Bcom 06 Block 03
Bcom 06 Block 03
Bcom 06 Block 03
BCO-06
Income Tax Law & Practice
Block-3
Heads of Income - II
Unit-7 Profits and Gains of Business & Profession
Unit-8 Capital Gains
Unit-9 Income from Other Sources
UNIT-7 PROFITS AND GAINS FROM BUSINESS &
PROFFESSION
Structure
7.0 Objectives
7.1 Introduction
7.2 Computation of Profits & Gains of Business & Profession
7.3 Method of Accounting
7.4 General Principles for allowing business deductions
7.5 Expenses allowed as deduction
7.6 General Allowable deductions
7.7 Business Losses Deductable
7.8 Expenses not deductable under Business & Profession
7.9 Deemed Profit chargeable to tax
7.10 Deduction for expenditure incurred on setting up a specified business
7.11 Let us Sum Up
7.12 Key Words
7.13 Further Readings
7.14 Terminal Questions
7.0 OBJECTIVES
7.1 INTRODUCTION
Third important head of the income is ‘Profit and gains of business or profession.
Major part of the revenue is collected by income tax department from the tax payers
engaged in business activities.
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Meaning of Business- Sec. 2 (13) Business includes any trade, commerce or
manufacture or any adventure or concern in the nature of trade, commerce or
manufacture.
Vocation: In the act, It implies natural ability of person for some particular work. In
the other words by the way in which a man passes his life.
1. Business Incomes Taxable under the head of ‘Profit and Gains of Business or
Profession’ (Section 28).
Under section 28, the following income is chargeable to tax under the head “Profits
and gains of business or profession”:
2. Business Income Not Taxable under the head ‘Profit and Gains of Business
or Profession’
In the following cases, income from trading or business is not taxable under section
28, under the head “Profits and gains of business or profession”:
3. Basic Principles for Computing income Taxable under the head ‘Profit and
Gains of Business or Profession’
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(2) Central Government empowered to notify income computation and
disclosure standards [Section 145(2)]
The Central Government may notify, in the Official Gazette from time to time,
income computation and disclosure standards to be followed by any class of assessees
or in respect of any class of income. The Central Government vide Notification No.
87/2016, dated 29.9.2016 has notified certain Income Computation and Disclosure
Standards to be followed by all assessees.
Section 28 defines various income which are chargeable to tax under the head “Profits
and gains of business or profession”. Section 29 permits deductions and allowances
laid down by sections 30 to 43D while computing profits or gains of a business or
profession. Loss of revenue nature, which is incidental to business, is allowable as
deduction while computing taxable business income, even though it is not codified
specifically under any of these sections. Sections 40, 40A and 43B give a list of
expenses which are not deductible.
Before studying the nature and amount of permissible and non-permissible deductions
under sections 30 to 43D, it will be useful if one keeps in view the following
principles governing admissibility of these deductions:
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It is the responsibility of the assessee to prove that a particular deduction is
admissible in his case
Allowances are cumulative
Expenditure should relate to the previous year
Business should be carried on during the previous year
Expenditure should have been incurred in connection with assessee’s business
Benefit of expenditure may extend to somebody else
Benefit of expenditure may extend beyond the relevant previous year
No allowance in respect of exhaustion of wasting assets
No allowance in respect of expenditure incurred before the setting up of a
business
No allowance in respect of non-assessable business
Expenditure relating to illegal business
No allowance in respect of anticipated losses
No deduction in respect of depreciation of investment
Relevance of distinction between capital and revenue expenditure
1. Rent, Rates, Taxes, Repairs and Insurance for Building [Section 30]
In respect of rent, rates, taxes, repairs and insurance for premises, used for the
purposes of the business or profession, profession, the following deductions shall be
allowed:
a. Where the premises are occupied by the assessee:
i) As a tenant — the rent paid for such premises; and further if he has
undertaken to bear the cost of repairs to the premises, the amount paid on
account of such repairs;
ii) Otherwise than as a tenant — the amount paid by him on account of
current repairs to the premises;
b. Any sum paid (whether as owner or tenant) on account of land revenue, local
rates or municipal taxes;
c. Any insurance premium paid (whether as owner or tenant) in respect of
insurance against risk of damage or destruction of the premises.
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2. Any insurance premium paid in respect of insurance against risk of damage or
destruction of the plant and machinery or furniture.
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He/it acquires and installs (for the purposes said undertaking) a “new asset”.
“New asset” for this purpose is a new plant or machinery. But it does not
include second hand machinery, machinery installed in office/ residential
accommodation/guest house, vehicle, ship or aircraft or any plant and
machinery, the whole of the actual cost of which is allowed as deduction
(whether by way of depreciation or otherwise) in computing business income
of any previous year.
The new asset should be acquired and installed after March 31, 2015 but before
April 1, 2020. Both ‘acquisition’ and ‘installation’ of the new asset (i.e., new
plant and machinery) are required to be made after March 31, 2015 but before
April 1, 2020.
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Where the assessee does not himself carry on research but makes contributions to the
following institutions for this purpose, a deduction is allowed as follows
Amount of Deduction –
If the above conditions are satisfied, the taxpayer can claim a deduction under
section 35(1) (iia). The amount of deduction is –
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- for the assessment years 2009-10 to 2017-18 : 125% of the amount paid;
- from the assessment year 2018-19 onwards : 100% of the amount paid.
The above payment is made under a specific direction that it should be used by the
aforesaid person for undertaking scientific research program approved by the
prescribed authority.
AMOUNT OF DEDUCTION –
If the aforesaid conditions are satisfied, the taxpayer is eligible for deduction as
follows—
For the assessment years 2018-19 to 2020-21 : 150% of actual payment
From the assessment year 2021-22 onwards : 100% of actual payment
Such contribution which is eligible for deduction under the aforesaid provisions is not
eligible for any other deduction under the Act.
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Amount of Deduction -
If all the above conditions are satisfied, the quantum of deduction is as follows
A company approved under the provisions of section 35(1)(iia) is not eligible to claim
weighted deduction under section 35(2AB). However, deduction under section
35(1)(i)/(2) can be claimed to the extent of 100% of the sum spent as revenue
expenditure or capital expenditure on scientific research.
Amount of Deduction :
150% of such expenditure incurred during the previous year for the assessment years
2013-14 to 2020-21
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[from the assessment year 2021-22, an assessee can claim 100 % of expenditure as
deduction (but not weighted deduction)].
Quantum of Deduction:
150% of such expenditure incurred during the previous year for the assessment years
2013-14 to 2020-21 [from the assessment year 2021-22, an assessee can claim 100 %
of expenditure as deduction (but not weighted deduction)].
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a. by way of legal charges for drafting the Memorandum and Articles of
Association of the company;
b. on printing of the Memorandum and Articles of Association;
i) by way of fees for registering the company under the provisions of the
Companies Act, 1956;
ii) in connection with the issue, for public subscription, of shares in or
debentures of the company, being underwriting commission, brokerage
and charges for drafting, typing, printing and advertisement of the
prospectus;
such other items of expenditure (not being expenditure eligible for any allowance
or deduction under any other provisions of this Act) as may be prescribed.
Amount of Deduction:
1/5th of the Qualifying Expenditure is Allowable as Deduction in each of the 5 (five)
successive years beginning with the year in which the business commences, or as the
case may be, the previous year in which extension of the undertaking is completed or
the new unit commences production or operation.
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under an irrevocable trust, shall be allowed as a deduction subject to the provisions of
section 43B.
23. Provision for Bad and Doubtful Debts relating to Rural Branches of
Commercial Banks [Section 36(1)(viia)]
In respect of any provision for bad and doubtful debts made by,—
i) A scheduled bank (not being a foreign bank) or a co-operative bank (other than a
primary agricultural credit society or a primary co-operative agricultural and rural
development bank) or a non-scheduled bank, a deduction shall be allowed
of an amount not exceeding 8.5% of the total income (computed before
making any deduction under this clause and Chapter VIA i.e. deductions u/s
80C to 80U) and
of an amount not exceeding 10% of the aggregate average advances made
by the rural branches of such bank computed in the prescribed manner.
ii) A bank incorporated by or under any foreign laws or a public financial institution
or a State Financial Corporation or a State Industrial Investment Corporation, a
deduction shall be allowed of an amount not exceeding 5% of the total income
(computed before making any deduction under this clause and Chapter VIA).
iii) A non-banking financial company, a deduction shall be allowed of an amount
not exceeding 5% of total income (computed before making any deduction
under this clause Chapter VIA).
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24. Transfer to Special Reserve [Section 36(1)(viii)]
A financial corporation, banking company, co-operative bank and a housing finance
company can claim deduction under section 36(1)(viii) as follows, if a few conditions
are satisfied —
the amount transferred during the previous year to the special reserve account
created for the purpose of section 36(1)(viii); or
20 % of the profits derived from the business of providing long-term finance
before claiming deduction under section 36(1)(viii); or
200 % of (paid-up share capital and general reserve as on the last day of the
previous year) minus the balance of the special reserve account on the first day of
the previous year, whichever is lower.
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29. General Deductions [Section 37]
Any expenditure (not being expenditure of the nature described in Sections 30 to 36)
and not being in the nature of capital expenditure or personal expenditure of the
assessee, laid out or expended wholly and exclusively for the purposes of the business
or profession, shall be allowed as deduction in computing the income chargeable
under the Head "Profits and Gains of Business or Profession".
The twin requirements, therefore, are that the expenditure should be—
i) Wholly and exclusively.
ii) For the purpose of business.
Section 37(1) says that any expenditure (not being expenditure of the nature described
in sections 30 to 36 and not being in the nature of capital expenditure or personal
expenses of the assessee), laid out or expended wholly and exclusively for the
purposes of the business or profession shall be allowed in computing the income
chargeable under the head, “Profits and Gains of Business or Profession”.
(A) Conditions for Allowance of General Deduction from Business Income Under
Section 37(1)
In order to claim Deduction under this Section, the following conditions should be
satisfied :
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As the Act does not define the terms “Capital Expenditure” and “Revenue
Expenditure”, one has to depend upon its natural meaning as well as decided cases as
described below :
Acquisition of Fixed Assets v. Routine expenditure
Several Previous Years v. One Previous Year
Improvement v. Maintenance
Non-Recurring v. Recurring
Lump sum Payment v. Periodic Payment
4. The expenditure should have been incurred during the previous year -
- In order to claim deduction, the amount should have been laid out or expended in the
previous year.
5. The expenditure should have been incurred wholly or exclusively for the
purpose of the Business or Profession -
The main requirement of provision of section 37(1) is that expenditure should have
been laid out wholly and exclusively for the purpose of the business.
7. Illegal Expenditure -
Any expenditure incurred by an assessee for any purpose which is an offence or which
is prohibited by any law shall not be deemed to have been incurred for the purpose of
the business or profession and no allowance or deduction shall be made in respect of
such expenditure. Unlawful expenditure is not allowable as deduction. These
provisions apply only to ‘business expenditure’ and not to ‘business loss’ and, hence,
loss arising as a result of seizure and confiscation of illegal stock-in-trade is allowable
as a business loss against income from illegal business.
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(B) List of Expenditure Allowable as a Deduction Under Section 37(1) from
Business Income :
To have better understanding of section 37(1), a few instances are given where
expenditures are allowable under section 37(1):
Litigation expenses in protecting the trade or business.
Expenditure incurred for the preservation or protection of the asset or for
saving such asset from destruction, dissipation or wastage in the interest of and
for the benefit of assessee’s business.
Litigation expenses incurred in order to defend or maintain an existing title to
the business asset.
Expenses on litigation (whether civil or criminal) if incurred wholly and
exclusively for the purpose of the business.
Legal charges for obtaining a loan from a financial institution.
Royalty paid by an assessee to a company for using its logo.
Consultancy charges paid for maintenance of software.
Environment monitoring expenses and community development expenses.
Litigation expenses for making agreements, various deeds, etc.
Legal expenses incurred in altering the articles of association so as to bring it
in conformity with the changes brought about in the Companies Act.
Damages for breach of contract for export of goods before declaration of
export policy of the Government.
Damages paid to a worker in order to dismiss him in the interest of business.
