UNIT

01 Basic Concepts of Income Tax and

Residential Status of Various Persons

Names of Sub-Units

Direct and Indirect Tax , Constitutional Validity of taxes, Administration of Tax Laws, Sources of
Income Tax Law in India, Basic Principles of Charging Income Tax Section- 4, Assessment Year
Section 2 (9), Previous Year Section 3,Assesses Section 2(7), Person Section 2(31), Income Section 2(24),
Heads of Income Section 14, Gross Total Income Section 80B(5), Rounding off of total Income - Section
288A, Rounding off of tax- Section 288B, Capital Receipt and Revenue Receipts- The distinction and
implication, Basis of Charge and Scope of total Income, Diversion and Application of Income.

Overview

This unit describes the direct and indirect tax, the constitutional validity of taxes and administration
of tax laws. Also, this unit explains the sources of income tax law in India and basic principles of
charging income tax section-4. Further, this unit discusses the assessment year section 2(9) with
the previous year’s section 3. This unit elaborates on person section 2(31), income section 2(24) and
Heads of Income Section 14. It also describes gross total in income section 80B (5), rounding off of total
income- section 288A and rounding off of tax- section 288B. In the end, this unit explains capital receipt
and revenue receipts - the distinction and implication, basis of charge and scope of total income and
diversion and application of income.
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Learning Objectives

In this unit, you will learn to:

 Identify the basic concepts, definitions and terms related to Income Tax
 Examine the technical terms related to Income Tax
 Determine the basis and scope of total income
 Analyse the capital receipts and revenue receipts
 Describe the diversion and application of income

Learning Outcomes

At the end of this unit, you would:

 Learn that the assessment year and previous year are different
 Examine the capital receipts and revenue receipts
 List down the various heads of income tax, diversion and application income

Pre-Unit Preparatory Material

 https://www.bankbazaar.com/tax/direct-tax.html
 https://keydifferences.com/difference-between-capital-receipt-and-revenue-receipt.html

1.1 INTRODUCTION
The 16th Amendment, passed by Congress on July 2, 1909 and ratified on February 3, 1913, is widely
credited with establishing the individual income tax. Its history, on the other hand, goes back even
further.

Governments in almost every country around the world levy compulsory levies on individuals or entities,
which is known as taxation. Taxation is primarily used to raise revenue for government expenditures,
but it can also be used for other purposes.

India’s tax system is divided into direct and indirect taxes. While direct taxes are levied on taxable
income earned by individuals and corporations, assesses are responsible for depositing taxes.

1.2 DIRECT TAX AND INDIRECT TAX

Direct tax is a tax that is charged directly to the taxpayer, who must pay it to the government and
cannot pass it on to another person.

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Following are some of the most significant direct taxes imposed in India:
 Income tax: Income tax is imposed on individuals who fall into various tax brackets based on their
earnings or revenue and they are required to file an income tax return each year, after which they
must either pay the tax or be eligible for a tax refund.
 Estate Tax: Estate tax also known as inheritance tax is a tax levied on a person’s estate or the total
value of money and property left behind after they die.
 Wealth Tax: A wealth tax is a tax levied on the value of a person’s assets.

Estate and wealth taxes, on the other hand, have been repealed.

Direct taxes do have some benefits for a country’s social and economic development. Let’s discuss these
benefits.
 It reduces inflation: When there is monetary inflation, the government frequently raises the tax
rate, which reduces demand for goods and services, causing inflation to condense as a result of
lower demand.
 It enables social and economic balance: The government has well-defined tax slabs and exemptions
in place based on each individual’s earnings and overall economic situation to balance out income
inequalities.

There are several of drawbacks to direct taxes. However, the lengthy procedures of filing tax returns are
a taxing task in and of themselves.

Indirect Tax
Indirect tax is a government tax levied on goods and services rather than an individual’s income, profit
or revenue and it can be shifted from one taxpayer to another. Previously, paying an indirect tax meant
paying more than the actual cost of a product or service. In addition, taxpayers were subjected to a slew
of indirect taxes.

The Goods and Services Tax (GST) is one of India’s existing indirect taxes. Many indirect tax laws have
been absorbed into it.

The Goods and Services Tax or GST, was implemented on July 1st, 2017 to replace the country’s various
indirect taxes. Due to this the other taxes that used to be levied previously no longer exist. It has done
away with the tax’s cascading effect.
Service tax, state excise duty, countervailing duty, additional excise duty and special additional customs
duties are all included in the GST at the state level.

Following are the benefits of GST:

 Input Tax Credit: When paying tax on the final product, one can deduct the tax already paid on their
purchases and pay only the difference. This is known as Input Tax Credit and it helps to alleviate the
burden of a high tax.
 Composition Scheme under GST: The government has done an excellent job introducing the
Composition Scheme for small businesses with a turnover of less than Rs.1 crore. They don’t have
to go through the time-consuming formalities of GST and instead pay a fixed rate based on their
business turnover under the scheme.

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1.3 CONSTITUTIONAL VALIDITY OF TAXES

Article 265 to Article 289 of the Constitution refers to taxation provisions. No tax shall be levied or
collected unless authorised by law and the right to levy taxes must be exercised by the legislature. There
is no presumption in the levy of tax, because the fiscal act governing the levy of tax must be read in its
whole.

India’s Taxation Provisions in the Constitution

Every law in India has its origins in the Constitution, hence knowing the provisions of the Constitution
is essential to have a comprehensive knowledge of any law. The following are the categories of
constitutional provisions concerning taxation in India:
 Only by the authority of law can taxes be levied. (Article 265)
 Levy of duty on tax and its distribution between centre and states (Article 268, Article 269 and Article
270)
 Restriction on power of the states to levy taxes (Article 286)
 Sale/purchase of goods that take place outside the respective state
 Sale/purchase of goods which take place during the import and export of the goods
 Taxes imposed by the state or purpose of the state (Article 276 and Article 277)
 Taxes imposed by the state or purpose of the union (Article 271, Article 279 and Article 284)
 Grants-in-Aid (Article 273, Article 275, Article 274 and article 282)

1.4 ADMINISTRATION OF TAX LAWS

A tax administration’s job is to collect all owed taxes fairly and efficiently with minimal costs to both
taxpayers and the tax administration. As a result, a tax administration must:
 Ensure that taxpayers follow the rules
 Possess sufficient resources (well-trained staff, IT, budget)

Verification of a tax return or claim for credit, rebate or refund; investigation, assessment, determination,
litigation or collection of a person’s tax liability; investigation or prosecution of a tax-related crime; or
enforcement of a tax statute are all examples of tax administration.

Responsibilities
 Inland tax regulations are written, revised and interpreted.
 National tax administrations and local tax administrations plan, direct, supervise and evaluate the
levy and collection of national tax.
 Directing, supervising and evaluating all levels of tax administration’s anti-corruption efforts
 Auditing major cases of tax evasion, as well as supervising and evaluating audit performance at all
levels of the tax administration
 Tax administration, as well as tax information, planning and evaluation
 Encouragement of tax-related education and public awareness campaigns

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1.5 SOURCES OF INCOME TAX LAW IN INDIA

Salary, business or profession, house property, capital gains and other sources are all covered by the
Income Tax Act of 1961. While the nature of income is obvious for the four sources of income, income
from residual sources is included in the other sources.

Income from Salary

This heading essentially involves any remuneration received by an individual in exchange for services
rendered under a contract of employment. Basic pay, advance salaries, pensions, commissions,
gratuities, perquisites and a yearly bonus are all included in a salary. The crucial thing to remember is
that salary is taxable on a due or received basis, depending on which comes first. Allow me to illustrate
this with an example. If you get paid in April 2020 for the month of March 2020, it will still be taxable in
the prior fiscal year 2019-20.

This is due to the fact that it was due in March. Similarly, if your company paid you in advance for April
and May in the month of March, it will be taxed again in March. As a result, salary income will be taxed
on a due or received basis, whichever comes first.

Income from House Property

Sections 22 to 27 of the Income Tax Act of 1961 deal with the income tax computation of a person’s total
standard income from his or her home or land.

In layman’s terms, this category contains the rental income from the homes.

Income from Profits and Gains of Business or Profession

The income produced through the profits of a business or profession will be attributed to the income
tax computation of total income. The difference between the revenue collected and the expenses will be
charged.

The following is a list of the income that is taxed under this heading:
 Profits made during the assessment year by the assesses
 Profits from an organisation’s revenue
 Profits from the selling of a specific license
 Cash received as a result of an individual’s export under a government program
 Profit, income or bonus earned as a result of a business collaboration
 Benefits gained as a result of working for a company

Income from Capital Gains

Profits or gains obtained by an assesses from the sale or transfer of a capital asset kept as an investment
are referred to as capital gains.

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Real estate, equities, mutual funds, bonds, gold and other capital assets are examples of capital assets.
As a result, anytime you sell a capital asset and profit. This is considered your income and it will be taxed
under the Capital Gains heading. Rental income is taxed as “Income from House Property,” but if the
property is sold and profit is made, then it will be taxed as “capital gain.”

Income from Other Sources

This category includes interest from bank deposits, lottery prizes, card games, gambling and other
sports awards. These earnings are taxable and are ascribed under Section 56(2) of the Income Tax Act.

1.6 BASIC PRINCIPLES OF CHARGING INCOME TAX SECTION -4

An income tax is a tax levied on a person’s earnings. Income tax is a yearly tax on earnings. Income earned
in one fiscal year is taxed in the following fiscal year. Previous Year refers to the financial year in which
the income is earned, while Assessment Year refers to the financial year in which the income is taxed.
Income earned in the previous fiscal year, which ended on March 31, 2011, i.e., 2010-11, will be taxed in the
assessment year 2011-12. The Finance Act determines the tax rates at which income is taxed each year. For
taxation, a person’s income must be computed. Individuals have five sources of income:
 Income from Salary
 Income from House Property
 Income from Business and Profession
 Income from Capital Gain
 Income from Other Sources

Applicable exemptions and deductions should be taken into account when calculating income under
different headings. If there is any provision for clubbing, this should be taken into account. Yearly losses
should be carried forward and losses from previous years should be deducted. Gross Total Income refers
to the income after such adjustments. Then you should claim a deduction under Chapter VIA. The total
taxable income is the amount on which tax is calculated at the prescribed rate. TDS and Advance Tax
paid will be deducted from the tax computed. If applicable, interest will be charged under sections 234A,
234B and 234C. The total tax will be rounded up to the nearest ten rupees multiple.

If your tax liability exceeds your prepaid taxes, you’ll have to pay the difference in self-assessment tax. If
the amount of prepaid taxes is greater than the actual tax liability, a refund should be requested.

1.7 ASSESSMENT YEAR SECTION 2(9)

Assessment Year” refers to the 12-month period that begins on April 1st of each year.

In India, the government keeps track of its finances for a year, from April 1 to March 31. As a result, it is
referred to as the financial year. The Internal Revenue Service has similarly chosen the same year for
its assessment method.

The Assessment year is the fiscal year of the Government of India during which a person’s income from
the previous year is assessed for taxation. Every individual who is subject to taxation under this Act is

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required to file a return of income by the specified deadlines. Officials and officers from the Internal
Revenue Service process these returns. Assessment is the term for this type of processing. This is where
the assesse’s income is scrutinised and validated.

An assessment order is issued when the tax is calculated and compared to the amount paid. The
assessment year is the year in which the entire procedure is completed.

1.8 THE PREVIOUS YEAR SECTION 3

The previous year is defined as the year immediately preceding the assessment year under Section 3 of
the Income Tax Act of 1961. The previous year is also referred to as the financial year. It primarily refers
to period beginning April 1 and ending March 31 of the following year. Tax is paid in the assessment year
for income earned in the previous/financial year.

However, in those circumstances when a new business/profession/new source of income is established

in a previous/financial year, the previous/financial year will begin/be calculated from the date the new
business/profession/new source of income was established, rather than the 1st of April.

If the prior year is regarded to be 2020-21, the previous year will begin on April 1, 2020 and end on March
31, 2021. And the previous/financial year’s evaluation year will be 2021-22, i.e., from April 1, 2021, to
March 31, 2022.

In the same way, if the assessment year was 2020-21, the previous/financial year would have been
2019-20.

1.9 ASSESSEE SECTION 2(7)

The assessment year is when the tax on the previous year’s earnings is paid. A person who is liable to
pay a tax or any other sum of money under this Act is referred to as an income tax assessee. And it’s
broken down into three groups:
1. Ordinary Assessee: This category comprises of:
 Any person who is the subject of a legal action brought under this Act. It makes no difference
whether he owes any taxes or other obligations.
 Any person who has suffered a loss and has submitted a Loss Return under Section 139 (3).
 Any person who is liable to pay an amount of interest, tax or penalty under this Act; or
 Any person who is eligible for a tax refund under this Act.
2. Deemed Assessee: This includes:
 A person may be liable not only for his income or loss, but also for the income or loss of other
people, such as a Guardian of a Minor or a Lunatic, an Agent of a Non-Resident and so on. In such
cases, the people in charge of assessing the income of these people are known as Representative
Assesses. Such a person is considered a deemed Assesses.
3. Assesses-in-Default: If a person fails to meet his statutory responsibilities, he is considered an
assesses-in-default. It is the responsibility of an employer paying a salary or a person paying

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interest to deduct tax at source and deposit the cash collected in the government treasury. Assesses-
in-default occurs when a person fails to deduct tax at the source or deducts tax but does not deposit
it in the treasury.

1.10 PERSON SECTION 2(24)

Person includes:
 Individual: A natural human being, whether male or female, minor or major, is referred to by this
term.
 Undivided Hindu Family: It is a relationship that has developed as a result of the application of
Hindu law. HUF’s manager is known as “Karta,” and its members are known as “Coparceners.”
 Company: It is a legal entity created under the Indian Companies Act 1956 or another law.
 Firm: It is a legal entity formed as a result of a partnership agreement between individuals to share
profits from a business carried on by all or any of them. Even though a partnership firm does not
have its legal entity, it is treated as such under the Income Tax Act. A partnership firm can be one of
two types under the Income Tax Act of 1961.

Note: A company that meets the requirements of section 184. A business does not meet the
requirements of Section 184.
 Association of Persons or Body of Individuals: Co-operative societies, MARKFED, NAFED and other
organisations are examples of such organisations. When individuals come together to carry on a
joint venture but do not meet the legal definition of partnership, they are assessed as an association
of persons. An association of people is more than just a group of people who get paid together. To
achieve a common goal, such as earning money, there must be a common purpose and common
action. Firms, companies, associations and individuals can all be members of an AOP.
Non-individuals cannot be members of a body of individuals (BOI). A body of individuals can only be
made up of natural human beings. Whether a group is AOP or BOI is a question of fact that must be
decided on a case-by-case basis.
 Local authorities: It includes municipalities, panchayats, cantonment boards and port trusts,
among others.
 Person of Artificial Judgment: Artificial Juridical Persons are a type of public corporation created
by a special act of the legislature and a body with its legal personality.
 Every artificial juridical person: not falling within any of the preceding sub-clauses.
 Association of Persons or Body of Individuals or a Local authority or Artificial Juridical Persons:
shall be deemed to be a person whether or not, such persons are formed or established or incorporated
with the object of deriving profits or gains or income.

1.11 INCOME SECTION 2 (24)

The definition is given in section 2 (24) is not exhaustive. The term “Income” is defined by the English
dictionary as “periodic monetary return coming in regularly from definite sources such as one’s
business, land, work, investments and so on.”

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It is never stated that “Income” only refers to monetary gain. It includes the value of Perquisites and
Benefits.

The term “income” refers to both the amount received and the amount saved by using the property
himself. Anything that can be converted into money can be considered a source of income accrual.

“Income comprises”:
 Profits and Gains: For example, a businessman’s profits are taxable as “Income.”
 Dividend: A “dividend” declared/paid by a company to its shareholders, for example, is taxable as
“income” in the hands of the shareholders.
 Voluntary contributions received by a Trust: Voluntary contributions received by a Trust are
included in its income. This rule applies in the following situations.
 A trust established entirely or partially for charitable or religious purposes receives such a
contribution; or
 A scientific research association receives such a contribution; or
 Any fund or institution established for charitable purposes receives such a contribution; or
 Any university, other educational institution or hospital can receive such a contribution.

1.12 HEAD OF INCOME SECTION-14

Individuals can have multiple sources of income, according to Section 14 of the Income Tax Act of 1961.
The computation of income tax is an important aspect that must be done according to a person’s income.
For a simple calculation, the revenue must be accurately categorised so that there is no confusion. The
government categorises different types of income under different headings and then calculates the
income tax appropriately. The regulations and guidelines are based on the specifics of the Income Tax
Act.

According to the above-mentioned Section 14 for the computation of Income Tax in India, the five
primary heads of income are:
1. Income from Salary: This heading essentially involves any remuneration received by an individual
in exchange for services rendered under a contract of employment. Basic pay, advance salaries,
pensions, commissions, gratuities, perquisites and a yearly bonus are all included in a salary. The
crucial thing to remember is that salary is taxable on a due or received basis, depending on which
comes first. Allow me to illustrate this with an example. If you get paid in April 2020 for the month
of March 2020, it will still be taxable in the prior fiscal year 2019-20.
This is because it was due in March. Similarly, if your company paid you in advance for April and
May in the month of March, will be taxed again in March. As a result, salary income will be taxed on
a due or received basis, whichever comes first.
2. Income from House Property: Sections 22 to 27 of the Income Tax Act of 1961 deal with the income
tax computation of a person’s total standard income from his or her home or land.
In layman’s terms, this category contains the rental income from the homes.

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3. Income from Profits and Gains of Business or Profession: The income produced through the profits
of a business or profession will be attributed to the income tax computation of total income. The
difference between the revenue collected and the expenses will be charged.
The following is a list of the income that is taxed under this heading:
 Profits made during the assessment year by the assesses
 Profits from an organisation’s revenue
 Profits from the selling of a specific license
 Cash received as a result of an individual’s export under a government program
 Profit, income or bonus earned as a result of a business collaboration
Benefits gained as a result of working for a company
4. Income from Capital Gains: Profits or gains obtained by an assessee from the sale or transfer of a
capital assets kept as an investment are referred to as capital gains.
Real estate, equities, mutual funds, bonds, gold and other capital assets are examples of capital
assets. As a result, anytime you sell a capital asset and profit. This is considered your income and
it will be taxed under the Capital Gains heading. Rental income is taxed as “Income from House
Property,” but if the property is sold and profit is made, then it will be taxed as “capital gain”.
5. Income from Other Sources: This category includes interest from bank deposits, lottery prizes, card
games, gambling and other sports awards. These earnings are taxable and are ascribed under
Section 56(2) of the Income Tax Act.

1.13 GROSS TOTAL INCOME IS EXPLAINED IN SECTION 80B (5)

The definition of Gross Total Income is explained in Section 80B. Gross Total Income, as defined by Section
80B (5) of the Income Tax Act, is the total income estimated by the rules of the Income Tax Act before any
deductions under Chapter VIA. This part is covered by provisions in the Income Tax Act.
GTI is calculated by multiplying the following numbers:
 Salary income: This includes earnings from employment.
 Rent from a house: This includes any rent you get from renting a house.
 Income from a business or profession: This comprises a businessman’s or a self-employed
professional’s earnings.
 Capital Gain: Profits or losses from the sale of any mobile or immovable capital property are included
in capital gains/losses. This would include things like land, buildings, houses, stocks, jewellery and
so on.
 Other sources of income: This includes any income that is not included in the above-mentioned
headings. Interest income, a lottery win and so forth are examples.

GTI (gross total income) must be determined.

Because calculating gross total income is so important.

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It is the amount that must be disclosed when filing an income tax return. Deductions under Chapter VI
A must be subtracted from GTI to arrive at the taxable or total income.

Gross Total Income does not include when computing gross total income, one must add all of their
earnings together without deducting any tax-saving investments made under Sections 80C to 80U of
the Income Tax Act of 1961.

1.14 ROUNDING OFF TOTAL INCOME SECTION-288 A

The Income Tax Act provides for rounding off taxable income as well as final tax liability, which is given
under section 288A. As per section 288A of the Income Tax Act, the total income computed as per various
sections of this act shall be rounded off to the nearest ` 10 to avoid difficulties in calculating the taxable
amounts and to make payment of tax liability easier. First, any part of the rupee consisting of paisa
should be ignored for the purpose of rounding off. The total amount should then be increased to the
next higher amount which is a multiple of ` 10, if the last digit in the total figure is 5 or greater than 5.

This means that if your total income is ` 12,98,464.50, round it up to ` 12,98,460.

If the total figure’s last digit is less than 5, the total should be reduced to the next lower number which is
a multiple of ` 10. This rounding off income should only be done on the total income, not on the income
under each of the various headings. This means that if your total income is ` 12,98,465.50, you should
round it up to ` 12,98,470.

1.15 ROUNDING OFF TAX SECTION-288 B

The total tax computed is rounded off to the nearest ` 10 under Section 288B of the Income Tax Act.
The tax would be rounded off on the total tax payable or refundable, not on various sub-heads of taxes
such as income tax, education cess, surcharge and so on. Rounding off would be done in the same way
as before, i.e., paisa would be ignored first and if the total figure’s last digit is 5 or greater than 5, the
total amount should be increased to the next higher amount that is a multiple of ` 10. For example, if a
taxpayer owes ` 62923.25 in total tax, the paisa will be ignored and the tax will be assumed to be 62923;
then, because the last digit is less than 5, the amount will be reduced to the nearest multiple of Rs. 10, i.e.
` 62920. If the tax had been ` 62926.25 instead of ` 62923.25, it would have been rounded to ` 62926 and
then to ` 62930.

1.16 CAPITAL RECEIPT AND A REVENUE RECEIPT- THE DISTINCTION AND IMPLICATION
During the business, two types of receipts are generated. The money brought into the business from
non-operating sources such as proceeds from the sale of long-term assets, capital brought in by the
proprietor, sum received as a loan or from debenture holders and so on is referred to as capital receipts.

The non-recurring income received by the company is referred to as capital receipts. Rather than being
part of the operating activities, they are part of the financing and investing activities. Capital receipts
either reduce or increase an asset or liability. The following sources can be used to generate receipts:
 Shares issued
 Debt instruments such as debentures issued
 A bank or financial institution provides a loan

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 Grants from the Government

 Insurer’s Claim
 The proprietor contributes additional funds

Revenue Receipts are receipts that are generated as a result of the company’s core operations. These
receipts are a regular part of business operations, which is why they appear so frequently. However, the
benefit can only be enjoyed during the current accounting year because the effect is temporary. All of
the operations that bring cash into the business are included in the income received from day-to-day
business activities, such as:
 Revenue generated from inventory sales
 Services provided
 Creditors or suppliers have given you a discount
 Interest has been received
 Dividend remuneration is a type of remuneration that is received in the form of a dividend
 Rent received

Capital receipts differ from revenue receipts in that the former has no impact on the financial year’s
profit or loss, whereas the latter is offset against the period’s revenue expenses.

The difference between capital and revenue receipts are as follows:

1. Capital receipts are generated from investing and financing activities, whereas revenue receipts are
generated from operating activities.
2. Capital Receipts are uncommon because they are non-recurring and irregular. Revenue receipts, on
the other hand, occur repeatedly,
3. The benefit of capital receipt can be enjoyed over several years, but the benefit of revenue receipt
can only be enjoyed this year.
4. Revenue Receipts appear on the credit side of the Profit and Loss Account as income for the financial
year, whereas Capital Receipts appear on the liabilities side of the Balance Sheet.
5. In exchange for the source of income, the capital receipt is received. In contrast to revenue received,
which is a form of income substitution.
6. Capital receipt either lowers the value of an asset or raises the value of a liability, whereas revenue
receipt does not affect on the asset or liability’s value.

1.17 THE BASIS OF CHARGE AND SCOPE OF TOTAL INCOME

The basis of the charge of an income tells us how much of a person’s income is subject to taxation. It
specifies whether the income received is taxable on a receipt or accrual basis, as well as how tax should
be charged in the event of accounting method differences. Section 4 of the Income-Tax Act of 1961 (the
Act) is the basic charging section under which income tax is levied on a person’s total income. The term
“income” is defined in section 2(24) of the Act. Tax is levied on the assessee total income. The total income

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of each person is determined by his Residential Status under the provisions of the Income Tax Act of
1961.

The assessee’s total income is taxed. The total income of each person is determined by his Residential
Status under the provisions of the Income Tax Act of 1961.

Section 56(1) states that income of any kind that is not excluded from total income under this Act is
chargeable to income tax under the heading “Income from Other Sources” if it is not chargeable to
income tax under any of the first four heads listed in Section 14.

Scope
1. Subject to the provisions of this Act, the total income of any previous year of a person who is a
resident includes all income from whatever source derived which—
a. Is received or is deemed to be received in India in such year by or on behalf of such person; or
b. Accrues or arises or is deemed to accrue or arise to him in India during such year; or
c. Accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-
section (6) * of section 6, the income which accrues or arises to him outside India shall not be so
included unless it is derived from a business controlled in or a profession set up in India.
2. Subject to the provisions of this Act, the total income of any previous year of a person who is a non-
resident includes all income from whatever source derived which—
a. Is received or is deemed to be received in India in such year by or on behalf of such person; or
b. Accrues or arises or is deemed to accrue or arise to him in India during such year.

1.18 DIVERSION AND APPLICATION INCOME

The term “application of income” refers to how income is spent after it has been earned by the assessee.
Because it is merely the application of earned income, this amount is not excluded from the assessee
total income. In other words, in the hands of the assessee, applied income is taxable. For example, if A
is required to pay his wife 10,000 rupees in monthly alimony, A, as an employee of Mr. C, requests that
he pay the alimony first and then disburse the remainder to him. Because the wife does not have an
overriding title to such an amount, this is an example of an income application. After earning his salary,
the amount he spends is a fulfillment of duty and thus taxable.

The process of diverting income before it is earned by the assessee is known as diversion of income.
Because the income is diverted to someone else before being earned by the assessee, it is excluded from
the assessee’s total income. There is an overriding title of any other person on such income in the event
of income diversion.

For example, if XYZ is a partnership firm and their deed specifies that 20% of any profits they are likely
to earn will be distributed to X’s mother, as well as the wives of Y and Z. This is a classic case of income
diversion. The rationale is that the deed mentioning the above-mentioned provision has an overriding
right to the money and is a requirement for the firm to continue. As a result, it isn’t taxable.

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It is a diversion of income if a third party becomes entitled to receive a sum of money due to the assesses
obligation, but it is not a diversion but rather an application of income if an obligation to pay to a
third party arises after the income is received. Many people try to divert their income to avoid paying
taxes. For instance, diverting income to the wife and children. Such tax avoidance is not tolerated by the
courts. In some cases, taxes are combined (sections 60-65). Transferring income without transferring
assets, income derived from revocable asset transfers, spouse income and minor income can all be
grouped together.

Conclusion 1.19 CONCLUSION

 Taxation is primarily used to raise revenue for government expenditures, but it can also be used for
other purposes.
 Direct and indirect taxes are important for the welfare of the Economy.
 Article 265 to article 289 of the Constitution refers to taxation provisions.
 No tax shall be levied or collected unless authorised by law and the right to levy taxes must be
exercised by the legislature.
 A tax administration’s job is to collect all owed taxes in a fair and efficient manner, with minimal
costs to both taxpayers and the tax administration.
 The basis of a charge of an income tells us how much of a person’s income is subject to taxation.

1.20 GLOSSARY

 Income tax: It is a tax levied on a person’s earnings.

 Goods and Services Tax (GST): It is one of India’s existing indirect taxes.
 Assessment year: It is when the tax on the previous year’s earnings is paid.
 Capital gains: It refers to the Profits or gains obtained by an assessee from the sale or transfer of a
capital asset kept as an investment.
 Assessment order: It is issued when the tax is calculated and compared to the amount paid.

1.21 CASE STUDY: RENTAL INCOME

Case Objective
This case aims to show the computation of rental income in the case of income tax.

This case will help us in finding out how is rental income added to the owner’s income tax return?

Adi rented out his Mumbai apartment for 35,000 rupees per month. He has to file tax returns for the
year. Adi needs to find out how much he owes the Income Tax Department.

Let us know the other expenses linked with the house during the year.
In November, Adi paid 25,000/- rupees in property taxes and spent 8,000/- rupees on repairs and 30,000/-
rupees on the payment of electricity bills. Adi also paid an interest of 2,20,000/- rupees on the money

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which he had borrowed for building the house. Since He has rented the property the entire interest on
the home loan can be claimed as a deduction.
He must determine the Gross Annual Value (GAV) of the property. It is important for calculating the
income earned from house property.
For rented property, the annual rent collected must be higher than or equal to the reasonable rent of the
property as founded by the municipality.
The municipality in the case of Adi has calculated the reasonable rent of ` 32,000/-
Therefore, GAV= ` 4,20,000/-
Deduct the property tax payment for finding the net annual value.
As per the Income Tax Act Section 24, the Act allows Adi to claim a standard deduction of 30 per cent on
the net annual value. Adi home loan interest is also fully deductible.

Gross Annual Value 4,20,000

Less: Property Taxes -25,000
Net annual value 3,95,000
Less: standard deduction at 30% -1,18,500
Less: Interest on money borrowed -2,20,000
Income from house property 56,500

Note:
 Expenses on repairs and electricity are not allowed to be deducted.
 If Adi was getting rental income from more than one house property; he would have to calculate for each one
of them individually in the same manner as above.

Source: https://cleartax.in/house-property/case-study-aditya-the-landlord

Questions
1. Summarise the Income Tax Act.
(Hint: Salary, business or profession, house property, capital gains and other sources are all covered
by the Income Tax Act of 1961.)
2. What is rental Income?
(Hint: the amount received in lieu of renting out or letting out the property)

1.22 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Explain Gross Total Income is explained in Section 80B.
2. Define Assessee Section 2(7).
3. Describe the scope of the Total Income.
4. Differentiate between Capital receipt and revenue receipt.
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5. What is a direct tax and indirect tax?

1.23 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. The definition of Gross Total Income is explained in Section 80B. Gross Total Income, as defined by
Section 80B (5) of the Income Tax Act, is the total income estimated by the rules of the Income Tax
Act before any deductions under Chapter VIA. This part is covered by provisions in the Income Tax
Act. Refer to section Gross Total Income is explained in Section 80B (5)
2. The assessment year is when the tax on the previous year’s earnings is paid.
A person who is liable to pay a tax or any other sum of money under this Act is referred to as an
assessee. Refer to Section Assessee Section 2(7)
3. Scope of total income
1. Subject to the provisions of this Act, the total income of any previous year of a person who is a
resident includes all income from whatever source derived which:
a. is received or is deemed to be received in India in such year by or on behalf of such person; or
b. accrues or arises or is deemed to accrue or arise to him in India during such year; or
Refer to Section The Basis of Charge and Scope of Total Income
4. Capital receipts are generated from investing and financing activities, whereas revenue receipts
are generated from operating activities. Capital Receipts are uncommon because they are non-
recurring and irregular. Revenue receipts, on the other hand, occur repeatedly. Refer to Section
Capital Receipt and Revenue Receipts - The Distinction and Implication
5. Direct tax is a tax that is charged directly to the taxpayer, who must pay it to the government and
cannot pass it on to another person. Indirect tax is a government tax levied on goods and services
rather than an individual’s income, profit or revenue and it can be shifted from one taxpayer to
another. Refer to Section Direct and Indirect Tax

@ 1.24 POST-UNIT READING MATERIAL

 https://www.indiacode.nic.in/handle/123456789/2435?sam_handle=123456789/1362
 https://indiankanoon.org/doc/789969/

1.25 TOPICS FOR DISCUSSION FORUMS

 Discuss with your professor how income tax is computed in Western countries?

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 UNIT

02 Residential Status of Various Persons

Names of Sub-Units

Introduction to Key Points Regarding Residential Status of a Person, Determination of Residential

Status, Hindu Undivided Family (HUF) [Sec. 6(2)] Company [Sec. 6(3)], Firm or an Association of
Persons (AOP) or Body of Individuals (BOI) [Sec. 6(4)], Any Other Person, Incidence of Tax [Sec. 5],
Income Received in India, Income deemed to be Received in India, Income deemed to Accrue or Arise
in India [Sec. 9].

Overview

This unit begins by explaining meaning of residential status, its types. Further, it discuses types of
income and its tax lability, meaning of incidence lawand its scope, determine the residential status of
each person.

Learning Objectives

In this unit, you will learn to:

 Identify the categories of assesses based on residential status
 Discuss the residential status
 Explain the different types of incomes and calculate tax liability
 Summarise the Hindu Undivided Family (HUF)
 Specify the income earned in India
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Learning Outcomes

At the end of this unit, you would:

 Assess the types of residential status
 Understand the rule of determination of residential status
 Analyse the Residential status of each taxpayer
 Determine Hindu Undivided Family (HUF)

Pre-Unit Preparatory Material

 https://www.indiafilings.com/learn/residential-status-income-tax/#:~:text=Residential%20
status%20refers%20to%20a,years%20preceding%20the%20financial%20year.
 https://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/Residential-Status/Meaning-of-
Residential-Status.html

2.1 INTRODUCTION
Residential status refers to a person’s status in relation to how long they have lived in India over the
previous five years. A taxpayer’s income tax liability is determined by his or her residence status
during the financial year and the four years prior to the financial year. In addition, when filing income
tax returns, the taxpayer must declare the appropriate residency status. The Income Tax Act divides
taxpayers into three categories based on their residence status:
1. Resident but not ordinarily resident
2. Resident
3. Non-resident

2.2 KEY POINTS REGARDING RESIDENTIAL STATUS OF A PERSON

For the purposes of income taxation in India, taxable persons are classified as follows:
 Resident
 Resident but Not Ordinarily Resident (RNOR)
 Non-Resident (NR)

Each of the above categories of taxpayers has a different taxability. Let us look at how a taxpayer
becomes a resident, an RNOR, or an NR before we get into taxability.
a. Resident: If a taxpayer meets one of the following two criteria, he is considered an Indian resident
1. Stay in India for a year is 182 days or more, or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in
the relevant financial year.

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If a citizen or person of Indian origin leaves India for employment during a fiscal year, then he will
only be considered a resident of India if he stays in India for 182 days or more. These individuals are
permitted to stay in India for a period of time that is greater than 60 days but less than 182 days.
These individuals are permitted to stay in India for a period of time that is greater than 60 days but
less than 182 days. For those whose total income (other than foreign sources) exceeds ` 15 lakh, the
period is reduced to 120 days or more beginning in the financial year 2020-21.
An individual who is a citizen of India and is not liable to tax in any other country will be deemed
to be a resident of India beginning in FY 2020-21. Only if his total income (other than from foreign
sources) exceeds ` 15 lakh and he has no tax liability in other countries or territories due to his
domicile or residence, or any other similar criteria, is he considered to be a resident.
b. Resident but Not Ordinarily Resident: If a person meets the residency requirements, the next step
is to determine whether he or she is a Resident and Ordinarily Resident (ROR) or a Resident but Not
Ordinarily Resident (RNOR). If he meets both of the following criteria, he will be a ROR:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR.
From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for employment
outside India during the year will be considered a resident and ordinarily resident if he spends at
least 182 days in India. This condition, however, will only apply if his total income (excluding foreign
sources) exceeds ` 15 lakh. A citizen of India who is deemed to be a resident in India will also be a
resident and ordinarily resident in India (as of FY 2020-21).
c. Non-Resident: An individual satisfying neither of the conditions stated in (a) or (b) above would be
an NR for the year.

Taxability

A resident will be taxed in India on his global income, which includes both income earned in India and
income earned outside India.

NR and RNOR: In India, their tax liability is limited to the income they earn there. They do not have to
pay any taxes in India on their foreign earnings. Also, keep in mind that in the event of double taxation
of income, where the same income is taxed both in India and abroad, one can use the Double Taxation
Avoidance Agreement (DTAA) that India would have entered into with the other country to avoid paying
taxes twice.

2.3 DETERMINATION OF RESIDENTIAL STATUS

Basic rules for determining an assesee’s residential status
1. Each person’s residency status should be determined separately. Different rules apply to determining
the residential status of individuals, HUFs and other entities such as partnerships and corporations.
2. The residential income, which is always calculated for the previous year and which we will tax.

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3. A person’s residential status should be determined each year, as it is possible that his or her
residential status will change in the following year.
4. If an assessee is resident in India for any source of income in the previous year relevant to the
assessment year, he is deemed to be resident in India for all other sources of income in the previous
year relevant to the assessment year.
5. For any given year, a person may have been a resident of more than one country.
6. There is a distinction between residential status and citizenship. In the previous year, a person could
have been an Indian national/citizen but not an Indian resident or vice versa.

Residential Status is Important

The determination of residential status is critical because a resident who is an ordinary resident must
pay tax on all of his worldwide income, even if he is eligible for DTAA benefits, whereas a non-resident
or resident who is not an ordinary resident (RNOR) must pay tax only on income derived from India,
received or earned in India.

Determine an Individual’s or a Company’s Residential Status in India

For income tax purposes, understand about your residency status in India. It differs between an
individual and a corporation.
1. Individual: An individual’s residential status is determined by the number of days spent in India.
2. Company: In any other case, residential status is determined by the place of incorporation (in the
case of a company) and the place of control and management.

The purpose of determining a person’s residential status is to determine the tax liability on the total
income earned by that person in a fiscal year.

2.4 HINDU UNDIVIDED FAMILY (HUF)

Residential Status of Hindu Undivided Family (HUF) [Sec 6(2)]

A HUF is said to be resident in India in any previous year unless the control and management of its
affairs is located entirely outside of India during that year.

If a HUF’s control and management of its affairs was entirely outside India during the previous year, it
is said to be non-resident in India.

In other words, if no part of the control and management of its affairs is located in India, it will be
considered non-resident in India.

The decisions made regarding the HUF’s affairs are referred to as control and management. Control
and management are located at the location where the HUF’s business decisions are made.

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Once the HUF has established residency in India, it must be determined whether it is:
 Resident in India and ordinarily resident there; or
 Resident in India, but not ordinarily resident.

If the HUF’s karta meets both of the following conditions, the HUF is said to be resident and ordinarily
resident in India.
a. He (Karta) must have lived in the United States for at least two of the ten years immediately preceding
the relevant previous year; and
b. He must have spent at least 730 days in India in the seven years preceding the relevant previous
year.

If the HUF’s manager (Karta) does not meet anyone, or both, of the conditions listed in clauses (a) and
(b) above during the relevant previous year, the HUF is said to be resident but not ordinarily resident in
India.

The residential status of HUF’s ‘Karta’ for the relevant previous year has no bearing on whether HUF is a
Resident or not. However, Karta’s status in the preceding years is relevant in determining whether HUF
is ordinarily resident in India or not.

Except for individuals and HUF, everyone else is either a resident or a non-resident. They are not to be
divided into two categories: ordinarily resident and not ordinarily resident.

Residential status of ‘A Company’ as per Section 6(3)

[Sec.6(3)(i)] Indian Company

A person’s residential status must be determined in order for their income to be taxed. The Income Tax
Act originated this phrase, which has nothing to do with a person’s country or citizenship. Each year, the
assessee’s residence status is determined using the ‘prior year.’ In one year, a person may be a resident
and, in the following, a non-resident. The residential status of the assessment year is immaterial.
The state in which a company is registered determines its residential status. Section 6(3) lays out the
following requirements in this regard.[Section 6(3)] Resident A company is said to be resident in India
in any previous year if:
a. it is an Indian company; OR
b. its place of effective management is in India at any time during that year. A location where critical
management and commercial decisions necessary for an entity’s overall functioning are made is
referred to as a “place of effective management.”

[Sec. 6(3)(ii)] Foreign Company having turnover more than `50 crores in the previous year
For foreign company, the phrase ‘place of effective management’ (POEM) is used to determine the
domicile of a corporation created in another country. Almost all of India’s tax treaties recognise the
concept of ‘place of effective management’ for determining a company’s residence as a tie-breaker rule
for avoiding double taxation. Each case’s POEM will be assessed based on the facts and circumstances.

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Furthermore, an entity may have several management locations, but only one effective management
location at any given moment. POEM must be determined on a year-to-year basis since “residential
status” must be determined each year. The process of determining POEM would be primarily based on
whether or not the company is actively engaged in business outside of India.

The Central Board of Direct Tax (CBDT) issued a set of guiding principles in the form of a circular dated
24-01-2017 [Circular No. 06 of 2017] to provide a comprehensive and clear understanding of the concept
of POEM for a company.

The CBDT’s ‘Place of Effective Management’ guidelines, issued via Circular No. 6/2017, dated 24-01-2017,
do not apply to a foreign company with a turnover or gross receipts of Rs. 50 crores or less in a fiscal
year.

[Sec. 6(3)(iii)] Foreign Company having turnover less than `50 crores in the previous year.

A company whose turnover is less than 50 cr. Rupees in the previous year is always treated as non-
resident in India -Circular No. 8/2017, dated February 23, 2017. In other words, a foreign company (whose
annual turnover/gross receipts is Rs. 50 crore or less) cannot be resident in India from the assessment
year 2017-18 onwards.

2.5 FIRM, AN ASSOCIATION OF PERSON (AOP) OR BODY OF INDIVIDUALS (BOI) [SEC-6(4)]

A Firm, AOP, BOI Resident in India

When a firm, AOP, or other entity is said to be resident in India in any previous year unless the control
and management of its affairs is located entirely outside of India during that year.

The control and management of a firm is in the hands of the partners, so if the partners regularly meet
in India to discuss the firm’s affairs, the firm is said to be resident in India.

A Firm, AOP, BOI Non-Resident in India

Non-resident entities are those whose control and management of their affairs took place entirely
outside of India during the preceding year.

To put it another way, if you’re a Non-Resident, you shouldn’t have any control or management in India.

2.6 ANY OTHER PERSON

Local authority, artificial juridical person are falls under any other person category. A local authority is
an organisation that is formally in charge of all public services and facilities in each area. Municipality,
panchayat, Cantonment Board, Port, trustees called local authority.

A juridical person is a non-human legal entity that is not a single natural person but rather an
organisation recognised by law as a legal person, such as a corporation, government agency or non-
governmental organisation (NGO), university. A juridical person, also known as an artificial person,
juridical entity, juridic person, juristic person, or legal person, has certain duties and rights that are
outlined in relevant laws.

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Residential status of Local authority, artificial juridical person

 Resident: Local authorities and artificial juridical persons have a residential status. Local
governments and artificial juridical persons will be considered Indian residents if their place of
control and management is in India. Control and management can be exercised entirely or partially
from a location in India.
 Non-Resident in India: A person is considered to be non-resident if the control and management of
the affairs were entirely located outside of India.

2.7 INCIDENCE OF TAX-(5)

The determination of a person’s tax liability, on whom the final tax is levied, is known as tax incidence.
To put it another way, it is the decision of the person who pays the final tax. The person who is subjected
to the tax may transfer the burden of the tax to another person.

Taxation Incidence — Scope of Total Income (Section 5)

We cannot calculate an assessee’s total income unless we know where he lived in India the previous year.
The assessee can be one of the following, depending on their residence status:
 A person who lives in India; or
 Non-Resident in India

Individuals and HUFs, on the other hand, cannot simply be called Indian residents. If a person lives in
India, then he will be one of the following:
 If you are a resident and ordinarily resident in India; or
 If you are non- resident and ordinarily resident in India

Other categories of people must be either Indian residents or non-Indian residents. In their case, there
is no distinction between ordinarily resident and not ordinarily resident.

Scope of Total Income according to residential status is as under:

A. In the case of Resident in India (resident and ordinarily resident in case of individual or HUF) [Section
5(1)]:
The following incomes from whatever source derived form part of Total Income in case of resident
in India/ordinarily resident in India:

(a) any income which is received or (b) any income which accrues (c) any income which accrues or
is deemed to be received in India in or arises or is deemed to accrue arises outside India during the
the relevant previous year by or on or arise in India during the relevant previous year.
behalf of such person; relevant previous year;

B. In the case of a Resident but not Ordinarily Resident in India (In the case of individuals and HUF
only) [Section 5(1) and its proviso]:

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The following incomes from whatever source derived form part of Total Income in the case of
resident but not ordinarily resident in India:

(a) any income which is received (b) any income which accrues (c) any income which accrues or arises
or is deemed to be received in or arises or is deemed to to him outside India during the relevant
India in the relevant previous accrue or arise to him during previous year if it is derived from a
year by or on behalf of such the relevant previous year; business controlled in or a profession
person; set up in India.

C. In the case of Non-Resident [Section 5(2)]:

The following incomes from whatever source derived form part of Total Income in the case of Non-
Residents in India:

(a) any income which is received or is deemed to be (b) any income which accrues or arises or is
received in India during the relevant previous year by deemed to accrue or arise to him in India during
or on behalf of such person; the relevant previous year.

In all three cases above, income described in items (a) and (b) must be included in total income of all
three categories of assessees in the same way. The income described in item (c), i.e., income earned or
arising outside of India, is as follows:
i. If the assessee is not a resident of India, it is not included in the total income.
ii. Only if it is derived from a business controlled in India or a profession set up in India is it included in
the total income of a resident but not ordinarily resident in India.

If an assessee has various incomes both inside and outside India, the tax incidence is likely to be higher
in the case of a resident and ordinarily resident in India, a little lower in the case of a resident but not
ordinarily resident in India, and the lowest in the case of a non-resident in India.

The provisions regarding incidence of tax above may be summarised in the following table:

Particulars of Income Whether Taxable

Resident and Ordinarily Resident Not-Ordinarily Non-
Resident Resident
1. Income received or deemed to be received Yes Yes Yes
in India whether earned in India or
elsewhere.
2. Income which accrues or arises or is Yes Yes Yes
deemed to accrue or arise in India during
the previous year, whether received in
India or elsewhere.
3. Income which accrues or arises outside Yes Yes No
India and received outside India from a
business controlled from India.
4. Income which accrues or arises outside Yes No No
India and received outside India in the
previous year from any other source.

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Particulars of Income Whether Taxable

5. Income which accrues or arises outside No No No
India and received outside India during
the years preceding the previous year and
remitted to India during the previous year.

2.8 INCOME RECEIVED IN INDIA AS PER (SECTION 7)

Income received in India: Any income received in India by any assessee during the previous year is
taxable in India, regardless of the assessee’s residency status or the location of the income’s accrual.

The term “receipts” refers to the first receipt: The term “receipt of income” refers to the first time the
money is placed in the recipient’s possession. Any remittance or transmission of an amount received as
income to another location does not constitute receipt within the meaning of this clause at that location.
This principle is important in determining the year of receipt, as well as determining the taxation
incidence where the income is solely dependent on receipt.

Non-residents, for example, do not have their foreign income assessed unless it is actually received in
India. In their case, unless the money is received as income from an outside source when it arrives in
India, it will not be considered an income receipt. If a non-resident received moneys as income or exempt
income outside of India (in a previous year or during the previous year) and transferred the funds into
India during the accounting year, the moneys will not be considered income in the eyes of the law.

2.9 INCOME DEEMED TO BE RECEIVED IN INDIA (SECTION 7)

Incomes deemed to be received are incomes that are not actually received but are included in the
assessee’s income under the law.

Income Deemed to be Received in India [Section 7]

Even if actual receipt is not made, the following incomes are deemed to bereceived in India in the
previous year:
1. Contribution by the employer to the recognised provident fund of more than 12% of the employee’s
salary.
2. Interest is credited to the employee’s RPF at a rate of more than 9.5 percent per year.
3. The contribution made by the Central Government or any other employer to an employee’s account
under a notified contributory pension scheme referred to in Section 80CCD in the previous year.
4. The Tax Officer adds the amount to the employee’s account if the employee has an old provident
fund that was not recognised previously but is now recognised. If the old funds had been recognised
earlier, they would have been taxed sooner. As a result, it is now taxable as income deemed to be
received.

The person is also deemed to have received tax deducted at source. The company’s dividend is considered
received in the year in which it is declared, distributed or paid. The previous year’s income is also
considered when calculating the interim dividend.

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2.10 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [ SECTION 9]

Certain incomes are considered to have been earned in India under Section 9 of the Income Tax Act, 1961,
even if they accrue or arise outside of India.

Within the ambit of tax liability, Indian Income Tax Laws cover residents, non-residents and residential
but non-ordinary residents’ taxpayers. The Act also imposes a tax liability on foreign companies’ and
non-resident Indians’ income to the extent that it is sourced within India.

It is important to note that Sections 9 and 5 of the Act are inter-twined, hence a thorough understanding
of Section 5 is required first.

Section-5 of the Income Tax Act, 1961

Section 5 establishes the taxability of various items, including:

1. Residents, non-residents, and residents who are not ordinarily residents are all taxed on income
received or assumed to be received in India.
2. In the hands of all three individuals listed above, income that has accrued or arisen or is deemed to
have accrued or arisen, within India is taxable.
3. Income earned or arising outside of India is taxable in India for residents, but not for non-residents
or residents who are not ordinarily residents.

Residential status

According to the Income Tax Act of 1961, a taxpayer’s residence status can be one of the following:
A. Resident: To be a resident of India, the taxpayer must meet one of the following two requirements:
a. Has spent at least 182 days in India in the previous year
OR
b. Have spent at least 365 days in India in the previous four years
And
In the relevant financial year, spends at least 60 days in India.
B. Resident but not Ordinarily Resident: If a person meets both of the following criteria, he falls into
this category:
a. He has spent at least two of the previous ten years as a “Resident of India.”
AND
b. Has spent at least 730 days in India in the previous seven years.

C. Non-Resident of India: Indians who are not citizens of the United States (NRI)
If the taxpayer does not meet any of the above conditions of Resident or Resident Non-Ordinarily
Resident, he is said to have the residential status of an NRI.

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Section (9) of the income tax act, 1961

The Income Tax Act’s Section 9 is a deeming provision. In a few circumstances, it specifies a certain
income that is deemed or supposed to accrue or arise in India. Non-residents’ income cannot be taxed in
India unless it falls within the four corners of the Income Tax Act, Section 5 read with Section 9.

Certain incomes are deemed to have arisen in India for tax purposes under Section 9(1). Even if it accrues
or arises outside of India, certain income is said to have been incurred in India.

Foreign companies and NRIs’ business income is taxed in India to the extent that it accrues or arises:
 through a business connection in India
 through any asset located within India
 through any source of income within India

Section 9(2) of the Income Tax Act defines deemed income as income incurred or arising in India for
taxation purposes

Income from business connections in India:

1. India is home to a branch office
2. In India, a subsidiary of a foreign holding company
3. Non-Residents’ agent or organisation

Any profit made by non-residents from such a connection is said to have been made within India and is
taxable under the Income Tax Act of 1961.
a. Income from assets or property located in India: Any income earned from any property located
in India, whether movable, immovable, tangible, or intangible, is considered incurred within India
for tax purposes.Mr. X, for example, resides in Beijing. He receives a royalty for a book that was
published in India. Such royalties are taxable in India because they are deemed to have accrued in
India, regardless of whether they are received in or outside of India.
Income arising from the transfer of capital assets located in India is said to have incurred in India if
the asset is located in India, regardless of the transferor’s or transferee’s residential status.
b. Salary earned for services performed in India: Any income earned as a salary for services
performed in India, regardless of whether the salary is paid within or outside the country.
c. Salary earned for services rendered outside India: Any Indian citizen’s salary paid by the Indian
government for services rendered outside India is considered to have been incurred in India.
d. Interest Income: In India, any interest received from the following is taxable in the hands of the
recipient:
 Except when the interest is paid in connection with money borrowed for use in a business or
profession outside India, by the Government, or
 by Indian residents.
 By NRIs, as long as the interest is related to the money borrowed for use in a business or
profession carried on in India.

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e. Royalty income: Any royalty paid by any of the following is taxable in India in the hands of the
recipient of such income:
 Unless the royalty is paid in connection with the right or information used in a business or
profession located outside India, it is paid by the government, or
 by an Indian resident.
 By NRIs, as long as the royalty is in connection with a right or information that is used in a
business or profession conducted in India.
f. Fee Paid for technical service: Fees paid for rendering technical services are taxable in the hands of
the recipient of such income in India if paid by one of the following:
 by the government
 Unless the service is provided in connection with a business or profession that is based outside
of India.
 By NRIs, provided that the service is used in connection with a business or profession conducted
in India.
g. Distribution of Profits: If the entire business operations are not confined within India and are
conducted globally, only that portion of the total operation that is attributable to the operations
conducted in India is deemed to be accrued in India and taxable within India under Section 9(1)(I).
For example, in any business operation, different countries are responsible for manufacturing and
selling. Manufacturing, for example, takes place in India, and the goods produced are exported.
Profit attributable to selling operations is deemed not to accrue in India in this case.
In the event that the income from operations carried out in India cannot be determined, Rule 10 of
the Income Tax Rules, 1962, takes precedence. As per the following rule:
 Assessing Officers determine a percentage of total turnover that has accrued or arisen in India
after considering the facts and circumstances.
OR
 Any amount that has the same proportion of total profit as the total receipts of the business.
OR
 Any other method that the Assessing Officer deems appropriate.

Conclusion 2.11 CONCLUSION

 In India, a person’s residency status is important for taxation purposes.

 In India, a non-entire resident’s income is not taxable, but a resident’s and ordinary resident’s entire
income is taxable, even if he earned or received income from foreign sources in the previous year.
 Residential status refers to a person’s status in relation to how long they have lived in India over the
previous five years.
 A person is considered to a resident of India, if he stays in India for 182 days or more or stays in India
for 365 days in immediate 4 preceding year and 60 days or more in relevant year.

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 A HUF is said to be resident in India in any previous year unless the control and management of its
affairs is located entirely outside of India during that year.
 When a firm, AOP, or other entity is said to be resident in India in any previous year unless the
control and management of its affairs is located entirely outside of India during that year.
 Non-resident entities are those whose control and management of their affairs took place entirely
outside of India during the preceding year.
 A local authority is an organisation that is formally in charge of all public services and facilities in
each area.

2.12 GLOSSARY

 Domicile: It refers to a place where a person resides with an intention of living their permanently
 Ambit: The range or area of something
 Intertwined: It means connected together and difficult to separate
 Possession: When a person is owing or controlling something

2.13 CASE STUDY: STATUS OF INCOME TO BE TAXABLE

Case Objective
The objective of this case study is to determine whether the income generated in India considered to
be taxable or not?

