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6TAX LAWS

UNIT 16

Direct Taxes 5

UNIT 17

Indirect Taxes 49

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Expert Committee

Dr. O. P. Gupta Prof. Hilda Amalraj

Vice Chancellor IBS Hyderabad

IU, Nagaland

Prof. Bratati Ray Prof.Marzun E JokhiIBS Kolkata IBS Ahmedabad

Dr. B.Padma Dr. Vijaya Lakshmi S

IBS Bangalore IBS Hyderabad

Dr. Vunyale Narender

IBS Hyderabad

Course Preparation Team

Prof. T.S.Rama Krishna Rao Prof. Vivek GuptaIFHE (Deemed to be University) IFHE (Deemed to be University)

Ms. C.Padmavathi Ms.Pushpanjali Mikkilineni

IFHE (Deemed to be University) IFHE (Deemed to be University)

Ms. Sunitha Suresh Prof. Tarak Nath Sha

IFHE (Deemed to be University) IU, Dehradun

Ms. Anita Ms.Padmaja

IFHE (Deemed to be University) IU, Meghalaya

Ms. Mrudula Ms.Anurita Jois

IFHE (Deemed to be University) IU, Sikkim

The ICFAI University Press, All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet,

or transmitted in any form or by any means electronic, mechanical, photocopying or otherwise

without prior permission in writing from The ICFAI University Press, Hyderabad.

Ref. No. BEL SLM 11 2K11R 21 B6

For a n y clarification regarding this book, the students may please write to The ICFAI University

Press specifying the unit and page number.

While every possible care has been taken in type-setting and printing this book, The ICFAIUniversity Press welcomes suggestions from students for improvement in future editions.

The ICFAI University Press, Hyderabad

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3

BLOCK 6 TAX LAWS

Ignorance of Law is no excuse. Taxes are vital inflows for social and economic

development of a nation. Taxes form an important component of State revenue in most

developing economies. Business organizations must keep themselves abreast with the

various tax laws of the State. Businesses need to take advantage of certain incentives,

exemptions provisions and embedded in the prevailing Tax laws to reduce their tax burden.

This calls for proper planning on the part of business. There are two types of taxes Direct

Taxes and Indirect Taxes. While the direct taxes is based on principle of ability to pay

indirect tax are not.

Unit 16 outlines the important provisions of direct taxes. Direct Taxes are the taxes that are

borne completely by the business entity on which the tax is levied and has been paid. The

Income Tax and Wealth Tax fall under this category. The income tax levied on the income

of an entity is governed by Income Tax Act, 1961 and the wealth tax levied on wealth

(property) of an entity is governed by Wealth Tax Act, 1957 in India.

Unit 17 deals with indirect taxes. Indirect Taxes are the taxes levied on expenditure,

consumption right or privilege. These are taxes that are passed on from one entity to

another till the ultimate consumer. The Customs duties levied on imports is governed by

Customs Act 1962, the excise duties levied on production is governed by Central Excise

Act, 1944, the Value Added Tax (VAT) levied on value added in production process is

governed by, the Central Sales tax levied on sale of goods is governed by Central Sales Tax

Act, 1956 and Service Tax levied on services rendered is governed by Service Tax, Finance

Act, 1994 in India.

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UNIT 16 DIRECT TAXES

Structure

16.1 Introduction

16.2 Objectives

16.3 Classification of Taxes

16.4 Income Tax

16.4.1 Residential Status and Tax Incidence

16.4.2 Incomes that are Exempted

16.4.3 Income from Salaries

16.4.4 Income from House Property

16.4.5 Income from Profits and Gains of Business or Profession

16.4.6 Capital Gains

16.4.7 Income from Other Sources16.4.8 Deductions from Gross Total Income

16.5 Wealth Tax

16.5.1 Debt Owed

16.5.2 Current Developments

16.6 Summary

16.7 Glossary

16.8 Suggested Readings/Reference Material

16.9 Suggested Answers

16.10 Terminal Questions

16.1 INTRODUCTION

The origin of the word tax is derived from the term taxation, which means an estimate.

The word tax refers to the required payments of money made to governments that provide

public goods and services for the benefit of the community as a whole. Taxes on income in

some form or other were levied existed even in primitive and ancient communities, and

were levied on the sale and purchase of merchandise and livestock and were collected in a

haphazard manner from time to time.

In India, the system of taxation existed even in ancient times, which find references in

Manu Smriti and Arthasastra. A detailed analysis given by Manu on the subject clearly

shows the existence of a well-planned taxation system in ancient India. Taxes were paid as

gold coins, cattle, grains, raw materials and also by rendering personal service. In this unit,

we shall identify the different types of taxes and the various taxes that fall under each

category. First, we shall deal with the first category of taxes Direct taxes in detail.

16.2 OBJECTIVES

After going through the unit, you should be able to:

Classify the various types of taxes;

List a few important incomes that are exempted from tax;

Summarize important provisions that fall under the head of Salaries;

Reproduce the various deductions that can be claimed under the head of HouseProperty;

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Recognize the expenditure that is allowable as deduction, and the expenditure that is

disallowed for the purpose of computation of Profits and Gains of Business or

Profession;

List the items that will be considered Deemed Income for the purpose of taxation

under the head of Profits and gains of Business or Profession;

State the important deductions that are allowed from Gross Total Income; and

State the important provisions pertaining to Wealth Tax.

16.3 CLASSIFICATION OF TAXES

Today the system of taxation in India is divided into the direct tax system and the indirect

tax system (see Figure 1). Direct tax is a tax that cannot be shifted to others, such as the

income tax, wealth tax etc. Indirect tax, on the other hand, is a tax that can be shifted to

others, such as sales tax, excise duty, custom duty etc.

System of Tax

Direct Tax Indirect Tax

Income Tax Wealth Tax Excise Duties Custom Duties Sales Tax

Figure 1

DIRECT TAXES

The Government directly collects these taxes from the pockets of the earners out of their

income. These taxes are collected from certain category of people only. Income tax,

professional tax, wealth tax and estate tax are such kind of taxes.

INDIRECT TAXES

Though these taxes are paid by the people of the country, these taxes need not be paid by

them directly. These taxes are collected through the manufacture and sale of products and

services i.e., the amount of tax is inclusive in the price of the product or service. The only

difference is that every person who becomes a consumer for a product or service needs to

pay this tax irrespective of his earnings. Sales tax/VAT, excise duty, customs duty and

service tax etc., comes under this category. These taxes are also known as commercial taxes

as these are imposed on traded items.

According to the Indian Constitution, the revenues that are generated in the form of levying

taxes are divided between Central and State Governments on ratio basis. Accordingly both

Center and States will share the revenue as per the subjects listed under Union List andState List of the VIIth Schedule of the Indian Constitution. According to this,

Taxes collected by Center: The Central Government collects wholly indirect taxes like

customs duty, excise duty, Central Sales Tax (CST), and direct taxes like income tax,

wealth tax, estate duty and education cess, etc.

Taxes collected by State: Indirect taxes like Sales Tax/VAT, excise duty on liquor etc.,

and direct taxes like property tax, professional tax are collected by the concerned State

Government.

Taxes are applied to every citizen of India if he comes under the purview of the tax. Taxes

are calculated on the basis of revenues generated or expected to be generated on the

particular entities. Direct taxes are mainly collected from the individuals and companies or

organizations etc. Whereas indirect taxes are collected from the entrepreneurs or

manufacturers or traders on the basis of their turnover during the financial year.

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16.4 INCOME TAX

Income Tax is a species of direct tax and is governed by the Income Tax Act, 1961. By

virtue of the power conferred on the Central Government by the Constitution of India, the

former enacted the Income Tax Act, 1961 (herein the chapter referred to as the Act).

The Act extends to whole of India and came into force on the first day of April 1962. Part

B of the Finance Act contains detailed tax proposals. Once it is approved by theParliament and acquires the assent of the President, the income shall be charged

according to the rates of tax prescribed in Schedule I of the Finance Act. The Act is

administered by Central Board of Direct Taxes (CBDT), which is empowered to frame

rules to achieve the purpose of the enactment and ensure proper governance of the Act.

The CBDT issues circulars from time to time:

to clarify any doubts regarding the scope and meaning of the Act;

to act as a guide for officers and assessees.

However, the circulars of CBDT, an executive authority, are binding on assessing

officers but not on assessees and courts. The Central Government is empowered to

constitute an independent authority, settlement commission, a quasi-judicial body tosubordinate the CBDT.

