) on or after 1.4.2001:
i. Cost of acquisition is the actual cost to the previous owner.
ii. Actual cost to the previous owner cannot be ascertained fair market
value on the date on which the asset became the property of the
assessee will be taken.
iii. Where there are successive transfers under this mode, the reference
to the previous owner will mean last of such previous owners who
has acquired the assets by a mode otherwise than any of the modes
under section 49(1).
B. (1) where the asset becomes the property of the assessee by a mode
other than referred to in section 49(1) before 1.4.2001:
Cost of acquisition is the actual cost to the assessee or the fair market
value as on 01-04-2001 at the option of the assessee. The base date
has been advanced from 01-04-1981 to 01-04-2001 by the Finance
Act, 2017
B. (2) Where the asset becomes the property of the assessee by a
mode other than referred to in section 49(1) on 1.4.2001 or
thereafter:
Cost of acquisition is the amount actually spent by the assessee in
acquiring the actual asset i.e. the actual cost of acquisition.
C. Where the asset becomes the property of the assessee subject to
tax under section 56 :
Where any asset ( cash, movable property, or shares of closely held
company’s immovable property) is received without consideration or
for consideration less than the fair market value, and as a result
becomes taxable under section 56, then, the cost of acquisition of
such asset will be the cost taken under section 56 for income tax
purposes. The section is discussed in detail in the next chapter. The
provision is apparently enacted to avoid double taxation of the same
property.
D. Specific Cases:
i. Earnest money forfeited
Vide section 51, any earnest money received in advance and
forfeited by the assessee, due to failure in negotiation will be taxable as
“income from other sources”.
Prior to A.Y. 2016-17 such deposit was reduced from the actual cost of
acquisition or the fair market value as on 1-4-2001 as the case may be and
cost of acquisition was adjusted accordingly. .
Illustration
26. A acquired a building on May 12, 2010 for Rs. 28 lakhs. In 2014, He
entered into negotiation with a prospective buyer, who gave him advance
money of Rs. 5 lakhs at that time. However, the negotiations failed, and

164
 A forfeited the advance money. Subsequently, he actually sold the
building in August 2020 for Rs 65 Lakhs. Calculate the indexed cost of
acquisition and the taxable capital gains on the sale of the building.

Solution:
Particulars Rs Rs
Sales Consideration 65,00,000
Actual Cost 28,00,000
Less: Earnest money forfeited-section 51 5,00,000
(then not taxable)
Net Actual Cost 23,00,000
Indexed Cost of Acquisition 23,00,000 X 301 -167 41,45,508
Long Term Capital Gain 23,54,492
# 301 and 167 are the Index for financial years 2020-21 & 2010-11
W. e. f. A.Y.2017-18, earnest money would be taxable, and cost of
acquisition will not be adjusted

ii. Self- generated assets

The courts have taken consistent view that self-generating assets
such as goodwill, patents, copyrights, tenancy rights, which have no actual
cost of acquisition incurred were not liable to capital gain tax as the cost of
acquisition was Nil.

The judicial view is no longer valid, and the amended section

provides that “ in relation to the goodwill of a business, trade mark or
brand name associated with a business, tenancy rights, loom hours, route
permits, right to manufacture or produce any process any article, cost of
acquisition shall be taken as the purchase price if such price is paid, or
NIL, if such price is not paid.”

Effectively, entire sale proceeds less expenses on transfer of self-

generated assets will be treated as capital gain.

iii. Financial assets – shares and other securities

Where an assessee becomes entitled to subscribe any additional
securities, known as ‘Rights” or where additional shares are issued as
bonus i.e. without any payment, the cost of acquisition shall be as follows:
a. Amount actually paid for acquiring such asset by way of subscription
to the securities or
b. Amount actually paid for acquiring such asset by way of exercising his
right or entitlement.
c. NIL; where rights are renounced for a price, then consideration for
renouncement of rights will be the amount of capital gains as reduced
by transfer cost, if any.
d. Amount paid to the renouncer of rights entitlement and amount paid to
the company, which has allotted the rights shares

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e. NIL in case of bonus shares- in other words, sales proceeds of bonus
share will be liable to capital gain as reduced by transfer costs, if any.
However, if the bonus shares have been acquired prior to 01-04-2001,
then the share market value of bonus shares as on 01-04-2001 will be
treated as the cost of acquisition.
f. Fair Market Value on the date of distribution of capital assets by a
Company under section 46 (2).
g. Cost of acquisition of the original asset Consolidation, division,
conversion, reconversion of share into stock or vice versa and where
such cost cannot be reasonably ascertained, the fair market value.
h. Cost of acquisition of the original shares held by the shareholders in
the demerged company as reduced by the amount arrived at under
section 49 (2C).
i. Cost of acquisition of original membership of a recognised stock
exchange when equity shares allotted to shareholders of recognized
stock exchange under a scheme of demutualisation or corporatisation
of the exchange – section 55(2)(ab)
j. NIL in respect of trading or clearing rights of stock exchange.
k. Pro rata amount i.e. the amount which bears to the Cost of Acquisition
of the shares held by the assessee in the demerged company the same
proportion as the net book value of the assets transferred in a demerger
bears to the net worth of the demerged company immediately before
such demerger will be the cost of acquisition of Shares in the resulting
company vide section. 49 (2C).
l. Stock option Specified security taxed as perquisites under section
17(2) vide section. 49 (2AA)
m. Actual cost of acquisition in all the other cases.

6.12 FAIR MARKET VALUE

Fair market value, in relation to a capital asset, means the price that
the capital asset would ordinarily fetch on sale in the open market on the
relevant date. If the assessee has acquired the asset prior to 01-04-2001, he
has the option of substituting the fair share market value of the asset as on
01-04-2001 instead of actual cost of acquisition. However, this option is
available to the assessee only when the asset has been acquired prior to
01-04-2001.Fair market value is adopted in many cases like where
ascertainment of actual cost is not possible; assets distributed on
liquidation have already been dealt with at their appropriate places. Some
other cases are considered below:

a) Conversion of capital asset into stock-in-trade

Conversion of a capital asset held by the assessee, into stock-in-
trade of his business, will be treated as taxable transfer giving rise to
notional capital gains or loss. For this purpose, the fair market value of the
capital asset on the date of conversion is treated as notional sale proceeds
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from which the cost of acquisition - indexed cost of acquisition is
deducted to get the capital gain.

Later, when this converted capital asset is sold, there will be

business profit or loss i.e. actual sale proceeds less notional fair market
value taken, as cost will be the taxable business profit or loss. However
business income as well as capital gains will be chargeable to tax only in
the year of actual sale to a third party.

Illustration
27. A jeweller converts his ancestral gold ornaments into the stock in-
trade of his business on 1-1-2012. The ornaments are actually sold on 31-
12-2020 for Rs. 30 Lakh. The market value of the ornaments was Rs. 5
Lakhs on 01-04-2001 and Rs. 22 Lakhs on 1-1-2012.

Solution:
Capital gain arises on the date of conversion of a private asset into stock
in trade i.e. 01-01-2012
Cost of acquisition as on 01-04-2001= Rs. 5 lakh .
Indexation in F.Y. 2011-12 – Index 184
LTCG = Rs 22 lakh – ( Rs *5 lakh X 184-100 )
= Rs 22 lakh -09.20 lakh = Rs 12.80 lakh
Position on 31-12-2020 ( A.Y. 2021-22)- Date of Sales
Profit = Sales consideration – FMV on 01-01-2012
= Rs 30 lakh – Rs 22 lakh = Rs. 8 lakh
Amount taxable in assessment year 2021-22
Profits & gains of business & profession = Rs 8 lakh
LTCG accrued in F.Y. 2011-12 Rs 12.80 lakh

b) Introduction of capital asset by a partner:

When a partner transfers his personal asset by way of his capital
contribution in a partnership firm, the amount credited to his capital
account in respect of this capital asset will be treated as sales proceeds in
the hands of the partner from which the cost or indexed cost of acquisition
will be reduced to get the amount of capital gains or loss taxable in the
hands of the partner.

c) Takeover of assets by the partner on dissolution of the partnership

firm
When a partner is allocated a capital asset upon the dissolution of a
firm the fair market value of the capital asset on the date of dissolution of
the firm will be treated as sales proceeds from which the cost of
acquisition or indexed cost of acquisition, as the case may be, will be
reduced to get the amount of taxable capital gains in the hands of the firm.

167
d) Compulsory acquisition of capital asset
Where there is compulsory acquisition of capital asset by the
government or any government authority under law, there will be a taxable
capital gain or loss in the year of such compulsory acquisition. However,
such capital gain will be chargeable only in the year in which the
compensation is received. If the compensation is enhanced later, then the
receiver of such additional amount is chargeable to capital gains in the
previous year in which such additional compensation is received. If the
compensation amount is subsequently reduced, the capital gain already
charged will be recalculated as if it were a mistake apparent from the
record under section 155.

d) Amount received on liquidation of the company:

Out of the money received by the shareholder on liquidation of the
company, a part of the amount will be treated as deemed dividend under
section 2(22) and the remaining amount less the indexed cost of
acquisition or cost of acquisition, as the case may be, is taxable as capital
gains on sale of the shares.

f) Sale of Shares under Depository System

Where an assessee has any depository account and any shares are
sold from the depository account, then such cost of acquisition of the
shares sold will be determined on FIFO i.e. on first in first out basis. It will
be assumed that the assessee is shares deposited in the account first were
sold first and accordingly the cost of acquisition, date of acquisition and
the period of holding will be calculated.

g) Stock Lending
Any share given under the stock-lending scheme approved by
SEBI in this behalf will not give rise to any taxable capital gain.

h) Corporatisation of Stock Exchanges

In case any person transfers equity shares allotted to him as
member of a recognised stock exchange in India under a SEBI approved
scheme of corporatization of stock exchanges, his original cost of
acquisition of membership of the stock exchange will be the cost of
acquisition for computation of capital gains on those shares.

i) Demerger:
Cost of acquisition of shares in the resulting company in case of a
demerger shall be determined as follows:-

Cost of shares of demerged company x Net book value of assets

Net worth of demerged company before demerger

The cost of acquisition of the original shares in the demerged

company shall be reduced by the amount calculated as above

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j) Taxation of capital gains of listed shares
Share are treated separately by the provisions of section. 111A-112,
The short term capital gain tax is charged at the rate of 15% + 4% cess
in A.Y. 2021-22 and forego the benefit of indexation or alternatively pay
regular tax under the normal provisions including indexation .

Long term capital gain is charged at the rate of 10% if the gain is above
Rs. 1 lakh subject to grandfathering rule by computing capital gain on
FMV as at 31-01-2018 . For securities other than shares and mutual funds
listed on recognized stock exchanges, the long term capital gain tax rate
is 10%.

6.13 TRANSACTIONS UNDER SECTION 49(1)

Section 49 provides that , in cases where capital asset became the

property of the assessee in certain circumstances ,
 the cost of acquisition of the asset shall be deemed to be the cost
for which the previous owner of the property acquired it,
 as increased by the cost of any improvement of the assets incurred
or borne by the previous owner or the assessee, as the case may be.

These circumstances are as under :_-

(i) any distribution of assets on the total or partial partition of a Hindu
undivided family;
(ii) under a gift or will;
(iii) by succession, inheritance or devolution,
(iv) distribution of assets on the dissolution of a firm, body of
individuals, or other association of persons, where such dissolution
had taken place at any time before 01-04-1987, or
(v) distribution of assets on the liquidation of a company, or
(vi) under a transfer to a revocable or an irrevocable trust, or
(vii) under any such transfer as is referred to in clause (iv); (v); (vi);
(via); (viaa); (viab); (vib); (vica); (vicb); (vicc); (xiii); (xiiib) or
clause (xiv) of section 47;
(viii) Conversion of personal asset of the assessee as the joint property
of the HUF referred to under section 64(2).
(ix) under a gift or will not being gift or transfer through an irrevocable
trust of shares, debentures or warrants allotted by a company
directly or indirectly to its employees under a Central Government
approved employees stock option- scheme (ESOP -ESOS). In such
cases, the market value of the shares, debentures or warrants gifted
or transferred to the irrevocable trust on the date of transfer will be
treated as the sale proceeds for the purpose of capital gains.
(x) by succession, inheritance or devolution.
(xi) distribution of assets on liquidation of company.
169
(xii) under a revocable or irrevocable trust.
(xiii) on transfer by a wholly owned Indian subsidiary company from its
holding company and by a parent company to its 100 per cent
Indian subsidiary company.
(xiv) on any transfer in scheme of amalgamation by the amalgamated
company from the amalgamating company.
(xv) by Hindu undivided family where one of the members has
converted its self acquired property into a joint family property.
(xvi) Transfer of units by unit holders on consolidation of plans within a
mutual fund scheme ;.
If some units are segregated from a portfolio, then the value of
those units will be taken pro rata and the portfolio balance will be
reduced accordingly.
(xvii) Redemption by an individual of sovereign gold bonds issued by
RBI ;
(xviii) In case of transfer of a capital asset from a business under section
28 (iva) of, the cost of acquisition of such asset shall be deemed to
be the fair market value which has been taken into account for that
purpose.

Illustration
28. ABC HUF allotted a flat purchased by it on 01-04-2001 for Rs 5 Lakh
to A as his share in HUF property on partition. A sells the flat for Rs. 30
lakhs on 1 April 2020. What will be A’s liability for tax?

Solution:
a) There will be no liability for capital gain on 01-04-2001 as partition of
HUF is exempted under section 49.
b) On 01-04-2020 relevant to assessment year is 2021-22, cost and date
of acquisition are same as previous Owner (HUF) viz Rs 5 lakhs and
01-04-2001. The capital gain will be as under:
Sales consideration 30,00,000
Indexed cost of Acquisition 5,00,000 X 301/100 15,05,000
LTCG 14,95,000

6.14 COST OF IMPROVEMENT

As per section 55, Cost of Improvement in relation to capital asset

means any expenditure or cost of capital nature incurred by (a) the
assessee or (b) the previous owner in case of an asset acquired by an
assessee in any of the circumstances under section 49(1):-

170
  for substantially improving or raising the value of the capital asset or
 in making addition or alteration to capital asset after date of
acquisition or
 for any expenditure incurred to protect or complete the title of the
capital asset or
 to cure the title of the property or remove any defect from the title.
In other words, cost of improvement includes all those
expenditures, which are incurred to increase the value of the capital asset
Following additional points are noteworthy in this regard
(i) In case of a capital asset acquired prior to 01-04-2001, where the fair
market value of the capital asset as of 01-04-2001 is substituted in
place of cost of acquisition, all capital expenditure incurred by the
assessee or the previous owner after 01-04-2001 in making any
additions or alterations to capital asset will be included in cost of
improvement but Cost of improvement incurred prior to 01-04-
2001 will be ignored in all cases.
The reason behind it is that for carrying any improvement in asset
before 1st April 2001, asset should have been purchased before 1st
April 2001. If asset is purchased before 1st April the fair market
value is adopted and the fair market value of asset on 1st April 2001
will certainly include the improvement made in the asset.
(ii) In any other case all the capital expenditure incurred in making in
additions or alterations to the capital asset by the assessee after it
become his property.
(iii) There will be no cost of improvement to goodwill, right to
manufacture or produce or process any articles or right to carry on
any business.
(iv) expenditure deductible from the income from house property will not
be included in cost of improvement.

6.15 INDEXED COST

Section 48(iii), vide Explanation iii defines Indexed Cost of

Acquisition and Indexed cost of Improvement as under:-
 "Indexed cost of acquisition” means- “an amount which bears to the
cost of acquisition the same proportion as Cost Inflation Index for the
year in which the asset is transferred bears to the Cost Inflation Index
for the first year in which the asset was held by the assessee or for the
year beginning on the 1st day of April, 2001, whichever is later; and
 "Indexed cost of any improvement" means:-an amount which bears
to the cost of improvement the same proportion as Cost Inflation Index
for the year in which the asset is transferred bears to the Cost Inflation
Index for the year in which the improvement to the asset took place.

171
 "Cost Inflation Index" (CII)for any year means:- Such Index as the
Central Government may, having regard to seventy-five per cent of
average rise in the Consumer Price Index for urban non-manual
employees for that year, by notification in the Official Gazette, specify
in this behalf Indexed cost of acquisition- improvement can be shown
by the following formulae:

Indexed cost of acquisition

Cost of Acquisition X CII ( the year of Transfer)
CII in the year of acquisition or 01-04-2001 , whichever is later

Indexed Cost of Improvement

Cost of Improvement X CII ( the year of Transfer)
CII in the year of Improvement

Exceptions:
Indexation benefit is not available in respect of the following:
1. Short term capital assets
2. Bonds, debentures other than Capital Indexed Bonds Issued by
Government;
3. Shares, Debentures of Indian Company Purchased in Convertible
Forex by non-residents ,
4. Depreciable assets,
5. Units purchased in foreign currency under section 115AB by an
Offshore Fund,
6. GDRs purchased in foreign currency under section 115AC by Non-
Residents ,
7. Securities under section 115AD purchased by non-residents,
8. Where option of 15% tax rate is claimed-section 112 in respect of
capital gain on shares,
9. Slump Sale under section 50B
10. Foreign exchange assets under section 115-O by Non- Resident
Indians.

COST INFLATION INDEX- REVISED

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

6.16 TRANSACTIONS NOT ‘TRANSFER”

A. Section 47 provides that following transactions will not be regarded as

transfer for the purpose of section 45 :
1) any distribution of capital assets on the total or partial partition of a
HUF ;
2) any transfer of a capital asset under a gift or will or an irrevocable trust
not being issue of securities allotted under ESOP or ESOS by a
company to its employees;
3) any transfer of a capital asset not being an asset transferred as stock in
trade by a:
i. holding company to its 100% Indian subsidiary company
ii. 100% subsidiary company to its Indian holding company,
4) any transfer, in a scheme of amalgamation,
i. of any capital asset by the amalgamating company to an Indian
amalgamated company or ;
ii. of any shares held in an Indian company by the amalgamating
foreign company to the amalgamated foreign company if at least
25% of the shareholders of the amalgamating foreign company
continue to remain shareholders of the amalgamated foreign
company, and such transfer does not attract tax on capital gains in
the country, in which the amalgamating company is incorporated;
iii. of any capital asset by a banking company to a banking institution
if such scheme is under section 45(7) of the Banking Regulation
Act, 1949;
iv. of any shares held by a shareholder in the amalgamating company,
made in consideration of the allotment to him of any share or shares
in an Indian amalgamated company ;
5) any transfer, in a scheme of demerger,
i. of a capital asset by the demerged company to the resulting Indian
company;
ii. of shares held in an Indian company, by the demerged foreign
company to the resulting foreign company, if the shareholders
holding not less than 3/4th in value of the shares of the demerged the

173
 resulting foreign company continue to remain shareholders of the
resulting foreign company and such transfer does not attract tax on
capital gains in the country, in which the demerged foreign company
is incorporated
6) any transfer or issue of shares by the resulting company, to the
shareholders of the demerged company if the transfer or issue is made
in consideration of demerger of the undertaking;
7) any transfer in a business reorganisation,
i. of a capital asset by the predecessor co-operative bank to the
successor co-operative bank;
ii. of shares in the predecessor co-operative bank by a shareholder,
made in consideration of the allotment to him of any share or shares
in the successor co-operative bank.
8) any transfer of bonds, Global Depository Receipts derivative or other
notified securities
9) under section 115AC (1), made outside India by a non-resident to
another non-resident;
10) any transfer of agricultural land in India effected before 01-03-1970 ;
11) any transfer of any work of art, archaeological, scientific or art
collection, book, manuscript, drawing, painting, photograph or print, to
the Government or a notified University or the National Museum,
National Art Gallery, National Archives or any such other public
museum or institution ;
12) any transfer by way of conversion of bonds or debentures, debenture-
stock or deposit certificates in any form, of a company into shares or
debentures of that company;
13) any transfer by way of conversion of bonds referred to section
115AC (1)(a) into shares or debentures of any company;
14) any transfer membership of a recognised stock exchange to a company
made on or before 31-12-1998 by a person (not being a company) in
exchange of shares allotted by that company to the transferor;
15) any transfer by way of conversion of preference shares of a company
into equity shares of that company
16) any transfer of land of a sick industrial company managed by its
workers’ co-operative during the period of loss till the period upto
which the company’s losses are equal to or more than its capital),
under rehabilitation scheme Under section 18 of the Sick Industrial
Companies (Special Provisions) Act, 1985;
17) any transfer of a capital asset or intangible asset by a firm to a
company as a result of succession of the firm by a company in the
business carried on by the firm, or any transfer of a capital asset to a
company in the course of demutualisation or corporatisation of
a recognised stock exchange in India as a result of which an
association of persons or body of individuals is succeeded by such
company if:
i. all the assets and liabilities of the firm or of the association of
persons or body of individuals relating to the business immediately
before the succession become the assets and liabilities of the
company;

174
 ii. all the partners of the firm immediately before the succession
become the shareholders of the company in the same proportion in
which their capital accounts stood in the books of the firm on the
date of the succession;
iii. the partners of the firm do not receive any consideration or benefit,
directly or indirectly, in any form or manner, other than by way of
allotment of shares in the company; and
iv. the aggregate of the shareholding in the company of the partners of
the firm is not less than fifty per cent of the total voting power in the
company and their shareholding continues to be as such for a period
of five years from the date of the succession;
v. the demutualisation or corporatisation of recognised stock exchange
in India is carried out under an approved scheme
18) any transfer of a membership right held by a member of
a recognised stock exchange in India for acquisition of shares and
trading or clearing rights acquired by such member in
that recognised stock exchange under an approved scheme
for demutualisation or corporatisation ;
19) any transfer of a capital asset or intangible asset by a private company
or unlisted public company to a limited liability partnership or any
transfer of a share or shares held in the company by a shareholder as a
result of conversion of the company into a limited liability partnership
if –
i. all the assets and liabilities of the company immediately before the
conversion become the assets and liabilities of the limited liability
partnership;
ii. all the shareholders of the company immediately before the
conversion become the partners of the limited liability partnership
and their capital contribution and profit sharing ratio in the limited
liability partnership are in the same proportion as their shareholding
in the company on the date of conversion;
iii. the shareholders of the company do not receive any consideration
or benefit, directly or indirectly, in any form or manner, other than
by way of share in profit and capital contribution in the limited
liability partnership;
iv. the aggregate of the profit sharing ratio of the shareholders of the
company in the limited liability partnership shall not be less than
fifty per cent at any time during the period of five years from the
date of conversion;
v. the total sales, turnover or gross receipts in the business of the
company in any of the three previous years preceding the previous
year in which the conversion takes place does not exceed sixty Lakh
rupees; and
vi. no amount is paid, either directly or indirectly, to any partner out
of balance of accumulated profit standing in the accounts of the
company on the date of conversion for a period of three years from
the date of conversion.
20) Any transfer of any capital asset or an intangible asset upon
conversion of proprietary concern into a company, if

175
 i. all the assets and liabilities of proprietary concern become the assets
and liabilities of the company upon such conversion ;
ii. sole proprietor holds 50% or more of the total voting power for a
period of five years from the date of the succession; and
iii. the consideration is paid by way of allotment of shares in the
company and not in any other form;
21) any transfer in a scheme for lending of any securities under an
agreement or arrangement, between the lender and the borrower .
22) any transfer of a capital asset in a transaction of reverse mortgage
under a scheme made and notified by the Central Government.
23) Transfer of units by unitholders on consolidation of plans within a
mutual fund scheme.
24) Redemption by an individual of sovereign gold bonds issued by RBI.

B. Under section 46(1), any distribution of assets of a company under

liquidation by the liquidator to the shareholder is not regarded as
transfer because such distribution is deemed as dividend under section
2(22).

6.16 EXEMPTIONS

Sections 54, 54B, 54D, 54EC, 54F, 54G and 54H grant exemption to
capital gains arising from the transfer of certain capital assets under
certain circumstances. These provisions are dealt with below :
1. Profit on sale of property used for residence
Eligible assessee : individual or HUF assessee.
Eligible capital gain :
 in respect of capital gain arising on transfer of a long term
residential house used for self-occupation or let out , the income of
which is chargeable under the head, ‘Income from house property’ ;
 short term capital gain will not be eligible for exemption
Eligible investment:
 the assessee or in case of his death, his legal representative has
i) purchased one residential house in India within
a. a period of one year before such transfer or
b. a period of two years after such transfer, or
ii) constructed one residential house in India within three years after
such transfer.

Following points are relevant in this regard :-

(i) Where the amount of capital gains does not exceed 2 Crore rupees ,
the assessee may exercise option to build or construct TWO houses
instead of one.
(ii) Old house must be a residential house (In India or outside India ,
chargeable under the head income from house property whether for
own residence or for letting out. .

176
(iii) The new house(s) also must be a residential house and must be
situated India.
(iv)the new house(s) may be purchased before or after, but construction
should be only after the sale of old house.

Extent of exemption
Under section 54 The exemption will be to the extent amount
invested in the purchase or construction of the second house.

Illustration
29. On 01-01-2010 Ashok purchased a residential house for self-
occupation for Rs 5 lakh and spent Rs 1 lakh on its registration and
improvement. He sold the house on 01-01-2021 for Rs 19 lakhs and
purchased a new residential house on 01-04-2017 for Rs 6 lakh. The
exemption under section 54 will be as under :-
Particulars Rs
Sales consideration 19,00,000
Indexed cost of acquisition + improvement 12,20,270
Rs. ( 5,00,000+1,00,000) *301/148
Revised index for F.Y. 2009-10 & 2020-21
LTCG 6,79,730
Exemption under section 54 6,00,000
Taxable capital gain 79,730

Restriction of transfer of new house

If the new house is transferred within a period of three years from the
date of its purchase or construction, the amount exempt under section 54
will be reduced from cost of the new house and the capital gain will be
accordingly computed.

Deposit Account
 Unutilized amount of the capital gain for purchase or construction of a
new house is required to be deposited in a specified deposit account
with a bank before the date for furnishing the return of income and the
proof of such deposit is required to be filed with the return of income.
Amount so deposited will be treated as amount utilized towards
acquisition of new house.
 The amount in deposit account can be utilized for purchase or
construction of house within the specified period.
 The unutilised amount is treated as capital gain of the relevant
previous year in which the period of three years from the date of
transfer of the old house expires

2. Transfer of agricultural land

Exemption Under section 54 B is available in respect of any
capital gain (LTCG or STCG) arising on the transfer of agricultural land ,
 which was being used for agricultural purpose

177
  in the two years immediately preceding the date of transfer by the
assesee being individual or his parents or the HUF.

Amount of exemption
Amount of capital gain will be exempt
 to the extent it is utilized for purchase of any other agricultural
land
 within a period of two years after the date of its transfer.

Other points
(i) The new land may be purchased in rural or urban area.
(ii) The New agricultural land so purchased should not be transferred
within three years of its purchase.
(iii) If the new land is sold before the expiry of three years, the cost of the
new agricultural land will be reduced by the amount of exempted
capital gain.

Deposit
The amount of capital gain not utilised by the assessee for purchase of
new agricultural land before the date for furnishing the return of his
income is to be deposited by him, on or before the due date for furnishing
the return of income, in an account in any bank or institution specified by
the Central Government. In the same manner as discussed above.

3. Compulsory acquisition of lands and buildings

Under Section 54 D , any capital gains arising from the transfer, by
way of compulsory acquisition,
 of any land or building forming part of and used as an industrial
undertaking
 belonging to the assessee for at least two years preceding the date
of compulsory acquisition ,
 will be exempt to the extent to which
 it has been utilized for purchase of any other land and building
 within a period of three years from the date of acquisition or
constructed a building within such period
 to be used for the shifting or re-establishment of old industrial
undertaking or for setting up new industrial unit.

If the new asset is transferred by the assessee for a period of three

years from the date of acquisition or construction, the amount of capital
gains arising therefrom, together with the amount of capital gains
exempted earlier, will be chargeable to tax in the year of sale of new land
and building.

178
Deposit
Unutilized capital gains will have to be kept deposited in a deposit
account with a notified account with a bank or other financial institution
before the due date of filing of return.

4. Investments made in specified bonds

Under section 54EC w.e.f. assessment year 2019-20 , any capital gain
arising from the transfer of a long-term capital asset being land and/ or
building shall be exempt under section 54EC
 to the extent of deposit made in specified long term specified asset
 within a period from 6 months from the date of transfer of the
original asset subject to a maximum limit of Rs fifty lakh

In case, the long-term specified asset is

 transferred or encashed or
 a loan or advance has been taken against that asset
 within a period of five years from the date of transfer of the original
asset , the amount allowed as deduction will be deemed to be
capital gain in the year of transfer or encashment of the long- term
asset or on the date on which such loan or advance is taken.

Further, a deduction under section 80C shall not be allowed in respect

of investment in such long-term specified asset. Presently, benefit of the
exemption will be available only if the gains are invested in bonds of
National Highways Authority of India NHAI or Rural Electrification
Corporation Limited, RECL.

5. Investment in units of a specified fund

Under section 54EE , where the whole or part of the capital gain
arising on the transfer of a long-term -asset, is invested by the assessee in
the long-term specified asset with in six months after the date of transfer
of the asset, and
(a) if the cost of the long-term specified asset is not less than the
capital gain, the capital gain shall be fully exempt;
a) if the cost of the long-term specified asset is less than the capital
gain, the capital gain well be exempt pro rata; not be charged
under section 45;-.

Capital Gain X Cost of investment

Amount of capital gain

Other points :
(a) Amount of investment in specified shall not exceed Rs 50 lakh in
respect of all the assets transferred.
(b) In case, the long-term specified asset is

179
  transferred or encashed or
 a loan or advance has been taken against that asset
 within a period of three years from the date of transfer of the
original asset , the amount allowed as deduction will be deemed to
be capital gain in the year of transfer or encashment of the long-
term asset or on the date on which such loan or advance is taken.

Illustration
30. LTCG Rs 25 lakh & Investment in specified asset Rs 25 lakh Full
capital gain will be exempt under section 54EE

If the investment is Rs 20 lakh then the amount exempt Rs, 16 lakh i.e.
(20 lakh X 20/25)

6. Investment made in residential house -Section 54F

Eligible assessee : Individual or HUF assessee.

Eligible capital gain

 Capital gain arising on transfer of a long term asset NOT being a
residential house ;
 short term capital gain will not be eligible for exemption

Eligible investment
 the assessee or in case of his death, his legal representative) has
i) purchased one residential house in India within
a. a period of a period of one year before such transfer or
b. a period of two years after such transfer, or
ii) Constructed one residential house in India within three
years after such transfer.
iii) The new house may be purchased before or after, but
construction should be only after the sale of old house.

Ineligibility
Exemption under this section will not be applicable:
(i) If the assessee owns more than one residential house,(other than the
new asset) on the date of transfer of the original asset;
(ii) The assessee purchases any residential house, (other than the new
asset), within a period of one year after the date of transfer of the
original asset; or
(iii) The assessee constructs any residential house, (other than the new
asset), within a period of three years after the date of transfer of the
original asset; and the income from such residential house, other than
the one residential house owned on the date of transfer of the original
asset, is chargeable under the head “Income from house property”.

180
Extent of exemption
If the investment in new house is not less than the net
consideration in respect of the original asset received as reduced by
expenses on transfer of the asset, whole of the capital gain will be exempt .

If the cost of the new asset is less than the net consideration in
respect of the original asset , amount of exemption will be in the
proportion as the cost of the new asset bears to the net consideration.

Illustration
31. Ashok purchased a residential house for self-occupation on 01-01-
2009 for Rs 5 lakh and spent Rs 1 lakh on its registration and
improvement. He sold the house on 01-01-2021 for Rs 15 lakhs. He
purchased a new residential house on 01-04-2015 for Rs 6 lakh. The
exemption under section 54F will be as under :
32.
Particulars Rs
Sales consideration 15,00,000
Indexed cost of acquisition + improvement 13,18,248
Rs. ( 5,00,000+1,00,000) *301-137
Revised index for F.Y. 2008-09 & 2020-21
LTCG 1,81,772
Exemption under section 54 72,708
1,81,772*6,00,000/15,00,000
Taxable capital gain 1,09,063

Restriction of transfer of new house

If the new house is transferred within a period of three years from
the date of its purchase or construction, the amount exempt under section
54F will be reduced from cost of the new house and the capital gain will
be accordingly computed in the year of such transfer.

Deposit Account
Unutilized amount of the capital gain for purchase or construction
of a new house is required to be deposited in a specified deposit account
with a bank before the date for furnishing the return of income and the
proof of such deposit is required to be filed with the return of income.
Amount so deposited will be treated as amount utilized towards
acquisition of new house.

The amount in deposit account can be utilized for purchase or

construction of house within the specified period.

The unutilised amount is treated as capital gain of the relevant

previous year in which the period of three years from the date of transfer
of the old house expires

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7. Shifting of urban industrial undertaking-Section- 54G

Eligibility
Exemption under section 54 G is available in respect of capital
gain :-
 arising on transfer of a capital asset (being plant, machinery, land or
building or any right in land or building used
 for the purpose of an industrial undertaking situated in a notified urban
area
 in the course of, or in consequence of, the shifting of such industrial
undertaking to any area other than an urban area , and
 the assessee has within a period of one year before or three years after
the date on which the transfer took place:
(a) purchased new machinery or plant for the purposes of business of
the industrial undertaking in the area to which the said undertaking
is shifted;
(b) acquired building or land or constructed building for the purposes
of his business in the said area;
(c) Shifted the original asset and transferred the establishment to such
area; and
(d) incurred expenses on such other purpose specified in a scheme
framed by the Central Government ;
Cost and expenses incurred in relation to all or any of the purposes
stated above called new asset.

