16478005 taxation notes

8/7/2019 16478005 Taxation Notes

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Ch.1 BASIC CONCEPTS

Financial Year: The year starting from April 1 and ending on March 31 of the next year is knownas a financial year.

Assessment Year: AY is a financial year in which the income earned during the previous year istaxed.

Previous Year (sec 3): The year in which the income is earned is called the previous year.

E.g.:1. Income earned by XYZ Ltd in the year 2007-2008 will be taxed in the year 2008-2009.

The same would be taxable irrespective of the accounting year followed by the assessee.In the aforesaid the year 2007-08 is the previous year and the year 2008-09 is theassessment year.

2. The income of X comprises of only property income till March 10, 2006. On March 10,

2006 he starts a new business of computer hardware. From the date given below, findout the taxable income of X or the assessment years 2005-06 to 2007-08.Property income: Rs. 42,000/- every year.Business income: Rs 10,000/- for the period ending 31 March 2006 and Rs.56000/-forthe period ending 31 march 2007.What would be the taxable income of X for the AY 05-06, 06-07, 07-08?

Income earned during the previous year is taxed during the assessment year. Therefore a year isan assessment year and previous year simultaneously. However in certain cases the income istaxed in the year in which it is earned. The exceptions to the rule are as under:

1. Income of non-resident from shipping. (sec172)2. Income of persons leaving India either permanently or for long period of time (sec174)

3. Income of bodies formed for short duration. (sec174A)

4. Income of persons trying to alienate his assets with view to avoiding payment of his tax.(sec 175)

5. income of discontinued business.(sec176)

Person sec 2(31):The term persons include:

a) an individualb) a Hindu undivided familyc) a companyd) a firme) an association of persons and a body of individuals whether incorporated or notf) a local authority

g) Every artificial jurisdictional person not falling under any of the preceding category.

The aforesaid is an inclusive list and the last category covers all those that do not fall in any of thepreceding classification.

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Assessee [sec2 (7)]:Assessee means a person by whom any tax or any other sum of money (i.e. penalty or interest ispayable under the act. It includes:

1. Every person in respect of whom any proceeding under the act has been taken for theassessment of his income or loss or the amount of refund due to him.

2. any person who is deemed to be an assessee.(representative assessee)

3. an assessee in default ( advance tax and TDS not deducted)

Overview of tax on income:

Income Tax is an annual Tax charged at the tax rates applicable for the assessment year, whichare fixed by the annual finance act.

Basic concept of Income:

1. Regular and definite source2. Different form of income (cash/kind)3. Receipt v/s accrual4. Illegal income5. Disputed title6. Relief or reimbursement of expense is not income7. Diversion of income by over riding title v/s application of income8. Surplus from mutual activity not an income.9. Temporary or permanent income10. tax free income

11. Receipt on account of dhrmada, gaushala etc is not an income.12. devaluation of currency

13. Income includes loss.

14. Appropriation of payment between capital and interest.15. same income cannot be taxed twice16. income should be real and not fictional

17. charge on person18. Award receipt by sports man19. revenue receipts v/s capital receipts20. voluntary payment21. prize of winning

Extended meaning of income sec 2(24):

1. profits and gains2. Dividend: dividend declared by domestic company is taxable in the hands of company

and not shareholders3. Voluntary contribution received by trust.4. Perquisites in the hands of employee5. Any special allowance and benefits6. City compensatory allowance7. Benefits or perquisites of director8. Benefit or perquisites to a representative assessee9. Any sum chargeable u/s 28, 41 and 5910. Capital gains11. Insurance profit12. banking income of a cooperative society13. winning from lottery14. employees contribution towards provided fund

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15. amt received under keyman insurance policy16. amount exceeding 50,000 by way of gift

Gross total income

As per section 14, the income is computed under five heads:

Rounding off total Income:The total income is to be rounded off to the nearest multiple of ten rupees.

Rs Rs

Computation of total income:Income from salariesIncome from House propertiesprofit and gains from business and professionCapital gains

Income from other sources Gross Total IncomeLess: deductions u/s 80 C to 80 U

Net total Income (rounded off)

--------

-- --

--

Computation of Tax Liability:

Tax on total income

Less: rebate u/s 88E

Balance

Add: surchargeTotal

Add: education cess

Tax

Less: Prepaid taxes

( TDS, self assessment and Advance tax)Tax Liability

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Ch.2 RESIDENTIAL STATUS AND ITS TAX EFFECT

Different Taxable Entity:

1. Individual2. Hindu Undivided Family3. A firm or an association of persons4. a joint stock company5. every other person

Residential status:

1. Resident and ordinary resident in India2. Resident but not ordinary resident in India3. Non-resident in India.

Different residential Status for different Taxable entity:

CategoryIndividual/ Hindu undivided Family Firm/association of persons,

joint stock company and everyother person.

Category 1

Ordinaryresident

ResidentIn India

Non-ordinaryresident

Resident in India

Category 2 Non resident in India Non resident in India

Residential status is to be determined for each previous year. A person can be a resident of twocountries at once. Whether a person is a resident or non-resident is a question of fact and its dutyof the assessee to place all relevant fact in front of the assessing officer

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Residential status of individual (sec 6):

Basic conditions:To be an Indian resident a person should satisfy atleast one of the two conditions as under:

1. He is in India in the previous year for a period of 182 days or more.2. He is in India for 60 days or more during the previous year and 365 days or more during

4 years immediately preceding the previous year.

Exceptions:In the following two cases a person will be a resident if he satisfies only the first condition, thesecond condition is not applicable.

1. In case of an Indian citizen who leaves India for the purpose of employment or as amember of the crew of an Indian ship.

2. In the case of an Indian citizen or a person of Indian origin who comes on a visit to India

in the previous year.

Additional Conditions:

For a resident to be classified as an ordinary resident the following two additional conditionsshould be fulfilled. In case any one of them is not fulfilled then the person will be under thecategory of resident but not an ordinary resident.

1. He should be resident in India for at least 2 years out of the preceding 10 years.2. He should be in India for at least 730 days out of the immediately preceding 7 years.

Eg:

X foreign citizen comes to India for the first time on March 20, 2006. On Sep 1,

2006 he leaves for Nepal on a business trip. He comes back on February 26,2007. Determine the residential status of X for the AY 2007-08.

X left India for the first time on May 20, 2004. During the FY 2007-08, he comesback to India on May 27 for a period of 53 days. Determine the residential statusfor the AY 2008-09.

X a foreign citizen leaves India for the first time in the last 20 years on Nov20,2004. During the calendar year 2005, he comes to India on Sep 1 for 30 days.During the calendar year 2006, he does not visit India at all but come on January16, 2007. Determine the residential status for the AY 07-08.

Residential Status of a Hindu undivided Family sec 6(2):

HUF is classified as a resident and non resident according to its control and management status.Control and management means the de facto control and management and not just the right tocontrol and manage.

Place of controlResidential statusof HUF

Ordinary residentor not

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Control and mangt is wholly in India Resident Next table

Control and mangt is wholly outside India Non-resident --

Control and mangt is partly in India and partlyoutside India

Resident Next table

Condition for being ordinary resident:

Add condition 1 Karta has been resident in India at least 2 out of 10 previous yearsimmediately preceding the relevant previous year.

Add condition 2 Karta has been present in India for a period of 730 days or more duringthe 7 years immediately preceding the previous year.

If karta or manager of a resident HUF does not satisfy the above two conditions then it would betreated as resident but not ordinary resident.

Eg:

X an individual, is resident but not ordinary resident in India for the AY 07-08. During theprevious year 06-07, the affair of X (HUF), whose Karta is X is partly managed from Indiaand partly from Nepal. Determine the residential status of X (HUF) for the financial year07-08?

Residential status of firm and association of persons: sec6 (2)

Place of control Residential

statusControl and management of the affairs of a firm/association of personsis-

Wholly in India

Wholly outside India

Partly in India and Partly outside India

ResidentNon-residentResident

Residential status of a company sec 6(3):

Place of control Residential status

Indian Company Other company

Control and management of the affairs of thecompany is situated-

Wholly in India



ResidentResidentResident

ResidentNon residentNon resident

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The term control and management refers to head and brain that directs the affair of policy,finance, disposal of profits and vital things regarding the management of a company.

Residential status of every other person sec 6(4):

Place of control Residential status

Control and management of his affairs are situated-

Wholly in India



ResidentNon- resident

Resident

Incidence of Tax for different Taxpayers:

Incidence of tax on taxpayers depends on his residential status and also on the place and time ofaccrual and receipt of his income.

