E-Notes

Class : BA LLB/BBA LLB 7th Sem

L
Subject : Tax Law
Paper Code : LLB 403

SO
UNIT-IV

Income from Other sources

&
Income which are taxed under other heads of income like income from salary,
S
income from house property, income from business, income from capital gain.
The income which are not taxed under these any kind of heads of income are
H

taxed under this head of income from other sources so it is called as other source
income or residual income. Incomes which are not earned as salary, from
C

business, from properties owned are treated as other source because the source of
income is not regular or casual. Speculation transactions which are made at stock
exchange is an example of other source because income is earned from non-
PJ

regular business. If assessee keeps mercantile system of accounting, income

which are chargeable under the head are taxed on due basis. If assessee keeps
cash system of accounting, income which are chargeable under the head are
C

taxed on receipt basis.

Some Incomes are falling under the head income from other sources

Sec.56 (2) and other examples of income which are falling under the head
income from other sources are followed.
1. Dividend
2. Interest on Securities
3. Interest on bank deposit
4. interest on foreign securities
1
 5. Income from horse race, bedding, gambling, card game, lottery
6. Income from letting of plant, machinery, and furniture
7. Income from letting of plant, machinery, and furniture along with
building.

L
8. Income from subletting
9. Ground rent

SO
10. Agricultural income of land which is situated in foreign
11. country Gift which exceeds Rs.50000/- in monitory value
12. Insurance commission
13. Royalty income
14.
15.
16.
Directors' commission &
Exam paper correcting charge which is received by the teacher
Pension which is received by family members
S
17. Salary of MLA, MP
H

18. Casual income

19. Income from undisclosed sources
C

20. Rent of plot of land

Provision regarding Dividend

PJ

Dividend it paid by a company to the shareholder who possess shares of the

company. Dividend is a return to the purchasers of shares. On every year
C

ending, dividend which is declared to the shareholders is decided according to

the terms which are declared while issuing the shares. Dividend which is
received from an Indian company is not taxable in the hand of shareholder.
Dividend which is provided by the Indian company under section 2(22) (e) is
taxable in the hand of shareholder. Generally Dividend which is provided under
section 2(22) e is provided to the shareholder who has provided loan to the
company. In return to the loan which has been provided by the shareholder,
such dividend is issued to them u/s 2(22)(e). If we get loan from any one, we
provide them in return as some gifts, Jewell, etc., instead of interest so the
company provides dividend instead of interest to the loan givers as well as

2
shareholders.
Dividend which is received from a foreign company is taxable in the hands of
shareholder. Dividend which is received from a foreign or Indian company by a
co-operative society is taxable.

L
SO
Provision regarding Gift
Gift, which is provided by one person to another person without any
considerations is income under the head income from other sources so it is
taxable. Some provisions are applicable to tax the gift as income. If gift which

&
is received after 1st April, 2006 is taxable and some provisions are applicable.
The gift should be received by an individual or HUF. If the gift, which exceeds
Rs.50000/- in monitory benefit is chargeable to tax entirely. If the gift which
S
is received from relatives i.e. spouse, brothers, sisters, parents, brother-in-law,
sister-in-law, father-in-law, mother-in-law is not taxable. If the gift which is
H

received on the occasion of marriage, by will, in contemplation of death is not

taxable. Gift which is received from a local authority is not taxable.
C

Provision regarding interest on securities

PJ

Government or other organization issue securities other than shares which

provide some amount as interest in return to securities' holders issuing
securities is an another way of getting loan from public so interest is paid in
C

return to such loan. TDS is charged on the interest on securities which has
given by the company. When we calculate the taxation of interest on securities,
the grossed up amount which includes TDS is entirely taxable. There are two
types of securities. They are tax free security and taxable security. Taxable
security only attract TDS so it is necessary to gross up the net amount of tax
free security. Generally they provide the net amount after deducting the TDS
from it so we have to gross it up by reverse calculation. If a listed security
which is recognized by stock exchange and unlisted securities are taxed at 10%
of TDS. Therefore, the net amount is divided by 90 and multiplied by 100 to
gross it up. Interest on securities is taxed on the person who holds the security
3
at the time of declaring such interest. When a person sells his security at a day
before the date of declaring the interest by the company or government, interest
is provided to the person who buys it.

L
Provision regarding Winning from lottery, card game, bedding, gambling,

SO
horse race
30% TDS is attracted on the casual incomes, if the value of such casual income
exceeds Rs.5000/-. On calculating the taxable value of the casual income it is
necessary to gross it up and take the grossed up value as taxable casual income.
The net amount is divided by 70 and multiplied by 100 to gross it up.
&
Sec.57 deduction of expenses which are made for realizing the income is not
allowed for the casual incomes. Any losses on casual income are not set off
S
against the incomes of any head. Deduction of 80C to 80U is not allowed to
this income.
H
C

Deduction under section 57

Commission and remuneration which are made to receive the dividend and
interest on securities is deductible u/s 57(i). Depreciation or repairs which are
PJ

made to the furniture, plant, machinery which are let out is provided as
deduction u/s 57.Rs.15000/- or 331/3% of such income by way of pension
which received by a family is deductible u/s 57.Any expenses which are made
C

to realize the income which come under head of income from other sources.

Expenditures which are disallowed u/s 58

Personal expenses of assessee are not taxable in income tax act 1961. Interest
which are received from foreign company do not pay TDS is not allowed as
deduction. Salary which are received from foreign company do not pay TDS is
not allowed as deduction. Wealth tax is not taxable. Any expenditure in course
of winning from lottery, card game, and other games is not allowed as
deduction.
Illustration
4
Mr.x has a security of AP government. The security worth Rs.150000/- .The
rate of interest is 10%. The date of payment of interest is June 1 and December
1. He sells it on October 2011. He receives dividend from x ltd for Rs.9000/-
u/s 2(22)(e). He gets a gift from a friend for Rs.45000/-. He gets royalty income

L
of Rs.15000/-. He has won an amount of Rs.12000/- as net from horse race.
Workings:

SO
• Interest on securities worth Rs.1500000/- is 10% of 150000 = 15000.
Only 6 months interest is treated as income because he sells it on
October 2011 before December 2011.Half yearly interest is 15000*6/12
= 75000/-
&
• Gift is not exceeding Rs.50000/- so it is not taxable.
• Winning from horse race: 12000/70*100 = 17143. Grossed up value of
S
income from winning from horse race is Rs.17143/-.
H

Set Off and Carry Forward of Losses

C

While one endeavors to derive income, the possibility of incurring losses

cannot be ruled out. Based on the principles of natural justice, a set-off should
be available for loss incurred. The income tax laws in India recognize this and
PJ

provide for adjustment and utilization of the losses. However, there are
conditions which have been introduced to prevent misuse of such provisions.
To the common taxpayer, income tax is a crunch into the income earned.
C

Accordingly, awareness of the relevant provisions pertaining to set off and

carry forward of losses is essential in order to maximize tax benefits. The
relevant provisions have been summarized here:

A. Set off of loss under the same head of income.(section 70) (Intra-head
set off)
The process of adjustment of loss from a source under a particular head of
income against income from other source under the same head of income is
called intra- head adjustment, e.g. Adjustment of loss from business A against
profit from business B.
5
Income of a person is computed under five heads. ‘Sources’ of income derived
by an individual may be many but yet they could be classified under the same
head. For instance, an individual may have a dual employment, yet the income
would be classified under the head ‘Salaries’. However, given the mechanism

L
of computing taxable salary income, it would be safe to say that an individual
cannot incur losses under this head of income.

