4 income tax part 2

98880-84999 � Prof. Rohit Kumar Jindal � Page No. 1 97790-84999 B.Com (H), M.Com, M.Phil, C.A.(Inter), C.S.(Inter), M.B.A. (Finance)

(Commerce Dept. in K.L.S.D. College)

B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”




INTRODUCTION

Capital Gain is the forth head of income. Section 45 to 55A of the Income Tax Act, 1961 deals with capital gains. BASIS OF CHARGE :- Any profits or gains arising from the transfer of a capital asset affected in the previous year shall be chargeable to income tax under the head ‘Capital Gains’. The Following are the essential condition for taking capital gains :- A. There must be a capital asset. B. The capital asset must have been transferred by the assessee. C. There must be profits or gains on such transfer, which will be known as capital gain. D. Such capital should not be exempted under section 54,54B, 54D, 54EC, 54ED, 54F, 54G, and 54H.

If the above conditions are satisfied. The capital gain shall assess and taxed in the previous year in which the asset is transferred.

However the following points should be considered :-

1. In some cases capital gain is taxable in a year other than the year in which the capital asset is transferred.

(In case of Stock in Trade) 2. In some cases capital gains arises even if there is no “transfer” of capital asset.(In the case when

exemption is withdrawn due to non-compliance with income tax rules) A. There must be capital asset :- Capital asset means a property of any kind held by an assessee, whether connected with the business or not, capital asset may be moveable or immovable, tangible or intangible, fixed or floating. Capital asset includes goodwill, leasehold rights, and jewelry, shares and manufacturing licenses etc. Gains on transfer of business undertaking are assessable as Capital Gains. HOWEVER THE TERM CAPITAL ASSET DOES NOT INCLUDES THE FOLLOWING

1. Any stock-in-trade :- Consumable stores or raw material held for the purposes of his business or

profession as there will be taxed under the head Business or Profession. 2. Personal effects :- That is to say moveable property including wearing apparels and furniture but

excluding jewellry and any immovable property held for personal use by the assessee. Jewellry and any immovable property shall, therefore, be capital asset for capital gains. An intimate connection between the effect and the person of the assessee must be shown to exist to render such effect as personal effects. Silver bars or bullion or even sovereigns and silver coins brought out of safe custody on special occasions for Pooja could not be described as personal effect. However silver utensils meant for personal use even if used only occasionally are personal effects.




3. Agricultural land in India, which is not an urban agricultural land i.e. it is not situated. � Within the limits of any municipality or a cantonment board having a population of 10,000 or more, or � In any areas which is lying within a distance not exceeding 8 KM from the limit of such municipality or

cantonment board. 4. 61/2 % Gold Bonds 1977 or 7% Gold Bonds, 1980 or National Defense Gold Bonds 1980 issued by the

central government. 5. Special Bearer Bonds 1991. 6. Gold Deposits bonds issued under Gold Deposit Scheme, 1999 notified by the Central Government.

TYPES OF CAPITAL ASSETS Capital assets have been divided in two categories for the purposes of computation of capital gains. These are short-term capital asset and long-term capital assets. A. Short Term Capital Asset :- Means a capital asset held by the assessee for not more than 36 months

immediately preceding the date of its transfer. Capital gain arising on the transfer of such capital asset is called as short-term capital gain.

However in the following cases an asset held for not more than 12 months is treated as short – term capital asset :- i) Equity or Preference shares in a company (whether quoted or not). ii) Securities (like Debentures, government securities) listed in a recognized Stock Exchange in India. iii) Units of UTI (whether quoted or not). iv) Units of Mutual Fund specified under section 10(23D) (whether quoted or not). v) Zero Coupon Bonds (From assessment year 2006-07) (whether quoted or not). B. Long – term capital asset :- Means asset held by the assessee for more than 36 months and in case of

shares, securities, units (mentioned above), if held for more than 12 months. Any capital gain arising on transfer of such assets shall be treated as Long – Term capital gains.

SPECIAL NOTE :- The house property, in which the assessee lives, used by him for personal purposes, but it will not a personal effect as it is as immovable property.

Example :- A is the Managing Director of Soft Steels Pvt. Ltd. The company sold him a car at confessional price of Rs. 20,000. After a year, A resold the car of Rs. 80,000. Is he liable to capital gains tax on the surplus of Rs. 60,000.

Answer :- It has been judicially held that car is a personal effect. Hence any surplus arising from the sale of car cannot be brought to capital gains tax.




HOW TO DETERMINE THE PERIOD OF HOLDING

In determining the period of holding the following shall be considered :-

a) In case shares held in company in liquidation, the period subsequent to the date on which company goes

in liquidation should be excluded. b) In case of capital asset which become the property of the assessee in the circumstances mentioned in

section 49(1) [i.e. when asset is acquired by gift or will etc.] the period for which asset was held by the previous owner should be included.

c) Holding period for the purposes of capital gains transaction in shares/securities will be determined as under :-

Different situation Relevant date

1. Date of purchase (through stock exchange) of shares /securities.

2. Date of transfer (through stock exchange) of share and securities.

3. Date of purchase/transfer of shares/securities (transaction taken place directly between parties and not through stock exchange)

4. Date of purchase/sale of shares/securities purchased in several lots at different points of time but delivery taken of in one lot and subsequently sold in parts.

1. Date of purchase by broker on behalf of investor. 2. Date of broker’s note provided such transactions are

followed by delivery of such shares and securities. 3. Date of contract of sale as declared by parties

provided it is followed up by actual delivery of shares and transfer deed.

4. The FIFO method shall be adapted to reckoned the

period of holding of securities, in case the dates of sale and purchase cannot be correlated through specific number of scrip. In other words, the assets acquired last will be taken to be remained with the assessee while assets acquired first will be treated

SPECIAL POINT TO BE REMEMBERED 1. The tax incidence under the head “Capital Gains” depends upon whether the capital gain is short-

term or long-term. Long term capital gain is generally taxable at a lower rate. If the asset is transferred is a short-term capital asset, capital gain will be short-term capital gain.. conversely, long term capital gain arises on transfer of a long-term capital asset.

2. In the case of depreciable asset (other than an asset used by a power generating unit eligible for depreciation on straight line basis), capital gain is taken as short term capital gain irrespective of period of holding.

Time to be considered In case of securities as stated above In case of any other asset and Debentures & Govt. Securities) which are not listed




5. Allotment of shares in amalgamated

Indian company in lieu of shares in amalgamating company.

6. Right shares. 7. Right entitlement. 8. Bonus shares. 9. Issue of shares by the resulting company

in a scheme of demerger to the shareholders of the demerged company.

10. Transfer of a security by a depository (i.e. Demat Account)

11. Membership right held by a member of Recognised Stock Exchange.

as sold. 5. The period of holding shall be counted from the

date of acquisition of shares in the amalgamating company.

6. The period of holding shall be counted from the date of allotment.

7. The period of holding will be considered from the date of offer to subscribe to shares to the date when such right entitlement is renounced by the person.

8. The period of holding shall be counted from the date of allotment of bonus shares.

9. The period of holding shall be counted from the date acquisition of shares in the demerged company. (Example 1)

10. The period of holding shall be determined on the basis of First In First Out method.

The period of holding shall be calculated as per Example No. 2 given below.

B. Transfer of capital asset [section 2(47)] :- Transfer of capital asset is an essential requirement for the incidence of tax on capital gains. The term transfer has been defined under section 2(47) of the act and includes the following: 1. The sale, exchange or relinquishment of the assets; or 2. The extinguishments of any right therein; or 3. The compulsory acquisition of therein under any law; or 4. In case asset converted by the owner thereof into or treated by him as stock-in-trade of a business carried

on by him, such conversion; or 5. Any transaction involving the allowing of the possession of any immovable property to be taken or

retained in part performance of a contract of nature referred to in section 53A of the transfer of property act, 1882.

Example 1 :- X holds 1,000 shares in A Ltd. (Date of purchase being June 10,1996). A Ltd. has two undertakings. One of the undertakings is transferred to B Ltd. In a scheme of demerger. Under the scheme of demerger, on May 6 ,2004, B Ltd. Issues shares to the shareholders of A Ltd. Consequently, on May 6, 2004 X gets 400 shares in B Ltd. In this case, if X transfers shares in B Ltd., then the period of holding shall be counted from June 10, 1996. Example 2 :- X is a member of DEL Stock Exchange. The membership ticket was purchased by him on March 2, 1956. The Stock Exchange is converted into a company on November 1,2004. Consequently, on November 1, 2004, X is allotted 1,000 shares in DEL Stock Exchange Ltd. and a ticket to trade in DEL Stock Exchange Ltd. If X transfers shares in (or ticket to trade in) DEL Stock Exchange Ltd., then

SPECIAL NOTE :- For calculating period of holding of Capital Asset the date on which the asset is transferred should be excluded, e.g. if the date of sale of asset is 01-12-2008, the period of holding shall be calculated till 30-11-2008.




6. Any transaction (whether by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of person or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property.

MEANINGS OF SOME OF THESE ARE AS BELOW

1) Exchange :- E.G. a person transfers his building to a company in consideration of allotment of shares in

the company is example of exchange. 2) Relinquishment :- It is a voluntary surrender of an asset in favour of another person, e.g. X and Y

jointly own a property. Y relinquishes his share in the property in favour of X. It is case of relinquishment.

3) Extinguishments :- When right of one person in an asset comes to an end, it is called extinguishments

of rights in an asset, e.g. Ashok gives advance money to Vinod to purchase a property but subsequently Vinod gave him double of the advance money and cancelled the deed. This is extinguishment of Ashok’s right to purchase the asset.

4) Part performance of contract :- Sometimes, possession of an immovable property is given in consideration of part performance of a contract. For Example, A enters into an agreement for the sale of his house. The purchaser gives the entire sale consideration to A. a hands over complete rights of possession to the purchaser since he has realised the entire sale consideration. Under Income – Tax Act, the above transaction is considered as transfer.

5) Lastly, there are certain types of transactions, which have the effect of transferring or enabling the

enjoyment of an immovable property. For example, a person may become a member of a co-operative society, company or other association of persons, which may be building houses/flats. When he pays an agreed amount., the society etc. hands over possession of the house to the person concerned. No conveyance is registered. For the purpose of Income – Tax the above transaction is a transfer. Even power of attorney transactions are covered.

Examples of transfer � Redemption of preference shares by a company is a transfer in the hands of shareholders and they

will be liable to capital gain for the same. � Conversion of preference shares into ordinary shares amounts to transfer in the hands of the

shareholders. � Distribution of capital assets in case of liquidation of a company is not a transfer in the hands of

the company but a transfer in the hands of the shareholders. � Proprietary business taken over by a firm. � Slump sale of an undertaking of a business, effective from the assessment year 2000-2001. � Grant of mining lease at a premium. � Salami or premium received from lease of plots for 99 years.




TRANSACTION NOT RECORDED AS TRANSFER [SECTION 46 AND 47] 1) Any distribution of capital asset or the total or partial partition of HUF. 2) Any transfer of asset under a gift or a will or an irrevocable trust. This rule is not applicable if;

a) Taxpayer is an employee; b) He has been allotted (directly or indirectly) shares/debentures by the employer company under

notified Employees Stock Option Scheme in accordance with the guideline issued by the central government, and;

c) The aforesaid shares/debentures are gifted by the concerned employee to any person.

3) Transfer of capital assets at the time of liquidation by a company to its shareholders. 4) Any transfer of a capital asset by a company to its subsidiary company, if,

a) The parent company holds the whole of shares of subsidiary company; b) The subsidiary company is an Indian company.

5) Any transfer of a capital asset by subsidiary company to the holding company, if, a) The whole of share capital of the subsidiary company is held by the holding company; b) The holding company is an Indian company.

6) 6) Any transfer is in a scheme amalgamation of a capital asset by the amalgamating company (transferor) to

the amalgamated (transferee), if the amalgamating company is an India company. 7) Any transfer by a shareholder in a scheme of amalgamation, of capital asset being a share or shares held

by him in the amalgamating company, if, a) The transfer is made in consideration of the allotment to him of any share or shares in the

amalgamating company; b) The amalgamating company is an Indian company.

8) Any transfer of capital asset, being any work of art, book, manuscript, drawing, photograph, etc. to the government, university, national museum or institute notified by the central government in the official gazette.

9) Any transfer by way of conversion of debenture, debenture-stock or deposit certificate in any form of a company into shares or debentures of that company.

10) Any transfer of foreign currency Bonds or GDR or shares specified in section 115AC held by non-

resident to another non-resident where a transfer is made outside India. 11) Where a sole proprietary concern or firm is succeeded by a company in the business carried own by it as

a result of which of sole proprietary concern sells or otherwise transfers any capital assets or intangible assets to the company provided the following conditions are satisfied;

SPECIAL NOTE :- Any transfer of a capital asset as per clause (iv or v) above shall be treated as transfer if the transfer is made after 1ST April, 1984 as Stock – In – Trade.

SPECIAL NOTE :- It may be noted that conversion of Preference shares in to equity shares is treated as transfer, as it is not covered by the aforesaid condition.




a) All the assets and liabilities of sole proprietary or firm become the assets and liabilities of company b) The share holding of the sole proprietor in the company is not less than 50% of total voting power in

the company his share holding continuous to remain as such for a period of 5 years from the date of succession, and

c) The sole proprietor or partners of the firm does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by of allotment of shares of a company.

13) In case of demerger, if shares are issued by the resulting company to the shareholder of demerged

company and shares are issued in consideration of such demerger. 14) Transfer of agricultural land in India before March 1, 1970 15) Transfer of capital asset in the case of conversion of proprietary concern into a company [Sec 47(xiv)] :-

on has to satisfy the following conditions. a) A sole proprietary concern is converted into a company. b) All the business assets and liabilities of the sole proprietary concern immediately before conversion

is taken over by the company. c) The sole proprietary 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. d) The shareholding of the sole proprietor in the company is not less then 50 percent of the total voting

power in the company and shareholding shall continue to so remain for a period of five years from the date of the succession.

If all of the above conditions are satisfied, then the transaction is not treated as “transfer”.

TRANSFER WHEN COMPLETE AND EFFECTIVE

Generally capital gain is taxable in the year in which capital asset is transferred. Different rules are applicable in case of moveable/immovable assets to find out when a capital asset is transferred. 1. Immovable property when document are registered :- Title to immovable asset not passed till the

conveyance deed is executed or registered. 2. Immovable property when documents are not registered :- Even if the documents are not registered

but the following conditions of section 53A of Transfer of Property Act are satisfied, ownership in an immovable property is “transferred” :- a) There should be a contract in writing; b) The transferee has paid consideration or willing to perform his part of the contract; and c) The transferee should have taken possession of the property.

3. Moveable property :- Title to moveable property passes at the time when the property is delivered pursuant to a contract to sell. Entries in the books of account are not relevant for the determination of the date of transfer.

SPECIAL NOTE :- The aforesaid transactions are not recognized as transfer for the purposes of section of 45. Therefore, any profits or gains arising on the above noted transactions are not chargeable to tax under section 45; conversely, any loss arising there from is not liable to set off against other incomes of the assessee.




COMPUTATION OF CAPITAL GAIN [SECTION 48]

1. Computation of short-term capital gains

2. Computation of long-term capital gains

FULL VALUE OF CONSIDERATION [SECTION 48] The dictionary meaning of the word “full” is whole or entire, or complete. The word “full” has been used in contrast to “a part of the price”. The expression “full value” means the whole price without any deduction whatsoever. The following points should be noted :- � Full value of consideration is the consideration received or receivable by the transferor in lieu of assets,

which he has transferred. Such consideration may be received in cash or kind. If it is in kind, then fair market value of such asset is taken as full value of consideration.

� The full value of consideration does not mean market value of that asset which is transferred. � Adequacy or inadequacy of consideration is not relevant factor for the purpose of determining of full

value of consideration. � It makes no difference whether (or not) “full value of consideration” is received during the previous

year. Even if the full value of consideration is received in installments in different years, the entire value of consideration has to taken into account for computing the capital gains, which become chargeable in the year of transfer.

Full value of consideration xxxxx

Less :- Expenditure incurred in connection with such transfer xxxxx Net consideration xxxxx

Cost of acquisition xxxxx Cost of improvement xxxxx xxxxx

Gross short-term capital gains xxxxx Less :- Exemptions, if available under section 54B/54D/54G/54GA xxxxx

Taxable Short-term capital gains xxxxx

Full value of consideration xxxxx

Less :- Expenditure incurred in connection with such transfer xxxxx Net consideration xxxxx Indexed cost of acquisition xxxxx Indexed cost of improvement xxxxx xxxxx Gross long-term capital gains xxxxx Less :- Exemption u/s 54/54B/54D/54EC//54F/54G/54GA xxxxx

Taxable long-term capital-gain xxxxx

SPECIAL NOTE :- No deduction will be allowed in computing the income chargeable under the head “Capital Gain” in respect of any sum paid on account of Securities Transaction Tax. (W.E.F from A.Y. 2005-2006)




CASES WHEN “FULL CONSIDERATION” IS DETERMINED ON NOTIONAL BASIS

In some cases, instead of actual consideration, the full value of consideration shall be the deemed value. Such cases have been summarised in the table given below :- Sr. No.

Mode of Transfer Deemed Full Value of Consideration Sec

1. Money or asset received from an insurer on account of damage or destruction of any Capital Asset.

Value of money and or F.M.V. of asset on the date of receipt.

45 (1A)

2. Conversion into or treatment of Capital Asset as Stock in Trade.

F.M.V. of the asset as on the date of its conversion or treatment.

45 (2)

3. Introduction of Capital in kind into Firm or AOP / BOI by partner / member.

Amount recorded in the books of account of the Form of AOP / BOI as the value of the Capital Asset.

45 (3)

4. Distribution of Asset in Kind on dissolution of Firm or AOP or BOI.

F.M.V. as on the date of distribution. 45 (4)

5. Shareholders receiving assets from the liquidator on the liquidation of the company.

Market value of the assets on the date of distribution minus amount assessed as deemed dividend.

46 (2)

6. Gift, etc. of shares or debentures allotted under ESOP

Market value on the date of gift etc. 48

7. Transfer of land or building or both Not less than value adopted by or assessed by “stamp valuation authority” if consideration declared by assessee is less.

50C

EXPENSES ON TRANSFER

Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration. Example of such expenses are: Brokerage or commission, cost of stamps, registration fees borne by the vendor, traveling expenses, litigation expenses for claiming enhancement of compensation awarded in the case compulsory acquisition of asset. One should keep in view the following propositions :- 1. Vague claim of expenses is not allowable. 2. Expenditures in connection with transfer need not necessarily have been incurred prior to passing the

title. 3. If a sum has already been subject matter of deduction under other heads, the same cannot be allowed as

deduction under section 48.

SPECIAL NOTE :- Where consideration declared to be received or accruing as result of such transfer of land or building or both, is less than the value adopted for the purposes of payment of stamp duty of such transfer, the value so adopted or assessed shall deemed to be the full value of consideration and capital gains accordingly shall be computed.




4. Proceeding in a civil court for enhancement of compensation is an integral part of proceeding for the transfer of a property in case of compulsory acquisition. Expenditure incurred in such proceeding wholly and exclusively in connection with such transfer.

COST OF ACQUISITION [SECTION 55(2)]

Cost of acquisition is the price, which the assessee has paid, or the amount, which the assessee has incurred for the acquisition of such asset. The meaning of cost of acquisition is same in case of cost for claiming depreciation. Following points should be considered for the purpose of cost of acquisition :- 1. Cost of acquisition includes expenses incurred in acquiring the asset or completing the title :-

Litigation expenses incurred by the assessee who holds shares of a company, to acquire better voting rights in respect of the shares, by filing suit to get article of association amended and the expenses incurred for compelling the company to register the shares in the name of the assessee would form part of cost of acquisition of shares.

2. Interest on money borrowed for acquiring capital asset will form part of cost of asset :- Interest on

loan taken for acquiring capital asset will become part of the cost of acquisition. 3. Sum paid for discharge of mortgage :- Where the property has been mortgaged by the previous owner

during the lifetime and the assessee, after inheriting the same, has discharged the mortgaged debt, the amount paid by him for the purpose of clearing off the mortgage shall be regarded as cost of acquisition. The position is however, different where the mortgage is created by the owner after he has acquired the property. The clearing off of the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction because in such a case he did not acquire any interest in the property subsequent to his acquiring the same.

4. Cost of acquisition has to be referred to be ascertained with reference to the date of acquisition and not

with reference to the date on which it became a taxable capital asset. 5. Ground rent cannot be said to be an expenditure incurred by the assessee for the acquisition of the capital

asset and it cannot, therefore, be included in computing the actual cost to the assessee of the capital asset.

6. Estate duty paid in respect of inherited property can neither be treated as part of cost of acquisition of

property nor as cost of improvement.

COST OF ACQUISITION IN SOME CERTAIN CASES 1. Cost to the previous owner deemed to be the cost of acquisition [Sec 49(1)] :- If the asset is acquired

by an assessee in the following circumstances the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it. It will be increased by the cost of any improvement of the assets incurred by the previous owner or the assessee.

Circumstances when the cost of previous owner is taken :- � On any distribution of assets on the total or partial partition of Hindu Undivided Family. � Under Gift or Will. � By succession, inheritance or devolution etc.. � On any distribution of assets on the liquidation of a company.




� Under a transfer to a revocable or an irrevocable trust. � When any of the members of a Hindu Undivided Family converts his self-acquired property into H.U.F. property after December 31,1969. (The cost of the property to the H.U.F. will be taken as the cost of the property to the individual converting the property.)

2. Cost of shares of securities :- Where shares or securities was acquired before 1st April, 1981, the cost of

acquisition will be taken the actual cost or market value on 1st April, 1981, whichever is beneficial to the assessee. If it is acquired after 31st March 1981, the actual cost will be cost of acquisition.

3. Cost of Bonus Shares :- The cost of bonus shares or securities which is received by the assessee without

any payment on the basis of his holding any financial asset will be as under :- � Where bonus share or security was received prior to 1st April, 1981, the fair market value on 1st

April, 1981. � In any other case :- Nil.

4. Cost of acquisition u/s 49(3) :- In a case where the capital gain arising from the transfer of a capital

asset belonging to a holding company to a subsidiary company to its holding company under some circumstances , it is deemed to be income chargeable under the head “Capital Gain” u/s 47A. The cost of acquisition of such asset to the transferee company shall be the cost for which such asset was acquired by the transferor company.

5. Cost of acquisition of Goodwill :- The cost of acquisition in relation to (a) goodwill of business, a

trademark or brand name associated with a business (b) a right to manufacture, produce or process any article or thing, right to carry on any business, (c) tenancy rights, (d) stage carriage permits or (e) loom hours shall be determined as under :-

� If the asset is purchased from a previous owner :- The amount of purchase price. � In any other case :- Nil. However this will not cover the case specified in Section 49(1). � Case covered under section 49(1) :- Cost to the previous owner.

6. Cost of acquisition of Right Issue :- In the case where an assessee by holding a share or any other

security become entitled to subscribe addition shares or securities (known as financial asset) on the basis of right issue, the cost of acquisition shall be :- � On the basis of entitlement if the assessee subscribed to the right issue :- Amount actual paid to

acquire it.

SPECIAL POINTS TO BE REMEMBERED � The previous owner of the asset means the last previous owner who acquired the asset by any means

other than those stated above. � In order to find out whether the capital asset is short term or long term in the above cases, the period

of holding of the previous owner shall be taken into consideration. � The benefit of the indexation will be available from the year in which the asset was first held by the

current owner. � By virtue of Section, 53(3), where the cost for which the previous owner acquired the property

cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner.




� If the assessee renounced the right in favour of any other person :- Nil � If the assessee has purchased the right to subscribe for the additional shares / securities (financial asset) :- Purchase price paid to purchase the right plus the amount paid to the company for acquiring the rights shares / securities.

7. Cost of acquisition of a capital asset acquired before 1st April, 1981 :- In the following cases, the

assessee may take at his option, either actual cost or the fair market value of the asset (other than a depreciable asset), as on 1st April, 1981 as cost of acquisition :- � Where the capital asset became the property of the assessee before 1st April, 1981. � Where the capital asset became the property of the assessee by any mode referred to in section 49(1)

and the capital asset became the property of the previous owner before 1st April, 1981.

8. Cost of acquisition of shares or debentures :- The cost of acquisition of shares or debentures of a company acquired in consideration of conversion of debenture, debenture-stock or deposit certificate, shall be deemed to be the cost of original debentures, debenture-stocks or deposit certificates converted.

9. Cost of stock option to the employee :- Where capital gain arise from the transfer of shares, debentures

or warrants, the value of which has been taken into account while computing the value of perquisite u/s 17(2), the cost of acquisition of these shall be the value u/s 17(2).

10. Cost of acquisition of an asset acquired on distribution of capital asset of a company on its liquidation :- Where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income tax under the head capital gain in respect of the asset u/s 46, the cost of acquisition to him shall be the fair market value of the asset on the date of distribution.

11. Cost of equity shares allotted in lieu of membership of stock exchange :- The cost of equity share or

shares allotted to a shareholder of a recognised stock exchange in India under a scheme for corporatisation or demutualisation approved by the SEBI shall be cost of acquisition of his original membership of the exchange.

However, the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been equity shares under the scheme of demutualisation or corporatisation shall be deemed to be nil. 12. Cost of acquisition on consolidation or conversion of shares :- Where the capital asset, being a share

or a stock of a company became the property of the assessee on the consolidation and division of shares into shares of larger amount than its existing shares, or on the conversion or reconversion of any shares into stock or vice-versa, or on the sub-division of any shares into shares of smaller amount or on the conversion of one kind of shares into another kind, the cost of acquisition shall be taken to be the cost to the assessee of the original shares or stock held by him.

13. Cost of acquisition in case of advance money received as a result of previous negotiation for transfer with someone else :- Under Sec. 51, where any capital asset was on any previous occasion the subject of negotiation for its transfer, any advance or other money received and retained by the assessee in respect of such negotiation shall be deducted from the cost for which the asset was acquired or the written-down value, or the fair market value, as the case may be, in computing the cost of acquisition.




14. Cost of acquisition in case of devaluation of rupee :- Under section 43A, for the purpose of computing the capital gains arising to the assessee on the sale of transferor of a capital asset acquired by him from abroad on deferred payment terms or against a foreign loan, the additional rupee liability incurred by him in repaying the installments of the cost or the foreign loan (along with interest if any), as the case may be, after devaluation of the rupee, will be added to the original cost of the asset and the resultant amount will be taken as the cost of acquisition of the capital asset.

15. Cost of securities held with depository :- The cost of the acquisition and the period of holding of any

securities with the Depository shall be determined on the basis of the First In First Out method.

SPECIAL POINTS TO BE REMEMBERED � It may be observed that only when the advance or other money has been received or retained or

forfeited by the assessee, then only it has to be deducted from the cost of the asset. If such an advance was received and retained or forfeited by any previous owner, the same shall not be deducted from the cost of the asset.

� If the advance money received and forfeited by the assessee before 1st April, 1981 and the assessee has assumed the Fair Market Value of the asset as on 1st April, 1981 as the cost of acquisition, such advance money received (though 1st April, 1981) shall also be deducted as in the section it is written that is will be deducted from the Fair Market Value.

� A situation may arise where advance money forfeited is more than the cost of acquisition. In such a case, the excess of the advance money forfeited over the cost of acquisition of such asset shall be a capital receipt not taxable.

� For purpose of sec. 51, no distinction is made between moneys received and retained by way of advance and other moony. The phrase other money would cover, for example, deposits made by the purchaser for guaranteeing due performance of the contracts and not forming part of consideration. The monies received on the previous occasions and retained by the vendor / assessee cannot, therefore, be treated as a revenue receipt.

� In this case cost of acquisition will be first reduced by the amount of advance money received and thereafter it will be indexed.

� Forfeiture of earnest money by the vendor, if due to the default on the part of the vendee, will not amount to relinquishment of a right in that asset. Therefore the amount forfeited will not be allowed as a capital loss under the head of capital gain.

On the other hand if the vendor commits a default and the vendee receives some compensation besides the refund of the earnest money paid by him, such compensation shall be subject to capital gains as it will amount to relinquishment of a right by the vendee.

SPECIAL POINTS TO BE REMEMBERED � If instead of devaluation there is appreciation in the value of rupee in terms of foreign currency the

above rule will be reversed. � The actual cost of the asset shall be adjusted on actual payment towards the cost of the asset or

repayment of loan instead of on accrual basis. If an adjustment has already been made upto A.Y. 2002-03 on accrual basis, no adjustment can be made at the time of actual payment to the extent of adjustment already made.




