MR0003-Unit-01-Basic Concepts

Unit 1 Basic Concepts 1.1 Introduction Learning objectives: 1.2 Tax Planning and Management Tax avoidance Tax evasion Tax planning Tax management 1.3 Terminology 1.4 Agricultural Income 1.5 Residence and Tax Liability 1.6 Scope of total income 1.7 Tax incidence in brief 1.8 Illustrations on incidence of tax 1.9 Total taxable income: how it is computed: tax liability 1.10 Summary 1.11 Terminal Questions 1.12 Answers to TQs 1.1 Introduction The theory of taxation depends upon the definition of the term tax. According to Seligman, A tax is a compulsory contribution from the person to the Govt. to defray the expenses incurred in the common interest of all, without reference to special benefits conferred.

Bastable defines a tax as a compulsory contribution of the wealth of person or body of persons for the service of the public powers. The Indian Taxation Enquiry Committee adopted the definition as taxes are compulsory contributions made by the members of a community to the governing body of the same towards the common expenditure without any guarantee of a definite measured service in return. The above definitions emphasize certain common features of tax such as: 1. It is a compulsory levy. 2. Its proceeds are utilized for the common purpose. 3. The extent of the levy does not depend upon the benefits derived from state expenditure by the tax payer. 4. Its object is to raise revenue to the state Learning objectives: After studying this unit, you will be able to know: The difference between tax evasion and tax avoidance Basic concepts of taxation Terminologies Concept of agricultural income and concept of total income 1.2 Tax Planning and Management The goal of the tax payers is to minimize his tax liability. To achieve this goal the following three methods are commonly used by him: 1. Tax avoidance 2. Tax evasion 3. Tax planning Tax avoidance Tax avoidance can be defined as the art of dodging tax without breaking the law. Objective of tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner that although it is within the four corners of the taxation laws but the advantage is taken by finding out loopholes in the laws. but where the main purpose is to defer, reduce or completely avoid the tax payable under the law. Tax evasion

In the tax evasion, facts are deliberately misrepresented and tax liability is understated by employing the following means: a) concealment of income; b) Inflation of expenses; c) Falsification of accounts d) violation of rules These devices are unethical. Evasion, once proved, not only attracts heavy penalties but may also lead to prosecution. Tax planning Tax Planning is an arrangement of ones financial affairs in such a way without violating the legal provisions of the Act. Full advantage is taken of all exemptions, deductions, rebates, reliefs etc. permitted under the Act, reducing the burden of taxation to the least. The aim of tax planning is to minimise the incidence of tax. It is a guide in decision making. It looks at future benefits arising out of present actions. Tax management: Tax management refers to the compliance with the statutory provisions of law. Tax planning is optional, tax management is mandatory. It covers a wider field like maintenance of accounts, filling of return, payment of taxes, TDS, timely payment of advance tax, etc., poor tax management may lead to levy of interest, penalty, prosecution, etc. Difference between tax planning and tax evasion

Tax planning Tax evasion Objective is to reduce the tax liability Objective is to avoid the tax liability by misrepresentation of facts and falsification of accounts. It works within the permissible range It is achieved by violation of the act of the Act Tax planning is a legal right Tax evasion is a legal offence which may lead to penalty and prosecution. Tax planning accelerates development Tax evasion retards the development of of the economy of a country by economy and accelerate the development generating funds for investment in of parallel economy desired sectors

Difference between tax avoidance and tax evasion

Tax avoidance The objective is to minimising the tax liability by finding the loop holes in the act 2) Tax avoidance takes into accounts various gaps of law 3) Tax avoidance is lawful but involves the element of mala fide intention 4) Tax avoidance is planning before the actual liability for tax comes into existence

Tax evasion Objective is to avoid the tax liability by misrepresentation of facts and falsification of accounts. Tax evasion involves use of unfair means Tax evasion is unlawful

Tax evasion involves avoidance of payment of tax after the liability of tax has arisen

Difference between tax planning and tax management Tax planning Tax planning a wider term and includes tax management Objective is to reduce the tax liability Tax management Tax management is narrow term and is the first step towards tax planning. It emphasizes on compliance of legal formalities for minimisation of tax It is optional Tax management is essential for every person. Tax planning helps in decision Tax management helps in complying the making conditions for effective decision making Tax planning helps to claim various Tax management involves maintenance of benefits of tax accounts in prescribed for, filing of return, payment of tax, etc. Tax planning involves comparison of Tax management involves maintenance of various alternatives before selecting accounts in prescribed form, filing of the best one. return, payment of tax, etc. Tax planning looks at future befits Tax management relates to past present Who is liable to pay income tax? Every person, whose taxable income for the previous financial year exceeds the minimum taxable limit, is liable to pay to the Central Government the income tax during the current financial year on the income of the previous financial year at the rates in force during the current financial year. 1.3 Terminologies

Income [Sec 2 (24)] In general sense It means any monitory receipt either in cash or in kind (Should be quantifiable), may be real or notional, regular or casual or legal or illegal or owns own or somebody elses from a definite source. These sources may be Income from salary, H.P, Business or profession, other sources or Capital Gains excluding anything in the nature of a mere windfall. Assesses [Sec. 2(7)] An Assesses means a person: (i) Who is liable to pay any tax; or (ii) Who is liable to pay any other sum of money under this Act. (Ex: interest, penalty, etc.); or (iii) In respect of whom any proceeding under this act has been taken for the assessment of his income; or (iv) In respect of whom any proceeding under this act has been taken for the assessment of the income of any other person in respect of which he is assessable; or (vii) Who is deemed to be an assesses under any provision of this Act; or (viii) Who is deemed to be an assesses in default under any provision of this Act. Deemed Assesses: A person, who is deemed to be assesses for some other person, is called deemed assesses Assesses in Default: When a person responsible for doing any work under the Act, fails to do so, he is termed an Assesses in Default. For Ex: If a person while making any payment to other person, is liable to deduct income tax thereon at source, does not deduct income tax therefrom, or having deducted at it, does not deposit it in the Government treasury, he will be treated as an Assesses in Default for that income tax. Assessment [Sec 2 (8)] It is a process of computing taxable income of the assesses, calculating tax on such taxable income and imposing tax liability on the assesses Assessment Year [Sec. 2 (9)]: Assessment Year means the period of twelve months commencing on the first day of April every year and ending on 31st March of next year. This period is fixed by law and never changes. An assesses is liable to pay tax on the income of the previous year during the next following assessment year. Person [Sec. 2 (31)] Person includes the following:

(i) An Individual: means a natural person or human being, (ii) A Hindu Undivided Family (H.U.F) (iii) A Company (iv) A Firm: It means a partnership firm; which is defined under the partnership Act. (v) An Association of Person (A.O.P): It means two or more persons joining for a common purpose for the purpose of earning income. (vi) Body of Individuals (B.O.I) (vii) A Local Authority: It includes Municipality, Municipal Corporation, District Board (viii) Every artificial Juridical Person, not falling within any of the preceding sub classes: An Idol or Deity, university. Gross Total Income [Sec 80B (5)] It is the Total income computed in accordance with the provisions of the income tax Act, before making deductions under sections 80C to 80U Total Income: [Sec 2 (45)] It means amount left after making the deductions under sections 80C to 80U Previous Year [Sec 3]: Previous year is a period of twelve months, immediately preceding the Assessment Year. Or any financial year immediately preceding the Assessment Year Exceptions to the general rule of year Income earned in any year will be assessed in its following year. This is called general rule of Previous Year, However in the following cases the assessee is liable to be assessed to tax in the same year in which he earns the income: (i) Income of non resident from shipping business [Sec 172] (ii) Income of persons leaving India either permanently or for a long period of time [Sec 174] (iii) Income of bodies formed for short duration [174A] (iv) Transfer of property to avoid tax [175] (v) Income of a discontinued business or profession [176] Self Assessment Questions I 1) Mr. Suresh is a partner of a firm. He is assessable as .

2) For previous year 2008-09, assessment year is . 3) Indian Income Tax Act was passed in -. 4) Income of discontinued business in the year 2008-09 is taxable in the year Casual Income: Any receipts, which is of a casual, and non-recurring in nature is called casual income i.e., it is that income the receipt of which is accidental and without any stipulation and is in the nature of an unexpected windfall. Heads of Income [Sec 14] All taxable income of an assessee fall under any of the following five heads of income. Those incomes, which do not find place under the first four heads and are taxable fall under the fifth head of income. 1. Salaries [Sections 15 to 17] 2. Income from House Property [Sections 22 to 27] 3. Profits and Gains of Business or Profession [Sections 28 to 44] 4. Capital Gains [Sections 45 to 55] and 5. Income from Other Sources [Sections 56 to 59]. Rates of Tax for an Individual

Note: Surcharge: In all the above cases, If total income exceeds Rs. 10,00,000 @ 10% Education cess: On the amount of Income Tax + Surcharge @ 3% (Primary education cess at 2% + Secondary and Higher education cess at 1%) 1.4 Agricultural Income (Sec. 2(1A) Agricultural income is totally exempt from liability to income tax. However, agricultural income is factor in determining the tax on the non-agricultural income of an Individual, Hindu undivided family, Association of persons and Body of individuals whose total income (excluding agricultural income) exceeds the minimum taxable limit and the agricultural income exceeds Rs. 5,000.

It is necessary to understand clearly the meaning of the term agricultural income which can be done with the help of the following chart:

(A) (i) And (ii) Rent or revenue derived from land situated in India. When one person grants to another a right to use his land situated in India for agricultural purposes; the former receives from the latter rent or revenue in consideration of such user. Such rent or revenue is treated as agricultural income. (i) Used for agricultural purposes. It means cultivation of a field, tilling of the land, watering it, sowing of the seeds, planting and similar operations on the land. (B) (i) Income derived from such land by agricultural operations. (ii) Income derived from such land by the performance of any process ordinarily employed by a cultivator to render the produce raised by him fit to be taken to market. The process employed in curing of coffee, flue curing of tobacco, ginning of cotton, etc., is such a process. (iii) Income derived from such land by a sale by a cultivator or receiver of rent-in-kind the produce raised or received by him. (C) Income from farm house. The income from a farm house is treated as agricultural income if the following conditions are satisfied (i) It is situated on or in the immediate vicinity of the agricultural land; (ii) The building is, by reason of his connection with the land, used as dwelling house or a storehouse or an out-house by the cultivator or receiver of rent-in-kind; (iii) The land is either assessed to land revenue in India or is subject to local rate assessed and collected by the officers of the government, or alternatively; (iv) If the land is situated in non-urban area, i.e., an area which though, is within municipality or cantonment board jurisdiction, has a population of less than 10,000; or is beyond a notified distance (maximum 8 kilometer) from the local limits of any such municipality; or cantonment board. However, the income derived from any building or land [mentioned in (C)] arising from the use of such building or land for any purpose (including letting form residential purpose or for the

purpose of any business or profession) other than agricultural [mentioned in (A) or (B)] shall not be agricultural income. Examples of Agricultural Incomes: (i) Income from growing flowers and creepers. (ii) Rent from agricultural land. (iii) Profit on sale of standing crops or produce after harvest by the cultivating owner or tenant of agricultural land. (iv) Income from leasing out agricultural land for grazing cattle required for agricultural purposes. (v) Interest on capital received by a partner from his firm engaged in agricultural operations. (vi) Conversion of latex into smoked sheets. (vii) Rent from agricultural land received from sub-tenants by the mortgagee in possession. (viii) Income from sale of mulberry leaves grown on agricultural land. (ix) Compensation received from an insurance company for damages caused by hailstorm or floods to the tea plantations. (x) Income from conversion of timber into planking. Examples of Non-Agricultural Incomes The following incomes are a not derived from land used for agricultural purposes hence they are non-agricultural incomes: (i) Income from markets; (ii) Income from stone quarries; (iii) Income from mining royalties; (iv) Income from land used for storing agricultural produce; (v) Income from supply of water for irrigation purposes (e.g., income from supply of water for irrigation from a tube-well, as it does not involve any agricultural operation); (vi) Income from self-grown grass, trees or bamboos;

(vii) Income from fisheries; (viii) Income from the sale of earth for brick-making; (ix) Remuneration received as manager of an agricultural farm; (x) Dividend from a company engaged in agriculture; (xi) Income of the buyer of a ripe crop; (xii) Income from dairy farm, poultry farming, etc.; and (xiii) Income from interest on arrears of rent of agricultural land. When the individual has net agricultural income exceeding Rs. 5,000, in addition to the nonagricultural income exceeding the exemption limit (Rs, 1,35,000 for women assesses, 1,85,000 for senior citizens, Rs. 1,00,000 for other individual), agricultural income is included in the income only for rate of tax. 1.5 Residence and Tax Liability The scope of total income of an assessee is determined with reference to his residence in India in the previous year (Sec. 5). It is immaterial what type of resident an assessee is during the assessment year. Residence and citizenship are two different things. The incidence of tax has nothing to do with citizenship. An Indian may be non-resident and a foreigner may be resident for income tax purposes. The residence of a person may change from year to year but citizenship cannot be changed every year. Different Types of Residents On the basis of residence, the assessees are divided into three categories, viz.: a. Persons who are resident in India, Popularly known as ordinarily resident. b. Persons who are not ordinarily resident in India. c. Persons who are non-resident. Residential status of Individuals Resident (Ordinarily Resident). Sec. 6 (1) and 6 (6) (a) Basic Conditions: Sec. 6 (1): An individual is said to be resident in India in any previous year if he satisfies any one of the following basic conditions:

(a) He is in India in the previous year for a period of 182 days or more, or (b) He has been in India for at least 365 days during the four years proceeding the previous year and is in India for at least 60 days during the previous year. Exceptions to the above rules of 60 days stay in India (i) An individual who is a citizen of India and leaves India in any previous year for the purpose of employment or as a member of the crew of an Indian ship must have stayed in India for at least 182 days during the previous year instead of 60 days. (ii) If any citizen of India or a foreign national of Indian origin, who is living outside India, comes on a visit of India in the previous year, he must have stayed in India for at least 182 days during the previous year instead of 60 days. In other words, in the case of an individual covered by the above two exceptions only condition (a) is to be satisfied to become a resident in India and condition (b) has no significance at all. Note: 1. It means that a non-resident Indian will not lose his non-residential status even if he visits India and stays here up to 181 days in a previous year. 2. For calculating number of days stay in India, days of entry and exit should be included in the period of stay in India. Indian origin means that either he or either of his parents or any of his grandparents was born in undivided India. Further, comes on a visit to India in the previous year means that he may come to India for any purpose. Whatsoever, it may be business purpose or personal purpose of any nature or he may come to meet his relations or he may come for a pleasure trip also. Stay in India for 182 days or more during the previous year. It is not at all necessary that he should stay at a stretch for 182 days. His total stay for at least 182 days may be with gaps. It is also not necessary that the entire stay should be at one place. It may be at different places in India. Stay in India for at least 365 days during the four years preceding the previous year and for at least 60 days or 182 days, as the case may be, during the previous year Here again, it not necessary that he should stay during the previous year in India at a stretch for 60 days or 182 days, as the case may be, or the entire stay need not be at one place only. Additional Conditions: Sec. 6 (6) (a): In fact, in order that an individual may become ordinarily resident in India, he is to satisfy both the following conditions besides satisfying any one of the above mentioned basic conditions:

(i) He has been resident in India in at least two out of the ten previous years preceding the relevant previous year, and (ii) He has been in India for at least 730 days in all during the seven previous years proceeding the relevant previous year. In condition (i) resident of two years out of ten years preceding the previous year means that the assessee must have satisfied at least one of the basic conditions for two years out of ten years preceding the previous year. In condition (ii) the assessee must be physically present in India for at least 730 days during the seven previous years preceding the relevant previous year. Resident but not ordinarily resident: Sec. 6(1), 6 (6) (a) An individual who satisfies at least one of the basic conditions laid down in Sec. 6 (1), but does not satisfy the two additional conditions of Sec. 6 (6) (a), is treated as a resident but not ordinarily resident. Non-resident: An individual is a non-resident in India if he satisfies none of the basic conditions. In the case of non-resident, additional conditions are not relevant. Residential Status of Hindu Individed Family, Firm or Association of Persons Resident: A Hindu Undivided family, firm or association of persons are residents in India in any previous year if the control and management of its affairs is situated wholly or partly in India during the relevant previous year. i.e., even if a part of their control and management is situated in India during the previous year, they will be called resident in India. A resident H.U.F. will be ordinarily resident only when its kartha satisfies both the additional conditions of ordinarily resident as an individual. Not Ordinarily Resident: Firm and Association of persons cannot be not ordinarily resident. A Hindu Undivided Family is not ordinarily resident in India, if, its Karta or manager (as an individual) is not ordinarily resident in India. In this connection it is important to note that where during the last ten years preceding the previous year the managers of Karta of H.U.F. had been different from one another, the total period of stay of successive kartas of the Family should be aggregated to determine the residential status of the Karta and consequently its H.U.F.

Non-Resident: All the three types of assessees (i.e., H.U.F., Firm of A.O.P.) are non-resident only when the control management of their affairs is situated wholly outside India. Self Assessment Questions II 1) A Ltd. Company cannot be a -. 2) Income from poultry farming is an agricultural Income.: True/ false 3) To become a Resident but ordinarily Resident, an individual must satisfy the conditions laid down in , in addition to the conditions laid down in 4) Income from house property is in the hands of a Non resident. Residential Status of Companies Resident. A company is said to be resident in India in any previous year, if, (i) It is an Indian company; or (ii) During that year, the control and management of its affairs is situated wholly in India. A company may be resident here even though its entire trading operations are carried on abroad. If the management and control is situated wholly in India, the company is resident here. Normally, control and management of a companys affairs is situated at the place where meetings of its board of directors are held. Not Ordinarily Resident. A company is never an not ordinarily resident. Non-resident. If a company does not satisfy both the aforesaid conditions of residence, it is said to be a non-resident company. It means neither the company is an Indian Company nor the control nor management of its affairs is situated wholly in India. 1.6 Scope of total income or incidence of tax Incidence of Tax: It refers to chargeability of incomes based on the residential status of the assessee and also on the place and time of accrual or receipt of income. Factors of incidence: 1. Residential Status 2. Place

3. Time of accrual or receipt of income Received: It means the receipt of the income on the first occasion Deemed to be received: It means that the income has not been actually received, but it is deemed to be received under the Income Tax Act. Accrue or Arise: Right to receive the income as against receipt of income. Deemed to accrue or arise: Means the income has actually not accrued or arisen in India but it is deemed to accrue or arisen in India under the income tax act. 1.7 Tax Incidence in Brief The following table highlights the tax incidence in brief Incomes Whether Taxable or Not OrdinarilyResident Not Ordinarily Resident (1) Income Received in India Yes whether accrued or arisen in India or outside India. (2) Income deemed to be received Yes in India whether accrued or arisen in India or outside India. (3) Income accruing or arising in Yes India whether received in India or outside India (4) Income deemed to accrue or Yes arise in India whether received in India or outside India (5) Income received and accrued Yes or arisen outside India from a business controlled from or a profession set-up in India. (6) Income received and accrued Yes or arisen outside India from a business controlled from or a profession set-up outside India. (7) Income received and accrued Yes or arisen outside India from any other source. (8) Income accrued or arisen and No. received outside India in earlier years but later on remitted to India during the previous year. 1.8 illustrations on Incidence of tax

Non-Resident Yes Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

No

No

No

No

No

No

1. The following are the incomes of Mr. Arunachal for the previous year 2008-09; 1) Income from agriculture in Bangladesh Rs. 10,000 2) Income from salary received in India for the services rendered in England Rs. 9,000 3) Income from business carried in India Rs. 8,000 4) Income from business in Ceylon but controlled from India Rs. 7,000, but deposited in a bank there. 5) Income from hotel business in Paris Rs. 6,000 6) Income from business in Bombay, managed from London Rs. 5,000 7) Income from assets in Dubai, received in India Rs.4,000 8 Income accrued in Chennai, but received in London Rs. 3,000 9) Interest on U.K. Govt. securities Rs. 2,000, Rs. 1,000 received in India 10) Past untaxed foreign income brought in to India Rs. 1,000 Compute the total income of Mr. Arunachal for the assessment year 2009-10, if he is: a) Resident but ordinarily resident b) Resident but not ordinarily resident c) Non resident Solution Computation of total income of Mr. Arunachal for the assessment year 2008-09 Resident Rs. Income from agriculture in Bangladesh Salary for services rendered in England Income from business in India Income from business in Ceylon, controlled from India Income from hotel business in Paris 10,000 9,000 8,000 7,000 6,000 Not Non Ordinarily resident Resident Rs. Rs. 9,000 9,000 8,000 8,000 7,000

Income from business in Bombay Income from assets in Dubai, received in India Income accrued in Chennai received in London Interest on U.K Govt. securities, received in India Past untaxed income brought in to India Total income taxable Illustration 2

5,000 4,000 3,000 2,000 54,000

5,000 4,000 3,000 1,000 37,000

5,000 4,000 3,000 1,000 30,000

Mr. Sumantha furnishes the following particulars of his income earned during the previous year relevant to the assessment year 2008-09.

Solution 2 Resident and Resident but Nonordinarily not resident resident ordinarily resident Rs. Rs. Rs Interest on German Development Bonds: Two fifths is taxable on receipt basis 24,000 Three-fifths is taxable in the case of resident and 36,000 ordinarily resident on accrual basis Income from agriculture in Bangladesh: Income accrued and received outside India 1,81,000 Income from property in Canada received outside India 24,000 24,000

Income accruing and arising outside India 86,000 Income earned from a business in Kampala, Controlled from Delhi: Rs. 15,000 is taxable on receipt basis 15,000 Balance is not taxable in the case of non-resident 50,000 Dividend paid by a foreign company: Income received in India 46,500 Past untaxed profit brought to India Not an income of the previous year 2005-06 relevant for the assessment year2009-10 hence not taxable Profits from a business in Madras and managed from outside India: Income accrued in India 27,000 Profit on sale of a building in India but received in Sri Lanka Income deemed to accrue or arise in India 14,80,000 Pension from an Indian former employer received in Rangoon: Income deemed to accrue or arise in India 36,000 Gift from a friend Now it is taken as an income 80,000 Gross Total Income 20,61,500 Illustration 3 Following are the taxable income of Sri Ratnakar for the previous year 2008-09

15,000 50,000 46,500

15,000 46,500

27,000

27,000

14,80,000

14,80,000

36,000 80,000 17,58,500

36,000 80,000 17,08,500

Compute Sri Ratnakars total income for the assessment year 2009-10, if he is (i) Resident, (ii) Not Ordinarily resident, (iii) Non-resident Solution 3

Computation of Total Income of Sri Ratnakar for the assessment year 2008-09 Rs. 20,000 30,000 4,000 20,000 6,000 5,000 20,000 30,000 1,35,000 Rs. 20,000 4,000 20,000 6,000 5,000 30,000 85,000 Rs.. 20,000 4,000 20,000 6,000 5,000 30,000 85,000

1 2. 3. 4. 5. 6. 7. 8.

Income from salary accrued and received in India Profit from hotel business in London Dividend declared in Perth but received in India Income from transfer of a long term capital situated in India Interest on debentures of a company at London, received in India Interest received from nonresident for a business in India Royalty received in London, for technical services in London Fees from Indian company, deposited directly in bank account in India Total Income

1.9 Total taxable income: how it is computed: tax liability Statement of Total Income for the Assessment Year (Previous Year)

Note: No deduction under Chapter VIA is available for Short Term Capital Gain covered U/S 111A, any LTCG etc. and on casual income though these incomes are part of GTI Computation of Tax Liability Particulars 1. Casual income (lotteries, winnings form races) at 30% 2. LTCG at 20% 3. Other income at applicable rate Amount XXXXXX XXXXXX XXXXXX

Income tax on net income Less: Rebate u/s 80 E Balance Add: Surcharge at 10% (if applicable) Tax + Surcharge

XXXXXX XXXXXX XXXXXX XXXXXX XXXXXX

Add: Education cess (@ 2% on tax and 1% SHEC on Tax & surcharge) XXXXXX Gross tax due from the assessee XXXXXX Less: Pre-paid taxes (tax on self assessment, TDS, tax paid in advance) Tax liability (rounded off nearest ten Rupees) 1.10 Summary This chapter has given the idea about the basic aspects of income tax in India. The agriculture is the main source of living to Indians. Hence the income is not taxed in India under Income Tax Act. Yet in some cases the agricultural income is included for determining the rate of tax. The incidence of tax also varies according to residential status of an assessee. 1.11 Terminal Questions 1. What do you mean by tax evasion and tax avoidance? 2. What is previous year? What are the exceptions to the general rule that income of the previous year is taxed in the assessment year? 3. Discuss briefly the scope of total income of a person who is resident in India. 4. What are the agricultural incomes? How it is treated for the computation of tax? 5. How is the total taxable income of an assessee arrived at? SAQ I 1. Individual. 2. 2009-10 3. 1961 4. 2008-09 XXXXXX

XXXXXX

SAQ II 1. Not ordinarily Resident 2. False 3. 6(1),6(6) 4. Not taxable 1.12 Answers to TQs 1. Refer to Section 1.2 2. Refer to Section 1.3 3. Refer to Section 1.6 4. Refer to Section 1.4 5. Refer to Section 1.9 Copyright 2009 SMU Powered by Sikkim Manipal University .