SO
Consider a situation where Harsh has two properties – one, occupied by him
and the other, let out. Harsh pays interest on loan of Rs 1.50 lakh on the
property occupied and derives net rental income of Rs 1.50 lakh from the let-
out property.
&
In case of a self-occupied property, income is computed as nil and interest
expenditure results in loss. The loss of Rs 1.50 lakh can be set off against rent
income of Rs 1.50 lakh; the income chargeable under the head ‘House
S
property’ will be ‘Nil’.
H

An exception to intra head set off is loss under the head ‘Capital gains’, which
may arise from transfer of any capital asset. Long-term capital loss arises from
C

transfer of shares or units where holding period is more than 12 months and in
respect of other assets holding period is more than 36 months prior to sale.
Transfer of assets held for less than prescribed period results in short-term
PJ

capital loss. Long-term capital loss cannot be set off against short-term capital
gains.
Further, loss incurred from speculation loss (e.g. from shares or commodities)
C

cannot be set off against any other income.

Also, it is unlikely that the benefit of set off of loss under an activity or source
will be available, where the income from an activity or source is exempt from
taxation.

Exceptions to Intra-head set off:

1. Loss from speculation business cannot be set of against profit from an non
speculation business (Interpretation: Loss from non speculative business can
be set-off against speculation income)
2. LTCL can only be set off against LTCG and cannot be set off against
6
 STCG (Interpretation: STCL can be set off against LTCG)
3. No loss can be set-off against casual income i.e. Income from lotteries,
crossword puzzles, race including horse race, card game, and any other
game of any sort or from gambling or betting of any form or nature.

L
4. No expenses can be claimed against casual income.

SO
5. Loss from the business of owning and maintaining race horses cannot be set
off against any income other than income from the business of owning and
maintaining race horses.
6. Loss from an exempted source cannot be set off against taxable Income- If
income from a particular source is exempt from tax, then loss from such
&
source cannot be set off against any other income which is chargeable to tax.
E.g., Agricultural income is exempt from tax, hence, if the taxpayer incurs
S
loss from agricultural activity, then such loss cannot be adjusted against any
other taxable income.
H

7. Loss from business specified under section 35AD cannot be set off against
any other income except income from specified business (section 35AD is
C

applicable in respect of certain specified businesses like setting up a cold

chain facility, setting up and operating warehousing facility for storage of
agricultural produce, developing and building a housing projects, etc.).
PJ

B. Set off Loss from one head against Income from another Head (Inter
head set off)
C

After making intra-head adjustment (if any) the next step is to make inter-head
adjustment. If in any year, the taxpayer has incurred loss under one head of
income and is having income under other head of income, then he can adjust
the loss from one head against income from other head, E.g., Loss under the
head of house property to be adjusted against salary income.
A person may have various sources of income computed under different heads
of income. Loss under one head of income is generally allowed to be set off
against income under another head.
For instance, X has only one property, which is occupied by him and the loss is
7
Rs 1.50 lakh. He derives salary of Rs 10 lakh during the year. Here, he can set
off the loss of Rs 1.50 lakh against his salary income by making appropriate
declarations to his employer, thereby making his net taxable income Rs 8.50
lakh. Certain exceptions to the provisions are that the loss from business or
profession cannot be set off against salary income. Capital loss, whether long

L
term or short term, can be set off only against capital gains income.

SO
Where during a given year, there is no sufficient income to absorb the loss,
unabsorbed loss can be carried forward and set off against income, in the future
years as explained here.

Exceptions to Inter-head set off:

&
1. Before making inter-head adjustment, the taxpayer has to first make intra-
head
S
2. Loss from speculative business cannot be set off against any other income.
However, non-speculative business loss can be set off against income from
H

speculative business. For Example: House property loss can be set-off

against Speculative Incomes but speculation loss cannot be set off against
C

House property)
3. Business loss cannot be set-off against salary income. (It can be set-off
against other incomes)
PJ

4. Loss under the head Capital Gains (LTCL or STCL) cannot be set-off
against any other head.(Interpretation: Loss from other heads can be set-off
against Capital Gains) For Example: HP loss can be set-off against CG but
C

LTCL or STCL cannot be set off against HP

5. No loss can be set off against Casual income from winnings from lotteries,
crossword puzzles, race including horse race, card game, and any other
game of any sort or from gambling or betting of any form or nature.
6. No expenses can be claimed against casual income
7. Loss from the business of owning and maintaining race horses cannot be set
off against any other income.
8. Loss from an exempted source cannot be set off (e.g. Share of loss of firm,
agricultural income, cultivation expenses)
9. Loss from business specified under section 35AD cannot be set off against
8
 any other income (section 35AD is applicable in respect of certain specified
businesses like setting up a cold chain facility, setting up and operating
warehousing facility for storage of agricultural produce, developing and
building housing projects, etc.)

L
A) Carry forward and set off of losses

SO
Carry forward of unadjusted loss for adjustment in next year

Many times it may happen that after making intra-head and inter-head
&
adjustments, still the loss remains unadjusted. Such unadjusted loss can be
carried forward to next year for adjustment against subsequent year(s)’ income
Separate provisions have been framed under the Income-tax Law for carry
S
forward of loss under different heads of income.
H

Unabsorbed loss under house property, capital loss and business loss can be
carried forward for 8 years. Unabsorbed speculation business loss can be
C

carried forward only for a period of 4 years.

Loss can be carried forward and set off even if the business in respect of which
it was incurred has been discontinued. However, such loss cannot be set off
PJ

against income under any other head. An exception exists in respect of

unabsorbed depreciation from business which can be set off against any other
source of income in the absence of business income and can be carried forward
C

indefinitely, even if the business through which depreciation was incurred has
ceased to exist.
Carry forward of losses (other than loss from house property and unabsorbed
depreciation) is permissible if the return of income for the year, in which loss is
incurred, is filed in time. The late filing of return should not impact the status
of carry forward of loss of previous years.
When clubbing provisions apply, loss is required to be clubbed in the same
manner as income. Such clubbed loss can be set off and carried forward, as if it
is loss determined in the taxpayer’s own case. The successor of business can
carry forward and set off the loss of his predecessor, if such succession is by
9
way of inheritance.
In light of the above, taxpayers are advised to be mindful of the relevant
provisions and seek guidance, where required, to effectively utilize their losses
and achieve optimum tax results.

