Income Tax
Income Tax
PRACTICE
STUDY MATERIAL
B.COM./BBA/MBA
EASYNOTES4U
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CONTENTS
6 Capital Gains 54
8 Clubbing of Incomes 74
Chapter 1
Income Tax in India --- An Introduction
BRIEF HISTORY OF INCOME TAX IN INDIA
In India, Income tax was introduced for the first time in 1860, by Sir James Wilson in order to
meet the losses sustained by the Government on account of the Military Mutiny of 1857.
Thereafter; several amendments were made in it from time to time. In 1886, a separate Income tax
act was passed. This act remained in force up to, with various amendments from time to time. In
1918, a new income tax was passed and again it was replaced by another new act which was
passed in 1922.This Act remained in force up to the assessment year 1961-62 with numerous
amendments. The Income Tax Act of 1922 had become very complicated on account of
innumerable amendments. The Government of India therefore referred it to the law commission
in1956 with a view to simplify and prevent the evasion of tax. The law commission submitted its
report-in September 1958, but in the meantime the Government of India had appointed the Direct
Taxes Administration Enquiry Committee submitted its report in 1956.In consultation with the
Ministry of Law finally the Income Tax Act, 1961 was passed. The Income Tax Act 1961 has
been brought into force with 1 April 1962. It applies to the whole of India including Jammu and
Kashmir.
Income-tax law in India
The income tax law in India consists of the following components:
1. Income tax Acts
2. Income tax rules
3. Finance Act
4. Circulars, notifications etc
5. Legal decision of courts.
Finance Act:
Every year, the Finance Minister of the Government of India presents the Budget to the
Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the
President of India, it becomes the Finance Act.
Income-tax Rules:
The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).
The CBDT is empowered to make rules for carrying out the purposes of the Act. For the proper
administration of the Income-tax Act, the CBDT frames rules from time to time. These rules are
collectively called Income-tax Rules, 1962.
Circulars and Notifications:
Circulars are issued by the CBDT from time to time to deal with certain specific problems and to
clarify doubts regarding the scope and meaning of the provisions. These circulars are issued for
the guidance of the officers and/or assessees.
Important Definitions
Assessment Year : Section 2(9)
“Assessment year” means the period starting from April 1 and ending on March 31 of the next
year. Eg: Assessment year 2013-14 which commences on April 1, 2013 and ends on March 31,
2014. Income of previous year of an assessee is taxed during the assessment year at the rates
prescribed by the relevant Finance Act for tax rates.
Income Tax Law and Practice Page 4
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(16) Any sum received under a Keyman insurance policy including the sum allocated by way of
bonus on such policy will constitute income. “Keyman insurance policy” means a life insurance
policy taken by a person on the life of another person where the latter is or was an employee or is
or was connected in any manner what so ever with the former’s business.
(17) Any sum referred to clause (va) of Section 28. Thus, any sum, whether received or receivable
in cash or kind, under an agreement for not carrying out any activity in relation to any business; or
not sharing any know-how, patent, copy right, trade-mark, licence, franchise, or any other
business or commercial right of a similar nature, or information or technique likely to assist in the
manufacture or processing of goods or provision of services, shall be chargeable to income tax
under the head “profits and gains of business or profession”.
(18) Any sum of money or value of property referred to in section 56(2)(vii) or section
56(2)(viia).
(19) Any consideration received for issue of shares as exceeds the fair market value of shares
referred to in section 56(2)(viib).
Gross Total Income Sec: 80b (5)
As per section 14, the income of a person is computed under the following five heads:
1. Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
If the income is not derived from any of the above sources, it is not taxable under the act. The
aggregate income under these heads is termed as “gross total income”.
Total Income Sec : 2(45)
Total income means the the amount left after making the deductions under section 80C to 80U
from the gross total income.
Casual Income
Any receipt which is of a casual and non-recurring nature is called casual income. Casual income
includes the following receipts:
1. Winning from lotteries,
2. Winning from crossword puzzles,
3. Winning from races (including horse races),
4. Winning from card games and other games of any sort
5. Winning from gambling or betting of any form or nature.
Individual- Senior citizen (60 years or more but less than 80 years):
Upto Rs: 2,50,000 : Nil
Rs: 2,50,001 to 5,00,000 : 10%
Rs: 5,00,001 to 10,00,000 : 20%
Above Rs:10,00,000 : 30%
Other individuals, HUF, AOP, BOI:
Upto Rs: 2,00,000 : Nil
Rs: 2,00,001 to 5,00,000 : 10%
Rs: 5,00,001 to 10,00,000 : 20%
Above Rs: 10,00,000 : 30%
Special Rates:
On short term capital gains specified in Sec. 111A : 15%
On long term capital gains : 20%
On gains from listed shares without indexing the cost of acquisition : 10%
On winnings from lottery, cross word puzzle, horse race, etc. : 30%
Surcharge: Nil
Education Cess: 3% on the amount of income tax.
Agriculture income
Agriculture income is exempt under the Indian Income Tax Act. This means that income earned
from agricultural operations is not taxed. The reason for exemption of agriculture income from
Central Taxation is that the Constitution gives exclusive power to make laws with respect to taxes
on agricultural income to the State Legislature. However while computing tax on non-agricultural
income agricultural income is also taken into consideration. As per Income Tax Act income
earned from any of the under given three sources meant Agricultural Income;
(i) Any rent received from land which is used for agricultural purpose.
(ii) Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the market,
or sale of such produce.
(iii) Income attributable to a farm house subject to the condition that building is situated on or
in the immediate vicinity of the land and is used as a dwelling house, store house etc.
Now income earned from carrying nursery operations is also considered as agricultural income
and hence exempt from income tax.
In order to consider an income as agricultural income certain points have to be kept in mind:
(i) There must me a land.
(ii) The land is being used for agricultural operations.
(iii) Agricultural operation means that efforts have been induced for the crop to sprout out of the
land .
