chapter-1ii structure of income tax in...
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CHAPTER-1II
S T R U C T U R E O F I N C O M E T A X
I N I N D I A A N D
T H E C O - O P E R A T I V E S O C I E T I E S
PART-1
3.1 INTRODUCTION
3.2 A BRIEF HISTORY OF INCOME TAX IN INDIA
3.3 INCOME TAX ACT, 1961
3.4 SCHEME OF INCOME TAX LAW
3.4.1 SOME IMPORTANT CONCEPTS
l.ASSESSEE
2. PERSON (Taxable Entity)
3. ASSESSMENT YEAR [Section 2(9)]
4. PREVIOUS YEAR (Section 3)
5. TOTAL INCOME [Section 2(45)]
3.4.2 CHARGE OF INCOME TAX
3.4.3 INCOME
3.4.4 TAX FREE INCOME (Section 10)
3.5 COMPUTATION OF INCOME UNDER DIFFERENT HEADS OF
INCOME
3.5.1 INCOME FROM SALARIES (Section 15,16, & 17)
3.5.2 INCOME FROM HOUSE PROPERTY (Section 22 to 27)
3.5.3 PROFITS AND GAINS OF BUSINESS OR PROFESSION (Section 28to 44D)
3.5.4 CAPITAL GAINS [Section 45to 55]
3.5.5 INCOME FROM OTHER SOURCES [Section 56to59]
3.6 AGGREGATION, SET-OFF AND CARRY FORWARD OF LOSSES
3.7 DEDUCTION TO BE MADE IN COMPUTING TOTAL INCOME
CONCLUSION
3.1 INTRODUCTION
The most important purpose of this chapter is to give a bird's eye view of
income-tax structure in India at present. This is expected to serve as a background
to understand the subsequent chapters. The chapter has been divided into two
parts. Part-I deals with the structure of income-tax in India. The part-II presents
briefly the income-tax provisions applicable to the Co-operative societies.
PART-I
In the Sovereign Democratic Republic of India, the Power of Government
to levy and collect taxes flows out of the constitution adopted in 1950. Article
245(1) of the Constitution of India authorized the parliament to make laws for the
whole of India and granted to it exclusive powers to make "laws with respect to
any of the matters enumerated in List-I in Seventh Schedule".
The List-I (called Union-List) of the Seventh Schedule to the constitution
of India consists of 97 entries and entry No.82 specifies taxes on Income other
than agricultural income. As per this provision in the Constitution of India, the
Income tax is levied and collected in India by the Union Government.
59
3.2. A BRIEF HISTORY OF INCOME TAX IN IN DIA
Income-tax is the very important direct tax in India. Its incidence docs not
fall on the poorer sections of the society like the indirect taxes such as Sales-tax,
and Excise duties .
The British rulers incurred some expenditure to suppress the freedom
movement started in India in 1857 called by them as "Soldiers mutiny". They
introduced income-tax for the first time in India in 1860 as a temporary measure to
tide over the financial difficulties. However, it became a permanent feature of the
tax system after passing the Indian Income-tax Act, 1886. Due to several
amendments made in this Act, it was repealed by passing the income-tax Act in
1918. Further, on the recommendations made by the All India Taxation Enquiry
Committee a new Income-tax Act was passed in 1922. This Act also did not
remain static. It underwent a number of amendments from time to time and hence
became very complicated, cumbersome and confusing one. It was, therefore,
refened to law commission in 1956 to suggest the measures for simplification of
the Act. The Direct Taxes Administration Committee was also appointed by the
Government for the suggestion of the means and measures to minimise the
inconveniences caused to tax payers and for preventing evasion of tax. It is on the
recommendations made by them that the new Income-tax Act, 1961 was passed
and it came into force from lsl April 1962 and is now applicable.
Inspite of the fact that the new Act of 1961 retained the basic structure of
old Act of 1922, vast changes are made in the Act, in the matter of the contents, as
compared to the old Act. It is mentioned that the provisions in the new Act
are simplified and logically arranged and some new provisions have been
1. Samal, Kishor C. (1992). Tax Structure and Budgetary Trends. New Delhi : Manak
Publications. Pp.63-64.
60
introduced with a view to simplify the taxation process and prevent avoidance and
evasion of tax.
The Finance Act passed every year prescribes the rates of income-tax to be
levied on the income of the relevant assessment year and for payment of advance
tax.
3.3 INCOME TAX ACT, 1961
The Income-Tax Act, 1961 as mentioned in its preamble, is "an Act to
consolidate and amend the law relating to Income-tax and Super Tax". It has 23
chapters, each dealing with separate subject and further divided into 298 Sections.
In addition, 12 Schedules were originally attached to the Act, of which schedules
6th and 9lh have since been deleted. The Act is also accompanied by 125 rules,
known as the Income-tax Rules 1962. These rules are divided into fifteen parts and
they supplement the main statute. These rules have been amended and altered
from time to time. Appendix-I attached to rules deals with depreciation rates,
while under appendix-II, a total of 57 different "Forms" arc provided. Since its
commencement in 1961 to the present date, almost 70 Finance Acts and adoption
orders have amended the Income Tax Act, and brought it into present shape.3
3.4 SCHEME OF INCOME TAX LAW £ ( ^
3.4.1 SOME IMPORTANT CONCEPTS Offf
1) Assessee: An 'assessee', as defined in Section. 2 (7) of the income tax Act,
1961 means a 'Person' from whom any tax or any other Sum of money is
2. Gupta, Rupram. (1981). Income Tax Law and Practice. Agra : Agra Book Store.
Pp.1-2.
3. Chaturvedi, .K & Pithisaria, S.M. (1995-96). Inametax Law {2^ Ecl.i), New Delhi :
Wishwa Prakashan. P-l. »>o t c
61
payable under the Act and includes every person in respect of whom any
proceeding under the Act has been taken for the assessment of his income or
loss and the amount of refund due to him. It also includes a person who is
assessable in respect of income or loss of another person or who is deemed to be
an assessee, or an assessee in default, under any provisions of the Act. The term
includes the following person;
2) Person (Taxable Entity)
Under Section. 2(31), the term 'Person' includes,
i) an individual ,
ii) a Hindu Undivided Family,
iii) a Company,
iv) a Firm,
v) an Association of Person's or a body of individuals whether incorporated or not,
vi) a Local authority ; and
vii) every artificial juridicial Person not falling within any of the preceding
category.
Every 'Person' who has taxable income is liable to pay tax.
3) Assessment Year [Section 2(9)]
"Assessment Year" means the period of 12 months starting from April lsl
and ending with 31sl March next year. The period of assessment year is fixed by
the law and remains so irrespective of the accounting year adopted by the assessee.
Income of previous year of an assessee is taxed during the immediately following
assessment year at the rates prescribed by the relevant Finance Act.
4. Singhania, K. Vinod. (1981). A New Approadi to Income Tax. New Delhi: Himalaya
Publication. P.M.
62
4) Previous Year (Section 3]
As the tax payable by an assessee for any assessment year is in respect of
the income of the previous year, the definition of previous year is very important.
Generally, the previous year means the financial year (commencing from 1st April
and ending with 31st March next) immediately preceding the assessment year. It is
uniform for all the assessees and all sources of income. For new business, it may
be less than 12 months in the first year. It commences with the date of
commencement of business and ends with 31sl March.
