178698 51947 Direct Tax Super Summary for Nov 2012 Exam

7/28/2019 178698 51947 Direct Tax Super Summary for Nov 2012 Exam

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C H A P T E R1

Basic Concepts and Important Defi nitions

Diffi cult times come to make us strong and offer us an insight of our strengths. So when hard timescome, be in gratitude and say - thanks Lord for having faith in me and giving me a chance to grow.

Section Provision

Sec 2(31) Person

Sec 3 Previous Year

Sec 2(9) Assessment Year

Sec 2(7) Assessee

Sec 2(24) Income

Sec 2(45) Total Income

INDIAN TAXATION SYSTEM

Te Income-tax Act, 1961 came into orce with efect rom 1/4/1962. It hasXXIII chapters and 298 Sectionsin all. Te Indian taxation structure is a mix o number o provisions either governed by income tax law andat some stages by number o mercantile and corporate laws. A number o amendments in the structure havemade the taxation structure very complex and di cult to handle, the subject is not that easy to digest.

India Sec. 225AIndia means the territory o India as reerred to inArticle 1 o the Constitution, its territorial waters, seabedand subsoil underlying such waters, continental shel, exclusive economic zone or any other maritime zoneas reerred to in the erritorial Waters, Continental Shel, Exclusive Economic Zone and other maritime ZonesAct, 1976 and the air space above its territory and territorial waters.

Person Sec. 231

Person includes seven types o persons namely

(1) Individual,

(2) Hindu undivided amily (HUF)


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Taxation (Summary)2

(3) Company

(4) Firm

(5) Association o persons (AOP) or a body o individuals (BOI)

(6) Local authority

(7) Every articial juridical person not alling within any o the preceding sub clauses.

Association o Person Vs. Body o IndividualTe 2 basis diferences betweenAOP and BOI are:

In BOI there are only individuals but in AOP there can be any type o persons.

BOI is creation o lawwhereas AOP can be created by diferent persons coming together or doingsome income producing activity on the voluntary basis.

Assessee Sec. 27

Assessee means any person by whom tax, interest or penalty is payable under any provision o this act andincludes:

(a) Deemed assessee

(b) Assessee in deault(c) Person against whom any income tax proceedings have been started or the assessment o his income

or loss or the income o some other person or the loss or whom he is liable.

Assessment Year Sec. 29

Assessment year means the period o 12 months starting rom 1st April every year and ending on 31st marcho the succeeding year.

Previous Year Sec. 234

Previous year means the year immediately proceeding to assessment year. Income or the previous year is

always taxed in the assessment year.

INCOME OF ONE PY TAXABLE IN SAME YEAR

Te ollowing are the exceptions to the general rule that income o every previous year is chargeable to tax inthe relevant assessment year.

Sec. 172: Shipping business o a non-resident;

Sec. 174: Person leaving India;

Sec. 174A: An AOP ormed or the purpose o a particular event.

Sec. 175: Persons likely to transer property to avoid tax;

Sec. 176: Discontinued business or proession

Gross Total Income Sec. 14

Gross total income is the aggregate o income rom all ve heads o Income; namely:

(1) Income under the head salary

(2) Income under the head house property

(3) Income under the head business and proession

(4) Income under the head capital gains

(5) Income under the head other sources


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Basic Concepts and Important Defi nitions 3

TAXABILITY OF GIFT

Income includes the gits received in excess o` 50000. I anyone has received git in each exceeding ` 50000rom a non-relative then whole o such amount received shall be considered his income. However gitsreceived rom relatives shall not be covered in this.

Total/Taxable Income Sec. 245

otal income is income ater reducing the deduction under Chapter VI-A rom the gross total income. Tisincome is also called taxable income on which tax has to be imposed.

Computation o total income o or AY 201213

Particulars Amount (`)

Income under the head Salary

Add: Income under the head House Property

Add: Income under the head Business and Proession

Add: Income under the head Capital Gains

Add: Income under the head Other Sources

Gross Total Income

Less: Deduction under Chapter VI-A [Sec C-U]

Total/Taxable Income

Rounding Of o Total Income Sec. 288A

Te total income shall be rounded of in the multiples o` 10.

Rounding Of o Tax Liability Sec. 288B

Te amount payable by the assessee and the amount o reund due, under the provisions o the Income ax

Act, 1961 shall be rounded of to the nearest` 10.

CESS

Education cess or the AY 2012-13 is 2% or primary education and 1% or higher and secondary education.

Charitable Trust *Sec. 215

Te denition u/s. 2(15) has been amended to enhance the current monetary limit in respect o receiptsrom commercial activities rom ` 10,00,000 to ` 25,00,000. Hence, the charitable trust who are registeredunder the category o advancement o any other object o general public utility shall continue to be treatedas charitable trust i gross receipts rom such trade, commerce or business does not exceed ` 25,00,000.

1.1 Tax Rates for AY 2012-13

Individual/HUF/AOP/BOI and every artifcial juridical person

Upto ` 1,, NIL

` 1,, to ` 5,, 1%

` 5,, to ` ,, 2%

Above ` ,, 3%


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Taxation (Summary)4

For resident women below the age o 60 years at any time during the previous year

Upto ` 1,9, NIL

` 1,9, to ` 5,, 1%

` 5,, to ` ,, 2%

Above ` ,, 3%

For resident individuals o the age o 60 years or more but less than 80 years at any time during the previousyear

Upto ` 2,5, NIL

` 2,5, to ` 5,, 1%

` 5,, to ` ,, 2%

Above ` ,, 3%

For resident individuals o the age o 80 years or more at any time during the previous year

Upto ` 5,, NIL

` 5,, to ` ,, 2%

Above ` ,, 3%

Note: Surcharge: NIL Education Cess: 3% (Primary Edu Cess 2%+Secondary & Higher Seco Edu Cess 1%)

Co-Operative society

Upto ` 1, 1%

` 1, to ` 2, 2%

Above ` 2, 3%

Note: Surcharge: NIL Education Cess: 3% (Primary Edu Cess 2%+Secondary & Higher Seco Edu Cess 1%)

Partnership frms/Limited Liability Partnership 30%

Company

Type Particulars Surcharge* Rate

Domestic Whole o total income 5% 3%

ForeignSpecifc royalties and technical services

2%5%

On balance 4%

Note: Education Cess: 3% (Primary Edu Cess 2% + Secondary Seco Edu Cess 1%) *Surcharge should be payable only i total income exceeds ` 1,,,

Special rates o Income Tax

On Short-Term Capital Gain (STCG) covered under Sec 111A 15%

On Long-Term Capital Gain (LTCG) covered under Sec 112 2%

On winning o lotteries, crossword puzzles, card games etc [Sec 115BB] 3%


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C H A P T E R2

Residential Status

There is no defi nition of a good day or bad day; it all depends on your thoughts,Either you run the day or the day runs you.

Section Provision

Sec 2(26) Indian Company

Sec 2(3) NR-Individual

Sec 5(1) Incidence o Tax on R/RO/RNOR

Sec 5(2) Incidence o Tax NR

Sec 6(1) Residential Status o Individual

Sec 6(2) Residential Status o HUF/Firm/AOP/BOI

Sec 6(3) Residential Status o Company

Sec 6(4) Residential Status o other persons (Local Authority/Artifcial Judicial Person)

Sec 6(6)(a) RNOR-Individual

Sec6(6)(b) RNOR-HUF

Sec 115C Person o Indian origin

Type o person Can be

(1) Individual Resident Ordinary Resident

(2) HUF Not Ordinarily Resident

(3) Company Non-resident

(4) Firm Resident

(5) AOP/BOI Non-resident

(6) Other person


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Taxation (Summary)6

FOR INDIVIDUAL *[SEC. 6(1)]

An Individual can be resident or a non-resident in India. o be a resident he has to satisy one o the ollowingconditions:

(a) Stay in India 182 days in a PY OR

(b) Stay in India 60 days in a PY and Stay in India 365 days in preceding 4 PYs.

For the condition (b) above, we have 3 exceptional cases. In all these 3 cases second condition does notapply:

(a) A citizen o India who leaves India or the employment purposes.

(b) A citizen o India who leaves India as a member o crew o Indian ship.

(c) An Individual who is a citizen o India OR is a person o Indian origin who comes to India on a visit.

ROR & RNOR

ROR is one who satises both o the ollowing conditions:

(a) Resident in 2 out o 10 preceding PYs.

(b) Stay in India 730 days in a 7 preceding PYs.

For an individual, residential status is determined based on the period o stay in India. However, or HUF,Firm, AOP and other non-corporate entities the control and management is critical in determining residentialstatus.

FOR HUF * [SEC. 6(2)]

While determining residential status o HUF period o stay o Karta is not at all relevant. What is importantis whether control and management o such HUF is situated in India or not. Further to check whether HUFis ROR or NOR residential status o Karta as an individual becomes relevant. HUF becomes non-residenti entire control and management is situated outside India. I Karta satises the ollowing conditions HUIFbecomes ROR:

(a) Resident in 2 out o 10 preceding PYs.(b) Stay in India > 730 days in a preceding PYs.

Otherwise HUF shall be RNOR.

FOR INDIAN COMPANIES * [SEC. 6(3)]

An Indian company is always regarded as a Domestic Company. A company incorporated outsideIndia may also be treated as a domestic company i certain conditions are ullled.

