REVISION

PREVIOUS EXAMINATION QUESTIONS

Question No.1
Mr. Ashok owns a property consisting of two blocks of identical size. The first block is
used for business purposes. The other block has been let out from 01.04.2007 to his
cousin for Rs.10, 000 p.m. the cost of construction of each block is Rs.5 lacs (fully met
from bank loan); rate of interest on bank loan is 10% p.a. The construction was
completed on 31.03.2006. During the year ended 31.03.2008., he had to pay a penal
interest of Rs.2,000 in respect of each block on account of delayed payments to the bank
for the borrowings. The normal interest paid by him in respect of each block was Rs.42,
000. Principal repayment for each block was Rs.23, 000. An identical block in the same
neighborhood fetches a rent of Rs.15, 000 per month. Municipal tax paid in respect of
each block was Rs.12, 000.
The income from business prior to adjustment towards depreciation on any asset is Rs.2,
20,000. He follows mercantile system of accounting.
Depreciation on Equipments used for business is Rs.30, 000.
On 23.03.2007, he sold shares of B Ltd., a listed share in BSE for Rs.2, 30,000. The share
had been purchased 10 months back for Rs.1, 80,000. Security transaction tax paid may
be taken as Rs.220.
Brought forward business loss of a business discontinued on 12.01.2006 is Rs. 80, 000.
This loss has been determined in pursuance of a return of income filed in time and the
current year is the seventh year.
The following payments were effected by him during the year:

(i). LIP of Rs.20, 000 on his life and Rs.12, 000 for his son aged 22, engaged as a
software engineer and drawing salary of Rs.25, 000 p.m.
(ii). Mediclaim premium of Rs.6, 000 for himself and Rs.5, 000 for above son. The
premiums were paid by Cheque.
You are required to compute the total income for the assessment year 2008-09 and the tax
payable. The various heads of income should be properly shown. Ignore the interest on
bank loan for the period prior to 1.4.2005, as the bank had waived the same.
Question No.2
Following is the Profit & Loss Account of Mr. A, a dealer in shares and securities for the
year ended 31st March 2008:

Particulars Rs. Particulars Rs.

 To Trading Expenses 62,60,000 By Sales 72,54,000

To Administrative By Interest on FD with

Expenses 1,05,000 Bank 16,500

To Financial Expenses By Dividend from Indian

48,265 Co., 64,360
To Demat & Delivery
Charges By Interest on I.T. Refund
4,350 (A.Y.2005-06) 230
To Securities transaction
tax
5,500
To Net Profit before
depreciation
9,11,975

Total 73,35,090 Total 73,35,090

Compute the rebate available under Section 88 E.

Question No.3
Compute the total income of Mr. And Mrs. A from the following
information:

(a) Salary Income (Computed) of Mrs. A Rs.2, 30,000

(b) Income from profession of Mr. A Rs.3, 90,000

( c) Income of minor son B from company deposit Rs.15, 000

(d) Income of minor daughter C from special talent Rs.32, 000

(e ) Interest from bank received by C on deposit made

out of her special talent Rs.3, 000

(e) Gift received by C on 30.09.2006 from friend of

Mrs. A Rs.2, 500
Brief working is sufficient. Detailed computation under various heads of income is NOT
required.
4. From the following particulars furnished by Mr.X for the year-ended 31.03.2008,
you are requested to compute his income and tax payable for the year.
(a). Mr.X retired on 31.12.2007 at the age of 58, after putting in 25 years and 9
months of service, from a Private company at Mumbai.
(b). He was paid a salary of Rs.25, 000 p.m. and house rent allowance of Rs.6, 000
p.m. He paid rent of Rs.6, 500 p.m. during his tenure of service.
( c). On retirement, he was paid a gratuity of Rs.3,50,000. He was not covered by the
payment of Gratuity Act. His average salary in this regard may be taken as Rs.24, 500.
Mr.X has not received any other gratuity at any point of time earlier, other than this
gratuity.
(d). He had accumulated leave of 15 days per annum during the period of his service;
this was encashed by Mr.X at the time of his retirement. A sum of Rs.3, 15,000 was
received by him in this regard. His average salary may be taken as Rs.24,500.
(e). After retirement, he ventured into textile business and incurred a loss of
Rs.80,000 for the period up to 31.3.2008.
(f). Mr.X has invested Rs.22, 500 in recognized Provident Fund, Rs. 40,000 in public
provident fund and Rs.37, 500 in National Savings Certificates.
5. (a). Smt.Savita Rani born on 01.07.1939. She is a Deputy Manager in a company in
Mumbai. She is getting a monthly salary and D.A. of Rs.45, 000 and Rs.12, 000
respectively. She also gets a House Rent allowance of Rs.6, 000 per month. She is a
member of Recognized P.F. wherein she contributes 15% of her salary and half D.A. Her
employer also contributes an equal amount.
(b). She is living in the house of her minor son in Mumbai.
(c ). During the previous year 2007-08, her minor son has earned an income of
Rs.30,000/- (COMPUTED) AS RENT FROM A house property, which had been
transferred to him by Smt.SAVITA RANI without consideration a few years back.
(d). During the previous year 2007-2008, she sold Government of India Capital
Indexed Bonds for Rs.1,50,000 on 30.09.2006, which she purchased on 01.07.2001 for
Rs.80,000
(e). Her employer have her an interest free loan of Rs.1,50,000 on 01.10.2007 to one
of her son’s wife for the purchase of an Alto Maruti Car. Nothing has been repaid to the
company towards the loan.
(f). During the previous year 2007-08, she paid Rs.15,000/- by cheque to GIC
towards Medical Insurance Premium of her dependent mother.
Compute the taxable income and tax liability of Mrs.Savita Rani
6. Dr. Krishna furnished you the following information:
Income and Expenditure Account for the year ended 31st March 2008.
Expenditure Rs. Income Rs.
 To Medicines consumed 2,42,000 By Fee Receipts 8,47,500
To Staff Salary 1,65,000 By Rent 27,000
To Hospital consumables 47,500 By Dividend from
Indian Companies 9,000
To Rent Paid 60,000
To Administrative
Expenses 1,23,000
To Net Income 2,46,000
Total 8,83,500 Total 8,83,500
(i). Rent paid includes rent for his residential accommodation of Rs.30, 000 (paid by
cheque).
(ii). Hospital equipments (eligible for depreciation @ 15%)
01.04.2007 Opening WDV Rs.5, 00,000
07.12.2007 Acquired (cost) Rs.2, 00,000
(iii). Medicines consumed include medicines (cost) Rs.10, 000 used for Dr.Krishna’s
family.
(iv). Rent received-relates to a property situated at Mysore (Gross Annual Value). The
municipal tax of Rs.2, 000 paid in December 2006 has been included in the
“Administrative Expenses”.
(v). He received Rs.5, 000 per month as salary from Full Cure Hospital. This has not
been included in the “fee receipts” credited to income and expenditure account.
(vi). He sold a vacant site in July 2007 for Rs.5, 00,000. It was inherited by him from
his father in January 2000. The site was acquired by his father in December 1991 for
Rs.1, 50,000.
Compute Dr.Krishna’s taxable income for theyear-ended 31.03.2008.