Income tax can be levied on both individuals (personal income taxes) and businesses (tax

on business and corporate income) with respect to the income, both earned (salaries, wages,

tips, commissions) and unearned (interest, dividends).

Before discussing about the other aspects of the Act, let us have a look at the important

terminology pertaining to the Income Tax Act.

Assessee (Section 2(7)): An assessee is a person by whom any tax or any other sum of

money is payable under the Act.

Assessment Year (Section 2(9)): Assessment year means the period of 12 months

starting from 1st April of every year and ending on 31st March of the next year. Previous Year (Section 3): Income earned in a year is taxable in the next year. The

year in which income is earned is known as the previous year and the next year in

which income is taxable is known as the assessment year.

Receipt vs. Accrual of Income: Income is said to have been received by a person

when payment has been actually received whereas income is said to have accrued if

there arises in the person a fixed and unconditional right to receive it.

Belated Return: Section 139(4) provides that a return which has not been furnished

by the due date may still be furnished as a belated return before the expiry of one year

from the end of the assessment year or before the completion of assessment,

whichever is earlier.

Revised Return: If a person having filed his return within the due date discovers any

omission or wrong statement therein, he may file a revised return before the expiry of

one year from the end of the assessment year or completion of assessment whichever

is earlier.

Income: The definition of income under Section 2(24) of the Income Tax Act, 1956,

is of an inclusive nature, i.e., apart from the items listed in the definition, any receipt

which satisfies the basic condition of being income is also to be treated as income and

charged to income tax accordingly. Income includes:

a. Profits and gains of business or profession including any benefit, amenity,

perquisite obtained in the course of such business or profession.

b. Salary income including any benefit, allowance, amenity or perquisite obtainedin addition to or in lieu of salary.

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c. Income from house property.

d. Dividend Income.

e. Winnings from lotteries, crossword puzzles, races, games, gambling or betting.

f. Capital gains on sale of capital assets.

g. Amounts received under a Keyman Insurance Policy, i.e., a life insurance policytaken by a person on the life of another person who is or was the employee of the

first mentioned person or is or was connected in any manner whatsoever with the

business of the first mentioned person.

h. Voluntary contributions received by a religious or charitable trust or scientific

research association or a sports promotion association.

i. Any allowance granted to the assessee either to meet the personnel expenses at

the place where the duties of his office or employment of profit are ordinarily

performed by him or at a place where he ordinarily resides or to compensate him

for the increased cost of living.

j. Any sum received from an individual or HUF on or after 1st September 2004 in

cash or by cheques or by any other mode or credit in excess of Rs.50,000, then

the whole of such sum,

Which excludes,

i. Amounts received or credited to by an individual from a relative out of

natural love and affection.

ii. Amounts received or credited to by an individual or HUF under a will or by

way of inheritance.

iii. Any sum received in contemplation of death of an individual or

karta/member of a HUF.

iv. Any sum received on occasion of marriage of the individual.

v. Money received from a local authority.

vi. Money received from any fund, foundation, university, other educational

institutions, hospital, medical institution, any trust or institution referred to

in Section 10(23C).

vii. Money received from a charitable institute registered under Section 12AA

Gross Total Income.

According to Section 14 income of a person is computed under the following five

heads: (a) Income from Salaries, (b) Income from House Property, (c) Profits and

Gains of Business or Profession, (d) Capital Gains and (e) Income from Other

Sources.

APPLICABILITY

The Income Tax Act, 1961 is applicable to all persons of India. According to Section 2(31)

of the Income Tax Act, a person means and includes:

i. an individual;

ii. a Hindu Undivided Family (HUF);

iii. a company;

iv. a firm;

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v. an Association of Persons (AOP) or a body of individuals, whether incorporated or

not;

vi a local authority; and

vii. every artificial juridical person, not falling within any of the above clauses.

BASIS OF CHARGE

According to Section 4 of the Income Tax Act, 1961 the gross taxable income of every

person during the previous year is the basis of calculation of income tax. The rate of tax

depends upon the class of assessee he belongs to, and the tax rates prescribed by the

Finance Act.

TAX RATES

Tax rates are given by the Finance Act which is passed by the Parliament every year.

Income tax is computed according to the relevant Finance Act. The tax rates are contained

in the First Schedule (Parts i, ii and iii). For the Assessment Year 2009-2010, the rates are

i. In the case of Individuals

a. In case of an individual (man or woman) being resident in India who is of the

age of 65 years and above

Income Tax Rates

Up to Rs.2,25,000 Nil

Rs.2,25,001 Rs.3,00,000 10%

Rs.3,00,001 Rs.5,00,000 20%

Above Rs.5,00,000 30%

b. In case of a woman, resident in India and below the age of 65 years

Income Tax Rates

Up to Rs.1,80,000 Nil

Rs.1,80,001 Rs.3,00,000 10%

Rs.3,00,001 Rs.5,00,000 20%

Above Rs.5,00,000 30%

ii. In case of other individuals, HUF, AOP

Income Tax Rates

Up to Rs.1,50,000 Nil

Rs.1,50,001 Rs.3,00,000 10%

Rs.3,00,001 Rs.5,00,000 20%

Above Rs.5,00,000 30%

In case of Individuals, HUF, AOP (other than co-operative societies):

Surcharge is not leviable, if the total income does not exceed Rs.10,00,000. Where the

total income exceeds Rs.10,00,000, surcharge will be levied @ 10% of the income

tax payable.

Education Cess

In addition to income tax and surcharge, an additional levy of 3% towards education

cess is to be made on the aggregate of income tax and surcharge payable for the

Assessment Year 2009-10.

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iii. Companies

Domestic companies are levied a tax @30%; surcharge @10% and education cess of

3% levied on tax plus surcharge.

The tax rate in the case of foreign companies is @40%, surcharge of @ 2.5% and

education cess of 3%.

In addition to the tax rates prescribed by relevant Finance Act, special rates are prescribed

under Income Tax Act. For example, the long-term capital gains are taxable at the rate of

20% under Section 112, winnings from lotteries, crossword puzzles, races, card games is

taxable at 30% under Section 115 BB.

16.4.1 Residential Status and Tax Incidence

As per Section 5 of the Income Tax Act, the total income of any person in the previous

year is determined according to his residential status (Resident and Ordinary Resident,

Resident but not Ordinarily Resident and Non-Resident) of that person for the relevant

assessment year.

RESIDENTIAL STATUS OF AN INDIVIDUAL

The basis for determination of residential status of the same is presented an individual is

laid down in Section 6.

There are a few conditions to be taken into consideration for determining the residential

status of an individual.

In the case of an individual

[other than that mentioned in

columns (2) and (3)].

In the case of an Indian

citizen who leaves India

during the previous year for

the purpose of employment

or, in the case of an Indian

citizen who leaves India

during the previous year as a

member of the crew of an

Indian ship.

In the case of an Indian

citizen or a person of Indian

origin (who is abroad) who

comes to India on a visit

during the previous year.

(1) (2) (3)

a. Presence for at least

182 days in India

during the previous

year.

a. Presence for at least

182 days in India

during the previous

year.

a. Presence for at least 182

days in India during the

previous year.

b. Presence of at least 60

days in India during the

previous year and 365

days during 4 years

immediately preceding

the relevant previous

year.

b. Non-functional. b. Non-functional.

Table 1: Basic Conditions at a Glance

i. Resident India in at least 2 out of 10 years preceding the previous year [or must

satisfy at least one of the basic conditions, in 2 out of 10 preceding previous years].

ii. Presence of at least 730 days in India during 7 years preceding the previous year.

Table 2: Additional Conditions at a Glance

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RESIDENTIAL STATUS OF A HUF, FIRM, AND AOP

According to Section 6(2) a hindu undivided family, firm or other association of persons is

said to be resident in India, if control and management of its affairs is wholly or partly

situated in India.

They are treated as Non-Resident in Indiaif control and management of its affairs is wholly

situated outside India.

Note: Only an individual and a HUF can be resident but not ordinarily resident.

Whereas Firm, AOP, BOI, Company and other persons can be either be residents or non-

residents only.

Therefore if the control and management of the affairs of the HUF is wholly or partly

situated in India and if the manager or Karta of the family satisfies any of the following

conditions, the HUF shall be considered as Resident and Ordinarily Resident:

a. Resident in India in at least 2 out of 10 years preceding the previous year [or must

satisfy at least one of the basic conditions, in 2 out of 10 preceding previous years].

b. Presence of at least 730 days in India during 7 years preceding the previous year.

