SLM-19615-B Com-INCOME TAX LAW AND ACCOUNTS - 0
SLM-19615-B Com-INCOME TAX LAW AND ACCOUNTS - 0
UNIVERSITY OF CALICUT
School of Distance Education
Calicut University PO, Malappuram, Kerala 67363
19615
School of Distance Education
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
STUDY MATERIAL
Core Course: BCM5 B09
V Semester
B.Com.
INCOME TAX LAW AND ACCOUNTS
Prepared by
Dr. Sudheesh S,
Assistant Professor on Contract,
School of Distance Education,
University of Calicut.
Scrutinized by:
Dr. Lakshmanan M P,
Associate Professor & Head,
P. G. Department of Commerce,
Government College, Chittur.
DISCLAIMER
“The author shall be solely responsible for the
content and views expressed in this book”
CONTENTS
PAGE
MODULE PARTICULARS NO.
I BASIC CONCEPTS 5
Module I
BASIC CONCEPTS
Introduction
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
Income Tax Law and Accounts 6
School of Distance Education
Deemed Assessee:
A person who is deemed to be an assessee for some other
person is called “Deemed Assessee”.
Assessee in Default:
When a person is responsible for doing any work under
the Income Tax Act and he fails to do it, he is called an
Income Tax Law and Accounts 8
School of Distance Education
“Assessee in default”.
Income includes:
1. Profits and gains
2. Dividend
3. Voluntary Contributions received by a trust. Voluntary
contributions received by a trust are included in the
definition of income. As such contributions received by
following types of trusts, funds, associations, bodies etc. are
included in the income of such bodies.
i. Contributions received by a trust created wholly or partly
for charitable or religious purposes.
ii. Contributions received by a scientific research
association.
iii. Contributions received by a fund or institution set up for
charitable purposes and notified u/s 10 (23c) (iv) (v).
iv. Contribution received by any university or other
educational institution, hospital referred in section 10
(23c).
4. The value of any perquisite or profit in lieu of salary taxable
under section 17(2)(3)
5. Any special allowance or benefit, other than perquisite
included under sub-clause (iii), specifically granted to the
assessee to meet expenses wholly, necessarily and
Income Tax Law and Accounts 10
School of Distance Education
policy.
15. Any sum received by an individual or HUF from any
person during 2013-14 in cash or by issue of cheque or
draft or by any other mode or by way of credit otherwise
than by way of consideration for goods or services but
does not include.
16. An aggregate amount of gift or gifts received (whether in
cash or in the form of property) exceeding Rs. 50,000 in a
previous year by an individual or Hindu undivided family
from non- relatives shall be treated as income which will
be taxable in the hands of the recipient. (For details, please
refer to chapter on Other Sources).
17. Gifts received by a firm or closely held company as
provided in Section 56(2)(viia).
18. Any consideration for issue of shares by a closely held
company as exceeds the fair market value of shares as
provided in Section 56(2)(viib) [w.e.f. Assessment year
2013-14].
The definition of term ‘Income’ as given above does not
explain what income is? It only tells that the above mentioned
receipts are also included in the meaning of term income. The
definition given u/s 2(24) is inclusive and not exhaustive.
According to English dictionary, the term income means
“periodical receipts from one’s business, land, work,
investments etc.”
1. The term income simply means something which
comes in. It is a periodical return with regularity or expected
regularity. It’s nowhere mentioned that income refers to only
monetary return. It includes value of benefits and perquisites.
Anything which can reasonably and properly be described as
Income Tax Law and Accounts 13
School of Distance Education
Financial Year
According to sec. 2(21) of the General Clauses Act, 1897, a
Financial Year means the year commencing on the 1st day of
April. Hence, it is a period of 12 months starting from 1st April
and ending on 31st March of the next year. It plays a dual role
i.e. Assessment Year as well as Previous Year.
Example: Financial year 2020-21 is -
Parameter
Gross Total
of Total Income
Income
Comparison
Refers to income
Total income is the
earned by an
income estimated after
individual, or an
deductions under
Meaning entity from all the
section 80 from Gross
heads, before taxes
Total income have
or, other deductions
been subtracted.
are implied.
Represents revenue
On the other hand,
generated, or
total income
income earned
Represents represents the income
before the taxes and
on which tax liability
other deductions
is determined.
have been made.
Parameter
Gross Total
of Total Income
Income
Comparison
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.
Residential Status
Residential status of an assessee determines the scope of
chargeability of his income. Whether a person will be charged
to a particular income or not, depends on his residential status.
Income Tax Law and Accounts 18
School of Distance Education
Sec. 6 provides the test for residential status for the persons
which can be categorized as under:
Resident in India
An individual is said to be a resident in India, if he satisfies
any one of the following conditions -
i) He is in India in the previous year for a period of 182 days
or more [Sec. 6(1)(a)]; or
ii) He is in India for a period of 60 days or more during the
previous year and for 365 or more days during 4 previous
years immediately preceding the relevant previous year
[Sec. 6(1)(c)]
Non-Resident in India
An assessee who is not satisfying sec. 6(1) shall be treated as a
non-resident in India for the relevant previous year.
Illustration 1
Mr. X came to India first time during the P.Y. 2020-21. During
the previous year, he stayed in India for (i) 58 days; (ii) 185
days; & (iii) 149 days. Determine his residential status for the
A.Y. 2021-22.
Solution
(1) Since Mr. X resides in India only for 58 days during the P.Y.
2020-21, he does not satisfy any of the conditions specified in
sec. 6(1). He is, therefore, a non-resident in India for the P.Y.
2020-21.
(2) Since Mr. X resides in India for 185 days during the previous
year 2020-21, he satisfies one of the conditions specified in sec.
6(1). He is, therefore, a resident in India for the P.Y. 2020-21.
(3) Mr. X resides in India only for 149 days during the previous
year 2020-21. Though he resided for more than 60 days during
the previous year but in 4 years immediately preceding the
previous year (as he came India first time), he did not reside in
India. Hence, he does not satisfy any of the conditions
specified in sec. 6(1). Thus, he is a non-resident for the P.Y.
2020-21.
Illustration 2
Simon, a British national, comes to India for the first time
during 2016-17. During the financial years 2016-17, 2017-18,
2018- 19, 2019-20 and 2020-21, he was in India for 55 days,
60 days, 80 days, 160 days and 70 days respectively. Determine
his residential status for the assessment year 2021-22.
Solution
During the previous year 2020-21, Simon was in India for 70 days
& during 4 years immediately preceding the previous year, he was
in India for 355 days as shown below:
Illustration 3
Miss Paul, an Indian citizen, left India for first time on 1st April,
2020 for joining job in Tokyo. She came to India on 11th
October, 2020 for only 190 days. Determine her residential
status for P.Y. 2020-21.
Solution
Number of days Miss Paul stayed in India can be calculated as
under:
P.Y. Apr May June July Aug Sep OctNov Dec Jan Feb Mar Total
2020- 1 - - - - - 21 30 31 31 28 31 173
21
2020- 18 - - - - - - - - - - - 18
21
Since she left India for employment purpose, hence for
becoming resident she has to stay in India for at least 182 days.
However, she is in India for only 173 days during the previous
year, thus she is a non-resident for the P.Y. 2020-21.
Illustration 4
Mr. Y, aged 19 years, left India for first time on May 31, 2020.
Determine his residential status for the previous year 2020-21
if:
i) He left India for employment purpose
ii) He left India on world tour.
Solution
During the previous year 2020-21, Mr. X was in India for 61
days as shown below –
P.Y. Apr MayJuneJulyAug Sep Oct Nov Dec Jan Feb MarTotal
2020- 30 31 - - - - - - - - - - 61
21
During the previous year 2020-21, X stayed in India for 61 days.