(iv) If any rent is being received from the land then in order to assess that rental income as
agricultural income there must be agricultural activities on the land.
(v) In order to assess income of farm house as agricultural income the farm house building must
be situated on the land itself only and is used as a store house/dwelling house.
1 Its effect is temporary, i.e. the Its effect is long-term, i.e. it is not exhausted
benefit is received within the within the current accounting year-its benefit is
accounting year. received for a number of years in future.
2 Neither an asset is acquired nor is An asset is acquired or the value of an existing
the value of an asset increased. asset is increased.
3 It has no physical existence because Generally it has physical existence except
it is incurred on items which are intangible assets.
used by the business.
4 It is recurring and regular and it It does not occur again and again. It is
occurs repeatedly. nonrecurring and irregular.
5 This expenditure helps to maintain This expenditure improves the position of the
the business. business.
6 The whole amount of this A portion of this expenditure (depreciation on
expenditure is assets) is shown in trading & P & L A/c and the
shown in trading P & L A/c or balance are shown in the balance sheet on asset
income statement. side.
7 It does not appear in the balance It appears in the balance sheet until its benefit is
sheet. fully exhausted.
8 It reduces revenue (profit) of the It does not reduce the revenue of the concern.
business
Residential Status And Tax Incidence
Tax incidence on an assessee depends on his residential status. The residential status
of an assessee is determined with reference to his residence in India during the previous year.
Therefore, the determination of the residential status of a person is very significant in order to find
out his tax liability. Residence and citizenship are two different things. The incidence of tax has
nothing to do with citizenship.
Residential Status of an Individual
As per section 6, an individual may be (a) resident and ordinarily resident in India, (b)
resident but not ordinarily resident in India, or(c) non-resident in India. The following are the two
sets of conditions for determining the residential status of an individual:
Basic conditions :
He is in India in the previous year for a period of 182 days or more
OR
He is in India for a period of 60 days or more during the previous year and has been in
India for a period of 365 days or more during 4 years immediately preceding the
previous year.
Note: In the following two cases, an individual needs to be present in India for a minimum
of 182 days or more in order to become resident in India:
The following perquisites are taxable in case of every employee, whether specified or not:
1. Rent free house provided by employer
2. House provided at concessional rate
3.Any obligation of employee discharged by employer e.g. payment of club or hotel bills of
employee, salary to domestic servants engaged by employee, payment of school fees of
employees’ children etc.
4. Any sum paid by employer in respect of insurance premium on the life of employee
5. Notified fringe benefits (on which fringe benefit tax is not applicable) – it includes interest free
or concessional loans to employees, use of movable assets, transfer of moveable assets.
Perquisites taxable in case of Specified Employees only
Specified Employee:
An Individual will be considered as a Specified Employee if:
• He is a director of a company, or
• He holds 20% or more of equity voting power in the company,
• Monetary salary in excess of 50,000: His income under the head salaries, (from any employer
including a company) excluding non-monetary payments exceeds 50,000. For the above purpose,
salary, should be arrived at after making the following deductions:
(a) Entertainment Allowance
(b) Professional Tax.
The following perquisites are taxable in case of such employees:
1. Free supply of gas, electricity or water supply for household consumption
2. Free or concessional educational facilities to the members of employees household
3. Free or concessional transport facilities
4. Sweeper, watchman, gardener and personal attendant
5. Any other benefit or amenity
Illustration:9
Following particulars are furnished by Muhammed Labeeb, a citizen and resident in India:
Basic salary after deduction of contribution to RPF Rs: 2,40,000
Own contribution to RPF Rs:20,000
Interest credited to RPF @9.5% Rs:3,600
HRA (house is at Kolar and rent paid amount to Rs:30,000) Rs: 14,400
Unit-linked insurance plan contribution paid by employer Rs: 2,000.
Compute taxable income from salary of Muhammed Labeeb for the A.Y.2013-14.
Solution:
Computation of Income from Salary for the assessment year 2013-14
Basic salary ( 2,40,000+20,000) 2,60,000
HRA (14,400-4,000) 10,400
Ulip paid by employer 2,000
Gross Salary 2,72,400
Less: Deductions Nil
Taxable Salary 2,72,400
Notes: Least of the following is exempt:
Actual HRA Rs:14,400
Excess of rent paid over 10% of salary (30000-26000) Rs:4,000
40% of salary Rs: 1,04,000
The annual value of a property, consisting of any buildings or lands appurtenant thereto, of
which the assessee is the owner, is chargeable to tax under the head ‘Income from house
property’. However, if a house property, or any portion thereof, is occupied by the assessee, for
the purpose of any business or profession, carried on by him, the profits of which are chargeable
to income-tax, the value of such property is not chargeable to tax under this head.
Thus, three conditions are to be satisfied for property income to be taxable under this head:
1. The property should consist of buildings or lands appurtenant thereto.
2. The assessee should be the owner of the property.
3. The property should not be used by the owner for the purpose of any business or profession
carried on by him, the profits of which are chargeable to income-tax.
Ownership of house property
It is only the owner (or deemed owner) of house property who is liable to tax on income under
this head. Owner may be an individual, firm, company, co-operative society or association of
persons. The property may be let out to a third party either for residential purposes or for business
purposes. Annual value of property is assessed to tax in the hands of the owner even if he is not in
receipt of the income. For tax purposes, the assessee is required to be the owner in the previous
year only.
Deemed Owner [Section 27]
1. Owner: An Individual shall be considered as owner of a property when the document of title to
the property is registered in his name.
2. Deemed Owner: Under the following circumstances, Income from House Property is taxable
in the hands of the Individual, even if the property is not registered in his name —
(a) Where the Property has been transferred to spouse for inadequate consideration other than in
pursuance of an agreement to live apart.
(b) Where the Property is transferred to a minor child for inadequate consideration (except a
transfer to minor married daughter)
(c) Where the Individual holds an impartible estate.
(d) Where the Individual is a member of Co-operative Society, Company, or other Association
and has been allotted a house property by virtue of his being a member, even though the property
is registered in the name of the Society / Company / Association.