If the control and management of the affairs of the HUF is wholly or partly situated in India

and if the manager or Karta of the family fails to satisfy any of the above conditions, the

HUF shall be considered as Resident and not Ordinarily Resident.

RESIDENTIAL STATUS OF A COMPANY

According to Section 6(3) an Indian company is always resident in India. A foreign

company is resident in India only, if during the relevant previous year, control and

management of its affairs is situated wholly in India. A foreign company is treated as non-

resident if, during the previous year, control and management of its affairs is either wholly

or partly situated out of India.

RESIDENTIAL STATUS OF EVERY OTHER PERSON

According to Section 6(4) every other person is resident in India if during the relevant

previous year control and management of its affairs is wholly or partly situated within

India. On the other hand, every other person is non-resident in India if control and

management of its affairs is wholly situated outside India.

16.4.2 Incomes that are Exempted

Section 10 of the Act provides exemption for certain incomes from the calculation of Total

Income. That means those incomes need not to be considered as taxable income. Some of

those incomes are:

i. Agricultural income.

ii. Receipts by an individual HUF member out of the income of the family.

iii. Share of profit of a partner in a partnership firm.

iv. Salary received by a ships crew.

v. Remuneration to foreign trainee.

vi. Technical fees received by a notified foreign company.

vii. Payment from public sector company at the time of voluntary retirement

[Section 10(10C)].

viii. Tax on perquisite paid by employer [Section 10(10CC)].

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ix. Amount received on life insurance policies [Section 10(10D)].

x. Payment from provident fund [Section 10(11), (12)].

xi. Payment from an approved superannuation fund [Section 10(13)].

xii. Scholarships granted to meet the cost of education.

xiii. Any long-term capital gain arising out of transfer or a listed security being equity in

a listed company.

xiv. Income and allowances of MLAs and MPs arisen from such position.

xv. Income of former rulers.

xvi. Income of local authorities.

xvii. Incomes of political parties.

xviii. Incomes of trade unions.

xix. Incomes of charitable and religious trusts.

xx. Income of a mutual fund [Section 10(23D)].

xxi. Income of provident funds [Section 10(25)].

xxii. Income of employees state insurance fund [Section 10(25A)].

xxiii. Income of investor protection fund set up by recognized stock exchange

[Section 10(23EA)].

xxiv. Income of venture capital funds and venture capital undertakings

[Section 10(23FB)].

xxv. Income of trade unions [Section 10(24)].

xxvi. Income of a member of scheduled tribe [Section 10(26)].

xxvii. Exemption of commodity boards and authorities from income tax [Section 10(29A)].

xxviii. Income of a minor [Section 10(32)].

xxix. Exemption of capital gain on transfer of a unit of unit scheme, 1964 (US 64)

[Section 10(33)].

xxx. Dividend to be exempt in the hands of the shareholders [Section 10(34)].

xxxi. Interest to be exempt in the hands of the unit holders [Section 10(35)].

xxxii. Long-term capital gains on transfer of listed equity shares [Section 10(36)].

xxxiii. Capital gain on compulsory acquisition of urban agriculture land [Section 10(37)].

xxxiv. Income from transfer of long-term capital asset covered by Securities Transaction

Tax (STT) [Section 10(38)].

xxxv. Capital gains on transfer of business to an Indian Company [Section 10(41)].

xxxvi. Income of new undertakings in FTZ/EPZ/SEZs.

xxxvii. Income of new undertaking which are 100% export oriented units.

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Self-Assessment Questions 1

a. What is scope/applicability of Indian Income Tax Act in terms of geographical area

and when did it come into force?

..

.

.

b. Can January 1st to December 31st, the period of 12 months be considered as

assessment year under Income Tax Act, 1961?

..

.

.

c. Mr. Xs (below 65 years) total income for the assessment year 2009-10 is

Rs.4,50,000. Compute his tax liability...

.

.

16.4.3 Income from Salaries

For the income to be taxable under this head, the relationship of employer and employee

must exist between the payer and payee. The person employed may be on a full-time or

part-time basis.

The remuneration received by an individual is taxable under the head Salariesirrespective of whether the remuneration is termed as salary or wages as both are

compensation for work done or services rendered.

The salary payable must be real and not fictitious and there must be an intention to pay on

the part of employer and receive on the part of employee.

Under Section 17(1), salary includes:

wages,

any annuity or pension,

any gratuity,

any fees, commission, perquisite or profits in lieu of or in addition to any salary or

wages,

any advance of salary,

any payment received in respect of any period of leave not availed by the employee,

portion of the annual accretion in any previous year to the balance at the credit of an

employee participating in recognized provident fund to the extent it is taxable and

transferred balance in a recognized provident fund to the extent it is taxable.

ADVANCE SALARY

Any salary received in advance is taxable on receipt basis in the year in which it is

received, irrespective of incidence of tax in the hands of the employee. For this purpose,

any loan taken from the employer is not regarded as advance salary.

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ARREARS OF SALARY

If there are any arrears of salary which have not been taxed in the past, such arrears will be

taxed in the year in which these arrears are paid or allowed to the employee.

SURRENDER OF SALARY

If any employee opts to surrender his salary to the Central Government under Section 2 of

the Voluntary Surrender of Salaries (exemption from taxation) Act, 1961, the salary so

surrendered is excluded while computing his taxable income.

TAX-FREE SALARY

When the employee receives tax-free salary from his employer, it means that the employer

himself pays the tax which is due on the salary of such employee. The amount of tax, so

paid by the employer, is also to be considered as the income of the employee and will be

added to his salary.

LEAVE SALARY

Any amount received as cash equivalent of leave salary in respect of period of earned leave

at his credit at the time of retirement whether on superannuation or otherwise is exempt

from tax in the case of government employees. Similar provisions with certain limits apply

to leave salary in the case of other employees.

GRATUITY

Gratuity is paid for the long and meritorious services rendered by an employee. Under

Payment of Gratuity Act, 1972, gratuity payment has become legally compulsory in most

of the cases and where it is not applicable the employee can claim gratuity under the terms

of contract of employment. In the case of government employees gratuity is wholly exempt

in the case of employees covered under Payment of Gratuity Act, 1972, the amount is

limited to 15 days salary, actual gratuity received or Rs.3,50,000 whichever is less.

When the gratuity is received from more than one employer the maximum amount that is

exempt.

PENSION

Pension is a periodical payment of money for past service and it is received by employee

after his retirement and is taxed as salary. Pension earned and received abroad but later

remitted to India is exempt from tax, in the case of a non-resident and a resident but not

ordinarily resident. It is chargeable to tax if the pensioner is resident and ordinarily resident.

Pension may be received by the assessee either in lump sum or periodically. The former is

known as commuted pension and the latter is known as uncommuted pension.Uncommuted pension is treated as salary, taxable in the hands of the recipient irrespective

whether he is a government or non-government employee.

Any amount received by a Government employee as commutation of pension is fully

exempted from tax under Section 10(10A)(i).

But in case of non-government employee the amount exempt from tax is limited to

commuted value of 1/3 of pension or 1/2 of pension depending on whether he is receipt of

gratuity or not.

BONUS

It is taxable in the year of receipt. Contractual bonus is treated as salary while gratuitous

bonus is treated as perquisite. An assessee may claim relief under Section 89(1) where he

receives bonus in arrears.

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FEES AND COMMISSION

They are taxable as salary irrespective of the fact that they are paid in addition to or in lieu

of salary. However, commission paid to a director (not being an employee) for his giving

guarantee for repayment of loan is taxable under the head Income from Other Sources.

DEARNESS ALLOWANCE (DA)

It is taxable under the head Income from Salaries.

CITY COMPENSATORY ALLOWANCE

It is taxable whether given for meeting personal and other expenses that an employee

may have to incur either due to the special circumstances he works in or posting at a

particular place.

HOUSE RENT ALLOWANCE

The least of the following will be allowed as deduction:

i. 50 percent of salary in case the residential house is situated at Mumbai, Delhi,

Kolkata, and Chennai;

40 percent of salary in case the residential house is situated at any other place;

ii. Actual house rent allowance received by the employee in the previous year;

iii. The excess of rent paid over 10 percent of the salary.

For the purpose of calculating HRA,

Salary includes DA if the terms of employment so provide and it also includes

commission based on a fixed percentage of turnover achieved by an employee as per

terms of contract of employment but it excludes all other allowances and perquisites.

Exemption in case of HRA is denied where rent paid does not exceed 10 percent of salary

or when employee lives in his own house or when he lives in a house for which he does not

pay any rent.