Ramesh was born in India in 1976 and moved to the U.K. for further studies after doing graduation from
India. He completed his studies in the U.K. and started doing a job. After some years he came to India
but stayed only for 3 months in India. He used to do this every year. Along with job he started a business
with a company in India. In the first year of his business where he supplied goods to a company which
is situated in India he made a profit of ` 3 lakhs. He was taxed by the Income tax authorities in India but
he argued and refused to pay the tax.

Question
1. Discuss whether he should be taxable? Why?
(Hint: Any profit made by non-residents from such a connection is said to have been made within
India and is taxable under the Income Tax Act of 1961. Refer Section 2.10.)

2.14 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Explain the residential status of any other person.
2. Define Income received In India.
3. Define Determination of residential status

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2.15 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Answer for Essay Type Question

1. Local authorities and artificial juridical persons have a residential status. Local governments
and artificial juridical persons will be considered Indian residents if their place of control and
management is in India. Control and management can be exercised entirely or partially from a
location in India. Refer to Section Any other person
2. Income received in India: Any income received in India by any assessee during the previous year is
taxable in India, regardless of the assessee’s residency status or the location of the income’s accrual.
Refer to Section Income received in India as per (Section 7)
3. The determination of residential status is critical because a resident who is an ordinary resident
must pay tax on all of his worldwide income, even if he is eligible for DTAA benefits, whereas a non-
resident or resident who is not an ordinary resident (RNOR) must pay tax only on income derived
from India, received or earned in India. Refer to Section Determination of Residential Status

@ 2.16 POST-UNIT READING MATERIAL

 https://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/Residential-Status/Meaning-of-
Residential-Status.html
 https://taxguru.in/income-tax/residential-status-individuals-income-tax-act-1961.html

2.17 TOPICS FOR DISCUSSION FORUMS

 Compare and contrast the tax systems in India and the UK.

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 UNIT

03 Income Tax Slab and Rates of Tax

Names of Sub-Units

Steps Involved in Calculation of Tax Liability, Income Tax Rates and Slabs, For Individuals, For HUF/
AOP/BOI/AJP, For a Company, For Partnership Firm/LLP/Local Authority, For a Co-operative Society,
Rebate u/s 87A, Surcharge, Cess, Marginal Relief, Special Rates of Tax (Section 112, 112A, 111A, 15BBD,
115BBDA, 115BBC, 115BA, 115BAA, 115BAB,115BB,115BBE, 115BBF, 115BBG).

Overview
The unit begins by describing the steps involved in the calculation of tax liability followed by listing
the rates and slabs of income tax for different classes of assessees, such as individuals, HUF, AOP,
BOI, AJP, company, partnership firm, LLP, local authority and co-operative societies. Thereafter, the
chapter discusses the concepts of rebate u/s 87A, surcharge, cess and marginal relief. The last section
of this unit lists and briefly explains the special rates of tax under Sections 112, 112A, 111A, 15BBD,
115BBDA, 115BBC, 115BA, 115BAA, 115BAB,115BB,115BBE, 115BBF and 115BBG.

Learning Objectives

In this unit, you will learn to:

 List the steps involved in calculating the tax liability of an assessee
 Outline the income tax rates and slabs for individuals, HUF, AOP, BOI, AJP, company, partnership
firm, LLP, local authority and co-operative societies
 Explain the concept of surcharge and marginal relief
 Discuss the concept of cess
 Explore the special rates of tax under sections 112, 112A, 111A, 15BBD, 115BBDA, 115BBC, 115BA,
115BAA, 115BAB,115BB,115BBE, 115BBF and 115BBG of the Income Tax Act, 1961
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Learning Outcomes

At the end of this unit you would:

 Appraise the importance of rebate available u/s 87A
 Assess the impact of marginal relief
 Compare surcharge and effective surcharge
 Calculate the tax liability of an assessee given its taxable income
 Summarise the special rates of income tax

Pre-Unit Preparatory Material

 https://www.incometaxindia.gov.in/Tutorials/2%20Tax%20Rates.pdf

3.1 INTRODUCTION
You have already learned that the first step in the process of determining the income tax liability of an
assessee is to determine its residential status. After this step, the next step is to determine the taxable
income of the assessee. Thereafter, the total tax is calculated on the taxable income of the assessee
using the corresponding rates of tax. For each assessment year, the Finance Ministry issues the rates
applicable for different categories of assessees falling into different slabs of income.

3.2 STEPS INVOLVED IN CALCULATION OF TAX LIABILITY

The steps involved in the calculation of the tax liability of a person are shown in Table 1:

Particulars Amount (`)

Total tax on taxable income at the corresponding slab rate/flat rate (as applicable on XXX
assessee)
Less: Rebate under section 87A (if applicable) (XXX)

Add: Surcharge, if any XXX

Less: Marginal Relief, if applicable (XXX)

Tax including Surcharge XXX
Add: Health and Education Cess @ 4% on tax including surcharge XXX
Tax liability XXX
Less: rebate u/s 86,89,90,90A and 91
Net tax liability XXX

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Particulars Amount (`)

Less: Taxes paid by way of: (XXX)

– Tax deducted at source (TDS)
– Advance tax
– Self Assessment Tax
Tax Payable/Refundable XXX

3.3 INCOME TAX RATES AND SLABS

In India, the income tax is charged at rates that are fixed for the given assessment year by the Finance
Act. The rates at which the income tax is to be levied on income chargeable to tax for Assessment Year
2021-2022 are mentioned in Section 2 and Part I of the First Schedule to Finance Act, 2021.
Different tax rates have been furnished for several sections of taxpayers and varied sources of income.
Individuals, Hindu Undivided Families (HUFs), Association of Persons (AOP), Body of Individuals (BOI)
or Artificial Juridical Person (AJP) are taxed as per different income tax rates.
Companies are taxed at a fixed rate barring some exceptions. Tax rates applicable to two classes of
taxpayers, namely domestic and foreign companies, for Assessment Year 2021-2022 have also been
discussed. Tax rates applicable to all other categories of taxpayers for Assessment Year 2021-2022 are
discussed in the upcoming sections.

3.3.1 For Individuals/HUF/AOP/BOI/AJP

Tax slab rates for Individual/Hindu Undivided Family (HUF)/Association of Persons (AOP)/ Body of
Individuals (BOI)/ Artificial Juridical Person (AJP)are shown in Table 2:

Table 2: Tax Slab Rates for Individuals*

(Below 60 Years of Age)/HUF/AOP/BOI/AJP

Total income (in `) Rates of tax (in %)

` 0 – 2,50,000 Nil
` 2,50,001 – 5,00,000 5% of (Total Income – ` 2,50,000)
` 5,00,001 – 10,00,000 ` 12,500 + 20% of (Total income – ` 5,00,000)
` 10,00,001 and above ` 1,12,500 + 30% of (Total income – ` 10,00,000)
* Born on or after 02-04-1961 or non-resident individual

Tax slab rates for resident senior citizens aged above 60 years but below 80 years are shown in Table 3:

Table 3: Tax Slab Rates for Resident Senior Citizens**

Aged Above 60 Years But Below 80 Years

Total income (in `) Rates of tax (in %)

`0 – 3,00,000 Nil
`3,00,001 – 5,00,000 5% of (Total Income – ` 3,00,000)
`5,00,001 – 10,00,000 ` 10,000 + 20% of (Total income – ` 5,00,000)

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Total income (in `) Rates of tax (in %)

`10,00,001 and above ` 1,10,000 + 30% of (Total income – ` 10,00,000)
** Born on or after 02-04-1941 but before 02-04-1961

Tax slab rates for resident super senior citizens aged 80 years and above are shown in Table 4:

Table 4: Tax Slab Rates For Resident Super Senior Citizens***

Aged 80 Years And Above

Total income (in `) Rates of tax (in %)

` 0 – 5,00,000 Nil
` 5,00,000 – 10,00,000 20% of (Total income – ` 5,00,000)
` 10,00,001 and above ` 1,00,000 + 30% of (Total income – ` 10,00,000)
*** Born before 02-04-1941

Note: It must be noted that the basic exemption limit or the maximum amount not chargeable to tax for
individuals, senior citizens and super senior citizens is `2,50,000; `3,00,000; and `5,00,000, respectively.

3.3.2 For a Company

Tax slab rates for a company are shown in Table 5:

Table 5: Tax Slab Rates for a Company

Total income (in `) Rates of tax (in %)

A. Domestic Company
i. Total turnover or gross receipts during the PY 2018-19 does not exceed `400 crore 25%
ii. Any other case 30%

B. Company other than a domestic company (foreign company) 50%

i. on so much of the total income as consists of-
a. royalties received from Government or an Indian concern in pursuance of an
agreement made by it with the Government or the Indian concern after the 31st
day of March 1961 but before the 1st day of April 1976; or
b. According to an agreement reached by the Indian government or company
with the Indian government or company after February 29, 1964 but before
April 1, 1976, the cost of technical services received from the Indian government
or company is provided , and if the agreement has been In any case, the central
government has approved
40%
ii. on the balance, if any, of the total income

The above income tax rates are as prescribed by the Finance Act, 2021. However, in respect of certain
types of income, such as long-term capital gains under Section 112 or 112A, some specific rates are
prescribed by the Income Tax Act, 1961, as the case may be. These rates are discussed along with the
relevant sections at appropriate places.

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3.3.3 For Partnership Firm/LLP/Local Authority

The partnership firms, Limited Liability Partnerships and local authorities are taxed at a rate of 30% on
the total income.

3.3.4 For a Co-operative Society

Tax slab rates for co-operative society are shown in Table 6:

Table 6: Tax Slab Rates for Co-Operative Society

Total income (in `) Rates of tax (in %)

` 0 – 10,000 10% of the total income
` 10,000 – 20,000 ` 1,000 plus 20% of the amount by which the total income exceeds ` 10,000
` 20,000 and above ` 3,000 plus 30% of the amount by which the total income exceeds ` 20,000

3.4 REBATE U/S 87A

A tax rebate is allowed to resident individuals under Section 87A. If the total income of resident
individuals does not exceed ` 5,00,000 during the previous year, a tax rebate of ` 12,500 or 100% of total
income tax, whichever is less, is allowed to them. It is very important to note here that the rebate, if any,
is deducted from the total income tax before charging the health and education cess. It must be noted
that rebate u/s 87A is not available

3.5 SURCHARGE
The rates of surcharge for different assessees are listed in Table 7:

Table 7: Rates of Surcharge for Different Assessees

Rate of Surcharge
Assessee
(as % of income tax)
A. Individual/HUF/AOP/BOI/AJP
i Total income ≤ `50 lakh Nil
ii. Total income > `50 lakh but ≤ `1 crore 10%
iii. Total income > `1 crore lakh but ≤ `2 crore 15%
iv. Total income > `2 crore lakh but ≤ `5 crore 25%
v. Total income > `5 crore 37%
B. Firm/Limited Liability Partnership/Local Authority/Co-operative society
i. Total income ≤ `1 crore Nil
ii. Total income > `1 crore 12%
C. Domestic company
i. Total income ≤ `1 crore Nil
ii. Total income > `1 crore but ≤ `10 crore 7%
iii. Total income > `10 crore 12%

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Rate of Surcharge
Assessee
(as % of income tax)
D. Foreign company
i. Total income ≤ `1 crore Nil
ii. Total income >`1 crore but ≤ `10 crore 2%
iii. Total income >`10 crore 5%

It must be noted that the companies that opt for taxability under Section 115BAA or Section 115BAB will
be charged a surcharge at a rate of 10% irrespective of the amount of total income.

3.6 MARGINAL RELIEF

The concept of marginal relief has been designed to provide relaxation to taxpayers from levy of
surcharge if their total income exceeds marginally above ` 50 lakh or ` 1 crore or ` 2 crores or ` 5 crores.
To take advantage of marginal relief, the total income of an assess should exceed ` 50,00,000 (or ` 1 crore
or ` 2 crores or ` 5 crores)
The purpose of providing marginal relief is to ensure that the income tax including surcharge payable
on incomes over and above ` 50,00,000 or ` 1,00,00,000 or ` 2,00,00,000 or ` 5,00,00,000 is limited to the
amount by which the income is more than ` 50,00,000 or ` 1,00,00,000 or ` 2,00,00,000 or ` 5,00,00,000.
Marginal relief = Calculated Surcharge – 70% (Total Income – ` 50,00,000)] (if positive)
OR
Marginal relief = [(Income tax on income + surcharge] – [(Income tax on ` 50,00,000) + (Total Income –
` 50,00,000)]
Similar relief shall also be provided where income exceeds marginally above ` 1 crore or ` 2 crores or `
5 crores. In those cases, the given formula for marginal relief will change accordingly.
Marginal relief in the case of different assesses is discussed as follows:
A. Individual/HUF/AOP/BOI/AJP
An individual/HUF/AOP/BOI/AJP can claim marginal relief if their total income exceeds ` 50 Lacs.
Case 1: Total income > `50 lakh but ≤ `1 crore

Particulars Amount (`)

1. Income tax on income + surcharge XXX

2. (Income tax on ` 50,00,000) + (Total Income – ` 50,00,000) XXX

3. Marginal Relief = 1 – 2 (if positive) XXX

Similarly, we can also have three other cases as follows:
Case 2: Total income > `1 crore
Particulars Amount (`)
1. Income tax on income + surcharge XXX
2. (Income tax on ` 1,00,00,000) + (Total Income – ` 1,00,00,000) XXX
3. Marginal Relief = 1 – 2 (if positive) XXX

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Case 3: Total income > `2 crore

Particulars Amount (`)

1. Income tax on income + surcharge XXX

2. (Income tax on ` 2,00,00,000) + (Total Income – ` 2,00,00,000) XXX

3. Marginal Relief = 1 – 2 (if positive) XXX

Case 4: Total income > `5 crore

Particulars Amount (`)

1. Income tax on income + surcharge XXX

2. (Income tax on ` 5,00,00,000) + (Total Income – ` 5,00,00,000) XXX

3. Marginal Relief = 1 – 2 (if positive) XXX

B. Firm/Limited Liability Partnership/Local Authorities/Co-operative Societies

Firms/LLPs/Local Authorities/Co-operative Societies can claim marginal relief if their total income
exceeds ` 1 crore.

Particulars Amount (`)

1. Income tax on income + surcharge XXX

2. (Income tax on ` 1,00,00,000) + (Total Income – ` 1,00,00,000) XXX

3. Marginal Relief = 1 – 2 (if positive) XXX

C. Companies
Companies can claim marginal relief if their total income exceeds ` 1 crore.
Case 1: Total income > `1 crore but ≤ `10 crores

Particulars Amount (`)

1. Income tax on income + surcharge XXX

2. (Income tax on ` 1,00,00,000) + (Total Income – ` 1,00,00,000) XXX

3. Marginal Relief = 1 – 2 (if positive) XXX

Case 2: Total income > `10 crores

Particulars Amount (`)

1. Income tax on income + surcharge XXX

2. (Income tax on ` 10,00,00,000 including surcharge) + (Total Income – ` XXX

10,00,00,000)
3. Marginal Relief = 1 – 2 (if positive) XXX

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Illustration 1: For the Assessment Year 2020-21, calculate the tax liability of Ms. Shikha who received a
total income of ` 51,20,000.
Solution: Calculation for Shikha’s tax liability for the A.Y. 2020-21 is as follows:

Particulars Amount (`)

A. Tax payable including surcharge on total income of ` 51,20,000
– ` 2,50,000 – ` 5,00,000 @ 5% 12,500
– ` 5,00,000 – ` 10,00,000 @ 20% 1,00,000
– ` 10,00,000 – ` 51,20,000 @30% 12,36,000

Total 13,48,500
Add: Surcharge (@10%) 1,34,850

Tax payable including surcharge 14,83,350

B. (Income tax on ` 50,00,000) + (Total Income – ` 50,00,000)

= (12,500 + 1,00,000 + 12,00,000) + (` 51,20,000 – ` 50,00,000) 14,32,500

C. Marginal Relief = A – B = 14,83,350 – 14,32,500 50,850

Effective Surcharge = 1,34,850 – 50,850 84000

D. Tax Payable (Tax payable before surcharge + Effective Surcharge) = 13,48,500 + 84,000 1,432,500

3.7 CESS
Health and Education cess is an additional surcharge computed on income tax as increased by
surcharge and as reduced by rebate if any. It is computed on total income tax (i.e., income tax and
effective surcharge, if applicable) after allowing for rebate under Section 87A. Health and education
cess is levied @ 4% on income tax plus surcharge if any. Net income tax payable is arrived at after the
tax is increased by health and education cess.
In the case of every assessee, the amount of tax after adding surcharge shall be increased by health and
education cess at the rate of 4%.

3.8 SPECIAL RATES OF TAX (SECTION 112, 112A, 111A, 115BBD, 115BBDA, 115BBC, 115BA,
115BAA, 115BAB,115BB,115BBE, 115BBF, 115BBG)
Section Nature of Income Rate of Tax
111A Short-term capital gains from transfer of securities units on which Securities 15%
Transaction Tax has been charged
112/112A  Long-term capital gains 20%/10%
 Long-term Capital Gain covered by the provision to Section 112 10%
(Listed Bond/ Debenture)
 On Long-term Capital Gain (Listed Share/Unit) Exempt up to
1 lakh. Excess
taxable @10%

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Section Nature of Income Rate of Tax

115BB Winnings from lotteries, crossword puzzles, races including horse races, card 30%
games and other games of any sort or gambling or betting of any form or nature
whatsoever.

115BBE Unexplained amounts treated as income under sections 68, 69, 69A, 69B, 69C 60%
and 69D of the Act will be taxable @60% without granting any deduction of
expenditure or allowance there against. The benefit of threshold exemption and
lower slab rates for individuals and HUFs will not be available to such amounts.
No set off of any loss against Section 68,69,69B,69C and 69D.

115BBDA Income by way of dividends over ` 10 Lacs in the hands of a person other than 10%
i. a domestic company or
ii. a fund or institution or trust or any university or other educational institu-
tion or any hospital or other medical institution referred to in sub- clause (iv)
or sub-clause (via) of clause (23C) of section 10; or
iii. a trust or institution registered u/s 12A or 12AA who is resident in India
Further, the taxation of dividend income in excess ` 10 lacs shall be on gross
basis, i.e., no deduction in respect of any expenditure or allowance or set-off
of loss shall be allowed to the assessee in computing the income by way of
dividends.

115BBF Income by way of royalty in respect of a patent developed and registered in India 10%
in respect of a person who is resident in India. No deduction in respect of any
expenditure or allowance or set-off of loss shall be allowed to the assessee in
computing the said income

115BBG Tax on income from transfer of carbon credits 10%

115BBD Dividend received by a domestic company from a foreign company in which such 15%
domestic company has 26% or more equity shareholding

115BBC If any person receives income by way of anonymous donation received an excess 30%
of the higher of the following: (a) 5% of total donation received or (b) ` One lakh

115BA Domestic companies’ setup and registered on or after 01/03/2016 and engaged in 25%
the business of manufacturing or production of any article or things

115BAA Domestic company where it opted for Section 115BAA. This benefit shall be 22%
available when the total income of the company is computed without claiming
specified deductions, incentives, exemptions and additional depreciation
available under the Income-tax Act.

115BAB Domestic company where it opted for Section 115BAB. This regime shall be 15%
available only for the manufacturing companies incorporated in India on or after
01-10-2019. Hence, old companies will not be able to take the benefit of this section.

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Note that where a domestic company has not opted for Section 115BAA and the Total Turnover or Gross
receipts of the company in the last previous year does not exceed 400 crore rupees; tax applicable is 25%.
For any other domestic company, the tax rate is 30%.

Conclusion 3.9 CONCLUSION

 For each assessment year, the Finance Ministry issues the rates applicable for different categories
of assessees falling into different slabs of income.
 The rates at which the income tax is to be levied on income chargeable to tax for Assessment Year
2021-2022 are mentioned in Section 2 and Part I of the First Schedule to Finance Act, 2021.
 Different tax rates have been furnished for several sections of taxpayers and varied sources of
income. Individuals, Hindu Undivided Families (HUFs), Association of Persons (AOP), Body of
Individuals (BOI) or Artificial Juridical Person (AJP) are taxed as per different income tax rates.
 The basic exemption limit or the maximum amount not chargeable to tax for individuals, senior
citizens and super senior citizens is `2,50,000; `3,00,000; and `5,00,000, respectively.
 A tax rebate is allowed to resident individuals under Section 87A. If the total income of resident
individuals does not exceed `5,00,000 during the previous year, a tax rebate of `12,500 or 100% of
total income tax, whichever is less, is allowed to them.
 The concept of marginal relief has been designed to provide relaxation to taxpayers from levy of
surcharge if their total income exceeds marginally above ` 50 lakh or ` 1 crore or ` 2 crores or ` 5
crores.
 Health and Education cess is an additional surcharge computed on income tax as increased by
surcharge and as reduced by rebate if any. It is computed on total income tax (i.e., income tax and
effective surcharge, if applicable) after allowing for rebate under Section 87A. Health and education
cess is levied @ 4% on income tax plus surcharge if any.
 Special Rates of Tax are applicable to different assessees as per sections 112, 112A, 111A, 115BBD,
115BBDA, 115BBC, 115BA, 115BAA, 115BAB,115BB,115BBE, 115BBF and 115BBG.

3.10 GLOSSARY

 Assessee: A person who pays tax under the provisions of the Income Tax Act, 1961
 Rebate: A form of deduction available to resident individuals from their tax liability
 Tax slab: The incomes of different assessees are categorised into different groups and each such
group is known as a Tax Slab

3.11 CASE STUDY: WHY DOES THE GOVERNMENT GIVE REBATES BUT DOESN’T
ENHANCE THE EXEMPTION LIMIT?
Case Objective
This case study highlights the reason why government give rebates but doesn’t enhance the exemption
limit.

In the interim budget of 2019, the government increased the rebate available under Section 87A from `
3,500 to ` 12,500. As a result, the taxable income of up to ` 5 lakh became tax-free in the hands of small
taxpayers. For this, the government did not require raising the basic exemption limit.

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It has been observed that successive governments usually keep on adjusting the rebate available u/s
87A but they seldom try to raise the exemption limits. The main reason that the governments do not
increase the exemption limits, and prefer tweaking rebates available is that rebates spur consumption
but increasing exemption limits may impact the tax collections especially from higher tax brackets.

The government needs to maintain and try to increase tax compliance because the percentage of people
who file income tax is extremely low as compared to a population of 1.2 billion. As of 2019, the number
of Income Tax Returns filed in India was only 6.85 crores. Out of these 6.85 crores, two crores did not pay
any tax. The people who filed zero-ITRs had to file the ITR even though their tax liability was nil was due
to multiple reasons, such as gross income above the basic exemption limit, but occurs no tax liability
as a result of deductions available or to claim a refund for the Tax Deducted at Source (TDS) even when
taxable income was well within the exemption limit.

All the governments irrespective of their political affiliations have worked on broadening taxpayers’
base. For making policy related decisions and for various statistical calculations, the government
requires gathering data on the economy as early as possible. For this, the government makes efforts to
convince the taxpayers to file their income tax returns earlier.
To discourage late ITR filing, the government has also made a provision for charging late filing fees if
ITR is filed beyond the due date. Government is extremely considerate about timely data collection. If the
government raises the basic exemption limit (current `2,50,000), various taxpayers would be excluded
from the tax network due to which the government would lose hold of a lot of data.
As mentioned earlier, various persons need to file their ITR even if their tax liability is zero and as their
taxable income is just below ` 5 lakh. This helps the government access more data.

Another reason due to which governments change rebates but do not change the basic exemption
limit is to ensure savings for small taxpayers without losing a lot of tax revenue. For the growth of any
economy, the people must spend money or the consumption must be increased. The government needs
to ensure that people spend and at the same time it does not lose taxes. The rationale behind allowing
rebates under Section 87A is that only the small taxpayers should be able to save tax whereas others
pay as per their tax rates. It is relevant to note that the government is well-aware that money saved by
middle-class taxpayers is spent and the money saved by higher income groups is kept safe.

Not raising the basic exemption limit also helps the government in curbing unaccounted money. The
government also encourages more and more people to file ITR so that it can gain access to records of
earnings and assets of such persons. However, if the exemption limit is increased (say from `2,50,000
to ` 5,00,000); a lot of people who file ITR will be excluded from the tax bracket. And, such people can
always claim that they have generated assets and capital by saving their income when their income
was not taxable. This can lead to the generation and use of black money.
Source: https://www.dnaindia.com/personal-finance/report-why-government-gives-rebates-and-doesn-t-enhance-exemption-limit-2749339

Questions
1. What is the major reason that Why government gives rebates and doesn’t enhance the exemption
limit?
(Hint: Rebates spur consumption but increasing exemption limits may impact the tax collections
especially from higher tax brackets.)

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2. Explain how the basic exemption limit is related to black money?

(Hint: If the exemption limit is increased; a lot of people who file ITR will be excluded from the tax
bracket. And, such people can always claim that they have generated assets and capital by saving
their income when their income was not taxable. This can lead to the generation and use of black
money.)
3. How does the government impact small taxpayers by changing the rebate available u/s 87A.
(Hint: The rationale behind allowing rebate under Section 87A is that only the small taxpayers
should be able to save tax whereas others pay as per their tax rates.)

3.12 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Explain the steps involved in the calculation of the tax liability of a person.
2. List the tax slabs and rates for companies.
3. Discuss the surcharge applicable for domestic companies that opt for Section 115BAA.
4. Describe the concept of marginal relief.
5. Appraise the tax rate applicable as per Section 115BBG.

3.13 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints to Essay Type Questions

1. The first step involved in the calculation of the tax liability of a person is to determine the total
tax on taxable income at the corresponding slab rate/flat rate (as applicable on assessee). Refer to
Section Steps Involved in Calculation of Tax Liability
2. Tax slab rates for a domestic company are i. Total turnover or gross receipts during the PY 2018-19
does not exceed ` 400 crore (25%); and ii. Any other case (30%). Refer to Section Income Tax Rates
and Slabs
3. Companies that opt for taxability under Section 115BAA or Section 115BAB will be charged a
surcharge at a rate of 10% irrespective of the amount of total income. Refer to Section 3.5 Surcharge
4. The concept of marginal relief has been designed to provide relaxation to taxpayers from levy of
surcharge if their total income exceeds marginally above ` 50 lakh or ` 1 crore or ` 2 crores or ` 5
crores. If Total income is marginally more than ` 50 lakh; then, Marginal relief = [(Income tax on
income + surcharge] – [(Income tax on ` 50,00,000) + (Total Income – ` 50,00,000)]. Refer to Section
Marginal Relief
5. As per Section, 115BBG, 10% Tax rate is applicable on income from transfer of carbon credits. Refer
to Section Special Rates of Tax (Section 112, 112A, 111A, 115BBD, 115BBDA, 115BBC, 115BA, 115BAA,
115BAB, 115BB, 115BBE, 115BBF, 115BBG)

@ 3.14 POST-UNIT READING MATERIAL

 https://cleartax.in/s/marginal-relief-surcharge

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 https://www.finwealthcare.com/2020/12/section-115ba-115baa-115bab-of-income-tax.html

3.15 TOPICS FOR DISCUSSION FORUMS

 Discuss the significance of marginal relief.

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 UNIT

04 Overview of Income From Salaries

(Section 15 To 17)

Names of Sub-Units

Introduction to income from salaries, meaning of salary, computation of salary income, analysis
of deductions from salary, analysis of provident fund tax treatment, concept of allowances and
computation of salary income.

Overview

This unit begins by meaning of income from salaries, it discusses the classification of different forms of
salary for computation of income under the head. The unit analysis the provident fund tax treatment.
Analysis of special allowances and analysis of important points for computing salary income.

Learning Objectives

In this unit, you will learn to:

 Explain the meaning of salary
 Discuss the computation of salary income
 Describe the provident fund tax treatment
 Extent the computation of salary income
 Classify the allowances
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Learning Outcomes

At the end of this unit, you would:

 Assess the meaning of income from salaries
 Examine the provident fund tax treatment
 Analyse the treatment of perquisites
 Evaluate the important points for computing salary income
 Identify the basic of charge

4.1 INTRODUCTION
For the purpose of taxation, the term ‘salary’ has been defined under Section 17(1) of the Income Tax
Act, 1961. In addition, important concepts, such as employer-employee relationship, arrears of salary,
allowances, gratuity and the taxability of different types of perquisites, have been discussed at length.
Perquisites have been defined under Section 17(2) of the Income Tax Act, 1961. The concept of profits in
lieu of salary under Section 17(3) has also been described. Section 16 of the Act describes deductions
that may be made from the overall income generated from salary. These include deductions against
entertainment allowance and professional tax. The chapter also discusses the taxability of various
components of the provident fund. The last section of the chapter presents illustrations that will help you
in working out problems which demand calculating the value of income from salaries for an individual
assessee.

4.2 WHAT IS SALARY? [SECTION 17(1)]

The meaning of the term ‘salary’ for purposes of income-tax is much wider than what is normally
understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary
payments (for examp,le basic salary, bonus, commission and allowances) as well as non-monetary
facilities (for example, housing accommodation, medical facility and interest free loans).
Salary refers to a fixed and regular payment that is being paid by an employer to his/her employees
usually on a monthly basis. This amount is paid by an employer to employee in lieu of employee’s work.
The salary is often expressed as an annual sum and is mostly given to professionals and people doing
white-collar jobs. This is the generic definition of salary. However, for the purpose of taxation, Section
17(1), defined the term “Salary”. It is an inclusive definition and includes monetary as well as non-
monetary items.

‘Salary’ under section 17(1), includes the following:

(i) wages,
(ii) any annuity or pension,
(iii) any gratuity,
(iv) any fees, commission, perquisites or profits in lieu of or in addition to anysalary or wages,
(v) any advance of salary,
(vi) any payment received in respect of any period of leave not availed by him
i. e., leave salary or leave encashment,

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‘Salary’ under section 17(1), includes the following:

(vii) Provident Fund:
 the portion of the annual accretion in any previous year to the balance at the credit of an employee
participating in a recognised provident fund to the extent it is taxable and
 transferred balance in recognised provident fund to the extent it is taxable,

(viii) the contribution made by the Central Government or any other employer in the previous year to the
account of an employee under a pensionscheme referred to in section 80CCD.

4.2.1 Computation of Salary Income [Sections (15 to 17)]

The income tax regulations allow individuals to derive income from five sources, namely:
1. Income from Salary
2. Income from Business or Property
3. Income from Capital Gains
4. Income from House Property
Income from Other Sources
Each income derived by an individual must fall under one of the abovementioned categories.
The procedure for the calculation of taxable income on salary is as follows:
1. Gather your salary slips along with Form 16 for the current fiscal year and add every emolument
such as basic salary, HRA, TA, DA, DA on TA, and other reimbursements and allowances that are
mentioned in your Form 16 (Part B) and salary slips.
2. The bonus received during the financial year must be added for the income that is being calculated.
3. The total is your gross salary, from which you will have to deduct the exempted portion of House Rent
Allowance, Transport Allowance (for which the maximum exemption is `19,200 per year), Medical
reimbursement (for which the maximum exemption is `15,000), and all other reimbursements
provided the actual bills in respect of the expenses incurred.
4. The result is your net income from salary.

4.2.2 Basis of Charge

As per Section 15 of the Income Tax Act, 1961, income chargeable to tax under the head of ‘salaries’
includes the following:
 Any salary due to an employee from an employer or from a former employer to an assessee, whether
paid or not during the previous year.
 Any salary paid or allowed to an assessee in the previous year by or on behalf of an employer or a
former employer even though such amount is not due to the assessee in the accounting year.
 Any arrears of salary paid or allowed to the employee in the previous year by or on behalf of an
employer or a former employer will be charged to tax during previous year if they have not been
charged to income tax in any of the earlier previous years.

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For charging tax under income from salary, following points must be remembered:
 Income from salary becomes chargeable to tax either on ‘due basis’ or on ‘receipt basis’, whichever
is earlier.
 Employee-employer relationship must exist between the payer and payee in order to tax the income
under this head.
 Where salary is assessed in the year of payment or in the year when it becomes due, the same cannot
be subjected to tax subsequently in the year when it gets due or paid, as the case may be.

4.2.3 Important Points for Computing Salary Income

For any payment to be made taxable under the head `Salaries’, it must fulfill the following characteristics.
 Relationship of Employer and Employee
 Salary from more than one Employer
 Salary from Present, Past or Prospective Employer
 Tax Free Salary
 Salary Received as Member of Parliament
 Receipts from Persons other than Employer
 Place of Accrual of Salary Income
 Deductions made by the Employer
 Salary or Pension received by UNO Employees
 Salary received by a teacher researcher from a SAARC member State
 Salary as Partner
 Payments received by Legal Heirs of a Deceased Employee
 Payment made after Cessation of Employment
 Voluntary foregoing: Application of Salary
 Previous year for Salaries
 Taxability of salary on due or receipt, whichever is earlier basis
 Salary Grade/Pay Scale
 Advance salary received
 Arrears of salary received
 Salary in Lieu of notice

It should be noted that in case any receipt is not covered under any of these features, it will not come
under the head Salaries.
Calculation of Income from salary

Particulars Amount
Basic Salary —
Add: —

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Particulars Amount
1. Fees, Commission and Bonus —
2. Allowances —
3. Prerequisites —
4. Retirement Benefits —
5. Fees, Commission and Bonus —

Gross Salary —

Less: Deductions from Salary —

1. Entertainment Allowance u/s 16 —
2. Professional Tax u/s 16 —

Net Salary —

4.3 PROVIDENT FUND TAX TREATMENT

The Provident Fund involves contribution that is made for the employee’s welfare by the employee
and the employer. The deduction is available under section 80C. Provident fund is basically a security
fund wherein a part of employee’s salary is contributed and the same amount is also contributed by
the employer on behalf of their employees. Section 10(11) and 10(12) of the Income Tax Act defines the
exemption on the amount added to the provident fund. Additionally, the amount allowed as a deduction
on contributing to the provident fund is dealt in Section 80C of the Income Tax Act. The types of provident
funds are:
1. Recognised Provident Fund (RPF) as recognised by Commissioner of Income Tax under EPF and
Miscellaneous Provision Act, 1952. It applies to enterprises employing at least 20 employees.
2. Unrecognised Provident Fund (UPF) is not recognised by the Commissioner of Income Tax. The
employers and employees start these schemes.
3. Public Provident Fund (PPF) under Public Provident Fund Act, 1968 is another system of contributing
to the provident fund. Self-employed people can also take part in this scheme. A minimum
contributing limit of Rs. 500 per annum and a maximum of Rs. 1,50,000 per annum are set.
4. Statutory Provident Fund (SPF) is meant for employees of Government or Universities or Educational
Institutes affiliated to university.

Tax Treatment of Provident Fund

Particulars Recognised PF Unrecognised PF Statutory PF Public PF

Employer’s Contribution to 12% of salary is Not taxable Not taxable Not taxable
Contribution exempt, above that is added to
salary income of the employee.
Employee’s Section 80C Deduction No Section 80C Section 80C Section 80C
Contribution deduction Deduction Deduction
Interest on PF Any interest over and above 9.5% Not taxable Exempt Exempt
is added to Income from Salaries.
Until 9.5% interest is exempt.

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Particulars Recognised PF Unrecognised PF Statutory PF Public PF

Amount withdrew at Exempt subject to certain Contribution from Exempt Exempt
retirement time conditions*. employer and
interest on that
is taxable under
the head Income
from Salaries;
Contribution
by an employee
is not taxable,
and employee’s
contribution
interest is taxable
under the head
Income from Other
Sources.

4.4 ALLOWANCES
An allowance refers to a fixed amount of money given periodically in addition to the salary. These
allowances are generally taxable and are to be included in gross salary unless specific exemption is
provided in respect of such allowance. For the purpose of tax treatment, we divide these allowances into
three categories:
 Fully taxable cash allowances
 Fully exempt cash allowances
 HRA

4.4.1 Fully Taxable

There are some allowances which are fully taxable. The allowances which are fully taxable in the hands
of employee are:
The allowances which are fully taxable in the hands of employee are:
1. Dearness Allowance, Additional Dearness Allowance and Dearness Pay: This is a very common
allowance these days on account of high prices. Sometimes Additional Dearness Allowance is also
given. It is included in the income from salary and is taxable in full. Sometimes it is given under the
terms of employment and sometimes without it. When it is given under the terms of employment,
it is included in salary for purpose of determining the exemption limits of house rent allowance,
recognised provident fund, gratuity and value of rent-free house. It is also taken into account for the
purpose of retirement benefits. Sometimes dearness allowance is given as `Dearness Pay’. It means
that it is being given under the terms of employment.
2. Fixed Medical Allowance: Medical allowance is fully taxable even if some expenditure has actually
been incurred for medical treatment of employee or family.
3. Tiffin Allowance: It is a fully taxable allowance and is given to employees for lunch as coupons or
added as part of salary.
4. Servant Allowance: It is fully taxable even if it is given to a low paid employee, not being an officer,
i.e., it is taxable for all categories of employees.

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5. Non-practicing Allowance: It is generally given to those medical doctors who are in government
service and they are banned from doing private practice. It is to compensate them for this ban. It is
fully taxable.
6. Hill Allowance: It is given to employees working in hilly areas on account of high cost of living in
hilly areas as compared to plains. It is fully taxable, if the place is located at less than 1,000 meters
height from sea level.
7. Warden Allowance and Proctor Allowance: These allowances are given in educational institutions
for working as Warden of the hostel and/or working as Proctor in the institution. These allowances
are fully taxable.
8. Deputation Allowance: An employee is given a deputation allowance when an employee is sent from
his permanent place of service to some other place or institution or organisation on deputation for
a temporary period. It is fully taxable.
9. Overtime Allowance: An overtime allowance is given an employee works for extra hours over and
above his normal hours of duty. It is fully taxable.
10. Other Allowances: Other allowances such as Family allowance, Project allowance, Marriage
allowance, City Compensatory allowance, Dinner allowance and Telephone allowance. These are
fully taxable.

4.4.2 Fully Exempt

Some of the allowances which are fully exempted from tax in hands of employee are:
1. Foreign Allowance: This allowance is usually paid by the government to its employees being Indian
citizen posted out of India for rendering services abroad. It is fully exempt from tax.
2. Allowance to High Court and Supreme Court Judges of whatever nature are exempt from tax.
3. Allowances from UNO organisation to its employees are fully exempt from tax.

4.4.3 HRA
House Rent Allowance (HRA) is generally paid as component of salary package. This allowance is given
by an employer to an employee to meet the cost of renting an accommodation. Section 10(13A) of the
Income Tax Act provides for exemption of HRA based on certain rules. In order to claim HRA exemption,
the following basic conditions should be met:
Assessee should be staying in a rented accommodation.
The house should not be owned by him or his spouse.
Assessee should be paying the rent.
Exemption limit in HRA: Minimum of the following three is exempt:
1. Actual HRA received
2. Rent paid minus 10% of Salary
3. 50% of salary if you live in Mumbai, Delhi, Kolkata or Chennai, otherwise 40% of Salary.
Here, Salary means Basic Salary + Dearness Allowance + Commission based on a fixed percentage of
turnover achieved by an employee. Most private sector companies don’t have the last two components
in the salary package.

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An employee can claim exemption on his HRA under the Income Tax Act if he stays in a rented house and
is in receipt of HRA from his employer. In order to claim the deduction, an employee must actually pay
rent for the house which he occupies.
The rented premises must not be owned by him. In case one stays in an own house, nothing is deductible
and the entire amount of HRA received is subject to tax.

4.5 SPECIAL ALLOWANCES [SECTION 10(14)]

Special allowances are paid on a monthly basis and are taxable. Special allowance can be divided into
two categories, namely, personal allowances and official allowances.
Various types of personal allowances include the following:
 Children Education Allowance: The maximum exemption of Rs. 100 per month per child for two
children, while excess is taxable.
 Hostel Allowance: The maximum exemption is Rs. 300 per month per child for two children. Excess
is taxable.
 Transport Allowance: The maximum exemption is Rs. 1600 per month. Excess is taxable. The
maximum is Rs. 3200 per month in case of handicapped employees. Excess is taxable.
 Underground Allowance: Granted to employees working in underground mines. The maximum
exemption is Rs. 800 per month, while excess is taxable.
 Tribal Area Allowance: Special allowance for residents living in hilly areas, scheduled areas and
agency areas. Available in Madhya Pradesh, Uttar Pradesh, Karnataka, Odisha, Assam, Tamil Nadu
and Tripura. The maximum exemption is Rs. 200 per month. Excess is taxable.
 Outstation Allowance: Allowance paid by railways, roadways and airways to their employee’s in
lieu of daily allowance
Exempt to the least of 70% of allowance, Rs. 10,000 per month
Taxable = received – exempt
 Island Duty Allowance: Granted to members of armed forces for performance of duties in Andaman
and Nicobar Islands and Lakshadweep Group of Islands. The maximum exemption is Rs. 3250 p.m.
Various types of official allowances include the following:
 Travelling Allowance: Includes cost of travel during tour or on transfer of duty. This allowance is
exempt from Income Tax while saving is taxable.
 Daily Allowance: Includes daily charges incurred by an employee while on a tour. This allowance is
exempt from Income Tax while saving is taxable.
 Conveyance Allowance: Includes expenditure incurred on conveyance during performance of
duties of an employment of profit or office. This allowance is exempt from Income Tax while saving
is taxable.
 Uniform Allowance: Includes expenditure on purchase and maintenance of uniform worn during
performance of duties of an office or employment of profit. This allowance is exempt from Income
Tax while saving is taxable.
 Academic/ Research Allowance: Granted for encouraging academic research and training pursuits
in research institutions. This allowance is exempt from Income Tax while saving is taxable.

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 Helper Allowance: Provided to cover expenditure incurred on a helper hired for performance of
duties of an office or employment of profit. This allowance is exempt from Income Tax while saving
is taxable.

4.5.1 Perquisites
Perquisites refer to payments received by employees over their salaries and are not the reimbursement
of expenses. Some perquisites are taxable for all employees, they are:
 Rent free accommodation
 Concession in accommodation rent
 Interest free loans
 Movable assets
 Club fee payments
 Educational expenses
 Insurance premium paid on behalf of employees

Some perquisites are taxable only to specific employees like directors or those who have substantial
interest in the organisation, they are taxed for:
 Free gas and electricity for domestic purpose
 Concessional educational expenses
 Concessional transport facility
 Payment made to gardener, sweeper and attendant.

Some perquisites are exempt from tax. These are:

 Medical benefits
 Leave travel concession
 Health Insurance Premium
 Car and laptop for personal use.
 Staff Welfare Scheme

4.5.2 Profit in lieu of Salaries

Section 17(3) gives an inclusive definition of “Profits in lieu of salary”. As the name suggests, these
payments are received by the employee in lieu of or in addition to salary or wages.
These payments include the following:
1. Terminal Compensation: The amount of any compensation due to or received by an assessee from
his employer or former employer at or in connection with the termination of his employment or the
modification of the terms and conditions relating thereto is regarded as profits in lieu of salary. The
termination may be due to retirement, premature termination, resignation or otherwise.
2. Payment from an Unrecognised Provident Fund or an Unrecognised Superannuation Fund: The
next category of such profit in lieu of salary is, payment due to or received by an assessee from
an unrecognised provident fund or an unrecognised superannuation fund to the extent to which

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such payment does not consist of contributions by the employee or interest on such employee’s
contribution.
In other words, total employer’s contribution till date and interest on such employer’s contribution
would both be taxable. Employer’s contribution and interest thereon and interest on the employee’s
contribution are not taxed during the period of employment. When the accumulated balance of such
a fund is paid to the employee either on retirement or on termination of service, the untaxed portion,
i.e., the employer’s contribution and interest thereon is taxed as ‘profit in lieu of salary’. The interest
on employee’s contribution is taxed as ‘Income from other sources’.
3. Payment under Keyman Insurance Policy: Any payment due to or received by an employee, under
a Keyman Insurance Policy including the sum allocated by way of bonus on such policy, will also be
regarded as profit in lieu of salary.
4. Any amount due or received before joining or after cessation of employment: Any amounts due to
or received, whether in lump sum or otherwise by any assessee from any person—
A. before his joining any employment with that person; or
B. after cessation of his employment with that person.
5. Any other sum received by the employee from the employer: All other payments made by an
employer to an employee, would be brought under the head “Profits in lieu of salary”. This is a
comprehensive provision by virtue of which all payments made by an employer to an employee
whether made in pursuance of a legal obligation or voluntarily are brought under profit in lieu of
salary.
However, the following receipts, will not be termed as ‘profits in lieu of salary’ to the extent they
are exempt under section 10.
i. Death-cum-retirement gratuity — Section 10(10)
ii. Commuted value of pension — Section 10(10A)
iii. Retrenchment compensation received by a workman — Section 10(10B)
iv. Payment received from a statutory provident fund — Section 10(11)
v. Payment received from recognised provident fund — Section 10(12)
vi. Any payment from an approved superannuation fund as per section 10(13)
vii. House rent allowance exempt under section 10(13A)
In short, except for the terminal and other payments specifically exempted under clauses (10) to (13A)
of section 10, all other payments received by an employee from an employer or former employer are
liable to tax under this head.

4.5.3 Retirement Benefits

Retirement benefits are given to employees during their period of service or during retirement.
 Pension is given either on a monthly basis or in a lump sum. The tax is treated depending on the
category of the employee.
 Gratuity is given as appreciation of past performance which is received at the time of retirement
and is exempt to a certain limit.
 Leave salaries tax depends on the category of the employee. The employee may make use of the
leave or encash it.

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 Provident fund is contributed by both employee and employer on a monthly basis. At the retirement,
employee gets the amount along with interest. Tax treatment is based on the type of provident fund
maintained by the employer.

4.5.4 Deductions
Section 16 of the Act is related to deductions from salaries. According to this section, the income
chargeable under the head ‘Salaries’ shall be computed after making certain deductions from gross
salary which are as follows:
 Section 16(i) – Standard Deduction
 Section 16(ii) – Entertainment Allowance
 Section 16(iii) – Professional Tax

These deductions are explained in following Table

Name of Deduction Deductible Amount

Standard Deduction A standard deduction of ` 50,000 or amount of gross salary, whichever is lower,
is allowed to the employees.
Entertainment Allowance Entertainment allowance received has to be first included in gross salary and,
thereafter, deduction can be allowed to the least of the following:
1. One-fifth of basic salary
2. ` 5,000
3. Entertainment allowance received
Deduction in respect of entertainment allowance is available only in case of
Government employees.
Professional Tax Any sum actually paid by the employee on account of tax on employment is
allowed as a deduction.
In case where professional tax is reimbursed or paid by an employer on behalf of
an employee, such amount should be first included in gross salary as a perquisite
and, thereafter, deduction can be allowed.

Conclusion 4.6 CONCLUSION

 As per Section 15 of the Income Tax Act, 1961, income chargeable to tax under the head ‘salaries’
includes any salary due to an employee, any salary paid or allowed to an assessee in the previous
year, and any arrears of salary paid or allowed to the employee in the previous year.
 Salary income becomes chargeable to tax either on ‘due basis’ or on ‘receipt basis’, whichever is
earlier.
 Before the income of an assessee is charged under the head ‘salaries’, it must be ensured that there
exists an employer-employee relationship between the receiver and the payer.
 Gratuity refers to a payment that is made in appreciation of an employee’s past services rendered
by him/her to the employer.
 It can be received either by the employee himself at the time of his

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 Pension is paid to an employee on a monthly basis.

 However, at the time of retirement, the employee may decide to receive a particular percentage of
his/her monthly pensions for a particular period
 The employee is entitled to exemption under Section 10(5) with respect to the value of travel
concession received by him or due from his or her employer for himself/herself and his family.
 Section 16 of the Act is related to deductions from salaries.
 According to this Section, the income chargeable under the head ‘Salaries’ shall be computed after
making certain deductions for entertainment allowance and professional tax.

4.7 GLOSSARY

 Encashment: An exchange of a tangible or intangible item, such as cheques and leaves for a sum of
money
 Keyman: A person whose service has a significant effect on the profitability of the company is known
as a keyman
 Legal hier: A person, whether male or female, who is entitled to receive and inherit the entire
property of a person who dies without declaring a will
 Retrench: A practice of reducing the employee strength
 Substantial interest: A person or assessee is said to have substantial interest in a company who
holds more than 20% of shares or controls more than 20% of board of directors

4.8 CASE STUDY: TAXABILITY OF GRATUITY OF MR. RISHI BASED ON THE NATURE
OF HIS EMPLOYMENT
Case Objective
This Case Study discusses the provisions relating to the exemption of gratuity.
The amount of gratuity received by an employee during the Previous Year 2021-2022 becomes taxable
in the Assessment Year 2021-2022 on the basis of his nature of employment. Gratuity is a voluntary
payment made by employers for the appreciation of services rendered by his employees.
1972, gives statutory recognition to the payment of the gratuity. Mr. Rishi retired on 14th June, 2020
after completely serving a period of 26 years and 8 months of his service. He received a gratuity
Dearness allowance was ` 4,000 per month, of which 60% was meant for retirement benefits as per the
terms of employment. Also, he was eligible to a commission @ 1% of turnover (turnover
Under the Income Tax Act, 1961, any gratuity received during the tenure of service is fully taxable. The
amount of exemption is available in respect of gratuity received at the time of retirement/death of an
employee differs under three situations.
 Section 10(10)(i): Employees of Central Government/Local Authority employees/Members of Civil
Services – The death cum retirement gratuity is fully exempt.
 Section 10(10)(ii): Employees covered by the Payment of Gratuity Act, 1972 – The death cum
retirement gratuity is exempt to the extent of least of the following:
1. `20 lacs
2. The actual amount of gratuity received

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3. 15 days’ salary for every completed year or part thereof in excess of 6 months (based on last
drawn salary) Salary, in this case, means (Basic Salary + Dearness Allowance) and the number of
days in a month are taken as 26.
 Section 10(10)(iii): Employees not covered by the Payment of Gratuity Act, 1972 – The death cum
retirement gratuity is exempt to the extent of least of the following:
1. `x 20 lacs
2. The actual amount of gratuity received
3. Half month’s salary for every completed year of service

(Based on an average of past 10 months’ salary) Salary, in this case, means (Basic Salary + Dearness
Allowance forming part of retirement benefits + Commission as a % of turnover)

If Mr. Rishi is a government employee Amount in `

Amount of Gratuity received on retirement 7,00,000

Less: Amount exempt under Section 10(10)(i) 7,00,000

Taxable Gratuity -

If Mr. Rishi is a private sector employee covered by Payment of Gratuity Act Amount in `
Amount of Gratuity received on retirement 7,00,000
Less: Amount exempt under Section 10(10)(ii) 1,86,923
Least of the following:
1. ` 7,00,000
2. ` 20,00,000
3. ` {(8,000 + 4,000) × 15/26 × 27} = ` 1,86,923

Taxable Gratuity 5,13,077

If Mr. Rishi is a private sector employee not covered by Payment of Gratuity Act Amount in `
Amount of Gratuity received on retirement 7,00,000
Less: Amount exempt under Section 10(10)(iii) 1,48,200
Least of the following:
1. ` 7,00,000
2. ` 20,00,000
3. = ` 1,48,200
  10 
   
 800  10  4,000  60%  10   1%  12,00,000   
15  12  
 
   26
30 10
Taxable Gratuity 551,800

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4.9 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Tax is the main source of income for the government of every country. Explain the basis for
chargeability of income from salary for the purpose of income tax.
2. Salary includes wages, pension, annuity, gratuity, fees, commission, profits, leave encashment,
annual accretion and so on. Define Salary as per Section 17(1) of the Act.
3. Describe the tax treatment of commuted pension in the hands of:
i. government employees and
ii. non-government employees
4. Discuss the taxability of unfurnished accommodation provided by a non-government employer to
its employees in the following cases:
i. accommodation is owned by the employer
ii. accommodation has been leased by the employer
5. Elucidate various deductions that can be claimed by an assessee from income from salary under
Section 16 of the Act.

4.10 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. Section 15 of the Income Tax Act, 1961 describes what incomes are chargeable to tax under the head
‘salaries. Under this Section, the salaries and arrears of salary are chargeable to tax. Refer to Section
What is Salary? [Section 17(1)]
2. According to Section 17(1) of the Act, Salary is defined to include: wages, annuity or pension, gratuity,
fees, commission, perquisites, profits in lieu of or in addition to salary or wages, advance of salary
and leave encashment. Refer to Section What is Salary? [Section 17(1)]
3. In case of government employees, commuted pension is fully exempt from tax. For non-government
employees, the commuted pension is partially exempt. Refer to Section What is Salary? [Section 17(1)]
4. In case of a non-government employer, the taxability of accommodation perquisites depends on
two factors. First, the city in which the accommodation has been provided; second, whether the
accommodation is provided by an employer is owned by him/her or it has been taken on lease. Refer
to Section What is Salary? [Section 17(1)]
5. According to Section 16 of the Act, income chargeable under the head ‘Salaries’ shall be computed
after making deductions against entertainment allowance and professional tax. Refer to Section
Deductions

@ 4.11 POST-UNIT READING MATERIAL

 https://resource.cdn.icai.org/65964bos53217cp4u1.pdf

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4.12 TOPICS FOR DISCUSSION FORUMS

 Discus with your team about the Provident Fund Tax Treatment in income tax.

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 UNIT

05 Overview of Income from House

Property (Section 22 To 27)

Names of Sub-Units

Introduction to income from house property, meaning of house property, computation of income from
house property, analysis of charges under the head IFHP, analysis of standard deduction (section 24a),
concept of recovery of unrealised rent vs receipt of arrear of rent (section 25a), co-owner (section 26),
deemed owner (section 27)

Overview
This unit begins by explaining the meaning of income from house property, it discusses the classification
of different forms of charges under the head IFHP. The unit analyses the standard deduction (section
24a), analysis of deemed owner (section 27) as well as analysis of the recovery of unrealised rent vs
receipt of arrear of rent (section 25a).