(e) Where the property has been transferred to the individual’s name as part-performance of a
contract u/s 53A of the Transfer of Property Act, 1882. (i.e. Possession of the Property has been
transferred to Individual, but the Title Deeds have not yet been transferred).
(f) Where the Individual is a holder of a Power of Attorney enabling the right of possession or
enjoyment of the property.
(g) Where the property has been constructed on a leasehold land.
(h) Where the ownership of the Property is under dispute.
(i) )Where the property is taken on a lease for a period of not less than 12 years, then the lessee
shall be deemed as the owner of the property.
However, if the borrowal is for repairs, renewals or reconstruction, the deduction is restricted to
Rs.30, 000. If the borrowal is for construction/acquisition, higher deduction as noted above is
available. If a person owns more than one house property, using all of them for self-occupation,
he is entitled to exercise an option in terms of which, the annual value of one house property as
specified by him will be taken at Nil. The other self occupied house property/is will be deemed to
be let-out and their annual value will be determined on notional basis as if they had been let out.
Annual Value of a house property which is partly self – occupied and partly let out: If a house
property consists of two or more independent residential units, one of which is self – occupied
and the other unit(s) are let out, the income from the different units is to be calculated separately.
Illustration:1
Compute Gross annual value:
Actual rent Rs: 24,000 p.a.
Fair rent Rs:28,000 p.a.
Standard rent Rs: 20,000 p.a.
Solution:
Gross Annual Value = ERV or Actual Rent Received for full year, whichever is higher.
Here Rent Control Act is applicable.
FRV =Rs: 28,000 ; SRV = 20,000
Therefore, ERV = 20,000.
Actual Rent = 24,000
So, GAV = 24,000.
Illustration:2
Calculate annual rental value from the following particulars for the assessment year 2013-
14.Actual rent Rs: 14,000 p.m.; MRV Rs: 1,20,000 p.a.; FRV Rs:1,32,000 p.a. Standard rent Rs:
1,38,000. During the P.Y. the assessee is not able to realise two months rent.
Solution:
Expected Rental Value = 1,32,000
Actual rent for the full year (14,000x12) = 1,68,000
Therefore, GAV = 1,68,000.
Annual Value = 1,68,000 – unrealised rent
= 1,68,000 -- 28,000 = 1.40,000.
========
House-1 House-2
Municipal value 30,000 35,000
Actual rent 40,000 32,000
FRV 36,000 30,000
SRV 30,000 36,000
Municipal tax paid 4,000 3,500
Solution:
MRV or FRV (higher) 36,000 35,000
SRV 30,000 36,000
ERV (Lesser of the above 2) 30,000 35,000
Actual Rent 40,000 32,000
GAV (higher of 3 and 4) 40,000 35,000
Less : Municipal Taxes 4,000 3,500
Annual Value 36,000 31500
====== ======
Illustration:5
Mr. Abhinand constructed one house in 2010. Half of the portion is let out and the remaining half
is used for his residence. The following particulars are available:
MRV Rs: 12,500; Rent received Rs:10,000 ; Municipal taxes Rs:2,500 ; Ground rent Rs;250 ;
Repairs Rs:2,000 ; Interest on loan taken for construction Rs: 2,500.
Compute income from house property of Mr. Abhinand for the AY 2013-14.
Second House:
Annual Value : 14,400
Less : Loss for vacancy period : 3,600
Unrealised rent : 13,000 16,600 --2,200
(b) deposited any amount in an account (hereafter in this section referred to as the Site
Restoration Account) opened by the assessee.
Expenditure on scientific research (section 35)
The word 'Scientific Research' has been defined as 'an activity for the extension of knowledge in
the fields of natural or applied sciences including agriculture, animal husbandry or fisheries'. Such
an activity may result in an improved efficiency and thereby increases the productivity of the
process. So, in order to encourage people to enhance the productivity, government has provided
certain tax incentives under this section for expenditure incurred in respect of Scientific Research.
Such Scientific research may be carried out for the purpose of
(a) Extension of business;
(b) Providing medical facilities to the employees.
Deduction under this section is allowed in two ways
(A) When assessee takes up scientific research on his own
(B) When assessee contributes amount for scientific research to an approved body.
The provisions of both are given below.
(A) When assessee takes up scientific research on his own:
When assessee carries on any scientific research, the expenditure incurred by him for such may be
(a) Revenue expenditure or
(b) Capital expenditure.
The treatment of above is as follows.
(a) Revenue expenditure:
Any revenue expenditure incurred by the assessee in respect of scientific research within 3 years
immediately preceding the year of commencement of business shall be allowed deduction in the
year of commencement. Such revenue expenditure may be in respect of salaries (excluding any
perquisites) payable to the staff involved in the research; for acquiring the inputs required to carry
out the research or any such eligible expenditure.
(b) Capital expenditure:
Any Capital expenditure incurred by the assessee is deductible 100% in the year it is incurred.