SPECIAL ALLOWANCES

Special allowance will be allowed as exemption which is not in nature of a perquisite

within the meaning of Section 17(2) and which is specifically granted to meet expenses

incurred wholly, necessarily and exclusively for the performance of the official duties or

employment for profit, as notified by the Central Government in the Official Gazette.

PERQUISITES

Perquisite is defined as any casual emolument or benefit attached to an office or position in

addition to salary or wages. They may be provided either in cash or in kind. Perquisites are

included in salary only if they are:

a. received by an employee from his employer,

b. allowed during the continuance of employment,

c. directly dependent upon service,

d. resulting in the nature of personal advantage to the employee, and

e. derived by virtue of employers authority.

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According to Section 17(2), perquisite includes:

a. The value of rent-free accommodation provided to the assessee by his employer:

[Section 17(2)(i)].

b. The value of any concession in the matter of rent in respect of any accommodation

provided to the assessee by his employer [Section 17(2)(ii)].

c. The value of any benefit or amenity granted or provided free of cost or at concessional

rate in any of the following cases:

i. By a company to an employee who is a director thereof;

ii. By a company to an employee, being a person who has substantial interest in the

company;

iii. By any employer (including a company) to an employee to whom provisions of

(i), (ii) above do not apply and whose income under the head Salaries

exclusive of the value of all benefits or amenities not provided for by way of

monetary benefits, exceeds Rs.50,000 [Section 17(2)(iii)].

d. Any sum paid by the employer in respect of any obligation which but for such

payment would have been payable by the assessee [Section 17(2)(iv)].

e. Any sum payable by the employer, whether directly or through a fund other than a

recognized provident fund or approved superannuation fund or a deposit-linked

insurance fund, to effect an assurance on the life of the assessee or to effect a contract

for an annuity [Section 17(2)(v)].

f. The value of any other fringe benefit or amenity as may be prescribed [Section

17(2)(vi)] excluding the fringe benefits chargeable to tax under Chapter XII-H

[Section 17(2)(vi)].

DEDUCTIONS UNDER THE HEAD SALARY

The income chargeable under the head Salaries shall be computed after making the

following deductions from gross salary:

i. Deduction for entertainment allowance.

ii. Deduction for profession tax.

16.4.4 Income from House Property

The annual value of property consisting of any buildings or lands appurtenant thereto, of

which the assessee is owner, is chargeable to tax under the head, Income from HouseProperty. Any house property occupied by the assessee for the purpose of business or

profession carried on by him, the profits of which are chargeable to tax, annual value of

such property is not chargeable to tax under this head.

According to Sec.22 of the Income Tax Act, 1961, tax is charged only if (a) the property

consists of any building or land appurtenant thereto; (b) the assessee is the ownerof house

property; and (c) the property should not be used by the owner for purpose of his business

or profession, the profits of which are chargeable to tax. If the house property is sublet, it is

not taxable under this head but it is taxed under the head Income from Other Sources.

Tax on house property is levied only if the assessee is the owner of the property. Owner

includes legal as well as deemed owners. Under this section owner may be an individual,firm, company, co-operative society, or association of persons.

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Under Section 27 of the Act the following persons will be treated as deemed owners an

individual, who transfers house property otherwise than for adequate consideration to his or

her spouse or to minor child, the holder of impartible estate, a member of co-operative

society, company or association of persons to whom a building or a part thereof is allotted

or leased under a house building scheme of the society, company or association, a person

who is allowed to take or retain possession of any building in part performance of a

contract entered into under Section 53A of the Transfer of Property Act.

Tax is levied on the annual value of the property and not on rent.

ANNUAL VALUE

The annual value is calculated by taking the following factors into consideration

(i) the rent payable by the tenant, (location of property), (ii) municipal valuation of the

property, (iii) fair rent of the property, and (iv) the standard rent under the Rent

Control Act.

Income from house property is referred to as annual value. For the purpose of taxation, the

annual value of house property is determined as follows:

1. The annual value is taken as nil if the house property is occupied by the owner.

2. If the house cannot be occupied by the owner because of his employment, business or

profession being at some other place forcing him to reside there, the annual value is

again taken as nil.

However, these two clauses are applicable only for one house, and that too only if the

owner does not let-out the house during any part of the year, nor does he derive any

other benefit from such house.

3. In other cases, the annual value of any property is taken as:

a. The sum for which the house may reasonably be expected to let from year to

year; or

b. Where the house is let-out for a sum higher than one mentioned in (a) above, the

actual rent; or

c. Where the house is let-out for a part of the year, and the rent received is lower

than the sum mentioned in (a) above due to the house being vacant for a part of

the year, the actual rent received.

For the above purpose Reasonably expected rent means municipal valuation or fair rent,

whichever is higher subject to a maximum of standard rent under Rent Control Act.COMPUTATION OF INCOME FROM HOUSE PROPERTY

Gross Annual Value xxx

Less: Municipal Taxes xxx

Net Annual Value xxx

Less: Deductions under section 24

Standard deduction

Interest on borrowed Capital

xxx

Income from House Property xxx

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PROPERTY EXEMPT FROM TAX

There are certain properties which are completely exempt from tax under this head. They

are:

i. Income from farm house.

ii. Annual value of any one palace of an ex-ruler.

iii. Property income of local authority.

iv. Property income of an authority constituted for the purpose of planning, development

or improvement of cities, towns and villages.

v. Property income of an approved scientific research association.

vi. Property income of a university or other educational institutions, hospital or other

medical institution, games association, trade union.

vii Property income of a trade union.

viii. House property held for charitable purposes.

ix. Property income of a political party.

x. Property used for own business or profession and one self-occupied property.

DEDUCTIONS UNDER THE HEAD OF HOUSE PROPERTY

i. Municipal rates and taxes.

ii. 30% of Net Annual Value: 30% of the Net Annual Value is allowed as deduction

under this head. This deduction is automatic and does not depend on the quantum ofactual expenditure incurred in respect of repairs, collection charges etc. This deduction

is allowed even if no expenditure is incurred by the assessee. The assessee can avail

this deduction even if the tenant undertakes to do the repairs.

iii. Interest on Loans: Interest payable on the loans borrowed for the purpose of

acquisition, construction, renovation, repairing or reconstruction can be claimed as

deduction. Interest relating to the year of completion of construction can be fully

claimed in that year irrespective of the date of completion. Interest accrued during the

construction period preceding the year of completion of construction can be

accumulated and claimed as deduction over a period of five years in equalinstallments commencing from the year of completion of construction.

In the case of self-occupied property interest on loan borrowed on or after April 1,

1999 is limited to Rs.1,50,000. In the case of others there is no such ceiling.

iv. Unrealized rent from the tenant.

TAX TREATMENT OF LOSS FROM HOUSE PROPERTY

If the assessee incurs a loss under the head Income from House Property, the loss can be

set-off against any other head of income. Any unadjusted loss can be carried forward for a

period of 8 years for being set-off against any future income under the same head.

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Self-Assessment Questions 2

a. The maximum exemption of gratuity in case of non-government employees covered

under Payment of Gratuity Act, 1972 for the assessment year 2009-2010 is?

..

.

.

b. If the rent is paid for a house situated in Delhi, the HRA shall be exempt to the

maximum extent of ?

..

.

.

c. The municipal value of a let-out property of Mr.Naidu was Rs.90,000; its fair value

was Rs.1,05,000; and the standard rent fixed under Rent Control Act is Rs.95,000.

What can be taken as reasonable rent for this property?

..

.

.

16.4.5 Income from Profits and Gains of Business or Profession

Meaning of Business

In view of Section 2(13) business includes any (a) trade (b) commerce (c) manufacture or

(d) any adventure or concern in the nature of trade, commerce or manufacture. Though the

definition is not exhaustive, it covers every facet of an occupation carried on by a person

with a view to earning profit. Production of goods from raw material, buying and selling of

goods to make profits and providing services to others are different forms of business.

Profits arising therefrom are, therefore, chargeable to tax under the head Profits and Gains

of Business or Profession. The term business is a word of wide import and in fiscal

statutes it must be construed in a broad rather than a restricted sense.

EXPENSES EXPRESSLY ALLOWED AS DEDUCTIONS

i. Rent, rates, taxes, repairs and insurance for buildings.

ii. Repairs and insurance of machinery, plant and furniture.

iii. Depreciation.

iv. Expenditure on scientific research.

v. Expenditure on acquisition of patent rights and copyrights.

vi. Expenditure on know-how.

vii. Amortization of telecom licence fees.