Damages for failure to fulfil a contract in time.
Brokerage paid for raising loan to finance business.
Stamp and registration charges for the purpose of entering into agreement for
obtaining overdraft facilities.
Amount spent towards stamps, registration fees, lawyer’s fees, etc., for
obtaining loan or raising money by issue of debentures (not shares).
Guarantee commission paid to brokers and shareholders for giving personal
guarantee to obtain credit facility.
Commission paid at a percentage of profits to general manager.
Commission paid to selling agents.
Contribution to a trade syndicate with a view to preventing uneconomic
competition.
Contribution to a union formed for opposing nationalisation of assessee’s
business.
Salary and perquisite to employees.
Salary, bonus and travelling expenses paid by a partner-assessee to his staff to
look after his interest and to earn income for partnership.
Expenditure incurred in obtaining use of trademark, technical information,
training of apprentices and technicians.
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Recurring expenses incurred on imparting of the basic training to apprentices
under the Apprentices Act, 1961.
Expenses incurred on the occasion of Diwali and mahurat subject to the
Assessing Officer being satisfied that the expenses are admissible as a
deduction under the law and are not expenses of a personal, social or religious
nature.
Initial expenditure on the first installation of fluorescent lights is treated as
capital expenditure and all subsequent expenditure for replacement of tubes is
treated as revenue expenditure and are allowed in toto.
Expenditure in respect of commitment charges paid by the borrower with
regard to the amount of loan not drawn by him but kept in readiness by the
lender for disbursement.
Premia paid on loss of profit policies.
Professional tax paid by a person carrying on business or trade.
All expenditure on maintenance of a tea garden including expenditure on the
maintenance of an area that has not reached maturity.
Deposit made under “own your telephone” scheme [is allowable as deduction
in the year of payment and in case the telephone is not installed and money is
returned, it is chargeable to tax under section 41(1)].
Forfeiture of security deposit for breach of contract.
Expenses on registration of trademarks.
Penalty levied for supply of foodgrains not conforming to the contract quality.
Expenditure incurred by a surgeon to keep himself up-to-date about the latest
technique in surgery.
Substantial repair charges on plant and machinery being necessary owing to
long neglect of assets.
Entertainment expenses incurred on opening of new branches at different
places.
Expenditure incurred to protect capital asset income of which is assessable to
tax.
Cash shortage found in business at the end of day.
Periodical payment for the use of goodwill.
Expenditure incurred on renovation of the living room, bathroom, back
verandah, study, etc., of branch office.
Municipal property tax chargeable under local tax law of Japan.
Expenditure incurred to secure overdraft facilities for the business purposes.
Annual listing fees paid to stock exchanges.
Expenditure on management of temple in factory premises for recreation of
employees.
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Contribution given under a development scheme for construction of roads
around factory building for facilitating the transport of sugarcane to the factory
and the flow of manufactured sugar out of the factory.
Expenditure incurred for purchase of loom hours.
Royalty payable on goods manufactured as a consideration to acquire
monopoly rights to manufacture the product.
Expenditure on licence fees for the import of capital goods and registration
fees of trade mark.
Expenditure on valuation of shares.
Amount paid in compromising a bona fide dispute and as part of an
arrangement for enabling the assessee to continue business.
Expenditure incurred by the assessee on replacement of damaged moulds.
Expenditure in regard to contribution made by the assessee-company to State
Electricity Board towards laying of additional circuit line in order to meet
increased demand of company.
Expenditure on re-routing of pipeline in order to obtain saline free water for
factory.
Donation/contribution made by an assessee to any relief fund, such as Chief
Minister’s Drought Relief Fund or a District Welfare Fund established by
District Collector for benefit of public with a view to securing benefit to
assessee’s business .
Amount paid by the assessee-company for Flag Day Fund on Government’s
appeal.
Contribution made by the assessee, running a refinery, to railway department
for construction of railway track and siding which are necessary for the
purpose of smooth running of business in a profitable and advantageous
manner (only expenditure incurred in relevant year of assessment alone is to be
allowed).
Contribution made by the assessee-company to State Housing Board for
construction of tenements for its workers, ownership of which tenements
remained with Housing Board.
Expenditure incurred by the assessee-company on foreign visit of director and
his wife in connection with medical treatment of the director.
Expenditure incurred by the assessee on plantations in factory premises and
residential quarters of company, with a view to making atmosphere pollution
free.
Royalty paid by the assessee for user of trademark of another company.
The expenditure incurred solely for repairs and modernizing the hotel and
replacing the existing components of the building, furniture and fittings, with a
view to create a conductive and beautiful atmosphere for the purpose of
running of the business of a hotel.
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Penalty which is compensatory in nature and which is paid for breach of a
contract or statute is deductible.
Software programme once developed by the assessee cannot be said to be of
enduring benefit and expenses incurred in developing such software
programme are allowable as revenue expenditure.
Expenditure on issue of bonus shares.
Harvesting and transportation expenses incurred by the Co-operative Sugar
Mills for procuring sugarcane from farmers, who are members of such Co-
operative Sugar Mills and who are bound under an agreement to supply the
sugarcane exclusively to the concerned sugar mill.
Expenditure for improving the performance of existing products is deductible.
Expenditure incurred for purpose of sub-division of shares for easy trading of
shares in market, is revenue in nature and deductible.
Expenses incurred by an assessee for preliminary work for a project (which
has been abandoned for some unavoidable reasons) is deductible.
Advertisement expenditure incurred by an assessee for building up its brand is
deductible.
Expenses on replacement of mother board/UPS and expenditure incurred on
ERP software/customizing software, are deductible.
Expenditure incurred on garden to control pollution is deductible.
(C). List of Expenditures NOT Allowable as Deduction Under Section 37(1) from
Business Income :
Damages and penalty paid for transgressing the terms of agreement with the
State.
Penalty and damages paid in connection with infringement of law.
Litigation expenditure incurred for curing any defect in title of assets or
completing that title.
Litigation expenses for registration of shares.
Fees paid for increase of authorised capital.
Expenditure on raising equity share capital and preference share capital (may
be redeemable). However, expenditure on issue of bonus shares is deductible.
Amount paid for acquiring technical know-how which is to be utilised for the
purpose of manufacturing any new article and such know-how is to become
the property of the assessee at the end of the stipulated period.
Amount expended for acquiring a business or a right of a permanent character
or an asset which generates income or for avoiding compensation in business.
Payments made for acquisition of goodwill.
Expenditure incurred for acquiring right over or in land to win minerals
(where, however, minerals are already on surface, expenditure incurred for
obtaining right to acquire raw material is deductible).
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Fees paid to obtain license to investigate and search minerals.
Payment made in consideration of acquiring a monopoly right to manufacture
a product (royalty payable on the basis of goods produced under the same
arrangement is, however, deductible).
Tax paid by the assessee (who is defaulter by not deducting tax at source under
section 195) on behalf of nonresident.
Compensation paid to contracting party with the object of avoiding an
unnecessary investment in capital asset.
Expenditure on shifting of registered office.
Insurance premia paid by a firm on life insurance policies of its partners.
Amount paid by liquor contractor to police staff and other officer to enable it to make
unauthorized purchases and sales of liquor.
The following expenses given by sections 40, 40A and 43B are expressly disallowed
by the Act while computing income chargeable under the head “Profits and gains of
business or profession”.
Case-2 : Tax is deductible (and is so deducted) during the current financial year but it
is not deposited on or before the due date of submission of return of income under
section 139(1) : 100 % of such expenditure is disallowed in the current year
If tax is deposited with the Government after the due date of submission of return
of income, the expenditure (which is disallowed in the current year) will be
deductible in that year in which tax will be deposited
Note :
If the following three conditions are satisfied, the assessee (i.e., the payer) is supposed
to deduct tax at source (TDS) under section 195—
1. The amount paid is interest, royalty, fees for technical services or any other
sum (not being salary).
2. The aforesaid amount is chargeable to tax in India in the hands of the
recipient.
3. The aforesaid amount is paid/payable to a non-resident. If the above three
conditions are satisfied, the assessee (the payer) is supposed to deduct tax at
source and deposit the same with the Government.
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Case 2- TDS is deductible 30% of such If tax is deposited with the
(and is so deducted) during expenditure is Government after the due date
the current financial year disallowed in the of submission of return of
but it is not deposited on or current year income, the expenditure
before the due date of (which is disallowed in the
submission of return of current year) will be deductible
income under section in that year in which tax will
139(1) be deposited
Note :
In respect of the following payments/credit to a resident, tax is deductible under
Chapter XVII-B of the Income-tax Act (i.e., Sections 192 to 206AA)
1. Salary
2. Payment in respect of life insurance policy
3. Interest
4. Payment in respect of deposits under NSS
5. Dividends
6. Payment on account of certain units
7. Winnings from lottery or crossword puzzles
8. Rent
9. Winnings from horse races
10. Payment on purchase of immovable property
11. Payments to contractors
12. Technical/professional fees, royalty, fees to a part time director
13. Commission or brokerage (including insurance
14. Payment of compensation on acquisition of immovable commission) property
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4. Disallowance of royalty, license fees, etc., in case of State Government
Undertakings [Section 40(a)(iib)] -
The following shall not be allowed as deduction from the assessment year 2014-15 –
Any amount paid by way of royalty, license fee, service fee, privilege fee, service
charge or any other fee or charge (by whatever name called), which is levied
exclusively on a State Government undertaking by the State Government.
Any amount which is appropriated (directly or indirectly) from a State
Government Undertaking by the State Government.
If the above conditions are fulfilled, the Assessing Officer can disallow the
expenditure to the extent he considers it excessive or unreasonable by the above
objective standards or otherwise.
Section 40A(2) is applicable in the following cases (list is not complete, only
important cases are given) –
Payment made by an individual to his or her relative.
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Payment made by a company to a director of the company or any relative of
the director.
Payment made by a firm/AOP/HUF to a partner/member or a relative of
partner/member.
Payment made to an individual who has a substantial interest in the business of
the payer or a relative of such individual.
Payment made to a company who has a substantial interest in the business of
the payer, any director of such company or relative of such director.
Payment made to a firm/AOP/HUF who has a substantial interest in the
business of the payer or partner/ member of such person or relative of
partner/member.
Exceptions - The above rule i.e. Section 40A(3) is not applicable to a few cases given
below –
Payment made to a bank (including private sector banks, co-operative bank,
credit societies), LIC, etc.
Payment made to Government.
Payment through banking system.
Payment made by book adjustment by an assessee in the account of the payee
against money due to the assessee for any goods supplied or services rendered
by him to the payee.
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Payment made to a cultivator, grower or producer in respect of the purchase of
agricultural or forest produce or product of animal husbandry (including
livestock, meat, hides and skins) or dairy or poultry farming or fish or fish
products or products of horticulture or apiculture (even if these products have
been subjected to some processing provided the processing has been done by
the cultivator, grower or the producer of the product).
Payment made to a producer in respect of the purchase of the products
manufactured or processed without the aid of power in a cottage industry.
Payment made to a person who ordinarily resides or carries on business in a
village not served by any bank.
Payment of terminal benefits, such as gratuity, retrenchment compensation,
etc., not exceeding Rs. 50,000.
Payment made by an assessee by way of salary to his employee after deducting
tax and when such employee is temporarily posted for a continuous period of
15 days or more in a place other than his normal place of duty or on a ship and
does not maintain any account in any bank at such place or ship.
Payment required to be made on a day on which the banks were closed either
on account of holiday or strike.
Payment made by any person to his agent who is required to make payment in
cash for goods or services on behalf of such person.
Payment made by an authorised dealer or a money changer against purchase of
foreign currency or travellerscheques in the normal course of his business.
Following Table showing the Examples towards Nature of Transactions with
Disallowed Amount :
Therefore, no deduction shall be allowed in respect of any provision made for the
payment of gratuity to the employees, even though the assessee may be following the
mercantile system of accounting, unless it is a provision for the purpose of payment of
a sum by way of any contribution towards an approved gratuity fund.
In other words, any provision for unapproved gratuity fund (for meeting future
liability) is not deductible.