Further, he was in India for more than 365 days during 4 years
immediately preceding the relevant previous year (as he left India
for first time).
i. Since he left India for employment purpose, condition of sec.
6(1)(c) shall not be applicable on such assessee. He will be
treated as resident in India, if and only if, he resided in India
for at least 182 days during the previous year. Hence, Mr. X is
a non-resident in India for the previous year 2020-21.
ii. Since he left India on world tour, which is not an exception of
sec. 6(1), satisfaction of any one condition of sec. 6(1) makes
him resident in India for the previous year 2020-21. As he
satisfies 2nd condition of sec. 6(1) [shown above], he is
resident in India. Further, he also satisfies dual conditions
specified u/s 6(6) (since he left India for first time). Therefore,
he is an ordinarily resident for the previous year 2020-21.
Illustration 5
Mr. Z came India for first time on July 24, 2016. From July
24, 2016 to December 25, 2017 he was in India. Again, he
came to India on August 5, 2020 for employment purpose &
left India on November 25, 2020 permanently. Determine his
residential status for the previous year 2020-21 assuming -
Income Tax Law and Accounts 24
School of Distance Education
a) He is a foreign citizen
b) He is an Indian citizen
Solution
During the previous year 2020-21, X was in India for 113 days
as shown below:
Year Apr MayJuneJulyAug Sep Oct Nov Dec Jan Feb MarTotal
2020- - - - - 27 30 31 25 - - - - 113
21
Further, he was in India for more than 365 days during 4 years
immediately preceding the previous year as shown below:
Year Apr MayJuneJulyAug Sep Oct Nov Dec Jan Feb MarTotal
16- - - - 8 31 30 31 30 31 31 28 31 251
17
17- 30 31 30 31 31 30 31 30 25 - - - 269
18
18- - - - - - - - - - - - - -
19
19- - - - - - - - - - - - - -
20
As he satisfies condition given in sec. 6(1)(c), he is a resident
in India.
Further, he was resident during 2 out of 10 years immediately
preceding the relevant previous year but he was in India only
for 520 days in 7 years immediately preceding the relevant
previous year. As he is not satisfying dual conditions of sec.
Illustration 6
Ross Taylor, a foreign citizen, resides in India during the
previous year 2020-21 for 83 days. Determine his residential
status for previous year 2020-21 assuming his stay in India
during the last few previous years are as follows –
Solution
During previous year 2020-21, Ross Taylor was in India for
83 days & during 4 years immediately preceding the previous
year, he was in India for 378 days as shown below:
Income Tax Law and Accounts 26
School of Distance Education
Presence
in India Resident or Condition satisfied to
Year (In Days) Non resident become a resident
2019
-20 67 Resident 6(1)(c)
2018
-19 15 Non Resident None
2017
-18 175 Resident 6(1)(c)
2016
-17 121 Resident 6(1)(c)
2015
-16 310 Resident Both
2014
-15 265 Resident Both
2013
-14 137 Non Resident None
2012
-13 65 Resident 6(1)(c)
2011
-12 123 Resident 6(1)(c)
2010
-11 115 Resident 6(1)(c)
Illustration 7
Shriram provides following details of income, calculate the
income which is liable to be taxed in India for the A.Y.2021-
22 assuming that –
He is an ordinarily resident (b) He is not an ordinarily
resident (c) He is a non-resident.
Particulars Amount
(Rs.)
Solution
Calculation of income liable to be taxed in India of Shriram
for the A.Y.2021-22
Interest on company
deposit in Canada 10,000 10,000 10,000
-
- 1/3rd received in India
- 2/3rd received outside 20,000 Nil Nil
India
Profit from a business in 1,00,000 1,00,000 1,00,000
Mumbai controlled from
UK
Past Profit from a Nil Nil Nil
business in Tokyo
remitted to India
Income from a property 45,000 45,000 45,000
in India but received in
USA
Income from a property 1,50,000 1,50,000 1,50,000
in London but received in
Delhi
Income from a property 2,50,000 Nil Nil
in London but received in
Canada
Income from a business 10,000 Nil Nil
in Jambia but controlled
from Turkey
Income liable to tax in 7,35,000 4,55,000 4,45,000
India
Kinds of Income
1. Income received in India:
Income received in India is taxable in all cases (whether
accrued in India or elsewhere) irrespective of residential status
of the assessee, therefore it is significant to know the meaning
of income received in India. If the place, where the recipient
gets the money (on first occasion) under his control, is in India,
it is said to be income received in India.
e) Deemed profit.
f) Income from undisclosed sources
3. Income which accrues or arises in India
Income is said to accrue or arise of an assessee only when he
obtains a rights to receive it. Accrual simply means the amount
earned. No amount can be said to accrue unless it is actually
due.
4. Income deemed to accrue or arise in India [sec. 9]:
Following incomes are deemed to accrue or arise in India:
Illustration 8
Miss Juliet, a foreign national, comes India every year for 90
days since 2005-06.
Income Tax Law and Accounts 36
School of Distance Education
Illustration 9
Mr. Moin, a British national, joined XYZ Co. Ltd. as an engineer
in India on 1st May, 2010. On 31st December, 2011, he went to
Sri Lanka on deputation. On 1st April, 2016, he came back to
India and left for Sri Lanka again on 31st May, 2016. He returned
to India and joined his original post on 1st July, 2020. Determine
his residential status for the A.Y. 2021- 22.
Solution
Number of days Mr. Moin stayed in India in past few years
can be calculated as under:
SN P.Y. Apr May June July Aug Sep Oct Nov Dec Jan Feb MarTotal
0 20- - - - 31 31 30 31 30 31 31 28 31 274
21
1 19- - - - - - - - - - - - - 0
20
2 18- - - - - - - - - - - - - 0
19
3 17- - - - - - - - - - - - - 0
18
4 16- 30 31 - - - - - - - - - - 61
17
5 15- - - - - - - - - - - - - 0
16
6 14- - - - - - - - - - - - - 0
15
7 13- - - - - - - - - - - - - 0
14
8 12- - - - - - - - - - - - - 0
13
9 11- 30 31 30 31 31 30 31 30 31 - - - 275
12
10 10- - 31 30 31 31 30 31 30 31 31 28 31 335
11
On the basis of data drawn, residential status of Mr. Moin in
last few years can be decided as under:
Resident Condition
(R) or Non satisfied to
Year Previous Presence Resident become a
Year in India (In (NR) resident
days)
1 2019-2020 0 NR None
2 2018-2019 0 NR None
3 2017-2018 0 NR None
4 2016-2017 61 NR None
5 2015-2016 0 NR None
6 2014-2015 0 NR None
7 2013-2014 0 NR None
8 2012-2013 0 NR None
Illustration 10
State how the following incomes are to be assessed in the
hands of an assessee who is
a. Resident
b. Non-resident and
c. Non resident
1. Salary received during the year for employment outside
India from government of India Rs. 50000.
2. Profits earned in UK and received in India Rs. 35000
3. Salary drawn for employment in Singapore office of an
Indian company for two months Rs. 7500
4. Dividend received from an Indian company Rs. 8000
5. Profit earned from business transaction outside India and
kept in Punjab national bank Rs.25000
Solution
Computation of total income
Not Non
Particulars of income Resident ordinarily resident
resident
Income accruing or arising in 50000 50000 50000
India. But received
outside India
Profit earned in UK and received 35000 35000 35000
in India
Illustration 11
From the following particulars submitted by Miss. Rekha as
regards her income in the previous year 2020-21 compute her
gross total income if she is
a. Resident and ordinary resident
b. Resident but not ordinary resident and
c. Non resident
1. Income from agriculture in Srilanka received in Srilanka
and remitted to India. Rs. 25000
2. Pension from an Indian employer received abroad Rs.
12000
3. Past untaxed profits brought to India Rs. 50000
4. Rental income from the property in Nepal received outside
India Rs. 17000
5. Annual value of a single self-occupied property in India
Rs. 3600
Solution
Computation of gross total income of Miss Rekha
Particulars of income Resident Not ordinarily Non
resident resident
Solution
Total Income of Mr. Vinod for the Assessment Year 2021-22
Not
ordinarily
Particulars of income Resident Non
resident resident
Rebates
Rebate under section 87A: In order to provide tax relief to the
individual tax payers who are in the 5% tax slab, section 87A
provides a rebate from the tax payable by an assessee, being an
individual resident in India, whose total income does not exceed
Rs. 500000. The rebate shall be equal to the amount of income-
tax payable on the total income for any assessment year or an
amount of Rs. 12500 whichever is less.