L
SO
Conditions in brief related to carry forward and set-off of losses :-

1. Past year losses can be set-off against income from that respective head
of income (Inter head adjustment is not possible)
(e. g. Unadjusted loss of HP for the year 2004-05 c/f Rs. 20,000. This
&
loss can be set-off only against HP income of the year 2007-08 and not
under any other head)
S
2. The above rule (1) is not applicable to unabsorbed depreciation, which
can be set-off against any other head
H

3. All losses (Except loss due to owning and maintaining of race horses)
can be carried forward and set-off for 8 subsequent financial years
C

following the Previous Year in which such loss arose.

4. Unadjusted loss due to owning and maintaining of race horses can be
carried forward and set-off for 4 subsequent financial years following the
PJ

Previous Year in which such loss arose.

5. Unabsorbed depreciation can be carried forward for an unlimited period.
C

B) Order of Set-off of losses

In case where profits are insufficient to absorb brought forward losses, current
depreciation and current business losses, the same should be deducted in the
following order
• Current scientific research expenditure [Sec. 35(1)].
• Current depreciation [Sec. 32(1)].
• Brought forward business losses [Sec. 72(1)].
• Unabsorbed family planning promotion expenditure [Sec. 36(1)(ix)].
• Unabsorbed depreciation [Sec. 32(2)].
• Unabsorbed scientific research capital expenditure [Sec. 35(4)].
10
 • Unabsorbed development allowance [Sec. 33A(2)(ii)].
• Unabsorbed investment allowance [Sec. 32A(3)(ii)].

Set Off and Carry Forward of Losses

L
While one endeavors to derive income, the possibility of incurring losses

SO
cannot be ruled out. Based on the principles of natural justice, a set-off should
be available for loss incurred. The income tax laws in India recognize this and
provide for adjustment and utilization of the losses. However, there are
conditions which have been introduced to prevent misuse of such provisions.
To the common taxpayer, income tax is a crunch into the income earned.
&
Accordingly, awareness of the relevant provisions pertaining to set off and
carry forward of losses is essential in order to maximize tax benefits. The
relevant provisions have been summarized here:
S
H

A) Set off of loss under the same head of income.(section 70) (Intra-head
set off)
C

The process of adjustment of loss from a source under a particular head of

income against income from other source under the same head of income is
called intra- head adjustment, e.g. Adjustment of loss from business A against
PJ

profit from business B.

Income of a person is computed under five heads. ‘Sources’ of income derived
by an individual may be many but yet they could be classified under the same
C

head. For instance, an individual may have a dual employment, yet the income
would be classified under the head ‘Salaries’. However, given the mechanism
of computing taxable salary income, it would be safe to say that an individual
cannot incur losses under this head of income.
Consider a situation where Harsh has two properties – one, occupied by him
and the other, let out. Harsh pays interest on loan of Rs 1.50 lakh on the
property occupied and derives net rental income of Rs 1.50 lakh from the let-
out property. In case of a self-occupied property, income is computed as nil and
interest expenditure results in loss. The loss of Rs 1.50 lakh can be set off
against rent income of Rs 1.50 lakh; the income chargeable under the head
11
‘House property’ will be ‘Nil’.
An exception to intra head set off is loss under the head ‘Capital gains’, which
may arise from transfer of any capital asset. Long-term capital loss arises from
transfer of shares or units where holding period is more than 12 months and in

L
respect of other assets holding period is more than 36 months prior to sale.
Transfer of assets held for less than prescribed period results in short-term

SO
capital loss. Long-term capital loss cannot be set off against short-term capital
gains.
Further, loss incurred from speculation loss (eg. from shares or commodities)
cannot be set off against any other income.
&
Also, it is unlikely that the benefit of set off of loss under an activity or source
will be available, where the income from an activity or source is exempt from
taxation.
S
Exceptions to Intra-head set off:
H

1. Loss from speculation business cannot be set of against profit from an

non speculation business
C

2. (Interpretation: Loss from non speculative business can be set-off

against speculation income)
PJ

3. LTCL can only be set off against LTCG and cannot be set off against
STCG (Interpretation: STCL can be set off against LTCG)
4. No loss can be set-off against casual income i.e. Income from lotteries,
crossword puzzles, race including horse race, card game, and any
C

other game of any sort or from gambling or betting of any form or nature.
5. No expenses can be claimed against casual income
6. Loss from the business of owning and maintaining race horses cannot be
set off against any income other than income from the business of
owning and maintaining race horses.
7. Loss from an exempted source cannot be set off against taxable Income-
If income from a particular source is exempt from tax, then loss from
such source cannot be set off against any other income which is
chargeable to tax. E.g., Agricultural income is exempt from tax, hence, if
the taxpayer incurs loss from agricultural activity, then such loss cannot
12
 be adjusted against any other taxable income.
8. Loss from business specified under section 35AD cannot be set off
against any other income except income from specified business (section
35AD is applicable in respect of certain specified businesses like setting

L
up a cold chain facility, setting up and operating warehousing facility for
storage of agricultural produce, developing and building a housing

SO
projects, etc.).

B) Set off Loss from one head against Income from another Head (Inter
head set off)
&
After making intra-head adjustment (if any) the next step is to make inter-head
adjustment. If in any year, the taxpayer has incurred loss under one head of
income and is having income under other head of income, then he can adjust
S
the loss from one head against income from other head, E.g., Loss under the
head of house property to be adjusted against salary income.
H

A person may have various sources of income computed under different heads
C

of income. Loss under one head of income is generally allowed to be set off
against income under another head.
For instance, X has only one property, which is occupied by him and the loss is
PJ

Rs 1.50 lakh. He derives salary of Rs 10 lakh during the year. Here, he can set
off the loss of Rs 1.50 lakh against his salary income by making appropriate
declarations to his employer, thereby making his net taxable income Rs 8.50
lakh.
C

Certain exceptions to the provisions are that the loss from business or
profession cannot be set off against salary income. Capital loss, whether long
term or short term, can be set off only against capital gains income.
Where during a given year, there is no sufficient income to absorb the loss,
unabsorbed loss can be carried forward and set off against income, in the future
years as explained here.

Exceptions to Inter-head set off:

1. Before making inter-head adjustment, the taxpayer has to first make intra-
13
 head
2. Loss from speculative business cannot be set off against any other
income. However, non-speculative business loss can be set off against
income from speculative business. For Example: House property loss can

L
be set-off against Speculative Incomes but speculation loss cannot be set
off against House property)

SO
3. Business loss cannot be set-off against salary income. (It can be set-off
against other incomes)
4. Loss under the head Capital Gains (LTCL or STCL) cannot be set-off
against any other head.
5.

6.
Gains)
&
(Interpretation: Loss from other heads can be set-off against Capital

For Example: HP loss can be set-off against CG but LTCL or STCL

S
cannot be set off against HP
H

7. No loss can be set off against Casual income from winnings from
lotteries, crossword puzzles, race including horse race, card game, and
C

any other game of any sort or from gambling or betting of any form or
nature.
8. No expenses can be claimed against casual income
PJ

9. Loss from the business of owning and maintaining race horses cannot be
set off against any other income.
10.Loss from an exempted source cannot be set off (e.g. Share of loss of
C

firm, agricultural income, cultivation expenses)

11. Loss from business specified under section 35AD cannot be set off
against any other income (section 35AD is applicable in respect of
certain specified businesses like setting up a cold chain facility, setting
up and operating warehousing facility for storage of agricultural produce,
developing and building housing projects, etc.)