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10. Amount Not Deductible in respect of contributions to Non-Statutory Funds
[Section 40A(9)] -
Any sum paid by the assessee as an employer by way of contribution towards
Recognised Provident Fund, or Approved Superannuation Fund or an Approved
Gratuity Fund, is Deductible to the extent it is required by any law.
The following expenses (which are otherwise deductible under the other provisions of
the Income-tax Act) are deductible on payment basis
i. any sum payable by way of tax, duty, cess or fee (by whatever name called
under any law for the time being in force);
ii. any sum payable by an employer by way of contribution to provident fund or
superannuation fund or any other fund for the welfare of employees;
iii. any sum payable as bonus or commission to employees for service rendered;
iv. any sum payable as interest on any loan or borrowing from a public financial
institution (i.e., ICICI, IFCI, IDBI, LIC and UTI) or a State financial
corporation or a State industrial investment corporation;
v. interest on any loan or advance taken from a scheduled bank or a co-operative
bank other than a primary agricultural credit society or a primary co-operative
agricultural and rural development bank;
vi. any sum payable by an employer in lieu of leave at the credit of his employee;
and
vii. any sum payable to the Indian Railways for the use of railway assets.
The above expenses are deductible in the year in which payment is actually made.
There is, however, one exception given below.
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Exception - Certain Expenses are Deductible on Accrual Basis -
If the aforesaid payment is actually made on or before the due date of submission of
return of income, deduction can be claimed on Accrual Basis.
Due date of submission of return of income in the case of a company (or in the
case of a taxpayer whose books of account are required to be audited under any
law) is September 30 of the assessment year.
In the case of any taxpayer (having international or specified domestic
transactions) due date of submission of return of income is November 30 of the
assessment year.
In all other cases, the due date of submission of return of income is July 31 of the
assessment year.
And subsequently, during any previous year, he (the same assessee) has obtained,
whether in cash or in any other manner, whatsoever—
i. any amount in respect of such loss or expenditure; or
ii. some benefit in respect of such trading liability by way of remission or
cessation thereof,
Then, the amount obtained by the assessee or the value of benefit accruing to him
shall be deemed to be profit and gains of business or profession and accordingly
chargeable to income-tax as the income of that previous year.
It may be mentioned that the business or profession, in respect of which the allowance
or deduction has earlier been made, may or may not be in existence in the previous
year in which such amount is obtained or the benefit accrued to him.
3. Profit on Sale of Capital Assets used for Scientific Research [Section 41(3)].
Where any capital asset used in scientific research is sold without having been used
for other purposes and the sale proceeds, together with the amount of deduction
allowed under section 35, exceed the amount of the capital expenditure incurred on
purchase of such asset, such surplus (i.e., sale price) or the amount of deduction
allowed, whichever is less, is chargeable to tax as business income in the year in
which the sale took place.
Where any profession is discontinued in any year on account of the cessation of the
profession by, or the retirement or death of, the person carrying on the profession, any
sum received after the discontinuance shall be deemed to be the income of the
recipient and charged to tax accordingly in the year of receipt, if such sum would have
been included in the total income of the aforesaid person had it been received before
such discontinuance.
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7.10 DEDUCTION IN RESPECT OF EXPENDITURE INCURRED ON
SETTING UP OF A SPECIFIED BUSINESS [SECTION-35AD] :
Condition-2 :
Specified business should be new business -
35
The specified business should not be set up by splitting up, or the reconstruction, of a
business already in existence. Moreover, it should not be set up by the transfer of old
plant and machinery.
Further, if such asset is used for any purpose other than the specified business during
the period of 8 years specified in section 35AD(7A), otherwise then by way of a mode
referred to in section 28(vii), the total amount of deduction so claimed and allowed in
any previous year in respect of such asset, as reduced by the amount of depreciation
allowable in accordance with the provisions of section 32 as if no deduction had been
allowed under section 35AD, shall be deemed to be income of the assessee chargeable
37
under the head "Profits and gains of business or profession" of the previous year in
which the asset is so used.
However, this provision will not apply to a company which has become a sick
industrial company under section 17(1) of the Sick Industrial Companies (Special
Provisions) Act within the time period of 8 years as stated above.
38
The provisions regulating compulsory maintenance of books of account are given
below.
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 discussed below :
Prescribed Books Of Account and Documents to be kept and maintained under section
44AA(3) by person carrying on Certain Professions [Rule 6F]:
As per Rule 6F(1), any person carrying on legal, medical, engineering or architectural
profession or the profession of accountancy or technical consultancy or interior
decoration or authorised representative or film artist is required to maintain prescribed
books of account and documents.
The prescribed Books of Account and other documents under Rule 6F(2) are as
follows:
i. a cash book;
ii. a journal, if the accounts are maintained according to the mercantile system of
accounting;
iii. a ledger;
iv. 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;
and
v. original bills wherever issued to the person and receipts in respect of
expenditure incurred by the person or, where such bills and receipts are not
issued and the expenditure incurred does not exceed Rs.50 , payment vouchers
prepared and signed by the person.
39
The vouchers mentioned above may not be prepared if the cash book maintained by
the person contains adequate particulars in respect of the expenditure incurred by him.
As per Rule 6F(3) a person carrying on medical profession shall, in addition to the
above books of account and documents, keep and maintain the following also:
a. a daily case register in Form No. 3C;
b. an inventory under broad heads, as on the first and the last day of the previous
year, of the stock of drugs, medicines and other consumable accessories used for
the purpose of his profession.
(B) Circumstances where Maintaining the Prescribed Books of Account shall Not
be Necessary :
The above Rule 6F(2) of maintaining the prescribed books of account and other
documents shall not apply in relation to any previous year in case of any person—
i. if his total gross receipts in the specified profession do not exceed Rs. 1,50,000
in any one of 3 years immediately preceding the previous year, or
ii. where the specified profession has been newly setup in the previous year, his
total gross receipts in the profession for that year are not likely to exceed Rs.
1,50,000.
However, such person shall have to maintain such books of account and other
documents as may enable the Assessing Officer to compute his total income.
where the profits and gains from the business are deemed to be the profits and
gains of the assessee under section 44AE (relating to goods carriages) or
section 44BB (relating to business of exploration, etc. of mineral oils in case of
non-resident) or section 44BBB (relating to foreign companies engaged in the
business of civil construction, etc. in certain turnkey power projects), as the
case may be, and the assessee has claimed his income to be lower than the
profits or gains so deemed to be the profits and gains of his business, as the
case may be, during such previous year, he shall keep and maintain books of
account and other documents.
where the provisions of section 44AD(4) (see Note below) are applicable in his
case and his income exceeds the maximum amount which is not chargeable to
income-tax in any previous year, he shall have to keep and maintain books of
account and other documents.
Illustration 01 :Mr. Gopi carrying on business as proprietor converted the same into a
limited company by name Gopi Pipes (P) Ltd. from 01-07-2019. The details of the
assets are given below:
41
Block - I WDV of plant & machinery (rate of depreciation @ 15%)
Rs. 12,00,000
on 01.04.2019
Block - II WDV of building (rate of depreciation @ 10%) on
Rs. 25,00,000
01.04.2019
The company Gopi Pipes (P) Ltd. acquired plant and machinery in December 2019 for
Rs10,00,000. It has been doing the business from 01-07-2019. Compute the quantum
of depreciation to be claimed by Mr. Gopi and successor Gopi Pipes (P) Ltd. for the
assessment year 2020-21. Assume that plant and machinery were purchased by way of
account payee cheque.
Solution :
Computation of depreciation allowable to Mr. Gopi for A.Y. 2020-21
Particulars Rs Rs
Block 1 Plant and Machinery (15% rate)
WDV as on 1.4.2019 12,00,000
Depreciation@15% 1,80,000
Block 2 Building (10% rate)
WDV as on 1.4.2019 25,00,000
Depreciation@10% 2,50,000
Total depreciation for the year 4,30,000
Proportionate depreciation allowable to Mr. Gopi
for 91 days (i.e., from 1.4.2019 to 30.6.2019) [i.e., 1,06,913
91/366 x Rs. 4,30,000)
Note: In the case of conversion of sole proprietary concern into a company, the
depreciation should be first calculated for the whole year as if no succession had taken
place. Thereafter, the depreciation should be apportioned between the sole proprietary
concern and the company in the ratio of the number of days for which the assets were
42
used by them. It is assumed that in this case, the conditions specified in section
47(xiv) are satisfied.
Illustration 02
Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down
value on 01.04.2019 was Rs40 lacs. It purchased another asset (second-hand plant and
machinery) of the same block on 01.11.2019 for Rs14.40 lacs and put to use on the
same day. Sai Ltd. was amalgamated with Shirdi Ltd. with effect from 01.01.2020.
You are required to compute the depreciation allowable to Sai Ltd. &Shirdi Ltd. for
the previous year ended on 31.03.2020 assuming that the assets were transferred to
Shirdi Ltd. at Rs60 lacs. Also assume that the plant and machinery were purchased by
way of account payee cheque.
Solution :
Statement showing computation of depreciation allowable to Sai Ltd. &Shirdi
Ltd. for A.Y. 2020-21
Particulars Rs
Written down value (WDV) as on 1.4.2019 40,00,000
Addition during the year (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on Rs 40,00,000 @ 15% 6,00,000
Depreciation on Rs 14,40,000 @ 7.5% 1,08,000
Total depreciation for the year 7,08,000
Apportionment between two companies:
(a) Amalgamating company, Sai Ltd.
Rs 6,00,000 × 275/366 4,50,820
Rs 1,08,000 × 61/152 43,342
4,94,162
(b) Amalgamated company, Shirdi Ltd .
Rs 6,00,000 × 91/366 1,49,180
Rs 1,08,000 × 91/152 64,658
2,13,838
Notes:
i) The aggregate deduction, in respect of depreciation allowable to the
amalgamating company and amalgamated company in the case of amalgamation
shall not exceed in any case, the deduction calculated at the prescribed rates as if
the amalgamation had not taken place. Suchdeduction shall be apportioned
between the amalgamating company and the amalgamated company in the ratio of
the number of days for which the assets were used by them.
43
ii) The price at which the assets were transferred, i.e., Rs 60 lacs, has no implication
in computing eligible depreciation.
Illustration 03
A car purchased by Dr. Soman on 10.08.2016 for Rs5,25,000 for personal use is
brought into professional use on 1.07.2019 by him, when its market value was
Rs2,50,000. Compute the actual cost of the car and the amount of depreciation for the
assessment year 2020-21 assuming the rate of depreciation to be 15%.
Solution :
As per section 43(1), the expression “actual cost” would mean the actual cost of asset
to the assessee. The purchase price of Rs 5,25,000 is, therefore, the actual cost of the
car to Dr. Soman. Market value (i.e. Rs 2,50,000) on the date when the asset is
brought into professional use is not relevant. Therefore, amount of depreciation on car
as per section 32 for the A.Y.2020-21 would be Rs 78,750, being Rs 5,25,000 x 15%.
Note:
Explanation 5 to section 43(1) providing for reduction of notionaldepreciation from
the date of acquisition of asset for personal use todetermine actual cost of the asset is
applicable only in case of buildingwhich is initially acquired for personal use and
later brought intoprofessional use. It is not applicable in respect of other assets.
Illustration 04
Mr. Gamma, a proprietor started a business of manufacture of tyres and tubes for
motor vehicles on 1.1.2019. The manufacturing unit was set up on 1.5.2019. He
commenced his manufacturing operations on 1.6.2019. The total cost of the plant and
machinery installed in the unit is Rs120 crore. The said plant and machinery included
second hand plant and machinery bought for Rs20 crore and new plant and machinery
for scientific research relating to the business of the assessee acquired at a cost of
Rs15 crore. Compute the amount of depreciation allowable under section 32 of the
Income-tax Act, 1961 in respect of the assessment year 2020-21. Assume that all the
assets were purchased by way of account payee cheque.
Solution :
Computation of depreciation allowable for the A.Y. 2020-21 in the hands of Mr.