Extent of exemption
A. Where the amount of capital gain is more than the value of
new asset
The capital gains will be exempted to the extent of the value of new
asset and the balance of capital gains will be taxable in that previous year.

The cost of the new asset will be nil if it is transferred within a period
of 3 years of its being purchased, acquired, constructed or transferred,

B. In case of the amount of the capital gain being equal to, or less
than the cost of the new asset,
The capital gain shall not be charged under section 45. The cost of new
asset shall be reduced by the amount of the capital gain if it is transferred
within a period of 3 years of its being purchased, acquired, constructed or
transferred

Deposit account
 The amount of capital gain not appropriated or utilised by the assessee
for purchase or construction of the new asset within one year before
the date on which the transfer of the original asset took place or before

182
 the date of furnishing the return of income, shall be deposited on or
before the due date of furnishing the return of income, in a specified
an account with a bank or institution .
 The amount already utilised for purchase or construction of the new
asset, together with the amount so deposited, shall be deemed to be the
amount utilised for the purchase of a new asset.
 If the amount deposited not utilised fully for purchase or construction
of a new asset within the stipulated period, shall be treated as the
capital gain of the previous year in which the period of 3 years from
the date of transfer of original asset expires. .

8. Shifting of industrial undertaking to a SEZ Section. 54GA

Eligibility
Exemption under section 54GA is available
 to all categories of assesses
 in respect of short-term or long –term capital gains
 arising on the transfer of fixed assets machinery, plant, building, land
or any right in building or land(other than furniture and fittings) used
for the business of industrial undertaking in an urban area
 effected in the course of shifting of such industrial undertaking to any
Special Economic Zone(SEZ) whether in any notified urban area or
any other area , and
 the assessee has utilized the capital gain within 1 year before or 3
years after the date of transfer 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;
 acquisition of building or land or construction of building for the
purposes of the assessee’s business in the Special Economic Zone;
 expenses on shifting of the old undertaking and its establishment to the
Special Economic Zone; and
 incurring of expenditure on such other purposes as specified by the
Central Government for this purpose.

9. Capital Gain on transfer of residential House

Eligibility :
only an individual or a HUF assessee
Under section 54GB exemption is allowed in relation of any capital
gain arising on
 Transfer before 01-04-2017 (01-04-2021 in case of a startup) of a
long-term capital asset, being a residential property- house or plot of
land ,and
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 the assessee, before the due date of furnishing of return of income
under section 139 (1) utilises the net consideration for subscription in
the equity shares of an eligible company incorporated in India during
the previous year in which the capital gain arises and such company
being
 a small or medium enterprise (SME)
 engaged in the business of manufacture of an article or a thing; and
 the assessee holds more than fifty per cent share capital or more
than fifty per cent voting rights after the subscription in shares by
the assessee therein ; and
 the company has, within one year from the date of subscription in
equity shares by the assessee, utilised this amount for purchase of
new asset.

Extent of exemption
Where the amount of the net consideration is greater than the cost
of the new asset,
So much of the capital gain as it bears to the whole of the capital
gain the same proportion as the cost of the new asset bears to the net
consideration, shall not be charged under section 45 as the income of the
previous year; or

Where the amount of the net consideration is equal to or less than the
cost of the new asset
The capital gain shall not be charged under section 45 as the
income of the previous year.

Deposit
If the company does not utilize the amount of the net consideration
received by it for issue of shares to the assessee for the purchase of the
new asset before the due date of furnishing of the return of income by the
assessee under section 139, it shall deposit the same before the said due
date in specified bank account to be utilised in accordance with a scheme
framed by the Central Government and the return furnished by the
assessee shall be accompanied by proof of such deposit having been made
and the amount, if any, already utilised by the company for the purchase
of the new asset together with the amount deposited shall be deemed to be
the cost of the new asset.

If the amount so deposited is not utilised, wholly or partly, for the

purchase of the new asset within the specified period the amount of
capital gain exempted shall be charged as the capital gain of the assessee
for the previous year in which the period of one year from the date of the
subscription in equity shares by the assessee expires and the company
shall be entitled to withdraw such amount in accordance with the scheme.
Transfer
If the equity shares of the company or the new asset acquired by
the company are sold or otherwise transferred within a period of five years
184
from the date of their acquisition, the amount of exempted capital gain
shall be deemed to “Capital gains” of the assessee in the previous year in
which such equity shares or such new asset are sold or otherwise
transferred.
The period of five years will be reduced to three years where the
new asset is computer or computer software is acquired by a startup.

New Asset
“New asset” means new plant and machinery but does not include
(i) any machinery or plant, which, before its installation by the assessee,
was used either within or outside India by any other person;
(ii) any machinery or plant installed in any office premises or any
residential accommodation, including accommodation in the nature of
a guesthouse;
(iii) any office appliances including computers or computer software;
(iv) any vehicle; or
(v) any machinery or plant, the whole of the actual cost of which is
allowed as a deduction (whether by way of depreciation or otherwise)
in computing the income chargeable under the head “Profits and gains
of business or profession” of any previous year.

10. Extension of time -Section 54H

Section 54H 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 and
the extended period shall be reckoned from the date of receipt of such
compensation. L

6.17 ILLUSTRATIONS

33. State whether the following are the capital Asset or not:
1. Bicycle
2. Horse
3. Car
4. House for self residence
5. Jewellery
6. House let on hire
7. Silver utensils
8. Air Conditioner used as stock in trade
9. Personal Air Conditioner
10. Rural Agricultural Land
11. Urban Agricultural Land

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Solution:
Bicycle, horse, personal air conditioner and silver utensils (if used for
personal use) are personal effects, hence not capital assets .

Item 8 Air Conditioner used as stock in trade and Item 10 Rural

agricultural land are excluded from the definition of capital asset.

All the remaining items are capital assets including , Item 4 House
for self residence, item 5 Jewellery , item 6 House let out on hire , item 7
Silver utensils and item 11 Urban agricultural land as they are not
excluded from the definition of capital asset .
34. State whether the following transactions are transfer :
1. A house transferred by way of will to son.
2. Bonus shares given by a company to its shareholders.
3. Giving away jewellery for a piece of land.
4. Getting money in lieu of shop in a shopping complex.
5. Giving the rights to use the asset.

Solution
1) Transfer by will is not transfer
2) Issue of Bonus share is not transfer
3) Exchange of jewellery with land is transfer of both assets.
4) Money being consideration of shop, it is transfer.
5) Not transfer as asset only hired
35. An asset was acquired on 31 May 2001 for Rs 10,000, it is
substantially improved on 30 June 2004 for Rs 5,000 and it is sold on 10
December, 2020 for Rs 75,000.

Solution:

Particulars Rs
Sales consideration 75,000
Indexed cost of acquisition (10,000* 301/100) 30,100
Indexed cost of improvement 13,318 17,782
5,000 X 301/113).
Long Term Capital Gain 57,218

36. Assume that the asset was acquired before 01-04-2001 & and
improvement were carried before 01-04-2001 there is no change in fair
market value on 01-04-2001

Sales consideration 75,000

Indexed cost of acquisition 30,100
(10,000 X 301/100) on 01-04-2001*
Cost of improvement Ignored (Pre-01- 0 30,100
04-2001 - *Optional
Long Term Capital Profit 44,900

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37. A sells a residential house property in Mumbai for Rs. 30,00,000 on
May 15, 2020. The house was purchased by him on June 11, 2002 for Rs
2,00,000. Compute the capital gain

Solution:
Rs.
Sales Consideration. 30,00,000
Less- Indexed cost of acquisition 25,80,000
9,00,000X 301/105
Long Term Capital Gain 4,20,000

38. A sells a flat on 13 March 2021 for Rs 7,00,000. He had acquired the
flat on 15 August 2004 for Rs 1,00,000 and had incurred capital cost of
major repairs of Rs 50,000 in 2007-08.

Solution
Rs.
Sales Consideration 7,00,000
Indexed cost of acquisition 2,66,372
1,00,000*301/113)
Indexed cost of improvement 1,16,667 3,83,039
50,000* 301/129)
Long Term Capital Gain 3,16,961

39. X purchased a house property for Rs. 4,00,000 on 01-07-2015 and

constructed the first floor in March 2016 for 1,10,000. The house
property was sold for Rs 7,10,000 31-03-2021. The expenses incurred on
transfer of asset were Rs. 10,000. Compute the capital gains from the
transaction and show the difference, if any, if the house was constructed
in March, 2020

Solution:
Sales consideration 7,10,000
Less: Expenses For Transfer 10,0000
Net Sales Consideration 7,00,000
Indexed cost of acquisition 4 lakh * 301/-254 4,74,016
Indexed cost of improvement 1,30,354 6,04,370
1,10,000 x 301/254
Long Term Capital Gain 95,230

Notes: 1. Date of purchase will be the date of acquisition. Construction of

additional floor is improvement to the property.

2. If the house was constructed in March, 2020, it is held for12 months,

which is less than 24 months. It will be short term capital asset not entitled
to indexation. Resultant capital gain of Rs 2,90,000 will be Short Term
Capital gain [Rs. 700000- (4,00,000+ 1,10,000 )

187
40. On 1-7-2017 X sold gold jewellery for Rs.1,50,000. It was
purchased on 1-7-1970 for Rs 9,000. Market Value of the jewellery as on
1st April 2001 was Rs. 40,000. Compute taxable amount of capital gain,
if the expense on transfer is 5% of the sales price.

Solution:
Rs.
Sales Consideration 1,50,000
Less: Indexed Cost of Acquisition cost as on 1,20,400
01-04-2001=-40,000x 301/100
Expenditure on transfer (0.5% x 1,50,000) 750 1,21,150
Long Term Capital Gains 28,850

41. X invested Rs. 1,00,000 in ornaments and Rs. 50,000 in unquoted

equity shares on 1st March 2019. He sold the jewellery for Rs. 1,20,000
and shares for Rs.1,00,000 on 1st August 2020. He paid ½% brokerage
on both the investments, both at the time of purchase and sale. Calculate
the taxable amount of capital gain.

Solution
A- Capital Gain on sale of Jewellery
Particulars Rs. Rs.
Sales Consideration of Jewellery 1,20,000
Less: Cost of Acquisition 1,00,000
Brokerages on purchases 500
(0.5% x100,000)
Brokerages on Sales 600 1,01,100
(0.5% x120,000)
Short Term Capital Gain 18,900
Jewellery held for 30 months (1-3-
2019 to 1-8-2020) less than 36
months, hence STCG, no
indexation.

B- Capital Gain on sale of Shares

Particulars Rs. Rs.
Sales Consideration on Sale of Shares 1,00,000
Less: Indexed Cost of Acquisition 50,000
Brokerages on purchases 250
(0.5% x50,000)
Total 50,250
50,250* 301/240 Indexed cost 56,950
Brokerages on Sales 500 56,450
(0.5% x 1,00,000)
Long Term Capital Gain being less than 43,550
1,00,000 exempt
Assuming grandfathering cost same

188
6.18 SELF ASSESSMENT QUESTIONS:

1. Write short note on:

a. Short Term Capital Gain
b. Cost of Acquisition
c. Cost of improvement
d. Expenditure on transfer
e. Transfer
2. Explain the term ‘capital asset.
3. Explain capital gains on compulsory acquisition of a capital asset.
4. What is “transfer” in relation to a capital asset?
5. State the situations under which the written down value of a “block of
assets” will be reduced to nil.
6. Give any five items are not considered as’ capital asset’.
7. Explain the provisions regarding:
i. Conversion of capital assets to stock-in-trade.
ii. Capital gains in case of depreciable assets.
8. State whether the following are the capital Asset or not:
a. Bicycle
b. Horse
c. Car
d. House for self residence
e. Jewellery
f. House let on hire
g. Silver utensils
h. Air Conditioner used as stock in trade
i. Air Conditioner not used in own house
j. Rural Agricultural Land
k. Urban Agricultural Land
{Ans: item g is not capital asset)
9. Whether the following transactions are transfer in relation to capital
asset.
a. A house transferred by way of will to son.
b. Bonus shares given by a company to its shareholders.
c. Giving away jewellery for a piece of land.
d. Getting money in lieu of shop in a shopping complex.
e. Giving the rights to use the asset.
[Ans: only c and d are transfers]
10. Ajay converted unquoted shares(kept as investment) as his stock in
June,2015. He had purchased the shares in F.Y. 2011-12 for Rs.
2,00,000. The market value of the shares, in June 2020 Rs. 8,00,000.
He sold the shares Rs. 9,20,000 on 30-10-2020. Compute taxable
capital gains .
(Ans: Rs 1.20 lakh business profit and LTCG ( 8 lakh -2 lakh *254- 182 = Rs 5
,20,879 in 2015-16 , taxable in A.Y. 2021-22

189
11. Aditya sold his only house property occupied by him as residential
house for Rs 18 lakh on 31-12-2020. The house property was
purchased by him on 28-02-2005 for a consideration of Rs 2 lakhs.
Determine the capital gains.
(Ans: LTCG Rs12,67,257 = [ 18,00,000- Rs. 2,00,000X 301/-113)

12. Siddharth converts his plot of land purchased in July 2006 for Rs
60,000 into stock-in-trade on 31st March 2014. The fair market value
on 31-3-2014 is Rs 1,60,000. The stock-in-trade was sold for Rs
2,00,000 in the month of January 2021. Find out the taxable income,
if any, and if so under which “head” of income and for which
“assessment year”.
(Ans: LTCG 1,60,000-60,000 X 220-122 = Rs. 91,803 in AY 2014-15 Business Income Rs.
40,000 taxable in AY 2021-22-19)

13. X acquired a plot of land on 30-6-2006 for Rs. 2,20,000. Brokerage

and other incidental expenses on acquisition of plot were Rs. 30,000.
X sold the plot of land on 30-6-2017 for Rs. 12,50,000. What will be
the amount of capital gain? Can he claim deduction for ground rent
paid by him amounting to Rs. 5,000 during the period when he held
the asset?
(Ans: LTCG 12,50,0000-2,50,000X 301-122= Rs.6,33,197 , No)
14. Raju Purchases 250 equity shares of ABC Ltd on 01-04-2011 @ Rs.
270 per share and incurs Rs. 500 on brokerage and transfer. On 01-
07-2012, he gets 200 bonus shares. On 01-09-2014 he gets 300 right
shares @ Rs 140 per share. On 28-02- 2021 he sells all the 750
shares@ Rs 1000 per share and incurs expenditure of Rs. 1,500 on
brokerage. Compute his taxable capital gain.(STT not paid)
(Ans: Sales [750X 1000]- 1500 = Rs 7,48,500– Purchase [[250X270+500] X 272-
184]= Rs 1,00,522+0 Bonus+ Right [300X140]X 301/-240 = 47600 LTCLG
Rs.5,99,278 i.e. { 7,48,500 –1,48,122 =[1,00,522 +0+ 47,600] subject to
grandfathering clause taking 2018 value
15. WDV of the block on 01-04- 2017 of the block (depreciation 25%)
comprising of two copier is Rs 6 lakh. Both the copier were
discarded on 31-03-2021 and sold for Rs.80,000 each. New copier
was bought on 01-04-2021 for Rs 13 lakh. Compute the amount of
capital gain chargeable- Depreciation. (Ans: STCL – 4.8 lakh 31,000 No
depreciation on empty block . New copier will qualify for dep. In A.Y.2022-23).
16. Ramesh sold jewellery on 15-11-2020 for Rs. 4,50,000. He
purchased it on 01-04-2014 for Rs. 3,05,000. He paid brokerage of
Rs. 4,000 for purchase and Rs. 2.000 for sale. Compute capital
gains chargeable to tax.
(Ans: LTCG RS 15312= {4,50,000-2000 - [3,05,000+4000 X 301/-240)

17. Mahesh sold his flat 15-04-2017 for Rs 16.5 Lakh. He had purchased
it for Rs 50,000 on 03-07-1983. Its market value as on 01-0-4-2001
was Rs 5 lakh. He paid brokerage of Rs. 13,000 for the sale
transaction. Compute the total taxable capital gain.
(Ans: LTCG 16,50,000-13,000- {5,00,000X 272-100 )= Rs 2,77,000)

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18. A purchased 1000 share of Reliance @ Rs 1000 each. Reliance
goes for right issue in the ratio of 1:1 for Rs 600. A sells( renounces)
his rights for 500 shares @ Rs 50 per share to X. Ascertain the
liability for taxable capital gains , if any .
(Ans: for A-STCG 1300 , For X- Cost of Acquisition of right Rs 5000 )
19. A sold a residential house for Rs 55 lakhs on 31-03-2021. He had
inherited the house from his father in 1990, the fair market value of
which as on 1.4.2001 was Rs.10 lakhs. During the year 1992-1993,
he carried out further construction and improvements, at a cost of Rs.
6 lakhs. Expenditure in connection with transfer Rs. 50,000 Compute
capital gains.
(Ans: LTCG Rs 55 Lakh –50,000 - [Rs. 10 lakhs X 301-100 ]=+Rs25,40,000. Improvement in
1992-93 will be ignored).

20. WDV of Block of 2 machines- (depreciation 15%) owned by AK

Ltd. was Rs 9 lakh as on 01--04-2020. AK purchased a new
machine for Rs 8 lakh on 30-12-2020 and sold the old machines for
Rs. 10 lakh . Compute depreciation and taxable capital gains if any,
for AY 2021-22 . Show the difference if AK sold the machines for
Rs. 8 lakh. .
(Ans: a) block Rs 9 lakh+ 8 lakh – 10 lakh = 7 lakh . Deprecation @ 15% -Rs 1,05,000
b)STCG- 1 lakh , Depreciation- Nil.)



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 7
INCOME FROM OTHER SOURCES
(Sections 56 -59)
Unit Structure
7.1 Introduction & Objectives
7.2. Basis of Charge
7.3. Incomes specifically chargeable u/s 56
7.4. Other incomes chargeable u/s 56
7.5. Some specific incomes – gifts, dividend
7.6. Deductions
7.7. Amounts not deductible
7.8. Miscellaneous- Balancing charge, Method of accounting
7.9. Self- Assessment Questions

7.1 INTRODUCTION AND OBJECTIVES

“Income from other sources” is the last and residuary head of

income specified in section 13. Income not covered under any other head
of income, will be chargeable to tax under this head. The lesson explains
the scope of “Income from other sources”, its computation and the
deductions allowable therefrom as given in section 56 to 59.

7.2 BASIS OF CHARGE

2.1. As per section 56 (1), any income, which is not chargeable to tax
under any other heads of income and which is not to be excluded from the
total income shall be chargeable to tax as residuary income under the head
“Income from Other Sources”.

2.2. As per section 56(2), the following incomes are specifically

chargeable to tax under the head “Income from Other Sources”:-
i. Dividends
ii. 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 whatsoever.
iii. Any sum received by the assessee from his employee as contribution
towards provident fund , superannuation fund or Employee State
Insurance fund or any other employees’ welfare fund, if not
chargeable under the head ‘profits and gains of business or
profession”.
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 iv. Interest on securities, if not chargeable under the head ‘profits and
gains of business or profession”.
v. Rental income from machinery, plant or furniture belonging to the
assessee and let on hire if not chargeable under the head ‘profits and
gains of business or profession.”
vi. Composite rental income from letting machinery, plant or furniture
with buildings and letting of the buildings is inseparable from the
letting of the said machinery, plant or furniture, if not chargeable
under the head ‘profits and gains of business or profession”.
vii. Any sum including bonus received under keyman insurance policy, if
not taxable as salary or ‘profits and gains of business or profession”.
viii. Any sums of money exceeding 50,000 rupees in aggregate
received without consideration by an individual or HUF.
ix. Fair market value of movable property received without consideration
by an individual or HUF if it exceeds 50,000 rupees in aggregate.
x. The difference between the aggregate fair market value and the
consideration received by an individual or HUF in respect of a
movable property or immovable property, if such difference exceeds
50,000 rupees.
xi. Excess of the stamp duty value of any immovable property ( whether
assessed or assessable) if it exceeds by 50,000 rupees than the
consideration for such immovable property received by an individual
or HUF.
xii. Shares of closely held companies having aggregate fair market value
exceeding 50,000 rupees received by a firm or a closely held
company without consideration or for a consideration which is less
than the aggregate fair market value of the property by an amount
exceeding 50,000 rupees.
xiii. Interest received on compensation or on enhanced compensation
referred to in section 145A (b).
xiv. Any sum of money received as an advance or otherwise in the course
of negotiations for transfer of a capital asset, if such sum is forfeited
and the negotiations do not result in transfer of such capital asset.

7.3 INCOMES SPECIFICALLY CHARGEABLE

UNDER THE HEAD INCOME FROM OTHER SOURCES

Some well-defined incomes will be taxable under the head

“income from other sources” as per section 56(2) in addition to the
residual income not charged under the other four heads. These incomes are
as under :-

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i) Dividends
ii) Family Pension received by the legal heirs of an employee.
However, pension received by an employee in his lifetime is
charged under section 17(3) as the income from salaries.
iii) Any winnings from lotteries, crosswords, puzzles, races
including horse races, card games or other games of any sort or
gambling or betting of any form or nature under section 2(24);
iv) Income from letting out any plant, machinery or furniture on
hire where it is not the business of the assessee to do so;
v) Interest on securities if not chargeable as the profit and gains of
business or profession;
vi) Employees’ contribution to any staff welfare scheme received
by the employer, which is not paid within the prescribed time.
However deduction will be allowed in respect of the amount
of contribution paid , only the balance amount will be taxable;
vii) Income from sub-letting;
viii) Interest on bank deposits and loans and securities;
ix) Royalty;
x) Directors’ fees;
xi) Casual income;
xii) Agricultural income when taxable e.g. land situated outside
India;
xiii) Cash credits under section 68; ,
xiv) Unexplained investments under section 69,
xv) Unexplained money , bullion etc., under section 69A
xvi) investments under section 69;
xvii) Undisclosed investments under section 69B;
xviii) Amount borrowed or repaid on Hundi under section 69C;
xix) Rent of plot of land;
xx) Mining rent and royalty;
xxi) Casual income under a will, contract, trust deed;
xxii) Salary payable to a member of parliament;
xxiii) Gratuity received by a director who is not an employee of a
company; and
xxiv) Any other receipt, which is income but does not fall under the
other four heads of income viz. salary or business income or
income from house property or capital gain.

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7.4 SOME SPECIFIC INCOMES

4.1. Dividend
Some important characteristics concerning dividends are given
below:-
(i) Dividend is the amount of profits distributed by a company among its
shareholders or members.
(ii) Prior to financial year 2020-21, Dividend from a domestic company
was exempt under section 10(34) as a domestic company was liable
to pay dividend distribution tax at source under section 115-O.
However gross dividend over Rs 10 lakh under section 115BBDA,
was taxable in the hands of the shareholders. From assessment year
2021-22, exemption under section 10(34) has been withdrawn .
Hence now the position is that all dividends whether received from a
domestic company, a cooperative bank or a foreign company will be
chargeable as the income from other sources.
(iii) It is not relevant whether dividend is in cash or in kind, out of taxable
profits or tax-free income, out of revenue profits or from capital
gains.
(iv) Dividend may be of three types viz. Final dividend, Interim dividend
or Deemed dividend
a. Final dividend is declared at the at the annual general meeting of a
company (AGM), where the final accounts for the financial year
are laid before the members. Final dividend, once declared
becomes a debt due and cannot be withdrawn. Unpaid dividend is
earmarked and kept in a separate account as per the Companies
Act, 2013. Accordingly, final dividend is chargeable to tax on the
date of AGM in which it is declared. Date of actual payment of
the dividend is not relevant.
b. The dividend declared by the board of directors between two
AGMs is called Interim dividend. Interim dividend will be
taxable when it is made available or paid to the shareholders.
c. Deemed dividend is not dividend in real terms. Certain payments
made to shareholders by the company or its liquidator, which are
deemed to be dividend in the hands of the shareholder in different
circumstances prescribed in section 2(22) are chargeable under
this head when such sums are actually paid.

4.2. Deemed dividend: -Loan to shareholders

Under Section 2(22)(e) any sum paid as loan or advance by a
closely held company shall be deemed to be the dividend in the hands of
the shareholder, if It is paid to
 the shareholder for his individual benefit, and such shareholder and
his relatives hold substantial interest -10 per cent stake in share capital
or voting power in the company or

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 a concern(HUF/Firm etc.) where such shareholder is having
substantial interest has at least 20 per cent interest.

This provision intend to prevent persons having substantial control

and influence over the affairs of a company to take away all funds of the
company as low-interest loans for their personal benefit to the prejudice of
the other shareholders.
In this regard following points are also relevant: -
(i) As per section 8, dividend shall be deemed to be the income of the
recipient in the year in which sum was advanced as loan.
(ii) The section applies only on cash loans or advances.
(iii) Advances made in kind e.g. of sale of goods on credit in the normal
course of business will not be covered .
(iv) Dividend will be chargeable even if the loan or advance has been
repaid. The courts have repeatedly held that there is no inequity in
this. However, a shareholder is entitled to set off the deemed dividend
if and when company declares any dividend.
(v) The loan will be taxable as dividend only to the extent of free
reserves of the company;
(vi) Any loans or advance made to a shareholder or the concern by a
company in the ordinary course of its business or for purchase of its
own shares or on demerger etc. will not be covered under this section;
(vii) Substantial interest may be existing at any time during the year;
(viii) Deduction of expenses against dividend income will also be extended
to deemed dividend.

Illustrations
Ascertain the amount of deemed dividend u/s 2(22) (e) if A
borrows 20 lakh rupees as loan from A Ltd. a closely held company
having free reserves of 20 lakh rupees.
1. A retains the loan for his personal use

Solution:
Entire loan amount of Rs 20 lakhs will be deemed dividend in the
hands of A U/s 2(22) (e)

2. A returns the loan next day, when he makes his own arrangement for
finance.

Solution
Entire amount of 20 lakh rupees will be taxable as deemed
dividend. Repayment of loan does not affect the tax liability. However, A
is entitled to setoff dividend against dividend If and when declared.

3. A Ltd. has free reserves of Rs 10 lakh rupee only.

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Solution
Only 10 lakh rupees be treated as deemed dividend u/s 2(22)(e)
i.e. to the extent of free reserve of A Ltd.

4. A limited has accumulated losses of 10 lakh rupees

Solution
Since the company has no free reserves, the loan taken will not be
taxable in the hands of A as dividend.

5. A transfer his shareholding within a month of taking loan.

Solution
Entire loan amount of Rs 20 lakhs will be deemed dividend
although A holds substantial interest only for a part of the year.

6. A Ltd. Is a listed company.

Solution

7. Provisions of 2(22) (e) not attracted on shareholder of widely held

companies .

4.3. Deemed dividend – Distribution by Companies:

Under section 2(22) any distribution by a company to its
shareholders, will be deemed to be dividend in the hands of the
shareholders to the extent of accumulated profits of the company, if such
distribution
(a) entails the assets of the company, or
(b) is made on liquidation or reduction of capital
(c) Is made its preference shareholder or debenture holders but
directly taxable in the hands of the company.

4.4. Interest on securities

Interest received from debentures of company, mutual funds, and
government securities is taxable as income from other sources unless such
interest is
(a) exempt under section 10, or
(b) taxable as income under the head profits and gains from business &
Profession

Any tax deducted at source from interest on securities should be

added back and only the gross income should be considered. In case of
tax-free govt. securities, grossing up is not required as there is no
deduction or TDS. However, grossing up is required in case of taxable
securities and non-government securities.

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Illustration
8. A received Rs 36,900 as interest net of TDS @ 10% on
debentures of B Tea Ltd worth Rs 2,50,000 held by him. Calculate the
interest income and the amount of TDS @ 10% that can be claimed.

Solution:
Dividend received net of 10% TDs: Rs 36,900
Gross Dividend – 36000/90% : Rs 41,000
TDS claim 10 % of Gross dividend Rs 4,100

4.5. Winning from Lotteries, Crossword puzzles, etc

Winnings from, Lottery, crossword puzzles, card games or other
games including any game show like KBC, horse races, betting, gambling
etc. are treated as income from other sources and taxed at the maximum
marginal rate under section 15BB on the gross income without
considering -:
 Claiming basic exemption limit
 Deductions under chapter VI-A.
 Expenditure including collection charges, etc or allowances;
 Benefit of set off and carry forward of losses.

Illustration
9. The winnings out of Sawaal Aapka were Rs 1,50,000. Calculate
the net receipt.

Solution
Winning received subject to maximum marginal rate is 30%, + 4%
education cess, works out to 31.2% .
Hence, gross winning – (Rs 1,50,000 X 31.2%) Rs 46,800
Net receipts of winnings-( Rs 1, 50,000 – Rs 46,800) Rs1,03,200
Alternatively – Rs 1,50,000X 68.8% = Rs 1,03,200

4.6. Family Pension

Family pension means a regular monthly payment made to the
legal heirs of the employee after his death. This is treated as income from
other source and not salary because there is no employer-employee
relationship between the legal heirs and the employer.

1.7. Gifts in the hands of individuals and HUFs

4.7.1. Concept of Gift
Gift means a sum of money or a property received without consideration.
Ordinarily this being a capital receipt was considered outside the scope of
income tax. However, with the times the things have changed and more
and more capital receipts have been brought into the tax net.

4.7.2. What is Taxable

Section 56(2)(xi) states that the following receipts
(i)by an individual or a Hindu undivided family,

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 (ii) in any previous year after 01-04-2017
(iii)from any person or persons shall be taxable as “Income from
Other Sources :-
a. The whole of the aggregate value any sum of money, without
consideration, the aggregate value of which exceeds 50,000 rupees
b. Immovable property,
i. Whole of the stamp duty value of any immovable property
without consideration, if such stamp duty value exceeds
50,000 rupees.
ii. Whole of the amount of the stamp duty value of any
immovable property that exceeds consideration 50,000
rupees and amount equal to ten per cent of the consideration:
Following points are important in this regard :
 Date of valuation
When the date of agreement and the date of registration are not the
same, stamp duty value will be considered on the date of:-
i. agreement if any part or whole of the amount of consideration
thereof, has been paid by any mode other than cash i.e. Cheque
draft electronic clearance etc. on or before the date of the
agreement;
ii. registration in all other cases .
 Disputed Value
If the stamp duty value of immovable property is disputed by the
assessee under section 50C (2), the Assessing Officer may refer the
valuation of such property to a Valuation Officer as per the provisions of
section 50C and 155(15) will apply for valuation of capital asset.
c. Any property, other than immovable property-
i. the whole of the aggregate fair market value of any property, other
than immovable property without consideration, the aggregate
fair market value of which exceeds 50,000 rupees or
ii. the aggregate fair market value of such property as exceeds 50,000
rupees where consideration which is less than the aggregate fair
market value of the property.

4.7.3. Exceptions:
The provisions will not apply to any sum of money or property
received:-
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer or donor; or
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 (e) from any local authority
(f) from any fund or foundation or university or other educational
institution or hospital or other medical institution or any trust
or institution referred to in section 10 (23C) ; or
(g) from any trust or institution registered under sections
12A/12AA /12AB; or
(h) by any fund or trust or institution or any university or other
educational institution or any hospital or other medical
institution referred to in section 10 (23C) ; or
(i) by way of transaction not regarded as transfer under section 47
(i)/(iv) /(v)/ (vi)/ (via)/(viaa)/(vib)/(vic)/(vica)/ (vicb)/(vid)/(vii)
; or
(j) from an individual by a trust created or established solely for
the benefit of relative of the individual;
(k) from such class of persons and subject to such conditions, as
may be prescribed.
(l) any compensation or other payment, due to or received by any
person in connection with the termination of his employment
or the modification of the terms and conditions relating thereto.

4.7.4. Meaning of Property:

Property means the following capital asset of the assessee: —
a. immovable property being land or building or both;
b. shares and securities;
c. jewellery;
d. archaeological collections;
e. drawings;
f. paintings;
g. sculptures;
h. any work of art; or
i. Bullion

4.7.5 Meaning of Relative

Relative “means:
I. In relation to an Individual :
a. spouse of the individual;
b. brother or sister of the individual.
c. brother or sister of the spouse of the individual ;
d. brother or sister of the either of the parents of the individual,
e. any lineal ascendant or descendant of the individual
f. any lineal ascendant or descendant of the spouse of the individual
g. spouse of the persons referred to in (2) to (6) above.

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 RELATIVE OF A OR MRS. A
Spouse Mrs. A A
Siblings A’s brother Mrs. A ‘s Brother
A’s sister Mrs. A’s sister
Lineal A’s Parents Mrs. A’s Parents
Ascendants – A’s grandparents Mrs. A’s grandparents
paternal
Lineal A’s sons Mrs. A’s sons
Descendants A’s daughters Mrs. A’s daughters
Paternal A’s grandsons Mrs. A’s grandsons
Siblings of parents of Individual ( Not of Spouse )
Mother’s brothers / sisters + Father’s brothers / sisters
Spouses of all the above persons

Note: This relationship is explained in a diagram, where lineal

ascendants or descendants taken on male side
II. In relation a Hindu Undivided Family any member thereof.