C) Carry forward and set off of losses

14
Carry forward of unadjusted loss for adjustment in next year

Many times it may happen that after making intra-head and inter-head
adjustments, still the loss remains unadjusted. Such unadjusted loss can be

L
carried forward to next year for adjustment against subsequent year(s)’ income

SO
Separate provisions have been framed under the Income-tax Law for carry
forward of loss under different heads of income.
Unabsorbed loss under house property, capital loss and business loss can be
carried forward for 8 years. Unabsorbed speculation business loss can be
carried forward only for a period of 4 years.
&
Loss can be carried forward and set off even if the business in respect of which
it was incurred has been discontinued. However, such loss cannot be set off
against income under any other head. An exception exists in respect of
S
unabsorbed depreciation from business which can be set off against any other
H

source of income in the absence of business income and can be carried forward
indefinitely, even if the business through which depreciation was incurred has
C

ceased to exist.
Carry forward of losses (other than loss from house property and unabsorbed
depreciation) is permissible if the return of income for the year, in which loss is
PJ

incurred, is filed in time. The late filing of return should not impact the status
of carry forward of loss of previous years.
When clubbing provisions apply, loss is required to be clubbed in the same
C

manner as income. Such clubbed loss can be set off and carried forward, as if it
is loss determined in the taxpayer’s own case. The successor of business can
carry forward and set off the loss of his predecessor, if such succession is by
way of inheritance.
In light of the above, taxpayers are advised to be mindful of the relevant
provisions and seek guidance, where required, to effectively utilize their losses
and achieve optimum tax results.

Conditions in brief related to carry forward and set-off of losses :-

15
 1. Past year losses can be set-off against income from that respective head
of income (Inter head adjustment is not possible)
2. (e. g. Unadjusted loss of HP for the year 2004-05 c/f Rs. 20,000. This
loss can be set-off only against HP income of the year 2007-08 and not

L
under any other head)

SO
3. The above rule (1) is not applicable to unabsorbed depreciation, which
can be set-off against any other head
4. All losses (Except loss due to owning and maintaining of race horses)
can be carried forward and set-off for 8 subsequent financial years
following the Previous Year in which such loss arose.
&
5. Unadjusted loss due to owning and maintaining of race horses can be
carried forward and set-off for 4 subsequent financial years following the
Previous Year in which such loss arose.
S
6. Unabsorbed depreciation can be carried forward for an unlimited period.
H

D) Order of Set-off of losses

C

In case where profits are insufficient to absorb brought forward losses, current
depreciation and current business losses, the same should be deducted in the
PJ

following order
• Current scientific research expenditure [Sec. 35(1)].
• Current depreciation [Sec. 32(1)].
• Brought forward business losses [Sec. 72(1)].
C

• Unabsorbed family planning promotion expenditure [Sec. 36(1)(ix)].

• Unabsorbed depreciation [Sec. 32(2)].
• Unabsorbed scientific research capital expenditure [Sec. 35(4)].
• Unabsorbed development allowance [Sec. 33A (2) (ii)].
• Unabsorbed investment allowance [Sec. 32 A (3) (ii)].

Capital Gain

Capital gain is discussed in Sec- 45 to 55(4) of the Act. It is the fourth head of
income.
16
Capital Gain – A capital gain is a profit that results from a sale of a capital
asset, such as stock, bond or real estate, where the sale price exceeds the
purchase price. The gain is the difference between a higher selling price and a

L
lower purchase price. Conversely, a capital loss arises if the proceeds from the
sale of a capital asset are less than the purchase price.

SO
Capital gains may refer to "investment income" that arises in relation to real
assets, such as property; financial assets, such as shares/stocks or bonds; and
intangible assets.

&
Any Income derived from a Capital asset movable or immovable is taxable
under the head Capital Gains under Income Tax Act 1961.
S
H

Types of Capital Gain-

C

The Capital Gains have been divided in two parts under Income Tax Act 1961
PJ

Short Term Capital Gain Long Term Capital Gain

C

1. Short Term Capital Gains : If any taxpayer has sold a Capital asset
within 36 months and Shares or securities within 12 months of its purchase
then the gain arising out of its sales after deducting there from the expenses of
sale (Commission etc) and the cost of acquisition and improvement is treated as
short term capital gain and is included in the income of the taxpayer.

The deduction u/s 80C to 80U can be taken from the income from short term
capital gain apart from the short term capital gain u/s111A

17
2. Long Term Capital Gain: A Capital Asset held for more than 36 months
and
12 months in case of shares or securities is a long term capital asset and the
gain arising there from is a long term capital gain. Long term capital gains are

L
arrived at after deducting from the net sale consideration of the long term
capital asset the indexed cost of acquisition and the indexed cost

SO
of improvement of the asset.

Chargeability (Sec- 45)

&
Any profit or gain arising from the transfer of a capital asset is chargeable to
tax in the year in which transfer take place under the head “Capital Gains”, if it
is not eligible for exemption under sec- 54, 54B, 54D, 54E, 54EA, 54EB, 54F,
S
54G and 54H. In other words, capital gains tax liability arises only when the
H

following conditions are satisfied –

1. There should be a capital asset.
C

2. The capital asset is transferred by the asseessee.

3. Such transfer takes place during the previous year.
4. Any profit or gain arises as a result of transfer.
PJ

5. Such profit or gain is not exempt from tax under relevant sections.

Capital Asset: Sec.2 (14):

C

Capital Asset means property of any kind held by an assessee whether or not
connected with his business or profession, but does not include the following
a. Stock-in-trade
b. Personal effects of the assessee
c. Agricultural land in a rural area
d. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence
Bonds, 1980 issued by the Central Government
e. Special Bearer Bonds, 1991 issued by the Central Government.
f. Gold Deposit Bonds issued under Gold Deposit Scheme 1999
18
Types of Capital Asset

1. Short term Capital Assets- It is an asset held by the assessee for not more

L
than 36 months, immediately preceding the date of transfer. However the
following financial assets shall be deemed to be short term capital assets if they

SO
are held by the assessee for more than: 12 months-
1. Shares in a company; or
2. Any other security listed on a recognized stock exchange in India; or
3. A unit of the Unit Trust of India; or

5. A zero coupon bond.

&
4. A unit of Mutual Fund. Specified in sec. 10

In other words, if these assets are held by the assessee for more than 12 months
S
they are deemed to be long term capital assets.
In the case of a financial asset which is allotted to him without any payment
H

(such as bonus share) on the basis of holding of any other financial asset, the
C

period of its holding shall be reckoned from the date of allotment of such
financial asset.
PJ

2. Long term Capital Assets- Assets which are not short term assets are long
term capital assets. In other words, such assets are held by the assessee for
more than 36 months (12 months in case of shares, securities listed on a
C

recognized stock exchange, units of the Unit Trust of India or of Mutual Fund
or Zero coupon bond) immediately prior to the date of transfer.