5) Total Income [Section 2(45)]
The 'total income' is the base on which income-tax is levied. The income
tax Act, 1961 defines total income to mean the total amount of income referred to
in Section 5 and computed in the manner laid down in the Act. Section 5 specifics
the income to be included in the total income of a person when such person is
"resident", or not ordinarily resident, or "non-resident."5
The scope of total income computed as per the provisions of the Act,
depends upon the residential status of an assessee.
The total income of a resident person in a particular year includes the
income from whatever source derived that the,
a) income which is received or deemed to be received in India in such a
year; or
5. Bhattacharya, Sukamar. (1982). Indian Income Tax and Practice Law. Agra : Wadhwa
& Company. P.51.
63
b) income which accrues or arises or is deemed to accrue or arise to him in
India during such year
c) income which accrues or arises to him outside India during such year.
In the case of a person who is not ordinarily resident, the income mentioned
in item (c) above should not be included unless it is derived from a business
controlled or profession set-up in India. In the case of non-resident person, the
income mentioned in items (a) and (b) should only be included.
3.4.2. CHARGE OF INCOME TAX
Section 4 pertains to the charge of income tax on the income and it is
explained as under:
1) The charge is on every person.
2) Income-tax shall be charged at the rates prescribed by the Finance Act, enacted
every year.
3) The Income that is taxed must pertain to the previous year.
4) Besides the tax that is chargeable on the income of the previous year, current
income may also be taxed whenever desired.
5) By virtue of this Section, income-tax is also deducted at source or is paid in
advance under certain provisions of the Act.
6) Each year of assessment is a self contained period and the assessment of one
year may or may not have a bearing on the assessment of the others.6
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3.4.3. INCOME
The term "income" in Section 2(24) is inclusive and not exhaustive.
Therefore, the term "income" not only includes those things which are included in
Section 2(24), but also includes such things which the term signifies
according to its general and natural meaning. As per Section 2(24), the term
"income" includes.
a) Profits and gains
b) Dividend
c) Voluntary contributions received by a trust created wholly or partly for
charitable or religious purposes or by an institution established wholly or partly
for such purposes not being contributions made with a specific direction that
they shall form part of the corpus of the trust.
d) The value of perquisites, or profit in lieu of salary.
c) The value of any benefits perquisites obtained from a company by a director or
a person who has substantial interest in the company or by relative of a director
or such person.
f) The value of any benefit or perquisite;(whether convertible into money or not)
obtained by any representative assessee [Section 160 (i),(iii),(iv)]or
beneficiary, or any amount paid by the representative assessee for the benefit
of the beneficiary, (which the beneficiary would have ordinarily been required
to pay)
g) Any sum chargeable under Section 28 (ii), (iii), 41 or 59.
h) The value of any benefit or perquisite, whether convertible into money or not,
arising from business or the exercise of a profession.
6. Pahwa, S.P. (197r4).Taxation of Co-operative Society. Allhabad : Central Law Agency.
P.61.
65
i) Any capital gains.
j) Insurance profit computed under Section 44.
k) Any annuity under Section 280 D.
1) Winning from lotteries, cross word Puzzles, races including horse races, card
games and other games of any Profit.
The aforesaid definition does not define the term "income" but merely
describes various receipts as income. It, therefore, follows that in addition to the
aforesaid receipts, any other receipt, is taxable under the Act, if it comes within
the general and natural meaning of term "income".
A study of the Following broad principles will be helpful to understand the
concept of income.
a) Regular and Definite Source
The term "income" connotes a periodical monetary return coming in with some
sort of regularity or expected regularity from definite source. This statement
must, however, be read with reference to the facts of each case.
b) Different Forms of Income
Income may be received in cash or in kind. When income is received in kind,
its valuation is to be made according to the rules prescribed in the Income-tax
rules. If, however, there is no prescribed rule, valuation is made on the basis of
market value.
7. ibid.
66
c) Receipts vs Accruals
Income arises either on receipt basis or on accrual basis. Income may accrue to
tax payer without its actual receipt. Moreover, in some cases income is deemed
to accrue or arise to a person without its actual accrual or receipt.
d) Illegal Income
The income'-tax law does not make any distinction between income accrued or
arisen from a legal source and income tainted with illegality.
e) Disputed title
Income-tax assessment cannot be held up or post-poncd merely because of
existence of a dispute regarding the title of income.
f) Relief or reimbursement of expenses not treated as income
Mere relief or reimbursement of expenses is not treated as income. For
instance, reimbursement of actual travelling expenses to an employee is not an
income.
g) Surplus from Mutual activity
A person cannot make a taxable profit out of a transaction with himself.
Income must, therefore, come from outside. A surplus arising to mutal concern
cannot be regarded as income chargeable to tax.
h) Temporary and Permanent Income
For the purpose of income-tax there is no distinction between temporary and
permanent income. Even temporary income is taxable.
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i) Lump Sum Receipts
Income, whether received in lump sum or in instalments, is liable to tax. For
instance, arrears of bonus, received in lump sum, is income and taxable as
salary.
j) Personal Profit
Gift of a personal nature e.g. birthday, marriage gifts etc., is not income and
therefore, recipient of such gift is not liable to income-tax.
k) Tax-Free Income
If a person receives tax-free income on which tax is paid by the person making
payment on behalf of the recipient, it has to be grossed up for inclusion in his
total income. For instance, interest on tax-free commercial securities is grossed
up.
1) Receipt on Account of Dharmada
Receipt on account of dharmada, gauashala and pathashala is not income and,
therefore, not liable to tax.
m) Devaluation of Currency
If an assessee receives extra money on account of devaluation of currency, it is
taxable.
n) Income Includes Loss
Income includes loss while income and profit and gains represent "Plus
Income',' losses represent minus Income.
8. Singhania, K. Vinod. Op.Cit., Pp. 15-16.
68
3.4.4. TAX FREE INCOMES ( Section 10)
The Act provides a scheme of two fold exemption; total exemption and
partial exemption. There are certain incomes which are completely exempt from
tax, i.e., they do not form part of the total income, which arc covered by
Section.10. There are some incomes which are partially exempt form tax i.e., they
are included in the total income, but rebate of tax is given on such incomes at the
average rate applicable to the total income. They are covered under Section 86. It
may be noted that if the assessee wants to claim any exemption the burden of
proof that the income is exempt lies on him.
Section. 10 of the Act, enumerates incomes which are tax-free. They arc
also called exempted incomes. The following are such type of incomes which are
not to be included in computing the total income of an assessee:
1. Agricultural Income: Agricultural income is exempt from tax under Section 10
(A). Parliament has no power under the constitution to levy tax on agricultural
income.