MF0003-Unit-02-Deductions from Gross Total Income

Unit 2 Deductions from Gross Total Income and Exempted Incomes Structure: 2.1 Introduction Objectives 2.2 Deductions u/s 80C 2.3 Deduction in Respect of Medical Insurance Premium (sec 80D)

2.4 Deduction in Respect of Interest on Loan taken for Higher Education (Sec 80E) 2.5 Deduction in Respect of Donations to certain funds & Charitable Institutions (Sec 80G) 2.6 Deduction in Respect of Profits and Gains from Industrial Undertaking Engaged in Infrastructure Development (Sec 80I) 2.7 Deduction in Respect of Profits and Gains from Business of Collecting and Processing of Bio-Degradable Waste (Sec 80JJA) 2.8 Deduction in Respect of Certain Incomes of Offshore Banking Units (Sec 80LA) 2.9 Deductions in the Case of a Person with Disability (Sec 80U) Self assessment question 2.10 Exemptions: Tax-Free Incomes 2.11 Exemptions U/S 10A, 10AAA, 10B 2.12 Rebate U/S 88E 2.13 Summary 2.14 Terminal Question 2.15 Answers to SAQ and TQ 2.1 Introduction After computing the income under each head separately, the incomes of the various heads are added together. The total of incomes of the various heads is called Gross Total Income. From the gross total income, certain allowable deductions are made. The purpose of these deductions is to encourage savings, industrialization and to assist tax payers in meeting their essential expenditures. The resulting balance is the total income of the assessee. The deductions from gross total income are allowed: (i) In respect of certain investments and payments made by the assessee and (ii) In respect of certain incomes received by the assessee

The deductions from gross total income are provided in Sections 80CCC to 80U. i.e., under Chapter VI-A of the income-Tax Act of 1961. As per Section 80A of the Income-tax Act, the aggregate (i.e., total) amount of various deductions from gross total income allowed in Section 80 CCC to 80U should not exceed the gross total income. (i.e. G.T.I. after excluding long-term capital gains, short term capital gains taxable u/s 111A, winnings from lotteries, races etc.) Learning objectives: After reading this chapter you will learn: Various deductions allowable under the Act. To prepare proper tax plans. To claim exemptions given under the Act. Various tax concessions available for the entrepreneurs. 2.2. Deductions u/s 80C Deductions under Section 80C: Deductions in respect of certain investments made or certain payments, deposits made Eligible assessee: An Individual and HUF Quantum of Exemption: Rs. 1, 00,000 or Amount invested or Payment made, whichever is less. Conditions: The maximum amount of exemptions under Sections 80C, 80CCC and 80CCD should not exceed Rs. 1, 00,000 Eligible Investments, Contributions and Payments Life Insurance Premium: Premium paid for insurance on his own life or on the life of his wife or her daughter, or his or her child (minor or major) of any status including married daughter. 1. Condition: The qualifying amount of any premium or other payment made on an insurance policy shall not exceed 20% of the actual capital sum assured. 2. Payment made for a contract of deferred annuity 3. Deduction from the salary payable to a government servant by the government

securing to him a deferred annuity (should not exceed 1/5th of salary) 4. Contribution to the Statutory Provident Fund, Public Provident Fund or to a Recognised Provident Fund and to an Approved Superannuating Fund. 5. Purchase National Savings Certificates VIII Issue (Interest accrued on VIII Issue is deemed to have been re-invested) 6. Contributions towards Unit Linked Insurance Plan, (ULIP) of the UTI and of LIC Mutual Fund (notified) 7. Any sum paid annuity plan of LIC or any other insurer 8. Subscription to any notified units of any Mutual Fund or UTI 9. Contribution to any pension fund set-up by any Mutual Fund or by the UTI 10. Subscription to Home Loan Account or contribution to pension fund set-up by the National Housing Bank. 11. Any subscriptions to any scheme PSU engaged in Long term financing of acquisitions and constructions of residential houses 12. Tuition fees paid other than donations for full time education (max: two children) 13. Any payment made towards any loan taken to meet the cost of purchase or construction of a new residential house 14. Amount invested in approved debentures and equity shares of PSUs engaged in infrastructure facilities including power sectors or subscription of Units of MFs proceeds of which are invested in infrastructure facilities Deduction in respect of contribution to certain Pension Funds (80CCC) Eligible assessee: Individual It is allowed in respect of any amount paid or deposited in the P. Y. for an annuity plan of LIC or any other insurer (approved by IRDA) for receiving pension Deductible amount: the amount so paid or Rs.1, 00,000, whichever is less The contribution made by the central government to the account of an employee under a pension scheme referred to in Section 80CCD Section 80CCD is applicable if the following conditions are satisfied

Eligible assessee: Individual He is employed by the central Government on or after 1 1 2004 Amount should be deposited any amount in his account under a pension scheme notified by the central Government during the P. Y.10% of employees contribution (to the extent of Basic Pa y + D. A. given in terms of employment) to the above scheme is deductible 10% of Contribution by the Central Government to the above scheme is deductible in the year in which the contribution is made Note: In both the cases the contribution amount should not exceed 10% of salary 2.3 Deduction in respect of Medical Insurance Premium [Sec 80D] Eligible assessee: Individual and HUF. Deductible amount: the maximum deductible amount is Rs.10, 000, or actual amount paid whichever is less (In case of senior citizen it is Rs. 15,000) Certain conditions: (i) Premium must be paid by cheque (Cash not allowed) (ii) The medical insurance scheme of GIC (Ex: Mediclaim Policy) or any other scheme approved by the Central Government or IRDA (iii) Insurance on his health or on the health of his spouse or parents or dependant children. Deduction in respect of maintenance including Medical treatment of a, handicapped Dependant (Sec. 80DD) Eligible assessee: Resident individual and HUF Quantum of Deduction: For disability fixed sum of Rs. 50,000 irrespective of the amount incurred or deposited further in case of a dependent with severe disability (80% disability or more) the deduction shall be Rs. 75,000. Note: If deduction u/s 80U is claimed no deduction is available under section 80DD Deduction in respect of MedicalTreatment, etc. (Sec. 80DDB) Eligible assessee: Individual and HUF Deductible amount: i) Amount paid or Rs. 40,000, whichever is less (ii) Where the payment is in relation to a senior citizen the deduction shall be amount paid or Rs. 60,000, whichever is less.

Note: However, the deduction shall be reduced by the amount received, if any, by under an insurance from an insurer or reimbursed by the employer for the medical treatment of person mentioned in this section. Specified diseases: Neurological diseases, cancer, AIDS, chronic renal failure, Hemophilia etc 2.4 Deduction in respect of interest of loan taken for Higher Education (Sec. 80E) Eligible assessee: Individual An individual is entitled to a deduction of amount paid by him in previous year by way of repayment of loan (including interest) taken by from any financial institution or an approved charitable institution for t purpose of pursuing his higher education Conditions: (i) The repayment should be done out of his income chargeable to tax. (ii) The deduction will be allowed for the previous year in which the assessee starts repaying the loan. The deduction is available for a maximum period of 8 years till the loan together with inter thereon is fully paid (whichever is earlier) by the assessee. Only interest is allowed not repayment of any installments 2.5 Deduction in respect of donations to certain Funds, Charitable institution, etc. (Sec. 80G) Eligible assessee: All Assesses

(A) No limit donations where deduction is allowed @ 100% are as under: (1) The National Defense Fund; (2) The Prime Ministers National Relief Fund;

(3) The Prime Ministers Armenia Earthquake Relief Fund; (4) The Africa (Public Contributions-India) Fund; (5) The National Foundation for Communal Harmony; (6) A University or Educational Institution of national eminence (approved) (7) The Maharashtra Chief Ministers Relief Fund (8) Zila Saksharta Samitis constituted in any district (9) The National Blood Transfusion Council (10) Any Fund set-up by State Govt. to provide medical relief to the poor (11)The Central Welfare Fund of the Army and Air Force and the Indian Naval Benevolent Fund (12) The Andhra Pradesh Chief Ministers Cyclone Relief Fund (13) The National illness Assistance Fund (14) The Chief Ministers Relief Fund or the Lt. Governors Relief Fund (15) National Sports Fund (16) National Cultural Fund (17)The Fund for Technology Development and Application set-up by the Central Government; or (18)Any fund set-up by the State Government of Gujarat exclusively for providing relief to the victims of earthquake in Gujarat (19)The National Trust for welfare of persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities. (B) No limit donations where deduction is allowed @ 50% are as under: (1) Jawahar Lal Nehru Memorial Fund; (2) Prime Ministers Drought Relief Fund; (3) National Childrens Fund;

(4) Indira Gandhi Memorial Trust; (5) Rajiv Gandhi Foundation (C) With limit donations where deduction is allowed @ 100% of qualifying amount are as under: (l) The Government or to any local authority, approved association or institution as for the purpose of promoting family planning. (2) Sums paid by a company to the Indian Olympic Association or any other Association for sponsorship of sports and games in India. D) With limit donations where deduction is allowed @ 50% of qualifying: l) The Government or any local authority to be utilized for any charitable purpose 2) Any authority constituted in India for providing housing accommodation or for the purpose of planning development or improvement of cities, towns and villages or for both 3) Any authority created under any law exclusively for the purpose of satisfying the need of (I) Housing accommodation (II) Planning, development and improvement of cities, towns and villages 4) Any corporation established by the Govt for promoting the interests of the members of a minority community; or 5) The sums paid for the renovation or repair of any temple, mosque, gurudwara, church or any other place which is notified by the Central Government in the Official Gazette to be of historic, archaeological or artistic importance or to be a place of public worship of renown throughout any State or States. How to ascertain Adjusted Gross Total Income GTI xxx Less: LTCG xx All Deductions u/s 80C to 80U (except 80G) xx Exempted Income included in GTI xx Income referred u/s 115A to 115AD xx xx_ Adjusted Gross Total Income xxx Conditions for allowing deduction under this section:

i) Donations should be in cash, not in kind. ii) Donation should not be given for the benefit of any particular religion, class, creed, community, etc. Donation given for the benefit of scheduled castes, scheduled tribes, backward class or women o children are not for any particular religious community or caste. Deduction in respect of Rent Paid [80GG] Eligible assessee: Individual and HUF An employee who is not in receipt of house Rent Allowance (H R A) from his employer during the previous year or an individual who is a self employed Least of the following amounts shall be allowed (i) Excess of rent paid over 10% of Total Income; (ii) 25% of Total Income; or (iii) Rs. 2,000 p.m. The total income for this purpose means Gross Total Income minus the deductions allowable u/s 80C to 80U (except u/s 80GG) Deductions for scientific research or Rural development [80GGA] Eligible Assessee: All Assessees Deductible amount: 100% of such donation. Deductions in respect of contributions given by any person to political parties: 80GGB Only to a company entire amount is exempt from tax Deductions in respect of contributions given by any person to political parties: 80GGC Available to all assessees other than a local authority and any authority or organisation or person funded by the government entire amount is exempt from tax 2.6 Deduction in respect of profits and gains from Industrial Undertaking engaged in infrastructure development [Sec 80- IA] Deduction under section 80-IA is available only to the following undertakings: Case 1 Provision of infrastructure facility

Case 2 Case 3 Case 4 Case 5

Telecommunication services Industrial Parks Power generation, transmission and distribution or substantial renovation and modernisation of existing distribution lines Undertaking set up for reconstruction of a power unit.

An undertaking providing infrastructure facility must satisfy the following conditionsConditions 1 Conditions 2 Condition 3 Condition 4 It should start operation on or after April 1, 1995 Condition 5 Return of income should be submitted on or before due date of Submission of return of income Particulars AMOUNT OF DEDUCTION 1. Provision of infrastructure facility 100 per cent of the profit is deductible for the first 10 years. 2. Telecommunication services Assessee- enterprises % of profit deductible Period of deduction commencing from the initial assessment year First 5 years Next 5 years It should provide infrastructure facility It should be owned by an Indian company There should be an agreement which the central Government

Owned by a company or any 100 other person 30 3. Industrial parks / Special 100 per cent of profit is economic Zone deductible for 10 years commencing from initial assessment year. 4. Power generation / 100 per cent of profit is distribution deductible for 10 years commencing from initial assessment year.

Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone [Section 80- IAB] The following conditions should be satisfied1. The taxpayer is a developer of special economic zone 2. The gross total income of the taxpayer includes profits and gains derived by an undertaking from any business of developing a special economic zone. 3. Such special economic zone is notified Amount of deduction- If the above conditions are satisfied, the taxpayer can claim 100 per cent deduction in respect of the aforesaid profit. Period of Deduction- The aforesaid deduction is available for 10 consecutive assessment years. The deduction may be claimed, at the option of the taxpayer, for any 10 consecutive assessment years out of 15 year beginning from the year in which the special economic zone has been notified by the central Government. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings- [Sec. 80-IB]

Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7 Case 8 Case 9 Case 10

Business of an industrial undertaking Operation of ship Hotels Industrial research Production of mineral oil Developing and building housing projects Business of processing, preservation and packaging of fruits or vegetables or integrated handling, storage and transportation of food grains units Multiplex theatres Convention centre Operating and maintaining a hospital in rural area

Case 1: Business of an industrial undertaking Amount of Deduction: Assessee SSI Industrial Unit or Cold Storage in Backward State 100% for first 5 years and 25% for next 7 years Same in Cold Chain for Backward Agri goods District Same Same Any Other

Company

25% for fist 12 years

25% for first 12 years

Any other Person

25% for first 100% for first 5 years Same 10 years and 25% for next 5 years

Same

25% for first 10 years

2. Operation of ship 30 percent of the profit is deductible for the first 10 years. 3. Hotel Assessee in a notified area Any other hotel % of profit deductible 50 30 Period of deduction First 10 years First 10 years

4. Engaged in Indusial Research approved by the prescribed authority at any time before April 1, 1999 Amount of deduction Period of deduction 5 years beginning with the initial assessment year 10 years beginning with the initial assessment year 100 per cent of profit from such business If the company is approved by the prescribed authority after March 31, 200 but before April 1, 2007 100 per cent of profit from such business

5. Production of mineral oil: Amount of deduction- 100 per cent of the profit is deductible for the first 7 years 6. Developing and building housing projects - If all the aforesaid conditions are satisfied 100 per cent of the profit derived in any previous year relevant to any assessment year from such housing project is deductible. 7. Business of processing, preservation and packaging of fruits or vegetables or integrated handling, storage and transportation of food grains units Amount of Deduction- The amount of deduction is given below: Enterprises Owned by a company Owned by any other person % of profit deductible 100 30 100 25 Period First 5 years Next 5 years First 5 years Next 5 years

8. Multiplex theatres- 50 per cent of the profits and gains derived from the business is deductible from the assessment year 2003-04 for a period of 5 consecutive years beginning from the initial year. 9. Convention centre-50 per cent of the profits and gains derived from the business is deductible from the assessment year 2003-04 for a period of 5 consecutive years beginning from the initial year. 10. Operating and maintaining a hospital in a rural area- 100 per cent of the profits and gains of such business is deductible for a period of 5 consecutive assessment years, Deduction in respect of profits and gains of certain undertaking in certain special category of States- How to find out [Sec. 80-IC] Amount of deduction State in which the industrial Undertaking is set up Sikkim Amount deductible

100% of profit and gains of the industrial for 10 years commencing from the initial assessment year Himachal Pradesh or uttaranchal 100% of the profit and gains of the industrial undertaking for the first 5 years commencing with the initial assessment year and 25% (30% in the case of a company) for the next 5 years North-Eastern State [i.e., Arunachal pradesh , 100% of profit and gains of industrial Assam,Manipur, Meghalaya, Mizoram, undertaking for 10 years commencing from Nagaland and Tripura] the initial assessment year 2.7 Deduction in respect of profits and gains from the business of collecting and processing of bio-degradable waste [Sec. 80JJA] Amount of deduction- The whole of the profits and gains of the above activities shall be deductible for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which such business commences. Deduction in respect of employment of new workmen [Sec 80JJAA] The following conditions should be satisfied to avail deduction under section 80JJAA

Condition 1

The taxpayer is an Indian company.

Condition 2

Condition 3

Condition 4

Income of the taxpayer includes any profits and gains derived from any Industrial undertaking engaged in the manufacture or production of article or thing. The industrial undertaking is not formed by splitting up or reconstruction of an existing undertaking or amalgamation with another industrial undertaking. The assessee furnishes along with the return of income the report of a chartered accountant in Form No. 10 DA.

Quantum of Deductions: 30% of the additional wages paid to the new regular workmen employed by the assessee during the P Y for a maximum period of three years Here workmen does not include (i) a casual workmen (i) contract labour and (iii) any workmen recruited for less than 30 days 2.8 Deduction in respect of certain incomes of offshore banking units Sec 80LA: Available to a schedule Bank or Foreign Bank performing offshore banking services in SEZ Quantum of Exemption: 100% of such income for 5 A Years 2.9 Deductions in the case of a Person with Disability (Sec. 80U) Eligible Assessee: A resident individual, Quantum of deduction: Flat Rate of Rs. 50,000. In case of severe disability deduction shall be allowed Rs. 75,000. Note: If deduction u/s 80DD is claimed no deduction is allowable under this section. Self Assessment Questions I 1. The amount invested in P.O.NSC VIII issue qualifies for deduction under section 80C (true/false) 2. Repayment of bank loan borrowed for construction of the house does not qualify for deduction u/s 80C (true/false) 3. Donation to National Childrens Fund fully qualifies u/s 80G (true/false) 4. The gross qualifying amount under section 80C is . 5. 80 DDB deals with .

6. A person with severe disability is given deduction u/s 80U which is equal to Rs. 2.10 Exemptions: Tax-Free Incomes An assessee need not pay tax on all his incomes. Some of his incomes are exempt from tax. Such incomes are called incomes exempt from tax or tax-free incomes. Tax-free incomes are covered by Section 10 of the Income-tax Act. The various incomes exempt from income-tax are: Sec. 10 (1): .Agricultural income is exempt from income-tax. In some cases agricultural income is taken into consideration to find out tax on non- agricultural income. Sec.10 (2): any sum received by a member of the Hindu undivided family either out of the income of the H.U.F. or out of the income of the estate belonging to the H.U.F. is fully exempt from income-tax. Such receipts are not taxable in the hands of an individual member, even if they have not been taxed in the hands of the H.U.F. Sec.10 (2A): The share of income of a partner in the total income of the firm, which is separately assessed to tax, is fully exempt from tax. Sec. 10(5 ): Leave travel concessions. Sec. 10 (7): Any allowance paid or allowed outside India by the Govt. to an Indian citizen for rendering service outside India is wholly exempt from tax. Sec. 10 (10): Gratuity: See Unit 3 Sec. 10 (10A), 10 (AA): Pension and leave salary: See Unit 3 Sec. 10 (10B): Retrenchment compensation; See unit 3 Sec. 10 (10C): Compensation received at the time of voluntary retirement: See unit 3 Sec. 10 (10CC): Tax on perquisite paid by the employer: Sec. 10 (10D): Amount paid by life insurance companies: Sec. 10 (11), (12), (13): payment from provident fund, superannuation fund: See unit 3. Sec. 10 (13A): House rent allowance: See unit 3 Sec. 10(14): Special allowance; See unit 3 Sec. 10 (15): Interest on securities. See unit: 7

Sec. 10 (16): Educational scholarships: Sec. 10 (17): Daily allowance to Members of Parliament Sec. 10 (17A): Scientific and artistic work awards instituted by the Central Government or by any State Government are exempt from Income-tax. Sec. 10 (18), (19): i) Pension received by an individual who has been in the service of the Central or State Government and has been awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or such other gallantry award as the Central Government may, by notification in the official gazette, specify in this behalf, and ii) family pension received by any member of the family of such individual, will be exempt from tax . Sec 10 (31): Subsidy received by an assessee engaged in the business of growing and manufacturing rubber, coffee, cardamom or such other plantation crops as may be notified by the Central Government is exempt from tax, provided the subsidy is received from the concerned Board, it (i.e., the subsidy) is used for re plantation or replacement of rubber plants, coffee plants or cardamom plants or for rejuvenation or consolidation of areas, and the assessee furnishes to the assessing officer, along with the return of income, a certificate from the concerned Board stating the amount of subsidy received during the previous year. Sec. 10 (32): Income of minor child included in the income of individual is exempted up to Rs. 1,500 in respect of each such minor child or income of such minor child whichever is lower. Sec.10 (33): Capital gains on the transfer of US64 Sec. 10 (34), (35): Income by way of dividends from domestic company or any income from the units of Unit Trust of India, and the income received from the units of mutual funds specified under Section 10 (23D) of the Income-tax Act are exempt from tax. Sec. 10 (37): Capital gain on compulsory acquisition of urban agricultural land: only to individuals and HUFs., provided such agricultural land was used by the assessee (or by his parents) for agricultural purposes during 2 years immediately prior to transfer. Sec. 10 (38): Long term capital gains on transfer of listed equity shares/ units covered by securities transaction tax. 2.11 Exemptions U/s 10A, 10AAA, 10B Newly established Under takings in Free trade zone: Electronic hardware technology park or software technology park, special economic zone Sec. 10A Subject to the fulfillment of certain conditions the profits and gains calculated as below is allowed to be deducted from his total income for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software.

Newly established units in Special Economic Zone: Sec. 10AA Income from export of articles or thing or from services from such unit is deducted to the following extent, subject to the fulfillment of certain conditions.

100% of the profit is deductible for a period of five assessment years, 50% for next five assessment years. Newly established 100% export oriented undertakings: Sec. 10B Undertakings approved by the Board, is eligible for the deduction for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles. The profit eligible for deduction is calculated as per deduction computed u/s 10A (previous para) 2.12 Rebate u/s 88 E Rebate of income tax in respect of securities Transaction Tax: Tax paid on taxable securities transactions; or tax payable on income from taxable securities transactions at an average rate of tax, whichever is lower is allowed as a rebate and shall be deducted from the amount of income tax. 2.13 Summary Various deductions are available for savings, certain expenses, certain sources of incomes. All these savings, investments, incomes subject to certain conditions, can be claimed by the assessee as deductions and see that his taxable total income is reduced hence his tax liability also. 2.14 Terminal Questions

2.15 Answers to SAQs and TQs SAQs 1) True

2) False 3) True 4) 1, 00,000 5) Deduction in respect to Medical Treatment 6) Rs. 75,000 TQs 1) Refer 2.2 2) Refer 2.5 3) Refer 2.4 4) Refer 2.11 Copyright 2009 SMU Powered by Sikkim Manipal University .

MF0003-Unit-03-Income from Salaries

Unit 3 Income from Salaries Structure: 3.1 Introduction Objectives 3.2 Chargeability 3.3 Basis of charge of salary income Salary [Sec. 17(1) 3.4 Different Forms of salaries Advance salary

 Arrear salary Fees and commission Bonus Death Cum Retirement gratuity Leave salary of encashment of earned leave Compensation for retrenchment Tax paid by the4 employer on the value of perquisites [sec 10(10CC)] Salary and Pension from UNO 3.5 Allowances 3.6 Perquisites Self Assessment Question 3.7 Who are specified employees? 3.8 Profits in Lieu of Salary 3.9 Deductions from cross income from salary 3.10 Provident Fund 3.11 Summary 3.12 Terminal Questions 3.13 Answers to SAQs and TQs 3.1 Introduction Major number of assessees is from salaried class. Though they receive their dues in the form of cash or in kind, much of the receipts and value received in kind are not taken for tax purpose. Hence it necessary to understand the meaning of salary and its chargeability. Any remuneration paid by an employer to his employee in consideration of his services in called salary. It also includes monetary value of those benefits and facilities provided by the employer which are taxable.

Objectives: After studying this unit you will be able to understand the concept of salary income The various concepts involved in computation of taxable salary The relevance of provident fund in savings The application of bargaining techniques with the employer Under Section 15, the following incomes are taxable under the head Salaries: (a) The salary due from an employer or former employer to an assessee in the previous year, whether paid or not; (b) The 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 becomes due to him; eg. Advance Salary (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. Tax planning hints While fixing the salary to his employee, the employer has to keep two factors in his mind. First factor, make sure that the compensation payable to the employee must be a deductible expenditure while computing the income from business or profession of the employer. On other hand, make sure even the package received by the employee is taxable in their hand at lesser rates to reduce their overall tax liability i.e., focus should be reduction of their tax liability and to maximise their take home salary. 3.2 Chargeability Any Remuneration paid by an employer to his employee in consideration of his services is called salary. It includes monetary values of those benefits and facilities provided by the employer, which are taxable 3.3 Basis of charge of salary income Income is chargeable under this head on due basis or receipt basis whichever is earlier Salary [Sec. 17(1) Salary includes; Wages; bonus; fees; commission

 any annuity or pension; any gratuity; taxable allowances; value of perquisites profit in lieu of salary; any advance of salary; but not loan for purchasing a car, cycle, scooter or a house; etc any arrears of salary; Employers contribution to Recognised Provident fund account of employee in excess of 12% of the employees salary and interest credited during the year on provident fund in excess of 9.5%. The contribution made by the Central Government in the previous year, to the account of an employee (who joins on or after 1.1.2004), under a pension scheme. Tax Planning: Where employee takes salary in advance, it is added in the salary income of the previous year in which it is taken. This increases tax liability of the employee. Hence, instead of advance salary, a loan may be taken from employer. (Loan is not added in the salary income for tax purpose. Even interest free loan or interest on concessional loan is tax free, if the amount of loan in aggregate does not exceed Rs. 20,000 during the previous year.) 3.4 Different Forms of salaries =>Advance Salary Advance salary is taxable on receipt basis, in the year, which it is drawn. =>Arrear Salary It is taxable on receipt basis, if the same has not been subjected to tax earlier on due basis. =>Fees and Commission This is paid by an employer to his employee for doing any extra work (not over time) other than the job assigned to him as an employee. It will be included under the head salaries in computation income of the employee. =>Bonus: It is taxable as salary in the year of receipt, if it has not been taxed earlier on due basis. =>Death cum Retirement Gratuity Death cum Retirement Gratuity [Sec.17 (1) iii]

Tax planning: If an employee is due for retirement shortly, it is better to go for commutation of pension as per the above stated rules. Because pension (un-commuted) received by all employees (govt. and non govt.) during their life time is included in the salary income and chargeable to tax. =>Leave Salary or Encashment of earned leave Cash equivalent of leave salary payable to an employee of the central and the sate government in respect of the earned leave at his credit at the time of his retirement whether on superannuation or otherwise (e.g. by resigning), is exempt from tax.