Gamma
Particulars Rs (in Crore)
Total cost of plant and machinery 120.00
Less: Used for Scientific Research (Note 1) 15.00
105.00
Normal Depreciation at 15% on ` 105 crore 15.75
44
Additional Depreciation:
Cost of plant and machinery 120.00
Less: Second hand plant and machinery (Note 2) 20.00
Plant and machinery used for scientific research, the whole of
the actual cost of which is allowable as deduction under
35.00
section
35(1) (iv) read with section 35(2)(ia) (Note 2) 15.00
85.00
Additional Depreciation at 20% 17.00
Depreciation allowable for A.Y.2020-21 32.75
Notes:
1. As per section 35(2)(iv), no depreciation shall be allowed in respect of plant and
machinery purchased for scientific research relating to assessee’s business, since
deduction is allowable under section 35 in respect of such capital expenditure.
2. As per section 32(1)(iia), additional depreciation is allowable in the case of any
new machinery or plant acquired and installed after 31.3.2005 by an assessee
engaged in, inter alia, the business of manufacture or production of any article or
thing, at the rate of 20% of the actual cost of such machinery or plant. However,
additional depreciation shall not be allowed in respect of, inter alia, –
i) any machinery or plant which, before its installation by the assessee, was used
either within or outside India by any other person;
ii) any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head “Profit and gains of business or profession” of any one
previous year.In view of the above provisions, additional depreciation cannot be
claimed in respect of - (i) Second hand plant and machinery; (ii) New plant and
machinery purchased for scientific research relating to assessee’s business in
respect of which the whole of the capital expenditure can be claimed as deduction
under section 35(1)(iv) read with section 35(2)(ia) & (iv).
Illustration 05
Mr. X, set up a manufacturing unit in Warangal in the state of Telangana on
01.06.2019. It invested Rs30 crore in new plant and machinery on 1.6.2019. Further,
he invested Rs25 crore in the plant and machinery on 01.11.2019, out of which Rs5
crore was second hand plant and machinery. Compute the depreciation allowable
under section 32. Is Mr. X entitled for any other benefit in respect of such investment?
If so, what is the benefit available?
45
Solution :
Computation of depreciation under section 32 for Mr. X for A.Y. 2020-21
Particulars Rs(in crores)
Plant and machinery acquired on 01.06.2019 30.000
Plant and machinery acquired on 01.11.2019 25.000
WDV as on 31.03.2020 55.000
Less: Depreciation @ 15% on Rs 30 crore 4.500
Depreciation @ 7.5% (50% of 15%) on Rs 25 crore 1.875
Additional Depreciation@35% on Rs 30 crore 10.500
Additional Depreciation@17.5% (50% of 35%) on 20.375
3.500
Rs 20 crore
WDV as on 01.04.2020 34.625
Computation of deduction under section 32AD for Mr. X for A.Y. 2020-21
Particulars Rs(in crores)
Deduction under section 32AD @ 15% on ` 50 crore 7.50
Total benefit 7.50
Illustration 06
Mr. Suraj, a proprietor, commenced operations of the business of a new three-star
hotel in Madurai, Tamil Nadu on 1.4.2019. He incurred capital expenditure of Rs50
lakh during the period January, 2019 to March, 2019 exclusively for the above
business, and capitalized the same in his books of account as on 1st April, 2019.
Further, during the P.Y. 2019-20, he incurred capital expenditure of Rs2 crore (out of
which Rs. 1.50 crore was for acquisition of land) exclusively for the above business.
Compute the income under the head “Profits and gains of business or profession” for
the A.Y.2020-21.
Solution
Computation of profits and gains of business or profession for A.Y. 2020-21
Particulars Rs
Profits from the specified business of new hotel in Madurai (before
25 lakh
providing deduction under section 35AD)
Less: Deduction under section 35AD
Capital expenditure incurred during the P.Y.2019-20
(excluding the expenditure incurred on acquisition of land) = Rs 200 50 lakh
lakh – Rs 150 lakh
Capital expenditure incurred prior to 1.4.2019 (i.e., prior to
commencement of business) and capitalized in the books of account as 50 lakh
on 1.4.2019
Total deduction under section 35AD for A.Y.2020-21 100 lakh
46
Loss from the specified business of new hotel in Madurai (75 lakh)
Profit from the existing business of running a hotel in Coimbatore 120 lakh
Net profit from business after set-off of loss of specified business
45 lakh
against profits of another specified business under section 73A
As we know that a person‘s income can be divided under five heads like Salary,
House property, Capital gains, income from other sources and Profits and gains of
Business or Profession. Out of these heads ‗Profits and gains of Business or
Profession‘ are most important and largest head. The income from business to which a
person is chargeable under this head represents not the gross receipts from the
business but the profits and gains derived from there. For instance, in the case of a
businessman, the gross sale proceeds would not be the basis for levying tax but it is
net profit or the profit or gain as determined in accordance with sections 28 to 44DB.
The chargeability to tax under Section 28 is based primarily upon the condition that
the assessee must have carried on a business or profession at any time during the
accounting year, though not necessarily throughout the accounting year. There are two
parts of this head one is business and second is profession.
47
Amortisation: The action or process of gradually writing off the initial cost of an
asset.
Preliminary Expenses: The expenses incurred when a company is formed and
before the start of any business operations are termed as preliminary expenses
Special Reserve: Specific reserves are the amount set aside for a specific purpose
and cannot be used for any other reason.
Income tax Law and practice, Makta Jain/ Rakesh Jain, V.K. Global Pub. Pvt.
Ltd., New Delhi
Income Tax Law and Pratcice-Saha, Dash- Himalaya Publishing House.
Pagare, Dinkar. Law and Practice of Income Tax. Sultan Chand and Sons, New
Delhi.
Lal, B.B. Income Tax Law and Practice. Konark Publications, New Delhi
Gour and Narang, Income tax: Law and practice, kalyani Publishers
Dr. Vinod Kumar Singhania, e-filing of Income Tax Returns and Computation
ofTax,
Taxmann Publication Pvt. Ltd, New Delhi. Latest version.
48
Q8 : Dr. Biju is a medical practitioner in Mahe. From the following, calculate his
income from profession for the AY 2020-21:
Purchase of publication) Loan from bank was taken for the construction of the house
in which he lives. MRV of the house is Rs: 8,000 and the local taxes Rs: 800 p.a. One-
fourth of travelling expenses are not allowable. Compute income from profession for
the A Y 2020—21.
Q10 : Calculate the amount of depreciation on the assets of a mill: Factory building
W.D.V. on 01-04-2012 Rs: 14,00,000 Additions made on 01-06-2012 Rs: 6,00,000
Rate of depreciation 10% The part of factory building which was destroyed by fire,
for which the insurance company accepted the claim for Rs: 60,000 and scrap value
realised amounted to Rs:10,000
Q11 :From the following figures, you are required to calculate the depreciation
admissible during the previous year:
Computation of Depreciation
50
UNIT-8 CAPITAL GAINS
Structure :
8.0 Objectives
8.1 Introduction
8.2 Transfer of Capital Assets for taxation of Capital Gain
8.3 Computation of period of holding an asset for computation of Capital
Gain
8.4 Methods of Computing Capital Gain
8.5 Deemed Cost of Acquisition of Assets for computing Capital Gain
8.6 Cost of Acquisition of assets for completion of Capital Gain
8.7 Calculation of Capital Gain in some special cases
8.8 Let us Sum up
8.9 Keywords
8.10 Further Readings
8.11 Terminal Questions
8.0 OBJECTIVES
8.1 INTRODUCTION
You know 'capital gains' is a separate head of income and any income arising out of
sale or transfer of a capital' asset is charged to tax under this head. In this unit, you
will study the meaning of capital gains, items included in capital gains capital gains
exempt from tax and the deductions allowed from capital gains. You will also study
how the taxable income from capital gains is calculated. 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 be deemed to be the income of
the previous year in which the transfer took place. The above definition can be split up
into three parts:
Capital Asset
Transfer of Capital Asset
Profits or Gains
51
8.2 CAPITAL ASSETS, CAPITAL GAIN & TRANSFER OF CAPITAL
ASSETS FOR TAXATION OF 'CAPITAL GAIN'
The following are the essential conditions for Taxing capital gains:
A. There must be a capital asset;
B. The capital asset must have been transferred;
C. There must be profits or gains on such transfer, which will be known as capital
gain;
D. Such capital gain should not be exempt under section 54, 54B, 54D, 54EC,
54EE, 54F, 54G, 54GA or 54GB.
If the above conditions are satisfied, the capital gain shall arise and taxed in the
previous year in which the asset is transferred, subject to certain exceptions..
Note : In case of profit or gain from insurance claim, due to damage or destruction of
property, there will be capital gain, although no asset has been transferred in such
case.
Hence, if unlisted share or immovable property is transferred after 24 months from the
date of its acquisition, the gain arising from the transfer of share or immovable
property shall be treated as long-term capital gain.
53
In other words, if the asset is held by the assessee for more than 36 months/24
months/12 months, as the case may be, such an asset will be treated as a long-term
capital asset
Some of the relevant transactions which are not regarded as transfer are:
i. where the assets of a company are distributed to its shareholders on liquidation
of a company, such distribution shall not be regarded as transfer in the hands
of the company [Section 46(1)];
ii. any distribution of capital assets on the total or partial partition of Hindu
Undivided Family [Section 47(i)];
iii. any transfer of a capital asset under a gift or will or an irrevocable trust
[Section 47(iii)];
iv. any transfer of a capital asset by a company to its 100% subsidiary company
provided the subsidiary company is an Indian company [Section 47(iv)];
v. any transfer of a capital asset by a 100% subsidiary company to its holding
company, if the holding company is an Indian company [Section 47(v)];
vi. any transfer in a scheme of amalgamation of a capital asset by the
amalgamating company to the amalgamated company, if the amalgamated
company is an Indian company [Section 47(vi)];
vii. any transfer in a scheme of amalgamation of shares held in an Indian company
by the amalgamating foreign company to the amalgamated foreign company if
certain conditions are satisfied.
55
viii. any transfer, in a demerger, of a capital asset by the demerged company to the
resulting company, if the resulting company is an Indian company [Section
47(vib)];
ix. any transfer in a demerger, of a capital asset, being a share or shares held in an
Indian company, by the demerged foreign company to the resulting foreign
company, if certain conditions are satisfied.
x. any transfer or issue of shares by the resulting company, in a scheme of
demerger to the shareholders of the demerged company if the transfer or issue
is made in consideration of demerger of the undertaking [Section 47(vid)];
xi. any transfer by a shareholder, in a scheme of amalgamation, of shares held by
him in the amalgamating company if certain conditions are satisfied:
xii. any transfer, made outside India, of a capital asset being rupee denominated
bond of an Indian company issued outside India, by a non-resident to another
non-resident; [Section 47(viiaa)]
2. Transfer in case of -
Immovable Property when documents are not registered -
Even if the documents are not registered but the following conditions of section 53A
of the Transfer of Property Act are satisfied, ownership in an immovable property is
“transferred”—
a. there should be a contract in writing;
b. the transferee has paid consideration or is willing to perform his part of the
contract; and
c. the transferee should have taken possession of the property.
When these conditions are satisfied, the transaction will constitute “transfer” for the
purpose of capital gains.
56
4. Transfer of Capital Asset in Table Chat Format [Section 2(47)]
5. Capital Gain should arise in the previous year in which transfer took place
Normally, capital gain arises in the previous year in which the transfer of the asset
takes place even if the consideration for the transfer is received or realised in a later
year.
There are, however, 4 exceptional cases where capital gain is taxable not in the year of
transfer of the asset, but in some other year. These exceptions are:
i) damage or destruction of any capital asset by fire or other calamities
ii) conversion of capital asset into stock-in-trade (discussed in para 7.13c);
iii) compulsory acquisition of an asset (discussed in para 7.13f).
iv) transfer of capital asset, being land or building or both by an individual HUF
under a specified agreement with the developer [Section 45(5A)]
2. Holding period in case of Shares or any other Security [Explanation 1(i)(e) and
(f)]
The period of Holding , in the following circumstances will be computed as under :
58
1. Right to subscribe to shares or any The period shall be reckoned from
other securities(may be called as the date of allotment of such financial
financial assets subscribed to by the asset.
assessee on the basis of right to
subscribe to such financial assets.