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viii. Expenditure on eligible projects or scheme used for promoting social and economic

welfare or upliftment of the public as may be specified by the Central Government.

ix. Amortization of preliminary expenses.

x. Amortization of expenditure on prospecting, etc., for development of certain

minerals.

xi. Insurance against risk of damage or destruction of stocks or stores, used for the

purposes of business.

xii. Insurance premium paid by a federal milk co-operative on the lives of cattle.

xiii. Premia for insurance on health of employees.

xiv. Bonus or commission to employees.

xv. Interest on borrowed capital.

xvi. Employers contribution to recognized provident fund and approved superannuation

fund.

xvii. Employers contribution towards an approved gratuity fund.

xviii. Employees contribution towards staff welfare schemes amount of any debt or part.

xix. Provisions for bad and doubtful debts in case of certain banks and financial institution.

xx. 20 percent of the profits derived from business of providing long-term finance

carried on to a special reserve account.

xxi. Revenue expenditure incurred for the purpose of promoting family planning among

its employees.

xxii. Any sum paid by a public financial institution by a way to contribution towards any

exchange risk administration fund.

xxiii. Banking cash transaction tax paid by an assessee during the previous year on taxable

banking transactions.

xxiv. Expenses not in the nature of a capital expenditure, not represent any item of

personal nature, wholly and exclusively for the purpose of business or profession.

EXPRESSLY DISALLOWED EXPENSES

a. Any interest, royalty, fees for technical services or other sum chargeable under

Income Tax Act which is payable:

i. Out of India; or

ii. In India to a non-resident, not being a company or to a foreign company on

which tax has not been paid or after deduction, has not been paid during the

previous year, or in the subsequent year before the expiry of the time prescribed

under law.

In case the tax is deducted in any subsequent year or has been deducted in the

previous year but paid in any subsequent year after the expiry of time prescribed

under law, such sum shall be allowed as a deduction in computing the income of

the previous year in which such tax has been paid [Section 40(a)(i)]:

a. Any interest, commission or brokerage, fee for professional services or fees

for technical services payable to a resident contractor or sub-contractor on

which tax is deductible at source shall be disallowed if on which tax has not

been paid or after deduction, has not been paid during the previous year, or

in the subsequent year before the expiry of the time prescribed under law;

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b. In case the tax is deducted in any subsequent year or has been deducted in

the previous year but paid in any subsequent year after the expiry of time

prescribed under law, such sum shall be allowed as a deduction in

computing the income of the previous year in which such tax has been paid

[Section 40(a)(ai)];

c. Any sum paid on account of Income Tax, Wealth Tax, Fringe Benefit Tax

and Securities transaction tax are not deductible;

d. Salary payable out of India if tax has not been paid or deducted at source;

and

e. Any payment to a provident or any other fund established for the benefit of

employees of the assessee in respect of which the assessee has not made

effective arrangement to secure that tax shall be deducted at source from

any payment, made from the fund;

f. Tax paid by employer at his option on non-monetary perquisites of the

employee on behalf of the latter;

g. Expenditure incurred by an assessee in respect of which payment has been

made to relative;

h. Any expenditure in excess of Rs.20,000 spent in a mode otherwise than by

a crossed cheque or crossed bank draft;

i. Any provision made by the assessee for payment of gratuity to his

employees in respect of Provision for Unapproved Gratuity;

j. Contribution to Non-statutory Funds;

DEEMED PROFITS

Deemed profits are those receipts which have to be treated as income for the sake of

inclusion under the head profits and gains of business or profession even though these

incomes are not considered as one as per the accounting norms of the company.

i. Any recovery or salvage obtained from items allowed as deduction in any of the

previous years, is chargeable to tax as business income.

ii. Balancing charge on asset of an undertaking engaged in generation or generation and

distribution of power.

iii. Sale of assets used for scientific research.

iv. Recovered bad debts earlier allowed as deduction.

v. Amount withdrawn from special reserve created and maintained by certain financial

institutions.

vi. Any amounts in the form of unexplained investments; Unexplained money.

investments not fully disclosed; Unexplained and amount borrowed or repaid on hundi

are considered as deemed incomes.

ACCOUNTING METHOD

The accounting method regularly employed by the assessee has to be used to calculate the

income under the head Profits and Gains of Business or Profession. That is, it shall be

computed only in accordance with either the cash or the mercantile system of accounting

regularly employed by an assessee.

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COMPULSORY MAINTENANCE OF BOOKS OF ACCOUNT

This section provides for compulsory maintenance of books of account by certain specified

persons.

a. Persons carrying on

specified profession

Gross receipts does notexceed Rs.1,50,000 in any

of the three preceding

previous years.

The persons falling underthis category should

maintain books of account

and other documents to the

satisfaction of Assessing

Officer.

b. Persons carrying on

specified profession

Gross receipts from theprofession exceedsRs.1,50,000 in any of the

three preceding previous

years.

The persons falling in thiscategory should maintainsuch books of account as

are prescribed under Rule

6F.

c. Persons carrying on non-specified profession or

carrying on business

Income from profession orbusiness or business does

not exceed Rs.1,20,000 or

the total sales turnover or

Not required to maintain

any books of account.

gross receipts thereof arenot in excess of

Rs.10,00,000 in any of the

three years immediately

preceding the previous

year.

d. Persons carrying on non-

specified profession

Income from suchprofession or business

exceeds Rs.1,20,000 or the

total sales, turnover or

gross receipts thereof are

in excess of Rs.10,00,000

in any of the three years

immediately preceding theprevious year.

Should maintain booksand other documents to the

satisfaction of Assessing

Officer.

Table 3: Compulsory Maintenance of Books by Specified Persons

For (a) and (b), the income limit is Rs.80,000 in the case of a person who, in the course of

medical profession, dispenses drugs and medicines.

AUDIT OF CERTAIN PERSONS

This section provides for audit of accounts of certain persons.

Different taxpayers When then are covered by the provisions of compulsory audit

under Section 44AB.

A person carrying on

business

If the total sales, turnover or gross receipts in business for the

accounting year or years relevant to the assessment year

exceeds Rs.40 lakh.

A person carrying on

profession

If the gross receipts in profession for an accounting year

relevant to any of the assessment year, exceeds Rs.10 lakh.

A person covered under

Section 44AD, 44AE,

44AF, 44BB, 44BBB

If such person claims that the profits and gains from the

business are lower than the profits and gains computed under

these sections (irrespective of his turnover).

Table 4: Audit of Certain Persons

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MINIMUM ALTERNATE TAX

Section 115JB provides that, where in the case of an assessee, being a company, the income

tax, payable on the total income as computed under this Act in respect of any previous year

relevant to the assessment year commencing on or after the 1st day of April, 2001, is less

than seven and one-half percent of its book profit, the tax payable for the relevant previous

year shall be deemed to be seven and one-half percent of such book profit and such book

profit shall be deemed to be the total income.

16.4.6 Capital Gains

Section 2(14) defines a Capital Asset as property of any kind whether fixed or

circulating, movable or immovable, tangible or intangible.

The term Capital Asset does not include the following:

Any stock-in-trade, consumable stores or raw materials held for the purpose of

business or profession;

Personal effects of the assessee, that is movable property including wearing apparel,

furniture and jewelry held for personal use or for the use of any member of his family

dependent upon him;

Agricultural land in India provided it is not situated in any area within the jurisdiction

of a municipality or a cantonment board, having a population of 10,000 or more or in

any such notified area;

6 percent Gold Bonds, 1977 or 7 percent Gold Bond, 1980 or National Defence Gold

Bonds, 1980 issued by the Central Government; and with effect from assessment year

2000-01, Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 shall not

be included;

Special Bearer Bonds 1991;

Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999.

The goodwill of a business is capital asset and any excess realized over its book value

would be a capital gain chargeable to tax, right to subscribe to shares, partners share in a

firm, leasehold in mines and license to manufacture an item, dealership rights, right of

tenancy under Tenancy Act, a right to obtain conveyance of an immovable property, a

business undertaking, and route permits are included as capital assets.

COMPUTATION OF CAPITAL GAINS

Steps Computation of short-term capital gain. Computation of long-term capital gain.

I Full value of consideration received. Full value of consideration received.

II Deduct

a. Expenditure incurred wholly and

exclusively in connection with such

transfer

b. Cost of acquisition

c. Cost of improvement

Deduct

a. Expenditure incurred wholly and

exclusively in connection with

such transfer

b. Indexed cost of acquisition

c. Indexed cost of improvement

III From the above resultant deduct

exemptions.