The least of the following is exempt from tax: Particulars Amount

1. Maximum of 10 months salary on the basis of the average salary drawn by the employee during 10 months preceding his retirement on superannuation or otherwise 2. Average salary x Approved Period Maximum or Statutory limit 3. Amount actually received

xxx xxx Rs. 3,00,000 xxx

Approved period: Earned leave entitlement cannot exceed 30 days for every year of actual service Salary: Basic pay + Dearness Allowance (given in terms of employment) + Commission achieved on fixed percentage of turnover Tax Planning If a Govt. employee is due for retirement shortly, it is better for him not to encash his salary while he is in service. This is because he can avoid paying tax on leave encashment which he receives at the time of retirement. Even an employee in private service gets exemption for a major part of the amount received as leave encashment. In this connection employee should also consider the loss of interest on the amount which is not taking to save tax. =>Compensation for Retrenchment [Sec10 (10B)] Any compensation received by a workman under Industrial Disputes Act, 1947; at the time retrenchment is exempt from the tax to the extent of the least of the following: Particulars 1. An amount calculated in accordance with Sec 25F(b) of the industrial dispute act 1947; or 2. Statutory Limit (as the central government notified in this behalf) 3. Actual amount of compensation received by the employee Amount XXX 5,00,000 XXX

Receipts of employees on voluntary retirement [Sec10 (10C)] The least of the following is exempt from tax: Particulars 1. Three months salary X Each completed year of service Amount XXX

2. Salary at the time of retirement X the balance of XXX months of service left before the date of his retirement XXX 3. Actual Amount received 4. Max Statutory limit 5,00,000

Note: Salary means Basic pay + DA in terms of employment + Commission achieved fixed percentage of turnover achieved by the employee Note: It applies to an employee who has completed ten years of service or completed 40 years of age (not applicable to P. S. U employees) Tax planning The voluntary retirement can be postponed to the beginning of the next year, to see that taxable income from salary (actual salary is less or nil) is restricted to the compensation. =>Tax paid by the employer on the value of perquisites [Sec 10(10CC)] The amount of tax actually paid by an employer, at his option, on non-monitory perquisites on behalf of an employee, is not taxable in the hands of the employee and it shall not be treated as an allowable expenditure in the hands of the employee. => Salary and pension from U N O It is totally exempt in India. Even pension received by widows/ children of former U N O employees is exempt from tax 3.5 Allowances Under Section 15 of the IT Act all allowances are taxable on receipt or due basis whichever is earlier From the IT point of view, there are three types of such allowances, which are as under: I. Taxable Allowances 1. 2. 3. 4. 5. 6. 7. 8. Dearness Allowance or Dearness Pay Medical Allowance Tiffin Allowance Servant Allowance Non-Practicing Allowance Hill Allowance Warden Allowance/ Procter Allowance Deputation Allowance

9. Over-time Allowance 10. Other Allowance Ex: Family All, Project All, Marriage All, Rural All, C. C. A, Telephone All, Health All, Holiday All, Special Qualification All, Dinner All etc. II. Allowances exempt up to specified limit 1. H. R. A 2. Entertainment Allowance 3. Special Allowances notified u/s 10 (14) (ii) (a) Travelling Allowance (b) Daily Allowance (c) Conveyance Allowance (d) Helper allowance (e) Academic Allowance (f) Uniform Allowance 1. Special Allowances exempt u/s 10 (14) (ii) (a) Allowances to an employee working in any transport system (b) Children Education Allow (c) Children Hostel Allowance (d) Transport Allowance (e) High Altitude Allowance III. Fully exempted allowances 1. Foreign Allowance given to government employees posted abroad 2. Sumptuary Allowances to Supreme and High Court Judges 3. Allowances from U. N. O IV Allowances Exempted up to Specified Limit

1. House Rent Allowance (H. R. A): [Sec 10(13A) An allowance granted to an assessee by an employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him is exempt from tax to a certain extent:

Note: In case of employee is living in his own house and is getting H. R. A, or living in a house for which he is not paying any rent, full amount of H. R. A receivable is taxable. In this rule: (i) Salary means: Basic Pay + D.A (given in terms of Employment) + Commission achieved on fixed percentage of turnover achieved 2. Entertainment Allowance {Sec 16 (ii)] First the entertainment allowance is included in the salary and thereafter a deduction is allowed in accordance with the following rules: (a) In the case of a Government employee: The least of the following is exempt from tax: (i) Actual E.A. received (ii) 1/5th of Salary, or (iii) Rs. 5,000. (A) Those are exclusively to be incurred in the performance of the duties of his office [Sec 10 (14) (i)] Special allowances which are granted to meet the expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office will be exempt from tax, to the extent to

which such expenses are actually incurred for that performance and notified by the central government The following special allowances have been notified by the central government u/s 10 (14) (i) (a) Travelling Allowance Daily Allowance, Conveyance Allowance, Helper Allowance, Academic Allowance and Uniform Allowance B) Special Allowances to meet the personal expenses [Sec10 (14) (ii)]: 1. Any allowances granted to an employee working in any transport system: Any such allowances given to an employee working in a transport system to meet his personal expenses during his duty performed in the course of running of such transport from one place to another is exempt in the whole of India Up to 70% of such Allowance or Rs. 6.000/ month Whichever is less. 2. Children Education Allowance: Is exempt in the whole of India @ Rs. 100/ month per child to a maximum of two children 3. Children Hostel Allowance: Is exempt in the whole of India @ Rs. 300/ month to a maximum of two children 4. Transport Allowance: Given to compensate them for the cost incurred on account of commuting between the place of residence and the place of duty, will be exempt subject to a maximum of Rs. 800/month. However, if the employee is blind or orthopaedically handicapped with disability of lower extremities, the transport allowance is exempt up to Rs. 1,600/month. 5. High Altitude Allowance: (a) For Altitude below 9,000 feet Nil (b) For Altitude of 9,000 15, 000 feet It is exempt up to Rs. 1060/month (c) For Altitude above 15,000 feet It is exempt up to Rs. 1,600/month 3.6 Perquisites The term perquisite means any benefit, attached to an office or position in addition to salary or wages. It may be given in cash or in kind. if it is given in kind it is measured in terms of money

and added to find out employees salary for tax purpose. The perquisites are taxable under the head salary only if they are (a) allowed by an employer to an employee; (b) allowed during the continuance of employment; (c) directly dependent on service; (d) resulting in the nature of personal advantage to the employee. Perquisites received from a person other than employer, are taxable under the head profits and gains of business or profession or income from other sources. Perquisites as defined in the Act [Sec. 17 (2)] (1) Rent free accommodation [Sec 17(2) (i)] (2) Accommodation at concessional rent [Sec 17(2) (ii)] (3) Perquisites taxable only under specified cases [Sec 17 (2) (iii)] (4) Employees obligation met by the employer [Sec 17(2) (iv)] (5) Any sum payable by the employer, weather directly or through a fund other than a recognised provident fund or an approved superannuation fund or Deposit Linked Insurance Fund, to effect an insurance on the life of employee or in respect of a contract for an annuity on the life of the employee [Sec 17(2) (v)] (6) Notified Fringe benefits [Sec 17(2) (vi)], In terms of provisions of [Sec 17(2) (vi)], the value of the following benefits or amenities shall be included in the income of an employee: (a) Interest free or concessional loan (b) Use of any movable asset (c) Transfer of any movable Asset Perquisites taxable in case of all employees A) The value of residential accommodation provided to the assessee by his employer. Central and state govt. employees: The value of perquisite is equal to the licence fee which would have been determined by the govt. in accordance with the rules framed by the govt. for allotment of houses to its employees. Other Employees: Employees in private sector (a) Accommodation owned by employer.

(i) Provided in cities having population exceeding 25 lakh as per 2001 census: The value taxable shall be 15% of employees salary. (ii) 10% of salary in cities having population exceeding ten lakh but not exceeding 25 lakh as per 2001 census. (iii) Provided in other cities The value taxable is equal to 7.5% of salary in respect of the period during which the accommodation was occupied by the employee during the previous year. (b) Accommodation is taken on lease or on rent employer: Actual amount of lease rent paid or payable by the employer or 15% of salary, whichever is lower, will be the value of accommodation and taxable Where the accommodation is furnished (in both cases) 10% of the cost of furniture shall be added to the above value. If the furniture is hired by the employer the hire charges payable for the furniture will be taken into account. From the above value, any amount is paid or payable by the employee during the previous year shall be reduced and the balance shall be the value of perquisite. For the purpose of valuation of rent free accommodation or accommodation at concessional rent, the salary means and includes: a) basic salary; b) dearness allowance/pay, if terms of employment so provide; c) bonus; d) commission; e) fees; f) all other taxable allowances (excluding amount not taxable); g) any monetary payment which is chargeable to tax (by whatever name called) For this purpose salary does not include the following: a) dearness allowance/pay, if not taken into account while calculating retirement benefits like P/F., gratuity, etc or if the term of employment does not so provide; b) employers contribution to provident fund account of employee and interest there on; c) all allowances which are exempt from tax;

d) the value of perquisites under sec. 17 (2) Payments of gas, electricity, water and income tax bills are not taken into consideration. Leave encashment of salary pertaining to the current year is taken into consideration. Tax Planning When an employee is given the option as above, he will choose that alternative which reduces his taxable salary income. (B) Any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee 17 (2) iv) Given below are some examples of such obligations: a) payment by the employer of the employees club or hotel bills provided that they are not connected with the employers business; b) payment by the employer of any loan due on his employee; c) payment by the employer of education expenses of the children of his employees; d) payment by the employer of the salary of the domestic servant of an employee meant for his personal use and employed by the employee; e) income tax paid by the employer in respect of the salary of his employee; f) legal expenses incurred by the employer to save or defend the employee; However, tax paid by employer on value of perquisites (not provided for by way of monetary payment) shall be exempt u/s 10(10CC); B) Any sum payable by the employer, whether directly or through a fund, other than a recognized provident fund or an approved superannuation fund or a Deposit-linked Insurance Fund, to effect an insurance on the life of the employee or in respect of a contract for an annuity on the life of the employee. C) In term of provisions of Sec. 17(2)(vi), the value of the following benefits or amenities shall be included in the income of an employee; a) Interest-free or concessional loan; b) Use of or transfer Movable asset to an employee or any member of his household; Self Assessment Questions

1) Value of rent free accommodation is taxable u/s . 2) Medical facility provided to assessee and his family members in the hospital maintained by the employer is -. (taxable/not taxable) 3) Amount spent for providing free education facilities to and training of, employees is . (taxable/not taxable) 4) Every individual can subs to PPF any amount being not less than -& more than in year 3.7 Who are specified employees? The following are specified employees: An employee, who is a director in the employer company OR An employee who has substantial interest in the employer concern (if he is a beneficial owner of equity shares carrying 20% or more equity voting power in the employer concern) OR Employee drawing in excess of Rs. 50,000(Salary exclusive of all benefits or amenities not provided by way of monetary payments). Monetary benefits which are not taxable under sec. 10, deduction on account of entertainment allowance are excluded. Given below are some examples of free or confessional benefit/s amenities provided by the employer to his employee, the value of which shall be included in the salary income of the specified employee; (i) Gas, electric energy and water, connections in the name of employer and bills are paid by employer (ii) Sweeper, watchman, gardener and personal attendant, paid by employer (iii) Education facility to the members of employees household bills in the name of employee but paid by employer. Tax-free Perquisites: The value of the following perquisites shall not be included in the salary income of any employee: i) Medical benefits Fixed medical allowance is always taxable.

If bills are in the name of an employee and the employer makes payment, then it is taxable in the hands of all employees, whether specified or not. Medical facilities in the hospitals etc. maintained by the employer are tax free. Medical bills incurred or reimbursed by the employer for the treatment in hospitals etc. maintained by Govt. or local authority or any approved hospitals is not chargeable in the hands of any employee. Medical bills incurred or reimbursed by the employer fir the treatment in private hospitals etc. are tax free up to Rs. 15,000 in aggregate per year. Medical facilities outside India for the treatment of employee or any member of the family of such employee are also tax free provided the expenditure shall be permitted by R.B.I. Cost on travel of employee/any member of his family and one attendant who accompanies the patient in connection with the treatment outside India shall also be tax free provided, the employees gross total income before including the expenditure on traveling does not exceed Rs. 2,00,000. Medical bills incurred or reimbursed by the employer for the treatment of prescribed diseases, approved by the chief commissioner are also tax free Medical insurance premium paid or reimbursed by the employer is tax free. ii) Tea or snacks or free food or beverages provided in office or factory (work place) or through paid vouchers which are not transferable and usable only at eating joints. iii) Facility of motor car(s) iv) Residential accommodation provided at remote area. v) Facility of club or health club and similar facilities. vi) Expenses on telephones including mobile phone. vii) Employers contribution of Staff Group Insurance Scheme viii) Scholarships to employees or their children paid by the employer. ix) The facility of conveyance provided by the employer from residence to place of employment and vice-versa. x) Refresher courses, etc. If the employer pays fees for an employee taking refresher courses or management course in order to enable, the employee to perform his services more efficiently. Such expenses are treated as scholarship.

xi) Free Rations to Armed Personnel. The value of free rations given to the armed forces personnel. xii) Facility of guest house or holiday home xiii) Welfare expenses xiv) Entertainment expenses xv) Free or confessional ticket provided by the employer (engaged in the business of transport) for private journeys of the employee or his family members. xvi) Perquisites to Government Employees posted abroad. Any perquisites allowed outside India by the Government of India to a citizen of India for rendering service outside India. This exemption is not available to non-government employees and also to those who are not citizens of India. xvii) Rent-free house and conveyance facility provided to High Court and Supreme Court Judges xviii) The value of rent-free furnished residence provided to a Minister, specified officers of Parliament or a Leader of the Opposition in Parliament. xix) Gifts in Kind. xx) Laptops and computers provided by the employer for personal use of employee or any member of his household. xxi) Interest-free or confessional loan, if the amount of loan in aggregate does not exceed Rs. 20,000 during the previous year. xxii) Transfer without consideration to an employee of a movable asset (other than computers electronic items and car) by the employer after using it for a period of ten years or more. xxiii) Periodicals and journals required for discharge of work. xxiv) Leave travel concession u/s. 10(5). xxv) Issue of share etc., free of cost or at a confessional price under employees Stock Option Plan- The value of any benefit provided by a company free of cost at a confessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly, under the Employees Stock Option Plan or Scheme offered to employees in accordance with the guidelines issued by the Central Government. xxvi) Where loans are made available for medical treatment in respect of diseases specified in Rule 3A (e.g., cancer, tuberculosis, AIDS, etc) The value shall be taken as nil. However, the

exemption shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme. 3.8 Profits in Lieu of Salary Profits in lieu of salary include the following: 1. The amount of any compensation due to or received by an assessee from his employer or former employer in connection with the termination of his employment or the modification of the terms and conditions relating thereto. 2. Any payment due to or received by an assessee from an employer or a former employer. Where an employer gives to his employee any sum by way of personal gift and not in appreciation of his service, it is not taxable in the hands of the employee. 3. Any payment made from unrecognized provident fund or other fund will be included only to the extent of employers contributions and interest thereon. Interest on employees own contribution is also taxable but it will be taxed under the head. Income from Other Sources and not as salary income. 4. Any payment received under a Keyman Insurance Policy including the amount of bonus Exceptions: Payments made under clauses (10), (10A), (10B), (10C) (11), (12), (13), (3A) of section 10 will not be included in profits in lieu of salary. 3.9 Deductions from Gross income from salary: Sec. 16 Taxable income from salary is calculated after making following deductions: i) Entertainment allowance: only to govt. employee: disused in allowances ii) Professional tax or tax on employment levied by a state and paid during the year Sec. 16 (iii) 3.10 Provident Fund The word Provident means to provide for the future, hence this fund is to provide for the future. This fund is created by an amount deducted from the salary of the employee every month at a certain rate. The employer also makes his own contribution to this fund. These contributions are invested to earn interest, which is also credited to the employees provident fund account. When an employee retires from his service, he receives this amount in lump-sum along with interest on it and is a great help to him at that time. If unfortunately, the employee dies during the tenure of his service, the amount of this fund is received by his wife and children or legal heirs, which is of great help to them.

Provident funds are of four kinds: i) Statutory Provident Fund, ii) Recognised Provident Fund iii) Unrecognized Provident Fund, iv) Public Provident Fund Statutory Provident Fund. It is that Provident fund to which the Indian Provident Fund Act, 1925 applies. Generally, this Provident Fund is maintained by Government or Semi-Government offices, like local authorities, universities, other recognised educational institutions, statutory corporations and nationalized banks, etc., Recognized Provident Fund. It is a fund to which the Provident Fund Act, 1952, applies. Under this scheme, any person who employs 20 or more employees is under an obligation to register his firm or organisation under the provident Fund Act, 1952, and start a provident fund scheme for the employees in his organization. It is after 3 years of its establishment, that the registration should be done under this Act. There is one more alternative also. The funds which are not established under E.P.F. Act of 1952 have to be expressly recognised by the Chief Commissioner or Commissioner of Income Tax. The Chief Commissioner or Commissioner recognises this fund only when he is satisfied that this fund fulfils certain conditions set-out in the Income Tax Act of 1961. Generally this fund is maintained by scheduled banks, factories and several business houses. Thus, thius fund is maintained by private sector organizations. Unrecognized Provident Fund: It is that provident fund which is neither statutory nor recognised. Any institution or organization can maintain this fund. It is approved by the P.F. commissioner but not by the commissioner of income tax. Public Provident Fund: The Public Provident Fund Scheme was started from Ist July, 1968, under the provision of PPF Act, 1968. Every individual (including a salaried employee) can subscribe to this fund any amount being not les than Rs. 500 and not more than Rs.70, 000 in year. He can also deposit money in installments which cannot exceed 12 in a year. An individual can open a public provident fund account either on his own behalf or on behalf of a minor of whom he is the guardian. However, an individual can open only one account in his own name. An account under this scheme can be opened at a branch of the State Bank of India or its subsidiaries or at a branch of any of the nationalized banks authorized for this purpose by the Central Government. A withdrawal is permissible every year from the seventh financial year of the date of opening the account, of an amount not exceeding 50% of the balance at the end of the 4th preceding year or year immediately preceding the year of the withdrawal, whichever is lower, less the amount of loan if any.PF scheme allows the assessee to withdraw the entire amount at his credit, after adjustment of the dues if any to government, on completion of 15 years after the end of the year in which the account is opened.

The first loan can be taken in the third financial year, up to 25% of the amount at the credit at the end of the first financial year. This facility can be availed only before the expiry of 5 years from the end of the year in which the initial subscription was made. The loan is repayable either in lump sum or in convenient installments. The account can be transferred to any other accounts office. The interest credited to the fund and amount standing to the credit of subscribers are exempted from income tax and wealth tax respectively. Nomination facility is available. NRI are not permitted to open account under this scheme. Amount which is included in the salary income: Statutory Provident Fund Recognised Provident Fund Unrecognised Provident Fund When a person is a When a person is a member of When a person is member member of this provident this fund: (i) his own of this fund his own fund: (i) his own contribution to this fund, contributions to this fund contributions to this fund are included in his total are included in his total (ii) employers contribution in income but the employers income, contribution and interest on excess of 12% of the provident fund is not employees salary, and (iii) (ii) employers contribution interest on provident fund in included in his total income and interest on provident excess of 9.5% are included in from year to year. fund is neither included in employees total income i.e., the employees total employers contribution to the income nor it is taxable. extent of 12% of the salary and interest on provident fund upto the prescribed rate; is neither included in the total income of the employee nor it is taxable. Maximum amount qualifying for deduction Contribution to S.P.F. or R.P.F by the employee qualifies up to Rs. 1,00,000. Employees contribution to U.R.P.F. never qualifies. Tax Planning: PPF is an ideal scheme of saving. The amount of deposit attracts 80 C deduction. The interest is also tax free. The asessee can open an account for 15 years and see that account is in life. During 13th, 14th, 15th year he can deposit and claim maximum deduction, and withdraw entire balance on completion of 15 years of account opening. Even during the 15 years, he can avail loan and deposit the same in PPF account. By this, he can reduce the tax liability substantially.

Those with their income of more than Rs. 2,50,000 get tax benefit of 30%, while they are paying marginal interest on loan. 3.11 Summary This chapter has given the total idea as to the meaning of salary and what are all included in the meaning of taxable salary. Knowledge about taxable and tax free allowances, the valuation of perquisites helps the salaried assessees to make bargain with their employers. Even they can plan their savings in such way to reduce their salary income. 3.12 Terminal Questions 1) What are the taxable allowances taxable? 2) Who are specified employees? 3) What are the deductions available from gross salary income? 4) Discuss the provisions relating to Public Provident Fund. 3.13 Answers to SAQs and TQs SAQs 1) U/s 17(2) 2) Not taxable 3) Not taxable 4) Rs. 500, Rs. 70,000 TQs 1) Refer 3.5 2) Refer 3.6 3) Refer 3.9 4) Refer 3.10 Copyright 2009 SMU Powered by Sikkim Manipal University

MF0003-Unit-04-Income from House Property

Unit 4 Income from House Property Structure 4.1 Introduction Objectives 4.2 Chargeability (Sec22) Basis of Charge 4.3 Annual Value (Sec 23) Gross Annual Value Unrealized rent Determination of GAV Municipal Value 4.4 Deductions form of Annual Value Self Assessment Questions I 4.5 Buildings self occupied for Residential Purposes 4.6 Loss from house property 4.7 Computation of income from House Property 4.8 Summary 4.9 Terminal Questions 4.10 Answers to SAQs & TQs 4.1 Introduction

This head covers the assessees who are the owners of house properties. The property income i.e., the rental receipts are taxed under this head, considering the expenses incurred to earn the source. The following gives the meaning and requirements to be fulfilled for including the income under the head income from house property. Under Sec. 22, the annual value of a property, consisting of any buildings or land attached thereto is chargeable to tax in the hands of assessee owner, provided it is not used for the purpose of assessees business or profession. Thus: a) Income from subletting is not taxable under this head b) Income from vacant land is taxable under income from other sources. c) Annual value of property used by the owner for his own business or profession is not chargeable to tax d) If the assessee lets out the building or staff quarters to the employees of business whose residence there is necessity for the efficient conduct of business, the rent collected from such employees is assessable as income from business and not as an income from house property. e) If a building is let out to authorities for locating bank, post office, police station, etc., income from such building will be assessable as income from business and not as income from house property, provided the dominant purpose of letting out the building is to enable the assessee to carry on his business more efficiently and smoothly. f) Where the assessee hires machinery, plant or furniture belonging to him and also buildings for a composite rent and if the rent of the buildings is inseparable from the rent of the said machinery, plant or the furniture, the income from such letting is not chargeable to income tax under the head Income from house property but is taxable under the head Business or Profession, if such letting is his business or under income from other sources. g) Paying guest accommodation. It is assessable as business income. Objectives: After studying this unit you will be able to compute income from house property. You will understand the benefit of taking loan to construct a house and tax benefit that can be availed of. The balanced approach of constructing a house or to live in a rented house. You also understand how the loss from house property is treated for tax purpose. 4.2 Chargeability Sec (22)

The property: Rental income is taxable under the head income form house property if the following conditions are fulfilled: Condition 1 Condition 2 Condition 3 There must be Building and lands appurtenant thereto; The assessee must be the owner of such property; Which is not used for the purpose of assessees Business and Profession?

Note 1: Land, which is not appurtenant to any building, is taxable under the head Income from other Sources. Note 2: income from subletting, temporary hutments in the vacant land are not included in buildings. Any rental income from such hutments is taxable under the head Income from Other Sources. Note 3: The Following are the exceptions to the general rule that the Income from House Property is taxable under the head Income from House Property: (a) Building and staff quarters let out to employees. (b) If building is let out to the government authorities for locating bank, post office and police station where the dominant motive is to run business efficiently. (c) Composite letting of building with others. (d) Paying guest accommodation Given by a club to its members =>Basis of Charge Under the head Income from Hose Property the basis of charge is the annual value of property and not on its annual rental value. Again it is computed on the basis of nature of occupation. On the basis of nature of occupation Income of House Property can be classified as follows: 1. Let out property. 2. Self-occupied. 3. Deemed to be let out property. 4. Partly let out and partly self occupied property. Part of the period self occupied and Part of the period let out Part of the total portion self occupied and part of the total portion let out.

4.3 Annual Value [Sec 23] (a) It means the sum for which the building might reasonably be expected to be let out from year to year. Or =>Gross Annual Value: It refers to the value of the property for any year, before giving any deductions. Computation of Gross Annual Value. Generally the GAV can be determined on the basis of the following factors: (i) Actual Rental Income: It refers to the rent actually charged by the owner for the property for the entire year. (ii) Municipal Valuation: It refers to the value of the property according to the Municipal authorities for collection of taxes. (iii) Fair Rent: It refers to a rent feted by a similar property in the same locality (iv) Standard rent where rent control Act is applicable. Remember: (i) The last three statements are also called as Notional rents. (ii) Reasonable expected rent couldnt exceed the standard rent. =>Unrealised Rent: It means the rent not realized by the owner from the tenant. Unrealised rent shall be excluded from rent received if the following conditions are fulfilled: (a)The tenancy is bonafide; (b)The defaulting tenant has vacated the property or steps have been taken to compel him to vacate the property; (c)The defaulting tenant is not in occupation of any other property of the assessee; (d)The assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceedings are useless. =>Determination of GAV Case I (when there is no unrealised rent and no vacancy period)

FRV MV Whichever is higher Compare standard rent Whichever is lower (Notional Rent) Actual Rent Whichever is higher (GAV) Case II when there is an unrealised rent FRV MV Whichever is higher Compare standard rent Whichever is lower (Notional Rent) Actual Rent unrealised rent Whichever is higher (GAV)

xxx xxx xxx xxx xxx xxx xxx

xxx xxx xxx xxx xxx xxx xxx

Case II when there is an unrealised rent and vacancy period) FRV MV Whichever is higher Compare standard rent Whichever is lower (Notional Rent) Actual Rent unrealised rent Whichever is higher Less : Vacancy period GAV Illustrations on computation of GAV 1. Calculate Notional Rent from the following data: xxx xxx xxx xxx xxx xxx xxx xxx xxx

Particulars Municipal Value F. R. V. Standard Rent Solution Particulars Municipal Value F. R. V. Whichever is higher Standard Rent Whichever is lower Notional Rent

A 60,000 56,000 N. A.

B 60,000 56,000 45,000

C 60,000 56,000 55,000

A 60,000 56,000 60,000 N. A. 60,000 60,000

B 60,000 56,000 60,000 45,000 45,000 45,000

C 60,000 56,000 60,000 55,000 55,000 55,000

N.A* = standard rent is not applicable (hence ignored)

=>Municipal Taxes It refers to tax levied on the property by municipal authorities or any local authorities including services taxes. They are deductible only if: (a) These taxes are borne by the owner and (b) Actually paid by him during the previous year (not due) i.e., if they are not paid by the assessee they are not deductible Municipal Taxes paid by the assessee are deducible from the GAV of the property. The balance after making deduction is called Net Annual Value of the property. Particulars Gross Annual Value Less: Municipal Taxes Paid by the assessee Net Annual Value Note: Net Annual Value cannot be negative i.e., deductions for municipal taxes paid must be restricted to GAV. 4.4 Deductions from Annual Value: Sec. 24 Let out houses: The income chargeable under the head Income from House Property (in case of let-out house) shall be computed after making the following deductions from its annual value: 1) A sum equal to 30% of annual values standard deduction for expenses (except interest). 2) Interest on loan taken in respect of house property. Interest on loan taken for the purpose of purchasing, constructing, reconstructing or repairing the house property is allowable as a deduction on accrual basis. Amount xxx xxx xx

Interest for pre-acquisition or pre-construction period. Interest payable in respect of funds borrowed for the acquisition or construction of house property and pertaining to the period prior to the previous year in which such property has been acquired or constructed shall be deducted in five equal annual installments commencing from the previous year in which the house was acquired or constructed. The amount of interest shall not include any amount of such interest allowed as a deduction under any other provision of the Act. The interest for the previous year prior to the current year, which is to be deducted in five equal annual installments, shall be deducted in addition to the interest of the current year. The pre-construction period means the period commencing on the date of borrowing and ending on (a) March 31 immediately prior to the date of completion of construction/date of acquisition or (b) Date of repayment of loan, whichever is earlier. Self Assessment Questions I 1) Income from subletting is taxable under the head . 2) The rental value is Rs. 5,000 p.m. Municipal value is Rs. 50,000 p.a. The standard rent is Rs. 55,000. The gross annual value is Rs. . 3) % of net annual value is deductible irrespective of any expenditure incurred by the assessee u/s . 4) The interest of pre-construction period is deductible in equal installments. 4.5 Buildings self-occupied for residential purposes The building self-occupied by the owner (an individual or HUF) for residential purposes can be arrived as under: House or part of a house occupied by the owner for full previous year for the purposes of his own residence Sec. 23(2)(a): Where the property consists of one house in the occupation of the owner for his own residence, the annual value of such house shall be taken to be NIL Deduction from Annual Value: Interest on borrowed capital. Sec. 24(b) Interest on borrowed capital (of the current year and pre- construction period) is deductible. However, it is subject to a maximum ceiling given below: (a) Where such property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the maximum limit for deduction of interest shall be Rs. 30,000. (b) Where such house property is constructed/acquired with capital borrowed after 31.3.1999, the deduction on account of interest shall be allowed up to Rs. 1,50,000. The acquisition or

construction should be completed within three years from the end of the financial year in which capital was borrowed. Tax Planning Those who are staying in rented premises can think of availing loan from banks or approved institutions. They have the pleasure of staying in their own house. Not bothering to pay monthly rent, they can reduce their taxable income substantially. Even their disposable income may not decrease, since they need not pay monthly rent. Even the effective rate of interest may be reduced, because of tax saving caused by the interest payment (or due). (of course this requires detailed calculations.) House self-occupied for part of previous year, let out for part of previous year [Sec. 23(2)(b)] House self-occupied for part of the previous year and let-out for part of the previous year: Sec. 23(3): The annual value of the house shall NOT be nil. Such a house will be treated as let-out house annual value will be determined u/s 23(1) More than one house in the occupation of the owner [Sec. 23(4) Where the owner of the houses occupies more than one house for his residence for full previous year, except one (at his option), all other houses are deemed as let out. The income(s) of deemed let out house(s) shall be computed in the usual manner. The following points will be considered: The question of house remaining vacant or unrealized rent will not arise. The municipal tax paid can be claimed. The expected rent will be the gross annual value. Full amount of interest on loan for acquisition, construction etc. will be allowed. 4.6 Loss from house property If the aggregate deductions under section 24 exceed the annual value, there will be a loss from that property. This loss can be set off against income from any other property. If loss can not be wholly set off against the income from any other house property, the balance can be set off against income under any other head in the same year. The balance if any not so set off in the same year, can be carried for eight assessment years to be set off against income from house property only. Illustration

Mr. Sunil is the owner of following house properties in Shimoga (Karnataka), particulars in respect of which for the year ended 31.3.2009 are as below: I house Rs. 9,000 7,000 8,400 840 840 1,000 1 Month 300 II house Rs. 1,800 2,000 1,800 180 90 90 500 600 III house Rs. Dwelling House 35,600 3,200 2,000 12,000

1. Actual rent for twelve months 2. Standard rent 3. Municipal valuation 4.Total municipal tax 5. Municipal tax paid by Mr. Sunil 6. Municipal tax paid by tenant 7. Repairs 8. Vacancy period 9. Interest on loan for repairing house Unrelised rent allowed in the A.Y. 2005-06 recovered during the year for the Ist house Rs. 4,000. Compute his income from house property for the A.Y. 2009-10. Solution

Computation of Income from House Property for the A.Y. 2009-10 III house self II house occupied house Rs. Rs. 1,800 2,000 1,800 1,800 8,250 8,250 (-) 840 7,410 (-) 2,223 (-) 300 (a) 4,887 (d) 4,000 1,800 (-) 90 1,710 (-) 513 (-) 600 (b) 597 (-) 12,000 (c)-12,000

I house

(i) Municipal Value (ii) Standard rent (a) Expected rent (i) or (ii) whichever is less (b) Actual rent G.A.V. (a) or (b) whichever is greater Less: Municipal tax paid by owner Annual Value Less: 30% of A.V. Interest Income/Loss Unrealised rent recovered Income from House Property (a+b+d+c) = Rs.2, 516 (Loss).