4.7.6. Cost of Acquisition

Cost of acquisition of a property received without consideration or
short consideration and subsequently sold or transferred by the recipient of
such property, shall be the value considered under section 56.

Illustration
10. A purchases a painting valued at 5 lakh rupees for 3 lakh rupees.
Excess of Fair Market Value over consideration 2 lakh rupees will be
charged under section 56. Assuming a resell the painting for 11 lakh
rupees. the cost of acquisition will be taken at Rs 5 lakh and capital gain
will be 6 lakh rupees.

4.7.7. Issue of shares at premium

Under section 56(viib), Excess of consideration for the shares issued
by a closely held company (private company) to a resident at premium
above their fair market value by 50,000 rupees except when the shares
are issued to
 A venture capital company; or
 other company notified by the Central government.

Fair market value of the shares will be determined as per the

prescribed rules net asset value or break-up value method or any other
method as may be substantiated by the company to the satisfaction of the
Assessing Officer, based on the value, on the date of issue of shares, of its
assets, including intangible assets, being goodwill, know-how, patents,
copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature.

In case of failure to comply with the notification, the difference

will be taxable in the year of default and will be deemed to be
misreporting of income under section 270A.

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Illustration
11. A company issues 1000 shares for 800 rupees per share, while
Fair market value is 100 rupees. The excess of consideration over fair
market value (800-100) x1000=7 lakh rupees will be treated as “income
from other sources, unless the company is a venture fund or other notified
company.
Following table summarizes the position of gifts u/s56
TAXABLE GIFTS AT A GLANCE
INDIVIDUALS AND HUFS
RECEIPTS WITHOUT CONSIDERATION
Cash 50,001 Aggregate
Movable Assets 50,001 Aggregate
Immovable Assets 50,001 Per Property
INADEQUATE CONSIDERATION [ FMV- CONSIDERATION]
Movable Assets 50,001 Aggregate
Immovable Assets 50,001 Per Property
Shares 0f Pvt Co. 50,001 Consideration or
Recd by firm or Co difference with FMV
Share Premium by Pvt Co 50,001 Difference with FMV
Important Points:
1. Limit of 50,000 rupees is
a. for each category in case of cash and movable assets
b. each immovable property as the section says “such property’
2. Once the limit of 50,000 rupees exceeds, entire sum will be taxable. For
instance, A receives cash gift of 40,000 rupees it will be exempt as it is
below Rs 50,000 but If he receives another gift of Rs. 15,000 rupees,
then entire sum of 55,000 rupees will be taxable.
3. The section does not cover arm’s length transactions of sale or
purchase, or business assets like stock.
4. The section covers
a. any movable property like shares, securities, jewellery, drawings,
paintings, sculptures, work of art or archaeological collections or
b. immovable property.
5. In case of transfer value exceeding Rs 50,000 aggregate fair market
value will be taxable
6. In case of inadequate consideration, falling short of their aggregate fair
market value by more than Rs 50,000, aggregate difference will be
taxable.
7. List of relatives -
a. Includes –
i. Spouses, Siblings - own, spouses and parents, lineal ascendants
and descendants and spouses.
ii. Uncles and aunts of the individual but not those of the spouse.
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 b. Does not include nephews, nieces or cousins.
8. Stamp duty valuation has the same meaning as in section 50C.
9. Fair Market Value can be determined by the valuer.
Illustration
12. Compute the total income of XYZ, who receives 60,000 rupees in
cash and of 1000 shares of a company valued at 40 rupees per share as
gift from each of the following persons:
1. B, his neighbour.
2. C, employer
3. D, one of his patients
4. E, his sister on the occasion of his daughter’s marriage.
5. Mrs. A
6. Mr. husband of E
7. H, son of E
8. X, a stranger on his marriage.
Solution
COMPUTATION OF TOTAL INCOME OF XYZ
Particulars Rupees
Salaries - Gift from employer C.Section 17 1,00,000
Profits and gains of business & profession- 1,00,000
Gift from patient D Section 28
Income from Other sources- Section 56 2,00,000
Sister E ‘s son [ nephew not exempted] 1,00,000
B- his neighbour 1,00,000
Total income 4,00,000
 Gift of shares of Rs 40,000 and cash Rs 60,000 each treated at par.
Therefore, total gift in each case Rs 1,00,000
 Exempt gifts from with reason in brief :-
E - Sister – Relative
Mrs. A- Spouse –Relative
G -E’s husband – Sister’s spouse –Relative
On Occasion of marriage (Relationship not relevant)

4.7.8. Gifts Received by firms and companies

When a firm or a closely held company receives, in any previous
year, from any person or persons, any shares of another closely held
company-
 Without consideration and the aggregate fair value of such shares
exceeds 50,000 rupees, the whole of the aggregate fair market
value of such shares or property;
 for a consideration which is less than the aggregate fair market
value of the shares by an amount exceeding 50,000 rupees, the
aggregate fair market value of such property as exceeds such
consideration .

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 This section will not however apply to transactions not regarded as
transfer u/s 47.
4.7.9. Under the new sub-section 56(2)(vii), firms, widely held companies
and AOP are liable to pay tax on the difference between fair market value
and the actual consideration of movable or immovable asset.
Illustration:
13. A Pvt. Ltd. buys shares in B Ltd of 5 lakhs rupees for 1 lakh
rupees from C. The difference in the consideration and the fair market
value amounting to 4 lakh rupees will be taxable u/s 56.
4.7.8 The section has been enlarged to include firms and companies in its
purview. Shares received by an individual or HUF as a consequence of
demerger or amalgamation of a company or a business reorganisation of a
co-operative bank shall not to be subject to tax by virtue of section
56(2)(vii).

5.10. Additional compensation

Income by way of interest received on compensation or on enhanced
compensation referred to in clause (b) of section 145A.

7.5 DEDUCTIONS

Section 57 allows the following deductions in computing the

income from other sources:

I In case of taxable dividend and interest from securities:

1. From assessment year 2020-21 onwards, dividend in respect of shares
held for trading will be taxable under the head profits and gains of
business or profession and will be computed in accordingly.
2. Dividend received on shares, or securities or mutual funds held as
investment will be taxable as Income from other sources. No
deduction of any kind will be allowed against dividend income except
interest subject to a maximum limit upto 20% of dividend included in
income.
3. From the Interest income from this head, reasonable bank charges and
other collection charges, office and other expenses if the same were
incurred for earning the income and interest payable on loans taken for
acquiring securities can be deducted.

II In case of income from plant, machinery or furniture given out on

hire:
a. Current repairs to building.
b. Current repairs to machinery, plant or furniture.
c. Insurance premium paid for insuring the plant, machinery, building or
furniture.

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d. Depreciation on building, machinery, plant or furniture.
e. Any expenditure (not being capital expenditure or personal
expenditure) which has been incurred wholly, necessarily and
exclusively for earning income, such expenditure will also be allowed
as a deduction, e.g. sub-letting expenses. Office stationery, rent,
salaries, etc where maintenance of office is necessary for earning the
income.

III In case of family pension received by legal heirs of an employee,

A standard deduction of 1/3rd of such amount received as family
pension or Rs. 15,000, whichever is less.

For this purpose, family pension means a regular monthly payment

made to the legal heirs of the employee after his death. Significantly,
pension amount received during the lifetime of employee is taxable as
salaries and not entitled to standard deduction.

Illustration
14. Mrs. S receives Rs 75,000 as yearly pension after the death of her
husband. She pays Rs 2,000 per month to Ali to collect it from the office
of the employer. Calculate the net taxable pension of Mrs. S.

Solution
Pension amount Rs 75,000
Less: Lower of the following : Rs 15,000
 1/3 of the pension i.e. =
Rs 75,000 X 1/3 = Rs 25,000 or
 Rs 15,000
Taxable Pension Rs 60,000
The expenses occurred for collection of family pension to the extent of Rs 24,000 shall
not be allowable as deduction since the standard deduction of 1/3 of family pension or
Rs 15,000 is to cover such expenses.
IV. Employees’ contribution to Provident or any other fund if deposited
before the due date.
V. Any allowances paid for breeding or maintaining the racehorses.
VI. A deduction of 50% against the enhanced compensation received and
no further deduction will be allowed from the income.

7.6 AMOUNTS NOT DEDUCTIBLE

Under section 58, the following amounts are not deductible while
computing income under the head “income from other source”:-
 Personal expenses of the assessee;
 Any interest which payable outside India, on which income tax has not
been paid or deducted at source;
 Any sum paid on account of wealth tax in India or abroad;
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 Any amount not allowable by virtue of it being unreasonable;
 In case of foreign companies, expenditure in respect of royalties and
technical services received under an agreement made after 31/3/76;
and
 Any expenditure in connection with income from winning from
lotteries, crosswords, puzzles, races including racehorses, car races and
other games of races, gambling, betting of any form. However,
expenses are allowed as a deduction in computing the income of an
assessee who earns income from maintaining as well as holding
racehorses.

7.7 MISCELLANEOUS

a) Balancing charge taxable

Section 59 provides that any amount received or benefit derived in
respect of any expenditure, incurred or loss or trading liability allowed
shall be deemed to be the income of the year in which such benefits is
accrued or received as the case may be.
b) Method of accounting
Section 145 relating to method of accounting is also applicable to the
computation of income from other sources. Income under this head is
computed in accordance with the method of accounting regularly
employed by the assessee i.e. if the assessee accounts only on cash receipt
and cash payment basis, income will be treated on cash payment and cash
receipt basis only; otherwise it will be treated on mercantile basis. An
assessee can adopt either the cash method or accrual method of
accounting. Hybrid method is not permissible. However, certain items like
lottery, horse races, dividend u/s 2(22)(e) can only be recorded on cash
basis because of their variable nature.
c) Grossing Up:
Many times, dividends, interest from securities are received after TDS.
In such case amount to be included in total income is gross amount and
not the amount received. Amount of TDS should be added back.
Illustration- 3 :
A receives taxable interest of Rs. 18,000 after deduction of 10% TDS.
Find out the taxable income.

Solution
Since TDS is 10% and Gross amount is Rs. 100
Net amount will be 90%
Amounts to be taxed will be gross amount Rs 20,000 i.e.
Rs 18,000 X 100
90
Rupees 20,000 will be included in the income and credit for TDS of Rs. 2,000
will be claimed against the tax payable.

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7.8 SELF-EXAMINATION QUESTIONS:

1) Enumerate any five items of income, which are included under the head
‘income from other sources’.
2) Define Dividend. Discuss the taxability of dividend.
3) What are the incomes included under the subhead of winning? What is
the rate of tax on such incomes?
4) What are the deductions allowable in respect of hire charges of plant
and machinery?
5) Are there any amounts, which are not allowed as deductions while
computing the income from other sources? Give examples.
6) A is in receipt of pension as a retired government employee @ Rs.
10000 per month. Besides, he is in receipt of family pension of his late
wife @ Rs. 6ooo per month. Show how the two amounts will be treated
for tax purposes.,
(Own pension salary / wife’s pension other sources with std deduction Rs 15000)
7) Show the head of income under which the following items would be
charged.
a. Rent received by an event manager on letting out tents /pandal.
b. Hiring charges received by a taxi driver.
c. Car hiring charges received by a company from the cars requisitioned
by the Election Commission
d. Interest on Income Tax Refund
e. Rent received by letting out own house and
f. Rent received by sub-leasing premises.
g. Computer hiring charges.
h. Salary of director
i. Salary of M.P/ MLA
j. Rent of a house.
k. Rent of a plot of land.
l. Rent of a machine let on hire along with building and letting is
separable.
m. Dividend from domestic company.
n. Winning from TV game show like.
(Hints/Answers: item e/j remaining other sources. Director if employee, then salary)




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 8
EXCLUSIONS AND DEDUCTIONS
Unit Structure :
8.1 Introduction and Objectives
8.2 Exemptions and Deductions
8.3 Income Exempt
a. Agricultural income-
b. Receipts by a member from a Hindu Undivided Family
c. Share of profit of a partner in a firm
d. Income of minor Child
e. Dividend Income –Domestic Companies
f. Dividend Income- Mutual Fund Units
g. Other Exemptions
8.4 Deductions under Chapter VIA
h. Investments
i. Pension Plan
j. Mediclaim
k. Physical Disability
l. Treatment f major diseases
m. Interest on educational Loans
n. Physical Disability(Own)
8.5 Solved Examples
8.6 Self-Assessment questions

8.1 INTRODUCTION AND OBJECTIVES

The Income Tax Act 1961 does not charge tax in respect of some
incomes. This is done two ways. Some incomes are not included in the
total income itself while other incomes are considered in for computing
total income. In respect of the latter, deduction is allowed under Chapter
VIA of the Act. This lesson will deal with some of the provisions of the
Income Tax Act 1961 relating to exemptions and deductions.

8.2 EXCLUSIONS VS DEDUCTIONS

2.1. Exclusions
Income, which is not chargeable to income tax, is called exempt
income. Exempt incomes are altogether excluded from the computation of
total income and do not form its part

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 As a rule, every income is chargeable to tax unless it is
specifically exempt. Burden of proof is on the person who claims an
income to be exempt to prove that such receipt is exempt.

The Act grants blanket exemption to a person or class of persons

in respect all or some of their incomes. Charitable Trusts , Foreign
Diplomates fall in this category.

On the other hand, some incomes are exempt from tax for all types
of assessees. Agricultural income falls in this category.

Some of the exemptions are unconditional , but some exemptions

carry a string of conditions to avail them. Exemptions to Startups, SEZ
developers falls in this class.

Sections 10 to 13 deal with the exemptions to some incomes

generally and sections 15 to 56 grant exemptions under a particular head
of income only.

Some income may be exempt for not falling under the definition
of income under section 2(14).

Similarly a receipt of capital nature will normally be exempt,

unless it is specifically chargeable to income tax.

To summarize exempt incomes may be of following types:

(i) Income exempt under sections 10-13
(ii) Income exempted under different heads of income under sections 15-
56
(iii)Income of capital nature not specifically chargeable to income tax and
(iv)Income not falling in the definition of income.

2.2 Deductions
After, the income has been computed under different heads of income
under sections 15-56, deduction will be allowable under the provisions of
chapter VIA of the Act. Thus, deductions will be allowed only after the
gross total income is computed.

Chapter VIA contains provisions for grant of deductions. The

deductions are of two types:-
1. In respect of expenditure or investments made by the assessee -
section 80C to 80G
2. In respect certain income -sections 80HH to 80RRB
3. irrespective of whether income or expenditure- Section 80 U
allowable to a handicapped person.

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8.3 EXEMPT INCOME

Section 10 provides that any income falling within any of the

clauses of that section shall not be included in computing the total income
of a previous year of any person. Subject to the mandate of the syllabi,
some of such exempt incomes have been taken for detailed study below.

3.1 AGRICULTURAL INCOME

Under section 10(1), agricultural income is exempt from the Act.
As per section 2(1A) Agricultural income” means :-
A. any rent or revenue derived from land which is -
a) situated in India and
a) used for agricultural purposes
B. any income derived from such land by
a) agriculture; or
b) raising the performance by a cultivator or receiver of rent-in-
kind of any process to render the produce raised or received by
him fit to be taken to market or
c) the sale of such produce without performing any other process
as stated above. ;
C. any income derived from any building owned and occupied by
the
a) receiver of the rent or revenue of any such land, or
b) cultivator or
c) receiver of rent-in-kind, of any such land

if such building is-

a) on or in the immediate vicinity of the land, and
b) required as a dwelling house, or storehouse, or other
outbuilding by reason of its connection with the land, and the
land is-
(i) assessed to land revenue in India or
(ii) subject to local rates and taxes assessed and collected
by the government and
(iii)situated in any area within the distance measured
aerially from the local limits of any municipality or
cantonment board depending upon its population as
per the last published census namely –
Population Distance
more than 10,000 but not 2 kms
exceeding 1 lakh
more than 1 lakh but not 6 kms
exceeding 10 lakh
more than 10 lakh 8 kms

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Other Points
1. Income from land situated in urban area is not exempt
2. Land situated in areas having population of 10,000 or less will qualify
for exemption.
3. Agricultural income must be received in India.
4. Agricultural income from a foreign country is treated as non-
agricultural income in India.
5. Receipts arising on transfer of agricultural land under section 2(14)
is not considered agricultural income
6. Any income arising from letting out the building for residential or
business purpose other than agriculture will not be agricultural income
Illustration
1. Tukaram employs Sakharam to carry out agriculture on his
agricultural land at a remuneration based on the value of agricultural
produce. Sakharam remits the sale proceeds of the agricultural produce to
Tukaram after deducting his share of remuneration. Discuss the tax
liability of Tukaram and Sakharam.

Solution
Income on sale of agricultural produce derived from agricultural in
India is agricultural income . It is exempt under section10(1) in the hands
of Tukaram.

Sakharam gets salary for rendering his services. Salary income is

not derived from agricultural land. Hence, it will be chargeable to income
tax under the head “Salaries”.

3.2 Receipts by a member from a HUF

Under section 10(2), any sum received by an individual as a
member of a Hindu undivided family either out of income of the family or
out of income of impartible estate belonging to the family will be exempt
from tax.

A Hindu Undivided family (HUF) is a separate and independent

entity liable to pay tax on its income. Hence, when its income is
distributed among its members, there will be no further tax liability as it
will amount to taxing the same income twice.

Sometimes, a member of the family converts his personal property

into the family property. It is called throwing self-property into family
hotchpot). Any income derived from such converted property will not be
eligible for exemption under this section. Instead, u/s64(2), it will be
clubbed in the hands of the member, who has transferred the property to
the family

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Illustration
2. X, an individual has personal income of Rs. 5,00,000 . He is also a
member of a Hindu undivided family, which has an income of Rs.
2,50,000. Out of income of the family, X gets Rs. 1,25,000, as his share in
the income of the family. Show the status of the income from taxability
point of view.

Solution:
X is liable to pay tax only on his personal income of Rs. 5,00,000.
His share of Rs. 1,25,000 from HUF is exempt in the hands of X under
section 10(2) irrespective of the fact whether the family is chargeable to
tax or not. The HUF is liable to tax in respect of its income of Rs, 2,50,000

3.3 Share of Profit of a partner in a firm

Under section 10(2), Share of a person in the total income of the
firm in which he is a partner and which is separately assessed as such will
be exempt.

A firm like a HUF is assessed as a separate entity. Hence,

section10(2), avoids double taxation of same income first in the hands of
the firm and then again in the hands of the partners.

However, any remuneration paid by the firm or any interest on

capital, which was allowed as a deduction to the firm shall not form part
of the share of profit received by partner and will be taxed in the hands of
the partners.

But any remuneration or interest on capital in excess of the limits

laid down in section 40 shall be chargeable to tax in the assessment of the
firm and will be exempt under this section.

3.4 Income of minor child

Under section 64(1A), income of a minor child is clubbed in the
hands of his parent, who is having higher income except income earned by
minor’s personal efforts or skill. Section 10(32) provides for an
exemption of the amount included in the income of such parent subject to
a maximum of Rs. 1,500 per child.

Illustration
3. Determine the amount exempt under section 10(32) if income of
Rs 1,000 of Suresh, a minor son is included in the income of his father
Sudesh?

Solution
Exemption under section10(32) will be Rs. 1000 only being the
actual income included in the hands of parent or Rs. 1,500, whichever is
less.

4. What will be the amount exempt under section10(32) if income of

Suresh is Rs, 15,000.
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Solution
Exemption under section10 (32) will be restricted to Rs 1,500 only.
5. Determine the amount of deduction under section 10 (32) if
Incomes of Ashok and Babu amounting Rs 7,500 and Rs 5,500 were
clubbed with the income of their father Chandu.

Solution
Exemption under section10 (32) will be restricted to Rs 3,000
being Rs 1,500 per child.

3.5 Dividend from Domestic Companies

With effect from A.Y. 2020-21 exemption under section 10(34) in
respect of dividend declared by a domestic company which is liable for
dividend distribution tax @ 15% covered by section 115-O, has been
withdrawn. Now instead of the companies, it will be taxable in the hands
of the shareholders,

3.6 Dividend from Units of Mutual Funds

With effect from A.Y. 2020-21, exemption under section 10(34)
in respect of Dividend or income received in respect of units of mutual
fund or administrator of the specified undertaking; or specified company
has been withdrawn and same will be included in the total income of the
assessee

3.7 Other Exemptions:

Section 10 provides a comprehensive list of exempt incomes.
Important exemptions e.g. gratuity, pension etc., which are for
computation of income under the five heads of income, are incorporated at
appropriate lessons dealing with such heads of income. Remaining
exemptions, though not directly covered by the syllabus, may have a
bearing on the computation. A brief summary of such exemptions is given
in the following Appendix
APPENDIX
A. EXEMPTION TO FOREIGNERS/ NON RESIDENTSECTION
1. Interest income of non-resident (persons of Indian origin) from
notified securities, saving certificates/ NRE Account. Purchased
in convertible foreign exchange–Section 10(4).
2. Remuneration / salary of
a) foreign diplomats - Section 10(6).
b) a trainee of a foreign government- Section 10(6)(xi),
c) a foreign national as an employee of foreign Enterprise I –
Section 10(6)(vi)
d) Non-Resident Employee of a Foreign Ship– Section c
10(6)(viii)

213
 e) Person from a foreign government under Co-operative
Technical Assistance Programme/ projects Section 10(8)
f) a consultant under Grant Agreement between the International
Organisation and the Government of Foreign State- Section
10(8A) :
g) non-resident, engaged by the agency for rendering technical
services in India in connection with any technical assistance
programme or project, provided in accordance with an
approved agreement- Section 10(8A)
h) an Individual who is assigned to duties in India in connection
with any Technical Assistance Programme and Project in
accordance with an Agreement entered into by the Central
Government and the Agency - Section 10(8A)
i) an individual who is assigned to duties in India in connection
with any technical assistance programme and project from a
consultant referred to Section 10(8A), income- Section
10(8B)
3. Income other than salary, royalty or fees for technical services
from Government or an Indian concern under an approved
agreement and if the tax liability is paid by the employer the tax
paid is exempt from tax. - Section 10(6B)
4. Income accruing or arising outside India by any family member
of persons covered under sections 10 (8),(8A) or (8B) , in respect
of which such member is required to pay any income tax or social
security tax to the Government of that foreign state. – Section
10(9)
5. Amount of tax actually paid by an employer, at his option, on
non-monetary perquisites on behalf of an employee in the hands
of the employee. Section 10(10CC).
B. EXEMPTION TO SALARIED EMPLOYEES
Exemption granted to salaried employee have been dealt in detail in
the lesson relating to salaries such as
a) Value of travel concession/ assistance- Section 10(5),
b) allowance paid by the government to a Indian citizen
rendering service outside India - Section 10 (7)
c) Death cum Retirement gratuity - Section 10(10)
d) Commuted pension- Section 10 (10A),
e) Leave encashment - Section 10 (10AA)
f) Retrenchment compensation - Section 10(10B)
g) Voluntary Retirement Compensation Section 10(10C)
h) Value of tax-paid perquisite - Section 10(10CC)
i) leave travel allowance, Section 10(10A)
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 j) Payment from statutory PF - Section 10(11)
k) Any payment from National Pension Trust or upto 40% on
closure of account - Section 10(12A /12B)
l) house rent allowance - Section 10(13A),
m) special allowances etc. - Section 10(14). Etc.
C. EXEMPTIONS TO INSTITUTIONS / FUNDS :
The income of the following institutions is exempt subject to
certain conditions:
1. Local authority -panchayat, municipality, district board or
cantonment board etc .- Section 10(20)
2. Approved Notified scientific and research association applying
which has as its object, undertaking research in social science or
statistical research, and applying its income wholly and
exclusively to its objects, including profits and gains of a
business carried on by an institution, which is incidental to its
object - Section 10(21)
3. News agency set up in India which applies its income or
accumulates it for application solely for collection and
distribution of news and does not distribute its income in any
manner to its member- Section 10(22B)
4. Regimental Fund or non-public fund.- Section 10(23AA)
5. Approved fund for employees’ welfare - Section 10(23AAA)
6. Pension fund (Jeevan Suraksha) set up by the Life Insurance
Corporation of India or a pension fund of any other insurance
company.- Section 10(23AAB)
7. Khadi and Village industries Board.- employees 10(23B)
8. Public charitable trusts , religious institutions and political trusts
-Sections 11 ,12, 13
9. European Economic Community.
10. SAARC Fund for Regional Projects
11. ASOSAI-Secretariat
12. Insurance Regulatory and Development Authority
13. Prime Minister’s Relief Fund
14. National Foundation for Communal Harmony
15. University/educational institution, hospital or medical institution
- employees 10 (22)/(22A)
16. Professional bodies - Section 10(23A)
17. Notified fund, charitable/ religious institution or trust.- Section
10(22B)

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18. Mutual fund - Section 10(22B)
19. Notified Investor Protection Fund set up by recognised Stock
Exchanges
20. Credit Guarantee Fund Trust for Small Industries
21. Approved Venture Capital Fund or Venture Capital Company-
Section 10(23FB)
22. Prasad Bharati (Broadcasting Corporation of India) Section
10(23BBH)
23. Swachh Bharat Kosh – Section . 10(23C(iiiaa)
24. Clean Ganga Fund - Section. 10(23C(iiiaaa)
25. Core Settlement Guarantee Fund set up by a recognized clearing
corporation in accordance with notified regulations- Section
10(23EE) to the extent of contributions from members fines and
income from investments
26. Trade Union or Association of trade Unions from house property
and other sources -Section 10(24)
27. Statutory Provident Fund under P. F. Act.- Section 10(25)
28. Employees’ State Insurance Fund -ESI Act- Section 10(25A)
29. Members of scheduled tribes residing in specified area -Section
10(26)
30. Statutory Corporation, body, association or institution formed or
established for promoting the interests of the members of
Scheduled Castes/ Schedules Tribes or backward classes or of
any two or all of them.- Section 10(26B)
31. Corporation established by the Central/ State Government for
promoting the interests of a notified minority community. -
Section 10(26BB)
32. Ex-Servicemen Corporation established under an Act for the
welfare and economic upliftment of ex-servicemen being the
citizens of India.- Section 10(26BBB)
33. Co-operative Society formed for promoting the interest of
members of SC /ST Tribe Section 10(27)
34. Coffee Board, Rubber Board, Tea Board, Tobacco Board,
Marine Products Export Development Authority, Agricultural
and Processed Food Products Export Development Authority
and Spice Board.- Section 10(29A)
35. Subsidy received from the Tea Board for replantation or
replacement of tea bushes or for rejuvenation or consolidation of
areas used for cultivation of tea under any scheme notified by
the Central Government Section 10(30)

216
 36. Subsidy received from the Rubber Board, Coffee Board, Spices
Board or any other Board under any scheme of replanting or
replacement, etc- Section 10(31)
Exemptions not be available to the institutions under section
10(23C) having commercial receipts of rupees 25,00,000 or more
D. CAPITAL GAINS
1. Any long-term capital gain arising on transfer of eligible equity
shares of a company acquired on or after 1-3-2003 but before 1-
3-2004 and held for 12 months or more if STT is paid except in
case of a transaction undertaken in foreign currency on a
recognised stock exchange located in an International Financial
Services Centre .
2. Any long-term capital gains from transfer of equity shares of a
company or units of an equity-oriented fund subject to Securities
Transaction Tax - Section 10(38).
3. Any capital gain arising to an individual/ HUF on compulsory
acquisition of an agricultural land in urban areas (situated within
the jurisdiction of a municipality or a cantonment board having
population of 10,000 or more or within 8 Kms from the local
limits of such municipality/ board), where the compensation/
consideration is received by the assessee Provided, the land was
being used for agricultural purposes by the HUF/ individual or
his parent(s), during the period of 2 years immediately before
acquisition.
4. Any income arising from the transfer of US 64- Section 10(33).
However, loss arising on transfer of such units cannot be set off
against any income in the same year in which it is incurred and
the same cannot be carried forward.
E. MISCELLANEOUS
1. Daily allowance of Members of Parliament while the parliament is
in session is and Members of State Legislative Assemblies Rs 2000 -
Section 10(17)
2. Any sum received on life insurance policy (including bonus) not
being the amount received on the following policies -
a. any sum received under section 80DD (3)/ 80DDA(3);
b. any sum received under a Keyman insurance policy;
c. any sum received under an insurance policy in respect of which the
premium payable for any of the years during the term of policy,
exceeds 20 per cent of the actual sum assured except in case of the
death of the person and the value of any premiums agreed to be
returned or of any benefit by way of bonus or otherwise, over and
above the sum actually assured, which is received under the policy
by any person, which shall not be taken into account for the purpose
of calculating the actual capital sum assured under this clause. -
Section 10(10D),

217
3. Family pension received by the widow or children or nominated
heirs of a member of the armed forces or paramilitary forces of the
Union if death occurred in such circumstances given below—
a. acts of violence or kidnapping or attacks by terrorists or anti-
social elements;
b. action against extremists or anti-social elements;
c. enemy action in the international war;
d. action during deployment with a peace keeping mission abroad;
e. border skirmishes;
f. laying or clearance of mines including enemy mines as also mine
sweeping operations;
g. explosions of mines while laying operationally oriented mine-
fields or lifting or negotiation mine-fields laid by the enemy or
own forces in operational areas near international borders or the
line of control;
h. in the aid of civil power in dealing with natural calamities and
rescue operations; and
i. in the aid of civil power in quelling agitation or riots or revolts by
demonstrators - Section 10(19),
4. Interest income arising to certain persons -Section 10(15):
(i) Income by way of interest, premium on redemption or other
payment on notified securities, bonds, annuity certificates or other
savings certificates is exempt subject to such conditions and limits
(ii) Interest from Post Office Savings Bank Account:
(1) Rs 3,500 in case of an individual account.
(2) Rs 7,000 in case of a joint account.
(iii) -Interest on deposit certificates issued under the Gold
Monetization Scheme, 2015 Section
5. Under section10AA export incomes of undertakings in SEZ are
exempt on pro rata basis i.e.

Business Profit X Export Turnover

Total Turnover

6. Incomes of charitable trusts and political parties subject to the

provisions of Sec 11, 12 and 13.
7. any income of a foreign company received in India in Indian
currency on account of sale of crude oil to any person in India subject to
approved conditions being satisfied received under a notified agreement
or an arrangement with the Central Government or approved by it and
the receipt of the money is the only activity carried out by the foreign
company in India

218
8. exemption of income accruing or arising to a foreign company on
account of storage of crude oil in a facility in India and sale of crude oil
there from to any person resident in India.
If (1) such storage and sale by the foreign company is pursuant to
an agreement or an arrangement entered into by the Central Government
or approved by the Central Government; and (2) having regard to the
national interest, the foreign company and the agreement or arrangement
are notified by the Central Government in this behalf- Section 10(48A):.
9. The premium payable during any previous year for a policy issued
on or after 1-4-2012 exceeds 10% of the actual capital sum assured, the
entire amount received under such policy shall be taxable except when
the sum received on the death of a person

8.4 DEDUCTIONS UNDER CHAPTER VI A

4.1 Sections 80A and 80AB of chapter VIA lay down framework for
deduction to be made from gross total income. Salient points of such
framework are as under:-
(a) Aggregate of income of an assessee will be computed under different
heads of income as provided in sections 15-58. Aggregate of such
income is called Gross Total Income.
(b) Items like long term capital gains, short term capital gains winnings
from lottery, crossword puzzles etc., income taxable under section
115BBE are excluded from the Gross Total Income as these items are
treated differently for tax purposes.
(c) From the remaining Gross Total Income, deductions under sections
80C to 80U of chapter VIA are allowable.
(d) The aggregate of all deductions under this chapter cannot exceed the
Gross Total Income of the assessee
(e) Deduction is admissible to the members of an AOP or BOI in
relation to their share therein under sections 80G, 80GGA, 80GGC,
80HHA, 80HHB, 80HHC, 80HHD, 80I 80IB , 80IC, 80ID, 80IE,
80J or 80JJA.
(f) No deduction will be allowed if any exemption is claimed and
allowed to eligible assessee, enterprises, units, or undertakings under
sections10A, 10Aa, 10B, 10BA, or 35AD for that year. Further, such
deduction shall not exceed the profits and gains of such undertaking
or unit or enterprise or eligible business.
(g) As per section 80A, the above deduction will be available only if the
assessee makes a claim in his return of income.
(h) Section 80B clarifies that deduction in respect of any income shall be
allowed if such income is included in gross total income.

219
(i) For deduction in respect of any payment, the assessee has to claims
the deduction and submit gives the proof of such for any investments/
expenditure etc.
(j) Deductions under Chapter VIA are of three types:
a) In respect of expenditure or investments made by the assessee -
section 80C to 80G
b) In respect certain income -Sections 80HH to 80RRB
c) irrespective of whether income or expenditure allowable to a
handicapped person - Section 80 U .
Some of the deductions covered by the syllabus are discussed in
the following paragraphs.