2. Any sum received by a member of a Hindu-undivided family, out of the family
income [Section 10(2)]
3. The receipts which are of a casual and non-recurring nature are exempt from
tax to the extent of Rs. 5000 for all such receipts on the aggregate [Section
10(3)]
4. Certain interest incomes of foreigners [Section 10(4)]
5. Certain interest incomes received by a non-resident Indian CitizcnfScction 10
(4B)]
6. Travel concession received by an individual from his employer [Section
10(5)]
69
7. Any remuneration received by a non-resident individual who is not a citizen of
India for rendering service in connection with the shooting of a
cinematography film in India, subject to certain conditions [Section 10(5A)]
8. Certain incomes such as passage money, remuneration of foreigners [Section
10(6)]
9. Tax paid on behalf of foreign company by Government or an Indian concern in
respect of royalties or fees for technical Service [Section 10(6 A)]
10. Tax Paid on behalf of non-resident or a foreign Company by Government or an
Indian concern in pursuance of an agreement duly approved [Section 10(6B)]
11. Any fees received by a specified foreign company for technical service
rendered in pursuance of an agreement [Section 10(6C)]
12. Any perquisite or allowance paid or allowed by the Government to its
employees, servicing abroad [ Section 10(7)]
13.Remuneration received by an individual from a foreign state under Co
operative technical assistance programme [Section 10(8)]
14. Death-cum-retirement gratuity received by certain employees to the extent
specified and subject to prescribed conditions [Section 10( 10)]
15. Retrenchment compensation received by a workman upto certain extent
[Section 10(10B)]
16. Any compensation received by an employee of a public sector company on his
voluntary retirement in accordance with any scheme approved by the central
Government is fully exempt [Section 10(10C)]
17.Payment from Statutory Providend Fund [SectionlO (11)] ; Recognised
Providend Fund [Section 10(12)] and, Approved Superannuation fund [Section
10(13)] exempt subject to fulfillment of certain conditions.
18. The House Rent Allowance actually received by an employee specially granted
to him by his employer to meet the expenditure incurred on rent is exempt upto
certain extent.
70
19. Any Special allowance or benefit not being perquisite specially granted to an
employee for specific purposes [Section 10(14) Rule 2B].
20. Income by way of exchange risk premium received by a Public Financial
Institution under certain circumstances. [Section 10 (14A)]
21. Interest on certain Government securities [Section 10(15)]
22. Payment of lease-rent by an Indian Company [Section 10 (15A)j
23. Scholarship to meet the cost of education [Section 10(16)]
24. Any daily allowance received by a Member of Parliament or of any state
legislature or of any committee thereof, is exempt [Section 10(17)]
25. Awards and rewards received either in cash or in kind are exempt [Section 10
(17A)]
26. Any ex-gratia receipt from the Central Government consequent upon the
abolition of privy Purse is exempt [Section 10(18A)]
27. The Annual value of any one palace in the occupation of an erstwhile ruler of
an Indian State [Section 10 (19A)]
28. Income of a local authority from certain sources is exempt [Section 10(20)]
29. Any Income of an authority constituted in India under any law for the purpose
of dealing with and satisfying the need for housing accommodation or for
planning, development or improvement of any city, town or a village is exempt
[Section 10(20A)].
30. Any income of an approved scientific research association is exempt if such
income is applied or accumulated wholly and exclusively to its objects
[Section 10(21)].
31. Income of a University or Educational Institution existing solely for
educational purpose but not for the purpose of profit is exempt Section 10(22).
32. Any income of a hospital or other institution which is existing solely for
philanthropic purposes is exempt [Section 10 (22A)].
33.Income of sports association established in India and notified by the
Government Section 10(23).
71
34. Income of approved association established in India having as its object the
control, supervision, regulation or encouragement of certain profession is
exempt [Section 10(23A)].
35. Income received by any person on behalf of Regimental fund or non-public
fund established by the union armed forces for the welfare of its members or
their dependents, is exempt [Section 10 (23 AA)].
36. Any income of an institution registered as a public charitable trust or under
other Acts and existing solely for the development of Khadi or Village
Industries is exempt [Section 10 (23 B)].
37. Any income of such Board or authority established under a state Act for
development of Khadi or Village Industries in the state is exempt [Section 10
(23BB)].
38. Any income of a body established under an Act for the administration of the
public, religious or charitable trusts or endowments, etc., is exempt [Section 10
(23BBA)].
39. Income of certain notified funds or institutions is exempt from tax [Section
10(23C)].
40. Income of certain mutual funds set up by the public sector bank or public
financial institution is exempt [Section 10 (23D)].
41. Income of Exchange Risk Administration Fund set up by the financial
institutions as specified by the Government is exempt [Section 10 (23E)].
42. Any income from 'house property' and 'income from other sources' of trade
Union registered under the Trade Unions Act, 1926 is exempt [Section 10(24)].
43. Income of provident funds established under the Provident Fund Act, 1925 or
Recognised Provident Fund, or Approved Superannuation or Gratuity Fund
[Section 10(25)].
44. Income of Schedule Tribes residing in specified or notified area as defined in
the Constitution is exempt [Section 10 (26)].
72
45. Income of resident in Ladakh where such person is resident in the said district
in the previous year relevant to the assessment year 1962-63 is exempt
[Section 10(26A)].
46. Any income of a corporation established by Government for promoting the
interest of the members of Scheduled castes or Scheduled tribes is fully exempt
[Section 10 (26 B)].
47. Income from letting of gowdowns, etc., of an authority constituted under any
law for the marketing of commodities, is exempt [Section 10(29)].
48. In the case of an assessee who carries on the business of growing and
manufacturing tea in India, the amount of any subsidy received from or
through the Tea Board under a specified scheme [Section 10(30)].
49. Subsidy received from concerned board Section 10(31) : In the case of an
assessee who carries on the business of growing and manufacturing rubber,
coffee, cardamom or such other commodity in India as specified by the Central
Government, the subsidy received from the concerned board for specified
purpose.
50. Profit of newly established industrial undertaking in Free Trade Zone Section
10A (Known as complete tax-holiday benefit). Any profits derived by an
assessee from an industrial undertaking is exempt from tax for 5 consecutive
assessment years falling within 8 years beginning with the assessment year
relevant to the previous year during which it begins to manufacture articles, in
any Free Trade Zones.
51.100% Export oriented undertaking Section 10B. The profits and gains derived
by an assessee from the newly established undertaking is fully exempt from tax
for a period of 5 consecutive assessment years, falling within a period of 8
years beginning with the assessment year relevant to the previous year in
which it begins to manufacture or produce articles or things as specified by the
assessee.
73
3.5. COMPUTATION OF INCOME UNDER DIFFERENT HEADS OF
INCOME
The income of an assessee is the total of all his income from whatever
source derived. The computation of such total income requires the consideration of
a number of factors. The residential status of an assessee should be determined
since the scope of total income depends upon the residential status. All his income
should be computed under five different heads. Each head of income has got
specific deductions. The exempted incomes if any, should be excluded from the
total income. From the gross total income of an assessee the deductions for which
he is entitled under any of the Sections from 80CCC to 80U should be claimed and
the balance represents his total income.
For the purpose of income tax, the income has been classified into certain
specified heads. According to Section 14 of the 1961 Act, all income is classified
under the following five heads of income:
1) Salaries
2) Income from House Property
3) Profits and Gains of Business or Profession
4) Capital Gains
5) Income from other Sources
3.5.1. INCOME FROM SALARIES [Section 15,16 and 171
Under Section 15, the following incomes are chargeable under the head
'Salaries';9
9. Mehrotra, H.C & Goyal, S.P. (2000). Income-tax Law and Practice. (21st Edn.) Agra;
Sahitya Bhavan Publications. P.91.
74
(a) any salary due from an employer or former employer to an asscssee in the
previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer ;
(c) any arrears of salary paid or allowed to him in the previous year or on behalf
of an employer or a former employer, is not charged to income tax for any
previous year.