Learning Objectives

In this unit, you will learn to:

 Explain the meaning of house property
 Discuss the chargeability under the head IFHP
 Describe the concept of recovery of unrealised rent vs. receipt of arrear of rent (section 25a)
 Extent the computation of income from house property
 Classify the deemed owner (section 27)
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Learning Outcomes

At the end of this unit, you would:

 Assess the meaning of income from house property
 Examine the standard deduction (section 24a)
 Analyse the Interest on Borrowed Capital (Section 24b)
 Evaluate the computation of income from house property
 Identify the chargeability under the head IFHP

5.1 INTRODUCTION
The provisions for computation of Income from house property are covered under sections 22 to 27.
This unit deals with the provisions for computation of Income from house property. Section 22 is the
charging section that identifies the basis of charge wherein the annual value is prescribed as the basis
for computation of Income from House Property. Therefore, the process of computation of “Income
from House Property” starts with the determination of the annual value of the property. The concept
of annual value and the method of determination is laid down in section 23. The admissible deductions
available from house property are mentioned in section 24.
At the end of this unit, you will learn the conditions to be satisfied for income to be chargeable under this
head, how to determine the annual value of different types of house properties, admissible deductions
and inadmissible deductions from annual value, the tax treatment of unrealised rent, who are deemed
owners, what is meant by co-ownership and what is its tax treatment, etc.
Income from house property is one of the important heads of income under the Income Tax Act. The tax
payers have been, in particular, keen to know about the exemptions and deductions available to them on
repayment of interest and principal of the loan obtained to purchase the house property, if that house
property is let out or self-occupied. The amount of interest on borrowed capital of the current year is
available under the head house property further repayment of principal is available under section 80C
to individuals and Hindu Undivided Families.

Section 22 of the Act provides:

“The annual value of property consisting of any buildings or lands appurtenant thereto of which the
assessee is the owner, other than such portions of such property as he may occupy for any business or
profession carried on by him, the profits of which are chargeable to income-tax, shall be chargeable to
income tax under the head Income from House Property”.
The following points emerge from the above charging section:
 Tax is charged on income from the buildings or lands appurtenant thereto: The buildings include
residential buildings, buildings let out for business or profession or auditoriums for entertainment
programmes. The location of the building is immaterial. It may be situated in India or abroad.
 Tax is charged on income from lands appurtenant to buildings: Where the land is not appurtenant
to a building the income from land can be charged as business income or “income from other
sources”, as the case may be. The lands appurtenant to buildings include approach roads to and
from public streets, courtyards, motor garage, compound, playground and kitchen garden. In the

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case of non-residential buildings, carparking spaces, drying grounds or playgrounds shall be the
lands appurtenant to buildings.
 Tax is charged from the owner of the buildings and land appurtenant thereto: Where the recipient
of the income from house property is not the owner of the building, the income is not chargeable
under this head but the head ‘Income from Business or Other Sources’. For example, the income to a
lessee from sub-letting a house or income to a mortgagee from house property mortgaged to him is
not chargeable under the head.

‘Income from House Property’.

The owner of the buildings may be the legal owner or beneficial owner. In ownership, the ownership of
building is considered and not the ownership of income. In certain cases, the income may not be received
by the owner of the building, still, he shall be liable to tax because he is the owner of the building.
Following is the pro forma of calculation of Income from House Property:

Particulars Amount

Computation of GAV

Step 1 Compute ER
ER = Higher of MV and FR, but restricted to SR

Step 2 Compute Actual rent received/receivable

Actual rent received/receivable less unrealized rent as per Rule 4
[See Note below for alternate view]

Step 3 Compare ER and Actual rent received/receivable

Step 4 GAV is the higher of ER and Actual rent received/receivable

Gross Annual Value (GAV) A

Less: Municipal taxes (paid by the owner during the previous year) B

Net Annual Value (NAV) = (A–B) C

F
Less: Deduction’s u/s 24
(a) 30% of NAV D
(b) Interest on borrowed capital (actual without any ceiling limit) E

Income from house property (C-F) G

5.2 CHARGES UNDER THE HEAD IFHP

According to Section 22 of the Act, house property does not include empty areas. Income received from
an empty area is charged either under the head ‘Income from Business or Profession’ or under the head
‘Income from Other Sources’, based on the source of income. If an individual uses his property for his
own business or profession, no tax is levied under the head of income from house property. Rent and
other income from any flat, building or supportive land are generally taxed under the head ‘Income
from House Property’.

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Let us understand the above concept with the help of an example.

Mr. Ram has a house. It incorporates a large open area. The house has been let out at a rent of ` 1,00,000
per month, out of which a lease of ` 25,000 per month is attributable to the open area. In this situation,
the whole rental wage is assessable under the head ‘house property’.
Section 22 of the Income Tax Act 1961, deals with the levying of tax on house property. As per Section 22
of the Income tax Act, 1961, “Annual value of property consisting of any buildings or lands appurtenant
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 are chargeable to
income tax shall be chargeable to income tax under the head ‘Income from House Property’.”
According to this section, land, buildings and the lands that are attached to buildings are chargeable to
tax, provided that such house property is not used for the business of the assessee’s own business, the
income of which is chargeable to tax.
For taxing an income under the head, ‘Income from House Property’, three conditions must be fulfilled,
which are as follows:
1. The property must consist of buildings and lands appurtenant thereto.
2. The assessee must be the owner of such house property.
3. The property may be used for any purpose, such as renting or letting out, but it should not be used
by the owner for any business or profession carried on by him, the profit of which is chargeable to
tax.

If the property is used for own business or profession, it shall not be chargeable to tax. If the assessee is
engaged in the business of letting out of the property on rent, the income earned would be taxable as his
business income. It should be noted that if the house property is held by an assessee as stock-in-trade of
his business, then also the annual value of such house property shall be charged under the head ‘Income
from house property’.
The process of computation of income from house property is explained in the following Table:

Step 1 Determination of Gross Annual Value (GAV)

Step 2 Less: Municipal taxes paid by the owner during the previous year
Step 3 Net Annual Value (NAV) = Step 1 - Step 2
Step 4 Less: Deductions under Section 24
1. 30% of NAV
2. Interest on borrowed capital
Step 5 Income from House Property = Step 3 - Step 4

5.3 ANNUAL VALUE OF HOUSE PROPERTY (SECTION 23)

Annual value refers to the amount of money for which a property owner may rent his property from
year to year. The annual value does not refer to the actual rent received for the property or the municipal
value of the property. As stated earlier, the annual value of the house property is the notional amount
of rent that can be derived from the property. While determining the annual value of a house property,
four factors are taken into consideration. These are as follows:
 Actual Rent Received or Receivable (ARR): The annual value of the property is based on the actual
rent received by the owner or the amount expected to be received by him/her.

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 Municipal Value (MV): Municipal value refers to the value determined by local municipal authorities
based on which it collects municipal taxes.
 Fair Rent of a Property (FR): Fair rent of a property refers to the amount of money that can be
expected to be received in a year by letting a property of similar size in the same locality.
 Standard Rent (SR): Standard rent refers to the rent that is fixed under the Rent Control Act, 1958.
Under this Act, the maximum rent has been prescribed for all the localities.

According to the Act, the annual value of a property is the value received after the deduction of municipal
taxes (if any) paid by the owner. At a broader level, the annual value of the property may be determined
in just two steps as shown in the following Figure

Determine the gross annnual value of house property

Defuct the municipal taxcs actually paid by the owenr in the

privious year from the forss annual value calculated in step I.

The net annual value obtained after deducting municipal taxes is considered to be the annual value
of the house property for all purposes related to the Income Tax Act. The Gross Annual Value (GAV) is
determined by following the steps mentioned in the following Table:

Step 1 Compare Fair Rental Value with Municipal Value, whichever is higher
Step 2 Compare Standard Rent with Step 1 value. The lower of the two is the Expected Rent
Step 3 Compare Expected Rent and Actual Rent
If Actual Rent > Expected Rent, Actual Rent is the GAV
If Actual Rent < Expected Rent owing to the vacancy of the property, Actual Rent is the GAV
If Actual Rent < Expected Rent owing to any other reason, Expected Rent is the GAV

5.4 STANDARD DEDUCTION (SECTION 24A)

30% of the net annual value of house property is allowed as a standard deduction from the net annual
value of house property. The 30% standard deduction is fixed even if the actual expenditure incurred by
the house owner on the insurance, repairs, electricity, water supply for the house, etc., is higher or lower.

5.5 INTEREST ON BORROWED CAPITAL (SECTION 24B)

If an individual takes a (home) loan for purchasing, construction, repair, renewal or reconstruction of
his/her house property, the interest paid by him/her is allowed as a deduction from the NAV of the house
property. The interest deduction is allowed on an accrual basis, i.e., it is immaterial whether the interest
has been paid or not during the assessment year.
The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has
been borrowed to buy or construct the house. The amount of interest payable for the relevant year

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should be calculated and claimed as a deduction. It is immaterial whether the interest has been paid
during the year or not.
However, there should be a clear link between the borrowal and the construction or purchase, etc., of
the property. If money is borrowed for some other purpose, interest payable thereon cannot be claimed
as a deduction.
The following points are to be kept in mind while claiming a deduction on account of interest on borrowed
capital:
 In case the property is let out, the entire amount of interest accrued during the year is deductible.
The borrowals may be for construction/acquisition or repairs/renewals.
 A fresh loan may be raised exclusively to repay the original loan taken for purchase or construction,
etc., of the property. In such a case also, the interest on the fresh loan will be allowable.
 Interest payable on interest will not be allowed.
 Brokerage or commission paid to arrange a loan for house construction will not be allowed.
 When interest is payable outside India, no deduction will be allowed unless the tax is deducted at
source or someone in India is treated as an agent of the non-resident.

5.6 RESTRICTION ON DEDUCTION OF INTEREST SECTION (SECTION 25)

Interest chargeable under this Act which is payable outside India shall not be deducted if –
(a) tax has not been paid or deducted from such interest and
(b) in respect of which no person in India may be treated as an agent.

5.7 RECOVERY OF UNREALISED RENT VS RECEIPT OF ARREAR OF RENT (SECTION

Where any rent cannot be realised, and subsequently if such amount is realised, such an amount will be
deemed to be the income from house property of that year in which it is received. We have seen earlier
that the basic requirement for the assessment of this income is the ownership of the property. However,
in the cases where unrealised rent is subsequently realised, the assessee doesn’t need to continue to be
the owner of the property in the year of receipt also the Assessment of arrears of rent received (Section
25B). When the owner of a property receives arrears of rent from such a property, the same shall be
deemed to be the income from house property in the year of receipt. 30% of the receipt shall be allowed
as deduction towards repairs, collection charges, etc. No other deduction will be allowed. As in the case
of unrealised rent, the assessee need not be the owner of the property in the year of receipt.

5.8 CO-OWNER (SECTION 26)

According to Section 26 of the Act, when a house property (property consisting of buildings or buildings
and lands appurtenant thereto) is owned by two or more persons, those persons are known as co-
owners of the property if their share in the property is definite and ascertainable. In case the share is
not definite, the co-owners shall be assessed as an Association of Persons (AOP). In such cases, the share
of each co-owner in the income of the property as determined under the head of income from house
property shall be included in the total income of such persons. In such cases, each co-owner is entitled
to get a benefit or relief of up to ` 30,000/` 1,50,000 as the case may be if the house property is used for
own residence.

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5.9 DEEMED OWNER (SECTION 27)

An owner is an individual under whose name the document of title of the property is registered. A
deemed owner is an individual who does not have the property registered in his name but is liable to pay
tax for the income received from house property as per Section 27 of the Income Tax Act. Let us study
various provisions as laid down in section 27 of the Act, which is as follows:
Following persons, though not legal owners are deemed to be owners of house property for chargeability
under Sections 22 to 26.
 Transfer to spouse {Section 27(i)}: In case of transfer of house property by an individual to his or her
spouse for inadequate consideration, the transferor shall be the deemed owner.
Exception – This section is not applicable where the transfer is made in connection with an agreement
to live apart.
 Transfer to minor child {Section 27(i)}: In case of transfer of house property by an individual to his
or her minor child for inadequate consideration, the transferor shall be the deemed owner.
Exception – This section is not applicable where the transfer is made to a minor married daughter.
 The holder of an impartible estate {Section 27(ii)}: The holder of an impartible estate shall be the
deemed individual owner in respect of all properties comprised in the estate.
Impartible estate – It refers to a property that is not legally divisible.
 Member of co-operative society/association {Section 27(iii)}: In case of allotment or lease of
building/part thereof under House Building Scheme of a co-operative society/association to its
member, the member shall be the deemed owner. Although the legal owner of such building/part
thereof is the co-operative society/association.
 A person possessing a property {Section 27(iiia)}: A buyer who is allowed to take possession of a
building/part thereof in part performance of the contract under Section 53A shall be deemed to be
the owner. For example, this may happen when the sale consideration is paid by the buyer to the
seller, although the property is not yet registered in the buyer’s name.
 A person having rights in the property for 12 years or more {Section 27(iiib)}: A person who
acquires rights of a building/part thereof by transfer by way of lease of 12 years or more shall be the
deemed owner.

Example:
Ganesh has three houses, all of which are self-occupied. The particulars of the houses for the P.Y. 2020-21
are as under:

Particulars House I House II House III

Municipal valuation p.a. ` 3,00,000 ` 3,60,000 ` 3,30,000
Fair rent p.a. ` 3,75,000 ` 2,75,000 ` 3,80,000
Standard rent p.a. ` 3,50,000 ` 3,70,000 ` 3,75,000
Date of completion/purchase 31.3.1999 31.3.2001 01.4.2014
Municipal taxes paid during the year 12% 8% 6%
Interest on money borrowed for the repair of property - 55,000
during the current year

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Particulars House I House II House III

Interest for the current year on money borrowed in July 1,75,000
2014 for purchase of property

Compute Ganesh’s income from house property for A.Y.2021-22 and suggest which houses should be opted
by Ganesh to be assessed as self-occupied so that his tax liabilityisminimized.
Solution:
Let us first calculate the income from each house property assuming that they are deemed to be let out.
Computation of income from house property of Ganesh for the A.Y. 2021-22

Particulars Amount in `

House I House II House III

Gross Annual Value (GAV)
ER is the GAV of house property 3,50,000 3,60,000 3,75,000
ER = Higher of MV and FR, but restricted to SR
Less: Municipal taxes (paid by the owner during the previous 36,000 28,800 19,800
year)

Net Annual Value (NAV) 3,14,000 3,31,200 3,55,200

Less: Deductions under section 24
(a) 30% of NAV 94,200 99,360 1,06,560
(b) Interest on borrowed capital - 55,000 1,75,000

Income from house property 2,19,800 1,76,840 73,640

Ganesh can opt to treat any two of the above house properties as self-occupied.
OPTION 1 (House I and II– self-occupied and House III – deemed to be let out)
If House I and II are opted to be self-occupied, the income from house property shall be –

Particulars Amount in `
House I (Self-occupied) Nil
House II (Self-occupied) (interest deduction restricted to ` 30,000) (30,000)
House III (Deemed to be let-out) 73,640
Income from house property 43,640

OPTION 2 (House I and III – self-occupied and House II – deemed to be let out)
If House I and III are opted to be self-occupied, the income from house property shallbe–

Particulars Amount in `
House I (Self-occupied) Nil
House II (Deemed to be let-out) 1,76,840

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Particulars Amount in `
House III (Self-occupied) (1,75,000)
Income from house property 1,840
OPTION 3 (House II and III – self-occupied and House I – deemed to be let out)
If House II and III are opted to be self-occupied, the income from house property shall be –

Particulars Amount in `
House I (Deemed to be let-out) 2,19,800
House II (Self-occupied) (interest deductionrestricted to ` 30,000) (30,000) (2,00,000)
House III (Self-occupied) (1,75,000) 19,800

(Total interest deduction restricted to ` 2,00,000) (2,00,000)

19,800
Income from house property

Since Option 2 is most beneficial, Ganesh should opt to treat House I and III as self- occupied and House
II as deemed to be let out. His income from house property would be ` 1,840 for the A.Y. 2021-22.
(VI) HOUSE PROPERTY, A PORTION LET OUT AND A PORTION SELF- OCCUPIED

Conclusion 5.10 CONCLUSION

 The owner of house property (in whose name the property stands) is considered as the assessee for
taxation.
 If an individual has given his house property on rent or lease and derives any income from it, it is
termed as ‘income from house property’.
 For taxing an income under the head ‘Income from House Property’, three conditions must be
fulfilled, which are as follows:
 The property must consist of buildings and lands appurtenant thereto.
 The assessee must be the owner of such house property.
 The property may be used for any purpose, such as renting or letting-out, but it should not be used
by the owner for any business or profession carried on by him, the profit of which is taxable. If the
property is used for own business or profession, it shall not be taxable.
 A deemed owner is an individual who does not have the property registered in his name but is liable
to pay tax for the income received from house property as per Section 27 of the Income Tax Act.
 The annual value of the property is based on the actual rent received by the owner or the amount
expected to be received by him/ her [Actual rent received or receivable (ARR)].
 At a broader level, the annual value of the property may be determined in just two steps:
Step I: Determine the gross annual value of house property; and
Step II: Deduct municipal taxes paid by the owner in the previous year from the gross annual value
calculated in Step I.
 For the income chargeable under the head ‘Income from House Property’, there are only two
deductions, namely standard deduction and interest on borrowed capital.

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5.11 GLOSSARY

 Actual rent: Actual rent received/receivable is a vital cause in establishing the annual value of a
property
 Deemed owner: A deemed owner is an individual who does not have the property registered in his
name, but is liable to pay tax for the income received from house property as per Section 27 of the
Income Tax Act
 Notional basis: Notional basis of calculating annual value means that the house property is taxed
not based on actual income or rent received from the house property, but based on the potential of
the house property to generate income
 Standard rent: The standard rent is set under the Rent Control Act. If the standard rent has been
set for any property under the Rent Control Act, the proprietor cannot be projected to obtain a rent
higher than the standard rent set under the Rent Control Act

5.12 CASE STUDY: TAX ISSUES RELATED TO SELF-OCCUPIED HOUSE PROPERTY

Case Objective
This Case Study discusses the tax issues related to the income from the house property of Swapnil.
Mr. Swapnil, a Delhi-based IT professional, owns a flat in South Delhi. He is planning to purchase another
property in North Delhi. He is considering the following options:
 Let it out on rent
 Use it as a residence for himself or his family
 Keep it vacant/unoccupied
 Use it as a holiday home

Each of these alternatives has its tax implications. Therefore, it becomes important for Swapnil to
understand the tax implication for each option by the Income Tax Act, 1961 before deciding what he
should do with his new property. The tax implications for the above alternatives are as follows:
 If the new property is let out on rent: In this situation, the rent received from the property will be
taxed. For example, if Swapnil is getting a rent of ` 10,000 per month from his property, he will have
to pay tax for his annual rental income, i.e., ` 1,20,000 after tax deductions including municipal
taxes, standard deductions and interest (if any).
 If the new property is used as a residence for his family: In this situation, Swapnil will have the
alternative to select any one property for living purposes. The other property will be deemed to be
rented out and the estimated annual rent will be considered taxable.
 If the new property remains vacant: In this case, the property will be deemed to be rented out. The
estimated annual rent will be considered as the taxable value.
 If the new property is used as a holiday home: The advantage of the self-occupied home will not be
applied in this case. So, the estimated annual rent will be considered as the taxable value.

As per Section 23(2) of the Income Tax Act, 1961, whether a house property is self-occupied for own
residency or unoccupied throughout the previous year, the annual value shall be taken as Nil unless any

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other benefit is derived by the owner from such house property. However, this benefit of exemption can
be claimed by any individual or HUF for two self-occupied properties.
Furthermore, by applying Section 23(4), if the assessee owns more than two self-occupied house
properties, then the income of such self-occupied house property shall be taken to be nil at the option of
the owner. The remaining self-occupied properties shall be treated as let out properties for taxation and
their expected rents shall be taken as Gross Annual Values.
Thus, it can be observed that Swapnil cannot generate income from both the properties as he has to
consider one of them as rented or self-occupied. He may claim the benefit of Nil Annual Value only in
respect of one house property at his option.

Questions
1. List the deductions that will have to be borne by Swapnil from the rental income of his property.
(Hint: Municipal taxes, standard deductions and interest, etc.)
2. Explain the computation of income from ‘self-occupied property’ as per the provisions of the Income
Tax Act.
(Hint: Refer to Section 23(2) and 23(4))

5.13 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Rental income from a property being building or land appurtenant thereto of which the taxpayer is
owner is charged to tax under the head “Income from house property”. Explain Income from House
Property.
2. Discuss the Charges under the head IFHP.
3. Section 22 of the Income Tax Act 1961, deals with the levying of tax on house property. Extent Annual
Value of House Property (Section 23).
4. Express standard deduction and interest on borrowed capital.
5. An owner is an individual under whose name the document of title of the property is registered.
Describe Co-Owner (Section 26) and Deemed Owner (Section 27).

5.14 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. The provisions for computation of Income from house property are covered under sections 22 to 27.
This unit deals with the provisions for computation of Income from house property. Section 22 is the
charging section that identifies the basis of charge wherein the annual value is prescribed as the
basis for computation of Income from House Property. Refer to Section Introduction
2. According to Section 22 of the Act, house property does not include empty areas. empty areas.
Income received from an empty area is charged either under the head ‘Income from Business or
Profession’ or under the head ‘Income from Other Sources’, based on the source of income. Refer to
Section Charges Under the Head IFHP
3. Annual value refers to the amount of money for which a property owner may rent his property
from year to year. The annual value does not refer to the actual rent received for the property or
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the municipal value of the property. As stated earlier, the annual value of the house property is the
notional amount of rent that can be derived from the property. Refer to Section Annual Value of
House Property (Section 23)
4. 30% of the net annual value of house property is allowed as a standard deduction from the net
annual value of house property. Refer to section Standard Deduction (Section 24a) and 5.5 Interest
on Borrowed Capital (Section 24b)
5. According to Section 26 of the Act, when a house property (property consisting of buildings or
buildings and lands appurtenant thereto) is owned by two or more persons, those persons are
known as co-owners of the property if their share in the property is definite and ascertainable. Refer
to section Co-Owner (Section 26) and Deemed Owner (Section 27)

@ 5.15 POST-UNIT READING MATERIAL

 https://resource.cdn.icai.org/65965bos53217cp4u2.pdf

5.16 TOPICS FOR DISCUSSION FORUMS

 Discuss the more sources of income which comes in income from house property.

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 UNIT

06 Income From Capital Gain

(Section 45 To 55AA)

Names of Sub-Units

Introduction to income from capital gain, meaning of capital asset, computation of income from capital
gain, analysis of transfer of a capital asset, analysis of cost inflation index, concept of exemption
(section 54), computation of capital gains (section 48).

Overview

This unit begins by meaning of income from capital gain, it discusses the computation of income
from capital gain. the unit analysis the cost inflation index. It also analysis the concept of exemption
(section 54), analysis the computation of capital gains (section 48).

Learning Objectives

In this unit, you will learn to:

 Explain the meaning of income from capital gain
 Discuss the long-term gain and short-term gain
 Describe the computation of capital gains under section 48
 Extent the exemption under section 54
 Classify the concept of cost inflation index
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Learning Outcomes

At the end of this unit, you would:

 Assess the meaning of income from capital gain
 Examine the concept of capital asset
 Analyse the types of capital asset
 Evaluate the period of holding
 Identify the transfer of a capital asset

6.1 INTRODUCTION
When a person buys a property for a lower price and then subsequently sells it at a higher price, he
makes a gain. The gain on sale of a capital asset is called capital gain. It should be noted that this gain
is not a regular income like salary, or house rent rather it is a one-time gain. In other words, the capital
gain is not recurring, i.e., not occur again and again periodically. Loss is the opposite of gain; therefore,
there can be a loss under the head capital gain. The term capital loss cannot be used as it is incorrect.
Capital loss means the loss on account of destruction or damage of capital asset. Thus, whenever there
is a loss on sale of any capital asset it will be termed as loss under the head capital gain.
The provisions for computation of Income from capital gains are covered under sections 45 to 55. Section
2(14) defines the term capital gain and section 45, the charging section lays down basis of change for
taxability of capital gain or loss arises on transfer of capital asset.
Taxability of capital gain depends upon the nature of capital gain arises, i.e., short term capital gain or
long-term capital gain. The type of capital gain depends upon the period for which the capital asset is
held. The taxability of capital gain shall satisfy the conditions like there should be capital asset, the asset
is transferred by the assessee, such transfer takes place during the previous year, etc. To give relief to
the assessee, the concept of exemption introduced under different sections.
Under the Income Tax Act, any profits or 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 deemed to
be the income of the previous year in which the transfer took place unless such capital gain is exempted
under the prescribed exemptions. ‘Capital gains’ means any profit or gains arising from the transfer of
a capital asset.
If any capital asset is sold or transferred, the profits arising out of such sale are taxable as capital gains
in the year in which the transfer takes place. Capital gains refer to the difference between the price at
which the capital asset was acquired and the price at which the same asset was sold. In technical terms,
capital gain is the difference between the cost of acquisition and the fair market value on the date of
sale or transfer of asset.

6.2 CAPITAL ASSET

According to Section 2(14) of the Income Tax Act, 1961, unless the context otherwise requires, the term
‘capital asset’ refers to:
(a) Property of any kind held by an assessee, whether or not connected with his business or profession;

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(b) Any securities held by a Foreign Institutional Investor (FII)which has invested in such securities in
accordance with the regulations made under the Securities and Exchange Board of India (SEBI) Act,
1992.

However, capital asset does not include the following:

(i) Any stock-in-trade, other than the securities referred to in subclause consumable stores or raw
materials held for the purposes of his business or profession;
(ii) Personal effects, such as movable property (including apparel and furniture) held for personal use
by the taxpayer or any member of his family dependent on him/her, but excludes the following:
 jewellery
 archaeological collections
 drawings
 paintings
 sculptures
 any work of art

6.2.1 Types of Capital Asset

There are two types of capital assets, long-term and short-term capital assets. The basis of differentiation
depends on the time period for which the asset was held by the taxpayer before its transfer. In case
the asset is acquired as inheritance, gift or succession, the period for which the asset was held by its
preceding owner would also be included while classifying the asset as a short-term or a long-term asset.

Short-Term Assets and Long-Term Assets

A long-term asset is one that is held for more than 36 months. However, from the financial year 2017-18,
this criterion has been revised to 24 months in the case of immovable property, such as land, building and
house property. For example, Mr. A sells his house property after holding it for a period of 24 months. In
this case, any income arising will be treated as a long-term capital gain. This reduced period is, however,
not applicable to the movable property, such as jewellery, debt-oriented mutual funds, etc. These items
will be classified as long-term capital assets only if they are held for more than 36 months.
Capital assets are considered short-term in case they are held for a period less than 36 months from
the date of transfer. This rule applies to assets transferred after 10th July, 2014 regardless of the date
of purchase. However, the period of holding should be less than 12 months in case of shares (equity and
preference). For example, short-term assets include the following:
 Equity or preference shares in a company listed on a recognised stock exchange in India
 Securities listed on a recognised stock exchange in India
 Units of UTI, whether quoted or not
 Units of equity-oriented mutual funds, whether quoted or not
 Zero-coupon bonds, whether quoted or not

It should be noted that in case these assets are held for a period above 12 months, they will be considered
as long-term capital assets.

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Let us look at a few examples to understand the difference clearly:

Example: Amit as a salaried employee. In the month of April, 2014, he purchased a piece of land and
disposed the same off in December 2015. In this case, land is a capital asset for Amit. He purchased the
piece of land in April 2014 and disposed it off in December 2015. In this case, the period of holding was
less than 36 months. Therefore, the land will be considered as a short-term capital asset.
Example: Prem is a salaried employee. In the month of April 2015, he purchased equity shares of an
Indian company listed at the NSE and sold the same in December 2017. In this case, equity shares are
capital assets for Prem. He purchased shares in April 2015 and sold them in December 2017. The period
of holding in this case is more than 12 months. Therefore, the equity shares will be considered as long-
term capital assets.

6.2.2 Period of Holding

For proper tax computation, it is important for a taxpayer to understand the concept of a period of
holding of a capital asset. This is because the tax treatment of capital gains and losses on short- and
long-term capital assets is different. Period of holding refers to the time during which an assessee holds
on to a given capital asset. It is the elapsed time between the initial date of purchase of a capital asset
and the date on which it was sold.
Example: Mr. A purchased a security on January 1, 2009 and sold the same on June 30, 2009. The holding
period for the security would be six months. Hence, it would be treated as a short-term asset. To compute
the holding period of a capital asset, counting begins on the day after the date of purchase (acquisition)
and ends on the day of sale of that capital asset. The first day after purchase is used as a benchmark
for each succeeding month till the sale date of the asset to determine the period of holding for the given
capital asset. Classification of capital gains on the basis of period of holding is shown in following figure

• Security (other than a unit) listed in a recognised stock

STCA, if held for  12 months exchange
LTCA, if held for  12 months • Unit of equity-oriented fund/unit of UTI
• Zero coupon bond

STCA, if held for  24 months • Unlisted shares

LTCA, if held for  24 months • Land or building or both

• Unit of debt-oriented fund

STCA, if held for  36 months
• Unlisted securitised other than shares
LTCA, if held for  36 months
• Other capital assets

6.3 TRANSFER OF A CAPITAL ASSET

Capital gain arises on transfer of capital asset; so, it becomes important to understand what the
meaning of word transfer is. The word ‘transfer’ occupies an important place in capital gain, because
if the transaction involving the movement of capital asset from one person to another person is not
covered under the definition of transfer, there will be no capital gain chargeable to income tax. Even if
there is a capital asset and there is a capital gain.
The word transfer under income tax act is defined under section 2(47). As per section 2 (47) Transfer, in
relation to a capital asset, includes sale, exchange or relinquishment of the asset or extinguishments of
any right therein or the compulsory acquisition thereof under any law.

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In simple words Transfer includes:

 Sale of asset
 Exchange of asset
 Relinquishment of asset (means surrender of asset)
 Extinguishments of any right on asset (means reducing any right on asset)
 Compulsory acquisition of asset.

The definition of transfer is inclusive; thus, the transfer includes only above said five ways. In other
words, transfer can take place only on these five ways. If there is any other way where an asset is given
to other such as by way of gift, inheritance etc. it will not be termed as transfer.

6.3.1 Transactions not Regarded as Transfer (Section 47)

Section 47 of the Income Tax Act defines the transactions which are not regarded as transfer for purpose
of capital gains. Some of the transactions that are not regarded as transfers for the purpose of capital
gains are as follows:
 Any transfer done by distributing capital assets on the total or partial value of the partition of an
HUF.
 Any transfer of capital asset done under a will or gift or an irrevocable trust.
 Any transfer of capital asset from a holding company to any of its wholly owned Indian subsidiary
company or vice versa.
 Any transfer or issue of shares from the company/companies resulting from the demerger to the
shareholders of the demerged company.
 In case two or more companies have resolved to amalgamate, then, if a shareholder holding any
shares in the amalgamating companies transfers his/her shares in exchange for shares in the
amalgamated company, then such transfer is not taxable.
 Any transfer of sovereign gold bonds issued by RBI and held by an individual by way of redemption.
 Any conversion of bonds, debentures, debenture stock and deposit certificates of a company into the
shares and debentures of the same company.
 Any conversion of the preference shares of a company into the equity shares of the same company.

6.3.2 Computation of Capital Gains (Section 48)

The capital gain on transfer of the capital asset is computed as follows:

Short-term capital assets (Section 48) Long-term capital assets (Section 48)
Full value of consideration Full value of consideration
Less : Cost of acquisition of asset Less : Indexed cost of acquisition
Less : Cost of improvement Less : Indexed cost of improvement
Less : Expenditure incurred wholly and exclusively Less : Expenditure incurred whollly and exclusively in
in connection with such transfer connection with such transfer
Less : Excemptions provided under section 54, 54EC, 54E
and 54B
Resulting figure is short-term capital gain Resulting figure is long-term capital gain

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For example, Mr. X purchased shares worth ` 1000 on September 30, 2017 and disposed them off on
December 31, 2020 for ` 1200. The stock value was ` 1100 as on 31st January, 2020. Out of the capital
gains realised by Mr. X, ` 200 (1200–1000), ` 100 (1100–1000) is not taxable.
The remainder of the capital gain of `100 would be taxed at the rate of 10 percent without the benefit
of indexation. Section 50 of the Income Tax Act gives the provisions for computation of capital gains
arising from depreciable assets. Accordingly, in case a taxpayer has transferred a capital asset forming
part of a block of assets (building, machinery, etc.) on which depreciation has been allowed under the
Income Tax Act, the income arising from such capital asset shall be considered as short-term capital
gain. Short-term capital gain or loss from sale of depreciable asset shall be realised only in the following
two conditions:
(a) When, on the last day of the previous year, Written Down Value (WDV) of the block of asset is zero.
(b) When, on the last day of the previous year, block ceases to exist.
Section 48 of the Act provides that the income chargeable under the head ‘capital gains’ shall be computed
by deducting from the full value of consideration received or accruing as a result of the transfer of the
capital asset the following amounts, namely (as applicable from the assessment year 1993–94):
1. The expenditure incurred wholly and exclusively in connection with such transfer;
2. The cost of acquisition of the capital asset and the cost of any improvement thereto.
However, in the case of an assessee who is a non-resident, capital gains arising from the transfer of a
capital asset, being shares in, or debentures of, an Indian company shall be computed by converting the
cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and
the full value of the consideration received or accruing as a result of the transfer of the capital asset into
the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the
capital gains so computed in such foreign currency shall be reconverted into Indian currency.
Further, the above manner of computation of capital gains shall be applicable in respect of capital
gains accruing or arising from every re-investment thereafter in, and sale of, shares in, or debentures
of, an Indian Company. Where long-term capital gain arises from the transfer of a long-term capital
asset (other than capital gain arising to a non-resident from the transfer of shares in or debentures of
an Indian company), such long-term capital gains will be computed by deducting from the full value of
consideration, the expenditure incurred in connection with the transfer, the ‘indexed cost of acquisition’
and ‘indexed cost of improvement’.
The Finance Act, 1997 has with effect from 1.4.1998 denied the benefit of indexation of cost of bonds and
debentures other than indexed bonds issued by the government.
Provided also that where shares, debentures or warrants referred to in the proviso to Clause (iii) of
Section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such
transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer
for the purposes of this section. For this purpose:
1. “Foreign currency” and “Indian currency” have the meanings respectively assigned thereto in
Section 2 of the Foreign Exchange Management Act, 1999, and
2. The conversion of Indian currency into foreign currency and the re-conversion of foreign currency
into Indian currency shall be at the rate of exchange prescribed in that behalf;
3. Indexed cost of acquisition’ means an amount which bears to the cost of acquisition the same
proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost
Inflation Index for the first year in which the asset was held by the assessee or for the year beginning
on the 1st day of April 1981 whichever is later;

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4. Indexed cost of any improvement’ means an amount which bears to the cost of improvement the
same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the
Cost Inflation Index for the year in which the improvement to the asset took place; and
5. ‘Cost inflation index’, in relation to a previous year, means such Index as the Central Government
may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban
non-manual employees for the immediately preceding previous year to such previous year, by
notification in the Official Gazette, specify in this behalf.

Commission paid to a broker for effecting sale of the asset falls under (1) above. Similarly, expenditure
incurred on litigation for getting enhanced compensation is expenditure wholly and exclusively incurred
in connection with transfer of the capital asset and is deductible. However, litigation expenses incurred
for having the shares registered in his name are part of the cost of acquisition and that incurred for
gaining better voting rights is cost of improvement. Section 48 of the Act does not an Assessing Officer
from taking into amount sale consideration stated in the deed or actual consideration received by the
assessee whichever is higher.

6.3.3 Exemption (Section 54)

 Exemptions under Section 54: Exemptions of Section 54 is applicable to an individual and HUF. It
states that any long-term capital gain arising from the transfer of the residential house property
shall be exempted from the capital gain tax if another residential property is purchased within one
year before transfer or two years after transfer. If the amount of capital gains exceeds ` 2 crore, the
assessee i.e., individual or HUF, should purchase one residential house in India within 1 year before or
2 years after the date of transfer/constructed within a period of 3 years after the date of transfer. On
the other hand, if the amount of capital gains does not exceed ` 2 crore, the assessee may purchase
two residential houses in India within 1 year before or 2 years after the date of transfer/construct
two residential houses in India within a period of 3 years after the date of transfer.
 Exemptions under Section 54B: Section 54B deals with the transfer of agricultural land. It states
that if any sale of agricultural land takes place, the capital gain arising out of that shall be exempted
to the extent that new agricultural land is purchased within 2 years of the transfer or two years
prior to the transfer.
 Illustration: Ravi had purchased certain agricultural land in 1990-91 for ` 1,00,000. The land was
being used for agricultural purpose by him. This land was later sold by him in 2015 for ` 15,00,000.
Compute taxable capital gains for Assessment Year 2016-17 if the agricultural land, which was sold,
is rural agricultural land.
 Solution: There is no capital gain since rural agricultural land is not a capital asset.
 Exemptions under Section 54D: Section 54D is applicable to any assessee who holds an industrial
undertaking. To claim an exemption under this Section, the asset must have been used for 2 years
immediately preceding the date of the transfer for the purpose of the business undertaking.
Alternatively, the assessee must have constructed or purchased a land or building within a period
of 3 years after the date of compulsory acquisition.
 Illustration: Aditya purchased an industrial undertaking on 1.5.2005 for ` 2,00,000, which he
employed for business purpose. He later sold it for ` 8,00,000 on 10.9.2009. Is he exempt from payment
of tax on capital gain or not?
 Solution: Aditya shall be exempt from the payment of capital gain on the sale of the industrial
undertaking since he used it for a period of 4 years and 5 months before the sale of the asset.

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 Exemptions under Section 54EC: Exemption under Section 54EC is applicable to all gains arising
from the transfer of any long-term capital asset that was held or put to use for more than 24 months.
The maximum quantum of the exemption amount is ` 50,00,000 in the year of transfer and in the
subsequent financial year and the proceeds should be invested within the period of 6 months from
the date of transfer in bonds issued by NHAI or RECL or PFCL or IRFCL. The new asset should be held
for 5 years. If any of the given conditions is violated, then the capital gain which was exempted will
be taxed as LTCG in the previous year in which the asset was transferred.
 Illustration: Mukesh acquired shares of Genesis Ltd. on 10.10.1998 for ` 2,00,000. He later sold
these shares on 1.7.2015 for ` 10,00,000. He invests ` 1,00,000 in the bonds of Rural Electrification
Corporation Ltd. on 1.10.2015. What will be the consequences if Mukesh takes a loan against the
security of such bonds?
 Solution: If any loan is taken against the security of such bonds, it will be treated as if it is converted
into money as such capital gain which was exempt earlier on such bonds shall be treated as long-
term capital gain of the previous year, in which such loan is taken against the security of such bonds.
 Exemptions under Section 54F: Section 54F is applicable when an assessee constructs a residential
property within 3 years of sales or purchases a residential property within 1 year before sale or 2
years after the sale of the asset. This is only available to individuals and HUF. The assessee claiming
this exemption should not have more than one residential property. Furthermore, the asset sold
may be any asset, but the asset acquired must be a residential property.
 Exemptions under Section 54G: Section 54G is only applicable to industrial undertakings. The
exemption is granted for capital gain arising from the transfer of capital assets in the case of
shifting of industrial undertaking from an urban area. This exemption is available for purchases
made within one year before the transfer or 3 years after the transfer.
 Exemptions under Section 54GA: Section 54GA is only applicable to capital gains arising from the
transfer of assets in cases of shifting of an industrial undertaking to any special economic zone
(SEZ) whether it is developed in an urban area or any other area. This exemption is available for
purchases made within 1 year before the transfer or 3 years after the transfer.

6.4 COST INFLATION INDEX

Cost Inflation Index (CII) is a means to measure inflation used in the computation of long-term capital
gains. Cost inflation takes into account the Consumer Price Index (CPI) for a given year for urban non-
manual employees (mainly requiring mental efforts) for the preceding year. As the price of a capital
asset is likely to increase between the purchase and its sale, selling the asset would provide the owner
a profit which is chargeable to tax. In order to avoid paying huge amounts of tax, the sale price of
the capital asset is indexed to provide the asset value as per its current value, taking inflation into
consideration.
Thus, indexation helps in arriving at the actual value of the asset at current market rate, taking into
consideration the erosion of value due to inflation. The CII for a particular year is decided by the
government and announced before the accounting year ends. The Central Board of Direct Taxes (CBDT)
has notified the ‘Cost Inflation
Index’ applicable from financial year 2017-18 (Assessment Year 2018- 19) onwards, with base year shifted
to 2001-02, in line with the amendments made in the budget 2017. Cost Inflation Index as per amended
provisions has been fixed at 280 for financial year 2018-19/Assessment Year 2019-20, with cost inflation
index for base year (financial year 2001-02) at 100.

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As per Notification No. So 3266(E) [No. 63/2019 (F.No. 370142/11/2019-TPL)], Dated 12-9-2019, following
table should be used for the Cost Inflation Index:

Sl. No. Financial Year Cost Inflation Index

(1) (2) (3)
1 2001-02 100
2 2002-03 105
3 2003-04 109
4 2004-05 113
5 2005-06 117
6 2006-07 122
7 2007-08 129
8 2008-09 137
9 2009-10 148
10 2010-11 167
11 2011-12 184
12 2012-13 200
13 2013-14 220
14 2014-15 240
15 2015-16 254
16 2016-17 264
17 2017-18 272
18 2018-19 280
19 2019-20 289
20 2020-21 301
21 2021-22 317

How to calculate the cost inflation index:

Cost Inflation Index (CII) = (CII for the year the asset was transferred or sold/CII for the year the asset
was acquired or purchased)
 Illustration: Ms. Priya purchased as apartment for ` 20 lakhs in January 2001 and Sold it for ` 35
lakhs in January 2009. The profit or capital gain is ` 15 lakhs. Compute the tax liability on capital
gain.
 Solution: The CII for the year the apartment was purchased is 100. The CII for the year the apartment
was sold is 148.
Then, the cost inflation index is 148/100 = 1.48
To find the indexed cost of acquisition, CII is multiplied with the purchase price.
This is the actual cost of the asset.
Therefore, the indexed cost of acquisition = 20,00,000 × 1.48 = 29,60,000
The long-term capital gain = Sale value of the asset – indexed cost of acquisition
35,00,000 – 29,60,000 = 5,40,000

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The tax liability for long-term capital gains is charged at 20 per cent.
Tax liability will be 20 percent of 54,00,000 = ` 1,08,000.

Conclusion 6.5 CONCLUSION

 Under Section 45(1) of the Income Tax Act, any profits or gains arising from the transfer of a capital
asset effected in the previous year, unless otherwise provided in Section 54, will be chargeable to
income tax under the head ‘Capital Gains’ and shall be deemed to be the income of the previous year
in which the transfer took place.
 A capital asset is defined to include property of any kind held by an assessee, whether connected
with their business or profession or not connected with their business or profession.
 Capital assets are considered as short-term in case they are held for a period of not more than 36
months from the date of transfer. However, the period of holding should be less than 12 months in
the case of shares (equity and preference).
 A long-term asset is one that is held for more than 36 months. However, from financial year 2017-
18, this criterion has been revised to 24 months in the case of immovable property, such as land,
building and house property.
 The period of holding refers to the time during which an assessee holds on to a given capital asset.
 Any profits or gains arising from the transfer of a capital asset effected in the previous year unless
otherwise provided in Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, will be chargeable
to income tax under the head ‘Capital Gains’, and shall be considered as the income of the previous
year in which the transfer of the capital asset took place.
 Full value of consideration refers to the amount received/receivable by the transferor with respect
to the transfer of a capital asset, which may be received in cash or kind.

6.6 GLOSSARY

 Foreign Institutional Investor (FII): An institution registered as FIIs under Section 2 (f) of the SEBI
(FII) Regulations 1995, incorporated outside India which offers investment in securities in India
 Speculative business: A transaction defined in Section 43(5) of Income Tax Act, 1961 in which a
contract for the purchase or sale of any commodity, including stocks and shares, is periodically
settled other than by the actual delivery or transfer of the commodity
 Stock-in-trade: The tools, merchandise or supplies that an organisation or professionals use to
carry out their business
 Written Down Value (WDV): The value of an asset derived after accounting for depreciation

6.7 CASE STUDY: CAPITAL GAINS OF MR. CHUGH

Case Objective
This Case Study discusses the capital gains of an individual.

Mr. Chugh, a businessman, purchased a house property on 1.5.1978 for ` 1,12,000. He incurred the
following expenses for making some additions and alterations to the house property:

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 Construction cost of first floor, incurred in 1984-85, for ` 2,95,000.

 Construction cost of second floor, incurred in 2003-04, for ` 8,05,000.
 Renovation expenses of the building, incurred in 2013-14, for ` 5,11,000.

The fair market value of the property as on 1.4.2001 is ` 9,40,000. This house property was sold by Mr.
Chugh on 11.8.2018 for ` 77,00,000 after incurring expenses of ` 40,000 on the transfer.
The capital gains on such transfer are calculated as follows:

Financial Year (FY) Cost Inflation Index (CII)

2001-02 100
2003-04 105
2013-14 200
2018-19 280
2019-20 289
2020-21 301

Computation of Capital Gains of Mr. Chugh from the sale of house property for the Assessment Year
2021-2022.

Particulars Amount (in `) Amount (in `)

Gross consideration of sale 77,00,000
Less: Expenses incurred on transfer 40,000
Net consideration of sale 26,32,000 76,60,000
Less: Indexed cost of acquisition (COA)
Less: Indexed cost of improvement (COI) 28,62,067
Long-term capital gains 21,65,933

Indexed cost of acquisition (COA) = ` 9,40,000 × 301/100 = ` 28,29,400

Cost of acquisition is taken as fair market value as on 1.4.2001 = ` 9,40,000
(Actual cost of acquisition is ignored as it is lower than the fair market value)
Indexed Cost of Improvement (COI) is computed as follows:

Particulars Amount (in `)

Construction cost of first floor in 1984-85 Nil
(Expenses incurred before 1.4.2001 are ignored for computing capital gains)
Construction cost of second floor in 2003-04
(Indexed COI = ` 8,05,000 × 301/105) 23,07,667
Renovation expenses of the building in 2013-14 7,69,055
(Indexed COI = ` 5,11,000 × 301/200)
Total Indexed COI 30,76,722

The capital gains on the sale of house property by Mr. Chugh would be taxable @20% in the Assessment
Year 2021-2022.

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Questions
1. What are the rates of income tax chargeable on long-term capital gains?
(Hint: Refer to Sections 112A and 112).
2. How is the cost of acquisition computed if the asset is acquired from a previous owner?
(Hint: Cost to the previous owner or fair market value as on 1.4.2001, at the option of the assessee).

6.8 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. For firms, a capital asset is an asset that has a useful life longer than one year and is not intended
for sale during the normal course of business. Explain the capital asset with its types.
2. Transfer, in relation to capital asset, includes the sale, exchange or relinquishment of the asset.
Discuss.
3. Section 54 of the Income Tax Act provides the seller of a residential property with relief from capital
gains tax. Explain the exemption under section 54 of Income Tax Act.
4. Cost Inflation Index (CII) is a means to measure inflation used in the computation of long-term
capital gains. Describe the cost inflation index.
5. A holding period is the amount of time the investment is held by an investor, or the period between
the purchase and sale of a security. Explain period of holding with example.

6.9 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. According to Section 2(14) of the Income Tax Act, 1961, unless the context otherwise requires, the
term ‘capital asset’ refers to:
 Property of any kind held by an assessee, whether or not connected with his business or
profession;
 Any securities held by a Foreign Institutional Investor (FII), which has invested in such securities
in accordance with the regulations made under the Securities and Exchange Board of India
(SEBI) Act, 1992. Refer to Section Capital Asset
2. Capital gain arises on transfer of capital asset; so, it becomes important to understand what the
meaning of word transfer is. The word transfer occupies a very important place in capital gain,
because if the transaction involving movement of capital asset from one person to another person
is not covered under the definition of transfer there will be no capital gain chargeable to income tax.
Refer to Section Transfer of a Capital Asset
3. Exemptions of Section 54 is applicable to an individual and HUF. It states that any long-term capital
gain arising from the transfer of the residential house property shall be exempted from the capital
gain tax if another residential property is purchased within one year before transfer or two years
after transfer. Refer to Section Transfer of a Capital Asset
4. Cost Inflation Index (CII) is a means to measure inflation used in the computation of long-term
capital gains. Cost inflation takes into account the Consumer Price Index (CPI) for a given year for
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urban non-manual employees (mainly requiring mental efforts) for the preceding year. Refer to
Section Cost Inflation Index
5. For proper tax computation, it is important for a taxpayer to understand the concept of a period of
holding of a capital asset. This is because the tax treatment of capital gains and losses on short- and
long-term capital assets is different. Period of holding refers to the time during which an assessee
holds on to a given capital asset. It is the elapsed time between the initial date of purchase of a
capital asset and the date on which it was sold. Refer to Section Capital Asset

@ 6.10 POST-UNIT READING MATERIAL

 https://resource.cdn.icai.org/65967bos53217cp4u4.pdf

6.11 TOPICS FOR DISCUSSION FORUMS

 Study more about cost inflation index.

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 UNIT

07 Profits and Gains of Business Or

Profession (Section 28 To 37)

Names of Sub-Units

Basis of Charge (Section 28), Specific Deduction (Section 30-36), General Deduction (Section 37), Specific
Disallowances, Compulsory Maintenance of Books of Accounts (Section 44AA), Compulsory Audit of
Books of Accounts (Section 44 AB), Presumptive Scheme of Taxation

Overview

The unit explains the Basis of Charge (Section 28), Specific Deduction (Section 30-36), General Deduction
(Section 37), Specific Disallowances, Compulsory Maintenance of Books of Accounts (Section 44AA),
Compulsory Audit of Books of Accounts (Section 44 AB), Presumptive Scheme of Taxation.

Learning Objectives

In this unit, you will learn to:

 Explain Basis of Charge (Section 28)
 Discuss Specific Deduction (Section 30-36)
 Describe General Deduction (Section 37)
 Summarise Specific Disallowances
 Define Compulsory Maintenance of Books of Accounts (Section 44AA)
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Learning Outcomes

At the end of this unit, you would:

 Discuss Specific Disallowances
 Analyse General Deduction (Section 37)
 Recognise Compulsory Maintenance of Books of Accounts (Section 44AA)
 Interpret Compulsory Audit of Books of Accounts (Section 44 AB)
 Apply Presumptive Scheme of Taxation

7.1 INTRODUCTION
Profits and gains of business or profession are an important part of the total income of an assessee.
This is one of the most important heads of tax collection and, therefore, it is necessary to understand the
terminologies used under various heads.

7.2 BASIS OF CHARGE (SECTION 28)

Basis of charge Section 28 is the charging section of profits and gains of business or profession. The
items of income which are chargeable to tax under the head ‘Profits and Gains of Business or Profession’
include the following as discussed in Table 1:

Table 1: Various Items Chargeable under this Head

Nature of Income Explanation

Profits and gains Any profits and gains arising from any business or profession
carried on by the assessee during the previous year.
Compensation due to or received Any compensatory payment due to or received by a person in
in connection with specified cases relation to termination/modification of his management in
under Section 28(ii) the affairs of an Indian company, termination/modification
of his office in the affairs of an Indian company, termination/
modification of conditions of any contract related to his business,
etc.
Income earned by trade or similar Any income derived by a professional, trade or similar association
association. from some specific services rendered for the members.
Export incentives Export incentives derived by an assessee carrying on an export
business, such as profit on sale of import entitlements, customs
or excise duty repayable as a drawback, cash assistance against
exports, and profit on transfer of duty-free replenishment
certificate.
Benefits or perquisites from Value of benefits or perquisites arising from business or profession,
business or profession whether such perquisites are convertible into money or not.
Interest, bonus, commission, Any interest, bonus, commission, salary or remuneration due to
salary or remuneration received or received by a partner from a firm is taxable in his hands to the
by partner extent it can be claimed as a deduction in the hands of the firm
under Section 40(b).

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Nature of Income Explanation

Sum received under Keyman Any sum received under Keyman Insurance Policy including sums
Insurance Policy allocated by way of bonus.
Sum received on capital asset Any sum, whether received or receivable, in relation to a capital
being discarded or demolished. asset being transferred, demolished, destroyed or discarded, for
which whole expenditure has been allowed as deduction under
Section 35AD
Sum received under an agreement Any sum, whether received or receivable, in respect of an
for not carrying out an activity agreement for not carrying out any activity related to a business
or profession, or for not sharing any know-how, copyright, patent,
commercial right, etc.

Speculation Business
If speculative transactions are carried on by the assessee, which constitute a business, then such
business has to be considered as a distinct and separate business for the purpose of computation of
income under the head ‘Profits and Gains of Business or Profession’. Here, a for sale or purchase of
commodities including shares and stocks is periodically and ultimately settled through modes other
than actual delivery or transfer of such commodities or shares.
Moreover, in case where both speculative and non-speculative transactions are carried out by the
assessee on a composite basis, it is imperative to determine the income or loss from such speculative
business and non-speculative business separately and distinctly.