16. Cost of shares in Resulting company :- The cost of acquisition of shares in the resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company the same proportion s the net book value of the asset transferred in a demerged bears to the net worth of the demerged company immediately before such demerger. Or we can say that

Net Worth means the aggregate of the paid up shares capital and general reserves as appearing in the books of account of demerged company immediately before such demerger. 17. Cost of shares in demerged company :- The cost of acquisition of the original shares held by the

shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under the previous point.

COST OF IMPROVEMENT [SECTION 55(1)(B)]

Cost of improvement is capital expenditure incurred by an assessee in making any additional/improvement to the capital asset. It also includes any capital expenditure incurred to protect or complete the title of the asset or to cure such title. To put is different, any expenditure incurred to increase the value of the capital asset is treated as cost of improvement. In terms of section 55(1)(b), cost of improvement means as follows :- Cost of improvement in relation to capital asset, in relation to a capital asset being goodwill of a business or a right to manufacture, produce or process any article or thing or right to carry on any business shall be taken as Nil. But in case of tenancy rights, route permits, loom hours, trademark, brand names associated with business the actual expenses incurred are the cost of improvement. (It makes no difference whether goodwill or such right was self generated or acquired for a price.) i) Where the capital asset became the property of the assessee (or the previous owner in a case specified by

section 49(i)) before April 1, 1981, means all expenditure of capital nature incurred in making any addition or alteration to the capital asset on or after April 1, 1981 by the assessee [or the previous owner in case specified by section 49(1)].

In other words we can say that expenditures incurred by the assessee or the previous owner before 1st April 1981 is to be ignored completely, whether the assessee opts for the market value as on 1st April 1981 or not. ii) In the other cases, means all expenses of capital nature incurred in making any addition/ alteration to the

capital asset by the assessee [or the previous owner in a case specified by section 49(1)]

Cost of acquisition of shares held by the Net book value of the assets transferred assessee in the de-merged Company Net worth of demerged company before demerger

SPECIAL POINTS TO BE REMEMBERED � Any expenditure, which are deductible in computing the income chargeable under the heads “interest

on securities”, “income from house property”, “profits and gains from business or profession”, “income from other sources”

� Only capital expenditure is considered as a cost of improvement. Routine expenses on repairs and maintenance do not form part of cost of improvement.

� Expenditure incurred prior to April 1, 1981.




INDEXATION OF COST OF ACQUISITION

As already mentioned, in the case of short term capital gain, cost of acquisition and cost of

improvement are deducted from the full value of consideration for computation of capital gain. On the other hand, in the case of long term capital gain, indexed cost of acquisition and indexed cost of improvement are deducted instead of cost of acquisition and cost of improvement.

Indexed cost of acquisition means and amount which bears to the cost of acquisition the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost of inflation index for the first year in which the asset was held by the assessee or for the year beginning on 1st April 1981 whichever is later.

INDEXED COST OF ACQUISITION AND COST IMPROVEMENT MAY BE COMPUTED AS FOLLOWS

1. Capital asset acquired by the assessee [other than in circumstances referred in section 49(1)], before

April 1, 1981. In this case indexed of acquisition is determined as under :- 2. Capital asset acquired by the assessee [not being in circumstances specified in section 49(1)], on or after

April 1, 1981. In this case indexed of acquisition is determined as under :- 3. Capital asset acquired on or after 1-4-1981, in one of the circumstances specified in section 49(1) and

originally acquired by the previous owner before April 1, 1981. Indexed cost of acquisition will be determined as under :-

4. Capital asset acquired by the assessee on or after April 1, 1981 in one of the mode referred in section

49(1) and originally acquired by the previous owner on or after April 1, 1981. Indexed cost of acquisition will be determined as under :-

INDEXATION OF COST OF IMPROVEMENT As already discussed under cost of improvement, any expenses on improvement before 1-4-1981 are to be completely ignored. Therefore cost of improvement only after 1-4-1981, by the assessee should be indexed. However, if the asset is acquired by the assessee from the previous owner in any mode given u/s

X

Cost of acquisition or fair market value C.I.I of the year of Transfer (519) as on 1-4-1981 which ever is more C.I.I of the year of acquisition i.e. 100 X

Cost of acquisition C.I.I of the year of Transfer (519) C.I.I of the year of acquisition X

Cost of acquisition to the previous owner or fair C.I.I of the year of Transfer (519) market value as on 1-4-1981 which ever is more C.I.I of the year in which asset was first held by the present assessee

X

Cost of acquisition to the previous owner C.I.I of the year of Transfer (519) C.I.I of the year in which asset was first held by the present assessee

X




49(1), the expenses on improvement incurred by the previous owner after 1-4-1981 will also have to be indexed. Indexed cost of improvement is to be calculated as follows :-

INDEXATION OF COST NOT ALLOWED IN CERTAIN CASES In the following cases, index of cost shall not be allowed for the assets specified therein :- 1. Transfer of bonds and debentures other than capital indexed bonds issued by the government. 2. Transfer of shares or debentures acquired by a non-resident in foreign currency in an Indian company. 3. Transfer of undertaking or division in a slump sale. 4. Transfer of units of UTI or mutual fund covered u/s 10(23D) purchased in foreign currency by overseas

financial organization, also known as offshore funds. 5. Transfer of Global Depositary Receipt (GDR) purchased in foreign currency by an individual resident in

India and employee of Indian company. 6. Transfer of foreign exchange asset by a non-resident Indian. 7. In case of depreciable assets, there is no question any indexation as capital gain arising from the transfer

of depreciable asset shall always be short-term capital gain. 8. Transfer of securities by Foreign Institutional Investors (F I I’s) [Section 115AD]

RATES OF INDEXATION

YEARS C.I.I. YEARS C.I.I. YEARS C.I.I.

1981 – 1982 100 1991 – 1992 199 2000 – 2001 406

1982 – 1983 109 1992 – 1993 223 2001 – 2002 426 1983 – 1984 116 1993 – 1994 244 2002 – 2003 447

1984 – 1985 125 1994 – 1995 259 2003 – 2004 463

1985 – 1986 133 1995 – 1996 281 2004 – 2005 480

1986 – 1987 140 1996 – 1997 305 2005 – 2006 497 1987 – 1988 150 1997 – 1998 331 2006 – 2008 519

1988 – 1989 161 1998 – 1999 351 2008 – 2009 551

1989 – 1990 172

1991 – 1992 199

2009 – 2009 582

1990 – 1991 182 1999 – 2000 389 2009 – 2011 632

CAPITAL GAINS IN CERTAIN SPECIFIED CASES

1. Computation of capital gains in case of conversion of capital asset in to stock-in-trade [section 45(2)] :- For the purposes of computing the capital gain in such cases, the fair market value of the capital asset on the date on which it was converted or treated as stock-in-trade shall be deemed to be full value of consideration received or accruing as the result of transfer of the capital asset.

The notional capital gain arising from the transfer by way of conversion of capital asset in to stock-in-trade will be chargeable to tax in the year in which stock in trade is sold and not in the year in which asset converted. Indexation of cost of acquisition and improvement if required, will be done till the previous

Capital expenditure on improvement C.I.I of the year of Transfer (519) after 1-4-1981 C.I.I of the year in which the improvement was made by the present assessee or previous owner

X

SPECIAL NOTE :- In case of depreciable assets, there is no question of any indexation as capital gain arising from the transfer of depreciable asset shall always be short term capital gain.




year in which such conversion took place and not upto the date of sale of that asset. Further the fair market value of the asset, as on the date of such conversion shall be deemed to be full value of the consideration of the asset. The sale price minus ‘market value as on the date of conversion’ shall be treated as business income and will be taxed under the head “Profits and gains of business or profession”. 2. Computation of capital gains on transfer of firm’s assets to partners and vice versa :-

a) Transfer of capital asset by a partner to a firm [section 45(3)] :- The profits or gain arising from the transfer of capital asset held by a person, to a firm or other association of person or body of individual (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year, in which such a transfer takes place and, for the purposes of computation of capital gain, the amount

recorded in the books of the firm, association or body of individuals for such capital asset shall be deemed to be the full value of the consideration.

It may be observed that the sale consideration in this case shall be the amount as recorded in the books of the Firm / A.O.P. etc. and not the market value of the asset as on the date of the transfer.

b) Capital gain on transfer of capital asset by way of distribution on the dissolution of firm, AOP / BOI [Section 45(4)] :- The profits or gains arising from the transfer of a capital asset is specie to the partners/members thereof by way of distribution on the dissolution of a firm or other association of persons or body of individuals (not being accompany of a cooperative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place. In such a case, there will be a capital gain, the fair market value of the asset on the date of such transfer shall be deemed to the full value of the consideration received or accruing as a result of transfer, instead of the value at which it is given to the partner/member.

Although, for the purposes of computation of capital gains in the hand of firm/AOP, the sale consideration shall be the market value of the asset as on the date of its distribution but the cost of acquisition of this asset to the partner/member shall be the value of at which it was transferred to partner/member. 3. Distribution of stock in trade amongst partners at the time of dissolution :- Section 45(4) deals with

distribution of capital assets at the time of dissolution. Stock in trade in not a capital asset and as such if stock in trade is distributed amongst the partners, and for this purpose the stock is valued at the market value and once the stock is valued at market price, the surplus, if any, has to be taxed as business income and not as capital gain income.

4. Computation of capital gains on transfer by way of compulsory acquisition [section 45(5)] :- In any

of the following cases, section 45(5) is applicable: -

1. When the transfer of capital asset is by way of compulsory acquisition under any law. 2. When a capital asset is transferred (not by way of compulsory acquisition) and the consideration is

approved or determined by the central government (not by state government) or by the RBI.

SPECIAL NOTE :- Amount received by retiring partner in respect of his share in the partnership including goodwill is not assessable as capital gains. In the hands of partners cost shall be the agreed consideration.

SPECIAL NOTE :- However the compensation is taxable in the year in which the compensation is received.




a) When initial compensation is received or receivable :- In any of the two cases, the initial compensation is taken as consideration and accordingly capital gain is computed. It is chargeable to tax in the previous year in which such compensation (or part thereof) is first received. It may be noted that capital gain is not taxable in the year, which the capital asset is transferred but it is taxable in the first year in which the initial compensation (or part thereof) is received.

b) When enhanced compensation received :- In any of the two cases, if any compensation is enhanced

by a court, tribunal or any authority, then it will be taxable as follow: - � It shall be taxable in the previous in which enhanced compensation is received by the assessee. It will

be taxable in the year of receipt even if the appeal is pending in any court or tribunal. � In this case, cost of acquisition and the cost of improvement shall be taken as NIL. � Litigation expenses of getting the compensation enhanced are deductible as expenses on transfer. � If the enhanced compensation is received by any other person (because of the death transferor or for

any other person), it is taxable as income of the recipient. � Where such amount of the compensation is subsequently reduced by the court, Tribunal or other

authority, the capital gain of that year, in which the additional compensation was taxed, shall be recomputed accordingly.

5. Computation of capital gains in the case of transfer of shares/debentures by non-resident [section 48] :- As already discussed, in the case of long-term capital gains, the cost of acquisition and cost of improvement there to be both indexed. However in the case of an assessee who is a non-resident, any capital gain, whether short-term, or long-term, arising from the transfer of a capital asset, being shares/debentures of an Indian company, bought in foreign currency, shall be computed in the following manner and no indexation of cost will be done, even if it is a long-term capital gain.

� Cost of acquisition shall be converted into the foreign currency, which was initially utilized in the

purchase of such shares/debentures. For the purpose of conversion average rate of TT (telegraphic transfer) buying and TT selling, on the date of acquisition of such shares/debentures shall be taken;

� Expenses of transfer will also be converted into the same foreign currency, which was initially utilized for acquisition of such shares/debentures. For the purpose of conversion average rate of TT buying and TT selling, on the date of transfer, shall be taken.

� Full value of consideration shall also be converted into the same foreign currency, which was initially utilized for purchase of such shares/debentures. Here also the average rate of TT buying and TT selling of the foreign currency on the date of transfer, shall be taken;

SPECIAL NOTE :- The aforesaid rules are applicable whether the compensation is enhanced by the Court / Tribunal / Authority on an appeal of the taxpayer or because of any other reason.




� Compute the capital gain in such converted foreign currency in the same manner as already discussed. The capital gain so computed in foreign currency, which may be long-term or short-term shall be converted into Indian Rupees at the TT buying rate only (not the average rate) on the date of transfer of the capital asset.

6. Exemption of long-term capital gain arising to non-resident Indian on transfer of “Foreign Exchange Asset” [Section 115F] :- Where an assessee, who is non-resident India, transfer any long-term foreign exchange asset (Original Asset), he can claim an exemption in respect of the long-term capital gain from such asset if the following conditions are satisfied

He has invested within a period of six months after the date of such transfer, the whole or any part of the Net Consideration in any of the foreign exchange assets (New Asset)

Quantum of deduction :- � If the cost of the new asset is not less than the net consideration is respect of original asset, the whole

capital gain shall be exempt. � If the cost of the new asset is less than the net consideration in respect of the original asset, then the

proportionate capital gain shall be exempted in the following manner :-

SPECIAL POINTS TO BE REMEMBERED � The aforesaid manner of computation of gain shall be applicable in respect of capital gain accruing

or arising from every re-investment thereafter in, and sale of, shares in, or debentures of, an Indian company. The shares / debentures in this case may be listed or non-listed.

� Telegraphic transfer buying / selling rates in relation to a foreign currency is the rate of exchange adopted by the State Bank of India for purchasing or selling such currency, where such currency is made available by that bank through telegraphic transfer.

� The transferor should be a non-resident at the time of transferor. Non-resident also includes foreign companies.

� This provision is not applicable to units of UTI and Mutual Funds. � The shares of debentures (Whether listed or non-listed) of India companies only are covered under

this provision. Indian companies shall include Government companies, however, bonds of Central Government / State Government and RBI are not covered for this purpose.

� The first provision to section 48 is mandatory. Hence the non-resident covered by this provision is not allowed to opt for indexation of cost.

� If the shares and debentures are acquired by the non-resident in India currency, the second provision to section 48 relating to indexation will apply only the shares as debentures are not eligible for indexation.

� It may be noted that long-term capital gain on equity shares sold through a recognised stock exchange on or after 01-10-2004 shall be exempt.

Foreign Exchange Asset means any of the following assets, namely � Shares of an Indian Company, � Debentures issued by an Indian Company which is not a Private Company, � Deposit with an Indian Public Limited Company, � Central Government Securities, � National Saving Certificates VI and VII issue.




Withdrawal of exemption :- The exemption granted U/S 115F will be withdrawn under the following circumstances :- Where the new asset is transferred or converted into money within a period of 3 years from the date of its acquisition, the exemption granted, on the basis of cost of the new, asset, shall be deemed to be income chargeable under the head “Capital Gain” of the previous year in which the new asset is transferred or converted into money and shall be taxed as long-term capital gain. 7. Capital gains on transfer of bonus shares :- The cost of acquisition of any additional financial asset as

bonus shares (or securities or other wise) which is received without any payment by the assessee on the basis of his holding any financial asset shall taken to be NIL. Moreover, in the case of capital asset being a share, security or unit which is allotted without any payment on the basis of holding any other financial asset, the period of treating such share, security or unit as short-term capital asset/long-term capital assets shall be calculated from the date of allotment of such share etc.

But the cost of bonus shares allotted before 1-4-1981 shall be taken as fair market value as on 1-4-1981.

8. Capital gains on transfer of right shares :- The cost of transfer shall be considered as follows :-

a) In case sale of right only :- The cost of rights entitlement in the hands of the original shareholder will

be deemed to be NIL. The amount realized by the original shareholder by selling his rights entitlement will be short-term capital gain in his hands (as the cost is taken as NIL). The period of holding of the rights entitlement will be reckoned from the date of offer made by the company to the date of renouncement.

b) In case of sale of right shares :- The cost of right shares acquired by the original shareholder is the price actually paid to the company for acquiring the right shares. Where however, the right renounce acquires the right shares, the cost of the rights shares is equal to the cost incurred by him for purchasing the rights entitlement + the price paid by him to the company for acquiring the right shares.

8. Capital gains on distribution of assets by a company in liquidation [section 46] :-

a) Tax treatment in the hands of the company [section 46(1)] :- Section 46(1) is applicable when a company distribute assets to the shareholders at the time liquidation then there is no “transfer” in such distribution and capital gain is not chargeable in the hands of the company.

b) Tax treatment in the hands of the shareholders [42(2)] :- When a shareholder receives money or

other assets at the time of liquidation of the company (in which he is a shareholder), section 46(2) shall be determined as follow :-

� Find out the money received and the market value of other assets on the date of distribution. � Find out the amount treated as dividend under section 2(22) (c) [any distribution by a company at the

time of liquidation is treated as dividend to the extent of accumulated profit of the company]. � The excess of (1) over (2) is treated as full value of consideration received on transfer of shares.

Amount of Exemption :- Long Term Capital Gain Amount Invested Net Consideration

X

SPECIAL NOTE :- The above rules are also applicable in respect of shares, securities, debentures, bonds, units allotted without any payment on the basis of holding of any other financial asset.




� From the consideration, deduct cost of acquisition/indexed cost of acquisition, expenditure on sale, etc., to find out capital gain.

9. Sale of asset received on liquidation :- Where the capital asset became the property of the assessee on

the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income tax under the head capital gain in respect of the asset u/s 46, the cost of acquisition to him shall be the fair market value of the asset on the date of distribution.

10. Computation of capital gain on transfer of self-generated assets :- Self-generated assets are those

assets, which do not cost any thing to the assessee in the terms of money in its creation or acquisition. In this case, at the time of transfer the cost of acquisition of such asset shall be taken as NIL. Like in the case of goodwill or creation of any patent right to manufacturer etc.

11. Conversion of debentures into shares [section 49(2A)] :- Any transfer by way of conversion of

debentures, debentures stock, or deposit certificate in any form, of a company in to shares or debentures of that company will not be regarded as transfer. But at the time of sale of such shares the cost of acquisition shall be taken as the original cost of debentures/debentures stock/deposit certificate as the case may be.

12. Capital gain on transfer of shares in amalgamated company [section 49(2)] :- If a person holds shares

in a company which is must be an Indian company, in lieu of shares in the amalgamating company, he will get shares in the amalgamated company. In such a case, the cost of shares of the amalgamating company will become the cost of shares in amalgamated company and capital gain will be computed at the time of transfer of shares of amalgamated company.

13. Capital gains on transfer of shares in resulting company [section 49(2C)] :- Section 49(2C) provides

that the cost of acquisition of the shares in the resulting company shall be computed as follows :-

SPECIAL NOTE :- In determining whether the capital gain in the above case is short term or long term, the period subsequent to the date on which the company goes into liquidation shall not be considered.

SPECIAL POINTS TO BE REMEMBERED � In this case the option to take fair market value as on 01-04-1981 is not available whether such assets

are purchased or self generated. � Cost of improvement in the case of Goodwill, Right to Manufacture is taken as NIL. Whereas the cost

of improvement regarding Tenancy Rights, Route Permits, Loom Hours, Trade Mark, Brand Name is taken as actual expenditure.

SPECIAL POINTS TO BE REMEMBERED � To find out whether or not shares in amalgamated company are long term capital asset or not, the

period of holding shall be determined from date of acquisition of shares in the amalgamating company.

� The indexation will start from the date of allotment of shares in the amalgamated company.

SPECIAL NOTE :- Same As Above.




Net Worth means the aggregate of the paid up shares capital and general reserves as appearing in the books of account of demerged company immediately before such demerger. 14. Capital gain on transfer of shares/securities held by an assessee received as stock option scheme [section 49(2AA)] :- when the shares/securities is offered to an employee by employer, the difference between the market value and the rate which it is offer to the employee is taxable as perquisites. At the time of transfer such shares/securities the cost of acquisition shall be its fair market value on the date of exercise of option.

15. Taxation on gain on slump sale [with effect from 1-4-2000 i.e. assessment year 2000-01 :- The term

slum sale has been defined u/s 2(42C) and it means “Transfer of one or more undertaking as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.” In other words, it is a sale where the assessee transfers one or more undertaking as a whole including all the assets and liabilities as a going concern. The consideration is fixed for the whole undertaking. The assessee may also transfer a division instead of the undertaking as a whole by way of such sale. Thus it ma be noted that the undertaking as a whole or the division transferred shall be a capital asset.

Profit/Loss on ‘slump sale’ [Section 50B]

1. Any profits and gains arising from ‘slump sale’ effected in the previous year shall be chargeable to tax as

capital gains and shall be deemed as income of the previous year in which transfer takes place. In case undertaking was held for a period not exceeding 36 months it shall be a short-term capital asset and if held for a period exceeding 36 months it shall be long-term capital asset.

2. “Net worth” shall be the aggregate of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of accounts but any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.

For computing the net worth, the aggregate value of total assets shall be :-

a) In the case of depreciation assets, the written down value of the block of assets determined in

accordance with the provisions contained in sub-item (C) of item (I) sub-clause (c) of clause (6) of section 43; and

Cost of acquisition of shares held by the Net book value of the assets transferred assessee in the de-merged Company Net worth of demerged company before demerger

X

SPECIAL NOTE :- Same As Above.

SPECIAL NOTE :- If values are assigned to sum assets only for the purpose of stamp duty and registration, it shall not be regarded assignment of values to each asset. For computing capital gains in case of ‘slump sale’ the term W.D.V. has been defined under section 43(1)(6) (c)(i)(C). The W.D.V. of any block of assets shall be decreased by the amount of actual cost as reduce by the amount of depreciation actually allowed.




b) In the case of other assets, the book value of such assets.

3. Every assessee having ‘slump sale’ shall furnish a report along with its return of income, from a chartered accountant certifying the net worth has been correctly calculated. 16. Insurance claim received for damage or destruction of a capital asset to be treated as capital gain [Section 45(1A)] :- Insurance claim received on account of destruction of asset is not chargeable to tax as “destruction” does not amount to transfer. The effect of the judgment has been nullified to some extent by inserting sub-section 45(1A) in section 45 with effect from the assessment year 2001-01.

When section 45(1A) is to be applied :- If the below conditions are satisfied then this sec is applicable. 1. Firstly the compensation is received because of “damage to” or “destruction of” any capital asset. 2. Secondly damage or destruction is a result of four categories of circumstances,

� Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature. � Riot or civil disturbance. � Accidental fire explosion. � Action by an enemy or action taken in combating an enemy.

� Any profits or gains arising from receipt of such money or other assets shall be chargeable to income tax

under the head capital gain. � It shall be deemed to be the income of such person for the previous year in which such money or other

asset is received. � For this purpose, the value of any money or the fair market value of other asset (on the date of receipt)

shall be deemed to be the full value of the consideration received or accruing as a result of transfer of such asset.

When section 45(1A) is not applicable :- If the above two conditions are not satisfied, then this sec is not applicable.

SPECIAL POINTS TO BE REMEMBERED � A road accident takes place in which vehicles and machinery or furniture being carried are destroyed. � A ship, being overweight, is suck and assets are lost. The receipt of insurance compensation in such

circumstances is not chargeable to tax under this section. The reasons for destruction being other then those mentioned in the above conditions.

� Insurance compensation for theft of stock in trade is not taxable under this sec but it will be taxable as business income.

� Where asset is destroyed and there is no insurance or insurance compensation is not received, neither sec 45(1A) or sec 45 shall be attracted. Since destruction of asset shall not be treated as transfer, the cost of the asset destroyed shall be treated as dead loss. But if any insurance claim in received, it will amount to transfer as per section 45(1A).




17. Capital gain on purchase by company of its own shares or other specified securities :- Where a company purchases its own shares from a shareholder or other specified securities from its shareholders, then the capital gains shall be chargeable to tax in the hands of transferor. The capital gains shall be computed as provided in sec 48 in the year in which such shares or securities are purchased by the company.

18. Capital gain on Depreciable asset (Section 50) :-. � Where entire block of depreciable assets is transferred i.e. the block ceases to exist :- If the value

of the consideration exceeds the aggregate of cost of acquisition and the expenses of transfer, there will be short term capital gain. On the other hand, if the value of the consideration of entire block transferred is less than the aggregate of cost of acquisition and expenses of transfer, there will be short-term capital loss.

� Where part of block of depreciable assets is transferred i.e. the block does not cease to exist :- If

the value of consideration exceeds the aggregate of cost of acquisition and expenses of transfer, there will be short-term capital gain. On the other hand, if the value of the consideration of the part transferred is less than the cost of acquisition, then the balance left is WDV of the block at the end of the year on which depreciation will be charged.

REFERENCE THE VALUATION OFFICER (SECTION 55A)

With a view to ascertaining the fair market value of a capital asset for the purpose of computation of capital gain, the Assessing Officer may refer the valuation of capital assets to a Valuation Officer of the Income Tax Department under the following circumstances :- 1. In case where the value of the asset, as claimed by the assessee, is in accordance with the estimate made

by a registered valuer, an the Assessing Officer is of opinion that the value so claimed is less than the market value.

2. In case, the Assessing Officer is of the opinion that the fair market value of the asset exceeds the value of the asset so claimed by the assessee by more than 15% of the value of the asset or by more than 25000 of the value claimed by the assessee.

3. Where the Assessing Officer, having regard to the nature of the asset and other relevant circumstances, feels it is necessary to do so.

Block (Written Down Value)

Block exist Block doesn’t exist +ve balance -ve balance +ve balance -ve balance Balance S.T.C.G S.T.C.L S.T.C.G




EXEMPTION AVAILABLE IN COMPUTATION OF CAPITAL GAIN (A) Exemption of capital gains under various sub clause of section 10 (B) Exemption of capital gains under section 54

(A) EXEMPTION OF CAPITAL GAINS UNDER VARIOUS SUB CLAUSE OF SECTION 10

1. Capital gain on transfer of U64 [Sec 10(33)] :- Any income arising on the transfer of capital asset being

a unit of U64 is not chargeable to tax where the transfer of such asset take place on or after 1 April 2002. This rule is applicable whether the capital asset U64 is long-term capital asset or short-term capital asset.

2. Long-term capital gains on transfer of listed equity shares [Sec 10(36)] :- Capital gains is not

chargeable to tax if the following conditions are fulfilled: � The asset, which is transferred is a long-term capital asset being an eligible equity share in a company. � Such shares are purchased on or after 1st March, 2003 but before March 1, 2004. � Such shares are held by the taxpayer for the period of 12 months or more.

3. Exemption of capital gain on compensation received on compulsory acquisition of agricultural land situated within specified urban limits [Sec 10(37)] [W.r.e.f 01-04-2004] :- Any capital gain (whether short term or long term) arising to an individual or a HUF from transfer of agricultural land by way of compulsory acquisition shall be exempt provided the compensation or the enhanced compensation or consideration, as the case may be, received on or after 01-04-2004. The exemption is available only when such land has been used for agricultural purpose during the period of two years immediately preceding the date of compulsory acquisition by such individual or a parent of his or by such HUF.

4. Exemption of long – term Capital gain arising from sale of shares and units [Sec 10(38)] [W.r.e.f 01-04-2004] :- Any income arising on or after 01-04-2004 from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund shall be exempt provided :-

Such equity shares are sold through recognised stock exchange, whereas units of equity oriented fund may either be sold though the recognised stock exchanged or may be sold to the mutual fund. Such transaction is chargeable to securities transaction tax.

SPECIAL NOTE :- If income from a particular source is exempt from tax, loss from such source cannot be set off against income from another source under the same head of income. Consequently, loss arising on transfer of units of U64 cannot be set off against any income in the same year in which it is incurred and the same cannot be carried forward.

SPECIAL POINTS TO BE REMEMBERED � Where the compulsory acquisition has taken place before 01-04-2004 but the compensation is

received after 31-03-2004, it shall be exempt. But if part of the original compensation in the above case has already received before 01-04-2004, then exemption shall not be available even though balances original compensation is received after 01-04-2004.

� However, enhanced compensation received on or after 01-04-2004 against agricultural land compulsory acquired before 01-04-2004 shall be exempt.




(B) EXEMPTION OF CAPITAL GAINS UNDER SECTION 54

1. Capital gains arising from the transfer of residential house property [section 54] :- Capital gains

arising from the house property is exempt from tax, if the following condition are fulfilled :- a) The house property should be a residential house (building or land appurtenant thereto) whose income is

assessed under the head “Income from House Property” b) Such house property is transferred by individual or HUF c) The house property (may be self occupied or let out) is a long-term capital asset, i.e. there is a long terms capital gain.

d) The assessee has purchased the residential house with in a period of one year before or two year after the date of transfer OR has constructed a residential house property with a period of three year after the date of transfer.

SOME SPECIAL CASES

� House property does not mean a complete independent house. It includes independent residential units

also, like flats in a multi-storied complex. The emphasis is not on the type of the property, but, on the head under which the rental income is assessed.