7. Ramesh retired as General Manager of XYZ Co., Ltd., on 30.11.2007 after rendering
service for 20 years and 10 months. He received Rs.3, 00,000 as gratuity from the
employer. (He is not covered by Gratuity Act, 1972)
His salary particulars are given below:
Basic pay – Rs.10, 000 per month up to 30.06.2007
Basic Pay – Rs.12, 000 per month from 01.07.2007
Dearness allowance (Eligible for retirement benefits) – 50% of basic pay
Transport allowance-Rs.1, 500 per month
He resides in his own house. Interest on monies borrowed for the self-occupied house is
Rs.24, 000 for the year-ended 31.03.2008
From a fixed deposit with a bank he earned interest income of Rs.18, 000 for the year-
ended 31.03.2008.
Compute taxable income of Ramesh for the year-ended 31.03.2008.

8. Mr.A furnishes you the following information for the year-ended 31.03.2008.
 (i). Income from plying of vehicles (computed as per books) 2,10,400
[He owned 5 heavy goods vehicle-throughout the year]

(ii). Income from retail trade of garments (computed as per books)

[Sales turnover Rs.21, 70,000]
75,000
(iii) He has brought forward depreciation allowance relating to
Assessment Year 2005-2006
1,00,000
(iv) He deposited Rs.1, 00,000 into his PPF account on 06.11.2007
Compute taxable Income of Mr.A and his tax liability for the Assessment Year with
reasons for your Computation

9.Mr.Murali provides the following information for the year ending 31.03.2008:
i. Sales (Retail Trade in Garments] (no books of account 32,00,000
maintained]
10,000 p.m.
ii) Rent from house property at Chennai
iii) Vacant site lease rent 12,000
iv) Murali purchased 20,000 shares of X Co.Ltd. Who declared
1:1 bonus on 01.01.2002.
Murali sold 1000 bonus shares in September 2007 for Rs.1,
20,000/-
v) Received Rs.50,000 on 12.02.2008 being amount due from
Mr.X relating to Electronic goods supplied by Murali’s father,
which was written off as bad debt by his father in A.Y 2004-05
and allowed as deduction. Murali’s father dies in August 2003.
vi) Brought forward business loss related to discontinued
automobile business of Murali relating to A.Y.2004-05 2,00,000
vii) Brought forward depreciation relating to discontinued
1,50,000
automobile business of Murali.
viii. Murali contributed Rs.1 5,000 to Prime `Minister’s National
Relief Fund and Rs.10,000 to Heritage Charitable Trust enjoying
exemption u/s. 80G

Compute Taxable income of Mr.Murali for the previous year ended 31.03.2008.
10.Shri. Hari is the General Manager of ABC Ltd. From the following details compute
the taxable income for the A.Y
 Basic Salary (per month) Rs.
Dearness allowance 30% of basic salary
20,000
Transport allowance (per month)
2,000
Expenditure on accommodation in hotels while touring on
official duties met by the employer
30,000
Loan from recognized provident fund (maintained by
The employer)
40,000
Computer (cost Rs.50, 000) kept by the employer in the
residence of Hari from 01.10.2007

Hari made the following payments:

Medical insurance premium: Paid in Cash Rs.2, 000

Paid by Cheque Rs.3, 200

11. Mr.Vignesh, Finance Manager of KLM Ltd., Mumbai, furnishes the following
particulars for the financial year 2007-08:
i. Salary Rs.46, 000 per month;
ii. Value of medical facility in a hospital maintained by the company
Rs.7, 000.
iii. Rent free accommodation owned by the company.
iv. Housing loan of Rs.6, 00,000/- repayable in 15 years at the interest rate of 5%
p.a.(No repayment made during the year)
v. A wooden table and 4 chairs were provided to Mr.Vignesh at his residence (dining
table). This was purchased on 01.05.2005 for Rs.60, 000/- and sold to Mr.Vignesh on
01.08.2007 for Rs.30, 000/-
vi. Personal purchases through credit card provided by the company amounting to Rs.10,
000/- was paid by the company. No party of the amount was recovered from
Mr.Vignesh.
vii. An ambassador car which was purchased by the company on 16.07.2003 for Rs.2,
50,000/- was sold to the assessee on 14.07.2007 for Rs.80, 000/-.
Other income received by the Assessee during the previous year 2007-08.
a. Interest on fixed deposits with a company Rs. 5,000
b. Income from specified mutual fund Rs. 3,000
c. Interest on bank deposits of a minor married daughter Rs. 3,000
d. Income from UTI received by his handicapped minor son Rs. 1,200
e. Contribution to LIC towards premium u/s.80 CCC Rs. 10, 000
f. Deposit in PPF Account made during the year Rs. 75,000
g. Bonds of ICICI (Tax Savings) eligible for Sec.80G Rs. 25, 000
Compute the taxable income of Mr.Vignesh and the tax thereon for the Assessment Year.

12. Compute the tax liability of Mr.Madhavan for the AY. from the following particulars:
Particulars Rs.
 i. Net House property Income as computed under the head
2,70,000
:Income from House Property”
ii. Income from business before adjusting the following
90,000
(a) Carried forward business loss 70,000
(b) Current Depreciation 30,000
(c) Carried forward unabsorbed depreciation 1,40,000
v. Short Term Capital Gains-Jewellery 1,60,000
vi. Long Term Capital Loss-Shares 40,000
vii. Long Term Capital Gain-Debentures 2,00,000
viii. Dividend on shares held as stock in trade
10,000
ix. Dividend from a company carrying on agricultural
operation 12,000
x. Income from growing and manufacturing coffee
1,00,000
(cured and roasted)
During the previous year, the assessee has donated Rs.35, 000/- to an approved local
authority for the promotion of family planning and subscribed deferred annuity policy for
Rs.1, 00,000/-, where annuity is paid by cash.

13. Mrs. Lakshmi aged about 66 years is a Finance Manager of M/s. Lakshmi & Co. PVT
Ltd based at Calcutta. She is in continuous service from 1963 and receives the following
salary and perks from the company during the year.
i. Basic Salary (50,000 x 12) = Rs. 6,00, 000
ii. D.A. (20,000 x 12) = Rs.2, 40, 000
iii. Bonus – 2 months Basic pay
iv. Commission- 0.1% of the Turnover of the Company. The turnover for
the Financial Year was Rs.15.00 crores
v. Contribution of the Employer and employee to the RPF Account Rs.3,
00,000 each
vi. Interest credited to P.F. Account at 9.5%- Rs. 60,000
vii. Rent Free unfurnished accommodation provided by the company for
which the company pays a rent of Rs.70, 000 per annum
viii. Entertainment Allowance- Rs. 30,000
ix. Childrens education allowance to meet the hostel expenditure of three
children –Rs. 5,000 each
She makes the following payments and investments
i. Premium paid to insure the life of her major son – Rs. 15,000
ii. Medical Insurance premium for self- Rs. 5,000: spouse- Rs.5, 000
iii. Donation to a Public Charitable Institution registered u/s. 80 G- Rs.
2,00,000
iv. LIC Pension fund – Rs. 12,000
Determine the tax liability for the A.Y
14. Mr. A, a senior citizen, has furnished the following particulars relating to his House
Properties.
 Name of Occupation House I House II
Self occupied Let out
Rs. Rs.
Municipal Valuation 60,000 1,20,000
Fair Rent 90,000 1,50,000
Standard Rent 75,000 90,000
Actual Rent per Month -- 9,000
Municipal Taxes Paid 6,000 12,000
Interest on Capital Borrowed 70,000 90,000

Loan for both houses were taken on 1.04.1999. House II was remained vacant for 4
months

Besides the above two houses, A has inherited during the year an old house from his
grandfather. Due to Business Commitments, he sold the house immediately for a sum of
Rs.250 lakhs. The house was purchased in 1962 by his grandfather for a sum of Rs.2.00
lakhs. However the fair market value as on 1.04.1981 was Rs.20.00 lakhs. With the sale
proceeds, A purchased a new house in March, 2008 for a sum of Rs. 100 lakhs and the
balance was used in his business.
The other Income Particulars of Mr.A besides the above are as follows

Business Loss 2,00,000

Income from other sources (Bank Interest) 1,00,000

Investments made during the year PPF 70,000

ICICI infrastructure Bond 30,000

Compute total income of Mr. A and his tax liability for the A.Y.