However, rebate under section 87A is not available in respect of
tax payable @10% on long-term capital gains taxable under
section 112A.
Income Tax Law and Accounts 45
School of Distance Education
Tax on Rs. 12,000 Rs. 14,900 Rs. Rs. Rs. 500 Rs. 750
above 6,250 18,000
Surcharge:
Surcharge is an additional tax payable over and above the income-
tax. Surcharge is levied as a percentage of income-tax. Surcharge
at the following rate is also payable on tax as computed above
after rebate u/s 87A.
Total income exceeds Rs. 50 lacs but does not 10% of tax
exceed Rs. 1 crore
Total income exceeds Rs. 1 crore but does not 15% of tax
exceed Rs. 2 crores
Total income exceeds Rs. 2 crores but does not 25% of tax*
exceed Rs. 5 crores
Marginal Relief
To provide relaxation from levy of surcharge to a taxpayer where
the total income exceeds marginally above Rs. 50 lakh or Rs. 1
crore or 2 crores or 5 crores, the concept of marginal relief is
designed.
Condition: Total income exceeds Rs. 50,00,000 (or Rs. 1 crore
or 2 crores or 5 crores)
Relief: Marginal relief is provided to ensure that the additional
income tax payable including surcharge on excess of income over
Rs. 50,00,000 or Rs. 1,00,00,000 or Rs. 2,00,00,000 or Rs.
5,00,00,000 is limited to the amount by which the income is more
than Rs. 50,00,000 or Rs. 1,00,00,000 or Rs. 2,00,00,000 or Rs.
5,00,00,000.
Marginal relief = Calculated Surcharge - 70% (Income – Rs.
50,00,000)] (if positive)
Or
Marginal relief = [(Income tax + surcharge) on income] -
[(Income tax on Rs. 50,00,000) + (Income – Rs. 50,00,000)]
Similar relief shall also be provided where income exceeds
marginally above Rs. 1 crore or Rs. 2 crores or Rs. 5 crores. In
that case, the aforesaid equation shall be changed accordingly.
Illustration 4
Compute tax liability of the assessee (52 years) whose total
income is: (Case 1) Rs. 49,90,000 (Case 2) Rs. 50,10,000; (Case
3) Rs. 60,00,000
Total 13,09,50013,15,50016,12,500
Liability [A + C] 13,09,50013,22,50017,73,750
after
surcharge
Add: Health & 4% of above 52,380 52,900 70,950
Education
cess
Company Rate
In the case of a domestic company
Surcharge
Salaries,
Capital Gains
AGRICULTURAL INCOME
The income tax does not define the term agricultural income.
Instead it gives a list income that can be treated as agricultural
income. Section 2(1A) of the Act defines agricultural income
as follows:
1. Any rent or revenue derived from land that is situated in
India and is used for agricultural purpose;
2. Any income derived from such land by-
a. Agriculture ; or
b. Any process ordinarily employed by a cultivator or
receiver of rent-in-kind to make the produce fit to be taken
to market or
Illustration 13
Mr. Ramsanth had estates in Rubber, tea and coffee. He
derives income from them. He furnishes the following
particulars of his income for the year ending 31-3-2021.
Manufacture of rubber Rs: 5,00,000
Manufacture of coffee grown and cured Rs: 3,50,000
Manufacture of tea Rs: 7,00,000
Compute taxable income of Ramsanth for the A.Y. 2021-22.
Income Tax Law and Accounts 59
School of Distance Education
Solution:
Computation of Taxable income for the A.Y.2021-22:
Illustration 14
X Ltd. grows sugarcane to manufacture sugar. Details for the
previous year 2020-21 are as follows:
Rs. in
Particulars
lacs.
Cost of conversion 5
Solution:
Computation of income of X Ltd. for the A.Y. 2021-22
Rs. in lacs
Sale of manufactured 25 -
product in market
Revenue [A] 25 15
Cost of conversion 5 -
Cost of cultivation - 10
Expenditure [B] 17 10
Income [A – B] 8 5
Method of integration
1. Net agricultural income is integrated with non agricultural
income.
2. Income tax is calculated on this integrated income at the
rates prevailing each assessment year.
3. Then income tax will be calculated on the net agricultural
income as increased by an amount of Rs. 250000 or
300000 or Rs. 500000 as the case may be.
4. Income tax calculated under 3 above is deducted from the
income tax calculated 2 above.
Illustration 15
Mr. X aged 42 years has non-agro income of Rs. 3,25,000 and
agro income of Rs. 2,55,000. Compute his tax liability for the
A.Y. 2021-22.
Solution:
Computation of tax liability of Mr. X for the A.Y. 2021-22
Particulars Rs.
Income Tax on Rs. 5,80,000 (i.e. agro income Rs. 28,500
2,55,000 + non agro Rs. 3,25,000)
2,500
Casual Income
Any receipt which is of a casual and non-recurring nature is
called casual income. Casual income includes the following
receipts:
EXEMPTED INCOME
INCOME WHICH DO NOT FORM PART OF
TOTAL INCOME
Sec. 10 enlists the various income which are exempt from tax
i.e. does not form part of total income of the assessee. These
are –
Where such sum has been received out of the income of the
family; or
iii) The assessee was the first user of such asset in India.
b) Where the total value of old plant and machinery
transferred to the new business does not exceed 20% of
total value of plant and machinery used in such business,
then this condition is deemed to be satisfied.
5) A report of a chartered accountant in Form 56F must be
filed with the return of income certifying that the deduction
has been correctly claimed.
Module II
Computation of Income under Different
Heads:
Income from Salaries
Basic Elements of Salary
Payer and payee must have employer and employee (or
Master & Servant) relationship; and
Employer-employee relationship
A payment can be construed as salary only if the payer is the
employer and payee is the employee of the payer.
ILLUSTRATION
State whether the following receipts should be treated as
salary or not?
Principles of salary
1. Employee employer relationship
2. Salary from a former employer
3. Place of accrual of salary income
4. Foregoing salary
5. Tax free salary
6. Surrender of salary
7. Accrual basis
8. Payment made after termination
Scope of salary
1. Basic salary or wages
2. Advance pay
3. Arrears of salary
4. Dearness pay
5. Annuity
6. Pension
Deta Amou
Particulars ils nt
Basic Salary *****
Fees *****
Commission *****
Bonus *****
Gratuity *****
Leave Encashment *****
Pension *****
Retrenchment Compensation *****
Compensation received under Voluntary
Retirement Scheme *****
Allowances:
Dearness Allowance (DA) /Dearness Pay (DP) ****
House Rent Allowance ****
Children Education Allowance ****
Children Hostel Allowance ****
Entertainment Allowance ****
Medical Allowance ****
Conveyance Allowance ****
City Compensatory Allowance ****
Uniform Allowance ****
Professional Development Allowance ****
Allowances at a glance:
House Rent Allowance, City
Compensatory Allowance,
General Allowance Tiffin Allowance, Medical
Allowance, Servant Allowance,
Entertainment Allowance
Allowances Meaning
institutions.