From the above resultant deduct

exemptions.

IV Balance is short-term capital gains. Balance is long-term capital gains.

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TRANSACTIONS NOT REGARDED AS TRANSFER

For the purpose of capital gain tax, certain transactions are not regarded as transfer. Hence,

for these transactions, there is no liability towards capital gains;

Any distribution of capital assets on the total or partial partition of a Hindu Undivided

Family (HUF).

Any transfer of a capital asset under a gift, or will or an irrevocable trust.

Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit

certificates in any form, of a company into shares or debentures of that company.

Transfer of shares in certain schemes of amalgamations, etc.

Transfer of a capital asset being any work of art, archaeological, scientific or art

collection, book, drawing, painting etc. to the government or any university or

museum notified by the Central Government.

Any transfer involved in a scheme entered into by the assessee with borrower of

securities for lending of any securities under an agreement or arrangement subject to

guidelines issued by SEBI.

Any transfer of capital asset in a transaction of reverse mortgage under a scheme made

and notified by the Central Government shall not be regarded as transfer. The revenue

received from reverse mortgage scheme by senior citizens would not be taxable

income.

TAX TREATMENT IS DIFFERENT FOR SHORT-TERM CAPITAL GAINS AND

LONG-TERM CAPITAL GAINS

Short-term Capital Gains

A short-term capital asset is one which is held for 36 months or less 12 months or less in

the case of equity shares, units of mutual funds/UTI and listed securities immediately

preceding the date of transfer. Short-term capital gains, i.e. gains arising from the transfer

of short-term capital assets, are treated as a part of total income in the year in which the

transfer is effected, and taxed at the normal rates of tax.

Prior to amendment made in Finance Act 2004 the short-term capital gains are taxed at

applicable tax rates (i.e., slab rates). This treatment continues to apply to all short-term

capital assets except short-term capital gains from sale of securities. A new section 111A

has been introduced, to tax the short-term capital gains arising from the sale of securities to

investors @ fifteen per cent.

Cost of Acquisition

To determine capital gains arising out of the transfer of a long-term capital asset, the cost of

acquisition and the cost of improvement are allowed as a deduction from the sales proceeds.

The cost of acquisition and the cost of improvement of asset are linked to the Cost Inflation

Index.

Long-term capital gains are therefore computed by deducting from the full value of the

consideration the expenditure incurred in connection with the transfer, the indexed cost of

acquisition, and the indexed cost of improvement.

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Cost Inflation Index

Financial Year Cost of Inflation Index Financial Year Cost of Inflation Index

1981-82 100 1995-96 281

1982-83 109 1996-97 305

1983-84 116 1997-98 331

1984-85 125 1998-99 351

1985-86 133 1999-00 389

1986-87 140 2000-01 406

1987-88 150 2001-02 426

1988-89 161 2002-03 447

1989-90 172 2003-04 463

1990-91 182 2004-05 480

1991-92 199 2005-06 497

1992-93 223 2006-07 519

1993-94 244 2007-08 551

1994-95 259 2008-09 582

Taking 1981-82 as the base year, the Central Government notified cost inflation index in

August 1992 and further as amended in 1993 (table 1), based on 75% of the increase inconsumer price index for urban and non-manual employees.

Indexed cost of acquisition means an amount which bears to the cost of acquisition the

same proportion, as the Cost Inflation Index (CII) for the year in which the asset is

transferred bears to the Cost Inflation Index for the first year in which the asset was held by

the assessee or for the year beginning on 1 April, 1981, whichever is later. In other words,

indexed cost of acquisition for financial year 2008-09 = [(CII for 2008-09) (CII for

1981-82 or later)] x Cost of Acquisition.

The indexed cost of improvement will also be similarly computed.

LONG-TERM CAPITAL GAINSAssets other than short-term capital assets are regarded as long-term capital assets. Under

Section 112, individual assesses and HUFs will pay a flat rate of tax @ 20% on long-term

capital gains (except on securities). The long-term capital gains on sale of securities are

fully exempt. Instead a tax of 0.125 % on the value of all the transactions of purchase of

securities that take place in recognized stock exchange in India has been introduced.

The threshold exemption of Rs.1,50,000 is fully available in cases where there is no income

other than long-term capital gains and partially to the extent of unabsorbed threshold

exemption after set-off of any other income if it falls below Rs.1,50,000. A cess of 3% is

applicable in the case of all assesses and (cess of 3% + 10% surcharge) is applicable in the

case of assessees with total income exceeding Rs.10,00,000.

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EXEMPTIONS FROM CAPITAL GAINS

Certain exemptions are provided from taxation of capital gains.

Exemption on Transfer of Residential House Property (Section 54)

Under Section 54, exemption from long-term capital gains tax on transfer of residential

house property is available if the whole or part of the capital gains are used to purchase

another residential house within a period of one year before the date of such transfer or

within two years of the date of transfer. In case of construction of residential property, the

construction must be completed before three years of the date of transfer.

The condition is that the new residential house should be held for a minimum period of 3

years from date of its acquisition.

In case the individual is unable to utilize the amount for the aforesaid purpose before the

date for furnishing the return of income, it shall be deposited in a Deposit Account notified

in accordance with Capital Gains Account Scheme, 1988.

Exemption from Long-term Capital Gains Invested in Bonds (Section 54EC & 54F)

Under Section 54EC, exemption from long-term capital gains tax is available if the

whole or part of the capital gains are invested within six months of the date of transfer

of the asset in bonds which are redeemable after three years. Such exemption is

available only in respect of investment in bonds issued by National Highways

Authority of India (NHAI) or by Rural Electrification Corporation Limited. The

investment is proposed to be restricted upto Rs.50,00,000 per assessee per financial

year for investments made on or after 1 April 2007.

The condition is that such investments should not be used as security for taking loans

during this lock-in period.

In the case of individuals and HUFs, long-term capital gains arising out of transfer of

capital assets other than a residential house are protected from tax under Section 54F

provided the sales proceeds are invested to either purchase a residential house within two

years or construct one within three years, subject to other conditions.

Exemption on Transfer of Assets in case of shifting of Industrial Undertaking from

Urban Area (Section 54G)

Capital gains arising on transfer of plant, machinery, land, building or any rights in land /

building effected in course of or in consequence of the shifting of an industrial undertaking

situated in an urban area to any area (other than an urban area), shall be exempt to the

extent of the amount of capital gains utilized within a period of 1 year before or 3 yearsafter the date of transfer of the above assets, for purchase of new plant and machinery, land

and building and for shifting expenses.

Exemption on Transfer of Assets in case of shifting of Industrial Undertaking from

Urban Area to Special Economic Zone (Section 54GA)

Capital gains arising on transfer of plant, machinery, land, building or any rights in land/

building effected in course of or in consequence of the shifting of an industrial undertaking

situated in an urban area to any SEZ, shall be exempt to the extent of the amount of capital

gains utilized within a period of 1 year before or 3 years after the date of transfer of the

above assets, for purchase of new plant and machinery, land and building and for shifting

expenses, subject to specified conditions.

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ADJUSTMENT OF CAPITAL LOSSES

Losses due to transfer of short-term or long-term capital assets cannot be set-off against any

other income. Long-term capital losses can be set-off only against long-term capital gains.

However, Short-term capital losses can be set-off against both short-term capital gains and

long-term capital gains. Any unadjusted capital loss may be carried forward and set off

against income under the head, capital gains of the subsequent years. However such loss

cannot be carried forward for more than 8 assessment years.

Self-Assessment Questions 3

a. X purchases a house property on March 10, 2006 and transfers it on June 6, 2008.

Is this a short-term asset or long-term asset? Justify.

..

..

..

b. Mr.Ramesh claims Rs.42,500 as deduction in respect of Income tax paid on May

15th, 2008 in respect of earlier year. Is the amount allowable as deduction under the

head of Profits and Gains of Business or Profession?

..

..

..

c. Ms.Jasmine purchased a house on June 30th, 1981 for Rs.6,50,000. She sold the

property on June 15, 2008 for Rs.75,00,000. The expenses incurred on transfer were

Rs.50,000. Compute the capital gains...

..

..

16.4.7 Income from Other Sources

Incomes like

dividends;

any winnings from lotteries, crossword puzzles, races including horse races, card

games and other games of any sort or from gambling or betting of any form or nature;

any sum received by the assessee from his employees as contributions to any staff

welfare scheme (if not taxable under Section 28);

interest on securities, if not charged to tax under the head Profits and gains of

business or profession;

income from machinery, plant or furniture let on hire [if it is not taxable in profits and

gains of business or profession];

income from letting of plant, machinery or furniture along with the building and

letting of building is inseparable from the letting of plant, machinery or furniture (if it

is not taxable under Section 28); and

any sum received under a keyman insurance policy, including bonus, if not taxable as

salary or business income.