(4) Amount contributed to National Laboratory [Section 35(2AA)]:
Any amount contributed by the assessee to a National laboratory* or University or IIT or to a
specified person (approved by prescribed authority) with a specific direction that the amount shall
be used for the purpose of scientific research, shall be given a weighted deduction of 2 times
(from the Assessment year 2012-13. For AY2011-12, it is given to the extent of 1.75 times only
and before that 1.25 times only)
*National Laboratory
(I) Building:
(1)Residential Buildings except hotel and boarding houses ……………..5%
(2)Non-residential Buildings [office, factory, godown, hotels, ………..10%
boarding houses but other than (1) above and (3)(i)below]
(3) (i) Buildings for installing Plant and Machinery forming part of water supply or water
treatment system for infrastructure business u/s 80-India IA (4)(i). (ii) Purely temporary erections
such as wooden structures ……………………………….100%
Intangible Assets
(13) Know-how, patents, copyrights, trademarks, licences, franchises, or any other business or
commercial rights of similar nature …………25%
llustration: 1 The net profit of business of Mr. Baveesh as disclosed by its P&L account was
Rs:3,25,000 after charging the following:
Municipal taxes on house property let out Rs:3,000
Bad debt written off Rs:15,000
Provision for bad and doubtful debts Rs: 16,000
Provision for taxation Rs: 15,000
Solution:
Computation of income from busines
Particulars Rs Rs
Net profit 3,25,000
Add: Municipal taxes 30000
Provision for bad debts 16000
Provision for taxation 15000
Excess epreciation 5000 39,000
Business Profit 3,64,000
Illustration:2
From the following P&L account, compute income from business:
PROFIT AND LOSS ACCOUNT
To Salaries 14,600 By G/p 1,35,000
To household expense 2000
To income tax 900
To Gifts 900
To business expense 2,200
To LIC premium 2,100
To bad debt reserve 800
To N/P 1,11,500
1,35,000 1,35,000
Solution:
Computation of income from business for the A Y 2013-14
Net Profit as pe P&L Account : 1,11,500
Add : Expenses Disallowed:
Household expenses 2,000
Income tax 900
Gift 900
LIC Premium 2,100
Bad debt reserve 800 6,700
Income from business 1,18,200
=======
Illustration:3
Dr. Biju is a medical practitioner in Mahe. From the following, calculate his income from
profession for the AY 2013-14:
Solution:
Computation of income from profession for the AY 2013-14
Illustration:5
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.
Income Tax Law and Practice Page 52
Solution:
Computation of Depreciation
Factory building : W.D.V on 1-4-2012 Rs: 14,00,000
Additions made on 1-6-2012 Rs: 6,00,000
-------------------
Rs: 20,00,000
Less: Amount received from the insurance company Rs:60,000
Amountb received from the sale of scrap Rs:10,000 Rs: 70,000
Written Down Value of factory building for the AY 2013-14 Rs: 19,30,000
Therefore, Depreciation @ 10% Rs: 1,93,000
==========
Illustration:6
From the following figures, you are required to calculate the depreciation admissible during the
previous year:
Plant & Machinery(Rs:) Building(Rs:)
W.D.V. at the beginning of the year 3,75,000 15,00,000
Purchased during the year 4,50,000 Nil
Sales during the year 7,75,000 3,00,000
Solution:
Computation of Depreciation
Particulars Plant & Machinery Building
Rate = 15% Rate = 10%
W.D.V at the beginning of the year 3,75,000 15,00,000
Add: Purchase 4,50,000 Nil
Total 8,25,000 15,00,000
Less: sales 7,75,000 3,00,000
W.D.V. 50,000 12,00,000
Depreciation 7,500 1,20,000
xxxxxxxx
Capital Asset: Sec. 2(14): Capital Asset means property of any kind (Fixed, Circulating,
movable, immovable, tangible or intangible) whether or not connected with business or
profession.
Exclusions —
a. Stock-in-trade
b. Personal effects of the assessee i.e., personal use excluding jewellery, costly stones, silver,
gold
c. Agricultural land in a rural area i.e., an area with population more than 10,000.
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 2000
Short-term capital asset: Sec. 2(42A): means a capital asset held by an assessee for not more
than thirty six months immediately preceding the date of its transfer. However, in the following
cases, an asset, held for not more than twelve months, is treated as short-term capital asset—
a. Quoted or unquoted equity or preference shares in a company
b. Quoted Securities
c. Quoted or unquoted Units of UTI
d. Quoted or unquoted Units of Mutual Funds specified u/s. 10(23D)
e. Quoted or unquoted zero coupon bonds
Long-term capital asset: Sec. 2(29A): means a capital asset which is not a short-term capital
asset. Under the existing law, profits and gains arising from the transfer of capital asset made in a
previous year is taxable as capital gains. A capital asset is distinguished on the basis of the period
of holding. A capital asset, which is held for more than three years, is categorized as a long-term
capital asset. However, if the capital asset is in the nature of equity, it is categorized as a long-
term capital asset if it is held for more than one year. All capital assets other than long-term
capital asset are termed as a short-term capital asset.
Cost of Acquisition
Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset
under transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the
form of registration, storage etc. expenses incurred on completing transfer. In other words, cost of
acquisition of an asset is the value for which it was acquired by the assessee. Expenses of capital
nature for completing or acquiring the title are included in the cost of
acquisition.
Cost to the previous owner deemed to be the cost of acquisition: If the asset is acquired by an
assessee in the following circumstances the cost of acquisition of the asset shall be deemed to be
the cost for which the previous owner of the property acquired it.
1. On any distribution of asset on the total or partial partition of a HUF or
2. Under gift or will
3. By succession , inheritance or devolution or
Computation of capital gains in case of slump sale: Any gain arising from the slump sale
effected in the previous year shall be chargeable as long term capital gains of the previous year in
which the transfer take place.
Expenditure on transfer
Expenditure incurred wholly and exclusively for transfer of capital asset is called expenditure on
transfer. It is fully deductible from the full value of consideration while calculating the capital
gain. Examples of expenditure on transfer are the commission or brokerage paid by seller, any
fees like registration fees, and cost of stamp papers etc., travelling expenses, and litigation
expenses incurred for transferring the capital assets are expenditure on transfer.
Note: Expenditure incurred by buyer at the time of buying the capital assets like brokerage,
commission, registration fees, cost of stamp paper etc. are to be added in the cost of acquisition
before indexation.
Exemption from Capital Gains
Capital gain arising on the transfer of property used for residence: -
The exemption u/s 54 relates to the capital gain arising out of transfer of residential house. The
exemption is available to only Individual assessee. The exemption relates to the capital gains
arising on the transfer of a residential house.
Conditions: Exemption is available if: -
1. House Property transferred was used for residential purpose.
2. House Property was a long term capital asset.
3. Assesses has purchased another house property within a period of one year before or two years
after the date of transfer or has constructed another house property within three years of date of
transfer i.e. the construction of the new house property should be completed within three years.