Illustration 1
Mr. Y, a resident of Ajmer, receives Rs. 48,000 as basic salary
during the previous year 2020-21. In addition, he gets Rs. 4,800
as dearness allowance forming part of basic salary, 7%
commission on sales made by him (sale made by X during the
relevant previous year is Rs. 86,000) and Rs. 6,000 as house rent
allowance. He, however, pays Rs. 5,800 as house rent. Determine
the quantum of exempted house rent allowance.
Solution
Computation of taxable house rent allowance of X for the
A.Y. 2021-22
Illustration 2
Compute the taxable house rent allowance of Mr. Harikumar
from the following data:
Basic Salary Rs. 5,000 p.m., D.A. Rs. 2,000 p.m., HRA Rs.
4,000 p.m., Rent paid Rs. 4,000 p.m. in Pune.
Income Tax Law and Accounts 111
School of Distance Education
Solution
Allowance Meaning
Travel or An allowance, by whatever name called, to
transfer meet the cost of travel on tour. Cost of travel
Allowance includes any sum paid in connection with
transfer, packing and transportation of personal
effects on such transfer.
Illustration 3
Mr. Mohan, received education allowance of Rs. 80 p.m. for
his 1st child, Rs. 90 p.m. for his 2nd child and Rs. 120 p.m. for
his 3rd child. He also received hostel allowance of Rs. 1,000
p.m. None of his children are studying. Find taxable Children
Education Allowance and Hostel allowance.
Solution
Computation of taxable children education allowance for
Mr. Mohan for the A.Y. 2021-22
Particulars Details Amount
Children Education
allowance [(Rs. 80 × 12) +
3,480
(Rs. 90 × 12) + (Rs. 120 ×
12)] 1,200
Illustration 4
Mr. & Mrs. X have three children and two of them are not
studying. Both Mr. & Mrs. X are working in A Ltd. and getting
children education allowance Rs. 500 per month and hostel
allowance Rs. 1,000 per month. Compute taxable children
education allowance and hostel allowance.
Notes:
a) Perquisites are taxable under the head “Salaries” only if,
they are:
● Allowed by an employer to his employee or any member of
his household.
● Resulting in the nature of personal advantage to the
employee.
● Derived by virtue of employee’s authority.
b) Perquisite may be contractual or voluntary. In other words, it
is not necessary that the benefit must have been received
under an enforceable right.
c) Perquisite may be received from the former, present or
prospective employer
d) Member of household includes:
Notes
a) No exemption can be claimed without performing journey and
incurring expenses thereon.
b) Block-period: Exemption is available in respect of 2 journeys
performed in a block of 4 calendar years commencing from 1st
January 1986.
accommodation.
10% of salary for the Rent paid or
period during which payable by the
Having population
exceeding 10 lacks the employee employer or 15%
of salary,
but not exceeding 25occupied the said
whichever is
lacks as per 2001 accommodation.
lower.
census
7.5% of salary for
the period during
which the employee
Any other city occupied the said
accommodation.
Illustration 5
Mr. Chauhan has the following salary structure:
Bonus 10,000
Fees 5,000
Allowances
Entertainment 12,000
Allowance
Illustration 6
In above illustration, how shall answer differ if the property is
situated in a city where population is only 14,60,000.
Solution
Taxable value of rent free accommodation for the A.Y.2021-
22
Illustration 7
Miss Sree has the following salary structure: `
a) Basic salary 15,000 p.m.
b) Dearness Allowance 5,000 p.m. (not forming part of
retirement benefit)
c) Hostel Allowance 1,000 p.m. (does not have any child)
d) Tiffin Allowance 500 p.m.
e) Transport Allowance 200 p.m.
f) Bonus 20,000 p.a.
g) Commission 15,000 p.a.
h) Free refreshment in office worth 5,000 p.a.
i) Mobile phone facility by employer 900 p.m.
Bonus 20,000
Commission 15,000
Allowances:
Dearness Allowance 60,000
Bonus 20,000
Commission 15,000
Allowances
Total 2,35,400
PROVIDENT FUND
Provident fund scheme is a saving device in the hands of
salaried class. It is a retirement benefit scheme. Under this
scheme, a stipulated sum is regularly deducted from the salary
of the employee as his contribution towards the fund. The
employer also, generally, contributes a similar amount out of
his pocket to the fund. The employer’s and employee’s
contribution are together invested in such fund. Interest earned
thereon is also credited to the fund of the employee. Thus,
provident fund scheme is a great media to initiate and mobilize
small savings to a large scale. On termination of service or
retirement, employee receives the whole accumulated fund,
subject to certain conditions. Hence, provident fund has four
Income Tax Law and Accounts 138
School of Distance Education
Illustration 8
Mr. X has the following salary structure –
Basic pay Rs. 10,000 p.m.
Commission (fixed) Rs. 2,000
DA Rs. 1,000 p.m.
Entertainment allowance Rs. 2,000 p.m.
X contributes Rs. 20,000 to provident fund. Employer also
makes a matching contribution. Compute gross salary of if –
a) Mr. X is a Government employee and such provident fund is a
statutory provident fund.
b) Mr. X is an employee of Y Ltd. and such fund is a recognized
fund.
c) Mr. X is an employee of Z Ltd. and such fund is an
unrecognized fund.
Solution
Computation of taxable salary of Mr. X for the A.Y. 2021-22
Illustration 9
Mr. Sharma has been appointed as an accountant of ABC Ltd
as on 1/4/2018, since then he is working with the same
company. The salary structure and increment details are as
under:
Basic Rs. 5000 - 1000 - 8000 -1500 - 14000
D.A. Rs. 3000 – 500 – 5000 – 1000 - 10000
He and his employer contribute to URPF 14% of basic and
DA.
Every year 9% interest is credited to such fund. As on 1/4/2020,
the fund gets recognition. Hence, the accumulated balance in
URPF was transferred to RPF. Comment on tax treatment of such
transferred balance.
Solution
Statement showing treatment of transferred balance:
During
continuation
of service (Case By Govt.
A) Employee
[Case B] Covered by
the Payment
Gratui of Gratuity
On Act (Case C)
ty termination
of service
By Other
Not Covered by
Received after the Payment of
death of Gratuity Act
employee (Case (Case D)
E)
Notes
Illustration 10
Kishore, an employee of XYZ Ltd., receives Rs. 2,05,000 as
gratuity under the Payment of Gratuity Act, 1972. He retires on
10th September, 2020 after rendering service for 35 years and
7 months. The last drawn salary was Rs. 2,700 per month.
Calculate the amount of gratuity chargeable to tax.
Solution
Computation of taxable gratuity of Mr. Kishore for the A.Y.2021-
22
Illustration 11
Mr. Prem retired from his job after 29 years 6 months and 15
days of service on 17/12/2020 and received gratuity amounting
Income Tax Law and Accounts 146
School of Distance Education
Rs. 4,00,000. His salary at the time of retirement was basic Rs.
6,000 p.m., dearness allowance Rs. 1,200 p.m., House rent
allowance Rs. 2,000, Commission on turnover 1%,
Commission on profit Rs. 5,000. He got an increment on
1/4/2018 of Rs. 1,000 p.m. in Basic. Turnover achieved by
assessee Rs. 1,00,000 p.m. Calculate his taxable gratuity if he
is a —
a) Government employee
b) Non-Government employee, covered by the Payment of
Gratuity Act;
c) Non-Government employee not covered by the Payment
of Gratuity Act
Solution
a) Government employee: Taxable amount: Nil as per section
10(10)(i).
b) Other cases:
Computation of taxable gratuity of Mr. Prem for the A.Y.
2021-22
u/s 10(10)
1 2 3 4 5 6 7 8 9 10
Par
Tot
ticu Feb’20
al
June
May
Mar
Sept
July
Aug
Nov
Apr
Oct
lars
58,000
Basic
5,000
5,000
6,000
6,000
6,000
6,000
6,000
6,000
6,000
6000
12000
D.A
1200
1200
1200
1200
1200
1200
1200
1200
1200
1200
Commission
10000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
80000
Total
8000
Average Salary = Rs. 80000/10
Illustration 12
Mrs. S is working with ABC Ltd. since last 30 years 9 months.