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The treatment of each of the incomes that may be included in the head income from other

sources is detailed in the following paragraphs:

EXEMPTED ASSESSES

Interest on securities is not taxable in the hands of the following assessees:

i. Local authority.

ii. An authority constituted in India for town planning, etc.

iii. Approved scientific research association.

iv. A regiment fund or non-public fund.

v. An approved hospital.

vi. An approved athletic association.

vii. A registered trade union.

viii. A statutory, recognized provident fund and approved superannuation fund and an

approved gratuity fund.

ix. A charitable trust.

DEDUCTIONS [SECTION 57]

The income that is taxable under the head income from other sources will be arrived at

after making the following deductions under Section 57:

a. Any reasonable sum paid by way of commission or remuneration to a banker or any

other person for the purpose of realizing such dividend or interest on behalf of the

assessee is allowed as deduction.

b. The amount credited by the employer on or before the due date in the employees

accounts towards provident fund/superannuation/other funds with the amounts of

contribution received is allowed as deduction.

c. Repairs in respect of building, insurance premium paid in respect of insurance againstrisk of damage or destruction of the premises, repairs and insurance of machinery,

plant and furniture and depreciation are deductible in case of income chargeable under

Section 56 (ii)/(iii).

d. Rs.15,000 or 33 1/3% of income in the nature of family pension under Section 57(iia)

whichever is less.

e. Any other expense not being personal/capital in nature, expended in the previous year

wholly and exclusively for the purpose of making or earning income.

INADMISSIBLE EXPENSES [SECTION 58]

The following expenses are not deductible by virtue of Section 58:

i. Personal Expenses.

ii. Wealth Tax.

iii. Expenses of the nature described in Section 40A.

iv. Interest and salary payable outside India, if tax has not been paid or deducted at

source.

v. No deduction shall be allowed in respect of winnings from lotteries, card games, races

including horse races, gambling, betting, etc. (These incomes are charged to tax under

Section 115BB at a flat rate of 40% subject to availability of exemption under Section

10(3) of the Income Tax Act.)

In respect of the activity of owning and maintaining race horses, expenses incurred shall be

allowed even in the absence of any stake money earned. Such loss shall be allowed to be

carried forward in accordance with the provisions of Section 74A.

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16.4.8 Deductions from Gross Total Income

DEDUCTIONS MADE IN RESPECT OF CERTAIN PAYMENTS AND EXPENDITURE

The deductions that are allowed for payment or expenditure for computation of gross total

income are as follows:

DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS

Deduction in Respect of Life Insurance Premia, Contribution to PF etc. (Sec. 80C)

a. Premia paid on life insurance policies.

b. Sum paid for a deferred annuity as is not in excess of 20% of the actual capital sum

assured.

c. Provident fund contributions.

d. Subscriptions to any savings certificates as the Central Government may specify on

this behalf in the Official Gazette.

e. Contribution by an individual towards an approved superannuation fund.

f. Premium to keep in force a contract for annuity plan of the LIC or any other insurer as

the Central Government may notify.

g. Subscription to National Savings Certificates (VIII issue), issued under the

Government Saving Certificates Act, 1959.

h. Subscription of any security of the Central Government.

i. Any unit-linked insurance plan of LIC mutual fund.

j. Subscription to any units of the mutual fund notified under section 10 (23D).

k. Contribution to any pension fund set-up by any mutual fund notified under section 10

(23D).

l. Subscriptions to home loan account scheme or a notified pension fund of the National

Housing Bank.

m. Any sum paid on account of repayment of the sum borrowed for the purchase or

construction of house property from approved agencies.

n. Education expenses for the purpose of full time education (restricted to two children).

o. Amount invested in equity shares, debentures of a public company engaged ininfrastructure including power sector.

p. From the AY 2007-08, investment in term deposit for a fixed period of not less than

five years with any scheduled bank.

q. Five year time deposit in an account under post office time deposit rules, 1981.

r. Deposit in an account under the senior citizens savings scheme rules, 2004.

Deduction in Respect of Contribution to Pension Fund (Section 80CCC)

This section provides a deduction to an individual for any amount paid by him in any

annuity plan of LIC for receiving pension. This contribution under this section is limited to,

the overall ceiling of Rs.1,00,000 laid down under Section 80CCE.

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Deduction in Respect of Contribution to New Pension Scheme (Section 80CCD)

A new pension scheme has been introduced and is applicable to new entrants to

Government service. This section provides a deduction of the amounts paid or deposited by

an individual employed by the Central Government on or after 1st January 2004, in the

pension account subject to a maximum of ten per cent of his salary as per the scheme

notified by the Central Government. From the AY 2008-09, an individual employed by anyother employer on or after the 1 January 2004 and who has paid or deposited the specified

amount in his account under the pension scheme referred to in section 80CCD(1) of the

said section is also eligible for deduction.

An assessee claiming deduction under this section cannot claim deduction under 80C for

the same amount.

However, the total of the deductions under 80C, 80CCC and 80CCD shall not exceed

Rs.1,00,000 (inserted by Section 80CCE).

Deduction in Respect of Medical Insurance Premium (Section 80D)

A deduction of Rs.15,000 is allowed under Section 80D in respect of any sum paid by an

assessee to effect or keep in force mediclaim insurance policy. Additionally, with effectfrom AY 2009-2010, a deduction of Rs.15,000 is allowed on any payment made to effect or

keep in force an insurance on the health of parent or parents. If however, either of the

parents is a senior citizen, the additional deduction would be Rs.20,000.

Medical Treatment of Handicapped Dependents (Section 80DD)

Section 80DD provides that if a person makes some expenditure on the maintenance or

medical treatment of a handicapped dependent, or deposits money in an approved scheme

for the maintenance of such dependent, a deduction of Rs.50,000 from taxable income will

be allowed in respect of a person with disability and Rs.75,000 in case of a person with

severe disability irrespective of the expenditure actually incurred, or the amount actually

deposited. The deduction under this section has been extended to persons suffering from

autism, cerebral palsy and multiple disability.

Deduction in Respect of Medical Treatment (Section 80DDB)

An individual can claim a deduction of Rs.40,000 limited to the actual expenditure

incurred towards expenditure for the medical treatment for individual himself or for his

relative or for any member of hindu undivided family in respect of selected serious

diseases. The amount of deduction is irrespective of the amount actually incurred. If the

amount is spend on a senior citizen, a deduction of Rs.60,000 limited to the actual

expenditure incurred is allowed.

Interest on Loan taken for Higher Education (Section 80E)

A deduction is allowed in respect of interest on loan taken for pursuing higher studies. The

loan should be from an approved institution. The loan can be taken for higher education of

himself or his relative being spouse and children. The deduction is allowed from the year

the assessee starts paying interest on the loan and subsequent seven years.

Deduction in Respect of Donations (Section 80G)

Under this section, certain specified donations are eligible for deductions from income. For

some kind of donations, the amount deductible is 50% of the donation, while for some

others, it is 100% of the donation. The total deduction under this section, is however,

limited to 10% of gross total income after being adjusted for certain items.

Deduction in Respect of Rent Paid (Section 80GG)

Any amount paid in respect of an expenditure towards payment of rent by a self-employed

person and/or salaried employee who is not in receipt of any house rent allowance isallowed as deduction under this section. Only individuals are eligible for deduction under

this section.

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The amount deductible under this section is the least of the following amount:

i. Rs.2,000 per month; or

ii. 25 percent of total income; or

iii. The excess of actual rent paid over 10 percent of total income.

Donations for Scientific Research or Rural Development (Section 80GGA)

Under this section, certain donations to specific kinds of institutions are eligible for 100%

deduction.

Deduction in Respect of Contributions given to Political Parties Sec. 80GGB and

80GGC

Deduction shall be allowed in respect of contribution given to political parties during the

previous year, while computing the total income of an assessee (including an Indian

Company).