15. For the A.Y., the Gross Total Income of Mr. Chaturvedi was Rs.1,68,240 which
includes Long Term Capital gain of Rs. 45,000 and Short Term Capital gain of Rs. 8,000.
The Gross Total Income also includes interest income from Banks of Rs.12,000. Mr.
Chaturvedi has invested in PPF Rs. 60, 000 and also paid a medical insurance premium
Rs.11, 000. Mr.Chaturvedi also contributed Rs.15,000 to public Charitable Trust eligible
for deduction u/s. 80 G. Compute the Income and tax thereon of Mr.Chaturvedi, who is
70 years old ..

16. Compute the taxable income of Mr.Ramesh for the A.Y

 Net Income from Tyre Business 30,000
Interest on Post office Savings Bank Account 900
Share of profit from a Partnership Concern 22,000
Short Term capital gain on land 24,000
Long Term Capital gain on sale of House Property 1,20,000
Share of Income from HUF in which he is a Member 8,200
Winning from Camel Race 10,000
Interest on Bank Deposits:
-Deposits in his own name 4,000
-in the name of minor son 1,300
Expenditure incurred for the Medical treatment of his
Handicapped 67 years old brother, a person with disability
(Dependent of Mr.Ramesh] 42,000
Repayment of Loan taken for part-time studies for
Graduate Course in Management 10,000
Donation to Prime Ministers National Relief Fund 20,000

17. Smt. Uma, a resident attained the age of 65 years on 23.12.2005. She had following
income for the previous year.
Rs.
i. Short Term Capital on sale of shares 26,000
ii. Long –Term Capital gain on sale of land 1,76,000

You are required to compute the tax liability of Smt. Uma for the A.Y.
18. Mr.Manohar submits the following information for the year, from his proprietory
business:

Net profit (As per Profit and Loss Account) 1,12,500

The following expenditure was part of debits to the
Trading and Profit and Loss Account:
i. He used goods for his personal use.
The value was credited to sales was Rs.25, 000.
The cost of which was Rs.20, 000
ii. Rent of Residence Rs.3, 000 per month 36,000
iii. Payments in cash for purchases exceeding Rs.20, 000 4,00,000
iv. Sales tax in dispute provided 20,000
v. Interest on Term Loan from State Bank of India,
Paid in the month of May, 2007 70,000
The following amounts were credited to
Profit and Loss Account:
i. Agricultural Income 50,000
ii. Income from Unit Trust of India
(Monthly income plan) 30,000
iii. Winnings from Lottery Gross
(Tax deducted at source Rs.30, 000) 1,00,000
Compute the taxable income, assuming Mr.Manohar has no residential house. Give
reasons for the claim under each head of income.

19. Raghav furnished the following particulars and requests you to compute his taxable
income for the previous year:
i. Joined service on 01.10.2007, on a consolidated salary of Rs.15, 000 per month.
ii. He was paid Rs.30, 000 in September 2007, so that he should not join elsewhere.
He makes following contributions
(a). Life insurance premium Rs.20, 000
(b). National Savings Certificate Rs.10, 000

20. From the following particulars furnished by Kiran for the previous year , compute
the taxable income for Assessment Year

i. He owns a house property in Metro City. The fair rental value per annum is
Rs.27, 000 and the Municipal value is Rs.24, 000.
ii. The house was let out from 01.04.2007 to 31.08.2008 at a monthly rent of
Rs.2, 100. From 01.09.2007 Kiran occupies for his residence (self)
iii. Expenditure incurred on property and paid:
(a). Municipal Tax Rs.4, 000
(b). Fire Insurance Rs.2, 500
(c ). Land Revenue Rs.4,600
(d). Repairs Rs.1, 000
iv). Interest paid on borrowings for construction:
(a). For the year Rs.21, 600
(b). Proportionate pre-construction interest Rs.12, 960
v). Income from Firm (Partnership Firm Account) as partners:

(a). Salary 25,000

(b). Interest on Capital 20,000
(c). Share Income 35,000

21. Mr.Pramod, a writer and a professional furnishes the following particulars for the
previous year:

(a). Royalty on Books 42,000

(b). Expenditure relating to royalty income 8,000
(c ). Income from profession 1,30,000
(d). Deposited in Public Provident Fund 80,000

You are required to compute- (i) taxable income (ii) Tax payable, for Assessment
Year

22. The particulars of income of Mrs.K, aged 55 years, for the financial year are given
below:
 1. Gross salary received from
M/s.ABC Ltd., for the year 4,00,000
2. Rental income received from a commercial
complex per men sum 12,000
3. Arrears of rent received from the complex,
which were not charged to tax in any earlier years. 30,000
4. Interest paid on loan taken for the purchase of a
House from a Scheduled Bank for use as own
Residence 1,20,000
5. Repayment of installments of loan taken
from the bank for purchase of the above property 60,000
6. Deposits in Public provided Fund Account
i. Out of earlier loan taken from PPF Account 20,000
ii. Out of Current year’s income 40,000
Investment made in units of a Mutual Fund
approved by the Board u/s.80C of the I.T.Act. 40,000

Compute the Total Income Tax of Mrs.K and the tax payable thereon in respect of
Assessment Year .

23.From the following particulars, you are required to work out the tax payable by
Mrs.Pinto, aged 70 years; in respect of Assessment Year .

i. Family Pension Gross 75,000

ii. Income from House Property (Net) 24,000
iii. Income from Other sources:
a). Interest on Bank Deposits 15,000
b). Income from Horse Racing 20,000
iv. Capital Gains on transfer of Land-Long-Term 15,000
v. Agricultural Income 25,000
-----------
Total Rs.1,74,000
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24.Following details are furnished by Sundaram, an Indian citizen for the year ending
March 31,2008.
Salary (Net of tax and Sundaram’s contribution
to Provident fund) 48,000
Sundaram’s contribution to Provident Fund 4,950
Employer’s contribution to Provident Fund 14,000
Interest credited to Provident Fund @ 3.75% p.a.) 3,600
Leave Travel Allowance received 4,500
House Rent Allowance
(Rent paid on house in Hyderabd, Rs.4,500) 2,500
Dividend collection charge 200
Tax deduction at source on salary 1,500
Contribution to Public Provident Fund 4,000
 Contribution to National Laboratory approved u/s.35 5,000
Amount received on maturity of a Keyman Insurance
Policy 6,000

Sundaram acquired 2,000 shares of Rs.5 lakhs during 1988-1989. Company allotted him
equal value of bonus shares during 1996-1997. Second bonus issue made during March
2005, when he received 1 bonus share for every 2 shares held by him. The entire shares
held in the company have been sold by him during November 2007 @ Rs.1, 100 per
share.

Determine the total income of Sundaram for the Assessment Year.