Her salary structure is as under:
Basic Rs. 5,000 p.m. Dearness allowance Rs. 3,000 p.m. On
15/12/2020, she died. State the treatment of gratuity in
following cases:
Case 1: Mrs. S retired on 10/12/2020 & gratuity Rs. 4,00,000
received by her husband (legal heir) as on 18/12/2020.
Case 2: Husband of Mrs. S received gratuity on 18/12/2020
falling due after death of Mrs. S. Mrs. S is covered by the
Payment of Gratuity Act.
Solution
In Case 1, Computation of taxable gratuity in hands of Mrs. X
for the A.Y. 2021-22
In Case 2
Since gratuity falls due after the death of Mrs. S hence the same
is not taxable in hands of Mrs. S. The said gratuity is not taxable
even in hands of husband of Mrs. S.
LEAVE SALARY ENCASHMENT
As per service contract and discipline, normally, every employee
is allowed certain period of leave (with pay) every year. Such
leave may be availed during the year or accumulated by the
employee. The accumulated leave lying to the credit of an
employee may be availed subsequently or encashed. When an
employee receives an amount for waiving leave lying to his
credit, such amount is known as leave salary encashment.
Case A: Leave salary received during continuation of
service
Leave salary during continuation of service is fully taxable in the
case of the Government employee as well as other employees
[Sec. 17(1)(va)].
Case B: Leave salary received by Government employee
on termination of service
At the time of termination of service, leave salary received by
the Central or State Government employee is fully exempted
u/s 10(10AA)(i).
Illustration 13
a) Mr. Dany is working in Zebra Ltd. since last 25 years 9
months. Company allows 2 months leave for every completed
year of service to its employees. During the job, he had availed
20 months leave. At the time of retirement on 10/8/2020, he got
Rs. 1,50,000 as leave encashment. As on that date, his basic salary
was Rs. 5,000 p.m., D.A. was Rs. 2,000 p.m., Commission was
5% on turnover + Rs. 2,000 p.m. (Fixed p.m.). Turnover effected
by the assessee during last 12 months (evenly) Rs. 5,00,000. Mr.
Dany got an increment of Rs. 1,000 p.m. from 1/1/2020 in basic
and Rs. 500 p.m. in D.A. Compute his taxable leave encashment
salary.
b) How shall your answer differ if the assessee had taken 2
months leave instead of 20 months, during his continuation of job.
Solution
Working
1.Completed year of service: 25 years 9 months = 25 years
2.As per sec. 3(35) of the General Clauses Act, 1897, month shall
mean a month reckoned according to the British calendar e.g.
the period commencing from 7th September & end on 6th
October shall be a month.
3.Salary here means Basic + Dearness Allowance + Commission
on turnover (last 10 months average from the date of
retirement)
Particulars Oct’ Nov Dec Jan’ Feb Mar April May June July Aug Total
10
19 (Rs.) (Rs.) 20 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
(Rs.) Days
21
(Rs.)
days
(Rs.)
Basic 2,7104,000 4,0005,0005,0005,0005,0005,0005,0005,000 1,61347,323
D.A. 1,0161,500 1,5002,0002,0002,0002,0002,0002,0002,000 64518,661
Commission 500000 × 5% × 10/12 20,833
Total 86,817
Average salary i.e. Rs. 86,817 / 10 months 8,682
Monthly fixed commission is irrelevant. Commission as fixed percentage of turnover is to
be considered.
Solution
Working
1. Calculation of completed year of service: Employee has
received 18 months leave encashment on termination of service
as well he had enjoyed leave of 12 months during his tenure. That
means he had received a leave benefit of 30 months. Since leave
allowed by employer is 1½ months for every completed year of
service, this signifies that Mr. Kumar had completed 20 years
(being 30/1½) of service.
2. Salary here means, Basic + DA + Commission, being last
10 months average from the date of retirement. There is no
Income Tax Law and Accounts 156
School of Distance Education
Illustration 15
Mr. Amit has retired from his job on 31/3/2020. From 1/4/2020,
he was entitled to a pension of Rs. 3,000 p.m. On 1/8/2020, he
got 80% of his pension commuted and received Rs. 1,20,000.
Compute taxable pension if he is:
a) Government employee;
b) Non-Government employee & not receiving gratuity
c) Non-Government employee (receiving gratuity, but not
covered by the Payment of Gratuity Act)
Solution
Computation of taxable pension of Mr. Amit for the
A.Y.2021-22
3,000×4)
Illustration 16
Compute taxable Entertainment allowance & net salary of Sri
Hanuman Prasad from the following data:
Basic salary Rs. 8,000 p.m. D.A. Rs. 2,000 p.m. Taxable
perquisite Rs. 35,000, Entertainment Allowance Rs. 4,000
p.m. Out of such allowance Rs. 20,000 is expended and
balance amount is saved. Assuming he is:
a. Government employee
b. Non-Government employee.
Solution
Computation of taxable income of Sri Hanuman Prasad for the
A.Y.2021-22
Government Non-Government
Employee Employee
Particulars
Details Amount Details Amount
(Rs.) (Rs.) (Rs.) (Rs.)
Illustration 17
Mr. Rohit a non-Government employee has the following
salary details:
a) Basic Salary Rs. 5,000 p.m.
b) D.A. Rs. 2,000 p.m.
c) Entertainment Allowance Rs. 300 p.m.
d) Professional tax paid by employee Rs. 600
e) LIC Premium paid by employer Rs. 3,600
f) Income tax paid by employee Rs. 2,000
g) Professional tax paid by employer on behalf of employee
Rs. 1,600
Find his taxable salary.
Solution
Computation of taxable salary Mr. Rohit for the A.Y.2021-22
Bonus 24,000
Commission 9,000
Fees 5,000
Allowances
Illustration 19
Rasheed aged 48 years is an accountant and employed by GLF
ltd. He gets Rs. 100000 per month as salary and Rs. 100000 per
annum as bonus. Besides, GLF ltd .provides the following.
1. Transport allowance: 1600 per month
2. Medical facility in a hospital which is owned by GLF. Cost
for providing this facility to Ratheesh Rs. 30000
3. Medical facility in a government hospital Rs. 38000.
4. Medical facility in a private hospital (same hospital is
recommended by the government for the medical treatment
of government employees.) Rs. 18000
5. Medical facility (rule 3A) in a hospital approved by the chief
commissioner: Rs. 63000
6. Medi claim insurance premium paid by GLF ltd for
Ratheesh and his family Rs. 25000
7. Reimbursement by GLF ltd. Of other medical expenditure:
Rs. 18000.
Solution
Income of Rasheed from salary can be calculated as follows:
Particulars AY AY 2021-
2020-21 22
Basic salary 1200000 1200000
Bonus 100000 100000
Transport allowance Nil 19200
Medical facility in GLF Ltd’s hospital Nil Nil
Medical facility in government hospital Nil Nil
Medical facility in private hospital Nil Nil
Medical facility (Rule 3A) Nil Nil
Medi-claim insurance premium paid by Nil Nil
GLF ltd
Reimbursement of other medical
expenditure(reimbursement up to Rs.
15000 is not chargeable to tax for the
assessment year 2020-21) 3000 18000
Gross salary 1303000 1337200
Less: standard deduction us 16(ia) Nil Nil
Income under the head salaries 1303000 1297200
Illustration 20
Miss Nithya is a govt. employee and she is drawing a monthly
salary of Rs. 8000. She is provided with a rent free unfurnished
accommodation for which the government has fixed a monthly
rent of Rs. 1000. She pays a monthly rent of Rs. 200 to the
government. Calculate her gross salary.