2 Right to subscribe to share or any other —do——
securities acquired by a person in
whose favour the right has been
renounced by the existing holder.
3 Period of holding of the right by a The period shall be reckoned from
person who has renounced the right, the date of offer of such right by the
company or institution to the date of
renouncemern, which in normal
circumstances will be short-term.
4 Period of holding of a financial asset The period will be reckoned from
allotted without any payment and on the dare of allotment of such financial
the basis of holding of any other asset (not from the date of allotment of
financial asset e.g. bonus shares. the original shares).
5. Period of holding of specific security The period shall be reckoned from the
or sweat equity shares allotted or date of allotment or transfer of such
transferred, directly or indirectly, by specific security or sweat equity share.
the employer free of cost or at a
concessional rate to his employees
(including former employees).
6. Share or shares of a company, which is The period shall be recknoned from the
acquired by the non-resident assessee date on which a request for such
on redemption of Global Depository redemption was made
Receipts referred to in section 11 5AC(
1 )(b)
Short-term capital gain is the excess of the full value of consideration over the
aggregate of the following three:
a. cost of improvement;
b. expenses of transfer;
59
c. cost of acquisition of the asset.
Whereas in the case of long-term capital gain, the capital gain shall be the excess of
the full value of consideration over the aggregate of the following three amounts:
i. Expenses of transfer;
ii. Indexed cost of acquisition of the asset;
iii. Indexed cost of improvement.
From capital gain, computed as above, certain exemptions are available under sections
54/54B/ 54D/54EC/54F/54G/ 54GA/54GB. The capital gain after claiming the said
exemption(s) is known as taxable long-term or short-term capital gain.
(A) Full Value of Consideration (Section 48) in lieu of Capital Asset for
Calculating Capital Gain
Full value of consideration is the consideration received or receivable by the transferor
in lieu of assets, which he has transferred. Such consideration may be received in cash
60
or in kind. If it is received in kind, then fair market value of such assets is taken as full
value of consideration. Full value of consideration does not mean market value of that
asset which is transferred.
Adequacy of Consideration -
Adequacy or inadequacy of consideration is not a relevant factor for the purpose of
determining full value consideration. However, in the case of transfer of land or
building (or both), if stamp duty value is more than 105 per cent of sale consideration,
the stamp duty value is taken as full value of consideration.
Receipt of Consideration -
It makes no difference whether (or not) “full value of consideration” is received
during the previous year. Even if consideration is not received, capital gain is
chargeable to tax in the year of transfer.
If, however, loan is taken by Mrs. X, then repayment of loan will not be deductible as
part of cost of acquisition of the property while calculating capital gains in the hands
of Mrs. X.
(D) Cost of Improvement to the Capital Asset for Calculating Capital Gain
Cost of improvement is capital expenditure incurred by an assessee in making any
additions / improvement to the capital asset. It also includes any expenditure incurred
to protect or complete the title to the capital assets or to cure such title. Any
expenditure incurred to increase the value of the capital asset is treated as cost of
improvement.
62
8.5 DEEMED COST OF ACQUISITION OF ASSET FOR COMPUTING
CAPITAL GAIN
Important Points :
The following points should be duly considered —
No option - If a capital asset was acquired in any one of the modes given above,
then cost to the previous owner shall be taken as “cost of acquisition” for the
purpose of calculating capital gain at the time of its transfer. There is no option in
this regard.
Last previous owner - Where the previous owner has acquired the property in the
aforesaid manner, the previous owner of the property means the last previous
63
owner who had acquired the property by means other than those discussed above.
Cost of any improvement of the asset borne by the previous owner, or the
assessee, will be added to such cost.
Period of holding of previous owner - In order to find out whether the capital
asset is short-term or long-term in the above cases, the period of holding of the
previous owner shall be taken into consideration.
Indexation - The benefit of indexation will be available from the year in which
the asset was first held by the previous owner.
For example...,
X purchases 100 shares of R Company Ltd. for Rs.10 each on 5.11.2014. In 2015-16,
R Company Ltd. amalgamates into S Company Ltd. and under the scheme of
amalgamation, X receives 10 shares of S Company Ltd. in lieu of the 100 shares of R
Company Ltd. The cost of acquisition of 10 shares of S Company Ltd. will be Rs.1000
i.e. the cost of acquisition of the shares of R Company Ltd. in lieu of which he has
received the shares of S Company Ltd.
For example...,
X has subscribed to 10 partly convertible debentures of Rs.100 each of R Co. Ltd. on
4.4.2015. On 5-2-2017, he receives 4 shares of Rs.10 each per debenture and the
remaining value of the debenture is Rs.50 i.e. the 4 shares have been received by him
in lieu of a part of the cost of the debenture which is Rs.50. Therefore, the cost of 4
shares shall be Rs.50.
In case of a capital asset, being a share or debenture of a company, which becomes the
property of the assessee in the circumstances mentioned in section 47(x) of the Act,
64
there shall be included the period for which the bond, debenture, debenture-stock or
deposit certificate, as the case may be, was held by the assessee prior to the
conversion [Rule 8AA(2)].
Example:
In the above case if these 4 share are sold on 6-8-2017, its period of holding shall be
taken from 4-4-2015 to 5-8-2017.
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8. Cost of acquisition of the units in the consolidated plan of mutual fund
scheme [Section 49(2AF)]:
Where the capital asset, being a unit or units in a consolidated plan of a mutual fund
scheme, acquired in consolidating plan, the cost of acquisition of the asset shall be
deemed to be the cost of acquisition to him of the unit or units in the consolidating
plan of the scheme of the mutual fund.
"Net worth" for this section shall mean the aggregate of the paid up share capital and
general reserves as appearing in the books of accounts of the demerged company
immediately before demerger.
If the shares of the resulting company are later on transferred, then for computation of
nature of capital gain, the period for which the shares were held in demerged company
shall also be considered [Section 2(42A)].
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12. Cost of acquisition of an asset declared under the Income Declaration
Scheme, 2016 [Section 49(5)] [Inserted w.e.f. A.Y. 2017-18]
Where the capital gain arises from the transfer of an asset declared under the Income
Declaration Scheme, 2016, and the tax, surcharge and penalty have been paid in
accordance with the provisions of the Scheme on the fair market value of the asset as
on the date of commencement of the Scheme (i.e. on 1.6.2016), the cost of acquisition
of the asset shall be deemed to be the fair market value of the asset which has been
taken into account for the purposes of the said Scheme.
13. Cost of acquisition of the share in the project being land and building in a
joint development agreement referred in section 45(5A) [Section 49(7)
inserted by the Finance Act, 2017, w.e.f. A.Y. 2018-19]:
Where the capital gain arises from the transfer of a capital asset, being share in the
project, in the form of land or building or both, referred to in section 45(5A), not
being the capital asset referred to in the proviso to the said sub-section, the cost of
acquisition of such asset, shall be the amount which is deemed as full value of
consideration in that sub-section.
Cost of acquisition is the price which the assessee has paid, or the amount which the
assessee has incurred, for acquisition of the asset. Expenses incurred for completing
the title are a part of the cost of acquisition. Interest on money borrowed for acquiring
capital assets will form part of cost of asset. Similarly, Sum paid for Discharge of
Mortgage debt shall be regarded as Cost of Acquisition under Section 48 read with
Section 55(2) of the Act. Here we mentioned the various situations for determining the
Cost of Acquision of Assets for Computation of Capital Gain.
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ii) The option is available only when an asset was acquired by the assessee [or by the
previous owner in case section 49(1) is applicable] before April 1, 2001.
iii) When option is available, the cost of the asset or fair market value as on April 1,
2001, whichever is higher, is taken as the cost of acquisition.
iv) The option is not available in the case of depreciable assets.
v) Further option is not available in respect of transfer of a capital asset being
goodwill of a business; trade mark/ brand name associated with a business; right
to manufacture, produce or process any article or thing; right to carry on
business/profession; tenancy right; route permits or loom hours (whether self
generated or otherwise).
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The cost of acquisition in relation to the financial assets (i.e., share or any other
security) allotted to the assessee on or after 1.4.2001 (1.4.1981 upto A.Y. 2017-18)
without any payment and on the basis of holding of any other financial asset, shall be
taken to be nil. Therefore, the cost of bonus shares/security shall be taken to be nil and
the entire sale consideration received on the transfer of the bonus shares/security shall
be treated as capital gains.
(B) Bonus shares or financial asset allotted without payment before 1.4.2001:
If bonus shares have been allotted to the assessee before 1.4.2001 (1.4.1981 up to
A.Y. 2017-18), although the cost of such bonus shares is nil, the assessee may opt for
market value as on 1.4.2001 as the cost of acquisition of such bonus shares.
Where the full value of the consideration as a result of the transfer of any part or entire
block of asset exceeds the cost of acquisition of that block of depreciable assets, there
will be a capital gain, which will always be a short-term capital gain. The cost of
acquisition of a block of depreciable assets is the written down value of the block at
the beginning of the year plus actual cost of any asset falling within the same block,
acquired during the year.
In other words, the excess of the sale consideration over the aggregate of the
following three amounts shall be the short-term capital gain:
a. expenditure in connection with the transfer;
b. the written down value of the block of assets in the beginning of the year; and
c. the actual cost of any asset falling within the block of asset acquired during the
previous year.
Such an excess shall be deemed to be the capital gain arising from the transfer of short
term capital assets.
Additional compensation -
If a Court/Tribunal/authority enhances compensation, it will be taxable in the year in
which enhanced compensation or additional compensation is received. For this
purpose cost of acquisition and cost of improvement are taken as nil. However,
litigation expenses or incidental expenditure for obtaining additional compensation is
deductible.
If the enhanced compensation is received by any other person (because of the death of
the transferor or for any other reason), it is taxable as income of the recipient.
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8.7 CALCULATION OF CAPITAL GAIN IN VARIOUS SPECIAL CASES
Taxability of long-term capital gain from zero coupon bond [Proviso to section
112(1)]: The long-term capital gain on zero coupon bonds shall be chargeable to
tax at 10% of long-term capital gain without indexation of cost of such bonds.
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What shall be full value of consideration in this case?:
It shall be value of any money or the fair market value of other assets for the date of
such receipt.
Cost of acquisition -
In the above two cases, cost of acquisition shall be the aggregate of the following–
o Step 1 : Find out written down value of block of assets at the beginning of the
previous year.
o Step 2 : Add: Actual cost of‡ any asset(s) falling within that block of asset
acquired by the assessee during the previous year (whether put to use or not).
Always Short-Term -
On transfer of depreciable assets gain (or loss) is always short-term capital gain (or
loss). It can never be treated as long-term capital gain (or loss).
Example :
X, Y and Z form a partnership firm. Soon after formation of the firm, X brings a house
property as his capital contribution on August 20, 2018. On the date of transfer fair
market value of the house is Rs. 20,00,000. However, the amount recorded in the
books of firm is Rs. 18,00,000. The house was purchased by X in 2005-06 for Rs.
2,50,000. Find out the amount of capital gain.
Solution :
Capital gain will be taxable in the hands of X for the assessment year 2019-20 –
Full value of consideration (i.e., amount recorded in the Rs. 18,00,000
books of account of the firm)
Less: Indexed cost of acquisition (Rs. 2,50,000 × 280 ÷ Rs. 5,98,291
117)
Long-term capital gain Rs. 12,01,709
Example :
X and Y are two partners of a hardware trading firm. It is dissolved on March 10,
2019. At the time of dissolution, a plot of land owned by the firm is given to X (amount
recorded in books of the firm is Rs. 45,00,000, however, fair market value is Rs.
66,00,000). This plot was purchased by the firm for Rs. 36,00,000 on March 5, 2012.
Find out the amount of capital gain.
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Solution :
Capital gain will be taxable for the assessment year 2019-20 –
Full value of consideration (i.e., fair market value on the Rs. 66,00,000
date of distribution)
Less: Indexed cost of acquisition (Rs. 36,00,000 × 280 ÷ Rs. 54,78,261
184)
Long-term capital gain Rs. 11,21,739
Initial Compensation -
Initial compensation† is taken as full value of consideration. Capital gain is
chargeable to tax in the year in which the initial compensation (or part thereof) is first
received. Indexation benefit is, however, available up to the year in which the asset is
compulsorily acquired.