An Indian company is always a resident. A Company incorporated outside India is treated as residentonly i control and management is wholly in India.

Taxability o Income

Resident and ordinarily resident is taxed on his global income.

Not ordinarily resident is taxed in respect o Indian Income. In respect o oreign income he is taxedonly i it is rom business controlled in India or proession set up in India.

Non-resident is taxed in respect o Indian incomes only.

Taxability o Remittance

Remittance in India is never taxed in India, since it is the second receipt.

Treatment o Agricultural Income

Agriculture income rom a land in India is always exempt rom tax. However, i land is not in India then

agriculture income will be taxed in India.


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C H A P T E R3

Income under Head Salary

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Section Provision

Sec 15 Chargeability section

Sec 16(ii) Deduction or Entertainment Allowance

Sec 16(iii) Deduction in respect o Proessional Employment Tax

Sec 17(1) Meaning o Salary

Sec 17(2) Meaning o PerquisitesProviso to Sec 17(2) Treatment o Medical Facility

Sec 17(3) Proft in lieu o Salary

Rule Valuation o Perquisites under Income Tax Rules, 1962

Rule 3(1) Valuation o rent ree accommodation

Rule 3(2) Valuation o car acility

Rule 3(3) Valuation o servant acility

Rule 3(4) Valuation o gas, electricity, water acility

Rule 3(5) Valuation o education acilitySection Exemption under the head Salary

Section 1(5) Exemption or leave travel concession

Section 1(1) Exemption or Gratuity

Sec 1(1A) Exemption or Commuted Pension

Sec 1(1AA) Exemption or Leave Encashment upon retirement

Sec 1(1B) Exemption or retirement compensation


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Taxation (Summary)8

Sec 1(1C) Exemption or VRS

Sec 1(13A) Exemption or HRA

Sec 1(14) Exemption or other Allowances

Schedule IV Provident Fund

BASIC CONCEPT

Any amount received by an individual shall be treated as salary only i the relationship between payerand payee is that o an employer and employee. Te employee may be a ull time employee or part- timeemployee.

Basis o Charge Sec. 5

For charging tax under income under the salary the oremost requirement is that the relationship oemployer and employee must subsist between the payer and payee.

Even i the person is in employment with more than one employer, all kinds o benets extracted rom

such kind o contract would be taxable under income under the head salaries. Te basic diference one must remember between orgone and surrender o salary is that even i

orgone, salary is taxable but when salary is voluntarily transerred to the central government, suchsalary is not taxable.

Salary is taxable on due or receipt basis whichever is earlier. Accounting method o employee isnot relevant.

Salary Sec. 171

It means any kind o:

Wages

Annuity Gratuity, ees, bonus, commission, perk or prot in lieu o salary or wages.

Any advance o salary

Any amount on account o leave encashment

Any contribution to RPF to the extent it is taxable.

Any interest on RPF to the extent it is taxable

Any contribution under Sec. 80CCD under scheme ramed by CG.

Place o Accrual

Salary is Deemed to accrue at place where service is rendered , however there is an exception to the same:

Where an Indian National is rendering service outside on behal o government o India outside Indiasuch salary is deemed to accrue and arise in India Itsel and allowances and Perks to such person arealso exempt rom tax. And on the principle o reciprocity any salary or wages paid in India to a oreignnational in this behal shall also not be taxable in India.

Also Salary received rom UNO would not be taxable in India.

TAXATION OF ADVANCED SALARY AND ARREARS OF SALARY

Any advance salary received would be taxable in the previous year in which it is received on receiptbasis and any arrears o salary received which is not taxed earlier would be taxable in the year in whichthey are allowed , however recipient would be entitled to claim relie under Sec. 89 in respect o sucharrears.


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Income under Head Salary 9

However it is to be noted that Advance salary is diferent rom advance against salary and suchadvance against salary is taxable when salary becomes due.

GRATUITY [SEC. 10(10)]

Government

Employees

Employees covered under the Payment o

Gratuity Act, 1972

Any other employees

Fully exempt Minimum o Minimum o

(1) Actual received (1) Actual received

(2)15___26

Last drawn Salary No o completed

years plus excess o 6 months

(2)15___26

Average Salary o 1 months No o

completed years

(3) ` 1,, (3) ` 1,,

PENSION [SEC. 10(10A)]

Un-commuted CommutedFully Taxable Govt. employees Non-Govt. Employees

Fully Received gratuity also Not received gratuity

1

__3

o ull value o pension1

__2

o ull value o pension

LEAVE SALARY [SEC. 10(10AA)]

Govt. employees Non-govt. employees

Fully exempt Minimum o

(1) Actual received(2) Average salary o last 1 months Balance leave calculated on the basis o 3 days

(3) Average salary 1 months

(4) ` 3,,

RETIREMENT COMPENSATION [SEC. 10(10B)]

Minimum o

(1) Actual received

(2) Amount calculated in accordance with Industrial Dispute Act, 1947

(3) ` 5,00,000

Voluntary Retirement Compensation

Conditions [Rule 2BA]* Exemption [Sec. 10(10C)

(i) 1 years o service or 4 years o age Minimum o

(ii) For all employees (except directors o the company) (1) Actual received

(iii) Reduction in number o employees (2) Last down salary 3 months No o completed yearso services

(iv) Not to be flled up (3) Last down salary Balance months services let

(v) No same management (4) ` 5,,

* Rules reerrers to Income Tax Rules, 1962


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Taxation (Summary)10

Provident Fund

Recognised Provident Fund Employers contribution excess o 12% salary o (Taxable) Interest on provident und excess o 95% (Taxable)

Unrecognised Provident Fund Employers contribution Taxable (Salary) Interest on Employers contribution Taxable (Salary) Interest on Employees contribution Taxable (Other sources)

ALLOWANCES

1 Fully Taxable Allowance

Dearness Allowance As is clear by its name, this allowance is paid to compensate the employee against therise in price level in the economy Although it is a compensatory allowance againsthigh prices, the whole o it is taxable

City Compensatory Allowance This allowance is paid to employees who are posted in big cities The purpose is tocompensate the high cost o living in cities like Delhi, Mumbai etc However, it is ully

taxableTi n/Lunch Allowance It is ully taxable It is given to employees or lunch as coupons or added as part o

salary

Overtime Allowance When an employee works or extra hours over and above his normal hours o duty, heis given overtime allowance as extra wages It is ully taxable

Fixed Medical Allowance Medical allowance is ully taxable even i some expenditure has actually been incurredor medical treatment o employee or amily

Servant Allowance It is ully taxable whether or not servants have been employed by the employee

Other Allowance There may be several other allowances like amily allowance, project allowance,marriage allowance, education allowance, and holiday allowance etc which are notcovered under specifcally exempt category, so are ully taxable

2 Partly Exempt Allowance Sec. 1015

Interest on Post O ce Savings Bank Account

Individual Account ` 3,500 and

Joint account ` 7,000

House Rent Allowance Rule 2A Sec. 1013A

Minimum o

(1) Actual allowance received

(2) Rent paid 10% Salary

(3) 50% o salary I accommodation is in Mumbai, Kolkata, Delhi, Chennai [Metro City]

40% o salary For any other place

Exempt Minimum o

(1) Actual amount received

(2) Amount spent

(i) ravelling (ii) Daily (iii) Conveyance (iv) Helper (v) Academic (vi) Uniorm

Exempt Minimum o

(1) Actual amount received

(2) Limit Specied


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Transer o Movable Assets

Computer & electronic items Dep @5% or completed years (WDV)

Motor car Dep @2% or completed years (WDV)

Other assets Dep @1% or completed years (WDV)

Valuation o Car Facility [Rule 3(2)]

Car owned/hired by EmployerExpenses incurred by Employer

Use ExemptionO cial use Exempt

(Running & Maintenance ) Private use 1% o cost OR Actual hire chargesAdd : Running and Maintenance expLess : Amount recoverable

Partly o cial partly private For/below 16 ltr CC ` 1, pmAbove 16 ltr CC ` 2,4 pm(Nothing deductible on account o amountrecovered)

Car owned by EmployerExpenses incurred by

Employee (Running &Maintenance)

Use Exemption

O cial use NIL

Private Use 1% o cost OR Actual hire chargesLess :Amount recoverable

Partly o cialPartly private

For/below 16 ltr CC - ` 6 pm Above 16 ltr CC ` 9 pmI chauer provided ` 9 pm (Nothing deductibleon account o amount recovered)

Car owned by EmployeeExpenses incurred by Employee

Nothing is taxable

Car owned/hired by EmployerExpenses incurred by

Employer(Running & Maintenance)

Use Exemption

O cial use NIL

Private use Amount o expenditure

Partly o cial partlyprivate

ExpenditureLess: (or/below 16ltr CC` 1, pm)

(Above 16 ltr CC ` 2,4 pm)Less: I chauer provided : ` 9 pm(Greater deduction can be allowed i as per o cial records it isestablished that expenditure was or o cial use)

Any other automotive owned byEmployer

Use Exemption

O cial use NIL

Private Expenditure incurred

Partly o cialPartly private

ExpenditureLess: ` 9 pm(Greater deduction can be allowed i as per o cial records it isestablished that expenditure was or o cial use)

Conditions : When such a acility is provided to high court or supreme court judges, it is exemptrom taxation

When such a acility is provided or commuting between residences to o ce, it isexempt rom taxation