The date of starting of construction is irrelevant. Where the amount of capital gain is not utilized
by the assessee for acquisition of new house before the due date, it shall be deposited by him on
Solution:
Computation of capital gains for the AY 2013-14
Particulars Rs: Rs:
Selling price of the house 4,50,000
Less: Brokerage 13,500
Indexed cost 1,80,000 1,93,500
Long terrm capital gain 2,56,500
Less: Cost of new house 2,00,000
Taxable Capital Gain 56,500
Illustration:2
Mr. Irfan provides you the following information to the sale of residential house. Calculate his
capital gain for the AY 2013-14.
House purchased in January, 1989 Rs:4,83,000
Sold the house in August, 2012 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 1988-89 was 161 and for 2012-13 was852.
Solution:
Computation of capital gains for the AY 2013-14
Particulars Rs: Rs:
Sale of asset in August,2012 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:3
Mr. Anandamurthy showed his block of assets as on 1-4-2012 at a WDV of Rs:1,50,000. He
purchased another asset within the block during the year 2012-13 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 2013-14.
Illustration:4
Mr. Varma purchased a plot in 1986-87 for Rs: 1,40,000. It was sold on 15-1-2013 for
Rs:15,80,000 and he paid Rs:1,00,000 as brokerage. He invested Rs:2,00,000 in NHAI bonds on
31-3-2013 and Rs: 3,10,000 in bonds issued by Rural Electrification Corporation Ltd. on 1-8-
2013. Compute his taxable capital gain, if the CII for 1986-87 was 140 and for 2012-13 is 852.
Solution:
Computation of capital gains for the AY 2013-14
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 1984-85 for Rs: 75,000 sold for Rs: 7,20,000 on 01-05-2012. The
assessee purchased another piece of agricultural land on 01-08-2012 for Rs:80,000 and deposited
Rs:50,000 in Capital Gains Account Scheme, 1988. Compute tha Capital Gain chargeable to tax
for the AY 2013-14. CII in 1984-85 was 125 and in 2012-13 is 852.
Solution:
Computation of capital gains for the AY 2013-14
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
Less: Cost of new agri. land 80,000
Deposit in Capital Gains Account 50,000 1,30,000
Taxable Capital Gains 78,800
Illustration:7
From the following particulars, calculate capital gains:
Self-generated goodwill of a business sold for Rs: 14,00,000. Bonus shares in B.Ltd. (not listed)
and ( being STCA) sold for Rs:8,00,000. Business income Rs: 60,000. LTCl in the transfer of a
building Rs: 40,000. Face value of bonus shares sold Rs:6,00,000.
Solution:
Computation of Capital Gains for the AY 2013-14
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
xxx
Dividend
The dividend is the distribution of divisible profits by a joint stock company to its shareholders
by way of return on investments in the shares of the company. Dividend from an Indian company
is exempted from tax.
Winnings from lotteries & betting, crossword puzzles, horse races and card games etc. sec. 115
BB.
It also includes income through draw of lots, television game shows and similar other games.
Taxable at a flat rate of 30% without claiming any allowance or expenditure. Even if income is
less than Rs 2,00,000 for the financial year 2012–13, these incomes are fully taxable Income from
Units of UTI and Mutual Fund :Income from units of UTI and Mutual Fund is exempt from tax as
per section 10(35).
Lottery includes winnings, from prizes awarded to any person by draw of lots or by chance or in
any other manner whatsoever, under any scheme or arrangement by whatever na me called. Card
game and other game of any sort includes any game show, an entertainment programme on
television or electronic mode, in which people compete to win prizes or any other similar game.
Deductions u/s 80C to 80U is not available against such incomes. Surcharge & education cess
will apply in a usual way.
Net amount received X 100
Formula for grossing up = --------------------------------------
100--Rate of TDS
Note : No TDS is deducted if Lottery Price is less than Rs.10,000 but still the tax is payable by
the assessee. Similarly no TDS in case of Winning from other races, gambling or betting.
Interest on securities
The income from interest on securities shall be chargeable to tax under income from
other sources, if it is not taxable under the head income from business or profession.
The following amounts due to an assessee in the previous year shall be chargeable to
income tax as interest on securities.
1. Interest on any security of the central or state govts.
2. Interest on debentures or other securities issued by a local authority.
3. Interest on debentures issued by a company (whether Indian or foreign)
4. Interest on debentures or other securities issued by statutory corporation.
Kinds of securities
There are four types of securities.
Tax free government securities: The interest on these securities is fully exempt from tax. The
interest on such securities is neither included in total income nor taxed.
Less tax government securities: These securities are issued by central govt or state government.
These securities are taxable securities. But no tax is deducted at source on such securities.
Therefore the interest on such securities will not be grossed up.
Tax free commercial securities: These securities are issued by local authority or Statuary
Corporation or a company in the form of debentures or bonds. Actually the interest is not tax free.
Income tax due on this interest is payable by the company or authority or Statuary Corporation.
These are called tax free because the assessee is not required to pay tax on it. The interest due to
an assessee is grossed up and this grossed up amount is included in the total income.
Less tax commercial securities: These are taxable securities. In this case income tax is deducted
at source on the amount of interest calculated at the percentage stated on the securities. In this
type of securities, if the net amount of interest is given, it has got to be grossed up. If the rate of
percentage of interest is given it is not grossed up.