4.2 Investments in specified saving schemes

Section 80C provides for deduction in respect of investment or
contribution towards specified saving schemes. The basic scheme of the
section is as follows:
(i) Only individuals and HUFs are eligible for deduction under this
section. Other assessees are not eligible.
(ii) Both residents and the non-resident assessee are eligible for the
deduction under the section
(iii) The deduction is allowed in respect of the aggregate amount paid
or deposited during the previous year by the assessee in eligible
saving schemes.
(iv) The aggregate amount paid or deposited towards these schemes is
called Gross Qualifying Amount.
(v) The payments/investments eligible under this section are:
(a) Life insurance premium paid on a policy taken or renewed by
 An individual
- on his own life,
- life of the spouse or any child
- child may be dependent or independent
 A Hindu undivided family on the life of any member of the
family

The premium including the arrears of premium should not exceed

 10% of sum assured if policy taken after 0-1-04-2013
 15% for persons with handicap under section 80U or person
suffering from serious disease under section 80DDB on policy
taken after 01-04-2014.
 Prior to this, the restriction was up to 20% for all assessees.

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(b) Any sum paid under the contract of non –commutable deferred
annuity plan for the purpose of securing the individual or his
spouse or children to pay a deferred annuity ;
(c) Any sum deducted from salary payable to a Government
employee for the purpose of securing the individual or his
spouse or children to pay a deferred annuity subject to a
maximum of 20% of salary;
(d) Contribution towards statutory provident fund;
(e) Contribution towards 15 year Public provident fund(PPF) in
the name of himself, wife or child or a family member upto a
maximum of Rs 1,00,000;
(f) Contribution towards Recognized provident fund;
(g) Contribution towards an approved Superannuation Fund;
(h) Investment in 10 / 15 years Post office cumulative term
deposits( CTDS);
(i) Subscription to notified deposit scheme e.g. NSS
(j) Subscription to National savings certificates, VIII Issue
(k) Contribution for participating in the Unit-linked insurance plan
(ULIP) of Unit Trust of India;
(l) Contribution for participating in the Unit-linked insurance plan
(ULIP) of LIC Mutual Fund (i.e. Dhanraksha plan of LIC
Mutual Fund);
(m) Payment for notified annuity plan of LIC (i.e. Jeevan dhara,
Jeevan akshay, New jeevan dhara, etc. or any other insurer;
(n) Subscription towards notified units of mutual fund/ UTI
(o) Contribution to notified pension fund set up by mutual fund or
UTI;
(p) Any sum paid including accrued interest as subscription to
home loan account scheme of the National Housing
Bank(NHB);
(q) Any sum paid as tuition fees (but not donation) to any
university/college/educational Institution in India for full time
education for maximum 2 children;
(r) Any subscription towards infrastructure bonds or units of
Mutual Funds;
(s) Any amount paid for the purchase or construction of a
residential house property or for purchase of land;
(t) Term deposits for a fixed period for at least 5 years with a
scheduled bank under a notified scheme;
(u) Deposit in an account under Senior citizens savings scheme
(v) 5- years post office time deposit account;

221
 (w) Subscription to notified bonds issued by NABARD;
(x) Subscription to eligible issues of equity shares or debentures
of an Indian public company or a public financial institution
where the entire proceeds of the issue is wholly and
exclusively for the purposes of any business specified for
developing, maintaining and operating an infrastructure
facility for generation or generation and distribution of power
or for providing telecommunication services whether basic or
cellular or for developing, developing and operating or
operating and maintaining an industrial park or a special
economic zone- (SEZ)
(y) Any contribution by a Central Government employee towards
specified account of notified pension scheme Under section
880CCD for a minimum period of three year

Amount of deduction allowable under section 80C will be:-

 Aggregate deposit in all above schemes called Gross Qualifying
Amount ; or
 Rs 1,50,000, whichever is less.
 Together with deduction available under section 80CCE, 80CCC
and 80CCD
(vi) Some important points:
 Payment for house include amount paid to authorised developers or
repayment of loans.
 The amount of investments need not necessarily be made out of the
taxable income
 Life insurance premium paid for parents will not be allowable even if
parents are dependent on the assessee.
 Life insurance premium paid for married daughter will be allowable.
 Dependence of wife or children is not necessary for claiming
deduction under this section.
 Refundable premium and bonus on premium are not eligible for
deduction
 Premature termination( before the period shown below) from any
scheme will have the following effects:
 In the year of termination, deduction will not be allowed ;
 Premium earlier paid and allowed as deduction will be brought
back to tax in the current year and added to the total income in the
assessment year pertaining to the year of withdrawal.

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 Premature withdrawal/Transfer/ Termination
Life insurance Policy Two years for whole life policy
One year for other policy
P/O TDS / SCSS Five Years
Unit Linked Insurance Plan Five Years
House property-Transfer Five Years

Illustrations:
1. A whole life policy on which a premium of Rs. 6,000 has been paid
upto last year and Rs. 3000 is the current year’s premium otherwise
eligible for deduction under section 80C. What will be the effect if the
contract is prematurely terminated during the financial year 2020-21.

Solution
Premium paid Rs 3,000 in financial year 2020-21 will not be
eligible for deduction under section 80C and the old premium of Rs. 6000
allowed earlier will be added to the income of assessment year 2021-22.

Illustration 2
2. Shyam makes the following payments during the financial year 2020-
21. His Gross Total Income amounts to Rs 5,00,000. Shyam asks you to
calculate the deduction available under section 80C and the taxable
income for the A.Y. 2021-22.
School fees of his 4 children Rs 50,000
University fees of his wife Rs 20,000
Life insurance for wife and kids Rs 10,000
Life insurance for parents Rs 15,000
Life insurance for father-in-law Rs 10,000
NSC Rs 20,000
Repayment of principal for house Rs 35,000
Coaching class fees Rs 11.030
Solution
Gross Total Income Rs. 5,00,000
School fees up to 2 children Rs 25,000
University fees of wife - Not allowed NIL
Life insurance for wife and kids Rs 10,000
Life insurance for parent Not allowed NIL
Life insurance for father-in-law- Not NIL
allowed
NSC Rs 20,000
Repayment of principal for house Rs 35,000
Coaching class fee Not allowed NIL
Deduction under section80C Rs. 90,000
Total Income Rs.4,10,000
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3. Gross Total Income of Ashok for A.Y. 2021-22 is Rs 8,00,000.
During the P.Y. 2020-21, he made the following investments :-
Insurance for himself (sum assured Rs 1,00,000) Rs 28,000
Insurance for wife (employed with MNC) Rs 25,000
Insurance for son but unpaid Rs 7,500

Compute his total income assuming that a Life insurance policy

prematurely terminated in P.Y. 2020-21 , in respect of which he had had
availed Rs 7,000 as deduction in the earlier years .

Solution

Computation of total income Rs

Gross Total Income 8,00,000
Add: Deduction of last year on termination of policy 7,000
Revised Gross Total Income 8,07,000
Insurance for himself Rs 10,000
(restricted to 10% sum assured
Insurance for wife Rs. 25,000
(dependence not relevant
Insurance for son (not paid Nil
Total deduction under section80C 35,000
Total Income 8,42,000

4. Gross Total Income of W for AY 2021-22 is Rs 12,00,000. He

pays premium of Rs 22,000 on a policy on his own life of Rs 1,00,000, Rs
10,000 each for policies of his son and brother, both being dependent on
him besides Rs. 20,000 for unrecognized Provident fund, Rs 10,000
towards PPF, Rs 50,000 in ULIP. He also repaid housing loan to ICICI
Bank Rs 80,000 with Rs 20,000 towards outstanding interest.

School fees of three his children amounts to Rs 4,000 Rs. 5,000 and Rs
6,000 respectively.

Compute the deduction/s 80C and the taxable income of W

224
Solution
Computation of total income Rs
Gross Total Income 12,00,000
Insurance-self 10,000
(restricted to 10% of sum assured
Insurance(son)– 10,000
dependence not relevant
Insurance for brother not allowed Nil
Unrecognized Provident Fund – Nil
Not allowed
Public provident Fund 50,000
Unit Linked insurance plan 10,000
Housing loan –Principal 80,000
School fee –2 children – 11,000
Higher figures considered 6,000 + 5,000
Total deduction under section 80C 1,71,000 1,50,000
Restricted to maximum
Total Income 10,50,000

4.3 Contribution to certain pension funds

Under section 80CCC, deduction is allowed to Individuals in
respect of amounts paid/ deposited(excluding any interest /bonus accrued/
credited o the assessee) during the previous year to effect or keep in force
a contract for any annuity plan of Life Insurance Corporation of India or
any other insurer for receiving pension from the fund under section
10(23AAB).

The amount received by the assess or his nominee a) on account of the

surrender of the annuity plan whether in whole or in part, in any previous
year, or (b) as pension received from the annuity plan shall be deemed to
be the income of the assessee/ nominee, in the year of withdrawal or when
pension is received maximum deduction under section 80C, 80CCC and
80CCD shall not exceed Rs 1,50,000.

Note: section not directly mandated by syllabus but has bearing on section
80C

4.4 Health Insurance Premia-

Provisions of section 80D, which provided for deduction in respect of
the health premia are as under :-
(a) Eligible Assessee - individual or a Hindu undivided family
(b) Nature of Deduction-: payment made towards medical insurance
premia paid during the previous year
(c) Mode of Payment : The payment of premia must be made by any
mode other than cash, e.g. cheque , draft , ECS or other electronic mode
except payment for preventive health check-up may be made by any
mode including cash.
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(d) Amount of Deduction in case of an individual assessee:
Premia paid for Self and family
A. Aggregate of the following :-
(a) the whole of the premia paid to effect or keep in force an insurance
on the health of the assessee or his family ;
(b) any contribution made to the Central Government Health Scheme
or other notified scheme (popularly called Mediclaim policy),or
(c) any payment made on account of preventive health check-up of the
assessee or his family upto Rs 5,000 or
B. Rs 25,000, whichever is less AND

Premia paid for parents

A. Aggregate of the following :-
(i) the whole of the amount paid to effect or to keep in force an
insurance on the health of the parent or parents of the assessee or
(ii) any payment made on account of preventive health check-up of the
parent or parents of the assessee as does not exceed Rs 5,000
B. Rs 25,000, whichever is less

(iii) Medical expenditure for self or any family member

a. The whole of the amount paid on account of medical
expenditure incurred on the health of the assessee or any
member of his family being a senior citizen , or
b. Rs 50,000, whichever is less.
This expenditure will be available only if no amount has been paid to
effect or to keep in force an insurance on the health of such person

(iv) Medial Expenditure for parents

a. The whole of the amount paid on account of medical
expenditure incurred on the health of any parent of the assessee
being a senior citizen , or
b. Rs 50,000, whichever is less.
This expenditure will be available only if no amount has been paid to
effect or to keep in force an insurance on the health of such parents

(v) Other points

 ‘Family’ means the spouse and the dependent children of the assessee
 "senior citizen" means an individual resident in India who is of the
age of sixty years or more at any time during the relevant previous
year;

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  The parents and the spouse may not be dependent upon the assessee
but his children must be dependent for claiming the deduction
 Expenses paid for preventive health check-up have a sub limit of Rs
5,000 within the overall limit of Rs 25,000 /50,000 and such expenses
may be paid in cash.

(ii) Amount of Deduction to A Hindu undivided family:

Premia paid for members
a. whole of the amount paid to effect or to keep in force an insurance on
the health of any member of that Hindu undivided family, or
b. Rs 25,000, whichever is less.
Medical Expenditure
a. The whole of the amount paid on account of medical expenditure
incurred on the health of any parent of the assessee being a senior
citizen , or
b. Rs 50,000, whichever is less.
This expenditure will be available only if no amount has been
paid to effect or to keep in force an insurance on the health of such parents

Sec 80D – Amount of deduction available to an individual

( inclusive of preventive health check-up)
Situation Self, Parent(s) Total
Spouse & whether or not deduction
Dependent dependent under
Children Rs section80D
Rs
Rs
All below the age of 25,000 25,000 50,000
60 years
Assessee and his 25,000 50,000 75,000
family less than 60
years and parents
above 60 years

Assessee and his 50000 50,000 1,00,000

family have attained
the age of 60 years
and above
Sec 80-D Amount of deduction available to a HUF
(inclusive of preventive health check-up)
One or more member of HUF is a senior citizen 50,000
None of the members is a senior citizen 25,000

Illustration
5. Raj and his wife are not senior citizens. Raj pays mediclaim insurance
of Rs 18,000 for self, Rs 20,000 for his wife, and Rs 5,000 his two
independent sons. He also pays Rs 18,000 for each of his parents who are
senior citizens .Calculate the amount of deduction allowable under section
80D.
227
Solution
Amount of deduction under section80D
Premium in respect of wife Rs 18,000
Premium for himself Rs. 20,000
Premium in respect of children (not dependent) Nil
Total Rs 38,000, restricted to Rs 25,000
Premium in respect of parents (senior citizens) Rs 36,000
Deduction available under section80D Rs 61,000

4.5 Expenses on maintenance and medical treatment of a dependent

who is a person with disability.
Section 80 DD provides for a deduction of Rs 75,000 on
maintenance and medical treatment of a dependent who is a person with
disability ( Rs.1,25,000, it dependent person suffers from severe
disability ) subject to the following :-
(i) Eligible assessee:
Individual and Hindu undivided family, who is a resident of India.
Other assessees not eligible.
(ii) Eligible Payments:
a. Expenditure incurred for medical treatment including nursing,
training and rehabilitation of a dependent, being a person with
disability or
b. any amount paid or deposited under a scheme framed by the or
any other insurer or the administrator or the specified company
(UTI)approved by the Board in this behalf for the maintenance
of a dependent, being a person with disability.
(iii) Conditions for of Deduction :
The following conditions should be satisfied to claim deduction:
(a) Deduction is available in respect of a “dependent" person.
(b) A dependent person means:-
 spouse, children, parents, brothers or sisters of an individual or
any of them.
 a member of a Hindu undivided family.
(c) Such person must be dependent wholly or mainly on such individual
or Hindu undivided family for support and maintenance.
(d) Such dependent person must not claim deduction under section 80U
while computing his total income for that assessment year;
(e) The assessee nominates either the handicapped dependent or any other
person or trust to receive the payment under the scheme for the benefit
of the handicapped dependent;

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(f) In the event of the death of the subscriber assessee, the amount of
annuity or lump-sum under the scheme is paid for the benefit of the
handicapped dependent.
(g) If the handicapped dependent predeceases the subscriber assessee, then
the amount so received shall form part of the total income of the
subscriber assessee in the previous year in which the amount is
received.
(h) The assessee must furnish a certificate from a neurologist, a pediatric
neurologist, in case of children,) or a civil surgeon or Chief Medical
Officer of a Government hospital in form 10IA (in case of autism,
cerebral palsy or multiple disability)
(i) Where the condition of disability requires reassessment, a fresh
certificate shall have to be obtained on expiry of the period mentioned
in the original certificate.
(j) Section contemplates that the assessee must incur some amount of
eligible expenditure. If the assessee incurs some expenditure, the full
deduction of 75,000 or 1,25,000 rupees will be allowed irrespective of
the amount actually spent .

4.6 Medical Treatment of certain diseases

Section 80DDB provides for a deduction -
1. To Individual and Hindu undivided family, who is a resident of India.(
Other assessees not eligible)
2. Which is equivalent to
(a) Amount actually paid in the previous year or
(b) Rs. 40,000, or
(c) Rs 1,00,000, where such person or member is a senior citizen
senior citizen.
whichever is lower
3. Eligible Payments:
Amount actually paid for medical treatment of specified disease or
ailment of the assessee himself or a person dependent on him or a
member of HUF
4. Other Points
(a) “Dependent relative” means
a. an individual himself ,
b. spouse, children, parents or brothers and sisters of an
individual , or
c. a member of the HUF, who is wholly or mainly dependent for
support and maintenance on the individual or the HUF

229
(b) “senior citizen" means an individual resident in India who is of the
age of 60 years or more at any time during the relevant previous
year;
(c) The assessee shall furnish with the return of income, a certificate
in prescribed form, from a neurologist, an oncologist, a urologist, a
hematologist, an immunologist or such other prescribed specialist,
working in a Government hospital :
(d) Amount of deduction shall be reduced by any amount received
under an insurance from an insurer, or reimbursed by an employer

4.7 Interest on loan taken for higher education

Section 80E provides for deduction in respect of Interest on loan
taken for higher education as under:-
(a) Eligible assessee:
Any individual assessee, (whether resident or non-resident) who has
taken loan from a financial institution or any approved charitable
institution for pursuing higher studies of himself or his relative
(b) Amount and term of deduction:
- Interest on such loan paid by the assessee without any limit.
- Upto a maximum period of 8 years from the year in which the
payment of interest on the loan begins or till the interest is paid in full,
whichever is earlier.
(c) Other Points
1) “Higher education’’ means any course or study pursued after passing
Senior Secondary Education or its equivalent from any Government
recognized school, Board or university.
2) “Course” may be any post-SSC course whether full -time or part time
any Government recognised school, Board or university.
3) Higher education may be for the assessee himself or any of his
relatives. Relative means the spouse and children of the assessee or the
student for whom such individual is the guardian.
4) The deduction can be claimed by the student assessee himself if the
interest is paid by him or his relative (say father), if interest on the
student’s loan is paid by the relative.

Illustrations
6. Advise A on the deduction in respect of interest on loan of Rs. 10
lakhs taken from SBI on 01-04-2016 for doing MBA repayable in 10 equal
annual instalment carrying simple interest @ 10%. per annum.

Solution:
A being the student himself, is eligible to get deduction under section 80E.
A will be entitled to claim interest as under :-

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 Financial year Interest allowable
under section 80E
2016-17 100,000
2017-18 90,000
2018-19 80,000
2019-20 70,000
2020-21 60,000
2021-22 50,000
2022-23 40,000
2023-24 30,000

Thereafter, for the remaining two years, no deduction will be available.

7. Will B father of A be entitled to deduction under section 80E in

respect of interest paid on A’s Loan?

Solution:
Yes, if father pays the interest, he will be entitled to claim the
deduction.

4.8 Person with Disability – Section 80U

Eligible assessee :
- Individual resident of India
- with at least 40% disability
- at any time during the previous year.

Amount of deduction;
- Person with minimum disability of 40%- Rs 75,000 ;
- Persons with severe disability of over 80% - Rs. 1,25,000

Other Points
1) The deduction under section 80U of Rs 75,000 / 1,25,000 is of a flat
amount without any requirement for spending that amount.
2) Mere submission of a disability certificate in the prescribed form will
be enough to avail the deduction along with the return of income of
the assessment year for which the deduction is claimed for the first
time.
3) Where the condition of disability requires reassessment of its extent
after a period stipulated in the medical certificate, deduction for any
year falling after the expiry of such period shall be allowed only if a
new certificate is obtained and furnished.
4) “Disability” means blindness, low vision, leprosy-cured, hearing
impairment, locomotor disability, mental retardation, mental illness,
autism, cerebral palsy and multiple disabilities.
5) “Person with disability” & “Person with severe disability” have been
defined in the Persons with Disabilities (Equal Opportunities,

231
 Protection of Rights & Full Participation) Act, or the National Trust
for Welfare of Persons with Autism, Cerebral Palsy, Mental
Retardation & Multiple Disabilities Act, 1995.

8.5 ILLUSTRATIONS

8. S presents the following data for the previous year 2020-21.

1. Business income Rs.8,10,000
2. Capital Gains Rs. 3,15,000
3. Payment of medical insurance premium on own life Rs.5,000
4. He pays Rs. 20,000 to GIC for maintenance of his severely disabled son
under an approved scheme.
5. He has borrowed Rs 5,00,000 as educational loan for his younger son
who pursues MBA from IIM and pays 10% interest on the loan.
6. S himself his severely disabled.
Determine the income of S for the assessment year 2021-22

Solution:
Computation of Total Income of X

Rs
Business Income 8,10,000
Capital gains 3,15,000
Gross Total Income 11,25,000
Deductions under chapter -VIA-
80D :Mediclaim 5,000
80DD:Maintenance of dependent with severe *1,25,000
disability
80E interest on study loan 50,000
80U :Severe disability *1,25,000
Total Deductions under chapter -VIA 3,05,000
Total Income 8,20,000

For 80U full deduction available. Amt spent not relevant

8.6 SELF-EXAMINATION QUESTIONS:

1. Enumerate various income, exempt from under Section 10.

2. Explain the difference between deduction and exemption with 3
suitable examples.
232
3. Define Gross Total Income.
4. Explain the deduction under section 80C of the Income Tax Act, 1961.
5. What is the amount of maximum deductions under section80D?
6. Briefly explain the provisions relating to deductions from the gross
total income in the case of blind or physically handicapped person.
7. Enumerate exemptions available to foreign nationals in India.
8. Write short notes on:
a) Gratuity
b) Leave Salary
c) Retrenchment Compensation
d) House Rent Allowance
e) Dividends
f) Income of a minor child
9. Manan gets Rs 8,000 by letting out his agricultural land to a tenant who
used the land for vermiculture. Clarify if Manan would be eligible for
exemption for agricultural income with appropriate reasons.
10. The net profit as per the P & L A/c was Rs. 2,85,000 after taking
credit of Rs. 45,000 received on maturity of LIC policy and Rs. 30,000
as Interest from government securities and donation of Rs. 40,000 to
BMC for promotion of family planning and Rs 5,000 as alms to
destitute. He also pays Mediclaim for Rs 10,000 in cash and Rs.
10.000 by a credit card and Rs. Rs. 25,000 for his 70 year old father
. Compute total income for the A.Y.2021-22
(Ans: Bus. Income 2,47,000, Other Sources 30,000 GTI 2,77,000, Tot. inc. 2,47,000)
11. A Resident person, who is physically handicapped (75%) earns a net
income of Rs 5, 76,000 from a consultancy business run by him.
Compute his total income for the AY 2021-22
(Ans : Business income 576,000, deductions, 80U- 75,000 total Income 5,01,000)



233
 9
COMPUTATION OF TOTAL INCOME
Unit Structure
9.1 Introduction and Objective
9.2 Typical Illustrations on computation of income
9.3 Filing of Returns
9.4 Advance Tax
9.5 Self Assessment Questions.

9.1 INTRODUCTION AND OBJECTIVES

The lesson deals with procedural aspect of law in respect of like

filing of income tax returns and payment of advance tax and other
incidental matters like procedure for computation of total income of
individuals, firms and companies, computation of tax liability etc.
As per the syllabus , law applicable as on as on 01-04-2021 will
be considered for computation of total income for the assessment year
2021-22 (previous year 2020-21.Furthe the computation will be restricted
to not more than two heads of income and two deductions at a time.

9.2 COMPUTATION OF TAXABLE INCOME-

2.1 Taxation of Individuals

Following are the salient features of the procedure relating to
preparation of income tax returns for the financial year 2020-21 relevant
to assessment year 2021-22.
1. Collection of preliminary details such as Name, address,
residential status , Bank account No with name and IFSC Code of
branch, Gender, birth date, age, PAN Bank Aadhar Linkage, e-filing user
id, password, TDS certificates ,salary certificates, Investment details ,
housing loan interest certificate Form 26As downloaded from
departmental portal giving details of income, TDs, Financial transaction ,
email address, residential status. Without these details return can not be
uploaded. These details are relevant to ascertain inter alia
a. applicable tax rate e.g. woman, senior citizen, super senior citizen etc.;
b. deductions e. g. insurance premium, handicapped assessee, education
loan etc. ;
c. disallowances based on relation as in 40A(2);
2. Preparation of return -steps
(a) Computation of income under the five heads of income as per the
applicable provisions of law.
234
(b) Income of other assessees; e.g. minor children, spouse etc., which
are to be included as per the clubbing provisions given in sections
60-64.
(c) Aggregate of income from all such sources excluding the exempt
income is called the Gross total Income.
(d) From the Gross Total Income reduce the amount of deductions
available in Chapter VI A of the Act.
(e) The result will be the total income
(f) Compute the tax liability at appropriate rate applicable including
special rates applicable to some items of income –horse race ,
Capital gains on shares.
(g) From the tax liability, any tax rebates are to be reduced.
(h) The result will be the net tax liability, from which any amounts
deducted at source (TDS) or Tax Collected at Source (TCS), and
taxes paid in advance are reduced.
(i) The final balance, if any, is payable as self –assessment tax u/s
140A before filing the return of income. If the advance tax and
TDS are more than the tax payable, the excess is shown as the
refund due.
PROCEDURE OF COMPUTATION:
A. Preliminary Information
Name and address of the assessee ,
PAN
GST No
E mail
Residential
Status
Assessment Year 2018-19
Previous Year -2017-18
B. Computation of Total Income
1. Income from Salary
2. Income from House Property
3. Profit and Gain of business and Profession
4. Capital Gains
5. Income from Other Sources
C. Gross Total Income( Total of B 1 to 5)
( excluding exempt income )
D. Deduction under chapter VIA
E. Total Income [D-E]
F. Ascertain Tax Liability
Tax at applicable rates + Surcharge ( after marginal relief)
Add –Education Cess -2 % on tax
Add Secondary and Higher Education Cess @ 1% of tax
G. Less : Rebates, Advance Tax , TDS , TCS
H. Add : Interest Payable to Government
I Self Assessment Tax / Refund Due ( F-G+H)

235
3. Other Important Points
a) Agricultural income in excess of Rs 5,000 is added to the total
income and tax is computed on such total income. From the tax
so computed , tax on agricultural income is separately computed
by adding Rs 2,50,000 to the agricultural income. Difference of
the two will be the tax liability
b) Interest and remuneration payable to partners will be taxable if
they are allowed in the hands of firm. Profit from the firm
exempt in the hands of the partners as it is taxable in the hands of
the firm.
c) Income of HUF is to be excluded as tax on such income will be
payable by the HUF.
d) Any loan taken from a closely held company is deemed dividend
u/s 2(22) (e), if the hands of the individual if the individual and
his relatives hold 10% voting power therein.

4. Old Versus new tax regime

Finance Act 2020 introduced a new tax regime under section
115BAC giving an option to Individuals and HUF Taxpayers to pay
income tax at lower rates. The new scheme is applicable for income
earned for FY 2020-21 (AY 2021-22). The new tax regime has removed
70 tax deductions and exemptions. Following is the comparison between
old and new tax regime between old and new tax regime –

A. Comparative Tax Rates A.Y.2021-22

Particulars Old Tax New tax

Regime Regime

Income tax slabs: Rate Rate

Upto Rs.2,50,000 Nil Nil

Rs.2,50,001 to Rs.5,00,000 5% 5%

Rs.5,00,000 to Rs.7,50,000 20% 10%

Rs.7,50,001 to Rs.10,00,000 20% 15%

Rs.10,00,001 to 30% 20%

Rs.12,50,000

Rs.12,50,001 to 30% 25%

Rs.15,00,000

Rs.15,00,001 and above 30% 30%

Surcharge (income above 50 10% 10%

lakh
236
Income above 75 lakh 15% 15%

Health & Education Cess 4% on (Tax + 4% on (Tax +

Surcharge Surcharge

Rebate upto Rs 5 lakh u/s 87A available in both regime

Availability of claims

Standard deduction (salaried Rs.50,000/- NIL

person)

LTA, HRA, Professional Available No

Tax, Housing Loan Principal
& Interest, Tuition Fees,
Chapter VI-A deductions

National Pension Scheme Non-Government Allowed as qualified

NPS Employee, Maximum for deduction u/s 80
Employee’s contribution deduction allowed is CCD(2) irrespective of
lower of 10% of any limit.
salary (Basic + DA or Employee’s
Rs.50,000 contribution to NPS
u/s 80 CCD(2 would not attract any
deduction.

1) Any Individual having income from business or profession , who opts

for the new taxation regime, shall get only one chance in their lifetime to
go back to the old regime or unless income from business of profession
ceases to exist.

2) Senior citizen exempt upto Rs. 3 lakh and super senior citizen upto Rs.
5 lakh under old regime.

In case of an Individual (resident or non-resident) or HUF or

Association of Person or Body of Individual or any other artificial
juridical person
Individuals Senior Citizens Very Tax
Senior Citizens Rate
0- 2,50,000 0- 3,00,000 0-5,00,000 NIL
250,001- 5,00,000 3,00,001- 5,00,000 -NA 5%
5,00,001-10,00,000 20%
10,00,001 and above 30%
Surcharge on income tax upto 50 lakh
Surcharge - total income exceeds 50 lakh upto Rs 1 crore 10%
Surcharge -total income exceeds Rs 1 crore upto Rs 2 Cr 15%
Surcharge -total income exceeds Rs 2 crore upto Rs 5 Cr 25%
Surcharge -total income exceeds Rs 5 crore 37%

237
Surcharge restricted to income from STCG-u/s111A LTCG) 15%
u/s 112A and Foreign Portfolio Investors u/s 115AD
Marginal relief - Surcharge, not to exceed 100% of excess over previous
slab
Rebate under 87A to Resident Individual having total income Rs 5,00,000
or less - Rs 12500 or 100% income tax (whichever is less
Health and Education Cess (HEC) on Tax + Surcharge 4%
Senior Citizen or Super Senior Citizen means an individual, who has
reached the age of 60 years(but not 80 years) or 80 years respectively at
any time during the previous year.
HUF /AOP/BOI will be chargeable as at normal rates not applicable to
senior/ super senior citizens
No basic exemption or allowance or expenditure shall be allowed in
computing deemed income, unexplained income, investments, money etc.
chargeable under sections 68/69/69A/69B/69C/69D [Section 115BBE]
Set-off of losses not permissible against such income.

Illustrations.
1. Ascertain the tax liability of Rajesh, whose total income is Rs 15
lakh. A also show if there will be any difference in the tax liability if he
also has agricultural income Rs 2 lakh.

Solution
I Tax on Income of Rs 15 lakh
Rs
Tax on first Rs 2,50,000 NIL
On Next Rs 2,50,000@ 5% 12,500
On Next Rs.5,00,000 @ 20% 1,00,000
On Balance Rs 5,00,000 @ 30% 1,50,000
Total 2,62,500
HEC @ 4% 10,500
Total Tax on Rs 15,00,000 2,73,000

II If Income includes Agricultural income

(a) Tax on Total income plus agricultural income
Rs 15 lakh +2 lakh = Rs17 lakh

Rs
Tax on first Rs 15,00,000 2,62,500
Tax on Balance Rs 2,00,000 @ 30% 60,000
3,22,500
Add -HEC @ 45 12,900
Total Tax on Rs 17,00,000 3,35,400

238
 (b) Tax on basic limit plus agriculture income
-Rs 2,00,000+2,50,000 = Rs 4,50,000
Rs
Tax on first Rs 2,50,000 NIL
On Next Rs 2,00,000 @ 5% 10,000
10,000
Add Cess EC+SHEC 300
Total Tax on Rs 4,50,00 10,300

(c) Tax payable (a)- (b) or Rs 3,35,400-10,300= 3,25,100

From the above, tax lability works out to Rs 3,25,100 against the normal
tax liability of Rs 2,73,000 which implies that agricultural income is
indirectly taxed.

2.3. Specific points applicable to Partnership Firms including Limited

Liability Partnerships (LLP)
A. Tax Rates
 Tax Rate uniform 30 % without any exemption ;
 Plus surcharge @ 12% of tax ,if firm’s income exceeds Rs 1 Cr
(Subject to marginal relief), and
 SHEC @ 4% of tax plus surcharge

Classification of firms :
As per Section 184 the partnership firm are classified as
(a) Partnership firm assessed as such (PFAS) ,and
(b) Partnership firm assessed as an association of person.

B. Procedural requirements for firm :-

i. A firm shall be evidenced by a partnership deed containing inter alia
the individual shares of the partners. [Sec. 184(1)]
ii. The firm must file -
a. a certified copy of the partnership deed along with the return of
income in the first year. [Sec. 184 (2)]
b. a certified copy of the revised deed in the year , when there is
a change in the constitution of the firm or in the sharing ratio of
partners -[Sec. 184(4)]
iii. The firm will continue to be assessed as firm after the first year,
unless,
a. there is a change in firm’s constitution or partners profit
sharing ratio, and
b. the firm does not satisfy the above conditions. [Sec. 184(3)]
;and
c. The firms fails in compliance as specified in Sec. 144 [Sec.
184(5)]
iv. A copy of the partnership deed shall be certified in writing by
a. all the major partners ; and

239
 b. all the major partners in the firm immediately before the
dissolution ,where return is filed after the firm’s its
dissolution.; Legal heir can sign for a deceased a partner. [Sec.
184(2) Expl.]
v. In computing the income of the firm remuneration and interest payable
shall be allowed only from the date of deed and to the extent specified
the deed.
C. A firm not assessable as a firm it will be treated as AOP and shall pay
tax at the maximum marginal rate. The income will taxable in the
hands of partners subject to rebate u/s 86.
2.4. Specific points applicable to Companies:
A. Rates of Tax applicable to companies
I. Normal Tax Rates for Widely or Closely held Domestic Companies

 25% - Where gross receipt of the company does not exceed Rs. 400
crore.
 30% For other companies

Surcharge:
 7% of tax where total income exceeds Rs. 1 crore
 12% of tax where total income exceeds Rs. 10 crore
 (Subject to marginal relief )
Higher Education cess SHEC 4% on tax and surcharge

II. Special rates Tax Rates for Widely or Closely held Domestic
Companies
Company Option Rate
Section 115BA 25% New Companies
Section 115BAA 22% New Companies
Section 115BAB 15% New Manufacturing companies
Surcharge 4% of Tax
HEC 4% of Tax+ Surcharge
These companies were given tax sop subject to condition they could
not claim certain deductions , or additional depreciation and advantage
of set off and carry forward of losses linked to such concessional tax
rates

III. Tax Rates for Foreign Companies @ 40% ,

Surcharge
 2% if the total income exceeds Rs 1 Crore , and
 10% if the total income exceeds Rs 10 Crore , and
Health and Education cess @ 4% on tax and surcharge subject to
marginal relief.