Documents to be maintained byemployee :

1 Complete details o journey undertaken or o cial purposes2 Employers certifcate that expenditure was incurred wholly or o cial useNote: When 2 or more cars are provided, the value or one car would be as providedor partly o cial partly private and or other cars as purely or personal purposes


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(2) Taxable in the hands o specifed employees

Specifed employees means- Director, 2% (benefcial ownership), salary more than ` 5, pa

Sweeper, gardener or watchman Actual Cost

Gas, electricity or watersuppliers

[Rule 3(4) (1) Actual cost OR (2) Manuacturing cost

Education acilities [Rule 3(5)] ` 1, pm (exempt)

(3) Tax ree perquisites in the hands o all employees

Medical acilities

Medical treatment in India Medical Treatment Outside India

Employers hospital, Govt Hospital,Notifed hospital, Group medicineinsurance, medical insurance u/s D(ully exempt)

Any other medical expenditure-maximum o 15,

Medical treatment and stay expenses abroad- exempt (I permitted byRBI)

Travel expenditure is ully exempt i GTI upt ` 2,, GTI above ` 2,,

Leave travel concession [Sec. 10(5)]

Maximum o 2 journeys in block o 4 years by air/frst class air-conditioned in train by shortest distance

DEDUCTION FROM SALARY

Entertainment Allowance Only or Govt. Employees Sec. 16ii

Minimum o

(c) Actual amount

(d) 20% o Basic Salary

(e) ` 5,000

Proessional Tax/Employment Tax Sec. 16iiiActual amount paid

Meaning o salary o deerent cases

(1) For entertainment allowances Basic Salary only

(2) Gratuity or employees (Covered under Gratuity Act) Basic Salary + DA

(3) Gratuity or employees (not covered under GratuityAct)

Basic Salary+ DA (i orming part o retirement beneft)+ Commission as a fxed percentage turnover(4) Leave Salary

(5) Voluntary retirement compensation

(6) Contribution to RPF(7) House rent Allowances

() Rent ree accommodation Basic salary + DA (or RB) + Bonus or commission + TaxableAllowances

(9) Employers contribution towards employee pensionscheme reerred u/s CCD *[Sec 36(1) (iva)] [weAY 212-13]

[see page no 29 or more inormation ]

Basic salary + DA (orming part o salary)(Excludes all Allowances and perks)


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Salary Structure o Employee

SI.

No.

Name o

Employee

Basic

Salary

D.A. HRA Other

Allowance

Commission Gross Salary Deduction Net

SecurityLoan Income

Tax

Proessional

Tax

P.F. Total

A B C D E F = (A + B + C + D + E) G H I J L = (G + H +I + J) M = (F L)

Common DoubtQuestion 1: Whether exemption o 1,000 is available while computing taxable value o perquisites oEducation acility and balance amount is taxable?

Answer: It was held in case o Delhi Public School that in case o Education Facility i the cost o educationo similar school exceeds ` 1000, the entire amount is taxable. Otherwise nothing taxable. E.g, i the cost osimilar school ` 1200 p.m, then ` 1200 p.m is taxable and not just ` 200 p.m.

A contrary view was held in case oBal Bharati Public School that ` 1000 exemption should be given. E.g.,cost o similar school ` 1200 p.m then only` 200 p.m is taxable.

Format: Computation o Income under the head Salary

Particulars Amount

(` )

Amount

(` )

Basic Salary

Dearness Allowance/Pay

Bonus

Commission (Based on turnover)

Commission (Fixed or Other)

Other Taxable Allowances

Medical allowance

Add: City compensation allowance

Add: Split duty allowance

Add: Ti n/lunch allowance

Add: Deputation allowance

Add: Overtime allowance

Add: Servant or warden allowance

Add: Non-practicing allowance

Allowances exempt with conditions

Amount received

Less: Exempt amount

Allowances exempt without conditions Amount received

Less: Exempt amount

Interest on balance o RPF

Less: Exempt amount

Employers contribution to notifed pension und

Value o perquisites

Leave encashment (Current Year)

Retirement beneft

Gratuity


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Less: Exempt amount

Leave encashment upon retirement

Less: Exempt amount

Pension:

Un-commuted pension

Commuted pension Less: Exempted amount

Compensation under VRS

Less: Exempted amount

Retrenchment compensation

Less: Exempted amount

Amount received rom URPF upon retirement GROSS SALARY

Less: Deduction under Sec. 16

Deduction or Entertainment Allowance [Sec 16(i)]

Deduction or Proessional/Employment Tax [Sec 16(ii)] INCOME UNDER THE HEAD SALARY


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C H A P T E R4

Income under Head House Property

No matter your situation or circumstances. Stretch, breathe-in, and believe that you can make goodthings happen. Affi rm to yourself, I am happy and positive, and Im going to have a wonderful

day. Believe it!

Section Provision

Sec 22 Basis o charge (ie Charging Section)

Exp To Sec 23(1) Unrealised rent

Sec 24(a) Statutory deduction

Sec 24(b) Interest on borrowed capital

Sec 25A Expenses not deductible

Sec 25AA Recovery o unrealized rent

Sec 25B Arrears (Outstanding) rent received

Sec 26 Property owned by co-owners

Sec 27(i) Deemed ownership Transer to Spouse

Sec 27(ii) Deemed ownership-Holder o an impartible estate

Sec 27(iii) Deemed ownership-Member o co-operative society etc

Sec 27(iiia) Deemed ownership Person in proession o property as per Sec 53A oTranser o Property Act, 12

Sec 27(iiib) Deemed ownership- Person having right in property or a period not less than12 years

BASIS OF CHARGE [SEC. 22]

Tere must be a property consisting o building or land appurtenant thereto

Te Assessee should be owner o that property


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Income under Head House Property 17

Such property should not be used or Business or proession o assessee the prots o which arechargeable to tax.

Some Important Points

It must be noted that the would property or part thereo means part or unit o that property

I there is any income rom vacant piece o land such income would be charged under Prots and

gains rom business and proession or under income rom other sources depending upon nature o thecase.

Property not owned by assessee should not be charged under house property, stating and example wemention that income rom subletting is charged under income rom other sources.

Ownership

Includes legal owner as well as deemed owner. Te term ownership includes ownership o any kind andincludes:

Freehold Property Leasehold property Deemed ownershipDEEMED OWNERSHIP [SEC. 27]

Te various cases in which owner would be counted as deemed o property are as ollows:

Transer to spouse: Where an individual transers his/her house property to his/her spouse withoutany adequate consideration (except in an agreement to live apart), the transerorwould be deemed to be owner o such house property It is to be noted that onlyhouse property is transerred and not any cash through which House property ispurchased, in such a case, clubbing provisions will apply

Transer to minor child Where property is transerred to minor child (except married minor daughter)

Transeror would be deemed to be owner o that house propertyHolder o an impartible estate Such holder would be deemed to be owner o that property

Member o co-operative estate Person holding property under a co-operative estate as leasehold or reeholdproperty would be deemed to be owner o that property

Person holding some rights oproperty under Sec 53A o Transero Property Act, 12

Conditions:

There is an agreement in writing Purchaser has paid consideration or agreed to pay the same Purchase has taken possession o the property

Person holding lease o a propertyor not less than 12 years

Such a person would be deemed to be owner o that property provided that leaseis renewed ater a minimum period o 12 months

Disputed property A person who holds the possession o a disputed property or enjoys income rom

that property is deemed to be owner o that property

Use o House Property and its impact on Taxation

House property may be used or either commercial or residential purposes. Some cases o taxation are asollows:

Where property is held as Stock in trade then also taxed under house property.

When it is business to give property on rent, then also it is taxed under this head o house property. When hotel or P.G. accommodation building is given on rent then also taxed under house property but

where separate rooms are given on rent then it is taxed either business or proession or under incomerom other sources.


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Some exceptions to general rule o taxation under house property are : Where property is used or business o assessee

Where P.G. or hostel accommodation is run by assessee

Where property is given on rent or e cient conduct o business

Where H.P. is given on rent to Govt. agency or locating branch, etc. or conducting businesse ciently, it is taxed under income rom business and proession.

Where it is a case o composite rent.

Income rom House Property not Chargeable to Tax

House Property use or Business o Assessee

Building held or charitable purposes

Sel-occupied property

Property o registered trade union

Palace o ex ruler

Income rom Farm house:

Conditions:

Farm house in India

In immediate vicinity o agricultural land

Used as a dwelling or store house

Cases o Composite Rent

Composite rent can be on amount o

Provision o acilities with House Property

Provision o assets with House Property

(a) Rent On account o House Property and Other acilities like gas, etc. should be separated and renton account o House Property would be taxed under income rom House Property and rest would

be taxable under either under the head Business & Proession or income under the head othersources.

(b) Rent on account o House Property and hire charges o assets is treated as ollows :-

I assets rom an integral part o lending, whole o the rent should be taxed under either Income underthe head Prots and gains rom Business and Proession (PGBP) or Income under the head Incomerom Other Sources as the case may be.

I asset do not orm an integral part o lending, rent should be separated into:-

Rent or H.P. and should be taxed under H.P.

Rent or assets must be taxed under P.G.B.P. or income rom other sources.