7.3 SPECIFIC DEDUCTION (SECTION 30-36)

According to Section 29 of the Act, the income from profits and gains of business and profession is
calculated after accounting for allowances/disallowances as per provisions of Sections 30-36. Let us
now study provisions of Sections 30-36
DEDUCTION FOR RENT, RATES, REPAIRS AND INSURANCE OF BUILDING (SECTION 30)
An assessee is allowed a deduction for any amount paid by him in relation to rent, rates, repairs, taxes
and insurance for buildings, provided the buildings are used for the purpose of business or profession.
However, no expenditure is allowed as a deduction if the expenditure is of capital nature.
Where the assessee has occupied the premises as a tenant, then the amount of repair can be claimed as
a deduction only if the assessee has undertaken to bear the cost of such repairs to the premises. If some
part of the premises is sub-let by the assessee, then the amount of deduction under this section would
be limited to rent paid by the assessee as reduced by rent recovered from sub-tenant.
DEDUCTION FOR REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE (SECTION 31)
Section 31 of the Act relates to the deductions in respect of expenses incurred on the repairs and
insurance of machinery, plant and furniture used for the purpose of business or profession. As per this
Section, following deductions are allowed:
 amount spent on current repairs
 amount spent on premium paid with respect to insurance against risk of damage or destruction
 amount paid on account of current repairs shall not include any expenditure in the nature of capital
expenditure

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DEDUCTION FOR DEPRECIATION INCLUDING the CONCEPT OF BLOCK OF ASSETS (SECTION 32)
Section 32 of the Act relates to the deductions in respect of depreciation or diminution or exhaustion in
the value of certain capital assets. Depreciation refers to a decrease in the value of an asset as a result
of normal wear and tear or due to obsolescence. In other words, depreciation means depletion in real
value of assets over a period of time.
As per the Act, there are two methods for calculating the value of depreciation. They are the Straight Line
Method (SLM) and the Written Down Value (WDV) Method. Depreciation can be charged as a percentage
of the value of asset by either of the above two methods. The WDV method is used for depreciation
calculations under the income tax barring the power generation and distribution companies which use
the SL method.
Depreciation under Section 32(1) is mandatory. It means that even if the assessee does not claim
deduction in respect of depreciation, it will still be allowed while calculating the total income of the
assessee. In such a case, the assessing officer must allow depreciation as per the law.
For a thorough understanding of depreciation and its computation,you must be aware of the following
concepts:
(A) Conditions for claiming depreciation
(B) Block of assets [Section 2(11)]
(C) Actual cost [Section 43(1)]
(D) Written Down Value (WDV) [Section 43(6)]
(E) Rates of depreciation [Appendix I (Rule 5)]
(F) Types of depreciation
(G) Unabsorbed depreciation [Sec. 32(2)]

CASES WHERE ADDITIONAL DEPRECIATION IS NOT ALLOWED

 Ships and aircraft
 Second-hand machinery (machinery used earlier by other persons within or outside India)
 Any machinery installed in an office or residence including the guest house
 Any office appliances or road transport vehicles
 Any plant or machinery over which 100% depreciation is allowed

Section 35 provides for deduction in respect of any expenditure of scientific research incurred by the
assessee in relation to his business or profession. Various amounts of deductions allowed under Section
35 are discussed in Table 2:

Table 2: Expenditure on Scientific Research

Nature of
Payment eligible for deduction Deduction allowed
Expenditure

Inhouse Scientific Inhouse scientific research expenditure of 100% of the expenditure is allowed as
Research revenue nature is incurred by the assessee deduction
related to his business

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Nature of
Payment eligible for deduction Deduction allowed
Expenditure
Inhouse scientific research expenditure of 100% of the expenditure is allowed
capital nature is incurred by the assessee as deduction (except expenditure on
related to his business acquisition of land and building)
Expenditure on an approved inhouse 150% of the expenditure is allowed
research and development facility incurred as deduction (except expenditure on
by a company engaged in the business of bio- acquisition of land and building)
technology or manufacturing/production of
an article other than those specified in the
Eleventh Schedule

Contribution to Amount paid by the assessee to an approved 100% of the expenditure is allowed as
Outsiders Indian company for the purpose of scientific deduction
research
Amount paid by the assessee to a notified 100% of the expenditure is allowed as
approved college/research association/ deduction
university/other institutions for the
purpose of social science or statistical
research
Amount paid by the assessee to a notified 150% of the expenditure is allowed as
approved college/ research association/ deduction
university/other institutions for the
purpose of scientific research
Amount paid by the assessee to an approved 150% of the expenditure is allowed as
National Laboratory/IIT/university/other deduction
specified persons for the purpose of scientific
research undertaken under a prescribed
programme

Deductions under Section 36(1)

This Section provides for deductions in respect of certain specific expenses. The items of expenditure and
their corresponding conditions for claiming deductions under Section 36(1) while computing income
from business or profession are discussed in Table 3:

Table 3: Other Deductions

Section Name of Expenses Quantum of Deduction Allowable

36(1) (i) Insurance premium paid against risk of Whole amount is allowable
damage and destruction of stocks or stores
of the business or profession

36(1) (ib) Insurance premium paid by an employer Whole amount is allowable

otherwise than by way of cash to secure
an insurance cover on the health of his
employees

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Section Name of Expenses Quantum of Deduction Allowable

36(1) (ii) Any sum paid by an employer by way of Whole amount is allowable subject to Section
bonus or commission to employees 43B. However, such amount should not have
been otherwise payable as profits or dividends
if it had not been paid as bonus or commission

36(1) (iii) Interest payment on borrowed capital for Whole amount is allowable. However, interest
the purpose of business or profession paid on capital borrowed for acquisition of an
asset for the period beginning from the date of
borrowing of capital to the date on which the
asset was first put to use is not allowed as a
deduction

36(1) (iv) Employer’s contribution by the assessee to Whole amount is allowable subject to Section
Recognised 43B
Provident Fund or approved
superannuation fund

36(1) (v) Bad debts written off as irrecoverable in Whole amount is allowable subject to following
the accounts of the assessee conditions:
1. Debt is incidental to the business of the
assessee
2. It has been taken into account while
computing the business income or represents
money lent in the ordinary business of
banking or money lending
3. It has been written off in the books

7.4 GENERAL DEDUCTION (SECTION 37)

This Section allows for claiming deductions in respect of residuary expenses. To claim deduction under
Section 37(1), following conditions should be satisfied:
 Expenditure should not be of the nature described under Section 30 to 36.
 Expenditure should not be capital expenditure.
 Expenditure should not be assessee’s personal expenditure.
 Expenditure should have been incurred in the previous year.
 Expenditure must have been incurred in respect of business of an assessee.
 Expenditure must not have been incurred on any illegal or prohibited activity.

Expenditure incurred by an assessee on the activities relating to corporate social responsibility referred
to in Section 135 of The Companies Act, 2013 shall not be deemed to be an expenditure incurred by the
assessee for the purposes of the business or profession.

7.5 SPECIFIC DISALLOWANCES

There are certain provisions under the Income Tax Act which hinder an assessee from claiming deduction
of expenses while computing his income from business or profession if certain prescribed conditions are
not fulfilled.

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The relevant sections of disallowance are discussed as follows:

Section 40(a) – Disallowance of expenses for all assesses While computing the business income in the
hands of any assessee, following expenses are not deductible as shown in Table 4:

Table 4: Disallowance of Certain Expenses

Section Nature of Expenses Quantum of Deduction Allowable/

Disallowable
40 (a) (i) Interest, royalty, fees for technical services or other Whole amount is disallowable. However,
sums payable outside India or to a non-corporate non- such sum shall be allowed in the previous
resident/foreign company in India, on which TDS has year in which such TDS is paid subsequently
not been deducted or after deduction has not been
paid within the due date specified under Section 139(1)
40 (a) (ia) Any sum payable to a resident in India, on which TDS 30% of such amount is disallowable.
has not been deducted or after deduction has not been However, 30% of such sum shall be allowed
paid within the due date specified under Section 139(1) in the previous year in which such TDS is
paid subsequently
40 (a) (ii) Any sum paid on account of income tax on profits and Whole amount is Disallowable
gains of business or profession
40 (a) (iii) Any amount chargeable under the head ‘Salaries’ Whole amount is disallowable
payable outside India or to a non-resident in India, on
which TDS has neither been deducted nor paid

Section 40(b) – Disallowance in case of Partnership Firms or LLPs

While computing the business income of a partnership firm or LLP, following amounts are inadmissible
and not allowed to be claimed as a deduction in the hands of the firm:
 Payment of interest to a partner is not deductible. However, deduction shall be allowed only if all the
following conditions are satisfied:
 It is authorised by and in accordance with the terms of partnership deed.
 It relates to period falling after the date of partnership deed.
 The amount of admissible deduction is restricted to the amount calculated @ 12% simple interest
p.a.
Payment of salary, commission, bonus or any remuneration to a partner is not deductible. However,
deduction shall be allowed only if all the following conditions are satisfied:
 It is authorised by and in accordance with the terms of partnership deed.
 It relates to period falling after the date of partnership deed.
 The payment is made to a working partner.
 The amount of admissible deduction of remuneration is restricted to the below-mentioned prescribed
amounts,

Section 40(ba) – Disallowance in case of Association of Persons (AOP) or Body of Individuals (BOI)
While computing the business income of AOP or BOI, any interest, salary, commission, remuneration or
bonus paid by AOP or BOI to its members shall not be allowed as a deduction.

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Section 40A(2) – Disallowance of unreasonable expenditure

If any expenditure has been incurred by an assessee and in respect of which payment is made to a related
person or entity, then such payment shall be disallowed under Section 40A(2) to the extent to which it is
considered excessive or unreasonable by the Assessing Officer. In other words, any payment made by
an assessee for goods or services rendered or facilities provided by related parties is not allowed as a
deduction subject to the extent that the assessing officer considers it unfair.

7.6 COMPULSORY MAINTENANCE OF BOOKS OF ACCOUNTS (SECTION 44AA)

As per the Income-tax Act, a person who takes up in business activity or profession is mandated to
maintain proper books of account and further, the proprietor has to get the accounts audited. To offer
reprieve to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive
taxation scheme under sections 44AA.
For the purpose of section 44AA and Rule 6F legal, specified professions including medical, engineering,
architectural, accountancy, technical consultancy, or interior decoration or any other notified profession
[i.e., authorised representative, film artist, company secretary and information technology].
If yearly gross receipts (of any one or more of previous 3 years) do not surpass Rs. 1,50,000, the taxpayer
is mandated to maintain books of account as may enable the Assessing Officer to calculate his/her
taxable income under the Income-tax Act.
If, however, gross receipts are more than Rs. 1,50,000 (of all preceding 3 years), the taxpayer will have
to maintain books of account prescribed by Rule 6F [i.e., cash book, journal, ledger, copies of bills issued
by the taxpayer, etc.
As per Rule 6F(1), any person engaged in legal, medical, engineering or architectural profession or the
profession of accountancy or technical consultancy or interior decoration or authorised representative
or film artist is mandated to maintain prescribed books of account and documents.
The prescribed Books Of Account and other documents under Rule 6F(2) are as follows:
 a cash book
 a journal, if the accounts are maintained according to the mercantile system of accounting
 a ledger
 carbon copies of bills, whether machine numbered or otherwise serially numbered wherever such
bills are issued by the person and carbon copies or counter foils of machine numbered or otherwise
serially numbered receipts issued by him excepting if the bill or receipts of an amount less than Rs.
25

7.7 COMPULSORY AUDIT OF BOOKS OF ACCOUNTS (SECTION 44 AB)

Section 44AB pertains to provisions relating to tax audit applicable to specified assessees. A tax audit
ensures that the assessee has properly maintained his books of accounts which truly reflect the income
of the tax-payer and has also complied with income tax requirements, such as filing of return, accurate
specification of deductions and claims, etc.
As per section 44AB, it is requisite for a person to get their accounts audited. A person carrying on
business, if his/her total sales, turnover or gross receipts (as the case may be) in business for the year is
higher than Rs. 1 crore. This provision is not applicable to the person, who opts for presumptive taxation
scheme under section 44AD and his total sales or turnover does not exceeds Rs. 2 crores.

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7.8 PRESUMPTIVE SCHEME OF TAXATION

Presumptive scheme of taxation enables a person to compute tax on an estimated income or profit.
The presumptive taxation scheme has been framed under Sections 44AE, Sections 44AD, and Sections
44ADA of the Income Tax Act. A person or business assimilating this scheme is taxed at an assumed rate
of income rather than on the actual income.
As per the Income-tax Act, a person engaged in business or profession is required to maintain regular
books of account and further, he has to get his accounts audited. To give relief to small taxpayers from
this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections
44AD, 44ADA and 44AE. A person adopting the presumptive taxation scheme can declare income at a
prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also
from getting the accounts audited.
The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged
in any business (except the business of plying, hiring or leasing of goods carriages referred to in section
44AE).
Under Section 44 AD, the following can benefit from this scheme:
 Resident Individual
 Resident HUF
 Resident Partnership Firm (does not include LLP Firm)

Conclusion 7.9 CONCLUSION

 Under Sections 28 to 44DB of the Income Tax Act, 1961, we will discuss the chargeability of profits
and gains of business or profession and the scope of income under this head.
 Profits and gains of business or profession are an important part of the total income of an assessee.
 This is one of the most important heads of tax collection and, therefore, it is necessary to understand
the terminologies used under various head.
 Value of benefits or perquisites arising from business or profession, whether such perquisites are
convertible into money or not.
 Speculative transactions are carried on by the assessee, which constitute a business, then such
business has to be considered as a distinct and separate business for the purpose of computation of
income under the head ‘Profits and Gains of Business or Profession’.
 An assessee is allowed a deduction for any amount paid by him in relation to rent, rates, repairs,
taxes and insurance for buildings, provided the buildings are used for the purpose of business or
profession. However, no expenditure is allowed as a deduction if the expenditure is of capital nature.
 Depreciation refers to a decrease in the value of an asset as a result of normal wear and tear or due
to obsolescence. In other words, depreciation means depletion in real value of assets over a period
of time.
 Depreciation can be charged as a percentage of the value of asset by either of the above two methods.
 There are certain provisions under the Income Tax Act which hinder an assessee from claiming
deduction of expenses while computing his income from business or profession if certain prescribed
conditions are not fulfilled.

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7.10 GLOSSARY

 Profits and gains: Any profits and gains arising from any business or profession carried on by the
assessee during the previous year.
 Export incentives: An assessee carrying on an export business, such as profit on sale of import
entitlements, customs or excise duty repayable as a drawback, cash assistance against exports, and
profit on transfer of duty-free replenishment certificate
 Speculative transactions: These are carried on by the assessee, which constitute a business, then
such business has to be considered as a distinct and separate business for the purpose of computation
of income under the head ‘Profits and Gains of Business or Profession’
 Section 32 of the Act: Deductions in respect of depreciation or diminution or exhaustion in the value
of certain capital assets
 Depreciation: A decrease in the value of an asset as a result of normal wear and tear or due to
obsolescence.

7.11 CASE STUDY: INCOME FROM OTHER SOURCES

Case Objective
This Case Study discusses the income earned by Mohan from other sources.

Mohan is asalaried personnel and works for acompany which provides services to different organisations
in different capacities. He earns a lot from dividends of his past investments. Apart from this, he earns
from gambling, lotteries, betting and horse races. This means that his income from other sources is very
high.
Following are the details of the income of Mohan from other sources:
1. He earns ` 8 lakhs from job.
2. He gets `3 lakhs as rent from his property.
3. He earns around ` 9 lakhs as dividends.
4. He won a lottery and earned around ` 3 lakhs.
5. He won ` 3 lakhs by winning a bet in horse race.
6. He received a gift from his father which is an envelope and carries around ` 50,000.
7. He received ` 24,000 as gift from his friends on his birthday.
8. His grandfather gifted him ` 2,52,000.
9. He received ` 35,000 as gift on his marriage anniversary.
10. He earned ` 47,000 from interest earned from securities.

Questions
1. Ascertain the total amount of gifts charged to tax.
(Hint: Exclude salary, house property, dividend exempt under Section 10(34), gifts received from
relatives, lottery income, horse race income, and interest income. The remaining value of gifts, if
aggregate value exceeds ` 50,000)

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2. Out of the total income stated above, which income will come under the head ‘Income from Other
Sources’?
(Hint: Value of taxable gifts, lottery)
3. What is the profession of Mohan?
(Hint: Mohan is a salaried personnel and works for a company)
4. What is the role of the company where Mohan works?
(Hint: It provides services to other organisations in different capacities.)
5. Apart from salary, which is the predominant source of income for Mohan?
(Hint: From dividends of his past investments.)

7.12 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Various items of income chargeable to tax as income under the head ‘profits and gains of business
of profession’ are mentioned in Section 28. Explain various charge under section 28.
2. Speculative transaction means a transaction in which a contract for the purchase or sales of any
commodity including stocks and shares is periodically or ultimately settled otherwise than by the
actual delivery or transfer of the commodity or scrips [section 43(5)]. Discuss.
3. Section 30 allows deduction in respect of the rent, rates, taxes, repairs and insurance of buildings
used by the assessee for the purpose of his business or profession. Elucidate on deduction for rent,
rates, repairs and insurance of building.
4. There are some cases where depreciation is not allowed. Discuss those cases.
5. The Income Tax Act states certain circumstances where if the tax has not been deducted appropriately,
such expenses are expressly disallowed. Write a brief note on specific disallowances.

7.13 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1.
Profits and gains Any profits and gains arising from any business or profession
carried on by the assessee during the previous year.
Compensation due to or Any compensatory payment due to or received by a person in
received in connection relation to termination/modification of his management in the
with specified cases under affairs of an Indian company, termination/modification of his office
Section 28(ii) in the affairs of an Indian company, termination/modification of
conditions of any contract related to his business, etc.

Refer to Section Basis of Charge (Section 28)

2. If speculative transactions are carried on by the assessee, which constitute a business, then such
business has to be considered as a distinct and separate business for the purpose of computation
of income under the head ‘Profits and Gains of Business or Profession’. Here, for sale or purchase of
commodities including shares and stocks is periodically and ultimately settled through modes other

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than actual delivery or transfer of such commodities or shares. Refer to Section Basis of Charge
(Section 28)
3. An assessee is allowed a deduction for any amount paid by him in relation to rent, rates, repairs,
taxes and insurance for buildings, provided the buildings are used for the purpose of business or
profession. However, no expenditure is allowed as a deduction if the expenditure is of capital nature.
Refer to Section Specific Deduction (Section 30-36)
4. Cases where additional depreciation is not allowed:
 Ships and aircraft
 Second-hand machinery (machinery used earlier by other persons within or outside India)
 Any machinery installed in an office or residence including the guest house
 Any office appliances or road transport vehicles
 Any plant or machinery over which 100% depreciation is allowed

Refer to Section Specific Deduction (Section 30-36)

5. There are certain provisions under the Income Tax Act which hinder an assessee from claiming
deduction of expenses while computing his income from business or profession if certain prescribed
conditions are not fulfilled. Refer to Section Specific Disallowances

@ 7.14 POST-UNIT READING MATERIAL

 https://resource.cdn.icai.org/65966bos53217cp4u3.pdf

7.15 TOPICS FOR DISCUSSION FORUMS

 Using the Internet, find out the share contributed by businesses/professions towards the national
income of India. Include only the latest relevant data.

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 UNIT

08 Income From Other Sources

(Section 56 To 59)

Names of Sub-Units

Incomes Taxable under the head Income from Other Sources, Incomes Taxable under this head if
not taxable under PGBP. Taxation of Dividends, Casual Income Section 56(2) (ib), Interest Received
on Securities Section 56 (2)(id), Gross up Concept, Taxation of Gift Section 56 (2)(x), Interest on
Compensation for Compulsory Acquisition of L&B [Section 56 (viii)], Permissible Deductions under
IFOS (Section 57), Inadmissible Deductions from IFOS (Section 58)

Overview

The chapter will begin by explaining about incomes taxable under the head income from other sources
along with incomes taxable under this head if not taxable under PGBP. The chapter will also shed
light on taxation of Gift Section 56 (2)(x). Towards the end, the chapter will shed light on permissible
deductions under IFOS (Section 57) and inadmissible deductions from IFOS (Section 58).

Learning Objectives

In this unit, you will learn to:

 Summarise incomes taxable under the head income from other sources
 Express incomes taxable under this head if not taxable under PGBP
 Outline taxation of dividends
 State Casual Income Section 56(2) (ib)
 Assess interest received on Securities Section 56 (2)(id)
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Learning Outcomes

At the end of this unit, you would:

 Describe gross up concept
 Discuss taxation of Gift Section 56 (2)(x)
 Elucidate on interest on compensation for Compulsory Acquisition of L&B [Section 56 (viii)]
 Identify permissible deductions under IFOS (Section 57)
 Interpret inadmissible deductions from IFOS (Section 58)

8.1 INTRODUCTION
Income chargeable under Income-tax Act, which does not specifically come under scope for assessment
under any of the heads discussed earlier, must be charged to tax as “income from other sources”. This
head is thus a residuary head of income under which income can be computed only after deciding
whether the particular item of income is otherwise assessable under any of the first four heads.
In addition to the taxation of income not covered by the other heads, Section 56(2) specifically provides
certain items of incomes as being chargeable to tax under the head in every case. The provisions for
computation of income from other sources are covered under Sections 56 to 59.
While section 56 defines the scope of income chargeable under this head, Sections 57 and 58specify the
basis of computation of such income.

8.2 INCOMES TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES
Section 56 of the Income Tax Act relates to the provisions of ‘Income from Other Sources’. Under
Section 56 (1) of the Act, income of every kind which is not to be excluded from the total income shall be
chargeable to income tax under the head ‘Income from Other Sources’, if it is not charged to income tax
under any other head of income which includes incomes from salaries, house property, capital gains,
and business and profession. Income from other sources is a residuary head of income, i.e., income
which is not taxable under any other head will be taxable under this particular head.
Section 56(2) specifically provides certain items of incomes as being chargeable to tax under the head in
every case. Such incomes are as follows:
Dividends [Section 56(2)(i)]: Current profit would be part of accumulated profits but subsidiary on
capital account cannot be treated as accumulated profits.
Keyman Insurance policy: Amount received under a Keyman insurance Policy, including bonus on each
Policy, if it is not taxable under any other head of income.
Winnings from lotteries [Section 56(2)(ib)]: Any winnings from lotteries, crossword puzzles, races
including horse races, card games and other games of any sort or from gambling or betting of any
form or nature
Following incomes shall be specifically charged to tax under the head ‘Income from other sources’:
Dividend Income {Section 56(2)(i)}: Dividends are chargeable to tax under the head ‘Income from Other
Sources’. The tax ability or otherwise of dividend income received by a shareholder is based upon the
provisions explained in Table 1:

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Table 1: Taxability Of Dividend Income in the Hands of the Shareholder

(A) Dividend received from a foreign company Fully taxable
(B) Taxability of Dividend received from a domestic company
Type of Dividend Taxability Criteria
1. Deemed dividend under Section 2(22)(e) Fully exempt under Section 10(34)
2. In case of Actual Dividend received; and If the aggregate dividend does Fully exempt under
Deemed Dividend under Section 2(22)(a) to not exceed ` 10 lakhs during the Section 10(34)
2(22)(d) previous year
If the aggregate dividend exceeds ` 10 lakhs exempt
` 10 lakhs during the previous under Section 10(34);
year and remaining amount
taxable under section
115BBDA

For this purpose, the term ‘dividend’ is explained as follows:

 Section 2(22) (a): Distribution of accumulated profits by a company to its shareholders, entailing the
release of all or some of the company’s assets, is deemed as a dividend in the hands ofthe shareholder.
 Section 2(22) (b): Distribution of debentures/deposit certificates by a company to its shareholders
or distribution of bonus shares to preference shareholders, is deemed as a dividend in the hands of
the shareholder to the extent of accumulated profits of the company.
 Section 2(22) (c): Distribution made by a company to its shareholders on its liquidation is deemed
as a dividend in the hands of the shareholder to the extent of accumulated profits of the company
immediately prior to liquidation.
 Section 2(22) (d): Distribution made by a company to its shareholders on reduction of its share
capital is deemed as a dividend in the hands of the shareholder to the extent of accumulated
 profits of the company.
 Section 2(22) (e): Any advance or loan payment made by a closely held company to a beneficial
shareholder holding 10% or more of equity shares is deemed as a dividend in the hands of the
shareholder to the extent of the accumulated profits of the company.

8.2.1 INCOMES TAXABLE UNDER THIS HEAD IF NOT TAXABLE UNDER PGBP
The provisions of this section apply only in the case of a property which is of the nature of capital asset
in the hands of the recipient and not stock-in-trade/consumables/raw materials of the business of
the recipient. Hence, only transfer of capital assets, whether without consideration or for inadequate
consideration, is covered under the provisions of this Section.
The below-mentioned incomes shall be taxable under the head ‘Income from Other Sources’ if and only
if they are not taxable under the head ‘Profits and Gains of Business or Profession’:
 Sums received by employees from their employers as contributions to provident funds,
superannuation funds, or other employee welfare funds.
 Income received from letting out of the plant, machinery or furniture on hire, whether with or
without building
 Interest on securities

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The following incomes must be classified under Profits and Gains of Business, even when a business was
not conducted by the assessee during the past financial year:
 Recovery against any loss, expenditure or trading liability earlier allowed as a deduction.
 Balancing charge in case of electricity companies.
 Sale of a capital asset which was used for scientific research.
 Recovery against bad debts.
 Any amount which is withdrawn from a Special Reserve.
 Receipt of discontinued business in the case of assessees who are making use of a cash system of
accounting.

8.3 TAXATION OF DIVIDENDS

Section 10(34) exempts dividend (as defined in Section 115-O) from tax in the hands of recipients thereof.
Section 115-O, the main operative provision in the newly introduced however, calls upon a company
declaring or distributing dividend to pay 15% plus surcharge plus Education & Secondary and Higher
Education Cess by way of tax on distributed profits in addition to what it is liable by way of tax on its
income in the normal course.
This tax on distribution paid by a company is not available for deduction under any provision of the Act.
Dividend for the purpose of Section 115-O and by extension for the purpose of Section 10(33) is the same
as defined in Section 2(22) except that clause (e) thereof shall not be treated as dividend for both these
purposes.
The scheme of taxation of dividend can be summarised as under:
 Dividends or any other income distributed by UTI or a foreign company, arechargeable to tax under
this head.
 In respect of dividend under clause (e) of Section 2(22) the status quo continues i.e.the specified
persons receiving loans and advances from a closely-held companywill continue to pay tax as
earlier on these receipts and the company giving suchloans and advances will not be liable to tax
like it was earlier. It may be pointed outthat tax liability under clause (e) of Section 2(22) would be
extremely unlikely nowthat there is no need for the dominant shareholders of closely-held companies
tocombine dividend with the character of loan or advance to avoid tax liability becausedividend is
no longer taxable in the hands of shareholders.

8.4 CASUAL INCOME SECTION 56(2) (IB)

Casual income refers to anyincome earned by way of winnings from lotteries, races includinghorse races,
crossword puzzles, betting, gambling, card games,such other games, etc. These incomes are chargeable
to tax underthe head ‘Income from other sources’. Section 115BB is applicableto casual income, wherein
such incomes are taxed at a flat rateof 30% plus surcharge, if any, plus health and education cess of4%.
No allowance, expenditure, loss, or deductions under ChapterVI-A can be allowed/set off from casual
income. Also, the unexhaustedbasic exemption limit is also not permitted to be adjustedagainst such
income.

8.5 INTEREST RECEIVED ON SECURITIES SECTION 56 (2)(ID)

Interest received on Securities Section 56 (2)(Id), is chargeable under the head “income from other
sources”, if such income is not chargeable to income-tax under the head, “Profits and Gains of Business

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or Profession”. Any reasonable sum paid by way of commission or remuneration to a banker or any
other person for the purpose of realising such interest on behalf of the assessee. Interest on money
borrowed for investment in securities can be claimed as a deduction.
For example, during the previous year the assessee withdrew a fixed deposit before maturity and had
to refund ` 3,500 to the bank. The amount withdrawn was invested in shares. It was held byKarnataka
High Court under the earlier regime that the amount paid to the Bank was anexpenditure laid out wholly
and exclusively for the purpose of earning the dividendincome and deduction thereof while computing
income from dividend is in order.
Interest received on Securities Section 56 (2)(Id), infers to:
 Interest on any security of the Central Government or a State Government;
 Interest on debentures or other securities for money issued by, or on behalf of a local authority or a
company or a corporation established by Central, State or Provincial Act.
 Securities may be divided into following categories:
 Securities issued by Central/State Governments;
 Debentures/bonds issued by a local authority;
 Debenture/bonds issued by companies;
 Debenture/bonds issued by a corporation established by a Central, State or Provincial Act i.e.
autonomous and statutory corporations.

8.6 GROSS UP CONCEPT

Gross up is the additional amount added to the payment, used to pay the income tax that the beneficiary
must pay at the time of payment.
A process to compute the gross amount of a payment i.e., the before-tax value of a payment where only
the net amount (amount after tax) is known or to increase the net amount of a payment to reach the
gross amount.
Gross up is when an organisation gives an offer to the employee, that the gross amount that will be
owed in taxes. This additional gross income enables the employee to allay the tax liability associated
with relocation expenses. For example, if the relocation costs include 5,000taxable dollars, the employer
may pay a total of 7,500so that the employee gets the full benefit of the 5,000 as the estimated taxes of
2,500 are paid by the employer.
Total compensation appears most frequently in executive compensation plans. For example, the
company may agree to pay executive relocation costs and the full amount to offset the expected income
tax that must be paid when paying salaries.

8.7 TAXATION OF GIFT SECTION 56 (2)(X)

Gift is usually used to convert black money into white money. To stop practice of converting black money
into white money Government has come up with Section 56(2)(x). This section deals with law of taxation
of gift.
This article explains Income Tax Treatment of Immovable Property Received as Gift Without
Consideration or for Inadequate Consideration, Any property other than immovable property received
Without consideration or For Inadequate Consideration and all those gifts which are fully exempt under
Income Tax under Section 56(2)(X)

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Taxation of Gift Section 56(2)(x) is applicable only when gifts are received by Individual and Hindu
Undivided Family. Donor or Donee may be Resident or non Resident. Taxation of Gift Section 56 (2)(x)
states that:
 If aggregate value is less than 50000 than nothing will be taxable. If value exceeds 50,000, the
whole amount will be taxable.
 Where any person receives, in any preceding year, from any person or persons any property
apart from immovable property without consideration, the aggregate fair market value of which
supersedes fifty thousand rupees, the whole of the aggregate fair market value of such property will
be taxable in the hands of receiver.

8.8 INTEREST ON COMPENSATION FOR COMPULSORY ACQUISITION OF L&B [SECTION 56

Any interest income received on compensation or enhanced compensation payable by the Government
on compulsory acquisition of land of the assessee shall be taxed under the head ‘Income from Other
Sources’. Such interest income shall be deemed to be the income in the year of receipt irrespective of the
method of accounting followed by the assessee.

8.9 PERMISSIBLE DEDUCTIONS UNDER IFOS (SECTION 57)

Permissible deduction under ‘Income from Other Sources’ section 57is computed after making the
following deductions:
 In the case of dividend income (and interest on securities: any reasonable sum paid by way of
remuneration or commission for the purpose of realising dividend or interest.
 2. In the case of income in the nature of family pension:
 ` 15,000 or
 33 1/3% (33.33%) of such income,whichever is lower.
 In the case of income from machinery, plant or furniture let on hire:
 repairs to building [section 30(a)(ii)]
 current repairs to machinery, plant or furniture and insurance premium [section 31]
 depreciation on building, machinery, plant or furniture [section 32]
 unabsorbed depreciation [section 32(2)].
 Any other expenditure (not being a capital expenditure) expended wholly and exclusively for the
purpose of earning of such income.

The income under the head ‘Income from Other Sources’ is calculated after making the deductions as
given in Table 2:

Table 2: Permissible deduction under Income from other source Section 57

S. No. Particulars Deduction(s) allowable

1. Income from recovery from employees as the Amount to the extent the contribution is remitted
contribution to provident fund, superannuation prior to the due date under different respective
fund, etc. Acts as per the provisions of Section36(1)(va)

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S. No. Particulars Deduction(s) allowable

2. Income from dividends (except dividends under Any amount reasonably paid to a banker or other
Section 115-O on which corporate dividend tax is person as remuneration or commission
leviable) or interest income on securities
3. Income received from letting out of the plant, Insurance premium paid
machinery or furniture on hire, whether with or Depreciation or unabsorbed depreciation
without building
Amount paid on current repairs to plant,
machinery, furniture,
4. Family pension received Least of the following:
15,000
33-1/3% of family pension received
5. Any interest income on compensation or 50% of interest income
enhanced compensation received
6. Any other expenditure (except that of capital
nature) incurred wholly and exclusively for the
purpose of earning such income

8.10 INADMISSIBLE DEDUCTIONS FROM IFOS (SECTION 58)

Inadmissible deduction from ‘Income from Other Sources’ under section 58 of an assessee are discussed
in Table 3:

Table 3: Inadmissible Deductions from IFOS (SECTION 58)

S. No. Deductions not allowable

1. Personal expenses incurred by an assessee
2. An interest chargeable under the Act and payable outside India, on which tax has not been deducted
at source or paid
3. A payment chargeable under the ‘Salaries’ and payable outside India, on which tax has not been
deducted at source or paid
4. Payment of any expense made to a related person to the extent to which it is unreasonable or excessive
from its Fair Market Value (FMV) on consideration by the Assessing Officer
5. Payment of any expense made to a person otherwise than by draft/account-payee cheque/ECS through
a bank account, if the aggregate payment exceeds ` 10,000 in a day
6. Any expense connected to income or earnings from lotteries,races including horse races, crossword
puzzles, card games,gambling or other games of such nature
7. 30% of any sum or expenditure payable to a resident, if the tax on it deductible at source, has not been
deducted or has been deducted but not paid on or before the due date specified under Section 139(1).

Conclusion 8.11 CONCLUSION

 Income chargeable under Income-tax Act, which does not specifically come under scope for
assessment under any of the heads discussed earlier, must be charged to tax as “income from other
sources”.

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 In addition to the taxation of income not covered by the other heads, Section 56(2) specifically
provides certain items of incomes as being chargeable to tax under the head in every case.
 While section 56 defines the scope of income chargeable under this head, Sections 57 and 58 specify
the basis of computation of such income.
 Section 56 of the Income Tax Act relates to the provisions of ‘Income from Other Sources’.
 Under Section 56 (1) of the Act, income of every kind which is not to be excluded from the total
income shall be chargeable to income tax under the head ‘Income from Other Sources’,
 Dividends [Section 56(2)(i)]: Current profit would be part of accumulated profits but subsidiary on
capital account cannot be treated as accumulated profits.
 Keyman Insurance policy: Amount received under a Keyman insurance Policy, including bonus on
each Policy, if it is not taxable under any other head of income.
 Section 2(22)(d) distribution made by a company to its shareholders on reduction of its share capital
is deemed as a dividend in the hands of the shareholder to the extent of accumulated profits of the
company.
 The provisions of this section apply only in case of a property which is of the nature of capital asset in
the hands of the recipient and not stock-in-trade/consumables/raw materials of the business of the
recipient. Hence, only transfer of capital assets, whether without consideration or for inadequate
consideration, is covered under the provisions of this Section.
 Casual income refers to any income earned by way of winnings from lotteries, races including horse
races, crossword puzzles, betting, gambling, card games, such other games, etc.
 Interest received on Securities Section 56 (2)(Id), is chargeable under the head “income from other
sources”, if such income is not chargeable to income-tax under the head, “Profits and Gains of
Business or Profession”.
 Any reasonable sum paid by way of commission or remuneration to a banker or any other person
for the purpose of realising such interest on behalf of the assessee. Interest on money borrowed for
investment in securities can be claimed as a deduction.

8.12 GLOSSARY

 Assessee: An individual who is liable to pay taxes for himself/ herself or on behalf of somebody else.
 Dividends: An amount of money paid on a regular basis by a company to its shareholders out of its
profits
 Fair market value: An estimate of the market value of a property on the basis of a willing,
knowledgeable and unpressured buyer
 Hindu Undivided Family (HUF): A family including all people lineally descended from a common
ancestor, which includes wives and unmarried daughters
 Immovable property: An immovable object or an item of property that cannot be moved without
altering or destroying it

8.13 CASE STUDY: COMPUTATION OF DEDUCTIONS FROM TOTAL INCOME

Case Objective
This Case Study discusses the computation of deductions under Chapter VI-A.

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During the previous year 2020-2021, Mr XY, a resident individual aged 63 years, has earned an income
of 1,48,000 from his business/profession and gross lottery income of 1,10,000. The interest earned by
him on fixed deposits with banks was 55,000. He had also made an investment of 1,50,000 in the Public
Provident Fund account during the year.
Mr XY seeks help from his tax accountant to determine the amount of total deduction eligible under
Chapter VI-A for computation of total income for tax purposes. The tax accountant computes deductions
as follows:

Particulars Workings (in) Amount(in)

Profits and gains of business or profession 1,48,000
Income from Other Sources
1. Lottery Income 55,000
2. Interest on Fixed Deposits 148,000

Gross Total Income

Less: Deductions allowed under Chapter VI-A 150,000 3,13,000
1. Deduction under Section 80C Amount contributed to Public Provident Fund 50,000
2. Deduction under Section 80TTB Interest on deposits with banks Amount of 2,00,000 2,03,000
deductions restricted to

The maximum deduction allowed under Section 80C is 1,50,000of sums paid or deposited to recognised
funds. The deduction allowed under Section 80TTB to resident senior citizens is the amount of actual
interest earned on bank deposits or 50,000,whichever is lower.
Although the eligible value for deduction amounts to 2,00,000however, deductions under Chapter VI-A
cannot be more than the gross total income exclusive of long-term capital gains under
Section 112/112A, short-term capital gains under Section 111A,and lottery winnings.
Thus, the amount of maximum permissible deductions under
Chapter VI-A = 3,13,000 – 1,10,000 = 2,03,000
The taxable income of Mr XY for the previous year 2020-2021amounts to 1,10,000. Since his total
income falls within the basic exemption limit of 3,00,000, he does not fall within the tax bracket for the
Assessment Year 2021-2022.

Questions
1. Which sums are eligible for claiming a deduction under Section 80C?
(Hint: Contribution to specific funds, Refer to Section 80C)
2. Who are eligible for claiming a deduction under Section 80TTB?
(Hint: Resident senior citizens, Refer to Section 80TTB)
3. What is the taxable amount in the aforesaid study?
(Hint: The amount of maximum permissible deductions under Chapter VI-A is = `3,13,000 – `1,10,000
= 2,03,000)
4. What is the amount of interest received from bank by Mr. XY?
(Hint: The interest earned by him on fixed deposits with banks was `55,000.)

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5. Was MR. XY income taxable in previous year?

(Hint: Since his total income falls within the basic exemption limit of `3,00,000, he does not fall
within the tax.)

8.14 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Shed light on Section 56 of the Income Tax Act.
2. Explain items of incomes as being chargeable to tax under the head in every case.
3. Income taxable under the head income from other sources (if not taxable under PGBP) include sums
received by employees from their employers as contributions to provident funds, superannuation
funds, or other employee welfare funds. Discuss.
4. Dividend usually refers to the distribution of profits by a company to its shareholders. Examine
taxation of dividends.
5. Income, by way of interest on securities, is chargeable under the head “income from other sources”.
Evaluate interest received on securities Section 56 (2)(ID).

8.15 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints For Essay Type Questions

1. Section 56 of the Income Tax Act relates to the provisions of ‘Income from Other Sources’. Under
Section 56 (1) of the Act, income of every kind which is not to be excluded from the total income shall
be chargeable to income tax under the head ‘Income from Other Sources’. Refer to Section Incomes
Taxable Under the Head Income from Other Sources
2. Section 56(2) specifically provides certain items of incomes as being chargeable to tax under the
head in every case. Such incomes are dividends and Keyman Insurance policy. Refer to Section
Incomes Taxable Under the Head Income from Other Sources
3. The provisions of this section apply only in case of a property which is of the nature of capital asset
in the hands of the recipient and not stock-in-trade/consumables/raw materials of the business of
the recipient. Refer to Section Incomes Taxable Under the Head Income from Other Sources
4. The scheme of taxation of dividend can be summarised as under:
 Dividends or any other income distributed by UTI or a foreign company, are chargeable to tax
under this head.
 In respect of dividend under clause (e) of Section 2(22) the status quo continues i.e. the specified
persons receiving loans and advances from a closely-held company will continue to pay tax as
earlier on these receipts and the company giving such loans and advances will not be liable to
tax like it was earlier.
Refer to Section Taxation of Dividends
5. Interest received on Securities Section 56 (2)(Id), is chargeable under the head “income from other
sources”, if such income is not chargeable to income-tax under the head, “Profits and Gains of
Business or Profession”. Any reasonable sum paid by way of commission or remuneration to a
banker or any other person for the purpose of realising such interest on behalf of the assesse. Refer
to Section Interest Received on Securities Section 56 (2)(Id)
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@ 8.16 POST-UNIT READING MATERIAL

 https://resource.cdn.icai.org/65968bos53217cp4u5.pdf

8.17 TOPICS FOR DISCUSSION FORUMS

 Read all the sub-sections of Section 56 and make a brief presentation on various sums chargeable to
tax under the head ‘Incomefrom Other Sources’.

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 UNIT

09 Total Income Deduction from Gross

Total Income U/C VI-A

Names of Sub-Units

Specified Investment (Section 80C) Pension Fund of Insurance Co. (Section 80 CCC) Contribution to New
Pension Scheme (Section 80CCD) Health Insurance (Section 80D) Medical Treatment of Handicapped
Dependent Relative (Section 80 DD Treatment of Disease (Section 80DDB) Interest on Education Loan
(Section 80 E) EE Interest on Housing Loan (Section 80) EA Interest on Electric Vehicle Loan (Section 80)
Donation (Section 80G) Deduction for Interest (Section 80TTA/80TTB)

Overview
The unit begins by shedding light on Specified Investment (Section 80C), Pension Fund of Insurance Co.
(Section 80 CCC), Contribution to New Pension Scheme (Section 80CCD) and Health Insurance (Section
80D). The unit will also delve into Treatment of Disease (Section 80DDB), Interest on Education Loan
(Section 80 E) EE Interest on Housing Loan (Section 80), EA Interest on Electric Vehicle Loan (Section
80), Donation (Section 80G) and Deduction for Interest (Section 80TTA/80TTB)

Learning Objectives

In this unit, you will learn to:

 Summarise Specified Investment (Section 80C)
 Express Pension Fund of Insurance Co. (Section 80 CCC)
 Outline Contribution to New Pension Scheme (Section 80CCD)
 State Health Insurance (Section 80D)
 Medical Treatment of Handicapped Dependent Relative (Section 80 DD)
 Assess Treatment of Disease (Section 80DDB)
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Learning Outcomes

At the end of this unit, you would:

 Assess Interest on Education Loan (Section 80 E)
 Examine Interest on Housing Loan (Section 80)
 Elucidate on EA Interest on Electric Vehicle Loan (Section 80)
 Identify Donation (Section 80G)
 Interpret Deduction for Interest (Section 80TTA/80TTB)

9.1 INTRODUCTION
In a previous financial year, whatever income you earn under the five income heads is summed up to
arrive at the Gross Taxable Income, which is chargeable to income tax. However, to compute the net
taxable income of an assessee, certain deductions are applicable on which income tax is not chargeable.
Tax deductions help an assessee reduce his or her taxable income and decrease the overall tax liability
to save taxes. The amount of deduction, however, varies with the type of tax deduction claimed by an
assessee.

9.2 SPECIFIED INVESTMENT (SECTION 80C)

Deduction under Section 80C is allowed to an individual or a HUF for making certain payments or
contributions in respect of life insurance premium, specified term deposits, provident fund, etc. The
eligibility and conditions for claiming deductions under this Section are as discussed in Table 1:

Table 1: Specified investment deduction under Section 80C

Eligible Amount of Permissible

Conditions for Claiming Deduction
Assessee Deduction from GTI
Individual Deduction is available in respect of some specified investments made The amount of deduction
or HUF by an individual or an HUF during the previous year. Some of the is equal to the sums paid
investments which qualify for claiming deduction under this section or deposited subject to
are as follows: the maximum limit of
 Payment of life insurance premium on the life of specified persons, ` 1,50,000.
i.e., individual, spouse, children or member of HUF
 Contribution by an employee towards Statutory Provident Fund
or Recognised Provident Fund or Approved Superannuation Fund
Any amount deposited in Public Provident Fund (in the name of
individual, spouse or children)
 Any amount invested in NSC certificates and interest accrued
thereon
 Repayment of housing loan taken for the construction or acqui-
sition of new residential house property from bank, Government,
LIC, specified employer, financial institution, etc.
 Tuition fees paid to any university, educational institution, college
or school in India for the education of the children (deduction can
be claimed for maximum of 2 children for their full-time education)

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Eligible Amount of Permissible

Conditions for Claiming Deduction
Assessee Deduction from GTI
 Investment made in the units of mutual fund specified under Sec-
tion 10(23D) or any other notified schemes
 Any amount deposited in a five-year post-office deposit scheme
 Contribution towards Unit-Linked Insurance Plan (ULIP) of LIC Mu-
tual Fund
 Deposits made in Senior Citizen Saving Scheme account
 Subscription to/deposits made in notified bonds of NABARD
 Subscription to certain equity shares/debentures or certain units
of mutual fund
 Amount deposited in term deposits with a scheduled bank for a
fixed period of not less than 5 years
 Amount paid or deposited to Sukanya Samriddhi Account Scheme
(in the name of individual or girl child or a girl child for whom the
individual is the legal guardian)

9.3 PENSION FUND OF INSURANCE CO. (SECTION 80 CCC)

Deduction under Section 80CCC is available to an individual in respect of contribution made to an
approved annuity plan of LIC or certain pension funds. The eligibility and conditions for claiming
deduction under this Section are as discussed in Table 2:
Table 2 Deduction under Section 80CCC

Eligible Amount of Permissible

Conditions for Claiming Deduction
Assessee Deduction from GTI
Individual Deduction is available to any individual who has paid or deposited any The amount of deduction
amount during the previous year to keep in effect a contract for any allowed is limited to
annuity plan of LIC of India or other insurer to receive pension from `1,50,000.
such fund set up by LIC or other insurers.

Deduction under Section 80CCD can be availed by an individual assessee in respect of contribution
made to the Central Government Pension Scheme.

9.4 CONTRIBUTION TO NEW PENSION SCHEME (SECTION 80CCD)

The eligibility and conditions for claiming deductions under this Section are as discussed in Table 3:
Table 3: Deduction under Section 80CCD

Eligible
Conditions for Claiming Deduction Amount of Permissible deduction from GTI
Assessee
Individual Deduction is available to an individual For salaried assessees, the deduction allowed under
assessee who is employed by the Central Section 80CCD (1) is the amount of employee’s
employed by Government on or after 01.01.2004 contribution made which is restricted to 10% of
the Central or any other employer or any other salary. In addition, the deduction of employer’s
Government assessee and who has contributed, contribution is restricted to 10% of salary under
or employed deposit or payment of any amount to Section 80CCD(2). For other assessees, the deduction
any other his account under the notified pension allowed under Section 80CCD(1) is the amount of
employer or scheme of the Central Government, employee’s contribution made which is restricted to
self-employed such as National Pension Scheme 20% of GTI.

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Under Section 80CCD(1B), a further additional deduction of up to `50,000 shall be available to all
assessees.

9.5 HEALTH INSURANCE (SECTION 80D)

A large part of Indian citizens is uncovered under health insurance and rely on their savings or borrowing
in times of medical emergencies. The government stimulates its nationals to be covered under medical
insurance and even offers tax deductions on it under Section 80D.
Every individual or HUF can avail of a deduction from their total income for medical insurance premium
disbursed in any given year under Section 80D. This deduction is also eligible for top-up health plans
and serious illness plans.
Deduction for medical insurance premiums along with medical expenses for elderly citizens is offered
to the Individual or HUF category of taxpayers only.
The deduction benefit is extended not only for a health insurance plan for oneself but one can also reap
the benefit of buying the policy to cover spouse or dependent children or parent.
For availing deduction under Section 80D, the amount of insurance premium must have been paid
during the previous year out of the income chargeable to tax.
Deduction under Section 80D is liable to an individual or an HUF concerning paying of medical health
insurance premium for self or a family member. The eligibility and conditions for claiming deductions
under this Section are as discussed in Table 4:
Table 4: Health insurance deduction under Section 80D

Any
Amount of Permissible Deduction
individual or Conditions for Claiming Deduction
from GTI
HUF
Any individual Medical health insurance premium paid otherwise The amount of deduction is limited to
or HUF than by cash for keeping in force insurance on the the maximum of `25,000. However,
health of self, spouse and dependent children in case in case the individual or spouse or
of an individual (or family member of HUF in case member of HUF is a senior citizen,
the assessee is an HUF). the maximum amount deductible is
AND/OR `50,000.
Any contribution made by an individual otherwise
than by way of cash to CGHS or such other scheme
as may be notified by the Central Government is also
eligible for deduction.

Individual Medical health insurance premium paid otherwise The amount of further deduction in
then by way of cash to keep in force a medical addition to above is limited to the
insurance for the health of the parents, whether they maximum of ` 25,000. However, in
are dependent on the individual or not. case either or both of the parents are
senior citizens, the maximum amount
a deductible is `50,000.
Individual or Any medical expenditure incurred otherwise by way The amount of deduction is limited to
HUF of cash on the health of the individual or his family the maximum of ` 50,000.
member or parents or member of HUF, provided such
a person is a senior citizen and no other amount has
been incurred to give effect to the insurance policy
on the health of such person.

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Some important points:

 Also, if any amount has been incurred by any mode including cash payment on account of preventive
health-check up of the assessee himself, spouse, dependent children and parents, an amount of
deduction equivalent to ` 5,000 is allowed. However, the said deduction is within and subject to the
aggregate limit of deduction of ` 25,000/` 50,000, as the case may be.
 If the individual or his family member or member of HUF is a senior citizen, the aggregate deduction
in respect of insurance premium, CGHS and medical expenditure are restricted to ` 50,000.
 It is also clarified here that if one parent is a senior citizen for whom medical insurance premium
is paid and the other parent is a senior citizen for whom medical expenditure is incurred by the
assessee, then the maximum allowable deduction is restricted to ` 50,000.

9.6 MEDICAL TREATMENT OF HANDICAPPED DEPENDENT RELATIVE (SECTION 80 DD)

Deduction under Section 80DD can be claimed by the assessee only when deduction under Section 80U
is not claimed by the dependant disabled in computing the total income of that previous year.
Deduction under Section 80DD is available to a resident individual or HUF for payments in respect of
maintenance including medical treatment of a dependent disabled. The eligibility and conditions for
claiming deductions under this section are as discussed in Table 5:

Table 5: Deduction under Section 80DD

Eligible
Conditions for Claiming Deduction Amount of Permissible Deduction from GTI
Assessee
Resident The deduction from GTI shall be  In the case of normal disability of dependent,
individual or available to the assessee who has made the amount of deduction allowed is ` 75,000.
HUF expenditure in relation to a medical  In case of severe disability of dependent (i.e.,
treatment (including nursing), training 80% or more disability), the amount of deduc-
and rehabilitation of a dependent having tion allowed is `1,25,000.
a disability; or who has deposited any
the sum on this behalf under a scheme The assessee is allowed to claim a flat deduction of
framed by LIC/ other insurers/approved ` 75,000/` 1,25,000 as the case may be, irrespective
specified company for maintenance of the of the amount actually spent by the assessee.
dependent disabled.

For Section 80DD, the meaning of a dependent person is as follows:

 In the case of an individual, a dependent may be his or her spouse/children/parents/brothers or
sisters who are wholly dependent upon such individual for maintenance and support.
 In the case of a HUF, the dependent may be any member of the HUF who is wholly dependent upon
such HUF for maintenance and support.

9.7 TREATMENT OF DISEASE (SECTION 80DDB)

Section 80DDB of the Income Tax Act stipulates tax deductions for individuals and HUF in respect
of medical expenses incurred for the treatment of certain diseases or health ailments. This section
elucidates medical costs incurred on the treatment of specific diseases or illnesses, which should not
be confused with the premium amount paid to buy a health insurance policy, covering such diseases or
ailments. The premium paid for a health insurance policy is included under Section 80D of the Income
Tax Act.

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The term ‘disability’ is defined in harmony with conditions laid down under the Persons with Disability
(Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, and includes persons
suffering from autism, cerebral palsy and multiple disabilities.
Taxpayers who have dependents with specified diseases can claim deduction under Section 80DDB on
their income tax return.
Deduction under section 80DDB is allowed for medical treatment of a dependant who is suffering from
a specified disease can be claimed by following:
 Can be claimed by an Individual or HUF
 Allowed to Resident Indians
 When a taxpayer has spent money on treatment of the dependant
 Dependant shall mean spouse, children, parents and siblings
 In case the dependant is insured and some payment is also received from an insurer or reimbursed
from an employer, such insurance or reimbursement received shall be subtracted from the deduction.

9.8 INTEREST ON EDUCATION LOAN (SECTION 80 E)

For interest on education loan Section 80E, a financial institution means a banking company to which
the Banking Regulation Act, 1949 applies or any other financial institution as may be notified by the
Central Government in the Official Gazette on this behalf. While computing the gross total income,
Section 80E allows an individual assessee to claim a deduction in respect of interest payment on any
loan taken for pursuing higher education. The eligibility and conditions for claiming deductions under
this Section are as discussed in Table 6:

Table 6: Interest on Education Loan Deduction under Section 80E

Eligible Conditions for claiming deduction Amount of permissible deduction from

Assessee Gross Total Income
Individual Deduction is available to an individual who The amount of deduction allowed is without
pays interest on a loan taken from any financial any limit. It can be claimed from the initial
institution or an approved charitable institution year of commencement of interest payment
for the higher education of himself or his relatives
to seven assessment years succeeding the
(spouse and children of the individual) or a student
initial commencement year or until the
for whom the individual is a legal guardian. full interest payment is made, whichever is
Deduction under this Section can be claimed only earlier.
when interest is paid out of the income chargeable
to tax under the Act.

9.9 EE INTEREST ON HOUSING LOAN (SECTION 80)

Accordingly, a new Section 80EEA has been enacted to enable an interest deduction for the financial
year 2019-20. The existing provisions of Section 80EE allow a deduction up to `50,000 for interest paid by
first-time home buyers for loans sanctioned from a bank or any other institution between 1 April 2016
and 31 March 2017. Section 80EE was formulated for the first time in the fiscal year 2013-14 for individual
taxpayers to avail tax deduction on interest on home loans.
Tax deduction under Section 80EE of the Income Tax Act 1961, can be claimed by first-time home buyers
for the amount they pay as interest on home loan. The maximum deduction that can be claimed under

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this section is `50,000 during a financial year. The amount can be claimed over and beyond the deduction
of Section 24 and Section 80C, which are `2,00,000 and `1,50,000, respectively.
The deduction under this section is available only to individuals. This deduction is not available to any
other taxpayer. Thus, if you are a HUF, AOP, Partnership firm, company, or any other kind of taxpayer,
you cannot claim any benefit under this section.
A deduction for interest payments up to `1,50,000 is available under Section 80EEA. This deduction is
over and above the deduction of `2 lakh for interest payments available under Section 24 of the Income
Tax Act.
Therefore, taxpayers can claim a total deduction of `3,50,000 for interest on a home loan, if they meet
the conditions of section 80EEA

9.10 EEA INTEREST ON ELECTRIC VEHICLE LOAN (SECTION 80)

A deduction for interest payments up to `1,50,000 is provisioned under Section 80EEB. An individual
taxpayer may own an electric vehicle for personal use or commercial purpose. This deduction would
enable individuals having an electric vehicle for personal use to claim the interest paid on the vehicle
loan.
In case of business purpose, an individual can also claim the deduction of up to `1,50,000 under Section
80EEB. Any interest payments above `1,50,000 can be claimed as a business expense. To get reimbursed
for a business expenditure, it is requisite that the vehicle should be registered in the name of the owner
of the business entity.
It should also be noted that an individual taxpayer should receive the interest paid certificate and
maintain a record of the requisite documents, such as tax invoice and loan documents, at the time of
filing of the return.
Deduction under Section 80EE is available to an individual who pays interest on a loan taken from a
financial institution (any housing finance company or bank) to acquire a residential house property.
The quantum of deduction allowed is `50,000 or the actual amount of interest payable on the loan.