Deductions in Respect of Certain Incomes

Deduction in respect of profits and gains from industrial undertakings or enterprises

engaged in infrastructure development etc. (Section 80-IA)

Deduction under Section 80-IA is available to the industrial undertakings engaged in the

following activities:

i. Provision of infrastructure facility.

ii. Telecommunication facility.

iii. Industrial park or special economic zone.

iv. Power generation, transmission and distribution.

v. Undertaking set up for reconstruction of a power unit.

vi. A cross-country natural gas distribution network (from the assessment year 2008-09).Deduction under Section 80-IB in Respect of profits and Gains from certain Industrial

Undertakings other than Infrastructure Development Undertakings

Section 80-IB of the Income Tax Act, 1961 provides exemption from tax in respect of

profits and gains from certain industrial undertakings engaged in the following activities

(other than infrastructure development):

i. Business of industrial undertaking.

ii. Operation of ship.

iii. Hotels.

iv. Industrial research.

v. Production of mineral oil.

vi. Developing and building housing projects.

vii. Integrated handling, storage and transmission of foodgrains units.

viii. Multiplex theatres.

ix. Convention center.

Deduction under Section 80-IC in respect of profits and gains of certain undertakings in

certain special category of states.

Deduction under Section 80-IC is available to any undertaking or enterprise which has

begun or begins to manufacture or produce any article or thing, not being any article or

thing specified in the thirteenth schedule, or which manufactures or produces any article or

thing specified in the thirteenth schedule and undertakes substantial expansion.

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Tax Holiday under Section 80-ID Introduced for Hotels and Convention Centers in

National Capital Territory and Specified Areas

100% deduction of the profits and gains derived from such business shall be allowed for 5

consecutive assessment years beginning from the initial assessment year.

Deduction in Respect of Certain Undertaking in North Eastern States Section-80IE

from Assessment Year 2008-09

100% of the profits from the aforesaid business shall be deductible for 10 consecutive years

beginning with the assessment year relevant to the previous year in which the undertaken

begins to manufacture/ produce articles or things or complete substantial expansion.

Deduction in Respect of Profits and Gains from Business of Collecting and Processing

of Bio-degradable Wastes: Section 80JJA

The whole of the profits and gains of these units shall be deductible for a period of five

consecutive assessment years beginning with the assessment year relevant to the previous

year in which such business commences.

Deduction in Respect of Employment of New Workmen: Section 80JJAA

Where the gross total income of an assessee, being an Indian company, includes any profits

and gains derived from any industrial undertaking engaged in the manufacture or

production of article or thing, there shall, subject to the conditions, allowed a deduction of

an amount equal to 30%, of additional wages paid to the new regular workmen employed

by the assessee during the previous year will be allowed a deduction.

Deduction in Respect of Certain Income of Offshore Banking Units and International

Financial Services Center: Section 80LA

The assessee being a scheduled bank and having an offshore banking unit in a special

economic zone or a foreign bank having an offshore banking unit in a special economic

zone or a unit of international financial services center is eligible for a deduction of 100

percent of the gross total income for five consecutive assessment years beginning with

the assessment year relevant to the previous year in which the permission from SEBI or

under other law is obtained, and 50 percent of such income for the next five years is

allowed as deduction.

Deduction under Section 80P in Respect of Income of a Co-operative Society

In the case of a co-operative society, the following amounts are allowed as deductions:

The whole of the amount of the profits attributable to any one or more of the following

activities in the case of a co-operative society engaged in:

a. Carrying on the business of banking or providing credit facilities to its members; or

b. A cottage industry; or

c. Marketing of the agricultural produce of its members; or

d. Purchase of agricultural implements, seeds, livestock or other articles intended for

agriculture for the purposes of supplying them to its members; or

e. Processing, without the aid of power of the agricultural produce of its members; or

f. Collective disposal of the labor of its members; or

g. Fishing or allied activities, that is to say, catching, curing, processing, preserving,

storing or marketing of fish or the purchase of materials and equipment in connection

therewith for the purpose of supplying them to its members.

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Deduction in Respect of Royalty Income, etc. of Authors of Certain Books other than

Text Books: Section 80QQB

Section 80QQB provides deduction up to Rs.3,00,000 to an individual resident, being an

author, in respect of any income derived from the exercise of his profession, on account of

any lump sum consideration for the assignment or grant of any of his interests in the

copyright of any book, or of royalties or copyright fees (whether receivable in lump sum or

otherwise) in respect of such book.

Deduction for Royalty on Patents: Section 80RRB

Section 80RRB provides for tax breaks on royalty income earned from patents to a resident

in India.

A deduction equivalent to the royalty income received or Rs.3 lakh, whichever is less, is

allowed as deduction to an individual who is registered under the Patents Act as the true

and first inventor in respect of an invention. Even a co-owner of a patent can opt for the

deduction.

Deduction in the Case of a Permanent Physical Disability (Including Blindness) or

Mental Retardation: Section 80U

The amount of deduction permitted under this section is Rs.50,000 and Rs.75,000 in the

case of a person with severe disability. The deduction under this section has been extended

to persons suffering from autism, cerebral palsy and multiple disability.

Self-Assessment Questions 4

a. Mr.Sagar does not own any house and stays in a rented house and pays a rent of

Rs.3,500 per month. Compute the amount of deduction that can be claimed by

Mr.Sagar for the Assessment Year 2009-10 if his total income is Rs.2,30,000.

..

..

..

b. Ms.Latha has taken a loan of Rs.7,00,000 to pursue her post graduation. She repays

an amount of Rs.30,000 towards principle and an amount of Rs.42,000 towards

interest on loan for the previous year 2008-09. How is the amount she can claim as

deduction under section 80E.

..

..

..

c. Sheela (widow of Arvind) was in receipt of Rs.1,00,000 family pension for

AY 2009-2010. Is she eligible for any deduction under this income? If so how

much?

..

..

..

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16.5 WEALTH TAX

Wealth Tax is another species of direct tax. It is governed by Wealth Tax Act, 1957 that

came into force on the 1st day of April, 1957. This Act is applicable to the whole India.

CHARGEABILITY

The wealth tax is chargeable in respect of net wealth of every individual, hindu undivided

family and company in respect of every assessment year at the rate of 1 percent of the

amount where the net wealth exceeds Rs.15 lakh (For AY 2009-10). The net wealth on

valuation date is chargeable to wealth tax in the immediately following assessment year.

Valuation date is March 31 immediately preceeding the assessment year.

However, according to Section 45 of the Act, no wealth tax is chargeable in respect of the

wealth of:

Any company registered under Section 25 of the Companies Act, 1956.

Any co-operative society.

Any social club.

Any political party.

A mutual fund specified under Section 10(23D) of the Income Tax Act.

COMPUTATION

Net wealth for the purpose of Wealth Tax is computed as follows:

Assets (Sec. 2(ea)) xxx

Add: Deemed Assets (Sec. 4) xxx

Total xxx

Less: Exempted Assets (Sec. 5) xxx

Assets Chargeable to Wealth Tax xxx

Less: Debt Owed (Sec. 2(m)) xxx

Net Wealth xxx

NET WEALTH [SECTION 2(M)]

The term net wealth means taxable wealth. It represents the excess of assets over debts.

Assets include deemed assets but do not include assets exempted under Section 5. The net

wealth is calculated on the consideration of certain assets. For the purpose of calculation of

net wealth, the term Assets Sec. 2(ea) includes:

i. Any building or land appurtenant thereto hereinafter referred to as house, whether

used for residential or commercial purposes or for the purpose of maintaining a guest

house or otherwise including a farm house situated within twenty five kilometers from

local limits of any municipality whether known as municipality, municipal

corporation or by any other name or a cantonment board, but does not include.

a. A house meant exclusively for residential purposes and which is allotted by a

company to an employee or an officer or a director who is in whole-time

employment, having a gross annual salary of less than five lakh rupees;

b. Any house for residential or commercial purposes which forms part of stock-in-

trade;

c. Any house which the assessee may occupy for the purposes of any business or

profession carried on by him;

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d. Any residential property that has been let-out for a minimum period of three

hundred days in the previous year; and

e. Any property in the nature of commercial establishments or complexes.

ii. Motor cars (other than those used by the assessee in the business of running them on

hire or as stock-in-trade);

iii. Jewelry, bullion, furniture, utensils or any other article made wholly or partly of gold,

silver, platinum or any other precious metal or any alloy containing one or more of

such precious metals, provided if the above said are forming part of any stock-in-trade

they are not considered as assets. If above jewelry or ornaments made of gold, silver,

platinum or any other precious metal and contain any precious stones are also

included for this purpose;

iv. Yachts, boats and aircrafts (other than those used by the assessee for commercial

purposes);

v. Urban land (which is comprised within the jurisdiction of a municipality or a

cantonment board and which has a population of not less than ten thousand. If the

same land is held as stock-in-trade by the assessee is