ANNUAL VALUE [SEC. 23]

Step 1 Take higher o(a) Expected rent (which is computed by taking higher o municipal value or air rent whichever is higher but

limited to standard rent) or,(b) Actual rent received or receivable(c) But in this clause c, we compute actual rent which would have been there i there would have been no

vacancy, i such rent is higher than expected rent, then rent computed under this clause (c) would beused otherwise rent computed in clause (a) that is the expected rent would be used

Step 2 From this Calculate GAV by taking rent as per above provisions and subtracting vacancy allowance on thebasis o actual rent rom the same


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Step 3 This is our Gross Annual Value (GAV)

Step 4 From GAV deduct Standard deduction @ 3% o GAV and municipal taxes actually paid and borne by theowner during the previous year

Step 5 Finally we have computed our Net Annual Value or annual value

UNREALISED RENT [RULE 4]Sometimes owner is not able to recover some portion o rent rom the tenant such a rent is called asunrealized rent, Unrealized rent is allowed as a deduction only when ollowing 4 conditions given in Rule 4are satised:

enancy is bonade

Every step has been taken to get the property vacated

Every step has been taken to recover unrealized rent

enant is not in occupation o any other property o Owner

Tere are a number o conicting views regarding treatment o unrealized rent due to diference o opinioncreated by income tax law and income tax return orm, However aking in to account the provisions o law;

the appropriate provisions are written below: Just deduct amount o unrealized rent rom Step 1 Point (b) and Point (c) o above Steps i.e. WhileComputing gures or actual rent, these are allowed as a deduction. Te Rest o Steps Follow in the samemanner as written above.

Vacancy

In point Annual Value, everything regarding vacancy clause has been discussed in the 5 steps orcomputation o annual value, so we are not discussing the same separately.

It is to be noted that there is a diference o opinion among authors regarding vacancy allowance, restnecessary and commonly accepted provisions have been discussed in point Annual Value.

House property let out during part o year and part o year seloccupied

Te Income rom such property is calculated as i let out or whole o the year. In Tis case, expectedrent would be taken or whole year but actual rent would be taken or let out period only and no specialallowance or this purpose is allowed.

However where property is acquired during the year itsel, expected rent would be taken or only thatportion or which property has been owned by assessee and rest provisions remains the same.

Treatment o Vacancy + Unrealised Rent

I the problem is such that adjustment is required both or Vacancy and unrealized rent then ollowingtreatment ollows which is a combination o provisions written in Point Unrealised rent and Point Vacancy

above: Te amount o unrealized rent would be deducted rom Step 1 Point (b) and Point (c)

Next, the treatment o unrealized rent is same as per provisions written in Point Annual Value in thenext steps.

Income rom House Property Sel Occupied or Residence

When property is:

Sel occupied or residence or

Cannot be sel-occupied or residence owing to reason o employment and he has to reside at someother place not belonging to him Ten, Annual Value o such property would be taken to be NIL.


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Annual other benet is derived rom property.

House Property Actually let out during the year

Any other benet is derived rom property.

Case where more than one house is or sel-occupation:

Ten the assessee has option to take any o the above houses as sel-occupied and the other one would betreated as deemed let out property.

Notes:

Annual value here denotes value ater municipal taxes.

Tis option is available only to individuals and Hindu undivided amilies.

Where An assessee lets out his house to the employer and the employer in return allots the same toassessee only then, tax treatment would be as ollows :-

ax on income o house property and

ax on the matter o rent ree or concessional accommodation provided by employer taxable underincome under the head salaries.

Deduction rom Income rom House Property

(1) Standard deduction : A Standard Deduction o 30% o Net Annual Value Would be allowed as adeduction rom net Annual Value, irrespective o expenditure incurred. No other deduction on accounto any expenditure is allowed.

However such deduction would not be allowed when annual value is negative.

(2) Deduction on account o interest: Any Kind o interest on borrowed capital would be allowed asa deduction rom H.P. income on accrual basis. Interest includes pre construction period interestinstallment.

However Interest would not be allowed as a deduction i such interest is paid out o India and NoDS has been deducted rom it and there is no person in India who can be assessed in respect operson to whom interest is paid.

Notes:

Loan can be or any purpose like repairs, construction or any kind o extension to house property butshould be connected with H.P.

Fresh loan to merely repay original loan would be counted as i like original loan and interest would beallowed as a deduction.

Pre-construction period: Period starting rom date on which capital is borrowed and ending on

31st March immediately preceding the date on which capital is borrowed and ending on

Date on which borrowed capital is repaid, whichever, is earlier.

Pre-construction period interest is allowed as deduction in 5 equal installments commencing romyear in which construction is completed.

Example: I capital is borrowed on June 30, 2010 and construction o property is completed on 30th July 2012,

then interest rom period June 30, 2010 to 31st March 2012 would be counted as pre-construction interest andwould be allowed a deduction in 5 equal installments and interest rom 1st April 2012 would be counted asinterest or the current period.

Deduction in Case o Seloccupied Property

Deduction as written above are not ully applicable in case o a sel-occupied property. Te changes case osel-occupied property are as ollows :-

(1) No standard deduction o 30% would be allowed.

(2) Deduction in case o money borrowed: Here also deduction is allowed subject to certain terms andconditions :-


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Tese conditions are as ollows :

Money is borrowed ater 1-4-1999

Money is borrowed or construction or acquisition o property.

Construction or acquisition o property is completed within 3 years rom end o nancial year in whichmoney is borrowed.

Creditor gives a certicate that amount was borrowed or construction or acquisition o property.

In Case above 4 provisions are satised the amount o deduction is Actual interest (inclusive o pre-construction period interest) or ` 1,50,000 otherwise the amount o interest deduction would be` 30,000.

However, Interest would not be allowed as a deduction i such interest is paid out o India and No DShas been deducted rom it and there is no person in India who can be assessed in respect o person to

whom interest is paid.

Recovery o Unrealized Rent and Arrears o Rent:

Recovery o unrealized rent Recovery o arrears o rent

This provisions is applicable only i unrealized rent isallowed as a deduction earlier

This income is chargeable to tax under house propertyincome

Any amount recovered on account o unrealized rentshould be directly added to house property income

Standard Deduction o 3% is allowed to the assessee

No Standard Deduction or any kind o deduction isallowed

No other deduction is allowed on account o anyexpenditure

No other deduction is allowed on account o anyexpenditure

This Provision is applicable whether property exists ornot

This provision is applicable whether property exists ornot

Coowners Property:

I shares o co-owners are denite, then such property would be assessed in hands o individualpersons.

I shares o individual owners are not denite then such property would be assessed as body oindividuals/association o persons.

In case property is sel-occupied than each co-owner would be allowed a deduction o` 5\150,000/`30,000.

In case property is let out, we will ignore co-ownership and compute income and in the next step wewill distribute the income among co-owners in ratio o co-ownership.

Can Annual Value be Negative? Common Doubt

Yes annual value can be negative.In Case o Sel-occupied property:Yes, annual value o a property can be negative but only to the extent o` 1,50,000/` 30,000.

In Case o Let-out property: Te annual Value can be negative Because o deduction on account o municipaltaxes and interest.

Tere is no limit to which such income can be negative.


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C H A P T E R5

Income Under Head Profi t andGains from Business and Profession

It can be anything relevant to your needs and ambitions, such as I can do it! or I will succeed! Ifyoure feeling slightly out of kilter, repeat your mantra, either silently or out loud to yourself. Believe in

the words. Trust in your mantra. You really can achieve your goals.

Section Provision

Sec 2 Income chargeable as PGBP

Sec 29 Computation sheet o PGBP

Sec 3 Deduction or expenses in relation to buildingSec 31 Deduction or expenses in relation to plant, machine and urniture

Sec 32(1)(i) Depreciation by SLM or electricity company

Sec 32(1)(ii) Depreciation by WDVM or other assets

Sec 32(1)(iia) Deduction or additional depreciation or manuacturing concern

Sec 32(1(iii) Deduction or terminal depreciation (Under SLM)

Sec 32(2) Deduction or unabsorbed depreciation

Sec 33AB Special deduction or Tea Growing and Manuacturing concern

Sec 33ABA Deduction or Site Restoration und

Sec 35 Deduction or the activities o scientifc research

Sec 35A Deduction or expenses on patent and copyrights (old provision)

Sec 35ABB Deduction or acquisition o telecommunication licenses

Sec 35AC Deduction in respect o eligible project

Sec 35AD Deduction in respect o expenditure or specifc business


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Sec 35CCA Deduction in respect o donation to RDP or NUEF

Sec 36(1) Other revenue deductions

Sec 37(1) General deductions

Sec 37(2B) Disallowance o payment to political party

Sec 3 Disallowance o expense on assets not wholly (used) or business

Sec 4(a) Certain expenditure disallowed

Sec 4(b) Remuneration and Interest allowed to Partner rom Firm

Sec 4A(2) Disallowance o payment made to related party

Sec 4A(3) Disallowance @ 2% on certain cash payments

Sec 4A(7) Disallowance o provision or gratuity

Sec 41(a)/(2)/(3)/(4) Certain income chargeable to tax as PGBP

Sec 43(1)+Exp Actual cost o depreciable asset under dierent situation

Sec 43(6) Meaning o WDV or charging depreciation on WDVM

Sec 43B Certain expenses allowed on payment basis only

Sec 44AA Requirements o maintenance o books o accounts

Sec 44AB Requirements o tax audit

Sec 44AD/AE/AF Presumptive taxation

Sec 5 Capital gains on depreciable assets (WDVM)