B. Provision applicable on companies

There are several provision in the Act such as excessive payment
to directors and their relatives u/s 40A(2), amortization of preliminary

240
expenses u/s 35D , merger, demerger, amalgamation , ESOP/ESOS ,
certain deductions under chapter VIA , payment of Minimum alternative
Tax 18.5%) u/s 155JA/JB etc., which are applicable only to company
assessees. These provisions , to the extent covered by the syllabus have
been taken up at their appropriate place.

9.3 ILLUSTRATIONS

2. Compute the taxable income of Mangesh for the AY 2021-22 from

the following and also compute the tax liability.:

Profit and Loss Account for the year ended 31st March, 2021
Particulars Rs. Particulars Rs.
To Salaries 2,10,000 By Gross Profit 20,18,000

To Rent 20,000 By Interest on Bank 8,000

FD
To postage 7,000 By Dividend-Indian Co 20,000
To Stationery & Ptg 27,000 By dividend from -Co- 2,000
Op Bank
To Advertising Exp. 20,000 By Lottery Prize 15,000
To Repairs to Office 22,700 By Interest on 5,000
Debentures
To Conveyance 17,000
To Income Tax 30,000
To IT scrutiny Exp 4,000
To CA’s Fees for Tax 10,000

To Misc. Expenses 25,000

To Depreciation 5,000
To Donation 20,000
To Net Profit 16,50,300
20,68,000 20,68,000

Additional Information:
(1) Salaries include bonus due to employees Rs. 30,000 which was not
paid before the due date of filing of Income Tax return.
(2) Rent is paid for the residential house of Mr. Mangesh.
(3) Repairs to office include a one-time cash payment of Rs. 20,000.
(4) Miscellaneous expenses include purchase of shares of an Indian
company for Rs. 20,000.
241
(5) Donations include charity of Rs. 15,000 and Rs 5,000 given to GIC
for maintenance of his handicapped brother.
(6) Depreciation as per Income tax rules is Rs. 4,000.
Solution:

Computation of Total Income of Mangesh for A.Y. 2021-22

Particulars Rs Rs
Income from Business
Net Profit as per P/L Account 16,50,300
Add: Disallowable Expenditure
Bonus due but not paid u/s 43B 30,000
Rent (Personal 20,000
Purchase of share (Misc Exp) 20,000
Income Tax 30,000
Donation (15,000+ 5,000) 20,000
Depreciation 5,000 1,25,000
17,75,300
Less: Income Considered Separately
Interest on Bank FD 8,000
Dividend from Indian Company 20,000
Dividend from Co-operative Bank 2,000
Winning from Lottery 15,000
Interest on Debentures of Ltd Co 5,000 50,000
17,25,300
Less: Depreciation as per rules 4,000
INCOME FROM BUSINESS 17,21,300
II Income from Other Sources
Interest on Bank FD 8,000
Dividend from Indian Company ( Exempt) 0
Dividend from Co-operative Bank 2,000
Winning from Lottery 15,000
Interest on Debentures of Ltd Co 5,000
INCOME FROM OTHER SOURCES 30,000
GROSS TOTAL INCOME 17,51,300
Less: Deductions- under Ch. VI-A
80-DD: Maint. of handicapped dependant 75000
TAXABLE INCOME 17,21,300
Tax Payable 3,28,890
HEC @4% 13,156
Total Tax Payable 3,42,046

242
Note: To claim deduction u/s 80DD, assess must incur some expenses on
handicapped dependent not necessarily to the extent of claim available

3. Compute the total income and ascertain the tax liability of Sam for
the A.Y. 2021-22 from the following Profit and Loss Account:

Profit and Loss Account for the year ended 31st March, 2021
Particulars Rs. Particulars Rs.
To Salaries 1,30,000 By Gross Profit 9,67,000
To Rent 30,000 By UTI Dividend 9,000
To Entertainment Exp 18,000 By LIC Mutual 5,000
To Printing & Stn 25,000 By Gift from Mother 5,000
To Advt Exp 50,000 By Winning- Puzzle 12,000
To Motor Car Exp 30,000 By Interest on NSC 3,000
To Drawings 60,000
To Income Tax 16,000
To Embezzlement -Employee 7,000
To Staff Welfare Exp 70,000
To Donation 30,000
To Depreciation 35,000
To Net Profit 5,00,000
Total 10,01,000 10,01,000

Additional Information:
(1) Depreciation as per Income tax rules is Rs. 38,000.
(2) Staff Welfare expenses include Rs. 20,000 for his own treatment.
(3) 50% of the rent is paid for his residential house
(4) Printing includes Rs. 5,000 paid for printing marriage cards for his
daughter’s marriage

243
Solution:

Computation of Total Income of Sam for AY: 2021-22

Rs Rs Rs
I Income from Business
Net Profit as per P/L Account 5,00,000
Add: Disallowable Expenditure
Own Medical Expenses 20,000
Rent (Personal) 15,000
Printing of Marriage Cards 5,000
Income Tax 16,000
Donation 30,000
Depreciation 35,000
Drawings 60,000 1,81,000
Less: Income Considered Separately 6,81,000
UTI Dividend 9,000
Income from LIC Mutual Fund 5,000
Gift from Mother 5,000
Winning from Crossword Puzzle 12,000
Interest on NSC 3,000 34,000
Less: Depreciation as per rules 6,47,000
INCOME FROM BUSINESS 38,000 6,09,000
II Income from Other Sources
UTI Dividend 9,000
LIC Mutual Fund ( 5,000l
Gift from Mother (exempt) Nil
Winning from Crossword Puzzle 12,000
Interest on NSC 3,000
INCOME FROM OTHER SOURCES 29,000 29,000
GROSS TOTAL INCOME 6,38,000
Less: Deductions under Chapter VI-A
80-C NSC Interest Re-invested 3,000 3000
TAXABLE INCOME 6,35,000
Tax Payable on Income 39,500
HEC @ 4% 1,580
Total Tax 41,080

244
4. Mr. Joshi is a Chartered Accountant, Following is his Receipt and
Payments Account for the year ended 31st March, 2021.

Receipts Rs. Payments Rs.

To Cash & Bank B/f 70,000 By Office Rent 6,000
To Fees from Clients (net) 10,60,000 By Ptg & Stn 5,000
To Hon. For Articles 40,000 By Gifts to Staff 11,000
To Dividend-Indian Co 5,000 By General Exp. 14,000
To Interest– Bank SB A/c 2,000 By Motor Car Exp 16,000
To Interest.-on PO SB A/c 3,000 By Telephone Exp 12,000
To Interest- Bank FD 8,000 By Income Tax 40,000
To Int. on Govt Securities 6,000 By Drawings 1,20,000
To Sale of Motor Car 1,00,000 By Car Insurance 12,000
By Conveyance 13,000
By Tally Software 19,000
By LIC Premium paid 64,000
By Salaries to Staff 12,000
By Computer (cost) 50,000
By Cash & Bank c/f 9,00,000
TOTAL 12,94,000 TOTAL 12,94,000

Additional Information:
(1) Computer was purchased on July 1, 2020 and depreciation is allowed
@ 60% on the same.
(2) Opening WDV of Block of Motor Cars consisting of 2 Motor Cars
was Rs. 2,50,000 and depreciation is allowed @ 20% on the same.
(3) Personal use of the Motor car is estimated to be 25%.
(4) Fees from clients are after TDS of Rs. 2,000.
(5) General expenses include a sum of Rs. 4,000 given to his daughter as
birthday gift.
(6) Drawings include a sum of Rs. 30,000 given premium for self and
family of Rs. 20,000 and Rs. 10,000 for his father, who is a senior
citizen.
Compute the net taxable income of Joshi for the AY 2021-22.

245
 Solution:

Computation of Total Income of S. V. Joshi –Asst. Year 2021-22

Particulars Rs Rs
Income from Profession
Fees from Clients 10,60,000
Add: Tax Deducted at Sources 2,000 10,62,000
Less: Allowable Expenses
Depreciation on Motor Car 22,500
Motor Car Expenses @ 75% 12,000
Office Rent 6,000
Printing and Stationery 5,000
General Expenses 10,000
Motor Car Insurance @ 75% 9,000
Telephone Expenses 12,000
Conveyance Expenses 13,000
Depreciation on Computer @ 60% 30,000
Salaries to Staff 2,000
Gifts to Staff 11,000 1,32,500
INCOME FROM BUSINESS 9,29,500

II Income from Other Sources:

Receipts for Writing Articles 40,000
Interest on Fixed Deposit 8,000
Interest on Government Securities 6,000
Interest on SB Account 2,000
Interest on PO Savings Account Nil
(exempt)
Dividend from Indian Companies Nil
(exempt)
INCOME FROM OTHER SOURCES 56000 56000
GROSS TOTAL INCOME 9,85,500
Less: Deductions under Chapter VI-A
80-C Life Insurance paid 64,000
80-D Medical insurance Premia :
Rs 30,000 for father + Rs. 25,000 for self- 55,000 1,19,000
maximum
TAXABLE INCOME 8,66,500
Tax Payable on Income 85,800
HEC @ 4% 3,432
Total Tax 89,232

246
5. Compute total income and tax liability on the income of X from
the particulars given below:
Basic pay: Rs. 26,000 pm
Education allowance for one child: Rs. 300 pm
Bonus: Rs. 20,000
Salary in lieu of leave: Rs. 15,000

He contributed Rs. 18,400 to the recognized provident fund and an equal

amount was contributed by his employer. He received Rs. 14,000 from
bank as interest, dividend of Rs. 10,000 from a foreign company and
winning from horse race of Rs. 42,500 (gross). He paid Rs. 500
professional tax.

Solution
COMPUTATION OF TOTAL INCOME – A.Y. 2021-22
Basic Salary 16,000 X 12) 3,12,000
Education allowance (300 X 12) 3,600
Less: Exempt (100 X 12) 1,200 2,400

Bonus 20,000
Leave Encashment 15,000
3,49,400
Less Profession Tax 500
Income from Salaries 3,48,900
Dividend from foreign company 10,000
Winnings from Horse Race 42,500
Bank Interest 14.000
Income from Other Sources 66,500
Total Income 4,15,400
Tax Payable 8,270
Rebate U/s 87A -100% of Tax 8,270
Balance payable 0
Total Tax NIL

6. ABC is a partnership Firm carrying on a business, in which A, B,

and C are partners sharing profits and losses equally. In respect of
Assessment Year 2021-22 it furnishes the following particulars:
1 Net loss as per P/L A/c after debiting remuneration/ Interest to
partners Rs 2,50,000
2 Remuneration paid to partner – A Rs 90,000, B Rs 60,000 & C Rs
30,000
3 Interest paid to partners @ 20% per annum on their capital of Rs
1,00,000 each.
You are required to work out the income of the firm and the
partners A, B and C assuming that partners have no other income.

247
Solution:

COMPUTATION OF TOTAL INCOME OF FIRM

Net Profit as per Profit and Loss A/c (Loss) [2,50,000]
Add: Remuneration to Partners 1,80,000
Interest to partners - 20,000 X3 60,000 2,40,000
Profit before remuneration & Interest [10,000]
Less: Interest allowable only upto 12% 36,000
Profit before remuneration
Max. Remuneration upto profit 1,50,000
LOSS [186000]

TAXABLE INCOME IN THE HANDS OF PARTNERS

A B C
Salary 75000 50000 25000
Interest 12000 12000 12000
Total Income 87000 62000 37000
 Salary allowed as deduction to firm Rs 1,50000 taxed in the hands of
partners in the ratio of the salary paid to them by firm 90:60:30
 Interest allowed to firm will also be taxed in the hand of the partners
 Total Income of Partners i.e. Salary and Interest taxable as Profits and
Gains from Business or Profession:
 Excess of salary and interest, which was disallowed in the hands of
the firm is not liable to be taxed in the hands of the partners.

9.4 PAYMENT OF ADVANCE TAX -SECTIONS 207-219

4.1 All assessees are required to pay advance tax on their current income
from all sources , if tax liability for payment of tax is Rs.10,000 or more-
(Section 208) .

4.2. Amount and due Dates for payment of Advance Tax;

Advance tax is payable four instalments by the companies and in three
instalments by other assessees as per the following table:

248
 .PAYMENT OF ADVANCE TAX
Corporate and non-corporate assessees
Due date of Instalment Tax Payable Remark
% of total tax (Payment during the period)
Not Less than
15 June 15% 15%
15 September 45% 30%
15 December 75% 30%
15 March 100% 25%
@15 March 100% 100%
st
Payment made by 31 March considered Advance Tax
@ Assessee covered under presumptive tax u/s 44AD/44ADA

4.3. Miscellaneous;
 The Assessing officer may, serve a notice upon the assessee to pay
advance tax on the basis of the last regular assessment and if the
assessee does not pay the advance tax he/it shall be deemed to be an
assessee in default.
 For shortfall / non- payment assessee will be liable to pay interest U/s
234 B and 234 C.

Illustration
7. Explain the liability for Advance Tax payment by Ramesh whose
Income is estimated to be Rs 8,00,000 for F. Y. 2021-22 .
Solution:
Tax payable on current income of Rs 8,00,000 works out at Rs 74,675 ,
which will be payable as under:-

I - 15% 15 June ,2017 Rs 11,201

II-45% 15 September,2017 Rs 22,403
III-75% 15 December,2017 Rs 22,403
IV- 100% 15 March,2018 Rs 18,668

Illustration
8. Explain the liability for Advance Tax payment by Ramesh Limited
whose Income is estimated at Rs 18,00,000 during the financial year
2021-22

Solution:
Ramesh Ltd is a company assessee liable to pay tax of Rs 3,66,600
on total income of Rs 8,00,000 , which is more than Rs.10,000. Hence
Ramesh Ltd. is liable to pay advance tax as under:

249
Instalment Last Date for payment Total Amount Instalment
Payable Amount
Rupees Rupees
I 15% 15th June,2020 54,990 54990
II- 45% 15th September,2020 1,64,970 1,09,980
III-75% 15th December,2020 2,74,950 1,09,980
IV-100% 15th March,2021 3,66,600 91,725

9.5. FILING OF RETURNS- SEC 139(1) AND 139(5)

5.1. LIABILITY FOR FILING RETURNS:

Section 139(1) casts the burden of filing return of income or loss on
assessees. For some of the assessees it is mandatory to file on or before the
due date a return of income or loss for the previous year in prescribed
form, verified in prescribed manner and setting forth such other particulars
as may be prescribed
For the following, assessees filing the return of income is mandatory:
1. Companies and Firms
2. Every Person (other than a company or a firm,) if his total income or
the total income of any other person in respect of which he is assessable
under the Act during the previous year exceeds the basic exemption limit.
(3) Further, every person, being an individual or a HUF or an AOP or BOI
or an artificial juridical person–
– whose total income or the total income of any other person in respect of
which he is assessable under this Act during the previous year
– Without giving effect to the provisions of section 10A or 10B or 10BA
or Chapter VI-A exceeds the basic exemption limit is required to file a
return of his income or income of such other person–
2. For companies and other assessees having tax audit or having income of
Rs 10 lakhs or more , filing of return in a digitally signed electronic form
is mandatory.(Section 139D)

5.2. DUE DATE FOR FILING RETURN OF INCOME;

A return of income has to be filed on or before the due date of filing
return, ‘Due date’ means –
A. 31-10-2021 for all Audit cases , Extended date due to Covid-30-11-
2021, Tax Audit report to be filed one month before due date
B. 31st July 2021 all non-audit cases, Extended date due to Covid -30-09-
2021
C. Illustrations : -
1. XYZ Limited shall file the return of income for the A.Y. 2021-22 on or
before 31-10-2021 (extended to 30-11-2021)
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2. X having income of Rs 50,000 is not liable to file his return of income.
3. Z has a loss of Rs 2 lakhs, and his accounts are not audited, due date in
his case will be on or before 31-10-2021 (extended 30-11-2021)

5.3 REVISED RETURN – SECTION 139(5)

If any person having furnished a return under section 139(1) or in
pursuance of a notice issued under section 142(1), discovers any omission
or any wrong statement therein, he may furnish a revised return at any
time before the expiry of nine moths from the end of the relevant
assessment year or before completion of assessment, whichever is earlier.

From the above, it is apparent that a belated return and it cannot be

revised. In any case, a belated return can be filed under S 139(4) before
31-12-2021 for AY 2021-22. 31-01-2022Extended date due to Covid-2019

5.4 OTHER POINTS:

A. CBDT is vested with the powers to prescribe forms of return
B. A return must be properly verified and signed by an individual or
partner of a firm or a director of company etc.
C. Consequences of late filing of return ;
 Liability for Interest @ 1% per month U/s 234A
 Late filing fess Rs 10,000 , Rs 1000 if return below Rs 5 lakh .
 Belated return can not be revised
 Certain exemptions cannot be claimed. Including u/s 11- Charites,
10(38)- LTCG etc.
 Loss is not allowed to be carried forward.
D. Return will not be treated defective if Self –assessment tax not paid .
Return without payment of tax not uploaded on e-filing portal
E. A return cannot be revised if filed in response to notice u/s 142.
F. Belated return can not be filed after 31-12-2022 for assessment year
2021-22
1. Prescribed returns for the Assessment Year 2021-21 are
 ITR-1: For individuals being a resident (other than not ordinarily
resident) having total income upto Rs.50 lakh, having Income from
Salaries, one house property, other sources (Interest etc.), and
agricultural income upto Rs.5 thousand] [Not for an individual who is
either Director in a company or has invested in unlisted equity shares
or in cases where TDS has been deducted u/s 194N or if income-tax is
deferred on ESOP
 ITR-2: For Individuals and HUF not having income from profits and
gains of business or profession
 ITR-3: For Individuals and HUF having income from profits & gains
business & profession
251
 ITR-4 For Individuals, HUFs and Firms (other than LLP) being a
resident having total income upto Rs.50 lakh and having income from
business and profession which is computed under sections 44AD,
44ADA or 44AE] [Not for an individual who is either Director in a
company or has invested in unlisted equity shares or if income-tax is
deferred on ESOP]
 ITR-5: For persons other than,- (i) individual, (ii) HUF, (iii) company
and (iv) person filing Form ITR-7
 ITR-6: For Companies other than Companies Claiming Exemption
under section 11
 ITR-7: For Companies including Companies required to furnish return
under section 139(4A), or section 139(4B), or section 139(4C), or
section 139(4D), or section 139(4E), or section 139(4F)

9.6 SELF ASSESSMENT QUESTIONS

1. Discuss the provisions for payment of advance tax.

2. Explain advance tax liability of Ms. ABC if her income will be Rs
15,00,000 for the financial year 2021-22.
3. What are the due dates of payment of advance tax by different
assessees ?
4. Mr. Ram gives you the Profit and Loss Account for the year ended 31st
March, 2021. You are required to compute the total income of Ram for
AY 2021-22 assuming that Ram has paid LIC premium of Rs.
5,000.and interest of Rs 25,000 for educational loan of his son.

Profit and Loss Account for the year ended 31st March 2021
Particulars Rs. Particulars Rs.
To Opening Stock 1,60,000 By Sales 18,50,000
To Purchases 14,05,000 By Closing Stock 1,08,500
To Salaries 1,84,350 By Winnings from 5,000
To Office Expenses 70,040 Lottery
To Office Rent 20,000 By Interest on fixed 15,000
To Staff Welfare 13,000 deposits with bank
To Advertisement 65,000 By Interest on RBI 16,000
Exp. To Donations 5,000 Bonds (exempt u/s
To R.D.D. 10,000 10) 20,000
To Mediclaim (Cash) 21,000 By bad debts
To insurance 10,000 recovered 9,000
To Income Tax 8,000 By dividend from
To Depreciation 20,000 Indian companies
To Net Profit 32,110

20,23,500 20,23,500

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Additional Information:
a) Advertisement expenses include Rs. 11,000 for advertisement in a
souvenir of a local political party and Rs. 20,000 for introducing a new
product in the market.
b) Donations are given for books to poor students
c) On August 10, 2020 furniture of Rs. 20,000 was purchased on credit
the payment for which was made on April 2, 2021 The same was not
recorded in the books of accounts. The rate of depreciation on
furniture is 15% per annum. On other fixed assets, depreciation was
charged exactly as per I.T. Rules.
d) Bad debts recovered were allowed during the A.Y 2018-19.
5. Sheela who is a suffering from a permanent disability, received the
following emoluments from SWY Ltd, her employer for last 10 years
during the year ended March 31, 2021: You are required to compute
her total income for the AY 2021-22.

Basic Salary (Net) Rs. 10,000 p.m.

April 1, 2020 to September 30, 2020 (TDS Rs 600 P.M) ,
(Profession Tax Rs 1,250 P.M.)
October 1, 2020 to March 31, 2021 Rs. 12,000 p.m.
( TDS Rs. 700 p.m. )
(Profession Tax Rs 1,250 P.M.)
Dearness Allowance 40% of basic salary
Entertainment Allowance Rs. 500 p.m.
(Actually spent Rs. 300 p.m.)
Bonus for the year Rs. 8,000
Conveyance Allowance Rs. 1,000 p.m.
(Actually spent Rs. 800 p.m.)

1) Commission from employer is 1% of turnover of Rs. 10 lakh.

2) She needs a personal physical attendant whose salary of Rs. 2,000 p.m.
was paid by the employer.
3) She paid Mediclaim insurance of Rs. 12,000 for himself and Rs. 5,000
for his brother. Statutory Provident Fund @ 10% of basic salary was
deducted from her salary.
6. Mrs. Sweety aged 66 years took voluntary retirement on January 1,
2021 from a private bank after completing 26 years and 11 months of
service. She furnishes you with the following information: Compute her
net taxable income for the AY 2021-22. After retirement, She delivers
lectures as guest faculty in Indian Institute of Banking for which She
receives honorarium of Rs. 22,000. She paid Mediclaim premium of Rs.
13,200 by crossed cheque. She invests Rs. 50,000 in National Saving
Certificates. She received gifts from her colleagues for Rs. 3,00,000 in
January 2021 .

253
Basic Salary Rs. 2,800 p.m.
Dearness Allowance 128% of basic salary
Conveyance Allowance (actual expenses. For Rs. 900 p .m
official purpose Rs. 600 p.m.)
Gratuity Rs. 1,29,200
Commuted pension Rs. 67,500
Leave Encashment 3 months basic salary
Uncommuted pension Rs. 2,500 p.m.
Voluntary retirement compensation Rs. 8,72,000
Profession tax paid Rs. 1,200

7. Compute total income of Krishna for the AY 2018-197 from the

Profit and Loss Account of his proprietory concern for the year ended
March 31, 2021

Particulars Rs. Particulars Rs.

To Opening Stock 2,34,000 By Sales 12,40,000
To Purchase 10,00,000 By Closing Stock 2,05,000
To Office Salaries 57,000 By Income Tax Refund 15,000
To Proprietor’s Salaries 30,000 (including interest Rs. 2,000)
To Bad Debts 25,000 By Dividend from UTI
To Advertisement 10,500 By Dividend from Y Ltd (an 20,000
To Fire Insurance 4,500 Indian Company) 25,000
Premium By Interest on PPF
To Conveyance Exp 6,000 By Lottery prize received 5,000
To Interest on 25,000 10,000
Proprietor’s Funds
To Medical Expenses 20,000
To General Expenses 35,000
To Wealth Tax paid 5,000
To Residential 14,000
Telephone expenses
To Depreciation 30,000
To Net Profit 20,000
1520,000
15,20,000

Additional Information
a) The residential telephone is used half the time for office work.
b) Purchases include Rs. 1,00,000 paid for cash purchases, exceeding
the limits prescribed under Section 40A(3).
c) General expenses include advance income tax of Rs. 10,000 paid
during the year and Rs. 500 for purchase of lottery tickets.
d) Depreciation allowable as per Income Tax Rules Rs. 25,000
e) Agricultural income Rs.70,000.

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8. Compute total income of R with 40% disability, from following
information regarding his house property for the AY 2021-22

Particulars HOUSE I HOUSE II

Fair Rent 40,000 60,000
Municipal Valuation 55,000 50,000
Rent received 60,000 --
Municipal tax:
(a) Paid by the tenant 4,000 --
(b) Paid by Ri 6,000 5,000
Interest on capital borrowed (due but not paid) 6,000 13,000
for the purpose of construction of house
property --
Ground Rent 2,000 --
Insurance premium paid 1,500
Other information: --
(i) Interest from debentures in Y Ltd 12,000 --
(ii) Dividend from UTI 5,000 --
(iii) Bank interest from SBI 3,500 --
(iv) Winning from lottery 28,000 --
(v) Interest from Post Office Savings A/c 5,000 --
(vi) Dividend from a co-operative society 5,000



255
 10
GST – AN OVERVIEW

Unit Structure
10.0 Introduction and Objective
10.1 Direct vs Indirect Taxes
10.2 Pre-GST Indirect Tax Structure
10.3 Historical Background of GST in India
10.4 Indian GST vis-à-vis GST in Other Countries
10.5 Concept of GST
10.6 Need for GST in India
10.7 Indirect taxes Subsumed in GST
10.8 Framework of GST in India
10.9 Benefits of GST
10.10 GST council
10.11 Goods and services tax network (GSTN)
10.12 Self-Examination Questions

10.0 INTRODUCTION AND OBJECTIVE

The lesson explains the concept and basic feature of direct and indirect
taxes, the differences between the two types of taxes and principal direct
and indirect taxes levied in India. The lesson further explains the concept,
need and objective of Goods and Service Tax (GST) in India, its
framework, the roadmap for its implementation, benefits accruing from
implementation of GST and other incidental matters.

10.1 DIRECT VS INDIRECT TAXES

10.1.1. Tax

‘Tax” is the money, people pay to the government. It is a forced

payment; not something that people pay voluntarily. Tax is considered as
the price of civilization to enable a government to mobilise funds for
governance, defence and development of the nation, provision of health,
education, sanitary and other public welfare services, maintaining law
and order and creation of infrastructure. In the modern times, taxation has
become a powerful tool or a catalyst for implementing socio-economic
goals of the governments and stimulating economic growth.

256
10.1.2. Types of taxes
10.1.2.1. Broadly, the taxes are of two types, viz. direct and indirect taxes.

10.1.2.2. Direct Tax

A direct tax is a personal tax directly paid to the government by a
taxpayer, on whom it is imposed. A taxpayer cannot shift his burden on a
third party. Income tax, wealth tax, estate duty and gift tax are some
examples of direct taxes. Of late, wealth tax and estate duty have been
abolished and gift tax has been partially merged with income tax.
10.1.2.3. Indirect Tax
An indirect tax is a tax paid by one person but borne by another
person. Effectively, the taxpayer viz. the manufacturer, the trade of the
goods or the service provider acts only as an agent or an intermediary
between the government and the consumer. Indirect tax is a destination-
based tax on consumption of goods and services. In the first instance, the
taxpayer pays the tax to the government and recovers it from the end-
consumer of the products or services by adding the amount of tax in their
price. Thus, the tax burden is ultimately shifted on and borne by the end
user or consumer of the goods or services.
Excise duty, customs duty, service tax, central sales tax (CST),
value added tax (VAT), entry tax, purchase tax, entertainment tax, tax on
lottery, betting and gambling, luxury tax, tax on advertisements are some
examples of the indirect taxes From 1 July 2017, barring some exceptions
such as property tax; stamp duty, customs duty etc., most of the indirect
taxes have been merged into one single uniform tax called Goods and
Service Tax (GST).

10.1.2.4. Direct V/s indirect Taxes

10.1.2.4.1. Progressive and Regressive Taxes
Direct taxes are collected from the actual taxpayer according to his
capacity to pay taxes. A person with higher income pays more taxes than a
person with lower income. Therefore, direct taxes are considered
progressive taxes.
In contrast, indirect taxes are uniformly collected from all
consumers of goods and services regardless of their capacity to pay.
Hence, the indirect taxes a reconsidered regressive taxes.
10.1.2.4.2. Larger Tax Base
Unlike the direct taxes, indirect taxes are uniformly spread over
all sections of the population based on the value of goods and services
consumed by them. Hence, they do not directly affect the actual taxpayers.
Therefore, the indirect taxes create a larger tax base and provide a major
source of revenue to the governments.

257
10.1.2.4.3. Inflationary Impact
Indirect taxes have an inflationary impact because the suppliers
add the amount of tax paid in the prices of goods and services consumed.
10.1.2.4.4. Socio-economic Goals
Indirect taxes act as a catalyst or tool for achieving their socio-
economic goals of the government. For instance, most governments
impose steep taxes on luxury goods and services, “sin goods” or harmful
goods such as tobacco, alcohol serving the twin goals of augmentation of
revenue coupled with control on the consumption of such goods and
services.

10.2 PRE-GST INDIRECT TAX STRUCTURE

3.1. Seventh schedule to the Constitution of India divides the legislative

powers into three lists viz.

 List I-the Union List,

 List –II- the State List ; and

 List III the Concurrent List.

As per the Union List, direct taxes viz. Income Tax, Capital Gains
and Corporate tax are in the domain of the Centre while right to levy
Agricultural Income tax is vested in the states as per the State List.
10.2.2. For indirect taxes, the constitution provides two-tiered tax structure
with the following features:-
i. Under the Union list, Centre was authorised to levy following
taxes, viz. :-
a. excise or tax on manufacture of goods except alcoholic liquor
for human consumption, opium, narcotics etc.
b. tax on the value of all taxable services provided or to be
provided.
ii. The state list authorised the states to levy taxes on intra-state sale
or consumption of goods. The taxes included VAT Excise on
liquor, Luxury Tax etc.
iii. Under the concurrent list, both the Centre and the states could levy
taxes concurrently on some items. However, residual powers
remained with the Centre.
iv. Inter -state sales attracted both the excise duty and central sales
tax.
v. Central sales tax was levied by the centre but it was collected and
retained entirely by the originating States.

258
10.2.3. These taxes were not mutually exclusive. When the goods were
again sold in the course of intra-state sale, they attracted VAT on the
gross value of the goods, which included the basic value, the excise duty
charged by manufacturer and the profit by dealer. There was no set off or
rebate in respect of one tax against the credit of another tax and vice versa
for the following reasons :-
a) Excise and service tax were central taxes on manufacture of goods or
the component of service provided or to be provided.
b) VAT was a state tax on sale of goods
c) A seller of goods could not get set off excise on manufacture of goods
and service tax on the service component of those goods paid to the
Centre against the liability to pay VAT to the state.
d) Conversely, a manufacturer or a service provider could not avail
credit for VAT on purchase of inputs paid to the state against the tax
liability for central taxes.

10.2.4.A service provider or a manufacturer could avail credit for the

service tax or the excise duty paid on the inputs for providing taxable
service or for manufacturing excisable goods, integrated at the central
level both being the central taxes. No such credit was, however allowed
for VAT paid on the inputs to the state government
10.2.5. Pre-GST sales tax regime was a combination of -
a. An origin -based central sales tax levied in the state, from where
the goods originated, and
b. Destination based multipoint value added tax levied in the state-
where the goods were consumed.
10.2.6. Hence, the country had a multi-tier indirect tax regime
comprising of overlapping taxes levied by different authorities at different
levels of the tax pyramid that denied credit or set off for the taxes paid at
the previous stages. Credit for the VAT paid on the inputs was denied to
the manufacturer and the service provider and credit for the excise duty or
the service tax paid was denied to the seller only because the excise duty
and the service tax were the central taxes, but the VAT was a state tax.
This resulted into complex cobweb of rules and regulations in different
parts of the country having cascading tax effect.
10.2.7. The flaws in the indirect tax structure created the need for a
uniform, integrated central tax with lower tax rates; efficient
implementation and free credit across the board for various taxes paid and
reduce the cascading effect of multiple taxes.

259
10.3 HISTORICAL BACKGROUND OF GST IN INDIA

10.3.1. In 2004, Kelkar Task Force recommended the idea of a fully

integrated Goods and Services Tax (GST) on national basis. Accepting
the recommendation of the Task force, the Government in the Union
Budget 2007-08 fixed 1 April2010 as the date for implementation of GST
in India. No significant progress was made thereafter due to lack of
consensus among the stakeholder states until 19 December 2014, when the
Constitution (122nd Amendment) Bill, 2014 on GST was tabled in the
parliament.
10.3.2. The bill was passed by Lok Sabha on 6May 2015 and Rajya Sabha
on 3 August 2016. After ratification by more than half of the stakeholder
states, the bill received the presidential assent on 8 September 2016 and
became The Constitution (101st Amendment) Act, 2016 clearing the decks
for introduction of GST in India.
10.3.3. After several post amendment meetings among the states and the
Centre, four Central GST legislations, the Central Goods and Services Tax
(CGST) Bill, 2017, Integrated Goods and Services Tax (IGST) Bill, 2017,
Union Territory Goods and Services Tax (UTGST) Bill, 2017 and Goods
and Services Tax (Compensation to States) Bill, 2017 were introduced in
the parliament on 27 March 2017 and promptly passed on 29 March 2017.
The bills received the President’s assent on 12 April 2017 resulting into
enactment of the respective four Acts.
10.3.4 The States led by Telangana, Rajasthan, Chhattisgarh, Punjab, Goa
and Bihar passed their respective State GST laws. Finally, at a special
session of the parliament, at the stroke of midnight on 1 July 2017, India
rolled out GST as its path breaking indirect tax reform on the principle of
one nation -one tax.