Tax incidence on Individual and HUF is as under:

Resident andordinary resident

Resident but notordinary resident

Non resident

Indian Income

Foreign Income

Business is controlled

wholly or party from India

Income from profession set

up in India

Business is controlled from

outside India

Profession is set up

outside India

Any other foreign Income

Taxable in India

Taxable in India

Taxable in India

Taxable in India

Taxable in India

Taxable in India

Taxable in India

Taxable in India

Taxable in India

Not taxable in IndiaNot taxable in IndiaNot taxable in India

Taxable in India

Not taxable in India

Not taxable in India

Not taxable in IndiaNot taxable in IndiaNot taxable in India

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Tax incidence on any other taxpayer (company, firm etc) as under:

Resident in India Non- resident in India

Indian Income

Foreign income

Taxable in India

Taxable in India

Taxable in India

Not Taxable in India

Ch3. Income that is exempt from Tax

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Agriculture Income:

Agriculture income is exempt from tax by virtue of sec 10(1). By virtue of sec 2(1A) theexpression Agriculture Income means:

1. Any rent or revenue derived from land, which is situated in India and is used foragriculture purpose.

Rent or revenue should be derived from land (may be in cash or kind).

The land should be in India

The land should be for agriculture purpose.

2. Any income derived from such land by agricultural operations including processing ofthe agriculture produce, raised or received as rent-in- kind so as to render it fit for themarket or sale of such produce.

3. Income attributable to a farmhouse subject to certain conditions.

The building should be occupied by a cultivator (as a landlord or tenant).

He should be in immediate vicinity of agriculture land.

The building is used as a dwelling house or as a store house or other out

building. The land is assessed to land revenue or local rates or alternatively the land is

situated outside urban areas i.e. any area which is comprised within themunicipality jurisdiction having a population of not less than 10,000 persons orwithin 8 kms from the limits of any such municipality.

If the above conditions are satisfied then, income from a farm building is exempt from tax.

Agriculture income is included for tax rate purposes only.

Special Provisions in respect for newly established undertaking Sec 10(A):

Eligibility:

Any undertaking which satisfy the following conditions is eligible to get deduction:1. It must begin manufacture or production in free trade Zone2. It should not be formed by splitting/ reconstruction of business.3. It should not be formed by transfer of old machinery. (Second hand imported and 20%)4. Sale consideration should be remitted to India in convertible foreign exchange.5. Books of account should be audited6. Return of income should be submitted on Time.

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If a voluntary contribution is made with a specific direction than it shall form a part of the

corpus of the trust and not deemed as the income of the trust.

Application of the income of the trust:

If the income applied to charitable or religious purposes, during the previous year fall short of

85% of the income derived during the year due to below mentioned reasons then the trust can usthe income as below:

Reason for less than 85% application ofincome

When the income can be spend

Income has not been received during theprevious year

Any other reason

The year in which the income is received or thefollowing subsequent year.

During the previous year immediately followingthe year in which the income is derived.

If the income is not applied during the extended time then the income will be taxable in the nextyear.

Accumulation of income:

The trust or institution may accumulate or set apart either the whole or part of its income for futureapplication for such purposes. Such income so accumulated will not form the income of the trust.

Forfeiture of exemption:

If the benefits of any amenities or services are derived by any specified persons as per section 13then the exemption given to trust stand forfeited.

The following income do not qualify for exemption:1. Income for private religious purposes only2. Income for the benefit of particular religious community3. Income for the benefit of interested persons4. Funds not invested in specified securities/ deposits

Eg:During the previous year 2006-07, a charitable trust gets the following income:a. Voluntary contribution (with specific direction that they Rs

shall form part of the corpus of trust 12,90,000b. Voluntary contribution (without specific direction) 18,30,000c. Income from property held in trust

During the previous year 2006-07, the trust spends Rs. 8,90,000 for charitable purpose in India.Besides it gives donation of Rs. 85,480/- to the charitable trusts. It sets apart Rs. 14,00,000 forthe purpose of construction of a charitable hospital up to March 31,2012.

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Ch.4 INCOME UNDER THE HEAD SALARIES

Meaning of salary

1. Relationship of an employer and employee2. Salary and wages not conceptually different3. Salary can be from more than one source4. It can be in cash or kind

Salary Sec 17(1):

Salary under 17(1), is defined to include the following:1. wages2. any annuity or pension3. any gratuity4. any fees, commission, perquisites, or profits in lieu of or in addition to any salary or

wages.5. any advance on salary6. any payment received by an employee in respect of any period of leave not availed by

him.7. the portion of the annual accretion in any previous year to the balance at the credit of an

employee participating in a recognized provident fund to the extent it is taxable.8. the contribution made by the central government to the account of an employee under a

pension scheme.

Basis of Charge Sec 15:

1. Any salary due from an employer whether actually received or not.2. Any salary received in the previous year whether actually due or not.3. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an

employer, if not charged to income tax for any previous year.

Computation of income from Salary:

Income from Salary

Income by way of allowanceTaxable value of perquisites

Gross SalaryLess: deductions u/s 16

Entertainment AllowanceProfessional Tax

Income from salaries

Rs. Rs.

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Leave Salary:

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Leave Salary refers to the encashment of the leave standing to the credit of an employee either atthe time of his retirement/ or leaving his job or at any time during his service.

Tax treatment:

Nature of Leave encashment Status of employee Whether it is taxableLeave encashment during continuityof employment

Government/ nongovernment employee

Chargeable to Tax

Leave encashment at the time ofretirement / leaving the job

Government employee Fully exempted

Leave encashment at the time ofretirement / leaving the job

Non governmentemployee

Fully or partly exempted fromtax in some cases.

Non government employee getting Leave encashment at the time of retirement / leaving the job:

In case of a non-govt employee including a local authority or public sector undertaking, leavesalary is exempt from tax on the basis of following:

1. Period of earned leave (in no. of months) to the credit of employee x Average Salary permonth. (cannot exceed more than 30 days in a year)

2. 10 x average monthly salary(Avg monthly salary= basic salary+ dearness allowance+ commission onturnover)

3. Amt specified by Govt. (300,000)4. Leave encashment actually received

Note: Any part of the year is to be ignored.

Eg:

1. Mr. Pradeepkumar retires on 1st July 2007 after serving 18yrs of service and receives Rs.80,000 as amount of leave encashment for 15 months. His employer allows 45 daysleaves for every completed year of services. During service he has encashed leave for aperiod of 12 months. Calculate the taxable amount of leave encashment if his salaryduring 1/7/06 to 1/7/07 is Rs. 5000/- per month.

Gratuity Sec 10(10):Gratuity is a retirement benefit and is generally payable at the time of cessation of employmentand on the basis of duration of service.

Status of employee Tax treatment

Government Employee Fully exempted from Tax

Non government employee coveredby the payment of Gratuity Act, 1972

Exempted to the Least of the following:

3,50,000/-

Gratuity actually received

15 days last drawn salary x length ofservice/26

Non government employee notcovered by the payment of Gratuity

Act, 1972

Exempted to the Least of the following:

3,50,000/-

Gratuity actually received Half-month average salary for each

completed year of service.

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Note:1. In case where the employee is covered by gratuity Act, 1972 then the year is to be

rounded off to the nearest whole. (above 6 months the year to be rounded off to one.)

2. In case where the employee is not covered by the gratuity Act, 1972 then the years arethe completed years of service( any fraction is to be ignored).

Eg:1) X, an employee of PQ Co. Ltd, receives Rs. 78,000 as gratuity. He is covered by the payment

of gratuity Act, 1972. He retires on December 12, 2006 after rendering services of 38 yearsand 8 months. At the time of retirement his monthly basic salary and dearness allowance wasRs.2,400/- and Rs. 800 respectively. Calculate the amount of exemption.

2) In the above example calculate the amount of exemption if X was not covered by the GratuityAct, 1972.

3) Mr. X retired on 1st April 2007 after serving for 30 years and 7 months. He was getting salaryRs. 5,000/- pm from 1/1/2006 to 31/12/2006 and thereafter Rs. 5,200/- pm. He received DA@ Rs. 1,000 pm (forming part of salary for computation of retirement benefits) and2%commission on sales achieved by him. Turnover achieved by him during 10 months(preceding the month in which he retired) Rs. 8,00,000. He received a gratuity of Rs.1,56,000. Compute the exempted amount of gratuity.