9.11 DONATION (SECTION 80G)

One ideal way to save money on tax while also contributing to the nation is by making donations towards
charities that will then enable deductions under Section 80G. These have to be trusts or institutions that
are eligible.
Section 80G of the Income Tax Act predominantly governs with donations made towards charity, to offer
tax incentives to individuals engaged in philanthropic activities. This section provides tax deductions on
donations made to certain funds or charities. An amount donated by an individual to an eligible charity
can be claimed as a tax deduction while filing an income tax return.
Contributions made to certain relief funds and charitable institutions can be claimed as a deduction
under Section 80G of the Income Tax Act. All donations, however, are not eligible for deductions under
section 80G.
Only donations made to prescribed funds qualify as a deduction. This deduction can be claimed by any
taxpayer, such as individuals, companies, firms or any other person.

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To be able to claim this deduction the following details have to be submitted in your Income Tax Return:
 Name of the Donee
 PAN of the Donee
 Address of the Donee
 Amount of Contribution

9.12 DEDUCTION FOR INTEREST (SECTION 80TTA/80TTB)

Deduction for interest under Section 80TTA is available to assessees whose gross total income includes
any interest income from deposits in a savings accounts maintained with banks. The eligibility and
conditions for claiming deductions under this Section are as discussed in Table 7:

Table 7: Deduction under Section 80TTA

Eligible Assessee Conditions for Claiming Deduction Amount of Permissible Deduction

from GTI
Individual (except Deduction is available to an individual other The amount of deduction allowed is the
senior citizen) or than senior citizen who earns interest income lower of the following:
HUF from deposits in a savings account with a  Actual interest, or
bank, a co-operative society bank, or a post
office. The deposits for this purpose exclude  `10,000
any time deposits which are repayable after
the completion of a certain fixed time.

Deduction under Section 80TTB is available to individuals aged 60 years or more during the previous
year, who have an interest income on deposits with banks.
The eligibility and conditions for claiming deductions under this section are as discussed in Table 8:

Table 8: Deductions under Section 80TTB

Eligible Assessee Conditions for Claiming Deduction Amount of Permissible Deduction from
Gross Total income
Individual senior Deduction is available to an individual (of age The amount of deduction allowed is the
citizen 60 years or more), who earns interest income lower of the following:
from deposits with a banking company, a co-  Actual interest, or
operative society bank, or a post office. The
deposits for this purpose, may include time  `50,000
deposits.

Conclusion 9.13 CONCLUSION

 Deduction under Section 80C is allowed to an individual or an HUF for making certain payments
or contributions in respect of life insurance premium, specified term deposits, provident fund,
etc.
 Deduction is available in respect of some specified investments made by an individual or an HUF
during the previous year.
 Deduction under Section 80CCC is available to an individual in respect of contribution made to an
approved annuity plan of LIC or certain pension funds.

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 The large part of Indian citizens is uncovered under health insurance and rely on their
savings or borrowing in times of medical emergencies. The government stimulates its
nationals to be covered under medical insurance and even offers tax deductions on it under Section
80D.
 The deduction benefit is extended not only for a health insurance plan for oneself but one can also
reap the benefit of buying the policy to cover spouse or dependent children or parent.
 Deduction under Section 80D is liable to an individual or an HUF concerning paying of medical
health insurance premium for self or a family member.
 if any amount has been incurred by any mode including cash payment on account of preventive
health-check up of the assessee himself, spouse, dependent children and parents, an amount of
deduction equivalent to ` 5,000 is allowed. However, the said deduction is within and subject to the
aggregate limit of deduction of ` 25,000/` 50,000, as the case may be.
 Section 80DDB of the Income Tax Act stipulates tax deductions for individuals and HUF in respect
of medical expenses incurred for the treatment of certain diseases or health ailments. This section
elucidates medical costs incurred on the treatment of specific diseases or illnesses, which should not
be confused with the premium amount paid to buy a health insurance policy, covering such diseases
or ailments.
 The term ‘disability’ is defined in harmony with conditions laid down under the Persons with
Disability (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995, and includes
persons suffering from autism, cerebral palsy and multiple disabilities.
 For interest on education loan Section 80E, a financial institution means a banking company to
which the Banking Regulation Act, 1949 applies or any other financial institution as may be notified
by the Central Government in the Official Gazette in this behalf.
 The deduction under this section is available only to individuals. This deduction is not available to
any other taxpayer. Thus, if you are a HUF, AOP, Partnership firm, a company, or any other kind of
taxpayer, you cannot claim any benefit under this section.

9.14 GLOSSARY

 Assessee: An individual that is liable to pay taxes for himself/herself or on behalf of somebody else
 Gross Total Income (GTI): An individual’s total pays before accounting for taxes or other deductions
 Health Insurance Premium: The sum of money that an individual pay towards an insurance policy
to cover health care issues
 Resident Individual: An individual who is domiciled in this state, even though absent for temporary
or transitory purposes, and every individual who, for an aggregate of more than six months, both
maintains a permanent place of abode within this state and who is present in this state

9.15 CASE STUDY: COMPUTATION OF DEDUCTIONS FROM TOTAL INCOME

Case Objective
This Case Study discusses the computation of deductions computation of total income of Neelam and
Helen.

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Neelam and Helen are two sisters born and brought up in Delhi. While Neelam is settled in Australia
after her marriage in 1981, Helen is settled in Delhi. Both of them, being aged below 60 years, earn the
following incomes during the previous year ended 31st March 2021:

Particulars Neelam (`) Helen (`)

Pension granted by State Government - 51,000
Pension granted by Australian Government 21,000 49,000
Long-term capital gain from the sale of land situated in Delhi 1,03,000 49,000
Rent received from house property situated in Delhi 59,000 31,000
LIC premium paid - 9,000
Australian Life Insurance Corporation premium paid at Australia 41,000 -
Short-term capital gain from the sale of shares of the listed Indian 21,000 2,49,000
company, STT paid
Premium on Mediclaim policy paid - 24,000
Contribution to PPF - 18,000

The taxable income and total tax liability of Neelam and Helen for the Assessment Year 2021-2022 are
computed as follows:

Particulars Neelam (`) Helen (`)

Income from Salary (A)
Pension granted by State Government - 51,000
Less: Standard Deduction allowed under section 16 - 40,000
{In case of a non-resident, pension granted by Australian Government is - -
not taxable in India because it is earned and received outside India}
- 11,000
Income from House Property (B)
Rent received from house property in Delhi (assumed as Net Annual Value) 59,000 31,000
Less: Deduction under Section 24 @ 30% 17,000 9,300

41,300 21,700

Income from Capital Gains (C)

Short-term capital gain from the sale of shares of the listed Indian company 21,000 2,49,000
Long-term capital gain from the sale of land situated in Delhi 1,03,000 49,000
1,24,000 2,98,000
Gross Total Income (A+B+C) 1,65,300 3,30,700
Less: Deductions allowed under Chapter VI-A
Deduction under Section 80C
(1) LIC premium - 9,000
(2) Premium paid to Australian Life Insurance Corporation 41,000 -
(3) Contribution to PPF - 18,000

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Particulars Neelam (`) Helen (`)

41,000 27,000
Deduction under Section 80D
Premium paid on Mediclaim policy - 24,000

- 24,000
Total deduction under Chapter VI-A is restricted to Gross Total Income 41,000 32,700
exclusive of long-term and short-term capital gains

Total Income = Gross Total Income – Deductions 1,24,300 2,98,000

The tax liability of Neelam (Non-resident) Amount (in (`)

Tax on long-term capital gain @20% on ` 1,03,000 20,600
Tax on short-term capital gain @15% on ` 21,000 3,150
Tax on balance income of ` 300 -
23,750

Add: Health and Education Cess @4% 950

Total Tax Liability 24,700

The tax liability of Helen (Resident) Amount (in (`)

Tax on long-term capital gain = Nil, by utilising the unexhausted basic exemption -
limit
Tax on short-term capital gain = ` 2,49,000 – ` 2,01,000 (` 2,01,000 being the 7,200
unexhausted limit) = 15% or ` 48,000

Less: Rebate under Section 87A 2,500

4,700

Add: Health and Education Cess @4% 188

Total Tax Liability 4,888

Long-term capital gains are subject to tax at a flat rate of 20% under Section 112. Short-term capital
gains on the sale of shares in respect of which STT (Securities Transaction Tax) has been paid are subject
to tax @15% under Section 111A.
In case the basic exemption limit of ` 2,50,000 is not exhausted against other income, the benefit of
utilising/deducting the unexhausted basic exemption limit against/from long-term and short-term
capital gains are available to resident individuals only. Therefore, Neelam cannot utilise the basic
exemption limit against capital gains. Also, the rebate under Section 87A can be availed only by resident
individuals whose total income is up to ` 5,00,000.

Questions
1. Can non-residents adjust the unexhausted basic exemption limit from tax payable on capital gains?
(Hint: No; Refer to Sections 111A, 112 and 112A)

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2. Discuss the provisions relating to the rebate under income tax law.
(Hint: Refer to Section 87)
3. Why cannot Neelam utilise the basic exemption limit against capital gains?
(Hint: basic exemption limit of ` 2,50,000 is not exhausted against other income, etc.)
4. What is the rate for Long-term capital gains?
(Hint: Long-term capital gains are subject to tax at a flat rate of 20% under Section 112)

9.16 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Section 80C of the Income Tax Act of India is a clause that points to various expenditures and
investments that are exempted from Income Tax. Elucidate on Deduction under Section 80C.
2. Explain Pension Fund of Insurance Co. (Section 80 CCC).
3. Summarise Health Insurance (Section 80D).
4. Deduction under Section 80DD of the Income Tax Act is allowed to Resident Individuals or HUFs for a
dependant-who is differently-abled and - is wholly dependent on the individual (or HUF) for support
& maintenance. Write a short note on Medical Treatment of Handicapped Dependent Relative
(Section 80 DD).
5. Section 80DDB provides tax deductions for medical expenses of a specific ailment. Discuss the
Treatment of Disease (Section 80DDB).

9.17 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. Deduction under Section 80C is allowed to an individual or a HUF for making certain payments
or contributions in respect of life insurance premium, specified term deposits, provident fund, etc.
Refer to Section Specified Investment (Section 80C)
2. Deduction under Section 80CCC is available to an individual in respect of contribution made to an
approved annuity plan of LIC or certain pension funds. Refer to Section Pension Fund of Insurance
Co. (Section 80 CCC)
3. A large part of Indian citizens is uncovered under health insurance and rely on their savings or
borrowing in times of medical emergencies. The government stimulates its nationals to be covered
under medical insurance and even offers tax deductions on it under Section 80D. Refer to Section
Health Insurance (Section 80D)
4. Deduction under Section 80DD is available to a resident individual or HUF for payments in respect
of maintenance including medical treatment of a dependent disabled. Refer to Section Medical
Treatment of Handicapped Dependent Relative (Section 80DD)
5. Section 80DDB of the Income Tax Act stipulates tax deductions for individuals and HUF in respect of
medical expenses incurred for the treatment of certain diseases or health ailments. Refer to Section
Treatment of Disease (Section 80DDB)

12 @ 9.18 POST-UNIT READING MATERIAL

UNIT 09: Total Income Deduction from Gross Total Income U/C VI-A JGI JAIN
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 https://resource.cdn.icai.org/65971bos53217cp7.pdf

9.19 TOPICS FOR DISCUSSION FORUMS

 Interview a taxpayer in your neighbourhood and calculate his/her applicable deductions as per
Section 80U for the current assessment year.

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 UNIT

10 Setoff and Carry Forward

of Losses (Section 70 to 80)

Names of Sub-Units

Section - 70, 71, 71B to 74A, Rules to Carry Forward & Set off Past Year Losses, Section 72 Business loss
set off, Section 73 Speculation loss

Overview

The unit begins by explaining the concept of set-off and carry forward of losses. Thereafter, the unit
discusses inter source adjustment of losses, inter head adjustment of losses and set-off of brought
forward losses. Towards the end, a summary of provisions of set-off and carry forward of losses is
given in a tabular form.

Learning Objectives

In this unit, you will learn to:

 Discuss rules to carry forward and set off past year losses
 Describe inter source adjustment of losses
 Explain inter head adjustment of losses and set-off of brought forward losses
 Outline different business losses that cannot be set-off under inter-head adjustments
 Summarise provisions of set-off and carry forward of losses
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Learning Outcomes

At the end of this unit, you would:

 Assess rules to carry forward and set off past year losses
 Analyse inter-source adjustment of losses
 Examine inter head adjustment of losses and set-off of brought forward losses
 Recognise different business losses that cannot be set-off under inter-head adjustments
 Tabularise provisions of set-off and carry forward of losses

10.1 INTRODUCTION
Specific provisions have been made in the IT Act, 1961, for the setoff and carry forward of losses. Set-off
refers to the adjustment of losses against the profits from another source/head of income in the same
assessment year. If losses cannot be set-off in the same year due to inadequacy of eligible profits, then
such losses are carried forward for the next assessment year for adjustment against the eligible profits
of that year. The maximum period for which different losses can be carried forward for set-off has been
given in the Act.

10.2 RULES TO CARRY FORWARD & SET OFF PAST YEAR LOSSES
Set-off of loss means that a particular amount of loss is equated and negated by an equal amount of
profit. Carry forward of loss means that if instead of profit an assessee incurs losses and they are not
being set-off by profits, they can be carried forward to the next assessment year where they can be set-off
against the allowable profits. Set-off of losses refers to the adjustment of losses incurred by an assessee
against the profit of that financial year. Losses can be carried forward to subsequent assessment years
in case there are no adequate profits in the given financial year.
Regarding the set-off and carry forward of loss, the following points must be remembered:
 Loss from a source of income that is exempted from tax cannot be set-off against any other income
which is taxable. For example, loss on the grounds of agricultural activity (which is exempted from
tax) cannot be adjusted against profit or income from any other taxable source of income.
 In any year, if a taxpayer has incurred a loss from any source under a particular head of income,
then, the taxpayer may adjust such loss against income from any other source falling under the
same head of income. This process of adjustment of a loss from a source under a particular head of
income against income from some other source under the same head of income is called an intra-
head adjustment. For example, if an assessee runs two businesses X and Y, then loss from business
X can be set-off against profits from business Y.
 After making intra-head adjustments (if any); the next step is to make inter-head adjustments. If
in any year, the taxpayer has incurred loss under one head of income and is having income under
other heads of income, then he can adjust the loss from one head against income from the other
head. For example, loss under the head of house property can be adjusted against salary income.
 At times, some part of the loss may remain even after making intra-head and inter-head adjustments.
In such cases, the unadjusted loss can be carried forward to the next year for adjustment against
subsequent years’ income. This is called carry forward of loss. Different heads of income have
different provisions to carry forward of loss.

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Provisions under the income tax law in relation to carry forward and set-off of loss from house
property:
If the loss from house property is not fully adjusted in the same year in which the loss was incurred, then
such loss can be carried forward to the next year. However, such loss can only be adjusted against the
head of income from house property in the subsequent years. It means that in the subsequent years, the
inter-head adjustment would not be allowed. Such an amount of loss can be carried forward for eight
years succeeding the year in which the loss occurred.
According to the Income Tax Act, 1961, an individual taxpayer may set-off and carry forward the income
losses incurred by him/her to the coming years. The provisions of set-off and carry forward of income
losses have been made to divide the tax burden of the assessee in the case of losses.

10.2.1 Inter Source Adjustment of Losses

As per Section 70 of the Income Tax Act, 1961, if the assessee has incurred losses under a certain income
head, then he/she is permitted to adjust these losses from any other income source under the same
head. This is referred to as intra-head adjustment. A taxpayer is not allowed to carry out intra-head/
inter-source adjustment of loss in the following cases:
 Speculative business losses: Speculative business losses are not allowed to be set-off against any
income other than income from the speculative business. However, the non-speculative business
loss can be set-off against income from the speculative business.
 Long-term capital loss: Such losses cannot be set-off against any income other than income from
long-term capital gain. However, a short-term capital loss can be set-off against long-term or short-
term capital gain.

10.2.2 Inter Head Adjustment of Losses and Set-off of Brought Forward Losses
The other method of carrying forward or set-off of losses is through inter-head adjustment. As per
Section 71 of the Income Tax Act, 1961, if an assessee incurs loss under one head of income and has
earned any income under other heads of income, he/she is allowed to adjust the loss from one head
against income from other heads. Some examples are as follows:
 House property income losses: House property income losses can be set-off against profits from
other heads. Such loss can be adjusted against salary income, business income, income from capital
gain, and income from other sources except for casual income.
 Non-speculative business losses: Non-speculative business losses can be set-off under any other
head except income from salary.

The losses incurred in the following cases cannot be set-off under inter-head adjustments:
 Speculative business loss
 Specified business loss
 Capital gain income loss
 Loss from owning and maintaining racehorses

Even after the taxpayer has made intra-head or inter-head adjustments, it may be the case that the
losses continue to remain unadjusted. Such unadjusted loss can be carried forward to the subsequent
year for adjustment against the income from that subsequent year.

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The Act lays down different provisions for carrying forward losses under different heads of income,
which are as follows:
 House property income losses: As per Section 71(B) of the Income Tax Act, 1961, an assessee can carry
forward losses incurred under the head house property up to eight years immediately succeeding
the assessment year in which the loss has been incurred. It can be adjusted only against house
property income loss. In this case, the assessee can file the deferred return.
 Non-speculative business losses: As per Section 72 of the Income Tax Act, 1961, an assessee can carry
forward non-speculative business loss up to eight years immediately succeeding the assessment
year in which the loss has been incurred. He/she must file an Income Tax Return (ITR) within the due
date prescribed under Section 139 (1) of the Income Tax Act, 1961. The loss can be set-off only against
business income.
 Speculative business losses: Section 73 of the Act specifies that losses in speculative businesses can
be carried forward up to four years immediately succeeding the assessment year in which the loss
has been incurred. An assessee must file the ITR within the due date prescribed to carry forward the
losses from speculative business. Such loss can be adjusted only against income from speculation
business.
 Specified business loss: According to Section 73A of the Income Tax Act, 1961, losses in specified
business can be carried forward subject to the following conditions:
 Loss in respect of any specified business referred to in section 35AD shall not be set-off except
against profits and gains, if any, of any other specified business.
 If the loss in specified business has not been wholly set-off, so much of the loss as is not so set-off
or the whole loss where the assessee has no income from any other specified business shall be
carried forward to the next assessment year. It shall be set-off against profits and gains, if any,
of any specified business, carried on by him assessable for that assessment year.
 Capital gain losses: If a taxpayer is unable to set-off the capital loss in the given financial year, both
long-term loss and short term loss can be carried forward immediately for eight assessment years.
 Brought forward losses or unabsorbed depreciation: In the case where a company suffers a loss
before claiming depreciation, then the entire amount of depreciation is unabsorbed depreciation.
However, if the company suffers a loss as a result of the depreciation amount, then the business loss
would be considered as nil and the balance of depreciation amount will be unabsorbed depreciation.

10.2.3 Summarised Provisions of Set-off and Carry Forward of Losses

Now let us summarise the provisions of set-off and carry forward of losses in Table 1:

Table 1: Set-off and Carry Forward of Losses

Section Nature of Inter-Source/Inter-Head Set-off of Maximum no. of Years for Carry

Loss Losses Forward and Set-off of Losses
Section 71B Loss from Inter-source: Can be set-off against Brought forward loss of one assessment
house income from another house property year can be carried forward to the
property Inter-head: Can be set-off against following eight assessment years to be
income under any other head, but set-off against income under the head
restricted to the extent of ` 2 lakhs ‘Income from House Property’

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Section Nature of Inter-Source/Inter-Head Set-off of Maximum no. of Years for Carry

Loss Losses Forward and Set-off of Losses
Section 72 Loss from Inter-source: Can be set-off against Brought forward loss of one assessment
business or income from another business or year can be carried forward to the
profession profession following eight assessment years to
Inter-head: Can be set-off against be set-off against income under the
income under any other head, but head ‘Profits and Gains of Business or
not against income under the head Profession’
‘Salaries’
Section 73 Loss from Inter-source: Can be set-off only Brought forward loss of one assessment
speculation against income from any other year can be carried forward to the
business speculation business following four assessment years to
Inter-head: Cannot be set-off against be set-off against income from any
income under any other head speculation business

Section 73A Loss from Inter-source: Can be set-off only Brought forward loss of one assessment
specified against income from any other year can be carried forward to the
business specified business under Section 35AD following any no. of assessment years
under Section Inter-head: Cannot be set-off against to be set-off against income from any
35AD income under any other head specified business

Section 74 Long-term Inter-source: Can be set-off only Brought forward loss of one assessment
capital loss against long-term capital gain year can be carried forward to the
Inter-head: Cannot be set-off against following eight assessment years to be
income under any other head set-off against long-term capital gain

Section 74 Short-term Inter-source: Can be set-off against Brought forward loss of one assessment
capital loss both short-term capital gain or long- year can be carried forward to the
term capital gain following eight assessment years to be
Inter-head: Cannot be set-off against set-off against long-term capital gain
income under any other head or short-term capital gain

Section 74A Loss from the Inter-source: Can be set-off only Brought forward loss of one assessment
activity of against income from such activity year can be carried forward to the
owning and Inter-head: Cannot be set-off against following four assessment years to be
maintaining income under any other head set-off against income from the activity
race horses of owing and maintaining race horses
Section 32(2) Unabsorbed Inter-source: Can be set-off against Brought forward loss of one assessment
depreciation income from any business year can be carried forward to the
Inter-head: Can be set-off against following any no. of assessment years
income under any other head except to be set-off against income from any
salary head other than salaries

Mandatory filing of Return of income (Section 80)

According to Section 80, to be eligible to carry forward and set-off a loss suffered in a particular
assessment year, the assessee must have filed the return of income within the time limit as prescribed
under Section 139(1). However, this condition does not apply to loss from house property income (Section
71B) and unabsorbed depreciation [Section 32(2)].

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Order for set-off of losses

The order in which set-off of losses shall be given effect is as follows:
1. Depreciation of current year or capital expenditure of current year on scientific research and
current year expenditure on family planning, to the extent allowed.
2. Brought forward losses of business or profession
3. Unabsorbed depreciation
4. Unabsorbed capital expenditure on scientific research
5. Unabsorbed expenditure on family planning

Let us discuss some illustrations to understand the concept of set-off and carry forward.
Illustration 1: Mr. Mukherjee submits the following particulars of his income for the A.Y. 2021-2022. Find
his gross total income setting off and carrying forward losses.

Particulars Amount (in `)

Income from the let out house (Computed) 15,000
Loss from self occupied house 14,000
Profit of business of publication of books 45,600
Speculation income 8,000
Short-term capital gains 26,000
Long-term capital gains 4,000
Winnings in card game 8,000

The items brought forward for set-off:

Loss from Sugar Mill of A.Y. 2013-2014 which is discontinued 13,000

Loss from publication business of A.Y. 2013-2014 9,000
Loss in card game of A.Y. 2014-2015 4,000
Speculation loss of A.Y. 2012-2013 24,000
Short-term capital loss of A.Y. 2016-2017 12,000
Long-term capital loss of A.Y. 2006-2007 14,000

Solution: Computation of gross total income of Mr. Mukherjee:

Income from House Property

(15,000 – 14,000, being loss from self-occupied house) 1,000
Income from Business and Profession:
(i) General Business (Publication business profit ` 45,600 – B/F Loss of sugar mill ` 13,000 – 23,600
B/F Loss of publication business ` 9,000)
(ii) Speculation business (Profit ` 8,000 – B/F ` 24,000).
(Balance Loss of ` 16,000 shall be carried forward) NIL

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Capital gains (STCG ` 26,000 + LTCG ` 4,000 – B/F short term capital loss ` 12,000) (B/F long- 18,000
term capital loss cannot be set-off, on account of expiry of time limit of 8 years)
Income from other sources (winnings in card game, B/F loss cannot be set-off) 8,000
Gross Total Income 50,600

Illustration 2: From the following particulars regarding income, compute the total income of Ms. Mehak
for the A.Y. 2021-2022:
 Salary ` 9,000 p.m.
 House A (let out) ` 40,000; House B (let out) ` (20,000); House C (Self-occupied) ` (50,000)
 Business A ` 2,00,000; Business B ` (2,50,000), Business C (shares speculation) ` 30,000; Business D
(commodity speculation) ` (40,000)
 STCG ` 30,000; short-term capital loss ` 40,000
 LTCG ` 1,00,000
 Profits from card games (gross) ` 50,000; Loss from horse races ` 30,000
 Winnings from lottery ` 70,000

Solution: Computation of gross total income of Ms. Mehak for A.Y. 2021-2022:

Particulars Amount (in `)

Salary 1,08,000
Income from house property (` 40,000 – ` 20,000 – ` 50,000)* (30,000)
Profits and gains of Business or profession :
(i) General Business (` 2,00,000 – ` 2,50,000)* (50,000)
(ii) Speculation Business (` 30,000 – ` 40,000) – Balance loss of ` 10,000 to be carried forward
to A.Y. 2022-2023
Capital gains :
(i) Short-term capital gains (` 30,000 – ` 40,000) (10,000)
(ii) Long-term capital gains 1,00,000 90,000
Income from other sources : [` 50,000 + ` 70,000] 1,20,000
(Loss from horse races of ` 30,000 to be carried forward to next A.Y. 2022-2023)
Total income 2,38,000

* Loss from house property can be set-off against salary income and loss from general business can be
set-off against income from other sources.

Conclusion 10.3 CONCLUSION

 If the loss from house property is not fully adjusted in the same year in which the loss was incurred,
then such loss can be carried forward to the next year.
 As per Section 70 of the Income Tax Act, 1961, if the assessee has incurred losses under a certain
income head, then he/she is permitted to adjust these losses from any other income source under
the same head. This is referred to as intra-head adjustment.

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 The other method of carrying forward or set-off of losses is through inter-head adjustments. As per
Section 71 of the Income Tax Act, 1961, if an assessee incurs loss under one head of income and has
earned any income under other heads of income, he/she is allowed to adjust the loss from one head
against income from other heads.
 The losses incurred in the following cases cannot be set-off under inter-head adjustments:
 Speculative business loss
 Specified business loss
 Capital gain income loss
 Loss from owning and maintaining racehorses

10.4 GLOSSARY

 Inter-head adjustments: After the intra-head adjustments, the taxpayers can set-off remaining
losses against income from other heads
 Intra-head adjustments: Losses from one source of income can be set-off against income from
another source under the same head of income
 Set-off of loss: The adjustment of losses from one head against the income, profits or gains of any
other head of income during the assessment year

10.5 CASE STUDY: SET-OFF AND CARRY FORWARD OF LOSSES

Case Objective
This Caselet discusses the provisions of set-off and carry forward of losses while computing the Gross
Total Income of an assessee.
Sections 70 to 74 of the Income Tax Act, 1961, deal with set-off and carry forward of losses. Mr. Einy had
the following business incomes/losses for the Assessment Year 2021-2022:

1. Income from salary ` 1,50,000

2. Speculation business income ` 71,000
3. Non-speculation business losses ` 39,000
4. Short-term capital gains ` 79,000
5. Long-term capital loss relating to A.Y. 2018-2019 ` 28,000
6. Lottery and gambling income ` 30,000

Speculation business losses can be set-off only against speculation business profits. However, losses
from other businesses can be set-off against speculation business gains and gains under other heads of
income except for salaries. Losses from speculation business can be carried forward for four assessment
years for set-off against income from speculation business. Other unabsorbed business losses can be
carried forward for 8 assessment years for set-off against profits and gains from business or profession.
A long-term capital loss can be set-off against long-term capital gain only. However, a short-term
capital loss can be set-off against both long-term and short-term capital gains. Also, capital gains/
losses cannot be set-off from any other head of income. Both long-term and short-term capital losses

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can be carried forward for eight assessment years for set-off against long-term and long-term/short-
term gains, respectively.
The taxable income of Mr. Einy for the Assessment Year 2021-2022 will be as follows:

Particulars Amount in ` Amount in `

Income from Salary 1,50,000
Speculation business income 71,000
Less: Set-off of non-speculation business loss 39,000 32,000
Short-term capital gains
Lottery income 30,000
Total Income 2,91,000

Since long-term capital loss (`28,000) can be set-off only against long-term capital gains, it shall be
carried forward to the next assessment year.

Questions
1. What do Sections 70 to 74 of the Income Tax Act, 1961 deal with?
(Hint: Set-off and carry forward of losses)
2. How can losses from other businesses be set-off?
(Hint: Against speculation business gains and gains under other heads of income except for salaries)
3. For how many assessment years losses from speculation business can be carried forward?
(Hint: Losses from speculation business can be carried forward for four assessment years for set-off
against income from speculation business.)

10.6 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. The Indian law contains provisions for set-off and carry forward of losses. Discuss.
2. One cannot adjust the losses of speculative business with the income from any other business
or profession. Discuss the cases under which a taxpayer is not allowed to carry out intra-head
adjustments of loss.
3. If loss of any business/profession (other than speculative business) cannot be fully adjusted in the
year in which it is incurred, then the unadjusted loss can be carried forward for making adjustment
in the next year. Write a short note on non-speculative business losses.
4. Describe speculative business losses.
5. Explain brought forward losses.

10.7 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. Set-off of loss means that a particular amount of loss is equated and negated by an equal amount
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of profit. Carry forward of loss means that if instead of profit an assessee incurs losses and they are
not being set-off by profits, they can be carried forward to the next assessment year where they can
be set-off against the allowable profits. Refer to Section Rules to Carry Forward & Set off Past Year
Losses
2. The losses incurred in the following cases cannot be set-off under inter-head adjustments:
 Speculative business loss
 Specified business loss
 Capital gain income loss
 Loss from owning and maintaining racehorses
Refer to Section Rules to Carry Forward & Set off Past Year Losses
3. As per Section 72 of the Income Tax Act, 1961, an assessee can carry forward non-speculative
business loss up to eight years immediately succeeding the assessment year in which the loss has
been incurred. Refer to Section Rules to Carry Forward & Set off Past Year Losses
4. Section 73 of the Act specifies that losses in speculative businesses can be carried forward up to four
years immediately succeeding the assessment year in which the loss has been incurred. Refer to
Section Rules to Carry Forward & Set off Past Year Losses
5. In the case where a company suffers a loss before claiming depreciation, then the entire amount of
depreciation is unabsorbed depreciation. Refer to Section Rules to Carry Forward & Set off Past Year
Losses

@ 10.8 POST-UNIT READING MATERIAL

 https://resource.cdn.icai.org/62005bos50392cp6.pdf

10.9 TOPICS FOR DISCUSSION FORUMS

 Prepare a list of losses incurred by an assessee which cannot be setoff under inter-head adjustments.

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11 Assessment Procedure

Names of Sub-Units

Normal Return – Section 139(1), Loss Return – Section 139(3), Belated Return – Section 139(4), Revised
Return – Section 139(5), Defective Return – Section 139(9), Verification of Return – Section 140, Aadhar
Number – Section139AA, PAN – Section 139A, TRP – Section 139B, Self-Assessment Tax – Section 140A,
Inquiry Before Assessment – Section 142(1), Special Audit – Section142(2A), Estimation of Value of
Assets by Valuation Officer – Section 142A, Best Judgement Assessment – Section 144, Discretionary
Best Judgement Assessment – Section 145(3), Income Escaping Assessment – Section 147, Rectification
of Mistake – Section 154, Demand Notice – Section 156

Overview

This unit describes the Normal Return – Section 139(1), Loss Return – Section 139(3) and Belated Return
– Section 139(4). It also explains the Revised Return – Section 139(5), Defective Return – Section 139(9)
and Verification of Return – Section 140. Further, it elaborates the Aadhar Number – Section139AA,
PAN – Section 139A and TRP – Section 139B. Also, it elaborates the Self-Assessment Tax – Section
140A, Inquiry Before Assessment – Section 142(1) and Special Audit – Section142(2A). Towards the end,
it examines the Estimation of Value of Assets by Valuation Officer – Section 142A, Best Judgement
Assessment – Section 144, Discretionary Best Judgement Assessment – Section 145(3), Income Escaping
Assessment – Section 147, Rectification of Mistake – Section 154, and Demand Notice – Section 156.
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Learning Objectives

In this unit, you will learn to:

 Discuss the Normal Return – Section 139(1)
 Explain the Loss Return – Section 139(3)
 Describe the Belated Return – Section 139(4) and Revised Return – Section 139(5)
 Define the Defective Return – Section 139(9)
 Analyse the Verification of Return – Section 140
 Elucidate the Aadhar Number – Section139AA and PAN – Section 139A
 Examine the TRP – Section 139B and Self-Assessment Tax – Section 140A
 Discuss the Inquiry Before Assessment – Section 142(1) and Special Audit – Section142(2A)
 Know how to Estimate Value of Assets by Valuation Officer – Section 142A and Best Judgement
Assessment – Section 144
 Elaborate the Discretionary Best Judgement Assessment – Section 145(3)
 Describe the Income Escaping Assessment – Section 147
 Assess the Rectification of Mistake – Section 154 and Demand Notice – Section 156

Learning Outcomes

At the end of this unit, you would:

 Define Normal Return – Section 139(1)
 Elaborate the Loss Return – Section 139(3)
 Measure the Belated Return – Section 139(4) and Revised Return – Section 139(5)
 Analyse the Defective Return – Section 139(9)
 Examine the Verification of Return – Section 140
 Assess the Aadhar Number – Section139AA and PAN – Section 139A
 Examine the TRP – Section 139B and Self-Assessment Tax – Section 140A
 Define the Inquiry Before Assessment – Section 142(1) and Special Audit – Section142(2A)
 Estimate Value of Assets by Valuation Officer – Section 142A and Best Judgement Assessment –
Section 144
 Describe the Discretionary Best Judgement Assessment – Section 145(3)
 Elaborate the Income Escaping Assessment – Section 147

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Pre-Unit Preparatory Material

 Perform the Rectification of Mistake – Section 154 and Demand Notice – Section 156
 https://icmai.in/upload/Students/Syllabus2016/Inter/Paper-7-April-2021.pdf
 https://www.icsi.edu/media/webmodules/DIRECT_TAX_LAW_AND_PRACTICE_BOOK.pdf

11.1 INTRODUCTION
Every assessee, who earns income beyond the basic exemption limit in a financial year, should file a
statement with details of his/her income, deductions, and other related information. This is known as
the Income Tax Return (ITR).

Once a person or firm comes into the taxpayer bracket or file the income returns, the Income Tax
Department will process it. There are occasions where on the basis of the set parameters by the CBDT
i.e. Central Board of Direct Taxes, the return of an assessee gets picked for an assessment.

It must be noted that the time limit to re-open income tax assessment cases has been decreased to 3
years. Earlier it was 6 years. Also, in serious tax evasion, the assessment can be reopened until 10 years,
only when concealment of income is above 50 lakh rupees.

11.2 NORMAL RETURN – SECTION 139(1)

Normal Return Section 139(1)

Every person, according to Section 139(1), must:
a. be a corporation or a business; or
b. If his total income or the total income of any other person in respect of whom he is assessable
under the Income-tax Act exceeded the maximum amount not chargeable to income-tax during the
previous year, he is a person other than a company or a firm.

Shall, provide a return of his or her earnings.

Such income tax return must be filed on or before the due date, in the prescribed form verified in the
prescribed manner, and include any other information that may be required.

139 Section (1)

The mandatory and voluntary filing of income tax returns is discussed in this section. The situations in
which ITR filing is required are listed below.
 Anyone whose total income exceeds the income tax exemption limit is required to file an ITR by the
deadline.
 Any company whether public, private, domestic, or foreign, which is located or doing business in India.

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 Firm can be a Limited Liability Partnership (LLP) or an Unlimited Liability Partnership.

 If an Indian resident owns an asset outside of India or has signing authority over an account that is
based outside of India. Regardless of the tax liability amount of such incomes, filing of Income Tax
Returns in the prescribed form is required in such cases.
 If their total income exceeds the prescribed limit, every HUF, AOP, and BOI is required to file Income
Tax Returns with the required documentation.

Individuals or entities are not required to file an ITR in a variety of circumstances. In such cases, their
tax returns are treated as voluntary returns that are valid tax returns.

Due dates for filling ITR

31st of July

This deadline can be extended by the ITR department but only until August 31. This due date applies to
all tax examiners who are not required to perform a tax audit. It applies to
 Salaried employees
 Self-employed or professional employees
 Freelancers
 Consultants.

30th of September

Individuals and entities whose accounting books are audited must file ITR by September 30 th of each
assessment year. This deadline may be extended at the discretion of the Indian government. This
deadline also applies to a business entity, a self-employed person or professional, a working partner
employed by a firm, or a consultant who requires an audit.

11.3 LOSS RETURN – SECTION 139(3)

139(3) Loss Return

Section 139(3) of the Income Tax Act governs the filing of income tax returns in cases of loss, which states
that if a taxpayer has incurred a loss in the previous year, he is not required to file an income tax return
for that year. Firms and corporations, on the other hand, are required to file an income tax return even
if they lose money.

Section 139(3) provisions in case of Loss

 When loss falls under the heading i.e., Capital Gains or “Profits and Gains of Business and Profession,”
then it becomes important to file ITR in order for the loss to be carried forward to the next year and
offset against future income. The Income Tax Return showing the loss must be filed on or before the
due date if it is to be carried forward to the next year and offset against future income.

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 However, if a loss is incurred under the heading House Property, it can be carried forward even if
the income tax return is filed late.
 However, if the loss is to be set-off against other income earned in the same year, the off-set is
allowed if the ITR is filed after due date is passed.
 If the taxpayer has filed a return of loss in response to a notice under Section 142(1), the loss can
only be carried forward if it is a loss from house property. In this case, however, the unabsorbed
depreciation can be carried forward.
 Although the loss for the current year cannot be carried forward unless the return of loss is submitted
before the due date, the loss for previous years can be carried forward if the return of loss for those
year(s) was submitted before the due date and the loss was assessed.

In the event of a loss, there are several advantages to filing an income tax return.

Advantage of filing ITR in the event of a loss is that the loss can be carried forward to future years and
offset against incomes which are arising in future years. This will lower future years’ taxable income,
lowering the amount of tax due in subsequent years.

As a result, even if you have a loss, it is highly recommended that you file income tax returns.

11.4 BELATED RETURN – SECTION 139(4)

139(4) Belated Return

Any person who has not filed a return within the time limits set out in section 139(1) or the time limits set
out in a notice issued under section 142(1) may file a return for any previous year at any time —
 Before the end of the relevant assessment year
 Prior to the completion of the evaluation
 Whichever comes first

Consequences of Late IT Return Submission or Filing:

If a return is filed after the due date for filing an income tax return, the following consequences will
apply. These rules apply even if a late return is filed within the timeframe specified:
1. Under section 234A, the assessee will be liable for penal interest.
2. Under section 234F, the assessee is liable for a late filing fee.
3. The late filing fee under section 234F is ` 5,000 (if ITR is filed after the due date but before December
31 of the assessment year) or ` 10,000 (if the return is filed after the due date but before December
31 of the assessment year) (if return is furnished after December 31 of the assessment year).
4. If the tax payer’s total income doesn’t exceed ` 500000, then in that circumstance, the late fee cannot
be more than ` 1,000.
5. A few losses cannot be carried forward if the return of loss is submitted after the deadline. However,
if a return is filed late and a claim for carry forward of losses is made, the CBDT has the authority
under section 119(2) to excuse the delay.

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6. Deductions under sections 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE are not available if the return is
filed after the due date. Also, non-availability of exemptions under 10A and 10B sections.

11.5 REVISED RETURN – SECTION 139(5)

139(5) Revised Return

1. Requirements for Filing a Revised Income Tax Return Under Section 139 (5)
A person may file a revised return of income under section 139 if certain conditions are met (5).
The following requirements must be met:
 Which Returns are Revisable:
If a person discovers an omission or a false statement in a return filed under section 139(1) or
(4), he may file a revised return. Even a late return filed under section 139(4) can be revised
beginning in the assessment year 2017-18.
 Misstatement or omission: Only if the assessee discovers an error or omission in the original
return can a revised return be filed.
 Time Limit: A revised ITR can be filed before the end of the relevant assessment year or the
assessment’s completion, whichever comes first.
A revised ITR can be filed for 2019-20 until March 31, 2020. If the assessment is completed before
March 31, 2020 (for example, on December 15, 2019), a revised return can be filed before that date.
2. ‘Completion of Assessment’ in relation to Section 139(5):
In section 139(5), the term assessment refers to assessments made under sections 143(3) and 144.
Because the return can be revised even after the intimation under section 143(1) has been served, an
assessment made under section 143(1) will not be considered an assessment for this purpose.
Furthermore, the ITR can be revised prior to the date of passing the order under section 143(3) or
section 144, but not after it has been served.
3. Is it possible to revise a return filed under section 139(3), 139(4A), 139(4B), 139(4C), or 139(4D)?
A return of loss filed under section 139(3), 139(4A), 139(4B), 139(4C), or 139(4D), is treated the same as
a return filed under section 139(1).
As a result, a return filed under section 139(3) or 139(4A), among other provisions, can be revised
under section 139(5).
4. Is it possible to revise a return filed within the CBDT’s extended timeframe?
Return filed under section 139(1) is one that is filed within the period extended under section 119, i.e.
one that is extended by the CBDT beyond the due date specified in section 139(1) (1).
As a result, it can be changed under section 139. (5).

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5. Is it possible to revise a return submitted in response to a notice under Section 142(1)?

Only after the due date specified in section 139 can the Assessing Officer issue the assessee a notice
under section 142(1) to file a return of income (1). Even if a return filed in response to a notice under
section 142(1) is filed after the due date set forth in section 139(1), it can be revised under section
139(1). (5).However, if a return in response to a notice under section 142(1) is filed after the time
period specified in the notice, it will be a return filed under section 139(4), and such a return cannot
be revised, according to the Supreme Court’s decision.
As a result, a return filed in response to a notice under section 142(1) can be revised, but any loss
declared in either the original return or the revised return, due to the fact that the original return
was filed after the due date, cannot be carried forward under section 80 read with section 139(3).6).
6. Is it possible to revise a Revised Return?
If an assessee discovers an omission or a false statement in a revised ITR, it is revised again in that
case, as long as it is done within the time limit.
7. Revised Return Replaces Original Return:
When a revised return is filed, the original return must be considered withdrawn and replaced by
the revised return. Thus, if a return filed under section 139(1) declares income but is later revised to
declare a loss, the loss can be carried forward because the revised return will replace the original
return that was filed on time.
Similarly, if a return declaring a loss is filed within the time allowed under section 139(1) and the loss
is increased in the revised return, the higher loss is eligible for carryover.
8. Is it possible to revise a return after receiving a Notice under Section 143(2) or a Show Cause
Notice under Section 144?
A return can be revised under the law (prior to the amendment made by the Finance Act, 2017,
w.e.f. A.Y. 2018-19), at any time before the end of the relevant assessment year or the completion of
assessment, whichever comes first.
The assessment is not yet complete if a notice under section 143(2) or a show cause notice under
section 144 is issued. As a result, even after receiving such notice, the original return can be revised
if it was submitted on time. However, the penalty for concealing income under section 271(1)(c) may
be applied to the additional income disclosed in the revised return.

11.6 DEFECTIVE RETURN – SECTION 139(9)

139(9) Defective Return

1. Defective or Incomplete Return: If the Assessing Officer believes the assessee’s return of income
is incorrect, he may notify him of the error and give him 15 days to correct it. On the assessee’s
application, the Assessing Officer may extend the time limit.

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Within 15 days or extended time, if the defect is not corrected or rectified then the return will be
invalid, and the consequences will be the same as if the assessee had not filed a return at all. The
Assessing Officer may forgive the delay and treat the return as a valid return if the assessee corrects
the defect after 15 days, or the extended time, but before the assessment is completed.
2. In the following situations, a return of income is considered defective:
a. The Return Form has not been properly completed:
 Complete all items on the income-tax return form (ITR-1 to ITR-7) in the order listed on the form.
If any schedule of the relevant form does not apply to an assessee, the score should be “.... NA...”
across the board. If something isn’t applicable, put a “NA” next to it. Write 0 to represent a nil
figure “NONE. There should be no blank columns or rows in your spreadsheet.” Otherwise, the
return could be considered faulty or even void.
 Return of Income without Self-Assessment Tax - Section 139(9) states that a return of income is
considered defective unless the tax, plus interest, if any, due under section 140A has been paid on
or before the due date. From the assessment year 2017-18, this provision has been amended by the
Finance Act of 2016. Following this change, a valid return will no longer be considered defective
if self-assessment tax and interest due under section 140A are not paid on or before the due date.
3. Defective or incomplete ITRs because of the annexures, statements, and accounts, and others:
Proof of pre-paid taxes, few statements, reports, accounts, and other items must accompany
the ITR under section 139(9), or the return will be deemed defective. With new income tax return
forms, however, no certificate, report, computation, or final accounts can be attached. Similarly,
proof of pre-paid taxes (such as tax deducted/collected at source, advance payment of tax, and self-
assessment tax) cannot be attached. As a result, the assessee should keep these certificates, reports,
computations, final accounts, and proof of pre-paid taxes on hand. These may be provided whenever
the Assessing Officer wishes to examine them, whether in the course of assessment proceedings or
not. Non-compliance with this requirement will not result in a deficient return of income.

11.7 VERIFICATION OF RETURN – SECTION 140

140 Verification of Return

ITR that has been filed and uploaded needs to be validated, which if not done will make it null and void
which further would result in belated return filing and penalty, interest pay out.

Thus ITR verification has to be made within 120 days period of filing it either physically or electronically.

The ITR filing procedure is complete only if the verification part is too complete as can be analysed from
the above paragraph:

Process for e-verification of ITR is given below:

Step 1: On IT department’s e-filing portal select “e-verify return” under the Quick Links section.

Step 2: Assessee’s PAN, assessment year and acknowledgement number generated upon e-filing needs
to be entered.

Step 3: The web page that follows will have the uploaded return details displayed. Henceforth, ITR
verification process can be commenced by tapping on e- verify on this page.
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Step 4: An EVC i.e. electronic verification code has to be generated using one out of several ways being
displayed.

Step 5: On successful generation of EVC, enter it and tap submit.

Step 6: Thereafter, we will get “Return successfully e-verified” message along with a transaction ID. The
green button will aid us in our record’s access.

Electronic Verification Code Generation Methods (EVC)

An EVC being a 10 digit alphanumeric code is compulsory for e-verification process which if not completed
within the maximum time i.e. 120 days from filing proves as invalid. Separate EVC’s are required in case
of an original and a revised return. It can be generated through either of various methods listed below:
1. Online banking
Step 1: Log in to your online banking a/c.
Step 2: We will find an Income tax filing tab on the home page.
Step 3: Navigate to the IRS website and select the e-verify option.
Step 4: On the e-filing web page, go to the “My Account” tab and generate EVC.
Step 5: It will be send to the registered phone number and e-mail address.
Step 6: Your return can be verified now with this code available with you.
2. Using a Bank’s ATM
Step 1: At Bank’s ATM do the debit card swiping.
Step 2: Generate PIN for e-filing option has to be selected from the menu displayed.
Step 3: EVC will be sent to your registered mobile phone number.
Step 4: On the IRS e-filing website, select “e-verify using a bank ATM.”
Step 5: Finish the verification process by entering your EVC.
3. Bank Account Number
Step 1: On the e-fiing portal of IT department, under Quick Links select the e-verify return option.
Step 2: Assessee’s PAN along with A.Y and acknowledgement number generated upon filing of return
have to be entered.
Step 3: E-verify option has to be selected in the displayed menu.
Step 4: Choose option 3 “Generate EVC using Bank Account Number” from the list of EVC generation
methods displayed.
Step 5: To allow you to do pre validation of your bank a/c, there will be a screen appearing.
Step 6: Do bank selection entering alongside IFSC code and phone number. Then in the displayed
menu, select “prevalidate”.

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Step 7: Post your bank a/c’s prevalidation web page would appear as follows. In the displayed menu,
choose “Yes” to receive EVC in SMS form.
Step 8: Upon entering of EVC your return will be e-verified. We can download the attachment upon
successful e verification for our record purpose.
4. Account Number (Demat)
Step 1: Log in to your e-filing account with IRS.
Step 2: In the dashboard view, select the “profile Settings” tab.
Step 3: Select “Prevalidate your demat account” from the displayed menu, and the web page that
appears will appear.
Step 4: Upon entering fields like Depository Type (NSDL/CDSL), DP ID, Client ID, Mobile Number, and
Email ID Click the “Prevalidate” button
Step 5: Now click yes to receive EVC on your registered mobile number.
Step 6: We can download the attachment for our record purpose on e-verifying successfully.
5. One-Time Password (OTP) for Aadhaar
Step 1: Aadhar and PAN linking is required.
Step 2: On e-filing website, ‘e-verify using Aadhar OTP” option is selected.
Step 3: OTP will be sent to registered mobile number.
Step 4: Enter OTP for e- verification which is valid for 10 minutes only.
Step 5: Attachment can be downloaded upon successful e- verification.
Physical verification of ITR: a step-by-step guide
Step 1: Sign in to e-filing portal of IT department.
Step 2: Go to “View Returns/Forms.” And you will find e-filed returns etc.
Step 3: Choose the ITR-V/ Acknowledgement.to download ITR-V.
Step 4: Password is needed to open this form that is your PAN in small letters and date of birth, being
entered at on go as explained below.
If your PAN number is ABCDE12345 and your date of birth is 01/02/1983 (dd/mm/yyyyy), the password
will be “abcde1234501021983.”
Step 5: It has to be signed with blue ink.
Step 6: Not later than 4 months of filing ITR, ITR V has to be dispatched at the below mentioned
address:
Centralised Processing Centre, Income Tax Department,
Bengaluru, Karnataka 560500

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11.8 AADHAR NUMBER – SECTION139AA

139AA Aadhar Number

With effect from April 1, 2017, Section 139AA was added. The following are the provisions of this section:

1. Persons who are eligible to quote Aadhaar number (Category A) [Section 139AA(1)]:
On or after 1.7.2017, everyone who is eligible for an Aadhaar number must quote their Aadhaar
number—
 in the PAN allocation application form (Permanent Account Number;)
 in the income return:
Where an individual doesn’t have the Aadhaar number, the Enrolment ID of Aadhaar application
form issued to that individual at enrolment time shall be quoted in the application for a PAN or, as
the case may be, in the details of the return of income given by him or her.
2. Eligible Person to Inform Aadhaar Number (Category B) [Section 139AA(2)]:
On or before a date to be notified by the Central Government in the Official Gazette, every person who
has been assigned a permanent account number as of 1.7.2017 and is eligible to obtain an Aadhaar
number shall intimate his Aadhaar number to such authority in such form and manner as may be
prescribed.
However, if the Aadhaar number is not provided, the permanent account number allotted to the
person is deemed invalid, and the other provisions of this Act apply, as if the person had not applied
for a permanent account number.
When Section 139AA’s provisions doesn’t apply to certain individuals or states [Section 139AA (3)]:
This section doesn’t apply to individual, class, or classes of persons, or any State or part of a State,
as the Central Government may notify in the Official Gazette (see Notification No. 37/2017).
Notification No. 37/2017 was issued on May 11th, 2017.
The Central Government hereby notifies that, in exercise of the powers conferred by sub-section (3)
of section 139AA of the Income-tax Act, 1961 (43 of 1961), the provisions of section 139AA shall not
apply to an individual who does not have an Aadhaar number or an Enrolment ID and is:—
 Residing in Assam, J&K, and Meghalaya
 A non-resident under the 1961 Income Tax Act
 A person whose age is 80 or older at any point during the previous year;
 Not a citizen of India.
The 1st of July 2017, will be the effective date of this notification.

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11.9 PAN – SECTION 139A

139A PAN
PAN stands for Permanent Account Number. The provisions under the Section 139A, Income Tax Act,
(Rule 114) deals with application for and acquisition of a PAN.

The I.T. Department assigns each assessee a 10-digit PAN code.

The Information Technology Department has made quoting the Permanent Account Number (PAN)
mandatory in many cases. An assessee must include his PAN in his/her return.

A person must submit a Form 49A application to the Assessing Office with jurisdiction over the applicant.
UTI Investor Services Ltd. has been given permission by the Department to improve PAN-related
services. ( UTISIL) will be in charge of managing IT PAN Services Centres in all cities and towns with an
Income Tax Office, and National Securities Depository Limited (NSDL) will be in charge of dispensing
PAN services. The main benefits of having a PAN include the ability to locate the Assessing Officer more
easily, faster assessments, refund processing, tax compliance, credit for tax payments, and control over
unregulated and undisclosed dealings.

It is important to fill the PAN application completely and accurately by writing required information
which includes the assessee name, father’s name, address, birth date, sources of income, and so on.

2. Compulsory Requirement to acquire PAN

A PAN is need for the following individuals:

If income more than Exemption Limit or Turnover more than ` 5,00,000.

If your income more than the exemption limit or your turnover more than ` 5,00,000 , you must file a
tax return.

Before the end of the accounting year in which the gross turnover or receipts exceed the maximum
amount chargeable to tax, or before May 31 of the assessment year in which the income exceeds the
maximum amount chargeable to tax, Rupees 5,00,000, an application for a PAN should be submitted.
 Trust for Charitable Purposes: A charitable trust that is required to file a return of income under
section 139(4A) is required to obtain a PAN.
Financial transaction of at least ` 2,50,000 or more
With effect from April 1, 2018, any resident person (other than an individual) who enters into a
financial transaction of ` 2,50,000 or more during a financial year (as well as the managing director,
director, partner, trustee, author, founder, karta, chief executive officer, principal officer, or office
bearer of such person, or any person competent to act on behalf of such person) must obtain a PAN.
 The central government has designated a person: The Central Government has the authority to
notify (for the purpose of collecting any information) anyone who wishes to apply for a PAN. The
Central Government has notified the following individuals for this purpose, and these individuals

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must apply for a PAN with the Assessing Officer: exporters/importers, assessees under central
excise/service tax/sales tax.
 Allotment by his own Assessing Officer: Aside from the aforementioned situations, the Assessing
Officer has the authority to assign a PAN to any other person who owes tax. Any other person can
apply for a PAN.