Additional Compensation -
If a Court/Tribunal/authority enhances compensation, it will be taxable in the year in
which enhanced compensation or additional compensation is received. For this
purpose cost of acquisition and cost of improvement are taken as nil. However,
litigation expenses or incidental expenditure for obtaining additional compensation is
deductible.
If the enhanced compensation is received by any other person (because of the death of
the transferor or for any other reason), it is taxable as income of the recipient.
If the above conditions are satisfied, the capital gains shall be chargeable to income-
tax as income of the previous year in which the certificate of completion for the whole
or part of the project is issued by the competent authority.
Full value of the Consideration for Computing the Capital Gain under Section
45(5A):
The stamp duty value of his share (i.e. share of the individual or HUF), being land or
building or both, in the project on the date of issuing of said certificate of completion
as increased by any monetary consideration received, if any, shall be deemed to be the
full value of the consideration received or accruing as a result of the transfer of the
capital asset.
However, when these shares are, thereafter, actually transferred, capital gain shall
arise and be chargeable in the previous year in which the shares are transferred. The
cost of acquisition of the shares shall be that part of the cost of debenture in relation to
which shares were acquired by the assessee. [Section 49(2A)]
Further, for the purpose of computing the period of holding of such shares, the period
for which the bond, debenture, debenture-stock or deposit certificate, as the case may
be, was held by the assessee prior to the conversion shall also be included. [Rule
8AA(2)]
The aforesaid rule is not optional but it is compulsory and applicable whether the asset
is short-term or long-term. The benefit of indexation is not available, even if the asset
is long-term.
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Capital Gain will now be computed as under :
Full value of consideration (converted into foreign currency at -
average TT buying and TT selling rate on date of sale)
Less: (i) expenses on transfer (converted into foreign currency at -
average TT buying and TT selling rate on the date of sale)
(ii) cost of acquisition (converted into foreign currency at - -
average TT buying and TT selling rate on the date of
acquisition)
Capital gain in foreign currency -
When a self-generated capital asset is transferred, the following special rules are
applicable –
Self-generated goodwill of a business, right to manufacture/produce an
article/thing or right to carry on business or profession -
In the case of transfer of these capital assets, cost of acquisition and cost of
improvement are taken as nil. Expenses on transfer are, however, deductible on the
basis of actual expenditure.
Self-generated assets being tenancy right, route permit, loom hours, trade mark
or brand name associated with a business -
In the case of transfer of these self-generated capital assets, cost of acquisition is taken
as nil. Cost of improvement and expenses on transfer are, however, deductible on the
basis of actual expenditure.
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Any other Self-Generated asset -
In the case of transfer of any other self-generated capital asset, capital gain is not
chargeable to tax.
16. Computation of Capital Gains in the case of Transfer of Land and Building
or in Real Estate Transactions [Section 50C] -
Section 50C is applicable if the following conditions are satisfied—
i) There is a transfer of land or building or both. The asset may be long-term capital
asset or short-term capital asset. It may be depreciable or non-depreciable asset.
ii) Stamp duty value adopted (or assessed or assessable) by the Stamp duty authority
in respect of such transfer, is more than 105 % of sale consideration.
If the above conditions are satisfied, the value adopted by the Stamp duty
authority shall be taken as “full value of consideration” for the purpose of
computation of capital gains. In other words, section 50C is applicable only in
those cases, where stamp duty value is more than 105 % of actual consideration .
18. Capital Gain on Sale of Land and Building to be computed separately in case
of Building Constructed by the Assessee:
Where the assessee acquires land and constructs the building on the same in any
subsequent previous year then, for the purpose of computation of capital gain, the
period of holding of the land and period of holding of the building shall be separately
determined as below :
The period of holding of land shall be from the date of purchase of land till the
date of sale of the house property.
On the other hand, the period of holding of the building shall be from the date of
completion of building till the date of sale of the house property.
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Thus, for computing capital gain, the indexation of cost, if required, will be computed
separately for the land and for the building.
Illustration:1: Mr. Vishal sold his residential house for Rs:4,50,000 in November,
2019. Indexed cost of this house was Rs: 1,80,000. He paid 3 % of sale as commission
to broker. He purchased another house on 26th January, 2020 for Rs:2,00,000.
Compute his capital gains for the AY 2020-21
Solution:
Computation of capital gains for the AY 2020-21
Particulars Rs: Rs:
Selling price of the house 4,50,000
Less: Brokerage 13,500
Indexed cost 1,80,000 1,93,500
Long term capital gain 2,56,500
Less: Cost of new house 2,00,000
Taxable Capital Gain 56,
Illustration:2: Mr. Irfan provides you the following information to the sale of
residential house. Calculate his capital gain for the AY 2020-21.
House purchased in January, 1999 Rs:4,83,000
Sold the house in August, 2019 Rs:30,00,000
Purchased another residential house in November, 2012 Rs:2,00,000
Invested in bond issued by NHAI Bonds u/s 54EC Rs:1,00,000 The Cost Inflation
Index in 1998-99 was 161 and for 2019-20 was 852.
Solution:
Computation of capital gains for the AY 2020-21
Particulars Rs: Rs:
Sale of asset in August,2019 30,00,000
Less: Indexed cost of acquisition(483000x 852/161 ) 25,56,000
Capital Gain 4,44,000
Less: Exemption u/s 54 being cost of house
2,00,000
purchased within one year
Exemption u/s 54EC 1,00,000 3,00,000
Taxable Capital Gain 1,44,000
Illustration 03: Mr. Ananda murthy showed his block of assets as on 1-4-2019 at a
WDV of Rs:1,50,000. He purchased another asset within the block during the year
2019-20 for Rs:40,000.The entire block of assets is sold during the previous year for
Rs:2,00,000. Calculate capital gain for the assessment year 2020-21.
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Solution:
Computation of capital gains for the AY 2020 - 21
Particulars Rs:
W.D.V. of assets as on 01-04-2019 1,50,000
Add: Assets purchased during P.Y. 40,000
1,90,000
Less: Selling Price 2,00,000
Short Term Capital Gain 10,000
Illustration 04:Mr. Varma purchased a plot in 1986-87 for Rs: 1,40,000. It was sold
on 15-1-2020 for Rs:15,80,000 and he paid Rs:1,00,000 as brokerage. He invested
Rs:2,00,000 in NHAI bonds on 31-3-2020 and Rs: 3,10,000 in bonds issued by Rural
Electrification Corporation Ltd. on 1-8- 2020. Compute his taxable capital gain, if the
CII for 1986-87 was 140 and for 2019-20 is 852.
Solution:
Computation of capital gains for the AY 2020-21
Particulars Rs: Rs:
Selling price of plot 15,80,000
Less: Brokerage 1,00,000
Indexed cost (1,40,000 x 853/140) 8,52,000 9,52,000
LTCG 6,28,000
Less: Exempt u/s 54EC : NHAI Bonds purchased
2,00,000
within 6 months from the date of transfer of LTCA
Taxable Capital Gains 4,28,000
Note: Bonds of Rural Electrification Corporation Ltd. not purchased within 6 months
from the date of transfer of LTCA, hence, not entitled to exemption.
Illustration:5: Agricultural land purchased in 1994-95 for Rs: 75,000 sold for Rs:
7,20,000 on 01-05-2012. The assessee purchased another piece of agricultural land on
01-08-2019 for Rs:80,000 and deposited Rs:50,000 in Capital Gains Account Scheme,
1988. Compute the Capital Gain chargeable to tax for the AY 2020-21. CII in 1984-85
was 125 and in 2019-20 is 852.
Solution:
Computation of capital gains for the AY 2020-21
Particulars Rs: Rs:
Selling price of agri. land 7,20,000
Less: Indexed Cost (75,000 x 852/125) 5,11,200
LTCG 2,08.800
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Less: Cost of new agri. land 80,000
Deposit in Capital Gains Account 50,000 1,30,000
Taxable Capital Gains 78,800
Solution:
Computation of capital gains for the AY 2020 -21
Particulars Rs:
Selling price of house 31,00,000
Less: Indexed cost (3,48,000 x 852/116) 25,56,000
LTCG 5,44,000
Less: Cost of new house 8,00,000
Taxable Capital Gains Nil
Solution:
Computation of Capital Gains for the AY 2020-21
Particulars Rs:
Selling price of self-generated
14,00,000
goodwill(assumed LTCA)
Less: Cost Nil
LTCG 14,00,000
Less: LTCL on sale of building 40,000
LTCG 13,60,000
Selling price of bonus share 8,00,000
Less: Cost Nil
STCG 8,00,000
Taxable Capital Gain 21,60,000
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8.8 LET US SUM UP
Any profits or gains arising from the transfer of a capital asset affected in the previous
year shall be chargeable to income-tax under the head 'Capital Gains'. Capital asset
means property of any kind held by an assessee whether or not connected with his
business' or profession, but does not include stock-in-trade, personal effects and,
agricultural land in India. Capital assets are of two types-long-term and short-term.
Long-term capital assets are those which are held by the assessee for more than
36 months before transfer and short-capital assets are those which are held by the
assessee for not more than 36 months before transfer.
Capital gains arising from the transfer of short-term capital assets are called short-term
capital gains and capital gains arising from the transfer of long-term capital assets are
called long-term capital gains.
Only long-term capital gains are exempt from tax under Section 53,54,54E, and 54F,
subject to the fulfillment of certain conditions. Similarly ,capital gains are also exempt
under sections 54B, 54D and 54G subject to fulfillment of certain conditions. In the
case of long-term capital gains an initial deduction of Rs. 10,000 is made and
thereafter on the balance of such capital gain deduction at specified percentage will be
allowed on specified nature of capital gains. The net balance left thereafter shall be
taxable capital gain.
In case of long-term capital losses also deduction shall be made in the same manner as
is done in respect of long-term capital gains u/s 48(2) and the balance of the amount
shall be net long-term capital loss to be set-off and/or carry forward.
Capital Asset: Capital asset means property of any kind held by an assessee,
whether or not connected 'with his business or profession except stock-in-trade,
personal effects and agricultural land in India.
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Capital Gains: Profits or gains arising from the transfer of a capital asset is called
capital gain.
Long-term capital gain : Capital gain arising from the-transfer of an asset held
for more than 36 months (in case of shares for more than 12 months) is called
long-term capital gain.
Short-term capital gain : Capital gain arising from the transfer of an asset held
for not more than 36 months (in case of shares for not more than 12 months) is
called short-term capital gain.
Transfer : Transfer in relation to a capital asset includes the sale, exchange or
relinquishment of an asset, the extinguishment of any rights therein, or
compulsory acquisition thereof under any law or conversion of an asset into
stock-in-trade
Income tax Law and practice, Makta Jain/ Rakesh Jain, V.K. Global Pub. Pvt.
Ltd., New Delhi
Income Tax Law and Pratcice-Saha, Dash- Himalaya Publishing House.
Pagare, Dinkar. Law and Practice of Income Tax. Sultan Chand and Sons, New
Delhi.
Lal, B.B. Income Tax Law and Practice. Konark Publications, New Delhi
Gour and Narang, Income tax: Law and practice, kalyani Publishers
Dr. Vinod Kumar Singhania, e-filing of Income Tax Returns and Computation
ofTax,
Taxmann Publication Pvt. Ltd, New Delhi. Latest version.
Q1 : What does the term 'Capital Gains' signify under the Income Tax Act?
Q2 : Explain the following terms in the context of the I.T.' Act
a) Capital Assets
b) Short Term Capital Assets
c) Transfer of Capital Assets
Q3 : Discuss the provisions of the Income-tax Act regarding exemption of capital
gains U/S54E?
Q4 : A is the owner of a car. On 1-4-2019, he starts a business of purchase and sale
of motor cars. He treats the above car as part of the stock-in-trade of his new
business. He sells the same on 31-3-2020 and gets a profit of Rs 1 lakh.
Discuss the tax implication in his hands under the head “Capital gains”.