Pension Sec 17(1)(ii):

Uncommuted Pension: Periodical payment of pension.

Commuted Pension: Lump sum payment in lieu of periodical payment.

Taxability of commuted pension:

Uncommuted Pension is always chargeable to tax for both government and non-governmentemployee.

Status of employee Gratuity received/ not received

Exemption

Government Employee Gratuity may or may not bereceived

Exempted from Tax

Non-GovernmentEmployee

Gratuity is received One-third of the pension,which he is normallyentitled to receive, isexempt from tax.

Gratuity is not received One-half of the pension,

which he is normallyentitled to receive, isexempt from tax.

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Eg:

1. X retires from a private company on 30th April 2007. He gets a pension of Rs. 24000/- permonth. Upto 30th June 2007. From 1st July 2007 onwards he gets two-third of his pensioncommuted for Rs. 1,50,000/-. He was not in receipt of any gratuity at the time of

retirement. Compute the taxable amount of pension for the assessment year 2008-09.2. Calculate the taxable pension of X for the AY 2008-09, in the above ex. if X was in receiptof Gratuity as per gratuity Act 1972.

Pension Scheme for an employee joining Central Government on or after Jan 1, 2004:Under the new scheme it is compulsory for an employee to contribute 10% of salary every monthtowards their pension account and a matching contribution will be made by the government. Suchcontribution will be deductible under u/s 80 CCD. When the pension is received out of theaforesaid amount it will be taxable in the hands of recipient.

Different form of Allowances:

Allowances is generally defined as a fixed quantity of money or other substance given regularly inaddition to salary for the purpose of meeting some particular requirement connected with theservices rendered by the employee or as compensation for unusual conditions for that service.It is fixed, predetermined and given irrespective of actual expenditure.

House rent Allowance:

The least of the following amount would be taxable:1. An amount equal to 50% of the salary, where the residential house is situated at Mumbai,

Kolkatta, Delhi or Chennai and an amount equal to 40% of salary where residential houseis situated at any other place.

2. House Rent Allowance received by the employee.3. The excess of rent paid over 10% of the salary.

Salary means basic salary and includes dearness allowance and commission based on the fixedpercentage of turnover.

Eg:

Mr. X is employed in a company in Agra. He is getting a basic salary of Rs. 5000/- pm,Dearness allowance @10% of basic pay, commission based on fixed percentage ofturnover Rs. 24,000/- pa. Actual rent paid by the assessee Rs. 2,500/- pm. Compute thetaxable amount of HRA.

Entertainment Allowance:Entertainment Allowance is first included in the salary income and thereafter a deduction is givenon the following basis:

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E.g.:X, a government employee gets Rs. 40,000 per annum as basic pay. In addition, he receives Rs.8,500 as entertainment allowance. His actual expenditure on entertainment for official purposehowever exceeds Rs. 9000/-. What would be the amount of deduction?Special Allowances:

When exemption depends upon actual expenditure by the employee:

In these below mentioned cases the amount of expenditure is the least of the Amount of allowance

The amount utilized pertaining to allowance

List of the allowances is as under:1. Traveling Allowance/ transfer allowance2. Conveyance allowance3. Daily allowance4. Helper allowance5. Research Allowance6. Uniform Allowance

When exemption does not depend upon the expenditure:

These allowances are exempt to the least of the following: Amount of allowance

Amount specified in rule 2BB

Name of allowance Nature of allowance Exemption

Tribal Area/ scheduledarea allowance

This allowance if given in MadhyaPradesh, Tamil Naidu, UttarPradesh, Karnatka, Tripura,Assam, West Bengal, Bihar,Orrisa.

Rs. 200 pm

Children EducationAllowance

Given for children education Exemption l imited for Rs. 100/-per month per child limited to a

maximum of two children.

Hostel ExpenditureAllowance

This allowance is granted to anemployee to meet the hostelexpenditure on is child

Exemption limited for Rs. 300/-per month per child limited to amaximum of two children.

Status of Employee Exemption Amount

GovernmentEmployee

Least of the following is deductible:a) Rs. 5000b) 20% of basic salaryc) actual amount of entertainment allowance

Non-government employee Entertainment allowance is not deductible

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Transport Allowance It is given to an employee to meethis expenditure for commutingfrom his office to his residence.

Exempted to the extent of Rs.800/- per month

Special Compensatory( Hill Areas) Allowance

It includes any special allowancein the nature of specialcompensatory (hill areas)allowance or high altitudeallowance or uncongenial climateallowance or avalancheallowance.

Amount exempt varies from Rs.300 per month to Rs. 7000 permonth.

Underground allowance Underground allowance isgranted to an employee who isworking in uncongenial, unnaturalclimate in underground mines.

Exemption limited to Rs.800 permonth.

Perquisites:

Perquisites can be defined as any casual emolument or benefit attached to an office or position inaddition to salary or wages. Therefore a perquisite to be taxable under the head salaries:

a. allowed by an employer to an employeeb. allowed during the continuance of his employmentc. directly dependent upon serviced. resulting in the nature of personal advantage to the employeee. derived by virtue of employers authority

Perquisites: Sec 17(2)The term perquisite is defined to include the following:

1. The value of rent free accommodation provided to the assessee by his employer.2. The value of any concession in rent for accommodation provided by the employee3. Value of any benefit or amenity granted or provided free of cost or at concessional rate

in any of the below cases:a) by a company to an employee who is a director thereofb) by a company to an employee, having an substantial interest in the companyc) any person not included in any of the above two categories having a cash salary of

more than 50,000/-4. any sum paid by the employer in respect of any obligation which but for such payment

would have been payable by the assessee5. any sum payable by the employer, to effect an assurance on the life of the assessee or to

effect a contract for an annuity6. the value of any other fringe benefits or amenity as may be prescribed.

Taxability of perquisites:

When it is an obligation of Employee:If the employer meets an obligation of an employee then the perquisite is always chargeable totax.If the employer, pays any bills which are in the name of employee, then they are taxable in thehands of employee.

When not an obligation of employee:In any other case, where it is not an obligation of an employee, the below table list all perquisiteswhich are taxable in the hands of the employee, Remaining perquisites are not taxable inemployees hands regardless of the expenditure incurred by the employer.

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Taxable Perquisites in the hands of theemployee

Exceptions

Furnished/ unfurnished house without rent or atconcessional rent

Exceptions are:

A rent free house in a remote

area,

hotel accommodation in case oftransfer for not exceeding 15

days.

Services of a sweeper, gardener, watchman orpersonal attendant

Taxable in the hands of Specifiedperson only

Supply of gas, electricity or water for householdpurpose

Taxable in the hands of Specifiedperson only

Education Facility to employees family members Taxable in the hands of Specifiedperson only

Leave travel Concession Exempted if it is given twice in a blockof four years.

Amount payable by an employer directly orindirectly to effect an assurance on the life ofemployee or to effect a contract of an annuity

Any contribution to recognizedprovident fund or super annuationfund is exempted.

Interest free or concessional loan Following are exempted:

Loan not exceeding 20,000,

Loan for medical treatment

Providing use of movable asset Providing use of computer/ laptop or motor car

Transfer of movable asset None

Medical expenditure reimbursement in excess ofRs. 15,000

Following are exempted:

In employer/ govt hospital

Expenditure in case of specified

treatment

Health insurance premium

Medical facilities outside India

Specified/ Non specified Employee:The following are specified employees:

a) An employee who is a directorb) An employee, having a substantial interest in the company: 20% or more voting

power in the employer-company.c) any person not included in any of the above two categories having a salary

(excluding the value of all benefits/ amenities not provided by way of monetarypayment) of more than 50,000/-.

Valuation of rent-free unfurnished accommodation:

a) Central and State Government Employees:The value of such accommodation provided to employee is equal to the license fee,which would have been determined by the central or state government.

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b) Private sector or other employees:Value of the perquisite depends on salary of the employee and lease rent of theaccommodation.