Meaning of Salary [Section 17(1)]
The ordinary meaning of salary is periodic payment received for services
rendered. But for income tax purpose salary includes the following.10
i) Wages
ii) Any gratuity or pension
iii) Any fees, commission, perquisites, or profits in lieu of or in addition to
any salary and wages,
iv) Any advance of salary, but not advance for purchasing a car, cycle,
scooter or house ; etc.
v) Any payment received by an employee in respect of any period of leave
not availed by him.
vi) The annual accretion to the balance at the credit of any employee
participating in a Recognised Provident Fund to the extent to which it is
chargeable to tax under Rule 6 of part A of the fourth Schedule i.e.,
employer's contribution in excess of 12% of the employees Salary and
the interest on provident Fund in excess of 12%.
10. Mehta, V.G. (1995-96). Income-tax Ready Reckoner. Bombay : Kubera Publishing
House. P-28
75
vii) The aggregate of all sums that are comprised in the transferred balance
as referred to in Sub-rule (2) of Rule II of Part A of the fourth Schedule
of an employee participating in Recognised Provident Fund. It is
included in salaries only to the extent to which it is chargeable to tax
under sub-rule (4) of Rule II.
Remuneration or commission paid to an employee at a fixed percentage of
turnover achieved by him is Salary.1
Incentive bonus paid to Development Officers of the LIC Constitute Salary.
Deduction under Section 10(14) is not permissible in respect of such bonus.12
However, any lump-sum payment made gratuitously or by way of
compensation or otherwise to the widow or other legal heirs of an employee, who
dies while still in active service is not taxable under the Income tax Act.1
ALLOWANCES
Allowance is generally defined as a fixed amount of money or other
substance given regularly in addition to salary for the purpose of meeting some
particular requirement connected with the service rendered by the employee or as
compensation for unusual conditions of that service.1 Under the Act; it is taxable
under Section 15 on "due"or "receipt" basis irrespective of the fact that it is paid
in addition to or in lieu of salary1 . some of the important allowances arc:
11. Gestener Duplicator (P) Ltd vs. CIT (1979), 117 ITR 1 (SC)
12. CLT vs. S.B.Chinniah & Others (1995) 214 ITR 368 (A.P) & P.N.Verma vs. CIT
[(1997) 227 ITR 24 Raj)]
13. Circular No.573 Dated 21-8-1990.
14. Mutual Acceptance Co. vs. CIT (1944) 69 CLR 389
15. Vinod. K. Singhania Op. Cit., P.75-76
76
1. Dearness allowance
2. Commission
3. Bonus
4. City Compensatory Allowance [Section 10(14)]
5. House Rent allowance [Section 10(13A) and rule 2A]
6. Entertainment allowance [Section 16 (ii)]
7. Conveyance allowance /Special allowance [Section 10(14)]
8. Allowance to Government employees outside India [Section 10(7)]
9. Children's education allowance [17(2)(iv)]
10. Tiffin allowance
11. Fixed Medical allowance
12. Servant allowance
PERQUISITES [Section 17(2)]
For the purpose of computing the income chargeable under the head
"Salaries", it is necessary to determine the value of perquisites. Some of the
perquisites are:
1. Rent-free accommodation.
2. Accommodation provided to the employee at concessional rent.
3. Motar Car for the Personal use of an employee.
4. Free service of a sweeper, a gardner or a watchman provided to employees.
5. Gas, Electricity, Water, etc., supplied free of charge.
6. Free transport to employees by an undertaking engaged in the carriage of
passengers or goods.
7. Any other benefit not included in the preceding items.
77
EXEMPTED PERQUISITES AND OTHER ALLOWANCES
Salary includes perquisites and allowances provided in the form of cash or
kind by the employer to his employees. The following allowances and perquisites
are exempted
1. Medical benefits in certain cases.
2. Refreshment during office hours in office premises.
3. Recreational benefits.
4. Telephone bill
5. Family Planning expenses
6. Perquisites to Government employees posted abroad.
7. Certain perquisites to High Court and Supreme Court Judges
8. Scholarship to children of employees paid by the employer.
9. Concessional or interest free loans from employer for construction or purchase
of a house.
DEDUCTION FROM SALARIES
The income chargeable under the head 'Salaries' is computed after making the
following deductions.
1. Standard deduction [Section 16(i)] : An assessee whose income from salary
before standard deduction-
(a) does not exceed Rs. 1,00,000 One-third of salary or Rs. 25,000, whichever is
less ;
(b) exceeds Rs. 1,00,000 but does not exceed Rs. 5,00,000- Rs. 20,000 ;
(c) exceeds Rs. 5,00,000 - Nil.
78
2. Entertainment Allowance [Section 16(h)] : Entertainment allowance granted
to an employee is included in the gross salary income and then the following
deduction is given :
(i) If the employee is a Government employee maximum of Rs. 5,000.
(ii) If the employee is not a Government servant, a maximum of Rs. 7,500.
3. Tax on Employment [Section 16(iii)] : Any sum paid by the assessee on
account of a tax on employment is allowed.
After these deductions, whatever remains is income from salary.
3.5.2. INCOME FROM HOUSE PROPERTY [Section 22 to 271
This is the second head of income. The income chargeable here is the
'annual value' of property consisting of any building or land appartanent thereto
of which the assessee is the owner, other than such portions of such property as he
may occupy for the purposes of any business or profession carried on by him the
profits of which arc chargeable to income tax.
TOTALLY EXEMPTED INCOME FROM HOUSE PROPERTY
Income from certain house property is exempted from income-tax
1) Income from agricultural building [Section 2(1 A) (c)]
2) The annual value of any one Palace in the occupation of Ruler [Section
10(19 A)]
3) Income from house property belonging to
a) a local authority [Section 10(20)]
b) an authority constituted for the purpose of planning development or
improvement of cities, towns and villages [Section 10(20A)]
79
c) scientific research association [Section 10(21)]
d) games or sports association [Section 10(23)]
e) a Registered Trade Union [Section 10 (24)]
4) In the case of an authority constituted under any law for the time being in force
for the marketing of commodities any income derived by it from the letting of
godowns or warehouses for storage, processing or facilitating the marketing of
commodities [Section 10(29)]
5) Income from house property held by trust wholly for charitable or religious
purpose [Section 11(1)]
6) Income from house property held by a political party [Section 13 A]
7) Income from house property used by the assessee for purposes of his business
or profession and the profits of which are chargeable to income tax.[ Section
22]
8) Income of one self-occupied house16 [Section 23(2) a(i) ]
DEDUCTIONS FROM HOUSE PROPERTY INCOME
Section 24 provides that the income under the head, "income from house
property" is to be computed after making the following deductions from annual
value determined under section 23.'7
1. In respect of repairs and collection of rent of the property, a sum equal to %
(One fourth) of annual value.
2. The premium paid to insure the property against risk of damage.
3. Where the property is subject to any annual charge not being a charge created
by the assessee voluntarily or a capital charge the amount of such charge.
4. Where the property is subject to a ground rent the amount of such ground rent.
16. MehotraiT.C& Goyal, S.P. Op.Cit., P .153.
17. Amendment made in the provision to Section 24(2) by Finance (No.2) Act. 1998.
80
5. Where the property has been acquired, constructed, repaired, renewed or
reconstructed with borrowed capital, the amount of interest payable on such
borrowing.18
6. Any sum paid on account of land revenue or any other tax levied by the State
Government in respect of the property.
7. Where the property is letout and it is vacant during a part of the year, that part
of the annual value which is proportionate to the period during which the
property is wholly unoccupied.
8. Irrecoverable rent subject to the conditions prescribed in the income tax rules.
None of the above deductions is allowable where the annual value of the
house kept for self-occupation is to be taken at 'Nil' under Section 23(2)(a)(i)
and 23(3). However interest on funds borrowed for the puipose of acquiring,
constructing or repairing the self-occupied house is allowed to certain extent
depending upon the date of completion of construction.