Sec 5A Capital gains on depreciable assets (SLM)Sec 145 Method o Accounting [AS 1 & AS 2: Cash System OR Mercantile (Accrual)]

BASIS OF CHARGE [ESSENTIAL CONDITIONS] [SEC. 28]

Proft rom Business or Proession Any Compensation received or receivable

(a) Termination or Modifcation o aairs other than Indian Company(b) Termination or Modifcation o aairs o Indian Co(c) Rested power on Agencies/Corporation

Proft on sale o import license Any Subsidy received rom Govt Proft rom Speculation Business

Salary, Bonus, Commission, o Partner Tax on Non-monetary perquisites Income rom key man insurance policy

Business Have skills, talent, knowledge Special qualities Carried on business with intension o proft


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Income Under Head Profi t and Gains from Business and Profession 25

Occupation Dont have skill or talent No qualitative Bonus or commission earned

Computation o Business Prot Sec. 29

Balance as per proft and loss or Income expenditure account Add: Expenses expressly disallowed but not debited to P&L A/C

Expenses not allowed but debited to P&L A/c

Incomes or receipts taxable under this head but not credited to P&L A/c

Capital expenses debited to P&L A/c

Personal expenses debited to P&L A/c

Expenses in excess o the allowed amount, debited to P&L A/c

Losses not allowed but debited to P&L A/c

Expenses not relating to the previous year but debited to P&L A/c

Under-valuation o closing stock or over-valuation o opening stock

Less: Expenses expressly disallowed but not debited to P&L A/C

Expenses not relating to the previous year but debited to P&L A/c

Expenses not allowed but debited to P&L A/c


Capital receipts credited to P&L A/c


Over-valuation o closing stock or under-valuation o opening stock

Proft taxable under the head incomes rom business or proession

INCOME UNDER THE HEAD PGBP

Keyman Insurance Policy

Meaning: Keyman insurance policy is taken by a business concern on the lie o an employee (Keyman)whose services contribute substantially to the success o the business.

Objective: Te object o the keyman insurance is to indemniy a business concern rom the loss oearning resulting rom the death o a valuable employee.

Determine the amount: Te amount o keyman insurance can be estimated as the monetary value othe likely setback to prots o the concern due to the death o the keyman.

ax impact: Any sum received under a keyman insurance policy including the sum allocated by wayo bonus is also taxable.

Sum received by Employee-employer relationship Taxable under the head

Employee Exist Salary

Does not exist Other Sources

Management PGBP


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5.1 Allowable Deductons [Sec. 30 to Sec. 37]

RENT, RATES, TAXES, REPAIRS AND INSURANCE FOR BUILDING[SEC. 30]

Nature o expenditure Deduction i

building istaken on rent

Deduction i

building isowned

Rent paid* Allowed

Cost o repairs (Revenue nature) Allowed Allowed

Cost o repairs (Capital nature) Not Allowed Not Allowed

Land revenue, Municipal Tax, Local Rates Allowed Allowed

Premium on insurance o building against damage or destruction Allowed Allowed

For the purpose o Sec 2 to 43 the word paid* means actually paid or incurred according to themethod o accounting upon the basis o which income is computed under the head PGBP

[Sec. 31]

REPAIRS AND INSURANCE OF PLANT AND MACHINERY [SEC. 31]

Nature Deduction

Repairs (Revenue nature) Allowed

Repairs (Capital nature) Not Allowed

Insurance against damage/destruction Allowed

Note: Any expenses incurred or increasing e ciency o machinery will be also treated as revenue nature and it will bedeductible

DEPRECIATION [SEC. 32]

In respect o (1) Tangible Assets: Building, machinery, plant or urniture(2) Intangible Assets: Know-how, patents, copyright, trademarks, licenses, ranchises or any

other business or commercial rights o similar nature (acquired on or ater 1/4/199)Block o Asset [Sec. 2(11)]

Conditions Owned wholly or partly by the assessee and used or the purpose o the business andproession

Depreciation shall be allowed on the WDV o the block o assets at prescribedpercentage

Some Important Points kept in Mind while Calculation o Depreciation

When 50% Depreciation ?

In ollowing cases assesses can claim only hal rate o depreciation i he ull ollowing conditions:

1. I asset acquired during the PY

2. Applicable only or the year o acquisition (purchase)

3. Put to use not more than 180 days

CAPITAL EXPENDITURE [EXPLANATION TO SEC. 32(1)]

Assesse carried on business on lease

Any Capital expenditure incurred by him

reated him as owner o the building


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ADDITIONAL DEPRECIATION [SEC. 32(1)(iia)]

I ollowing conditions ull by assessee then he can claim additional 20% depreciation on original costvalue:

1. I new plant & machinery acquired or industrial undertaking purpose

2. Installed ater 31st march 2005.

AGGREGATED DEPRECIATION

In case o Depreciation allowable to

Succession [under Sec 47(xiii) orSec 47(xiiib) or Sec (xiv) or Sec 17]*

Predecessor and the successor

Amalgamation Amalgamating company and amalgamated company

Demerger Demerger company and resulting company

When AOP/Firm/individual/business acquired by company or frm then deprecation will be calculated day wise notmonth wise In case o amalgamation o companies, number o days o use o assets in ratio will be kept in mind

Sec 47(xiii)* Transer o a capital asset by a frm to a company as result o succession o a frm by a company

Sec 47(xiiib) Transer o a capital asset by a private company/unlisted public company to LLP (Limited LiabilityPartnership) as a result o conversion o private company/unlisted public company

Sec 47(xiv) Transer o a capital asset by a partnership concern to a company result o succession o partnershipconcern by a company

Sec 17 Succession o business/proession otherwise than on death: Where a person succeeds business/proession o any other person: Predecessor (Seller) shall be assessed in respect o the income o the PY in which the succession took

place up to the date o succession & Successor (Purchaser) shall be assessed in respect o the income o PY ater the date o succession

WRITTEN DOWN VALUE [SEC. 43(6)]

Particulars Amount

(` )

WDV o block o assets as on PY (ie as on 1/4/211)

Add: Actual Cost o the asset alling within the block acquired during the PY

Less: Money Payable in respect o asset sold/discarded/demolished/destroyed during the PY and theamount o scrap value

WDV o the block at the end o PY (ie as on 31/3/212) or the purpose o charging depreciationor the PY

Less: Depreciation or PY 211-12 [AY 212-13]WDV o the block at the beginning o next PY [ie 1/4/212]

Depreciation = Closing WDV (WDV o the block at the beginning o next PY) Rate o depreciation

1. Actual cost means the actual cost o the asset to the assessee, reduced by the portion o the cost whichhas been directly or indirectly met by any other person or authority

2. Money payable means Sale Price and it includes insurance compensation

3. Te reduction o money payable shall only be to the extent that WDV becomes NIL.

4. Depreciation on ractional ownership is allowed.

5. No depreciation is admissible where WDV has been zero, though the block o assets does not cease toexist (block o assets is not empty) on the last day o PY.


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6. I a block o asset cease to exist or i all asset o the block have been transerred and the block o theasset is empty on the last day o the PY, no depreciation will be admissible in such case.

SPECIAL PROVISION FOR COMPUTING GAINS

IN CASE OF DEPRECIABLE ASSETS [SEC. 50]

Computation o capital gain/loss can be made only in ollowing two situation :

1. On the last day o PY, WDV o the block o assets is zero, although block o assets is not empty becauseall assets in the block are not transerred during the PY.

2. When block o assets is empty on the last day o PY because all assets in that block are transerredduring the PY.

Computation o capital gain

Sales consideration Amount (`) Amount (`)

Less: WDV o block o assets at the beginning o PY (ie as on 1-4-211)

Actual Cost o the asset alling within the block acquired during the PY Transerexpenses

Short term capital gain

Notes:

1. It is not necessary that depreciation is allowed or the year under consideration. I the depreciation isallowed in the current year (or any earlier years), Sec. 50 will be applicable.

2. I Sec. 50 is not attracted (afected) then the expenditure on transer o assets shall be allowed asbusiness expenditure under Sec. 37(1). It shall not be reduced rom Sales consideration.

3. As per Sec. 45(1A), value o any money or FMV o assets received as compensation rom insurancecompany shall be deemed to be ull value o consideration received as a result transer o asset whichwas destroyed.

SET-OFF AND CARRY FORWARD OF UNABSORBED DEPRECIATION [SEC. 32(2)]

Step 1 Depreciation allowance o the current PY is frst deductible rom Income under PGBP head

Step 2 I depreciation allowance is not ully deductible under the head PGBP because o absence or inadequacy oproft, it is deductible rom income chargeable under other heads o income (except income under the Salary)o the current PY

Step 3 I depreciation allowance still remains unabsorbed, it can be carry orward to the subsequent AYs by the sameassessee

Same head Any head o income other than salary Carry orward to any number o years

Notes:

1. Unabsorbed depreciation can be carry orward and set of, even ROI (Return o Income OR Incomeax Return) is led ater due date o urnishing the return o Income.

2. No time limit is xed or the purpose o carrying orward o unabsorbed depreciation, it can be carriedorward or indenite period, i necessary .