Solution
Illustration 21
Mr. Jamal is employed in a town (having a population of 13
lakh). He draws a salary of Rs. 8000 pm. DA Rs. 2000 pm (40%
enters into retirement benefits), bonus Rs. 8000 p.a
Commission Rs. 4500 p.a. Entertainment allowance Rs. 500
p.m. FRV of rent free house provided by the employer Rs.
40000 p.a. Value of the furniture provided Rs 20000. Calculate
this income from salary for the assessment year 2021-22.
Solution
Particulars Rs.
Salary 96000
DA 24000
Bonus 8000
Commission 4500
1,52,910
14410
Illustration 22
The following are the particulars of income of Mr.Baburaj for
the previous year ended 31st March 2021. He is employed by
an individual.
1. Salary Rs.9000 p.m
2. Bonus equal to 2 months salary
3. Dog allowance Rs. 150 p.m
4. Special allowances Rs. 120 pm
5. Employee’s contribution to RPF @ 15% of salary.
6. Employers contribution to the fund @ 15% of the salary.
7. Interest credited to the provident fund @ 9.5% p.a is Rs. 5600
8. He is provided with free lunch in office. The cost per meal is
Rs. 30.
9. The employer has given him a small car which he uses for his
personal and office use. He meets the expenses of the car
which is used for personal purposes.
Compute his income from salary for the assessment year 2021-
22.
Solution
Computation of income from salary of Mr. Krishnan for the
assessment year 2021-22
Salary 108000
Bonus 18000
Illustration 23
Mr. Rajiv furnished the following particulars of his income for
the year 2020-21.
Salary Rs. 15000pm
DA Rs. 1250pm
Entertainment allowance Rs. 1000 pm
Employers’ and Employees contribution to RPF Rs. 24000 each
Interest on PF AT 9.5% P.a Rs. 19000
City compensatory allowance Rs. 200 pm
Medical allowance Rs. 10000
Solution
Computation of taxable income from salary
Salary 180000
DA 18000
Entertainment allowance 12000
Employer’s contribution to RPF in excess of 2400
12%
City compensatory allowance 2400
Medical allowance 10000
Sweeper 2400
Servant 9000
Concession in rent
Value 15330
Less rent paid by the employee 6000 9330
Gross salary 245530
Less standard deduction 50000
Taxable salary 195530
Note:
Employer’s contribution to RPF in excess of 12%
Income Tax Law and Accounts 175
School of Distance Education
Module III
INCOME FROM HOUSE PROPERTY
As per sec. 22, the annual value of property consisting of any
building or land appurtenant thereto of which assessee is the
owner, other than such portion of such property as he may
occupy for the purposes of any business or profession carried
on by him shall be chargeable to income tax under the head “
Income from house property.”
It is an exceptional feature of this head that rather than actual
income from house property, earning capacity o f house
property is taxable. As stated u/s 22 that “annual value” of the
property is taxable rather than actual income of the property.
House Owner
property
shall not be liable to tax under this head. That is why, income
from sub-letting is not taxable under this head but under the
head ‘Income from other sources’. E.g. Mr. X being a tenant of
a house property acquired it at a monthly rent of Rs. 10,000
from Mr. Y (owner of such house property). Mr. X sublets the
property to Mr. Z for a monthly rent of ` 12,000. Income from
subletting being ` 2,000 p.m. is taxable as business income or
as income from other sources.
Owner includes legal owner, beneficial owner and deemed
owner.
Legal owner: Legal owner means a person who has the legal
title of the property as per the Transfer of Property Act,
Registration Act, etc.
Beneficial owner: For income tax purpose it is not necessary
that the property must be registered in the name of the assessee.
If the assessee is enjoying the property as an owner to full
extent he will be treated as a beneficial owner of such property
and will be charged under the head ‘Income from house
property’.
Taxpoint:
Incidences thereof
Letting out to employees: If an assessee lets out the property
to his employee, where such letting out supports smooth
flow of his business, then such letting out shall be deemed to
be incidental to business and such rent shall be chargeable
under the head “Profits & gains of business or profession”.
Letting out to Government Agencies: Where an assessee let
out his property to any Government agency for locating
branch of a nationalized bank, police station, post office,
excise office, railway staff quarters, etc. for the purpose of
running the business of assessee more efficiently, such
letting out shall be deemed to be incidental to business and
such rent shall be chargeable under the head “Profits &
gains of business or profession”.
Letting out to ancillary units: Where an assessee lets out its
property to ancillary units, which manufactures components
required by the assessee. Income from such letting out shall
be taxable under the head “Profits & gains of business or
profession”.
SOME SPECIAL CASES
Foreign property
If house property is situated abroad, then annual value of such
property shall be taxable as:
Assessee Condition for taxability
Tax treatment
1) Share of each co-owner in the income from the property as
computed in accordance with sec. 22 to 25 shall be included in
his total income.
2) Where the house property is owned by co-owners and is
occupied by each of the co-owner then all of them can claim
benefit u/s 23(2)(a) and interest on loan shall be allowed to all
the co-owners to the extent of Rs. 30,000/Rs. 2,00,000 as the
case may be.
Exempted Properties
Income from the following house properties are exempted
from tax:
would be worthless.
Step 3: Compare the values calculated in step 1 and step 2 and
take the higher one.
Step 4: Where there is vacancy and owing to such vacancy the
‘ARR – UR’ is less than the RER, then ‘ARR - UR’ computed
in step 2 will be treated as GAV.
Taxpoint: Reasonable Expected Rent cannot exceed Standard
Rent but can be lower than Standard Rent
In nutshell, GAV shall be computed as under
Particulars H1 H2 H3 H4 H5 H6
Gross Municipal value for the 120 130 140 150 160 180
whole year
Fair rent for the whole year 105 115 135 155 175 168
Standard rent (for whole year) NA 100 135 180 165 144
Solution
Computation of Gross annual value (GAV)
Step Particulars H1 H2 H3 H4 H5 H6
Calculation of RER
Higher of the [(a) and 120 130 140 155 175 150
(b)] [A]
1st RER [Lower of (A) 120 100 135 155 165 120
and (B)]
3rd Gross Annual Value 120 110 135 175 200 120
Particulars H1 H2 H3 H4 H5
Standard rent under the Rent Control 50 800 240 250 500
Act
Solution
Computation of gross annual value
Step Particulars HI H2 H3 H4 H5
Calculation of RER
Gross Municipal Value 90 500 30 100 315
IIIrd Gross Annual Value (being higher 100 500 240 270 315
of step 1 and step 2)
Particulars H1 H2 H3 H4 H5 H6
Gross Municipal Value p.a. 200 300 400 500 300 300
Standard rent under the Rent 300 180 280 225 250 240
Control Act p.a.
Solution
Computation of Gross Annual Value
Step ParticularsWorking H1 H2 H3 H4 H5 H6
1st Calculation Higher of GMV 300 180 280 225 250 240
of RER and FR (RER
cannot exceed SR)
2nd ARR For the period 550 675 250 220 180 220
actually let out
3rd Higher of Higher of Step 1 & 550 675 280 225 250 240
above Step 2
4th Gross Annual Value 550 675 250 220 250 220
Particulars H1 H2 H3
Gross Municipal value 150 180 120
Actual rent if property is let out throughout the 180 300 150
previous year 2020-21
Solution
Working: Calculation of ARR – Unrealised Rent
H1: [{(1,80,000/12) × 9} – 25,000] = Rs. 1,10,000
H2: [{(3,00,000/12) × 11} – 40,000] = Rs. 2,35,000
H3: [1,50,000 – 20,000] = Rs. 1,30,000
ARR less
current year
2nd unrealized rent Working 1 110 235 130
(for let out
period only)
DEDUCTIONS U/S 24
ILLUSTRATION 6
Following information are provided by an assessee for his
house properties for computing interest on loan allowed u/s
24(b):
Solution
Calculation of ‘Interest on loan’ allowed u/s 24(b)
Interest on loan by 2 - - - - -
mortgaging HP3 for business
purpose
Tax Treatment
The amount so received shall be taxable under the head
‘Income from house property’ in the year of receipt after
deducting standard deduction @ 30% of such amount.