25. Pritam occupied two flats for his residential purposes, particulars of which are as
follows:

Particulars Flat 1 Flat 2

Rs. Rs.

Municipal Valuation 90,000 45,000

Fair Rent 1,20,000 40,000
Fair rent under Rent control Act 80,000 Not Available
Municipal Taxes paid 10% 10%
Fire Insurance 1,000 600
Interest payable on Capital borrowed for
purchase of flat 40,000 NIL

Income of Pritam from his proprietory business-Pritam Warehousing Corporation is

Rs.6,50,000. Determine the taxable income and tax liability for the Assessment Year, on
the assumption that he contributes Rs.80,000 towards the Public Provident Fund. You are
informed that he Pritam could not occupy Flat 2 for two months commencing from
December 1, 2007 and that he has attained the age of 65 on on 23rd August 2007.

26. Mr.Rahul Jadav furnishes the following particulars relating to his house properties and other
incomes and expenditure for the Assessment Year.
i. First House: This is taken by him on lease for 10 years which is let to a tenant, for his residence,
at a monthly rent of Rs.2, 400.
He has incurred the following expenses during this year:
Lease rent Rs.1, 000 per month.
Salary of Durban Rs.200 per month.
Interest on loan taken to pay for the acquisition of the lease Rs.200 per month.
ii) Second House: This house was constructed by him in 1992, but was transferred to his wife in
1996 out of love and affection. He, however, continues to stay in this house with his wife till
date. He has taken a loan for the construction of this house for which interest of Rs.6,000
becomes due for the year, but had not been paid by him. He has paid repair expenses of Rs.1,000
during the year.

iii. Taxable income from business for this year amounts to Rs.64, 000.
Compute gross total income of Mr.Rahul Jadav for the Assessment Year.

27. From the following information, compute taxable income for the Assessment year:

Income from business-letting cycles on hire 40,000

Lease rent received from lands given to tenants for
Agricultural operations 48,000
Sale of agricultural produce [landlord’s share] 30,000
Sale proceeds of agricultural lands situated in a village 1,20,000
Fixed deposit interest received from companies on
deposits made of sale proceeds of land 18,000
Dividends from an Indian company having rubber plantations 6,000
Salary received as a partner from a firm growing and
Manufacturing tea 36,000
Payment of Government tax on agricultural lands 6,000
Expenses on power, irrigation cess and farm labour 10,000
Purchase of seeds 1,000
Tractor hire charges (for agricultural operations) 2,500
Your answer must indicate reasons for the treatment given to the items mentioned above.

28.R retired from Government service in Mar’ 2007and got a sum of Rs. 20 lakhs on
account of retirement benefits. Out of the aforesaid sum R purchased on 26th April, 2006,
two heavy goods vehicles for Rs.8 lakhs, four medium goods vehicles for Rs.4 lakhs and
two light commercial vehicles for Rs.2 lakhs for the purpose of carrying on business of
plying, hiring and leasing goods carriages. However, R could actually start business of
plying the aforesaid vehicles on 4th July, 2007 only, though R had got the delivery of the
aforesaid vehicles on the date of purchase itself. R had been keeing a full record of all
receipts and expenditure incurred in a diary in respect of the aforesaid business. However,
he did not maintain the regular books of accounts and also the vouchers in respect of the
aforesaid business. As per R’s diary his gross receipts during the financial year ending
31st March, 2008 are Rs. 1,77,600 and the sum total of the entire business expenditure
(other than Depreciation) is Rs.52,100.

R had inherited a house from his father in the year 1995 with the condition that R shall pay a sum
of Rs.1,000 per month to his ailing grandfather throughout his life, irrespective of the fact
whether the said house was fetching any rent or not. During financial year 2007-08 R was able to
let out this house only for eight months at a monthly rent of Rs.5,000 R has also furnished the
following information in relation to this house:

Municipal taxes paid by the tenant during the F.Y

based on municipal valuation of Rs.53,000 5,300
Insurance premium to insure the house, paid by the tenant 1300
During F Y
Interest paid on loan taken for renovation of the house
During F Y 12,000
Actual repair & renovation expenses incurred
During F Y 8,000
Actual collection expenses while recovering the rent
During F Y 400
Water taxes levied and paid to Municipal Corporation
working under the State Government during F Y 400
After inheriting the aforesaid house in the year 1995, R decided to sell his personal
house, which was being let out earlier. R finally sold his personal house on 4th April 1997,
During thisA.Y, R was able to recover the unrealized rent of Rs.22, 000 but R had to pay
a sum of Rs.11, 000 on account of Litigation expenses with the old tenant (including
Advocate’s fee) During F.Y, R received Rs.60,000 on account of pension from
Government. R contributed the entire sum of Rs.60,000 in his P P F Account during F.Y.
R’s P.P.F Account was also credited with Rs.44,000 on account of interest during F.Y

During F.Y, R also suffered long-term capital loss on account of sale of shares on various
dates, amounting to Rs.44,000.

R requires you to compute his total income for A.Y.. R also requires you to give reasons
in respect of each and every item given above and further state the relief’s to what R is
entitles to.

29. In respect of A.Y., an author of textbooks furnishes the following particulars and
requests you to work out his tax liability:

1. Royalty from printers Ltd. On publications of books 1,20,000

2. Long term capital Gain 60,000
3. Other Sources:-
(a) Interest on bank Deposits 12,000
(b) Dividend Income 3,000
(c) Income from Units of UTI 5,000

Gross Total Income 2,00,000

=======

Deductions:
(i) Contribution towards:
(a) LIC Pension Scheme 15,000
(b) LIC Premium 10,000
(ii) Contribution to public provident fund 10,000
(iii) Tuition fee paid for part-time course for daughter 50,000
(iv) Expenditure on medical treatment of
handicapped dependent 20,000
30. Mr. Aravind owns a building consisting of three identical units, the construction of
which was completed on 1st April 2002. The building was occupied from 1st April 2002
onwards. The particulars pertaining to the three units for the year ended 31st March 2008
are given below.

Particulars Unit I Unit II Unit III

Fair rent 60,000 60,000 60,000
Rent received -- 72,000 --
Municipal taxes –paid 3,000 5,000 3,000
-Due but not yet paid 3,000 5,000 3,000
Land revenue due but outstanding 1,200 1,200 1,200
Ground rent due, not yet paid 2,400 2,400 2,400
Nature of occupation Self occupied Let out for Used for
own
For residence residence Business
On 01.04.2000 Mr.Aravind had borrowed a sum of Rs. 5,00,000-bearing interest at 12%
p.a. for construction. Cost of this building was Rs.12,00,000
The business income of Mr. Aravind for the year ended 31st March 2008 is Rs.2,10,000
(before taking into account any item connected with the above property). The accounts of
the business are regularly maintained on mercantile basis. Compute the gross total
income of Mr. Aravind for the A.Y.
 CAPITAL GAINS - 6