� Where a property is owned by more than one person and the other co-owner or co-owners release his or their shares or interest in the property in favour of one of the co-owners, it can be said that the property has been purchased by the releasee. Such release also fulfils the condition of Section 54 as to purchase so far as releasee assessee is concerned.

� The assessee sold his residential property and invested the capital gain within the stipulated time in the construction of a new floor on another house owned by him by demolishing the existing floor, it was held that he was entitled to exemption under section 54.

� If the land alone is sold, the provisions of section 54 will have no application in as much as the income from land is not chargeable under the head income from house property.

� In case of assessee’s death during the stipulated period, benefit of exemption under section 54 is available to legal representative if the required conditions are satisfied by the legal representative.

� Exemption available for transfer of a part of house if the same is an independent unit. � An assessee gifted some land to his wife. He, thereafter constructed a building on the said land. The

government acquired the land and building and paid compensation for land to wife and for the building to the assessee (husband). It was held that capital gain on land was assessable in the hands of the husband by virtue of section 64 but he was not entitled to exemption under section 54 in respect of capital gain on the acquisition of the land of the wife as the capital gain to the wife did not arise on transfer of a residential house.

SOME SPECIAL POINTS TO BE REMEMBERED

� Construction of the house should be completed with in three years from the date of transfer. Date of

commencement of construction is irrelevant. � If the taxpayer pays full consideration and obtains possession of the house, it is qualified for the

exemption u/s 54, even sale deed is not registered




Amount of exemption :- Actual amount invested in the purchase or construction or both of new house property will be allowable as exemption out of long-term capital gain. If amount invested is more than capital gain then capital gain is fully exempted and balance of investment can be used for exemption u/s 54F. Consequences if the new house is transferred with in three years :- If the new house property is transferred within a period of three years from the date of its purchase or completion. The amount of capital gain arising there from, together with amount of capital gain exempted earlier will be chargeable to tax in the year of sale of the new house property. Scheme of deposit in respect of exemption :- Where the amount of capital gains is not appropriate or utilized by the assessee for purchase or construction of the new residential house before date for furnishing the return of income, it shall be deposited by him on or before the due date of furnishing the return of income, in the Deposit Account in any branch (except rural branch) of a public sector bank in accordance with “Capital Gains Deposit Account Scheme, 1988”. The amount already utilized for purchase or construction of new house together with the amount of deposited shall be deemed to be the amount utilized for the purchase of new house u/s 54. What happens if the deposit amount is not fully utilized :- If the amount deposited is not utilized fully for purchase or construction of new house within the stipulated period, then the amount not so utilized shall be treated as long-term capital gain of the previous year in which the period of three years from the date of transfer of original asset expires. 2. Capital gains on transfer of land use for agriculture purposes [section 54B] :- Exemption u/s 54B is

available if the following conditions are fulfilled :-

� Exemption is not limited to acquisition of one house property. � Case of allotment of flats under the self-scheme of DDA (or similar scheme of co-operative societies

or other institutions) is treated as construction of the house. � Holding of legal title is not necessary. If taxpayer pays full consideration or substantial portion of it

(in terms of purchase agreement) within the above given period, the exemption u/s 54 is available. This rule is applicable even if the possession is handed over after stipulated period or the sale deed is registered later on.

� In the case of capital gain arising on the compulsory acquisition of a residential house by the government, the aforesaid time limit of 1 year or 2 years or 3 years shall be determined from the date of receipt of compensation whether initial or additional.

Sale consideration of the new house xxxxx

Less :- Cost of acquisition (original cost of acquisition of the new residential Minus exemption given earlier under section 54 which is going to be taken back because the new residential property is transferred within 3 years) xxxxx Short-term capital gains xxxxx

SPECIAL NOTE :- The profit is always a short term capital gain because the period of holding is always less then 3 years in this case.




a) The taxpayer is an individual, who transfers an agricultural land, which was used, by the taxpayer or his parents, for agricultural purposes for a period of at least two years immediately preceding the date of transfer.

b) Capital gain on such transfer may be long-term or short-term. c) The taxpayer has purchased another land for agricultural purposes within a period of two years from the

date of such transfer. In case capital gain arises on compulsory acquisition of agricultural land by the government, the time limit of two years shall be applied from the date of receipt of compensation (whether initial or additional). The new land may be in rural area or urban area.

Amount of exemption :- If the above conditions are satisfied then the capital gain will be exempted upto the amount invested in new agricultural land however subject to amount of capital gain. Consequences if the new agricultural land is transferred within three years from the date of its purchase

:- Same as discussed u/s 54. Scheme of deposit in respect of exemption u/s 54B :- Same as discussed u/s 54. What happens if the deposit amount is not fully utilized :- If the amount deposited is not utilized fully for the purchase of new agricultural land within the stipulated period, then the amount not so utilized shall be treated as capital gain of the previous year in which the period of 2 years from the date of transfer of original asset expires. It will be taxable as long-term or short-term capital gains depending upon the original capital gain.

3. Capital gain on compulsory acquisition of land and building, forming part of industrial undertaking [section 54D] :- Exemption u/s 54D will be available if the following conditions are satisfied :-

a) This exemption is available to all assessee. b) There must be capital gain arises by way of compulsory acquisition of land and building which was used

by the assessee for the purpose of industrial undertaking for at least two years preceding the date of compulsory acquisition.

c) The asset may be short-term or long-term. d) Assessee has purchased any other land or building within a period of three years from the date of receipt

of compensation or constructed a building within such period. e) The new acquire land or building should be used for industrial undertaking. Amount of exemption :- Capital gain on arising such compulsory acquisition will be exempted up to the amount invested in new land and building however subject to the amount of capital gain. Consequences if the new land or building is transferred within three years from the date of the

purchase or construction : - Same as discussed u/s 54. Scheme of deposit in respect of exemption u/s 54D :- Same as discussed u/s 54.

SPECIAL POINTS TO BE REMEMBERED � Although the word used in the section is assessee but condition prescribes parents which indicates

that this exemption is available only to individual as only individuals can have parents. � It may be noted that capital gain on the compulsory acquisition of urban agricultural land is exempt.




What happen if the deposit amount is not fully utilized :- same as discussed in section 54B. 4. Capital gain or transfer of long-term capital asset not to be charged on investment in certain bonds [section 54EC] : - Exemption u/s 54EC is available if the following conditions are satisfied :-

a) The capital asset transferred must be long-term capital asset i.e. there is long term capital gain and is

transfer on or after 1-4-2000 by any assessee. b) The assessee has within a period of 6 month after the date of such transfer invested the capital gain in the

long-term specified asset. The long-term specified assets mean the following bonds, which are redeemable after three years.

� Bonds issue by NHAI (National Highways Authority of India). � Bonds issued by RECL (Rural Electrification Corporation Ltd). Amount of exemption :- The capital gain shall be exempted to the extent the amount invested in the long-term specified asset within a period of 6 months from the date of such transfer however subject to the amount of capital gain. Consequences if the long-term specified asset is transferred or converted into money within three years

:- Where the long-term specified asset transfer or converted into money at any time with in a period of three years from the date of its acquisition, the amount of capital gain exempt u/s 54EC earlier, shall be deemed to be the long-term capital gain of the previous year, in which the long-term specified asset is transferred or converted into money. 5. Exemption of capital gains on transfer of long-term capital assets in case of investment in residential house property [section 54F] :- For exemption u/s 54F, the following conditions must be satisfied :-

a) The assessee is an Individual or HUF. b) The asset transfer is any long-term capital asset but other than residential house (for instance, it may be a

plot of land, commercial property, gold, shares or any asset but not a residential house property).


� Investment made on or after the 1st day of April 2007 in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees in bonds of NHAI or RECL.

� If the assessee takes any loan or advance on the security of such long-term specified asset, he shall be deemed to have converted such long term specified asset into money on the date on which such loan or advance is taken.

� The cost of specified asset, which is considered for the purpose of section 54EC, shall not be eligible for rebate u/s 88.

� This deduction is based on actual investment because there is no scheme of “Capital Gains Deposit Account Scheme, 1988” is available under this deduction.

� Where a capita asset is converted into stock in trade, the investment U/S 54EC can be made within six months from the date of sale or otherwise transfer of stock in trade and not within six months from the date of conversion of capital asset into stock in trade.




c) The assessee has purchased, within one year before or two year after the date of transfer OR constructed a new house property within three years from the date of transfer. The following points should be taken into consideration :-

� Date of commencement of construction is irrelevant. � Relevant date for purchase of new housed under section 54F is when assessee paid full consideration

and obtains possession of new house property and not date of registration of agreement of purchase.

d) The assessee should not own on the date of transfer of original transfer more than one residential house (other than new house). He should not purchase within a period of two years after such date (or complete construction within a period of three years after such date) any residential house (other than the new house).

Amount of exemption :- a) If the amount invested in the new house property is more than or equal “net consideration” in respect of

the capital asset transferred, the entire amount of capital gain on transfer of such capital asset will be fully exempted.

b) If the amount invested in new house property is less than the “net consideration” in respect of capital asset transferred, the exemption will be given as under

Consequences in case of sale or transfer of new asset within three years OR purchased a new asset within two years after date of transfer of original asset or constructs a new residential house within

three years of transfer of original asset : - In this case the exempted capital gain will be taxable as :- � If the assessee transfers the new house within a period of three years :- Capital gain arises on the

transfer of new house will be taken as short-term capital gain. Besides, the capital gain, which was exempted u/s 54F, shall be treated as long-term capital gain of the year in which the new house is transferred.

� If the assessee has purchases, within a period of two years of the transfer of original asset OR assessee has constructs a new house within a period of three years from the date of transfer of

original residential house, other than a new house :- Capital gains which was exempted under section 54F shall be deemed to be the long term capital gain of the year in which another residential house is purchased or constructed.

Scheme of deposit :- Where the amount of net consideration is not utilized for purchase or constructed of new house before the date of filing return of income, it shall be deposited by him on or before the due date of filing return, in the deposit account of any branch of public sector bank (except the rural branch). The amount already utilized for the purchase/construction of new house together with the amount so deposited shall be deemed to be amount utilized for purchase/constructed of new house and exemption will be given accordingly.

SPECIAL NOTE :- Net consideration means Full value of consideration on transfer of capital asset less expense on such transfer.

Exemption u/s 54F = Long -Term Capital Gain Amount Invested in New House Property Net Consideration X




For the exemption u/s 54F only one house is allowed to be purchased/constructed. Where the assessee has purchased the house before due date of return, he can still deposit the amount under capital gain scheme which can be for addition made to that house only. What happen if the deposit amount is not fully utilized :- If the amount so deposited is not fully utilized for purchase/constructed of new house within the stipulated period, then the proportionate amount of unutilized amount will be treated as long-term capital gain of the previous year in the three years from the date of transfer of original asset expires. Proportionate amount will be calculated as follows :-

6. Capital gain arising on transfer of assets in case of shifting of industrial undertaking from urban area to non-urban area [section 54G] :- The conditions for claiming the exemption are as follows :-

a) The transfer is affected by any assessee in the course of or in consequence of shifting of undertaking

from urban area to non-urban area. b) Assets transferred are machinery, plant, building, land or any right in building or land used for industrial

business by the assessee. c) The capital gain arising on such transfer may long or short-term capital gains. d) The capital gain is utilized by the assessee within the period of one year before or three years after the

date of transfer for acquiring or constructing new assets for the said industrial undertaking. Amount of exemption :- The amount utilized for the purchase/construction of new assets for such new industrial undertaking or amount of capital gain, whichever is less will be allowed as exemption u/s 54G. Consequences where the new asset is transferred within a period of three years of its purchase or

construction :- In this case, the capital gain, which was exempted earlier u/s 54G, shall be treated as capital gain of the year in which the new asset is to be transferred. Scheme of deposit :- As discussed in the previous sections. Urban Land :- In this section, “Urban Land” means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by the general or special order, declare to be an urban area for the purpose of this section. 7. Exemption on capital gains o transfer of assets in cases of shifting of industrial undertaking from urban area to Special Economic Zone [section 54GA] :- Section 54GA has been inserted to give exemption in case of shifting of industrial undertaking from urban area to Special Economic Zone.

This exemption is available if the following conditions are satisfied :-

Unutilized amount in the deposit scheme Amount of original capital gain which is not utilized within the specified period for purchase/construction of new house Net Sale Consideration

X

SPECIAL NOTE :- Net consideration means Full value of consideration on transfer of capital asset less expense on such transfer.




1. A capital asset (being plant, machinery, land or building or any right in land or building) used for the purpose of an industrial undertaking situated in an urban area is transferred.

2. The transfer is effected in the course of, or in consequence of, the shifting of such industrial undertaking (hereinafter referred to as the original asset) to any Special Economic Zone. Such Special Economic Zone may be situated in any urban area or any other area.

3. The assessee has within a period of 1 year before or 3 years after the date on which the transfer took place :- � Purchased machinery or plant for the purpose of business of the industrial undertaking the Special

Economic Zone to which the said undertaking is shifted. � Acquired building or land or constructed building for the purpose of his business in the Special

Economic Zone. � Shifted the original asset and transferred the establishment to Special Economic Zone. � Incurred expenses on such other purposes as may be specified in a scheme framed by the Central

Government for the purpose of this section. Amount of exemption :- The amount of capital gain generated on transfer of capital assets in the case of shifting of an industrial undertaking as stated above or the amount of expenses on the above scheme whichever is less. Consequences where the new asset is transferred within a period of three years of its purchase or

construction :- In this case, the capital gain, which was exempted earlier u/s 54G, shall be treated as capital gain of the year in which the new asset is to be transferred.

Scheme of deposit :- As discussed in the previous sections. 8. Extension of time limit for acquiring new asset or depositing or investing amount of capital gain, in case of compulsory acquisition [section 54H] :-

There may be a time lag between the previous year in which the asset is compulsory acquired and the previous year in which the compensation is actually received. As per section 54H, the period of acquiring the new asset by the assessee referred to in section 54, 54B, 54D, 54EC and 54F (i.e. 6 months, 1 year before or 2 years/3 years after the date of transfer of the asset) shall be reckoned from the date of receipt of such full/part compensation and not from the date on which the asset was originally transferred Similarly, if the enhanced compensation is received, the period for investment shall be reckoned from the date the enhanced compensation is received.

Sale consideration of the new house xxxxx

Less :- Cost of acquisition (original cost of acquisition of the new residential Minus exemption given earlier under section 54 which is going to be taken back because the new residential property is transferred within 3 years) xxxxx Short-term capital gains xxxxx




TAXABILITY OF CAPITAL GAIN STEP 1. Compute the gross total income without including short-term capital gain of the nature referred to

in section 111A and long-term capital gain on any asset. STEP 2. Allow deduction permissible under section 80C to 80U from such gross total income. STEP 3. Calculate the income tax at the normal rate of tax on income arrived at in Step 2 STEP 4. Compute the tax @ 15% on such short-term capital gain and at the prescribed rate on long term

capital gain. STEP 5. The aggregate of the tax computed in Step 3 and Step 4 shall be the tax on the net income.

TAX RATES

A. Short-term or long-term capital gains :- On the gain cover under section 111A 15%

On other gains Normal Rates

B. Tax on long-term capital gains from listed securities With effect from assessment year 2000-01, the tax payable by the assessee on long-term capital gain from securities listed on any recognized stock exchange in India or units of UTI or mutual funds covered under section 10(23D) shall be minimum of the following two amounts: � Tax @ 20% on long-term capital gains computed after indexation of cost of such shares, securities or

units � Tax @ 10% on long-term capital gains computed without indexation.

SUMMARY OF THE CONSEQUENCES IF THE NEW ASSET ACQUIRED IS TRANSFERRED WITHIN 3 YEARS OF ITS ACQUISITION

� Under section 54, 54B, 54D and 54G :- For computation of New Capital Gain (Which will be short

term), the cost of acquisition of such new asset shall be reduced by the amount of Capital Gain exempt under Section 54, 54B, 54D,54G and 54GA.

� Under section 54F :- Besides the new Capital Gain (Which will be short term), the capita gain exempt earlier under section 54F, shall be long term capital gain of the previous year in which new asset is transferred.

� Under section 54EC :- If such security acquired is converted into money or any loan is taken against such securities within 3 years, the capital gain exempt under section 54EC, 54ED for such securities earlier shall be long term capital gain of the previous year in which such conversion takes place or the loan is taken.

� Consequences if the amount of deposited in capita gain scheme is not utilised within the

stipulated time of 3 years (2 years in case of 54B) :- The unutilised amount shall be capital gain (Short term or long term depending upon original transfer) of the previous year in which such period has expired. However, in case of section 54F, proportionate amount shall be taxable.




INTROUCTION This is the last head and residuary head of income. U/s 56(1) any income, which is taxable under this act but does not find place under any of the previous four head of income (i.e. salary, house property, business or profession and capital gain) shall be taxable under this head of income i.e. ‘income from other sources’.

SPECIFIED INCOME INCLUDED UNDER THIS HEAD [SECTION 56(2)] Following income shall be chargeable to tax under this head :- 1. Dividend, other than the dividends referred in section 115 O. 2. Any winning 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 whatsoever. 3. Any some received by the assessee from his employee as contribution to any provident fund or

superannuation fund or any fund set up under E.S.I. Act 1948 or any fund for the welfare of such employees, provided that it is not chargeable to under the head ‘business or profession’.

4. Income by way of interest on securities, if the income is not taxable under the head business or profession.

5. Income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to tax under the head ‘business or profession’.

6. Income of an assessee from letting on hire machinery, plant or furniture belonging to him and also building, and the letting of the building is inseparable from the letting of the said assets, it is chargeable under this head if it is not chargeable under the head ‘business or profession’.

7. Income received under key man insurance policy including bonus on such policy, if such income is not chargeable under the head ‘business or profession’.

OTHER INCOMES U/S 56(1)

1. Remuneration received by a teacher or a lawyer for doing examination work. 2. Income from leasehold property. 3. Income from undisclosed sources. 4. Casual incomes. 5. Interest received on securities of co-operative society. 6. Any fees or commission received by an employee from a person other than his employer. 7. Any annuity received under a will. It does not include an annuity received by an employee from his

employer. 8. Interest on loans, securities, deposits and current a/c. 9. Income of a tenant from sub-letting the whole or part of the H.P. 10. Income of royalty 11. Director fees (if he is not employee). 12. Rent of land not appurtenant to any building. 13. Agricultural income from land situated outside India 14. Income from markets, ferries and fisheries etc. 15. Remuneration from writing articles by a non-journalist in journals. 16. Income from undisclosed sources :-

i. cash credit which are unrecognized or unexplained (sec68); ii. unexplained Expenditure (sec69); iii. Unexplained money (sec69A);




iv. Unexplained Investments (sec69c). 17. Interest received by an employee on his own contribution to an unrecognized provident fund. 18. Salary of a M.P (Member of Parliament), M.L.A. (Member of Legislative Administration), M.L.C.

(Member of Legislative Council) 19. Family pension received by the widow and heirs of deceased employees {if taxable), (exempted in case

of U.N.O. employees or gallantry awardees) 20. Insurance commission if not chargeable under the head B/P 21. Gratuity received by a director who is not an employee of the co. 22. Tips received a waiter or taxi-driver, not being given by his employer. 23. Tax paid by an Indian company on behalf of a foreigner who was sent to India by a foreign company

was income of the foreigner taxable under the head of Income from other sources because assessee was not an employee of Indian co.

24. Receipts by Cricketers selected to play for India: - a) Test matches in India :- 25% of amount actually received by the player from cricket control board is

treated as Income. b) Other matches in India: Not taxable. c) Matches outside India: 50% of the amount received is taxable.

25. Income of the other persons to be included in the income of individual.

EXPLANATION OF SOME SPECIFIED INCOMES 1) Dividend :- Any dividend declared, distributed or paid by a company to its shareholders is chargeable to

tax under the head “Income from other sources” irrespective of the fact whether shares are held by the assessee as investment or stock-in trade. The term dividend has been defined in inclusive manner under section 2(22). The definition is sub divided in sub clauses (a) to (e), which are explained below:

Sub Clause (a) :- Any distribution by a company of accumulated profits entails release of company’s asset. The two conditions which must be fulfilled for including a particular distribution of profits by a company as dividend, these are :- (A) :- IT MUST BE OUT OF ACCUMULATED PROFIT. Following points are to be taken into account for accumulated profits :-

1. Accumulated profits of the company include all profits up to the date of distribution or payment. In case

of liquidation of company, however, it includes all profits up to the date of liquidation. 2. However, receipts of capital nature are included in accumulated profits only if such receipts are

chargeable to tax under the head “Capital Gain” in the hands of recipient company. 3. Accumulated profits are computed on the basis of commercial profits and not on the basis of assessed

income. 4. While calculating accumulated profits an allowance for depreciation at prescribed rates given by Income

tax act shall be provided. 5. Accumulated profits include tax-free income, like agricultural income. 6. Accumulated profits include general reserve, development rebate reserve, development allowance

reserve and investment allowance reserve. 7. Provision for taxation and dividend do not form part of accumulated profits. (B) :- IT MUST ENTAIL THE RELEASE THE ASSET OF THE COMPANY.




Therefore the issue of bonus shares to the ordinary or equity shares does not call as dividend because it does not entail the release of the assets of the company. It means dividend paid in cash out of accumulated profits and also entail the release of assets of the company is comes under the definition of dividend. Sub Clause (b) :- Under this provision the following two distributions are treated as dividend to the extent of accumulated profits. a) Any bonus shares distributed among the Preference Shares holders will amount to dividend. b) Distribution by a company to its shareholders (whether equity or preference) of debentures, debentures stock or deposit certificate in any form, whether with or without interest.

Sub Clause (c) :- Any distribution made by a company to its shareholders on its liquidation to the extent the company possessed its accumulated profits (whether capital or revenue immediately before its liquidation) shall amount to dividend.

Sub Clause (d) :- If at any time, it is felt that company is over capitalized and has accumulated profits, if the capital of such company is reduced by way of paying its share capital in excess of its need. In such case, any distribution made by a company to its shareholder on reduction of capital to extent it possess accumulated profits will amount to dividend.

Sub Clause (e) :- Distribution of accumulated profits by way of advance or loans i.e. any payment made by a company by way of advance or loan to shareholders, or on behalf of a shareholder, or for individual benefits of a shareholder, shall be deemed as dividend in the hand of shareholder if the following conditions are satisfied :- 1. The Company is not a company in which the public is substantial interested. 2. The payment is made after 31-05-1987 to its shareholder, who is holding not less than 10% of the voting

power. 3. The Company possesses sufficient accumulated profits at the time of making loans and advances. If any loan or advance given to a concern (a HUF/firm/AOP/BOI) in which a shareholder of the payer company has substantial interest, then such payment is taxable as dividend in the hands of such concern. E.G. a partnership firm obtain a loan from a company, then such payment is treated as dividend in

SPECIAL NOTE :- It is worthwhile to be noted that under the aforesaid circumstances, distribution amounts to dividend even if there is no release of assets at the time of distribution.

Followings are however not treated as dividend � Any distribution in respect of preference shares issued for cash consideration. � Any distribution insofar as such distribution to the capitalised profits of the company representing

bonus shares allotted to its equity shareholders after March 31st 1964 but before April 1st 1965.

Followings are however not treated as dividend � Any distribution out of accumulated profits, which arose up to the previous year 1932-32. � Any distribution in respect of preference shares issued for cash consideration. � Any distribution insofar as such distribution to the capitalised profits of the company representing

bonus shares allotted to its equity shareholders after March 31st 1964 but before April 1st 1965.




the hands of firm, if a partner (entitled at least 20% profits of the firm at any time during the previous year) and such a partner is shareholder in the payer company and having at least 10% shareholding in the payer

BASIS OF CHARGE

Method of accounting (may be cash basis or mercantile basis) will not effect the treatment of dividend, i.e. dividend will be taxable in the following manner :- a) Normal dividend :- Normal dividend declared in annual general meeting is deemed to be income of the

previous year in which it is declared. b) Deemed dividend :- Notional dividend as explained u/s 2(22) is treated as income of the previous year

in which it is so distributed or paid. c) Interim dividend :- Interim dividend is deemed to be the income of the previous year in which the

amount of such dividend is unconditionally made available by the company to a shareholder. d) Place of accrual: Dividend paid by Indian company is deemed to be accrued in India.

However in following cases loan or advance given to share holder is not taxable as dividend

� Where money lending is the business of the company. � Any dividend paid by the company to a shareholder, which is set off against the whole or part of any

sum payable to him, before and which was earlier taxed as dividend. If however the dividend is not set-off but paid to a shareholder even when the loan is outstanding against him, it would be treated as dividend. company.

Example :- The Indian company announces interim dividend on January 25, 2006; On March 10, 2006 the company declares April 10, 2006 as the date of payment of Interim dividend and payment of dividend actually made on April 12, 2006 by posting dividend warrant. In this case, the amount of dividend is chargeable to tax in the previous year 2006-07 and not 2005-06, as the interim dividend is assessable when the company issues the dividend warrant.

SPECIAL POINTS TO BE REMEMBERED � In case dividend is paid by a company in which public are substantially interested, to an individual,

in A/C payee cheque, on listed shares for amount not exceeding Rs. 2,500 there is no TDS. � Dividend [not covered u/s 2(22)(e)] from a domestic company declared, distributed or paid during

June 1, 1997 and March 31, 2002 or after March 31, 2003 is not taxable in the hands of shareholders u/s 10(34). Tax will not be deducted at source on such dividend, which is declared or paid during the above-mentioned dates.

� The above exemption is not available if dividend is received from a company other than a domestic company and, consequently, such dividend is chargeable to tax in the hands of recipient.

� In case of dividend received by an Indian Shareholder from a foreign company which has deducted tax at source, but has not paid the deducted amount of tax to the Government of India, the amount deducted as tax at source shall not be included in the dividend income of the Indian Shareholder.

� However, where assessee is entitled to double taxation relief the gross dividend shall be included in income.

� If dividend for several years is declared in some later year and paid in lump sum in that later year, the dividend shall be deemed to be the income of the previous year in which they are declared.




2) Winning from lotteries, crossword puzzles, races including horse races and games of any sort or nature or from gambling or betting of any form or nature, what ever name called U/S 56(2)(iv) :- As per section 58(4), in case assessee has received above incomes, no deduction in respect of any expenditure or allowance in connection with such income shall be allowed while computing such income. In fact deductions u/s 80C to 80U will also not available from these incomes. However rebate u/s 88E is available out of tax liability on such incomes.

The tax is levied on the gross income, but in case of income from lotteries, crossword puzzles

and horse races tax may be deducted art source. The rate of TDS in this case is 30% Plus surcharge of 10% of 30% (if total income of the assessee exceeds Rs. 10,00,000) Plus 2% Education Cess on the total amount of (Tax rate + Surcharge if applicable). In case assessee receives net amount or amount after deduction of tax or amount collected by bank is net amount, then it has to be grossed up for income tax purposes, i.e. gross prize shall be added in the gross total income of the assessee.

Sources Mode of conversion

Net winning from lotteries or crossword puzzles or horse raced or card games or other games.

100 100 – Rate of T.D.S.

Winning from other races, gambling or betting As not tax is required to be deducted, there is not difference between the net and gross amount.

3) Income from the activity of maintenance of horses for race purposes :- Income from maintenance of

horses for race purposes is taxable income under the head ‘Income from other sources’. In case the assessee has no income by way of stake money, the expenses incurred wholly and exclusively for the purpose of maintenance of such horses shall be treated as loss from race horse

Loss from activity of maintenance of race-horses can be set off only from income of same activity and not from income by way of betting at race course or any other income. In case such loss remains unadjusted from income of such activity, it can be carried forward for four succeeding previous years to be set off only from income of such activity. 4) Interest on Kisan Vikas Patra (KVP) and Indira Vikas Patra (IVP) :- Interest on KVP and IVP is

taxable under the head ‘other sources’. Interest accrued every year on them is calculated on the basis of a table. No other deduction under section 80L is allowed on this interest.

5) Interest on NSC VIIIth issue :- Interest accrued on such on NSC VIIIth issue is taxable under the head

‘Other Sources’. 6) Interest on securities :- A person may invest money in many ways such as deposit in banks, companies,

buying of debentures, or bonds issued by companies or government. The interest received on such investment is taxable under the head “Other Sources”, if it is not chargeable to tax under the head ‘Business or Profession’.

BASIS OF CHARGE

If books of accounts of an assessee are maintained on cash basis, the income by way of interest on such securities is chargeable to tax on receipt basis.

Net Amount x

SPECIAL NOTE :- With effect from 01-06-1997, where the winning from lottery is wholly in kind or partially in kind and partially in cash and cash is not sufficient to meet the liability of tax on such income, the person responsible for paying such prize must ensure that tax has been paid in respect of winning before such prize is release.