Transfer (Sec- 2 (74)):- Capital gain arises only on the transfer of a capital
asset. Transfer in the context of a capital asset includes –
1. Sale of Property; or
2. Exchange of property; or
3. Relinquishment i.e., Voluntary giving up; of an asset; or
4. Extinguishment of any right in the property; or
5. Compulsory acquisition of an assets under any law; or
6. Conversion of capital asset into stock in trade of his own business.
19
 7. Transaction allowing the possession of any immovable property to be
taken or retained in part performance of a contract for transfer of such
property.
8. Any transaction by way of becoming a member or a shareholder of a

L
cooperative society or a company or association or by say of any

SO
agreement or arrangement having effect of transferring enabling the
enjoyment of any immovable property.

Depreciation

Depreciation is a positive decline in the real value of tangible assets due to

&
consumption, wear and tear or obsolescence. It’s used all over the world to
write of an asset used for business purpose over its life time and charge it to the
S
profits of the business as it is used there.
H

As per section 32 of Income Tax Act, 1961, a assessee is entitled to claim

depreciation on fixed assets only if the following conditions are satisfied:
C

1. Assessee must be owner of the asset – registered owner need not be

necessary.
2. The asset must be used for the purposes of business or profession.
PJ

3. The asset must be used during the previous year.

Methods of Depreciation - Two methods of depreciation are used

C

1. Straight Line or Fixed Installment Method:

This method is the simplest and most commonly used method of charging
depreciation. Here, the amount of depreciation remains same over the expected
useful life of the asset. That is why this method is called ‘Fixed Installment
Method’. This method is also called as ‘Original Cost Method’ because a fixed
percentage of the original cost of asset is charged as depreciation during the
estimated useful life of the asset.
The amount of depreciation to be charged does not get affected by efficiency or

20
productivity of the asset. In this method the basic assumption is that the asset is
being used by the enterprise equally during the expected useful life. If we plot
the allocated amount of depreciation during the useful life of the asset, we will
find a straight line on the graph.

L
Merits:

SO
The merits of straight line method are as under:
1. Simplicity: This method is simple and calculations are easier to
understand.
2. Consistency: It is a consistent method since amount of depreciation

performance.
&
charged each year is equal. So we can easily compare the past

3. The whole cost can be charged as depreciation: Under this method,

S
the value of the asset can be reduced to its estimated scrap value (if the
asset has some residual value) or nil (if the asset has no residual value).
H

This is not possible under any other method.

4. Reasonable presentation: The balance sheet shows reasonable and fair
C

values of the assets.

Demerits:
PJ

Following are the demerits of straight line method:

1. Illogical: It is well known that the efficiency of an asset falls and the
expense on its repairs and maintenance increases gradually with the
C

passage of time. However, under this method the amount of depreciation

remains constant. Thus, the total charges (repairs and maintenance plus
depreciation) to profit and loss account increase in the later years.
2. Improper presentation: Under this method, the book value is sometimes
reduced to zero; however, it may happen that the asset is being used in
the enterprise. In that case balance sheet does not show true and fair view
of the enterprise.
3.Unsuitability: This method becomes unsuitable for certain assets in
which maintenance cost are higher in later years like plant and
machinery, land and buildings etc.

21
Suitability:
This method is suitable where:
1. The estimated useful life of an asset can be easily determined and the

L
assets which give almost equal utility in terms of productivity during the
useful life of the asset like Trademark, Copyright etc.

SO
2. The maintenance and repair cost of the assets is almost the same during
the useful life of the asset like Furniture etc.
2. Diminishing/ Reducing/ Written Down Value Method:

&
Under this method, depreciation is charged as a fixed percentage on the book
value of the asset every year. Instead of charging depreciation on the original
S
cost, depreciation is charged on reducing balance of every year (cost of the
asset minus depreciation). It is worth mentioning that though rate of
H

depreciation remains fixed, the amount of depreciation declines as the book

value of the asset reduces every year.
C

Case- In the recent case of CIT v. Star Resorts (P) Ltd . (P&H) 335 ITR 587 it
was held that Depreciation cannot be determined on the basis of estimate.
Case- CIT v E.I.H. Ltd. 54 DTR 249
PJ

Assessee obtained delivery of the new aircraft purchased by it in the latter half
of the relevant previous year and got the same insured, it was held that the
aircraft was made ready to use in business, hence depreciation was
C

allowable.(Asst year 1996-97)

Case- In the case of Chowgule & Company v ACIT, it was held that mere
accounting entries do not give right to assessee to claim depreciation on
goodwill.

Unabsorbed Depreciation (Sec- 32 (2))

If the profits and gains from business or profession less than the depreciation
allowance computed under section 32(1), then such short fall or unabsorbed
depreciation allowance shall be added to the depreciation allowance for the
following previous year or years and so on and deemed to be part of that
22
 allowance.

Case - CIT v Chennai Petroleum Corporation (2010) 125 ITD 396 (Chennai)
Assessee company was entitled depreciation in respect of gas sweetening plant

L
which was kept ready for use but could not be actually used due to lack of
availability of raw material during relevant assessment years.

SO
Block of Asset- As per S.2(11) of the Income Tax Act, 1961, unless the context
otherwise requires, the term “block of assets” means a group of assets falling
within a class of assets comprising-
(a) tangible assets, being buildings, machinery, plant or furniture;
&
(b) intangible assets, being know-how, patents, copyrights, trade-marks,
licences, franchises or any other business or commercial rights of similar
nature, in respect of which the same percentage of depreciation is prescribed.
S
Income from Residence
H

The determination of residential status of a person is very important for the

C

purpose of levy of income tax, as income tax is levied based on the residential
status of a taxpayer can be divided in the following categories-
PJ

Residential Status
C

Resident Non- Resident

Ordinary Resident Not Ordinary Resident

Determination of Residential Status of Individual

The Residential Status of an Individual is to be determined on the basis of

23
period of stay of the taxpayer in India and is computed separately for each
year. If an individual satisfies any one of the following conditions, he is said to
be Resident in India for that financial year. The conditions are:-

L
He is in India for a period of 182 days or more in that financial year

SO
OR

 He is in India for 60 days or more during that financial year and has
been in India for 365 days or more during 4 previous years immediately
preceding the relevant financial year.

&
If any one of the above conditions is satisfied, the individual is said to be
resident in India. However, if none of the conditions is satisfied, he is said to be
S
a Non Resident Indian (NRI)

Exceptions to Residential Status

H

There are 2 exceptions to the above rule of classification of Residential Status:-

C

1. In case of an individual, who is a citizen of India and who leaves India in

any financial year for the purpose of employment outside India, the
PJ

2ndcondition stated above shall not be applicable and only the 1 st

condition of 182 days or more would be applicable

2. In case of an individual who is a citizen of India or is a person of Indian

C

origin and who being outside India comes on a visit to India in any
financial year, the 2nd conditions stated above shall not be applicable and
only the 1st condition of 182 days or more would be applicable.