3. In the subsequent AYs, unabsorbed depreciation can be set of against any income whether chargeableunder the head PGBP or under any other head (except income under the head Salary) In the matter oset-of, the ollowing order o priority is ollowed in subsequent AYs:

(a) Depreciation o current PY.

(b) Brought orward business loss

(c) Brought orward unabsorbed depreciation


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I in the subsequent AYs, there is no brought orward loss, brought orward unabsorbed depreciationcan be added to depreciation o current PYor the purpose o claiming deduction.

4. For claiming depreciation, the assessee should be benecial owner o the asset. It is not necessary thathe should be registered owner.

5. Revaluation o assets does not have any impact on Income ax Act, 1961. For the calculation odepreciation, revaluation should be ignored .

DEPRECIATION FOR POWER GENERATING UNDERTAKINGS [SEC.32(1)(i)]

1. Tey have option to claim depreciation

(a) SLM on each assets OR (b) WDVM on block assets.

2. Put to use less than 180 days: same as block asset concept

3. Depreciation allowed shall not exceed actual cost o the asset

4. Open to such undertaking to opt the depreciation under WDVM

5. Above option is not exercised depreciation is allowed on the basis o SLM

TERMINAL DEPRECIATION [SEC. 32(2)(iii)]

Depreciation claimed under Sec. 32(i)(i) Sold, destroyed or discarded

Sale consideration < [Actual Cost Depreciation Allowed]

Diference o above shall allowed as terminal depreciation in PY in which asset sold, destroyed ordiscarded

Computation o Terminal Depreciation

Amount (`)

Written Down Value (WDV)

Less: Insurance received

Terminal Depreciation

BALANCING CHARGE [SEC. 41(2)]

Depreciation claimed under Sec. 32(i)(i) Sold, destroyed or discarded

Sale consideration < [Actual Cost Depreciation Allowed]

Minimum o ollowing will be treated as Balancing charge

(a) Cost Less WDV OR (b) Sales consideration Less WDV

CAPITAL GAIN ON THE TRANSFER OF CAPITAL ASSET

ON WHICH SLM DEPRE, CHARGED [SEC. 50A]Sales consideration exceeds actual cost o such assets

Computation o Capital Gain on the transer o Capital Asset on which SLM depre charged

Amount (`)

Sales consideration

Less: Actual cost o Assets

Capital Gain on the transer o Capital Asset on which SLM depre Charged


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APPENDIX

Rates o depreciation or various block o assets

Block No. Name o Asset Rate o

Depreciation

Class 1: Buildings [included roads, bridges, culverts, wells and tube-wells]

Block 1 Residential buildings 5%Block 2 Non-residential buildings (eg o ce, actory, godown etc) 1%

Block 3 Purely temporary erections such as wooden structures 1%

Class 2: Furniture and fttings

Block 1 Furniture and fttings include electronic fttings[Electronic fttings include electrical wiring, switches, sockets and other fttings and ansetc]

1%

Class 3 : Plant and machinery

Block 1 (a) Motor cars(other than those used in business o running them on hire)

(b) Any other plant and machinery

(other than those covered by Block 2 to below)

15%

Block 2 Ocean-going ships, vessels ordinarily operating on inland waters including speed boats 2%

Block 3 (a) Motor buses, motor lorries and motor taxis used in a business o running them on hire(b) Moulds used in rubber and plastic goods actories(c) Machinery used in semi-conductor industry

3%

Block 4 (a) Aeroplanes Aero-engines(b) Specifed lie-saving medical equipment

4%

Block 5 Containers made o glasses or plastic used as re-flls 5%

Block 6 (a) Computer including computer sotware(b) Books (other than annual publication) owned by proessional(c) Gas cylinders

(d) Plant used in feld operation by mineral oil concerns(e) Direct fre gas melting urnace used in glass manuacturing concerns

6%

Block 7 (a) Energy saving devices (eg Automatic Voltage Controller)(b) Renewal energy devises (eg Flat Plate Solar Collectors)(c) Rollers in our mills, sugar works and steel industry

%

Block 8 (a) Air pollution control equipment(b) Water pollution control equipment(c) Solid waste control equipment(d) Wooden parts used in artifcial silk manuacturing machinery(e) Cinematograph flms, bulbs o studio lights() Woods watch rames in match actories(g) Some plants used in mines, quarries and salt works

(h) Books (annual publication) owned by proessional(i) Books (mayor may not be annual publication) owned by assesses carrying on businessin running libraries

1%

Class 4: Intangible assets

Block 1 Know-how, patents, copyrights, trademarks, licenses, ranchises or any other business orcommercial rights o similar nature

25%

Tea Development

Account

[Sec. 33AB] Site restoration und

Account

[Sec.33ABA]

Applicable Tea or Coee or rubber Petroleum or natural gas

Time Limit Six months o end o P/Y or beore ROI Beore end o P/Y


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Deposit NABARD or TCR board SBI or Scheme o Ministry o P&G

Deduction 4% o profts o such business (max limit) 2% proft o such business (mix Limit)

Common provision in case o Sec. 33AB & 33ABA

Deduction withdrawn: Purchase or o ce or residence, o ce appliances (other than computer)Deduction allowed: In one year, XIth Schedule, sale beore years rom end o PY

EXPENDITURE ON SCIENTIFIC RESEARCH *[SEC. 35]

Purpose Donee Deduction

Specifc research National laboratories, IIT, specifed person 2% o donation

Specifc research Research association, university, college, other institutions 175% o donation

Specifc research Company (companys main object being is to carry on scientifcresearch)

125% o donation

Research in social sciences,statistical research

Research association, university, college, other institutions 125% o donation

Special business: Bio-technologies or companies engaged in the business o manuacturer or production o an articleor thing except those specifed in the XIth Schedule o the Income Tax ActUnabsorbed expenditure: Same Treatment as unabsorbed depreciation[Note: *signed content reers to Amendment, important or AY 12-13 and May/Nov 212 IPCC]

THE XIth (ELEVENTH) SCHEDULE: LIST OF ARTICLES OR THINGS

1. Beer, wine and other alcoholic sprits.

2. obacco and tobacco preparations, such as, cigars and cheroots, cigarettes, biris, smoking mixtures orpipes and cigarettes, chewing tobacco and snuf.

3. Cosmetics and toilet preparations.

4. ooth paste, dental cream, tooth powder and soap.5. Aerated waters in the manuacture o which blended avouring concentrates in any orm are used.

Explanation: Blended avouring concentrates shall include, and shall be deemed always to haveincluded, synthetic essences in any orm.

6. Conectionery and chocolates.

7. Gramophones, including record-players and gramophone records.

8. Projectors.

9. Photographic apparatus and goods.

10. O ce machines and apparatus such as typewriters, calculating machines, cash registering machines,cheque writing machines, intercom machines and teleprinters.

Explanation: Te expression o ce machines and apparatus includes all machines and apparatusused in o ces, shops, actories, workshops, educational institutions, railway stations, hotels andrestaurants or doing o ce work 16 [and or data processing (not being computers within the meaningo section 32AB).

11. Steel urniture, whether made partly or wholly o steel.

12. Saes, strong boxes, cash and deed boxes and strong room doors.

13. Latex oam sponge and polyurethane oam.

14. Crown corks, or other ttings o cork, rubber, polyethylene or any other material.

15. Piler-proo caps or packaging or other ttings o cork, rubber, polyethylene or any other material.


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EXPENDITURE ON- ACQUISITION OF PATENT RIGHTS OR COPY RIGHTS [SEC. 35A]

Beore 1/4/1998 Allowed in 14 equal annual instalments

On or ater Depreciation at 25% (WDV)

EXPENDITURE FOR OBTAINING LICENSE TO

OPERATE TELECOMMUNICATION SERVICES [SEC. 35ABB]Actual payment made to obtain a license, shall be allowed as deduction in equal instalments during thenumber o years or which he license is in orce.

I licence ee (amount) paid beore

Commencement o busienss

I licence ee (amount) paid beore

Commencement o busienss

Amount o deduction =Actual aount (ee) paid______________________

Total no o license periodAount o deduction =

Actual aomunt (ee) paid______________________Total no o license period

Treatment ater sale o license (or capita lgain purpose)

Fully license right sold Partly license right sold

SV > AV SV > WDV SV > AV SV > WDV

Sale value Org cost__________________Capital Gains Org cost WDV_______________Business Income Org cost WDV_______________Business Income Sale Value WDA_______________Business WDA Sale Value_______________WDA

EXPENDITURE (DONATION) ON ELIGIBLE PROJECT OR SCHEMES [SEC. 35AC]

(1) Eligible expenditure Payment to public sector company, local authority, approved association,direct expenditure incurred on eligble project (For Company only)

(2) Amount deduction Actual payment OR Actual expenditure

(3) Disallowance unless assessee urnishes along with his Return o Income ax a certicate

In Form No. 58A rom entity in respect o contribution (Expenditure or Donation) made

In case where the expenditure is directly incurred (only or companies), a certicate rom theChartered Accountant.