Accrual of interest :- Interest on securities accrues or become due on the date specified on such securities and not on day-to-day basis. Interest may become due on quarterly basis or half yearly basis or yearly basis, depending upon the term of issue.

INTEREST EXEMPTED FROM TAX OR EXEMPTED SECURITIES From the following securities tax is fully exempted from tax {section 10(15)} :-

(A) :- FOR ALL ASSESSEE

a) 12-year National Saving Annuity certificates; b) National Defense Gold Bonds, 1980; c) Special Bearer Bonds, 1991; d) Treasury Saving Deposit Certificates (10 year); e) Post Office Cash Certificates (5 year); f) National Plan certificates (10 years); g) National Plan Saving Certificates (12 years); h) Post Office national saving Certificates (12 years/7 years); i) P.O. Saving bank Account; j) P.O. Cumulative Time Deposit Account (15 years); k) Fixed Deposit scheme governed by the government saving certificate (F.D. rules1966); l) F.D. Scheme governed by the P.O. (Fixed Deposit) Rules, 1968; m) Special Deposit Scheme 1981; n) Public account in post office up to Rs. 5,000.

(B) :- For Individual and HUF

1) Interest on 7% Capital investment Bonds. 2) Interest on 10% Relief Bonds 1995, 9% Relief Bonds 1999, 8.5% Relief Bonds 2001, 8% Relief

Bonds 2002, 6.5% Saving Bonds 2003. 3) For some public sector companies [detail in books]. 4) Interest on Gold Deposit scheme issued under Gold Deposit Scheme, 1999. 5) Interest on notified Bonds issued by a local authority.

AVOIDANCE OF TAX [U/S 94]

(1) Bond Washing Transactions [section 94(1)] :- A bond washing transaction is narrated as a transaction,

which consists of selling securities (to friends or relatives) some time before the due date of interest. After due date of interest the security is acquiring back by the same person. This practice is generally

SPECIAL POINTS TO BE REMEMBERED � Interest is taxable on receipt basis if such interest had not been charged to tax on the due basis for any

earlier previous year. � In case assessee maintain books on accrual basis or does not maintain books, the interest is

chargeable to tax on due basis.

� If nothing is mentioned then we assume the Securities are Non Govt. & Less Tax




adopted by high-income class assessee to evade tax while transferring the securities to the low-income class assessee. To prevent the avoidance of tax in this manner, section 94(1) provides that where the security owner transfer the securities on the eve of due date of interest and reacquiring back, the interest received will be taxable in the hands of transferor and in the hands of transferee.

(2) Sales cum-interest [section 94(2)] :- Another method of avoiding tax is sale of securities cum-interest. Section 94(2) provides that if an assessee, having beneficial interest in securities during the previous year, sells them in such a way that either no income is received or income received is less than the sum he would have received if interest had accrued day to day and been apportioned accordingly. Then income from such securities for such year shall be the income of assessee.

DEDUCTION OF TAX AT SOURCE [SECTION 193] Before making payment of interest on securities, it is the duty of the security issuing authority to deduct tax at source on such interest. The tax deducted shall be deposited in the govt. treasury on behalf of the security holder. The security holder account is credited with the amount and while paying tax on the total income the amount deducted at source shall be deducted out of the total tax liability. However in the following cases tax shall not be deducted at source :- 1) 4.25% National Defense Bonds 1972 where the bonds are held by resident individual. 2) 4.25% National Defense loan 1968 or 4.75% National Defense Loan 1972, provided the interest is

payable to an individual. 3) National Development Bonds. 4) 7-year National Saving Certificate (IVth issue) 5) Debentures issued by any institution or authority or any public sector or co-operative society notified by

the central govt. 6) 6.5% Gold Bonds, 1977 or 7% Gold Bonds 1980, held by a resident individual. 7) Any security of central/state government. 8) No tax shall be deducted at source if interest on term deposit with a banking company including any

bank or banking institution or a co-operative society engaged in banking business, and amount of interest does not exceed Rs. 5,000 the amount of interest shall be the income paid or credited by a branch of a banking company or co-operative society.

9) No TDS in case of Debentures interest and dividend on shares if, (a) Debentures are issued by company in which public are substantially interested; (b) Interest is payable to resident individual; (c) Debentures are listed in a recognized stock exchange; (d) Interest is paid by company by account payee cheque; (e) The total amount of interest in the previous year does not exceed Rs. 2,500.

10) Where the recipient has made an application in Form No. 13 to the concerned assessing officer and has obtained a certificate in Form No. 15AA, authorizing the payer to deduct tax at lower rate or not to deduct tax at source, which one is appropriate.

EXCEPTIONS The provisions of section 94(1) and (2) are, however not applicable, if the owner proves that :- � There has been no avoidance of tax; or � The avoidance of income tax was exceptional and not systematic and that there was no avoidance

of tax by such transaction in any of the three preceding years.




RATES OF TAX DEDUCTED AT SOURCE DURING THE FINANCIAL YEAR 2006-07

FOR RESIDENT Rate of T.D.S.

� Interest on securities of the central/state government � Interest other than interest on securities [Banks interest etc.] � Debenture/securities issued by or on behalf of any local authority or a corporation

established by central/state Act like Railway, Electricity etc. � Any debentures listed in recognized stock exchange � Interest on any other securities including debentures not listed in recognized stock

exchange � On winning from lotteries, crossword puzzles, TV games or other games of any sort

or race winning (including horse races)

NIL 10% 10% 10% 20%

30%

IN CASE OF NON-RESIDENT PERSON Rate of T.D.S.

� On income by way of interest on tax-free government security � On winning from lotteries, puzzles, TV game or other game of any sort or race

winning � On any other income

20% 30%

30%

TYPES OF SECURITIES

TAX-FREE SECURITIES a) Tax free Commercial (non-government) Securities :- These securities are those, which are issued by

local authorities, Statuary Corporation or a Company in the form of debentures or bonds. Actually, these are not tax free, because tax due on this interest is payable by the security issuing authority. These are called tax-free because assessee has not to pay tax on it from his own pocket. In this case assessee will receive net amount of interest. But for income tax purposes the gross amount shall be added in the gross total income. (For Example, if a company has issued 10% Tax Free Debentures, the debenture holder will receive the entire amount of interest calculated at 10% but the amount to be included in total income of the debenture holder will be the amount actually received by him as interest plus income tax thereon paid by the company.)

Where gross amount of interest = 100 100 – Rate of T.D.S.

b) Tax free Government Securities :- These are those securities on which tax is fully exempted from tax. Interest on such securities is neither included in total income nor it is taxed.

LESS-TAX SECURITIES

a) Less tax Government Securities :- Such securities are issued either by Central Government or State

Government. These are taxable securities, but no tax is deducted at source on such securities. Hence, the interest on such securities will not be grossed up. The amount received or due, as the case may be included in the total income.

Net Amount x




b) Less tax Commercial Securities :- This is the most common form of securities. Out of the amount of interest due to the security holder, tax is deducted at source at prescribed rates by the security issuing authority before payment of interest.

DEDUCTIONS ALLOWED U/S 57 1. Deduction in case of dividend and interest on securities [section 57(i) & (ii)] :- The following

expenses incurred by the assessee are allowed as deduction out of dividend and interest on securities :- � Any sum spent by way of commission or remuneration to a banker or any other person as collection

charges for the receipt of such dividend or interest on securities. � Interest on capital borrowed for the purposes of investment in these securities.

SPECIAL POINTS TO BE REMEMBERED

� When the face value of security and the rate of interest both are given, it will directly give us the

gross amount of interest, which shall be included in the gross total income of the assessee. � Some time the amount of interest received by the assessee is available and that interest is net amount

of interest i.e. after deduction of tax at source. For income tax purposes it shall be grossed up.

RULES FOR GROSSING UP OF INTEREST ON SECURITIES � Interest on tax-free commercial securities is always grossed up whether its rate percent is given or

amount of interest received is given. � In case of less-tax securities interest shall be grossed up only when amount received is given. � If the rate of interest is given, only the interest on tax free commercial securities is grossed up and

interest on all other securities is not grossed up. � Less tax government securities are always grossed up and we have not any need to gross it up.

Types of Securities

Govt. Securities Non Govt. Securities

Tax Free Less Tax Tax Free Less Tax

Fully exempted from tax

Taxable but no need to Gross Up

Always Gross Up whether % is given or amount received

is given

If % is given then no need to Gross Up

If amount received is given then Gross it up




2. Deduction in case of sum received from employees as contribution to provident fund etc. [section 57(ia)] :- The sum credited by the employer to the employee’s account in the relevant fund on or before due date shall be allowed as deduction if the sum received as contribution to the provident fund etc. is treated as income under the head ‘other sources’. ‘Due date’ here means the date by which the employer required to credit (deposit in) employee’s a/c in the relevant fund under any act.

3. Deduction in case of rent from letting of machinery, plant, furniture and with or without building [section 57(ii)] :- The following expenses are allowed as deduction Out of the income from letting out of such assets:

� Current repair of the building or other assets. � Insurance premium in respect of insurance against risk of damages or destruction. � Depreciation on these assets if assessee is the owner of such assets. � Any other expenditure, not being an expenditure of a capital nature, lay out or expended wholly and

exclusively for the purposes of making or earning such income can be claimed as deduction.

4. Deduction in case of family pension [Sec. 57(iia)] :- In case of family pension received by the widow or legal heirs of the deceased employee, a standard deduction equal to Rs. 15,000 or 1/3 of the pension which ever is less shall be allowed as deduction.

5. Deduction in case of other incomes [section 57(iii)] :- Deduction for expenses incurred wholly and

exclusively for the purposes of earning of such income shall be allowed.

DEDUCTIONS EXPRESSLY DISALLOWED [SECTION 58] The following amounts shall not be allowed as deductions :-

� Any personal expenses of the assessee. � Any interest, salaries if payable outside India and on which TDS had not been deducted. � Any sum paid on account of wealth tax. � Cash payment exceeding Rs. 20,000 is not allowed to the extent of 20% of total payment [section 40A]. � Expenses or losses in connection with casual income shall not be allowed as deduction. But in case

assessee being the owner of horses, which are maintained for race purposes. � It must be expended in the previous year and not in any prior or subsequent year if it is not then it is

disallowed. � Payment to relatives and associates if the Assessing Officer considers it excessive or unreasonable are

not deductible.


� The deduction for interest on borrowed capital shall be allowed even if in the relevant shares or

securities had not yielded any income during the relevant previous year. � The deduction for interest on borrowed capital shall not be allowed if the amount of capital borrowed

for the purposes of purchase of those securities and shares on which the interest and dividend is fully

SPECIAL NOTE :- Lump-sum payment gratuitously or by way of compensation to the widow or legal heirs of deceased employee who dies while in active service is not taxable as income under income tax act. So there is no question of deduction.




� Expenses incurred in relation to exempted incomes are not deductible.

� Which of the deductions are not allowed under the head of income from other source. � Write a note on taxability of gift. � Write a note on deemed dividend. (V. Imp) � Write a note on taxability of income from interest. (V. Imp) � Write a note on dividend Stripping.

QUESTIONS




INTRODUCTION Section 10(1) of the income tax act 1961 exempts Agricultural Income from income tax. The reason for keeping the agricultural income outside the purview of Income Tax Act 1961 is that the Constitution of India gives exclusive powers to the State Legislature to make laws with respect to the taxes on agricultural income. Hence, the Central Government is not empowered to tax this source of income. However, from assessment year 1974-75 and onwards, net agricultural income is added to the total non-agricultural income computed as per Income Tax Act 1961, for the purpose of determining the income tax on non-agricultural income, although the agricultural income will remain fully exempt. The income-tax act 1961 does not define what agricultural income is? However by virtue of section 2(1A) the expression “agricultural income” means or includes: 1. Any rent or revenue derived by a person/assessee from land, which is situated in India and is used for

agricultural purposes during the relevant previous year (R.P.Y.). [2(1A)(a)] 2. Any income derived by a cultivator or receiver of rent in kind from such land by performing agricultural

operation including processing of the agricultural produce, raised so as to render it fit for the market for sale of such produce. [2(1A)(b)]

3. Income attributable to a farm house (farm building) subject to certain conditions. [2(1A)(c)] The above three types of incomes shall be treated as ‘Agricultural Income’ only when the following conditions are satisfied :- (i) Income should be derived from land :- The expression derived from land would mean springing from

land or arising from land. It points to a source from out of which the income springs. (ii) Land should be situated in India :-

a) Land should be situated anywhere in India, though, it may or may not be subject to land revenue or any local tax.

b) The land may be situated in an urban area or in a rural area. c) If the land is located outside India (or in foreign country), any agricultural income derived from such

land will not be deemed to be agricultural income and the same will not enjoy any exemption u/s 10(1).

(iii)Land should be used for agricultural purpose :- The Supreme Court has held that the land is said to be

used for agricultural purpose where the following two types of operations are carried out on such land :-

a) Basic operations :- These involve cultivation of the ground, in the sense of tilling of the land, sowing of the seeds, planting and similar operations on the land. Such basic operations demand the expenditure of human labour and skill upon the land itself and further they are directed to make the crop sprout from the land. In other words we can say that this includes ploughing the land / field, sowing the seeds, watering (if is essential for generation of agricultural output), etc.

b) Subsequent operation :- After the crop sprouts from the land, there are subsequent operations which

have to be resorted to by the agriculturists for the efficient productions of the crop such as, weeding, digging the soil around the growth, removal of undesirable growths, prevention of the crop from insects and pests and from depredation by cattle and tending, pruning, cutting etc. In other words we can say that this includes watering (if it is not essential for agricultural purposes), putting fertilizers and pesticides, harvesting the crop, etc.




(iv) Agriculture not merely includes food and grains :- Agriculture does not merely imply raising of food and grains for the consumption of men and animals; it also includes all products from the performance of basic as well as subsequent operations on land. These products, for instance, maybe grain or vegetables or fruits including plantation and groves or grass or pasture form consumption of beasts or articles of luxury such as betel, coffee, tea, spices, tobacco, etc., or commercial crops like cotton, flax, jute, hemp, indigo, etc. all these are products raised from the land. That is why the term “Agriculture” cannot be confined merely to the production of food and grains products from human beings but must be understood as comprising all the products of the land which have some utility either for consumption or for trade and commercial assets would also include forest products such as timber,

sal and piyasal trees, casuarina plantation, tendu leaves, horra nuts, etc. (v) Some connection with land not sufficient :- The mere fact an activity has some connection with or is in

some way dependent on land is not sufficient to bring it within the scope of the term “Agriculture”. For instance, breeding and rearing of livestock, dairy farming, cheese and butter making and poultry farming would not by themselves be agricultural purpose.

1. Any rent or revenue derived by a person or assessee from land which is situated in India and is used for agricultural purposes during the R.P.Y. :-

The following conditions are to be fulfilled for this income :- i) Income must be derived in the form of rent/revenue. (Whether in Cash or in Kind) ii) Rent or revenue should be derived form land. iii) The said land must be situated in India. iv) It must be used for agricultural purposes. (i) Rent from land :- Rent should be a payment in cash or in kind or in money or in money’s worth, by one

person to another person in respect of a grant of a right to use land. To treat any income or revenue in the nature of rent, there should be an established relationship of a landlord and tenant or lessor and lessee between the parties. For example, the share of agricultural produce received by a landlord is though in kind but it is rent and thus agricultural income.

(ii) Rent or revenue should be derived from land :- This would mean that such rent or revenue should

spring from land or arise from land. If the immediate and effective source is not land, the income cannot be considered to be agricultural income. The following incomes will not be agricultural incomes as theses are not derived from land.

� Dividend received by shareholders from a company carrying on agricultural operations is not

agricultural income in his hands. The shareholder receives the dividend not be virtue of any activity of agriculture carried on by him, but by virtue of the investment of his funds in the company in buying up its shares.

SPECIAL NOTE TO BE REMEMBERED � Here agricultural purposes mean basic operations must be performed on the land during the R.P.Y.

although subsequent operations are performed or not. � From above it is clear that income derived by an assessee from the sale of trees of the spontaneous

growth, wild grass, bamboos shall not treated as agricultural income because basic operations are not performed.




� Loan obtaining by a shareholder out of accumulated profits of a company having only agricultural income, which is liable to be treated as ‘Deemed Dividend’ is not agricultural income in the hands of the recipient.

� Interest on arrears of cess or rent payable by a tenant to his landlord is not agricultural income. (Because it is an extra payment from the tenant to the landlord for parting with the money for a particular time.)

� Commission earned by a broker for selling agricultural produce of an agriculturist is not agricultural income. (Because he gets it for his services.)

� Salami or Nazrana paid shall not be agricultural income in the hands of the recipient unless it is a payment of rent in advance.

2. Income derived by a cultivator or receiver of rent in kind by performing agricultural operation with a view to render the produce fit for marketing for sale:

Following conditions are to be fulfilled for this income :- (i) The assessee must generate the income by performing the basic operations on the land situated in India. (ii) The performance of other operations with a view to render the produce fit for the marketing for sale shall

include in this category.

But one this should be remembered that, if marketing process is performed on a produce which can be sold in its raw form (without requiring any process to make it fit for marketing), income derived there from is partly agricultural and partly non-agricultural income. For instance, if sugarcane is generally sold in a give area without being subjected to any process, the process of converting sugarcane into gur would not be agricultural income. Section [2(1A)(b)] does not contemplate sale of commodity different from what is cultivated and processed and where the assessee was growing mulberry leaves, feeding them to silkworms and obtaining silk cocoons, income from sale of silk cocoons would not be agricultural income. 2. Income from farm building :- Income from a house property (like that farmhouse) is termed as agricultural income if the following conditions are to be fulfilled :- i) The building should be occupied by the cultivator (As a Landlord or as Tenant) or receiver of rent in

kind (As a Landlord). ii) It should be on or in the immediate vicinity (open space) of the agricultural land situated in India and

used for agricultural purposes. iii) The building is, by reason of his connection with the land, used as dwelling house or a store-house or an

out house by the cultivator or receiver of rent-in-kind (landlord).

SPECIAL NOTE :- Any ‘Capital Gain’ arising from the transfer of agricultural land is not treated as revenue derived from land and hence it is not agricultural income.

Example :- Tobacco leaves are ordinarily dried to make them suitable for sale. Therefore the income from ordinary process employed to dry the tobacco leaves to make them fit to take them to market, is agricultural income. The ordinary process employed to render the produce fit to be taken to market includes thrashing, cleaning, drying, crushing boiling etc. through the nature of process depends upon the quality of produce and varies from time to time and place to place.




iv) The land is either assessed to land revenue in India or is subject to a local rate assessed and collected by the officers of Government of India, or alternatively;

v) If the land is situated in ‘Non-Urban Area’, i.e., an area which, though, is with municipality or cantonment board jurisdiction, has a population of less than 10000, or is beyond a notified distance (maximum 8 kilometer) from local the limits of any such municipality or cantonment board.

Municipality may be known as Municipal Corporation, notified area committee, town area committee, town committee or by any other name. However the income derived from any building or land arising form the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agricultural shall not be agricultural income.

PARTLY AGRICULTURAL AND PARTLY NON AGRICULTURAL INCOMES

[RULES 7, 7A, 7B AND 8] RULE 7 OF INCOME TAX ACT :- Under rule 7 if a manufacturer produces his raw material, which is to be used in process of manufacturing, in his own farm, then market value of such product is charged as their revenue. The difference between market value and original cost of such produce is treated as agricultural income. This rule is applicable in case of cotton, tobacco, sugarcane, potatoes for wafer (chips etc) etc.

SPECIAL POINTS TO BE REMEMBERED � With effect from assessment year 2001-02 any income from such building or land arising from the

use of the building or land for any purposes other than agricultural, shall not be included in the definition of “agricultural income”. For Example :- If a person has income from using farm building or land for purposes such as letting it out for residential purposes of any business or profession, then, such income shall not be treated as agricultural income.

� Agricultural comprises within its scope all produce regardless of its nature. The produce may be grain, vegetables or fruits including articles of luxury such as coffee, tea spices etc.

� Salary received by a partner for rendering services to a firm that is engaged in agricultural operation is agricultural income however, if profit from such firm received by partner then it is exempted u/s 10(2A).

FOR EXAMPLE :- A company produces sugarcane by agricultural process for manufacturing sugar, it cost Rs. 50,000 to produce the sugarcane and its market value is Rs. 1,50,000. Then amount charged as expense in Manufacturing A/C will Rs 1,50,000 and Rs. 1,00,000 is treated as agricultural income.




SOME OTHER INCOMES UNDER RULE 7A, 7B(1) AND 7B(7A) ARE GIVEN BELOW :

INCOME NON-AGRICULTURAL

INCOME

AGRICULTURAL INCOME

INCOME-TAX RULES

Growing and manufacturing tea in India. 40% 60% Rule 8

Sale of centrifuged latex cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as estate brown crepe, remilled crepe, smoked blanket crepe or flat bark crepe) or technically, specified block rubbers manufactured or processed from field latex or coagulum obtained from rubber plants grown by the seller in India.

35%

65%

Rule 7A

Sale of coffee grown and cured by seller. 25% 75% Rule 7B(1)

Sale of coffee grown, cured, roasted and grounded by seller in India with or without mixing chicory or other flavouring ingredients.

40% 60% Rule 7B(1A)

ILLUSTRATIONS OF AGRICULTURAL INCOMES: 1. If denuded parts of the forest are replanted and subsequent operations in forestry are carried out the

income arising from the sale of replanted trees. (i.e. basic operations are to be performed) 2. The fees collected from owners of cattle (normally used for agricultural purposes), for allowing them to

graze on forestland covered by jungle and grass not grown spontaneously. 3. Profit on sale of standing crop of the produce after harvest by a cultivating owner or tenant of land. 4. Rent for agricultural land received from sub-tenant by mortgagee-in-possession. 5. Income from growing flowers and creepers (Oil Base Flowers). 6. Salary received by a partner for rendering for service to a firm which is engaged in agricultural

operations is agricultural income as payment of salary only mode of adjustment of the firm’s income [it may be noted that share of profit from such firm is not taken as “agricultural income” as such share is exempted under section 10(2A)].

7. Interest on capital received by a partner from the firm engaged in agricultural operations. (Special note :- It is only in the case of the Firm and not in any other case.)

8. Income from toddy is agricultural income when it is received by the actual cultivator of the trees. 9. Seeds are clearly a product of agriculture and the income derived from the sale of such seeds derived on

account of cultivation by the assessee is an agricultural income. 10. Where the owner himself performs slaughter tapping and then sells the rubber, the income is agricultural

income.

SPECIAL NOTE :- Income in respect of business, given above is in the first instance, computed under the act as if it were derived from the business after making permissible deductions. 40 or 35 or 25 percent of the income so arrived at is treated as business income and the balance is treated as agricultural income. Salary and interest received by a partner from a firm (growing leaves and manufacturing tea or any other activity mentioned in the above table) is taxable only to the extent 40 or 35 or 25 percent and balance is treated as agricultural income.




11. Lease income derived by a lessor from lease of a coconut garden, to a lessee who pays rent and takes the coconuts from the trees during the tem of the lease and has to deliver possession of the coconut garden back to the lessor at the end of the term, would be treated as agricultural income in the hands of the lessor.

12. If nursery is maintained by carrying out basic operations and subsequent operations are carried out in pots in continuation of basic operations, then income from such nursery would be agricultural income.

13. Compensation received from an Insurance Company for damage caused by hail storm to (the green leaf) the crop forming part of assessee’s tea garden (Special note :- No part of such compensation consist of manufacturing income, as such compensation cannot be apportioned under the rule 8 between manufacturing income and agricultural income)

ILLUSTRATIONS OF NON-AGRICULTURAL INCOMES

1. Income from the sale of trees from a forest where no basic operation were performed and trees of

spontaneous growth or wild grass. 2. Income from the sale of gur or refined sugar acquired by using some manufacturing process 3. Income from the sale of ginned cotton. 4. Interest received by moneylender in the form of agricultural produce.(Because it is the reward for

providing the services of money.) 5. Share of agricultural produce received by a person for supply of water. 6. Remuneration received by managing agent for managing agricultural farm. 7. Any interest on rent due. 8. Commission received by the landlord for selling the agricultural produce of his tenants. 9. Profit from sale or harvest of an agricultural crop, purchased by the assessee as standing crop, and may

be called as profit from trading operations. 10. Income of salt produced by flooding the land with seawater as it is not derived from land used for

agricultural income. 11. Dividend paid by company from its agricultural income. 12. Annual annuity received by a person in consideration of transfer of agricultural land (for giving up his

claims to piece of agricultural land) even if it is charged on land, as source of annuity is covenant and not land.

13. Interest on arrears of rent in respect of agricultural land as it is neither rent nor revenue derived from land.

14. Interest accrued on promissory notes obtained by a Zamindar from defaulting tenants. 15. Income from sale of wild grass and reeds spontaneous growth. (No Basic Operations) 16. Income derived from land let out for storing crops. 17. Income from fisheries. 18. Maintenance allowance charged on agricultural land. 19. If the assessee takes loans on hypothecation of agricultural produce cultivated by him and advances the

same to its sister concerns, interest earned thereupon is not agricultural income. 20. Royalty income of mines. 21. Income from butter and cheese making. 22. Income from poultry farming. 23. Receipts from T.V. serial shooting in farmhouse. 24. Where the assessee-company is growing various kinds of hybrid/germ plasm seeds after conducting

agrigenetic agricultural research costing crores of rupees, income earned on sale of such seeds cannot be treated as ‘agricultural income’.

25. Preservation of potatoes by refrigeration as it is not a process ordinarily employed by a cultivator. 26. Income from brick making.




27. Compensation / damages paid for loss of agricultural income due to late payment of installments of the consideration of price of rubber plantation site.

28. Registration fee collected from contractor who is bidding at the auction conducted for sale of plantation is not an agricultural income as such registration fee had no nexus (relation) with land.

NET AGRICULTURAL INCOME

It is the agricultural income computed in accordance with the rules laid down under section 2(1A) of the Income Tax Act 1961 and rule 7 and 8 of the income tax rules 1962. These are: 1. Rent or revenue derived from the land will be computed on the same basis as adopted for computation of

income under the head “income from other sources” under section 57 to 59. 2. Income derived from agricultural operations will be computed in the same manner as adopted for

computation of income under the head “profits and Gains from Business or Profession”. Depreciation and loss on the death of animals used in the agricultural operations are allowed as expenses.

3. Income derived from agricultural hose property will be computed as if such income is taxable under the head “Income from House Property” and provisions of section 23 to 27 are applicable.

4. For computing share from tea business income as computed under rule 8, shall be considered to be agricultural income.

5. Loss incurred in agriculture will allowed to be set off only against gains from agriculture. The share of loss of partner from a firm assessed, as A.O.P. shall not allowed to be set off from his own agricultural income.

6. Any sum payable by the person on account of any tax levied by the state government on agriculture will be allowed as deduction. (Land revenues).

7. Where the net result of agricultural income from the various sources stated above in a particular previous year is loss, the loss will be regardless and net agricultural income shall be taken as NIL, i.e. loss from agricultural can not be carried forward.

ASSESSMENT OF AGRICULTURAL INCOME

Before the assessment year 1974-75, agricultural income was fully exempted from tax and was never taken into account while assessment of income of any person. Due to green revolution, the agricultural income increased and demand was raised to levy tax on agricultural incomes. A committee on taxation on agricultural income and wealth was set up under the chairmanship of Dr. K.N. Raj. This committee also recommended that agricultural income must remain exempted from tax. On the other hand, it suggests a system of integration of agricultural income and non-agricultural income. From the assessment year 1974-75, this scheme of assessment of agricultural income was introduced. Net agricultural income will be integrated with non-agricultural income if the following conditions are fulfilled : -

i) The tax payer is an Individual or H.U.F. or B.O.I. or A.O.P. or Artificial Juridical Person. This means that integration will not be done in case of Firm, Company and Local Authority.

ii) The tax payer has non-agricultural income exceeding Exempted Limit and net agricultural income exceeding Rs. 5,000 during the R.P.Y.

SPECIAL NOTE :- The value of agricultural produce consumed by the assessee for household purpose shall also be treated as agricultural income.




.

COMPUTATION OF TAX

STEP - i Net agricultural income is added with non-agricultural income and tax is calculated on such total income as per the given rates.

STEP - ii Net agricultural income is added with exempted limit and tax is calculated on such total. STEP - iii Tax calculated at step 2nd is deducted from tax calculated at step 1st. STEP - iv Deduct amount of rebate, if any, allowable u/s 88E. STEP - v Find out the balance (Step iii – Step iv). STEP - vi Add Surcharge if applicable (@ 10%) (if the non-agricultural income is more than the Rs.

10,00,000) STEP - vii Add Education Cess (@ 2%). STEP - viii The amount so arrived will be the total income-tax payable by the assessee.