Rs. 8,400 7,000 7,000 (9,000-750)

Illustration Mr. Pandey, owner of three houses in Chennai, Furnished the following information Compute his income from House Property for the Assessment year 2009-10. House No. 1 Let out Rs. Standard rent Under Rent Control Act Gross Municipal Value Rent received Actual Fair Rent Repairs Municipal Tax (10% on Municipal value Interest paid for construction of house Brokerage for arranging loan Vacancy period Collection charges Recovery of unrealised rent (allowed as deduction in A.Y. 2005-06) Fire Insurance premium Solution: Computation of Income from House Property for the Assessment Year 2009-10 Let Out House: Gross Annual Value Less: Municipal tax 60% Of Rs. 3,400 Annual Value Less: 30% of A.V. Interest Rs. Rs. 37,500 2,040 36,000 House No. 2 Self-occupied Rs. 63,500 House No. 3 Self-Occupied Rs.

34,000 37,500 45,000 2,000 40% due 2,000 500 2 months 3,000 5,000

56,500 67,500 Nil fully paid 4,000 1,000 6 months

30,000 45,000 3,000 fully paid 3,000 750 6 months

1,000 (due)

1,500

1,000

35,460 10,638 2,000 12,638 22,822

Add: Recovery of Unrealised rent (No deduction 5,000 is allowed) Income from Let-out House (a) 27,822

Self- 0ccupied houses Self Occupied Rs. Nil Deemed Let Out Rs. 45,000 3,000 42,000 ()12,600 () 3,000 26,400

Gross Annual Value Less: Municipal tax Less: 30% 0f A.V Interest

() 4,000 () 4,000

Income from self-occupied houses 22,400.( 26,400-4,000) Income from House Property Rs. 50,222 (22,400+27,822) Illustration Mrs..Bhavya owns four houses the details of which are as under I Annual Municipal value Fair Rental value Rent received Standard rent Municipal taxes paid Municipal taxes due Repairs 10,000 12,000 15,000 13,600 800 NIL II 8,000 15,000 14,400 18,000 600 12000 III 12,000 10,000 Self 15,000 Nil 1000 4000 IV 15,000 12,000 Self 10,000 1200 6000

For the construction of IV house, she had borrowed Rs. 80,000 at 15% p.a. on 1.1.2003. The house was completed on 1.8.2006. This loan is not cleared. Compute her income from house property. Solution 1. It is beneficial to treat III house as self occupied as its Gross Annual Value (SR) is high. IV house is treated as deemed to be let out. 2. Interest for pre-construction period (1-1-2003 to 31.3.06) is Rs. 39000 (80,000 x 15/100 x 39/12). It is claimed as deduction in five equal installments (39,000/5=7800) in subsequent 5 previous years (2006-07 onwards). 4.7 Computation of income from House property

Illustration Compute income from house from property form the following particulars: I Rs. Municipal Value Fair Rental Value Rent received Standard rent Vacancy period Repairs Municipal taxes: Paid Due 30,000 28,000 27,000 32,000 3 months 10,000 II Rs. 15,000 21,000 16,000 18,000
III

IV Rs. 12,000 20,000 17,000 18,000

Rs. 12,000 18,000 15,400 21,000

12,000

6,000

14,000

3,000

1,500 1,200

1,600

The assessee had borrowed on 1.8.2002 Rs. 2,50,000 at 12% for the construction of the III house which was completed on 31.10.2005. As on 1.4.2008 Rs. 2, 00,000 was outstanding. In respect of the IV house one month rent was unrealized. The claim was genuine and satisfied the conditions; and the rent received was for 10 months Solution Working note: Pre-construction period is from 1.8.2002 to 31.3.2005 i.e., 32 months (8+12+12) interest for PCP = 2,50,00012/100/x32/12 = Rs. 80,000 1/5 of Rs. 80,000 = Rs. 16,000 allowed for 5 years (2005-06 to 2009-10 previous years)

Computation of income from House Property for the assessment year 2009-10

Illustration Mr. Seetharam owns a residential house property. It has two equal residential units Unit 1 and 2. While Unit 1 is self-occupied by Seetharam for his residential purpose, Unit 2 is let out (rent being Rs. 6,000 per month, rent of 2 months could not be recovered). Municipal value of the property is Rs. 1,30,000, standard rent is Rs.1,25,000 and the fair rent is Rs. 1,40,000, Municipal tax is imposed @ 12% which is paid by Seetharam. Other for the previous year 2008-09 being repairs;: Rs. 250, insurance: Rs. 600, interest on capital (borrowed during 1999) for constructing the property; Rs. 63,000. Find the income of Mr. Seetharam for the assessment year 2009-10 on the assumption that income of Seetharam from other sources is Rs. 1,80,000 Solution:

4.8 Summary

This chapter has given the understanding about chargeability of income from house property. Even the self occupied house is not free from tax, if the assessee reserves more than one house for self occupation. Assessee can think of purchasing or to construct a house by availing loan from approved institution, there by reduce his tax liability. (caused by the interest payment allowed as deduction) 4.9 Terminal Questions 1) How do you calculate the annual value of let out houses? 2) How the loss from house property is treated while calculating the gross total income? 3) What deductions are permissible u/s 24 while calculating income from house property? 4) How do you calculate the taxable income from self occupied house property? 5) Find out GAV from the following details: A Municipal Value Fair rent Standard rent Rent per month Vacancy period 8,000 10,000 12,000 1,000 1 B 16,000 18,000 20,000 1,600 2 C 18,000 14,000 15,000 1,200 4

6. Mr. Suresh owns a house at Bangalore. While its municipal value is Rs. 18,000, the fair rental value is 24,000 per annum. He resided in the house up to 31st July and then let it out for residential purposes on 1st August at Rs. 2,500 p.m. During the year following expenses were incurred by him: Municipal taxes Rs. 6,000, Repairs Rs. 5,000. Mr. Suresh borrowed a sum of Rs. 30,000 @ 15% p.a. on 1-4-2003 for the construction of the house which was completed on 1-8-2005. Nothing was repaid on loan account so for. Find out his income from house property. 4.10 Answer to SAQ & TQ SAQ I: 1. Income from other sources. 2. Rs. 60,000 3. Thirty, 24 4. Five

Terminal Questions: 1. Refer to section 4.3 2. Refer to section 4.6 3. Refer to section 4.4 4. Refer to section 4.5 5. Ans: A: Rs. 11,000 B: Rs. 16,000 C: Rs. 10,200 6. Rs. 6,300; Hints: Pre construct Copyright 2009 SMU Powered by Sikkim Manipal University
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MF0003-Unit-05-Profits and Gains of Business or Profession

Unit 5 Profits and Gains of Business or Profession Structure: 5.1 Introduction Objectives 5.2 General principles 5.3 Adjustments to P&L account 5.4 Alternative method 5.5 Specific deductions Self assessment Questions I 5.6 Other deductions 5.7 General deductions

5.8 Expenses expressly disallowed 5.9 Expenses not deductible Self assessment questions II 5.10 Deductions allowable only on actual payment 5.11 Depreciation Block of assets Methods of depreciation Additional depreciation Rates of Depreciation Unabsorbed depreciation Self assessment Questions III 5.12 Summary 5.13 Terminal Questions 5.14 Answers to SAQ and TQ 5.1 Introduction Meaning of Business Sec. 2(13) Business means and includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It is not necessary that there should be a series of transactions in a business and that it should be carried on permanently. Even profit of an isolated transaction is also taxable under this head, provided that it is a venture in the nature of business or trade. In this connection, it is important that the intention of purchase or manufacture should be to sell at a profit Meaning of Profession or vocation. Sec.2 (36) Profession means the activities for earning livelihood which require intellectual skill or manual skill, e.g., the work of a lawyer, doctor, auditor, engineer and so on, are in the nature of profession. Profession includes vocation. Vocation means activates which are performed in order to earn livelihood, e.g., brokerage, insurance agency, music, dancing etc. As the rules for the

assessment of business, profession or vocation are the same, there is no importance of making any distinction between them for income tax purposes. Learning Objectives: After studying this unit you will be able to: Understand the meaning of business, profession. Know various deductions admissible under the Act. The rates and method of depreciation followed for tax purposes Compute the business or professional income for tax purpose. 5.2 General Principles: General Principles Followed in the Assessment of Profits and Gains of Business or Profession 1. Business or Profession carried on by the assessee. Tax is chargeable from the person who carries on the business or profession. The essential requirement is that he should be entitled to carry on the business. 2. Tax is chargeable on the aggregate income from all businesses or professions carried on by an assessee. The profits and gains of different business or professions carried on by an assessee are not taxable separately; but tax is chargeable under one head on the aggregate income from all businesses or professions carried on by the assessee. The essence of this rule is that, if in a year he earns profit in one business and sustains loss in the other, he can set-off his loss of one business against the profits of the other, and the balance of amount shall be income of the assessee under this head. 3. Profits and Losses of speculation business are kept separate. if there is a loss in a speculation business it can be set-off only against profits of speculation business and not against profits of any other business. 4. No tax is payable on anticipated or notional profits. 5. Tax is payable on the income of every business or profession whether legal or illegal. Expenses concerned with illegal business are to be allowed as deduction out of the income earned from illegal business. However, penalties levied for violation of law and expenses incurred in defense of criminal proceedings are not allowed. 6. General commercial principles to be kept in view while determining the real profits of a business.

7. Sums previously allowed as deduction are taxable, if recovered during the previous year e.g. bad debts recovered, disallowed earlier. 8. Only those expenses and losses are allowed as deductions which were incurred or sustained during the relevant previous year. 9. These losses and expenses should be incidental to the operation of the business. Only the expenses incurred in connection with the business of the assessee are allowed as deductions. 10. If a business has been discontinued before the commencement of the previous year, its expenses cannot be allowed as deduction against the income of any other running business of the assessee. 11.There are some essential expenses though neither expressly allowed nor disallowed, but are deductible while computing the profits of business or profession on the basis of general commercial principles provided these are not expenses or losses of a capital nature or personal nature. 12. Any expenditure incurred in consideration of commercial expediency is allowed as deduction. 13. Deduction can be made from the income of that business only for which the expenses were incurred. The expenses of one business cannot be charged against the income of any other business. 14. The value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of a profession is taxed under this head. 5.3 Adjustment to Profit and Loss Account prepared by the assessee The Profit and Loss account prepared by the assessee may not be correct from the income tax point of view, because: several such expenses are charged to it may be wholly or partly inadmissible under the Income Tax Act, some admissible expenses might be omitted from it, some taxable incomes may not be credited to it, and Some such incomes might be credited which are either neither taxable under the head Profits and Gains of Business or Profession or nor taxable at all. Hence, this profit and loss account has to be adjusted from the income tax point of view, so that the profit taxable under the head Business or Profession is determined correctly. The following are the rules for adjustment of the Profit and Loss Account:

i. Those expenses or losses which are charged to Profit and Loss Account but are not allowed under the Income Tax Act, should be added to the profit, as shown by the Profit and loss Account prepared by the assessee. If any expense is partly disallowed, only the disallowed part of it shall be added to the profit. ii. If any admissible expenses are omitted from Profit and Loss Account, they should be deducted from the above profit. iii. If some taxable incomes are omitted from the Profit and Loss Account they should be added to the above profit. iv. If some such incomes have been credited to the Profit and Loss Account which are either not taxable under the head Business or Profession or are not taxable at all, they should be deducted from the above profits. 5.4 Alternative method Second Method of Computing the taxable profits or losses of business or profession. In this method a fresh profit and loss account or income and expenditure account is prepared to determine the profit or loss. The format of this method may be as under: (1) All taxable incomes under this head which relate to the previous year are aggregated. (2) All admissible expenses under this head which relate to the previous year concerned (3) Deduct admissible business losses (4) The balance will be taxable profits or losses of business or profession. Second method is generally used in case of professions 5.5 Specific Deductions Expenses in respect of business premises (Sec. 30) The following deduction is allowed in respect of rent, rates, taxes repairs and insurance for premises used for the purpose of the business or profession. (a) Where the premises are occupied by the assessee: (i) as a tenant, rent paid for such premises: and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs; (ii) As a landlord, the amount paid by him on account of current repairs to the premises. Current repairs are those repairs which are done to maintain the building.

Any sum paid on account of land revenue, local taxes or municipal taxes. (b) The amount of any premium paid in respect of insurance against risk of damage or destruction of the premises. Repairs and insurance of machinery, plant and furniture (Sec. 31). In respect of repairs and insurance of machinery, plant and furniture used for the purposes of the business or profession the following deductions are allowable: The amount of any premium paid in respect of insurance against risk of damage of destruction of these assets. Depreciation allowance: Sec. 32 Discussed separately Expenditure on Scientific Research (Sec. 35) The following deductions shall be allowed in respect of expenditure on scientific research. Revenue expenditure incurred by the assessee himself [Sec. 35(1)(i)]. Where the assessee himself carries on scientific research in relation to his own business any revenue expenditure made by the assessee on scientific research during the previous year shall be allowed in full. Further, any such expenditure incurred during the three years immediately preceding the commencement of the business on: (1) Payment of salary to an employee engaged in such scientific research or (2) On the purchase of materials used in such scientific research; The aggregate of the expenditure so incurred shall be deemed to have been incurred in the previous year in which the business commenced and shall be deductible in that previous year. Contribution made to outsiders Sums paid for Scientific Research to an approved Scientific Research Association or a University, College or other Institution [Sec.35 (1)(ii)]. If the assessee himself does not carry on the scientific research; but contributes any sum to an approved scientific research association or to an approved university, college or other institution to be used for scientific research it is allowed as a deduction 125% of the amount so paid, whether it is related or unrelated to the business of the assessee.

Capital Expenditure on Scientific Research incurred by the assessee himself: Any expenditure of a capital nature on scientific research related to the business carried on by the assessee is allowed in full for the relevant previous year. No deduction shall be admissible in respect of any expenditure on the acquisition of any land after 29th February, 1984. If any capital expenditure has been incurred during the three years immediately preceding the commencement of the business the aggregate of the expenditure so incurred shall be deemed to have been incurred in the previous year in which the business commenced. Depreciation on Capital Expenditure: If any deduction is allowed in respect of any capital expenditure on scientific research, no deduction for depreciation will be allowed in respect of that asset. Expenditure on in-house research: only to company assesses engaged in biotech, pharmaceuticals, computer, telecommunication, chemicals etc. A weighted deduction of an amount equal to one and one- half times of expenditure incurred by a company on in-house research and development facility shall be allowed. It is, however, not admissible if expenditure is incurred on land or building; Admissibility of expenditure on eligible project or scheme: Sec. 35AC a deduction is allowed for an eligible project for promoting social and economic welfare or upliftment of the public. Payment to associations & institutions for carrying out Rural Development Programmes is fully allowed: Sec. 35CCA Amortization of preliminary expenses: Sec. 35D Expenditure in connection with preparation of feasibility report, project report, market survey, expenses on issue of shares and debentures etc.: One fifth of the qualifying amount is allowed in each of five successive years beginning with the year in which the business commences or the extension of the undertaking is completed. The qualifying amount cannot exceed: 5% of the cost of the project or 5% of capital employed whichever is less in case of corporate assesses, 5% of cost of project in case of non-corporate assesses. Expenditure on voluntary retirement (Sec. 35 DDA). Where an assessee pays any sum to an employee in any previous year in connection with his voluntary retirement, he shall be allowed a deduction of 20% of such expenditure for each of five successive previous years beginning with the year in which the expenditure was incurred. Self assessment Questions I

Answer the following statements whether true or false: 1) Sums paid for social and scientific research to an approved university etc., is allowed to the extent of 125% 0f sums paid. 2) Capital expenditure on scientific research incurred by the assessee is not allowed to be deducted. 3) Sums previously allowed as deduction are taxable if recovered during the previous year. 4) Income of illegal business or profession is not taxable 5.6 Other Deductions: Under section 36: The following other deductions are permissible while computing profits of business or profession. Insurance Premium, The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purpose of business or profession, is allowed as deduction. Insurance premium for Cattle paid by a federal milk co-operative society. The amount of any premium paid by a federal milk co-operative society on the life of the cattle owned by a member of a primary milk co-operative society affiliated to the federal milk co-operative society is allowed as deduction. Premia for insurance on health of employees Bonus or Commission to employees for services rendered . Interest on borrowed capital. Contribution to Provident Fund, Approved Gratuity Fund, Employees Contribution to Provident Fund Bad debts. Expenditure on family planning. Any expenditure incurred by a company for the purpose of promoting family planning amongst its employees is allowed as a deduction. If such expenditure is of a capital nature it shall be allowed as a deduction in five equal annual installments commencing from the previous year in which the expenditure is incurred. Banking cash transaction tax( applicable from assessment year 2006-07) 5.7 General deduction [Sec. 37(1)

It is a residuary section: Under section 37(1), the following conditions should be fulfilled, in order that a particular item of expenditure may be deductible under this head: The expenditure should not be of the nature described in section 30 to 36. It should be in respect of a business or profession carried on by the assessee and the profits and gains of which are to be computed and assessed. It should not be in the nature of personal expenses of the assessee It should have been paid out or expended wholly and exclusively for the purpose of such business or profession. It should not be in the nature of capital expenditure It should relate to the previous year concerned The following are the few examples of admissible general deduction under sec 37: 1) Expenses incurred in the purchase, manufacture and sale of goods. 2) General expenses incurred in the day to day running to the business. 3) Expenses incurred in defending a case for damages for breach of contract. 4) Amount of sales-tax paid and expenses incurred in connection with sales-tax proceedings including appeals. 5) Compensation paid to an undesirable employee for the retrenchment of his services or to a director to get rid of his services. 6) Contribution made to provident fund maintained for the benefit of employees under an Act and with the previous approval of a state Government may not be allowable u/s 36(1)(iv) but allowable u/s 37(1). 7) Commission, etc. paid for securing orders for the business. Compensation paid to employees in connection with injury sustained by them or accident met by them while on duty. 9) Royalties paid in connection with mines. 10) Insurance premium paid under a policy insuring its employees against injury or against liability for compensation in respect of accident to its workmen.

11) Reasonable expenses incurred on the occasion of Dussehra, Diwali, commencement of the business, etc. 12) Compulsory subscription or a subscription given to an association in the interest of the business. 13) Legal expenses incurred in connection with the business or profession. 14) Legal expenses incurred by a director of a company in defending a suit brought against him to challenge the validity of his election as a director; as it is incurred to save his income from the source. 15) Interest on unpaid purchase price of any business assets purchased by an assessee and put to use will be allowed. 16) Expenditure incurred to oppose nationalization or to prevent extinction of business. 17) Under executive instructions, cost of installing new telephone. 18) Normal advertisment expenditure incurred to maintain the sales. 19) Penalty paid by the assessee for saving from confiscation the good which he purchased from a third party without knowing that they had been illegally imported. 20) Amount paid by a director of a company in liquidation for compounding misfeasance proceeding started against him by the liquidator. 21) Welfare expenditure incurred by the assessee. 22) Payment of excise duty. 23) Guarantee fee paid to he Government for loan obtained for purchase of machinery. 24) Expenditure incurred in connection with alterations made in the Memorandum or Articles of Association of a company if therse alterations are warranted by the changes made in Companies Act. 25) If an asseessee stand ss surety for the debt of another and it is usual in this trade to guarantee debts, any payment made as a result of such guarantee may be allowed as a business losss. 26) Professional tax levied by local authorities the payment of which is a necessary condition for the carrying on the business within the area of a local authority. 27) Rebate granted by co-operative stores to their members on the value of the purchases made by them.

28) The interest payable on arrear of cess is in the nature of compensation paid to the Government of delay in the payment of cess and not as penalty, hence it is deductible. Similarly, interest paid for delay in payment of municipal taxes is also allowable as deduction. 29) Amount spent by an assessee in purchasing loom hours is deductible as revenue expenditure. 30) Amount paid as damages to the Government Department for delay in the execution of contracts was held to be allowable deduction, if the delay was inherent in the nature of business carried on by the assessee. 31) Annual listing fee paid to Stock Exchange by public limited company is allowable. 32) Interest levied for failure to pay installment of the assets purchased on hire-purchase basis is allowable. 33) Expenditure incurred on inauguration ceremony is allowable. 34) Expenditure incurred on foreign tour of director for purposes of expansion of business of the managed company is allowable. 35) Wife of chairman-cum-managing director accompanying him for fulfilling social aspects. Expenses incurred on foreign tour of wife are deductible. 36) Liability to pay debenture premium is to be spread over the years between date of issue and date of redemption. 37) Payment towards Flat Day Fund is deductible. 38) Cash shortage found in business at the end of the day. 39) Deposit made under own your telephone scheme. 40) Expenses in connection with income tax, sales tax proceedings 5.8 Expenses Expressly Disallowed The following expenses are expressly disallowed by the Act while computing income chargeable under the head profits and gains of business or profession. Expenditure on advertisement in any souvenir, etc. published by a political party in the case any assessee (i) Payments outside India. Royalty, fees for technical services, etc. which tax is deductible at not been paid during the previous year or in prescribed time. shall not be allowed as a deduction.

(ii) Payments to residents. any interest, commission or brokerage, fees for professional services or feeds for technical and such tax has not been deducted or, after deduction. Any sum paid on account of securities transaction tax. Any sum paid on account of fringe benefit tax . Wealth tax. chargeable under Wealth Tax Act. Tax on Profits and Gains. Any sum paid on account of any tax levied on the profits and gains of any business or profession Salaries Payable outside India or to a non-resident, if tax has not been paid thereon nor deducted at source. Payment to P.F., etc. Any payment to a provident or other funds shall not be allowed as a deduction unless it is ensured that tax shall be deducted at source from any payment made from the fund provided it is chargeable to tax Tax on perquisites of employee. 5.9 Expenses not deductible in certain circumstances Excessive payments. of an expenditure to a relative it to be excessive or unreasonable to be disallowed. Payments in cash: Any expenditure in respect of which payment is made exceeding Rs. 20,000 otherwise that by a crossed cheque drawn on a bank or by crossed bank draft will be disallowed to the extent of 20%.Further, the limit of Rs. 20,000 applies to the payment made to a party at a time and not the aggregate of the payments made to a party in the course of a day. No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up of, or as contribution to, any unapproved fund. Drawings of proprietor or partners. Personal expenses of the proprietor for partners. Capital expenditure. Any provision or transfer to reserve except transfer to reserves as provided in the Act. Amounts paid as charity or presents. Past losses charged to Profit & Loss Account.

 Any expenditure not incurred wholly and exclusively for the purposes of the business or profession. Income tax, wealth tax and other taxes on income Expenditure incurred to buy off competition, e.g., a sum paid by a company to a retiring director or a managing agent in consideration of their agreement not to complete with the company. Penalties paid by the assessee for infringement of law. Payments made by an assessee in the nature of sharing the profits to the sole selling agents under an agreement are not deductible. Contribution to a political party where there is no direct relationship between contribution and the business of the assessee. Insurance premia paid by a firm on life insurance policies of its partners Expenditure incurred in violating of another statute. Gift made on occasion of marriages in the families of friends and others with whom assessee has business dealing cannot qualify as business expenditure even on grounds of commercial expediency. Self Assessment Questions II State whether following expenses are deductible: 1) Drawings of proprietor. 2) Past losses charged to P/L account 3) Professional tax levied by local authorities, the payment of which is necessary condition for the carrying on the business within the area of a local authority 4) Reasonable expenses on Dussehra, Diwali etc. 5.10 Deduction Allowable only on Actual Payment The following deductions are allowable only on actual payment: Sec. 43B: If the tax payer maintains books of accounts on mercantile basis, following expenses are deductible on accrual basis, provided the payment is actually made on or before the due date of submission of return of income.

(a) Any sum payable by the assessee by way of tax, duty, cess or fee (b) Any sum payable by him as an employer by way of contribution to any provident fund, superannuation fund or gratuity fund or any other fund for the welfare of employees. (c) Any sum payable to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividends if it had not been paid as bonus or commission. (d) Any sum payable by the assessee as interest on any loan or borrowings from any Public Financial Institution or a State Financial Corporation or a State Industrial Investment Corporation. (e) Any sum payable by the assessee as interest on any loan or borrowing from any Public Financial Institution or a State Financial Corporation or a State Industrial Investment Corporation (f) Any sum payable by the assessee as interest to a scheduled bank on any loan or advance from a scheduled bank. (g) Any sum payable by the assessee in lieu of earned leave. If the amount is paid after the due date of furnishing the return, the deduction will be allowed in the year of payment. 5.11 Depreciation Depreciation means a diminution in the value of assets due to wear and tear, obsolescence etc. caused by their use over a period of time. Its cost is spread over its life by charging depreciation every year against the profits of business. Assets eligible for depreciation: A. Tangible assets: (i) Building, (ii) Machinery or Plant, and (iii) Furniture. B. Intangible assets: (i) Patents, (iii) Copyrights, (iv) Trademarks, (v) Licenses, (vi) Franchises, (vii) any other business or commercial rights of similar nature. Other assets such as investments, goodwill, etc., do not qualify for depreciation allowance Building means only the superstructure and does not include the land on which it is constructed, as the land does not depreciate by use. Building includes roads, bridges, culverts, wells and tube wells. The term plant includes ships, vehicles, books scientific apparatus etc. Conditions for allowance of depreciation:

(i) Asset should be owned, wholly or partly by the assessee (ii) It should be used for the purpose of the assessees business or profession. (iii) Depreciation is allowed on the block of assets: =>Block of Assets The term Block of Assets means a group of assets falling within a class of assets comprising: -tangible assets, being building, machinery, plant or furniture, -intangible assets, being know-how, patents, copyrights, trademarks, licenses, Franchises or any other business or commercial rights of similar nature, acquired on or after 1.4.1998, in respect of which the same percentage of depreciation is prescribed. => Methods of Depreciation: (i) In the case of assets of an undertaking engaged in generation or generation and distribution of power, depreciation may be claimed at the prescribed rates on the actual cost thereof, i.e., on the basis of Straight Line Method. (ii) in any other case on any block of assets at the prescribed rates on the written-down value of such block of assets. Assets acquired and put to use during the previous year: In the case of an asset acquired and put to use in the business during the previous year, only 50% of the normal depreciation will be allowed if it is used in the business for less than 180 days during the previous year. Tax Planning: As for as possible, the assessee should purchase and put to use the net asset on which depreciation is allowed upto 2nd October in the previous year. This will entitle to him full depreciation for the relevant previous year. Meaning of Written down Value of an asset Written-down value means: (a) in the case of asset acquired in the previous year the actual cost to the assessee; and (b) In the case of assets acquired before the previous year, the actual cost to the assessee less depreciation actually allowed to him.