Q5 : X converts his capital asset (acquired on June 10, 2003 for Rs 60,000) into
stock-in trade on March 10, 2019. The fair market value on the date of the
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above conversion
was Rs 5,50,000. He subsequently sells the stock-in-trade so converted for Rs
6,00,000 on June 10, 2019. Discuss the year of chargeability of capital gain.
Q6 : In which of the following situations capital gains tax liability does not arise?
Mr. A purchased gold in 1970 for Rs 25,000. In the P.Y. 2019-20, he gifted it
to his son at the time of marriage. Fair market value (FMV) of the gold on the
day the gift was made was ` 1,00,000.
A house property is purchased by a Hindu undivided family in 1945 for Rs
20,000. It is given to one of the family members in the P.Y. 2019 20 at the
time of partition of the family. FMV on the day of partition was Rs 12,00,000
Mr. B purchased 50 convertible debentures for ` 40,000 in 1995 which are
converted into 500 shares worth ` 85,000 in November 2019 by the company
Q7 : Mr. A converts his capital asset acquired for an amount of Rs 50,000 in June,
2003 into stock-in-trade in the month of November, 2016. The fair market
value of the asset on the date of conversion is Rs 4,50,000. The stock-in-trade
was sold for an amount of Rs 6,50,000 in the month of September, 2019. What
will be the tax treatment?
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UNIT-9 INCOME OF OTHER SOURCES
Structure
9.0 Objectives
9.1 Introduction
9.2 Income Chargeable under the head income from other sources
9.3 Winning from lotteries, crossword puzzle, card games etc
9.4 Interest on Securities
9.5 Income from letting out machinery, plant or furniture
9.6 Amount expressly disallowed in computing the income from other
sources
9.7 Deduction allowed in computing the income from other sources
9.8 Let us sum up
9.9 Key Words
9.10 Further Readings
9.11 Terminal Questions
9.0 OBJECTIVES
9.1 INTRODUCTION
You have read about three heads of income. Income specific to a particular head is
included in and charged to tax under that head. Income from other sources is a head of
income which includes all those incomes which are:
Listed in the definition of income,
Not exempt from tax, and
Not included in any specific head i.e., salaries, house property, capital gains
etc.
This means it is a residual head which includes all those incomes which are not
included in a specific head.
In this unit you will study in detail the incomes included under this head and the
provisions of income tax relating to them. You will also study about the set-off and
carry forward of losses.
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9.2 INCOME CHARGEABLE UNDER THE HEAD 'INCOME FROM
OTHER SOURCES' (SECTION 56)
As per section 56(1), income of every kind, which is not to be excluded from the total
income under this Act, shall be chargeable to income-tax under the head "Income
from Other Sources" if it is not chargeable to Income-tax under any of the first four
heads specified in Section 14.
In other words, the following conditions must be satisfied before an income can be
taxed under the head "Income from Other Sources":
i. There must be an income;
ii. Such income is not exempt under the provisions of this Act;
iii. Such income is not chargeable to tax under any first four heads viz., "Income
from Salary", "Income from House Property", "Profits and Gains of Business
or Profession" and "Income from Capital Gain".
Sub-section (2) of section 56 specifies nine incomes which are always taxable under
the head “Income from other sources". The following Eleven (11) incomes are always
taxable under the head “Income from other sources” —
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4. Interest on Securities Interest on debentures, Government
securities/bonds is taxable under the head “Income
from other sources” provided the income is not
chargeable to Income-tax under the head profits
and gains of business or profession.
5. Rental Income of Income from machinery, plant or furniture
Machinery, Plant or Furniture belonging to the assessee and let on hire, provided
the income is not chargeable to Income-tax under
the head profits and gains of business or
profession.
6. Rental income of leting out Where the assessee lets on hire, the machinery,
of Plant, Machinery or plant or furniture belonging to him and also
Furniture along with letting buildings, and letting of buildings, is inseparable
out of Building and (the two from the letting of the said machinery, plant or
lettings are not separable) furniture, the income from such letting, if it is not
chargeable to income-tax under the head profits
and gains of business or profession.
7. Sum Received under Key any sum received under a Key man Insurance
man Insurance Policy Policy, including the sum allocated by way of
bonus on such policy, if such income is not
taxable under the head "Salaries" or "Profits and
gains of business or profession".
8. Gift Any sum of money, the aggregate value of which
exceeds Rs. 50,000 is received without
consideration or property (whether movable or
immovable) is received without consideration or
property is received for an inadequate
consideration by any person on or after 1.4.2017,
if the amount of such gift or inadequate
consideration exceeds Rs. 50,000
9. Interest on Compensation or Income by way of interest received on
Enhance Compensation compensation or on enhanced compensation shall
be assessed under the head “Income from other
sources” in the year in which it is received.
However, 50% of such interest is deductible under
section 57(iv). Consequently, only 50% of such
interest is taxable.
10. Advance Money Received Where any sum of money, received as an advance
in the course of negotiations or otherwise in the course of the negotiations for
for transfer of a Capital Asset. transfer of a capital asset, is forfeited and the
negotiations do not result in transfer of such
capital asset, then, such sum shall be chargeable to
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income-tax under the head “Income from other
sources”.
11. Compensation on Any compensation or other payment referred to in
Termination of Employment or section 56(2)(xi) [i.e., compensation on
Modification of Terms of termination of employment or modification of
Employment terms of employment] is treated as income from
other sources.
Examples of Incomes Included under the head 'Income from Other Sources'
Following are some of the other incomes which are normally chargeable to tax under
this head because these are not covered under any of the four specified heads:
1. income from sub-letting of a house property by a tenant;
2. casual income;
3. insurance commission;
4. family pension (payments received by the legal heirs of a deceased employees);
5. director's sitting fee for attending board meetings;
6. interest on bank deposits/deposits with companies;
7. interest on loans;
8. income from undisclosed sources;
9. remuneration received by Members of Parliament;
10. interest on securities of foreign governments;
11. examiner ship fees received by a teacher from an institution other than his
employer;
12. total interest till date on employee's contribution to an unrecognised provident
fund at the time when the payment of lump sum amount from the unrecognised
provident fund is due;
13. rent from a vacant piece of plot of land;
14. agricultural income from agricultural land situated outside India; (xv) interest
received on delayed refund of income-tax;
15. income from royalty, if it is not income from business or profession;
16. Director's commission for standing as a guarantor to bankers;
17. Director's commission for underwriting shares of a new company;
18. Gratuity received by a director who, under the relevant contract, is not an
employee or servant of the company, is assessable as income from other sources;
19. Income from racing establishment;
20. Income from granting of mining rights;
21. Income from markets, fisheries, rights of ferry or moorings;
22. Income from grant of grazing rights;
23. Interest paid by the Government on excess payment of advance tax, etc.;
24. Income received after discontinuance of business.
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9.3 WINNINGS FROM LOTTERIES, CROSSWORD PUZZLES, HORSE
RACES AND CARD GAMES [SECTION 56(2)(IB)]
Deduction of any expenses, allowance or loss not allowed from such winnings:
According to section 58(4), no deduction in respect of any expenditure or allowance,
in connection with such income, shall be allowed under any provision of the Income-
tax Act. However, expenses relating to the activity of owning and maintaining race
horses are allowable.
In other words, the entire income of winnings, without any expenditure or allowance,
will be taxable. In fact, deduction under sections 80C to 80U on Deductions from
Gross Total Income will also not be available from such income although such income
is a part of the total income.
As lottery income is taxed at flat rate, the basic exemption of income (say Rs.
5,00,000) is not available to the assessee.
If a person wins a lottery of Rs.2,00,000, tax must have been deducted @ 30% and net
amount received by the assessee would be Rs. 1,40,000 (2,00,000 – 60,000). Grossing
up would be done as:
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1,40,000 × [ 100 ÷ (100-30)] = Rs. 2,00,000
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4. Grossing up of Interest on Securities :
Gross interest [i.e., Net Interest + TDS (Tax Deducted at Source] is Taxable.
Net interest is grossed up in the hands of recipient if tax is deducted at source by the
payer.
Net interest (if tax is deducted at source) in the hands of the recipient should be
grossed up by multiplying it by the following fraction :
5. Deductions for Expenses from Interest on Securities [Section 57(i) and (iii)]:
As discussed in the case of dividends, the following deductions will also be allowed
from the gross interest on securities:
1. Collection charges [Section 57(i)]:
Any reasonable sum paid by way of commission or remuneration to a banker,
or any other person for the purpose of realising the interest.
2. Interest on loan [Section 57(iii)]:
Interest on money borrowed for investment in securities can be claimed as a
deduction.
3. Any other expenditure [Section 57(iii)]:
Any other expenditure, not being a expenditure of a capital nature, expended
wholly and exclusively for the purpose of making or earning such income can
be claimed as a deduction.
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To prevent the avoidance of tax in this manner, section 94(1) provides that where a
security owner transfers the securities on the eve of due date of interest and reacquires
them, the interest received by the transferee will be deemed as income of the
transferor and, accordingly, it will be included in the total income of the transferor and
not of the transferee.
EXCEPTIONS -
Deeming provisions of section 94(1)/(2), discussed above, are not applicable if the
security owner proves to the satisfaction of the Assessing Officer that —
a. There has been no avoidance of income-tax; or
b. The avoidance of income-tax was exceptional and not systematic and there
was not any avoidance of income tax under section 94(1)/(2) in his case,
during three years preceding the previous year.
Income from machinery, plant or furniture, belonging to the assessee and let on hire,
is chargeable as income from other sources, if the income is not chargeable to income-
tax under the head "Profits and Gains of Business or Profession".
On the basis of the judicial pronouncements, the following broad conclusions can be
drawn:
If there is letting of machinery, plant and furniture and also letting of the
building and the two lettings form part and parcel of the same transaction or the
two lettings are inseparable (in the sense that letting of one is not acceptable to
the other party without letting of the other; for instance, letting of cinema house
along with letting of furniture) then such income is taxable under section
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56(2)(iii) under the head “Income from other sources” (if it is not taxable as
business income). This rule is applicable even if sum receivable for the two
lettings is fixed separately.
If a building is let out but other assets like machinery, plant or furniture are not
given on rent. However, certain amenities like lift services, air-conditioning, fire
fighting facilities, etc., are provided, then section 56(2)(iii) is not applicable.
The essential requirement of section 56(2)(iii) is that there should be letting of
plant, machinery or furniture and also letting of building.
For instance, if the owner of a building only undertakes to instal and operate an
air-conditioning plant and to instal, and maintain a lift in the building for the
benefit of all the tenants at specified charges (maybe on “no profit no loss basis”
or some other basis), there is no letting of air-conditioning plant and lifts to the
tenants. Consequently, in such case incomes from letting of building is taxable
under section 22 under the head “Income from house property” and amount
collected for providing different amenities shall be taxable under section 56(1).
The aforesaid rule is applicable even if the assessee receives composite rent from his
tenant towards building as well as services/amenities. The portion of rent attributable
to the building should only be assessed as “Income from house property” and balance
portion attributable to amenities must be assessed as “Income from other sources”.
Share Premium in excess of the Fair Market Value to be treated as Income [Section
56(2)(viib)]
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Section 56(2)(viib) is applicable as follows –
Recipient is a company (not being a company in which the public are
substantially interested).
It receives consideration for issue of shares (preference shares or equity shares)
from a resident person.
The consideration received for issue of shares exceeds the face value of such
shares. In other words, shares are issued at a premium.
If the above conditions are satisfied, the aggregate consideration received for such
shares as exceeds the fair market value of the shares, shall be chargeable to income-
tax in the hands of recipient-company under section 56(2)(viib) under the head
“Income from other sources”.
The above provisions are not applicable in the following two cases –
a. where the consideration for issue of shares is received by a venture capital
undertaking from a venture capital company or a venture capital fund; or
b. where the consideration for issue of shares is received by a company from a
class or classes of person as notified† by the Central Government.
The fair market value of the shares shall be the higher of the value—
a. as may be determined in accordance with the method given in rules 11U and
11UA ; or
b. as may be substantiated by the company to the satisfaction of the Assessing
Officer, based on the value of its assets, including intangible assets, being
goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or
any other business or commercial rights of similar nature.