SPECIAL NOTE :- In case above conditions are not satisfied then both agricultural and non-agricultural income will assessed separately. In that case agricultural income will be fully exempted any non-agricultural income will assessed at usual rates.

� Discuss the scheme of integration Or

Discuss partial integration of agricultural income. Or

Discuss indirect taxing of agricultural income. Or

Under the constitution, the power to levy tax on agricultural income vests in the states. However, parliament has also levied a tax on such income. Explain how this has been achieved.

� Explain the meaning of agricultural income.

QUESTIONS




INTRODUCTION Usually, an assessee has to pay income tax on his own income. However in certain cases an assessee shall be assessed in respect of income of others. These cases are where assessee transfers assets or income with view to reduce or avoid his tax liability. Sections 60 to 64 of the Income Tax Act 1961dealwith incomes of other persons are to be included in the income of assessee. These cases are as follows: 1. Transfer of income without transfer of asset [section 60] Where there is transfer of an income by a person to another person without the transfer of asset from which the income arises, such income shall be included in the total income of the transferor.

2. Revocable transfer of assets Where there is revocable transfer of an asset by a person to another person, any income arising from such asset shall be included in the income of transferor. When a transfer is revocable [Section 63]

� As per Section 63, a transfer shall be deemed as revocable, if :-

a. It contains any provision for the re-transfer, directly or indirectly of the whole or any part of income or assets to the transferor. Or

b. It gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets.

� As per Section 61 shall not be applicable, if transfer is of irrevocable for a specified period [Section 62];

following transfers are irrevocable :-

a. In case of transfer by way of trust, the transfer is not revocable during the lifetime of the beneficiary. b. In case of any other transfer, the transfer is not revocable during the lifetime of transferee. c. In case the transfer is made before 1-04-1961, the transfer is not revocable during a period exceeding

6 years. The above exceptions are applicable provided the transferor derives no direct or indirect benefit from such asset. In case of irrevocable transfer of assets, the income from such assets shall be deemed to be the income of transferee and not of the transferor provided that transfer is not to or for the benefit of the spouse of the transferor.

EXAMPLE :- A is the owner of the HP. He lets it out on a monthly rent of Rs. 5000/- during the previous year 2006-07. Municipal taxes paid on this HP in the aforesaid period is Rs. 10,000/-0 A instructed the tenant to pay the rent to his friend C.C. enjoyed the rental income without being the owner of HP. How will you treat this income from income tax point of view ? SOLUTION :- It is a case covered u/s 60 of Income Tax Act, wherein a has transferred the income from HP in favour of his friend C during the previous year 2004-05 without transferring the HP itself, the rule of clubbing will be applicable in regard to this income. Hence, Rs. 35,000/- [ 60000-10000 (MT) = 50000 (AV)-15000 (SD)] will be included in GTI of A for the Assessment year 2007-08.




3. Remuneration received by spouse [section 64(1)(i)] Any income accrue to spouse by way of salary, commission, fee or any other form of remuneration whether in cash or in kind from a concern in which such individual has substantial interest, shall be considered to be the income of such individual.

4. Income from assets transfer to the spouse [Section 64(1)(iv)] If an individual transfer any asset other than house property to his/her spouse, the income from such an asset shall be included in the total income of the transferor. This provision is not applicable on house property because in case of house property the transferor is deemed to be the owner of the house property and annual value of the house property is taxed in the hands of the transferor u/s 27.

� Salary- How it is to be computed :- For the purpose of clubbing u/s 64 (1) (ii), salary has to be computed as per the provisions of section 15 to 17. Even standard deduction has to be deducted.

� Concern :- It covers both B/P concerns as well as proprietary and non-proprietary concerns.

� Substantial interest :- Substantial interest means, if the assessee has (individually or along with his relative, which includes husband, wife, brother or sister or any lineal ascendant or decedent of that individual) having voting power in the concern, which is not less than 20% of Equity Capital of the company or is entitled to at least 20% profit of such concern.

� Exception :- Any income derived by spouse due to his/her technical knowledge or professional qualification or knowledge and experience; it shall not be included in the income of individual.


� When both husband & wife have substantial interest :- Where both the husband & wife have a

substantial interest in the concern and both are in receipt of the remuneration from such concern, remuneration will be included in the total income of husband or wife whose total income, excluding such remuneration is greater.

� If such remuneration is once included in the total income of any spouse, then this process cannot be charged/reversed in the subsequent years unless the AO is satisfied after giving an opportunity of being heard to the concerned spouse.

Exception :- The income shall not be included in the following cases :- � If the transfer is for adequate consideration, or � If the transfer is under an agreement to live apart. � It is to be noted that transfer before marriage not covered for clubbing under this section. � If the property is acquired by the spouse from saving out of pin money, then income from such asset

shall not be clubbed. Pin money is an allowance given by husband to his hose wife to meet household expenses.

� If the asset is purchased from the income of the transferred assets, any income from such asset shall not be included in the income of transferor.




Calculation of income of spouse from transfer asset

The income from asset transferred must be calculated in the same manner, as it would be if the asset has not been transferred, i.e. deductions, exemptions and are given as if the same can be claimed by the transferor. 1. Where the cash is gifted by husband to his wife and wife purchases house property with such amount

then income from such house property shall be included in the income of husband. 2. If an individual transfers his asset to his/her spouse and amount invested by such spouse :- a) In any business, but not as capital contribution as a partner in a firm or being admitted to the benefit of

partnership in the firm, the amount calculated under shall be included in the income of the transferor :-

b) In the nature of capital contribution as a partner in a firm, the interest received or receivable from firm on such capital contribution will be included in the income of transferor on the proportion amount given by the transferor. But share of income from the firm shall not be included in the income because it is exempted under section 10(2A).

5. Income from assets transferred to son’s wife or daughter in law [Section 64(I)(vi)] Any income accruing from asset, which is transferred after 1-6-73 to daughter in law without adequate consideration, shall be considered as income of the transferor. The following points should be taken into account :- a. The relationship of father-in-law or mother-in-law and daughter-in-law should subsist both at the time of

transfer asset and at the time of accrual of income. b. Transfer includes indirect transfer also.

SPECIAL NOTE :- The income from HP transferred to spouse will be computed under the head ‘Income from House Property’ in the hands of the transferor and not in the hands of the transferee.

Value of the asset transferred by transferor on the first day of previous year x Profit share of transferee from business Total investment on the 1st day of the previous year by the transferee

Indirect transfer or cross transfer :- If there is a genuine cross transaction/transfer between the two persons, then rule of clubbing will not be applicable. However, if such transaction/transfer is not genuine and it is used as a device to evade the tax, then the rule of clubbing will be applicable as decided by the Madras High Court in a case of L.G. Bal Krishnan Vs CIT (1963) 49 ITR 102.

Example :- A makes a gift to Mrs. B and B makes a gift to Mrs. A. In this case, we have to examine the genuineness of the transaction. If it is proved that it is a genuine transaction, then the rule of clubbing will not be applicable. However, if it is proved that it is not a genuine transaction, then the rule of clubbing will be applicable.




c. The computation of income is same in case of assets transfer to spouse. 6. Transfer of capital asset to a person or AOP for the benefit of the spouse of individual [section 64 (i) (vii)]

When asset transferred without adequate consideration to some other person or AOP for the benefit of spouse of individual then income from such asset shall be included in the income of transferor. 7. Transfer of capital asset to a person or AOP for the benefit of son’s wife or daughter-in-law [section 64(i)(viii)]

If an individual transfers his capital asset to any person or AOP for the benefit of the son’s wife after 31-5-1973, then the income from such asset shall be included in the income of transferor. 8. Income of a minor child [section 64 (1A)] At the time of computation of income of an individual, there shall be included all such incomes which arises to the minor child of such individual. The income of a minor child will be included in the income of either parent :- a. Whose income excluding minor’ income, is higher [if the marriage status of parents exists] b. In the income of such parent who maintain such minor child [if the marriage status of parents does not

exists]

Exception :- However the following income of minor child will not be included in the income of individual, i.e. these incomes are to be assessed in the hand of minor child himself :- a. Income of a minor child who is physically handicapped as per section 80U of the income Tax Act,

1961. b. Income which accrues or arises to the minor child on account of any manual work done by him, or

activity involving application of his skill, knowledge, experience and talent.

SPECIAL NOTE :- If the income of the above sources is invested somewhere else and the further income is generated from this activity then that income is to be clubbed. (As the income is deposited in the bank and the bank interest is received then this bank interest is to be clubbed.)

Amount of exemption :- Where the income of minor child or children included in the income of either parent, then such parent shall be entitle to an exemption of, actual clubbed or Rs. 1,500 for each children, whichever is less, u/s 10(32).

SPECIAL NOTE :- Where any income is once included in the total income of either parents, any such income in the succeeding year shall not be included in the total income of the other parents, though the income of the other parent is higher, unless the assessing officer satisfies with the sufficient ground for changing the mode of assessment of the income of the minor.




9. Income from self-acquired property converted in to joint family property [section 64(2)] If after 31-12-1969, an individual transfers his self-acquired property in the common stock of HUF without adequate consideration in which he is the member, then income from such assets earned by HUF shall be included in the income of such individual. Where such converted property is subsequently become part of partition, the income from the converted property received by the spouse of the individual will be included in the income of the individual who has converted the property, even after partition. 10. Benami transaction When a person enter into a transaction on the name of a person other than the real person in order to avoid tax, it is called a benami transaction, and the person on whose name transaction take place is called benamidar. If, in the opinion of the Assessing officer, a transfer is benami, he will be treat the income of the transaction as the income of the real person and tax shall be levied on him for that transaction. No tax shall be levied on the benamidar for a benami transaction.

TREATMENT OF LOSS The income of specified person is liable to be included in the total income of the individual in certain circumstances specified under section 64. Where there is loss to a specified person in specified circumstances, the individual will be entitled to set-off such loss. It means income shall also include loss. INCOME FROM ACCRETION OF PROPERTY TRANSFERRED OR ACCUMULATED

INCOME OF SUCH PROPERTY In this case income arising from the accretion to the property so transferred will be taxable in the hands of transferee. E.g. If X transfers a sum of Rs. 1,00,000 to his wife without any consideration and Mrs. X deposits the money in a bank, interest received from the bank on such deposit is taxable in the hands of X. If, however, Mrs. X purchases a house from the accumulated interest income, rental income received by Mrs. X is taxable in the hands of Mrs. X and not in the hands of X.

HEADS OF INCOME UNDER WHICH THE CLUBBED INCOME WILL BE

INCLUDED

In this respect procedure should be adopted as under :- Step 1 :- First compute the income in the hands of the actual recipient under the relevant head of income

as if the actual recipient is liable to pay tax. Step 2 :- After computing the income under the relevant head of income in the hands of actual recipient, it

will be clubbed under the same head of income in the hands of other person. Step 3 :- Gross total income of the person in whose hands the income clubbed shall be calculated as if it is

his own income. Provisions of set off and carried forward of losses are applicable as are applicable in other case.

Step 4 :- Deductions under section 80C to 80U will be given to other person in whose hands income is clubbed within the overall ceiling provided in the sections. No separate deduction is available to the actual recipient of income. Rebate under section 88E will be given as if these rebates are available in any other case.




Explain the various provision regarding Clubbing of Income under Income Tax Act 1961. Or

Under which circumstances the income of the person is to be clubbed in the income of the other person?

QUESTIONS




INTRODUCTION Income tax is levied on the total income of an assessee earned during a period of one previous year. The might be cases where an assessee has different sources of income under the same head of income. Similarly he may have income under different heads. It might also happen that the net result from a particular source/head may be loss. This loss can be set off against the income of other sources/head subject to the provision given under section 70 to 80 of the Income Tax Act, 1961. When the income of all the heads is aggregated, the loss from one head can be set off from income under other heads subject the provisions. And if the whole loss cannot be set-off, then such unadjusted loss can be carried forward (subject to the provisions regarding this under the Act). Such carried forward loss will be set-off in succeeding previous year out of the particular incomes. All this provisions are given below.

SET – OFF LOSSES

1. Set-off of losses from one source against the income from other source under the same head of income [section 70]

Current year’s loss of one source can be set off against the income another source under the same head of income in the same financial year. This is also known as Intra head adjustment.

However there are certain exceptions to this rule of Intra head adjustment :-

a. Loss from a speculation business :- U/S 73, any loss, in respect of speculation business carried on by

the assessee, shall be set-off only against speculative business income. However, a business loss from non-speculative business can be set off against the income from a speculation business i.e. vice-versa is not possible.

b. Loss from activity of owning and maintenance of horse for race purposes :- As per section 74A, the

loss incurred by the assessee, in the activity of maintenance of horses for race purposes, shall only be set-off against income from same activity. It cannot be set-off against income from any other source under the head ‘income from other source’.

ADJUSTMENTS

Inter Source Adjustment

Intra Source Adjustment

Inter Head Adjustment

Intra Head Adjustment

Example :- An assessee has loss from a cycle business of Rs. 15,000 and he has income from the machine business Rs. 25,000 then his income from the head business or profession is Rs. 10,000, i.e. (Rs. 25,000- Rs. 15,000). That is called Intra head adjustment.




c. No loss can be set-off against winning from lotteries, puzzles, card games etc. :- No expenditure, allowance or loss from lottery, card games, puzzles etc shall be allowed against income from these sources.

d. Loss from a source, which is exempt :- Loss or expenses incurred by the assessee on a source of

income, but such income is exempt from tax, then such expenses or loss can not be set-off against income from any other source under the same head of income.

e. Loss from an illegal business :- Where the loss from illegal business, such losses cannot be set-off

against income from any other business or any other head. f. Capital losses :- Short-term capital loss can be set-off from any capital gain (long-term or short-term)

but long-term capital loss can be set-off only against long-term capital gain.

2. Set-off loss from one head against the income from other head in the same previous year [sec. 71] In case after adjustment of loss from one source against the income from other source under the same head of income, and the net result is loss from the head. The loss from such head can be set-off against income from other head in the same previous year, this is also known as inter head adjustment.

However there are certain exceptions to this rule of inter head adjustment

a) SALARY HEAD :- i. Loss from head :- There can be no loss from the head salary. ii. Loss from other heads :-

• Loss which cannot be set off from income from salary are as under :- �� Loss from Business and Profession �� Unabsorbed Depreciation. �� Loss from activity of owning and maintaining race horses. �� Loss from speculative business. �� Loss from non - speculative business. �� Short term or long term capital loss.

• Loss which can be set off from income from salary.

�� Loss from House Property. �� Loss from other sources (other than loss from activity of owning and maintaining race horses)

Example :- Mr. X has suffered a loss of Rs. 50,000 under the head B/P and generated taxable income under the head salary Rs. 90,000 in the relevant previous year and he has no any other income from any other head, then his loss from the head B/P or profession can be set-off against the income under the head ‘salary’. Therefore his gross total income will be Rs. 40,000.




b) HOUSE PROPERTY HEAD :- i. Loss from head :-

• Loss from house property can be set off from the following income (Inter Head).

�� STCG or LTCG �� Income from speculative business. �� Income from non - speculative business. �� Income from other sources. [other than from income covered by Sec 56(2)(ib)] �� Income from the activity of owning and maintaining horse races. �� Income from salary.

ii. Income from other heads :-

• Loss which cannot be set off from income from house property. �� Loss from speculative business. �� Short term of long term capital loss.

• Loss which can be set off from income from house property.

�� Loss from non – speculative businesss. �� Loss from other sources. (other than loss from activity of owning and maintaining race horse)

c) BUSINESS LOSS :- �� Non Speculative Business Income :- i. Loss from head :-

• Loss from non – speculative business can be set off from the following income (inter head)

�� STCG or LTCG �� (Income from speculative business) Intra head as per Sec 70 allowed. �� Income from other sources [other than from income covered by Sec 56(2)(ib)] �� Income from the activity of owning and maintaining race horses. �� Income from house property.

ii. Loss from other heads :-

• Loss which cannot be set off from income from Non – Speculative business income :-

�� Loss from activity of owning and maintaining race horses. �� Loss from speculative business. �� Short term or long term capital loss.

• Losses which can be set off from income from non – speculative business income :-




�� Loss from house property. �� Loss from other sources (Other than loss from activity of owning and maintaining race horses)

�� Speculative Business Income :- i. Loss from Head :- Loss from Speculative business can be set off only from income from speculative

business and cannot be set off either intra head or inter head against any other source of income. ii. Loss from other heads :-

• Losses which cannot be set off from Speculative business income :-

�� Loss from activity of owning and maintaining race horses. �� Short term or long term capital loss.

• Losses which can be set off from speculative business income :-

�� Loss from house property �� Loss from other source (Other than loss from activity of owning and maintaining race horses) �� (Loss from non – speculative business) Intra head as per Sec 70 allowed

d) CAPITAL GAINS OR LOSS :- i. Loss from Head :- Loss from short term or long term capital asset can be set off only from only from

income from capital gains as per rule of section 70. STCL can be set off against LTCG or STCG but LTCL can only to be set off LTCG. Capital loss cannot be set off inter head against any other source of income.


• Losses which cannot be set off from STCG or LTCG.

�� Loss from activity of owning and maintaining race horses. �� Speculative business loss.

• Losses which can be set off from STCG or LTCG.

�� Loss from other source (Other than loss from activity of owning and maintaining race horses) �� Loss from non – speculative business.

e) OTHER SOURCES :- �� Income from sources covered under section 56(2)(ib) :- Winning from Lottery, Crossword puzzles etc.

:- There can be no loss in this source of income as expenditure is not allowed as a deduction while computing income from this source. Also no loss, whether inter head or intra head, can be set off from income fro this source.

�� Loss from the activity of owning and maintaining race horses :-




i. Loss from head :- Loss from the activity of owning and maintaining race horse can be set off only from the profits from the activity of owning and maintaining race horse.


• Losses which cannot be set off from income form the activity of owning and maintaining race horses.

�� Loss from speculative business. �� Short term or long term capital gain.

• Loss which can be set off from income the activity of owning and maintaining of horse races. :- �� Loss from house property. �� Loss from other sources (other than loss from activity of owning and maintaining race horses)

allowed intra head as per section 70. �� Loss from non - speculative business.

�� Other source of income or loss under the head other source :- i. Loss from source :- Loss from any other source (other than winning from lotteries etc. and other than

activity of owning and maintaining race horses) can be set off from :-

�� STCG or LTCG �� Income form speculative business. �� Income form the activity of owning and maintaining race horses (allowed intra head u/s 70) �� Income form house property. �� Income form non – speculative business. �� Income from salary.

ii. Loss from other heads of income :-

• Loss which cannot be set off from other income from other sources. �� Loss from activity of owning and maintaining race horses. �� Short term or long term capital loss. �� Loss from speculative business.

• Loss which can be set from other income from other sources.

�� Loss from house property. �� Loss from any other source under other sources (other than loss fro activity of owning and

maintaining race horses) allowed intra head u/s 70. �� Loss from non – speculative business.

SPECIAL NOTE :- No order of priority is given under the Income Tax Act. Therefore, the assessee should try to First set-off those losses, which cannot be carried forward to the subsequent years.




CARRY FORWARD AND SET-OFF OF LOSSES

If the losses could not be set-off under the same head or under different heads in the same assessment year, such losses are allowed to be C/F to be claimed as set off from income of the subsequent assessment year. All losses are not allowed to be carried forward, i.e. only specified losses are to be carried forward, which are given as under: a. Loss under the head ‘House Property’ Loss under the head ‘house property’ can be carried forward with effect from assessment year 1999-

2000 for eight succeeding assessment years to be set off from income under the head ‘House Property’. This rule is applicable for both self-occupied and let out house properties. b. Business loss (non-speculative). [Section 72(1)] As explained earlier, the loss under the head ‘Business or Profession’ except speculation loss shall be adjusted against income from business or profession or any other head of income, if the income from the head business or profession is not adequate in the same assessment year. But if the loss is still unadjusted, then such loss shall be carried forwarded for eight succeeding assessment years and that loss can be set-off against the income from business or profession only.

OTHER IMPORTANT POINTS REGARDING BUSINESS LOSS ARE AS FOLLOWS

The person who has incurred the loss, alone has the right to carry forward it. The successor cannot claim to carry forward the loss incurred by the predecessor in business. However following are the exceptions of this rule. That is in the following cases even successor can carry forward the losses, which are incurred by the previous owner :- a. Where a business carried on by one person, is acquired by another person through inheritance. However,

the unabsorbed depreciation, unabsorbed capital expenditures on scientific research cannot be carried forward by the legal heirs, as inheritance is not covered u/s 32(2).

b. Business loss and unabsorbed depreciation of an amalgamating company can be set off against income

of the amalgamated company if the amalgamation is in the nature of merger. c. With effect from assessment year 1999-2000, where there has been reorganization of business whereby a

proprietary concern or firm succeeded by a company and certain conditions in section 47(xiii) or (xiv) are fulfilled. In this case accumulated business loss and unabsorbed depreciation of the predecessor firm/proprietor concern shall be deemed to be loss or allowance for depreciation of the Successor Company for the previous year in which business reorganization was effected and carry forward provisions shall be applicable to the Successor Company.




Unabsorbed Depreciation, unabsorbed capital expenditures on scientific research and family planning :- With effect from assessment year 2002-03, depreciation, capital expenditures on scientific research and family planning are not part of the business. Theses expenditures, which remains unadjusted as either there is no income or less income in the relevant previous year, it can be carried forward till it is fully adjusted from any income during the succeeding previous year. In the case there is C/F business as well as C/F unabsorbed depreciation, capital expenditures on scientific research and family planning then the following order should be followed for set-off against business income :-

Example 1 :- If an assessee is carrying on the business of letting out house properties & he receives rent from such house properties, then it would be an income from business activity even though the rental income is taxable under the head ‘Income from HP’. Therefore, a B/P loss of an earlier year can be set-off against rental income of HP, even though such rental income is taxable under the head ‘Income from HP’. It has bee decided by Hon’ble SC of India in the case of Western States Trading Company Private Ltd. V/s CIT (1971) 80 ITR 21. Example 2 :- Loss from any asset held as stock in trade can be set-off from any income from such asset even if it is taxable under the head ‘Other Sources’. For example, if the shares are held by assessee as stock-in-trade, dividend on such shares will be taxable under the head “income from other sources”, in this case brought forward business loss can be set off against such dividend income.

1st Firstly current depreciation. 2nd Current year’s capital expenditures on scientific research and family planning 3rd Brought forward business loss. 4th Brought forward depreciation. 5th Brought forward capital expenditures on scientific research. 6th Brought forward expenditures on family planning

SOME SPECIAL POINTS TO BE REMEMBERED 1. With effect from assessment year 2000-01 the business loss can be carried forward and set-off in

subsequent assessment year(s) even if the business in respect of which the loss was originally computed is not continued by him in the previous year in which such loss is sought to be carried forward and set-off.

Impact of omission of aforesaid provision:- � If the B/P has been discontinued in A.Y. 1999-2000 or in any earlier A.Y. (s), loss cannot be carried

forward & set-off in A.Y. 2000-01 or in a later A.Y. (s). � If the B/P has been discontinued in Assessment year 2000-01 or in a later A.Y. (s) loss can be carried

forward & set-off against profits & gains of B/P. 2. In certain cases income from business may be taxed under some other heads of income also.




c. Loss from speculation business [section 73] If a speculation loss could not be set off against any other speculation business gain, in the same assessment year, it is allowed to carry forward to be claimed as set-off in the subsequent eight assessment years. Such carried forward loss can set-off only against the income from speculation business. It may observe that it is not necessary that the speculation business must continue in the assessment year in which the loss is to be set-off.

d. Loss under the head Capital Gain [section 74] Where in respect of any assessment year, the net result of the head ‘capital gains’ is a loss to the assessee, whether long term or short term, such loss can be carried forward for four succeeding assessment years. Long-term capital loss can be set-off against long-term capital gain only, where as short-term capital loss can be set off against short-term or long-term capital gains e. Loss from the activity of maintenance of horses for race purposes [section 74A] Under the head ‘other sources’ only expenses on maintenance of horses can be set-off from income of same activity, if any. If it still remains unadjusted, such loss can be carried forward for four succeeding assessment years and can set-off against income of the same activity. The aforesaid provisions of section 74A are applicable only in case of activity of owning and maintenance of racehorses. Loss from the activity of owning and maintenance of other race animals is governed by section 72 (i.e. business or profession) and not by section 74A.

TREATMENT OF CARRIED FORWARD LOSSES OF CERTAIN ASSESSEE

(i) Loss of firm :- The share of loss from firm cannot be set-off by a partner against his income. However,

firm can carried forward and set-off its losses as provision discussed above. (ii) Losses of a firm in the case change of its constitution :- If a change has occurred in the constitution of

a firm, the firm cannot carried forward the share of losses (so much of loss as exceeds his share of profits of the previous year in the firm) of the retiring or deceased partner.

FILLING OF RETURN OF LOSS

Unless the assessee files the return of income under section 139(1) and gets loss determined by the

assessing officer, he is not entitled to carried forward and set-off any loss under any of the aforesaid provisions.

SPECIAL NOTE :- Where a loss arises from illegal speculative business, it cannot be carried forward to the subsequent years for set-off against profits of another speculative business.

SPECIAL NOTE :- If the activity of owning and maintaining race horses is not carried by the assessee in the previous year in which such loss is to be adjusted then such adjustment is not permitted.




� Write a note on set off and carry forward of losses under the head House Property. � Write a note on set off and carry forward of losses under the head Business & Profession. � Write a note on set off and carry forward of losses under the head Income from Other Sources. � Write a note on set off and carry forward of losses under the head Capital Gains. � Write a note on Unabsorbed Depreciation. � “Loss can be carried forward only by the person, who has incurred the Loss” discuss. � Write a note on set off and carry forward of losses from Speculative Activities.

QUESTIONS




Deduction from 80C to 80U are deductible from Gross Total Income. But subject to following conditions :- i) Amount of deduction cannot be exceeded from Gross Total Income. ii) Deduction are not available for Long Term Capital Gain as well as Short Term Capital Gain referred in

Section 111A. iii) The deductions are not available to Casual Income also. 1. SECTION 80 C Deduction for amount invested in certain pension funds, debentures, bonds, certain equity shares and life insurance premium. i) This deduction is available only to Individual and HUF. ii) Individual and HUF may be Resident or Non – Resident. iii) Deduction shall be allowed to the extent of the following investment but subject to a maximum of Rs.

100000 (including deduction under section 80CCC and 80CCD) � Payment of Insurance Premium in connection with Insurance on the Life of Self, Spouse and Children

and HUF can take the Policy in the name of any of its members however the premium cannot exceed 20% of the sum assured.

� Employees’ contribution to Statutory Provident Fund (It should not be a repayment of loan). � Deposit in Public Provident Fund account and the account can be opened in the name of Self, Spouse

or Children. Maximum investment shall be Rs. 70000. � Employees’ contribution to a Recognised Provident Fund. (It should not be a repayment of loan). � Employees’ contribution to an Approved Provident Fund. (It should not be a repayment of loan). � Subscription to National Saving Certificate VIII issue issued under Government Saving Certificate Act

1959. (Accrued Interest shall also qualify for deduction under section 80C). � Investment in Unit Linked Insurance Plan 1971 or UTI (ULIP) amount can be invested in the name of Self, Spouse or Children.

� Investment in Unit Linked Insurance Plan of LIC Mutual Fund (i.e. Dhanraksha scheme of LIC Mutual Fund) amount can be invested in the name of Self, Spouse or Children.

� Payment for notified Annuity Plan of LIC i.e. Jeevan Dhara, Jeevan Akshay, New Jeevan Dhara and New Jeevan Akshay, New Jeevan Dhara I and New Jeevan Akshay I and investment should be in the

SOME SPECIAL POINTS TO BE REMEMBERED � Children may be Dependent or Independent or may be Married or Unmarried or Step or Adopted. � HUF can pay premium on the life of any of its members. � If an assessee has discontinued a life insurance policy before paying premium for a period of at least

2 years, no deduction will be allowed in respect of the premium paid in the year of termination. The deduction allowed in the earlier years shall be considered to be income of the assessee of the previous year in which the insurance policy is terminated.

DEDUCTION




name of Self and Hindu Undivided Family can make investment in the name of any of its members and further there is no limit for investment.

� As subscription to any Unit of Mutual Fund Notified under Section 10(23D) or the Units of UTI. � Contribution to Notified Pension Fund set up by Mutual Fund or UTI (i.e. retirement benefit unit

scheme of UTI and Kothari Pioneer Pension Plan of Kothari Mutual Fund) and amount can be invested only by an Individual.

� Subscription to Notified Deposit Scheme of NHB e.g. subscription to Home Loan Account Scheme of NHB. Even accrued interest shall qualify for deduction under section 80C.