Population of city as per

2001 census whereaccommodation is provided

Where the accommodation is

owned by the employer

Where the

accommodation is takenon lease or rent by theemployer

Exceeding 25 lakhs 15% of salary in respect of the period for which theaccommodation is occupiedby the employee

Lower of amount of leaserent paid/ payable or 15%of the salary

Exceeding 10 Lakhs but notexceeding 25 lakhs

10% of salary in respect ofthe period for which theaccommodation is occupiedby the employee

Lower of amount of leaserent paid/ payable or 15%of the salary

Any other 7.5% of salary in respect of

the period for which theaccommodation is occupiedby the employee

Lower of amount of lease

rent paid/ payable or 15%of the salary

SALARY:For the purpose of valuation the salary includes

a) Basic salary

b) Dearness allowance, if terms of employment so providec) Bonusd) Commissione) Feesf) All other taxable allowance (excluding amount not taxable)g) Any monetary payment which is chargeable to Tax

Eg:X, an employee of ABC(P) Ltd is posted in Ajmer( population 18 Lakhs), draws Rs. 300,000 basicsalary, Rs. 10,000 as dearness allowance(forming part of salary), and Rs. 5000 as commission .Besides, the company provides a rent free accommodation in Ajmer. The house is owned bycompany and has a fair rent of Rs. 50,000 p.a. Determine the taxable value of perquisite.

Valuation of rent-free furnished accommodation:

Accommodation is not in a hotel:a) Find out the value of the perquisite on the assumption that the accommodation is

unfurnished.b) Valuation of furniture is done:

10% per annum of the original cost of the furniture if the furniture is owned by theemployer

actual hire charges payable, if furniture is hired by the employer.

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Accommodation in a hotel:The perquisite is valued at the lower of the two amounts:

a) 24% of salary paid or payable for the period during which such accommodation isprovided in the previous year.

b) Actual charges paid or payable by the employer to the hotel.

Eg:X received during the previous year ending March 31,2007, emolument consisting of basic pay:Rs. 162,000: special allowance: Rs 17,000 and reimbursement of medical expenditure: Rs.3800/-. His employer has also provided a rent-free furnished flat in Mumbai. Lease rent of theunfurnished flat is Rs. 50,000. Some of the household appliance provided to X (with effect fromJune1 ,2006) are owned by the employer ( cost price Rs. 36000). Employer pays Rs. 10,000 ashire purchase charges for the three air conditioners installed. Compute the value of perquisite if:

a) X is a Secretary in the ministry of Law and Rs. 4000 is the license fee of unfurnished flatas per the Central Government rules.

b) X is the managing director of ABC(P) Ltd. What difference would it make if X wasprovided a hotel accommodation through out the year (tariff being Rs. 120,000 perannum)

Valuation provided at concessional rent:The below rules will apply for furnished as well as unfurnished accommodation:

Find out the value of perquisites on the assumption that no rent is charged by theemployer.

From the value so arrived deduct the rent charged by the employer from the employee.

Valuation of perquisite in respect of free domestic servant:

The value of benefit to the employee (or any member of his household) resulting from theprovision by the employer for services of a sweeper, a gardener, a watchman or a personalattendant, shall be the actual cost to the employer, that is, the total amount of the salary paid orpayable by the employer (or any other person on his behalf) for such services as reduced by the

amount paid by the employee for such services.

Valuation of perquisite in respect of gas, electricity or water provided free of cost:

This perquisite is taxable in the hands of specified employees only provided the connection is inthe name of employer. If in the name of employee then the employer would be paying on behalfof the employee and is taxable in all cases.

Mode of valuation If purchased from outside If supplied by the employer from own sources

Cost to employer (A) Amount paid /payable by theemployer to the outside

agency

Manufacturing cost per unitincurred by the employer

Sub: Amount recoveredfrom the employee (B)

Recovery from the employee Recovery from the employee

Taxable Value of perquisite (A-B)

Balancing amount Balancing amount

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Valuation in respect of free education:

This perquisite is taxable in the hands of a specified employee only and only in those caseswhere the educational institute is owned and maintained by the employer or where sucheducation facility is provided in any institute by reason of employees employment with theemployer. The valuation of the facility would be as under:

Different Situations Amount chargeable to tax

Where the education facility is provided toemployees children

Where the cost/ value of benefit

does not exceed Rs. 1000 per childper month

Where such amount exceeds Rs.

1000/-

Where education facility is provided to othermembers of the household

NIL

Cost of education in a similar instituted in a

similar locality Rs 1000 amount recoveredby employee

Cost of education in a similar instituted in asimilar locality amount recovered by employee

If the fee is paid by the employer for employees children then there is no exemption available forboth specified and non-specified employees. Similarly reimbursement of school fees is alsotaxable in the hands of both specified and non-specified employees.

Valuation in respect of providing use of movable assets:The value of benefit to the employee resulting from the use by the employee (or any member ofhis household) of any movable asset (other than car, computer and laptop) belonging to theemployer shall be determined at 10% per annum of the actual cost of such asset. It is taxable inthe hands of all employees i.e. specified and non specified. The taxable amount shall be reducedby the amount, if any, recovered by the employee.

Mode of Valuation Perquisite in respect of movable asset

Owned by employee Taken on hire by employee

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A. Find the cost to theemployer

10% p.a of actual cost Amount of rent paid or payable

B. Amount recoveredfrom the employee

Recovery from the employee Recovery from the employee

Taxable Value of perquisite (A-B)

Balancing amount (if positive) Balancing amount (if positive)

Valuation in respect of Transfer of movable Asset:The valuation will be done as follows:

Mode of Valuation Perquisite in respect of sale of movable assets to employee

Electronic Items/computers

Motor car Any other asset

Find out the cost to the

employer (A)

Actual cost to the

employer

Actual cost to the

employer

Actual cost to the

employer

Normal wear and tear forcompleted years forwhich the asset was usedby the employer for hisbusiness. (B)

50% for eachcompleted year byreducing balancemethod

20% for eachcompleted year byreducing balancemethod

10% for eachcompleted year ofactual cost.

Amount recovered by theemployee (C)

Paid by employee foracquiring such asset



Taxable Value(A-B-C)

Balancing amount (ifpositive)



Electronic Items refer to data storage and handling devices like computer, digital diaries andprinters. They do not include household appliances.

Valuation of Medical Facilities:

Fixed medical Allowance is always chargeable to tax. But Medical expenditure reimbursed inexcess of Rs. 15,000 is chargeable to tax. The following are the exemptions to the rule that is inthe following cases there is no monetary ceiling:

In employer hospital

government hospital

Expenditure in case of specified treatment

Health insurance premium Medical facilities outside India

Foreign Medical Facility:For medical treatment outside of the employee or any member of the employee shall be excludedto the extent it is permitted by the Reserve Bank of India.However the cost of travel of the employee/ any member of his family and his one attendant shallbe excluded only for those employee whose gross total income excluding such travelingexpenditure does not exceed Rs. 200,000/-.

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Leave travel concession:The leave travel concession is exempted twice in a block of four years. And the exemption isavailable to both Indian citizen and foreign citizen. Exemption is based on actual expenditure andis available only in respect of fare. If the journey is performed by the circuitous route then theamount of exemption is available in respect of the shortest route.The exemption is available for the family meaning spouse and two children, parents, brothers andsisters of individual who are mainly or wholly dependent on him.

Any other Facility provided to employee:Any other facility or perquisite like car, lunch, refreshment, traveling, touring gift, credit cards,clubs etc provided to employee is not taxable in the hands of employee.

Permissible deduction from Salary Income:The following deductions are permitted from the head Income form salaries :

1. Entertainment AllowanceAs discussed earlier the entertainment allowance is first included in the salary and thenallowed as deduction.

2. Professional TaxProfessional Tax also known as tax on employment is allowed as deduction in the year in

which it is paid. If the employer pays the professional tax, it is first included in the salaryof the employee as a perquisite as it is an obligation of the employee and then allowed asdeduction from the gross salary.

Provident Fund:

Provident Fund scheme is a retirement benefit scheme. Under this scheme, stipulated sum ofmoney is deducted from the employees salary and an equal matching contribution is made bythe employer. The contribution is invested in gilt-edged securities and interest is earned thereon.Thus the balance of provident fund consist of:

a) Employers contributionb) Interest on employers contribution

c) Employees contributiond) Interest on employees contribution

Kinds of Provident Fund:

Employees provident fund ca be divided into threea) Statuary Provident Fund:

It is set up under the provisions of Provident Fund Act, 1972. This fund is maintained bythe Government, semi government organization, local authority, railway, university andrecognized educational institutions.

b) Recognized Provident Fund :A provident fund to which the provident Fund Act,1972 applies is a recognized provident

fund. This fund is recognized by the commissioner of Income Tax.

c) Unrecognized Provident Fund:If the commissioner of Income Tax does not recognize a provident fund then it will beunder the category of unrecognized provident fund.

Public Provident Fund:The central government has established a public provident fund with a view to benefit the generalpublic and mobilize saving. Any person whether salaried or self employed can invest in the same.