Classification of Ordinary Resident & Non Ordinary Resident

As per Section 6 (6), a person shall be not ordinary resident in India if he

satisfies any one of the following conditions:-
• He has been a non-resident (in the manner computed above) in 9 out of
10 years immediately preceding the Financial Year

24
 OR

• He has been in India for a period of 729 days or less in 7 previous

years immediately preceding the financial year.

L
If any 1 of the above conditions is satisfied, the person is said to be resident but

SO
not-ordinary resident in India. However, if none of the above conditions is
satisfied, the person is said to be Resident and Ordinary Resident in India.

Relevant points regarding Residential Status

Receipt of Income
&
For the purpose of levy of income tax, what is important is the 1st receipt. If an
amount is received outside India and then subsequently remitted to India, it
S
shall be a receipt outside India. Merely, because it has been remitted to India
would not make it an income received in India. For eg: A non-resident receives
H

income equivalent to Rs. 80,000 in USA but then remits it to India. This
income would not be taxable in his hands in India because it is neither earned
C

in India nor received (1st receipt) in India.

Citizenship of a Country and Residential Status

PJ

Citizenship of a country and residential status are separate concepts. A person

may be an Indian national/citizen but may not be a resident in India. On the
C

other hand, a person may be a foreign national/citizen but may be a resident in

India.

Computation of Period of Stay

In computing the period of stay for the purpose of residential status, it is not
necessary that the stay should be for a continuous period. What is to be seen is
the total number of days of stay in India during that financial year. It is also not
necessary that the stay should be only at 1 place and can be anywhere in India.

For the purpose of computing the period of 182 days for the determination of

25
residential status, the day he enters India and the day he leaves India should
both be treated as stay in India. However, in borderline cases where stay in
India is very close to 182 days, his stay in India has to be calculated on hourly
basis and a total of 24 hours will be taken as 1 day.

L
SO
Income from Business or Profession

Business: Business has been defined in Section 2(13) of the Income-tax Act.
According to this definition, business includes any trade, commerce or
manufacture or any adventure or concern in the nature of trade, commerce or
manufacture.
&
Profession: Profession has been defined in Section 2(36) of the Act to include
S
any vocation. Meaning of the term profession involves the concept of an
occupation requiring either intellectual skill or manual skill controlled and
H

directed by the intellectual skill of the operator.

Continuity of Business or Profession: Continuity in the business or

C

profession is not an essential condition for making the assessee liable to tax
under this head.
PJ

Even a single receipts arising from the exercise of a business or profession

would be chargeable to tax under this head although they may be casual and
non- recurring in nature.
C

However it is compulsory that such activity should be carried during relevant

Previous Year.
Exception: following are exceptions when receipts are taxable in Previous
year even though business may not be carried in relevant previous year.
 Recovery of any loss, trading liability earlier allowed as deduction U/S
41(1)
 Balancing charge in case of electricity company U/S 41(2)
 Sale of capital asset used for scientific research U/S 41(3)
 Recovery of bad debt U/S 41(4)
 Amount withdrawn from special reserve U/S 41(4A)
 Receipt of discountinued business under cash system of accounting U/S
26
 176 (3A)

Chargeability (Sec- 28)

L
The profits and gains of any business or profession which was carried on by the
assessee at any time during the previous year

SO
Any compensation or other payment due to or received by,—

1. any person, by whatever name called, managing the whole or

substantially the whole of the affairs of an Indian company, at or in
connection with the termination of his management or the modification
&
of the terms and conditions relating thereto;

2. any person, by whatever name called, managing the whole or

S
substantially the whole of the affairs in India of any other company, at
or in connection with the termination of his office or the modification of
H

the terms and conditions relating thereto ;

C

3. any person, by whatever name called, holding an agency in India for

any part of the activities relating to the business of any other person, at or
in connection with the termination of the agency or the modification of
PJ

the terms and conditions relating thereto ;

4. any person, for or in connection with the vesting in the Government, or

C

in any corporation owned or controlled by the Government, under any

law for the time being in force, of the management of any property or
business.

Income derived by any trade, profession or similar associations from specific

services rendered by them to their members.

Section 10(23A) provides that any income (other than income chargeable under
the head “Income from house property” or any income received for rendering
any specific services or income by way of interest or dividends derived from its
investments) of an association or institution established in India having as its
object the control, supervision, regulation or encouragement of the profession
27
of law, medicine, accountancy, engineering or architecture or such other
profession as the Central Government may specify, is exempt provided that—

 the association or institution applies its income, or accumulates it for

application, solely to the objects for which it is established; and

L
 the association or institution is for the time being approved for the

SO
purpose of this clause by the Central Government by general or special
order.

Provided further that where the conditions as given above are not complied
with, the Central Government may, at any time after giving a reasonable
opportunity of being heard, by order, withdraw the approval so granted.

I.
&
Profit on sale of licence granted under import (control) order, 1955;
S
II. Cash assistance received/receivable against export under any scheme of
Government of India;
H

III. Any custom duty or excise duty repaid or repayable as drawback against
export under duty draw back Rules, 1971;
IV. Any profit on transfer of duty entitlement pass book scheme or duty free
C

replenishment certificate;
V. The value of benefit or perquisite (convertible into money or not), arising
from business or profession;
PJ

VI. Any sum received under key-man insurance policy (including bonus).
However, where such sum is received by the employee on whose life it is
taken, it shall be taxable in the hands of such employee under the head
C

salary where employer-employee relationship exists, if no such

relationship exists, under income from other sources.

“Keyman insurance policy” means a life insurance policy taken by a

employer on the life of their employee(s) or is or was connected in any manner
whatsoever with the business of the employer.
i.Any sum received or receivable in cash or in kind, under an agreement for-
(a) Not to carrying out any activity in relation to any business; or
(b) Not to share any know-how, patent, copyright, trademark, licence, franchise
or any other business or commercial right of similar nature of information or
technique likely to assist in the manufacture or processing of goods or
provision for service.
28
 However, the above sub-clause (a) shall not apply to-
a) Any sum which is chargeable to tax under the head “capital gains”, or
b) Any sum received as compensation from MFMP (Multilateral Fund of
the Montreal Protocol) under United Nation Environment Programme.