Amount can also be invested in any notified Pension Fund set up by the National House Bank. � Payment of Tuition Fees to School, College, University or any other Educational Institution

provided the fees has been paid in connection with the Children of the Assessee and further for Maximum Two Children and it should be whole time education.. Children shall include even Adopted and Step Child.

� Repayment of the amount borrowed by the assessee for the purpose of Purchase or Construction of a residential house property, the income from which is chargeable to tax under the head income from House Property and the amount was borrowed from the Central Government, Any Bank, Life Insurance Corporation or National Housing Bank and Other Notified Person.

� Investment in equity shares or debentures etc. forming part of an eligible issue.

� A fixed deposit of not less than 5 years with a schedule bank, which is in accordance with a scheme

framed and notified by the Central Government of India. � Amount invested by the assessee in NABARD. � Investment in fixed deposit of a period of 5 years or more with scheduled banks shall also be eligible for deduction under section 80C, provided the term deposit are issued in accordance with a

scheme notified by the Central Government.

SPECIAL NOTE :- It will also include payment under self – financing or other scheme of any development authority, housing boards etc.

It will not include any payment towards Interest or payment towards Loan taken for Addition, Alteration, or Repair etc of the House Property.

If the assess has transferred the house property before the expiry of 5 years from the end of financial year in which possession of such properties was taken by him, no deduction shall be allowable in the previous year which the house property has been transferred. The deduction allowed in the past years shall be considered to be income of the assessee of the previous year in which the house property is transferred.

SPECIAL NOTE :- Eligible Issue mean an issue made by an Indian Public Ltd. Company or a Public Financial Institution, a Mutual fund Notified under Section 10(23D) provided entire proceeds of the issue are utilized for Developing, Maintaining and Operating Infrastructure Facility.

If any equity shares or debentures for which deduction was taken under section 80C have been sold or otherwise transferred to any person within a period of 3 years from the date of their acquisition, the aggregate amount of the deduction allowed shall be deemed to be the income of the assessee of the previous year in which the shares or debentures have been sold or otherwise transferred.




2. SECTION 80 CCC Deduction in respect of contribution to certain pension funds. i) This deduction is available only to an Individual. ii) Individual may be Resident or Non – Resident. iii) Deduction is allowed if the assessee has paid any amount towards any annuity plan of LIC or any

other insurer for receiving pension from the pension fund. iv) The amount is to be paid out of the income chargeable to tax. v) Deduction allowed shall be equal to the amount paid. vi) Where any amount paid or deposited by the assessee has be taken into account for the purposes of this

section, deduction with reference to such amount shall not be allowed under section 80C. vii) If the assessee has surrendered the Policy, amount received on account of surrender shall be

considered to be income of the assessee under the Head Other Sources. viii) If any pension has been received under this policy, it will be considered to be income under the Head

Other Source. 3. SECTION 80 CCD Deduction in respect of Contribution to Pension Scheme of Central Government. i) Deduction is allowed only to an Individual who is an employee of the Central Government or any other employee who has started his employment w.e.f. 01-01-04 onwards.

ii) Deduction is allowed to the extent amount has been contributed by him towards pension scheme notified by the Central Government but maximum deduction allowed shall be 10% of the Salary.

iii) Deduction shall be allowed even for the contribution by the Central Government but it cannot be exceed 10% of Salary.

iv) If the employee has received any amount out of the pension account because of closure of the such account or because opting out of the scheme, the amount so received shall be considered to be his income. Similarly any pension received under the scheme shall be considered to be his income.

4. SECTION 80 D Deduction in respect of Medical Insurance Premium.

SPECIAL NOTE :- Salary include D A (Enter) but exclude all other allowance and perquisite.

SOME SPECIAL POINTS TO BE REMEMBERED Deduction under section 80C is not allowed either from Long Term Capital Gain (section 112) or from Income of Gambling Activities (Section 58(4)).

If the assessee has invested the amount out of his past saving or out of his income exempted from tax, even in such cases deduction under section 80C is allowed.

Deduction shall be allowed only if the amount has been actually paid by the assessee i.e. if the amount is due but not paid deduction is not allowed.




i) This deduction is available only to Individual or HUF.

ii) Deduction shall be allowed if the assessee has paid premium towards medical insurance out of his income chargeable to tax.

iii) The payment must be made by Cheque. iv) Policy can be taken in case of an Individual, in the name of his Spouse, Parents, or Dependent

Children and in case of HUF, any member of the family.

v) Deduction is allowed is equal to the amount of the premium paid or Rs. 15,000 whichever is less. vi) If the person in whose name policy has been taken is a senior citizen, deduction shall be allowed

upto Rs. 20,000 and such senior citizen may be the assessee, or his Spouse or Parents or any member of the family in case of the HUF.

vii) Senior Citizen means an Individual Resident in India who is of the age of 65 years or more at any time during the relevant previous year.

viii) Medical insurance shall be in accordance with a scheme framed in this behalf by the General Insurance Corporation of India or by any other insurer as approved by the Insurance Regulatory and Development Authority (IRDA).

Example :- Cases

Senior Citizens

Other than Senior

Citizens Total Amount Paid Amount of

Deduction

1 9000 10000 19000 19000

2 2000 20000 22000 17000

3 6000 12000 18000 18000 4 8000 15000 23000 20000

5 – 20000 20000 15000

6 20000 – 20000 20000

5. SECTION 80 DD Deduction in respect of maintenance including medical treatment of a dependent who is a person with disability i) Deduction is allowed only to a Resident Individual and a Resident HUF. ii) Deduction is allowed if the assessee has incurred any expenditure for the Medical Treatment, Training and Rehabilitation etc. of a dependant disabled person, or has deposited any amount with LIC or any other Insurer for the benefit of such dependant.

iii) Dependant in the case of an Individual, means the Spouse, Children, Parents, Brothers and Sisters who are dependant on the Individual and in the case of HUF means any member of HUF who is dependant on such HUF and has not claimed any deduction under section 80U.

iv) Deduction allowed shall be Rs. 75000 irrespective of the expenditure incurred by the assessee and in case of severe disability, deduction allowed shall be Rs. 100000.

v) If such disabled person, has expired, an amount equal to the amount deposited shall be deemed to be the income of the assessee of the previous year in which such amount is received by the assessee.

vi) The deduction shall be allowed only if deposit scheme of the insurance company provides for payment of annuity or lump sum amount for the benefit of a dependant, being a person with disability, in the event of the death of the Individual or the member of the HUF in whose name subscription to the

scheme has been made and the assessee nominates either the dependant, being a person with disability, or any other person or a trust to receive the payment on his behalf, for the benefit of the dependant, being person with disability.




vii) The assessee, claiming a deduction under this section, shall furnish a copy of the certificate issued by the Medical Authority in the prescribed form and manner, along with the return of the income under section 139, in respect of the assessment year for which the deduction is claimed.

6. SECTION 80 DDB Deduction in respect of medical treatment etc. of specified disease. i) Deduction is allowed only to a Resident Individual or Resident HUF. ii) Deduction is allowed if the assessee has incurred any amount for treatment of such disease as are

specified in the rule 11DD. iii) The expenditure can be incurred for himself or a dependent person, and in the case of Individual, such

person may be Spouse, Children, Parents, Brothers or Sisters who are dependant on such individual and in case of HUF such person may be any member of the HUF who is dependant on the HUF.

iv) Deduction is allowed shall be reduced by the amount received, under mediclaim insurance. v) No deduction shall be allowed unless the assessee furnished with the return on income, a certificate in

such form, as may be prescribed from a neurologist, an oncologist, a urologist, a hematologist, an immunologist or such other specialist, as may be prescribed working in a Government Hospital.

vi) “Senior Citizens” means an individual resident in India who is of the age of 65 years or more at any time during the relevant previous year.

vii) Deduction allowed shall be the amount incurred or Rs. 40000 whichever is less and if the amount has been with regard to a Senior Citizen, deduction allowed shall be upto Rs. 60000.

Example :- Cases

Senior Citizens

Other than Senior

Citizens Total Amount Paid Amount of

Deduction

1 24000 32000 56000 56000

2 36000 32000 68000 60000 3 12000 40000 60000 52000

4 24000 48000 72000 60000

5 – 60000 60000 40000

6 60000 – 60000 60000

7. SECTION 80 E Deduction in case of re-payment of loan taken for pursuing higher education. i) Deduction is allowed only to an Individual or his / her relatives. (spouse and children of the individual)

ii) Deduction is allowed if the assessee has paid interest on loan taken by him fro any financial institution or any approved charitable institution.

iii) Payment of interest should be given out of the income chargeable to tax. iv) The loan should have taken for pursuing higher education which means full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied science or pure sciences including mathematics and statistics.

v) The entire amount of interest paid by an individual is allowed as deduction. vi) No deduction shall be allowed for repayment of the principal loan amount.




vii) Deduction is allowed for a maximum period of 8 years starting from the year in which first payment of interest was given.

viii) No deduction is allowed after the expiry of 8 years. ix) Approved charitable institution means the institution notified by the Central Government Financial Institution means banking company or other Financial Institution notified by the Government.

8. SECTION 80 G Deduction in respect of donation to certain funds, charitable institutions, etc. i) This deduction is allowed to all assessees. ii) Donation shall be made in sum of money and not in kind. iii) It is obligatory on the part of the assessee to produce proof of payment. No ceiling limit for amount of donation and

Deduction on donation is Ceiling limit on donation / Deduction such

restricted amount is 100% of Donation 50% of Donation 100% of qualifying

amount 50% of qualifying

amount

1 2 3 4

� National Defense Fund � Prime Minister’s

National Relief Fund � PM’s Armenia

Earthquake Relief Fund

� AFRICA (Public Contribution) India Fund

� National Foundation for Communal Harmony.

� Approved Universities / Educational Institutions of National Eminence.

� Maharashtra Chief Minister’s Earthquake Relief Fund

� National / State Blood Transfusion Council

� Zila Saksharta Samiti of any district

� Any fund set up by a State Govt. to provide medical relief to the poor

� Army Central Welfare Fund, Air Force Central Fund or India

� Jawaharlal Nehru Memorial Fund

� PM’s Drought Relief Fund

� National Children’s Fund

� Indira Gandhi Memorial Trust

� Rajiv Gandhi Foundation

� Donation for promoting family planning paid to

- Government - Any approved

local authority. - Any approved

association. - Any approved

institution. � Amount paid by

company to the Indian Olympic Association or notified institution for the development of infrastructure for sports & games or the sponsorship for sports & games.

� Donation to the following for purposes except Family Planning.

- Government - Any approved

local authority. - Any approved

association. - Any approved

institution � Approved Charitable

Institution satisfying conditions u/s 80G(5)

� Any notified Temple Gurudwara, Mosque, Church or other place.

� Expenditure of religious nature not exceeding 5% of its total income not disqualify for Sec 80G




Naval Benevolent Fund

� Andhra Pradesh Chief Minister’s Cyclone Relief Fund

� National Illness Assistance Fund

� Chief Minister’s Lt. Governor’s Relief Fund for any State / Union Territory

� National Sports Fund � National Trust for

Welfare of persons with autism, cerebral palsy, mental retardation & multiple disabilities.

� Gujarat Relief Fund � Fund for Technology

& Application

SPECIAL NOTE :- These Temple Gurudwara, Mosque, Church or other places are not for promoting single religious but for all communities.

Procedure for computation of deduction for Ceiling limit on donation / Deduction such restricted amount is (Column 3 and Column 4)

Step 1. Compute Gross Total Income Step 2. Compute Adjusted Gross Total Income Step 3. Compute actual donation made for Column 3 and Column 4 Step 4. Compute 10% of Adjusted Total Income Step 5. Maximum permissible Donation is Step 3 or Step 4 whichever is less as follows :- Amount as Step No 5 :- xxxxx

Less 100% of Qualifying Amount :- xxxxx Balance remains after allowing the above deduction :- xxxxx 50% of Qualifying Amount :- Balance as Above x 50%

Adjusted Gross Total Income

Gross Total Income :- xxxxx Less :- Long Term Capital Gain :- xxxxx Deduction under from 80C and 80U except 80G :- xxxxx Income on which tax is not payable :- xxxxx Short Term Capital Gain u/s 111A :- xxxxx xxxxx Adjusted Gross Total Income :- xxxxx




Total Amount of Deduction 100% of Deduction :- xxxxx 50% of Deduction :- xxxxx 100% of Qualifying Amount :- xxxxx 50% of Qualifying Amount :- xxxxx Total Amount of Deduction :- xxxxx Example :- � Gross Total Income :- 500000 � Long Term Capital Gain :- 50000 � Deduction under from 80C and 80U except 80G :- 40000 � Short Term Capital Gain u/s 111A :- 50000 � Amount Invested in :- - 100% of Deduction :- 60000 - 50% of Deduction :- 80000 - 100% of Qualifying Amount :- 25000 - 50% of Qualifying Amount :- 20000

Gross Total Income :- 500000 Less :- Long Term Capital Gain :- 50000 Deduction under from 80C and 80U except 80G :- 40000 Short Term Capital Gain u/s 111A :- 50000 140000 Adjusted Gross Total Income :- 360000 Step 1. Compute Gross Total Income (400000) Step 2. Compute Adjusted Gross Total Income (360000) Step 3. Compute actual donation made for Column 3 and Column 4 (25000 + 2000 = 45000) Step 4. Compute 10% of Adjusted Total Income (360000 x 10% = 36000) Step 5. Maximum permissible Donation is Step 3 or Step 4 whichever is less. (45000 OR 36000 = 36000) Amount as Step No 5 :- 36000

Less 100% of Qualifying Amount :- 25000 Balance remains after allowing the above deduction :- 11000 50% of Qualifying Amount :- Balance as Above (11000) x 50% = 5500

Total Amount of Deduction 100% of Deduction :- 60000 50% of Deduction :- 80000 100% of Qualifying Amount :- 25000 50% of Qualifying Amount :- 5500 Total Amount of Deduction :- 171500




9. SECTION 80 GG Deduction in case of payment of rent i) Deduction is allowed only to an Individual. ii) He should not be getting any House Rent Allowance and also he is not being provided with Rent Free

Accommodation by his employer. iii) He should not have any house in his name of in the name of the Spouse or in the name of Minor Child

or in the name of HUF of which he is a member, at a place where he ordinarily resides or performs duties of his office or employment or carries on his business or profession.

iv) Also he should not have house even at any other place which he has declared to be self occupied. v) Deduction shall be allowed to such individual in case of payment of rent and deduction shall be allowed

to the extent of the least of the following :- - Rent paid Less 10% of the Adjusted Gross Total Income - Rs. 2000 p.m. Whichever is Less - 25% of the Adjusted Gross Total Income

Adjusted Gross Total Income

10. SECTION 80 GGA Deduction in case of certain donations i) Deduction is allowed to all the assesses except the assesses whose gross total income includes income

which is chargeable under the head “Profit and Gains of Business & Profession” ii) Deduction is allowed in case of donation to contributions to any of the below mentioned institutions.

Deduction allowed is equal to the amount of donation.

Gross Total Income :- xxxxx Less :- Long Term Capital Gain :- xxxxx Deduction under from 80C and 80U except 80GG :- xxxxx Income on which tax is not payable :- xxxxx Short Term Capital Gain u/s 111A :- xxxxx xxxxx Adjusted Gross Total Income :- xxxxx

SPECIAL POINTS TO BE REMEMBERED i) Deduction can be allowed, even where the employer has provided accommodation at Concessional

Rate. ii) Deduction can be allowed even where the assessee is not an employee i.e. the person having business

/ profession can also avail deduction under section 80GG.




Contributions / Donations / Payment to : Respective Condition

� Scientific Research Association having the object of undertaking Scientific Research.

� Universities, College or other Institution to be used for Scientific Research.

Association / University / College / Institution must be approved u/s 35 (1)

� University, College or other Institution to be used for Social Science or Statistical Research.

University / College / Institution must be approved u/s 35 (1)(iii)

� Association / Institution having the object of undertaking any Rural Development Programme to be used for Rural Development Programme.

Association / Institution must be approved u/s 35CCA

� Association / Institution having the object of training of persons for implementing Rural Development Programme.

Certificate u/s 35CCA(2)(2A) to be furnished

� Public Sector Company / Local Authority or Approved Association / Institution to carry out any eligible project or scheme.

Association / Institution must be approved by National Committee. Certificate u/s 35AC(2) to be furnished.

� Rural Development Fund u/s 35CCA(1)(c) � National Urban Poverty Eradication Fund u/s

35CCA(1)(d)

Amount paid shall be allowed as deduction.

11. SECTION 80 GGB Deduction in respect of contribution given by companies to political parties i) This deduction is allowed only to Indian Company. ii) Amount of deduction is the amount contributed during the previous year to a Political Party registered

u/s 29A of the Representation of the People Act, 1951. 12. SECTION 80 GGC Deduction in respect of contribution given by companies to political parties i) This deduction is allowed only to all other assesses except Indian Company, Local Authority and Artificial Juridical Person wholly or partly funded by Government..

ii) Amount of deduction is the amount contributed during the previous year to a Political Party registered u/s 29A of the Representation of the People Act, 1951.

13. SECTION 80 JJA Deduction in case of person engaged I the business of collecting or processing biodegradable waste i) Deduction is allowed to all the assesses. ii) The assesses should have the income from the business of :- - Collecting and processing or treating of bio-degradable waste for generating power or - Producing bio-fertilizers or - Other biological agents or for producing bio-gas or - Making pallets or briquettes for fuel or organic manure.

iii) Deduction allowed shall be equal to the amount of whole of such profits and gains.




iv) Deduction shall be allowed for a period of 5 consecutive assessment years beginning with the assessment year relevant to the previous year in which such business commence.

14. SECTION 80 LA Deduction for the income of some banks only i) This deduction is available only to scheduled bank other than banks incorporated by or under any law

outside India and owning an Offshore Banking Unit is SEZ. ii) Amount of deduction is :-

For the first 3 assessment years relevant to the previous year in which permission was obtained.

100% of such income.

Next two years. 50% of such income. iii) The income shall be in convertible foreign exchange. iv) The return shall be accompanied by :- - Chartered Accountant’s report in prescribed form. - A copy of the permission obtained u/s 23(i)(a) of Banking Regulation Act, 1949.

15. SECTION 80 QQB Deduction in respect of royalty income, etc., of authors of certain books other than text books i) This deduction is allowed only to Resident Individual who is an author. ii) He should have income through his copyright in a book which is a work of literary, artistic or scientific nature.

Further books shall not include brouchres, commentaries, diaries, guides journals, magazines,

newspapers, pamphlets, text-books for schools, tracts and other publications of similar nature, by whatever name called.

iii) Deduction allowed shall equal to the amount of royalty income or Rs. 300000 whichever is less. iv) If the income by way of such royalty or the copyright fee, is not a lump sum consideration so much of

the income, before allowing expenses attributable to such income, as is in excess of 15% of the value of such books sold during the previous year shall be ignored. (In other words we can say that the deduction is limited only to 15% in case of royalty received on per book system.)

v) Any income earned from any source outside India shall be remitted within 6 months in convertible foreign exchange from the end of the relevant previous year or such extended time by RBI.

vi) For income earned outside India a certificate from the prescribed authority in the prescribed form along with the return of income.




Example :-

Particulars 1 2 3 4

Royalty on books covered by section 80QQB 8,00,000 6,00,000 3,00,000 90,000 Is it lump sum payment for assignment of interest in copyright

YES NO NO NO

Rate of royalty as % of value of book NA 12.5% 17.5% 18% Expenditure for earning royalty 2,40,000 1,80,000 1,10,000 10,000 Is royalty received from abroad YES NO YES YES Amount remitted to India till September 30, 2008. 7,00,000 NA 2,80,000 70,000

Amount of Deduction 3,00,000 3,00,000 1,47,143 60,000

16. SECTION 80 RRB Deduction in respect of royalty income on patents i) Deduction is allowed only to Resident Individual. ii) His Gross Total Income should include royalty in respect of a patent registered on or after 01-04-03. iii) Deduction allowed shall be equal to the amount of royalty income or Rs. 300000 whichever is less. iv) Any income earned from any source outside India shall be remitted within 6 months in convertible foreign exchange from the end of the relevant previous year or such extended time by RBI.

17. SECTION 80 U Deduction in case of handicapped person i) In computing the Total Income of an Individual, being a Resident, who at any time during the previous

year, is certified by the Medical Authority to be a person with Disability, there shall be allowed a deduction of a sum of Rs. 75000.

ii) But if such individual is a person with Severe Disability, the deduction is allowed Rs. 100000. iii) Every Individual claiming a deduction under this section shall furnish a copy of the certificate issued

by the Medical Authority in the form and manner, as may be prescribed, along with the return of income under section 139, in respect of the assessment year for which the deduction is claimed.

� Write a note on deduction under section 80 C. (V. Imp) � Write a note on deduction under section 80 G. (V. Imp) � Discuss various deductions which are deductible from Gross Total Income under Income Tax Act

1961.

QUESTIONS




ASSESSMENT OF PARTNERSHIP FIRM (PFAS)

Section 4 of the Indian Partnership Act, 1932 defines partnership as “relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. Persons who have entered into partnership with one another are called individually partners and collectively a firm and the name under which their business is carried on is called the firm name.

1. What is the scheme of taxation of the firm :- The salient features of the scheme are as under :- � The firm is taxed as a separate entity. � The share of the partners in the income of the firm is not chargeable to tax in the hands of the partners. � Any salary, bonus, commission or remuneration (by whatever name called) paid / payable to partners is

allowed as a deduction to the firm. However, the deduction is subject to certain restrictions in the hands of the firm. The amount which is allowed a deduction to the firm is taxable I the hands pf the partners.

� Where a firm pays interest to any partner, the firm can claim deduction of such interest from its total income. However, the maximum rate at which interest can be allowed to a partner is 12% per annum. The amount of interest, allowed as deduction in the hands of the firm is taxable in the hands of partner.

� The income of the firm is taxed at a flat rate, i.e., 33.66% for the assessment year 2008-08 2. When Remuneration / Interest is deductible :- Payment of remuneration and interest is deductible if the following conditions are satisfied :-

a) Conditions of Section 184 b) Conditions of Section 40(b)

a) Conditions of Section 184

1. The firm must be in evidence by an instrument (Partnership Deed) in writing. It means any document of legal nature by firm which is incorporated.

2. Individual shares of all the partners profit in the profit of all the partnership firm must be specified in the instrument.

3. The above mentioned certified copy should be submitted along with return of income to the IT department.

4. If there is any change in the partnership firm then a revised copy should be submitted to the IT department along with the return of income

5. There should not any failure as mentioned u/s 144. What is important here is only type of failure u/s 144 and not an assessment u/s 144




b) Conditions of Section 40(b)

1. Remuneration should be paid to the working partner of the firm. Working partner means that is actively engaged in affairs of the business.

2. The remuneration should be authorized by the partnership deed and it should be given in accordance with the term and condition of partnership deed.

3. Remuneration to working partner as per partnership deed should be payable after the date of partnership deed. If such payment is related the prior period then it is not allowed as deduction. (i)

4. Remuneration should not exceed the permissible limits. (ii)

(i) Remuneration should not pertain to period prior to partnership deed :- Remuneration to the working partner (as per the partnership deed), should be payable after the date of deed. In other words, if such payment is made from a date prior to the date of partnership deed. It would not be allowed as deduction, unless the earlier deed provided for such payment. (In other words we can say that it cannot be made retrospective effect from the opening date) (ii) Remuneration should not exceed the permissible limits. :- Following are the permissible limits :- A. In case of professional firm :-

a) On the first Rs. 1,00,000 of book profit or in case of loss.

b) On the next Rs. 1,00,000 of book profit c) On the balance of book profit

Rs. 50,000 or 90% of book profit which ever is higher. @ 60% of book profit @ 40% of book profit

B. In case of other firms :-

a) On the first Rs. 75,000 of book profit or in case of loss.

b) On the next Rs. 75,000 of the book profit a) On the balance of book profit.

Rs. 50,000 or 90% of book profit which ever is higher. @ 60% of book profit @ 40% of book profit


1. As per section 40(b) nothing is deductible if remuneration to the partners is not given in accordance with partnership deed. So, many remuneration paid to the partners more or less then the amount authorized by the partnership deed shall be fully disallowed.

Meaning of Book Profit :-

Profit as per Profit and Loss a/c xxxxx ADD :- a) Expenses disallowed under the head B/P (+) xxxxx b) Remuneration to any partner whether working or non-working partner (+) xxxxx c) Interest to partners in excess of 12% p.a. (+) xxxxx LESS :- Incomes which are disallowed under the head B/P or taxable under other (–) xxxxx heads of incomes. Book Profit xxxxx




2. The remuneration to the partners should be as per partnership deed and it should be deterministic (i.e. the mode of quantification of remuneration is given in partnership deed) then it is allowed, otherwise it is disallowed.

• Instances where remuneration is deterministic and allowed

� The partnership deed provides that 3% of the sales shall be payable to working partner, which shall be equally divided by the partners

� The partnership deed provides that the remuneration to the working partner should be Rs. 5000 p.m. to each partner, but the total remuneration can’t exceed the ceiling limit u/s 40(b)

• Cases where remuneration is in deterministic and disallowed

� The partnership deed provides that remuneration to the working partner shall be as per sec 40(b) which shall be equally divided

� The partnership deed provides that 3% of sale shall be payable to the working partner, which shall be shared as mutually decided by the partners at the time of submission of ROI

3. Here profession has same meaning as given in sec 44AA.

ALLOWABLE INTEREST U/S 40(B)

The following specific condition should be satisfied to obtain the deduction of interest under section 40(b) 1) The payment of interest should be authorized by the partnership deed and it should be given in

accordance with the terms and condition of partnership deed.

2) The interest should be payable after the date of partnership deed. If such payment is related the prior period then it is not allowed as deduction.

3) Rate of Interest should not exceed 12% p.a. at simple rate. However any excess if any shall be disallowed as per the provision of sec 40(b)

4) WHEN THE RECEPIENT OF INTEREST ACT IN A REPRESENTATIVE CAPACITY

Where an individual is an partner in a firm on behalf of any other person, interest paid by the firm to such individuals, otherwise as a partner in a representative capacity, is not taken into account, for the purpose of sec 40b.

CHANGE IN CONSTITUTION OF FIRM

Where at that a t the time of assessment, it is found that a change has occurred in the constitution of the firm, ONLY ON ASSESSMENT shall be made in respect of the entire previous year in which change in the constitution has occurred.




CHANGE IN CONSTITUTION OF FIRM MEANS a) One or more partners ceases to be partners, one or more partners are admitted in the partnership provided

that at least one of the partners of the firm should be same who was also a partner before such change

b) Where all or some of the partners changes their profit sharing ratios

However the above doesn’t include the case where a firm is DISSOLVED ON THE DEATH any of its partners.

Carry forward and set off of loss in case of change in the constitution of firm Section 78 defines that where the change in the firm occurs due to death or retirement of the partner, then the firm shall not be entitled to carry forward of so much of the loss as is attributable to such partner. However this provision is not applicable on the case of change in profit sharing ratio or admission of the partner Section 78 is not applicable on unabsorbed depreciation, so entire unabsorbed depreciation will be carried forward (without deducting the share of out going partner)

TAX RATES ON THE INCOME OF PARTNERSHIP FIRMS Long term capital gains = 20% Winnings from lotteries etc. = 30% Other incomes = 30% Plus surcharge on the total of above = 10% (irrespective of income) Plus education cess = 2%

HOW TO FIND OUT TAXABLE INCOME OF PARTNER OF A FIRM � Share of profit :- It is fully exempted from tax u/s 10(2A) � Remuneration or Interest :- - Upto the expense allowed in the P&L :- It is taxable in the hands of the partners and taxed as

business income. - Expense disallowed in the P&L :- It is not taxable in the hands of the partners.




ASSESSMENT OF AOP / BOI

HOW TO DETERMINE THE TAXABLE INCOME OF AOP / BOI � Remuneration not allowed as deduction :- In case of AOP / BOI, salary, commission, bonus,

commission, or remuneration, by whatever name called to members, is not allowed as deduction. Even remuneration for actual services is not deductible. Any salary or remuneration paid by an AOP / BOI to an Individual who is a member of AOP / BOI representing his HUF is covered by section 40(ba) and, consequently, it is not allowed as deduction.

� Interest not allowed as deduction :- Interest paid by an AOP / BOI to its members is not allowed as

deduction by virtue of section 40(ba). � When interest is paid on capital and charged on drawings :- Where interest is paid by an AOP / BOI

to a member and the same member has also paid to the AOP / BOI, the amount of interest to be disallowed under section 40(ba) is limited to the net amount of interest paid by the AOP / BOI to the member

AOP / BOI When none of the members is a foreign company

When one (or more) of the members is a foreign company

1. When share of members are determinative When none of the members has income exceeding the maximum amount chargeable to tax.