10.4 INDIAN GST VIS-À-VIS GST IN OTHER

COUNTRIES
10.4.1. Indian GST is a unified tax model for the entire country. It
subsumes multiple indirect taxes such as excise duty, service tax, VAT,
CST, luxury tax, entertainment tax, entry tax, etc. under the common
umbrella of GST. The GST regime professes to create a pan-Indian
common national market , facilitate Indian businesses to become globally
competitive by creating an efficient, corruption -free and transparent tax
regime with minimum bureaucratic red-tape facilitating the ease of
business and making inter-state movement of goods easier.

10.4.2. India is one of the 160 countries across the world to implement
unified tax model like GST. For record, France was the first country to
implement GST in 1954 more than six decades ago. The United States
does not have a unified tax model as the states have their own taxes.

260
10.4.3. Most countries have adopted a uniform GST subsuming all indirect
taxes, grouped under one umbrella with the exception of Brazil and
Canada, which opted for a dual-GST model. India followed the dual
model having inbuilt concepts of UGST, SGST, CGST and IGST
separately for central, state and Union territories and for inter-state sales.

10.4.4. Efficient implementation of a simple lower tax rate to yield higher

revenue is the underlying principle of an efficient GST regime globally.
Singapore and Malaysia have moderate GST rates at 8% and 6%
respectively.

Canada has a dual system of GST with Harmonized Sales Tax

(HSN) with tax rates of 0%, 5% and 15%, while GST in UK is at 20%
with provision for lower rate, zero rate and exemptions.

Indian GST with a four-tier GST tax structure of 5%, 12%, 18%
and 28%, , zero rate and exempted supply coupled with different state and
central levy- i.e. CGST, SGST, UTGST, and IGST is one of the most
complex and intricate tax regime in the world.

10.4.5. Different countries have different exemptions and threshold limits

for liability for GST. The threshold limit of Rs 20 lakh to attract GST
liability in India is among the lowest in the world. However, Indian GST
provides for option of composition without claiming input tax credit
restriction on issue of taxable invoices etc., which is likely to deter many
from availing such schemes.

10.4.5. A stringent inflation control is necessary for an effective GST

regime to protect consumers against price rise and profiteering. India, like
Singapore and many other countries has initiated anti-profiteering laws at
the retail level to protect consumers from price swindling.

10.4.6. Alcohol and petroleum products constitute about 40% of a states’

revenue. Hence, most states did not concede their right to levy tax on these
products. As a result, unlike other countries, alcohol and petroleum
products are outside the purview of GST in India, with each state free to
set its own rates. Input credit will not be available for the manufacturers
using alcohol and petroleum products thus increasing the costs for the end
consumer.

10.5 CONCEPT OF GST

10.5.1. GST is a tax levied only on the value added at each stage of supply
chain comprising of manufacture, sale and consumption of taxable goods
or services. The GST provides for a comprehensive and continuous chain
of tax credits beginning from the manufacture or production of goods or
provision of service up to the retailer or consumer to ensure that
(a) there is no cascading effect by levying tax on tax at each stage; and
(b) the tax is levied only on the value added at each stage of supply.
261
10.5.2. At each stage of supply, a supplier can avail input credit for the
tax paid on the purchase of goods or services and set off this credit against
the GST payable on the supply of goods and services be made by him to
the next stage.

GST makes no difference between goods and services and both are treated
at par and taxed at a single rate.

10.5.3. It is only the final consumer, who bears the GST charged by the
last supplier in the supply chain, with set-off benefits at all the previous
stages.

Illustration
(a) Assumed that goods is priced at Rs 25,000 by A and Rs. 28,000 by B
with value addition is 20% . Rate of tax is assumed to be 6% each CGST/
STGST. Tax position will be as follows ;

Particulars A to B B to C Tax Payable

By B
Price charged for supply of goods/ 25000 28,000
services
CGST @ 6% 1500 1680 180
SGST @ 6% 1500 1680 180
Total price charged 28,000 31360

Notes
1. A pays Rs ,3000 ( 1500 each CGST & STGST)
2. B’s gross liability is Rs 3,360 (1680 each CGST & STGST)
3. B pays only Rs 360 ( Rs 180 each CGST & STGST
4. B gets input credit for tax paid to A 1500 each CGST & STGST
5. Government gets Full tax of Rs 3180 – 1500 from A and 180 from B
6. But for the ITC , the liability would be Ts 3,360 due to cascading
effect of tax)

(b) A and B belong to different states, then A will charge IGST of Rs 3000
(12%) and B will get ITC of RS 3000 against IGST and pay the balance
just as before. This is an example of seamless credit flow.

10.6 NEED FOR GST IN INDIA

The main flaw of the pre-GST tax regime was the existence of
multiple taxes at both the central and state level without having an across
the board credit system for taxes paid earlier. This imposed hindrance in
smooth movements of goods across the country besides creating scope for
arbitrage of rates at different places, interstate smuggling and grey markets
for goods and services. India needed a uniform tax regime with lower rates
and stringent implementation. Some other reasons are as under:-

262
a. Integration of different taxes such as excise, VAT, luxury tax,
entertainment tax, Octroi and CST so as to avoid multiple taxation of
a transaction as both goods and services
b. Replacement of multiple tax levies by a uniform tax regime in respect
of goods and services both.
c. Abatement of the cascading tax burden of tax on tax at different
levels.
d. Introduction of an indirect, comprehensive, broad based consumption
Tax for any product or service throughout India
e. Provision for a continuous chain of credits from the original producer
or service provider to the retailer or end consumer for taxes paid at
earlier stages i.e. input credit to ensure the removal of cascading effect
of multiple taxes.
f. Imposition of tax only on the value added at every stage in the supply
chain instead of tax on origin or manufacture of goods.
g. Setting up an efficient tax regime free of corruption and bureaucratic
red-tape to enable simplified tax compliance.
h. Creation of a national market for goods and services.
i. Safeguarding the interests of the states by opting for a dual- model
GST with inbuilt provisions for CGST, SGST, UGST and IGST.

10.7 INDIRECT TAXES SUBSUMED IN INDIA

10.7.1. The principle objective of the GST is to reduce the

complexities, remove the effect of cascading tax burden by
introducing a new broad based tax regime which subsumes all the
taxes levied on the sale of goods or provision of services by both the
centre and the states and provide a larger pull for set off of taxes.
10.7.2. Principles of subsuming taxes
Following principles were applied to identify the indirect taxes levied on
supply of goods or services to be subsumed, viz :-
a. Only indirect taxes on goods and services were to be subsumed in
GST.
b. Such taxes were part of the supply chain i.e. manufacturer ,
service provider or retailer or consumer;
c. The taxes resulted in free flow of tax credits in intra and inter-
State levels;
d. The taxes which were not specifically unrelated to supply of goods
or services, e.g. stamp duty, municipal taxes etc. were not
subsumed in GST. and
e. The subsuming of the taxes maintained revenue neutrality and
fairness between the central and the states.
263
10.7.3. Taxes subsumed or absorbed in GST
Based on the above principles, following taxes have been
subsumed in GST.

Taxes subsumed or absorbed in GST

Central Taxes State Taxes
Central Excise Duty (CENVAT)
Additional Excise Duties VAT / Sales tax
Excise Duty under the Medicinal and Toiletries Entertainment tax except levied by
Preparations (Excise Duties) Act 1955 the local bodies)
Service Tax Luxury tax
Additional Customs Duty, commonly known as Taxes on lottery, betting and
Countervailing Duty (CVD) gambling
Special Additional Duty of Customs – 4% (SAD) State Cesses and Surcharges
wherever they relate to supply of
goods and services
Surcharges and Cesses levied by Centre Octroi and Entry Tax
wherever they are in the nature of taxes on goods
or services e.g. cess on rubber, tea, coffee,
national calamity contingent duty etc.
Central Sales Tax phased out Purchase Tax

10.7.4. Taxes not subsumed

Following taxes were not subsumed in GST:
1) Basic Customs Duty levied on Import of goods into India.
2) Exports Duty imposed on export of goods are not available in India in
abundance,
3) Road and Passenger Tax ,
4) Toll Tax
5) Property Tax
6) Stamp Duty
7) Electricity Duty

10.7.4. Treatment of Specific goods

a) The Alcoholic Liquor for Human Consumption
Under Article 366, clause 12A, the supply of the alcoholic liquor for
human consumption is outside the ambit of GST. The States will continue
to impose tax on it. Moreover, CST on inter-state sales of alcohol products
would also continue.
b) Tobacco Products
Tobacco and tobacco products being “Sin’ goods will be subjected to
GST subject to a separate excise duty by the Centre.

c) Petroleum, Crude, High Speed Diesel (HSD) , Motor Spirit,

Natural Gas and Aviation Turbine Fuel(ATF)
264
 The states will continue to levy VAT on intra-state sales of petroleum
products. Inter-state sales would continue to attract Central Sales Tax
(CST). However, these products may be transitioned into the GST regime
on a future date to be notified by the GST Council. Moreover, these
products are also subject to levy of excise duty imposed by the Centre in
addition to the VAT or GST.

d) Newspapers and newspaper advertisements

While there is no GST on newspaper, GST, advertisements are
subject to levy of GST.

10.8 FRAMEWORK OF GST IN INDIA

10.8.1. GST is a destination-based tax applicable on all transactions
involving supply of goods and services for a consideration subject to
exceptions thereof. It extends to whole of India including the State of
Jammu and Kashmir.

10.8.2. India has followed the dual GST model like Canada and Brazil
Under this model, both the Centre and the states may concurrently levy
GST on intra-State taxable supply of goods or services or both
10.8.3. The dual model of GST adopted in India comprises of the
following components:-
a) Central Goods and Service Tax (CGST)levied and collected by the
Centre,
b) State Goods and Service Tax (SGST) levied and collected by the states
or
Union Territory Goods and Service Tax (UTGST) levied and
collected by the Union Territories with legislatures or
UTGST levied and collected by Union Territories without State
Legislatures,

10.8.4. The Centre is empowered to levy Integrated Goods and Service

Tax (IGST) on all the inter-state supply of taxable goods or service or
both. IGST is almost equal to the sum total of CGST and SGST/UTGST.
10.8.5. Legislative Framework
Legislative formwork for levy and collection of GST is as under:

Type of GST Legislation Levied and collected by

CGST CGST Act, 2017 Central Government
UTGST UTGST Act, Union territories without State
2017 legislatures viz. Andaman and
Nicobar Islands, Lakshadweep,
Dadra and Nagar Haveli,
Daman and Diu and
Chandigarh
265
 SGST SGST Acts Respective States and union
territories with their own
legislatures viz. Delhi and
Puducherry

Different state laws providing for levy of SGST and CGST Act are
by and large uniform in respect of the basic features of the tax,
chargeability, taxable event, taxable person, classification and valuation of
goods and services, procedure for collection and levy of tax etc. to keep
the concept to of dual GST in harmony.

10.9 BENEFITS OF GST

GST will be beneficial for the economic growth of the country and
all the stakeholders in the following ways: -

1. Common National Market

GST has removed economic barriers and created an integrated
economy with a unified common national market with harmonised laws,
common tax rates and procedures.

2. Single Tax
GST subsumes most of the central and state taxes into a single tax and
provides for a seamless credit scheme in the supply chain. Elimination of
multiple taxes and double taxation will remove the effect of cascading.

3. Competitive prices
As a result of mitigation of ill effects of cascading, average tax burden
is likely to come down, which is expected to bring down the prices of
goods and services and make them market friendly and competitive.

4. Make in India
a) 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
giving rise to the exports and also demand for goods and services
in domestic markets.
b) More consumption and higher exports will result in higher
production and manufacturing activities leading the growth of the
industries to turn India into a “Manufacturing hub”.
c) Increased manufacturing will create additional job opportunities in
industry and service sectors.

5. Foreign Investment
Unified common national market will attract Foreign Direct
investment necessary for the “Make in India” campaign.

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6. Ease of Doing Business
a) Mitigation of double taxation will make doing business easier and also
reduce litigation and disputes relating to double taxation of a
transaction as both goods and services.
b) GST is a simple tax regime with fewer exemptions.
c) It will reduce multiple taxes leading to simplification and uniformity
and the need for multiple record keeping for a variety of taxes saving
cost of compliance.
d) GST envisages simplified and automated procedures for various
processes such as registration, returns, refunds, tax payments, etc.
e) GST prescribes common procedures for registration, refund, filing of
returns, classification of goods, etc. will make the taxation system
more certain.
f) Public interface between the taxpayer and the tax administration will
be considerably reduced as interaction will be through the common
GSTN portal.
g) GST regime will improve environment of compliance with online
filing of returns, verification of input credits and encourage more
paper trail of transactions.
h) Electronic matching of input tax credits all-across India thus making
the process more transparent and accountable
i) Timelines are prescribed for obtaining registration, refunds, etc.
j) GST will help in improving liquidity of the business.

7. Economic growth and Tax compliance

a) GST will widen the tax base, improve compliance by the taxpayers,
and increase the tax revenues of the government.
b) A cumulative effect of high production, export etc. Will improve the
overall investment climate in the country and be helpful in growth in
economic activities, increase the GDP, boost economic growth and
remove poverty.
c) Uniform GST rates across the country will reduce tax avoidance or
evasion by eliminating rate arbitrage between different stage or intra
and inter-State sales

8. Consumers
a) Final price of goods is expected to be lower due to seamless flow
of input tax credit between the manufacturer, retailer and service
supplier.
b) A large number of small retailers with turnover up to Rs 20 lakhs
are exempted from tax and those having turnover up to Rs 1.5
Crore will be covered under a composition scheme with low to
moderate tax rates. This will mean purchases from such retailers at
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 relatively lower prices giving quantum increase to consumption of
goods.

9. Uniformity in tax rates , nomenclature and interpretation :

GST will ensure uniformity in rates of tax and interpretation.
While, “goods include all materials, commodities, and articles”,
service would include anything done for consideration which is not goods.
This will encompass all goods and services in its scope. Further the
classification of goods and services is done as per HSN or Harmonised
System of Nomenclature). A new scheme for classification of Services has
been devised under various sections, headings and groups.

10.10 GST COUNCIL

10.10.1. Under the newly inserted Article 279A, the President of India is
vested with the power to constitute a joint forum of the Centre and States
Goods & Services Tax Council (GST Council). These provisions came
into force on 12th September 2016. Soon thereafter, the President
constituted the GST Council on 15th September 2016.

10.10.2. The composition of the GST Council is as under;

i. Chairperson - Union Finance Minister
ii. Vice Chairperson – Chosen from amongst the Finance Ministers
of the State Governments
iii. Ex-Officio Secretary -The Secretary (Revenue) (as per the decision
of the Union cabinet on 12 September 2016.
iv. Members
a. Union Minister of State (Finance)/Revenue
b. All Ministers of Finance / Taxation of each State or any other
Minister nominated by the States or Union Territories with
legislatures
v. Permanent invitee ( non-voting) -Chairperson, Central Board of
Excise and Customs (CBEC)
vi. GST Council Secretariat
The GST Council is managed by the GST Council Secretariat)
comprising of the officers taken on deputation from both the States
and the Centre. Funds for running the Secretariat will beamed
available and borne by the Centre. The government has appointed
one Additional Secretary and four Commissioners to the
Secretariat.

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10.10.3 The functions of the Council
The GST Council shall perform the following functions, viz. :-
a. To make recommendations to the Union and the States on everything
related to GST including laws, rules and tax rates, exemptions,
threshold limits, dispute resolution etc.
b. To recommend the date on which GST be levied on petroleum crude,
high speed diesel, motor spirit, natural gas and aviation turbine fuel.

10.10.4. Decision making at the Council

a. Every decision of the council shall be taken in a meeting.
b. Quorum for every such meeting shall be not less than 50% of total
members.
c. Every decision of the GST Council is taken by a majority of not less
than three-fourth (75%) of the weighted votes of the members present
and voting.
d. Vote of the Centre has a weight age of one-third of total votes cast.
e. Votes of all the State Governments taken together has a weight age of
two-thirds of the total votes cast, in that meeting.

Example:
At a meeting of the Council, 24 members are present, of which 23
members are from the states and one represents the Centre. The weight
age of votes will work as under :
 Total votes cast 24
 Weight age of Centre -1/3 of 24 = 8 votes
 Weight age of the 23 members of the States taken together - 16
votes i.e. or 0.6956 votes each member.
To pass a resolution by votes required ¾ of 24 = 18 votes, the
Central Government will have weightage of 8
It will need support of 10 states to take the decision.
Interestingly, all the states present in above case concur, then only
the decision can be taken if the Centre does not agree. No decision can be
taken when states are not unanimous without the support of the Central
Government as the requisite majority of 75%.

10.10.5. Decision not to be invalid

Any defect in procedures adopted, or appointment of members or in
constitution of the council or non- filling up of any vacancy shall
not render the decision making by the Council invalid.

10.10.6. The GST Council has held as many as 28 meetings by end of July
2018 and has taken several decisions such as simplification of

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 procedures, composition, e-way bills, threshold limit for
registration, periodicity of returns to be filed, IGST credit and
measures for removal of difficulties including revision of GST
rates.

10.11 GOODS AND SERVICES TAX NETWORK (GSTN)

10.11.1. GST regime primarily relies upon technology-based compliances.
Hence, a Company Goods and Service Network (GSTN) was incorporated
as a special purpose vehicle as a non –profit organisation under the
provisions of section 8 of the Companies Act, 2013 with the initial capital
of Rs. 10 Crore. He Government of India holds 24.5% equity in GSTN
and all States including Delhi and Puducherry, and the Empowered
Committee of State Finance Ministers (EC), together hold another 24.5%.
Balance 51% equity is with non-Government financial institutions.

10.11.2. The company set up a single portal www.gst.gov.in to provide IT

infrastructure and all GST related services to the Central and State
Governments, taxpayers and other stakeholders for implementation of the
Goods and Services Tax (GST).

10.11.3. The portal also aims to establish a uniform interface linkage for
the taxpayer and a common and shared IT infrastructure between the
Centre, Union Territories and, States. The portal is accessible over Internet
by taxpayers and tax professionals like Chartered Accountants, Tax
Advocates Banks, accounting and tax authorities and other stakeholders
and Intranet by Tax Officials etc.
10.11.4. The functions of the GSTN
Primarily, GSTN provides three front end services to the taxpayers namely
registration, payment and return through GST Common Portal. Its main
functions are as under:-
a) To facilitate Registration of the taxpayer with the help of IT, ITeS,
and financial technology companies called GST Suvidha
providers(GSP), who provide mechanism to receive GST returns
from the tax payers and forwarding the returns to Central and State
authorities;
b) To develop with the help of GSPs ,applications to be used by
taxpayers for interacting with the GSTN and facilitate the tax payers in
uploading invoices as well as filing of returns and act as a single stop
shop for GST related services;
c) To customize products that addresses the needs of different segment
of users. GSPs may take the help of Application Service Providers
(ASPs) who act as a link between taxpayers and GSPs;
d) To compute and settle IGST with the concerned states/UT,
e) To match payment of tax by the tax payers with the banking network;

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f) To generate MIS reports from the information furnished by the
taxpayers in the GST returns information and provide such reports to
the Centre and States,
g) To analyse and provide analysis of taxpayers' profile;
h) To match reversal and reclaim of input tax credit.
i) To ensure data privacy and protection along with developing data
retrieval and audit trails and other value added service.

10.12 SELF-EXAMINATION QUESTIONS

1) Explain the concept of GST.

2) List the Central and State levies which will be subsumed in GST in
India.
3) What are the taxes not subsumed in GST
4) Enumerate and explain the principles for subsuming taxes in GST.
5) What is GST Council: How decisions are made by the GST Council?
6) Explain the benefits and need for GST.
7) What were the problems in pre-GST tax regime? How does GST
resolve them?
8) Discuss the dual GST model to be introduced in India.
9) Explain salient features of indirect taxes and differentiate direct and
indirect taxes.
10) Enumerate different types of direct and indirect taxes.
11) Write a short note on various Lists under VII Schedule to the
Constitution of India.
12) If A sells a product at a MRP of 20,000 rupees with VAT rate of
10%. Determine the GST payable. Will it make any difference if A
has purchased this product for Rs 15,000?
(Ans. GST -20,000 X 10/110 Rs 1818, Input credit 15,000X10/110= Rs 1364, payable Rs 1818-1364 = Rs.
454)

13) Multiple Choice questions ;

A. Which of the following taxes have been subsumed in GST?
(a) Central Sales Tax (b) Central Excise Duty (c) VAT (d) All of the
above
B. List I is the -(a) Union List (b) State List (c) Concurrent list (d)
None of above
C. List II is the -(a) Union List (b) State List (c) Concurrent list(d) None
of above

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D. List III is the (a) Union List (b) State List (c) Concurrent list (d) None
of above
E. Union list provides taxes levied by
a) Centre (b) states (c) Union territories (d) none of above
F. State list lists taxes levied by
a) Centre (b) states (c) both centre and states (d) None of above
G. Concurrent list gives items in the domain of
a) Centre (b) states (c) both centre and states (d) None of above ----
H. Weight age of Central Govt. in GST Council is a) 1/4(b) 1/3 (c) 2/3
(d) 3/4
I. GST council takes decisions with majority of a) 1/4(b) 1/3 (c) 2/3
(d) ¾
J. The functions of Goods and Services Network (GSTN) include:
(a) Facilitating registration (b) forwarding the returns to Central and
State authorities (c) computation and settlement of IGST (d) All of the
above
K. 3. GST is levied on supply of all goods and services except:
(a) Alcoholic liquor for human consumption (b) Tobacco (c) Health
care services (d) All of the above
L. On Petroleum Crude, High Speed Diesel, Motor Spirit (Petrol),
Natural Gas and Aviation Turbine Fuel:
(a) GST is not levied (b) GST to be levied from a notified date
decided by GST Council (c) GST is levied, but exempt (d) None of
the above
(Answers : (A) c(B) a (C) b (D)c (E) (a) (F) b. (G (c),H (d), I(d),J (d),K (a), L(d))



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 11
REGISTRATION UNDER GST

Unit Structure
11.1 Introduction and Objectives
11.2 Need and Advantages OF Registration
11.3 Liability for Registration
11.4 Registration Procedures
11.5 Self- Examination Questions

11.1 INTRODUCTION AND OBJECTIVES

The GST being a destination based tax on the consumer of the

goods and services or both; actual taxpayer is different from the factual
one. Registration is a process to establish a chain between the Government
vis-à-vis the supplier and the consumer. It helps the Government to
identify taxpayers and enables the taxpayers to collect tax from the
consumers besides establishing a seamless flow for claiming credit of tax
paid on inputs (ITC). This lesson takes a detailed look at the provisions
relating to Registration, its need, advantages, liability for registration,
exemption from registration, procedural aspect for registration and its
modification or cancellation etc.

11.2 NEED AND ADVANTAGES OF REGISTRATION

Primarily, registration is a process for obtaining a unique number

from the Government by a supplier of goods or service or both for
collecting tax on behalf of the Government and to avail Input tax credit for
the taxes on his inward supplies. Without registration, a person can neither
collect tax from his customers nor claim any input tax credit of tax paid by
him. Registration confers the following advantages to a taxpayer:

a. Registration is an official recognition to a person as the supplier of

goods or services or both.

b. A registered supplier is authorised to collect tax from the consumers.

c. The supplier may pass on credit of the taxes paid on the goods or
services or both, supplied to the consumers.

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d. The supplier may claim and utilise input tax credit of taxes paid
towards the discharge of his liability for taxes due on supply of goods
or services or both.

e. Registration acts as a catalyst in establishing a supply chain at the

national level with a seamless flow of Input Tax Credit from suppliers
to the consumers.

11.3 LIABILITY FOR REGISTRATION

Liability for payment of GST arises on happening of the taxable event

viz. the “supply” of goods or service or both by a supplier thereof.
Liability for registration is co-extensive with the liability to pay GST. A
supplier is liable for registration in four ways, viz.:-

a. Migration of the existing taxpayer from the old law to the GST,

b. Registration based on minimum turnover of supply of goods or

services or both,

c. Compulsory registration irrespective of the turnover limit, and

d. Voluntary registration irrespective of the turnover limit.

3.1. Migration of the existing taxpayer from the old law to the GST
The GST came into force on 1st July 2017. Every person who was
registered or holding a license under the existing law was required to
obtain provisional registration to migrate to the GST by 30th June 2017
i.e. a day preceding the appointed day as per section 22(2) of the CGST
Act, 2017. The provisional registration was subject to final registration
after submitting the documents and information required for registration.
There were elaborate provisions for declaration of stocks and unavailed
input credit on 30th June 2017 to facilitate smooth transition to the new
regime. his being only a transitory provision, is not discussed in detail.

3.2. Registration based on Turnover of taxable supply

3.2.1. Under section 22 (1) of the CGST Act, 2017, every supplier is
liable to be registered under the CGST , in the State or Union Territory,
from where he makes a taxable supply of goods or services or both, if his
aggregate turnover in a financial year exceeds the specified limit i.e.:-
 ten lakh rupees in special category states( other than Jammu and
Kashmir); and

 twenty lakh rupees in all the other states including Jammu and
Kashmir.

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As per the section effective threshold limit will be Rupees 10,00,001 / Rs
20,00,001 onwards.

3.2.2. Special category states are Arunachal Pradesh, Assam, Jammu &
Kashmir Manipur, Meghalaya, Mizoram Nagaland and Tripura and
Himachal Pradesh, Sikkim and Uttarakhand. Jammu & Kashmir, although
being a special category state has opted for threshold limit of Rs 20 lakh.

3.2.3. Aggregate turnover

A. “Aggregate turnover” as defined in section 2(6), means the aggregate

value of-
i. all taxable supplies,

ii. exempt supplies,

iii. exports of goods or services or both, and

iv. inter-State supplies

B. Aggregate turnover of supply of goods or services or both is computed
a. for a supplier having the same Permanent Account Number, on the
principle of one PAN- one person,
b. for the whole of India taken together,
c. with reference to a financial year i.e. April to March
C. The value of aggregate turnover excludes:-
a. Central tax, State tax, Union territory tax, Integrated tax and Cess;
b. The value of inward supplies on which tax is payable by a person
on reverse charge basis;
D. vide explanation to the section 22 , the aggregate turnover includes:-
a. all supplies made by the taxable person on his own account ; or
b. supplies made on behalf of all his principals; or
c. in case of a principal, the supply of goods by a registered job
worker after
d. completion of job-work,

3.2.4. Persons not liable for registration-Section 23

Following persons are not liable for registration vide Section 23 :-
A. Any person engaged exclusively in the business of supplying goods or
services or both; that are not liable to tax or wholly exempt from tax
under the CGST Act or under the IGST Act;
B. an agriculturist, to the extent of supply of produce out of cultivation of
land
C. Any class of persons specified by the Government on the
recommendations of the Council, by notification. Under this section,

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 the government has granted exemption from registration under this
section, to :
(i) Individual advocates including senior advocates ,
(ii) Individual sponsorship service providers including players ,
(iii) Suppliers, whose all supplies are taxable under reverse charge
(vide Notification No. 5/2017-Central Tax dated 19.06.2017).

3.2.4. Some relevant points

From the above, the following points emerge out, namely:-

a. The liability for registration is on “every supplier”.

b. The supplier should make a taxable supply of (i) goods or (ii) services
or (iii) both over the threshold limit of 10 lakh/20 lakh rupees.
c. Under section 22 read with section 23, a supplier of only tax-free
supplies is not liable for registration but if he some taxable supply,
then, all supplies, whether taxable or tax-free in the course of export or
inter-State supply, will be considered in aggregate turnover.
d. Registration will in the state or union territory, from where the
supplier makes the taxable supply of goods or services or both.
e. An agriculturist is specifically exempted from registration to the extent
of supply of produce out of cultivation of land, even if exceeds the
threshold limit.
f. Similarly a supplier of only supplies taxable under reverse charge, is
also exempted from registration vide Notification No. 5/2017-Central
Tax dated 19.06.2017.
g. All supplies by a taxable person will be included in his aggregate
turnover whether made
 on his own account; or
 as an agent on behalf of all his principals; or
 in case of a principal, the supply of goods, after completion of
job-work, by a registered job worker.
h. The value of the supply considered in the account of the principal,
shall not be included in the aggregate turnover of the registered job
worker because only one person should be liable for accounting the
turnover of supply.

3.2.5. Illustrations:
1. A is chartered accountant providing taxable services from Agartala. He
will be liable for registration u/s 22, when the value of services provided
by him exceeds Rs 10 lakh applicable to the state of Tripura, a special
category state.
2. B is a Kolkata based wholesaler in tea. He will be liable for registration,
when the aggregate turnover or supply of tea (sales) exceeds Rs 20 lakh.
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3. S of Surat supplies (sells) taxable goods worth Rs 18 lakh on his
account and Rs 3 lakh as an agent acting for his principal T. S will be
liable for registration, when the turnover exceeds Rs 20 lakh inclusive of
supply made on his account and made on T’s account.
4. D is a diamond merchant of Mumbai. D has turnover of Rs 5 lakhs and
he sends goods on job work to the registered artisan. The artisan
completes the job work and sends goods to D valued at Rs 25 lakh. S will
be liable for registration on his own turnover and the goods received from
the job worker, when the turnover exceeds the threshold limit of Rs 20
lakh. However, then the turnover of Rs 25 lakh will be excluded from the
turnover of the job worker.
5. An educational institution provides tax- free education services valued
at Rs 50 lakh. It will not be liable for registration u/s 23 because it does
not provide any taxable supply.
6. A hospital provides tax-free medical services of Rs 18 lakh and taxable
services of Rs 4 lakh. It will be liable because its aggregate turnover
exceeds Rs 20 lakh.
7. A makes export of taxable goods for Rs 100 lakh. A will be liable for
registration, although his tax liability will be nil.

8. A of Akola is engaged exclusively in supplying tax-free goods. He is

not liable for registration under this clause even of the turnover exceed the
limit of Rs 20 lakh.

9. Turnover of B of Bengaluru from supplying exempted goods is Rs 50

lakh and on supplying taxable goods is Rs 25 lakh. B will be liable for
registration from the date on which the aggregate turnover of supply of
goods exceeds Rs 20 lakhs.

3.3. Compulsory registration

Following categories of persons are liable for compulsory
registration under section 24 of the CGST Act, 2017, irrespective of the
amount of turnover:-

Inter-State Suppliers
Persons making any inter-State taxable supply (e.g. from Mumbai to Goa);
However, persons making inter-State supplies of taxable services and
having an aggregate turnover, to be computed on all India basis, not
exceeding an amount of twenty lakh rupees (ten lakh rupees for special
category States except J & K) are exempted from obtaining registration
vide Notification No. 10/2017-Integrated Tax dated 13.10.2017.

Casual taxable persons

A casual taxable person is one who has a registered business in a
different State and wants to affect taxable supplies from some other State
or Union Territory where he is not having any fixed place of business.

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Such persons are liable for registration in the State from where they seek
to affect a taxable supply as a casual taxable person.

An exception is made in case of casual taxable persons making

supplies of specified handicraft goods, who will be entitled to the
threshold exemption of Rs. 20 Lakh/10 lakh and thus need not take
compulsory registration.

Non-Resident Taxable Persons

Non-resident taxable persons i.e. a foreigners not having fixed place
of business in Indiahas to compulsorily apply for registration if they desire
to make any taxable supply any State in India at least five days in advance
of making such supply and also make advance deposit of the estimated
tax liability. Registrationis granted to the non-resident taxable persons
only for a specified period only, but the period may be extended on
making application.

Payers of tax under reverse charge

The persons who are required to pay tax under reverse charge on
the supplies received by them. e.g. clients of advocates, those receiving
transport services from a goods transport agency etc.

E-Commerce Operators
E-commerce operators, notified as liable for GST payment under
section 9(5) of the CGST Act, 2017.

(i) Tax Deduct or;

Persons required to deduct tax under section 51, whether or not
separately registered under this Act;

(ii) Agents
Persons making taxable supply of goods or services or both on
behalf of other taxable persons whether as an agent or otherwise;

(iii) Input Service Distributors, whether or not separately registered

under this Act;

(iv) Suppliers through E-Commerce Operator subject to TCS

Persons who supply goods or services or both, other than supplies
specified under section 9(5) through such E - Commerce Operator who are
required to collect tax at source(TCS) under section 52;

(v) Supplier through E- Commerce Operators subject to TDS

Suppliers of goods who supply through such E-Commerce
Operators, who are liable to collect tax at source. However , suppliers of
taxable service through e-commerce operators need not take compulsory

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registration and are entitled to avail the threshold exemption of Rs. 20
lakh/10 lakh(Notification No. 65/2017-Central tax dt. 15.11.2017)

(vi) E-commerce Operators, who provides platform to the suppliers

to make supply through them.