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Example :
Mr. X whose property was compulsorily acquired in 2013 received enhanced
compensation of Rs. 9,00,000 on 15.11.2017 which includes Rs.2,40,000 as interest
on such enhanced compensation. Discuss the taxability of such compensation.
Solution:
Enhanced compensation of Rs. 9,00,000 – Rs. 2,40,000 = Rs. 6,60,000 shall be
taxable under the head capital gain. Whereas interest on enhanced compensation shall
be taxable under the head income from other sources as under:
Income of any Person to include not only Gift of Money from any person(s) but also
the Gift of Property (whether Movable or Immovable) or Property acquired for
inadequate consideration [Section 56(2)(x), w.e.f. A.Y. 2018-19]
(1) Where any Person Receives, in any previous year, from any Person or
Persons on or after 1.4.2017 :
The following income, it shall be chargeable to income tax under the head "income
from other sources" as per section 56(2)(x):
The following expenses are not deductible by virtue of section 58 in computing the
income chargeable under the head 'Income from Other Sources' :
INTEREST [Section 58(1)(a)(ii)] - Any interest (which is chargeable under the Act in
the hands of recipient) which is payable outside India on which tax has not been paid
or deducted at source, is not deductible.
SALARY [Section 58(1)(a)(iii)] - Any payment (which is chargeable under the head
“Salaries” in the hands of recipient and payable outside India), is not deductible if tax
has not been paid or deducted therefrom .
WEALTH TAX [Section 58(1)] - Any sum paid on account of wealth-tax is not
deductible.
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EXPENDITURE IN RESPECT OF ROYALTY AND TECHNICAL FEES
RECEIVED BY A FOREIGN COMPANY [Section 58(3)] - In the case of foreign
companies, expenditure in respect of royalties and technical service fees as specified
by section 44D is not deductible.
However, expenditure incurred by the assessee for the activity of owning and
maintaining race horses shall be allowed as a deduction while computing the income
from this activity.
The income chargeable to tax under the head 'Income from Other Sources' is
computed after making the following deductions:
For this purpose, “family pension” means a regular monthly amount payable by the
employer to a person belonging to the family of an employee in the event of his death.
5. Deductions for Expenses from Dividend Income [Section 57(i) and 57(iii)]
The following expenses can be claimed as deductions from gross dividend income
other than the dividends referred to in section 115-O:
a. Collection charges: any reasonable sum paid by way of commission or
remuneration to a banker or any other person for the purpose of realising the
dividend.
b. Interest on loan: Interest on money borrowed for purchasing the shares can be
claimed as a deduction. The interest can be claimed even if no income is earned
by way of dividend on such shares. It has been held by the Supreme Court that if
the expenditure has been laid out for the purpose of earning the dividend income
then whether income is actually earned or not is immaterial and deduction on
account of interest can be claimed.
c. Any other expenditure: Any other expenditure, not being a expenditure of a
capital nature, expended wholly and exclusively for the purpose of making or
earning such income, can be claimed as a deduction.
6. Deductions for Expenses from Interest on Securities [Section 57(i) and (iii)]:
As discussed in the case of dividends, the following deductions will also be allowed
from the gross interest on securities:
a) Collection charges [Section 57(i)]: Any reasonable sum paid by way of
commission or remuneration to a banker, or any other person for the purpose of
realising the interest.
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b) Interest on loan [Section 57(iii)]: Interest on money borrowed for investment in
securities can be claimed as a deduction.
c) Any other expenditure [Section 57(iii)]: Any other expenditure, not being a
expenditure of a capital nature, expended wholly and exclusively for the purpose
of making or earning such income can be claimed as a deduction.
Solution:
Computation of Income from Other Sources For the AY 2020-21
Particulars Rs:
Examination remuneration 7,000
Royalty from books and articles 25,000
Winnings from card games 6,700
Winnings from State lottery 30,000
Income from other sources 68,700
Illustration :02- Compute income from other sources: Dividend (Gross) Rs:9,600
Expenses incurred for its collection Rs: 500 Receipts from letting of plant and
machinery Rs: 10,000 Repairs of Plant and Machinery Rs: 4,000 Insurance premium
in respect of plant and machinery Rs: 2,000 Depreciation allowed for letting Rs:4,000
Solution:
Computation of Income from Other Sources For the AY 2020-21
Particulars Rs: Rs:
Receipts from letting of P&M 10,000
Less: Admissible expenses:
Repairs of P&M 4,000
Insurance premium in respect of P&M 2,000
Depreciation allowed for letting 4,000 10,000
Income from other sources Nil
Illustration:03- Compute income from other sources of Mr. Ajaya kumar for the AY
2020-21. His investments are : 5% govt. securities Rs: 70,000 7.5% Agra Municipal
Bond Rs: 50,000 9% debentures of a company Rs:30,000 7% Capital Investment
Bond Rs: 20,000
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Solution:
Computation of Income from Other Sources For the AY 2020-21
Particulars Rs:
Interest on Govt. Securities (70,000 x 5%) 3,500
Interest on Agra Municipal Bond (5,000 x 7.5 %) 3750
Interest on debentures (30,000 x 9%) 2,700
Interest on Capital Investment Bond Exempt
Income from Other Sources 9,950
Any income which, though to be included in total income but does not find place
under any other head of income, is taxable under the head 'Income from Other
Sources'. It includes dividends; income from winnings from lotteries, crossword.
puzzles, horse races, card games or betting etc., interest on securities, income from
letting of machinery, plant ,or furniture which is not chargeable as business income,
etc. In case of dividends or interest on securities any commission paid to a banker or
any other person for collecting the dividends or interest on behalf of the assessee is
deductible from such income. In case of income from letting of machinery, plant or
furniture along with letting of buildings, which is chargeable under the head 'Other
Sources' deduction in respect of repairs, insurance premium and depreciation of
buildings, machinery, plant or furniture shall be allowed.
Bond washing Transactions: When securities are sold near the due date of
interest to some friend or relative with an intention to buy back after the due date
of interest, it is a bogus transaction, as it is a device to avoid tax. Such
transactions are called Bond-washing Transactions.
Dividends: Any distribution by a company of accumulated profits in any form
which results in reduction of assets or increase of liabilities or distribution at the
time of liquidation of the company, of by way of reduction of capital is called
dividend.
Interest on Securities: Interest on securities means interest on any security of the
Central or State Government or interest on debentures issued by a local authority
or a company or a Statutory Corporation.
Inter-head Adjustment: Where in respect of any assessment year the net result
of the computation under any head of income is a loss. He shall be entitled to
have the amount of such loss set-off against his income, if any, under any other
head of income. This is called Inter-head Adjustment.
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Inter-source Adjustment : When there is more than one source of income under
the same head, the loss from one or more sources is allowed to be set-off against
income from the other source under the same head. It is called Inter-source
Adjustment.
Less-Tax Securities (both Government and Commercial) :.On such securities
the rate of interest is given. The interest calculated at this rate is gross amount of
interest from which tax is deducted at source.
Tax-free Commercial Securities: These are issued by a company or some other
business institution. Really, their interest is not tax-free but the tax on this is paid
by the business institution concerned on behalf of the debenture holder over and
above the interest, which is fully paid to the debenture holder.
Set-off of losses: Setting off losses against the income of the same year.
Carry forward of losses: The losses which cannot be set off in the same year are
carried to next year to set-off against income of next year.
Income tax Law and practice, Makta Jain/ Rakesh Jain, V.K. Global Pub. Pvt.
Ltd., New Delhi
Income Tax Law and Pratcice-Saha, Dash- Himalaya Publishing House.
Pagare, Dinkar. Law and Practice of Income Tax. Sultan Chand and Sons, New
Delhi.
Lal, B.B. Income Tax Law and Practice. Konark Publications, New Delhi
Gour and Narang, Income tax: Law and practice, kalyani Publishers
Dr. Vinod Kumar Singhania, e-filing of Income Tax Returns and Computation
of Tax,
Taxmann Publication Pvt. Ltd, New Delhi. Latest version.
Q1 : Discuss the various kinds of securities? Explain the rule regarding grossing up
of interest on Tax-Free Commercial Securities.
Q3. Mr. Nilesh is the owner of M/s Nilesh Power Laundry. He provides you the
following information for the previous year ended on 31st March, 2016:
(a) Income from business Rs 67,500/‐
(b) 13,500/‐ were recovered from cashier which was allowed as business
expenditure being embezzlement of cash in earlier previous year. This was not
accounted in the books of M/s Nilesh Power Laundry.
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(c) Mr. Nilesh took Pushapak Bhavan on rent of Rs 1,000/‐ p.m.. He sublet this
property to Mr. Sanjay at ` 1,500/‐ p.m. w.e.f. 1st April 2015.
(d) Accrued interest on fixed deposit with Saraswat Co‐operative Bank Ltd. Rs
8,500/‐
(e) Interest on fixed deposits with BWM Toyota Pvt. Ltd. Rs 7,500/‐ (Gross) TDS
Rs 750.
(f) Directorship fees from Sumangal Chemicals Rs 3,000/‐
(g) Interest on debentures amounted to Rs 6,000/‐. He paid Rs 3,000/‐ as interest
on amount borrowed for purchase of Debentures to Mr. John, a German
resident. No tax has been deducted at source nor there is any representative
assessee in India.
(h) Winning from lottery Net Rs 70,000 TDS Rs 30,000. Cost of purchase of
lottery tickets was Rs 1,000. Determine the Gross total income of Mr. Nilesh
for the assessment year 2016‐2017.
Q4. Mr. Salil provides you the following information for the year ended 31st
March 2020.
(a) Received Rs 10,000/‐ as award from Mahatma Phule Krishi Vikas Mandal
instituted in public interest by Government of Maharashtra in respect of
scientific study on dry farming.
(b) Examiner ship fees received from Banaras University Rs 12,500/‐
(c) Salary @ Rs 14,500/‐ p.m. from Chattrapati Shikshan Mandal being a lecturer
including all allowances and perquisites. He is provided conveyance facilities
for the journey from his residence to college. Profession tax deducted at
source Rs 1,440/‐
(d) Royalty from Vidya Prasarak Rs 42,000/‐ for writing a book on
“Commercialisation of Agriculture‐ A need of the day.”
(e) Received Rs 5,000/‐ from H.U.F. as a member of H.U.F. and ` 10,000/‐ as
share in profit of the firm M/s Milan Traders. He did not receive any
remuneration or interest from the firm.
(f) He received an award of appreciation from Thane Municipal Corporation of
Rs 11,000/‐ as “Best Lecturer” of the city on 15th August, 2019.
(g) Honorarium of Rs 500/‐ from Dyan Prasarini for a speech on “Health
Awareness”
(h) He was owning a machine, which was given on hire to Danish Kaneria. He
received hiring charges of Rs 42,000/‐. He incurred Rs 11,800/‐ expenses on
maintenance and depreciation allowable as per income tax rules was
ascertained Rs 12,200/‐ You are required to ascertain the Gross Total Income
chargeable to tax for the assessment year 2020‐2021.
Q5. Mrs. Donald is a Member of Legislative Assembly. During the previous year
2019‐2020 she had the following income:
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(a) As M.L.A. she received a salary of ` 4,000 p.m. and total daily allowance of `
27,000 for attending various sessions and committee meetings.
(b) She held the following investments on which she received interest: 100 13.5%
Debentures of Rs 100 each in Tata Iron & Steel Co. Ltd. 9% fixed deposit of
Rs 10,000 in Central Bank.
(c) She also received dividend of ` 500 from Unit Trust of India.
(d) She won Rs 6,000 in horse races against which she had spent Rs 1,000 on
travelling, etc.
(e) On 1st September, 2015 she purchased a plot of land. She let out the plot at Rs
500 per month from 1st November 2016.
(f) She has let Machinery, Furniture & also Building to Mr. Ajit at a monthly rent
of Rs 3,000. Amount spent in respect of these assets on repairs for the previous
year was Rs 20,000.
(g) She received income tax refund of Rs. 3,400 in respect of excess tax paid
during P. Y. 2015‐16. It included interest of Rs 200.
Compute the gross total income of Mrs. Donald for the assessment year 2020‐2021
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