Income is taxable as if AOP / BOI is an Individual.

Share of members shall be included in taxable income of members can claim rebate u/s 86

Share of the foreign company shall be taxable at the rate applicable to the foreign company and the remaining income is taxable at the maximum marginal rate (i.e. 33.66%)

Share of members is not taxable.

When one (or more) of the members has income exceeding the maximum amount chargeable to tax.

Income will be taxable at the maximum marginal rate (i.e. 33.66%)

Share of members is not taxable

As given above As given above

2. When shares of members are indeterminative As given above As given above At the rate

applicable to the company member.

As given above

Example :- If an AOP pays interest of Rs. 40000 to a member A and receives Rs. 13000 from the same member as interest on withdrawals, the amount which is to be disallowed as deduction under section 40(ba) is Rs. 27000




HOW TO DETERMINE THE TAXABLE LIABILITY OF AOP / BOI � When AOP / BOI is taxable at the Maximum Marginal Rate of Tax :- Where the AOP / BOI is

chargeable to tax at the Maximum Marginal Rate of Tax or at the rate higher than the Maximum Marginal Rate, the share of member therein shall not be included in his total income at all.

� When AOP / BOI is taxable at Normal Rate and Tax is paid :- Where the AOP / BOI is chargeable to

tax at the normal rate applicable to individuals, etc., the share of a member therein shall be included in his total income, but a rebate shall be given on the same u/s 86.

� When AOP / BOI is taxable at Normal Rate of Tax and no Tax is paid :- Where no income – tax is

chargeable on the total income of the AOP / BOI, the shares of members therein shall be fully chargeable to tax as part of his total income and no rebate shall be given thereon. Thus, where an AOP / BOI is taxable at the normal rates applicable to individuals etc., but has income below table limit so that no income – tax is chargeable on the total income of the AOP / BOI, member in such AOP / BOI shall be fully taxable in his own assessment without any tax rebate.

Tax Liability of Individuals

Maximum Marginal Rate Normal Rate Tax paid No Tax paid Exempt from Taxable But Taxable & Tax Rebate u/s 86 no Rebate




HINDU UNDIVIDED FAMILY (HUF)

DEFINITION Hindu undived family is not defined under income tax act, 1961. So the relevent case laws are important for definig the meaning of HUF. HUF is creation of law only one male member is require to from a HUF. It include theire wives and unmarried daughter. There is no requirement of any authentication. As soon as mariage take place, the HUF of husband take place, the HUF of HUSBAND comes into existence.

HINDU COPARCENARY Existence of HUF depends upon the coparcenary of its member. Coparcenary is the male member of the HUF, who aquire the interest in the property by birth. Co-parceners have the right of partition of HUF. If there is Coparcenary in the assets of joint family, then it shall be taxable under the status of HUF. Howerver there is no Coparcenary then it shall be taxable otherwise. Those person who aquire by birth an interest in joint family property (sons, grandsons, great grandsons in joint family property.) male members may only the co-partner and only male member who are coparcener enjoy the right of partition. Female members don’t enjoy the right of the partition, though they are entitled for the mantainence out of family property. Daughter ceases to be a member of the HUF after her mariage. She become member of HUF of her husband. There are two schools of hindu law as explained below:-

DAYABHAGA SCHOOL OF LAW It prevails in west bengal and assam. Under this law a son doesn’t any interest by birth in ancestral properties. Son aquires such as interest only after the death of his father. So father has the absolute right to dispose of the property of the family as per his desire. So there is no Coparcenary as per this school of law till the death of his father. So the income of the joint property is assessed in the hands of the father during his lifetime. However after the death of his father, sons become Coparcenares of the property left by his father after his death and income arising therefore is taxable as the income of HUF. Under this school of law, no son has any right in the ancestral property during the lifetime of his father. If , therefore, the father does not have any brother as a Coparcener, income arising from the ancestral property is taxable as his individual income.

MITAKASHRA SCHOOL OF LAW It applies to the whole of india except west bengal and assam. Under this law each son acquires, by birth an equal interest with his father in the ancestral property. So Coparcenary is here enlarged at the time of each male bith and reduced at the time of each male death.

HINDU, SIKH, JAIN , MUSLIM FAMILIES JAIN AND SIKH families are not governed by the hindu law but still they can make HUF. But muslims family can’t make HUF and this chapter is not applicable on them.

PARTITION OF HUF

TOTAL PARTITION

Where a HUF undergoes a total partition, the entire joint property is divided among all coparceners and the family ceases to exist an undivided family. In income tax only total partion is allowed and only this fact can be recorded by the assessing officer. HUF is created itself when there is male member in the family. However it is closed only by the operation of law. So any member of HUF who claim such partition will intimate to assessing officer, after receiving such claim the assessing officer shall record such fact and give a due notice regarding the finding whether there is any partition. If yes then what is the date of partition is assessed as the income of HUF and thereafter it shall be considered as the income of the recipient member.

PARTIAL PARTITION




A partial partition means the member may make the partition of property partially or any member (not all) may seprate himself from the HUF. However , partial partition is not recognised by assessing officer under the income tax act 1961. So any finding regarding the partial partition will be null and void and have no legal effect. Such family shall contiue to be assessed, as HUF and any income from all properties of HUF shall taxable to the HUF. The effect of this shall be that each member of such family and HUF shall jointly and severally liable for any tax , penalty, interest, fine or other sum payable under the Act, whether before or after such partition.

OTHER IMPORTANT POINTS 1. If any remunration if given to KARTA, by HUF for rendering services in conducting the family ‘s

business then such remunration is allowed. 2. If a member transfers his self-acquired property to HUF without adequate consideration, then income

from such property shall be taxable in the hands of such member and not HUF. 3. Income from impartiable estate is taxable in the hands of the holder of such property. 4. As STRIDHAN is absolute property of a women, so income there from is not taxable as the income of

HUF 5. DEATH OF A SOLE MEMBER :- In case of VEERAPPA CHETTIAR supreme court held that it is

not necessary that male member should always remain in existence once a HUF is formed. Even after the death of the sole male member , so long as the property , which was , originally of the HUF, remains in the hands of the windows of the members of the family and is not divided among them , the joint family continue

6. If the partition is made by courts, then courts will always award equal partition however the family may mutualy affect the partition without going to the courts and mutual partition can uneaqual.

7. HUF cannot make any gift of HUF property to any person including coparceners. So any gift made by HUF shall void ab initio . therefore if HUF property is gifted then the income from such gifted property shall be taxable in hands of HUF.

8. Under section 47, no capital gain shall arise to the HUF on the distribution assets at the time of partition.

9. As per section 171, partition of HUF takes place on the date on which the properties are actually physicaly divided there must be physical division of the property. Where the property is not capable of phisical division, then the division as property admits of.

10. GOPAL BANSI LAL IRANI (superme court) 2001

Interest payments on the amounts advanced by coparceners, givrn by HUF is not deductible.




INCOME TAX AUTHORITIES

There shall be the following classes of income tax authorities for the purpose of this act, namely

a. The Central Board of Direct taxes constituted under Central Board of Revenue Act, 1963 b. Directors-General of Income tax or Chief commissioners of Income tax c. Directors of Income tax or commissioners of Income tax or commissioners of Income tax (appeal) d. Additional Directors of Income tax or Additional commissioners of Income tax e. Joint Directors of Income tax or Joint commissioners of Income tax f. Deputy Directors of Income tax or Deputy commissioners of Income tax g. Assistant Directors of Income tax or Assistant commissioners of Income tax h. Income- Tax officers i. Tax Recovery Officers j. Inspectors of Income Tax

CENTRAL BOARD OF DIRECT TAXES (CBDT)

Chief commissioners of Income tax Directors-General of Income tax

Commissioners of Income tax Directors of Income tax commissioners of Income tax (appeal)

Additional commissioners of Income tax Additional Directors of Income tax

Joint commissioners of Income tax Joint Directors of Income tax

Deputy commissioners of Income tax Deputy Directors of Income tax or Assistant commissioners of Income tax Assistant Directors of Income tax

Income- Tax officers

Tax Recovery Officers

Inspectors of Income Tax

SECTION 117 APPOINTMENT OF INCOME TAX AUTHORITIES

AUTORITIES (POWERS) OF CENTERAL GOVERNMENT

The central govt. may appoint such persons as it thinks fit to be income tax authorities. Here the central govt. appoints authorities upto and above the rank of an assistant commissioner.

AUTORTIES (POWERS) OF BOARD (CBDT) The central govt. may authorize(the Board, chief commissioner or a director general or director) to appoint income tax

authorities below the rank of an assistant commissioner or deputy commissioner. The board may appoint such executive or ministerial staff as may be necessary to assist it in the execution of its functions.




POWERS AND FUNCTION OF INCOME TAX AUTHORITIES

CENTRAL BOARD OF DIRECT TAXES(CBDT) {POWERS AND FUN CTIONS} Since 1st January 1964 the Central Board of Direct Taxes (CBDT) has been charged with all matters relating to various direct taxes in India and it derives its authority from Central Board of Revenue Act 1963, the CBDT is a part of Department of Revenue in the Ministry of Finance. On one hand, CBDT provides essential inputs for policy and planning of direct taxes in India and at the same time it is also responsible for administration of direct taxes laws through Income Tax Department. Section 119

(1) General Powers :- The Board may, from time to time, issue such orders, instructions and directions to other income tax authorities as it may deem fit for the proper administration of this Act. All the subordinates shall observe and follow such orders, instruction and direction of the Board.

a) However the board cannot issue such instructions to make a particular assessment in a particular manner. b) The board can not issue any instruction so as to interfere the discretion of Commissioner (Appeals)

(2) Other Specific Powers

a) Relaxations from certain provisions of Income Tax :- If the Board Consider it necessary for the purpose of proper and

efficient management of the work of assessment and collection of revenue, may relax the persons from the specified provision of income tax law. However such order may be only in favour of the assessee and not prejudicial to the assessee.

b) Extension of Time Limit :- The Board if it considers appropriate, may orders to admit an application or claim for any

exemption, deducting, refund, or any other relief under this act after the expiry of the specified period this act for making such application or claim.

c) Relaxation from claiming deductions :- the Board, may (if it considers it desirable or expedient so to do for avoiding

genuine hardship), relax any requirement contained in any of the provisions of Chapter of Deductions (u/s 80C to 80U) or u/s 14-59, where the assessee has failed to comply with any requirement specified in such provisions for claiming deduction there under. Such relaxation may be given subject to some conditions, which must be satisfied.

CHIEF COMMISSIONER AND DIRECTOR GENERAL (POWERS AND FUNCTIONS)

1. They are empowered to give instructions the Income Tax officers u/s 119(2) 2. They are empowered u/s 131(1A) to make enquiry or investigation into the case of concealment of Income. 3. They have the powers for issuing order regarding raiding (search and seizure u/s 132) of the concerned assessee. 4. They have the powers under section 132A for demanding the books of accounts. 5. u/s 133A they may survey the asseessees. 6. They have powers to make enquiries u/s 135

COMMSIONSER OF INCOME TAX (POWERS)

The Commissioners are appointed by the Central Government for administration of a specified are or jurisdiction. The

Commissioner enjoys the following powers and functions :-

Sections Powers 12A Registration of Charitable Institution or Trust. 117(2) Appointment of Income Tax Officer Class – II and inspector of Income Tax. 119 Instructions to the Subordinate Authorities. 127 Powers of Transfer of Cases. 131 Powers of Discovery, Production of Evidence. 132 Powers of Search and Seizure. 132A Powers of Requisition of Books of Accounts. 135 Powers to make any enquiry.




138 Disclosure of information regarding concerned assesses. 151(2) Giving sanction to issue notice after the expiry of Four years to reopen the case. 226(5) Giving powers to Income Tax officers to recover any arrear of tax due an assessee. The officer may sale the

immovable property for such recovery. 243 To give sanction for withholding refunds in certain cases. 245 Set off of refunds against tax remaining payable. 253 To give direction for appeal to ITAT against the order of CIT(A). 256 To give reference to High Court. 263 Revision of orders passes by lower authorities 273A Reduction or Waiver of Penalty in certain cases.

COMMISSIONERS OF INCOME TAX (APEALS)

Sections Powers 131 Registration of Charitable Institution or Trust. 133 Appointment of Income Tax Officer Class – II and inspector of Income Tax. 133 A Instructions to the Subordinate Authorities. 134 Powers of Transfer of Cases. 135 Powers of Discovery, Production of Evidence. 272 A Powers of Search and Seizure.

DEPUTY/ASSISTANT COMMISSONER OF INCOME TAX /I.T.O.( POWERS)

Class -1 officers are appointed by central government. The class –II officers are appointed by commissioner of income

tax. The powers and functions are as follows :

Sections Powers 52 To record Fair Market Vale as Sales Consideration for the transfer of Capital Assets where the sales

consideration is underestimated. 119 Instructions to the Subordinate Authorities. 125A Having powers of Income Tax Officers 131 Powers of Discovery, Production of Evidence 132 Power of Search and Seizure 133 Power to Call for Information 133 A Power to Survey 134 Power to Inspect Registers of Companies 135 Power to Make any enquiry 272A Imposing Specified Penalties.

SECTION 144 {BEST JUDGEMENT ASSESSMENT}

If any person fails to make comply with the notice issued by the assessing officer shall make the assessment himself. But the assessment should be logical and based on relevant data and facts . it should not be arbitrarily assessment. The assessing officer should use his BEST JUDGEMENT (based on relevant data and facts) to make such type of assessment as it is named. The following are the circumstances where the assessing officer may make best judgment assessment : 1. if any person fails to furnish a return of income under section 139(1) 2. if any person fails to furnish a BELATED RETURN Under section 139(4) 3. if any person fails to furnish a REVISED RETURN Under section 139(5) 4. if any person fails to comply with all the terms of a notice under section 142(1) 5. if any person fails to comply with the directions requiring him to gets his accounts audited U\S 142(2A) 6. if any person fails to comply with the terms of a notice Under section 143(2), requiring him his presence or production of

evidence and documents 7. If the assessing officer is not satisfied about the correctness or the completeness of the accounts of the assessee or if no

method of accounting is regularly employed by the assessee.




DETAILED DISCUSSION ON THE ABOVE PROVISIONS a. if any person fails to furnish a return of income under section 139(1)

The assessee is required to file the income tax return within the time as mentioned under section 139(1). This time is 31st July and 31st October depending upon the assessee’s income? This return is required to be filed by those assessee whose income exceeds the exemption limit mentioned under this section.

However if the asessee fails to furnish a return of income (INCOME TAX RETURN) under section 139(1) then the assessing officer shall make the assessment as per his best judgment. b. if any person fails to furnish a belated return under section 139(4)

The assessee is required to file the income tax return within the time as mentioned under section 139(1). However the assessee may file belated return as mentioned under section 139(4),. The time limit is within one year from the end of the relevant assessment year or the date of order of the assessment, which ever is earlier. However if the assess fails to furnish a belated return of income tax under section 139(4). Then the assessing officer shall make the ASSESSMENT as BEST JUDGEMENT.

c. IF any person fails to furnish a revised return under section 139(5)

The assessee is required to file the income tax return within the time as mentioned under section 139(1). However if the returned filled is wrong then he may file revised return under section 139(5). The revised return may be filled within one year from the end of the relevant assessment year. However in case of assessment order filled earlier then that time then the revised return should be filled within that time. However if the assess fails to furnish a revised return of income tax under section 139(5). Then the assessing officer shall make the ASSESSMENT as BEST JUDGEMENT.

d. if any person fails to comply with the terms of a notice under section 142(1)

the assessing officer requires some information then he sends notice to the assessee under section 142(1) for furnishing some information. The information may be related to demanding of accounts, documents, various other information’s and also a statement of assets and liabilities whether included in accounts or not. And the assessee fails to comply with all the terms of a notice under section 142(1) i.e. the assessee does not furnishes such information then the assessing officer shall make the ASSESSMENT as BEST JUDGEMENT. e. if any person fails to comply with the direction requiring him to get his accounts audited U/S 142(2A) Provisions of section 142(2A) are as below

a) if at any stage of proceedings before the assessing officer he is the option due to � Having regard to the complexities in the accounts of the assessee and � Having regard to the interest of the revenue,

It is necessary to get accounts of the assessee to be audited, and then he may direct the assess to get the accounts AUDITED.

b) this direction can be issued with the prior approval of commissioner. c) The accounts shall be audited by CHARTED ACCOUTANT nominated by Chief Commissioner or Commissioner and

the audit fees and expenses relating thereto shall also be fixed by him. And the expenses are recoverable by the assessee. d) This direction can be issued even if the accounts of the assessee have been audited under the Income Tax Act or under

any other law e) The assessee is to furnish the report in prescribed form to the assessing officers within the time period prescribed in the

direction. The assessee can seek the extension of the time, however the aggregate of the time period originally fixed and the time period so extended shall not exceed 180 days from the date of direction is received by the assessee.

f. If any person fails to comply within the terms of notice under section 143(2), requiring his presence or production of Evidence and Documents.

Provisions of section 143(2) are as below

a) If the assessing officer consider it necessary to ensure that the assessee • Has not understand the income or • Has not computed Excessive loss • Has not under- paid the tax in any manner




b) Serve on the assessee a notice requiring him c) To produce any Evidence, in support of the return

g. If the assessing officer is not satisfied about the correctness or the completeness of the accounts of the assessee or if no method of accounting is regularly employed by the assessee. The assessing officer may reject the books of accounts on the following grounds:-

i. Where the assessing officer is not satisfied about the correctness and completeness of the books of accounts maintained by the assessee.

ii. Where he method of accounting is not regularly adopted by the assessee same. It means if the assessee changes the method of accounting frequently. For example the assessee adopts CASH BASIS system for one year and MERCANTILE SYSTEM in the year and the assessee changes method frequently.

iii. The central government notified the ACCOUNTING STANDARD to be adopted by the assessee while making the books of accounts. The assessee should prepare his books of accounts as per these ACCONTING STANDARDS. However the assessee does not maintain he books of accounts as per these standards Then in all the above cases Assessing officers after taking into account all the relevant material, which he has gathered,

shall make the ASSESSMENT to the BEST of his JUDGEMENT and determine the tax payable by the assessee.

IMPORTANT POINTS TO BE REMEMBERED

1) Opportunity of being heard (show cause notice) :- For making the best judgment assessment the assessee should be given proper show Cause Notice. The assessee must be given an opportunity of being heard. Without show cause notice the best judgment assessment is void-ab-into.

2) A Refund can not be granted under section 144 3) The assessment under section 144 cannot be made in arbitrary manner or on adhoc basis. The assessment must be based on

the material which the assessing officer collects. The Assessing officer must specify the basis of computation of income U/s 144 and the basis must be rational and specific basis. The order u/s 144 should be a speaking order.

4) Time limit for completion of assessment under 153(1) :- No order of assessment u/s 144 shall be passed after the expiry of two years from the end of relevant assessment year.

REGULAR ASSESSMENTS BY ASSESSING AUTHORITY

This assessment is also called scrutiny assessment. This assessment is made U/S13(3) of income tax act 1961. What is scrutiny assessment U/S 143(3)? � Where the assessee has filed the ROI as per sec 139 or 142(1) and the assessing officer consider it

necessary to ensure that the assessee • Has not understated the income or • Has not computed Excessive loss • Has not Under-paid the tax in any manner

� Then the assessing officer shall serve on the assessee a notice requiring him to produce any evidence in support of the return or question asked in the notice.

� Such notice should be served on or before the expiry of 12 months from the end of the month in which returned is furnished.

� On the day specified in the notice issued under sec. 143(2),after hearing such evidence , the assessing officer shall, by an order in writing, allow or reject the claim specified in the notice and make assessment and determine the sum payable by or refundable to the assessee on the basis of such assessment.

SELF ASSESSMENT

The self assessment is maid under sec 140A of income tax act,1961




SECTION 140A (SELF ASSESSMENT) Where the assesee make the assessment himself , it is called self assessment. � An assessee is required to submit return of income U/S 139 / 142(1) / 148 / 158BC � Before submitting the above return, he shall calculate his tax and interest payable. This is called Self

Assessment Tax. � Self assessment tax so determined shall be deposited by the assessee and the proof of such deposit

should be submitted along with return of income. � Where the amount paid by the assessee falls short of the self assessment tax as determined above, the

amount so paid shall first be adjusted toward int. payable and the balance if any shall be adjusted toward tax payable

� If any assessee fails to pay the whole or any part of such tax or interest in accordance with the provisions of section 140A, he shall be deemed to be assessee in the default in respect of the amount remaining unpaid.

RECTIFICATION OF MISTAKES

SECTION 154 (RECTIFICATION OF MISTAKES)

� With a view to rectify a mistake Apparent from Record, an Income Tax Authority may: a. Amend any order passed by it b. Amend any INTIMATION OR DEEMED INTIMATION under sec 143(1)

� the income tax authority may make rectification

o on its own motion or o where the mistake is brought to its notice by the ASSESSEE o where the authority concerned is CIT(A), and brought to notice by the assessing officer

NOTES:-

a) “MISTAKE APPARENT FROM THE RECORD” mean a mistake about which no two views are

possible and about which there could be no arguments e.g. an error of law and fact, a clerical or arithmetical mistake , error in determining WDV of asset, retrospectively Amendment in Law etc

b) If the amendment has the effect of enhancing the tax liability or reducing the refund, then such an amendment shall not be made unless the assessee has been given a reasonable opportunity of being heard.

c) TIME LIMIT U/S 154(7) :- No amendment shall be made under this sec. after the expiry of 4 years from the end of the financial year in which the order sought to be amended was passed.

SEC 147 (INCOME ESCAPING ASSESSMENT OR REASSESSMENT)

If any assessee has not paid the tax, to tax department and subsequently the assessing officer comes to know regarding that fact then he may assess or reassess the income. The following are the cases where the assessing officer may send the notice for income escaping assessment:

a) Where the income of the assessee is above the taxable limit & he has not furnished the “Income Tax Return”

b) Where the assessee has furnished the “Income Tax Return” but it is found that the assessee has understated the income or claimed the excessive deduction of any expenses

c) Where the assessment has already but that was under assessed and the assessee has claim excessive loss or depreciation.




However before making such assessment the assessing officer must have satisfied the following conditions : Conditions before making income escaping assessment

a) The assessing officer must have reason to believe that income chargeable to income tax has been

escaped. b) Such escaping of income has been occurred by the reason of either OMMISSION OR FAILURE on

the part of the assessee disclose the fully or truly all-material fact necessary for his assessment for that year.

OPPORTUNITY OF BEING HEARD (SHOW CAUSE NOTICE)

For making the income escaping assessment the assessee should be given proper show cause notice. The assessee must be give an opportunity of being heard. Without show cause notice the income escaping assessment is Void-ab-into. TIME LIMIT OF ISSUE SUCH SHOW CAUSE NOTICE:

If the amount escaped is Rs. 100000 or more then such notice can be issued within 6 years from the end of the relevant assessment year. However if the amount escaped is less then Rs. 100000 then such notice can be issued only upto 4 years from the end of the relevant assessment year. However if the notice (to whom notice is served) is agent of non-resident U/S 163 then such notice shall be issued within 2 years from the end of the relevant assessment year.

TAX DEDUCTED AT SOURCE

TDS (tax deducted at source) means the income tax is deducted at the time and place of accrual of income. Although the liability to pay the income tax is in the assessment year, however under the provisions of tax collection at source the income tax is deducted by the payer of the income in the previous year in which income is paid to the recipient. And for the purpose of recipient it is termed ass advance payment of income tax and accordingly treated in the A.Y.

TDS FROM THE SALARY (U/S 192)

� WHO IS LIABLE TO DEDUCT TAX Any person responsible for paying any income chargeable under the head salary shall, at the time of

payment, deduct income tax on the amount payable at the average rate of income tax computed on the basis of rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. � WHICH PAYMENT IS LIABLE FOR TDS

Salary paid by the employer to the employees. The salary should be estimated for the whole year.

The way of calculation is same as per the provision of salary chapter. For calculating income all the deduction sec 16(ii), 16(iii), from the salary should be made. And also the deduction under sec 80 c to 80 u from gross Total income should be given. Also, if applicable, rebate u/s 88E shall be taken into account while calculating the income for TDS purpose. � AMOUNT LIMIT FOR TDS

TDS is made if the salary payable to employees exceeds the maximum limit not chargeable to tax.




� RATES OF TDS

The tax rates are normal rates as applicable to individuals. It means the slab rates as applicable to individuals are applicable here. � TIMING FOR TDS

The TDS should be deducted at the time of payment of salary to the employee. � LOWER RATES OF TDS U/S 197

The recipient can apply in form no. 13 to the assessing officer to get the certificate authorizing the payer to deduct tax at lower or NIL rates as the appropriate case may be. And the person responsible for paying the income shall, until such certificates is cancelled by the assessing officer, deduct income tax at the rate specified in such certificate or deducted no tax, as the case may be

� TWO OR MORE EMPLOYERS

Where during the financial year, assessee is employed simultaneously under more than one employer, he may furnish to the person responsible for making the payment, such detail of income under the head salaries due to received by him from the other employers. He has also to inform the tax deducted at source by the other employer and all other prescribed details. Then after that the person responsible for making the payment shall take into account the detail so furnished for the purpose of making the deduction.

� ANY OTHER INCOME

Where the assessee who receives any income chargeable under the head salary has, in addition, any other income under any other head of income (not being a loss under any such head other then the loss under the head income from the house property) for the same financial year, he may furnish the full details of such income to his employer. The employer shall accordingly deduct the TDS.

INTEREST ON SECURITIES (U/S 193)

� WHO IS LIABLE TO DEDUCT TAX

The person responsible for paying interest on securities shall, deduct income tax at the rates in the force on the amount of the interest payable.

� WHICH PAYMENT IS LIABLE FOR TDS

Any interest on securities is liable for deduction of TDS under this section.

However in the following case no tax shall be deducted from:-

a) Interest on 4% national defense bond , 1972 held by Resident Individual b) Interest on 4% national defense loan, 1968, or 4% national defense bond , 1972 held by Individual c) Interest payable on national development bonds d) Interest on 7- year national saving certificates (IV Issue) e) Any interest payable on any security of central govt. or state govt. f) Interest on debentures: Interest on debentures is not deductible if following condition are satisfied:




I. Debentures are issued by public company and are registered in stock exchange. II. Interest is paid to resident individuals

III. The interest is paid by the company by an account payee cheque IV. The amount of interest does not exceed 2500 p.a

� RATE OF TDS

If the recipient is domestic company 20% + surcharge + Education cess Other recipients

if int. is on listed security 10% + surcharge + Education cess if int. is on unlisted security 20% + surcharge + Education cess

� TIMING FOR TDS

The TDS should be deducted at any time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier

� LOWER RATE OF TDS U/S 197 (FORM NO. 13)

The recipient can apply in form 13 to the assessing officer to get the certificate authorizing the payer to deduct tax at lower or NIL rates as the appropriate case may be. And the person responsible for paying the income shall, until such certificates is cancelled by the assessing officer, deduct income tax at the rate specified in such certificate or deducted no tax, as the case may be.

� FORM NO. 15G, 15H

If the recipient is resident individual and he has the total income (including interest) not chargeable to tax, then he may furnish the prescribed form to the payer for not deducting TDS on such interest on securities. This declaration may be in form No. 25G for non-senior Citizens and form 15H for Senior Citizens. This declaration should be made in duplicate in writing to the effect that the tax on his estimated total income of the previous year in which such income is not included in computing his total income will be “Nil”

TDS ON WINNING FROM LOTTERY OR CROSSWORD PUZZLS ETC (U/S 194B)

� WHO IS LIABLE TO TAX

The person responsible for paying to paying any person any income by way of winning from any lottery or crossword puzzle or card game and other game of any sort.

� WHICH PAYMENT IS LIABLE FOR TDS.

Winning from any lottery or crossword puzzle or card game and other game of any sort, if the amount exceeds Rs. 5000 shall, deduct the TDS.

However in case where the winning are wholly in kind or partly in cash and partly in kind but part in cash is not sufficient meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of winnings

� RATE OF TDS

30% + surcharge (if applicable) + education cess




� TIMING FOR TDS The TDS should be deducted at the time of payment thereof

TDS ON WINNINGS FROM HORCE RACES (U/S 194BB)

� WHO IS LIABLE TO DEDUCT TAX The person responsible for paying to any person any income by way of winning from any Horse

races.

� WHICH PAYMENT IS LIABLE FOR TDS Winning from horse races shall be eligible for deduction of TDS. TDS is deductible if the payment

exceeds Rs. 2500 p.a.

� RATES OF TDS 30% + Surcharge + education cess

� TIMING FOR TDS

The TDS should be deducted at the time of payment thereof.