DEDUCTION IN RESPECT OF CERTAIN SPECIFIED BUSINESS *[SEC. 35AD]

Investment-linked tax incentive or specied business-cold chain acilities, warehousing acilities orstorage o agriculture produce, and

Cross-country natural gas or crude or petroleum oil pipeline network or distribution, includingstorage acilities

Specifed business Eligibleassessee

Date o commencement obusiness on or ater

Setting up & operating a cold chain acility or agriculturalproduce, meat, polutory products, processed ood, etc

Any April 1, 29

Setting up & operating a warehousing acility or storage oagricultural produce

Any April 1, 29

Laying & operating a cross-country natural gas pipeline networkor distribution include storage acilities

Indian Co OrConsortium o such

co

April 1, 27


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Laying & operating a cross-country crude/petroleum oil pipelinenetwork or distribution including storage acilities (Approvalrequired rom Petroleum and Natural Gas Regulatory boardnotifed by CG)

Indian Co OrConsortium o such

co

April 1, 29

Building & operating, anywhere in India, a hotel o 2 star orabove (we AY 211-12)

Any April 1, 21

Building & operating, anywhere in India, a hospital with atleast1 beds (we AY 211-12) Any April 1, 21

Developing & building a housing project under a scheme orredevelopment or rehabilitation

Any April 1, 21

Developing & building a housing project under a scheme oraordable housing (we AY 211-13)

Any April 1, 211

Production o ertilizer in India (we AY 211-13) Any April 1, 211

Deduction: 1% deduction o capital expenditure incurred during the previous year 1% o capital expenditure incurred prior to commencement o business shall be allowed in year

o commencement o business only i same has been capitalized on the date o commencemento buisness

Capital expenditure shall not include land, goodwill & fnanical instrument* [* Sec. 28(iv): Any sum, whether received or receivable, on account o capital assets (otherthan land or goodwill or fnancial instrument) being demolished, destroyed, discarded

or transerred, i the whole o the expenditure on such capial assets has been allowed as

deduction under Sec. 35AD shall treated as income o assessee chargeable to income under

the head PCBP.]

Other Provisions Business should be new business ie should not be ormed by splitting/reconstruction o oldbusiness

Business should not be set up by transer o old plant & machinery Old plant & machinery shouldnot be more than 2% o total plant & machinery used or the business

Deduction u/s VI-A shall not be allowed in respect o such business or any assessment year Actual cost o the asset or which deduction has been allowed u/s 35AD shall be taken as NIL Further, receipts on account o sale o these assets shall be taxable u/h PGBP only, whatever the

amount may be

Explanationregardingamendment

Since the word new is deleted, thereore the hotels (2 star or above) and hospital (1 or morebed) carried on by assessee beore 1421 is now covered under Specifed business However,no deduction under this section is available because one o the conditions or claiming deductionis the business must be operate on or ater 1421

But the assessee is eligible to set o the loss with the proft o earlier hotel business u/s 73ABecause, section 73A allow to set o o losses o one specifed business with the proft o anotherspecifed business Hence, or set o what is important is only Specifed business and whethersuch specifed business is eligible to claim deduction u/s 35AD or not is immaterial

EXPENDITURE BY WAY OF PAYMENT TO ASSOCIATIONS AND INSTITUTIONSFOR CARRYING OUT RURAL DEVELOPMENT PROGRAMMES [SEC. 35CCA]

Assessee contribute or

(i) National und or Rural Development

(ii) National Urban poverty Eradication und,

Te assessee shall be allowed a deduction o the amount o such expenditure during the PY.


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AMORTISATION OF CERTAIN PRELIMINARY EXPENSES [SEC. 35CCA]

Meaning o Expenses: Any expenses incurred beore commencement o business sections

Q. Who can clalim? (1) Preparation o easibility report/project report

A. Resident person (2) Conducting market surveys or any other surveys necessary or business

OR (3) Legal charges or drating any agreement/registering the complaint

Indian company (4) Legal charges or drating MoA/AoA

(5) Printing o MoA/AoA

(6) In connection with the issue, or public subscription o shares anddebentures, underwriting commission

(7) Engineering services relating to business o the assessee

Amount o Expenditure incurred Minimum o

Deduction:

On or beore 1-4-1998

(Avail or 10 successive years)(1)

1___1

[Maximum o (a) 25% o project Value [OR (b) 25% o

Capital Employed]

(2) Actual expenditure

Expenditure incurred on or

ater 1-4-1998 (Avail or 5

successive years

Maximum o

(1)1___

1 [Maximum o (a) 25% o project Value [OR (b) 25% o

Capital Employed](2) Actual expenditure

Some important

terms

Cost o project All fxed cost (Actual)

Capital employed Equity share capitalAdd: General reserveAdd: Debenture

Add: Preerence share

EXPENDITURE OF AMALGAMATION/DEMERGER *[SEC. 35DD]

Who can claim? Indian companies

Deduction:1___

5tho expenditure (in 5 equal installments)

EXPENDITURE INCURRED ON COMPENSATION UNDER VRS*[SEC. 35DDA]

Deduction: 1___

5tho expenditure (in 5 equal installments)

Amended

[on AY 2011-12]

Where a private company or unlisted company is succeeded (purchased) by a LLP, the provisiono Sec 35DDA shall apply to the successor (purchaser) LLP, as they would have applied topredecessor (sold) company

However, as per Sec 35DDA (5), no deduction under Sec 35DDA shall be allowed to thepredecessor (sold) company in the PY in which conversion takes place


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OTHER DEDUCTIONS [SEC. 36]

(a) Insurance premium on stock/stores used in Business or Proession (only in year of payment)

(b) Insurance premium on lie o cattle(only in year of payment)

Amount o deduction = Actual cost o animal less Amount realized on sale o animals

(c) Insruance premium on health o employee under ollowing schemes:

Mode o payment: Other than cashGeneral Insurance Corporation o India approved by CG

Any other insurer approved by IRDA

(d) Interest on capital borrowed or business purpose

(e) Contribution byemployer to rcognised P.F. or Approved Superannuation und subject to limit speciedin those und

() Contribution to approvd Gratuity Fund or exclusive benets o employees

(g) Contribution rom employees on or beore the due date under the relevant Act.

(h) Bonus or commission paid to an employee or service rendered [Sec. 36(I)(va)]

(i) Bad debts only actual bad debts allowed [Sec. 36(I)(vii)]

(j) Family planning expenses only or company assesse Revenue expenditure ully allowed

Capital expenditure Allowed in 5 years in equal instalments

Unabsorbed amily planning expenditure same manner as unabsorbed depreciation

[Sec.36(I)(ix)]

(k) Discount on zero coupon bonds on the basis o lie o the bonds and onpro-rata basis

[Sec.36(I)(iiia)]

(l) Banking transaction tax on taxable banking transaction by assessee [Sec. 36(I)(xiii)]

(m) Securities ransaction ax. [Sec.36(I)(iiia)]

(n) Employers contribution towards employee pension scheme reerred u/s 80CCD

Minimum o(1) Amount contributed

(2) 10% o Salary [Here, Salary = Basic Salary + DA]

[Meaning o salary in diferent cases: Page no. 11] *[Sec.36(I)(iiia)]

GENERAL CLAUSE FOR DEDUCTIONS [SEC. 37(1)

Any expenditure other than reerred under Sec. 30 to 36 shall allowed provided ollowing conditions aresatised:

1. It should not be in the nature o capital expenditure

2. It should not be in the nature o personal expenditure

3. Incurred wholly and exclusively or the purpose o business or proessionNote: Any expenditure incurred or any purpose which is an ofence or which is prohibited by law (e.g.extortion money, protection money, hata, bribes etc.) shall not be allowed under Sec. 37(1)

Expenditure on advertisement in any souvenir, brochure, tract, pamphlets or like that published by anypolitical party will not allowed [Sec. 37(1)]


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5.2 Disallowed Expenditures [Sec. 40 to Sec. 43B]

EXPENSES NOT DEDUCTIBLE [SEC. 40(a)

(1) Salary, Interest, Royalty, etc. or non-resident (without DS)

(2) Interest, Commission, Royalty, etc. or resident (without DS)

(3) Fringe benet tax

(4) Income tax/Dividend ax

(5) Wealth ax

DISALLOWANCE FOR PARTNERSHIP FIRMS [SEC. 40(b)]

Payment o interest to any partnerMinimum o (1) as per deed or (2) 12% p.a.

For payment o salary, bonus to working partner:

Specifed Proession Firm Other Firm

On the frst ` 3,, o the book proft or in case o loss `1,5, or at the rate o 9% o the book proft, whicheveris more

On the balance o the book proft 6% o book proft

PAYMENT TO SPECIFIED PERSONS [SEC. 40A(2)]

A.O. may disallowed excessive or unreasonable (air market value)

CASH PAYMENT IN RESPECT OF EXPENDITURE EXCEEDING ` 20,000 [SEC. 40A(3)]

Payment in excess o ` 20,000 (or transporter ` 35,000) otherwise Account Payee cheque or DemandDrat 100% disallowed

Note: Sec. 40A(3) will not apply i assessee purchase a capital asset.

Exceptions: payment made t bank and nancial institutions, Govt., Banking Holiday, Employees (not exceed` 50,000), village not served by any bank, book adjustment, producer o agriculture, Poultry arm, Dairy,Cottage Industry (without aid o power)

DISALLOWANCE IN PROVISION FOR GRATUITY [SEC. 40A(7)]

Provision or Gratuity

Approved gratuity und (allowed), actual payment o gratuity (allowed)

CERTAIN DEDUCTION ON ACTUAL PAYMENT BASIS [SEC. 43(B)

Certain deduction are made only on actual payment on or beore the due date o ROI

Any tax, duty, cess, Interest on loans rom scheduled bank or any public nancial institution

Any bonus or commission or leave encashment t employees, contribution to PF

PROFIT CHARGEABLE TO TAX [SEC. 41(1)]

(a) Where any loss or expenditure has been allowed as deduction and subsequently any amount isreceived and then the amount so received shall be deemed to be the Income o the P/Y in which suchamount is received.