Capital asset excludes following items;

i) stock in trade
ii) personal effects of movable nature(excluding jewellery , precious
items,archeological collections,drawings,paintings, any art work)
iii) agricultural land located outside specified area.
iv) Gold bonds
v) Special bearer bonds
Any profit or loss arising out of transfer of a capital asset is taxable under the head
CAPITAL GAINS
The term transfer means; Sec 2(47)
i) sale ,exchange
ii) Extinguishments, relinquishment of rights to any such capital asset.
iii) Compulsory acquisition of any asset under any law.
iv) Conversion of any asset into stock in trade
v) Maturity or redemption of zero coupon bonds.
vi) Possession of property under part performance of contract u/s 53A of
transfer of property act
vii) Transaction which has the effect of enabling enjoyment of any
immovable property.
Capital asset held by an assessee for not more than 36 months before the date of transfer
is called SHORT TERM CAPITAL ASSET. If it is held for more than 36 months before
the date of transfer it is LONG TERM CAPITAL ASSET.
For following assets 12 months instead of 36 months.
i) equity /pref shares of a company.
ii) Listed securities
iii) Uti /units of mutual fund u/s 10(23D)
iv) Zero coupon bonds
Redemption of preference shares is relinquishment of right. Hence it amount to transfer.
Compensation received from insurers on account of destruction of capital asset is
chargeable as income.
Tax treatment in case of conversion of capital asset into stock in trade
When capital asset is transferred into stock in trade it amounts to transfer. transfer is
deemed to have made in the year in which conversion is made. But tax liability arise
only in the year in which sale of stock is effected. Calculation of income is as under.
Capital gain =fair market value on the date of conversion – cost/ indexed cost
Business income=actual sale value of stock- fair market value on the date of conversion.
In the case of long term capital assets the benefit of indexation can be claimed. No
such benefit for short term capital asset.
Insurance compensation received upon damage of asset attracts Capital Gains. Taxability Sec
45(1A)
Damage may be as result of :
a) Natural calamities
b) Enemy action
c) Riot/ civil disturbances
d) Accidental fire or explosion
If any machinery is damaged and the same is repaired, the repair charges can be claimed u/s 31. If
subsequently any insurance compensation received to the extent deduction claimed shall be taxable u/s
41(1). Excess amount is only a receipt in capital nature which is not liable to tax.
Sale of demat shares .
i) taxable in the hands of beneficial owner.
ii) Cost of acquisition and period of holding determined under FIFO basis
iii) Shares which are demat first is deemed to have been sold first.
If any partner introduces capital in the form of capital asset into a partner ship firm it amounts to
transfer and capital gains arises for the partner.
Capital gains = amount recorded as value in firms books – cost / indexed cost of acquisition.
Upon dissolution if any partner takes over any capital asset of the firm,then capital gain arises for the
firm. Gain is calculated as under;
Fair market value- cost / indexed cost
If a firm transfers any capital asset to a retiring partner it is relinquishment of right hence taxable for
firm.
Compulsory acquisition is also transfer. Transfer is considered to have taken place in the year of
compulsory acquisition.
In the case of enhanced compensation the cost of acquisition is NIL
If initial compensation is of long term nature then enhanced compensation also will have the same
character. Else vice versa.
If any interest is received on compensation / enhanced compensation it is chargeable under INCOME
FROM OTHER SOURCES.
Compensation received in the hands of legal heirs is taxable in their hands.
In the case of repurchase of units referred u/s 80CCB capital gains arises .
Capital gains =repurchase price – amount invested.( no index benefit)
Capital gains upon distribution of assets on liquidation of accompany
If the assets are sold by the liquidator and cash realized then capital gains will be taxable in the hands
of the company.
If capital assets are distributed in specie among the share holders it is not transfer. Hence no capital
gains for the company.(sec 46(1) ). But in the hands of the share holders the treatment is as under;
Amt recd= fmv of assets + amt recd in cash
Distribution to the extent of accumulated profit is treated as deemed divident u/s2(22)(c )
Consideration for calculating capital gain = amt recd – deemed divident
Capital gain = above consideration – cost / indexed cost of shares.
In the case of depreciable asset there will be only short term capital gains.
Detemination of capital gains on transfer of shares / debentures of Indian company held by non
residents.
i) sale value in Indian rupee should be converted into foreign currency at avg rate on the
date of sale
ii) less expense on transfer in Indian rupee converted at above rates from ( I )
iii) result is net consideration
iv) purchase price should be converted into foreign currency at avg rate prevailing on the
date of purchase .
v) item 3 – 4 in foreign currency result is capital gain in foreign currency
vi) finally item 5 should be re converted into Indian rupee at buying rates on the date of
transfer.
Avg rate = selling rate on a day + buying rate on that day/ 2
Rates shall be based on TT rates of STATE BANK OF INDIA.
Income from deep discount bonds
Income is based on market value. Market value to be determined as on 31st march of
every year. Market value means value as determined by RBI or PRIMARY DEALERS
ASSOCIATION OF INDIA. Income from deep discount bond will be interest for
investors and business income for traders. Such income is calculated as under;
A ) Market value as on closing date - market value as on previous closing date.
If the DDB is purchased in between a year then treatment is as under;
INCOME = MARKET VALUE AS ON CLOSING DATE – PURCHASE PRICE . but
from the next year onwards formula (A) is to be adopted.
If the bond is transferred before maturity there will be capital gains in the case of
investors and business income in the case of traders. Capital gains always will be short
term capital gains. Capital gains will be calculated as under;
Sale value – market value as on previous valuation date.
If the DDB is redeemed upon maturity difference between redemption value and market
value as on previous valuation date is reckoned as interest/ business income in the case of
investors / traders.
ZERO COUPON BONDS
Means bond issued by infra structure company or infrastructure capital fund or a public
sector company where no benefit is received before maturity. Zero coupon bond should
be notified by the govt. issue date shall be on or after01-06-2005.
Determination of cost of acquisition
A ) In the case of inherited property cost of acquisition will be the cost incurred by the
previous owner.
B ) In the case of property acquired before 01- 04 – 1981 cost of acquisition will be cost
of acquisition or fair market value as on 01- 04 – 1981 which ever is more .
C ) If in the case ( b ) above FMV is adopted cost of improvement incurred prior to 01 –
04 – 1981 is to be ignored.
In the case of long term capital asset benefit of indexation can be claimed. No such
benefit for short term capital asset.
Calculation of capital gains
Gross consideration received **********
Less: expenses on transfer **********
----------------
net consideration **********
less cost of acquisition **********
cost of improvement **********
------------------
short term capital gains **********
============
note : if long term capital asset instead of cost of acquisition indexed cost of
acquisition is to be deducted. Same provision relate to improvement cost also.
Indexation is done as under;
index in the year of sale
Cost of acquisition X
index in the year of purchase
special provision in the case of slump sale
slump sale means industrial undertaking as a whole is sold without assigning individual
value for each asset. If the undertaking is existing for more than 36 months then result is
long term capital gain else short term capital gain. Individual purchase date of each asset
is not relevant. But no benefit of indexation will be available in the case of long term
capital asset.
Capital gain = sale value – net worth.
Net worth = assets – liabilities.
Valuation of the assets;
1) if depreciable asset then depreciated value as per IT ACT
2) other assets at book value or original value ie ; there should be no effect of
revaluation.
Other relevant points (general )

If any advance is received against the sale of property and later on the advance is
forfeited then the advance is to be reduced from cost of acquisition and the balance will
be the revised cost of acquisition. Indexation if applicable should be on this revised cost.
Sec51
If actual consideration is less than the value fixed for stamp duty purpose then the value
fixed for stamp duty purpose shall be deemed to be the gross consideration. If the
assessee claims before the valuation officer that value adopted for stamp duty purpose is
higher but does not appeal before any authority or court then AO shall refer the matter to
the valuation officer.
Reference to valuation officer sec55A arises when AO is of the opinion that
i) FMV of the asset exceeds the value as claimed by the assessee by more than
15% or by more than Rs 25,000.
ii) Or by any other reason the AO is of the opinion that the matter has to be so
referred.
EXEMPTIONS AVAILABLE IN THE CASE OF CAPITAL GAINS