3.5.3. PROFITS AND GAINS OF BUSINESS OR PROFESSION [Sections 28 to
44D]
I . BUSINESS
As defined under Section 2(13) of the income tax Act, "Business" includes
any trade, commerce or manufacturer or any adventure or concern in the nature of
trade, commerce or manufacture.
18. "The Board has clarified that interest on house building advance taken by Central Government Servants under the House Building advance Rules can be allowed as deductions Under Section 24 (i)(vi) on accrual basis even-though such interest is payable later" [Circular No. 363 dated :24.6.1983 143 ITR (ST)2 ]
81
For the purpose of computing business income, business, if any, carried on
by an assessee will be treated as distinct and separate from any other business
carried on by him.19
II. PROFESSION
Under Section 2(36), "Profession" is defined to include vocation.
Incomefrom exercise of any profession or vocation which calls for intellectual or
manual skills, falls under this head. It covers cases of doctors, lawyers, chartered
accountants, architects, consulting engineers, artists, sculptors, musicians, singers,
etc.20
Ill BUSINESS OR PROFESSIONAL INCOME
The following incomes are chargeable to tax under income from this head :
(a) Profits and gains of business or profession carried on during any part of the
previous year;
(b) Compensation received for modification in or termination of managing agency
agreement;
(c) Compensation received for nationalisation of business property ;
(d) Income derived by a trade, professional or similar association from specific
service performed for its members ;
(e) The value of any benefit or perquisite from business or profession ;
(f) Profit on sale of import entitlement license granted to an exporter ;
19. Harbans, Singhs vs. CIT (1981), 132 ITR 77 (P & H)
20. Shah. T. observed in the case of state of Punjab vs. Bajaj Electrical Ltd. (1968)70
ITR 730 (SC)
82
(g) Cash assistance received or receivable by an exporter ;
(h) Any duty of customs or excise rc-paid or rc-payablc as drawback to an
exporter.
(i) Any interest, salary, bonus, commission, or remuneration by whatever name
called due to or received by, a partner of a firm from such firm. However, the
amount of salary, remuneration etc., and / or interest which is disallowed in the
hands of the firm under Section 40 (b) and taxed at the maximum marginal
rate, will be reduced from salary, remuneration, etc. and/or interest assessable
in the hands of the partner ;
(j) Any sum received, on or after 1.10.1996, under a keyman insurance policy
including the sum allocated by way of bonus on such policy.
DEEMED PROFITS [Section 41]
The following receipts are deemed to be the incomes from business or
profession and are chargeable to tax.
1. Recovery of loss or expenditure
2. Remission or cessation of liability
3. Profits on sale of capital asset used for scientific research.
4. Bad debts recovered.
5. Income of discontinued business
COMPUTATION OF INCOME
The income from profits and gains of business or profession should be
computed in accordance with the provisions contained in Sections 30 to 43B. The
deduction in respect of expenditure and allowances have been dealt in Sections 30
to 37. Such deductions are expressly allowed. There may be other loss or
expenditure incurred by the assessee in course of his business or profession, not
83
falling in any of the above Sections. Even then, he is entitled for deduction of such
loss or expenditure on the ground of ordinary principles of commercial practice
provided that it is not expressly disallowed under any other provisions of the Act.
EXPENDITURE AND ALLOWANCE EXPRESSLY ALLOWED
1. Rent, taxes, repairs and insurance of building : Section 30
2. Repairs and insurance of machinery etc., : Section 31
3. Depreciation : Section 32
4. Investment Allowance : Section 32A (since withdrawn)
5. Development allowance : Section 33A (since withdrawn)
6. Reserve for shipping business : Section 33C
7. Expenditure on scientific research : Section 35
8. Expenditure on patent or copyrights : Section 35 A
9. Expenditure on know-how : Section 35 AB
10. Payment to association etc., Section 35 CCA
11. Payment to association or institution. Section 35 CCB
12. Amortisation of certain preliminary expenses : Section 35 D
13. Expenditure on prospecting etc., for minerals : Section 35E.
OTHERS DEDUCTIONS
The following are the other deductions allowable in computing the profits
and gains of business or profession
1. Insurance premium
2. Premium on health
3. Bonus or commission
4. Interest on borrowed capital
5. Contribution to Provident Fund and Superannuation Funds
84
6. Contribution to Gratuity funds
7. Any Sum credited to employees provident Fund Account
8. Loss on animals
9. Contribution to exchange risk administration fund
10. Special reserves of financial corporations
11. Expenditure by a company on family Planning.
GENERAL DEDUCTIONS : Section 37
1. Expenditure incurred wholly and exclusively for the purpose of the business or
profession ; Section 37 (i)
2. Entertainment expenditure : Section 37 (2A)
3. Advertisement in Souvenir of a political party : Section 37 AB
4. Expenditure on advertisement, holiday home, guest house and travelling:
Section 37(3)
Whatever remains after deducting the above expenditure from the gross
receipts is income chargeable under this head. If the deductions arc more than the
receipts, it results in loss.
3.5.4. CAPITAL GAINS [Section 45 TO 55J
Any profits and gains arising from the transfer of a capital asset effected in
the previous year shall be chargeable to income tax under the head capital gains
and shall be deemed to be the income of previous year.
In the charging Section the following expressions arc worth noting-
1) Capital asset;
2) Transfer;
85
3) Profits and gains are deemed to be the income of the previous year in
which the transfer took place or year of chargcability.
Where a capital asset of the owner is converted by him into stock-in-trade
of his business, it is treated as transfer, and fair market value of the capital asset as
on the date of conversion will be treated as full value of the consideration on such
transfer. However, the taxability of such converted stock arises only when it is
sold or transferred.
THE FOLLOWING ARE NOT TREATED AS CAPITAL AEESTS
1. Stock-in trade, consumable stores or raw materials held for the purposes of
business or profession.
2. Personal effects such as wearing apparel (but excluding jewellary), furniture,
motor car, air conditioner, refrigerator, etc., held for personal use by the
assessee or by any member of his family dependent on him.
3. 6 Vi % Gold Bonds, 1977.
4. 7% Gold Bonds, 1980
5. National Defence Gold Bonds, 1980
6. Special Bearer Bonds, 1991, and
7. Agricultural land in India, not being land which is situated within the local
limits of any municipality, notified area committee, town committee or
contonment board and which has a population of not less than ten thousand
(10,000) or which is situated in any area upto a distance of 8 kilometers from
such limits or up such distance from such limits as specified21. (In
21.Mehta.V.G,Op.Cit., P.134.
86
*Notification No.8.0.77(E), dated February 6'\ 1973 [(89 ITRST) 145)]. This
Notification No. 77(E), has been superseded and substituted vide Notification
No. 9447/F.No. 164/3/87-ITA-I dated. 6-J-J994).
Note: Provisions of the income-tax Act shall not apply to any long-term capital
gains to the initial subscriber on transfer of Gold Bonds, 1998 [Vide Section
5(a)(ii) of the Gold Bonds (immunities and exemptions) Act, 1993.
CAPITAL GAINS EXEMPT FROM TAX
The following capital gains are exempt from tax.