Arithmetically, taxable amount shall be –
Taxpoint
Particulars Amount
Illustration 8
Mr. Krishnan constructed one house in 2018. Half of the
portion is let out and the remaining half is used for his
residence. particulars are available.
Repairs 2000
Deductions:
Illustration 9
Mrs. Leela is the owner of a house in Kollam. The details
regarding her house are given below.
Repairs 2000
Illustration 10
Vipin das is the owner of a house in vatakara. It has let out for
rent fixed as /Rs. 90000 per annum. The municipal tax is fixed
as Rs. 10000, which according to agreement is to be paid by
the tenant. The owner spent the following amount for
providing additional facilities to the tenant.
Lighting 800
Water 1000
Lighting 800
Module IV
PROFIT OR GAINS OF BUSINESS OR
PROFESSION
Business [Sec. 2(13)]
Business includes –
Nature of commodity
Periodicity of transaction
incentive in form of –
SPECIFIC DEDUCTIONS
As per sec. 29, income under this head will be computed
considering the provisions of sec. 30 to 43DB, which decides
the admissibility of expenditures for computing income under
this head.
1) Rent, rates, taxes, repairs & insurance for building [sec.
30]: Rent, rates, taxes, repairs & insurance for premises used
for the purpose of business or profession shall be allowed
under this section.
2) Repairs & insurance of machinery, plant & furniture
[sec. 31]: Repairs & insurance of plant, machinery &
furniture are allowed as deduction. Points to be noted in this
regard:
a) Use of asset: The asset must be used for the purpose of
business or profession. However, if the asset is not
exclusively used for the purpose of business or profession
then deduction shall be restricted to a fair proportion of
above expenditure, which the Assessing Officer may
determine [Sec. 38(2)].
Conditions:
(1) The assessee who incurs such expenditure shall be a
Company
(2) Capital expenditure in the nature of land or building is not
allowed weighted deduction under this section. The cost of
building (excluding the cost of land) shall be given
deduction of 100% as mentioned in (b) Capital expenditure
above.
(3) To claim this deduction, the company shall enter into an
agreement with the prescribed authority for co-operation in
the R&D facility and for the audit of accounts of the
company.
Conditions:
i) Such institution should have 'scientific research' as its main
objective.
ii) Such institution should be approved by the Central
Government for this purpose.
(2) Amount paid to a Company registered in India:
Any amount contributed by the assessee to a Company
registered in India shall be given a weighted deduction of 1.25
times, even if the field of research of such Company is different
from that of the assessee.
Conditions:
(a) Such Company should have 'scientific research and
development' as its main objective.
(b) Such Company should be approved by the prescribed
authority for this purpose.
(3) Amount paid to a University/College/School/Research
association carrying out Social or Statistical research:
Any amount contributed by the assessee to such institutions
shall be given a weighted deduction of 1.25 times, even if the
field of research of such institution is different from that of the
assessee.
(a) Such institution should have 'social or statistical research'
as its main objective
(b) Such institution should be approved by the Central
Government for this purpose.
when the price paid is less than or equal to the price fixed by
the Government.
Illustration 1
The net profit of business of Mr. Vijayan as disclosed by its
profit and loss account were Rs. 325000 after charging the
following.
e. Depreciation 25000
Solution
Net profit 325000
Add:
Illustration 2
The following is the receipt and payment account maintained
by a registered medical practitioner. An abstract of receipts
and payments is given below. You are required to compute his
income from profession and also compute his total income for
the assessment year 2021-22.
163500 163500
Additional information:
1. Half of the motor car expenses are meant for personal use
2. Depreciation allowable on car is 15% and surgical tools @
25%
Solution
Computation of income from profession and house
property
Particulars Rs. Rs.
Illustration 3
Mr. X, a grower and manufacturer of tea, purchased machinery
(15%) on 10-04-2019 for ` 10 lakh. He computed depreciation
for A.Y. 2021-22 as given below; needs your comment on his
working:
Particulars Amount
10,00,000
Particulars Amount
Income before depreciation and without reducing 8,00,000
element of agricultural income
Less: Depreciation 1,27,500
6,72,500
Less: Agricultural Income being 60% of above 4,03,500
Profits and Gains of Business or Profession 2,69,000
Illustration 4
From the following figures, you are required to calculate the
depreciation admissible during the previous year.
Solution
Calculation of Depreciation
Plant and
Particulars Building
Machinery
WDV at the
375000 1500000
beginning
Add: purchase 450000 Nil
825000 1500000
Less: sales 775000 300000
42500 108000
Illustration 5
Sri Ram Gopal is the owner of a business. His Profit & Loss
Account for the year ended on 31st March, 2021 is given below:
To Advertisement in a 500
Magazine
of Political Party
91,622 91,622
67,292
Less: Expenses allowed but not debited to P. &
L. A/c
Illustration 6
From the following Profit & Loss Account of Mr. Raj Kumar for
the year ended 31st March, 2021, compute income from business
or profession:
Rs. Rs.
Depreciation on 8,000
Machinery
Advertisement 7,500
Expenses
Contribution of 5,000
Employees‘ Provident
Fund
1,46,000 1,46,000
77,250
84,600
Notes:
(1) Capital expenditure on advertisement is not admissible w.e.f.
A.Y. 1998-99, hence expenditure on neon-sign board is not
deductible. This expenditure is subject to depreciation @ 10%
taking it in the Block of Furniture.
(2) Winning from crossword puzzles is taxable under head ‘Income
from Other Sources’.
(3) Interest on 7% NPC is not taxable under this head. However it is
also exempt u/s 10.
Illustration 7
Dr. Suresh is a medical practitioner. He is a consulting physician
of XYZ Co. Ltd. on a monthly retainer fee. The doctor maintains
a record of his receipts and payments and for the year ended 31st
March, 2021, the following information is abstracted therefrom:
Receipts Rs.
Payments:
Rent and Electricity Charges for the Clinic 14,000
The written down value of the car and the furniture of the Clinic
as on 1-4-2020 were Rs. 40,000 and Rs. 3,000 respectively. 20%
of the use of the car and the telephone is attributable to personal
Income Tax Law and Accounts 241
School of Distance Education
Depreciation on Car
Module V
CAPITAL GAINS
Section Transaction
company is incorporated
Any transfer of –
(a) a capital asset or intangible asset by a private
company or unlisted public company (hereafter
referred to as the company) to a limited liability
partnership (LLP); or
(b) a share(s) held in the company by a shareholder as a
result of conversion of the company into a limited
liability partnership (LLP) shall not regarded as a
transfer, if following conditions are satisfied:
i) All the assets and liabilities of the company
immediately before the conversion be-come the
assets and liabilities of the LLP;
ii) All the shareholders of the company immediately
before the conversion become the partners of the
LLP and their capital contribution and profit sharing
ratio in the LLP are in the same proportion as their
shareholding in the company on the date of
conversion;
47(xiiib)
iii) The shareholders of the company do not receive any
(b) Proprietor holds not less than 50% of the total voting
power in the company and his shareholding
continues to remain as such for a period of 5 years
from the date of succession; and
(c) The sole proprietor does not receive any
consideration or benefit, directly or indirectly, in any
form or manner, other than by way of allotment of
shares in the company.
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.