SECTION 54
1) CAN BE CLAIMED BY INDIVIDUALS & HUF
2) ASSET TRANSFERRED SHOULD BE RESIDENTIAL HOUSE
3) IT SHOULD BE A LONG TERM CAPITAL ASSET
4) MAX EXEMPTION = LTCG OR AMOUNT INVESTED IN SPECIFIED ASSET
WHICHEVER IS LOWER.
5) SPECIFIED ASSET = CONST / PURCHASE OF RESI HOUSE.
6) IF PURCHASE IT SHOULD BE MADE WITHIN 1 YEAR BEFORE OR WITHIN 2
YEARS AFTER THE DATE OF TRANSFER.
7) IF CONSTRUCTION IT SHOULD BE WITHIN 3 YEARS AFTER THE DATE OF
TRANSFER.
8) UNUTILISED AMOUNT IF ANY SHOULD BE INVESTED IN CAPITAL GAIN
ACCOUNT SCHEME WITH ANY NATIONALISED BANK BEFORE DUE DATE OF
FILING RETURN OF INCOME.
9) HOLDING PERIOD OF NEW ASSET IS 3 YEARS FROM THE DATE OF PURCHASE
OR CONSTRUCTION.
10) IFSOLD WITHIN HOLDING PERIOD RESULT IS SHORT TERM CAPITAL GAIN.
11) STCG = SALE VALUE – ADJUSTED COST
12) ADJUSTED COST = COST OF NEW ASSET – LTCG EXEMPTED EARLIER.

SECTION 54B
1) Exemption applicable only for individuals.
2) Asset transferred should be urban agricultural land
3) The land should have been used either by the assessee or by his parents for
agriculture for two years prior to the date of transfer.
4) Asset can be either short term or long term.
5) Within two years from the date of transfer new agricultural land should be
purchased.
6) Exemption is lower of capital gain or value of new asset .
7) New asset should be held for a min period of 3 years from the date of
acquisition.
8) If sale within holding period result is STCG.
9) STCG = sale value – adj cost.
10) ADJ COST = cost – CG exempted earlier.

SECTION 54D
1) Applicable for all assessees.
2) There should be compulsory acquisition of land and building forming part of
an industrial undertaking.
3) Asset can be either short term or long term.
4) Asset should have been used for the purpose of industry for two years before
the date of transfer.
5) Within 3 years from the date of transfer new asset of same nature to be
acquired.
6) Exemption is lower of capital gain or value of new asset .
7) New asset should be held for a min period of 3 years from the date of
acquisition.
8) If sale within holding period result is STCG.
9) STCG = sale value – adj cost.
10) ADJ COST = cost – CG exempted earlier. Applicable for all assessees

SECTION 54G
1) Applicable for all assessees
2) ANY CAPITAL ASSET.
3) Asset transferred should be land , building , plant used by industrial undertaking
4) Transfer should be on account of shifting from urban area to rural area.
5) Asset acquired should be of same nature. Shifting expenses also qualifies for deduction
under this head.
6) Exemption is lower of new asset + shifting expenses or capital gains.
7) Investment should be made within 1year before or within 3 years from the date of
transfer.
8) New asset should be held for a min period of 3 years from the date of acquisition.
9) If sale within holding period result is STCG.
10) STCG = sale value – adj cost
11) ADJ COST = cost – CG exempted earlier.

SECTION 54GA
1) Applicable for all assessees
2) ANY CAPITAL ASSET
3) Asset transferred should be land, building, plant used by industrial undertaking .
 4) Transfer should be on account of shifting from urban area to any area in
special economic zone. Sez may be in urban or rural area.
5) Asset acquired should be of same nature. Shifting expenses also qualifies
for deduction under this head.
6) Exemption is lower of new asset + shifting expenses or capital gains.
7) Investment should be made within 1year before or within 3 years from the
date of transfer.
8) New asset should be held for a min period of 3 years from the date of
acquisition.
9) If sale within holding period result is STCG.
10) STCG = sale value – adj cost
11) ADJ COST = cost – CG exempted earlier.
In all the above cases unutilized amount should be deposited in capital gain account
scheme with any nationalized bank and the amount should be utilized within time
limit. Investment in the account shall be made on or before due date of filling return.

SECTION 54EC
1) Applicable to all assessees
2) Asset transferred can be any long term capital asset.
3) New asset to be acquired is notified bonds issued by NHAI or RECL
4) Exemption is lower of amount invested or LTCG
5) Investment to be made within 6 months from the date of transfer
6) Holding period of the asset is 3 years.
7) If sold within holding period capital gain exempted will be taxable in the year
in which the new asset is sold.
8) Even if the asset is pledged and cash raised it amount to transfer.

SECTION 54F
1) Applicable to individuals and HUF
2) Asset transferred is a long term capital asset
3) It should not be a residential house
4) Within 1 year before or within 2 years from the date of transfer a new
residential house should be purchased or within 3 years a new residential house
should be constructed
5) As on the date of transfer assessee should not own more than 1 residential
house.
6) Assessee shall not within 1 year after the date of transfer purchase or within a
period of 3 years construct any residential house other than the new asset
7) Holding period of new asset is 3 years
8) Amount of exemption is calculated as under;
i) if cost of new asset is equal to more than net consideration then
entire capital gain is exempted.
ii) Else proportionate exemption is as under; capital gain* cost of new
asset /net consideration.
9) if new asset is transferred within holding period then capital gain exempted
earlier will be now taxed.
ANALYSIS OF EXEMPTIONS: sec10(36),10(37),10(38)….

Sec 10(36)- capital gain arising out of transfer of long term capital asset being eligible
equity share being a constuent of BSE 500 is exempted if following is satisfied;
1) share is purchased on or after 01-03-2003 and before 01-03-2004 .
2) shares are held for more than 12 months before it is sold.

Sec 10(37)- in the case of individuals and HUF capital gains arising out of sale of
agricultural land is exempted if ;
i) land was used for the purpose of agriculture by the assessee or by
his parent for the purpose of agriculture.
ii) Land is transferred by way of compulsory acquisition.
iii) Compensation / enhanced compensation is received on or after 01-
04-2004
Sec 10 (38)- long term capital gain arising out of sale of listed security is fully
exempted if transaction should take place in a recognized stock exchange and;
i) Security transaction tax is paid.
ii) Listed security should be equity share or a unit of equity oriented
fund.
iii) Transfer takes place on or after 01-10-2004
Equity oriented fund means a fund where the investable funds are invested by way of
equity shares in domestic company to the extent of more than 65% of the total proceeds
of such fund and which has been set up under the scheme of mutual fund u\s 10(23D).
the percent is calculated by taking annual average of monthly average of opening and
closing figures.
While determining capital gains no deduction shall be permitted for STT deducted
TAX ON CAPITAL GAINS