Bond washing transaction
A bond-washing transaction is a transaction where securities are sold sometime
before the due date of interest and reacquired after the due date is over. This practice is adopted
by persons in the higher income group to avoid tax by transferring the securities to their
relatives/friends in the lower income group just before the due date of payment of interest. In such
a case, interest would be taxable in the hands of the transferee, who is the legal owner of
securities. In order to discourage such practice, section 94(1) provides that where the owner of a
security transfers the security just before the due date of interest and buys back the same
immediately after the due date and interest is received by the transferee, such interest income will
Illustration :2
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
Illustration:3
From the following particulars submitted by Sri. Mani Shankar Iyer, compute his income from
other sources for the AY 2013-14 :
As Director of ABC Ltd. he received Rs: 12,000 p.m. as salary and Rs:1,200 p.m. as
entertainment allowance. The company provides him a car for both official and personal
use. The personal use is estimated to be 50%. The company incurs an expenditure of
Rs:16,000 on running and maintenance of the car {for both official and personal use) and
depreciation of the car may be taken as Rs: 14,000.
He was also a Director in another company from which he received Rs: 13,000 as
Director’s fee.
Interest received on deposits with a Co-operative bank limited Rs:2,000.
Dividend received from a foreign company Rs: 6,000.
Received winnings from lottery Rs: 24,500
Income from agricultural land in England Rs: 78,000.
Honorarium for delivering lectures in a registered society Rs:1,200.
Solution:
Computation of Income from Other Sources For the AY 2013-14
Particulars Rs:
Director’s fee 13,000
Interest on deposits with Co-operative Bank 2,000
Dividend from a foreign company 6,000
Winnings from lottery ( 24500 X 100/70) 35,000
Agri. Income from England 78,000
Honorarium for Lectures 1,200
Income from other sources 1,35,200
Illustration:4
Compute income from other sources of Mr. Ajayakumar for the AY 2013-14. 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
Illustration:5
The following are the details relating to Mr. Siddharth for the P.Y. 2012-13. Compute income
from other sources:
Income from agriculture in Pakistan Rs: 5,000
Interest on post office savings bank Rs: 1,000
Dividend from foreign company Rs: 700
Dividend from Indian company Rs:1,000
Rent from sub-letting house Rs: 26,250
Expenses for sub-letting house Rs: 1,000
Winning from lottery (Net) Rs: 14,000
Solution:
Computation of Income from Other Sources For the AY 2013-14
Particulars Rs:
Income from agriculture 5,000
Interest on P.O.S.B. Exempt
Dividend from foreign company 700
Dividend from Indian company Exempt
Rent from sub-letting house 26,250
Less: Expenses 1,000 25,250
Winnings from lottery (14,000 x 100/70) 20,000
Income from Other Sources 50,950
Xxx
Clubbing of income means Income of other person included in assesse’s total income, for
example: Income of husband which is shown to be the income of his wife is clubbed in the
income of Husband and is taxable in the hands of the husband. Under the Income Tax Act a
person has to pay taxes on his income. A person cannot transfer his income or an asset which is
his one of source of his income to some other person or in other words we can say that a person
cannot divert his income to any other person and says that it is not his income. If he do so the
income shown to be earned by any other person is included in the assessee’s total income and the
assessee has to pay tax on it. Inclusion of other’s Incomes in the income of the assessee is called
Clubbing of Income and the income which is so included is called Deemed Income. It is as per the
provisions contained in Sections 60 to 64 of the Income Tax Act. For example: A purchased a
house property in the name of his wife B. A let out this house property. The rental income earned
by A in name of his wife B is taxable in the hands of A.
Clubbing of Income takes place in the following cases:
1. Transfer of income without transfer of Asset: If any person transfers income without
transferring the ownership of the asset, such income will be taxable in the hands of the transferor.
Ex. X owns 4000, 14% debentures of A ltd. of Rs. 100 each , he transfers interest income to his
friend Y without transferring the ownership of Debentures . In this case although interest will be
received by Y but it is taxable in the hands of X.
2. Revocable transfer of Asset: If any person transfers any asset to any other person in such form
and condition that such transfer is revocable at any time during the lifetime of the transferee , the
income earned through such asset is chargeable to tax as the income of the transferor. For ex. X
transfers a house property to A. However , X has right to revoke the transfer during the life time
of A . It is a revocable transfer and income arising from the house property is taxable in the hands
of X.
6. Income from asset transfer to a person for the benefit of spouse/ son’s wife: If an
individual , directly or indirectly transfers asset , without adequate consideration to a person or an
association of persons for the benefit of his/her spouse /son’s wife , income arising from such
asset directly or indirectly is included in the income of the transferor. For Ex. X transfers
Government bonds without consideration to an association of persons, subject to the condition
that , the interest income from these bonds will be utilized for the benefit of Mrs. X or Mrs. X
son’s wife . Interest from bonds will be included in the income of X
7. Income of a minor child: All income which arises to the minor shall be clubbed in the income
of his parents. Income will be included in the income of that parent whose total income is greater.
This case has two exceptions.(1) Income of minor child suffering from specified disability . (2)
Income of minor child on account of manual work or involving application of his skill/talent etc.
*Substantial Interest: An individual is deemed to have substantial interest if he beneficially
holds equity shares carrying not less than 20% voting powering case of a company or is entitled to
not less than 20% of the profits in case of a concern other tan a company , at any time during the
previous year.
Provided that, notwithstanding anything contained in any other provision of this Act, such
unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as
a deduction under any head of income.
Provided that, if in any case any amount borrowed on a hundi has been deemed under the
provisions of this section to be the income of any person, such person shall not be liable to be
assessed again in respect of such amount under the provisions of this section on repayment of
such amount. For the purposes of this section, the amount repaid shall include the amount of
interest paid on the amount borrowed.
Set-off and carry forward of loss from house property [Section 71B]
(i) In any assessment year, if there is a loss under the head ‘Income from house property’, such
loss will first be set-off against income from any other head during the same year.
Income Tax Law and Practice Page 78
(ii) If such loss cannot be so set-off, wholly or partly, the unabsorbed loss will be carried forward
to the following assessment year to be set-off against income under the head ‘Income from house
property’.
(iii) The loss under this head is allowed to be carried forward up to 8 assessment years
immediately succeeding the assessment year in which the loss was first computed.
(iv) For example, loss from one house property can be adjusted against the profits from another
house property in the same assessment year. Any loss under the head ‘Income from house
property’ can be set off against any income under any other head in the same assessment year.