'Urban area' means any such area within the limits of a municipal
corporation or municipality, as the Central Government may,
having regard to the population, concent ration of industries,
need for proper planning of the area and other relevant factors,
by general or special order, declare to be an urban area for the
purposes of this sub-section;
b) asset transferred is machinery, plant, building, land or any
right in building or land used for the business of industrial
undertaking in an urban area;
c) the capital gain arising on the asset transferred may be
short-term or long-term capital gain. Normally, it will be
short-term capital gain because most of the assets of the
industrial undertaking will be depreciable assets;
d) the capital gain is utilised within one year before or 3 years
after the date of transfer for the specified purpose.
8. Shifting of an industrial undertaking from urban area
to any special economic zone (section 54GA)
Section 54GA. (1) Notwithstanding anything contained in
section 54G, where the capital gain arises from the transfer of
a capital asset, being machinery or plant or building or land or
any rights in building or land used for the purposes of the
business of an industrial undertaking situate in an urban area,
effected in the course of, or in consequence of the shifting of
such industrial undertaking to any Special Economic Zone,
whether developed in any urban area or any other area and the
assessee has within a period of one year before or three years
after the date on which the transfer took place,-
a) purchased machinery or plant for the purposes of
business of the industrial undertaking in the Special Economic
Income Tax Law and Accounts 276
School of Distance Education
Solution
Computation of capital gain of Mr. Divesh for the
A.Y.2021-22
ILLUSTRATION 2
On 23rd December, 2020, Rajat sold 500 grams of gold, the
sale consideration of which was Rs. 13,50,000. He had
acquired this gold on 20th August, 2000 for Rs. 4,00,000. Fair
market value of 500 grams of gold on 1st April, 2001 was Rs.
3,60,000. Find out the amount of capital gain chargeable to tax
for the assessment year 2021-22.
Solution
Computation of capital gains of Rajat for the A.Y. 2021-22
Illustration 3
Mr. Kiran provides you the following information relating to
the sale of his only residential house. Calculate his capital gain
for the assessment year 2021-22.
The cost of inflation index in 2001-02 was 100 and for 2020-21
– 301
Solution
Calculation of capital gains for the assessment year 2021-
22
Particulars Rs.
2660800
Less: exemption u/s 54EC 850000
Illustration 4
Mr. A sold his property for Rs. 376000 in December 2020
incurring an expense of Rs. 6000 which was purchased in
January 2019 for Rs. 240000. Find out taxable capital gain?
Solution
Here the capital gain is short term Sale of property.
370000
Less: cost of acquisition 240000
Illustration 5
Calculate capital gain from the following data. Sold self
generated goodwill for a business Rs. 700000 bonus shares in
Kairali Ltd (not listed) and (being short term capital assets) sold
for Rs. 400000. Business income Rs. 30000. Long term capital
loss in the transfer of a building Rs. 20000. Face value of bonus
shares sold RS. 300000.
Solution
Computation of capital gain
Illustration 6
Mr. Arun converts his capital asset acquired for an amount of Rs.
50,000 in June, 2003 into stock-in-trade in the month of
November, 2016. The fair market value of the asset on the date of
conversion is Rs. 4,50,000. The stock-in-trade was sold for an
amount of Rs. 6,50,000 in the month of September, 2020. What
will be the tax treatment?
2003-04 109
2016-17 264
Solution
The capital gains on the sale of the capital asset converted to
stock-in-trade is taxable in the given case. It arises in the year of
conversion (i.e. P.Y. 2016-17) but will be taxable only in the year
in which the stock-in-trade is sold (i.e. P.Y. 2020-21). Profits
from business will also be taxable in the year of sale of the stock-
in-trade (P.Y. 2020-21).
The long-term capital gains and business income for the
A.Y.2021-22 are calculated as under:
Answer
Computation of total income and tax liability of Mr. Sumesh for
A.Y. 2021-22
Particulars Rs.
24,300
Add: Health and education cess @4% 972
lower of Fair market value of such asset i.e., Rs. 2,000 per
share and Full value of consideration i.e., Rs. 4,000 per share.
So, the cost of acquisition of original share is Rs. 2,000 per
share.
(3) Since bonus shares are held for less than 12 months before sale,
the gain arising there from is a short-term capital gain
chargeable to tax@15% as per section 111A after adjusting the
unexhausted basic exemption limit (Rs. 3,00,000 less Rs.
2,000, being the amount of dividend). Since Mr. Sumesh is
Income Tax Law and Accounts 289
School of Distance Education
1. Lotteries;
2. Crossword puzzles;
3. Races including horse races;
4. Gambling and betting of any nature or form; or
5. Card games, game show or entertainment program on
television or electronic mode and any other game of any sort,
- are taxable under this head.
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 name 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.
Exemption/deduction [Sec. 58(4)]: Such income shall be fully
taxable & no deduction shall be allowed.
Tax rate [Sec. 115BB]: Tax is charged at a flat rate of 30%.
Notes
(a) Income of jockey: Income of jockey from such profession is
not treated as winning from horse races.
(b) Winning from a motor car rally: Winning from a motor car
rally is a return for skill and effort and cannot be treated as
casual income but taxable as normal income
(c) Lottery held as stock in trade: Winning from lottery to an
agent or trader out of its unsold stock (tickets) shall be treated
Income Tax Law and Accounts 295
School of Distance Education
FAMILY PENSION
Meaning:
Family pension means a regular monthly amount payable by the
employer to a person belonging to the family of a deceased
employee (e.g. widow or legal heirs of a deceased employee)
Tax Treatment: It is taxable under the head “Income from other
sources” after allowing standard deduction.
Illustration 1
Sudhir died on 31st July 2020 while being in Central Government
service. In terms of rules governing his service, his widow Mrs.
Sudhir is paid a family pension of Rs. 10,000 p.m. and dearness
allowance of 40% thereof. State whether the amount of family
pension is assessable in her hands, and if so, under what head of
income. Can she claim any relief/deduction on such receipt?
Compute taxable income for the assessment year 2021-22 and tax
thereon.
Solution:
Computation of gross total income of Mrs. Sudhir for the
A.Y.2021-22
Particulars Details Rs.
Income from other sources
Family pension [(Rs. 10,000 + Rs. 4,000)
112000
x 8] [From 01-08-2020 to 31-03-2021]
Less: Standard deduction being
minimum of the following:
■ a company; or
Illustration 2
Compute income from “income from other sources” from the
following particulars submitted by Mr. soman.
Solution
Computation of Income from other Sources
Detail
Particulars s Rs.
1000
4,000
Depreciation allowed for letting 0
Illustration 3
Mr. vasu received the following incomes during 2018-19.
Compute taxable income under the head income from other
sources separately for each case.
Solution
Total 66000
Illustration 4
Compute taxable income under the head Income from other
sources of Mrs. X from the following data:
Amo
Particulars unt
1000
Private tuition fee received 0
3200
Award from KBC (a TV show) [Gross] 00
2500
Pension from employer of deceased husband 0
2500
Interest on bank deposit 0
2500
Letting out of vacant land 0
1000
Composite rent (related expenditures are Rs. 5,000) 0
1800
Payment made for personal expenses 0
Solution
Amou
Particulars Details
nt
Private tuition fee received 10000
Casual Income
Winning from lottery 2000
32000
Award from KBC (a TV show) [Gross]
0
Pension from employer of deceased
husband 25000
Less: Standard deduction
a) 1/3rd of amount received (i.e. Rs. 8,333)
b) Rs. 15,000 8333 16667
Interest on bank deposit 25000
Directors fee (Gross) 5000
Letting out of vacant land 25000
Taxable
Remuneration for checking the as
examination copy of employer’s school Salary -
Remuneration for checking the
examination copy of C.A 10000
Not an
Income tax refund Income -
Interest on income tax refund 100
Composite rent 10000
Less: Expenditure 5000 5000
Rent on sub-letting of house property 20000
Less: Rent paid to original owner 12000 8000
******
Income Tax Law and Accounts 308