3. Apply for PAN [Section 139A(1)]

In the following cases, any person who has not been assigned a permanent account number must apply
to the Assessing Officer for a permanent account number within the time period specified:
 If during any previous year, his total income, or the total income of any other person for whom he is
assessable under this Act exceeded the maximum amount not subject to income tax; or
 If he is engaged in any business or profession with total sales, turnover, or gross receipts of ` 5,00,000
or more in any previous year; or
 He must file a return of income, also known as a return of trust and charitable institutions, under
section 139(4A).

4. Application for Allotment of Permanent Account Number (PAN) [Rule 114(1) & (2)]
1. Form for application [Rule 114(1)]: Form No. 49A or 49AA, as the case may be, must be used to
apply for a permanent account number under section 139A(1), section 139A(1A), section 139A(2), or
section 139A(3).
Provided, however, that an applicant may apply for a permanent account number through a
common application form notified by the Central Government in the Official Gazette, and that the
Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems)
shall specify the classes of persons, forms, and formats, as well as the procedure for safe and secure
transmission of such forms and formats in relation to furnishing of a permanent account number.
2. Who should make the application [Rule 114(2)]: An application pursuant to rule 114(1) must
be filed,—
 If the Chief Commissioner or Commissioner has delegated the function of assigning a permanent
account number under section 139A to a specific Assessing Officer, to that Assessing Officer
 Otherwise, to the Assessing Officer who has jurisdiction over the applicant’s assessment.

11.10 TRP – SECTION 139B

139B TRP
A Tax Return Preparer (TRP) is a person who has been trained by the Income Tax Department to assist
taxpayers in the preparation and filing of their income tax returns. It is extremely difficult for the
average person to file an ITR.

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The assessee may file an I.T.R. with the assistance of TRP.

(Tax return preparer)These are government-authorised special agents who are trained to file tax
returns.

TRP can only file I.T.R. for cases that are not audited.

The following individuals are not eligible to become TRP:

a. C.A.

b. A lawyer (legal practitioner)

c. Any officer of a Schedule Bank with which the Assessee has a current account.

The following is a brief list of the key responsibilities of a Tax Return Preparer:
 Creating a taxpayer’s income tax return.
 Submitting the completed tax return to the appropriate Assessing Officer or concerned agency after
it has been verified by the resource centre.
 Obtaining a copy of the IT department’s acknowledgement on behalf of the taxpayer. This document
serves as proof of tax return submission.
 On or before the 7th of each month, submit a statement of particulars to the Resource Centre.
 Keeping detailed records of all tax returns prepared by them during the current and previous
assessment years.

11.11 SELF-ASSESSMENT TAX – SECTION 140A

140A Self-Assessment tax

New section 140A is added.
The following (section shall be inserted after section 140 of the Income-tax Act: —
Self-assessment
“140A. (1) Where a return is filed under section 139 and the tax due on the basis of that return, less
any tax already paid under any provision of this Act, exceeds five hundred rupees, the assessee shall
pay the tax due within thirty days of filing the return.”
2. Any amount paid under sub-section (1) following a provisional assessment under section 141 or a
regular assessment under sections 143 or 144 is deemed to have been paid towards the provisional
or regular assessment, as applicable.
3. If there is a failure on part of the assessee in tax payment or a part thereof in accordance with sub
section 1 provisions, he is under an obligation to pay such amount as a penalty as directed by the
ITO, subject to a provisional assessment u/s 141 or a regular assessment u/s 143 or 144 being made
not later than 30 days as referred, unless the penalty so payable shouldn’t cross tax’s amount 50%
However, before any such penalty is imposed, the assessee must be given a reasonable opportunity
to be heard.

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11.12 INQUIRY BEFORE ASSESSMENT – SECTION 142(1)

The Section 142(1) tax notice is the notice that is usually served after the return has been filed to request
additional information and documents from the assessee and to assess a specific case. This notice can
also be used to force him to file his return if he hasn’t already done so.

When you file your income tax return under section 139 (1) or when you do not file your income tax
return under section 139 (1) and the time limit for filing such return has passed, a notice under section
142(1) can be issued.

The Assessing Officer, on the other hand, may not demand the production of any accounts dating back
more than three years from the previous year.

The Income Tax Department has issued a notice under section 142(1) for:
1. Income Tax Return Filing: You can get a notice under section 142(1) requesting you do file ITR, if
you have not filed your return within the particular time frame or before the end of the relevant
assessment year.
2. Creating specialised reports and documents: By way of Notice u/s 142, your Assessing Officer (AO)
may ask you to produce specific accounts and documents after you’ve filed your income tax return
(1). You might be asked to produce your purchase books, sales books, or proofs of any deductions
you’ve taken, for example.
3. Any other information, notes, or calculations that the AO requests: The Assessing Officer may
require you to provide information, notes, or workings on specific points as requested by him in
writing and in the prescribed manner, which may or may not form part of the books of accounts. A
statement of your assets and liabilities, for example. The Joint Commissioner must, however, give
his or her approval first.

11.13 SPECIAL AUDIT – SECTION 142 (2A)

142(2A) Special Audit

The assessing officer can order a special audit of a taxpayer’s accounts under Section 142(2A) of the
Income-tax Act, 1961. If the assessing officer believes it is necessary due to the nature and complexity of
the accounts, he or she may exercise this power.

It’s worth noting that a special audit can be ordered even if the accounts have already been audited
under other laws.

When the Assessing Officer fails to understand the complexity of the accounts during any proceeding,
a special audit is conducted. The Chief Commissioner of Income Tax can issue a notice for a special
audit to be conducted by a chartered accountant with the prior approval of the Chief Commissioner of
Income Tax.

Special Audit circumstances

 the accounts’ nature and complexity
 the number of accounts

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 doubts about the accuracy of the books

 a large number of transactions in the books
 the nature of the assessee’s specialised business activity, the revenue’s interests

The auditor’s fees would be determined by the chief commissioner or commissioner, and if the taxpayer
did not pay them, he would be considered in default, and the fees would be recovered from him in
accordance with the Act’s sections 220 to 232. The audit must be completed within the specified time
frame or within such additional time as the assessing officer may determine. The period will be extended
if the taxpayer refuses to cooperate with the auditor.

11.14 ESTIMATION OF VALUE OF ASSETS BY VALUATION OFFICER – SECTION 142A

142A Reference to Valuation officer

1. The Assessing Officer may refer a Valuation Officer to estimate the value, including fair
market value, of any asset, property, or investment to assess or reassess and submit a copy of the
report to him.
2. Whether or not the Assessing Officer is satisfied with the correctness or completeness of the assessee’s
accounts, he may refer the matter to the Valuation Officer in accordance with sub-section (1).
3. On a referral made under sub-section (1), the Valuation Officer has all of the powers conferred on
him by section 38A of the Wealth-tax Act, 1957, for the purpose of estimating the value of the asset,
property, or investment (27 of 1957).
4. After giving the assessee an opportunity to be heard, the Valuation Officer shall estimate the value
of the asset, property, or investment, taking into account any evidence the assessee may produce as
well as any other evidence in his possession gathered.
5. If the assessee refuses to cooperate or follow his directions, the Valuation Officer may estimate the
value of the asset, property, or investment to the best of his ability.
6. Within six months of the end of the month in which a reference is made under sub-section (4) or (5),
the Valuation Officer shall send a copy of the report of the estimate made under sub-section (4) or
(5), as the case may be, to the Assessing Officer and the assessee (1).
7. The Assessing Officer may consider the report of the Valuation Officer in making the assessment
or reassessment after receiving it from the Valuation Officer and after giving the assessee an
opportunity to be heard.

11.15 BEST JUDGEMENT ASSESSMENT – SECTION 144

144 Best Judgement Assessment

In some cases, the Assessing Officer is required to make an assessment of the total income or loss to the
best of his judgement after considering all relevant material gathered.

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These are examples of such situations:

 if a person fails to file his or her tax return.
 if a person fails to comply with all of the terms of a section 142(1) notice.
 if a person does not follow the instructions to have his accounts audited.
 if a person fails to respond to a section 143(2) or 143(3) scrutiny notice
 if the Assessing Officer has doubts about the accuracy or completeness of the accounts

Only after the assessee has been given the opportunity to be heard can a best judgement assessment
be made.

Before making a Best Judgement Assessment, the assessee must be given an opportunity.

Only after giving the assessee an opportunity to be heard by giving notice to the assessee to show cause
why the assessment should not be completed under section 144 can the best judgement assessment be
made. However, if a notice under section 142(1) has already been issued prior to making an assessment
under this section, such notice will not be required.

Best Judgment Assessment on Accounts Rejection:

Section 145(3) empowers the Assessing Officer to reject account books that are untrustworthy, false,
incorrect, or incomplete. The Assessing Officer has the authority to reject the books of account for the
following reasons and make the assessment in accordance with section 144:
a. He isn’t satisfied with the assessee’s accounts because they aren’t correct or complete.
b. Although the assessee’s accounts are correct and complete to the Assessing Officer’s satisfaction,
the method of accounting used is such that profits cannot be correctly calculated, in the Assessing
Officer’s opinion.
c. When the assessee’s accounting method isn’t followed on a regular basis, or when the assessee’s
method of accounting isn’t followed at all,
d. Where income has not been computed in accordance with the notified standards under
section 145(2)”

11.16 DISCRETIONARY BEST JUDGEMENT ASSESSMENT – SECTION 145(3)

145(3) Discretionary Best Judgement Assessment

Even if the assessing officer is not satisfied with the correctness or completeness of the assessee’s
accounts, or if the assessee has not used any method of accounting on a regular and consistent basis,
discretionary best judgement assessment is performed. Judgment is the process of reaching a judicial
decision based on the best of available evidence.

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11.17 INCOME ESCAPING ASSESSMENT – SECTION 147

147 Income Escaping Assessment

If the Assessing Officer has reason to believe that any taxable income has escaped assessment, he
may assess or reassess it. A notice under section 148 will be issued for this purpose. Any other income
that escaped assessment and comes to the attention of the Assessing Officer later in the course of the
proceeding under section 147 can be included in the assessment once it has been reopened.

There are two requirements:

1. The Assessing Officer must have reason to believe that income, profits, or gains subject to income
tax have gone untaxed.
2. Such an escapement had occurred as a result of the assessee’s omission or failure to disclose fully or
truthfully all material facts necessary for his assessment of that year.
 For such cases, AO will make reassessment of income or recalculation of loss, allowance and like.
However, if no return of income has been furnished or a return of income has been furnished
but the assessment has not been completed by the Assessing Officer for that assessment year,
the procedure followed by the Assessing Officer will be referred to as Assessment rather than
Reassessment or Re-computation under section 143(3)/144.
 Assessment, reassessment, or re-computation made if required will attract tax at same rates i.e.
if there were no income escapement rates thus charged. [Section 152(1)] This means that tax will
be levied at the rate or rates in effect during the relevant assessment year in which the income
has escaped assessment.
 The provisions of sections 148 to 153 govern and apply to the initiation of the assessment
proceeding under section 147.
1. When can the Reassessment Process for any Income Escaping Assessment be Begun [Section 147,
Proviso 3]? –
If the AO has made assessment u/s 143(3)/147 and he wants to go for further proceedings at the end
of a.y, 2 conditions have to be satisfied. There is an exception in the following case which calls for
meeting of sole condition i.e. condition 1:
 If he wants to move for further proceedings not later than 4 years starting end of a.y, the original
assessment being completed u/s 143(1),143(3),144 or 147 or
 If the Assessing Officer wishes to take action after the four-year period has passed and the
original assessment was completed under section 143(1) or 144, the Assessing Officer may do so.
The above rule, however, does not apply if any income from an asset (including a financial interest
in a company) located outside India that is taxable has escaped assessment for any assessment
year.
2. Income Deemed Cases Were Not Assessed (Explanation 2 of Section 147)
It specifies that the following situations are also considered to be cases where taxable income has
escaped assessment:

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a. where the assessee has not provided a return of income and no assessment has been made
despite the fact that:
 His total earnings; or
 The total income of any other person for whom he is assessable under this Act during the
preceding year exceeded the maximum amount not subject to income tax;
If the Assessing Officer wishes to take action after the four-year period has passed and the
original assessment was completed under section 143(1) or 144, the Assessing Officer may do so.
b. where the assessee has provided a return of income but has not made an assessment (scrutiny/
best judgement assessment) and the Assessing Officer notices that the assessee:
 Has understated his or her earnings; or
 Has claimed in the return an excessive loss, deduction, allowance, or relief.
c. (ba) the assessee has failed to file a report under section 92E in respect of any international
transaction for which he was required to do so.
d. whether a return of income has been furnished or not has been assessed under section 143(3) or
144, but:
 Or taxable income has been under-assessed; or
 Income that is taxable has been assessed at a rate that is too low; or
 The Income Tax Act has provided excessive relief to income that is subject to tax; or
 The income-tax act’s excessive loss or depreciation allowance, as well as any other allowance,
has been computed.
e. (ca) income tax return hasn’t been filed or if filed, AO on receipt of information or documentation
from income tax authority prescribed therein has arrived at a conclusion that either income of
the assessee is above the exempted amount, or he has misstated the income or wrongly claimed
any loss or deduction etc.
f. when a person’s assets (including financial interests in any entity) are discovered to be located
outside of India.

11.18 RECTIFICATION OF MISTAkE – SECTION 154

154 Rectification of Mistake

Any order issued by the Assessing Officer may contain an error from time to time. In this case, a mistake
that is obvious from the record can be corrected under section 154. This section discusses the provisions
of Section 154 relating to the correction of mistakes. Section 154 can be used to overturn an order. An
income-tax authority may, in order to correct any mistake apparent from the record, –
a. Amend any order issued under the Income-Tax Act’s provisions.
b. Do any amendment to an intimation or deemed one sent u/s 143(1)

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c. Amend any intimation sent under section 200A(1) [section 200A deals with the processing of tax
deducted at source statements, also known as TDS returns].
d. make any necessary changes to any intimation under section 206CB.

(*) A TDS statement is processed under section 200A after any arithmetic errors, as well as any incorrect
claims, have been corrected. Similarly, the Finance Act of 2015 adds a new section 206CB to address
TCS statement processing. The taxpayer is entitled to a hearing if his or her tax liability or refund is
increased or reduced as a result of a mistake being corrected.

Correction of an order that is the subject of an appeal or a revision

If the order is the subject of an appeal or revision, the Assessing Officer cannot correct any matter
decided in the appeal or revision. To put it another way, if an order is the subject of an appeal, the
Assessing Officer can only correct the issues that the appeal does not resolve.

Power to do rectification

The income-tax authority has the authority to correct the error on its own. The taxpayer can notify the
income-tax authority of the error by filing an application to correct the error.

If the Commissioner (Appeals) issues an order, the Commissioner (Appeals) can correct any errors that
the Assessing Officer or the taxpayer have brought to his or her attention.

Time-limit for rectification

Rectification order cannot be issued after expiry of four years since the financial year in which the
rectification was sought to be made has ended. The period of 4 year commences on the order date that
needs correction, not the original order’s one. Consequentially, if any revision is made to an order, setting
aside or a modification otherwise, 4 years period commences on new order’s date. The amendment
should be made to the order or claim allowance be refused, for which a period of six months has been
given on receiving rectification’s request.

The procedure to be followed when filing a rectification application

The taxpayer should keep the following points in mind before filing any rectification application.
 The taxpayer should carefully review the order against which the rectification application will be
filed.
 While the taxpayer may believe that the order issued by the Income-tax Department contains an
error, the taxpayer’s calculations may be incorrect, and the CPC may have corrected these errors.
For example, the taxpayer may have computed incorrect interest on the income tax return but
correct interest on the intimation.
 To avoid having to use rectification in the situations described above, the taxpayer should examine
the order and confirm that any intimation errors are present.
 If he notices a mistake in the order, he should file an application for rectification under section 154.

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 He should also verify that the error is obvious from the records and does not require further
explanation, elaboration, or investigation. A taxpayer can correct a mistake by submitting an online
application. Before submitting an online application for rectification, the taxpayer should review
the rectification procedure at https i/incometaxindiaefiling.gov.in/.
 Any amendment or rectification that increases the taxpayer’s (or deductor’s) liability must be made
only after the authority has given the taxpayer (or deductor) notice of its intention to do so and
given the taxpayer (or deductor) a reasonable opportunity to be heard.

11.19 DEMAND NOTICE – SECTION 156

156 Demand Notice

If any tax, interest, penalty, fine, or other sum is due as a result of an order made under this Act, the
Assessing Officer shall serve the assessee with a notice of demand in the prescribed form11 specifying
the amount due:

If the assessee or 12[the deductor or collector under sub-section (1) of section 143, sub-section (1) of
section 200A, or sub-section (1) of section 206CB] is found to be liable for any sum, the intimation under
those sub-sections shall be deemed to be a notice of demand for the purposes of this section.

Conclusion 11.20 CONCLUSION

 Every assessee, who earns income beyond the basic exemption limit in a financial year, should file a
statement with details of his/her income, deductions, and other related information. This is known
as the Income Tax Return (ITR).
 Every person, according to Section 139(1), must:
a. being a corporation or a business; or
b. If I his total income or (ii) the total income of any other person in respect of whom he is assessable
under the Income-tax Act exceeded the maximum amount not chargeable to income-tax during
the previous year, he is a person other than a company or a firm.
Shall, provide a return of his or her earnings.
 Section 139(3) of the Income Tax Act governs the filing of income tax returns in cases of loss,
which states that if a taxpayer has incurred a loss in the previous year, he is not required to file
an income tax return for that year.
 A revised ITR can be filed before the end of the relevant assessment year or the assessment’s
completion, whichever comes first.
 A return of loss filed under section 139(3), 139(4A), 139(4B), 139(4C), or 139(4D), is treated the same as
a return filed under section 139 (1).
 Return filed under section 139(1) is one that is filed within the period extended under section 119, i.e.
one that is extended by the CBDT beyond the due date specified in section 139(1) (1).

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 When a revised return is filed, the original return must be considered withdrawn and replaced by
the revised return. Thus, if a return filed under section 139(1) declares income but is later revised to
declare a loss, the loss can be carried forward because the revised return will replace the original
return that was filed on time.
 If the Assessing Officer believes the assessee’s return of income is incorrect, he may notify him of
the error and give him 15 days to correct it. On the assessee’s application, the Assessing Officer may
extend the time limit.
 ITR that has been filed and uploaded needs to be validated, which if not done will make it null and
void which further would result in belated return filing and penalty, interest pay out.
 ITR verification has to be made within 120 days period of filing it either physically or electronically.
 PAN stands for Permanent Account Number.
 The provisions under the Section 139A, Income Tax Act, (Rule 114) deals with application for and
acquisition of a PAN.
 The Information Technology Department has made quoting the Permanent Account Number (PAN)
mandatory in many cases. An assessee must include his PAN in his return.
 A Tax Return Preparer (TRP) is a person who has been trained by the Income Tax Department to
assist taxpayers in the preparation and filing of their income tax returns. It is extremely difficult for
the average person to file an ITR.
 The Section 142(1) tax notice is the notice that is usually served after the return has been filed to
request additional information and documents from the assessee and to assess a specific case. This
notice can also be used to force him to file his return if he hasn’t already done so.

11.21 GLOSSARY

 Tax Return Preparer (TRP): It refers to a person who has been trained by the Income Tax Department
to assist taxpayers in the preparation and filing of their income tax returns.
 Assessing Officer: It refers to a Valuation Officer to estimate the value, including fair market value,
of any asset, property, or investment to assess or reassess and submit a copy of the report to him.
 Tax notice: It is the notice that is usually served after the return has been filed to request additional
information and documents from the assessee and to assess a specific case.
 PAN: It stands for Permanent Account Number.

11.22 CASE STUDY: FILING ITR

Case Objective
The aim of this case is to describe the return file and assessed.

Different situations under which return may be filed and assessment completed
1. Let’s say Mr B is a salaried employee and has filed his return of income for Accounting Year 2021-22
on 10 July 2021. Now, what would follow on IT department’s part.

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As Mr B has filed his ITR within the due date, assessment proceedings will start. If tax computed by
the department on his income is exactly matching with that furnished in his ITR, regular assessment
will be done and an assessment order u/s 143(1) will be issued to Mr B stating the amount of refund
due, if any.
2. Let’s say Mr B is a salaried employee and has filed his return of income for Accounting Year 2019-20
on 15.10 July 2019. What would be the consequences of this.
The only thing that would change on assessee’s part would be that he will need to pay interest and
penalty amount as applicable for late filing of return. IT department’s action will remain same as
stated in the above paragraph, other things being equal too.
3. Mr B carrying on a trading business fails to get his accounts audited for accounting year 2019-20 in
spite of being eligible to do so. What would follow on IT department’s end?
It is one of the criteria’s which qualifies for action to be taken on part of AO in the form of making
Best judgement assessment.
Hence, necessary action would be taken on department’s part and assessment u/s 144 would be
made after giving an opportunity of being heard to the assessee.
4 Mr B carrying on a trading business has furnished his return of income for accounting year 2019-20
on 20.10.2019. The assessment has been made u/s 143(3).AO has further reasons to believe regarding
the inaccuracy of accounts furnished by the assessee .What would follow on IT department’s part.
The AO has the right to initiate proceedings u/s 147 Income escaping assessment if he reasons to
believe that particulars and information furnished by the assessee are inaccurate and incomplete
and necessary consequences would then follow.

Questions
1. Define ITR.
(Hint: Every assessee, who earns income beyond the basic exemption limit in a financial year, should
file a statement with details of his/her income, deductions, and other related information)
2. Who is assessing officer?
(Hint: Valuation Officer to estimate the value, including fair market value, of any asset, property, or
investment to assess or reassess and submit a copy of the report to him)

11.23 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Describe in detail the Section 139(3), Loss Return of Income tax Act.
2. Explain the rules which are applied if a late return is filed within the timeframe specified.
3. What is defective return? Elaborate.

11.24 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

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A. Hints for Essay Type Questions

1. Section 139(3) of the Income Tax Act governs the filing of income tax returns in cases of loss, which
states that if a taxpayer has incurred a loss in the previous year, he is not required to file an income
tax return for that year. Firms and corporations, on the other hand, are required to file an income
tax return even if they lose money. Refer to Section Loss Return – Section 139(3)
2. If a return is filed after the due date for filing an income tax return, the following consequences will
apply. These rules apply even if a late return is filed within the timeframe specified:
Under section 234A, the assessee will be liable for penal interest.
Under section 234F, the assessee is liable for a late filing fee.
The late filing fee under section 234F is ` 5,000 (if ITR is filed after the due date but before December
31 of the assessment year) or ` 10,000 (if the return is filed after the due date but before December
31 of the assessment year) (if return is furnished after December 31 of the assessment year).
Refer to Section Belated Return – Section 139(4)
3. If the Assessing Officer believes the assessee’s return of income is incorrect, he may notify him of
the error and give him 15 days to correct it. On the assessee’s application, the Assessing Officer may
extend the time limit. Refer to Section Defective Return – Section 139(9)

@ 11.25 POST-UNIT READING MATERIAL

 https://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/Return-Of-Income/Defective-or-
Incomplete-Return-Section-139-9.html
 https://www.zeebiz.com/personal-finance/income-tax/news-income-tax-return-filing-itr-take-
these-precautions-to-avoid-mistakes-168743

11.26 TOPICS FOR DISCUSSION FORUMS

 Discuss when can notice under section 142(1) be issued.

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12 Advance Tax, TDS and TCS

Names of Sub-Units

Section 192 – TDS on Salary, Section 192A – TDS on EPS, Section 193 – TDS on Interest on Securities,
Section 194B/194BB – TDS on Winnings, Section 194C – TDS on Contract, Section 194D – TDS on
Insurance Commission, Section 194DA – LIP Maturity, Section 194E – NR Sports Person Entertainer,
Section 194H – TDS on Commission, Section 194I – TDS on Rent, Section 194IA – TDS on Immovable
Property, Section 200A – Processing of TDS Returns, Section 206C – TCS

Overview

This unit explain the Section 192 – TDS on Salary and Section 192A – TDS on EPS. It elaborates the
Section 193 – TDS on Interest on Securities, Section 194B/194BB – TDS on Winnings and Section 194C
– TDS on Contract. Further, it describes in detail about Section 194D – TDS on Insurance Commission,
Section 194DA – LIP Maturity and Section 194E – NR Sports Person Entertainer. Towards the end, it
examines the Section 194H – TDS on Commission, Section 194I – TDS on Rent, Section 194IA – TDS on
Immovable Property, Section 200A – Processing of TDS Returns and Section 206C – TCS.
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Learning Objectives

In this unit, you will learn to:

 Define Section 192 – TDS on Salary and Section 192A – TDS on EPS
 Explain Section 193 – TDS on Interest on Securities and Section 194B/194BB – TDS on Winnings
 Describe Section 194C – TDS on Contract and Section 194D – TDS on Insurance Commission
 State Section 194DA – LIP Maturity and Section 194E – NR Sports Person Entertainer
 Analyse Section 194H – TDS on Commission and Section 194I – TDS on Rent Elaborate Section
194IA – TDS on Immovable Property and Section 200A – Processing of TDS Returns
 Discuss Section 206C – TCS

Learning Outcomes

At the end of this unit, you would:

 Recognise the importance of Section 192 – TDS on Salary and Section 192A – TDS on EPS
 List down Section 193 – TDS on Interest on Securities and Section 194B/194BB – TDS on Winnings
 Elaborate Section 194C – TDS on Contract and Section 194D – TDS on Insurance Commission
 Identify Section 194DA – LIP Maturity and Section 194E – NR Sports Person Entertainer
 Analyse Section 194H – TDS on Commission and Section 194I – TDS on Rent Elaborate Section
194IA – TDS on Immovable Property and Section 200A – Processing of TDS Returns
 Assess Section 206C – TCS

Pre-Unit Preparatory Material

 https://www.incometaxindia.gov.in/tutorials/3%20e-payment%20of%20direct%20taxes.pdf
 https://www.iciciprulife.com/insurance-library/income-tax/what-is-advance-tax.html

12.1 INTRODUCTION
TDS stands for Tax Deducted at Source. It refers to a specified amount that is deducted by the employer
from the monthly salary at the source based on the assumption that the employee has a taxable income.
TDS can be deducted by banks or any other financial institutions on interest earned periodically. TDS
is a part of income tax and a source of income for the government which assists it in collecting taxes
swiftly and efficiently and using it for the country’s development. Let us understand the difference
between TDS and income tax.

Income tax is paid on the yearly income with tax being calculated for that particular financial year. TDS
is subtracted at the time of salary payment (or on interest on investments) either monthly or quarterly.

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Tax payer directly pays the income tax after determining the annual liability owed. TDS is indirect as
the tax liability is determined and TDS payment is done by a third party like an employer or a financial
institution—to the government.

12.2 SECTION 192 – TDS ON SALARY

Section 192 TDS on Salary

Tax deducted at source (TDS) on salary is dealt with in Section 192 of the Income Tax Act of 1961. TDS will
be deducted from your pay by your employer. Your employer’s salary is classified as ‘Income’ under the
heading ‘Salary,’ and your employer is responsible for deducting TDS on your estimated income for the
relevant financial year at the normal income tax rates applicable to you. TDS deducted under Section
192 is reflected in Form 16, which is issued to the employee by the employer.

Who is eligible to deduct TDS under Section 192?

It is possible for the employer to be-

 Corporations (Private or Public)
 Individuals
 HUF
 Trusts
 Firms that form partnerships
 Societies of co-operation

All of these employers must deduct TDS on a monthly basis and deposit it with the government within
a certain time frames. The deduction of tax at source requires an employer-employee relationship,
according to section 192 of the Income Tax Act. The status of the employer, such as HUF, firm or
corporation, has no bearing on the deduction of tax at the source under this section. Furthermore, when
calculating and deducting TDS, the number of employees employed by the employer has no bearing.

When does TDS occur? Deducted in accordance with Section 192

TDS is deducted at the time of actual payment of salary, not during the accrual of salary, as to required
by Section 192. This means that if your employer pays your salary in advance or arrears, the tax will be
deducted. If your estimated salary is less than the basic exemption limit, there will be no tax due and no
TDS will be deducted.

The table 1 below shows the basic exemption limit for not having to deduct TDS based on age:

Table 1: Basic Exemption Limit for not Having to Deduct Tds Based on Age:

Age Minimum Income

Resident in India below 60 years ` 2.5 lakh

Senior Citizens between 60 years and below 80 years ` 3 lakh

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Age Minimum Income

Super Senior Citizens above 80 years ` 5 lakh

What is the procedure for deducting TDS from a salary?

Calculation of the Employee’s Taxable Income

First, the employer calculates the salary of the employee for the current fiscal year. Basic pay, dearness
allowance, perquisites granted by the employer, other allowances granted by the employer such as
HRA, LTA, meal coupons, etc., EPF contributions, bonus, commissions, gratuity, salary from previous
employer, if any and so on should all be included.

The employer then calculates exemptions under Section 10 of the Income Tax Act in the next step.
Exemptions may apply to benefits such as HRA, travel expenses, uniform expenses and children’s
education allowances, among others. Reduce the amount of professional tax paid, the entertainment
allowance and the ` 50,000 standard deductions.

The employer subtracts the exemption from the gross monthly income, leaving the net amount as
taxable salary income.

If the employee has provided information on other sources of income, such as rental income from a home
or bank deposits, such amounts should be added to the net taxable salary. Furthermore, interest paid
on housing loans is deducted from house property income; however, if there is no income from house
property, a negative figure will appear under the heading ‘income from house property.’ The calculated
figure will be the employee’s gross total income after adding or subtracting the said amounts.

The employer now reduces the investments for the year that fall under Chapter VI-A of the Income Tax
Act, as reported by the employees in their investment declaration. PPF, employee’s provident fund, ELSS
mutual funds, NSC and Sukanya Samridhi account amounts may be included in the declaration. Income
expenditures such as home loan repayment, life insurance premiums, NSC, Sukanya Samridhi account
and so on may also be included. Similarly, the employer permits deductions under other sections such
as Sections 80D, 80G and so on.

Note:

If an employee wishes to switch to a new tax regime, he or she must notify the employer each year in
order to exercise the option. In addition, the employer may deduct his or her own income tax under
the new tax regime. Furthermore, if an employee has declared to calculate income tax under the new
tax regime, the Income Tax Act does not allow the 70 specified exemptions and deductions that were
available under the old tax regime. As a result, the employer will calculate the net taxable income
according to the employee’s chosen income tax regime.

TDS Deduction Rate

A TDS rate is not specified in Section 192. TDS will be deducted based on the taxpayer’s income tax slab
and rates for the fiscal year in which the salary is paid.

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In most cases, the employer calculates the tax at the start of the fiscal year. TDS is calculated by dividing
the employee’s estimated tax liability for the fiscal year by the number of months he worked for the
particular employer.

However, if the employee does not have a PAN, TDS will be deducted at a rate of 20% plus 4% cess.

The employer adjusts any excess or deficit resulting from a previous deduction by increasing or
decreasing the number of subsequent deductions during the same fiscal year. If an advance tax payment
was made by the employee, the TDS calculation can be adjusted accordingly. The employee must inform
the employer of the situation.

Salary from Multiple Employers

If you work for two or more employers at the same time, you can provide information about your salary
and TDS to any of them using Form 12B. Once your employer has all of your information, he or she will
be responsible for calculating your gross salary and deducting TDS.

After that, if you resign and go to work for a different company, you can provide your previous employer
with information from Form 12B. This employer will take into account your previous salary and deduct
TDS for the remainder of the financial year.

If you choose not to provide information about other sources of income, each employer will deduct TDS
only from the salary he pays you.

TDS Declarations

You must receive Form 16 from your employer, which contains information about your salary, including
the amount paid and taxes deducted. This can be supplemented with Form 12BA, which details perquisites
and profits in lieu of salary.

Section 192 sets a Dea dline for Depositing the Tax.

TDS must be deposited on the same day if it is deducted by a government employer.

If the TDS is deducted by an employer who is not a government agency–

a. On 30th April or before, if the salary is credited and TDS is deducted in March.
b. Within 7 days of the month in which TDS was deducted if the salary is credited and TDS is deducted
in a month other than March.

12.3 SECTION 192A – TDS ON EPS

TDS is deducted on various revenues earned like salary, interest, commissions, dividends and so on.
Section 192A is concerned with the TDS on the withdrawals of the PF i.e., Provident Fund.

Section 192A TDS on EPS

a. Who is responsible for deducting tax under Section 192A of the 1961 Income Tax Act?

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In the Employees’ Provident Fund Scheme, 1952, trustees or anyone else authorised to make payments
to employees under the scheme, must deduct tax.
b. When Should Section 192A TDS Be Withheld?
At payment’s incidence.
c. Is this amount eligible for a tax deduction?
In a condition when a person has not worked for 5 years in continuation, tax is deducted from the
accumulated lump sum payment (except the cases of termination because of ill health, contraction
or discontinuance of business, cessation of employment etc.) RPF is exempt in the hands of the
employee if he resigns before the end of the 5-year period but joins another employer with a
recognised provident fund and the money in the current employer’s provident fund is transferred to
the new employer.
d. A tax deduction will be made on the portion of the lump sum payment that is includible in the
employee’s total income.

The component of a lumpsum Is it taxable in the hands of an Is it subject to TDS if all

payment is employee who has not completed 5 of section 192A’s other
years of continuous service? conditions are met?

Employer contribution It is included in the taxable salary. Yes.

The interest of the employer’s It is included in the taxable salary. TDS is not applicable.
contribution

Employee’s contribution It’s not included in taxable salary. Yes.

The interest of the employee’s It’s taxable under “Income from Other TDS will be deducted.
contribution Sources” category

The limit of the Threshold

The tax is not deductible when the taxable component of a lump sum payment is less than ` 50,000.

TDS rate as Defined by Section 192A

Tax is deducted at a rate of 10% of the taxable portion of the lump sum payment. If an employee fails to
provide a PAN, tax will be deducted at the highest marginal rate.

Nil tax Deduction.

No tax deduction will be made if the income recipient submits a written declaration in duplicate in the
prescribed form [Form No. 15G/15H].

In addition, since there is no employer-employee relationship, any interest paid on the accumulated
balance that is not withdrawn after retirement must be deducted as per section 194A.

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12.4 SECTION 193 – TDS ON INTEREST ON SECURITIES

193 TDS on Interest on Securities

Section 193 of the Income Tax Act requires anyone paying interest on securities to a resident to deduct
TDS. As a result, section 193 does not apply to the payment of securities interest to a non-resident.

Rate of TDS on Securities Interest

TDS is deducted at a rate of 10% by the deductor. In the event that the payee fails to provide his Permanent
Account Number (PAN), the Deductor will be liable to deduct TDS at the maximum marginal rate. The
Deductor must deduct TDS on interest on securities at the earlier of the following events:
 When the income is credited to the payee’s account; or when the income is credited to the payee’s
account.
 When making a payment by cash, check, draft\ or any other method.

The deadline for depositing TDS on securities interest

According to section 193 of the Income Tax Act, the Deductor who deducts TDS on interest on securities
must deposit the deducted TDS within 7 days of the next month in which the TDS is deducted. Furthermore,
the TDS for the month of March must be deposited by April 30th.

TDS certificate issuance – A deductor who is required to deduct TDS under section 193 of the Income Tax
Act must issue a TDS certificate in Form 16A within the following time limit:
1. April - June – August 15th
2. July – September –November 15th
3. October - December – February 15th
4. January – March –June 15th

Filing of TDS Returns

The Deductor who is required to deduct tax under section 193 of the Income Tax Act must file a quarterly
return in Form 26Q by the deadlines listed below:
1. April to June – 31st July
2. July to September – 31st October
3. October to December – 31st January
4. January to March – 31st May

Section 193 of the Income Tax Act Establishes an Exemption limit.

Except in the following two cases, there is no TDS exemption limit specified under section 193:
 In the case of debentures issued by listed companies, the limit is ` 5000, provided the amount is
given by an account payee cheque.
 The limit for saving (taxable) bonds with an interest rate of 8% is ` 10,000.

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12.5 SECTION 194B/194BB – TDS ON WINNINGS

The Section 194B and Section 194BB are concerned with TDS on winnings from lottery or crossword
puzzles and TDS on winning from horse races, respectively. Let us understand the concept in detail.
1. Who is responsible for deducting TDS from the lottery, card game and other winnings?
Under Section 194B, any person who is responsible for paying any person any income from a lottery,
crossword puzzle, card game or other game of any kind in excess of ` 10,000 is required to deduct
income tax at the current rates.
2. When to Deduct TDS from Lottery, Card Game and Other Winnings Under Section 194B
At the time that such income is paid out. When lottery or prize money is paid in instalments, the tax
must be deducted at the time of each instalment’s actual payment.
Section 2(24) explanation(II) (ix)
3. “Lottery” refers to winnings from prizes awarded to anyone by a lottery, by chance or in any other
way, under any scheme or arrangement, regardless of name;
4. Any kind of game show, programme related to entertainment on television or electronic mode where
people compete for prizes or any other similar game comes under the category of “card game and
other game of any kind”.
5. As a result, if the gross winnings from these games do not exceed ` 10,000, no tax deduction is made.
6. TDS rate under Section 194B for the fiscal years 2021-22: TDS rate is 30%.
No surcharge, education cess or SHEC will be levied. TDS will thus be deductible at the basic rate.
When winnings are entirely in kind or partly in cash and partly in kind, the TDS is as follows:
Where a prize is given in cash and in kind, tax will be deducted from the cash prize, based on the total
amount of the cash prize and the value of the prize in kind.
When the winnings are entirely in kind or partly in cash and partly in kind, but the cash portion is
insufficient to satisfy the tax liability in respect of the entire winnings, the person responsible for
paying must ensure that tax has been paid in respect of the entire winnings before releasing the
winnings, whether in cash or kind.
7. No TDS on Lottery Agent Bonuses or Commissions: If any bonus or commission is paid/payable to
lottery agents or sellers of lottery tickets or sales made by them, no income tax is to be deducted and
tax will be deducted after such bonus and commission have been deducted.
Mr. A, for instance, wins a lottery prize of ` 2,000,000. The payment to the lottery agent is deducted
in the amount of ` 10,000. After allowing for the bonus/commission paid to the agent, tax will be
deducted from ` 190000
8. TDS from Horse Race Winnings [Section 194BB]

Who is responsible for deducting TDS under section 194BB?

Anyone responsible for paying another person any income from horse race winnings in excess of
` 10,000 (` 5,000 until 31.05.2016) must deduct income tax at the current rates. Any person here refers to

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a bookmaker or a person to whom the government has issued a licence under any current law for horse
racing on any race course or for arranging wagering or betting in any race course.

TDS rate for Fiscal years 2021-2022

TDS is present at a rate of 30%.

When TDS under Section 194BB is to be Deducted:

When such income is paid.

12.6 SECTION 194C – TDS ON CONTRACT

Section 194C TDS on Contract

Section 194C states that any person responsible for paying a sum to a resident contractor for the
contractor’s performance of any work (including the supply of labour) in accordance with a contract
between the contractor and the following:
 The Government of India or any Government of State
 Any local Government
 Central, State or Provisional Act established Any corporation.
 A company established under the Companies Act.
 Society established under the Co-operative societies act 1912
 An authority set up under Indian laws which has the objective of looking after citizens’ housing
needs and development and promotion of housing sector
 A company set up under Society Registration Act, 1980 or equivalent law in India’s part
 A trust fund established under Indian laws
 Any university established under Indian laws or the being granted the same recognition
 Partnership or proprietorship firm or a LLP.

In this section, the term “work” refers to the following:

 Advertising
 Broadcasting and telecasting, as well as programme production for such broadcasting or telecasting
 Other than railways, any mode of transportation can be used to transport goods and passengers.
 Catering
 Manufacturing or supplying a product in accordance with a customer’s requirement or specification
using materials purchased from such customer or its associate, as defined in section 40A(2), but not
manufacturing or supplying a product in accordance with a customer’s requirement or specification
using materials purchased from such customer or its associate.

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TDS rate u/s 194C

When the provisions of Income Tax Act Section 194C are invoked, the Deductor is required to deduct.

Table 2: Shows the Type of contractor /subcontractor and rate of TDS

Type of Contractor/ Subcontractor Rate of TDS

Any person who is an individual or a HUF 1%
Any person other than an individual or a HUF 2%
Any person who is a transporter NIL

However, if the PAN is not provided, the Deductor is obligated to deduct TDS at the maximum marginal
rate of 20%.

A “sub-contractor” would mean any person:

 Who enters into a contract with a contractor for the purpose of completing,
 For the provision of labour to complete all or part of the work undertaken by the contractor under a
contract with one or more of the authorities
 For the supply of any labour that the contractor has agreed to provide, in whole or in part, under the
terms of his contract with any of the authorities listed in this section.

TDS is not required to be deducted in the following situations:

1. In a single contract, the total amount paid or credited to the contractor does not more than INR
30,000.
2. During the fiscal year, the total amount paid or credited does not more than INR 100,000.
3. The amount paid or credited to a contractor’s account who hires, plies or leases goods carriage but
owns no more than ten goods carriage at any given time during the previous year. The Contractor
must provide the Deductor with the declaration and PAN.
4. An individual or a HUF pays or credits the contractor for personal use work.
You must deposit the TDS deducted on or before the following due date:

Month of deduction Deposit due date

April – February Upto 7th of subsequent month
March Upto 30th April
April- March(deductor is Government or it’s representative) Date of deduction

Issuing TDS Certificate Form 16A by the Deductor of TDS:

Quatres Government not Deducted TDS Government Deducted TDS

Q1st April -June July 30th August 15th
Q2nd July – September October 30th November 15th
Q3rd October - December January 30th February 15th
Q4th January – March May 30th May 30th

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12.7 SECTION 194D – TDS ON INSURANCE COMMISSION

Section 194D TDS on Insurance Commission
1. Insurance Commission TDS provisions under Section 194D
Section 194D’s provisions regarding Tax Deducted at Source (TDS) from the Insurance Commission
[Section 194D] are shown in table 3:

Table 3: Section 194D’s provisions regarding Tax Deducted at Source (TDS) from the Insurance
Commission [Section 194D]:
Taxpayer? Insurance commission’s payer
Recipient? Resident of India
Scope of payments Insurance Commission
Incidence of tax deduction? Earlier of payment being made or credit to payee.
Exemption limit Upto 15,000 (considered for whole year)
TDS Rate Payee being a person(resident) not being a company 5%
Company incorporated under Indian Laws 10%
Any TDS waiver? AO has to be submitted with Form 13 to obtain lower or no deduction certificate..

2. Deductor?
Payer of below listed sums to a resident:
Reward or remuneration, whether in the form of a commission or otherwise— for the purpose of
soliciting or obtaining insurance business or for the continuation, renewal or revival of insurance
policies
3. Is there a tax deduction?
When commission income is credited to the payee’s account or the payment of such sums in cash,
by check or draft or by any other means, whichever comes first
4. Rate of TDS under Section 194D for the Financial Year 2021-22

Payee whose payment will suffer TDS Rate of TDS

Resident Person other than Company 5%
Domestic Company 10%

Note:
The above rates will not be subject to a surcharge, education cess or SHEC. As a result, the basic rate of tax will
be deducted at the point of sale.

TDS will be applied at a rate of 20% in all cases if the deductee does not provide a PAN.

Section 194D applies to all payments made to a resident, regardless of whether they are made by an
individual, a corporation or another type of entity. Under these provisions, the deduction of tax at source
is not limited to insurance commissions paid only to individuals.

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The deduction of tax at source is not limited to insurance commissions paid only to individuals under
these provisions.

Section 194D requires no TDS to be deducted.

a. No tax is to be deducted if the amount or aggregate amounts of such income do not more than
` 15,000 in a fiscal year: No tax is to be deducted if the amount or aggregate amounts of such income
do not more than ` 15,000 in a fiscal year.
b. When a specific person completes Form No. 15G/15H [Section 197A(1A), (1B) and (1C)].

Non-Deduction or a tax Deduction at a Low Rate

An individual who receives a commission can apply to the Assessing Officer for a certificate authorising
the payer not to deduct any tax or to deduct tax at a lower rate by submitting Form 13 to the Assessing
Officer. According to Section 206AA(4), no certificate under Section 197 for non-deduction or a lower
rate of deduction will be issued unless the application also includes the applicant’s PAN

The deadlines for issuing TDS certificates are as follows:

TDS certificates will be sent to the deductee/recipient, summarising the insurance commission payments
and the TDS owed. The following are the deadlines for receiving TDS certificates:

Date by which TDS must be deposited under section 194D

The deadline for collecting and depositing tax deducted from insurance agent commissions is the 7th of
the following month.

Table 4: Shows Time Limit for Issuing Certificate for Different Periods

Periods Time limit for issuing the Certificate

April to June August 15th
July to September November 15th
October to December February 15th
January to March June 15th

The due date for TDS returns for Q1 and Q2 of FY 2020-21 was extended to 31st March 2021. Accordingly,
the due date to issue TDS certificates was 15th April 2021.

12.8 SECTION 194DA – LIP MATURITY

194DA LIP Maturity

194DA Section

Unless the amount is included in total income under clause (10D) of Section 10, any payment made to
a resident Indian upon the maturity of a life insurance policy, including the bonus is subject to a tax
deduction at source.

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Section 194DA allows anyone who makes a payment to a resident Indian upon the maturity of a life
insurance policy to deduct the applicable taxes at source.

TDS Rate

On the ‘income portion’ of the payment, the tax must be deducted at a rate of 5%. From May 14, 2020
to March 31, 2021) (3.75 percent). TDS will only be applied to the amount that exceeds the total of the
insured’s premiums.

There is no need to deduct taxes if the total amount owed is less than ` 1 lakh.

consider Mr. X who received ` 7 lakh as a maturity payment from his life insurance policy. Mr. X has paid
a total of ` 2 lakh in premiums over the course of the policy’s ten-year term.

The maturity amount in this case exceeds ` 1 lakh. As a result, the maturity proceeds will be paid after
a 5% TDS deduction.

The TDS, in this case, would be ` 25,000. (5 percent on ` 5 lakh). Mr. V will receive ` 6,75,000 after
deductions.

(An amendment to the TDS on insurance policy proceeds is proposed in the 2019 Union Budget.)

If the deductee fails to submit the PAN number, the TDS rate will increase to 20%.

TDS certificates will be sent to the deductee/recipient, summarising the insurance commission payments
and the TDS owed.

Exemptions Under Section 10(10D)

Any sum received under the LIC policy, including the amount of the bonus, is exempted under section
10 (10D).

The following exceptions apply to this section:

 Any payment made under section 80DD (3) or 80DDA (3).
 Any money received as a result of a keyman insurance policy
 A LIC policy is purchased after April 1, 2003, but before March 31, 2012, with a premium of more than
20% of the sum assured.
 A LIC policy is purchased after April 1, 2012 and the premium paid is greater than 10% of the sum
assured.
 After April 1, 2013, LIC policies were purchased for persons with disability or severe disability under
section 80U or for individuals suffering from ailments covered under section 80DDB, with premiums
exceeding 15% of the sum assured.

Unless the above-mentioned conditions are met, there is no limit to the amount of money that can be
claimed as an exemption under section 10(10D).

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12.9 SECTION 194E – NR SPORTS PERSON ENTERTAINER

194E NR Sports Person Entertainer

a. Tax Deduction Provisions for Payments Made to “Non-Resident Sportsmen”
If a person is responsible for paying any income to a non-resident sportsman (including an athlete)
who is not an Indian citizen, he must deduct tax at source of 20% plus surcharge, as applicable, if the
payment more than ` 10000000 + EC of 2% + SHEC of 1%.
The athlete must have earned the money by doing one of the following:
participation in any game or sport in India (excluding card games and other gambling or betting
games); or
or advertising; or
Contribution of articles to newspapers, magazines and journals in India about any game or sport.
b. Sums paid to a sports body that is not India resident. Is tax deductible.
Income tax of 20% plus surcharge if applicable, Education Cess of 2% and SHEC of 1% must be
deducted from any guaranteed income paid to a non-resident sports association or institution in
relation to any game or sport played in India.
c. Tax Deduction Provisions for Payments to “Non-Resident Entertainers”
Anyone who is responsible for paying any income to a non-citizen, non-resident entertainer (such as
theatre, radio or television artists and musicians) for any performance in India must deduct a 20%
tax at source (plus a surcharge if the payment exceeds ` 10000000 + EC @ 2% + SHEC @ 1%).
d. When TDS under Section 194E is to be deducted, tax should be deducted either when the income is
credited to the payee’s account or when it is paid in cash, by issuing a check or draft or by any other
mode, whichever occurs first.

Note:
 A tax deduction at a lower rate than the one listed above is not allowed under Section 194E.
 The TDS rate will include any applicable surcharge + Education Cess + SHEC in the case of a non-resident.
 The DTAA has no bearing on the obligation to deduct under section 194E.
 Nowhere in Section 194E does it state that income in the hands of the recipient must be taxed in India. This is
a requirement under Section 195, not Section 194E.
 Sections 115BBA and 194E do not apply to payments to umpires and referees. Section 194J covers payments
to resident umpires, while payments to non-resident umpires are subject to tax deduction under section 195
if they are taxable in India in the hands of non-resident umpires.

Table 5: Depicts Various TDS Provisions u/s 194E

One who makes payment to a non-resident, not of Indian origin

The payer is
sportsperson or body, association of sports.
The recipient is NRI, a sportsman or one who entertains in sports or an association of sports
belonging to foreign origin

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One who makes payment to a non-resident, not of Indian origin

The payer is
sportsperson or body, association of sports.
Scope of payments Covers payments to above mentioned payees.
Incidence of tax deduction Earlier of payment or credit.
Maximum exempted amount Zero
TDS rate 20% [see above]
Non applicability of provisions —

12.10 SECTION 194H – TDS ON COMMISSION

194H-TDS on Commission

Any person who is responsible for paying a resident, commission or brokerage is required to deduct TDS
under this section.

If an insurance commission is payable under section 194D, that commission is not covered by this section.

Individuals and HUF who are subject to section 44AB must also deduct TDS. Individuals and HUFs with
a business turnover of more than ` 10000000 or gross receipts from professions exceeding ` 5000000
will be required to deduct TDS starting in FY 2020-21.

TDS is deductible under section 195 and not under this section if the commission or brokerage is paid to
a non-resident.

Deduction Period

TDS must be deducted at the time of payment or credited to the payee’s account, whichever comes first.
If the amount is credited to a suspense account or any other account, it is considered credited to the
account of the payee and TDS must be deducted at the time of credit.

In the following situations, TDS is not required to be deducted.

 Only when the total amount of such income credited, paid or likely to be paid or credited during the
financial year exceeds ` 15,000 must TDS be deducted.
 TDS is not levied on brokerage or commission paid by BSNL or MTNL to public call centre franchisees.
If an employer pays a commission to an employee, the commission is subject to TDS under Section
192 – TDS from Salary, not this section.
 TDS is deducted from the Insurance Commission under Section 194D, not this section.
 Bank guarantee commission.
 Charges imposed by the depository for the maintenance of DEMAT accounts.
 Cash management service fees.
 Commodity warehousing service fees
 The expense of underwriting services.

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 Clearing fees.
 Debit or credit card transactions between the merchant establishment and the acquirer bank are
subject to a commission.
What Does Commission/Brokerage Mean?
Any payment received or receivable (not being commission or brokerage under section 194D) by a
person acting on behalf of another person is a considered commission or brokerage.
 for services provided (that aren’t professional) or
 for any services rendered in connection with the purchase or sale of goods, or
 any transaction involving any asset, valuable article or thing that is not a security.

As a result, property agents who work as agents in the purchase, sale or rental of real estate are also
covered by this section.

Professional services are not included in the services received, according to the section. Legal, accounting,
technical and interior design services are among the professional services included in its scope. Any
payment whether direct or indirect, receivable or received by a person acting on behalf of another
person, is known as commission or brokerage.

On the Amount of Service tax, TDS is not Deductible.

If service tax is levied, TDS must be deducted only from the amount payable as brokerage or commission
and is not deductible on the amount of service tax. Circular No. 1/2014. Although no separate notification
for GST has been issued, the concept remains the same, so no TDS will be deducted on GST amounts.

12.11 SECTION 194I – TDS ON RENT

194I TDS on Rent

TDS on rent is covered by section 194I of the income tax code. It requires TDS deduction from persons
(other than individuals/HUFs) who make rental payments to resident Indians in excess of a certain
amount, i.e., ` 2,40,000 per year. House rent, machine rent, building rent, office rent, furniture rent and
other types of rent are all included in this section.

Any person (who is not an Individual/HUF) who pays rent to another resident is required to deduct TDS
under section 194I. However, if the Individual/HUF is subject to audit under Section 44AB (a) and (b), he
or she must deduct TDS under this section.

Any payment made under a lease, sublease, tenancy or any agreement for the use of the following is
referred to as rent:
 Land
 Building (including factory building)
 Machinery
 Plant

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 Equipment
 Furniture
 Fittings

The following is the tax rate under this section:

 2% for the use of any machine, plant or piece of equipment. [1.5 percent from 14 May 2020 to 31
March 2021 as a result of the coronavirus outbreak, as granted by the Finance Minister].
 10% for the use of any land, building (including factory buildings) or both, as well as furniture and
fixtures. [7.5 percent from 14 May 2020 to 31 March 2021 as a result of the coronavirus outbreak, as
granted by the Finance Minister].
 And the earlier of the credit of income to the payee’s (receiver’s) account or actual payment is when
tax is deducted (in cash, cheque, draft or other modes).

There is no requirement for TDS

When the total amount of rent paid to a payee (i.e., receiver) in a financial year does not exceed 180000.
For the 2019-20 fiscal year, this limit has been raised to 240000. Where the rent is paid to a business trust
(which owns the asset) that is a real estate investment trust as defined by section 10 of the Income Tax
Act (23FCA).

Some Points to Think About

The amount paid as a warehousing charge is subject to TDS under section 194I.