LONG TERM CAPITAL GAINS- 20% FLAT

In the case of Resident individuals and huf if the basic exemption is not exhausted by
other income then ;
LTCG – UNEXHAUSTED BASIC EXEMPTION Only will be taxed at flat rate of
20%.
SHORT TERM CAPITAL GAINS – TAXED AT NORMAL RATES
IN THE CASE OF STCG ARISING ON OR AFTER 01-10-2004 WILL BE TAXED AT
FLAT RATE OF 10% IF;
a. there is transfer of listed security being equity share in a company or
unit of equity oriented fund.
b. Transaction take place through a recognized stock exchange.
Zero coupon bonds are not entitled for exemption. But long term capital gain are
entitled for 20% rate with indexation or 10 % rate without index. However shortterm
capital gain is taxable at normal rates.
Renounciation of right in respect of rights issue results in short term capital gains.
Consideration will be the amount received for renouncing the right. Cost of
 acquisition will be nil . and for a person to whom such right is renounced cost means
cost of shares + amount paid to the person who renounced the right to him

Capital Gain Account Scheme

Deposit can be withdrawn for the purpose U/s 54,54B, 54D, 54F,54G,54GA.
In the case of compulsory acquisition the time limit for investment is reckoned only from
the date of receipt of compensation.
One house can be used for claiming exemption U/s54 & 54F

Transactions which are not transfer

1) distribution of capital asset on total or partial partition of HUF

2) transfer by way of gift or will
3) transfer of capital asset by holding co to its subsidiary or vice versa if
i) holding co or its subsidiary holds 100 % shares in subsidiary.
ii) Transferee co is an Indian co.
4) transfer of capital asset in the scheme of amalgamation , by amalgamating co to amalgamated co if
amalgamated co is an Indian co .
5) transfer in the scheme of amalgamation between two foreign co if;
i) asset transferred is shares in Indian co.
ii) 25% of shareholders of amalgamating co continues to be shareholders of amalgamated
foreign co
iii) such transaction shall not attract capital gains tax in the country in which amalgamating co
is incorporated.
6) transfer of capital asset by demerged co to an Indian co if resulting co is an Indian co.
7) transfer of capital asset being shares in Indian co in a scheme of demerger between two foreign co if
i) not less than 75% shareholders of demerged foreign co continue to be shareholders of
resulting co.
ii) such transfer shall not attract capital gain tax in the country in which the demerged co is
incorporated.
8) under the scheme of demerger the shares of demerged co is transferred to resulting co ,if only
consideration received is in the form of shares.
9) Transfer of shares in the amalgamating co by its shareholders in lieu of shares in amalgamated co
provided
i) amalgamated co is an Indian co.
ii) shares are the sole consideration received.
10) transfer of any work of art , books, paintings, murals etc if transfer is made to government, museum,
national art gallery etc
11) transfer by way of conversion of bonds , shares , debentures etc into shares, stock depository
certificates etc….
12) transfer of land of a sick industrial co
13) transfer of capital asset by a banking company to a banking institution in a scheme of amalgamation.
14) Conversion of proprietory / partnership into company is not transfer if following conditions are
satisfied;
(i) all assets and liabilities of firm now become asseta and liabilities of company.
 (ii) the proprietor/ partners shareholding in the company shall not be less than 50% in aggregate.
(iii) proprietor/ partners should not receive any other consideration other than shares in the
company
(iv) they shall enjoy 50% voting power for atleast 5 years. From the date of succession by the
company.
(v) All the partners immediately before the succession shall become shareholders of the
company and shall hold shares in the ratio of their capital.
15) Any transfer of capital asset in the scheme of business re organization of preceeder co operative bank
to successor co operative bank
16) In the scheme of re organization the share holders of preceeder co operative bank surrender their
shares and in lieu of that they receive shares of successor provided shares are the only consideration
recieved

WITHDRAWAL OF EXEMPTION IN THE CASE OF HOLDING CO

IF ANY OF THE FOLLOWING EVENT HAPPENS WITHIN 8 YEARS EXEMPTION SHALL BE
WITHDRAWN;
1) transferee Co converts capital asset into stock in trade
2) holding Co or its nominee ceases to hold 100% shares in subsidiary co.

Income from other sources - 7

List of items that can be considered under this head

i) dividends
ii) winnings from lottery , horse races, gambling , betting, crossword
puzzles, etc
iii) amount of interest on employees contribution to URPF .
iv) interest
v) income from letting machine , furniture on hire if not chargeable under
the head “ business “
vi) agri income from land outside India
 vii) casual or non recurring income
viii) family pension
ix) income from subletting house property
x) sitting fee to director
xi) income from undisclosed sources
xii) sum received under keyman insurance policy
xiii) land rent received
xiv) commission if not charged under the head “business ‘’
xv) gratuity received not as an employee
xvi) on or after 01-04-2006 any sum of money exceeding 50,000/- received
by an individual or HUF from any person without consideration then
whole of such sum will be taxable.

Following gifts are not taxable;

1) gift in kind
2) gift from a relative
3) gift on the occasion of marriage
4) gift in contemplation of death of payer
5) gift under will or inheritance
6) gift from any local authority
7) gift from fund referred u\s 10(23C)
8) GIFT FROM SEC12AA registered charitable institution

relative means
i) Spouse of individual
ii) Brother / sister of individual
iii) Brother / sister of spouse of individual
iv) Brother / sister of either of parents of individual
v) Any lineal ascendant / descendant of the individual or the spouse of
the individual
vi) spouses of persons referred to in (ii) to (v) above.
Deduction eligible while calculating INCOME FROM OTHER SOURCES.
i) all reasonable expenses can be claimed as deduction
ii) in case of family pension 1/3 of family pension or 15000 whichever is lower
can be claimed as deduction.
iii) All expenses incurred for earning income can be claimed as deduction

Treatment of winnings from lottery/incomes of relevant nature. Sec 115BB

i) taxed at flat rate of 30%

ii) not eligible for deduction under chapter vi A
iii) loss can’t be set off
iv) no basic exemption can be claimed.
What is deemed dividend
i) distribution of debentures, debenture stock, deposit certificates in any
form , distribution of bonus shares to preference shareholders to the
extent company possess accumulated profits
ii) distribution of assets among shareholders to the extent accumulated
profits of the company( in the case of compulsory acquisition of company
by govt or govt owned corporations the accumulated profits shall not
include profits of company prior to 3 consecutive years preceding the
previous year in which such acquisition took place)
iii) any payment made by company to a shareholder who is a beneficial
owner of 10 % or more shares provided;
a) such advance is not in the normal course of business
b) public is not substantially interested in the company
iv) any amount paid by a company to a firm, huf or AOP in following cases;
a) there is no substantial PUBLIC interest in the company
b) the share holder is beneficial owner of 10% or more shares in that co
and 20 % or more interest in the income of the firm
 CLUBBING OF INCOME, SET OFF OF LOSSES - 8

Cases when income is clubbed

1) Income is transferred without transfer of asset.
2) Revocable transfer of assets
3) Transfer of assets to spouse, minor children or sons wife
4) Income of minor child
5) Transfer of asset to huf
6) Any income earned by spouse from a concern in which individual has
substantial interest.

Clubbing of income earned by spouse arises when;

1) Asset is transferred to spouse for inadequate consideration.
2) Income is transferred without transfer of asset.
3) Any cash gifted by assessee invested by spouse income arising out of the
same is includible in assessee’s income.
4) Income arising from a concern in which assessee is having substantial
interest
5) Natural love and affection is not a consideration

Income not clubbed in following cases;

1) If assets are transferred before marriage.
1) If transfer of asset is in connection to live apart.
3) If at the time of accrual of income transferee is not the spouse of assessee
4) if transfer is for adequate consideration
5) if income is earned by application of own skill or talent or knowledge.