However, if after such set off, there is still any loss under the head “Income from house property”,
and then the same shall be carried forward to the next year.
(v) It is to be remembered that once a particular loss is carried forward, it can be set off only
against the income from the same head in the forthcoming assessment years.
Carry forward and set-off of business losses [Sections 72 & 80]
Under the Act, the assessee has the right to carry forward the loss in cases where such loss cannot
be set-off due to the absence or inadequacy of income under any other head in the same year. The
loss so carried forward can be set-off against the profits of subsequent previous years. Section 72
covers the carry forward and set-off of losses arising from a business or profession. The
assessee’s right to carry forward business losses under this section is, however, subject to the
following conditions:-
(i) The loss should have been incurred in business, profession or vocation.
(ii) The loss should not be in the nature of a loss in the business of speculation.
(iii) The loss may be carried forward and set-off against the income from business or profession
though not necessarily against the profits and gains of the same business or profession in which
the loss was incurred. However, a loss carried forward cannot, under any circumstances, be set-off
against the income from any head other than “Profits and gains of business or profession”.
(iv) The loss can be carried forward and set off only against the profits of the assessee who
incurred the loss. That is, only the person who has incurred the loss is entitled to carry forward or
set off the same. Consequently, the successor of a business cannot carry forward or set off the
losses of his predecessor except in the case of succession by inheritance.
(v) A business loss can be carried forward for a maximum period of 8 assessment years
immediately succeeding the assessment year in which the loss was incurred.
(vi) As per section 80, the assessee must have filed a return of loss under section 139(3) in order
to carry forward and set off a loss. In other words, the non-filing of a return of loss disentitles the
assessee from carrying forward the loss sustained by him. Such a return should be filed within the
time allowed under section 139(1). However, this condition does not apply to a loss from house
property carried forward under section 71B and unabsorbed depreciation carried forward under
section 32(2).
Carry forward and set off speculation business losses (section 73)
The loss of a speculation business of any assessment year is allowed to be set off only against the
profits and gains of another speculation business in the same assessment year. If a speculation
loss could not be set off from the income of another speculation business in the same assessment
year, it is allowed to be carried forward for 8 assessment years immediately succeeding the
assessment year for which the loss was first computed. Also, it can only be set off against the
xxxxxxxxxxxxx
Extent of Deduction: 100% of the amount invested or Rs. 1,00,000/- whichever is less. However,
as per Section 80CCE, the total deduction the assessee can claim u/ss. 80C, 80CCC and
80CCD(1) shall be restricted in aggregate to Rs. 1,00,000/-.
SECTION 80CCC- Deduction In Respect of Contribution to Certain Pension Funds
Persons Covered- Individual.
Eligible Amount- Deposit or payment made to LIC or any other insurer in the approved annuity
plan for receiving pension.
Extent of Deduction- Least of amount paid or Rs. 1,00,000/- .
SECTION 80CCD- Deduction In Respect of Contribution to Pension Scheme of Central
Government
Eligibility
1. The assessee should be a new retail investor. This means you should be using a demat account
the first time ever for equities. You should be using a new demat account or if you had a demat
account you should have never traded in equities using it before.
2. The gross total income should not exceed Rs 12 lakhs.
3. Investment must be done in
(i) Shares belonging to BSE-100, NSE-100, maharatnas, navratnas or miniratnas. FPOs of these
companies or IPOs of PSUs with 51% government shareholding are also eligible.
(ii) Mutual funds and ETFs investing in the above shares are eligible for tax saving through
RGESS. NFOs of such funds are also eligible for 80 CCG RGESS deduction.
4. NRIs cannot avail this tax benefit. RGESS tax rebate under section 80CCG is applicable only
for residents. Investments will have a total lock-in period of three years. The first year will be a
fixed lock-in period where the assessee cannot alter the securities on which deduction has been
claimed under 80CCG and the next two years will be flexible lock-in period where the assessee
can sell the securities while ensuring that value of the portfolio on which tax benefit has been
claimed is maintained.
Maximum deduction limit: Maximum investment is capped at Rs 50,000. You can claim only
50% deduction on the amount invested. This deduction can be availed for three consecutive years,
based on investments you make in those years, complying with RGESS requirements.
Section 80D- Deductions In Respect Of Medical Insurance Premia
Eligible Amount Premium paid on Mediclaim Policy issued by GIC or any other insurer
approved by IRDA (Insurance Regulatory and Development Authority).
Persons Covered-All assessees [except for 80G (2)(c), which is applicable for donations made
only by company] to the Indian Olympic Association or to any other Association or Institution for
the development of infrastructure for sports & games or the sponsorship of sports & games, in
India
Eligible Amount- Any sums paid in the previous year as Donations to certain funds, charitable
institutions etc. specified u/s. 80G(2).
Relevant Conditions/Points
1. Donation in kind is not eligible for deduction.
2. Donations paid out of another year’s income or out of income not includible in the assessment
of current year are also eligible for deduction. Lt. F. No. 45/313/66 – ITJ (61) dt. 2-12-1966.
Persons Covered- Any assessee (except local authority and every artificial juridical person
wholly or partly funded by the Government).
Eligible Amount- Contribution given by assessee to political parties or an electoral trust.
Extent of Deduction-100% of the amount paid as contribution.
Illustration:1
Ram Prakash (70 years of age) gives the following information. Compute deductible amount
under sec.80C for the A.Y. 2102-14:
1. Payment of LIC premium for his own life (policy amount Rs: 60,000) Rs: 13,000.
2. Payment of LIC premium on life of his wife Rs: 5,000 (paid out of agricultural income)
3. Contribution to URPF Rs: 24,000
4. Contribution to PPF Rs: 15,000
5. Interest accrued on NSC (VIII issue) including 6th year’s interest of Rs: 1,500 is Rs:8,000
6. Repayment of loan taken for construction of a residential flat from Housing Development
Finance Corporation (includes interest Rs: 34,000) Rs: 80,000.