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Taxability of contribution to Provident fund.

Statutory providentFund

RecognizedProvident Fund

UnrecognizedProvident Fund

Employerscontribution toprovident fund

Exempt from tax Exempt upto12% of salary. Excess istaxable

Exempt from tax

Deductions u/s 80Con employeescontribution

Available Available Not Available

Interest credited toprovident fund

Exempt from tax Exempt from tax upto 9.5%; excess ofinterest over this istaxable

Exempt from tax

Lump sum paymentat the time of retirement

Exempt from tax Exempt from tax insome cases, whennot exempt providentfund will be treatedas unrecognizedprovident fund

Employees

contribution

exempt

Interest on

employee

contribution taxable

under income from

other sources

Employers

contribution and

interest thereon is

taxable under the

head income formsalaries.

Note:1. Salary includes basic salary, dearness allowance/ dearness pay, if terms of employment so

provide and commission if received as fixed percentage of turnover achieved by employee.2. The accumulated balance due and becoming payable to an employee participating in a

recognized provident fund will be excluded from his total Income in the following cases:

If he has rendered continuous service with his employer for a period of 5 years or more.

If the employee is not able to fulfill the conditions of such continues service due to his

service having been terminate by reason of his ill health or by reason of the contractionor discontinuance of the employers business or any other reason beyond the control ofassessee.

If on the occasion of his retirement, the employee obtains employment, to the extentthe accumulated balance due is transferred to another recognized provident fundmaintained by such employer.

Eg:

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For the previous year 2006-07, X submits the following information- Basic Salary: 120,000;dearness allowance: 40,000 (46% forming part of salary for retirement benefits); commission:6000 (i.e. 1% of turnover 600,000 achieved by him) and children education allowance for his 2children Rs. 7200. The employer contributes Rs. 20,000 towards provident fund to which amatching contribution is made by X. Interest credited in the provident fund account on March 15,2007 @ 11%comes to 93,500. Income of X from other source is Rs. 86,000. Find the net incomeof X for the assessment year 2007-08 if the provident fund is (a) statutory provident fund, (b)recognized provident fund, (c) unrecognized provident fund.

Deduction u/s 80C:

Section 80C is introduced from assessment year 2006-07 and it provides deduction in respect ofspecified qualifying amount paid or deposited by the assesses in the previous year.

Deduction would be available from gross total income

It is available for Hindu undivided family and individuals

Deduction is available on the basis of specified qualifying investment/ contribution/

deposit/ payment made by the assessee during the previous year.

Maximum amount deductible is Rs. 100,000 under sec 80C, 80CCC and 80 CCD.

Practical Problems:

Mrs. X (age 51 years) is a part time college lecturer in Delhi. During the year 2006-07. she getsbasic salary of Rs. 12300 up to June 30,2006 and Rs. 12,700 afterwards. Besides she gets 30%of Basic salary as house rent allowance, Rs. 1630 per month as dearness allowance (71% of itforming part of salary for computation of retirement benefits and Rs. 500 per month asconveyance allowance which is entirely for personal purpose. On July 10,2006 the employertransfer a music system to Mrs. X on her completing 10 years of service( cost of music systempurchased on sep 1, 2005: 22470) for Rs. 7500. She is a member of statuary provident fund towhich both the employer and employee contributes @ 12% of basic salary. Apart from theminimum contribution, she makes an additional contribution of Rs. 600 per month to the provident

fund. During the previous year 2006-07, Rs. 65698 is paid to her for checking answer sheet fordifferent universities. Determine the taxable income and tax liability on the assumption that she ispaying a rent of Rs. 4000/- per month.

X( age 26) is an employee of a cooperative society at Varanasi. During the previous year 2006-07, he gets Rs. 6500 per month as basic salary, Rs, 800 per month as bonus and Rs. 450 permonth as dearness allowance( 32% is forming part of the salary for computation of retirementbenefits) and Rs. 200 per month as medical allowance ( medical expense is however more thanRs 200 per month). He is a member of a recognized provident fund to which the employercontributes 11,162 (X also makes a matching contribution). X gets an interest free loan(repayable within 8 years) of Rs. 82,330 from the employer for purchasing a house. Besides hegets Rs. 10,30,760 as interest on company deposits from a private sector undertaking. Determinethe taxable income and tax liability of X for the assessment year 2007-08.

Ch.5 INCOME FROM HOUSE PROPERTY

This chapter deals with any income falling under the head income from house property.

Basis of Charge (Sec 22)Income is taxable under this head Income from House property if the following three conditionsare satisfied:

1. The property should consist of any building or land appurtenant thereto.2. The assessee should be the owner of the property

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3. he property should not be used by the owner for the purpose of any business orprofession carried on by him, the profit of which are chargeable to income tax.

All the above conditions should be satisfied for a property income to be made taxable under thehead income from house property.

Exceptions:In the below mentioned cases rental income is not charged to Tax:

a. Income from farmhouse.b. Annual value of ay one palace of any ex-ruler.c. Property income of any local authority.d. Property income of an approved scientific research association.e. Property income of any educational institution and hospitalf. Property income of a trade union.g. House property held for charitable purposes.h. Property income of a political partyi. Property income used for own business or profession

j. One self occupied property.

Basis of computing income for a let out house property:

Income under the head house Property Rs.

Gross Annual ValueLess Municipal Taxes

Net Annual ValueLess: Deduction u/s 24- Standard Deduction- Interest on borrowed capital

Income under the head house property

----------

----

--------

----

Gross Annual Value: Sec 23(1)Tax under the head income from house property is a tax on the inherent capacity of the buildingto yield income and not a tax on rent. The standard selection of the measure of the income is theannual value.

Gross annual value depends upon the following factors:a) Municipal Valuation

b) Fair rentc) Standard rentd) Annual Rent (i.e. rent for the previous year or that part of the previous year when the

property is available for letting out and there is no vacancy and unrealized rent)e) Unrealized rentf) Loss of rent because of vacancyg) Actual rent received/ receivable (d-e-f)

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Steps for determining the gross Annual Value:

.1 Determine the reasonable expected rent as a) or b) whichever is higher. If the amount sodetermined is higher then the amount in c) limit the amount to c).

.2 If Annual rent less unrealized rent is higher then the amount specified under step 1 thenAnnual rent less unrealized rent is substituted for the value in step 1.

.3 In case of vacancy the gross annual value so determined is adjusted for the period forwhich the house is occupied.

E.g.:

(Rs. In thousand)

Particular

A

B C D E F

Municipal valuation (a)Fair rent (b)Standard rent (c)Annual rent if property is let out through the

year 06-07 (d)Unrealized rent (e)Period for which property remains vacantLoss due to vacancy (f)

140145142

16814

17

180185175

168-

--

180185175

1681

14

140145142

16870

342

231262241

25242

5105

140150120

96--

1080

When unrealized rent shall be excluded:Unrealized rent shall be excluded from rent received/ receivable only if the following conditionsare satisfied:

1. The tenancy is bona fide.2. The defaulting tenant has vacated, or steps have been taken to compel him to vacate the

property.3. The defaulting tenant is not in occupation of any other property of the assessee.4. The assessee has taken all reasonable steps to institute legal proceedings for the

recovery of the unpaid rent or satisfies the assessing officer that legal proceeding wouldbe useless.

Deduct municipal taxes:From the gross annual value municipal taxes have to be deducted to arrive at net annual value.

Municipal value are deductible only if1. these taxes are borne by the owner.2. are actually paid by him during the previous year.

Deductions u/s 24:

The list of deductions u/s 24 is exhaustive that is no other deduction is allowed except whateverare explicitly mentioned. The following two deductions are allowed:

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1. Standard deduction2. Interest on borrowed capital

Standard deduction:30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer.

Interest on borrowed capital:Interest on borrowed capital is allowable as deduction, if capital is borrowed for the purpose ofpurchase, construction, repair, renewable or reconstruction of the house property.

Interest of pre-construction period:Interest of pre-construction period is allowed as deduction in five equal installments.

Interest of the current period:

a. Capital is borrowed on or after April 1, 1999:Interest on borrowed capital is allowed as deduction to the extent of Rs. 150,000/-provided the loan is taken for the acquisition or construction of the property. However theloan is taken for the any other purpose (e.g. Reconstruction, repair etc) the maximumamount deductible is Rs. 30,000.

b. Capital is borrowed before April 1, 1999:The interest on borrowed capital is allowed as deduction up to Rs. 30,000/-

Interest on borrowed capital is allowed as deduction even in those cases when the annual value of the house

property is nil.