The amount of unabsorbed depreciation carried forward is treated as depreciation actually allowed. (c) Depreciation is calculated on the block of asset instead of individual assets. In the case of any block of assets, the written-down value shall be computed as under: (i) The aggregate of the W.D.V. of all the assets falling within a block which were acquired during the previous year. (ii) Add to it the actual cost of any asset falling in that block which was acquired during the previous year. (iii) The sum arrived at in (ii) shall be reduced by the moneys receivable together with scrap value in regard to any asset falling within that block which is sold, discarded, demolished or destroyed during the previous year. The amount of such reduction cannot exceed the amount arrived at as per (ii) above. If it exceeds the written-down value will be taken as nil. (iv) The balance under (iii) shall be the W.D.V. for computation of depreciation for that previous year. If the full block of the assets is transferred and the monies payable is less than the W.D.V. under (iii), the loss shall be treated as short term capital loss. When the money payable in respect of a full block of assets or its part is more than written down value under (iii), the excess shall be treated as short term capital gains. =>Additional depreciation on plant or machinery (I.e. 2006-07) On new plant or machinery (other than ships and aircraft), which has been acquired and installed after 31.3.2005, by an assessee engaged in business of manufacture or production of any article or thing, additional depreciation shall be allowed @ 20% @ 10% if the asset is put to use for less than 180 days in the year in which it is acquired) of the actual cost of it: However, the deduction shall not be allowed in respect of: (a) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (b) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; or (c) any office appliances or road transport vehicles or (d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation of otherwise) in computing the income chargeable under the head Profit and gains of business or profession of any one previous year.

=>Rates of Depreciation Rates of Depreciation on Written-down Value Method I. Building Rates % of W.D.V. 5

A. Buildings which are used mainly for residential purposes except hotels and boarding houses B. Building other than those used mainly for residential purposes 10 C. Building acquired after 31.8.2002 for installing machinery 100 and plant forming part of water supply project or water treatment system and which is put to use for the purposes of business of providing infrastructure facilities D. Purely temporary erections such as wooden structure 100 II. Furniture and Fittings: Furniture and fittings including electrical fittings 10 Electric-fittings include electrical wiring, switches, sockets, other fittings and fans etc. III. Machinery and Plant: A General Rate applicable to all machinery or plant 15 Other than certain specified machines and plants B. Special Rate: 1. Motor Buses, motor lorries and motor taxies used in a business of running them on hire 2. Motor-cars (other than those used in a business of running them on hire) acquire or put to use on or after Ist April, 1990 (3) Energy Saving Devices (4) Machinery relating to environment protection and pollution control (5) Books for professional purposes: (i) Books being annual publications (ii) Other books 6. Books owned by assessee carrying on business in running lending libraries 7. Containers made of glass or plastic used in refills 8. Computers including computer software 9. Plant and machinery acquired and installed after 31.8.2002 in a water supply project or a water treatment system and which is put to use for the purpose of business of providing infrastructure facility IV. Ships: 1. Ocean-going ships

30 15 80 100 100 100 60 100 50 60 100

20

2. Vessels ordinarily operating on inland water not being speed boats 3. Vessels ordinarily operating on inland waters being speed boats Intangible Assets

20 20

Know-how, patents, copyrights, trademarks, licenses, franchises 25 or any other business or commercial rights of similar nature w.e.f. A.Y. 1999-2000). =>Unabsorbed Depreciation Depreciation allowance for a particular previous year is first deductible from the profits and gains of the business or profession. If the profits and gains of the same business or profession are insufficient for this purpose, the balance of the amount of current depreciation allowance is deductible from the profits of any other business or profession of the assessee. If the profits of any other business or profession are also unable to absorb the whole amount of depreciation allowance, the balance of such allowance which remains unabsorbed can be set-off against any other taxable income of the same year. If still, the whole amount of current depreciation allowance is not deductible on account of the insufficiency of the other taxable income, the remaining unabsorbed amount is called Unabsorbed Depreciation. If unabsorbed depreciation cannot be wholly set-off, the amount of depreciation not set-off shall be carried forward to the following assessment year. The unabsorbed depreciation shall be added to the depreciation allowance for the following previous year or for the succeeding previous years till such time it is fully deducted. In other words the unabsorbed depreciation shall be treated as part of the current years depreciation. Illustration The following are the particulars of the assets of a limited company as on Ist April, 2008; Actual cost W.D.V. on 1.4.2008 8,10,000 15,04,800 Rate of Dep.

Buildings: Ananth Bhagvan

10,00,000 16,00,000

10% 5%

The company sold the following assets during the financial year 2008-09 Buildings: Ananth Bhagvan Plants Machinery: Rathna Queen Compute the written-down value and the amount of depreciation for the Assessment year 200910. Assessee is entitled to additional depreciation on machinery on which depreciation is allowable @ 15%. Solution: Computation of W.D.V. and Depreciation allowance I Block-Building (Rate of Depreciation 10%) Rs. 9,00,000 19,00,000 4,50,000 5,00,000 Date of Sale 15.3.2009 1.7.2008 1.9.2008 1.2.2009

II Block Building (Rate of Depreciation 5%) Rs Written-down value of Bhagvan on 1.4.2008 Add: Cost of Building Chandra acquired during the year on 1.5.2008 Less: Sale consideration of Building Bhagvan sold during the year (not to exceed Rs. 18,04,800) 15,04,800 3,00,000 18,04,800 18,04,800

Balance Since the sale consideration exceeds the W.D.V. in the II block, the excess Rs. (19,00,000 less 18,04,800) 95,200 will be the short term capital gain taxable under section 50 (1) III Block-Plant & Machinery (Rate of Depreciation 15%) Rs.

NIL

Aggregate amount of W.D.V. of Plant & Machinery Prikrithi and 6,37,500 Rathna Add: Cost of Plant & Machinery Shanthi acquired during the year 3,00,000 on 1.12.2008 9,37,500 Less: Sale consideration of Plant & Machinery Rathna sold during 4,50,000 the year W.D.V. for A.Y. 2009-10 4,87,500 Less: (i) Depreciation n Rs. 1,87,500 @ 15% 28,125 (i) Depreciation on Rs. 3,00,000 @ 7.5% (onehalf normal depreciation as the machinery is acquired and used in the business for less than 180 days during the Previous Year) 22,500 (III) Additional depreciation on Rs. 3,00,000 @ 10% 30,000 Balance IV Block-Plant & Machinery (Rate of Depreciation 40%)

80,625 4,06,875

Tax planning Capital assets may be purchased even on the last day to claim 50% of normal depreciation. Business assets if are to be purchased during Sept. or Oct., one may see that it is used for a minimum period of 180 days to claim full depreciation allowance. Since no depreciation on the assets sold during the previous year is allowed, the sale of the asset may be postponed to the beginning of the next year.

Illustration The following is the profit and loss account of the United Plastic for the P.Y. 2008-09 Rs. To Op. Stock 30,000 Purchases 1,59,000 Wages and Salaries 50,000 Rent Reserve for bad debts Advertisement 20,000 Rs. 6,10,000 6,000 7,000 50,000

By Sales Dividends (Gross) Rent from staff quarters Interest on Govt. Securities Closing. Stock Income from Smuggling

10,000 5,000

25,000

MF0003-Unit 6 Capital Gains

Unit 6 Capital Gains Structure: 6.1 Introduction Objectives 6.2 Elements of capital gains Capital Assets 6.3 Basis of charges Self Assessment Questions I 6.4 Computation of Capital Gain 6.5 Cost of acquisition 6.6 Cost of Improvement 6.7 Capital Gains Exempt from Tax

Self Assessment Questions II 6.8 Tax on ST gains 6.9 Tax on LT gains 6.10 Summary 6.11 Terminal Questions 6.12 Answers to SAQ & TQ 6.1 Introduction Income under the Head Capital Gains This head deals with the sale or transfer of capital assets, and the treatment of capital gain or loss for tax purposes. The profits or gains arising from the transfer of a capital asset during the previous year is chargeable to tax under the head Capital Gains .The re-investment of capital gain or sales proceeds and exemptions are also dealt under this chapter. Learning Objectives After studying this unit, you will be able to: Understand the concept of capital gains. Understand how capital gains tax can be avoided by claiming exemptions. Understand the concept of income from other sources 6.2 Elements of capital gains The essential elements of capital gains are: (A) Capital Asset (B) Transfer of Capital Asset (C) Computation of Capital Gain. =>Capital Asset Capital asset means property of any kind held by an assessee, whether connected with his business, profession or not. Capital asset may be movable or immovable, tangible or intangible, fixed or floating. Capital asset includes goodwill, leasehold right, jewellery, shares, a

manufacturing licensee. etc. Business undertaking is a capital asset. Gains on transfer of business undertaking are assessable as Capital gains. However, the term capital asset does not include the following: (i) Any stocks-in-trade, consumable stores or raw materials held for the purposes of his business or profession. (ii) Personal effects, e.g., movable property (including wearing clothes and furniture but excluding jeweler) held for personal use by the assessee or any member of his family dependent on him. Thus, a car or any other vehicle, refrigerator, television or V.C.R. or other electrical appliances are included in this. (iii) Agricultural land in India, provided it is not situated: (a) within the limits of any municipality or a cantonment board, having a population of 10,000 or more or (b) in areas lying within a distance not exceeding 8 kilo metre from the local limits of such municipalities or cantonment boards. (iv) 6 % Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980, issued by the Central Government. (v) Special Bearer Bonds, 1991. (vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 2000 notified by the Central Government. 6.3 Basis of charges Capital Gain will be chargeable on the basis of period for which the capital Asset is held by the Assessee. On the basis of period for which Assets are held by the Assessee the Assets can be classified into 2 categories. 1. Short-term Capital Asset: A Capital Asset held by an Assessee for not more than 36 months immediately preceding the date of its transfer is known as Short Term Capital Asset. And the Gains arising from the transfer of STCA is called Short Term Capital Gain. Exceptions: In the following circumstances/cases an Asset held for not more than 12 months is treated as STCA.

1. Equity/ Preference shares in a company (May or May not be listed) 2. Securities (Debentures/ Government Securities) (Should be listed in a Recognised stock exchange) 3. Units of U.T.I. (May or May not be quoted) 4. Units of Mutual Fund notified under 10(23D) (May or May not be quoted) 5. Zero Coupons Bonds In the Aforesaid cases, if the asset is held for more than 12 months immediately to its transfer, then it is known as L.T.C.A. 2. Long-term Capital Asset (LTCA) It means a capital Asset held by an Assessee for more than 36 months immediately preceding the date of transfer. Capital Gain arising from the transfer of LTCA is called LTCG. In the above said 4 exceptions (1) (2) (3) &(4) LTCG will mean 1to4 held by the assessee for more than 12 months. Therefore we have two types of Capital Gain 1. S.T.C.G gains arising on the transfer of STCA 2. L.T.C.G gains arising on the transfer on LTCA Self Assessment Questions I 1. The capital gain is chargeable to tax under section . 2. The agricultural land outside India is capital asset (a, not a) 3. Short term capital assets mean a capital asset held by the assessee for not more than , immediately prior to its transfer. 4. Cost Inflation index for the year 2008-09 is . 6.4 Computation of Capital Gains Formats and Provisions: Short-term Capital Gain [STCG] sec 48(1)

Long term Capital Gain [LTCG] Sec 48

Note: Transfer expenses: Expd incurred wholly or exclusively in connection with such transfer. Exception: The provisions relating to indexed cost of acquisition and indexed cost of improvement will not apply to the long-term capital gains arising from the transfer of long-term capital asset being bonds or debentures. However, the benefit of indexation will be available on indexed bonds issued by the Government. Calculation of Indexed Cost of Acquisition: Case I: When the Asset is acquired by the Assessee before 1-4-1981. Actual cost of Acquisition. Or Fair Market Value as on 1-4-1981. Whichever is Higher. i.e., Whichever is Higher x Index for the year of transfer (551) 100 Indexed cost of Improvement:

Cost of improvement incurred on or after 1-4-1981 x index for the year of transfer (551) Index for the year of improvement Case II: When the Asset is acquired by the Assessee on or after 1-4-1981 Indexed cost of acquisition can be computed as follows: Actual cost of acquisition x Index for the year of transfer (551) Index cost for the year of acquisition Indexed cost of Improvement: Actual Cost of improvement x index for the year of transfer (551) Index for the year of improvement Case III: When the asset is acquired by the assessee under a transaction mentioned under section 49 (1), before 1-4-1981 and previous owner also acquired the property before 1-41981 (1) Indexed cost of acquisition: Actual cost of Acquisition to previous owner. Or Fair Market Value as on 1-4-1981. Whichever is Higher. i.e., Whichever is Higher x Index for the year of transfer (551) 100 (2) Indexed cost of Improvement: Cost of improvement incurred on or after 1-4-1981 x index for the year of transfer (551) Index for the year of improvement Case IV: When the asset is acquired by the assessee on or after 1-4-1981 after transaction under section 49 (1) and acquired by the previous owner before 1-4-1981 (1) Indexed cost of acquisition: Actual cost of Acquisition to previous owner.

Or Fair Market Value as on 1-4-1981. Whichever is Higher. i.e., Whichever is Higher x Index for the year of transfer (551) Index for the year in which the assessee acquired the asset (2) Indexed cost of Improvement: Cost of improvement incurred on or after 1-4-1981 x index for the year of transfer (551) Index for the year of improvement Case V: When the asset is acquired by the assessee on or after 1-4-1981 as per transaction mentioned under section 49 (1) and the previous owner has also acquired it on or after 1-41981 (1) Indexed Cost of acquisition Actual cost of acquisition to the Previous Owner x Index for the year of transfer (551) Index cost for the year in which the assessee acquired the asset (2) Indexed cost of Improvement: Actual Cost of improvement x index for the year of transfer (551) Index for the year of improvement Cost inflation index (CII) in relation to P.Y. means the index as the Central Government may, having regard to 75% of the average rise in the consumer price index for urban non-manual employees for the immediate preceding previous year, notify in this behalf. The Government has notified the following Cost Inflation Index. Sl.No. Financial Year 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 Cost Inflation Index 100 109 116 125 133 140 150 161 Sl. No. Financial Year 15 16 17 18 19 20 21 22 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 Cost Inflation Index 281 305 331 351 389 406 426 447

1 2 3 4 5 6 7 8

9 10 11 12 13 14

1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

172 182 199 223 244 259

23 24 25 26 27 28

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

463 480 497 519 551 582

Capital gains in case of depreciable assets on which depreciation in allowed on the basis of written-down method: Sec.50: The capital gains on depreciable assets shall be computed as under: (i) Find out the written-down value on the first day of the previous year of all those depreciable assets on which the depreciation is allowed at the same rate. All such assets are known as block of assets (ii) If any new asset of the same block is purchased during the previous year, the cost of such asset should be included in (i). (iii) If any asset is sold out of such block during the previous year, the net consideration should be deducted form the balance under (ii) (iv) On the balance under (iii) compute the depreciation at the prescribed rate and deduct it from the balance under (iii) (v) The balance under (iv) shall be the written-down value of the block of assets for the next year. It means that if the net consideration of an asset out of block is less than the balance under (ii), there would be no capital gain. If the net consideration of an assets is more than the balance under (ii) (the value of all assets in the block), the excess shall be deemed to be short term capital gain. If all the assets of the block are sold in the previous year & the net consideration is less than balance under (ii), the loss shall be deemed to be the short term capital loss. Full value of Consideration: Sec 48 Full value means the whole price without any deduction whatsoever and it does not refer to the adequacy of the price bargained for. Where agreed consideration is not paid fully in the previous year, the entire consideration stated in the agreement of sale would be regarded as forming the full value of consideration and capital gains would have to be calculated on that basis. The acceptance of lesser price than the agreed consideration in the later year would not affect this matter. 6.5 Cost of Acquisition

Cost of acquisition of an asset is the value for which it is acquired by the assessee. It means that whatever cost incurred for getting an asset plus all expenses incurred to acquire it is the cost of acquisition. Interest paid on money borrowed for the purchase of a capital asset would constitute part of the cost of acquisition, provided such interest has not been deducted under any other provision. However, in the following cases the above meaning of cost of acquisition does not hold good and cost of acquisition is taken as a notional figure. (1) Cost to the previous owner deemed to be the cost of acquisition. If the asset is acquired by an assessee in the following 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. It will be increased by the cost of any improvement of the assets incurred by the previous owner or the assessee. Circumstances when cost to previous owner is taken as cost of acquisition of asset: Sec. 49(1) On any distribution of asset on the total or partial partition of a Hindu undivided family; Or under gift or will; Or by succession, inheritance or devolution; Or on any distribution of assets on the liquidation of a company; Or under a transfer to a revocable or an irrevocable trust; Or on transfer by a parent company to its Indian subsidiary company which is wholly owned by the parent company; Or on the transfer by a subsidiary company to its Indian holding company which owns the whole of the share capital of the subsidiary company; Or on the transfer of capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company; or on transfer of shares of an Indian company by amalgamated foreign company to the amalgamated foreign company; Or when any of the members of a H.U.F. converts his self-acquired property into H.U.F. property. (The cost of the property to the H.U.F. will be taken as the cost of the property to the individual converting the property). Cost of acquisition of a Capital asset acquired before 1.4.1981. Where capital asset became the property of the assessee before Ist April 1981, the cost of acquisition of the asset may, at the option of the assessee, be taken to be any one of the following: (i) The cost of the asset to the assessee; or

(ii) The fair market value of the asset on Ist April 1981. Cost of acquisition of an asset acquired by the previous owner before Ist April 1981 by any mode u/s 49(1) If the capital asset (other than asset on which depreciation has been allowed) became the property of the assessee by any of the modes specified in section 49(1) and the capital asset became the property of the previous owner before Ist April, 1981, the cost of acquisition of the asset may, at the option of the assessee, be taken to be any one of the following: (i) the cost of acquisition of the asset to the previous owner; or (ii) the fair market value of the asset on 1st April, 1981 6.6 Cost of improvement: Cost of any improvement: (i) in relation to a capital asset being goodwill of a business or a right to manufacture, produce or process any articles or thing or right to carry on any business shall be taken to be nil; and (ii) in relation to any other capital asset: (a) where the capital asset become the property of the previous owner or the assessee before Ist April, 1981, it means all expenditure of a capital nature incurred in making any additions or alternations to the capital asset on or after Ist April, 1981 by the previous owner or the assessee; and (b) in any other case, it means all expenditure of a capital nature incurred in making any additions or alternations to the capital asset by the assessee after it became his property. In any case such expenditure incurred prior to Ist April, 1981 shall not be considered as cost of improvement and will be ignored. It will not be added to the cost of acquisition whether the assessee opts for fair market value on Ist April, 1981 to be his cost of acquisition or he opts his actual cost to be the cost of acquisition. In case of an asset being acquired on or after Ist April, 1981 also, it is only the capital cost incurred on additions and alterations on or after Ist April, 1981 that will be added to the cost to arrive at the cost of acquisition. 6.7 Capital gains exempt from tax Capital gains arising on the transfer of property used for residence: (Sec. 54). Any capital gain arising on the transfer to a house or land appurtenant thereto is exempt subject to the following conditions: (i)The building is owned by an individual or Hindu Undivided Family. (ii)Such property was being used as residential hose.

(iii)The income of such house property is chargeable under the head income from House Property. (iv)The exemption will be available only in relation to a house property which had been held by the tax-payer for a period exceeding 36 months before transfer. (v)The assessee has, within a period of one year before or two year after the date of transfer purchased a residential house; or he has within a period of three years after date of transfer constructed a residential house. Here the term constructed means completed. Where a part of capital gain is appropriated towards purchase of a plot and part towards construction of residential house thereon, the aggregate cost shall be considered for exemption us/ 54 provided the acquisition of plot and the construction thereon are completed within the aforesaid period. Where assessee is starts construction of a new building before sale but completes it after the sale of old building, the assessee is entitled to exemption. Quantum of Exemption (i) The capital gains arising from the transfer of such residential house or the cost of new residential house purchased or constructed within the specified period whichever is lower is exempted. Or it means if the whole capital gain is re-invested in the cost of new house it is fully exempt from tax. If only a part of it is re-invested, the balance of it is chargeable to tax. Where the amount of capital gain is spent partly on purchase of house property and partly on further construction of it, exemption is available in respect of both the amounts. (ii) Where the amount of capital gain is not utilised by the assessee for acquisition of new house before the due date of furnishing the return of income u/s. 139, it shall be deposited by him on or before the due date of furnishing the return of income in an account opened under the Capital Gains Account Scheme, 1988 with specified bank authorized by the Central Government in accordance with the Scheme. The amount already utilised for re-investment together with the amount of deposits shall be deemed to be the cost of the new house. Withdrawal of exemption and Tax and Sale of new house The new house (purchased or constructed) should not be transferred within a period of three years of its purchase or construction. If it is transferred within three years the exemption given earlier will be withdrawn and the old exempted capital gains and new capital gains (if any) arising on the transfer of the new residential house, shall be chargeable to tax as short term capital gain of the previous year in which the new residential house is transferred. If instead of a capital gain, there is a capital loss on the transfer of the new residential house it shall be deducted from the exempted capital gain of the old house and the balance, if any, shall be capital gain of the previous year in which the new house is transferred.

Tax on unutilized amount If the amount deposited is not utilized fully for acquiring the new house within the period stipulated (i.e., 3 years from the date of transfer of original house) the amount not so utilized shall be treated as the long-term capital gain of the previous year in which the period specified expires. The tax-payer shall be entitled to withdraw such amount in accordance with the scheme. Effect of Capital Gains Account Scheme The effect of the new scheme for deposits is that if the assessee cannot utilise the capital gain for acquisition of new house on or before the due date for furnishing the return of income, he may deposit it under this scheme up to the aforesaid date in order to avail this exemption. After such deposit he must utilize the deposit for acquiring the new house with 3 years from the date of transfer of the old house. Capital gain arising from the transfer or agricultural land (sec. 54B). Any capital gain arising on the transfer of agricultural land situated in an urban area is exempt subject to the following conditions: (i)The agricultural land is owned by an individual. (ii)The agricultural land was, in the two years immediately preceding the date of transfer, being used either by the assessee or his parent (as owner or otherwise) for agricultural purposes. (iii)The assessee has purchased within a period of two years from the date of transfer (and not before sale) any other land for agricultural purposes. Quantum of exemption (i) The capital gain arising from the transfer of such agricultural land or the amount invested in the purchase of the new agricultural land within two years from the date of transfer whichever is lower is exempted. It means, if the whole capital gain is reinvested it is fully exempt from tax. If only a part of it is reinvested the balance of it is chargeable to tax. (ii) If the amount of capital gain is not utilised by the assessee for acquisition of new agricultural land before due date for furnishing the return of income, it shall be deposited by him on or before the due date of furnishing the return of income in an account opened under the Capital Gains Account Scheme, 1988 and utilised in accordance with the scheme. The amount already utilised for re-investment together with the amount of deposits shall be exempt from tax. Withdrawal of exemption and tax on sale of new land If this new land is transferred within 3 years of its purchase the exemption given earlier will be withdrawn and the capital gain arising from the transfer of the new land together with exempted

capital gain of the old land shall be the chargeable as short term capital gain of the previous year in which the new land is transferred. Tax on unutilized amount If the amount deposited is not fully utilised for acquiring the new agricultural land within two years, the amount not so utilised shall be treated as the capital gain ( long term or short term depending on the original capital gain) of the previous years in which the period of two years from the date of transfer of the original agricultural and expires. Further, the tax-payer will be entitled to withdraw such amount in accordance with the scheme. Effect of Capital Gains Account Scheme. The effect of the new scheme for deposits is that, if the assessee cannot utilise the capital gain for acquisition of new agricultural land on or before the due date for furnishing the return of income he may deposit it under this scheme up to the due date for furnishing the return of income in order to avail this exemption. After such deposit he must utilise the deposit for acquiring new agricultural land within 2 years from the date of transfer of the old agricultural land. W.e.f. A.Y. 2005-06, capital gain on transfer to agricultural and situated in urban area shall be exempt if the following conditions are satisfied. Sec 10(37) (i) The owner of the agricultural land is an individual or a HUF. (ii) It was, in the two years immediately preceding the date of transfer, being used by the HUF or individual or his parent. (iii) The transfer of land is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined by the Central Government or the R.B.I. Capital gain arising from transfer of long-term capital assets invested in long term specified asset (Sec. 54EC). Where an assessee transfers a long-term capital asset and invests the capital gain in the specified, the assessee shall be entitled to exemption as per the following conditions: (i) The new asset should be purchased within 6 months from the date of transfer of original asset. (ii) The amount of exemption shall be the amount of capital gain, or the amount invested in longterm specified asset whichever is lower. (iii) Where the new asset is sold or transferred or converted into money or any loan/advance is taken on security of specified assets within 3 years from the date of acquisition, the exempted amount of capital gain shall be chargeable to as long-term capital gain of the previous year in which the new asset is transferred.

(iv) Where the assessee has claimed exemption in respect of new asset under this section on such cost he will not be entitled to deduction under Sec. 80 C (v) Long term specified asset shall mean bonds which are (i) redeemable after 3 years (ii) issued by National Highways Authority of India or (iii) the Rural Electrification Corporation Ltd. Exemption from tax on long term capital gains on investment of consideration in Residential house: Sec. 54F Long term capital gains are exempt under this section if the following conditions are satisfied: (i) The assessee is either an individual or a Hindu Undivided Family. (ii) The assessee has transferred a long-term capital asset which is not a residential house. (iii) The assessee does not own more than one residential house on the date of transfer of original assets other than as mentioned in (iv) below. (iv) The tax-payer purchases within a year before or within two years after the date on which the transfer took place or constructs within a period of 3 years after the date of transfer a residential house. Construction means completion. . (v) The income from newly acquired residential house is chargeable under the head Income from House Property. (vi) He should also not purchase within a period of two year after the date of transfer of the original asset or constructs within a period of three years after the aforesaid date any residential house other than the house stated in (iv) above. Quantum of exemption If the above conditions are satisfied, the capital gain arising from the transfer will be treated in a concessional manner as under: 1. If the cost of the new house that has been purchased or constructed is more than the net consideration in respect of the capital asset transferred (i.e. the original asset) the entire capital gain arising from the transfer will be exempt from tax 2. If the cost of new house is less than the net consideration in respect of the asset transferred, the exemption from long-term capital gain will be granted proportionately on the basis of investment of new consideration either for purchase or construction of tee residential house.