Solution :
Illustration:2
From the following information, compute total income for the A.Y. 2013-14:
1. Business income of Surjih, aged 70, is Rs: 13,20,000
2. He deposited Rs: 70,000 in PPF And purchased NSC VIII issue Rs: 50,000
3. He paid interest on loan taken from a financial institution for higher education of his grand
son Rs:1,20,000.
4. He spent Rs: 40,000 on medical treatment of disabled dependent.
Illustration :3
Compute total income of Mr. X, a disabled, for the A.Y 2013-14:
1. Salary income is Rs: 4,30,000
2. He deposited Rs:20,000 in URPF.
3. He paid LIC premium Rs: 45,000 on a policy (issued on 15-6-2012) of Rs: 4,00,000
4. He donated Rs: 20,000 to National Children’s Fund by cheque.
Solution:
Illustration:4
Compute total income of Mr. Xaviour, a non-resident for the A.Y. 2013-14:
1. Salary for 3 months received in India (computed) Rs: 18,000
2. Dividend received in Belgium from British companies Rs: 44,000
3. Interest on SB deposits in SBI Rs: 2,000
4. Taxable income from H.P. Rs:6,800.
Illustration:5
From the following , compute Total Income of Mrs. Rajalakshmi for the A.Y. 2013-14:
Income from poultry farming Rs: 30,000
Interest from bank deposits Rs: 4,000
Dividend from shares held in an Indian company (Gross) Rs: 20,000
Income from units of Mutual Fund (Gross) Rs:8,000
Income from other sources Rs:42,000
Donation to National Defence Fund Rs:2,000
Solution:
Computation of Total Income for the A.Y.2013-14
Particulars Rs: Rs:
Income from Business:
Income from poultry farming 30,000
Income from Other Sources:
Interest on deposits 4,000
Dividend from shares in Indian company Exempt
Income from units of UTI Exempt
Other incomes 42,000 46,000
Gross Total Income 76,000
Less : Deduction u/s 80G 2,000
Total Income 74,000
Illustration:6
Mr. X earned GTI of Rs: 5,00,000 in the P.Y and made the following donations during the year
by cheques:
a) Rs: 10,000 to CM’s Earthquake Relief Fund Maharashtra.
b) Rs: 15,000 to National Foundation for Communal Harmony.
c) Rs; 40,000 to municipality for family planning
d) Rs: 25,000 to approved institutions
Compute the amount of deduction admissible u/s 80G for the A.Y.2013-14
Note: salary received by member of an HUF and director’s fee received by the Karta are not
taxable in the hands of HUF.
xxx
B) Individual- Senior citizen (60 years or more but less than 80 years):
Up to Rs: 2,50,000 : Nil
Rs: 2,50,001 to 5,00,000 : 10%
Rs: 5,00,001 to 10,00,000 : 20%
Above Rs:10,00,000 : 30%
C) Individual- Super senior citizen (80 years or more):
Up to Rs: 5,00,000 : Nil
Rs: 5,00,001 to 10,00,000 : 20%
Above Rs:10,00,000 : 30%
Surcharge: Nil
Education Cess: 3% on the amount of income tax.
Illustration:1
Compute tax liability of Mr. Ramsanth for the A.Y. 2013-14:
Income from business Rs: 1,80,000
Income from H.P. Rs: 35,000
Solution:
Income from business Rs: 60,000
STCG Rs: 5,000
LTCG Rs: 1,00,000
Income from other sources Rs: 15,000
Illustration:2
Mr. Jithin Raj furnished the following incomes earned during the year 2012-13:
1.) Winning from Kerala State Lottery Rs: 1,00,000
2.) Profits from business Rs: 1,50,000
3.) STCG Rs: 12,000
4.) LTCG Rs: 23,000
Solution:
Solution:
Particulars Rs:
Long Term Capital Gains 2,30,000
Income from other sources:
Interest from bank
10,000 15,000
Dividend from Co-operative society 5,000
Gross total income 2,45,000
Less : Deduction u/s 80 C 15,000
Total Income 2,30,000
Tax on Rs: 2,00,000 Nil
Tax on Rs: 30,0000 (LTCG) @ 20 % 6,000
Total 6,000
Add : Education Cess (6,000 x 3% ) 180
Tax Payable 6,180
Note: Deduction u/s 80C to 80U are not available against LTCG.
Illustration:4
Mr. Muhammad Haneefa is an Assistant Professor in a college . Compute his total income and
tax liability for the A.Y. 2013-14 :
(a) Salary Rs: 20,000 p.m.
(b) Royalty from books Rs: 36,000
(c) Remuneration for examination duty Rs: 10,800
(d) Wardenship Allowance Rs: 400 p.m.
(e) Income from lottery (Net) Rs:21,000
(f) Income from card games Rs: 12,800
(g) Expenses on lottery tickets Rs: 20,000.
Illustration:5
Mr. Nair is working in a private company in Mumbai. He furnished the following details of his
income for the financial year 2012-13:
a) Monthly salary Rs: 11,200
b) D A per month Rs:3,850
c) A rent free unfurnished accommodation for which he pays Rs: 340 p.m.
d) A car with an engine capacity of 1.8 litres with a driver is provided by the employer. All
expenses relating to the car is met by the employer. The car is used for both personal and
official purposes.
e) He is also getting an amount of Rs: 1,000 p.m.as entertainment allowance.
Income Tax Law and Practice Page 98
f) He paid Rs: 1,200 as profession tax for the last financial year.
g) Education allowance for two children @ Rs: 600 p.m.
h) Cost of electricity bill paid by the company Rs: 22,000.
i) His income from let out house property Rs: 25,000. He spent Rs: 12,000 for its repairs in
the previous year.
j) He contributed Rs: 3,000 p.m. to a recognized provident fund. He also paid Rs: 16,000
towards his life insurance premium.
Solution:
Computation of tax liability for the A.Y 2013-14