Taxable income from self-occupied property:

When the property consist of:a. Any house which is occupied for own businessb. One house which is self occupiedc. A house property which is not actually occupied by the owner owing to employment or

business/ profession, carried on at any other place.In the aforementioned cases the annual value of the house property shall be taken as nil.

When more than one property is occupied for residential purpose:

When more than one house is occupied by a person during the previous year for is residentialpurpose, only one house is treated as self- occupied and all other houses will be deemed to be letout.In case of deemed to be let out the gross annual value is taken to be the higher of municipalvaluation or fair rent whichever is higher to the maximum of standard rent.

When a part of property is self-occupied and a part is let out or a house is self- occupiedfor the part of year and let out for the part of the year:

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In computing the income in the aforesaid situation the fair rent attributable to the self- occupiedperiod/ portion should be excluded in determining the annual value. Similarly the house tax andinterest in loan attributable to elf-occupied period/ portion should be ignored. It means the housetax and interest on loan attributable to self-occupied portion/period cannot be deducted to arriveat income from house property.

E.g.:From the following information, compute the annual value of the house for AY 07-08

Municipal Value- Rs. 90,000Municipal taxes paid- Rs. 20,000House was occupied for the first six months and for remaining six months it was let out @ Rs.8000 p.m.

Special provisions when unrealized rent is recovered subsequently:When a deduction has been allowed to the assessee for any unrealized rent during the previousyear and realized subsequently then that amount shall be deemed to be the income of theprevious year and shall be chargeable to tax under the head income from house property as perthe provisions of the act whether the assessee is an owner of that property or not.

Problems:

1. From the information given below, find out the income under the head Income under thehouse property for the assessment year 2007-08 and 2008-09.

X (Rs) Y (Rs)

Municipal valuationFair rentStandard rentAnnual rent

Unrealized rent for the previous year 2006-07Unrealized rent for the previous year 2007-0Unrealized rent of 2006-07 realized during 2007-08Interest on borrowed capital

1;0,000185,000170,00216,000

30,000NIL

28,000

36,000

190,000195,000170,000175,000

30,000Nil

28,000

36000

The above properties have been let out throughout the previous years 2006-07 and 2007-08.Municipal taxes are paid at the rate of 20%.

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Ch.6 Income under the head Business & Profession

This head is covered by sec 28 to sec 44D. This chapter deals with provisions which have abearing on the computation of taxable income.

Basis of charge (sec 28):The following income is chargeable to tax under the head Profit and gains from business andprofession:

1. Profit and gain of any business and profession2. any compensation or other payment due or received by any person specified in sec 28(ii)

any compensation received on termination of a managing agency of a foreigncompany

any compensation received on termination of a managing agency of a Indian

company

Any compensation received on termination of any agency or modification of

terms of agency.

Any compensation received from government or a corporation on taking over of

management of property or business.

2. Income derived by a trade, professional or similar association from specific servicesperformed for its members.

3. The value of any benefit or perquisites, whether convertible into any money or not, arisingfrom the business or the exercise of any profession.

4. Profit on sale of license (export/ import license)5. Cash assistance (subsidy received by any person against exports under any scheme of

government6. Any drawback of any duty of customs or excise.7. Any interest, salary, bonus, commission or remuneration received by a partner from firm.8. Any sum received for not carrying out any activity in relation to any business or not to

share any know-how, patents, copyrights, trademarks etc.9. income from a speculative transaction10. Profits from an illegal business.

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Meaning of term business:The term business refers to any economic activity carried out with a view to earn profit. As persection 2(13) term business is defined as any trade, commerce, manufacture or any adventure inthe nature of trade, commerce or manufacture. The definition covers every facet of anoccupation carried on by a person with a view to earn profit. The term business is a word of wideimport and in terms of fiscal statue it must be construed in a broad rather than in a restrictedsense.Thus Production of goods from raw material, buying and selling of goods to make profits andproviding services to others are different form of business.Profession and Vocation:As per sec 2(36) profession includes vocation. The term profession is an occupation of requiringpurely intellectual skill or manual skill attained in special knowledge. While the term vocationimplies natural ability of a person for some work. The distinction between the term business,profession or vocation is not important for the purpose of income tax.

Basic Principles for arriving at business Income:One has to keep in mind the following general principles for arriving at business income:

1. Business or profession should be carried on by assessee.2. Business or profession should be carried on during the previous year.

3. Income of the previous year is taxable during the following assessment year.4. Tax incidence arises in respect of all business or profession.5. Legal ownership v/s beneficial ownership.6. Real profit v/s anticipated profit7. Recovery of sum already allowed as deduction.8. Mode of book entries not relevant.

Loses incidental to business:General commercial principles have to be kept in view while determining the real and true profitsof a business and profession. Capital receipts are not taxable. Profits can only arise out of thetrading receipts and only the profit element of such receipt can be made taxable.Business losses can be allowed as deduction if the following conditions are satisfied:

1. Losses are revenue in nature.

2. Losses should be incurred during the previous year.3. Losses should be incidental to the business and profession carried on by assessee.4. It should not be notional or fictitious5. It should have been actually incurred and not merely anticipated to incur in future.6. There should not be any direct or indirect restriction under the act against the deductibility

of such loss.

Specific deductions under the Act :Section 30 to 37 cover expenses which are expressly allowed as deduction while computingbusiness income, section 40, 40A and 43B cover expenses which are not deductible.

Rent, rates taxes repairs and insurance for building (Sec 30):Under this section following deductions are allowed for premises used for business or profession:

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1. The rent of premises, the amount of repair (not being capital expenditure), if he hasundertaken to bear the cost of repair.

2. Any sum on account of land revenue, local rates or municipal taxes. **3. Amount of any premium in respect of insurance against risk of damage or destruction of

the premises.

** The amount is deductible as per the provision of sec 43B.

Repairs and insurance of machinery, plant and furniture (sec31):The expenditure incurred on current repair (not being capital expenditure) and insurance inrespect of plant, machinery and furniture used for business purpose is allowed as deduction u/s31.

Depreciation Allowance (Sec 32)In order to avail depreciation u/s 32, the following conditions need to be satisfied:

1. Asset must be owned by the assessee.2. It must be used for the purpose of business or profession3. It should be used for the relevant previous year4. Depreciation is available on tangible as well as intangible asset.

Use of the asset in the previous year:The asset in respect of which depreciation is claimed must have been used for the purpose of thebusiness. Normal depreciation (i.e. full year depreciation) is available if an asset is used is put touse at least for sometime during the previous year.

Depreciation allowance is limited to 50% of normal depreciation, if the following two conditionsare satisfied:

Where an asset is acquired during the previous year

It is used for the purpose of business or profession for less than 180 days during that

previous year.If the above conditions are satisfied, the assessee would be entitled to 50% of normaldepreciation, even if the asset is used for a single day.

Depreciation Available:Under the Indian Income Tax, one can claim depreciation on the following assets:

Tangible Asset Building, Plant, machinery or furniture

Intangible Assets acquired after March 31,1998

Know-how, patents, copyrights, trade marks,licenses, franchise, or any other business orcommercial rights of similar nature.

Block of Assets sec 2(11):The term block of assets means a group of assets falling within a class of assets comprising of:

Tangible assets, being building, machinery, plant or furniture

Intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchise,

or any other business or commercial rights of similar natureIn respect of which the same percentage of depreciation is prescribed.

Written down Value sec 43(6):Written down value for the year is determined as under:

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1. Find out the depreciated value at the beginning of the year as on 1st of April.2. To this value add actual cost of the asset acquired during the year.3. From the resultant year, deduct money received/ receivable (together with scrap value) in

respect of that asset which is sold, discarded, demolished or destroyed during that year.4. The resulting amount is the written down value of the block for that year.5. The amount of reduction under step 3 cannot exceed the value of asset computed under

step 1 and step 2.

Computation of depreciationDepreciation is calculated at the prescribed rate on the written down value. However the followingexceptions are there for the aforesaid:Exception 1: When the written down value of a block of assets is reduced to zero.No depreciation is admissible where written down value has been reduced to zero, though theblock of assets does not cease to exist on the last day.

Exception 2: If the block of asset ceases to existIf a block of assets ceases to exist or if all assets of the block have been transferred and theblock of assets is empty on the last day of the previous year, no depreciation is admissible insuch case.

Ex:X owns the following assets on April 1, 2006:

Assets Written down value onApril 1, 2006

(Rs.)