Other points for review

1) If both husband and wife is having substantial interest in a concern income will
be clubbed in the hands of that person whose total income is greater before
including the income from that concern.
2) Even if the transferee converts the asset received without paying adequate
consideration to some other asset the income from latter asset also will be
clubbed.
3) Income arising out of accretion of asset shall not be clubbed.
4) Income earned out of transferred asset alone shall be clubbed. Income earned out
of such income shall not be clubbed.

INCOME OF MINOR CHILD TO BE CLUBBED

1) income of minor child including minor married daughter shall be clubbed in the
hands of parent whose income before clubbing minors income is more. Child is
meant to include step child, adopted child also.
2) If marriage of the parents does not subsist the income of the child will be clubbed
in the hands of that parent who maintains the child.
 3) Income earned by the minor child by application of own skill , knowledge or
profession shall not be clubbed. But income out of investment of the same shall
not escape clubbing.
4) If the minor child is handicapped and eligible for deduction u/s80U income of
minor child shall not be clubbed.
5) If the minor has no parents in that case income of such child shall not be clubbed.
6) In respect of each minor child income clubbed exemption u/s10(32) can be
claimed at Rs 1500 per child or each minor child’s income which ever is lower.
7) Agriculture income of minor child shall not be clubbed. It shall be taxed in the
hands of minor child if he is having non agriculture income above exemption
limit.

Income of spouse not clubbed if

1) Asset is transferred to spouse for adequate consideration.

2) Asset is transferred in connection with an agreement to live apart.
3) Only if asset is transferred for inadequate consideration or if income is transferred
without transfer of asset the income is clubbed. But income arising out of
investment of the above income shall not be clubbed.
4) Income arising out of asset accretion shall not be clubbed.

INCOME OF HUF—CLUBBING PROVISIONS sec64(2)

1) if an individual transfers for inadequate consideration his assets to huf in which he

is a member income arising out of the same is clubbed in the hands of the transferor.
2) Subsequently if the huf is partitioned income arising to spouse only shall be clubbed
in the hands of the individual.

Substantial interest for the purpose of clubbing—means that a person is deemed to be

having substantial interest if he along with his relatives hold 20% or more
1) share of profits in a concern if it is a non corporate entity.
2) Equity shares with voting rights in the case of corporate entity

Once minor becomes major clubbing shall ceases to exist.

TREATMENT OF UNEXPLAINED INCOMES & EXPENDITURES

UNEXPLAINED CASH CREDITS SEC 68

Means;
1) Any sum is found credited in the books of accounts of assessee.
2) Assessee does not offer any explanation for such credit to the assessing officer or
the explanation offered is not satisfactory.
3) Such credit will be charged as the income of the assessee.
Unexplained investments sec69
Means;
1) Asseesee is found to have made some investments of any nature.
2) Assessee does not offer any explanation for such investments or such explanation
is not satisfactory.
3) Such investment will be deemed to be the income of the assessee.
Unexplained money, jewellery etc sec69A
Means;
1) Assessee is found to be the owner of such money, jewellery etc
2) Assessee does not offer any explanation for such investments or such explanation
is not satisfactory.
3) Such investment will be deemed to be the income of the assessee
INVESTMENTS NOT FULLY DISCLOSED sec69B
Means;
1) assessee is found to be the owner of money, bullion, investments etc
2) assessee has not fully disclosed such investments
3) such undisclosed portion will be treated as the income of the assessee.
Unexplained expenditure sec69C
Means;
1) assessee has incurred some expenditure
2) assessee does not offer any explanation regarding the sources of such expenditure.
3) Such expenditure not fully disclosed will be treated as the income of the assessee.

Amount borrowed/ repaid on hundi sec69D

When any amount is borrowed or repaid on hundi otherwise than by way of account
payee cheque or demand draft then such amount will be treated as the income of the
borrower. Amount repaid include principle as well as interest repaid.

SET OFF AND CARRY FORWARD OF LOSS

Inter source adjustment – sec70

Means ;
Loss under a head of income is adjusted against the profit under the same head. But
there are certain restriction to the same. The restriction apply to;
1) Loss from speculative business – can be set off only against profit from speculative
business. Else it has to be carried forward to next year.
2) Loss from the activity of owning and maintaining race horses. – can be set off only
against profit from owning and maintaining race horses. Else it has to be carried
forward
3) Long term capital loss – can be set off only against long term capital gains. Else it
has to be carried forward.

Inter head adjustment – sec 71

Means;
Loss under one head set off against profit under another head. But restriction apply for
the following losses;
 1) Loss from speculation business – if inter source not possible then has to be carried
forward.
2) Loss from the activity of owning and maintaining race horses. – if inter source not
possible then it has to be carried forward
3) Long term capital loss –.– if inter source not possible then it has to be carried
forward
4) Short term capital loss - inter source adjustment against long term as well as short
term capital gain possible. But loss after intersource adjustment has to be carried
forward.
5) Business loss cannot be set off against salary income.( applicable for unabsorbed
depreciation also )

Carry forward of loss

House property loss - carry forward upto 8 years.
Normal business loss – carry forward upto 8 years.
Speculation business loss – carry forward upto 4 years.
Loss from owning and maintaining race horses – carry forward upto 4 years.
Unabsorbed depreciation – carry forward for infinite period
Capital loss ( long term and short term ) carry forward upto 8 years
In the case of amalgamation loss can be carried forward for 8 years from the date of
amalgamation. Loss can be carried forward by the amalgamating company.
In the case of demerger the resulting company can carry forward the loss for the unexpired period
out of the total 8 years.
In the case of demerger if the loss s not fully attributable to the business of the resulting company
then loss benefit can be claimed by the resulting company in the ratio of assets taken over by
them out of total assets. Only that proportion of loss can be carry forward.
In the case of amalgamation carry forward of loss and set off is permissible only if following
conditions are satisfied;
Conditions to be satisfied by amalgamating company;
1) amalgamating company has been carrying on the business in which loss remains
unabsorbed for 3 or more years.
2) At least 3/4th assets of amalgamating company should be those assets which it has
been holding for atleast 2 years prior to the date of amalgamation.
Conditions for amalgamated company;
1) amalgamated company holds continuously for aperiod of five years from the date
of amalgamation at least 3/4th of assets acquired in amalgamation.
2) Business of amalgamating company should be carried on by the amalgamated
company for atleast 5 years from the date of amalgamation.
3) Amalgamated company should reach atleast 50% production of installed capacity
by the end of 4 years from the date of amalgamation abd this level is to be
continued upto the end of 5th year.
4) Certificate from the chartered accountant has to be obtained.

Carry forward of loss in the case of succession of business/ change in constitution

1) loss attributable to the retiring partner cannot be carry forward by the remaining
partners.
2) But upon death of partner if he is succeeded by legal heir firm is eligible for carry
forward of loss.
 3) If a sole proprietor dies and if the business is carried on by his legal heirs who
constitute a partnership firm then they can enjoy the benefit of carry forward of
loss.
4) There are no restriction whatsoever in connection with carry forward of
unabsorbed depreciation.
Carry forward of loss in the case of closely held company
Loss can be carry forward only if atleast 51% shareholding as on the last day of the
financial year in which loss is incurred and last day of the financial year in which loss is
to be set off are the same.
But this 51% restriction is not applicable if transfer of share is on accout of death of
shareholder or if shares are gifted by share HOLDER TO HIS /HER RELATIVE.