L
ii.Any sum receivable in cash or in kind, on account of any capital assets

SO
(other than land or goodwill or financial instrument) being demolished,
discarded or transferred, if the whole of the expenditure on such capital
asset has been allowed as deduction under section 35AD.(w.e.f. A.Y. 2010-
11)

Computation of Income From Business Or Profession (Section 299

&
Income under the head profits and gains of business or profession shall be
S
computed in accordance with the provisions contained in section 30 to section
43D.
H

It must, however, be noted that the specific allowance and deduction stated in
these sections are not exhaustive, the Act further permits allowance of items of
C

expenses under the residuary section 37(1), subject to the conditions contained
therein.
Scheme of Deduction and Allowances (Sec- 30 to 37)
PJ

Rent, Rates, Taxes, Repairs And Insurance For Building Section 30

Under this section a deduction is allowed in respect of rent, rates, taxes, repairs
C

and insurance of the building used by the assessee for the purpose of his
business or profession. Deduction is allowed as under:

Nature of expenditure Deduction is allowed to

Rent of building Tenant of building
Current repair (not being capital
Owner of building
expenditure)
Repair other than current repair (not Tenant of building, if he
being-capital expenditure) undertakes to bear the cost of
repair.
29
 Land revenue, Local taxes, Municipal The assessee who occupies the
taxes, Insurance premium paid premises.

In cases where the Assessee uses the premises partly for his business or

L
professional purposes and partly for other purposes the deduction allowable
under this section is a sum proportionate to that part of the expenses which are

SO
attributable to the premises used for business or professional purposes.

Repair And Insurance Of Machinery, Plant And Furniture (Section 31)

In respect of repairs and insurance of machinery, plant or furniture used for the
purposes of the business or profession, the following deductions shall be
allowed—


&
The amount paid on account of current repairs and not Capital repairs.
Any premium paid for insurance.
S
Depreciation On Assets (Section 32)
H

Following assets are qualified for deduction under section 32(1):

C

a. Tangible assets being building, machinery, plant or furniture

b. Intangible assets being know-how, patents, copyrights, trademarks,
licences, franchises or any other business or commercial rights of similar
PJ

nature.

Case- CIT v. London Hotel

C

Building does not include land: Building means superstructure only and does
not include land because there cannot be any question of the destruction of site-

Methods of Depreciation
Depreciation under income tax is calculated by using the following methods:
 Written down value method;
 Straight line method.

Written down value method

Under this method the depreciation is charged every year at a fixed rate on the
reducing balance of the block of assets. A certain percentage is applied to the
30
previous year’s book value, to arrive at the current year’s depreciation/book
value.
Straight line method
Under this method the depreciation is calculated at a fixed rate every year on

L
the amount of actual cost of the asset. Block of assets concept is not
applicable in this case. This method is applicable on certain assets of power

SO
generating units referred to in section 32(1)(i).

Conditions For Claiming Depreciation

1. Asset must be owned (wholly or partly) by the assessee: For

&
claiming depreciation on any asset, the assessee must me the owner (wholly or
partly). Other relevant considerations are as under:
a. Registered ownership is not necessary for claiming depreciation, what
S
has to be seen beneficial ownership and not registered ownership- Mysor
minerals (SC)
H

b. Tax treatments in case of lease and hire purchase of the asset:

Following points should be noted:
C

 If the transaction is treated as a lease, the lessor shall be eligible for

depreciation on the asset. The entire lease rentals will be taxed as income of the
lessor. The lessee, correspondingly, will not claim any depreciation and will be
PJ

entitled to expense off the rentals.

 If the transaction is a hire-purchase, the hirer (i.e. hire purchaser) will be
allowed to claim depreciation. This is based on an old Circular issued in year
1943.
C

If assessee is the lessee of building and uses such building for his business or
profession and incurs any capital expenditure on repairs of such building then,
he can claim depreciation on such part.

2. Asset must be used for the purpose of business or profession: For

claiming depreciation the assets must be used by the assessee for the purpose of
business or profession. Following other points should be noted:
a. Proportionate depreciation for assets used for business as well as personal
purpose-Section 38(2): Where an asset is partly used for the purpose of
business or profession and partly for personal purpose then, under section
38(2), the depreciation under section 32(1)(ii) shall be restricted to a fair
31
proportionate part thereof which the AO may determine, having regard to the
use of such asset.
Note: While computing the WDV for next year, the depreciation actually
granted to the assessee has to be taken into consideration and not the
depreciation notionally allowed- CIT v. Chirangi Lal (1969) 74 ITR 80 (Del.)

L
b. Temple constructed inside the factory for the benefits of the employees

SO
eligible for depreciation.

3. Asset must be used during the relevant previous year: It is not

necessary that asset must be used throughout the year, even use during any part
of the year would be sufficient to claim depreciation.

&
Courts have held that, in certain circumstances, an asset can be said to be in use
even when it is “kept ready for use”. For example, depreciation can be
S
claimed by a transport company on spare engines kept in store in case of need,
though they have not actually been used by the company. Hence, in such cases,
the term “use” embraces both active use and passive use. However, such
H

passive use should also be for business purposes.

C

Computation Of Depreciation
PJ

Under section 32(1)(ii), depreciation under income tax is allowed on the basis
of written down value method.
It is not computed on the basis of individual assets rather on the basis of a
group of assets called Block of Assets which means a group of similar type of
C

assets having same rate of depreciation.

Block of Assets: Under section 2(11),

“Block of assets” means a group of assets falling within a class of assets
comprising
(i) Tangible assets, being buildings, machinery, plant or furniture.
(ii) Intangible assets, being know-how, patents, copyrights, Trademarks,
licences, franchises or any other business or commercial rights of similar
nature, in respect of which the same percentage of depreciation is prescribed.
Each class of assets has been further divided into blocks with a particular rate of
depreciation for each block. Intangible assets, however, have been grouped into
32
one block only with a depreciation rate of 25%.

Depreciation shall be allowed on the written down value (WDV) of the

Block of asset at prescribed percentage

L
Additional Depreciation. Section 32(1)(Iia)

SO
In the case of any new machinery or plant which has been acquired and
installed after the 31.03.2005, by an assessee engaged in the business of
manufacture or production, or in the business of generation or generation and
distribution of power, additional depreciation at the rate of 20% of the actual
cost of such machinery or plant shall be allowed.

 Asset must be new

&
So all of the following conditions must be fulfilled
S
 It must be installed after 31 March 2005
 It must be for manufacturing or production
H

 Power Generation and Distribution companies are also

eligible for Additional Depreciation.
C

Additional depreciation is not allowed in the following cases:

PJ

(i) Any machinery or plant which, before its installation by the assessee, was
used either within or outside India by any other person or
(ii) Any machinery or plant installed in any office premises or any
C

residential accommodation, including accommodation in the nature of a

guest-house or
(iii) Any office appliances or road transport vehicles or ships and aircraft
(iv) 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 “Profits and gains of business or profession”
of any one previous year.

If the asset is purchased and put to use for less than 180 days, additional
depreciation shall be allowed at 10% and remaining additional depreciation
shall not be allowed in the subsequent year.
33
Claiming Of Depreciation Section 32(2)

Depreciation provision shall apply whether or not the Assessee has claimed the

L
deduction in respect of depreciation in computing his total income.
Carry Forward And Set Off Of Unabsorbed Depreciation Section 32(2)

SO
The current year depreciation for any assessment year shall be set off:
(a) against the profit and gains of any business or profession carried on by the
assessee assessable for that assessment year and
(b) the balance, if any, against the income under any other head assessable
for that assessment year,
&
Depreciation to the extent not set off being unabsorbed depreciation, shall be
carried forward to the following previous year and added to the amount of
S
allowance for depreciation for the following previous year and shall be deemed
to be part of such allowance,
H

or,
If there is no depreciation allowance for the following previous year, the
C

unabsorbed depreciation shall be deemed to be the depreciation allowance for

such previous year and so on for succeeding previous year.