3. If the amount of net consideration is not fully utilised for the purpose of purchase or construction of the new residential house as aforesaid, and if the utilized part of net consideration is deposited by the assessee in Capital Gains Account Scheme on or before the due date for furnishing the return of income and utilised in accordance with the scheme, the aggregate of the cost of new house and the amount so deposited shall be deemed to be the cost of the new residential house and exemption will be granted accordingly Withdrawal of exemption and tax on sale of new asset The exemption shall be withdrawn in the following circumstances: (i) Where the assessee purchases or constructs any other residential house [other than the new asset mentioned in (iv) above] within the aforesaid period of two years/three years, the exemption under this provision, if allowed, shall stand forfeited and shall be deemed to be longterm capital gain of the previous year in which such residential house is purchased or constructed. (ii) If a tax payer transfers the newly acquired residential house (i.e., new asset) within three years of its purchase or construction, then the amount of capital gain exempted on the transfer of the original asset shall be deemed to be the long-term capital gain of the year in which the new asset is transferred. (iii) If the amount deposited is not utilized wholly or partly for the purchase or construction of the new asset within the specified period specified, then, the amount not so utilized shall be treated as the long term capital gain of the previous year in which the specified period of three years from the date of transfer of original asset expires and the assessee is entitled to withdraw the amount. Self Assessment Questions II 1. Capital gains arising on transfer of the land used for agriculture is exempted u/s 2. Cost of improvement incurred by the assessee before April1. 1981 is -. (Indexed/ignored) 3. Capital gains are exempt from tax, if the capital gain is invested in specified assets (u/s 54 EC) within -. 4. Tax on long term capital gain is . 6.8 Tax on ST gains Tax on Short-term capital gains on transfer of equity shares in a company or units of an equity oriented fund (Sec. IIIA) Where the total income of an assessee includes the short-terrm capital gains arising from the transfer of equity shares in a company or units of an equity oriented fund, on such short-term

capital gains tax will be charged @ 10%+Surcharge (if applicable) +Education cess @2% + SHEC at 1% on the amount of income tax and surcharge if the following conditions are satisfied. (i) The equity shares in a company or units of an equity oriented fund are short-term capital asset. (ii) Such transactions are chargeable to Securities Transactions Tax. In respect of income other than aforesaid short-term capital gains, income tax shall be charged as per the normal provisions of the Act, assuming the other income only to be the total income. Other Provisions (i) Where the total income (excluding aforesaid short-term capital gains) of a resident individual and resident H.U.F. is less than the maximum amount which is not chargeable to income tax, then from the total income (including aforesaid short-term capital gains) the maximum amount which is not chargeable to income tax shall be deducted and on the balance tax shall be charged at the aforesaid rate. (ii) No deduction under section 80C to 80U will be allowed in respect of aforesaid short-term capital gains 6.9 Tax on Long-term Capital Gains Long term capital gains on the transfer of equity shares of a company or unit of equity oriented fund is exempt under section 10(38), if security transaction tax has been paid on such transfer. The tax on long-term capital gains is to be charged at the following rates: (1) In case of an individual or a Hindu undivided family who are resident in India @ 20%. Where the total income (excluding long-term capital gains) of a resident individual and resident H.U.F. is less than the maximum amount which is not chargeable to income tax then, from the total income (including long-term capital gains) the maximum amount which is not chargeable to income tax shall be deducted and on the balance, tax shall be charged @ 20%. (2) In case of a domestic company, non resident (not being a company, in any other case of a resident @20%. Tax on LTCG on transfer of listed securities or units of the U.T.I. or a mutual fund specified in Sec. 10(23D) (or zero coupon bonds w.e.f. A.Y. 2006-07) shall be charged. (i) @10% of LTCG computed without indexing the cost of acquisition; or (ii) @ 20% of LTCG computed after indexing the cost of acquisition, whichever is less.

Education cess. On the amount of income tax and surcharge, education cess shall be levied @2% No deduction under section 80C to 80U will be allowed in respect of L.T.C.G. Tax Planning: The exemption of capital gains requires the re-investment of capital gains in certain assets such as residential buildings, agricultural land, notified bonds etc., One can claim exemption in the same previous year either by re-investment of capital gains, or net sales proceeds or postpone the payment of capital gain tax by depositing the amount in capital gains deposit scheme, before the due date of filing return of income tax. Even in the case of shares, of listed companies held in physical form, he can reduce his tax liability (from normal rate to 10% only in case of short term assets) or avoid tax (in case of long term shares) by dematerializing shares and selling through stock exchange, paying security transaction tax. Even in dematerialized shares, tax liability is reduced or avoided if they are sold through stock exchange, paying STT. If such shares are sold off market trade, such concession is not available. Illustration Mr. Dinakar. Purchased a house in 1967 for Rs. 1, 00,000. He died leaving the property to his son by will in 1988. However he had incurred the following amounts on improvement in the house: Renovation in 1969 Rs. 45,000 Adding two bathrooms in 1974 Rs. 65,000 Fixing teak panels on walls in 1988-89 Rs. 40,250 His son E sold the house in October 2008 for Rs. 25,00,000. Calculate capital gains accruing to E assuming that the market value of the house under question is Rs. 4,00,000 as on 1.4.1981 and he invests Rs. 2,00,000 in 3 years bonds within 6 months. CII 1988-89: 161, 2008-09: 582. Solution Since the FMV as on 1.4.81 (Rs.4,00,000) is higher than the original cost (Rs. 1,00,000). it is beneficial for the assessee to treat FMV as COA. Computation of capital gains for the assessment year 2009-10

(Note: to ascertain the cost of acquisition by indexation, the year in which the assessee received the property should be taken at the denominator i. e., 1988-89) Illustration Mr. Suryakantha sold the following properties during the previous year 2008-09. (i) Jewellery costing Rs. 75,000 purchased on 6th Jan. 2006, sold for Rs. 1, 00,000 in Dec. 2008. (ii) House at Mangalore let out for residence, sold on 30.11.08 for Rs.10, 00,000. It was inherited by him in 1974 and its FMV on 1.4.81 was Rs. 1, 60,000. His father had acquired it for Rs. 1, 00,000 in 1970. He purchased another house in 2009 for Rs. 3, 00,000. (iii) Household furniture costing Rs. 18,000 in Oct. 1998, sold for Rs. 25,000 on July 2008. (iv) Agricultural land in Mysore sold for Rs. 5, 25,000. It had cost him Rs. 85,000 in Dec. 1990. He purchased agricultural land for Rs. 1, 20,000 in July 2009. Compute his taxable capital gains. C11 for 1981-82: 100; 1990-91: 182: 1998-99:351: 19992000: 389; 2008-09: 582. Solution Computation of Taxable Capital Gains for the assessment year 2009-10

Illustration Ramanath purchases a house property for Rs. 26,000 on May 10, 1962. He gets the first floor of the house constructed in 1967-68 by spending Rs. 40,000. He dies on September 12,1978. The property is transferred to Mrs. Ramanath by his will, Mrs. Ramanath spends Rs. 30,000 and Rs. 26,700 during 1979-80 and 1985-86 respectively for renewals/reconstruction of the property.

Mrs. Ramanath sells the house property for Rs. 11,50,000 on March 15, 2009 (brokerage paid by Mrs. Ramanath is Rs. 11,500). The fair market value of the house of April 1,1981 is Rs. 1,60,000. Compute the capital gain for the assessment year 2009-10 CII for 1981-82; 100, 1985-86:133, 2008-09: 582 Solution: Computation of capital gain for the assessment year 2009-10

Note: indexed cost of acquisition Cost to the previous owner 26,000 Fair market value on April 1, 1981 1,60,000 Cost inflation index for 1981-82 100 Cost inflation index for 2008-09 582 Indexed cost of acquisition (i.e., Rs. 1,60,000 X 585 / 100) 9,31,200 Indexed cost of improvement Cost of improvement incurred prior to April 1, 1981 (not considered) Cost of improvement incurred in 1985-85 26,700 Cost inflation index for 1985-86 133 Cost inflation index for 2008-09 582 Indexed cost of improvement

(i.e., Rs. 26,700 X 582/133) 1,16,838 Illustration Lakshmana sells the following long term capital assets on January 11, 2009.

The due date of filing return of income for the assessment year 2009-10 is July 31, 2009. For claiming exemption u/s 54 and 54EC, Lakshmana purchases the following assets:Assets Date of Acquisition 2nd April, 2009 5th Aug. 2009 5th July 2009 10th July. 2009 Amount Rs. 1,00,000

Land for constructing A residential house Bank deposit (for constructing house) Bonds of Rural Electrification Corporation (redeemable on 5th July 2011 Bonds of National Highway Authority Of India( redemption on 10th Aug. 2015)

50,000 7,50,000

3,05,000

Find out the taxable capital gain for the assessment year 2009-10 Solution House property Gold Rs. 3,90,000 10,000 3,80,000 70,000 3,10,000 1,00,000 Rs. 8,10,000 81,000 7,29,000 1,15,000 6,14,000 Nil Silver Rs. 2,96,000 6,000 2,90,000 1,78,000 1,12,000 Nil Diamonds Rs. 6,40,200 32,000 6,08,200 4,30,000 1,78,200 Nil

Sale consideration Less: Expenses on transfer Net sale consideration Less: Indexed cost of acquisition Long term capital gain Exemption U/s 54

Exemption u/s 54 EC Capital gain chargeable to tax

2,10,000 Nil

6,14,000 Nil

1,12,000 Nil

1,19,000 59,200

Notes: Since the due date of filing return is 31st July, 2009, deposit made on 5th Aug. 2009 is not considered. Land acquired for constructing is considered for Sec.54, Exemption u/s 54 EC is Rs. 10,55,000 (7,50,000 +3,05,000) being amount invested in bonds eligible) 6.10 Summary Though the assessee sells various types of assets, gains on the transfer of all the assets are not chargeable to tax. Even the capital gains are also calculated with reference to cost inflation index. This unit gives an idea as to how an assessee can reduce his taxable from capital gains by the reinvestment of capital gains/ net sales proceeds in certain asset within the time mentioned in the Act. 6.11 Terminal Questions 1) Distinguish between short term capital gain and long term capital gain. 2) Discuss the procedure for computation of capital gains. 3) Discuss the exemptions provided by sections 54 and 54 F 4) What do you mean by cost inflation index? 6.12 Answers to SAQ & TQ SAQ I 1. 45 2. a capital asset 3. 36 months. 4. 582 SAQ II 1. 54 B 2. ignored

3. six months 4. 20% TQ: 1. Refer to section 6.3 2. Refer to section 6.4 3. Refer to section 6.7 4. Refer to section 6.4 Copyright 2009 SMU Powered by Sikkim Manipal University
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MF0003-Unit-07-Income from Other Sources

Unit 7 Income from Other Sources Structure 7.1 Introduction Objectives 7.2 Incomes chargeable under this head 7.3 Interests on Securities 7.4 Kinds of Securities 7.5 Bond Washing Transactions 7.6 Deduction of tax at source Self Assessment Questions I 7.7 Deductions not permissible 7.8 Summary

7.9 Terminal Questions 7.10 Answers to SAQs and TQs 7.1 Introduction This is the last and residuary head of income. Any income which is taxable under the Act but does not find place under any of the first four heads of income (i.e. Salaries, House Property, Business and Capital Gains) will be assessable under this residuary head Income from other Sources. Learning Objectives: After studying this unit you will be able to understand: The meaning of income from other sources Provisions relating to taxation of interest, and various other incomes Compute various other sources of incomes Allowable deductions permitted from other incomes. 7.2 Incomes chargeable under this head Incomes chargeable under this head of income [Sec. 56(2)]. The following incomes shall be chargeable to income tax under the head Income Other Sources: Income from winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any short or from gambling or betting of any form or nature whatsoever. Any sum received by the assessee from his employees as contributions to any provident fund or superannuating fund or any fund set-up under Employees State Insurance Act, 1948 or any other fund for the welfare of such employees, provided that it is not chargeable under the head Profits and Gains of Business or Profession. Income by way of interest on securities, if the income is not chargeable to income tax under the head Profits and Gains of Business or Profession. Income from machinery, plant or furniture belonging to the assessee and let on hire if the income is not chargeable to income tax under the head Profits and Gains of Business or Profession. Income of an assessee from letting on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said

machinery, plant or furniture, if it is not chargeable to income tax under the head profits and Gains of Business or Profession. Income received under a Keyman insurance policy including bonus on such policy if such income is not chargeable to income tax under the head Profit and Gains of Business or Profession or under the head Salaries. Dividend on Shares in Foreign Companies: Any fees or commission received by an employee from a person other than his employer. All interest including interest on securities. Income of a tenant from subletting. Directors fees. Rent of land not appurtenant to buildings. Agricultural income from land situated outside India. Income from markets, ferries, fisheries etc. Income from leasehold properties. Remunerations for writing articles in Journals. Income from undisclosed sources (unexplained investments, unexplained money, unexplained expenditure etc.). Interest on employees own contribution to URPF. Casual income. Salary of M.P, M.L.A., M.L.C. Interest received on securities of co-operative society. Family pension received by the widow and heirs of deceased employee (Standard deduction permissible in respect of family pension is Rs. 15,000 or 1/3 of such pension whichever is less) Directors Commission for underwriting shares of a new company, Insurance Commission not chargeable under the head business or profession. Any sum of money exceeding Rs. 25,000 (Rs. 50,000 on or after 01-04-2006) received without consideration by an individual or a HUF from any person, the whole of such sum is taxable under this head. But it does not apply to any sum of money received: (a) from a relative; or

(b) under a will or by way of inheritance; or (c) on the occasion of the marriage of the individual; or (d) in contemplation of death of the payer For this purpose relative means: (i) spouse of the individual; (ii) brother or sister of the individual; (iii) brother or sister of the spouse of the individual; (iv) brother or sister of either of the parents of the individual; (v) any lineal ascendant or descendant of the individual; and of the spouse also (vi) spouse of the person referred to in (i) to (v) Illustration On marriage anniversary of Mr. Ramesh on 8.2.2008, relatives and family friends made the following gifts to the couple: 1) Cousin of Mr. Ramesh gifted a diamond ring to Mrs. Ramesh valued at Rs. 55,000. 2) Cousin of Mrs. Ramesh gifted Rs. 61,000 to Mr. Ramesh 3) Maternal uncle of Mr. Ramesh gifted Rs. 51,000 to Mrs. Ramesh 4) Father-in-law and mother-in-law of Mr. Ramesh gifted Rs.50,000 each to him. 5) Father and Mother of Mr.Ramesh gifted Rs. 1,00,000 each to Mrs. Ramesh 6) Mr. A., a family friend gifted Mrs. Ramesh Rs. 11,000 7) Mr. B. a family friend gifted Mrs. Ramesh Rs. 81,000 Sister-in-law (sister of Mrs. Ramesh) gifted. Rs. 61,000 to Mr. Ramesh 9) Sister-in-law (Brothers wife to Mr. Ramesh) Gifted Rs. 90,000 to Mrs. Ramesh 10) Son of Mrs. Ramesh gifted Rs. 91,000 to his mother Explain which gifts are liable to be included in the income of Mr. Ramesh and Mrs. Ramesh.

Solution: Gifts Liable to Tax 1. Gift No. 1 is in kind and not in cash, hence, exempt, 2. Gift No. 2 exceed Rs. 50,000, hence, includible in the income of Mr. Ramesh. 3. Gift No. 6 does not exceed Rs. 50,000, hence, not includible in income 4. Gift No. 7 exceeds Rs. 50,000, hence, includible in the income of Mrs. Ramesh 5. Gift Nos. 3,4,5,8,9 and 10 are from relatives, hence not includible in income (Cousin is not included in relative) 7.3 Interests on Securities The following amounts due to an assessee in the previous year shall be chargeable to income tax as interest on securities: (i) interest on any security of the Central or State Governments; (ii) Interest on debentures or other securities issued by a local authority; (iii) Interest on debentures issued by a company (whether Indian or foreign); and (iv) Interest on debentures or other securities issued by a Statutory Corporation. Basic of Charge Interest on securities does not accrue from day to day but becomes due on certain fixed dates only, which are mentioned on the securities. Interest on securities is chargeable to tax on the basis of accounting method (cash or mercantile) followed by the assessee. However, where no method of accounting is regularly employed by the assessee, the income from interest on securities shall be chargeable to tax as the income of the previous year in which it becomes due though it may be received later. Where the assessee adopts cash system of accounting the interest will be taxed on receipt basis. Cum interest or Ex-interest Transaction When securities are bought or sold between the two interest dates, the transaction is either cuminterest or ex-interest. Whatever be the nature of the transaction, the rule is that interest on securities is regarded as wholly the income of the person who happens to be the owner at the time when the interest becomes due, irrespective of whether he was the owner throughout the

period of which the interest is paid or not, and also whether the transaction has been cum-interest or ex-interest. 7.4 Kinds of Securities Securities are of four types: (i) Tax-free Government Securities. These securities are those, the interest on which is fully exempt from tax under section 10(15). Interest on such securities is neither included in total income nor it is taxed. (ii) Government Securities: Such securities are issued either by the Central Government or a State Government. These are taxable securities. but no tax is deducted at source on such securities. Hence, the interest on such securities will not be grossed up. The amount received or due as the case may be shall be included in the total income. (iii) Tax-free Commercial Securities. These are issued by a local authority or statutory corporation or a company, in the form of debentures or bonds. Really speaking their interest not tax-free, because tax due on this interest is payable by the company, or local authority or corporation concerned. These are called tax-free, because the assessee has not to pay tax on it from his own pocket. The tax paid by the company (10.2% in case of listed securities, 20.4% in case of unlisted securities) on this interest is deemed to have been paid on behalf of the assessee, hence the amount of tax paid on any interest due to an asseessee added to his interest income. i.e, the interest due to an assessee is grossed up and then this grossed up amount is included in his total income. The amount of tax paid by the company on this interest is deducted from the total tax payable by the assessee. For example, if a company has issued 10% Tax-free Debentures, the debenture-holder will receive the entire amount of interest calculated at 10% but the amount to be included in the total income of the debenture holder will be the amount actually received by him as interest plus income tax thereon paid by the company. (iv) Less-Tax Commercial Securities. These may be called Taxable Securities. In the case of these securities, income tax is deducted at source on the amount of interest calculated at the percentage stated on the securities and balance of the amount of interest left after deduction of the aforesaid income tax is paid to the security-holder. (The rate of tax deducted at source is 10.2 % in case of listed securities, 20.4% in case of unlisted securities) If the rate percent of interest is given it is not grossed up as it is already the gross amount of interest, and income tax is to be deducted there from. If in the case of these securities, the net amount of interest received is given, it has got to be grossed up. In any case, it is the gross amount of interest that is included in the total income of an assessee. The following are the rules for grossing up interest on securities: (1) If the rate of interest is given: only the interest on tax-free commercial securities is grossed up and interest on all other securities is not grossed up.

(2) Interest on tax-free commercial securities is always grossed up, whether its rate per cent is given or the amount received is given. (3) Interest on less tax securities is grossed up when the amount received is given. 7.5 Bond Washing Transactions It is a device to avoid tax by high income group of assessees by transferring securities to lowincome class of assessees on the eve of the due date of interest. Generally interest on securities is payable half-yearly or yearly and these dates are fixed. As the whole amount of interest is regarded as the income of the person who happens to be the owner at the time when the interest becomes due, some tactful persons transfer their securities a few days before the due date of interest, to some of their friends or relatives, and re transfer them back a few days after the expiry of the due date of interest. Thus, they do not remain the owner of the securities on the due date of interest and they are not required to pay tax on this income from interest on securities. They transfer their securities to such persons whose total income including the income from interest on securities either does not exceed the minimum taxable limit or if it exceeds that limit it is lesser than that of the transferor so that either no tax will be payable on the interest or it will be payable at the lower rate. Thus, the transferor escapes tax completely or partly and transferee also does not pay tax on it as his income is below the minimum taxable limit; and if the transferees income exceeds the minimum taxable limit, he will pay tax al lower rate of tax, which is, in fact, secretly paid by the transferor on behalf of the transferee. Thus by this device, the I T Department suffers loss of revenue. In order to prevent this device of avoiding tax, it has been provided that the Assessing Officer can include such an income from interest on securities in the total income of the person who is actually the owner of the securities and who wants to escape tax by adopting the device. In connection with such transactions the Assessing Officer has the power to enforce the assessee to furnish the required information. 7.6 Deduction of Tax at Source The person responsible for paying income by way of Interest on Securities shall, at the time of payment, deduct income tax at the rate in force on the amount of the interest payable. The words at the rate in force mean the rate or rates specified for the purpose of deduction by the finance Act of the year in which such deduction is required to be made. Aforesaid deducted tax is deposited in the Government Treasury on behalf of the security-holder and hence the person responsible for paying this interest has to issue a certificate to the security-holder regarding the deduction of tax at source so that the security-holder may claim the credit for it in his individual assessments. Tax shall not be deducted at source from interest payable on:

4 1/4% National Defence Bonds, or 41/4% National Defence Loan where Bonds or Loan are held by an individual; National Development Bonds; 7-Years National Savings Certificates (Fourth Issue); Debentures issued by any co-operative society or a public sector company or any authority or any other institution notified by the Central Govt. 6 Gold Bonds, 1977. 7%% Gold Bonds, 1980; any security of the Central Government of a State Govt. Debentures issued by a company in which the public are substantially interested if such debentures are listed on a recognised stock exchange in India, provided that the interest is paid to a resident individual by an account payee cheque and the aggregate amount of interest payable does not exceed Rs. 2,500. It should be clearly understood that the taxable income from interest on securities is (i) Interest received by the security-holder plus (ii) the amount of I. T. deducted at source or paid by the authority responsible for paying the interest, directly into the government treasury on behalf of the security-holder. Self Assessment Questions I 1. Tax will be deducted at source from interest on unlisted commercial securities at 2. __________is a device to avoid tax by high income group of assesses by transferring securities to low income class of assesses on the eve of due date of interest. 3. Money received in excess of Rs. from a person other than a relative is taxable in the hands of individual recipient. 4. Dividend from Indian companies is (taxable/ not taxable) 5. Standard deduction in case of family pension is -. 7.7 Deductions not permissible The following amounts shall not be deductible in computing income under the head Other Sources: 1) Any personal expenses of the assessee. 2) Any interest chargeable under this Act, which is payable outside India and has been paid without deduction of tax at source or without paying tax thereon. 3) Any sum paid on account of wealth tax. 4) Payment to relatives and associates if the Assessing Officer considers it excessive or unreasonable.

5) Expenses or losses in connection with income from lottery, crossword puzzles, races including horse races, cards games, gambling or betting of any nature, shall not be deductible in computing the said income. 6) Expenses incurred in relation to exempted incomes. 7.8 Summary This unit gives you an idea that though income chargeable under income from other sources is not fully discussed, all incomes are chargeable to tax unless otherwise expressed as not taxable. This head is residuary head and covers all incomes not taxed under first four heads of income. 7.9 Terminal Questions 1. Enumerate at least 10 items which can be included under the head income from other sources. 2. What are the various deductions not permissible while computing income from other sources? 3. What do you mean by Bond washing Transactions? 4. What are the different kinds of Securities? 7.10 Answers to SAQs and TQs SAQs 1 ) 20.6 % 2) Bond washing transaction 3) Rs. 25,000 4) Not taxable 5) Rs. 15,000 (or) 1/3 of such Pension whichever is less TQs 1) Refer 7.2 2) Refer 7.6 3) Refer 7.5 4) Refer 7.4

Copyright 2009 SMU Powered by Sikkim Manipal University .

MF0003-Unit-08-Set off and Carry Forward of Losses

Unit 8 Set off and Carry Forward of Losses Structure 8.1 Introduction Objectives 8.2 Provisions relating to set off of losses Intra head set off Inter head set off Self Assessment Questions I 8.3 Carry forward and set off of losses 8.4 Summary 8.5 Terminal Questions 8.6 Answers to SAQ & TQ 8.1 Introduction Income-tax is tax imposed on the total taxable income of an assessee from all the heads of income. As such it is quite proper that the loss under one head of income is set off against the income from another head of income, and the total taxable income of the assessed is computed. Meaning of Set-off of Losses Set-off of losses means setting-off of losses under one source of income against income from another source of income of the same head of income, and the setting-off off losses under one head of income against the income under another head of income of the same assessment year.

Learning objectives: After studying this unit you will be able to know: How a loss in any of the sources or head can be set off and carried forward. What are the losses which cannot be set off and carried forward. How the c/f losses are set off against the income of succeeding assessment years. Time limit upto which losses can be c/f for set off. 8.2 Provisions Relating to Set-off of Losses The various provisions of the Income-tax Act of 1961 regarding set-off of losses are: =>Intra head set off Set-off of losses under one source of income against income under another source of income under the same head (or inter-source adjustment of incomes) (section 70 of the Income-tax Act): When an assessee has two or more source of income less than one head (i.e., the same head); he can set off the loss in one source of income against the income from another source of income under the same head in the same assessment year. For instance. loss from one house property can be set of against the income from another house property. Similarly, the loss from hardware business can be set of against the income from timber business. So also the loss from one capital asset (i.e, capital loss) can be set off against the profit from another capital asset (i.e, capital gains). However, there are certain exceptions to this general rule, they are: a) Speculation loss cannot be set off against the profit from non-speculation business. Speculation loss can be set off only against profit from another speculation business. In this context, it may be noted that, though loss from speculation business, cannot be set off against the profit from non-speculation business, the loss from non-speculation business can be set off against the profit from speculation business. b) Loss from the activity of owning and maintaining race horses can be set off only against the profit from owning and maintaining race horses, and not against any other income under the head Income from other sources. c) Long-term capital loss can be set off only against long term capital gains. It cannot be set off against short-term capital gains. d) Loss cannot be set off against winnings from lotteries, cross word puzzles, etc.

=>Inter head set off Set-off of loss under the head of income against income from another head of income (Section 71) Loss under one head of income can be set off against the income under another head of income. However, there are certain exceptions to this general rule. They are: a) Speculation loss cannot be set off against the income from any other head of income. (As stated earlier, speculation loss can be set off only against the profit from another speculation business). b) Loss from business or profession cannot be set off against income under the head salaries. c) Losses from cross word puzzles, lotteries, gambling, card games races including horse races, etc. cannot be set off either against the income from the same source or against the income under any other head of income. This is because each of these specified sources is regarded as separate from others (i.e., other sources). d) Capital loss can be set off only against capital gains. It cannot be set off against the income from any other head of income. Self Assessment Questions I 1. Loss in a speculation business can be set of against . 2. Income from business can not be set off against -. 3. Long term capital loss against short term capital gains. 4. Short-term capital loss against long term capital gains. 5. Speculation loss can be carried forward for from assessment year 2006-07. 6. Carried forward business loss - set off against income from any other heads. 8.3 Carry Forward of Losses Meaning of Carry Forward of Losses: When it is not possible for an assessee to set off the losses during an assessment year against his incomes during the same assessment year in which they are computed, he can carry forward such unabsorbed losses for set off against his incomes in the succeeding assessment years. Such a process is known as carry forward and set-off of losses Provisions relating to Carry forward and set-off losses:

It must be noted that only the following losses can be carried forwarded for set-off in the succeeding years. Loss under the head Income from House Property. Loss on non-speculative business Loss on speculative business Capital loss (short-term as well as long-term) Loss from the activity of owning and maintaining race horses. The losses from house property (Sec 71B) can be carried forward loss for set off in subsequent years subject to a limit of 8 assessment years against income from house property Carry forward and set-off of losses from business (Section 72 of the Income-tax Act): Losses from business (other than speculation business), which could not be set off against the other incomes of the assessee during the same previous year can be carried forward to the subsequent years for set-off. The loss cannot be carried forward for more than eight assessment years. In the like manner speculation loss can be carried forward for set off against speculation income for four assessment years.( Sec. 73) The capital loss can be carried forward for set off against income from capital gains for eight assessment years. (Sec. 74) Loss from the activity of owning and maintaining race horses can be carried forward for set off for four assessment years. (Sec. 74A) Unabsorbed business loss carried forward for set off should be set off before setting off unabsorbed depreciation, unabsorbed capital expenditure on scientific research and unabsorbed capital expenditure on family planning. However, the carried forward business loss can be set off only after current years depreciation, current years capital expenditure on scientific research and current years capital expenditure on family planning. Illustration: Govinda submits the following information of the net incomes and losses for the year ended 31st March, 2009. Discuss the set off provisions. Rs.