1. Transfer not regarded as "transfer"
2. Distribution as assets on liquidation of a company.
3. Capital gain on residential House. Section 53
4. Profit on Sale of property used for residence. Section 54
5. Capital gain on Sale of agricultural land. Section 54B
6. Capital gain on compulsory acquisition of land and buildings. Section 54D
7. Capital gain not be charged in certain cases Section 54E.
8. Capital gain invested in residential house. Section 54F
9. Capital gain arising in the course of shifting of industrial undertaking from
urban area: Section 54 G.
MODE OF COMPUTATION [Section 48,49,51 & 55]
Section 48 provides that, from the full value of consideration received or
accruing as a result of the transfer of capital asset, the following amount should be
deducted to arrive at the amount of capital gains ;
i. The cost of acquisition of the capital asset;
ii. The expenditure incurred on any improvement to the capital asset;
87
iii. Expenditure incurred wholly and exclusively in connection with the
transfer of the capital asset, such as stamp duty, registration charges, legal
fees, brokerage, etc.
3.5.5. INCOME FROM OTHER SOURCES (Section 56 to 59)
This is a residuary head of income and sweeps all such taxable incomes,
profits and gains that are not chargeable to income-tax under any of the first four
heads of income. It is important to note that where there is a specified head for the
income in question and a specific Section providing for the head, such income
cannot be assessed under this residuary head, " income from other sources"
[Section 56(1 )]23
The following incomes shall be chargeable to income tax under this head.
1. Dividend - Section 56(2)(i)
2. Lottery, crossword puzzles, etc., Section 56 (2)(ib)
3. Funds of employees
4. Interest on securities
5. Hire of plant and machinery, Plant, etc.,
6. Hire of machinery, plant and building not separately Section 56 (2) (iii)
7. Insurance money
22. Section 48 for the notes on amendment by the Finance Act. (No.2). 1998.
23. Mehotra, H.C .& Goyal, S.P. Op. Cit., Pp. 372-73
88
SOME OTHER INCOMES CHARGEABLE UNDER THIS HEAD
[Section 56 (1)]
1. Any fees, commission or remuneration received by an employee.
2. Directors fees.
3. Examinership fees received by a professor.
4. Interest received on bank deposits and under direct taxes Act. eg., Income Tax
Act, Wealth tax Act, Gift tax Act, Estate Duty Act, and interest payable under
a decree.
5. Interest on foreign securities.
6. Rent on sub-letting house property
7. Income, from property for lease
8. Ground rent
9. Royalties received by the owners of mines and copy rights.
10. Salary of a Member of Parliament (M.P) or Member of Legislative Assembly
(M.L.A)
11. Income from undisclosed sources
12. Income from agricultural land outside India.
13. Casual income (in excess of Rs. 5000) other than discussed under item 2 under
Section 56(2)
14. Pension received by a nominee after the death of the employee. However
pension received by widow of employee of the U.N.O is exempt.24
15. Income from markets, ferries and fisheries.
16. Income of leasing out of Machinery purchased for the purposes of
manufacturing but not used for the said purpose at any time. 5
24. C n vs. Mujjidunnisa Belgaum (1996) 221 ITR 89
25. Ambica Tobacco (P) Co Ltd, vs. CTT (1998) 36 Taxman . 281 (A.P)
89
DEDUCTIONS TO BE MADE FROM INCOME FROM OTHER SOURCES
(Section 57).
The following deductions are allowed for computing income under the head
"Income from other Sources".
1) In respect of income from machinery, plant or furniture etc., belonging to the
assessee and let on hire, the deductions permissible under Section 57. (ii) are :
a) Amount paid on account of current repairs to the premises [Section 30(a)(ii)]
b) Amount paid on account of current repairs to machinery, plant or furniture
and premium paid in respect of insurance against risk of damage or
destruction there of (Section 31)
c) The amount of any premium paid in respect of insurance against risk of
damage or destruction of the premises [Section 30 (c)]
d) Depreciation in respect of building, plant or furniture [Section 32(1) and 32
(1A)]
e) Benefit of unabsorbed depreciation [Section 32(2)]
2) In respect of income in the nature of family pension a deduction of a sum equal
to 33 1/3 % of such income subject to ceiling limit of Rs. 15,000 [Section 57
(iia)]
3) In respect of contributions received for provident fund, etc., the deduction of
the same will be allowed only if such sum is credited by the assessee to the
employees account in relevant fund on or before the due date [Section 57(ia)]
4) Any other expenditure (not being in the nature of capital expenditure) laid out
or expended wholly or exclusively for the purpose of making or earning such
income [Section 57 (iii)]
26 Mehta, V.G . Op.Cit., Pp. 171-172.
90
3.6. AGGREGATION, SET-OFF AND CARRY FORWARD OF LOSSES
a) The income computed under Five heads is then aggregated to arrive at
'Gross Total Income'.
If there is loss under any head, the effect should be given before arriving at
the Gross total income. Section 70 to 80 of the income-tax Act provide rules of
setting off of losses and their carry farward.
Loss under any source falling under any head of income is to be set-off
against income from any other source under the same head of income in the same
assessment Year. However, this will not apply to losses relating to speculation
business and lotteries, cross ward puzzles, races etc. (Section 70).
The loss under one head of income may be set-off against the income under
other heads. The loss under the head "capital gains" (both short-term and long-
term) will not be set-off against income under any other head of income in the
same assessment year.
Unabsorbed business losses, capital loss, loss from maintaining horse races
in a previous year can be carried forward and set-off against income in ,the
subsequent previous year subject to certain conditions.
3.7. DEDUCTION TO BE MADE IN COMPUTING TOTAL INCOME
Chapter VI-A of the income tax Act, 1961 deals with deductions to be
made from "Gross Total Income" of an assessee in order to arrive at the total
income. The provisions are contained in Sections 80A to 80U of that Act. These
deductions are different from those discussed under various heads of income.
91
Whereas the deductions given in this head are incentives to save for future or a
kind of relief to assessee, those discussed under various heads of income were
meant to meet the expenses that were necessarily incurred to earn income under
those heads.
Under Section 80A, these deductions are to be made in accordance with and
subject to the provisions specified in Section 80CCC to 80U. The aggregate
amount of the deductions shall not, in any case, exceed the gross total income of
the assessee. After these deductions what we get is 'total income' :
Information about the assessees eligible, the purpose, and the amount of
deduction Under Section 80CCC to 80U is very briefly presented below :
1) Section 80CCC - For Individuals
(i) Regarding Contribution to pension Fund of the LIC of India
(ii) Deduction : Maximum Rs. 10,000
2) Section 80D - For Individuals and H.U.F.
(i) Regarding Premia Paid for insurance on the health of self, spouse,
dependent children and Parents / member of H.U.F.
(ii) Deduction : Maximum Rs. 10,000
3) Section 80DD - For Individuals and H.U.F resident in India.
(i) (a) Regarding medical treatment etc., of handicapped dependent.
(b) Regarding deposit made for maintenance of handicapped dependent,
(ii) Deduction : Maximum Rs. 40,000
27. CIT vs. Ram Lai Rajghoria & Sons (1980) 123 ITR, (New Delhi).
92
4) Section 80DDB - For Individuals and H.U.F resident in India
(i) Regarding Medical treatment
(ii) Deduction: Rs. 15,000
5) Section 80E -For Individuals
(i) Regarding repayment of loan (including interest) taken for higher
studies,
(ii) Deduction : Maximum Rs. 25,000
6) Section 80G - For all assessees
(i) Regarding donation to approved funds or institution in cash or by
cheque etc.