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(b) Where a deduction has been allowed in respect o a trading liability and subsequently there is aremission or cessation o the trading liability then he amount o trading liability so ceased shall bedeemed to be the income o P/Y in which such remission or cessation took place.

[Note: Te above provisions shall apply even i the business is not in existence]

RECOVERY OF BAD DEBTS [SEC. 41(4)

Where a deduction has been allowed in respect o bad debts and the bad debts is subsequently recovered,and the amount so recovered shall be deemed to be the income o P/Y in which the amount is recovered.

[Note: Te above provisions shall apply even i the business is not in existence]

MAINTENANCE OF ACCOUNTS BY PERSON CARRYING ON

PROFESSION NOR BUSINESS [RULE 6F][SEC. 44AA]

(1) Business assesse (Other than notied proession): Income rom business or proession exceeds` 1,20,000 Or otal sales/gross receipts exceeds ` 10,00,000. In any o 3 preceeding P/Yor likely toexceeds in case o newly setup business or proession.

Assessee is required to maintain books o account and other documents (or computation oincome)

(2) Note required to maintain any books i specied amount are not exceeded.

Notied Proessions: Proession o Law, Medicine, engineering, accounting, CA, CS, etc.

(i) Gross receipts exceeding ` 1,50,000 (in all three years immediately preceedings the PY or likely toexceed i the proession is newly setup)

Assessee is required to maintain Specied books Cash Book, Journal, Ledger, Carbon Copies oBills exceeding ` 25, Original Bill or expenditure exceeding ` 50

In case o medicine proession: Daily Cash Register, Medicine Inventroy Register

(ii) In other cases: Assessee is required to maintain such books o account and other documents as mayenabvle the Assessing O cer to compute income

COMPULSORY TAX AUDIT OF ACCOUNTS [SEC. 41AB]

(1) Applicability (a) For business total sales or gross receipts exceed ` 60,00,000

(b) For Proession gross receipts exceeds ` 15,00,000

(c) Business reerred to u/s 44AD/AE/AF and declaring lower income

(2) Filling o report Audit report o CA on or beore 30th September o the relevant A/Y

(3) I accounts audited under any other law Report with audit report under any law

(4) Consequence o non-compliance Deective return [Sec.139(9)]

Penalty: Failure to Keep/maintain books o account, documents etc. [Sec.271A] ` 25,000

Penalty: Failure to get accounts audited/to urnish audit report [Sec.271A] ` 1.5 lakh

Due dates or getting books audited or submission o audit report and its Form No.

Dierent Taxpayes Audit Form No. Statement o

particulars

Due dates or

getting books

audited

Due dates or

submission o

audit report

In the case o a person who carrieson Business or Proession and who isrequired by or under any law to get hisaccounts audited

Form No 3CA Form No 3CD 3th Septembero the AY

3th Septembero the AY


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In the case o a person who carries onBusiness or Proession but not being aperson reerred above

Form No 3CB Form No 3CD 3th Septembero the AY

3th Septembero the AY

SPECIAL PROVISION FOR COMPUTING PROFITS AND GAINS OF BUSINESS

ON PRESUMPTIVE BASIS [AMENDED AY 2011-12] [SEC. 441AD]Notwithstanding anything to the contrary contained in Sections 28 to 43C.

In the case o an eligible assesseeengaged in an eligible business*,

A sum equal to 8% o the total turnover or gross receipts o the assessee in the previous year on accounto such business or, as the case may be, a sum higher than the aoresaid sum claimed to have beenearned by the eligible assessee,

Shall be deemed to be the prots and gains o such business chargeable to tax under the head Protsand gains o business or proession.

Efect o this amendment: Now not only retail business but all business covered so scope o this section isvery wide. Tat is also evident rom the act , that just because o this amendment, a new IR has come called

Sugam#Eligible assesse:

1. An individual, HUF or a partnership rm, who is resident, but not LLP as dene in Sec. 2(l)(n) o theLimited Liability Partnership Act, 2008 and

2. Who has not claimed deduction under any o Sec. 10A, 10AA, 10B, 10BA or 80HH to 80RRB

*Eligible Business:

1. Any business except the business o plying, hiring or leasing goods carriages reerred to in Sec. 44AE;and

2. Whose total turnover or gross receipts in the previous year does not exceed an amount o sixty lakhrupees.

Tere is specic urnover limit o ` 15 Lakhs or Proession under Section 44AB, which means thatproession is totally separate rom Business.

Te assessee is bound to get the books o accounts audited, i the ollowing two conditions aresatised:

1. His prots and gains rom the eligible business are lower than the prots and gains specied in sub-section (1) i.e. his net prot is lower than 8% o turnover

And

Whose total income exceeds the maximum amount which is not chargeable to income-tax

[Sec. 10A] Special provision in respect o newly established undertaking in ree trade zone or exportprocessing zone.

[Sec. 10AA] Special provision in respect o newly established undertaking in ree trade zone who begins to

manuacture or produce articles or things or provide any services during the PY relevant to anyAY commencing on or ater 1-4-2006.

[Sec. 10B] Special provision in respect o newly established100% export oriented undertaking.

[Sec. 10BA] Special provision in respect o export o certain things or articles.

Tings to kept in mind with above provisions:

(1) Deduction under Section 30-38 (deemed to be allowed)

(2) Depreciation (deemed to be allowed)

(3) urnover or under (Sec. 44AB not to considered)

Option or lesser amount (Section 44AA & 44AB applicable)

Partners - Interest, salary(allowed)

Deduction under Section 80C-80U (allowed)


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SPECIAL PROVISION TO COMPUTING PROFIT AND GAINS OF BUSINESS OF

PLYING, HIRING OR LEASING GOODS CARRIAGE ON PRESUMPTIVE BASIS I

AMENDED AY 2011-121 *[SEC. 44AE]

Heavy goods vehicles: ` 5,000 per month/part o month or each heavy goods vehicle.

Other vehicles: ` 4,500 per month/part o month or each light goods vehicle (Maximum 10 goods carriage)

Common doubts:

Question 1: Whether Depreciation is allowed in respect o Goodwill?Answer: It was held in case oRaveendran Pillai Vs. CIT (2010) that i the goodwill is specically purchasedthen depreciation is allowed. However, In case o sel-generated Goodwill no depreciation is allowed.

Question 2: Whether computer printers and scanner are eligible to get higher rate o depreciation o 60% ascomputer or only general rate o 15%?

It was held in case o Samiran Majumdarthat or the purposes o depreciation computer printers andscanners to be regarded as computers and eligible or 60% rate and not 15%.

Format: Computation o Income under the head Prots and Gains rom Business or Proession

Particulars Amount (`) Amount (`)

Net proft as per Proft and Loss A/c

Add: Expenses debited to Proft and Loss A/c but not allowed as deduction

Less: Expenses not debited to Proft and Loss A/c but allowed as deduction ()

()

Less: Incomes credited to Proft and Loss A/c but either exempt or taxable under otherheads o income

Add: Incomes not credited to Proft and Loss A/c but taxable under other heads ()

o Proft and Gain rom Business or Proession Add: Adjustment o over-valuation o opening stock

Less: Adjustment o under-valuation o opening stock ()

Add: Adjustment o under-valuation o closing stock ()

Less: Adjustment o over-valuation o closing stock

Add: Adjustment o goods withdrawn by proprietor

Cost Price

Less: Price charged ()

Less: Adjustment o goods withdrawn by proprietor ()

Price charged ()

Less: Cost Price Add: Depreciation as per books o accounts

Less: Depreciation as per Income Tax Rules ()

PROFITS AND GAINS FROM BUSINESS OR PROFESSION


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C H A P T E R6

Income Under Head Capital Gains

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the positive in every situation.

Section Provision

Sec 45(1) Basis o charge (ie charging Section)

Sec 2(14) Meaning o capital asset

Sec 2(42A) Short-term capital asset

Sec 2(29A) Long-term capital assetSec 2(42B) Short-term capital gain

Sec 2(29B) Long-term capital gain

Sec 2(47) Defnition o transer

Sec 4 Method o calculating capital gain

First provisoto Sec 4

Computation o capital gain rom transer o shares or debentures o Indian companyheld by NR assesse and purchased in oreign currency

Rule 115A Method o conversion

Secondproviso toSec 4

Indexation

Sec 55 Cost o acquisition

Sec 47 Certain transaction not regarded as transer

Sec 49(1) Cost with reerence to certain modes o acquisition


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Income Under Head Capital Gains 41

Sec 49(2AA) Where the capital gain arises rom the transer o specifed security or sweat equityshares reerred to in Sec I7(2)(vi), the CO A o such security or shares shall be the FMVwhich has been taken into account or the purpose o said Sec 17(2)(vi)

Sec 49(4) Where the capital gain arises rom the transer o a property which has been subjectto income-tax under Sec 56(2)(vii), the CO A o such property shall be deemed to be

the value which has been taken into account or the purpose osaid Sec 56(2) (vii)Sec 2(42A) Period o holding

Sec 55 Cost o improvement

S