Unabsorbed depreciation can be carried forward indefinitely and set off

PJ

against any other head of income.

Where there is carry forward of business loss or speculation loss also then, the
order of set off shall be as under:
C

a. Set off of current year depreciation

b. Set off of brought forward business loss or speculation loss
c. Set off of unabsorbed depreciation

Set off will be allowed even if the same business to which it relates is no longer
in existence in the year in which the set off takes place.

Depreciation can be carry forward by the same assessee. Except, the following
cases:
(a) A firm is succeeded by a company [ section 47(xiii)]
a. A proprietorship concern is succeeded by a company [ section 47(xiv)]
b. In case of amalgamation
34
 c. In case of demerger
d. In case of amalgamation as given under section 72A

Expenditure On Scientific Research Section 35

L
According to section 43(4), scientific research means any activity for extension

SO
of knowledge in the fields of natural or applied sciences including agriculture,
animal husbandry or fisheries.

Under section 35 the amount deductable in respect of scientific research may be

classified as under:
1. In-house research
2. Contribution made to outsiders
&
S
Deduction Under Section 37(1)
H

Conditions for claiming deduction under section 37(1)

C

As per section 37(1),

 any expenditure (not being expenditure of the nature described in
PJ

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
C

Shall be allowed in computing the income chargeable under the head “Profits
and gains of business or profession”.
If any expenditure has been incurred by an assessee for any purpose which is
an offence or which is prohibited by law shall not be deemed to have been
incurred for the purpose of business or profession and no deduction or
allowance shall be made in respect of such expenditure. i.e. expenditure can be
claimed as deduction under section 37(1) provided the following conditions are
satisfied.

i. The expenditure must be in the nature of revenue expenditure and not a

capital expenditure.
35
ii. The expenditure must be laid out or expended wholly and exclusively for the
purposes of business or profession.

iii. The expenditure must not be in the nature of expenditure described in

L
sections 30 to 36.

SO
iv. The expenditure should not be in the nature of personal expenditure of the
assessee.

v. It has been further provided by the explanation to the section that any

&
expenditure incurred by the assessee for any purpose which is an offence or
which is prohibited by law will not be allowed as deduction.
S
Various expenditure which may be allowed under section 37(1) are as given
below:
H

1. Expenditure in connection with advertisement

C

2. Expenditure on travelling including the expenses of boarding and lodging.

PJ

3. Salary paid to the staff.

4. Expenditure in connection with entertainment of the employees or the

customers.
C

5. Expenditure in connection with opening ceremony (Mahurat) of the

business/profession.

6. Security under own your telephone scheme or tatkal telephone scheme.

Similarly, if any security has been paid in connection with telex, it is
allowed and any refund shall be considered to be income.

7. Expenditure on occasion of Diwali provided the expenses are not of

religious nature or personal nature.

8. Interest on late payment of VAT / Excise Duty / Service Tax.

36
9. Expenditure in connection with legal proceedings.

10. Legal charges for obtaining a loan from bank or financial institution etc.

L
SO
11. Damages paid to a worker in connection with his termination from the job.

12. Damages for failure to complete a contract in time.

13. Professional tax paid by a person carrying on business or profession.

14.
&
If there are expenditures like the expenditure on the filing of return of
income, filing of appeal, payment of salary to the expert staff for handling
S
income tax or wealth tax matters or there is any audit fee, expenditure is
allowed.
H

15. Expenses on registration of trade marks.

C

16. Payment of gratuity to an employee who died abroad while on business

tour
PJ

17. Fees to an architect for valuation of building

18. Legal charges in connection with amendment to Articles of Association.

C

19. Interest on overdraft utilised for payment of dividend

20. Expenditure on issue of bonus shares is revenue expenditure and is

accordingly allowed to be debited to profit and loss account as decided in

CIT v. General Insurance Corporation (2006) 156 Taxman 96 (SC). The

court held that issuance of bonus shares does not result in inflow of fresh funds
rather it is merely a reallocation of company’s funds, hence it cannot be said
that company has acquired a benefit or advantage of enduring nature.
The expenditure is revenue in nature.

37
Any other expenditure which is revenue in nature and it is related to business or
profession.

The following expenditure shall not be allowed under section 37(1).

L
1. Payment of income tax in foreign countries

SO
2. Cost of erecting the statue of the founder-chairman

3. Any fine or penalty for violating the provisions of law.

4. Interest on late payment of income tax.

5.
&
Fee paid to registrar for Change in MOA and AOA
S
6. Expenditure incurred by company for shifting of its registered office
H

7. Expense on dismantling a building to construct hotel.

C

8. Income tax paid

Expenses Not Deductible Section 40

PJ

As per Section 40 section 40A and 43B overrides section 30 to 38. So if an

expense is covered under any section from 30 to 38 and under section 40, 40A
and 43B then deduction will not be allowed until provisions of section 40A and
C

43B are satisfied.

Deduction For Interest, Royalty, Fee For Technical Services Payable
Outside India Section 40(A)(I)
Deduction shall not be allowed in respect of interest, royalty, technical fee or
other sum, which is payable:
I. outside India, or
II. in India to a non-resident or a foreign company, on which tax is deductible at
source under Chapter XVII-B and such tax-
(a) has not been deducted or,
(b) has not been paid during the previous year or in the subsequent year
before the time given u/s 200(1) [i.e. on or before 30th April]

38
Certain Deductions To Be Only On Actual Payment Section 43B
Under section 145, every assessee is allowed to maintain the books of accounts
either on cash basis or on the basis of mercantile system of accounting. If the
books are maintained on mercantile system, then all the expenditures are
allowed on due basis. But the expenditures listed under section 43B are allowed

L
only on actual payment basis.

SO
These expenditures are: -
a. Any sum payable by the assessee by way of tax, duty, cess or fee, by
whatever name called, under any law like Municipal Tax, Professional
Tax , Composition Tax etc.
b. Employer’s contribution to any provident fund or superannuation
fund or gratuity fund, ESI or any other fund for the welfare of
employees. &
c. Bonus or commission to the employee.
S
d. Interest on any loan or borrowing from any Public Financial
Institution or a State Financial Corporation or a State Industrial
Investment Corporation.
H

e. Interest on any loans and advances from a scheduled bank.

f. Leave salary to the employees
C

The assessee is allowed to make the payment till the last date of filing of return
of income relating to the previous year in which the expenditure was incurred.
The assessee has also to furnish the proof of having made the payment, with the
PJ

return of income.

If the payment is made after the last date of filing of return of income,
C

expenditure is allowed in the year in which the assessee has made the payment.

39