(ii) Qualifying Amount : Up to maximum of 10% of G.T.I (minus incomes
exempt, L.T.C.G and deduction under Section 80CCC to 80U except
Section 80G)
(iii) Deduction : 100% of donation for Prime Minister's National Relief
Fund, Prime Minister's Armenia Earthquake Relief Fund the Africa
(Public Contribution India) Fund, the National Foundation for
Communal Harmony, a University or Educational Institution of
National Eminence, the chief Minister's Earthquake Relief Fund
(Maharastra). Zilla Saksharata Samiti, National Blood Transfusion
Council or a State Blood Transfusion Council, State Government to
provide medical relief to the poor, Welfare Fund of the armed forced of
the Union and Family Planning etc., and 50% of other donations
qualifying for deduction.
7) Section 80GG - For Individuals and H.U.F
(i) Regarding expenditure on house rent by self-employed persons and
salaried person not getting house rent allowances (HRA) or rent-free
accommodation
93
(ii) Deduction : Maximum 25% of total income or Rs. 2000 P.M whichever
is less
8) Section 80GGA - For All Assessees
(i) Regarding payments made to a scientific Research Association or to a
university or college etc. For scientific research or social or statistical
research or to an association or institution engaged in any programme of
rural development or of training persons for such programme or any
programme of afforestation etc.
(ii) Deduction : 100% of the amount paid
9) Section 80HH - For all assessees
(i) Regarding profits of newly established industrial undertaking or hotel
business in backward areas,
(ii) Deduction : 20% of such profits for a period of 10 assessment years
from the initial assessment year.
10) Section 80HHA - For all assessees
(i) Regarding profits of newly established small-scale industrial
undertakings in rural areas,
(ii) Deduction : 20% of such profits for a period of 10 assessment years
from the initial assessment year.
11) Section 80HHB - Indian Company and persons resident in India,
(i) Regarding profits from execution of housing projects.
(ii) Deduction : 50% of such profits.
12) Section 80HHBA - Indian Company and persons resident in India,
(i) Regarding profits from execution of housing projects.
94
(ii) Deduction : 50% of such profits, or the amount credited to the housing
project Reserve Account, whichever is less.
13) Section 80HHC - Indian company and persons resident in India,
(i) Regarding profits from export business.
(ii) Deduction : Proportionate to export proceeds brought into India.
14) Section 80HHD - For Indian companies and other persons resident in India,
(i) Regarding earnings in convertible foreign exchange from hotel business
or travel agency,
(ii) Deduction:
(a) 50% of the profits ; and
(b) amount credited to reserve account out of remaining projects.
15) Section 80HHE - For Indian company and person resident in India,
(i) Regarding profits from export of computer software.
(ii) Deduction : Profits of the aforesaid business provided consideration is
received in or brought into India in convertible foreign exchange.
16) Section 801:
(i) Regarding profits of new industrial undertaking.
(ii) If industrial undertaking or ship or hotel business commences after 31st
March 1990 but before 1st April 1991 the deduction would be
(a) If assessee is a company 30% of.such profits for a period of 10 (ten)
assessment years.
(b) In any other case 25% of such profits for a period of 10 (ten) assessment
years and in case of a Co-operative society for period of 12 (twelve)
assessment years.
95
17) Section 80IA:
(i) Regarding profits of from new industrial undertaking, ship or hotel
business,
(ii) Deduction:
(a) If assessee is a company 30% of such profits for a period of 10 (ten)
asseessment years. If the hotel is located in a hilly area, rural area or
place of piligrimage, the deduction will be allowed @ 50%).
(b) In any other case 25% of such profits for a period of ten assessment
years and in case of a Co-operative society for a period of twelve
assessment years.
18) Section 80JJA - For all assessees
(i) Regarding profits from business of collecting and processing of bio
degradable waste,
(ii) Deduction : 100 % of such profits or Rs. 5,00,000 whichever is less.
19) Section 80JJAA - For an Indian company engaged in the manufacture or
production of article or thing.
(i) Regarding employment new workmen.
(ii) Deduction : 30% of additional wages paid to new regular workmen
employed during the previous year
20) Section 80L - For individual and H.U.F .
(i) Regarding interest on securities, interest on bank deposit etc.
(ii) Deduction : Upto Rs. 12,000 + 3,000
21) Section 80 O - For Indian companies and other resident in India.
(i) Regarding income from patent etc., received from a foreign enterprises,
(ii) Deduction : 50%) of such income
96
22) Section 80P - For Co-operative Societies .
(i) Regarding income of Co-operative Societies,
(ii) Deduction:
(a) 100% of income from activities connected with agriculture, marketing,
banking, dairyng etc.
(b) Rs. 50,000 in case of other activities and Rs. 1,00,000 in case of
consumer Co-operative Society for other activities.(Discussed in detail
in part II of this chapter and in chapter V)
23) Section 80R- For Indian Citizens, Professors, Teachers etc.,
(i) Regarding remuneration received by them outside India from certain
foreign sources,
(ii) Deduction : 75 % of remuneration brought into India under FERA.
24) Section 80RR- For resident individuals.
(i) Regarding professional income from foreign sources to authors, artists,
actors etc.
(ii) Deduction : 75% of such income brought into India under FERA.
25) Section 80RRA - For Indian Citizens.
(i) Regarding remuneration received in foreign currency from any
employer (foreign or Indian) for service outside India by Indian
technician.
(ii) Deduction : 75 % of remuneration brought into India under FERA.
26) Section 80U- For resident individuals.
(i) From income of blind or physically disabled persons or mentally
retarded persons,
(ii) Deduction : Rs. 40,000.
97
Conclusion:
The income of an assessee is the total of all his income from whatever
source derived. The computation of such total income requires the consideration of
a number of factors. The residential status of an assessee should be determined
since the scope of total income depends upon the residential status. All his
incomes should be computed under different heads since each head of income has
got specific deductions. The exempted incomes, if any, should be excluded from
the total income. However, if the assessee has any income on which he is entitled
for rebate of tax, such income should be included from the total income. From the
gross total income of an assessee the deduction for which he is entitled under any
of the Section from Section 80CCC 80U. Should be claimed and the and the
balance represents his total income.
98
PART II
INCOME -TAX PROVISIONS APPLICABLE T O CO-OPERATIVE
SOCIETIES
3.8 DEFINITION OF CO-OPERATIVE SOCIETY
3.9 WHETHER CO-OPERATIVE SOCIETY IS A TAXABLE ENTITY?
3.10 GROSS TOTAL INCOME OF CO-OPERATIVE SOCIETIES
3.11 COMPUTATION OF TOTAL INCOME OF A CO-OPERATIVE
SOCIETY
3.12 AMOUNT OF DEDUCTION
3.12.1 100% DEDUCTION [Section 80P (2) (a) ]
3.12.2 100 % DEDUCTION [Section 80 P (2) (b)]
3.12.3 100 % DEDUCTION [Section 80P (2) (d)& (e)]
3.12.4 LIMITED DEDUCTION [Section 80 P (2) (c)]
3.12.5 RATES OF TAX
CONCLUSION
PART-II
INCOME-TAX PROVISIONS APPLICABLE TO CO
OPERATIVE SOCIETIES
3.8. DEFINITION OF CO-OPERATIVE SOCIETY
Section 2(19) gives the definition of Co-operative society. According to it,
a 'Co-operative Society' means a Co-operative Society registered under the Co
operative Societies Act, 1912, (2 of 1912) or under any other law for the time
being in force in any state for the registration of Co-operative Societies.