If the amount given as a security deposit to the owner of an asset is refundable, it is not subject to TDS
under section 194I. When that ‘deposit’ is applied against rent, however, it is subject to TDS under section
194I.
 Under this section, any payment made for the rental of a business centre is subject to TDS.
 When a hotel room is booked on a regular basis (i.e., under an agreement), the payment is subject to
TDS under this section.

However, no TDS will be levied if the payment is made by an employee or individual (who represents the
company) and later reimbursed. TDS will be levied if such an individual is subject to audit under section
44AB.

12.12 SECTION 194IA – TDS ON IMMOVABLE PROPERTY

Section 194IA

Various clauses related to Tax Deducted at Source (TDS) payments are found in Section 194 of the
Income Tax Act. TDS on consideration on transfer of immovable properties by a resident transferor was
introduced by the Finance Act of 2013, which added a new section 194-IA. Section 194-IA of the Income-
Tax Act requires a buyer to deduct and pay 1% of the transaction cost as TDS if the property is worth
more than ` 50 lakhs.

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When should TDS be deducted under section 194IA?

TDS must be deducted by any person (Buyer or Transferee) who enters into an agreement with a resident
for the transfer of immovable property (land, building or both, but not agricultural land).
When and how much will the TDS be applied to the property sale?
The tax deduction is calculated at a rate of 1%. In addition, the time for deducting taxes is earlier.
The credit of income to the payee’s (receiver’s) account or
Payment in full (in cash, cheque, draft or other modes)
That is to say, in these cases, the seller is only entitled to the net amount.

Consider the following scenario

Mr x sells his property to Mr y for ` 50,00,000. Section 194IA will now apply as follows:

Description Value(in ` lacs)

Property’s sale to Y 50
TDS done by Y u/s 194IA @ 1% of sale value 0.50
Net payment 49.50

Things to Keep in Mind When Filing a TDS Claim Under Section 194IA
Buyers of properties worth more than ` 50 lakhs are required to deduct and pay TDS to the government.
The responsibility for deducting and submitting TDS falls on the buyers, not the sellers. The buyer will be
held liable to the authorities in the event of any misappropriation. Form 26QB must be completed by
buyers to credit the TDS. If there are multiple buyers or sellers in the transaction, each participant
must fill out a separate form.

TDS not paid in accordance with section 194IA

Mr. Y’s TDS deduction of ` 50,000 must be deposited with the government in challan Form 26QB within
7 days of the following month (TDS on Property).

12.13 SECTION 200A – PROCESSING OF TDS RETURNS

200A Processing of TDS Return
It includes a provision for the processing of TDS statements” sub-section 1

Where a deductor has deducted any sum and has made a statement of TDS or a correction statement
under section 200, such statement shall be processed as follows.
a. After making the following adjustments, the amounts deductible under this Chapter are computed:
i. any arithmetic error in the statement; or (ii) any grammatical error in the statement
ii. a claim that is false, as evidenced by any information in the statement;

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b. any interest is calculated on the basis of the deductible sums as computed in the statement;
c. the fee, if any, is calculated in accordance with section 234E;
d. after adjusting the amount computed under clauses (b) and (c) against any amount paid under
section 200, section 201 or section 234E and any amount paid otherwise by way of tax, interest or fee,
the sum payable by or the amount of refund due to, the deductor shall be determined;
e. an intimation shall be prepared or generated and sent to the deductor mentioning the sum
determined to be payable by or the amount of refund due to, him under
f. the deductor gets the amount of refund due to him for the determination made under clause (d):

Provided, however, that no notification under this section shall be sent after one year has passed since
the end of the financial year in which the statement was filed.

Explanation: For the purposes of this section, “an incorrect claim apparent from any information in the
statement” means a claim made on the basis of a statement entry.
i. of an item that contradicts another entry of the same or another item in the same statement;
ii. in the case of a rate of tax deducted at the source that does not comply with the provisions of this
Act.

(2) For the purpose of processing statements under sub-section (1), the Board may devise a scheme for
the centralised processing of tax deducted at source statements to determine the tax payable by or the
refund due to, the deductor as quickly as possible.

12.14 SECTION 206C – TCS

206C TCS

The gains and profits related to alcohol, forest produce, scrap and other items are addressed in Section
206C of the Income Tax Act of 1961. The percentage of tax to be collected by the seller on specified goods
is set forth in Section 206C.

Unlike TDS, the seller must present the tax collected to the government for income tax purposes. Taxes
must be collected under Section 206C when the buyer pays or when the funds are debited from the
buyer’s account, whichever comes first.

Applicability of Section 206C

Sellers are required to collect TCS from buyers under Section 206C TCS rules. This section now has an
exception. If a resident of India purchases goods for the purpose of manufacturing or producing other
items rather than trading, the goods are exempt from taxation under section 206C of the Income Tax
Act.

After closing the sale, buyers must file a declaration and provide a copy to the commissioner of income
tax within seven days of the month’s end.

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Table 6: Shows the Specifics of the Goods That are Covered by Section 206C TCS:

Sr. No. Description of goods Rate at which taxable

1 Alcohol for human use 1%
2 Tendu leaves 5%
3 Procurement of timber by way of a forest lease 2.5 %
4 Procurement of timber in a way other than above 2.5%
5 Product of forest not being tendu leaves and timber 2.5%
6 Scrap 1%
7 Minerals including coal, lignite or iron ore 1%

Please see below some other subsections of Section 206C:

Sub-Section Service’s description Tax rate(in %)

1C: Lease, License or A Parking lot 2%
contract in respect of: A Toll Plaza
A Mine or Quarry (excluding mining of mineral oil, petroleum,
natural gas)
1F: Sale of : A motor vehicle, second hand too above ` 10 lakhs 1%

Section 206C Limit

Section 44AB makes tax audits mandatory to prevent tax evasion. This also applies to the Section 206C
limit. Keep the following in mind when it comes to the Section 206C limit:
 Sellers must deposit tax collected with the government under Section 206C. The seller could be an
individual or a HUF with a previous financial year’s turnover of more than ` 1 Crore or ` 50 Lakhs.
 If a person’s gross receipts or turnover exceed ` 50 lakhs in a year, he or she must have his books
audited, according to section 44AB. In addition, any business owner with gross receipts or turnover
of more than ` 1 Crore during the year must have his books audited under section 44AB. This limit
has now been raised to ` 5 crores.

These restrictions are subject to the following conditions:

 The total cash receipts for the year do not exceed 5% of total receipts.
 Cash payments do not account for more than 5% of total payments made during the year.

Section 44AB Requires the submission of a form

 When a taxpayer is audited under Section 44AB, the auditor must submit the following 44AB Forms
to the Internal Revenue Service:
 Auditors use Form 3CA for taxpayers who have a business or profession and whose books are subject
to audit under laws other than the Internal Revenue Code. A declaration in relation to form 3CD will
also be included in the audit report.

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 Auditors use Form 3CB for taxpayers who operate a business or profession but are not required to
have their books audited under any law other than income tax. This form will be accompanied by a
declaration of form 3CD, just like form 3CA.
 Form 3CD: This form contains a detailed report on the audit process, as well as the taxpayer who
will be audited.
 Non-residents and foreign companies should fill out Form 3CE. Section 44AB of the Income Tax Act
applies to non-residents who receive royalties or technical fees from the Indian government or a
company in India.
Section 206C Amendments
Section 206C of the Income Tax Act has been changed. The following is a list of the changes:
 TCS was given new provisions under section 206C(1H) of the Income Tax Act by Finance Act 2020.
The following are some of the key points of this section 206c amendment:
 Sellers are only required to deduct TCS at 1% if the sales value of goods exceeds ` 50 lakhs during
a financial year, according to the new Section 206C provisions.
 This is a one-time payment of ` 50 lakhs per buyer per fiscal year.
 Only sellers with a gross turnover of more than ` 10 crore in the year prior to the year in which
sales were made are affected by the Section 206C amendment.
 This does not include the export and import of goods and goods specified in Section 206C, Section
206C(1F) and Section 206C(1G).
 If the buyer is a Central government, State government, Local authority, High Commission,
Embassy, Consulate or any representative thereof, TCS will not be deducted.
 Finally, if the buyer has deducted TDS on the goods under any other legal provision, the seller is
not required to deduct TCS.
 The threshold limit for income tax audit has been raised from ` 10000000 to ` 50000000 for
anyone running a business. This will be allowed as long as the cash receipts and cash payments
do not exceed 5% of the total receipts or payments in the applicable year.
 In the budget, Section 206CCA was introduced, which covers increased tax collection penalties
for non-filing of IT` The TCS will be higher of the following, according to this section:
 Twice the rate set forth in the relevant Act provision or At a 5% rate

Conclusion 12.15 CONCLUSION

 TDS stands for Tax Deducted at Source. It refers to a specified amount that is deducted by the
employer from the monthly salary at the source based on the assumption that the employee has a
taxable income.
 Income tax is paid on the yearly income with tax being calculated for that particular financial year.
TDS is subtracted at the time of salary payment (or on interest on investments) either monthly or
quarterly.

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 Tax deducted at source (TDS) on salary is dealt with in Section 192 of the Income Tax Act of 1961.
 TDS deducted under Section 192 is reflected in Form 16, which is issued to the employee by the
employer.
 TDS is deducted at the time of actual payment of salary, not during the accrual of salary, as required
by Section 192. This means that if your employer pays your salary in advance or arrears, the tax will
be deducted.
 A TDS rate is not specified in Section 192. TDS will be deducted based on the taxpayer’s income tax
slab and rates for the fiscal year in which the salary is paid.
 Section 192A is concerned with the TDS on the withdrawals of the PF i.e., Provident Fund.
 TDS rate as defined by Section 192A, Tax is deducted at a rate of 10% of the taxable portion of
the lump sum payment. If an employee fails to provide a PAN, tax will be deducted at the highest
marginal rate.
 According to section 193 of the Income Tax Act, the Deductor who deducts TDS on interest on
securities must deposit the deducted TDS within 7 days of the next month in which the TDS is
deducted. Furthermore, the TDS for the month of March must be deposited by April 30th.
 The Section 194B and Section 194BB are concerned with TDS on winnings from lottery or crossword
puzzles and TDS on winning from horse races, respectively.
 Section 194DA allows anyone who makes a payment to a resident Indian upon the maturity of a life
insurance policy to deduct the applicable taxes at the source.
 Any payment received or receivable (not being commission or brokerage under section 194D) by a
person acting on behalf of another person is considered commission or brokerage.

12.16 GLOSSARY

 Tax Deducted at Source (TDS): It refers to a specified amount which is deducted by the employer
from the monthly salary at the source based on the assumption that the employee has a taxable
income
 TAN: It refers to the Tax Deduction and Collection Account Number which is a unique 10 digits alpha
numeric number allotted to deductor/collector of TDS
 Deductor: It refers to a person who is required to deduct tax under section 193 of the Income Tax Act

12.17 CASE STUDY: CIRCUMSTANCES REQUIRING THE TAX TO BE DEDUCTED AT

SOURCE
Case Objective
The aim of this case is to show the calculations related to TDS as per the circumstances.

Circumstances requiring the tax to be deducted at source so the compliance obligation can be fulfilled
are:
1. Mr. Z estimated salary income for the financial year 2020 is ` 4 lacs. Compute the tax that has to be
deducted by his employer from his salary payment.

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Tax payable on his salary 5% of 4 lacs i.e., 20000

Add health and education cess 4% of 20,000 i.e., ` 800
Total amount payable is ` 20800
Less: Rebate u/s 87A 100% of tax payable or 12500 whichever is less i.e., 12500
Net tax payable is ` 8300
Tax to be deducted per month is ` 692

Note :
For the sake of simplicity it is assumed that Z doesn’t makes any investment in the f.y

2. ABC private Ltd. has executed a computer networking assignment for another MNC. It is being paid
a sum of ` 5 lacs being half of the amount contracted for. Compute the TDS applicable on it.
2% TDS is required to be deducted on ` 5 lacs i.e., ` 10000 and this amount have to be deposited by 7th
of next month.

Net payment of ` 4.9 lacs will be made to ABC

3. K has given on lease building premises to XYZ Private Ltd. On an annual rent of ` 6 lacs. Compute the
TDS applicable on it
XYZ will deduct TDS at the rate of 10% on 6 lacs i.e., 60000 and net payment of ` 5.4 lacs will be made
to K.
The TDS so deducted will have to be deposited by 7th of the following month.

Questions

1. How much tax should be deducted from Mr. Z’s salary?

(Hint: Mr. Z estimated salary income for the financial year 2020 is ` 4 lacs
Tax payable on his salary 5% of 4 lacs i.e., 20000.)
2. How much tax should deducted from ABC pvt. ltd and how much net payment will be made by ABC
after deducting TDS ?
(Hint: 2% TDS is required to be deducted on ` 5 lacs and Net payment of ` 4.9 lacs will be made to
ABC.)

12.18 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Who is eligible to deduct TDS under Section 192?
2. Explain Section 192A TDS on EPS.
3. Who is responsible for deducting TDS from the lottery, card games and other winnings?
4. Describe section 194C.
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12.19 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Answers to Multiple Choice Questions

B. Hints for Essay Type Questions

1. Tax deducted at source (TDS) on salary is dealt with in Section 192 of the Income Tax Act of 1961. TDS
will be deducted from your pay by your employer. Your employer’s salary is classified as ‘Income’
under the heading ‘Salary,’ and your employer is responsible for deducting TDS on your estimated
income for the relevant financial year at the normal income tax rates applicable to you. TDS deducted
under Section 192 is reflected in Form 16, which is issued to the employee by the employer. Refer to
Section 192 – TDS on Salary
2. TDS is deducted on various revenues earned like salary, interest, commissions, dividends and so on.
Section 192A is concerned with the TDS on the withdrawals of the PF i.e., Provident Fund. Refer to
Section Section 192A TDS on EPS
3. The Section 194B and Section 194BB are concerned with TDS on winnings from the lottery or
crossword puzzles and TDS on winning from horse races, respectively. Refer to Section Section
194B/194BB – TDS on Winnings
4. Section 194C states that any person responsible for paying a sum to a resident contractor for the
contractor’s performance of any work (including the supply of labour) in accordance with a contract
between the contractor and the following:
 The Government of India or any Government of State
 Any local Government
 Central, State or Provisional Act established any corporation.
 A company established under the Companies Act.
Refer to Section Section 194C – TDS on Contract

@ 12.20 POST-UNIT READING MATERIAL

 https://tax2win.in/guide/section-192-tds-on-salary
 https://www.incometaxindia.gov.in/booklets%20%20pamphlets/tds-on-salaries.pdf

12.21 TOPICS FOR DISCUSSION FORUMS

 Describe electronic payment of taxes and issue of TDS certificate.

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 UNIT

13 Tax Implication on Amalgamation

and Demerger

Names of Sub-Units

When Mergers are Not Regarded as Amalgamation, When Merger are Regarded as Amalgamation,
Taxation of Shareholders, Taxation of Amalgamating Company, Taxation of Amalgamated Company,
Section 72A(1), Section 72AA, What is Demerger?, Section 49(2C), Taxation of Resulting Company,
Apportionment of Depreciation, Taxation of Demerged Company

Overview

In this unit, mergers are discussed as either amalgamations or not amalgamations. Further the unit
explains the taxation of shareholders, the taxation of an amalgamating company and the taxation of
an amalgamated company. The unit also covers the Sections 72 A(1) and 72AA. This unit elaborates the
meaning of demerger and Section 49(2c). Towards the end, you will study the taxation of a resulting
company, apportionment of depreciation and the taxation of a demerged company.
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Learning Objectives

In this unit, you will learn to:

 Describe when mergers are not regarded as amalgamation
 Explain when mergers are regarded as amalgamation
 Analyse the taxation of shareholders, taxation of an amalgamating company and taxation of an
amalgamated company
 Discuss the sections 72A(1) and 72AA
 Elaborate the meaning of demerger and Section 4.3.(2C)
 Explain the meaning of taxation of a resulting company
 Examine the apportionment of depreciation
 Analyse the taxation of a demerged company

Learning Outcomes

At the end of this unit, you would:

 Summarise when mergers are not regarded as amalgamation and when they are regarded as
amalgamation
 Evaluate the taxation of shareholders, taxation of an amalgamating company and taxation of an
amalgamated company
 Analyse the Sections 72A(1) and 72AA
 Understand the definition of demerger
 Elaborate the meaning of the Section 49(2C)
 Analyse the taxation of a resulting company, apportionment of depreciation and taxation of a
demerged company

Pre-Unit Preparatory Material

 https://carajput.com/learn/merger-and-amalgamation-under-companies-act-2013-by-national-
company-law-tribunal-nclt-.html
 https://www.wirc-icai.org/images/material/WIRC -Presentation-on-Introduction-to-
Amalgamtion.pdf

13.1 INTRODUCTION
Merger is the consolidation of two or more than two entities. When a merger is done, the assets and
liabilities are transferred from one entity to other.

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Mergers are of many types namely such as horizontal, vertical and conglomerate.

Mergers are done to eliminate competitor or diversify.

Amalgamation refers to the joining of companies for forming a new company. Amalgamation can be
done in two ways:
 When two or more companies join to form a new company
 When there is an absorption or blending of one by the other

Absorption is when one powerful company takes control over the weaker company. Amalgamation is
done between 2 or more entities engaged in the same line of activity or have some synergy in their
operations. It can also be initiated when the entities wants to join hands for diversification or expansion
of services.

13.2 WHEN MERGERS ARE NOT REGARDED AS AMALGAMATION

Let us discuss when mergers are not regarded as Amalgamation.

An amalgamation is when two or more companies merge to form a new entity. Because neither of the
companies involved survives as a legal entity, amalgamation differs from a merger. Instead, a completely
new entity is created to hold both companies’ assets and liabilities. Amalgamation is a common strategy
used by businesses for a variety of reasons, including:
 Gaining a competitive advantage
 Increasing company efficiency by combining them into one
 Business increase
 Creating Synergy
 Large-scale production economies

The asset and liability of the companies involved in the process are obviously impacted by the merger of
two or more companies. As with assets and liabilities, shareholders go through changes.

The plan is then sent to market regulators and the court for approval after the board members of the
companies reach an agreement.

These approvals from various authorities take their time and, once completed, result in the creation
of a new entity. The transferor company’s shareholders would then receive shares from the new entity.
Following that, all assets and liabilities are handled.

A brief of the merger

The absorption of one company by another, which is larger in size, is referred to as a merger. Mergers
serve a variety of purposes, including expanding customer bases, expanding into new markets, reducing
headwinds such as competition and launching new products.

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All of the assets and liabilities of the merging company are transferred to the merged company. Similarly,
the old company’s shareholders receive ownership and shares in the new entity.

Merger vs. Amalgamation

Companies use inorganic growth as a business strategy to grow. Amalgamation and mergers are the
two most common inorganic growth tools used by businesses. The terms amalgamation and merger are
frequently used interchangeably by people. Both terms are commonly used in the business world when
it comes to takeovers. However, there are several distinctions between the two in terms of business
and accounting. It is important to know the difference between Amalgamation and Merger in order to
fully comprehend the two terms and their applications. The following are the key distinctions between
amalgamation and merger in terms of their various aspects:
1. Meaning:
 When two companies with similar lines of business merge, they usually want to expand into new
markets or acquire new customers.
 Amalgamation occurs when a larger company buys a smaller company or when a company
buys multiple companies.
2. Types:
 Horizontal, vertical, co-generic and reverse mergers are the most common.
 Amalgamation could occur as a result of a purchase or as a result of a merger.
3. New entity formation:
 A merger occurs when one company acquires control of another. As a result, the acquiring
company may keep its name.
 In amalgamation, the larger and acquiring company survives the merger and retains its identity.
The smaller company, on the other hand, goes out of business.
4. Initiator:
 When it comes to mergers, the initiative usually comes from the acquirer, who wants the deal to
go through.
 Amalgamation, on the other hand, requires both parties’ consent.
5. The number of businesses involved:
 A minimum of two companies are involved in the merger, one of which is an existing company,
and the other is the target company.
 Amalgamation requires at least three companies, one of which is the amalgamated company,
and the others are the merging companies.
6. Companies of various sizes:
 In a merger, the absorbing company is usually larger in terms of size and operations.
 The target companies in an amalgamation are typically of similar size.

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7. When Shareholders are involved, what happens?

 Shareholders of the absorbed company receive shares in the absorbing company after a merger.
The number of shares they receive, on the other hand, may or may not be proportional to their
previous shareholding pattern.
 In an amalgamation, all existing company shareholders receive shares in the new company as
well.
8. Stake management:
 The companies can decide who will own the controlling stake as part of the merger.
 The acquirer always has the controlling stake in a merger. The other companies have a minority
stake in the company.
9. Formalities in the legal system:
 A merger entails more legal formalities and paperwork.
 An amalgamation involves less legal formalities and paperwork.
10. Assets and liabilities transfer:
 In a merger, the existing company retains its assets and liabilities while also absorbing the
assets and liabilities of the other.
 The assets and liabilities of the merging companies are transferred to the newly formed entity
through amalgamation.
11. Treatment in accounting:
 The assets and liabilities of the merged company are consolidated in a merger.
 The assets and liabilities of the old company are transferred to the new company’s balance sheet
during an amalgamation.

Note: Mergers take place more frequently in the business world than amalgamations. Occidental
Petroleum and Anadarko Petroleum, AbbVie and Allergan and Bristol-Myers Squibb and Celgene are
among the year’s most significant mergers. Even though mergers are less common, the new company
that emerges from them is usually large and powerful. For example, Arcelor, the world’s largest steel
company, was formed through a merger.
Both amalgamations and mergers are effective tools for corporate restructuring. In fact, one could
argue that amalgamation is a type of merger. Alternatively, all amalgamations may be mergers, but
this does not imply that all mergers are amalgamations. Depending on the nature of their business,
company structure, objective and macro business environment, the company can choose between the
two.

13.3 WHEN MERGERS ARE REGARDED AS AMALGAMATION?

Merger will be regarded as amalgamation in the following scenarios:
 After the merger, the transferor company’s assets and liabilities become the transferee company’s
assets and liabilities.

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 Due to the result of amalgamation, shareholders who hold less than 90% of the face value of the
transferor entity’s equity shares (other than equity shares already held therein, immediately prior
to the amalgamation, by the transferee company or its subsidiaries or their nominees) become
equity shareholders of the transferee entity.
 The transferee entity fully discharges the consideration for the amalgamation because of those
equity shareholders of the transferor entity that were ready to become equity shareholders of the
transferee company by issuing equity shares in the transferee company, except that cash may be
paid in respect of any fractional shares.
 The transferor company’s business is intended to be continued by the transferee company after the
merger.
 Except to ensure uniformity of accounting policies, no adjustment to the book values of the transferor
company’s assets and liabilities is intended when they are incorporated in the financial statements
of the transferee company. If any of the preceding conditions are not met. It would be considered a
merger rather than an amalgamation.

13.4 TAXATION OF SHAREHOLDERS

When a shareholder of an amalgamating company transfers shares held in the amalgamating company
in exchange for allotment of shares in the amalgamated company in the scheme of amalgamation, the
transfer of shares is not treated as a transfer under Section 47(vii) of the Act, and the shareholder of the
amalgamating company does not receive any capital gain.

The above are just a few of the many tax breaks available to the aforementioned types of taxpayers
as a result of M&A transactions. Wherever applicable, appropriate inputs are given in the following
discussions in case of specific requirements relating to acquisitions by foreign entities.

It should be noted that only domestic companies can be amalgamated when an Indian target entity is
sought to be acquired by a foreign entity. As a result, the foreign acquirer must establish a local Special
Purpose Vehicle (SPV) in India to carry out the amalgamation with the Indian company, and the SPV
also benefits from the Act’s tax benefits on amalgamation, which are conditional on the amalgamated
company being an Indian company.

Let us discuss implications for Amalgamating Company Shareholders

The amalgamating company’s shareholders will be subject to capital gains tax. When shareholders of
an acquired corporation sell their shares as part of a merger or acquisition, they can receive a variety
of payment options. These receipts could be taxable or non-taxable. If they are taxable, the shareholders
must pay capital gains taxes on the difference between their cost basis and their gain. The issue of
whether allotment of shares, debentures or cash payments to the merging company’s shareholders
triggers capital gains liability is debatable.

According to one viewpoint, this leads to the exchange of shares in the merging company for shares
in the merged company. As a result, it would be subject to capital gains tax. The opposing argument
is that there can be no capital gains tax liability because there is no exchange of shares because the
transactions are effectively two separate transactions.

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This procedure necessitates the shareholders’ surrender of their shares in the amalgamating company.
It’s crucial to figure out whether this is a transfer subject to capital gains tax under Section 2(47) of the
Internal Revenue Code. According to judicial precedents, including recent Supreme Court decisions, this
transaction did not result in a “transfer” as defined by Section 2 of the Act (47).

It has been ruled out by the highest court in CIT vs. Mrs. Grace Collis and Others as regards inclusion
of right extinguishment by a shareholder in an amalgamating company which is alike to rights
extinguishment in any capital assets, both being considered distinct and independent in nature.

As a result, upon the amalgamation of the amalgamating company with the amalgamated company,
the shareholders’ rights in the capital asset, i.e. the shares, are extinguished, and this constitutes a
transfer under Section 2(47) of the ITA.

If the following conditions are met, the provisions of Section 45 relating to capital gains will not apply to
any transfer by a shareholder when a shareholder in the scheme of amalgamation transfers his shares
in the amalgamating company.
a. He receives shares in the amalgamated company in exchange for the transfer and
b. The amalgamated company is an Indian company.

The question is whether a shareholder receiving shares in the amalgamated company is subject to
capital gains tax if the conditions specified in Section 47(vii) are not met or if the conditions are not
met. There would be no such tax unless the amalgamation involved a transfer within the meaning of
Section 2 (47)

Even if Section 47(vii) of the Act did not exist, a shareholder would not be required to pay capital
gains tax because an amalgamation does not involve the exchange or relinquishment of assets, the
amalgamation of any right therein, or the compulsory acquisition under any law. It also does not
involve any exchange in the legal sense of the word. The terms “exchange” and “relinquishment” are
not defined in the Act. As a result, there is no ‘exchange’ in a merger. The merger does not necessitate the
relinquishment of an asset because relinquishment presupposes the asset’s continued existence. As held
in CIT vs. Rasik Lal manek Lal amalgamation does not entail an exchange or relinquishment of shares
by the amalgamating company.

13.5 TAXATION OF AMALGAMATING COMPANY

Amalgamating Company receives tax breaks any transfer of capital assets by an amalgamating
company to an Indian amalgamated company in the scheme of amalgamation is not treated as a
transfer under Section 47(vi) of the Act, and hence no capital gain tax is imposed on the amalgamating
company.
Let us discuss implications for the Amalgamating Company.
Implications of capital gains taxes for the merging (transferor) company

If the amalgamated company is an Indian company, there will be no capital gains tax on the transfer
of a capital asset by the amalgamating company to the amalgamated company in the scheme of
amalgamation.

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Profits or gains arising from the transfer of capital assets are subject to capital gains tax. The income
will be calculated using the transfer consideration. In other words, capital gains cannot occur if there
is no consideration. In the event of a merger, the properties and liabilities of the merging company are
transferred to the merged company under a court-approved scheme.

The cash, equity shares, and other forms of compensation for such vesting go directly to the shareholders.
As a result, there would be no capital gains in the hands of the company because it would not receive
any consideration.

In case when the amalgamated entity is an Indian entity, there will be no capital gains tax on the
transfer of a capital asset by the amalgamating company to the amalgamated company as per the
scheme of amalgamation. In case of a foreign amalgamating entity, it is exempted from capital gains
tax when the entity transfers a capital asset, such as shares in an Indian company.

If the following conditions (given below) are met, there will be no capital gain on the transfer of shares
held in an Indian company by the amalgamating foreign company to the amalgamated foreign company
in a scheme of amalgamation:
a. At least 25% of the shareholders of the merging foreign company remain shareholders of the merged
foreign company and
b. In the country where the amalgamating company is incorporated, such a transfer is not subject
to capital gains tax. In line with this strategy, the Revenue Authority recently issued notices to a
number of companies that had recently engaged in transactions.

Shares Exchange/Sale
i. Pursuant to amalgamation: By receiving shares in lieu of their existing shareholding, shareholders
of the target company would become shareholders of the amalgamated company. Such an exchange
is referred to as a “transfer.” Such an exchange is not considered to be a transfer as per IT Act 1961
where the same is for allotment of shares in the amalgamated Indian company.
Interestingly, any cash or other benefit given in exchange for the shares, whether fully or partially
would result in taxable capital gains.
ii. Post amalgamation: Capital gains tax calculation after amalgamation on disposal of an
amalgamated company
Shares: This section considers a scenario in which the amalgamating company’s shareholders,
having acquired shares in the amalgamated company as a result of the amalgamation, now decide
to sell those shares. As a result, when these shareholders sell their shares in the amalgamated
company, the cost of acquisition will be the cost of their shares in the amalgamating company when
computing the capital gains that will accrue to them as a result of the sale. In addition, the holding
period for determining long-term or short-term gains would begin on the date the shares in the
merging company were acquired by the shareholders.

13.6 TAXATION OF AMALGAMATED COMPANY

Amalgamated Company means a company that comes into existence as a result of an amalgamation as
specified in Section 282. Amalgamating Company shareholders are eligible for tax benefits.

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Implications on Amalgamated Company

a. When acapitalasset istransferred to anamalgamated companyaspartof ascheme of amalgamation,
the cost of acquisition of the asset to the amalgamated company is equal to the cost at which the
amalgamating company acquired it.
b. In the hands of the merging company, the value has been written down.

If the amalgamating company transfers any block assets to the amalgamated company, which is an
Indian company, the actual cost of the block of assets in the case of the amalgamated company shall be
the written value of the block of assets as in the case of the amalgamating company for the immediate
proceedings, less the amount of depreciation actually allowed in relation to the said previous year.

However, unabsorbed depreciation in the hands of the amalgamating company is not to be reduced as
depreciation actually allowed because the amalgamating company would cease to exist as a result of
the merger and thus could not carry forward such unabsorbed depreciation.

Carry forward and set off unabsorbed depreciation and accumulated losses

M&A is frequently used by businesses to gain the benefit of carrying forward and offsetting operating
losses or claiming a tax credit. The acquirer must continue to operate the company’s pre-acquisition
business, according to the terms of the agreement. The amalgamated company can claim the
amalgamating company’s unabsorbed losses and unabsorbed depreciation. Aside from the asset values
for depreciation purposes discussed above, the following should be noted:

Depreciation for the year in which the merger occurs

In most cases, an amalgamation takes place during the course of a fiscal year. Depreciation is allowed
on a pro-rata basis to both the merging and amalgamated companies in proportion to the number of
days the assets are used.

13.7 SECTION 72A(1) OF THE INCOME TAX ACT 1995

Section 72A under Chapter VI of the Act governed provisions relating to carry forward and set off of
accumulated loss and unabsorbed depreciation.

Section 72 A(1) stated that if a company owning an industrial undertaking or a ship merged with another
company and the Central Government, on the recommendation of the specified authority, was satisfied
that the conditions set forth in this regard were met, the Central Government would make a declaration
to that effect, and the amalgamating company’s accumulated loss on unabsorbed depreciation
allowance would be deemed to be the losers.

[Section 72A(1), (2) and (3)]: Carry-forward and set-off of accumulated business losses and unabsorbed
depreciation in the event of ‘Amalgamation’

An amalgamating company’s business loss may be carried forward and set off in the hands of the
amalgamated company for a new eight-year period if certain conditions in Section 72A are met.
Similarly, an amalgamating company’s unabsorbed depreciation may be carried forward and set off in
the hands of the amalgamated company. It can be carried on indefinitely and set off in the hands of an
amalgamated corporation.

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13.8 SECTION 72AA

This Section 72AA is the provisions in certain schemes of amalgamation of banking companies relating
to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance.

Where a banking company has been amalgamated with any other banking institution under a scheme
sanctioned and brought into force by the Central Government under Sub-section (7) of Section 45 of
the Banking Regulation Act, 1949, notwithstanding anything contained in sub-clauses I to (ii) of clause
(1B) of Section 2 or Section 72A (10 of 1949). The accumulated loss and unabsorbed depreciation of such
banking company shall be deemed to be the loss or, as the case may be, allowance for depreciation
of such banking company for the previous year in which the scheme of amalgamation was enacted,
and the provisions of this Act relating to set-off and carry forward of loss and depreciation allowance
applies in line with above.

In the context of this section:

i. “accumulated loss” means the amount of the amalgamating banking company’s loss under the
heading “Profits and gains of business or profession” (not including a loss sustained in a speculation
business) that it would have been entitled to carry forward and set-off under the provisions of
Section 72 if the amalgamation had not occurred;
ii. The term “banking company” has the same meaning as it does in Section 5 clause (c) of the Banking
Regulation Act, 1949 (10 of 1949);
iii. “Banking institution” has the same meaning as in Section 45, Sub-section (15), of the Banking
Regulation Act of 1949 (10 of 1949);
iv. “Unabsorbed depreciation” refers to the portion of the amalgamating banking company’s
depreciation allowance that is still available and would have been available if the amalgamation
had not occurred.’

13.9 WHAT IS DEMERGER?

The transfer of a firm’s business undertakings to another company is known as a demerger. The
demerged company is the source company, i.e. the corporation whose assets are being transferred. The
other firm is frequently referred to as the resulting firm.

There are several types of demergers. The following are some examples:
 Spinoff: A division or a line of business of a conglomerate company may become a separate entity in
some cases. This type of demerger is known as a spinoff. For example, company A used to do business
in two areas: logistics and hospitality. A spinoff occurs when company A decides to separate all of its
logistics operations into a separate entity.
It’s worth noting that both companies would be legal entities in their own right. As a result, A would
continue to exist while a new company, B, would emerge.
As a result of the separation of concerns, the parent company would not be dissolved.
 Split: A conglomerate may want to split its businesses into separate companies in other cases. This
is known as a split. For example, if company A decides to split into two new companies, B and C, to

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separate its hospitality and logistics businesses, this is referred to as a split. It’s worth noting that in
this scenario, company A would cease to exist.
 Equity carve out: In some cases, company A may decide to sell its logistics division to a third party.
As a result, it may sell a portion of a subsidiary company’s equity to a third party or a strategic
investor. An equity carve out is the term for this type of transaction. There are two noteworthy
aspects of this transaction. To begin with, spin-offs and splits are not the same as selling to a third
party. As a result, an equity carve-out generates cash, whereas spinoffs and splits do not. Second, A
is the same legal entity in this case. The carved-out unit B becomes a subsidiary of another company,
rather than remaining an independent unit under the parent company’s umbrella.

The Benefits of a Demerger

The following are some of the most obvious benefits of demerger.

 Focus on core competencies: Conglomerates are notorious for having disjointed business operations.
These businesses attempt to manage a wide range of operations, each of which necessitates a
different set of skills. Several times, competitors who concentrate on a single industry have displaced
these businesses. Specialisation is more important in today’s business world. Generalists do not have
a long shelf life. As a result, it is critical for businesses to concentrate on their core competencies.
Many conglomerates have streamlined their operations as a result of this reasoning, and demerger
has been a key tool in the process.
 Management accountability: When businesses are split up, each company’s management has its
own balance sheet. As a result, certain entities in the group are unable to survive as parasites on the
earnings of others. Each company’s management is now responsible for its own financial results. In
addition, management has a greater degree of control over their operations. They have the authority
to make their own investments and even raise funds on their own account from the market.
 Increased market capitalisation: Demergers are frequently used to boost stock market value.
Investors have a better understanding of a company’s operations and cash flow after it has been
spun off. As a result, they are able to make better investment decisions. Investors are willing to pay
a higher price for better data. As a result, spinning off units to form separate legal entities increases
the group’s overall market capitalisation.

How Mergers and Acquisitions Work?

The following steps must be followed in order to conduct a demerger:
1. The value of all assets associated with the resulting company must be determined and listed.
2. The value of all liabilities associated with the resulting company must also be determined and listed.
3. These values are then transferred from the demerged company’s balance sheet to the resulting
company’s newly created balance sheet.
4. These assets and liabilities are transferred at their current written-down value in the parent
company’s balance sheet.
5. A premium may be paid to the demerged company in a few rare cases. Tax authorities, on the other
hand, closely monitor such practises. Because demergers have been used strategically to evade
taxes in the past, this is a good idea.

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To summarise, demergers are a sound business strategy. They can be used to both unlock value and
streamline a company’s operations.

Demerger disadvantages

For starters, demergers can be costly because they must be carefully structured to avoid tax liability.
You’ll have to budget for the cost of professional legal and accounting advice. Second, there may be
inherent economies of scale in the group that are reduced when it is split up into new entities. The cost
of loans and production may rise, and suppliers may be less willing to trade with a new company on
favourable terms. Inevitably, the transaction and any loss of synergy that results will have an impact
on productivity.

The cost of acquisition of shares in the resulting company, according to Section 49(2C) of the IT Act,
shall be the amount that bears the same proportion to the cost of acquisition of shares held by the
shareholder in the demerged company as the net book value of the assets transferred in a demerger
bear to the net worth of the demerged company.

13.10 SECTION 49(2C)

The cost of acquisition of shares in the resulting company, according to Section 49(2C) of the IT Act,
shall be the amount that bears the same proportion to the cost of acquisition of shares held by the
shareholder in the demerged company as the net book value of the assets transferred in a demerger
bear to the net worth of the demerged company immediately before such demerger. Furthermore,
under Section 49(2D), the cost of acquiring the original shares held by the shareholder in the demerged
company is deemed to have been reduced by the amount calculated under Section 49(2C).

As a result, shareholders should apportion their pre-demerger cost of acquisition of Company’s shares
in the following manner in order to determine the post-demerger cost of acquisition of equity shares in
the Company under the IT Act:

Cost of acquisition of the  Cost of acquisition of share Net book value of the assets
transferred in a demerger
share in the resulting held by the assessee in the  Net worth of the demerged company
company demerged company immediately before demerger

Here net worth is demerged company’s aggregate of paid-up share capital and general reserves as per
the account’s books before demerger.

If the shares of the resulting company are later transferred, the period during which the shares were
held in the demerged company must also be taken into account when determining the nature of the
capital gain [Section 2(42A)].

13.11 TAXATION OF RESULTING COMPANY

In the following cases, a demerger will be tax-neutral:
 Section 47 of the Income Tax Act of 1961 specifies a number of transactions that are not considered
transfers for the purposes of capital gains tax. According to Section 47(vi b), if a capital asset is

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transferred from the demerged organisation to the resulting organisation in a demerger, and the
resulting organisation is an Indian organisation, the transaction is not considered a transfer for the
purpose of capital gains tax.
 Section 47(vi) (d) states that if the resulting organisation issues or transfers shares to the shareholders
of the demerged organisation in a demerger scheme, and the transfer is made in consideration
of the undertaking’s demerger, the transaction is not considered a transfer for capital gains tax
purposes.
 According to Clause (v) of Section 2(22) of the Income Tax Act of 1961, a deemed dividend has no
impact on the issue of shares by the resulting organisation. When shares are distributed to the
shareholders of the demerged organisation as a result of a demerger by the resulting organisation
(whether or not there is a capital reduction in the deemed organisation), they are excluded from the
definition of the dividend.
 Section 72A (4) of the Income Tax Act of 1961 provides for the benefit of set-off and carry-forward of
unabsorbed loss and depreciation in the case of a demerger. This provision is advantageous in the
event that a demerger has chosen to reorganise the business. This type of demerger should only be
conducted for legitimate business reasons.

When will a demerger’s taxation begin?

a. The resulting organisation is taxed as a business successor under Section 41(1) of the Income Tax Act
of 1961.Section 41(1)(a) applies when a deduction or allowance is provided in any assessment year in
respect of a loss, trading, or spending liability sustained by the assessee (first-mentioned individual)
in a previous year. The assets acquired by such individual or the value of the benefit received by him
are deemed to be gains and profits of the profession or business and are subject to income tax in the
same manner as the previous year’s income, regardless of the profession or business in question.
b. If the successor in business (resulting organisation) has gained any amount, whether in cash or in
any other way, in respect of which loss or expenditure was suffered by the assessee (first mentioned
individual), or some profit in respect of the business liability referred to in clause (a) by way of
revocation or termination thereof, the amount gained by the resulting organisation or the value of
profit arising to the resulting organisation shall be deemed to be gains and profits.

13.12 APPORTIONMENT OF DEPRECIATION

Apportionment in the event of a business succession, amalgamation or demerger

In the event of a company’s succession of a firm or proprietary concern, or in the event of a company’s
amalgamation or demerger, depreciation shall be allowed as follows:
 The total amount of depreciation allowed to both the company and the successor shall not exceed
the amount if no such succession or conversion occurred.
 Depreciation will be shared between the predecessor and the successor in proportion to the number
of days the assets were used.
 Section 32 proviso states that total deduction for depreciation with regard to tangible assets such
as plant & machinery, furniture or building and intangible assets such as know how, patents,

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copyrights, trademarks, franchises, licences or any other right being in similar nature available in
succession to the predecessor and the successor referred to in relevant clause of Section 47 or 170
or to the amalgamating company and the newly formed company in an amalgamation or to the
company being demerged and newly formed company in a demerger, as the case may be, is not to
be more in any previous year than the one calculated at rates prescribed, had the restructuring not
taken place and it shall be apportioned amongst these entities in the ratio of number of days for
which assets have been put to use by them.

The following issues may be considered for appropriate legislative amendment:

a. A question arises as to whether depreciation can be claimed on a proportionate number of days
by the transferor and transferee companies in the event of a slump sale, taking into account the
proviso to Section 32 read with Section 170 of the Act.
b. Depreciation can be claimed based on the proportionate number of days the assets were used by the
predecessor and the successor, or the amalgamating company and the amalgamated company, or
the demerged company and the resulting company, as the case may be, under the current provisions
of proviso to Section 32. There may be a time lag between holding the asset and using the asset that
has been transferred due to practical and administrative challenges. In such cases, the words “held
by them” instead of “used by them” may be substituted in the proviso to Section 32 to avoid genuine
difficulties.

13.13 TAXATION OF DEMERGED COMPANY

Gains on the sale of a capital asset are not taxed. Any transfer of a capital asset by the demerged
company to the resulting company under the Scheme of Demerger is exempt from capital gains tax if
the resulting company is an Indian company. The shareholders of the de-merged company are issued
proportionate shares in the resulting company under the Scheme of Demerger.

Similar to amalgamation, the Act states that any transfer or issue of shares by the resulting company to
the shareholders of the de-merged company in consideration of the demerger is exempt from taxation
in the hands of the shareholders under the head capital gains.

The cost of acquiring shares in the resulting company shall be the amount that bears the same proportion
to the cost of acquiring shares held by the shareholder in the de-merged company as the net book value
of the undertaking bears to the net worth of the demerged company immediately before such demerger.

Conclusion 13.14 CONCLUSION

 Merger is the consolidation of two or more than two entities.

 Mergers are of many types namely- horizontal, vertical and conglomerate.
 Amalgamation is done between two or more entities engaged in the same line of activity or have
some synergy in their operations.
 Mergers serve a variety of purposes, including expanding customer bases, expanding into new
markets, reducing headwinds such as competition and launching new products.

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 A minimum of two companies are involved in the merger, one of which is an existing company and
the other is the target company.
 Amalgamation requires at least three companies, one of which is the amalgamated company and
the others are the merging companies.
 In a merger, the existing company retains its assets and liabilities while also absorbing the assets
and liabilities of the other.
 The assets and liabilities of the merging companies are transferred to the newly formed entity
through amalgamation.
 When a shareholder of an amalgamating company transfers shares held in the amalgamating
company in exchange for allotment of shares in the amalgamated company in the scheme of
amalgamation, the transfer of shares is not treated as a transfer under Section 47(vii) of the Act,
and the shareholder of the amalgamating company does not receive any capital gain.
 The amalgamating company’s shareholders will be subject to capital gains tax. When shareholders
of an acquired corporation sell their shares as part of a merger or acquisition, they can receive a
variety of payment options. These receipts could be taxable or non-taxable.
 Amalgamating Company receives tax breaks any transfer of capital assets by an amalgamating
company to an Indian amalgamated company in the scheme of amalgamation is not treated as a
transfer under Section 47(vi) of the Act, and thus no capital gain tax is imposed on the amalgamating
company.
 Section 72A under Chapter VI of the Act governed provisions relating to carry forward and set off of
accumulated loss and unabsorbed depreciation.
 The transfer of a firm’s business undertakings to another company is known as a demerger. The
demerged company is the source company, i.e. the corporation whose assets are being transferred.

13.15 GLOSSARY

 Absorption: It is when one powerful company takes control over the weaker company
 Amalgamation: It is done between 2 or more entities engaged in the same line of activity or have
some synergy in their operations
 Amalgamated company: It means a company that comes into existence as a result of an
amalgamation as specified in Section 282
 Unabsorbed depreciation: It refers to the portion of the amalgamating banking company’s
depreciation allowance that is still available and would have been available if the amalgamation
had not occurred

13.16 CASE STUDY: MERGER OF ZEE ENTERTAINMENT ENTERPRISES LIMITED

(ZEEL) AND SONY PICTURES NETWORKS INDIA
Case Objective

The aim of this case is to discuss the top merger in India.

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ZEEL and SPNI (Now, it is known as Culver Max entertainment) are India’s two biggest media
conglomerates. They both took the steps towards a multibillion-dollar merger. The board of directors of
Zee gave approval to the merger between the two companies, i.e., ZEEL and SPNI. The merger agreement
has the power to make India’s largest newly created media company.

The proposed merger of Zee and Culver Max Entertainment has been permitted by the Bombay Stock
Exchange, i.e., BSE and National Stock Exchange (NSE), Zee Entertainment said in one of the statement.
As per Zee, The approval from the stock exchanges marks a firm and positive step in the overall merger
process.

In this April, SPNI changed its corporate name to Culver Max Entertainment but it continued to us the
old television channels and other digital properties and Sony’s brand name. Both the media companies
signed an agreement (definitive) to merge Zee into Sony and combine their linear TV networks, digital
assets, production operations and programme libraries. This merger would create the second-largest
entertainment network, after Disney-Star in India, analysts had said back then.

The merged company would retain Zee’s stock market listing, though Sony would give large cash
injection and control a majority shareholding of close to 51 per cent.

Zee’s Punit Goenka would be leading the Managing Director and Chief Executive Officer. Sony group will
nominate the majority of the board of directors and would include the existing MD and CEO, N P Singh.

Questions
1. Summarise the case study.
(Hint: ZEEL and SPNI (Now it is known as Culver Max entertainment) are India’s two biggest media
conglomerates.)
2. What are the advantages of merger?
(Hint: large cash injection and control a majority shareholding.)

13.17 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Differentiate between merger and amalgamation.
2. Explain the taxation of shareholders.
3. What are the implications of the amalgamating company?

13.18 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. It’s important to know the difference between Amalgamation and Merger in order to fully
comprehend the two terms and their applications.
The following are the key distinctions between amalgamation and merger in terms of their various
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aspects:
 Meaning:
 When two companies with similar lines of business merge, they usually want to expand into
new markets or acquire new customers.
 Amalgamation occurs when a larger company buys a smaller company or when a company
buys multiple companies.
 Types:
 Horizontal, vertical, co-generic, and reverse mergers are the most common.
 Amalgamation could occur as a result of a purchase or as a result of a merger.
 New entity formation:
 A merger occurs when one company acquires control of another. As a result, the acquiring
company may keep its name.
 In amalgamation, the larger and acquiring company survives the merger and retains its
identity. The smaller company, on the other hand, goes out of business.
Refer to Section When Mergers are not regarded as Amalgamation
2. When a shareholder of an amalgamating company transfers shares held in the amalgamating
company in exchange for allotment of shares in the amalgamated company in the scheme of
amalgamation, the transfer of shares is not treated as a transfer under Section 47(vii) of the Act,
and the shareholder of the amalgamating company does not receive any capital gain.
The above are just a few of the many tax breaks available to the aforementioned types of taxpayers
as a result of M&A transactions. Wherever applicable, appropriate inputs are given in the following
discussions in case of specific requirements relating to acquisitions by foreign entities.
It should be noted that only domestic companies can be amalgamated when an Indian target entity
is sought to be acquired by a foreign entity. As a result, the foreign acquirer must establish a local
Special Purpose Vehicle (SPV) in India to carry out the amalgamation with the Indian company, and
the SPV also benefits from the Act’s tax benefits on amalgamation, which are conditional on the
amalgamated company being an Indian company. Refer to Section Taxation of Shareholders
3. Implications of capital gains taxes for the merging (transferor) company
If the amalgamated company is an Indian company, there will be no capital gains tax on the transfer
of a capital asset by the amalgamating company to the amalgamated company in the scheme of
amalgamation. Profits or gains arising from the transfer of capital assets are subject to capital
gains tax. The income will be calculated using the transfer consideration. In other words,
capitalgains cannot occur if there is no consideration. In the event of a merger, the properties and
liabilities of the merging company are transferred to the merged company under a court-approved
scheme.
The cash, equity shares, and other forms of compensation for such vesting go directly to the
shareholders. As a result, there would be no capital gains in the hands of the company because it
would not receive any consideration. Refer to Section Taxation of Amalgamating Company

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@ 13.19 POST-UNIT READING MATERIAL

 http://www.differencebetween.net/business/difference-between-merger-and-amalgamation/#ix-
zz7e5D2OvQe
 https://taxguru.in/income-tax/note-tax-implication-amalgamation.html

13.20 TOPICS FOR DISCUSSION FORUMS

 Study amalgamation-related case studies and discuss them.

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 UNIT

14 Cash Loan, Deposits and Advances

Names of Sub-Units

Section 269SS – Taking Cash Loan, Section 269ST – Modes of Undertaking Transactions, Section 269T –
Repayment of Cash Loan, Section 269SU – Acceptance of Payment Through Electronic Modes, Section
68 – Cash Credit, Section 69 – Unexplained Investment, Section 69A – Unexplained Money, Section 69B
– Investment not Fully Disclosed, Section 69C – Unexplained Expenditure and Section 69D – Amount
Borrowed and Repaid on Hundi

Overview

This unit describes Section 269SS – Taking Cash Loan and Section 269ST – Modes of Undertaking
Transactions. Further, it explains Section 269T – Repayment of Cash Loan, Section 269SU – Acceptance
of Payment through Electronic Modes and Section 68 – Cash Credit. Also, it elaborates Section 69 –
Unexplained Investment, Section 69A – Unexplained Money and Section 69B – Investment not Fully
Disclosed. Towards the end, it explains Section 69C – Unexplained Expenditure and Section 69D –
Amount borrowed and repaid on Hundi.
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Learning Objectives

In this unit, you will learn to:

 Define Section 269SS – Taking Cash Loan
 Elaborate Section 269ST – Modes of Undertaking Transactions
 Examine Section 269T – Repayment of Cash Loan
 Analyse Section 269SU – Acceptance of Payment through Electronic Modes
 Describe Section 68 – Cash Credit, Section 69 – Unexplained Investment
 Discuss Section 69A – Unexplained Money
 Explain Section 69B – Investment not Fully Disclosed
 State Section 69C – Unexplained Expenditure
 Analyse Section 69D – Amount borrowed and repaid on Hundi

Learning Outcomes

At the end of this unit, you would:

 Summarise Section 269SS – Taking Cash Loan and Section 269ST – Modes of Undertaking
Transactions
 Execute Section 269T – Repayment of Cash Loan and Section 269SU – Acceptance of Payment
through Electronic Modes
 Interprete Section 68 – Cash Credit, Section 69 – Unexplained Investment
 Memorise Section 69A – Unexplained Money and Section 69B – Investment not Fully Disclosed
 Present Section 69C – Unexplained Expenditure and Section 69D – Amount borrowed and repaid
on Hundi

Pre-Unit Preparatory Material

 https://icmai.in/TaxationPortal/upload/DT/Article/4.pdf
 ht t ps : //w w w. inc o me tax i ndia. g ov. in/p a g es /a c ts /inc o m e-ta x-act .
aspx?key=section+269ss&key=section+269ss

14.1 INTRODUCTION
Financial stability is very important for leading a good life. Many families or institutions have a hard
time fulfilling their monetary needs. Whether business or family or individual, we all experience money
crunch at some point in our life. Hence, we seek loans and accept deposits. Section 269SS of the Income
Tax Act imposes restrictions on taking loans or deposits.

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This unit covers various sections related to cash loans, deposits and advances. This unit first explains
Section 269SS, which deals with cash payments and loan and deposit repayment. The purpose of this
section is to combat black money. One of the major issues causing economic disparities in India is tax
evasion. False cash transactions result in unaccounted money, which raises the risk of tax evasion.

Let us know the Purpose of introducing 269SS.

During raids, Income Tax Authorities discover hidden and unaccounted cash. Previously, the perpetrator
would get away by claiming that the money was a loan or deposit from friends or relatives. Furthermore,
individuals seeking tax evasion would engage in fraudulent transactions involving the payment and
repayment of loans and deposits in cash.

To combat the growing number of cash transactions that are leading to the accumulation of black
money, the 269SS was enacted, which limits these cash payments.

14.2 SECTION 269SS-TAkINg CASH LOAN

Let’s understand how Section 269SS of Income Tax Act impacts loans and deposits.

According to Section 269SS, no loan or deposit or specific sum may be taken or accepted from any other
person unless it is in the form of an account payee’s cheque or account payee’s bank draft if:
a. The amount of such loan or deposit or the aggregate amount of such loan and deposit is unpaid on
the date of taking or accepting such loan or deposit or
b. On the date of taking loan or accepting deposit, any loan or deposit taken or accepted earlier by
such person from the depositor is still unpaid and the amount or
c. The total or aggregate sum mentioned in the clause:
i. In addition to the sum or total amount mentioned in clause
ii. A sum of at least `20,000:

As a result, no loan or deposit of more than `20,000 can be accepted unless it is in the form of an account
payee cheque or account payee draft. The `20,000 limit applies even if any loan or deposit previously
taken or accepted by such person from such depositor remains unpaid on the date of taking or accepting
such loan or deposit and such unpaid amount, together with the loan or deposit to be accepted, exceeds
the aforesaid limit. Consider the following scenario: Mr. X has a credit balance of `19000 on a loan from
Mr. Y. In this case, unless he uses an account payee cheque or account payee bank draft, Mr. X cannot
borrow more than `999 from Mr. Y.