(vii) Every person supplying Online Information and Database Access

or Retrieval Services (OIDAR) from a place outside India to an
unregistered person in India.

(viii) Such other person or class of persons as may be notified by the

Government on the recommendations of the Council.

3.4. Voluntary registration

Any person having turnover below the threshold limit can apply
for voluntary registration. Such a person will not get the benefit of the
threshold limit of Rs 20 lakh /10 lakh. Their entire turnover will be subject
to GST from the day of registration. Further a voluntary registration will
not be cancelled until one year from the date of registration.

11.4 REGISTRATIONPROCEDURES

There are different procedures for registration for a non-resident

taxable person, casual taxable persons, deductors of tax, collectors of tax
and supplier of Online Information Database Access and Retrieval
(OIDAR) services and other suppliers. Some relevant provisions have
been dealt with separately at the appropriate places. For all other suppliers
the following will be the procedure for registration.

4.1. Nature of Registration

(i) Registration under GST is not tax specific. There will be a common
registration for all the taxes i.e. CGST, SGST/UTGST, IGST and
Cesses.

(ii) Registration under GST is PAN based and State specific. A given
PAN based legal entity would have one GSTIN per State. It would
mean:-

i. A taxable person is required to register in each State or Union

territory from where he effects supply. Hence, an entity having
branches in multiple States will have to take separate State wise
registration for the branches in different States.

ii. If the branches of the entity are within one State or Union
territory, it can have single registration declaring one place as

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 the principal place of business and other as the branches as
additional place of business.

iii. The above rule subject to the following three exceptions , where
separate registration is required even within a state :

a) a unit in SEZ ; or

b) a SEZ developer; or

c) Each of business verticals separately of business entity

within a State or Unit Territory. Section 2 (18) of CGTS Act,
2017 defines business vertical as under:
“business vertical means a distinguishable component of an
enterprise that is engaged in supplying an individual product or
service or a group of related products or services and that is
subject to risks and returns that are different from those of other
business verticals;
Explanation: Factors that should be considered in determining
whether products or services are related include:
(a) the nature of the products or services;
(b) the nature of the production processes;
(c) the type or class of customers for the products or services;
(d) the methods used to distribute the products or provide the
services; and
(e) if applicable, the nature of the regulatory environment, for
example, banking, insurance, or public utilities.”
iv. Upon registration each supplier is allotted 15-digit ‘ Goods and
Service Tax Identification Number or “GSTIN” comprising of the
first 2 digits for the State code followed by 10 digits PAN of the
legal entity, 2 digits for the entity code and the last digit for check
number.

v. A centralised unique identification number (UIN) is issued in

respect of supplies to some notified agencies of United Nations
organisation, multinational financial institutions and other
organisations.

vi. Upon Registration a certificate of registration incorporating the

GSTIN is issued to the taxpayer and the GSTIN is made available
to the applicant on the GSTN common portal.

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4.2. Standardisation of procedures for Registration

The GST registration rules prescribe as many as 30 standard forms

/ formats to be used for every process in the registration chain such as
application for registration, acknowledgment, query, rejection, registration
certificate, show cause notice for cancellation, reply, cancellation,
amendment, field visit report etc., This is to ensure uniformity of the
process all over the country and speeding up the decision making process.
Further, the rules stipulate strict timelines for completion of different
stages of registration process. The standardized process for Registration is
given below.

I. Procedure for Registration Regular Taxpayers

A. Submission of Application for Registration

(i) Every taxable person, who is not a non-resident, deduct or of tax and
collector of tax has to submit application for registration online
through the common portal (GSTN) or the Facilitation Centre in form
GST REG-01.
(ii) Time limit for submission of application is within thirty days from the
date when liability to register arose

(iii) Form for GST REG-01 is in two part – Par A and part B

(i) Part- 'A' – contains the applicant entity’s name PAN, Mobile,
email etc.

(ii) Part - B application reference no. given in acknowledgment in

GST-REG-02.

(iv) Following documents are required for GST registration :-

(i) PAN of the applicant

(ii) Identity and address proof of the promoters.

(iii)Proof of registration of business, e.g. partnership deed,

registration certificate, certificate of incorporation etc.

(iv)Address proof for place of business such as Rent receipt,

electricity bill, Municipal certificate etc.

(v) Bank account proof.

(vi)Digital Signature.

(v) On submission of the application, PAN of the applicant is verified

through GST portal Mobile no. and PAN through One Time Password

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 (OTP) and if these documents are found to be in order, an
acknowledgment will be issued in Form GST-REG-02 electronically.

B. Verification process
(i) The application will be forwarded to the Proper Officer of the
respective State or the Central Government, who shall examine the
application and the accompanied documents and after the verification,
the Proper Officer shall approve and grant the registration within three
working days.

(ii) Where, the Proper Officer finds the application to be deficient

for any reason or requires any further clarification, he shall intimate to
the applicant in form GST-REG-03.

(iii) The applicant shall submit the reply with clarification in form
GST-REG-04within seven working days starting from the fourth day
of filing the original application/ the date of receipt of such
information in form GST-REG-03. The clarification includes
modification or correction of particulars declared in the application
for registration.

C. Grant or Refusal of Registration

(i) The proper officer would have to grant the application for
registration within seven working days thereafter and
a) issue Registration Certificate in form GST-REG-06 or

b) reject the application in form GST-REG-05.

(ii) If the proper officer does not respond within 3 working days of
receipt of application or within 7 working days from receipt of
clarification, then application under this Act shall be deemed to have
been approved.

D. Physical verification in connection with registration

The basic premise of the GST is reduction of physical interface
and evolve a technology based tax regime. Hence, physical verification is
avoided. However, where the Proper Officer is satisfied and deems
necessity or desirable to carry out physical verification, he may do so only
after granting the registration. Further after the verification, he shall
upload the verification report along with the supporting documents and
photographs to on the common portal within fifteen working days.

II. Registration procedure for Casual Taxable Persons

(i) Registration under GST is compulsory for the casual taxable persons
irrespective of the annual aggregate turnover. For this purpose

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 A casual taxable person as a person who occasionally undertakes
transactions involving supply of goods or services or both in the course or
furtherance of business, whether as principal, agent or in any other
capacity, in a State or a Union territory where he has no fixed place of
business. Persons running temporary businesses like event management,
business fairs or exhibitions or other seasonal businesses fall under casual
taxable persons under GST. Casual taxable, unlike the regular taxable
person do not have a fixed place of business located in a State or Union
Territory where they supply of goods or services or both.
(ii) A Casual Taxable person shall make the application for GST
registration in form GST REG-01 at least 5 days prior to the
commencement of business.

(iii) Deposit for GST Registration

A Casual Taxable person can not opt for composition scheme.

Instead, he will have to deposit an amount equivalent to the expected tax
liability during the validity period of GST registration in advance for GST
registration. For this purpose, a temporary reference number is generated
for payment of GST deposit.

(iv) On paying the GST deposit, the electronic cash ledger of the taxpayer
is credited, and GST registration certificate is released, which will be valid
initially for a period specified in the application or 90 days, whichever is
earlier.

(v) The period of extension may be extended for a further period of 90

days on making application in form -GST-REG-11 before the expiry of
the original validity period of registration and amount of additional tax
liability during the extended period will have to be made. Other
procedures will be similar as those applicable mutatis mutandis to regular
taxable persons

(vi) Filing of returns:

A registered a casual taxable person has to file the following monthly
returns

 Form GSTR-1 on or before the 10th of the following month giving

detail of the outward supplies of goods or service made by him

 Form GSTR-2after the 10th but on or before the 15th of the following
month giving detail of the inward supplies made by him

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 Form GSTR-2 after the 15th but on or before the 20th of the following
month showing the tax liability base on auto populated details of
GSTR 1 & 2.

 There is no requirement for filing annual return by a casual taxable

person.

(vii)Refund of Tax
After filing all the returns for the registration period, a refund may
be claimed in GSTR-3 and allowed in respect of the excess tax paid by the
causal taxable person.

III. Registration procedure for Non- Resident Taxable Persons

(i) Registration under GST is compulsory for the casual taxable persons
irrespective of the annual aggregate turnover or any other criteria. For this
purpose:

 A Non-resident taxable person means any person or business or not-

for-profit Organisation who occasionally undertakes transactions
involving supply of goods or services or both, whether as principal or
agent or in any other capacity, but who has no fixed place of business or
residence in India. Foreigners and foreign entities supplying goods or
services to India will would be non-resident taxable persons as per the
GST.

(ii) A Non-Resident Taxable person shall identify a person in India to act

as its authorised representative who shall be a person resident in India
having a valid PAN.

(iii) Application for registration shall be submitted

 at least 5 days prior to the commencement of business in India ,
 shall be in form GST REG-0 9, and
 signed by his authorized signatory having a valid PAN in India
(iv) the non-resident taxable person during the GST registration process
must file the following documents :
 documents showing Proof of Principal Place of Business( Rent
receipt agreement, electricity bill etc. or consent letter from the
owner of the premises),
 Identity proof of the non-resident taxable person - Passport, Visa
etc.,
 Tax identification number or unique number on the basis of which
the entity is identified by the Government of that country or its
PAN, if available,
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  Authorisation for Authorised Representative in India along with
the copy of the resolution of the board of directors granting such
Authorisation, if any
 Certificate of Incorporation of the Company.
 License issued by foreign country, if any
 Clearance certificate issued by Government of India, if any, and
 Bank Account Proof with IFC Code MICR etc.
(v) GST Deposit for Non-Resident Taxable Persons

Like the Casual taxable persons, Non-resident taxable persons are

required to remit in advance a deposit equivalent to the expected tax
liability during the validity of the registration for GST registration, where
upon the registration certificate will be issued. Similar process is to be
followed for extension of restoration period and additional deposit will be
required to be made equivalent to the estimated tax liability for the
extended period. An application reference number would be generated for
payment of advance tax for obtaining GST registration and an allocation
will have to be filed for extension of registration Period in for GST-
REG-11. .

(vi) For final registration , an application is required to be submitted in

form GST REG-26 electronically within a period of 3 months from the
provisional registration Other provisions are similar to those applicable on
the regular taxable persons in regard to the final registration

(vii) The proper officer, after verification shall issue registration in form
GST REG-06.

(viii) If the officer is not satisfied with the correctness or completeness

of the information submitted or needs additional information, he shall
issue a show cause notice to the applicant in Form GST REG-27.

(ix) If the reply to the show cause is satisfactory, the show cause notice
may be cancelled by issuing an order in Form GST REG-20, and if it is
not satisfactory, then the officer after giving opportunity of being heard to
the applicant may pass an order for cancellation of the provisional
registration granted to the applicant in Form GST REG-28.

(x) The rules for filing of returns, refunds etc. are similar to those
applicable to the casual taxable persons.

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IV. Registration Procedure – OIDAR Service Providers

A taxable person supplying online information and data base

access or retrieval (OIDAR) services to a non-taxable online recipient
shall file the application for registration inf Form GST REG-10
electronically and follow the procedure applicable to non- taxable persons.

V. Registration Procedure – Deduct or collector of GST

A person who is liable to deduct GST at source or collect GST e.g.
e-commerce operator will have to follow the normal procedure as
applicable except that application for registration shall be submitted
electronically in Form GST REG-7

VI. Registration Procedure – Special agency like United Nations.

Unite nations and other connected specified agencies shall apply

for registration in GST-REG-13. It may be noted that these agencies are
not liable to GST under the international protocol, but registration will still
be required to claim refund of taxes pais on inward supply of goods or
service or both.

VII. Succession or Transfer of Business

Liability to registration is on the transferee of a business as going

concern as result of succession or transfer of business as result of
amalgamation, merger, demerger, or change in constitution etc. from the
date of transfer or succession and the transferee has to follow the
applicable procedure as above.

4.3. Amendment of Registration

Amendment in particulars of registration may be for the three reasons,

viz. :

(i) Change in Core field

Under Rule 12, a taxable person may make an application for amendment
in Form GST - REG -14 within 15 days of the following changes, which
do not require cancellation under section 29 of CGST Act,
(i) legal name of the business, or

(ii) the State of place of business or

(iii)additional place of business., or

(iv)names of the functionaries – like partners , directors , etc

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 The proper officer shall after making necessary inquiry, approve
the amendment electronically in form GST -REG-15within next 15 days
from the date of application.

(ii) Change in Non- Core field

All the other corrections amendments or change in the particulars

of registration are called the change in non- core field. A taxable person
suo motu (on his own) may effect the change on the common portal
without seeking approval of the proper officer. This change includes a
change in the name of the authorised signatory by adding another name of
signatory; otherwise the change will not be effective.

(iii) Change in Mobile, email etc.

Change in e mail, or mobile numbers may be effected in the

common portal by the taxable person after an online verification through
One Time Password is issued.

iv) Eligible persons

A tax payer may also change in the particulars can be effected by

the following categories of persons, viz:

(i) Applicant, Taxable person

(ii) Person holding UIN Card or other notified person for registration
under TDS/TCS U. N. bodies category,

(iii) Non-Resident taxpayer

(iv) GST Practitioner, and

(v) Online application and retrieval service provider.

Fields, which cannot be changed

GST is State specific PAN based, hence the following changes

which have the effect of changing these particulars is not allowed. E.G.

a. PAN details

b. Change in constitution of business ,

c. Modification of place of business from one state to another.

d. In these cases, a fresh registration will have to be obtained after

canceling the existing registration.

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 The amendments will come into effect from the date of application for
amendment.
However, the Commissioner may allow the amendments with
retrospective effect.

4.4. Cancellation of Registration

4.4.1Under section 29(1), registration can be cancelled only in two

circumstances :-

(i) Voluntary cancellation when a taxable person no more requires it ,

or

(ii) the Proper Officer considers the registration liable due to some
specific defaults.

4.4.2. Voluntary Cancellation :

a) Cancellation of Registration of Migrated Taxpayers :

A taxpayer, who has migrated from old tax to GST, may opt for
cancellation
 on GSTN portal online, if he has not issued any tax invoice , or

 in Form GST- REG- 16 if his issued any tax invoice.

In either case, cancellation is allowed only for the following reasons :-

a) turnover is below the threshold limit , or

b) his supply is in exempted category.

b) Cancellation of Registration of Other Taxpayers

1. Time condition
(i) Where a taxable person not being liable for obtaining registration,
has taken voluntary registration, cancellation of registration is not
allowed until expiry of one year from the effective date of
registration.
(ii) Other taxpayer may opt for cancellation anytime as the condign of
one year does not apply on them.

2. Reasons for cancellation

The cancellation may be for the following reason:-
a) the business of the taxpayer has been discontinued ; or
b) the business has been sold or transferred to some other entity and
that other entity needs to register under GST; or

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 c) turnover is below the threshold limit , or
d) the supply is in exempted category.
3. Procedure for cancellation
A taxable person desirous of cancellation of registration may apply
on the common portal within 30 days of event warranting cancellation in
Form GST-REG-16. Such person is required to :-

a) declare in the application the stock held on the date with effect
from which he seeks cancellation ,
b) work out and declare:-
 the quantum of dues of payments,
 credit reversal, and
 the particulars of payments made towards discharge of such
liabilities.
4. On receipt of the application the Proper officer shall cancel the
registration within 30 days from the date of application or receipt of
explanations or clarifications in response to his notice issued by him in
Form GST-REG-16, if any. The notice has to be replied in Form GST-
REG-18 within seven days. The order of cancellation in will be in Form
GST-REG-19.Revocation of notice will be in Form GST-REG-20.

C. Suo-motu cancellation by the Officer

The Proper Officer may issue a show cause notice in Form GST-
REG-16 to a registered person and call for information and after
considering such information and hearing the taxpayer , cancel the
registration by passing an order in Form GST-REG-19, if he is satisfied
that the registered person has :

(i) contravened the provision of the Act and the Rules;

(ii) furnished returns for-
a) three consecutive tax periods in case of a composition
taxpayer, or
b) Continuous period of six month in case of a regular taxpayer;
(iii) obtained voluntary registration but not commenced business within
six months of registration;
(iv) obtained registration by means of fraud, willful misstatement or
suppression of facts;
(v) discontinued business from the registered place of business;

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(vi) been issuing tax invoice without making the supply of goods or
services; or
(vii) Committed such other defaults as may be specified.

4.5. Revocation of Cancellation

Where registration is cancelled suo-motu, the taxable person,

within a period of 30 days the service of cancellation order, may apply to
the Proper Officer for revoking the cancellation order.

No such application shall be entertained unless the taxable person,

before making such application, has made good the defaults by filing all
pending returns, making payment of all dues etc. for which the
registration was cancelled by the officer.

On receipt of the application , the Proper Officer , if satisfied, may

wither revoke the cancellation earlier ordered by him or reject the request
for revocation of cancellation, after observing the principle of natural
justice by way of issuing notice to the person and hearing him on the
issue.

4.6. Cancellation not to affect pending tax lability :

Cancellation of registration will not affect the liability of taxes

prior to cancellation. Further, the taxpayer will have to pay his due taxes
by reversing the input credit in in stock (Raw materials, finished or semi -
finished goods) or make payment, whichever is higher. Similarly, input
credit on capital goods also will have to be reversed or the payment will
have to be made.

11.5 SELF EXAMINATION QUESTIONS

1. Explain the concept of Casual Taxable person.

2. What are the provisions for registration of a non- resident taxable
person?
3. List out the forms used for registration and cancellation
3. State whether the following are true or false:
a) A migrated person cannot cancel his registration
b) Registration may be refused if turnover does not exceed the taxable
limit
c) A farmer is not liable to GST in respect of his agriculture
d) A plastic surgeon, who provides life-saving surgery for Rs. 10 lakh
(exempt) and cosmetic surgery (taxable) for Rs 12 lakh not liable for
registration.
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e) A charitable trust is not liable for registration under GST.
f) An advocate is liable for registration under GST.
g) A Jammu taxpayer with taxable turnover of Rs. 15 lakh not liable for
registration.
h) Application for registrant in is to be made in GST-REG 1
i) A non- resident has to pay tax in advance
j) A GST number taken by fraud can be cancelled
k) A cancellation order can not be revoked.
(False a, b, d, e, f and j , True c, g, h, i )



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 12

PLACE OF SUPPLY UNDER GST

Unit Structure

12.1 Introduction and Objective

12.2 Inter -State Vs. Intra-State Supply
12.3 Location of the Recipient of services
12.4 Location of the Supplier of services
12.5 Place of supply in respect of goods and services
12.6 Place of supply in respect of goods
12.7 place of supply in case of supply of services, when location of the
supplier and recipient is in India
12.8 place of supply in case of supply of services, when location of the
supplier and recipient is in India
12.9 Self- Examination Questions

12.1 INTRODUCTION AND OBJECTIVE

Determination of the place of supply of goods and/or services is of

great importance as the GST being a destination based tax is levied at the
place, where the goods and/or services are consumed, not at the place of
origin. Accordingly, each transaction has to pass though the test of the
place of supply to determine: -
a. whether tax is to be levied on a particular cross-border transaction;
b. whether a particular transaction it is an Inter-state supply or Intra-state
supply;
c. who will collect the tax on such transaction; and
d. type of the tax is be levied; IGST, CGST, or SGST/UTGST, on that
transaction.

Further, the Place of supply depends upon the location of the

recipient of services and the location of the supplier of services. This
lesson will deal with the provisions relating to the place of supply of
goods and their implication

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12.2 INTER-STATE SUPPLY VS INTRA-STATE SUPPLY

2.1. Broadly, the transactions may fall in two categories: -

A. International or cross border transactions, viz.:
a. Imports of goods into India; or
b. Export of goods outside India, and
B. Domestic transactions, viz:
a. Inter-state supply
b. intra-state supply

2.2. Inter-state supply is when “location of supplier” and “place of supply”

are in different States or Union Territories (section 7 of the IGST Act). In
contrast, intra-state supply is when “location of supplier” and “place of
supply” are in the same state or same union territory (section 8 of the
IGST Act).

Examples
1. A supplier in Gujarat sells good in Gujarat. It is intra-state supply,
liable to CGST and SGST as location of the supplier and the place of
supply are within the same state (Gujarat).

2. The supplier in Gujarat sells goods in Goa. It is an inter-state supply

attracting IGST as the location of the supplier and the place of supply
fall in different states.

While, Section 2(70) and 2(71) of CGST Act define “location of

the recipient of services” and “location of the supplier of services”
respectively, the Act does not define “location of the recipient of goods”
and “location of the supplier of goods” at any place.

12.3 “LOCATION OF THE RECIPIENT OF SERVICES

As per section, 2(70) of CGST Act, 2017, “location of the recipient of

services” means, —

(a) where a supply is received at a place of business for which the

registration has been obtained, the location of such place of business;
(b) where a supply is received at a place other than the place of business
for which registration has been obtained (a fixed establishment
elsewhere), the location of such fixed establishment;
(c) where a supply is received at more than one establishment, whether the
place of business or fixed establishment, the location of the
establishment most directly concerned with the receipt of the supply;
and
(d) in absence of such places, the location of the usual place of residence
of the recipient;

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Thus, the location of the recipient primarily means: -

Supply Received at Location of Recipient of Service

Place of business for which the Recipient’s Registered Office;
registration has been obtained
Place other than the place of Recipient’s fixed establishment
business for which registration has
been obtained, a fixed
establishment
at more than one establishment, the location of the establishment
whether the place of business or most directly concerned with the
fixed establishment receipt of the supply
in absence of such places the location of the usual place of
residence of the recipient;

Illustration:
A is registered at Fort, head office at Dadar and branches at Thane
and Borivali. His residence is in Juhu.

For any supply received in Thane office, the place of recipient will
be at:
1. registered office at fort,
2. Dadar office, if A does not have registration at fort; or
3. Most connected office at Thane (in absence of fort and Dadar
offices, and
4. Residence at Juhu, in absence of any of the above.

12.4 “LOCATION OF THE SUPPLIER OF SERVICES

U/s section 2(71), of the CGST Act, “location of the supplier of

services” means: —
(a) where a supply is made from a place of business for which the
registration has been obtained, the location of such place of business;
(b) where a supply is made from a place other than the place of business
for which registration has been obtained (a fixed establishment
elsewhere), the location of such fixed establishment;
(c) where a supply is made from more than one establishment, whether
the place of business or fixed establishment, the location of the
establishment most directly concerned with the provisions of the supply;
and
(d) in absence of such places, the location of the usual place of residence
of the supplier;

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 The yardstick for determining the location of the provider or
supplier of service are more or less similar to those applicable on location
of the receiver of the supply.

Supply made from Location of Supplier of Service

Place of business for which the Recipient’s Registered Office;
registration has been obtained
Place other than the place of Recipient’s fixed establishment
business for which registration has
been obtained, a fixed
establishment
at more than one establishment, the location of the establishment
whether the place of business or most directly concerned with the
fixed establishment provision of the supply
in absence of such places the location of the usual place of
residence of the supplier

Example:
Goods are supplied to Jamnagar Branch of Reliance Industries
Limited. Its registered office is in Surat and the corporate office is in
Mumbai. Place of supply will be Surat, Mumbai and Jamnagar in that
order.

12.5 PLACE OF SUPPLY OF GOODS AND SERVICES

Section 10 and section 12 of the IGST Act, 2017 lay down the
principles for determination of place of supply broadly in three categories
viz.: -

Section 10 Supply of goods

Section 12 Supply of services where location of both the
supplier and the recipient is in India;
Section 13 Supply of services, where location of either the
supplier or the recipient is outside India.

12.6 PLACE OF SUPPLY IN RESPECT OF GOODS

Section 10 of the IGST, Act, 2017, lays down the following principles
to determine place of service of goods

6.1. When there is movement of goods

When there is movement of goods, there may be two situations: -

A. Where supply involves movement of goods whether by the

supplier or the recipient or by any other person, place of supply is the
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place where the movement terminates i.e. where the goods are delivered or
the ownership in goods is transferred.
Examples
1. Ashok of Akola sells 100 cotton bales to Ramesh of Dhule. The place
of supply is Dhule in Maharashtra, where the movement of goods is
terminated. Both Akola and Dhule being in the same state Maharashtra, it
is intra-State sales liable to CGST & SGST.

2. If Ashok sells goods to Rajesh of Bhopal in M.P., the place of supply

will be in Bhopal M. P. M.P. and Maharashtra being different states; it
will be inter-state sales attracting IGST.

3. P of Pune places an order to Reliance, Surat (Gujarat) for purchase of

mobile phones goods ex-factory.

Surat will be the place of supply as the goods are delivered there.
Both, the place of supply and location of the supplier being in same State
Gujarat, it will be intra-State sales chargeable to CGST and SGST. It is
immaterial that P after collecting goods from the factory of Reliance Surat
transports the goods to his place of business in Pune or anywhere else.
B. Delivery to a third party as per instructions
When goods are delivered by a seller to the recipient (whether
agent or not) on the direction of a buyer before or during the movement of
goods, by way of transfer of document of title to the goods or otherwise,
the place of supply will be the principal place of the buyer on the
assumption that the buyer has received the goods.
Examples
1. Rakesh of Ranchi buys umbrellas from Mahesh of Mumbai to be
delivered to his father living in Mumbai.
When they umbrellas are delivered in Mumbai (to his father), It
will be assumed that Rakesh has received the goods at his principal place
in Ranchi. Place of supply is in Ranchi (Jharkhand) Ranchi and Mumbai
(Maharashtra) being different states, it will be inter-State sale Chargeable
to IGST.
2. Raju of Mumbai places an order for a watch on Snapdeal (an e-
commerce operator) manufactured by Foss Ltd., Bengaluru (registered
with Snapdeal) to be delivered to Rakhi, his sister in Delhi.
This is again a case of delivery of third party. Delivery of watch to
Rakhi in Delhi) will be assumed to be delivery to Raju at his principal
place in Mumbai by the Supplier Foss (Bengaluru Karnataka). Hence,
Mumbai will be the place of supply and as inter-State sales, IGST will be
chargeable.

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6.2 When there is no movement of goods
A. Where supply does not involve movement of goods, the place of
delivery of goods will be the place of supply.

Examples
1. A of Mumbai has goods stored in B’s godown in Pune. A sell these
goods to B.

Place of service will be in Pune, when B appropriates the goods although

there is no physical movement of goods. This being intra- state as the
supplier and the place of supply both are in the same state CGST and
SGST will be charged.

2. If A of Mumbai sells good lying in Jaipur to B of Jaipur, the place of

delivery will be Jaipur. The place of supply Jaipur and the location of the
supplier A (Mumbai) being in different states, IGST will be charged.

3. Bhansali, a Mumbai based film producer purchases a studio in

Ramojirao Complex in Hyderabad with pre-installed audi-visual
equipments. The place of supply is Hyderabad being the location of
equipments at the time of delivery along with the studio building, which is
same as the location of the supplier. Hence, CGST and SGST will be
charged as intra -State sale. There is no GST on sale of building being a
capital asset.
B. The goods assembled or installed at site

Where, goods are assembled or installed at the site of the buyer,

site will be the place of supply.

Example
L &T Ltd., Mumbai fabricates oil storage tank at a Refinery in Odisha.
The place of supply is Odisha, where the oil storage tank is
installed or fabricated. This being an inter-State sale from Mumbai
(Maharashtra) to Odisha, IGST will be charged. However, L &T may
apply for registration as casual taxable person in Odisha and pay CGST &
SGST.
C. Goods Supplied on a Vessel/Conveyance
Where the goods are supplied on board a conveyance including any
vessel, aircraft, train or a motor vehicle, place of supply is the location
where such goods are taken (loaded) on board.

Examples

1. A buys food articles on board while travelling from Mumbai to Delhi

by air.

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 Mumbai is the place of supply since the food items are loaded into
the plane in Mumbai. If the Airline is registered in Mumbai, CGST&
SGST will be charged. But if the Airline is registered in Delhi, IGST will
be charged. (Ordinarily CGST/SGST is charged as most Airlines are
registered across the country).
2. Kamal, a consultant for JW Ltd, Delhi buys food articles on board,
while flying from Chennai to Bengaluru.
CGST & SGST will be charged as inter- State sales in Chennai being he
place of supply, where the food articles were loaded.
3. Vinod is travelling from Bhopal (M. P.) to Kolkata by Gitnajali
Express starting from Mumbai. Vinod buys lunch on board at Raipur in
Chhattisgarh. The Lunch was loaded by the IRCTC in Nagpur
(Maharashtra).
The food items were loaded in Nagpur, hence place of supply is
Nagpur. Since IRCTS is registered throughout India, CGST & SGST will
be charged
Where place of supply can not be determined, Parliament will
make rule on the recommendation of GST Council.
D. Where, supply is by transfer of documents, place of supply will be the
principal place of business of the person receiving the supply.

Example
A of Delhi sells goods by endorsing airways bill for goods lying in
Mumbai, from where the buyer takes the delivery of the goods. The place
of supply is in Mumbai by a supplier in Delhi. It will be inter-state sales
and CGST and SGST will be charged.

E. In case of import of goods into India, place of supply is location of

the importer and IGST will be charged?

Example
A toy dealer having his principal office in Pune imports Chines
toys in Mumbai port.
Place of supply is Pune and IGST will be charged on the value of
imports
F. In case of export of goods outside India, place of supply is outside
India. Exports are exempt from GST.

Example 2
A of Allahabad exports garments from Kolkata airport to Italy.
Place of supply will be in Kolkata. Exports are exempt from GST.

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12.7 PLACE OF SUPPLY IN RESPECT OF SERVICES
WHEN LOCATION OF THE SUPPLIER AND
RECIPIENT IS IN INDIA
Section 12 of the IGST Act spells out the principles for
determination of place of supply in case of supply of services, when
location of the supplier and recipient is in India, which are as under:
1. General Rule
Where the services are provided to a registered person, place of
supply of services is place of location of the registered recipient of
services.
Example
A computer mechanic provides services to a chartered accountant
registered in Mumbai. Place of service will be in Mumbai.
2. If the recipient is not registered, place of supply is address on record of
the recipient.
Example
A computer mechanic provides services to a chartered accountant
in Mumbai, who is not registered and his address on record is at Pune
Place of service will be at the address on record (i.e. Pune)
3. In other cases, it is location of supplier of services.
4. Immovable Properties _ Architects, surveyor etc.
Place of supply of services in case of services related to immovable
property like architects, interior decorator, property agents, surveyors,
engineers, hotels, inns, guest houses, lodges, club, banquet halls etc. shall
be the location of the immovable property.
Example
An U.S. Architect makes designs and plans for Trump Tower in
Pune. Place of service shall be Pune as the service is related to immovable
property located in Pune
5. Performance based service
In case of restaurant and catering, personal grooming services like
beauty treatment, health, fitness etc. shall be the place of performance of
these services.
Example
A bridal makeup artist of Mumbai goes to provide service in
wedding in Delhi. Place of service will be Delhi, where the grooming
service was provided.

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6. Transport & Insurance etc.
Several services such as transportation of goods, transportation of
passengers, Insurance etc, place of supply shall be the location of
registered person.
7. Banking Services
In case of banking, place of supply is location of the recipient on
record.
8. Telecommunication services
In case of telecommunication services involving fixed line, circuits,
dish etc., place of supply is location of such fixed equipment.
Example
In respect of set top box fixed at the homes of viewers, place of service
will be at the place where such box is installed.
9. Mobile / Internet Services
In case of mobile/ internet post-paid services, Place of service is
location of billing address of the recipient.
In case of sale of pre-paid voucher, place of supply is place of sale of
such vouchers.
In other cases, it is address of the recipient in records.
Examples
1. Billing Address for mobile phone of X a resident of Thane is his
Pune address. Place of service shall be Pune.
2. Y has purchased an Airtel prepaid talk-time voucher in Delhi.
Place of service shall be Delhi even if he is resident of Chandigarh.

12.8 PLACE OF SUPPLY OF SERVICES WHEN

LOCATION OF EITHER THE SUPPLIER OR THE
RECIPIENT IS OUTSIDE INDIA – SECTION 13

International Transactions
These are the transactions where either of the service recipient or
the provider is outside India. Transactions, in which both the recipient as
well as provider are outside India are not covered. In such a transaction,
place of service will be determined as per section 13 of IGST, Act, 2017.
The section provides several principles for determination of place of
service as given below.
A. General Rule
As a general rule, Place of Supply of services treated as international
transactions shall be the location of recipient of service.

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Example
A consultant provides service to his U.S. counterpart, this being an
international transaction, where the recipient of service is outside India,
section 13 comes into focus, under which the place of supply shall be U.S.

B. Non- availability of the location of service recipient

Where the location of service recipient is not available, the place of
supply shall be location of the supplier of services.