3.9. WHETHER CO-OPERATIVE SOCIETY IS A TAXABLE ENTITY?
The Co-operative society is a separate taxable entity under the Income-tax
Act 1961. However, it is not mentioned specifically either in the definition of
'assessee' or the 'person' (these two terms are explained in Part-11). One has to
look for the provisions of Section 80P which provide tax incentives to Co
operative societies to find out whether Co-operative society is an 'assessee' or not.
Section 80P starts with the words : "where, in the case of an assessee being a Co-TO
operative society," Hence, a Co-operative society is an assessee under the
Income-tax Act, 1961.
28. Income-tax Act. (1995). New Delhi: Taxman Publications Ltd. P. 1.362.
99
3.10. GROSS TOTAL INCOME OF CO-OPERATIVE SOCIETIES
The Co-operative societies do not enjoy complete exemption from tax.
They are entitled to certain specified deductions from the gross total income. The
gross total income is determined in the same way as in the case of any other
assessee. That is, the income is computed under specified heads of income and
then aggregated to arrive at Gross Total Income (GTI).
3.11. COMPUTATION OF TOTAL INCOME OF A CO-OPERATIVE
SOCIETY
Even in the case of a Co-operative society, total income is computed as in
the case of any other assesse. From the GTI, the deductions available under
Section 80 are deducted to arrive at Total Income. The deductions under Section
80 may be grouped into two for convenience.
(1) General deductions : The deductions available to all the assessees including
Co-operative society, and
(2) Specific deduction : The deduction available specifically to a Co-operative
society.
General Deductions
The following are the deductions from G.T.I available to a Co-operative
society. These deductions arc available to other asscssccs also. Hence, they arc
termed as general deductions. Since these deductions are briefly presented in
Part-I they are just mentioned here.
Section 80.G : Donations to specified funds and charitable institutions
100
Section 80HH : Deduction in respect of profits and gains from newly established
industrial undertakings or hotel business in backward areas
(only to be allowed in respect of an undertaking which begins to
manufacture or produce articles up to 31sl March 1990).
Section 80HHA : Deduction in respect of profits and gains from newly established
small-scale industrial undertakings in rural area (only to be
allowed in respect of an undertaking which begins to
manufacture or produce articles up to 31sl March 1990).
Section 80HHB : Deduction in respect of profits and gains from projects outside
India.
Section 80HHBA : From assessment year 1999-2000, deduction in respect of
profits and gains from housing projects.
Section 80HHC : Deduction for profits retained for export business.
Section 80HHD : Deduction in respect of earnings in convertible foreign
exchange.
Section 80HHE : Deduction in respect of export of computer software etc.,
Section 80-1 :Deduction in respect of Profits and gains from industrial
undertakings set up after 31-03-1990 but before 1-4-1991. Rate of
deduction 25% and the period of deduction in case of Co
operative societies is for 12 initial assessment year. In any other
case 10 initial assessment year.
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Section 80-IA : Deduction in respect of profits from industrial undertaking, ship
or business of hotel where the business starts functioning after
31st March, 1991.
Section 80-IB: From assessment year 2000-01 deduction in respect of profits and
gains of infrastructure and non-infrastructure undertakings also
eligible for deduction under this Section. In case of Co-operative
societies, the deduction @ the rate of 25% is allowed for additional
4 assessment years. That is totally for 12 years in case of Co
operative societies and for 8 years in case of others.
Section 80JJA: From assessment year 1999-2000, deduction in respect of profits
and gains from business of collection and processing of
biodegradable waste.
Section 80 O :Deduction in respect of royalty received from a foreign Government
or foreign enterprise.
Specific Deductions
Section 80P provides deduction specifically to Co-operative societies.
Since the provisions of this Section are extensively discussed in chapter-V, they
are briefly mentioned here.
Deduction under Section 80P is only allowed to a Co-operative Society in
respect of its income from any business activity or investment, etc.
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3.12. AMOUNT OF DEDUCTION
3.12.1.100% DEDUCTION [Section 80P (2) (a)]
A Co-operative Society is allowed 100% deduction in respect of its profits
and gains attributable to any of its following business or activities:
a) Business of banking or providing credit facilities to members.
b) Cottage industry ;
c) Marketing of agricultural produce grown by members ;
d) Purchase of agricultural implements, seeds, live stock, or articles meant
for use in agriculture with a view to supplying these to its members ;
e) Processing without the aid of power, of agricultural produce of its
members ;
f) Collective disposal of labour of its members ; or
g) Fishing or allied activities, in other words, catching, curing, processing,
preserving, storming or marketing of fish, or purchase of materials and
equipment in connection with such activities for supplying the same to
its members.
In the case of Co-operative societies engaged in (f) and (g) above, it is
necessary that voting rights are restricted only to the following of its members ;
(i) individuals contributing their labour and engaged in fishing or
activities allied to it;
(ii) Co-operative Credit Societies which provide financial assistance to
the society ; and
(iii) The state Government.
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Deduction at 100% in case of a Co-operative engaged in banking business
will not be allowed to a federation of Co-operative societies which provides credit
facilities to its own member societies.
3.12.2 100% DEDUCTION : [Section 80P(2)(b)J
There is a 100% deduction also in respect of profits and gains of a Co
operative society which is a primary society engaged in supplying milk, oilseeds,
fruits or vegetables grown by its members to -
(a) a federal society engaged in similar business ;
(b) the Government or a local authority ; or
(c) a Government company.
3.12.3 100% DEDUCTION [Section 80P(2) (d) and (e) [
A Co-operative society will be entitled to 100% deduction in respect of its
income by way of interest and dividend on its investment as received from another
Co-operative society. If it is engaged in banking business, any interest or dividend
received by it would also be exempt.
Like wise, the whole of the income derived by a Co-operative society
from letting of godowns or warehouses for storage, processing or facilitating the
marketing of commodities, will be allowed as deduction. However, where the
letting is for purposes other than these, the deduction will not be available.
29. C n vs. Bangalore District Co-operative Central Bank. 233 l'i'K (SC).
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3.12.4. LIMITED DEDUCTION [Section 80P (2) (C)]
In respect of its income attributable to any business or activity other than
those specified above, a Co-operative society is to be allowed a deduction as
below;
(a) If it is a consumer Co-operative society- Rs. 1,00,000
(b) In case of any other society - Rs. 50,000.
3.12.5. RATES OF TAX
The rates of income-tax applicable in the case of a Co-operative society
will be as follows:
Total Income
UptoRs. 10,000
Between Rs. 10,000- Rs. 20,000
Above Rs. 20,000
Tax Rate
10%
20%
35%
From assessment year 2000-01, tax computed as above will be increased
by a surcharge at 10% of the amount of tax.
Conclusion:
It is clear from the preceding discussion that the term 'income' and
'assessee' under the Income-tax Act are wide enough to encompass any kind of
'income' and the 'person'. Hence, the Co-operative society is also a separate
taxable entity. For the purpose of taxation, the income of a Co-operative society is
first computed under specified heads of income, and than aggregated as per the
prescribed rules. The aggregate income is called 'Gross Total Income'. From the
GTI, the deductions specified under Section 80 for Co-operative societies are
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deducted. The remaining amount is 'Total Income', which is subject to Income-tax
at the rates prescribed by the Finance Act passed by the parliament in its budget
session every year.
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