PENALTIES

SECTION WHAT PROVISION HAS BREACHED 27(1)(b) NON COMPLIENCE OF NOTICE

If any person fails to comply with a notice which is issued U/S 142(1) for scrutiny Assessment then assessing officer can levy penalty on such default. The penalty may be of Rs. 10000 for each default SPECIAL NOTE :- Students should write down the details of section 142(1) and 142(2A) here. For his see the relevant portion from the question of “BEST JUDGEMENT ASSESSMENT”

27(1)(c) CONCEALMENT OF INCOME Where any person has concealed the particulars of his income or furnished in accurate particulars of such income, then the assessing officer may levy the penalty which is maximum 100% and maximum 300% 0f the tax evasion

271(1)(d) CONVEALMENT OF FRINGE BENEFIT TAX Where any person has concealed the particulars of his fringe benefits or furnished inaccurate particulars of such fringe benefits, the assessing officers may levy the penalty which is minimum 100% and max 300% of such fringe benefit.

271(4) PARTNERSHIP FIRM PROFIT TO THE PARNER If the assessing officer is satisfied that the profit of a registered firm have been distributed otherwise than as mentioned in partnership deed and that any partner has thereby returned his income below its real amount he may direct that partner shall pay by way of penalty upto 150%of tax evasion and no refund or adjustment shall be claimable by any other partner by reason of such direction

271A BOOKS OF ACCOUNTS




If any person fails to maintain any such books of accounts & other documents as required under section 44AA in respect of any previous year or to retain such books of accounts and other documents for the period specified in the said rules then Assessing officer may direct that such person shall pay penalty of Rs 25000

271AA INTERNATIONAL TRANSACTION If any person fails to keep such information and document in respect of international transaction as require under sec 92D (1) or (2) then the Assessing officer impose penalty of 2% of each international transaction by person

271B TAX AUDIT If any person fails to get His account audited in respect of any previous year or fails to furnish a report of such audit then the assessing officer impose a penalty which is ½% of the total sale / receipts or Rs. 100000 whichever is less

271BA If any person fails to furnish a report from an accountant as required under section 92E then the assessing officer may direct that such person shall pay, by way of penalty of sum of Rs. 1000

271C TDS NOT DEDUCTED If any person fails to deduct tax (TDS) as require then the assessing officer impose the penalty which shall be 100% of tax which such person fails to deduct or pay as aforesaid and such penalty can be imposed by the joint commissioner

271CA TCS (TAX COLLECTED AT SOURCE) If any person fails to collect tax at source whole or any part of tax require then the person liable to pay, by way of penalty, a sum of 100%of tax which such person fails to collect as aforesaid. the penalty can be imposed by the joint commissioner

271 D TAKING LOAN MORE THAN RS 20000 If an person takes an loan more than Rs. 20000 without account payee cheque / crossed draft then he shall pay penalty of 100% of loan or deposit so repaid. the penalty can be imposed by the joint commissioner

271 E REPAYMENT OF LOAN MORE THAN RS 20000 If an person repay an loan more than Rs. 20000 without account payee cheque / crossed draft then he shall pay penalty of 100% of loan or deposit so repaid. the penalty can be imposed by the joint commissioner

271F RETURN OF INCOME If a person who is required to furnish a return of his income, as required U/S 139(1), fails to furnish such return before the end of the relevant assessment year, the assessing officer may direct that such person shall pay, by way of penalty of Rs. 5000 SPECIAL NOTE :- Students should write down the details of section 139 here. For his see the relevant portion from the question of “BEST JUDGEMENT ASSESSMENT”

271 FA AIR (ANNUAL INFORMATION RETURN) If a person who is require to furnish an annual return (AIR) U/s 285BA fails to furnish such return with in time prescribed under that sub section the income tax authority may direct that such person shall pay by way of penalty a sum of Rs. 100 per day during which the failure continue

271 FB RETURN OF FRINGE BENEFIT TAX If an employer, who is require to furnish a return of fringe benefits, as required under section 115WD (1), fails to furnish such return within the time prescribed under that sub sec. the Assessing Officer may direct that such employer shall pay , by way of penalty, a sum of Rs. 100 per day during the failure continue.

271G INTERNATIONAL TRANSACTION If any person fails to keep such information and document in respect of international transaction as require under sec 92D (3) then the Assessing officer impose penalty of 2% of each international transaction by




person 272A ANSWERING OR SIGNING OF ANY OF STATEMENT

If any person,

Refuses to answer the question put to him by an income tax authority Refuses to sign any statement made by him in the course of any proceeding under this act, or Failure to comply with summons issued U/S 131(1) to attend office for giving evidence and produce books of

accounts, Then he shall pay, by way of penalty, a sum of Rs 10000 for each such default or failure.

272AA 133B (COLLECT CERTAIN INFORMATION) If a person fails to comply with the provision of sec 133B, person shall pay, by way of penalty, a sum Rs. 1000

272B PAN U/S 139A If a person fails to comply with the provision of sec 139A, the assessing officer may direct that such person shall pay, by way of penalty, a sum Rs. 10000

272BB TDS NUMBER If a person fails to comply with the provision of sec 203A (For applying TDS Number) or disclosing false number on the documents, then such person shall pay, by way of penalty, a sum Rs. 10000




INTRODUCTION

Wealth tax act, 1957 which comes into force on April 1, 1957 is a personal and direct tax. The act provides for the levy of wealth tax and was introduce to supplement the tax revenue of the government. To reduce the gap between having wealth and have not, one of them measure adopt by the government is the levying of wealth tax; It is based on the criterion of the capacity to pay and is levied on assets which are unproductive in nature. The act extent to whole of India including state of J&K and Sikkim.

CHARGE OF WEALTH TAX

Subject to other provisions of the wealth tax act, 1957, the wealth tax is charged for every assessment year commencing from April 1, 1983 in respect of the net wealth on the corresponding valuation date of every individual, HUF (Governed by Mitakashra Law) and company @ 1% of the amount by which net wealth exceed Rs. 15,00,000.

MEANING OF IMPORTANT ITEMS

(A) Individual :- The term’ individual’ has not defined in the act but in general sense, individual means a

natural person or human being and includes :- � Group of individuals being trustees holding property for the benefit of an individual beneficiary. � Body of individuals, being joint heirs, joint purchaser etc. � Holder of an imparitible estate. � A joint family other than HUF such as Muslim Undivided Family. � Individual died in testate leaving behind self acquired property. Heirs can not assess as HUF in view of

section 8 of the Hindu succession act, 1965. � Partnership firm and AOP are not liable for wealth tax but the partners of firm or members of AOP are

liable for their share in the property of the firm or AOP, as the case may be. (B) Hindu Undivided Family :- For wealth tax purposes it is essential that a family must be a Hindu Undivided Family governed by Mitakshra Law (where the share of each member is not definite).

A HUF governed by Dayabagha Law is not assessed under wealth tax act because the members have definite share in the property of the family and each of them is liable to pay tax as an individual. (C) Company :- Under section 2(h), a company shall have the meaning assigned to it under section 2(17) of

the Income Tax Act. That means :- � Any Indian company. � Any body corporate as incorporated under the laws of a foreign country. � Any institution or association assessed or assessable as company before April 1, 1970. � Any association or institution declared by CBDT to be a company. (D) Assessee :- Same as in case of Income Tax Act 1961.




ACT NOT TO APPLY [SECTION 45]

According to section 45 of the act, no tax shall be levied under this act in respect of the following in respect of the net wealth of :-

� Any company registered u/s 25 of the Company Act 1956 :- It is a company in which public is

substantially interested. Such companies are incorporated for the promotion of commerce, art science, religion, charity and prohibit the payment of any dividend to its member.

� Any co-operative society :- It means a society registered under the Co-Operative Society Act, 1912 or

under the law for the time being in force in any state for the registration of the co-operative society. � Any social club :- Incorporated or not is an AOP formed with the object to fulfill social needs of the

members. � Any political parties :- Under section 13A, political party means an AOP or body of individual citizens

of India registered with the election commission of India. � A Mutual Fund :- Any mutual fund set up by a public sector bank or a public limited company or a

financial institution and authorized by the SEBI or RBI are excluded from the purview of the act. (E) Valuation Date :- Wealth tax is levied on the net wealth of a person as on a particular date. According

to section 2(Q) the valuation date is the last day of the previous year relevant to the assessment year, i.e. March 31, of the previous year.

(F) Net Wealth :- Under section 2(m), net wealth means the excess of aggregate value of assets belonging

to the assessee on the valuation date (Excluding exempted assets but including deemed assets), over the debts owed by him on the valuation date which have been incurred in relation to the taxable assets.

Net Wealth = Assets – Debts.




ASSETS, U/S 2(EA)

The term asset is defined u/s 2(ea) of the act includes six types of assets. One of the essential

elements of asset is that it must belong to the assessee on the valuation date. The term ‘belong to’ means ‘owned by’ the assessee. The assets include the following :- 1) Any building or land appurtenant there to :- It includes a commercial building, residential building,

any guest house, and a farm house ( farm house must be situated within 25 kilometers from the local limit of local authority).

However the following buildings are not included in the definition of building :- � A house meant for residential purposes is allotted by a company to its employee or an officer or a

director who is in whole time employment in the company and who have been drawing a gross salary of less than Rs. 5, 00,000.

� Any house for residential or commercial purposes which form part of stock in trade. � Any house which the assessee may occupy for the purposes of any business or profession carried on by

him. � Any residential property that has been let out for a minimum period of 300 days in the previous year. � Any property in the nature of commercial establishments or complexes. � Incomplete and unfinished building is not an asset. 2) Motor Car :- Any motor car whether used for business or personal purposes. However the following cars are not to be included :- � Motor cars held as sock in trade. � Motor cars used for hiring purposes such as taxi. 3) Jewelry :- This includes bullion, furniture, utensils or any other made wholly or partly of gold, silver,

platinum or any other precious metal of any alloy containing one or more of such precious metals (excluding those held as sock in trade by the assessee).

4) Yachts, Boats and Aircrafts :- All types of yachts, boats and aircrafts are taxable but excluding those

which are held by the assessee for his commercial purposes. Commercial purposes mean the use of yachts, boats and aircraft for business purposes with a view to earn profits.

5) Urban Land :- Urban land means a land situated in area which is within the distance of 8 kilometer

from the local limits of a local authority and where the population of not less than 10,000. However the following urban land shall not been included in assets :-

SPECIAL NOTE :- However jewellery shall not include Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the central government.




� Land on which construction of a building is not permissible under any law. � A land occupied by any building which has been constructed with the approval of the appropriate

authority. � Any unused land held by the assessee for industrial for a period of two years from the date of its

acquisition by him. � Land held by an assessee as stock in trade for a period of ten years from the date its acquisition by him. � Agricultural land situated in urban area is not liable for wealth tax, because the central government can

not impose wealth tax on such land according to schedule 7 article 86 of the constitution of India. 6) Cash in hand :- Cash is treated as an asset :- � In case of individual and HUF cash in excess of Rupees 50,000 shall include in assets. � In case of any other person cash in hand not recorded in the books of account shall be included in

assets.

DEEMED ASSETS [SECTION 4]

Some times an individual tries to avoid tax by transferring assets on to the name of friends or relatives before valuation date to combat this problem section 4 provides circumstances under which assets transferred by the assessee otherwise than for adequate consideration shall form part of the net wealth. Assessee is deemed as owner of such assets. Following are 13 kinds of assets of other persons included in the net wealth of an individual. 1) Transfer of assets to spouse [Section 4(1)(a)(i)] :- If any asset held by an individual and transfers to

his or her spouse is treated as asset of such individual ( i.e. transferor ) if :- � Asset transfer without adequate consideration and � Where it is not connection with an agreement to live a part. 2) Assets held by minor child [Section 4(1)(a)(ii)] :- Assets held a minor child shall be included in the

net wealth of that parent whose net wealth is greater or where the marriage of his parents does not subsist in the net wealth of that parent who maintains the minor child in the previous year.

However in the following cases the assets of minor child do not clubbed with his/her parent’ net wealth :-

� In case of married daughter. � In case of handicapped minor child. � In case assets acquire by minor child by the use of his intelligence, skill or manual work or experience.

3) Assets transferred to person or AOP for the benefit of the spouse [Section 4(1)(a)(iii)] :- In this case

assets are included in the net wealth of transferor. It is to be noted that assets are transferred without

SPECIAL NOTE :- Child means a real, step or adopted child but does not include grand child or child of any other relative. If trust deed provided that during the minority of child the income was to be made over to charity. Nothing would be included in the wealth of individual.




adequate consideration and relationship of spouse between transferor and the beneficiary must exist on the valuation date.

4) Revocable transfer of assets [Section 4(1)(a)(iv)] :- Assets transferred under revocable transfer are

included in the net wealth of transferor. In following cases transfer is regarded as revocable :- � When a transfer is revocable within a period of six years. Or � When a transfer is revocable within transferee’s life time. Or � When some benefit is derived directly or indirectly from assets transferred by transferor. Or � When the transferor reserves the right to retransfer or re assume whole or any part of the assets or

income from the assets so transferred.

5) Assets transfer to son’s wife [Section 4(1)(a)(v)] :- Where any individual parent in law transfer any

asset directly or indirectly, after 31-5-1973, otherwise than for adequate consideration to his/her daughter in law the transferred asset shall included in the net wealth of transferor.

6) Transfer of assets of an individual for the benefit of son’s wife [Section 4(1)(a)(vi)] :- If the asset is

held by a person or AOP to whom such assets has been transferred by the individual, directly or indirectly after 31-5-1973, otherwise than for adequate consideration for the immediate benefit of son’s wife of such individual.

7) Interest in a firm [Section 4(1)(b)] :- Where the assessee is a partner in a firm or a member of an AOP

(not being a co-operative housing society). The value of his interest in the assets of the firm or AOP shall be included in the net wealth.

The interest of a minor child in the firm (and not in AOP) shall be included in the net wealth of the parents of the minor. 8) Converted Property [Section 4(1A)] :- Where an individual who is a member of HUF, converts his

individual property after 31-12-1969, in to the common pool of HUF otherwise than for adequate consideration. Such property is known as converted property.

With effect from 1-4-1976, the following part of the converted property shall be included in the net wealth of individual :- � The value of converted property or any part thereof held by the family on the valuation date. � Where converted property is the subject matter of the partition amongst the members of the family, the

part of the property received by the spouse of the individual. 9) Transfer by means of book entry [Section 4(5A)] :- Where a gift of money from one person to another

is made by means of entries in the books of account maintained :- � By the person making gift (donor) or � By HUF or firm or an AOP or BOI with which donor has business relationship.

SPECIAL NOTE :- The transfer of any assets or part thereof under Gift Tax Act, 1958 is not regarded as revocable asset and hence will not be included in the wealth of transferor.




Such an amount shall be included in the net wealth of donor. But in case it can be proved that money was actually delivered then such amount will not added with the net wealth of the donor. 10) Impartiable estate of HUF [Section 4(6)] :- The holder of imprtiable estate of HUF shall deem to be

the individual owner of all such properties. Hence value of such assets shall be included in his net wealth.

11) House owned by a co-operative society, company or an association of persons [Section 4(7)] :-

Where the assessee is a member of a co-operative housing society, company or AOP to whom building or part there of is allotted or leased under a house building scheme, shall be deemed to be the owner of the building or part thereof the values of such building shall be included in the net wealth of a assessee.

In case any amount of installment of the house is repayable or outstanding under such scheme, it shall be allowed to be deducted as a debt owed by him in relation to building or part thereof. 12) House acquired in part performance of the contract [Section 4(8)(a)] :- In case a person is allowed to

be take or retain possession of any building or part thereof in part performance of the contract of the nature referred u/s 53A of the Transfer of Property Act or u/s 269UA of the income tax act, he shall be deemed as its owner.

13) Building on lease [Section 4(8)(b)] :- A person acquired any right (excluding any right by way of lease

from month to month or for period not exceeding one year) in respect of any building, shall be deemed to be the owner of the building. The value of the building shall be included in the net wealth of the assessee.

EXEMPTED ASSETS [SECTION 5(1)]

The following assets shall not to be included in the net wealth of the assessee :- 1) Property held under trust. [Section 5(1)(i)] :- Any property held under trust or other legal obligations

for any public purpose of a charitable or religious nature in India. However, the assets held for spending public purposes both charitable and non-charitable, is not entitled to exemption.

Where the income of charitable trust is misapplied by the trustee, the exemption is allowed. Because exemption is not based on the application of income but on holding the property for charitable purposes. Public charitable purposes include relief of poor, educational or medical relief etc. 2) Interest in the coparcenary property of HUF [Section 5(1)(ii)] :- It is the interest of the assessee in

the co-parcenary property of HUF of whom he is member. However on this property family liable to pay tax. This exemption is available to the assessee only so long as the property remains jointly and he continues as a member of the family.

3) One official residence of ruler [Section 5(1)(iii)] :- Any one building in the occupation of a ruler

which has been declared by the central government as his official residence is exempt. The exemption is available to the ruler himself during his life time and not to his successor. Similarly where a part of such building is let out, the exemption on such part of the building is not available.

4) Jewelry in possession of a ruler [Section 5(1)(iv)] :- Jewelry in the possession of any former or present

ruler of Indian State not being his personal property which has been recognized by the central




government as his heirloom is exempt from tax. Such recognition must be given before the commencement of the act. The CBDT may recognize the jewellery as his heirloom at the time of his first assessment if no such recognition exists.

Following conditions are necessary to maintain the recognition :- � Jewelry shall be permanently kept in India except for a purpose and period approved by the board. � The reasonable steps shall be taken for keeping the jewellery in original shape. � The reasonable facilities shall be allowed to any officer of the government to examine the jewellery as

and when necessary. 5) Money or assets brought in India by the NRI [Section 5(1)(v)] :- An assessee, being a person of

Indian origin or a citizen of India, who was ordinary residing in a foreign country and who was returned to India with the intention for permanently residing therein, the following assets shall be exempt for seven successive assessment years commencing with the assessment year next following the date on which such person returned to India :-

� The money and assets which he brings with him. � Any balance in NRE account in India. � Any asset acquired by him out of money in NRE A/C or by sending money from foreign country within

one year from the date of return to India. � Any asset acquired by him out of money brought to India or out of NRE a/c after his arrival.

6) House [Section 5(1)(vi)] :- One house or a part of a house or plot of land (not exceeding 500 square meters) belonging to the individual or HUF is exempt. The house may be self occupied or let out. A farm house used for own residence shall also qualify for this exemption. In the case of co-ownership each owner is eligible for the exemption on his respective share. Residential may in India or

abroad.

INCIDENCE AND CHARGE OF TAX. [SECTION 6]

According to section 3 of the act as discussed earlier, net wealth of individual, HUF and company on valuation date is taxed in the A.Y. at the rate of 1% of amount by which net wealth exceed Rs. 15,00,000.

SPECIAL POINTS TO BE REMEMBERED � Period of exemption shall be 7 years from the date of return. � If money is sent out from India then this exemption is not available.




INCIDENCE OF TAX

TYPE OF ASSESSEE

RESIDENT & ORDINARY RESIDENT

NOT ORDINARY RESIDENT

NON RESIDENT INDIAN

Indian Citizen

All assets in India + assets Outside India + deemed Assets in India and outside India

Less

Debts related taxable Assets in India and outside India.

Assets and deemed assets Situated in India only

Less

Debts related to these assets in India only.

Same as in case of NOR.

Non Citizen of India

Assets and deemed assets Situated in India only.

Less

Debts related to these assets in India only.






VALUATION OF IMMOVABLE PROPERTY

[RULE 3 TO 8 OF SCHEDULE III] For purpose of valuation, these can be following three categories of immovable property. 1. Property constructed on a free-hold land. 2. Property constructed on a lease-hold, whose un-expired period of lease is 50 years or more. 3. Property constructed on a lease-hold, whose un-expired period of lease is less than 50 years.

According to rule 8, where the unexpired period of lease does not exceed 15 years fro the relevant valuation date and the deed of lease does not given an option to the lessee for the renewal of the lease, the value of that property shall not be determined as per rule 3 but it will be determined in the manner laid down under rule i.e. it will be market value.

Although the method of determining value, in the case of aforesaid propertied, is different but the first step towards the determination of value, i.e. computation of net maintainable rent is same in case of all the above properties.

Step 1 :- Calculation of Annual Rent :- 1. Take the Rent received for the year. If let out of part of the year increase it as let out for full year. 2. Add :-

� Amount of Local / Municipal Taxes paid by tenant. � 1/9th of the rent, if repair are borne by tenant. � In case the owner has accepted and deposit from tenants (but not the advance rent upto 3 months), an

amount to be calculated @ 15% p.a. on such deposit. If any interest is paid by owner, the interest calculated above shall be reduced by such amount.

� Divide the amount of premium (Purgree) paid by tenant or owner by number of years for which property is lease. The resultant amount is to be added in rent.

� In case owner derives any benefit or perquisite from tenant, its value is to be added in rent. Step 2 :- Calculation of Gross Maintainable Rent (GMR) :-

The Gross Maintainable Rent in this case will be

The amount received or receivable The annual value assessed by the local by the owner as annual rent. authority in whose area the property is situated.

Whichever is higher

SPECIAL NOTE :- Where the land belonged to HUF but building on land belonged to the Karta of HUF in the individual capacity, initially the land and building should be valued together and thereafter the value should be allocated towards land and building separately to include in the net wealth of HUF and Karta as individual, separately.




Step 3 :- Calculation of Net Maintainable Rent (NMR) (Rule 4):-

Step 4 :- Capitalise the value of property (Rule 3):-

If property is held on free hold basis. NMR x 12

If property is held on leasehold basis and term on unexpired lease is 50 years or more than 50 years.

NMR x 10

If property is held on leasehold basis and term on unexpired lease is less than 50 years. NMR x 8

SPECIAL NOTE :- Acquired Constructed before 01-04-

74 Acquired Constructed after 01-04-74

Self Occupied Value calculated as per Schedule III if Cost of Construction / Acquisition + Cost of improvement does not exceed Rs. 50 Lakhs in 4 metro cities (Bombay, Calcutta, Delhi, Madras) and Rs. 25 Lakhs in other towns.

Other House Property

Value calculated as per Schedule III Value calculated as per Schedule III Or

Cost of Acquisition / Construction + Cost of Improvement whichever is higher.

Step 5 :- Adjustment for Unbuilt Area (Rule 6):- In case the property has unbuilt are in excess of specified are by more than 5% and upto 20% aggregate area than a premium is added in the capitalized value as follows :-

If the excess is upto 5% of the aggregate area Nil

If the excess is above 5% but upto 10% of the aggregate area 20% of the above value



If the excess is above 20% Rule 3 to 7 not applicable

“Aggregate Area”, in relation to the plot of land on which the property, is constructed, means the aggregate of the area on which the property is constructed and the unbuilt area :- “Specified Area”, in relation to the plot of land on which the property is constructed, means :-

Where the property is situated at Bombay, Calcutta, Delhi or Madras 60% of the aggregate area.

Where the property is situated at Agra, Ahmedabad, Allahabad, Amritsar, Banglore, Bhopal, Cochin, Hyderabad, Indore, Jabalpur, Jamshedpur, Kanpur, Lucknow, Ludhiana, Madurai, Nagpur, Patna, Pune, Salem, Sholapur, Srinagar, Surat, Surat, Tiruchirapalli, Trivandrum, Vadodara

65% of the aggregate area

GMR as calculated above xxxxx Deduct :- Any amount of Local or Municipal Taxes paid xxxxx by owner and tenant. 15% of G.M.R. for Expenses. Balance is NMR. xxxxx xxxxx Net Maintainable Rent xxxxx




(Baroda), or Varanasi (Banaras). Where the property is situated at any other place 70% of the aggregate area

Step 6 :- Adjustment of unearned increase in the value of the land (Rule 7) :- Deduct from the value arrived at in step V, unearned increase in the value of land computed as below :-

If the property is constructed on land obtained on lease from the Government or Local Authority or any authority referred to in section 10(20A) of the Income Tax Act and if the lease provides for claim and recovery of a specified part of the unearned increase in the value of the land at the time of the transfer of the property then reduction is to be made by :-

The value of deduction will be

Amount so liable to be claimed and recovered Amount equal to 50% of the value arrived at in step IV

Whichever is lower VALUATION OF SELF OCCUPIED RESIDENTIAL HOUSE [SECTION 7(2)]

The valuation of a house or part of the house belonging to the assessee and exclusively used by him for residential purpose throughout the period of 12 months immediately preceding the valuation date :- 1. Where the assessee became the owner of the house prior to 01-04-71 :- The value will be :-

The value of the house will be

The value determined in the manner laid The value determined as per Schedule III, down in Schedule III (as discussed earlier) as on the valuation date of the relevant valuation date relevant to assessment year 1971-72 assessment year

Whichever is lower

SPECIAL NOTE :- Where the house has been constructed by the asseessee, he should be deemed to have become the owner thereof on the date on which the construction of such house was completed. Thus, if the assessee, has himself constructed the house, he shall be the owner of the house on the date when the house was completed. On the other hand, if he has purchased the house, he shall become the owner on the date of its purchase.




2. Where the assessee became the owner of the house after 31-03-71 but prior to 01-04-74 :- The value will be :-


The value determined in the manner laid The value determined as per Schedule III, down in Schedule III (as discussed earlier) as on the valuation date of the relevant valuation date next following the date on which assessment year the assessee became the owner of the house.

Whichever is lower 3. Where the assessee became the owner of the house after 31-03-74 :- The value will be :-


The value determined in the manner laid The value determined as per Schedule III, down in Schedule III (as discussed earlier) as on the valuation date of the relevant valuation date next following the date on which assessment year the assessee became the owner of the house.

Whichever is lower

It means the value of the house property in this case will be

Net Maintainable Rent 12.5 or 10 or 8 depending Cost of Construction / Acquisition upon whether the property is free hold or lease hold + Cost of Improvement Whichever is higher

However, for determining the value of ONE house property belonging to the assessee, which is acquired / Constructed after 31-03-74 and used exclusively by the assessee of his own residential purpose throughout the period of 12 months immediately prior to the relevant valuation date. The Cost of Construction / Acquisition + Cost of Improvement shall not be taken into account in the following cases :- � If the house is situated at Calcutta, Chennai, Delhi, Mumbai, its Cost of Construction / Acquisition +

Cost of Improvement does not exceed Rs. 5000000. � If the house is situated at any other place, its Cost of Construction / Acquisition + Cost of Improvement

does not exceed Rs. 2500000.




In other words,, for one such house, the capitalized value shall be calculated on basis of Net Maintainable Rent only land Cost of acquisition / Cost of Improvement shall not be considered in this case.

VALUATION OF INTEREST IN FIRM OR ASSOCIATION OF PERSON (RULE 15 AND 16)

Step 1 :- The net wealth of the firm or association of the person on the valuation date shall first be determined as if such firm or association of person were the assessee. Step 2 :- The value so arrived at in Step no 1 shall be allocated amongst the partners in the following manner :- (i) That portion of the net wealth of the firm or association as is equal to the amount of its capital shall be

allocated amongst the partners or members in the proportion in which capital has been contributed by them.

(ii) The residue of the net wealth of the firm or association shall be allocated amongst the partners or members in accordance with the agreement of partnership or association for the distribution of the assets in the event of dissolution of the firm or association or, in the absence of such agreement, in the proportion in which the partners or members are entitled to share profits .(or we can say that equal proportion)

Step 3 :- The sum total of amounts so allocated to a partner or member under clause (i) and (ii) shall be treated as the value of the interest of that partner or member in the firm or association. Step 4 :- The exemption u/s 5 is to be allowed to the partner in the proportion of the share in the firm / association. Because the exemption u/s 5 is not allowed to the firm.

VALUATION OF JEWELLERY Valuation of jewellery must be made at the market value.

VALUATION OF BUSINESS ASSETS If the difference between the book value of the assets and the market value of the assets then the valuation is made as follows :-

Case Valuation Price

If Market value exceeds Schedule III value by more than 20 % Market value

If Market value exceeds Schedule III value by 20 % or less than 20% Schedule III value

SPECIAL NOTE :- When an assessee owns more than one house exclusively for his residential purpose through out the period of 12 months immediately preceding the valuation date, then the valuation of one house at the option of the assessee shall be done in the above manner and the other house or houses shall be valued as if there were let. Further, the option can be charged by him from year to year.




� Explain the following terms for the purpose of Wealth Tax :- Valuation Date ,Net Wealth, Residence and Citizenship. � What is the procedure followed in valuing the Business Assets for Wealth Purpose? � Define Assets under the Wealth Tax Act. � Define the Exempted Assets under the Wealth Tax Act. � When wealth of the others is included in the Net Wealth of the Individual?

QUESTIONS

4 income tax part 2

Economy & Finance

Transcript of 4 income tax part 2