In summary, a person cannot accept a cash loan or deposit of `20,000 or more from another person in
a single day.

Transaction Modes Specified

The following are the specified modes of accepting loans, deposits or specified sums under income
tax rules:
1. Account payee cheque/bank draft,
2. Electronic Clearing System (ECS) through a bank account; or

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3. Net Banking;
4. Credit Card;
5. Debit Card;
6. RTGS;
7. NEFT;
8. BHIM,
9. IMPS; and
10. UPI.

Exemption: As per provision of section 269SS:

1. Any amount, loan or deposit ‘accepted or taken from’ or ‘accepted or taken by’ the entities listed
below:
a. Government
b. Any banking company, post office savings bank or co-operative bank
c. Any corporation established by a Central, State or Provincial Act
d. Any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956) ;
e. Such other institution, association or body or class of institutions, associations or bodies which
the Central Government may, for reasons to be recorded in writing, notify in this behalf in the
Official Gazette.
In this way, the provisions of Section 269SS of the Income Tax Act will not apply if a person receives
a loan, a specific sum or deposits from any of the entities listed above or if the entities accept any
deposit, loan or some specific sum from any individual.
2. A person who earns a living from agriculture only accepts deposits or takes out loans from people
who also make a living from agriculture.
3. If one receives cash from family members in a time of need. The purpose here should not be to avoid
taxes.
4. When one or more partners contribute cash capital to a partnership firm.

Penalty for Violating Section 269SS

The assessing officer has the authority to levy a penalty of 100% of the loan or deposit amount. The
penalty applies to accepting loans and cash deposits in excess of the prescribed limit. As a result, the
receiver must ensure that the provisions of Section 269SS are followed when accepting payments.
However, if the person can show that the transactions were made for a legitimate reason and with no
malicious intent, he or she may not be punished. According to Section 271D of the Income Tax Act 1961,
if a loan or deposit is accepted in violation of Section 269SS, the Joint Commissioner may levy a penalty
equal to the amount of the loan or deposit taken or accepted.

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Transaction Reporting 269SS

In clause 31 of Form 3CD, the tax auditor must report transactions that have been affected by Sections
269SS. Both parties must report the transactions (payer and receiver).

14.3 SECTION 269ST-MODES OF UNDERTAkINg TRANSACTIONS

To combat black money and tax fraud in the economy, the government enacted Section 269ST. It makes
it illegal for anyone to receive more than `2 lakh in cash:
a. Single transaction
b. From a single individual in a single day
c. From a single individual for transactions involving an event or occasion.

Following the introduction of this section, NBFCs and HFCs sent various representations as to whether
the limit of `2 lakh applied to a single loan repayment instalment or the entire amount owed.

If you are repaying a loan to an NBFC or an HFC, one instalment of loan repayment will be considered a
single transaction, according to the IRS.

The payment can be made in cash if the single loan instalment is less than `2 lakh. All loan instalments
must be paid separately to determine whether the `2 lakh limit applies.

Section 269ST is not applicable to the following:

i. Government
ii. Any banking company
iii, Post office savings bank
iv. Co-operative bank
v. Other persons or receipts as may be notified
vi. Transactions referred to in section 269SS which are attracted when we accept loan from any person
will not be covered in this section’s scope.

Examples: Section 269ST:

a. Is said to be violated if a person sells any product worth `4,50,000 to an other person on 3 bills
(separate) of `150,000 each and accepts cash on the same day at different times.
b. Section 269ST (b) is violated if a person sells goods worth `500,000 to another person on a single bill
and receives cash of `2,50,000 on day one and another `2,50,000 on the next day.
c. For Y’s wedding, X accepts an order for catering, decorations and a tent. Section 269ST(c) will be
violated if he accepts `1,00,000 for catering, `1,50,000 for decoration and `1,50,000 for tent work on
different dates.
All of the cash transactions were related to the same event—wedding. Y’s

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Penalty for Noncompliance Section 271da

If a person receives any sum in violation of section 269ST, he shall be liable to pay a sum equal to the
amount of such receipt as a penalty. The Joint Commissioner will impose any penalty imposed under
subsection (1).

14.4 SECTION 269T-REPAYMENT OF CASH LOAN

Refund of Cash Deposits Section 269T of the Income Tax Act states that any branch of a banking
company or cooperative society, firm or other person shall not repay any loan or deposit other than
by an account payee cheque or account payee bank draft drawn in the name of the person who made
the loan or deposit if:
a. The loan or deposit, together with interest, is `20000 or more or
b. The aggregate amount of loans or deposits held by such person, either in his own name or in the
name of another.

For example: Suppose X has a loan of `30000 owed to Y. Then X cannot repay such a loan to Y in cash.

In a nutshell, if the loan or deposit is worth `20,000 or more, the person cannot repay it in cash.

Section is not applicable on any loan or deposit taken or accepted from:

a. Government;
b. Any banking company, post office savings bank or co-operative bank;
c. Any corporation established by a Central, State or Provincial Act;
d. Any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);
e. Such other institution, association or body or class of institutions, associations or bodies which
the Central Government may, for reasons to be recorded in writing, notify on this behalf in the
Official Gazette.

Consequences of Section 269T Violation

Section 271E of the Income Tax Act, 1961, provides that if a loan or deposit is repaid in violation of the
provisions of Section 269T, the Joint Commissioner may levy a penalty equal to the amount of such loan
or deposit repaid.

According to Section 273B of the Income Tax Act of 1961, if an individual fails to comply with the provisions
of section 269T due to reasonable cause, no penalty is imposed. The following are the reasonable causes
as determined by judicial decisions:
 Receiving or Repaying a Partner’s Amount: If one of the partners invests cash capital in the
organisation or withdraws `20,000 or more, the provisions of section 269T are not applicable
because the capital is not considered a deposit or a loan.
 Section 271D does not carry any penalties: When Income is accessed from the Deposit: There is no
penalty for income deposited.

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 Amount Paid by the Partner to the Firm or Vice Versa: There is no penalty for the amount paid by
the firm to the partner or vice versa.
 Section 269T Penalty Does Not Apply to Repayment or Acceptance by Journal Entry: ‘Deposits or
loans’ do not include repayment or acceptance via Journal Entry. As a result, under section 269T of
the Income Tax Act of 1961, this type of payment is not subject to any penalties.
 Any genuine transaction made in an emergency is not subject to penalty: Cash used to meet
emergency needs are also not subject to penalty.

269T Transaction Reporting

Those transactions which are influenced by the provisions of Sections 269T in clause 31 of Form
3CD must be reported by the tax auditor. The transactions must be reported by both parties (payer
and receiver).

14.5 SECTION 269SU-ACCEPTANCE OF PAYMENT THROUgH ELECTRONIC MODES

To promote the cashless economy and the use of digital payment methods, the government enacted
Section 269SU of the Income Tax Act. In addition to other electronic modes, Section 269SU prescribes
accepting payment through certain electronic modes. This unit goes over Section 269SU in detail, as well
as the various practical issues that assessees face when dealing with this section.

The government has prescribed certain payment modes for establishments and various entities whose
total sales, turnover or gross receipts from business is more than `50 crore in the previous year. The
Finance (No. 2) Act of 2019 added a new section 269SU to the Code of Federal Regulations and published
Rule 119AA, which defines payment acceptance modes.

269SU Section

Section 269SU mandates that anyone conducting business provide the ability to accept payments via
specified electronic methods. These prescribed modes will be in addition to any other electronic payment
methods that the person already offers to customers.

When a person’s total sales, turnover or gross receipts from a business exceed `50 crore in the
previous year, he or she is subject to Section 269SU. The section came into effect on November 1, 2019.
If the sales, turnover or gross receipts for the financial year ended 31 March 2019 exceed `50 crore, the
section applies.

E-Payment System or Electronic Mode of Payment

An e-payment system or electronic mode of payment refers to the way of conducting business or paying
for goods and services via an electronic medium rather than cheque or cash. E-payment system is also
known as the online payment system. Credit and debit cards are the most common online payment
methods. Alternative payment methods, such as bank transfers, electronic wallets, smart cards and so
on, are also available.

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Rule 119AA Specified the Modes of Payment Acceptance.

Section 269SU payment methods have been announced by the Central Board of Direct Taxes (CBDT):
 RuPay-powered debit card: The National Payments Corporation of India (NPCI) conceptualised
and launched RuPay on March 26, 2012. It was established to realise the Reserve Bank of India’s
(RBI) vision of a domestic, open and multilateral payments system. RuPay is accepted by all Indian
banks and financial institutions for electronic payments. In addition to the country’s major private
and public banks, cooperative banks in the country issue RuPay cards.
 UPI stands for Unified Payments Interface (BHIM-UPI): Bharat Interface for Money (BHIM) is a
payment app that uses the Unified Payments Interface to make simple, easy and quick transactions
(UPI). With the BHIM application, a person can do direct bank payments to anyone with the help of
UPI using their UPI ID. Any person can use the BHIM-UPI app to request money from a UPI ID.
 Quick Response Code for the Unified Payments Interface (UPI QR Code) (BHIM-UPI QR Code): Bharat
QR is a mobile payment solution that connects people to businesses. The NPCI, Visa and Mastercard
payment networks collaborated on this solution. Users can pay utility bills using BQR enabled mobile
banking apps without sharing any user credentials with the merchant once BQR codes are deployed
on merchant locations. It’s an easy way to pay. Bharat QR is an alternative payment method that
requires the cardholder to download the Bharat QR enabled mobile banking app from his or her
bank. To make a payment, the user must scan the Bharat QR code at the merchant store and select
a card. Both the cardholder and the merchant receive notification of the successful transaction in
the mobile application.

Rule 119AA came into effect on January 1, 2020. As a result, beginning January 1, 2020, anyone subject
to the provisions of section 269SU must make the payment methods specified in Rule 119AA available to
their customers.

Scope of Section 269SU and Purpose

The government’s initiative to promote digital payments and a cashless economy includes the
introduction of section 269SU. To promote a cashless economy, the government is promoting low-cost
digital modes of payment such as BHIM UPI, UPI-QR Code, Aadhaar Pay, certain debit cards, NEFT,
RTGS and others. As a result, the government enacted Section 269SU, which requires businesses with an
annual turnover of more than `50 crore to provide low-cost digital payment options to their customers.
Furthermore, the bank or payment system provider may not charge any fees or merchant discount
rates for using the payment methods specified in section 269SU.
The Reserve Bank of India and banks must bear the costs associated with these payment methods.
The current provisions of section 269SU, read in conjunction with Rule 119AA, will also apply to the
following types of assessees:
a. An assessee with a B2C business model;

Note:
Circular No. 12/2020 clarified that the provisions of section 269SU of the Act do not apply to a specified
person who only conducts B2B transactions (i.e., no transactions with retail customers/consumers) if at
least 95 percent of all amounts received during the previous year, including amounts received for sales,
turnover or gross receipts, are received in a form other than cash.

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b. An assessee that is entirely export-oriented (i.e., no domestic sales) and thus receives all payments
through traditional banking channels; and
c. A Permanent Establishment is a foreign company that operates in India (PE).

Violation Attracts Penal Provisions

A person subject to the provisions of section 269SU who fails to provide payment facilities through the
prescribed modes will be fined `5,000 for each day the facility is unavailable. If the person instals and
activates the prescribed payment facility by January 31, 2020, there will be no penalty. From February 1,
2020, a daily penalty of `5,000 will be imposed.
The Joint Commissioner of Income Tax has the authority to levy the penalty. A show-cause notice would
be issued to such a person to demonstrate why a penalty should not be imposed for non-compliance. In
addition, if the person who violated section 269SU proves that there were good and sufficient reasons
for their failure, the Joint Commissioner may not impose a penalty.

14.6 SECTION 68-CASH CREDIT

What is the Income Tax Act’s Section 68?

The unexplained cash credit is addressed in Section 68 of the Income Tax Act. This section declares:
 If any amount of money is found credited in the assessee’s books,
 The assessee must satisfactorily explain the nature and source of the sum so credited to the AO
(Assessing Officer) and demonstrate that the sum in question is not his income.
 If he does not provide an explanation or if the explanation provided is not satisfactory in the opinion
of the AO, the assessee’s income may be charged.
 Provision for Corporate Taxpayers: Any sum of money credited as the share application money,
share capital, share premium or any other amount, by whatever name called in the books of such
company shall be deemed unsatisfactory unless the person in whose name credit is recorded in the
books of such company explains to the satisfaction of the Assessing Officer.
As a result, the Company must first establish the identity of the person whose name appears in the
books and then satisfy the assessing officer as to the source and nature of the person whose name
appears in the books. The only exception to this rule is when the credit is recorded in the books of a
VC (venture capital fund) or a venture capital company as defined in Section 10. (23FB).

Why was There a Special Provision for Corporate Taxpayers?

This special provision has been introduced for closely held corporate taxpayers to prevent tax evasion by
companies by displaying the names of non-existent shareholders and third parties as paying company
share related money, which is a mechanism through which unaccounted money can be parked in such
companies.
The provision places the burden of proof on the closely held company receiving the share application
money/share capital/share premium/any other amount to prove that the money invested in the company
belongs to the person who gave it to the company. Otherwise, the money received will be taxable as an
unexplained cash credit in the hands of the company under section 68.

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What are the Tax Implications of an Unexplained Credit Under Section 68?
 Section 115BBE states that in the case when the assessee has included unexplained cash credits and
mentioned them in his return of income, he must make the payment of 60 per cent tax on such
income (In all cases, an additional 25% surcharge on the tax amount plus a 4% cess). [78 per cent is
the effective rate].
 Section 115BBE also states that if an assessing officer discovers unexplained cash credits, the assessee
must pay 60% tax on the income (In all cases, there is a 25% surcharge on the tax plus a 4% cess)
Section 271AAC imposes a penalty of 10% of the tax due, calculated according to Section 115BBE. If
the assessee has included such income in his or her return of income and paid tax on or before the
end of the previous year, no penalty will be imposed. [84 percent effective rate]
 Under section 68, no expenditures or deductions will be allowed from such deemed income.
Furthermore, losses cannot be offset against such deemed income.

If such income is included in the return of income filed under section 139, the effective rate is 78 percent.
Section 271AAC imposes a penalty of 10% of the tax due under section 115BBE if such income is not
reported on the return of income filed under section 139. In this case, the effective rate will be 84 percent.

14.7 SECTION 69: UNEXPLAINED INVESTMENT

Section 69 is the Income Tax department’s weapon for detecting tax evasion in the form of hidden or
illegal investments made by the assessee that are not recorded in the assessee’s accounts books.

When an assessee makes investments in the financial year immediately preceding the assessment year
that are not recorded in his books of account, if any, for any source of income and the assessee offers
no explanation about the nature and source of the investments or the assessee’s explanation is not, in
the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the
assessee’s income for that financial year:
 Rate of Tax: Section 69 does not specify the scope or duration of AO’s discretionary power to treat
the investment as income if the investor-assessee has not adequately explained it. As a result, the
Assessing Officer must value the reasonable explanations and evidence presented to him regarding
the nature and source of investment and he cannot make the addition solely on assumptions,
conjectures or without supporting evidence. If the assessee’s total income includes income referred
to in Section 69 and reflected in the return of income furnished under Section 139 or is determined by
the Assessing Officer and includes any income referred to in Section 69, income tax is calculated at
60% under Section 115BBE. The current 60 percent tax rate will be increased by a 25% surcharge and
a 10% penalty, bringing the total tax rate to 85.80% (Cess is not included.) In computing the assessee’s
income referred to in clause (a) of sub-section (1) of Section 115BBE, no deduction in respect of any
expenditure or allowance [or set - off of any loss] shall be allowed.
 Penalty: Assessing Officers must only initiate penalties u/s 271AAC where tax is payable u/s 115BBE
of the Income Tax Act starting in A.Y. 2017-18. A penalty of ten percent of the tax due under Section
115BBE will be imposed. If such income is disclosed in the income tax return and tax on it is paid
under Section 115BBE on or before the end of the previous year, there will be no penalty.

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14.8 SECTION 69A-UNEXPLAINED MONEY

As per Section-69 A, if any money, bullion, jewellery or other valuable article is lying with assessee
in ownership form in any financial year which is not so recorded in the accounts books if at all he
maintains for any income source and he is unable to explain the source from which he acquired these
items or he offers an unsatisfactory explanation to the AO, then such money’s, bullion’s, jewellery’s or
other valuable article’s value shall be considered his income for that year:
 Rate of Tax: Income tax is calculated at 60% under Section 115BBE if the assessee’s total income
includes income referred to in Section 69 A and reflected in the return of income furnished under
Section 139 or is determined by the Assessing Officer and includes any income referred to in Section
69A . The 60 percent tax rate will be increased by a 25% surcharge and a 10% penalty, bringing the
total tax rate to 85.80% (including cess). No deduction in respect of any expenditure or allowance or
set off of any loss] shall be allowed in computing the assessee’s income referred to in clause (a) of
sub-section (1) of Section 115BBE.
 Penalty: Assessing Officers must only initiate penalties u/s 271AAC where tax is payable u/s 115BBE
of the IT Act starting in A.Y. 2017-18. A penalty of ten percent of the tax due under Section 115BBE will
be imposed. There will be no penalty if such income is disclosed in the income return and tax on such
income is paid under Section 115BBE on or before the end of the relevant previous year.

14.9 SECTION 69B INVESTMENT NOT FULLY DISCLOSED

Amount of Investments, etc., not Fully Disclosed in Books of Account [Section 69B]
 Section-69 B: If assessee makes any investments or owns any bullion, jewellery or other valuable
article in a financial year and AO forms a contrary opinion that is he believes that the correct
value in respect of these items is not appearing in accounts books maintained for any purpose and
assessee doesn’t offer any explanation or is not able to satisfy the AO with same if offered regarding
the inaccurate amount, the amount found to be excess in this respect is considered as his income
for that financial year.
 Rate of Tax: Income tax is calculated at 60% under Section 115BBE if the assessee’s total income
includes income referred to in Section 69 A and reflected in the return of income furnished under
Section 139 or is determined by the Assessing Officer and includes any income referred to in Section
69A . The 60 percent tax rate will be increased by a 25% surcharge and a 10% penalty, bringing the
total tax rate to 85.80% (including cess). There will be no deduction in respect of any expenditure or
allowance [or set off of any loss] shall be allowed in computing the assessee’s income referred to in
clause (a) of sub-section (1) of Section 115BBE.
 Penalty: Assessing Officers must only initiate penalties u/s 271AAC where tax is payable u/s 115BBE
of the Income Tax Act starting in A.Y. 2017-18. A penalty of ten percent of the tax due under Section
115BBE will be imposed. No penalty will be imposed if such income is disclosed in the income
return and tax on such income is paid under Section 115BBE on or before the end of the relevant
previous year.

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14.10 SECTION 69C-UNEXPLAINED EXPENDITURE

Section 69C-Unexplained Expenditure
Where an assessee incurs any expenditure in a financial year and provides no explanation about the
source of such expenditure or part thereof or the explanation, if any, provided by him is not satisfactory
in the opinion of the Assessing Officer, the amount covered by such expenditure or part thereof, as
the case may be, may be deemed to be the assessee’s income for that financial year. The provision
to section 69C states that, notwithstanding anything else in the Act, such unexplained expenditure
that is deemed to be the assessee’s income will not be allowed as a deduction under any head
of income:
 Rate of Tax: Income tax is calculated at 60% under Section 115BBE if the assessee’s total income
includes income referred to in Section 69 A and reflected in the return of income furnished under
Section 139 or is determined by the Assessing Officer and includes any income referred to in Section
69A . The 60 percent tax rate will be increased by a 25% surcharge and a 10% penalty, bringing the
total tax rate to 85.80% (including cess). No deduction in respect of any expenditure or allowance [or
set off of any loss] shall be allowed in computing the assessee’s income referred to in clause (a) of
sub-section (1) of Section 115BBE.
 Penalty: Assessing Officers must only initiate penalties u/s 271AAC where tax is payable u/s 115BBE of
the Income Tax Act starting in A.Y. 2017-18. A penalty of ten percent of the tax due under Section 115BBE
will be imposed. No penalty will be imposed if such income is disclosed in the income return and tax on
such income is paid under Section 115BBE on or before the end of the relevant previous year.

14.11 SECTION 69D-AMOUNT BORROWED AND REPAID ON HUNDI

Amount Borrowed or Repaid on Hundi [Section 69D]
 Section-69 D: If any borrowing or any repayment is made on a hundi from or to any person as the
case may be, by way of other than a bank’s crossed cheque the amount involved in either case shall
be considered as borrower’s or repayer’s income in the year of borrowing or repayment, as the case
may be. It is provided that any borrowing which is considered as income due to violation mentioned
in the preceding lines shall not be assessed as income again when it’s repaid so as to avoid double
taxation, being interest on such borrowing too forming part of the repayment amount.
 Rate of Tax: Income tax is calculated at 60% under Section 115BBE if the assessee’s total income
includes income referred to in Section 69 A and reflected in the return of income furnished under
Section 139 or is determined by the Assessing Officer and includes any income referred to in Section
69A. The 60 percent tax rate will be increased by a 25% surcharge and a 10% penalty, bringing the
total tax rate to 85.80% (Including cess). No deduction in respect of any expenditure or allowance [or
set off of any loss] shall be allowed in computing the assessee’s income referred to in clause (a) of
sub-section (1) of Section 115BBE.
 Penalty: Assessing Officers must only initiate penalties u/s 271AAC where tax is payable u/s 115BBE of
the Income Tax Act starting in A.Y. 2017-18. A penalty of ten percent of the tax due under Section 115BBE
will be imposed. No penalty will be imposed if such income is disclosed in the income return and tax on
such income is paid under Section 115BBE on or before the end of the relevant previous year.

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Conclusion 14.12 CONCLUSION

 According to Section 269 SS of Income tax Act, No person shall accept any loan or deposit in a
single day from another person in any form other than account payee cheque or bank draft, if the
aggregate amount involved is more than `20,000.
 The following are the specified modes of accepting loans, deposits or specified sums under income
tax rules:
 Account payee cheque/bank draft,
 Electronic Clearing System (ECS) through a bank account; or
 Net Banking;
 Credit Card;
 Debit Card;
 RTGS;
 NEFT;
 BHIM,
 IMPS; and
 UPI.
 Penalty for violating Section 269SS: The assessing officer has the authority to levy a penalty of 100%
of the loan or deposit amount. The penalty applies to accepting loans and cash deposits in excess of
the prescribed limit.
 To combat black money and tax fraud in the economy, the government enacted Section 269ST. It
makes it illegal for anyone to receive more than `2 lakh in cash.
 To promote the cashless economy and the use of digital payment methods, the government enacted
Section 269SU of the Income Tax Act. In addition to other electronic modes, Section 269SU prescribes
accepting payment through certain electronic modes.
 When a person’s total sales, turnover or gross receipts from a business exceed `50 crore in the
previous year, he or she is subject to Section 269SU.
 An e-payment system or electronic mode of payment refers to the way of conducting business or
paying for goods and services via an electronic medium rather than cheque or cash.
 The National Payments Corporation of India (NPCI) conceptualised and launched RuPay in March
26, 2012. It was established to realise the Reserve Bank of India’s (RBI) vision of a domestic, open and
multilateral payments system.
 The unexplained cash credit is addressed in Section 68 of the Income Tax Act. This section declares:
 If any amount of money is found credited in the assessee’s books,
 The assessee must satisfactorily explain the nature and source of the sum so credited to the AO
(Assessing Officer) and demonstrate that the sum in question is not his income.
 If he does not provide an explanation or if the explanation provided is not satisfactory in the
opinion of the AO, the assessee’s income may be charged.

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 Section 69 is the Income Tax department’s weapon for detecting tax evasion in the form of hidden
or illegal investments made by the assessee that are not recorded in the assessee’s accounts books.
 As per Section-69 A, If any money, bullion, jewellery or other valuable article is lying with assessee
in ownership form in any financial year which is not so recorded in the accounts books if at all he
maintains for any income source and he is unable to explain the source from which he acquired these
items or he offers an unsatisfactory explanation to the AO, then such money’s, bullion’s, jewellery’s
or other valuable article’s value shall be considered his income for that year.

14.13 gLOSSARY

 Assessing Officer: A person appointed by the Income-tax department who has the jurisdiction
(rights) to make an assessment of an assessee, who is liable under the Income-tax Act
 Unexplained investment: Any investment in any financial year which has not been recorded in the
books of accounts and you are unable to explain the source as well as the nature of such investments
 RuPay: Established to realise the Reserve Bank of India’s (RBI) vision of a domestic, open and
multilateral payments system
 Bharat QR: A mobile payment solution that connects people to businesses
 Bharat Interface for Money (BHIM): A payment application (app in short) that uses the Unified
Payments Interface to make simple, easy and quick transactions (UPI)

14.14 CASE STUDY: SUMATI DAYAL VS. COMMISSIONER OF INCOME-TAX [TS-5013-

SC-1995-O]
Case Objective

The aim of this case study is to describe the case of Sumati Dayal.

In the case of Sumati Dayal, the apex court i.e., Supreme Court held in favour of the tax department i.e.,
Commission of Income Tax after taking into consideration all facts and circumstances. The Apex court
reached the conclusion that the propositions of the taxpayer defied human probabilities.

Following are the relevant facts and events and the SC Ruling:
1. This ruling is related to Assessment Year (AY) 1971-72 and 1972-73.
2. The assessee i.e., Sumati Dayal was a dealer (in art pieces, antiques).
3. By the way of race winning in Jackpots and Treble events in races at Treble events in different cities,
the assessee received more than INR 3 lakh annually.
4. Assessee claimed that such amount is not taxable but A.O i.e., Assessing officer treated the amounts
as ‘Income from other Sources’ and levied tax thereon.
Following are a few peculiar facts that are listed in the ruling are:
a. Assessee had presented evidence that is an affidavit which stated that she had no previous
experience in races as she has begun going for races only at the end of the year 1969.

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b. As per Assessee, she claimed to have won more than INR 3 lakh in a year on 13 occasions out of
which 10 were jackpots winning and 3 were treble events. In the other year, the assessee won INR
1 lakh approximately on jackpot winnings.
c. On the very first day of the races, the assessee won a jackpot.
d. As per assessee, she worked out the combination based on her husband’s advice and she added
a few horses of her own although she admitted that she did not understand anything about the
performance of these horses before the December of 1969.
e. Assessee’s books of accounts did not present drawings commensurate with the amounts that
would be needed to buy the tickets for participating in the races and concerned events.
f. The winning amounts were credited in the capital account of the assessee, however, there were
no debits for losses incurred on races and ticket amount.
g. It was strange that winning from races became taxable from 1972 and the assessee gave up the
activity in the same year.
h. When this case was presented before the settlement commission, the assessee offered to agree to
a reasonable addition towards inadequate drawings if the settlement commission were to come
to hold in her favour on the merits of the case.
5. On the basis of the above findings, the assessing authorities with the Settlement Commission
observed that “A Jackpot is a stake of 5 events in a single day and one can believe a regular and
experienced punter clearing a Jackpot occasionally but the claim of the appellant to have won a
number of Jackpots in three or four seasons not merely at one place but three different centres,
namely, Madras, Bangalore and Hyderabad appear, prima facie, to be wild and contrary to the
statistical theories and experience of the frequencies and probabilities.”

The Settlement Commission stated that the claim of winnings in races was false and what was passed
off as such winnings represented the appellant’s taxable income from some undisclosed sources.

The Supreme Court also agreed with the Settlement Commission saying that after considering the
surrounding circumstances and applying the test of human probabilities the Commission had rightly
concluded that the assessee’s claim about the amount being her winnings from races was not genuine.
Source: http://www.lexsite.com/services/network/settlement/case245D4a.shtml

Questions

1. Summarise the case law.

(Hint: The assessee i.e., Sumati Dayal was a dealer in art pieces, antiques, by the way of race winning
in Jackpots and Treble events in races at Treble events in different cities, the assessee received more
than INR 3 lakh annually.)
2. Discuss unexplained cash credits.
(Hint: Assessee cannot provide any explanation about the nature or source of the money.)

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14.15 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Explain section 269SS of the Income Tax Act in detail.
2. Define 269SU section. Also, describe what happens if someone violates the provision of section 269SU.
3. Examine section 68 of the Income Tax Act.
4. Elaborate unexplained investment in detail.
5. What is unexplained expenditure?

14.16 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. According to Section 269 SS of Income tax Act, No person shall accept any loan or deposit in a single
day from another person in any form other than an account payee cheque or bank draft, if the
aggregate amount involved is more than `20,000. Refer to Section Section 269SS-Taking Cash Loan
2. Section 269SU mandates that anyone conducting business provide the ability to accept payments
via specified electronic methods. These prescribed modes will be in addition to any other electronic
payment methods that the person already offers to customers.
When a person’s total sales, turnover or gross receipts from a business exceed `50 crore in the
previous year, he or she is subject to Section 269SU. The section came into effect on November 1,
2019. Refer to Section Section 269SU-Acceptance of Payment Through Electronic Modes
3. The unexplained cash credit is addressed in Section 68 of the Income Tax Act. This section declares:
 If any amount of money is found credited in the assessee’s books,
 The assessee must satisfactorily explain the nature and source of the sum so credited to the AO
(Assessing Officer) and demonstrate that the sum in question is not his income.
 If he does not provide an explanation or if the explanation provided is not satisfactory in the
opinion of the AO, the assessee’s income may be charged.
Refer to Section Section 68-Cash Credit
4. Section 69 is the Income Tax department’s weapon for detecting tax evasion in the form of hidden or
illegal investments made by the assessee that are not recorded in the assessee’s accounts books. When
an assessee makes investments in the financial year immediately preceding the assessment year that
is not recorded in his books of account, if any, for any source of income and the assessee offers no
explanation about the nature and source of the investments or the assessee’s explanation is not, in
the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be
the assessee’s income for that financial year. Refer to Section Section 69: Unexplained Investment
5. [Section 69C] Unexplained Expenditure, etc. - Where an assessee incurs any expenditure in a financial
year and provides no explanation about the source of such expenditure or part thereof or the explanation

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if any, provided by him is not satisfactory in the opinion of the Assessing Officer, the amount covered
by such expenditure or part thereof, as the case may be, may be deemed to be the assessee’s income
for that financial year. The provision to section 69C states that, notwithstanding anything else in the
Act, such unexplained expenditure that is deemed to be the assessee’s income will not be allowed as a
deduction under any head of income. Refer to Section Section 69C-Unexplained Expenditure

@ 14.17 POST-UNIT READINg MATERIAL

 https://cleartax.in/s/section-269ss-269t
 https://taxguru.in/income-tax/restrictions-loans-deposits-advances-section-269ss-section-269t.
html

14.18 TOPICS FOR DISCUSSION FORUMS

 Discuss the tax treatment of cash credit, unexplained investments, unexplained money and
unexplained expenditure of the Income Tax Act, 1961.

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15 Assessment of Companies

Names of Sub-Units

Section 115JB – Special Provision for Payment of Tax by Certain Companies, MAT Calculation,
Computation of Book Profit, Section 115JAA – MAT Credit Adjustments to be Made to Profit as Per
Statement of Profit and Loss to Arrive at Book Profit

Overview

This unit describes Section 115JB – Special Provision for Payment of Tax by Certain Companies. It
explains MAT Calculation and Computation of Book Profit. Towards the end, it discusses Section
115JAA – MAT Credit Adjustments to be made to Profit as per Statement of Profit and Loss to arrive at
Book Profit.

Learning Objectives

In this unit, you will learn to:

 Explain Section 115JB – Special Provision for Payment of Tax by Certain Companies
 Solve MAT Calculation
 Perform Computation of Book Profit
 Examine Section 115JAA – MAT Credit Adjustments to be made to Profit as per Statement of Profit
and Loss to arrive at Book Profit
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Learning Outcomes

At the end of this unit, you would:

 Analyse Section 115JB – Special Provision for Payment of Tax by Certain Companies
 Elaborate MAT Calculation
 Evaluate Computation of Book Profit
 Summarise Section 115JAA – MAT Credit Adjustments to be made to Profit as per Statement of
Profit and Loss to arrive at Book Profit

Pre-Unit Preparatory Material

 https://www.hostbooks.com/in/income-tax-act-1961/section-115jb-special-provision-payment- tax-
certain-companies/
 https://taxguru.in/income-tax/minimum-alternate-tax-mat-115jb-income-tax-act-1961.html

15.1 INTRODUCTION
Taxpayers need to submit the income details to the Income-tax Department. When taxpayer files return
of income, at that time these details are to be furnished. After filing up the return starts the processing
of the return of income by the Income Tax Department. This department checks the correctness of
the details. This process of assessing the return of income by the Income-Tax department is known as
“Assessment”. Assessment also includes re-assessment and best judgment assessment under section 144.

There are 4 major assessments under the Income Tax law given below:
 Assessment under section 143(1) is a preliminary assessment and is referred to as Summary
assessment without calling the assessee.
 Assessment under section 143(3) is a detailed assessment to confirm the correctness and genuineness
of the claims, deductions, etc., made by the taxpayer and is referred to as scrutiny assessment.
 Assessment under section 144 is an assessment carried out as per the best judgment of the AO based
on all relevant material he has gathered.
 Assessment under section 147 is an income escaping assessment.

15.2 SECTION 115JB – SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COMPANIES
MAT is an abbreviation for Minimum Alternate Tax. It is a tax imposed by section 115JB of the Income Tax
Act of 1961. In the AY 1988-89, a MAT was introduced for the first time. . It was later repealed by the Finance
Act of 1990 and reintroduced by the Finance (No. 2) Act of 1996, wef1-4-1997. The government introduces
the concept of MAT to target companies that earn large profits and pay dividends to their shareholders

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while paying no or little tax to the government by taking advantage of various exemptions, deductions
and benefits under the Income Tax Act. It was enacted in response to an increase in the number of zero-
tax corporations. Companies that have higher profits and pay dividends to their shareholders but do
not pay taxes to the government are considered zero tax companies. The government has initiated MAT
in order to regularise such tax payers.

In other words, MAT is a method of requiring businesses to pay a minimum amount of tax based on
their book profits. It is an indirect tax that corporations must pay. The MAT is calculated as 18.5% of the
book profits.

Tax is calculated in accordance with the standard provisions of the Income Tax Act (30 percent tax rate
plus 3 percent education cess plus surcharge, if applicable). Tax is calculated in accordance with the MAT
provisions of the Income Tax Act (18.5 % tax rate plus 3 % education cess plus surcharge, if applicable).

For fiscal year 2019-20, tax payable is calculated at 15% of book profit plus applicable cess and surcharge.

The MAT’s Main Goal

The main goal of MAT is to ensure that any company with significant profits and the ability to pay taxes
does not avoid paying income tax under section 115JB of the income tax act.

MAT’s Applicability

Only corporate companies are eligible for MAT. Individuals, HUF’s, partnership firms and other non-
corporate entities are not eligible for MAT. MAT is also payable by foreign companies with income
sources in India. It does not apply to businesses in the infrastructure and power sectors. MAT also
excludes income from charitable activities and free trade zones.

There is a distinction between two types of profits: regular profit and book profit:
 The profit computed using the provisions of tax laws is known as regular profit. Book profit, on the
other hand, is calculated using Schedule VI of the Companies Act, 1956.
 The rate of depreciation differs according to the Tax Law and the Companies Act.
 Real income is computed under tax laws, but deductions for provisions and reserves are allowed
under the Companies Act, resulting in the computation of conservation income rather than real
income.
 Various incentives and deductions from profits, such as deductions under Sections 80IA and 80IB,
were made possible by tax laws. This is not the case when it comes to calculating Book Profit under
the Companies Act.
1. The use of MAT (Minimum Alternate Tax) for the payment of taxes by certain businesses [Section
115JB]
Taxes cannot be less than 18.5 percent of book profit in any assessment year:
When the income-tax payable on a company’s total income as computed under the Income-tax Act
for the previous year relevant to the assessment year 2012-13 or thereafter is less than 18.5 percent

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of its book profit, the assessee’s total income (book profit) is deemed to be its total income and the
tax payable by the assessee on such total income (book profit) is the amount of the income-tax at the
rate of 18.5 percent.
Thus, in the case of a corporation, the higher of the two amounts is to be paid in income tax:
 If any income included in the company’s total income is taxable at special rates, tax on total
income is computed in accordance with the normal provisions of the Act by charging applicable
normal rates and special rates if any income included in the company’s total income is taxable
at special rates.
 18.5 % of the profit from the book.(15 % from financial year 2019-2020)
2. MAT rate will be 9 per cent not 18.5 % when the unit is located in an International Financial
Services Centre [Section 115JB (7)].
Section 115JB (1) provisions will give same effect had 18.5% been replaced by 9% for the assessee
being a unit having its location in International Financial Services Centre and earns income in non-
Indian currency which can be converted .
3. The provisions of Section-115JB will not apply in some cases.
The provisions of section 115JB do not apply in the following situations:
a. Any income a company receives or generates from the life insurance business described in
section 115B [Section 115JB (5A)]
b. Domestic corporations that have chosen Section 115BAA or Section 115BAB tax regimes
c. Tonnage taxation applies to the income of a shipping company
d. A foreign company (incorporated outside India)
The assessee is a resident of a country or specified territory with which India has an agreement
referred to in section 90(1), or the Central Government has adopted any agreement referred to in
section 90A(1) and the assessee does not have a permanent establishment in India in accordance
with such agreement’s provisions; or
The assessee is a resident of a country with which India does not have an agreement of the type
mentioned in clause I and the assessee is not required to register under any current company law.

15.3 MAT CALCULATION

According to Section 115JB of the Income Tax Act of 1961, MAT is calculated at 18.5 % of the book profit.
All businesses are required to pay corporate tax based on the following:

With effect from AY 2020-21, MAT is equal to 15% of Book profits (Plus applicable Surcharge and cess).
 Normal Tax Liability: Tax computed in accordance with the normal provisions of the Income-tax
Law, i.e., by applying the relevant tax rate to the company’s taxable income.
 Minimum Alternate Tax (MAT): A tax calculated at 15% (previously 18.5%) on book profit plus cess
and surcharge.

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Example of a Minimum Alternate Tax Calculation:

 According to the provisions of the Income Tax Act, 1961, the taxable income of ABC Company, without
any tax exemptions or incentives, is `10 lakh. Thus, at a corporate tax rate of 22%, this company’s
normal tax liability will be `2.2 lakh, plus surcharge and cess.
 On the other hand, 20 lakh rupees is this company’s book profit under Section 115JB because of
which at a rate of 15% of book profit, MAT will be 3 lakh rupees, plus cess and surcharge.
 Because MAT is higher than regular tax liability, the company will be required to pay `3 lakh (plus
cess and surcharge) as MAT rather than `2.2 lakh (plus surcharge and cess) .

Let’s look at an example to help you understand:

 Star Enterprise is a private corporation that is not seeking tax exemptions under the Internal
Revenue Code. Their taxable income is ₹15, 00,000 and the tax rate is 22% under the normal tax
liability concept. As a result, the total tax due is ₹3, 30,000 plus cess and surcharge.
 According to Section 115JB, the company’s book profit is ₹30, 00,000. As a result, the 15 percent of
book profit, plus cess and surcharge, will be ₹4, 50,000 below the MAT.
 Because MAT is higher than normal tax liability, Star Enterprise will have to pay ₹4, 50,000.

15.4 COMPUTATION OF BOOk PROFIT

Calculation of ‘Book Profits’ for MAT (Maximum Alternate Tax) Purposes (Section 115JB)

The following is a method for calculating book profit:

 Step 1: Determine net profit [before other comprehensive income (OCI)] from the company’s profit
and loss statement.
 Step 2: Adjust Net Profit to Convert it to Book Profit, as described in Explanation 1 of section 115JB (2)

After making certain adjustments to the profit as shown in the profit and loss statement, the ‘book
profit’ is calculated. The following steps can be used to make these adjustments:
i. Evaluating the Officer’s Ability to Alter Net Profit: Only in the following two circumstances can the
Assessing Officer rewrite the Profit and Loss Account:
 You will be fined if your profit and loss account is not prepared in accordance with the Companies
Act.
 AO can recalculate the profits subject to he is being finding that P&L statement is not made as
per relevant statute. AO cannot alter the profits if he is only differing in opinion with assessee
as regards inclusion of an item or amount in Profit and Loss or balance Sheet and no fraud or
misrepresentation is alleged against him.
If Accounting Policies, Accounting Standards, Rates, or Method of Depreciation are Different –
The first provision to section 115JB(2) states that the accounting policies, accounting standards,
method and rates of depreciation used in preparing the profit and loss account laid before the

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annual general meeting should be followed when preparing the profit and loss account for the
purpose of computing book value.
Under the Companies Act, some businesses have a different accounting year than they do under the
Income-tax Act (i.e., the previous (i.e., the fiscal year ended March 31). Typically, these businesses prepare
two sets of financial statements: one for the Companies Act and another for the Income-tax Act.
Different accounting policies/standards, as well as a different method or rate of depreciation,
are used in two sets of accounts to report higher profits to shareholders and lower profits to tax
authorities.
The second provision to section 115JB(2) was added to prevent this practise by ensuring that
accounting policies, accounting standards, depreciation method and depreciation rates for two sets
of accounts are the same. If this is not the case, the Assessing Officer can recalculate net profit using
the same accounting policies, accounting standards, depreciation method and rates as when profit
was reported to shareholders.
ii. Convert Net Profit to Book Profit by adjusting Net Profit
a. Positive Adjustment: Amount to be Added Back to Profit and Loss Account if Debt to Profit and
Loss Account:
1. Income tax paid or to be paid, as well as provisions Amounts carried to any reserves, by
whatever name called
2. Income tax, interest under the Income Tax Act and dividends derived from it
3. Amount or amounts set aside for liabilities other than ascertained liabilities in order to meet
provisions for meeting liabilities.
4. Amount set aside as a reserve for losses incurred by subsidiary companies
5. Dividends paid or proposed (amount or amounts)
6. Amount of expenditure relating to certain incomes (if such income is not subject to minimum
alternate tax)
7. (For the 2007-08 assessment year), the amount of Depreciation
8. The amount of deferred tax and the provisions for it, as well as the amount or amounts set
aside as a provision for asset depreciation.
9. Amount held in the revaluation reserve for a revalued asset at the time of retirement or
disposal.
10. In the case of units referred to in section 47, the amount of income/loss (xvii)
b. Negative Adjustments - Net Profit Deduction:
1. If any money is taken out of reserves or provisions, it is credited to the profit and loss account.
2. Tax-free income includes:
a. Section 10(38) exempt long-term capital gain for the assessment years 2005-06 and 2006-07;
b. Up to the assessment year 2004-05, income was exempt under section 10(23G);

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c. Income exempt under section 10’s other clauses

d. Up to the assessment year 2007-08, income was exempt under sections 10A and 10B;
e. Sections 11 and 12 of the Internal Revenue Code exempt income;
f. Share of profit from an AOP on which no income tax is due to the provisions of section
86 (starting with the assessment year 2016-17);
g. Things chargeable to tax under sections 115A to 115BBE are interest, royalty, or technical
fees or capital gain arising on securities transactions, if the income tax payable on these
incomes under normal provisions (other than provisions governing MAT) is less than the
MAT rate (applicable from the assessment year 2016-17);
h. One more thing that is subject to tax under section 115BBF is Royalty on a patent
i. Depreciation is debited to the profit and loss account when it is not due to revaluation of
assets (applicable from the assessment year 2007-08 onwards)
j. Amount withdrawn from the revaluation reserve that is credited to the P/L a/c if it
doesn’t exceed depreciation amount on asset account of asset revaluation [starting with
the 2007-08 fiscal year]
k. The total amount of unabsorbed depreciation and loss brought forward in the case of
a company against which the Adjudicating Authority has accepted an application for
corporate insolvency resolution under section 7/9/10 of the Insolvency and Bankruptcy
Code (applicable from the a.y2018-19)
i. Amount of loss (before depreciation accelerated or unabsorbed depreciation, whichever
is less, as per books of account [not being a company covered by Item 12A])
3. Profits made by a sick industrial company until its net worth is zero/positive
4. If any deferred tax is credited to the profit and loss account, this is the amount
5. In the case of units referred to in section 47, the amount of income/loss (xvii)
6. The amount of fictitious gain

15.5 SECTION 115JAA – MAT CREDIT ADJUSTMENTS TO BE MADE TO PROFIT AS PER

STATEMENT OF PROFIT AND LOSS TO ARRIVE AT BOOk PROFIT

Mat Provisions Provide a Tax Credit for Tax Paid On Deemed Income (Section 115jAA)

It states that if tax is paid in any assessment year on deemed income under MAT Provisions against Tax
Liability under section 115JB, a Tax Credit is allowed in subsequent years.

Section 115JAA provides that if a company pays any amount of tax under section 115JB(1) for any
assessment year beginning on or after 1.4.2006, the difference between the tax paid under section 115JB
and the amount of tax payable by the company on its total income computed in accordance with the
other provisions of the Act is allowed credit for the taxes so paid for such assessment year.

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In other words, MAT credit is calculated as follows:

 Tax paid under section 115JB – total income tax payable under normal Act provisions= MAT credit
available
 The amount of tax credit available under section 115JAA, however, is not subject to interest. [Section
115JAA’s first provision]

Furthermore, if the amount of tax credit allowed against the tax payable under the provisions of sub-
section (1) of section 115JB in respect of any income tax paid in any country or specified territory outside
India under sections 90, 90A, or 91 more than the amount of such tax credit admissible against the tax
payable by the assessee on its income in accordance with the other provisions of this Act, then, when
computing the amount of credit under this section, the amount of credit allowed under this section,
[Section 115JAA’s second provision]

The tax credited amount can be carried forward and set off in a year when the tax is due on the total
income calculated as per regular provisions. However, no carry forward shall be allowed beyond the 15th
assessment years (The 10th assessment year up to and including the 2017-18 assessment year) immediately
succeeds the assessment year in which the tax credit becomes allowable. The difference between the tax
on total income and the tax that would have been payable under section 115JB for that assessment year
is allowed as a set off for the brought forward tax credit in any assessment year. Prior to 2006-07, there
will be no credit given for MAT paid in any assessment year. In other words, MAT credit will be allowed
only for the previous year in which the tax payable on total income under normal provisions of the
Income Tax Act exceeds the tax payable under section 115JB and only to the extent that:

Taxable on total income under the Act’s regular provisions – Taxable on total income under section
115JB = MAT credit to be allowed.

Mechanism for MAT Credit Carry forward

According to current income tax rules, there is a carry forward mechanism for the minimum alternate
tax credit. MAT credit is currently available in assessment years where the normal tax liability exceeds
the MAT liability. Note that the maximum amount of MAT credit you can claim is limited to the difference
between your normal tax liability and your MAT liability for the year in question.

Calculating MAT Credit

If a company, XYZ Ltd, has taxable income of `6000000 and book profits of `10000000 for the fiscal year
2015-16 under normal provisions of the Income Tax Act. The higher of the two would then be the tax
payable:

Income taxation: 30% of `60, 00,000 = `18, 00,000

According to MAT, the tax liability is 18.5 percent. [From FY 19-20, the MAT rate has been reduced to 15%]
on `10000,000 = `18, 50,000

As a result, the company’s tax liability would be `18, 50,000. (Higher of the two)
Credit for MAT: 1850000-1800000 = `50000
XYZ Ltd has taxable income of `30 lakhs and book profits of `75 lakhs for the fiscal year 2019-20, according
to the normal provisions of the Income Tax Act.

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The tax due will be the greater of the two following:

`30,00,000 @ 30% plus 4% =`9,36,000

According to the MAT provisions, the tax liability will be as follows:

`75, 00,000 @ 15% plus 4% = `11, 70,000.

As a result, the company will owe `11, 70,000 in taxes.

MAT Credit: `11, 70,000– `9, 36,000 = `2, 34,000

This tax credit may be carried forward for 15 Assessment Years after the assessment year in which it
became allowable.

This will be in effect beginning with the fiscal year 2018-19. MAT could previously only be carried forward
for ten years.

This credit would be carried forward to the fiscal year 2016-17 of XYZ Ltd.

TAX CREDIT SET CHANGES: MAT Credit adjustments or set-offs can be challenging at times; let us
illustrate with an example.

Assessment Tax Tax Actual Tax Cash Tax Credit Tax Credit
Year Payable Payable as payable Outflow Available Set off/
under MAT per normal u/s 115JAA adjusted
provisions
2013-14 9,00,000 6,00,000 9,00,000 9,00,000 3,00,000 -
2014-15 10,00,000 8,00,000 10,00,000 10,00,000 2,00,000 -
2015-16 11,00,000 7,50,000 11,00,000 11,00,000 3,50,000 -
2016-17 8,00,000 10,00,000 10,00,000 8,00,000* - 2,00,000
2017-18 6,00,000 10,50,000 10,50,000 6,00,000* - 4,50,000

The difference is calculated using the MAT credit from the previous year.

This MAT credit set off is only available if the tax payable under normal provisions exceeds the tax
payable under MAT and only to the extent of the difference. This credit is only available for 15 years and
will expire if it is still available after that time.

Conclusion 15.6 CONCLUSION

 When taxpayer files return of income at that time these details are to be furnished. After filing
up the return starts the processing of the return of income by the Income Tax Department. This
department checks the correctness of the details. This process of assessing the return of income by
the Income-Tax department is known as “Assessment”.
 Assessment also includes re-assessment and best judgment assessment under section 144.
 MAT is an abbreviation for Minimum Alternate Tax. It is a tax imposed by section 115JB of the Income
Tax Act of 1961.

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 The MAT is calculated as 18.5% of the book profits.

 The main goal of MAT is to ensure that any company with significant profits and the ability to pay
taxes does not avoid paying income tax under section 115JB of the income tax act.
 Only corporate companies are eligible for MAT. Individuals, HUF’s, partnership firms, and other
non-corporate entities are not eligible for MAT.
 MAT is also payable by foreign companies with income sources in India. It does not apply to businesses
in the infrastructure and power sectors. MAT also excludes income from charitable activities and
free trade zones.
 Section 115JAA provides that if a company pays any amount of tax under section 115JB(1) for any
assessment year beginning on or after 1.4.2006, the difference between the tax paid under section
115JB and the amount of tax payable by the company on its total income computed in accordance
with the other provisions of the Act is allowed credit for the taxes so paid for such assessment year.

15.7 GLOSSARY

 MAT: An abbreviation for Minimum Alternate Tax

 Assessment: Process of assessing the return of income by the Income-Tax department
 Book profit: Profit earned by the business entity from its operations and activities
 Surcharge: Extra fee, charge, or tax that is added on to the cost of a good or service, beyond the
initially quoted price
 Minimum Alternate Tax: A tax imposed by section 115JB of the Income Tax Act of 1961
 Section 115JAA: Provides that if a company pays any amount of tax under section 115JB(1) for any
assessment year beginning on or after 1.4.2006, the difference between the tax paid under section
115JB and the amount of tax payable by the company on its total income computed in accordance
with the other provisions of the Act is allowed credit for the taxes so paid for such assessment year

15.8 CASE STUDY: COMPUTATION OF MAT AND ABC ENERGY LTD.

Case Objective
This case aims to explain the provisions related to computation of MAT and it’s carried forward and
set off.

Background

ABC Energy Ltd. has a tax liability of `18,80,000 under the normal provisions of the Income-tax Act for
the financial year 2022-23 and a liability of `18,40,000. It has brought forward `200,000 in MAT credit.

Problem

Is the company able to change the MAT credit? If yes, how much and what will be the company’s tax
liability after the MAT credit is adjusted?

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Solution

In the year in which the company’s liability under normal provisions exceeds the MAT liability, the MAT
credit can be adjusted. The liability under the normal provisions of the Income-tax Act in this case is
`18,80,000, while the liability under the MAT provisions is `18,40,000. The company can adjust the MAT
credit because liability under normal provisions is greater than liability under MAT provisions.

The set off for brought forward MAT credit will be allowed in the following year(s) to the extent of
the difference between the tax on total income under normal provisions and the liability under MAT
provisions. As a result, after deducting the MAT credit, the company’s liability cannot be less than its
MAT liability. In this case, the MAT liability is `18,40,000 and the liability of the company cannot be less
than `18,40,000 after claiming set off of the MAT credit. As a result, the company can claim only `40,000
of the `2,00,000 credit and the remaining `1,60,000 credit can be carried forward to future years.

Questions
1. Describe MAT.
(Hint: Ensure that any company with significant profits and the ability to pay taxes does not avoid
paying income tax under section 115JB of the income tax act)
2. What is the mechanism for MAT credit carry forward?
(Hint: According to current income tax rules, there is a carry forward mechanism for the minimum
alternate tax credit)

15.9 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Differentiate between regular profit and book profit.

2. Explain the applicability of Minimum Alternate Tax.
3. Analyse the computation of Book profit.
4. Describe the concept of Assessment of tax.

15.10 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. There is a distinction between two types of profits: regular profit and book profit.
The profit computed using the provisions of tax laws is known as regular profit. Book profit, on the
other hand, is calculated using Schedule VI of the Companies Act, 1956.
Refer to Section Section 115JB – Special Provision for Payment of Tax by Certain Companies

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2. Only corporate companies are eligible for MAT. Individuals, HUF’s, partnership firms, and other non-
corporate entities are not eligible for MAT. MAT is also payable by foreign companies with income
sources in India. It does not apply to businesses in the infrastructure and power sectors. MAT also
excludes income from charitable activities and free trade zones. Refer to Section Section 115JB –
Special Provision for Payment of Tax by Certain Companies
3. The following is a method for calculating book profit:
 Step 1: Determine net profit [before other comprehensive income (OCI)] from the company’s
profit and loss statement.
 Step 2: Adjust Net Profit to Convert it to Book Profit, as described in Explanation 1 of section
115JB (2)
Refer to Section Computation of Book Profit
4. Taxpayers need to submit the income details to the Income-tax Department. When taxpayer files
return of income at that time these details are to be furnished. After filing up the return starts
the processing of the return of income by the Income Tax Department. This department checks
the correctness of the details. This process of assessing the return of income by the Income-Tax
department is known as “Assessment”. Assessment also includes re-assessment and best judgment
assessment under section 144. Refer to Section Introduction

@ 15.11 POST-UNIT READING MATERIAL

 https://www.incometaxindia.gov.in/tutorials/10.mat-and-amt.pdf
 https://tax2win.in/guide/minimum-alternative-tax

15.12 TOPICS FOR DISCUSSION FORUMS

 Discuss MAT credit in detail with your professor.

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