Example
Consultant provides service to a person outside India, whose
location is not known, then the place of service shall be India being the
location of the supplier of services
C. Services involving actual performance
Services involving actual performance, place of actual
performance of services will be location of service.
Example
An Indian singer performs in a concert in Sydney. Place of
service shall be Sydney.
D. Processing of goods
When supply of service involves doing some activity on some
goods, place of supply is location of goods.
Example
If packing of goods imported is to be dome in London, the place
of service shall be London for providing packing service.
E. Services related to immovable property
Services related to immovable property, place of supply of services
is location of immovable property.
Example
An Engineer in India makes structural plans for a tower in Dubai.
The place of service will be Dubai, not India

F. Event based Services

Place of supply with respect to event based services like
exhibition, conference, fair etc. shall be place where such events are held.
Example
1. A decorator organises a business fair in Paris, the place of service will
be Paris.
2. An American Event manager organises AIFA award ceremony in
Mumbai. The place of service shall be Mumbai. The event manager
will have to take registration as a non-resident taxable person at least
five days advance of the event.
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G. Services of Banking companies, transport hiring and
intermediaries
In case of banking company, or intermediary services or hiring of
means of transport etc. shall be location of the supplier of services.
Example
1. A German company gives buses on rent to an Indian troupe
visiting Berlin and charters a plane for returning to Mumbai. Place of
service will be the location of supplier in Germany.
2. Bank charges payable to a London bank, the place of service will
be London.
H. Transportation of goods
Place of supply in case of transportation shall be place of
destination of such goods.
Example
1. A freight of a Truck carrying goods to Nepal, the place of service shall
be Nepal.
2. All ocean going ships or air crafts, place of service will be the
destination port.
I. Transportation of passengers
In case of transportation of passengers, place where the passenger
embarks on the conveyance.
Example
A travel agent carries passengers from Lucknow to Mansrovar in
China, the place of service shall be Lucknow.
J. Online data information
Place of supply of services in case of online information and
database access, place of recipient of services.
Example
Charges paid to google or Facebook for making available or data
information in India, the place of service shall be India.
Although, the syllabus covers sections 10 and 12 only. But in the
context of other topics, it is important to determine whether any supply is
import of service attracting IGST on import of services or export of
services exempted from GST if the place of supply is outside India. Hence,
provisions of section 13 are discussed, as the provisions are both
overlapping and relevant.

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12.9 SELF- EXAMINATION QUESTIONS

1. What is the meaning of “location of the recipient of service:

2. Explain the term ’ location of provider of service ‘
3. How the place of service is determined for supply of goods?
4. Explain the rules for determining place of supply of services.
5. What determination of place of service is important?
6. What are the types of taxes, How the will be affected by the place of
service.

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 13
PAYMENTS OF GST
Unit Structure

13.1 Introduction
13.2 Recording / Maintenance OF Register/Ledgers
13.3 Interest on Delayed Payment
13.4 Payment of GST
13.5 Tax Deduction at Source (TDS)
13.6 Collection OF tax AT Source (TCS)
13.7 Unique Identification Number (UIN)
13.8 Discrepancy
13.9 Self- Examination Questions

13.1 INTRODUCTION

This Lesson deals with payment provisions under GST given in

section 49 of the CGST Act, 2017 and the Payment of Tax Rules. Main
thrust of the provision is on payment of tax, interest, penalty and other
amounts payable under the Act through electronic mode “Over the counter
payments” have been permitted by cash / cheque/ DD etc. subject to a
limit of Rs. 10,000 per challan per tax period. Further, the provisions also
provide for maintenance through Electronic Cash Ledger, through
Electronic Credit Ledger in the Electronic Liability Register and payment
of adjustment of Input Credit of payment though these electronically
maintained registers.

13.2 RECORDING / MAINTENANCE OF

REGISTER/LEDGERS :

2.1 Recording and maintenance of register/ledgers on the common

portal:-
Following types of Register/Ledgers are maintained on the common portal
:
i. Electronic Liability Register
ii. Electronic Credit Ledger
iii. Electronic Cash Ledger.

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2.2. Electronic Liability Register
Under section 49(7) of the CGST Act, 2017 read with Rule 1 of
Payment of Tax Rules, all liabilities of a taxable person under this Act
shall be recorded and maintained in an Electronic Liability Register in
Form GST PMT-01. The Register shall contain the debit and credit entries
therein as per the following details.

A. Debit Entries
All amounts payable shall be debited to this register, viz. .
i. Tax and other dues as per return;
ii. Tax and other dues determined by proper officer;
iii. Tax & interest due to mismatch;
iv. Any interest chargeable for delayed payment or late fling of
return.

B. Credit Entries
All credits will be made by correspondingly debiting Electronic
Cash or Credit Ledger.

C. Sequence of discharging tax and other dues:

Following shall be the chronological order of discharge of tax and other
dues
i. Previous tax period
ii. Current tax period
iii. Any other amount payable under this Act.

Illustration:
The Electronic Liabilities Register shows the following liability :

Tax for July ,2018 Rs 25,000 , Assessed Tax for May ,2018 Rs
17,000 and interest for the month of May ,2018 Rs 15,000 , late filing
fees Rs 3000 for July 2018. Assuming the tax credit is Rs 40,000 in the
month of July, 2018. The liabilities shall be settled as under

Liabilities Previous tax Current tax Any other Total

Period(May) period (July) amount

Balance 17000+ 15,000 25000+3000 NIL 60,000

= 32,000 = 28,000

Credit used 32000 8000 NIL 40,000

Balance NIL 20,000 NIL 20,000

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2.3. Electronic Credit Ledger
Under section 49(2) of the CGST Act, 2017 read with Rule 2 of
Payment of Tax Rules, Electronic Credit Ledger shall be to be maintained
in Form GST PMT-02 for a registered person and the Ledger shall
contain debit and credit entries therein as per the following details:-

A. Credit Entries
i. Input Tax Credit (ITC) self assessed as per the return as per Section 41
read with Section 49(2) shall be credited to the ledger.
ii. In case, where the refund is rejected, then ledger shall be re-credited
by proper officer by order in Form GST PMT-03.

B. Debit Entries
i. Utilization of the ITC towards output tax shall be debited to the ledger.
ii. Unutilized amount in the Electronic Credit Ledger after payment of tax
and other dues can be claimed as refund subject to the provisions of
Section 54 of CGST Act, 2017 read with Refund Rules and the Ledger
shall be debited accordingly.

C. Sequence and restriction for the utilization of Input Tax Credit:-

i. ITC credit of any tax will be first credited against the liability of that
tax only i.e.
a. Central tax against central tax,
b. State/UT tax against state/UT tax and
c. IGST against IGST.
ii. Ant balance , thereafter of both central and state/UT tax credits can
be adjusted against the IGST ;
iii. IGST credit can be adjusted against central tax and state tax in that
order.
iv. Cross utilization of SGST & CGST & UTGST is not permissible.
In other words :
a) CGST will be first utilised against CGST, then against IGST.
b) SGST will be first utilised against SGST, then against IGST.
c) UTGST will be first utilised against UTGST, then against IGST.
d) IGST will be first utilised against IGST, then against CGST and
thereafter against SGST/UTGST.
e) Cross utilization of SGST & CGST & UTGST is not permissible
This is given in the following table :

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 Input Tax Can be utilized Order of utilization
Credit against
CGST CGST & IGST 1. CGST 2. IGST
SGST SGST & IGST 1. SGST 2. IGST
UTGST UTGST & IGST 1. UTGST 2. IGST
IGST IGST, CGST, 1. IGST 2. CGST then
SGST & UTGST 2. CGST 3. SGST/UTGST
Cross utilization of SGST & CGST & UTGST is not permissible

Example –
ITC available – CGST Rs 20,000, SGST Rs. 15,000 IGST Rs
14,000
Outstanding liabilities- CGST 22,000, SGST Rs. 18,000, IGST 10,000

The utilization will be as under :-

Liability IGST CGST SGST
Liabilities balance 14,000 22,000 18,000
Less credits Under same head 10,000 20,000 15,000
Balance Liability / Credit 4,000 (cr) 2,000 3,000
IGST used against CGST , then 4000 2,000 2000
SGST
Balance NIL NIL 1,000

2.4. Electronic Cash Ledger

2.4.1. Under section 49(1) of the CGST Act, 2017 read with Rule 3 of
Payment of Tax Rules, every deposit made towards tax, interest, penalty,
fee or any other amount by a person shall be credited to the Electronic
Cash Ledger to be maintained in Form GST PMT-05.Following
transactions shall have an effect on the Electronic Cash Ledger and shall
be debited/ credited accordingly: -

A. Entries credited to the Electronic Cash Ledger

a. Self-payment

b. Tax Deducted at Source ( TDS) U/s 51 in deductee’s ledger

c. Tax Collection at Source (TCS) u/s 52 – in the ledger of the person

from whom the tax was collected

d. Refund of balance in the Ledger after paying taxes interest, if rejected,

shall be re-credited by proper officer by order in Form GST PMT-03;

(Since amount of refund is debited in the Ledger, hence, for any

rejection of claim, the entry will be will be reversed)

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B. Entries debited to the Electronic Cash Ledger
a. Any tax, interest, penalty, fee or any other amount payable by the
registered taxpayer,

b. Any amount of refund claimed and granted as per rules, of the

balance in Electronic Cash Ledger after payment of tax and other
dues,

c. Interest on delayed payment

ii. Levy of TDS, TCS, tax under reverse charge and tax in case of
composition, can be made by debiting Electronic Cash Ledger only.

13.3 INTEREST ON DELAYED PAYMENT

When a register tax payer does not pay the tax on time , interest is
payable on such delayed payment u/s 50 and the interest so payable
shall be debited to the Ledger. The rate of interest is as under :-
a) 18% per annum in case of delayed payment

b)24% for excess claim of ITC

c) 24% for excessive reduction in output tax liability

.
13.4 PAYMENT OF GST

4.1. Mode of payment

Payment of GST by the taxpayer can be made by two modes, viz.
a) Online banking;
i. Internet banking
ii. Debit card/Credit card
iii. National Electronic Funds Transfer (NEFT)
iv. Real Time Gross Settlement (RTGS)

b) Over the counter (OTC)

Permitted up to Rs. 10,000 per Challan per tax period by following
modes :
i. Cash
ii. Cheque
iii. Demand Draft or Banker’ Cheque
4.2.Payment procedure:
i. Challan is generated in FORM GST PMT – 06 for the tax, interest, etc.
to be deposited and such challan shall remain valid for 15 days.

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ii. Payment by non-registered person (e. g – casual or non- resident taxable
person) shall be made by generating a temporary identification
number.

4.3. Mandate form in case of NEFT and RTGS:

Where the payment is made by way of NEFT or RTGS mode, the
mandate form shall be generated along with the challan on the Common
Portal and the same shall be submitted to the bank from where the
payment is to be made. The mandate form will be valid for 15 days from
the date of generation of challan.

4.4. Challan Identification Number (CIN)

On successful payment, a Challan Identification Number (CIN)
will be generated and indicated in the challan. On receipt of CIN from the
authorised Bank, the amount paid shall be credited to the Electronic Cash
Ledger. In case the CIN is not generated or not communicated, the
taxpayer may represent in FORM GST PMT – 07 to bank/electronic
gateway.

13.5 TAX DEDUCTION AT SOURCE (TDS)

5.1. Section 51 of the CGST, Act, 2017, provides for

 deduction of tax at source @ 1% of the value of the supply ;
 excluding GST i.e. CGST/ SGST / UTGST / IGST and cess
indicated in the invoice ;
 from the payment made or credited to the supplier of taxable goods
or services or both to:-
i. a department or establishment of the Central Government or
State Government; or

ii. local authority; or

iii. Governmental agencies; or

iv. other persons or category of persons notified by the

Government on the recommendations of the Council. and
 Total value of such supply, under a contract exceeds rupees
2,50,000.

5.2. The supplier or the receiver of payment is called the deductee and the
person deducting the tax is called “the deductor”.

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5.3. . Tax is not to be deducted if the location of the supplier and the place
of supply is in a State / UT is different from the State /UT of registration
of the recipient.

5.4. Procedural provisions

a) Deductor is required to
i. Pay the tax deducted to the Government within 10 days of the end of
the month of deduction. E.g. Tax deducted for the month of July, shall
be paid on or before 10th August and
b) issue a TDS certificate to the deductee mentioning the contract value,
rate of deduction, amount deducted and paid to the Government and
such other prescribed particulars within five days of crediting the
amount so deducted to the Government . For delay beyond 5 days, a
late fee of 100 rupees per day will be levied till the certificate is issued
, subject to a maximum of 5,000 rupees
c) Effect of TDS will be that :
i. The deductee shall claim credit, in his Electronic Cash Ledger,
of the tax deducted and reflected in the return of the deductor
furnished u/s 39(3) ; and
ii. Correspondingly, no refund to the deductor shall be granted, if
the amount deducted has been credited to the Electronic Cash
Ledger of the deductee.
d) In case of failure to pay the tax,
i. Interest u/ s 50 (1) in addition to the amount of tax deducted
will be payable by the deductor; and
ii. Amount of unpaid TDS shall be deemed to be the amount in
default u/s 73/74 for issuing show cause notice.
e) The refund to the deductor or the deductee arising on account of
excess or erroneous deduction shall be dealt as per section 54:

13.6 COLLECTION OF TAX AT SOURCE (TCS)

6.1. Under section 52, an electronic commerce operator, not being an

agent is required to collect tax at source at prescribed rate not exceeding
1% of the net value of taxable supplies made by other suppliers through
such operator if the consideration with respect to such supplies is to be
collected by it.
Net value of taxable supplies” means :
 the aggregate value of taxable supplies of goods or services or both,
 made during any month by all registered persons through the operator,
reduced by the aggregate value of taxable supplies returned to the
suppliers during the said month.
 Supply shall not include the services notified under section 9(5)
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Example –

During July 2018 different suppliers sold taxable goods valued at

Rs 50 lakh through Amazon, an e-commerce operator, out of which goods
worth rupees 10 lakh were returned. Amazon collected payment of 30
lakh rupees and supplier for 10 lakh rupees were using their own payment
gateway. Amazon shall collect tax at source @ 1% on 30 lakh or 30,000
rupees from the supplier from the payment received.

Procedural Provisions
1. The operator is required to
a) pay the tax deducted to the Government by the next 10th from
the end of the month of deduction, and
b) furnish a statement, electronically, containing the details of
outward supplies of goods or services or both effected through it,
including the supplies of goods or services or both returned
through it, and the amount collected during a month, in prescribed
form and manner by that date.
c) furnish an annual statement in prescribed from electronically,
containing the details of outward supplies of goods or services or
both effected through it, including the supplies of goods or services
or both returned through it, and the amount collected during the
financial year before the thirty first day of December following the
end of such financial year.
Example –
i. Monthly statement for January, 2018 should be filed by 10
February, 2018.
ii. Annual statement for F. Y. 2017-18 should be filed before 31
December, 2018.
iii. The monthly statement filed as above may be rectified for any
omission or incorrect particulars therein, other than as a result of
scrutiny, audit, inspection or enforcement activity by the tax
authorities, subject to payment of interest u/s 50. Time limit for
such rectification is
 the due date for furnishing of statement for the month of
September following the end of the financial year, or
 the actual date of furnishing of the relevant annual statement,
whichever is earlier.
2. The supplier of the goods or services or both through the operator shall
claim credit, in his Electronic Cash Ledger, of the amount collected
and reflected in the statement of the operator furnished.

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3. The statement filed by the operator shall be matched with the
corresponding details of outward supplies furnished by the concerned
supplier.
4. In case of a mismatch between the two statements, the discrepancy
shall be communicated to both persons in the prescribed time.
5. If the discrepancy so communicated is not rectified by the supplier in
his valid return or the operator in his statement for the month in which
discrepancy is communicated, shall be added to the output tax liability
of the said supplier, If the value of outward supplies furnished by the
operator is more than the value of outward supplies furnished by the
supplier, in his return for the month succeeding the month in which the
discrepancy is communicated.
6. The concerned supplier, in whose output tax liability any amount has
been added shall pay the tax payable in respect of such supply along
with interest, u/s 50(1) on the amount so added from the date such tax,
was due till the date of its payment.
7. Any authority not below the rank of Deputy Commissioner may serve
a notice, either before or during the course of any proceedings under
this Act, requiring the operator to furnish such details relating to :
(a) supplies of goods or services or both effected through such
operator during any period; or
(b) stock of goods held by the suppliers making supplies through
such operator in the godowns or warehouses, managed by such
operator and declared as additional places of business by such
suppliers, specified in the notice.
8. Every operator on whom a notice has been served shall furnish the
required information within fifteen working days of the date of service
of such notice. Failure will invite a penalty up to 25,000 rupees in
addition to any action under section 122.
9. The power to collect the amount shall be without prejudice to any
other mode of recovery from the operator.

13.7 UNIQUE IDENTIFICATION NUMBER (UIN)

A Unique Identification Number (UIN) shall be generated, when

any payment is made through electronic cash or credit ledger, or any other
amount is debited or credited in the said ledgers. The UIN relating to
discharge of any liability shall be indicated in the corresponding entry in
the Electronic Liability Register.

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13.8 DISCREPANCY

Any discrepancy in Electronic Liability Register, Electronic Credit

or Cash Ledger is required to be communicated to the proper officer in
FORM GST PMT-04.

13.9 SELF- EXAMINATION QUESTIONS

1. List out various forms in connection with payment of GST.

2. What is Electronic Lability Register? Explain the contents of
Electronic Credit or Cash Ledger
4. What is rate of interest of delayed payment /
5. What are the provisions regarding TDS.
6. Discuss the responsibility of an e- commerce operator for collection of
tax.



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 14
COLLECTION OF TAXES UNDER IGST,
ACT, 2017
Unit Structure

14.1 Introduction and Objectives

14.2 Cross-Utilisation of Credit
14.3 Nature and Place OF Supply
14.4 Self-Examination Questions

14.1 INTRODUCTION AND OBJECTIVES

1. Under the pre- GST tax regime, States and Union Territories collected
local sales tax or VAT on Intrastate sales of goods within the state /UT.
The Central Sales Tax Act, 1956(CST) regulated the interstate trade or
commerce. Although, the CST Act is a central law, the levy and collection
of taxes on sales of goods in the course of inter-State trade is delegated
entirely to the states of origin of goods taking place in the course of
interstate trade or commerce.

2. The tax regime suffered from several flaws, namely:-

(i) The state of origin of goods collected and retained the CST instead
of the destination state having jurisdiction over the consumer. This
was contrary to the cardinal principle of taxation that incidence of
any indirect tax being a consumption tax should be borne by the
consumer.
(ii) Input Tax Credit (ITC) of CST was not allowed to the buyer
resulting in cascading of tax (tax on tax) in the supply chain.
(iii) CST had its own protocol for compliance and different forms
required to be filed viz., C Form, E1, E2, F, I, J Forms etc. which
increased the compliance cost of the business and impeded the free
flow of trade.
(iv) The CST provided opportunity for “arbitrage” because of the huge
difference between tax rates under VAT and CST levied on intrastate
sales and interstate sales respectively.
2. The Goods and Services Tax (GST) replaced the multiple taxes levied
and collected by the Centre and the States. The GST is one multistage
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value added tax levied on the consumption of goods or services or both.
Having regard to its federal character, India adopted a “Dual GST” model,
enabling the Centre and States /Union Territories to simultaneously levy
GST on every supply of goods or services or both which, takes place
within a State or Union Territory i.e.:-
(i) CGST Levied and collected under the authority of CGST Act, 2017
passed by the Parliament,
(ii) (SGST) / UTGST levied and collected under the authority of SGST/
UTGST Acts passed by the states or the Union Territories having
legislatures
3. In addition, the parliament passed the Integrated Goods and Services
Tax (IGST) Act, 2017 to provide a mechanism to-
a) monitor the interstate trade of goods and services,
b) maintain the integrity of ITC chain in interstate supplies, and
c) ensure that the SGST component accrues to the Consumer State.

4. Under the Act, the Central Government levies and collects IGST on all
interstate transactions of taxable goods or services, which is broadly equal
to CGST rate plus SGST rate. For instance, CGST rate on intrastate sales
of goods is say 5%, then SGST rate will also be 5%. Total tax on the
product will be 10%. The IGST rate on interstate taxable supply of these
goods will be 10%. This may be clear from the following figure:-

IGST Rate on Interstate Sales (10%)

(Sales from one state/UT to another state/ UT)
CGST Rate (5%) SGST Rate(5%)
(Intrastate sales within same State/UT)

This lesson will discuss all these aspects with reference to cross
utilization of credits of different taxes against one another and other
relevant r matters.

14.2 CROSS-UTILISATION OF CREDIT

Input tax credit can be utilised in the following manner :-

1. The supplier will transfer funds to IGST account in the state of origin.
The IGST may be paid by utilising the ITC

2. The buyer in the destination state can utilise IGST credit for payment
of CGST and SGST by the transfer of funds from IGST account.

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3. The amount of ITC on account of IGST is allowed to be utilised
towards the payment in the following order , viz:-
a. IGST,
b. CGST,
c. SGST
4. The amount of ITC on account of CGST is allowed to be utilised
towards the payment in the following order , viz:-
a. CGST,
b. IGST
5. The amount of ITC on account of SGST is allowed to be utilised
towards the payment in the following order , viz:-
a. SGST,
b. IGST,
6. Input tax credit of CGST and SGST cannot be cross utilised.
7. Set off of ITC not available to a person under composition scheme.
Following chart summarises the position

SET OFF OF INPUT CREDIT

UTILISATION OF INPUT CREDIT
Input Credit
First utilisation Second Utilisation Balance
CGST CGST IGST No
SGST/UTGST SGST/UTGST IGST No
IGST IGST CGST, SGST/UTGST
Input tax credit of CGST and SGST cannot be cross- utilised

Following illustrations will explain the position ;

Illustration -1

A of Akola sells goods of Rs 10,000 to G of Goa. The CGST

/SGST rate is 5%. Each and IGST rate is 10% integrating the CGST and
SGST. G sells these goods in Goa for Rs 12,000.

(a) This is a case of interstate supply of goods involving movement of

goods between two different states viz. Maharashtra and Goa liable to
IGST. Hence, A will have to transfer Rs. 1000 to IGST account. A can
transfer this amount by paying cash or by utilising any ITC due to him.

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(b) (i) For G , it will an intrastate supply within the state of Goa. Hence,
G is liable for,
 5% or Rs. 600 towards CGST and
 5% or Rs. 600 towards Goa SGST.
(ii) G can avail credit of ITC in respect of IGST of Rs. 1000 in the
following manner;
 Firstly, Rs. 600 towards the CGST and
 Then balance Rs. 400 towards the Goa SGST.
G will have to transfer the balance of Rs. 200 towards the Goa SGST.

Illustration -2

Following is the summary of GST payable and input credit available to

Ashok :

Output tax Liability Input Tax Credit ( ITC)

Tax
Rupees
IGST 35,000 18000
CGST 10,000 15000
SGST 10,000 15000

The tax payable will be calculated as follows:

Input Tax Credit Cash

Output tax Payment
Tax Liability Balance
IGST CGST SGST
Rupees
IGST 35,000 18000 5,000 5000 7000
CGST 10,000 NA 10,000 NA 0
SGST 10,000 NA NA 10000 0
Total 55000 18000 15000 15000 7000

Illustration -3
Following is the summary of GST payable and input credit available to
Ashok :
Output tax Liability Input Tax Credit ( ITC)
Tax
Rupees
IGST 15,000 54000
CGST 36,000 12000
SGST 36,000 12000

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The tax payable will be calculated as follows:

Input Tax Credit Cash

Output tax Payment
Tax Liability Balance
IGST CGST SGST
Rupees
IGST 15,000 15000 NIL NIL 0
CGST 36,000 24000 12,000 NA 0
SGST 36,000 15000 NA 12000 9000
Total 87000 54000 12000 12000 9000

14.3 NATURE AND PLACE OF SUPPLY

It is very important to determine the nature of supply – whether it

is inter-State or intra-state, as the kind of tax to be paid (IGST or
CGST+SGST) depends on that.

(i) Inter-State Supply:

Subject to the place of supply provisions, where the location of the

supplier and the place of supply are in:

(a) Two different States;

(b) Two different Union territories; or
(c) A State and a Union Territory.
Such supplies shall be treated as the supply of goods or services in
the course of inter-State trade or commerce.

Any supply of goods or services in the taxable territory, not being

an intra-State supply, shall be deemed to be a supply of goods or services
in the course of inter-State trade or commerce. Supplies to or by SEZs are
defined as inter-State supply.

Further, the supply of goods imported into the territory of India till
they cross the customs frontiers of India or the supply of services imported
into the territory of India shall be treated as supplies in the course of inter-
State trade or commerce.

Also, the supplies to international tourists are to be treated as inter-

State supplies.

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(ii) Intra-State supply:

It has been defined as any supply where the location of the supplier
and the place of supply are in the same State or Union Territory.

Intra- State supply

• Supply of goods within the same State or Union Territory.
• Supply of services within the same State or Union Territory
• Supply of goods from one State or Union Territory to another State or
Union Territory
• Supply of services from one State or Union Territory to another State
or Union Territory
• Import of goods till they the cross customs frontier
• Import of services
• Export of goods or services
• Supply of goods/services to/by SEZ
• Supplies to international tourists
• Any other supply in the taxable territory which is not intra-state supply

Thus, the nature of the supply depends on the location of the

supplier and the place of supply. Both these terms have been defined in the
IGST Act.

9. Location of Supplier

Broadly, it is the registered place of business or the fixed

establishment of the supplier from where the supply is made. Sometimes,
a service provider has to go to a client’s location for providing service.
Such place would not be considered as the location of the supplier. It has
to be either a regular place of business or a fixed establishment, which is
having sufficient degree of permanence and suitable structure in terms of
human and technical resources.

10. Place of supply

(i) Places of supply provisions have been framed for goods and services,
keeping in mind the destination/consumption principle. In other words,
the place of supply is based on the place of consumption of goods or
services. As goods are tangible, the determination of their place of supply,
based on the consumption principle, is not difficult.

Generally, the place of delivery of goods becomes the place of

supply.

However, the services being intangible in nature, it is not easy to

determine the exact place where services are acquired, enjoyed and

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consumed. In respect of certain categories of services, the place of supply
is determined with reference to a proxy.

(ii) A distinction has been made between

 B2B (Business to Business) and

 B2C (Business to Consumer) transactions,

B2B transactions are wash transactions since the ITC is availed by the
registered person (recipient) and no real revenue accrues to the
Government.

(iii) Separate provisions for the supply of goods and services have been
made for the determination of their place of supply.

Separate provisions for the determination of the place of supply in

respect of domestic supplies and cross border supplies have been framed.

A. Place of supply of goods other than import and export [Section-10]

Nature of Supply Place of Supply

. Nature of supply Place of supply

1 Where the supply involves the the location of the goods at

movement of goods, whether by the the time at which, the
supplier, recipient or by any other movement of goods
person terminates for delivery to the
recipient
2. Where the goods are delivered to the The principal place of
recipient or any person on the business of such person
direction of the third person by way
of transfer of title or otherwise, it
shall be deemed it shall be deemed
that the third person has received the
goods.
3. Where there is no movement of Location of such goods at the
goods either by supplier or recipient time of delivery to the
recipient
4 Where goods are assembled or The place where the goods are
installed at site assembled or installed
5 Where the goods are supplied on- The place where such goods
board a conveyance like a vessel, are taken on-board the
aircraft, train or motor vehicle conveyance
6 Where the place of supply of goods It shall be determined in such
cannot be determined in terms of manner as may be prescribed
subsections (2), (3), (4) and (5)

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B. Place of supply of goods in case of Import & Export [Section-11]

S.No. Nature of supply Place of supply

1 . Import Location of importer

2 Export Location outside India

C. Place of supply of services in case of Domestic Supplies [Section 12]

(Where the location of supplier of services and the location of the recipient
of services is in India) (i) In respect of the following 12 categories of
services, the place of supply is determined with reference to a proxy. Rest
of the services is governed by a default provision.

S. Nature of supply Place of supply

No.

1 Immovable property Location at which the immovable

related to services, property or boat or vessel is located or
including hotel intended to be located
accommodation If Located outside India- Location of
the recipient
2 Restaurant and catering Location where the services are
services, personal actually performed
grooming, fitness, beauty
treatment and health
service
3. Training and performance B2B: Location of such Registered
appraisal Person
B2C: Location where the services are
actually performed
4. Admission to an event or Place where the event is actually held
amusement park or where the park or the other place is
located
5. Organisation of an event B2B: Location of such Registered
person
B2C: Location where the event is
actually held
If the event is held outside India:
Location of the recipient
6 Transportation of goods, B2B: Location of such Registered
including mails Person
B2C: Location at which such goods
are handed over for their transportation

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7. Passenger transportation B2B: Location of such Registered
Person
B2C: Place where the passenger
embarks on the conveyance for a
continuous journey
8 Services on board a Location of the first scheduled point of
conveyance departure of that conveyance for the
journey
9. Banking and other Location of the recipient of services on
financial services the records of the supplier
Location of the supplier of services if
the location of the recipient of services
is not available
10 Insurance services B2B: Location of such Registered
Person
B2C: Location of the recipient of
services on the records of the supplier
11 Advertisement services to The place of supply shall be taken as
the Government located in each of such States
Proportionate value in case of multiple
States
12 Telecommunication The location of such fixed equipment
services
involving fixed line,
circuits, dish etc.,
Mobile/ Internet post- the location of billing address of the
paid services, recipient
Sale of pre-paid voucher the place of sale of such voucher
In other cases, The address of the recipient in records.

(ii) For the rest of the services other than those specified above, a default
provision has been prescribed as under: Default Rule for the services other
than the 12 specified services Description of Supply Place of Supply

S. Nature of Place of supply

No. supply

1 B2B Location of such Registered Person

2 B2C Location of the recipient where the address on record
exists, in other cases Location of the supplier of
services

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 D. Place of supply of services in case of cross-border supplies:
(Section 13)

(Where the location of the supplier of services or the location of the

recipient of services is outside India)

(i) In respect of the following categories of services, the place of supply is

determined with reference to a proxy.

Rests of the services are governed by a default provision.

S. Nature of supply Place of supply

No.

1 Services supplied for The location where the services are

goods that are required actually performed,
to be made physically The location where the goods are
available from a remote situated
location by way of
electronic means
(Not applicable in case
of goods that are
temporarily imported
into India for repairs and
exported)
2 Services supplied to an The location where the services are
individual and requiring actually performed
the physical presence of
the receiver
3 Immovable property- Location at which the immovable
related services, property is located
including hotel
accommodation
4 Admission to or The place where the event is actually
organisation of an event held
5 If the ABOVE services are supplied at more than one locations. i.e.,
(i) Goods & individual related
(ii) Immovable property-related
(iii) Event related
I At more than one the location in the taxable territory
location, including a where the greatest proportion of the
location in the taxable service is provided
territory
II In more than one State each such State in proportion to the
value of services provided in each State
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6. Banking, financial Location of the supplier of service
institutions, NBFC
Intermediary services,
hiring of vehicles’
services etc.
7, Transportation of goods The place of destination of the goods
8. Passenger transportation Place where the passenger embarks on
the conveyance for a continuous journey
9. Services on-board a The first scheduled point of departure of
conveyance that conveyance for the journey
10. Online information and The location of recipient of service
database access or
retrieval services
11. Default Rule for the Any Location of the recipient of service
cross border supply of If not available in the ordinary course of
services other than THE business: The location of the supplier of
ABOVE nine specified service
services
12. Supplies in territorial Where the location of the supplier is in
waters the territorial waters, the location of such
supplier, or where the place of supply is
in the territorial waters, the place of
supply is deemed to be in the coastal
State or Union Territory where the
nearest point of the appropriate baseline
is located.
13 Export/Import of Service A supply would be treated as import or
export, if certain conditions are satisfied.
These conditions are as under
Export Export of services Means the supply of
any service, where
a) the supplier of service is located in
India,
(b) the recipient of service is located
outside India,
(c) the place of supply of service is
outside India,
(d) the payment for such service has
been received by the supplier of service
in convertible foreign exchange, and
(e) the supplier of service and the
recipient of service are not merely
establishments of a distinct person in

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 accordance with explanation 1 of
section 8
Import Import of services means the supply of
any service, where (a) the supplier of
service is located outside India,
(b) the recipient of service is located in
India, and
(c) the place of supply of service is in
India
13 Zero rated supply Exports and supplies to SEZs are
considered as ‘zero rated supply’ on
which no tax is payable. However, ITC
is allowed, subject to such conditions,
safeguards and procedure as may be
prescribed, and refunds in respect of
such supplies may be claimed by
following either of these options:
(i) Supply made without the payment of
IGST under Bond and claim refund of
unutilised ITC or
(ii) Supply made on payment of IGST
and claim refund of the same
14. Refund of integrated tax Refund of IGST paid to an international
paid on supply of goods tourist leaving India on goods being
to tourist leaving India - taken outside India, subject to such
Section 15 of the IGST conditions and safeguards as may be
Act prescribed. An international tourist has
been defined as a non-resident of India
who enters India for a stay of less than 6
months. IGST would be charged on such
supplies as the same in the course of
export.

14.4. SELF-EXAMINATION QUESTIONS

1. Collection of IGST is part of the GST regime, explain?

2. What are rules of cross utilization of credit of one tax against another.
3. How the nature of supply and place of supply affect collection of
taxes.
4. What are the limitations of cross- utilization of taxes?

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