Rate of depreciation (%)

FurnitureBuildingPlant and MachineryPlant and Machinery

Plant and Machinery

20,170900,500210,000

6400,000

205,000

10102015

40

During the previous year 2006-07, the following assets are purchased by X:

Date of Purchase

Date when the assetis put to use Asset

CostRs.

Rate of depreciation (%)

1/10/200620/06/200630/11/20066/12/2006

9/10/200622/06/20061/12/200610/12/206

Trade MarkPlantFurnitureBooks for professionaluse

15,000190,000140,000

2700

254015

100

Determine the amount of depreciation for the assessment year 2007-08.

Unabsorbed Depreciation:When in the assessment of the assessee full effect cannot be given to depreciation allowance inany previous year owing to there being no profit/ gain or there being insufficient profit/ gain, thebalance of depreciation allowance is called unabsorbed depreciation.

Steps for dealing with unabsorbed depreciation:

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Step 1 Depreciation allowance of the previous year is first deductible from the incomeunder the head Profit & gains from business and Profession.

Step 2 If depreciation cannot be fully deducted under the head Profit & gains frombusiness and Profession because of inadequate or no profit, it is deductible from

income chargeable under the other head of income (except income from salary)for the same assessment year.

Step 3 If depreciation allowance, is still unabsorbed then it can be carried forward to thesubsequent assessment year(s).

There is no time limit for the purpose of carrying forward of unabsorbed depreciation, it can becarried forward for indefinite period.The following priority order is to be followed when the unabsorbed depreciation is to be set off insubsequent year:

a. Current depreciationb. Brought forward business lossc. Unabsorbed depreciation

For the above setoff continuity of the business is not necessary.

Ex:X submits the following details

Previous years

2006-07 2007-08

Income from salariesBusiness Profit (before depreciation)Current depreciationIncome from other sources

100,00016,000

134,00010,000

200,00018,000

132,00080,000

Determine the taxable income of X for the assessment year 2007-08 and2008-09.

Tea/ coffee/ rubber development account (Sec33AB)To claim the deduction under this section the following conditions need to be satisfied:

1. The assessee must be engaged in tea, coffee or rubber plantation.2. It must make a deposit in special Account opened with NABARD( National bank for

Agriculture and rural development)3. The amount has to be deposited within 6 months from the end of the previous year or

before the due date of furnishing the return of income, whichever is earlier.4. The accounts of the assessee should be audited.

Amount of deduction:The least of following is allowed as deduction:

1. A sum equal to the amount deposited in the special account as discussed above.2. 40% of profit of such business computed under the head profit and gains of business

and profession before making any deduction under section 33AB and also beforeadjusting any bought forward losses.

The below points are also to be kept in mind:1. When a deduction is claimed under this section, no deduction shall be allowed in respect

of such amount in any other year.

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2. When a deduction is allowed and claimed under this section to an association of personsor body of individuals no deduction shall be allowed to any member of the association orbody in respect of the same.

3. Any excess deposit in special account made during the previous year is not treated asdeposit in any other year.

Withdrawal of amount:The amount standing to the credit of the special account may be withdrawn only in case of:

1. closure of business2. dissolution of firm3. death of an assessee4. partition of HUF5. liquidation of company

Amount cannot be utilized for certain purpose:No deduction can be claimed in respect of any amount utilized for the purpose of1. Any machinery or plant installed in the residential houses or a guest house.2. Any office appliances except computer3. Any plant or machinery whose full cost is allowed to be debited to P& L account.4. Any new plant or machinery to be installed for setting up of a new unit to produce any article

included in eleventh schedule.

Site restoration fund (Sec 33ABA):An assessee can claim deduction u/s 33ABA if he satisfies following conditions:

1. The assessee must be engaged in production of petroleum/ natural gas in India.2. The assessee has an agreement with the agreement with the central government.3. It must make a deposit in special account to be opened with SBI or deposited in an

account named site restoration fund to be opened in accordance with Government ofIndia with the ministry of Petroleum.

4. The deposit should be made within specified time limit i.e. before the end of previousyear.

5. The accounts of assessee should be audited.

Amount of Deduction:a) Sum equal to amount deposited in the special account.b) 20% of the profit of the business as computed under the head profit and gains from

business and profession before this deduction.Whichever is less is allowed as deduction.The below points are also to be kept in mind:

1. When a deduction is claimed under this section, no deduction shall be allowed in respectof such amount in any other year.

2. When a deduction is allowed and claimed under this section to an association of personsor body of individuals no deduction shall be allowed to any member of the association orbody in respect of the same.

Withdrawal of amount:The amount can be withdrawn only for the purpose specified in the scheme or deposit scheme.

Amount cannot be utilized for certain purpose:No deduction can be claimed in respect of any amount utilized for the purpose of5. Any machinery or plant installed in the residential houses or a guest house.6. Any office appliances except computer7. Any plant or machinery whose full cost is allowed to be debited to P& L account.

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8. Any new plant or machinery to be installed for setting up of a new unit to produce any articleincluded in eleventh schedule.

Reserve for shipping business (Sec 33AC):No deduction under section 33AC is available from the assessment year 2005-06.

The quantum of deduction is an amount not exceeding 100% of the total income ( computedbefore making any deduction under this section and u/s 80) as is debited to the profit and lossaccount of the previous year in respect of which the deduction shall be allowed shall beadmissible.The amount of deduction to be claimed must be transferred to a reserve account. The amount tobe credited to such reserve account must not exceed twice the amount of the paid up sharecapital (excluding the amount capitalized from reserves) of the assessee company. In the year inwhich the reserve exceeds this limit deduction u/s 33AC will be restricted to the amount which issufficient to reach this limit.The amount credited to the reserve account shall be utilized by the assessee company before theexpiry of 8 succeeding previous yrs for

a. Acquiring a ship for the purpose of business of assessee.b. Until the acquisition of a new ship, such reserve may be utilized for the business of the

assessee but not for distribution by way of dividends or profits or remittance outside India

as profits or for the creation of any asset outside India.

In case amount of reserve is not utilized in the aforesaid manner the amount of reserve shall betreated in the following manner:

a. In case amount of reserve is utilized for a purpose other than as given above, the amountso utilized for other purpose shall be deemed as profit of the previous year in which it isso utilized.

b. In case amount of reserve is not utilized to acquire a ship within 8 exceeding previous,the amount so unutilized shall be deemed as income of the previous year next followingthe period of 8 succeeding previous years.

c. In case ship is acquired within succeeding previous years, it cannot be sold or otherwisetransferred for 8succeding previous years from the previous year in which it s acquired. Incase it is sold or transferred before the expiry of 8 succeeding previous years, theamount of reserve utilized in acquiring the ship shall be deemed as profit of previous yearin which ship is sold or transferred.

Expenditure on Scientific Research (Sec 35):Scientific research means any activities for the extension of knowledge in the fields of natural orapplied science including agriculture, animal husbandry or fisheries.

Under this section amount deductible in respect of scientific research may be classified as under:

Expenditure on research carried on byassessee

Contribution to outsiders

1. Revenue expenditure2. Capital expenditure3. Expenditure on an approved in-house

research

1. Contribution to an approved scientificresearch association.

2. Payment to National Laboratory

Revenue expenditure incurred by assessee:Revenue expenditure incurred by assessee himself on scientific research, a deduction is allowedonly if the research is related to the business.

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Pre-commencement period expense:Any pre-commencement expenditure being revenue in nature (other than expenditure providingperquisites to employee) incurred before the commencement of business on scientific researchrelated to the business are deductible in the previous year in which the business is commenced.

Capital expenditure incurred by assessee himself:Where the assessee incurs any expenditure of a capital nature on scientific research related tohis business, the whole of such expenditure incurred in any previous year is allowable asdeduction for that year. The deduction is available even if the relevant asset is not put to use forresearch and development in that particular year.The aforesaid deduction is not available in respect of capital expenditure incurred on theacquisition of any land. And no depreciation is allowable on such capital asset.

Expenditure on approved in-house research:A weighted deduction is allowed in respect of expenditure on in-house research and developmentexpense incurred by the assessee. However the following points need to be kept in view:

1. The taxpayer is a company2. It is engaged in the business of bio-technology or in the business of manufacture or

production of articles or things notified by the board.3. The research and development facility is approved by the prescribed authority and

sufficient provision for audit is done for the accounts maintained by the facility.

Amount of deductionA sum equal to one-one half times of expenditure so incurred shall be allowed as deduction.