1 2

Salary income Income from house property House A (Income) House B (Loss) Income from business: Cloth business (profit) Hardware Business (loss) Speculation (Profit) Speculation (Loss) Capital Gains: Short-term (gain) Short-term (loss)

24,000 10,000 30,000

10,000 12,000 12,000 17,000 8,000 24,000 8,000

Long-term (gain) 5. Other source: Income from betting Loss from card games Income fro card games Interest on Government securities 6. Unabsorbed depreciation Compute his total income Notes:

12,000 6,000 9,000 8,000 5,000

1. Loss from House B has to be set off against income from House A: The balance of losses from house property B can be set off against the income from other heads. 2. Loss from hardware business can be set off against income from cloth business, and the balance off loss from hardware business (12,000 10,000) Rs. 2,000 can be set off against the other incomes of the assessee. 3. Speculation loss can be set off only against the speculation profit. The amount of speculation loss, which could not be set off against speculation profit, cannot be set off against the other incomes of the assessee. It can be only be carried forward for set-off against speculation profit in the future.

4. The short-term capital loss can be set off against the total of short-term and long-term capital gains. The balance of short-term capital loss cannot be set off against the other income of the assessee. It has to be only carried forward for set off against capital gains in the future. 5. Loss from card games, crossword puzzles, betting, etc. cannot be set off against any income, even against profit from card games, crossword puzzles, betting, etc. Illustration Mr. Sudhama an individual submits the following information relevant for the assessment year 2009-10.

Solution

Note: Loss on maintenance of race horses can be set off only against income from the business of owning and maintaining race horses. In the absence of such income, it cannot be set off.

However, it can be carried forward to next year for claiming set off against income from such business. The house property loss can be set off against salary income and / or interest on securities. It cannot be set off against income from card games. Business loss (non-speculative) can be set off against interest on securities. It cannot be set off against salary income and income from card games. 8.4 Summary Since assessee is required to pay tax on total taxable income which means aggregate of incomes taxable under five heads if income. This head has given the idea as to how an assessee can set off and carry forward the losses incurred in any of the head if incomes. 8.5 Terminal Questions 1. Explain the provisions regarding carry forward and set off of losses. 2. Explain the provisions regarding inter head set off. 8.6 Answers to SAQ & TQ SAQ 1. Income from speculation only, 2. income from salary 3. can not be 4. can be 5. four 6. can not be Terminal Questions: 1. Refer to section 8.2 & 8.3 2. Refer to section 8.2 Copyright 2009 SMU Powered by Sikkim Manipal University

MF0003-Unit-09-Assessment of Individuals and Computation of Tax-Deduction of Tax at source

Unit 9 Assessment of Individuals and Computation of Tax-Deduction of Tax at source Structure: 91 Introduction Objectives 9.2 Assessment Procedure 9.3 Rates of taxes Self Assessment Questions I Deduction of tax at source 9.4 Permanent account Number Self Assessment Questions II 9.5 Illustrations 9.6 Summary 9.7 Terminal Questions 9.8 Answers to SAQ & TQ 9.1 Introduction An individual has to pay tax on his total income calculated under different heads. In addition income of other persons is also included in his total income. This is to avoid shifting legally an income, which in fact belongs to him, to some other persons. To counteract such practices, special provisions relating to clubbing of incomes have been made in sections 60 to 65. Learning objectives:

After studying this unit, you will be able to: Understand the concept of total income of an individual, computation of gross and net income tax liability of individuals. Rates of taxes prevailing for the assessment year Understand as to how to claim various deductions. Analyze the tax treatment of agricultural income. 9.2 Assessment Procedure It refers to procedure of imposing the liability upon the tax-payer to pay the Income Tax. U/S 139 (1) every person, if his total income or total income of any other person in respect of which he is assessable, has exceeded the exemptible limit, shall on or before the due date, furnish return of income in the prescribed form. It has to be submitted ITO of the area. Due date of filing return of Income: Relevant AY

Return of Loss: If a person who has sustained loss u/s 28 or u/s 45 claims to carry forward the same, he should furnish with in the due date, a return of loss in the prescribed form, if the return of loss is not filed, the loss cannot be carried forward. Belated Return of Income: If person has not furnished a return with in the time limit he may furnish the same for any previous year at any time before the expiry of one year from the end of relevant assessment year or before the completion of assessment whichever is earlier. But he is liable for penal interest. Revised Return: Any person having furnished the return discovers any wrong statement therein, he may furnish a revised return at any time before the assessment is completed or before the expiry of one year from the end of the relevant year, whichever is earlier. But if an assessee deliberately files a false return, he will be liable to be imprisoned u/s 277 and he will not be condoned by filing a revised return.

Return by whom to be signed? The Return shall be signed and verified by an individual, Karta (in case of HUF), M.D. or Secretary (in case of Company), Managing Partner in case of firm or any responsible persons competent to act. Defective return of Income: When the A.O. considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within as period of 15 days from the date of such intimation. On application by the assessee the A.O. may extend the period of 15 days. 9.3 Rates of Taxes After computing the total income, tax is computed according to the rates prescribed by the Finance Act which is passed annually by the Parliament. The following are the rates of tax applicable to the individuals for the assessment year 2007-08. (For detail refer Unit 2: Sub heading Rates of Tax for an Individual) Marginal relief: Where the total income exceeds Rs. 10, 00,000, the amount of tax including the surcharge on the excess of income over Rs. 10,00,000 shall not exceed the amount of income exceeds Rs. 10,00,000. Marginal relief shall not be allowed regarding education cess. Tax on winnings from lotteries, cross word puzzles, race including horse races,( not being income from the activity of owning and maintaining race horses) or card games or other game of any sort or from gambling or betting.: On such income tax is levied @ 30%. Self Assessment Questions I 1. The minimum tax free limit for a senior citizen lady is . 2. On a taxable income of Mr. Udaya, aged 40 years, Rs. 2,50,000 the tax payable is 3. Permanent Account Number contains alphanumeric numbers. 4. The rate of deduction of tax at source on the bank interest exceeding Rs. 5.000 is . 5. The date of filing return of tax for individuals is . Deduction of tax at source:

To avoid cases of tax evasion, the IT act has made provisions to collect tax at source on accrual of income. Under this scheme, persons responsible for making payment of income covered by the scheme are responsible to deduct tax at source and deposit the same to the government treasury with in the stipulated time. The recipient of income gets only net income, but is liable to tax on the gross amount. The amount deducted at source is adjusted against is final tax liability. Salaried persons Interest on Debentures & Bonds Interest on FD in Banks & Housing finance companies Interest on other than interest on securities Insurance commission to agents (individuals) Winning from lotteries/Cross-word/games Shows Winnings from horse Races Payments to contractors (per Contract) Payment of rent to individuals /HUF Payment of rent to other than individuals/HUF Fees for professional or technical services At regular rates 10%over Rs.2,500 10% over Rs.5000 10% over Rs.5000 10% over Rs.5000 30% over Rs.5000 30% over Rs.2500 2% over Rs.20,000 15% over Rs. 1,20,000 20% over Rs. 1,20,000 5% over Rs. 20,000

In above cases surcharge and education cess and S&HEC is applicable 9.4 Permanent Account Number Quoting of the permanent account number (PAN) has been made mandatory by the Income Tax Department in many instances. An assessee needs to mention his PAN is issued in the form of a laminated card. A person has to apply in Form 49A to the Assessing Officer having jurisdiction to assess the applicant. In order to improve PAN related services, the Dept. has authorised UTI Investor Services Ltd (UTIISL) to manage IT PAN Services Centres in all cities or towns where there is an income tax office, and National Securities Depository Limited (NSDL) to dispense PAN services. The main advantages of having a PAN include, convenience to locate the assessing officer, faster assessment, processing of refunds, ensuring tax compliance, credit for payment of taxes, and control over unregulated and undisclosed transactions. The application form should be filled in carefully and completely giving specified information, including name of the assessee, fathers name, address, date of birth, sources of income, etc. 9.5 Illustrations Illustration

From the following information compute the tax payable by Miss Shilpa Shetty for the assessment year 2009-10 Rs. 1. 2. 3. 4, 5. 6. 7. 8. Income from House property (computed) Interest on govt. securities Long term capital gains Income from business Agricultural income Purchased N.S.C. VIII issue Deposited in PPF Subscription to eligible issue of capital 80,000 10,000 50,000 2,20,000 1,00,000 30,000 40,000 35,000

Solution Computation of tax payable for the assessment year 2009-10 Rs. Income from house property Income from business Short term capital gains (LTCG considered separately) Income from other sources Interest on Govt. securities Other Gross total income Less: deductions u/s 80C Maximum Rs. 1,00,000 (NSC + PPF + Eligible issue of capital) Total income other than LTCG Add: LTCG Add: Agricultural income Aggregate income 80,000 2,20,000 10,000

3,10,000 1,00,000

2,10,000 50,000 1,00,000 3,60,000

Illustration Find out the tax liability for the assessment year 2009-10 in the cases of resident individuals given below: Name of taxpayer Mrs. Mrs. Lakshmi Reshma Age of the taxpayer during the previous 65 years 60 years 68 years 50 years year 2008-09 Rs. Rs. Rs. Rs. Income from business 30,000 Income from profession 90,000 80,000 10,10,000 Salary income and other income 2,00,000 86,000 1,20,000 2,20,000 Contribution towards National Savings 80,000 90,000 10,000 65,000 Certificate VIII issue Public Provident Fund 2,000 2,000 2,000 6,000 Investment in notified infrastructure 5,000 1,000 33,000 sector Solution Computation of income and tax thereon Gross total income 2,90,000 1,66,000 1,50,000 12,30,000 Less: Deduction under section 80C [see 82,000 97,000 13,000 1,00,000 Note] Net Income 2,08,000 69,000 1,37,000 11,30,000 Tax on net income 5,800 Nil Nil 2,41,000 Add: Surcharge (surcharge is Nil Nil Nil 24,100 applicable if net income exceeds Rs. 10 lakh) Tax (c) 5,800 Nil Nil 2,65,100 Add: Education cess [3% of (c)] 174 Nil Nil 7,953 Tax payable 5,974 Nil Nil 2,73,053 Note: Deduction under section 80C Gross qualifying amount NSC VIII issue 80,000 90,000 10,000 65,000 PPF 2,000 2,000 2,000 6,000 Ganesh Suresh

Investment in infrastructure sector Total Net qualifying amount Illustration

82,000 82,000

5,000 97,000 97,000

1,000 13,000 13,000

33,000 1,04,000 1,00,000

From the following details compute the tax payable: Profit from share trading Rs. 10,000 Securities transaction tax paid 5,000 Other income 2,00,000 Solution

Illustration In the following cases find out the tax liability. a) Total income Rs. 1,40,000 inclusive of agricultural income of Rs. 90,000 b) Total income Rs. 1,80,000, Agricultural income Rs. 4,900 c) Total income Rs. 12,00,000, agricultural income Rs. 15,000 Solution a) No tax is payable as non agricultural income is less than Rs. 1,00,000 b) Tax on Rs. 1,80,000 amounts to Rs. 3,000 plus education cess @ 3% on Rs. 3,000, Rs. 90. Total tax payable is Rs. 3,090. Agricultural income is not clubbed since it is less than Rs. 5,000

Illustration

The following particulars are submitted for calculation net tax liability: Rs. Income from house property (computed) 68,000 Agricultural income 25,000 Long term capital gains 50,000 Lottery winnings (Net) 34,700 Life insurance premium paid 10,000 Business Income (computed) 1,00,000 Solution

Illustration From the following details, compute the tax liability of Salman Khan for the assessment year 2009-10 Rs. 1,04,000 20,000 40,000 10,000 8,000 12,000 20,000

Salary for 12 months Income from house property (computed) Long term capital gains Short term capital loss Dividend from Indian Company Income from mutual funds Personal agricultural income

B/F agricultural loss Insurance premium paid on policy for Rs.60,000 Donations to National Childrens fund Contribution to P.P.F. Contribution to URPF Solution

25,000 13,000 10,000 30,000 3,000

Computation of total Income for the assessment year 2009-10

C/F agricultural loss shall be set off against current year agricultural income. Loss shall be ignored; hence net agricultural income is NIL Tax liability Since the net income of the assessee is lesser than the minimum taxable limit i.e., Rs. 1,50,000 the entire income shall be exempt from tax Note: Life policy premium qualified only up to 20% of sum assured. (60,000 @ 20%= 12,000) Contribution to URPF never qualifies for 80C 9.6 Summary A brief idea about the tax rates applicable to individuals is given. Even the computation of net tax liability with the knowledge of TDS is also given. This unit also highlighted the necessity of PAN for various transactions. 9.7 Terminal Questions 1. Briefly understand the assessment procedure. 2. When PAN is compulsory?

3. Give ten instances where tax is deducted at source. 4. How the following incomes are treated in the assessment of an individual who is resident and ordinarily resident. a) Share of profits from the firm b) Share of income from a HUF 5. What is the minimum tax free limit for the following individuals? Mrs. Vanaja, aged 68 years. Miss. Shilpa shetty, aged 23 years Mr. Narayana Murthy, aged 66 years. Mr. Gururaja, aged 40 years. 6. Calculate the tax payable by an individual on the following taxable incomes: Rs. 85,000 Rs. 1,65,000 Rs. 3,58,000 Rs. 11,00,000 Rs. 1,75,000 which includes an agriculture income of Rs.20,000 Rs. 1,45,000 which includes long term capital gain of Rs.30,000 Rs. 1,45,000 which includes long term capital gain of Rs.50,000 9.8 Answer to SAQ & TQ SAQ I 1) Rs. 2,25,000 2) Rs. 10,300 3) Ten 4) 10.3%

5) 31st July of the assessment year TQ: 1) Refer to section 9.4 2) Refer to section 9.6 3) Refer to section 9.51 4) Refer to section 9.3 5) Refer to section 9.5 6) Refer to illustrations 9.7 Copyright 2009 SMU Powered by Sikkim Manipal University .

MF0003-Unit-10-Assessment of Companies
Unit 10 Assessment of Companies Structure: 10.1 Introduction Objectives 10.2 Important points on assessment of companies 10.3 Computation of tax on company 10.4 Book profit Self Assessment Questions 10.5 Summary 10.6 Terminal Questions 10.7 Answers to SAQ & TQ

10.1 Introduction A company means: i) any Indian company, or ii) any body corporate incorporated under the law of a foreign country, or iii) any institution, association or body which was assessable or was assessed as a company for any assessment year up to 1970-71, or iv) Any institution, association or body, whether incorporated or not and whether Indian or nonIndian, which is declared by general or special order of CBDT to be a company. Public Sector Company It means any corporation established by or under any Central or State Act. or a Government Company as defined in section 617 of the Companies Act, 1956. Domestic Company Domestic company means an Indian Company or any other company which in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends payable out of such income. Foreign Company A foreign company is a company which is neither an Indian Company nor has made the prescribed arrangements for the declaration and payment of dividends within India. Sec. 25 Company It is a company formed to promote art, charity, commerce, religion or any other useful object, nor for profits, and which intends to apply its profit, if any or other income towards the further improvement of such objects and prohibits the payment of any dividend to its members. Learning Objectives: After studying this unit you will be able to understand; The meaning of company The tax structure of the company The book Profit

 Tax liability of the company 10.2 Important Points Regarding the Assessment of Companies A company is liable to pay income tax on its total income, howsoever, small it may be. There is no exemption limit. Income tax is payable on a companys total income at a flat rate. However, different types of companies pay tax at different rates and on different types of incomes, the rates of taxes are also different. If the tax payable by a company is less than 10% (+ surcharge, if any and education cess) of its book profits, it is liable to pay tax 10% (+ surcharge, if any and education cess) of its book profits. 10.3 Computation of Tax on Companies Assessment of Companies Computation of Total Income of a company

Computation of Tax Liability of a Company

Therefore tax liability of the company is (A) or (B) whichever is more Tax Rates STCG on equity/ units of Equity Oriented funds where STT is applicable For A Y 2008-09 For A Y 2009-10 Tax on LTCG Tax on casual Income Tax on Any other income: a) Domestic Company b) Foreign company Surcharge: at 10% for domestic companies and at 2.5% for foreign company (if the income is likely to exceed Rs. 1 crore) For the above ( Tax + surcharge) add: 3% Education cess (always) Special provisions for payment of tax by certain companies or Minimum Alternative Tax (w.e.f. A.Y. 2001-02) Where in the case of company the income-tax payable on its total income in respect of any previous year relevant to assessment year is less than 10% (plus surcharge, if any + Education cess) of its book profit, such book-profit shall be deemed to be the total income and the tax payable on such total income shall be the amount of income-tax @ 10% (plus surcharge, if any + Education cess) of such book profit. Percentage 10 15 20 30 30 40

MAT (see 115 JB): under this tax payable by a company for any A.Y. cannot be less than 10% of book profit How to compute tax as Provisions of MAT: (A) Find out Normal Tax Liability (ignoring MAT) (B) MAT 1. Find out Book Profit 2. Find out MAT Tax at 10% If (A) is more MAT is not applicable If (B) is more MAT is applicable Points to be kept in mind while computing the profit The profit and loss account shall be prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Other Provisions: i. The company shall furnish a report of Chartered Accountant in the prescribed form certifying that the book profit has been computed in accordance with the provisions of this section. The report shall be furnished along with the return of income. Self Assessment Questions I 1. Expand MAT. 2. Companies for the promotion of commerce, art, science etc., are known as . 3. Fringe benefit tax is as deduction while computing the income of the company. Illustration From the following information compute the tax liability of X & Co, keeping in view the provisions of MAT u/s. 115JB for the assessment year 2009-10. Profit and Loss Account Rs. 4,50,000 Rs. 1,00,000

To Expenses relating to Business

By long-term capital Gain

To Income tax paid To General reserve To Provisions for Contingent liability To Proposed dividend. To Balance C/d.

20,000 40,000 40,000 1,00,000 1,50,000 8,00,000

By Sale

7,00,000

8,00,000

2. B/F loss as per books of account Rs. 1,00,000 1. B/F depreciation as per books of account Rs. 80,000 2. B/F. loss under the head capital gains (Computed as per Income Tax Act) Rs. 60,000 3. B/F unabsorbed depreciation Rs. 3,00,000 for A.Y. 2007-08. Solution Computation of Tax on Total Income for the A. Y. 2009-10 Rs. Rs. Profits and per P. & L. A/c. Add: Expenses disallowed: Income tax paid General reserve Provision for contingent liability Proposed dividends 1,50,000 20,000 40,000 40,000 1,00,000

Less: Income taxable under the head capital gains Business Income Statement of Total Income Business income Less: B/F unabsorbed depreciation Income from business Capital Gains 1,00,000 60,000 40,000 Less: B/F. unabsorbed depreciation 40,000 Total Income Note: B/F loss under the head capital gains c/f. next year = Rs. 60,000 50,000 = Rs. 10,000 Computation of Book Profit and Tax Payable u/s 115JB or Minimum Alternative Tax Income as per P. & L. A/c. Add: Disallowed items:

2,00,000 3,50,000 1,00,000 2,50,000 2,50,000 2,50,000 Nil Nil Nil

1,50,000

Income tax paid Transferred General reserve Provision for contingent liability Proposed dividends Less: B/F. loss as per books of account or B/F depreciation as per books of account (WIL) Tax on book-profit @ 10% Add: Surcharge @ 10% Add: Education cess @ 2% S& HEC @ 1% Tax Liability as per MAT

20,000 40,000 40,000 1,00,000

2,00,000 3,50,000 80,000

Book Profit Rs. 2,70,000 27,000 Nil 540 270 27,810

Tax payable. Tax on total income Nil or tax on book-profit Rs. 27,810, whichever is more. Hence, tax payable Rs. 27,810. Illustration Surya Ltd. is engaged in the business of manufacture of garments. The following profit and loss account of the company is given for the year ended 31St March, 2009. Rs. 2,00,000 20,000 25,000 2,50,000 10,000 15,000 60,000 50,000 20,000 30,000 20,000 2,50,000 5,000 15,000 Rs. 28,00,000 6,00,000 1,00,000 50,000

Salareis and Wages Entertainment expenditure Travelling Expenses Incoem Tax Wealth Tax Outstanding custom Duty Provision for unascertained liability Proposed dividend Provision for loss of subsidiary company Repairs of let out property Municipal Tax on let out property Agriculture expenses Fines and Penalties R.B.D.

Gross Profit Agricultural Income Rent from let out property Transfer from General Reserve

Depreciation Other Expenses Net Profit Additional information: 1. Excise duty of 2005-06 paid during the year 2008-09 is Rs. 65,000 However, this is not debited to profit and loss account given above. 2. Depreciation allowable as per Income Tax Rules is Rs. 4,60,000 3. The export sales of the company is Rs. 6,00,000. This stands credited to Trading Account. But out this Rs. 5,00,000 is remitted to India in convertible foreign exchange within specified time limit. The total sales of the company are Rs. 30,00,000. 4. The following losses are to be set off:

4,00,000 2,00,000 19,80,000 35,50,000

35,50,000

For Tax Purposes Rs. 11,00,000

For Accounting Purposes 9,00,000 3,00,000

Rs. Brought forward Business loss of 2004-05 Unabsorbed depreciation You are required to compute a. The book profit as per section 115JB b. Total income of the company and c. The tax liability of the company for the assessment year 2009-10. Solution

Computation of Total Income for the Assessment Year 2009-10: Net Profit Add: Disallowed items: Income Tax Wealth Tax Outstanding custom duty Provision for liability Proposed dividend Provision for loss of subsidiary comapnay Repairs of let out property Municipal Tax Agricultural expenses Fines and Penalites R. Bad debt Depreciation (a) Less: Disallowed items/deductions: Agricultural Income Rent from property Transfer from reserve Depreciation Excise duty paid (b) Business Income (a-b) B/F Loss Income from House Property: (c) G.A.V. (Rent) Less: Tax paid Annual Value Less: 30% of A.V. Income from House Property (d) Gross Total income (C+D) Deduction Computation of Tax Liability Tax on Rs. 7,86,000 @ 30% Add: Surcharge @ 10% (if applicable) Add: Education cess @2% on Tax + Surcharge S & HEC @ 1% Total tax Liability Computation of Book Profit u/s. 115JB 19,80,000 2,50,000 10,000 15,000 60,000 50,000 20,000 30,000 20,000 2,50,000 5,000 15,000 4,00,000 31,05,000 6,00,000 1,00,000 50,000 4,60,000 65,000 12,75,000 18,30,000 11,00,000 7,30,000 1,00,000 20,000 80,000 24,000 56,000 7,86,000 Nil 7,86,000 2,35,800 Nil 4,716 2,358 2,42,874

Net Profit Add: Disallowed items Income Tax Unascertained Liability Proposed dividend Agricultural expenses Reserve for Bad debts Provision for loss of subsidiary company (a) Less: Disallowed items/deductions: Agricultural Income General reserve Unabsorbed depreciation or B/f Business loss whichever is less (b) Book Profit (a b) 26,25,000 9,50,000 Computation of Tax Liability Tax on Book Profit @ 10% Add: Surcharge @10% (if applicable) Add: Education cess @2% on tax + Surcharge S & HEC @ 1% on tax + Surcharge Tax Liability Tax payable. Tax on total income Rs. 2, 42,874 or tax on book-profit Rs. 1, 72,525, whichever is more. Hence, tax payable Rs. 2, 42,874 Illustration

19,80,000 2,50,000 60,000 50,000 2,50,000 15,000 20,000 26,25,000 6,00,000 50,000 3,00,000 9,50,000 16,75,000 1,67,500 Nil 1,67,500 3,350 1,675 1,72,525

Sahara Ltd. is engaged in the business of manufacture of goods in India for domestic market. The P/L account for the year is as follows: Rs. 13,78,100 1,30,000 12,80,000 Rs. Sales 42,70,500 Rent of quarters given 60,000 to workers Rent of commercial 1,30,000 property given on rent to a foreign bank Sale proceeds of gold 2,60,000 not being stock-in trade Amount charged from 10,000 persons using guest

Cost of goods sold Office expenses Salary to employees

Expenditure on scientific 84,000 Bad debts 10,000

house of company Entertainment expenses Advertisement expenditure Travelling expness Interest Income and wealth taxes Sales tax, excise duty and customs duty Municipal tax of quarters given to workers Municipal tax of comm. property Repairs of workers quarters Repairs of comm. property given on rent Repairs of factory Insurance Land revenue: workers quarters Land revenue: comm. building Depreciation Other expenses Net profit 57,000 2,27,000 3,20,000 82,000 1,16,400 1,76,000 16,000 12,000 12,000 7,000 10,000 36,000 2,000 6,000 1,86,000 1,10,710 4,72,290 47,30,500

47,30,500

Other Information: 1. Cost of goods sold includes the following: a. Goods of Rs. 3,80,000 purchased on May 10 of PY from B. Ltd. in which Mrs. X holds 70% equity. (Mr. X holds 25% share capital in Sahara Ltd.) The market price of these goods is Rs. 2, 86,000 (out of Rs. 3,80,000, 30,000 is paid in cash). b. Goods purchased from Y Ltd Rs. 90,000, paid by bearer cheque. 2. Out of salary to employees Rs. 12,80,000 a. Rs. 30,000 is employees contribution of RPF Rs. 17,500 of which is credited in the employees a/c in the relevant fund before due date. b. Rs. 28,600 is bonus paid, on October 13, of AY.

c. Rs. 36,000 is commission, paid on Nov. 10 of AY. d. Rs. 40,000 paid outside India, without TDS. e. Rs. 6,100 capital expenditure for promoting family planning among employees. 3. Expenditure on scientific research includes Rs. 30,000 being cost of land and Rs. 16,000 paid to National Laboratory. 4. Advertisement expenses include: a. Rs. 16,000 on advertisement in a newspaper of a political party. b. Rs. 11,400 begin capital expenditure on advertisement; c. Rs. 22,000 paid in cash; d. Rs. 7,000 paid to a concern in which X has substantial interest (excessive to the extent of Rs. 2,400). e. Out of interest (Rs. 82,000) Rs. 60,000 is payable outside India (no TDS so for)_ and Rs. 15,000 is payable to IDBI (paid in Nov. 6 of AY) f. Taxes debited to P/L a/c include: a. sales tax, excise duty: Rs. 1,70,000 in March of PY Rs. 6,000 in November of A.Y. b. Municipal taxes (workers quarters ) on 30 June of AY c. Municipal taxes (commercial bldg) on 30 June of AY 5. Out of of insurance of Rs. 36,000, Rs. 6,000 is fire insurance on workers quarters paid on 10th April of AY and Rs. 4,000 on commercial building paid on 10th April of AY. 6. Land revenue (Rs. 8,000) is paid Sept. 10 of AY. 7. Indexed COA of gold Rs. 2, 41,000 Solution Computation of the Total Income Computation of Business Income Net Profit as per P/L a/c Add: Disallowed items: 4,72,290

1. Excess Cost of goods from B ltd 2. Payment by bearer cheque (20%) 3. Income-tax wealth tax 4. Municipal tax of property 5. Repairs of property 6. Land revenue of property 7. Employees contribution to RPF (30,000-17,500) 8. Commission paid after due date 9. Salary paid without TDS 10. Family planning exps. (4/5) 11. Cost of land 12. Payment to National Laboratory 13. Ad. Expenditure in newspaper 14.Capital exp. on Advertisement 15. Advertisement paid in cash (20%) 16. Excessive payment to a concern 17. Interest without TDS 18. Payment to IDBI after Oct 31, 19. Taxes paid after Oct 31 20. Fire insurance on property Less: Payment to National Lab (125%) Less: 1. Rent of commercial property 2. Sale Proceeds of goods Income from Business Statement of Total Income Sec 22: Rent from comm. property less: municipal taxes paid Annual Value less: Std. Dedn. 30% Sec. 28: Business Income Sec. 45: Long term capital gains (2,60,000 2,41,000) Sec. 56: Other incomes Gross Total income Deduction u/s 80 Total Income Notes:

94,000 18,000 1,16,400 12,000 7,000 6,000 12,500 36,000 40,000 4,880 30,000 16,000 16,000 11,400 4,400 2,400 60,000 15,000 6,000 4,000 20,000 1,30,000 2,60,000

5,11,980 9,84,270

4,10,000 5,74,270

1,30,000 NIL 1,30,000 39,000

91,000 5,74,270 19,000 Nil 6,84,270 Nil 6,84,270

1. Excessive payment by a person having substantial interest or his relative to a concern in which such person of his relative having substantial interest is disallowed (Rs. 30,000 is included in the above amount). 2. Capital expenditure on land for scientific research is disallowed, 3. Contribution received on RPF from employees is treated as income; if it is credited to the concerned RPF a/c on or before the due date then the deduction is allowed. 4. Commission paid to employees after 31st Oct. of AY is disallowed. 5. Payment of salary outside India without TDS is disallowed. 6. Capital expenditure on family planning is to be amortized over 5; years. 7. Advertisement in newspaper owned by a political party is disallowed. 8. Rent received from workers quarters is treated as business income. Hence the expenses incurred in that connection such as repairs municipal taxes, land revenue insurance (though paid after 31st March but before due date of filing returns (i.e., 31st October) is allowed. 9. Since the payment to IDBI is made after due date (31st October) it is disallowed) 10. Sales tax etc paid after due date (Rs. 6000) is disallowed. 11. Municipal taxes and fire insurance on workers quarters paid before due date of filing returns in allowed. 12. Municipal taxes, land revenue and fire insurance on commercial property is not allowed as deduction as they have not been paid during the PY. 13. For a company assessee due date for filing the returns is 31st October. 10.5 Summary The limited companies in India were not paying taxes, making best use of deduction u/s 80 in respect of incomes from industries in small scale sector, backward areas, specified industries etc., In view of this minimum alternate tax was introduced, making all the company to pay tax on normal income or tax at 10% on book profit calculated, whichever is higher. 10.6 Terminal Questions 1. How is tax liability of a company is computed. 2. What do you mean by book profit?

3. How do you calculate book profit. 4. When book profit is calculated and taken into consideration? 10.7 Answers to SAQ & TQ SAQ I 1. Minimum Alternate Tax. 2. Section 25 companies. 3. not allowed TQ: 1. Refer to section 10.3 and 10.4 2. Refer to section 10.4 3. Refer to section 10.4 4. Refer to 10.3 Copyright 2009 SMU Powered by Sikkim Manipal University .

MR0003-Unit-11-Fringe Benefits and Service Tax

Unit 11 Fringe Benefits and Service Tax Structure: 11.1 Introduction Objectives 11.2 Fringe Benefits 11.3 Provisions

11.4 Charging provisions 11.5 Value of Fringe benefits Self Assessment Questions I 11.6 Summary 11.7 Terminal Questions 11.8 Answers to SAQ & TQ 15.1 Introduction The employer provides to his employee certain perquisites or fringe benefits. At present, some of the perquisites are taxable in the hands of employees, while certain perquisites (which are collectively enjoyed by the employees) are neither taxable in the hands of the employees nor in the hands of the employer. Where the benefit are fully attributable to the employee, they are taxed in the hands of employee. In cases, where attribution of the personal benefit poses problems, or for some reasons, it is not feasible to tax the benefits in the hands of employee, a separate tax known as fringe benefit tax, shall be levied on the employer on the value of such benefits provided or deemed to have been provided to the employees. Fringe benefit tax has been introduced with effect from assessment year 2006-07 by the Finance Act 2005. Learning Objectives: After studying this unit you will be able to understand: The meaning of fringe benefits and services which are taxed. The various fringe benefits and their valuation fort the purpose of tax. The services that are taxed and their valuation for the purpose of tax 15.2 Fringe benefits: 115WB Fringe benefits mean benefits, any consideration for employment provided by way of: any privilege, service, facility or amenity, directly or indirectly, provided by an employer, whether by way of reimbursement or otherwise, to his employees (including employee or employees). However, the privilege, service, facility or amenity does not include perquisites in respect of which tax is paid or payable by the employee.

15.3 Provisions The main provisions of this chapter are as under: Employer (Sec. 115W) For the purpose of FBT, the term employer meansAOP or BOI, whether incorporated or not; a firm; a company; a local authority; and every artificial juridical person, not falling within any one of the preceding items Who is not liable to pay FBT An individual; or Hindu undivided family; or a person whose income is exempt u/s 10(23C); or a person who is registered u/s 12AA; or a political party a person who is not an employer; or a person who has no employee based in India. 15.4 Charging Provisions Charge of fringe benefits tax: (115 WA) The employer shall be liable to pay fringe benefit tax @ 30% plus surcharge, if any, plus education cess @ 2% + S & HEC at 1% on the value of fringe benefits. The fringe benefit tax shall be payable by the employer even where he is not liable to pay tax on his total income. Any sum paid on account of fringe benefit tax shall not be allowed as a deduction in computing the income. 15.5 Value of fringe benefits (115 WC): Value of fringe benefits (115 WC): Any free or confessional ticket provided by the employer for private journeys of the employees or their family members. Any contribution by the employer to an approved Superannuating fund for employees. Any security or sweat equity shares Value 100% 100% of the amount in excess of Rs. 1 lakh for each employee 100% of the Fair market value amount recovered from the employee 20% 20% 20%

Expenses on Entertainment Provision for hospitality Expenses on Conference. (Other than fee for participation by employee in any conference) Expenses on sales promotion including publicity.

20%

(Other than expenditure in any form in any print or electronic media, or transport system. expenditure on press conference, business convention, fair, exhibition. Advt. by way of signs, art of work, banners, expenditure by way of payment to advt. agency for the above purposes.) Expense on Employees welfare, expenses on Conveyance, 20% Tour and Travel (including Foreign Travel). Employer in the business of Construction, pharmaceutical production, computer software In any other case Motor Cars Motor cars- Employer in business of carriage of passengers or goods Guest House Telephone including mobile phone (other than leased telephone lines, fixed telephone allowance to employees) Festival Celebrations Gifts Scholarships Use of health club and similar facilities Use any other club facilities Tour travel and foreign travel Illustration A firm is engaged in the manufacture of computer software. It incurred the following expenses during previous year 2008-09. Compute the fringe benefits tax payable for the assessment year 2009-10. Rs. 1. Salary to staff. 20,00,000 2. Contribution to an approved superannuation fund for employees 2,00,000 3. Rent paid regarding houses provided to Staff 3,00,000 4. Expenses on motor cars including depreciation (used 5% 20%

20% nil 20% 20% 20% 50% 50% 50% 50% 5%

by the staff for business purposes and personal purposes) 3,50,000 An employee participated in a conference. The employer incurred the expenses in this connection as under: Participation fee 5,000 Expenditure on conveyance, travel boarding 10,000 6. Expenses on conveyance, tour travel 4,00,000 7. Expenses on use of hotel, boarding and lodging 8.00.000 8. Expenses on hospitality(including food supplies to staffing office And factory Rs. 2,00,000) 3,00,000 9. Expenses on telephones Leased telephone lines 1,00,000 Mobile phones 1,50,000 10. Expenses on sales promotion and publicity Advt. in print and electronic medias 4,00,000 Participation in exhibition 1,00,000 Solution Computation of FBT for the assessment year 2009-10

Self Assessment Questions I: 1. Fringe benefit tax was introduced with effect from . 2. Fringe benefit tax liability is calculated at the rate of (+ SC (if applicable)+EC). 3. Fringe benefits are valued as per section 4. The value of scholarship for FBT is . 5. An individual is - employer for the purpose of FBT 15.7 Summary All the employers are liable to pay fringe benefit tax. Fringe benefit tax paid will not be deducted while computing income from business. The value of fringe benefit for the purpose of tax varies from one benefit to another. Service tax is administered by the Central Excise Department. In some cases CENVAT credit is available for service tax paid. The mode of valuation of services for tax purpose varies from service to service. Every year more and more services are added to the list of taxable services. 15.6 Terminal Questions 1. What are various fringe benefits taxable? 2. How fringe benefits are valued? 3. What are the services which are exempt from tax? 4. Explain the following services: a) Advertising agencies B) Out door catering services. 15.7 Answers to SAQ & TQ SAQ I 1. Assessment year 2006-07 2. 30 per cent 3. 115 WC

4. 50 per cent 5. not an TQ: 1. Refer to section 15.2 2. Refer to section 15.5 3. Refer to section 15.6.2 4. Refer to section 15.6.7 References: Direct Taxes : Law & Practice Dr. H. C. Melhotra and S. P. Goyal Indirect Taxes : Dr. H. C. Mehrotra and Agarwal Income Tax : Dr. Vinod K. Singhania and Dr. Monica Singhania Income Tax : Dr. Dinker Pagare Copyright 2009 SMU Powered by Sikkim Manipal University .
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Dashboard / MF0003-201002 / articles / Unit 1 - Working notes Not ordinarily resident

2 Income from Agriculture from Bangladesh Income from rent of house in Pakistan Income from business in Delhi, controlled from Dhaka Income from dividends earned and received in Newyork Income from business in Germany, controlled from India

Ordinarily resident 45000 50000 200000 NIL 250000

non-resident

200000 NIL 250000

200000 NIL

Foreign Income of earlier previous years, brought to India during the previous year Agricultural income, earned and recived at Bangalore TOTAL 3 Computation of Tax salary Other source Total income other than LTCG LTCG Aggregate income Tax on LTCG @20% Balance income (540000-210000)=330000@ normal rates upto 150000 NIL 150001-300000 [150000 @10% ] 15000 300001-330000 [ 30000 @20% ] 6000 Total income other than LTCG Add: education cess @3% Total tax liability Note: there is no surcharge if the income is below 10 lakhs

NIL 50000 595000

NIL

NIL

450000

200000

180000 150000 330000 210000 540000 42000 42000

21000 63000 1890 64890

Non-agricultural income Agricultural income Total aggregate income Calcualtion of tax liability on total income Upto 150000 NIL 150001-300000 [150000 @10% ] 15000 300001-500000 [200000 @2 40000 500001 - 1700000 [1200000 @ 30% ] 360000 total 415000 ADD: education cess 3% 12450 Total (A) 427450 Calculation of tax liability on agricultural income alone Total income [ basic slab + 200000] = 350000 Upto 150000 NIL 150001-300000 [150000 @10%] 15000 300001-350000 [50000 @20% ] 10000 Total 25000 ADD: education cess 3% 750 Total (B) 25750 Net income (A)-(B) 401700 Add surcharge @10% 40170

1500000 200000 1700000

Net tax payable 441870 Last modified: Monday, 4 January 2010, 05:25 PM
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Dashboard / MF0003-201002 / articles / Unit 2 - Working notes

Mr. Nagaraj has an income of Rs.3 lakh after all deductions under section 80 except 80G. He made the following donations during the previous year 2006-07. : i) To Prime Minister National Relief Fund Rs. 10,000 ii) To Delhi Municipal Corporation for family Planning Rs.20,000 and donation to Birla Temple Rs. 14,000. What is the deduction u/ s 80G?

No limit donations: Prime Minister National Relief Fund 10000

10000

With limit donations: deduction is allowed upto @100% of the qualifying amount [10% of adjusted GTI -300000] ie upto 30000 Delhi 20000 Municipal Corporation for family Planning 20000

With limit donations where deductions is allowed @50% of the qualifying amount. Balance amount available is 30000-20000 = 5000 10000; 50% of 10000 is alone available for deductions. Donations to Birla temple 14000 [ 5000 is alone allowable.

Total

35000

Mr. Vasanth has income of Rs.5,00,000 from all sources except from business or profession. He has donated to Indian Statistical Institute Rs.25,000, to Bangalore University Rs. 15,000, to Rural Fund of central Government Rs.20,000. Can he claim deduction u/s 80 G and how much can he claim u/s GGA?

No limit donations where deductions is allowed at 100% Indian Statistical insitute 25000 Bangalore University 15000 Rural fund of central govt 20000

Yes he can claim deductions under 80G He can claim 60000

X Company of USA pays Rs.50 lakh as donation to a political party in India through its subsidiary at Delhi. The donation is paid by the subsidiary and deduction is claimed from profits. i) How much of this donation be permitted to be deducted u/s 80GGB? ii) If X co., is an Indian Company, how much amount be deductible? 1. No amount is deductible because it is not an indian company. It is a subsidiary of USA firm 2. Under 80GGB contribution given by a company to a political party is entirely exempted from tax

From the following details of Mr. Jitin, ascertain his taxable income for the A Y 2009-10 Taxable Salary Rs. 4,00,000 Income from Business Rs. 3,50,000 Income from other sources Rs. 50,000 He pays Rs. 1,00,000 as House rent for a house he has occupied in Bangalore and he is not getting any HRA from his employer.

No deductions is available for HRA. Hence Gross total income is [400000+350000+50000] = 800000 Last modified: Monday, 4 January 2010, 05:30 PM
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Dashboard / MF0003-201002 / articles

/ Unit 3 - Working notes

Mr. Sri Nath got th of his monthly pension commuted and received Rs. 1, [assumption he is not a govt employee. If he does 50,000 during the previous year.Ascertain the exempted value of pension (if he not receive gratuity, 1/2 of the normal pension does not received any gratuity) received is exempt under sec 10(10A) Ans 75000

For Question 13, What is the exempted portion of commuted pension, if he recieves a gratuity of Rs. 3 lakh ? Ans: 50000

[assumption he is not a govt employee. If he does receives gratuity, 1/3rd of the normal pension is exempt

Mr. Sunil encashed Rs. 3,50,000 as leave salary during the P Y (still he is in service with the same employer) what portion of encashed leave salary is taxable? D. Rs. 3,50,000 UNIT -2

During continuity of service earned leave is fully taxable for both govt and non govt employees

Mr. Janak retires on 1-1-2009 after serving Anoop Ltd., for 15 years and 11 months. At the time of retirement his basic salary was Rs. 10,000 per month along with that he was also getting a DA of Rs. 4,000 per month. On his retirement he received a gratuity of Rs. 1, 25,000 (covered under payment of Gratuity Act). Compute the the amount of gratuity exempt from tax.

C. Rs.105,000

salary 10000 + 4000 = 14000 /2 = 7000 completed years of service = 15 years

A. 1/2 month salary for completed years of service 7000 x 15 = 105000 B. Rs.3,50,000 C. Gratutity received Rs.1,25,000 Least of three - Rs.1,05,000

Mr. Santosh furnishes the following details for the P y 2008-09 Basic Pay Rs. 6,000 per month D.A. Rs. 3,000 per month Commission Rs. 500 per month HRA Rs. 600 per month (he is residing in his own house) Medical allowance Rs. 200 per month Transportation allowance Rs. 300 per month . What is Mr. Santosh's taxable income ? 72,000 + 36,000 + 6,000+7,200+2,400+3,600 = 1,27,200

Mr. Hemanth is an employee in Adarsh Groups in Bangalore. He is getting a monthly salary of Rs. 15,000 and a DA of Rs. 6,000 . Apart from this he is also getting a commission of Rs. 12,000 per annum achieved on turnover, Traveling A. 2,64,000 allowance of Rs. 500 per month and an HRA of Rs. 4,000 per month (Mr. Hemanth is paying Rs. 5,000 per month. During the previous year he contributes Rs. 15,000 towards PPF. What is salary for the purpose of computation of HRA?

1,80,000 + 72,000 + 12,000 = 2,64,000 What is Taxable portion of HRA? C. Rs.14,400

HRA recd 4000 x 12 = 48,000 Less: Exemption (least of the following) Actual HRA recd 48,000 Excess of rent paid over 33,600 10% of salary (60,00026,400) 40% of salary 105,600 Least of three is Rs.33,600. This has to be deducted from HRA received ( 48,000 - 33,600 = 14,400)

What is taxable HRA if Mr. Hemanth is working in Chennai instead of Banglaore?

HRA recd 4000 x 12 = 48,000 Less: Exemption (least of the following) Actual HRA recd 48,000 Excess of rent paid over 33,600 10% of salary (60,00026,400) 50% of salary 1,32,000 Least of three is Rs.33,600. This has to be deducted from HRA received ( 48,000 - 33,600 = 14,400)

What is Mr. Hemanth's taxable salary?

B. 2,63,400

Salary 15000 x 12 1,80,000 DA 6000 x 12 72,000 Commission 12,000 HRA (taxable) 14,400 Gross salary 2,78,400 Less contr to PPF (15,000) Taxable salary 2,63,400

What isMr. Hemanth's tax liability for the A Y 2009-10?

C. 11,680.20

Upto 1,50,000 NIL 1,50,000 - 2,63,400 @10% 11340 Add: education cess 3% 340.2 Total 11680.20

Mr. Karthik is an employee in an MNC company in Mysore and he furnishes the following details for the P Y: Basic Pay Rs. 12,000per month; Bonus equal to two months pay; DA Rs. 1,000 per month; Medical allowance Rs. 100 per month; HRA Rs. 3,000 per month (he is paying a rent of Rs. 4,500 per month); contribution to RPF 12% of basic salary. A. 1,56,000 Other benefits: 1. free lunch during working hours - Rs. 30 per meal totaled 245 meals 2. Free transportation from office to his residence costed employer Rs. 300 per month per employee 3. He took an interest free loan of Rs. 15, 000 for the employer on 1-7-2008 and nothing has been repaid. What is the salary for the purpose of HRA?

Basic + DA [12000 + 1000] x 12 = 1,56,000 SECTION C- 4 MARKS

Subodh retired on 31st December after serving for 32 years and 10 months. He received Rs. 1,50,000 as gratuity. He also commuted one half of the pension and received Rs. 60,000. His average salary A. Rs.46,000 & Rs.40,000 for the last 10 months was Rs. 6,500 where as the last drawn salary was Rs. 6,700. Compute his taxable gratuity and taxable pension. [Assumption: he is a non-government employee covered under Grautuity Act 1972]

Actual gratuity recd 1,50,000 Least of the following should be deducted. 1/2 month Average salary 1,04,000 x (completed years32years) Maximum limit 3,50,000 Actual gratuity received 1,50,000 Least of the three is 1,04,000 Gratuity taxable (1,50,000- 1,04,000) = 46,000 Pension received 60,000 1/3rd is exempt (20,000) Pension taxable 40,000

Ms. Sindhu furnishes the following details for the P Y 2008-09: Basic salary Rs. 12,000 per month DA Rs. 4000 per month Commission Rs. 1,000 per month Telephone Allowance Rs. 200 per month Tiffin Allowance Rs. 500 per month Conveyance allowance Rs. 800 per month Ad hoc allowance Rs. 300 per month HRA Rs. 3,500 per month (she is residing in her relatives house for that she is not paying any rent) Compute her taxable salary for the AY 2009-10

Basic 1,44,000 DA 48,000 Commission 12,000 Telephone 2,400 Tiffin allowance 6,000 conveyance NIL Adhoc allowance 3,600 HRA recd 42,000 Less exemption (least of the three ) HRA recd 42,000 Excess of rent paid NIL over 10% of salary 40% of salary 81,600 Exemption is NIL HRA taxable 42000 Taxable salary 2,58,000

From the following details ascertain the taxable value of perquisites given to Mr. Vatsa by a company: 1. Lunch provided during working hours Rs. 45 per meal for 210 days. 2. Car provided only for official purposes (total amount paid by the employer to the agency Rs. 45,000) 3. Amount spent by the employer for the treatment of Mr. Vatsa Rs. 65,000 (treatment has been done in a private hospital) 4. salary of personal attendant recruited by Mr. Vatsa paid by the employer Rs. 24,000 5. Gas, electric energy and water bills reimbursed by the employer Rs. 3000 each 6. Fee conveyance from office to house for all employees (employer is spending Rs. 2,400 per employee for an outside agency) Note: Mr. Vatsas total monitory receipts from the employer for the previous year are Rs. 4, 50,000.

Amount spent by the employer (65,000-15,000) 50,000 Gas, electric energyand water bill(3000 x3) 9,000 Salary of personal attendant 24,000 Total 83,000

Mr. Gundu Rao is an employee in a company and furnishes the following details for the PY 2008-9: Basic salary Rs. 10,000 per month, DA part of basic pay Rs. 5,000 per month, during the PY he encashed his two months leave credit and received Rs. 19,400 as earned leave salary. He is also getting Rs. 1,000 as traveling allowance and Entertainment Allowance of Rs. 250 per month. The company provided him a rent free accommodation at Bangalore and furniture and fixtures worth Rs. 45,000. Apart from this he is also getting water and electric connection for that the company is paying Rs. 4,500 and Rs. 5000 respectively to the supplying agency. He and employer contributing 11% of salary to a RPF A/c. during the PY he paid Rs.200 per month as professional taxes and paid insurance premium of Rs. 3,000 on his life.

Gross salary [1,20,000 + 60,000+19,400 +30720+2400+3000+4500+5000+4500 = 249520] taxable salary [ 249520 -2400=247120] Sec 80C deductions [ 13,200 +3000] = 16,200

tax liability Upto 1,50,000 - NIL 1,50,000- 2,30920 @ 10% 8092 Add education cess @3% 243 Total 8335 Last modified: Monday, 4 January 2010, 05:32 PM
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Dashboard / MF0003-201002 / articles / Unit 4 - Working notes Determination of GAV Case I (when there is no unrealised rent and no vacancy period)

FRV xxx MV xxx Whichever is higher xxx Compare standard rent xxx Whichever is lower (Notional Rent) xxx Actual Rent xxx Whichever is higher (GAV) xxx

Case II when there is an unrealised rent

FRV xxx MV xxx Whichever is higher xxx Compare standard rent xxx Whichever is lower (Notional Rent) xxx Actual Rent unrealised rent xxx Whichever is higher (GAV) xxx

Case II when there is an unrealised rent and vacancy period)

FRV xxx MV xxx Whichever is higher xxx Compare standard rent xxx Whichever is lower (Notional Rent) xxx Actual Rent unrealised rent xxx Whichever is higher xxx Less : Vacancy period xxx GAV xxx

Section B 2 Interest allowable as deduction for the previous year 2008-09 1-4-2008 to 31-309 [3,00,000 @12% = 36000]

refer case 1 and solve. NAV of 1st house - Rs18,400 NAV of 2nd house Rs.30000

House I House II M.V 40000 50000 FRV 36000 48000 which ever higher 40000 50000 Actual rent 24000 36000 whichever higher 40000 50000 (GAV) M. Tax (500) (1000) NAV 39500 49000 Less 30% (11850) (14700) Interest (5000) (4000) Taxable income 22650 30300

45000+25000+65000+145000+(54000) = 226000

M.V or FRV which ever is higher. Compare it with Standard rent and select which ever is lower. Compare with actual rent(-unrealised rent) select whichever is higher (GAV). 49500, 42000 and NIL. Less Municipal tax to get NAV 48500, 7,8,9.10.11,12 40750 and NIL. Subtract standard ded 30% 14550 and 12225 and interest on borrowed capital - 12000, 10,000 and 35000 respectively. Taxable income is 21950,18525 and (35000)

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Dashboard / MF0003-201002 / articles / Unit 5 - Working notes PROFIT AND GAINS FROM BUSINES OR PROFESSION SECTION B-2 MARKS 6 7 8 9 DEPRECIATION FOR LORRIES - 30% Dep for computers - 60% Dep for patents - 25% Lorries -165000 computers - 135000 Patents - 50000 factory, godown building - 1,50000 furniture - 25000 Total - 525000

10

Rate of depreciation - 7.5% (used the machine for 1 month)

11

Net income 75,000 Less interest (7000) Rental income from HP (36000) Total 32000 Add Inadmissible expenses Reserve for sales Tax 5000 IT Paid 6000 Property tax paid 1500 Bank collection charges 100 Excess dep (1/2 year ) 11250 Total 55850

13

Sharada's taxable income 1,00,000 Interest on capital employed 12,000 Total 1,12,000 Less 30% std ded 24,000 Total 88,000

15

Swetha taxable income Net Profit 1,20,000 Sales tax provision 25,000 Donation 45,000 Technical knowhow purchased 1,50,000 Total 3,40,000 Less dep 25% (37,500) Total 3,02,500

SECTION C- 4 MARKS

Net profit 3,00,000 Less dividend income (34,000) Interest on FD (26,000) Total 2,40,000 Less Dep 125% (Bal 25%) ( 12,500) Less under dep (20,000 ) Total 2,07,500

Dr.Shantaram's business income: Receipts : 1,54,000 + 25,000 + 1,45,000 = 3,24,000 Payments: 36,000 + 45,000 + 10000 (50%) +15,000 + 10,000 +12000 (to be reimbrused) +10,000 +5000+ 25000(50% dep)= 1,68,000 Total 1,56,000

Vatsa's taxable income Business income 8,20,000 Add salaries 15,000 RBD 10,000 Loss on sale of P & M 15,000 General expenses 1,75,000 Total 10,35,000

Vatsa's tax liability Upto 1.5 lakh NIL 1.5 - 3 lakh @10 % 15,000 3 lakh - 5lakh @ 20% 40,000 5 lakh -10.35 @ 30% 1,60,500 Total 2,15,500 Add 10% surcharge 21,550 Total 237050 Add edu cess 3% 7112 Total 244162

Sindhu's taxable business income Business income 4,05,000 Less LTCG (45,000) Less Interest on govt sec (1,05,000) Less Rent ofgodown (omitted) (60,000) Total 1,95,000 Add exp not admissible Rent paid (op cost) 1,44,000 Dep (bought & sold same year) 40,000 Total 3,79,000

Last modified: Thursday, 7 January 2010, 03:44 PM

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