Carry forward and set off deficiency shall be done in the same manner as for the unabsorbeddepreciation.

Contribution made to outsiders:Where the assessee does not himself carry on scientific research but makes contributions toother institutions for this purpose, a weighted deduction is allowed.The amount of deduction is equal to one and one fourth times of any sum paid to a scientific

research association or to a university, college or other institution or to a national laboratory.Scientific research carried on above may or may not be related to the business of the assessee.

Amortization of telecom license fees (sec 35ABB):Deduction under this section is available if the following conditions are satisfied:

1. The expenditure is capital in nature.2. It is incurred for acquiring any right to operate telecommunication services.3. The expenditure is incurred either before the commencement of business or thereafter at

any time during any previous year.4. The payment for the above has been actually made to obtain license.

The payment will be allowed as deduction in equal installment over the period for which thelicense is valid. Any profit or loss on sale of telecom license is to be taken into consideration

while computing business income.

Expenditure on eligible product or scheme Sec. 35AC:Deduction is available under this section for promoting social and economic welfare.Any taxpayer can claim deduction by making a payment of any sum to a public sectorcompany or a local authority or to an association or institution approved by a nationalcommittee for carrying out eligible project or scheme.A company can also directly incur expenditure in respect of eligible project and claim thesame as deduction.

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Payment to associations and institutions for carrying out rural developmentprogrammes:This section provides deduction of sums paid by assessee to:

1. Any association or institution which has its object for carrying out any program ofrural development approved.

2. Any association or institution which has its object the training of persons forimplementation of a rural development program.

3. The national fund for rural development set up by the government.4. The national Urban Poverty Eradication Fund set up and notified by the government.

Amortization of preliminary expenses (Sec35D):Those expenses which are incurred before commencement of business for setting up anyundertaking or business are termed as preliminary expenditure.Deduction under this section is available to an Indian company or a resident non corporateassessee.

Qualifying Expenditure:

Legal charges for drafting any agreement between the assessee any other person

relating to setting up of business of the assessee.

Legal charges for drafting the memorandum and articles of association if the taxpayer is

a company.

Printing expenses of the memorandum and article of association if the taxpayer is a

company.

Registration fees of a company under the provisions of the companys Act.

Expenses in connection with the public issue of shares or debentures of a company,

underwriting commission, brokerage and charges for drafting, typing, printing andadvertising of the prospectus.

Maximum ceiling:The aggregate expenditure cannot exceed the following-

In the case of corporate Assessee In the case of non-corporate Assessee

5% of cost of project

5% of capital employed, whichever

is more

5% of the cost of project.

Cost of Project means the actual cost of fixed assets which are shown in the books of assesseeas on the last day of the previous year in which the business of the assessee commences.

Amount of deduction:One fifth of the qualifying expenditure is allowable as deduction in each of the five successiveyears beginning with the year in which the business commences.

Amortization of expenditure in the case of amalgamation / demerger (Sec 35DD)

The provisions of the section are as under:1. The taxpayer is an Indian company.2. The expenditure is incurred for the purpose of amalgamation or demerger.3. The expenditure is allowed as deduction in five successive years in five equal

installments.4. The first installment is deductible in the year in which amalgamation or demerger takes

place.

Amortization of expenditure under voluntary retirement scheme (Sec 35 DDA)

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1. Expenditure is incurred in any previous year by way of payment of any sum to anemployee in connection with his voluntary retirement.

2. Such expenditure is allowed as deduction in five equal installments beginning with theyear in which the expenditure was incurred.

Where the undertaking of an Indian company entitled to deduction for amortization of voluntaryretirement expenses is transferred before the expiry of 5 years in a scheme of amalgamation ordemerger, the deduction for the remaining period shall be available to the resulting company.Similar provisions are applicable in the case of succession of firm or proprietary concern.

However, in the year of transfer and subsequent years, no deduction will be available to theamalgamating company, demerged company, firm or proprietary concern.

Amortisation of Expenditure on prospecting etc for certain minerals (Sec35E):This section provides for the amortisation of expenditure incurred wholly and exclusively on anyoperation relating to prospecting for the minerals or group of associated minerals or on thedevelopment of a mine or other natural deposit of any such minerals or group of associatedminerals as specified in the seventh schedule.The expenditure which is incurred during the 4 years prior to the commercial production isallowed as deduction in 10 equal installments over a period of 10 years.

In case where the installment of amortized expenditure relating to a given year cannot be whollyabsorbed by the profit against which the amortisation is to be allowed, the unabsorbed amount isto be carried forward to the subsequent year. Such carry forward is permitted till the tenth yearfrom the commercial production after which it will lapse.

Other deductions (Sec 36):The following deductions are provided under this section:

1. Insurance premium:The amount of any premium paid in respect of insurance of stock or stores used for thepurpose of business or profession is allowed as deduction.

2. Insurance premium by federal milk cooperative society:Insurance on the life of cattle owned by the members are allowed as deduction.

3. Premium on the health of employeeInsurance premium paid on the health of employee is allowable as deduction.

4. Bonus or commission to employeeAny bonus or commission paid to employee is allowable as deduction on payment basisand the amount given should not be otherwise payable as profit or dividend.

5. Interest on borrowed capitalIf the money is borrowed for the purpose of business or profession then the interestthereon is allowed as deduction.

6. Discount on zero coupon bondsDiscount on zero coupon bonds (being the difference between the amount received andamount payable on the redemption/ maturity of bonds) is allowed as deduction on pro-rata basis over the life of bond.These are issued by any infrastructure capital company or a public sector company on or

after June 1, 2005.7. Employer contribution to Provident Fund and Superannuation fund:The deduction is allowed as per the limits laid down for the same.

8. Contribution towards approved gratuity fund.9. Employees contribution towards staff welfare scheme

Any sum received from employee towards contribution for Provident fund or staff welfarescheme is allowed as deduction provided it is paid on or before date.

10. Write off allowance for animalsProvided the animals are used for business or profession then loss on sale. Theft ordeath is allowed as deduction.

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11. Bad Debt.A bad debt is allowable as deduction subject to the following conditions:

There must be a debt

Debt must be incidental to the business or profession of the assessee.

It must have been taken into account in computing assessable income.

Debt must have been written off in the books of account of the assessee.

Transfer to provision for bad and doubtful debts shall not be taken into account.12. Transfer to Special reserve:

Under this section deduction is available to a financial corporation including a public andgovernment company which is engaged in providing the long term finance for industrial oragriculture development.Amount of Deduction:

The amount transferred during the previous year to the special reserve account.

40% of the profits derived from the business activities.

200% of (paid up share capital and general reserve as on the last day of the

previous year) minus the balance of the special reserve account.Whichever is lower of the above.

13. Family Planning Expenditure:Any bona fide expenditure incurred by a company for the purpose of promoting family

planning among its employees, is allowable as deduction.If the expenditure is of capital nature, one-fifth of such expenditure is allowable asdeduction for the previous year in which it was incurred and the balance in four equalinstallments.Any expenditure which could not be allowed as deduction due to inadequate profit shallbe set off and carried forward as unabsorbed depreciation.

14. Any amount paid by employer as premium under keymans insurance scheme is fullyallowed.

Advertising ExpenseDeduction is not available in respect of expenditure incurred by an assessee on advertising in anysouvenir, brochure, tract, pamphlet or the like published by political party.

General Deduction (Sec37)This is a residuary section in order to claim deduction under this section; the following conditionsneed to be satisfied:

1. The expenditure should not be in the nature prescribed by section 30 to 36.2. It should not be in the nature of capital expenditure.3. It should not be personal expenditure of the assessee.4. It should have been incurred in the previous year.5. It should have been incurred with respect to the business carried on by the assessee.6. It should have been expended wholly and exclusively for the purpose of business.7. It should not have been incurred for any purpose which is an offence or prohibited by law.

Specific disallowances under the Act:The following expenses given by sections 40,40A and 43B are expressly disallowed under theact.Amount not deductible under sec 40The following amounts are not deductible from the income as per this section:

1. Any sum paid for which TDS was deductible but was not deducted or was deducted butpaid to the government within the previous year or in subsequent year within theprescribed time.

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However if the tax is paid subsequently then the deduction is allowed in the year in whichit is paid.

2. Securities transaction tax3. Fringe Benefit Tax4. Income tax5. Wealth Tax6. Tax on non monetary perquisites paid by the employer.

Amount not deductible under sec 40A1. Any payment m

16478005 taxation notes

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