Income From Business · Income From Business UNIT 1 After studying this unit, the student will be...

Accounting and Taxation218

Income From Business

1UNIT

After studying this unit, the student will be able to

• Understand about admissible expenses and inadmissible expenses

• Understand about admissible income and inadmissible income

• Learn about actual profit or loss of the business

• Learn about chargeble expenses under the head of business

IntroductionIn the assessment of total income of an assessee, computations of

income from business become most important. Major part of income of anassessee especially in the case of large organizations like firms and companiescomes from this head Income Tax Act has made elaborate arrangements forthe computation of income from business as there is a greater danger ofmanipulating accounts by assessee.

Meaning (Section 2(13))

Business includes any trade, commerce or manufacture or any adventureor concern in the nature of trade, commerce or manufacture. Trade impliesbuying goods and selling them to make profit. If such transactions are carriedout on large scale, it is called ‘commerce’ this business means rendering ofservices to others, manufacturing, selling and purchasing goods.

Learning Objectives

Paper - III Taxation - II 219

Chargeability (Section 28)

The following types of incomes are chargeable to tax u/s section 28under the head-profit and Gains of Business:

1. Profits and gains of any business.

2. Any compensation due or received by a person in connection with termination or modification of terms and conditions relating to this head.

3. Income derived by a trade, profession or similar association from specific services performed for its members.

4. Profit on sale of import licences, incentives by way of cash compensatory support and draw-back of duty.

5. The value of any benefit or perquisite convertible into money or not arising from business or the exercise of a profession.

6. Any interest, salary, bonus, commission or remuneration received by a partner of a firm assessed as such.

7. Any some whether received or receivable in cash or in kind under an agreement for not carrying out any activity in relation to any business or profession.

8. Income from speculation business.

9. Any amount (including bonus) received under a key man insurance policy.

10. Interest on securities where such securities are held as stock in trade.

Essential Features of Profits and Gains of Business.

1. Business carried on by the Assessee: It is a must that the businessshould have been carried on by the assessee himself during the previous year. Itdoes not mean that an assessee should physically carry on a business. What ismore important is that he must have right to carry on the business and the businessmust have been carried on in the exercise of that right by the assessee eitherpersonally or through his agent or servant. A business may be carried on inIndia or outside India. It is the residential status of an assessee which determinesthe incidence of tax.


2. Business is carried on during the previous year: The businessshould have been carried on during the previous year. The business may becarried on by the assessee at any time during the previous year. Thus, it is notnecessary that the business should be carried on throughout the year. Sometimessome of the receipts are taxable as income from business even if no business iscarried on by the assessee in the year of receipt. Following are some of theexamples:

(i) Recovery against any excess payment.

(ii) Sale of an asset used for scientific research.

(iii) Bad debts recovered (allowed as expenditure in the earlier years).

(iv) Any amount withdrawn from special reserve.

(v) Amounts received relating to a discontinued business.

3. Aggregate income of different businesses is assessed to tax:

If an assessee has different businesses, the profits of all of them will beaggregated and put to tax.

4. Speculation Profits: Profits from speculation business are taxedunder the head – Profits and Gains of Business. However, speculation losscannot be set-off against the legal business profits.

5. Income of previous year is put to tax in the following assessmentyear.

6. Any gain arising on the transfer of a capital asset used in the businesscannot be treated as business income. It can, however, be treated to tax underthe head-Capital Gains.

7. Profit on the revaluation of capital assets is not to be taxed under thehead.

8. Anticipated or future profits are not taxable in the current year. But,the real profits i.e. the profits received or receivable during the year are taxed inthe relevant assessment year.

9. Profits on winding up are not taxable as business income but areliable to tax under the head-Capital Gains.


Computation of Profits and Gains {Section 29}

The profits and gains of a business or profession are to be computed inaccordance with the provisions of sections 30 to 43 D (sec 29). The list ofprovisions/allowances is not exhaustive. We should apply ordinary commercialprinciples while determining real and true profits of a business or profession.Sometimes there may be an expenditure or loss which may not be coveredunder the above sections 30 to 43 D. Yet such losses would have to be allowedin order to determine true profits. Some of the usually occurring types of tradinglosses are given below :

1. Loss of Stock in trade: Loss of stock- in- trade because of energyaction, freezing of stocks, leakages, by ravages of white ants, fire or negligenceetc. are allowed as deduction. However any amount recovered shall be treatedas revenue receipt.

2. Loss through embezzlement by employee or agent is allowed asdeduction in computing business income.

3. Loss by theft: If robbery or theft takes place during the normalworking hours of the business, it is allowed as expenditure. Any loss by theftshould be incidental to the operations of the business e.g. theft by a pretendedcustomer, or loss of cash before being deposited in the bank etc.

4. Loss incurred for standing as surety: Where a trader stands suretyfor the debts of another and such guarantee is for the purpose of the trade, anypayment made as a result of such guarantee can be deducted as a business loss.

5. Loss incurred on account of insolvency of banker with which currentaccount is maintained by assessee.

6. Loss due to forfeiture of deposit made by the assessee for properlycarrying out of contract for supply of commodities.

7. Loss incurred due to devaluation of rupee in foreign country which isbeing utilized in the course of business.

8. Loss due to exchange rate fluctuation of foreign currency held onrevenue account.General Principles Governing Admissibility of Deductions

Following are the general principles which should be taken intoconsideration while allowing deduction in respect of allowances, expenses orlosses. As has already been explained, these are not exhaustive by nature butsimply lay some guidelines which may help us arriving at a decision while allowingor disallowing a particular deduction.


1. Expenditure must be incidental to the business.

2. Deduction must be in respect of an existing business.

3. Expenditure should relate to the previous year. This depends uponthe method of accounting. Under mercantile system of accounting expenditureis allowed only when it is related to the previous year. However under cashsystem of accounting, amount actually paid during the year is allowed. Thereare certain exceptions with regard to sales tax, excise duty and bonus etc.

4. Expenditure should be in relation to one’s own business.

5. Expenditure incurred should be in the commercial expendiency. Anexpenditure sometimes need not be for direct and immediate benefit of thebusiness.

6. Expenditure once incurred may give extended benefit to the business,i.e. benefit of expenditure may be extended beyond the year of expenditure viz.deferred revenue expenditure.

7. No deduction of expenditure incurred before setting up of a business, except in the case of preliminary expenses u/s 35 D.

8. Expenditure must have relationship with taxable profits.

9. Estimated losses are not allowed as deduction.

10. Expenditure incurred on wasting assets is not allowed.

11. Expenditure in relation to non-existing liability is not allowed.\

12. Expenditure incurred in defending against the breach of law is not allowed e.g. fines and penalties.

13. Depreciation on investment is disallowed.

14. Revenue expenses are allowed in full, while capital expenses are allowed over a period of time.

Deduction expressly Allowed

Section 30 to 37contain a list of certain expenses/ deductions which areallowed in computing the income under this head. While considering thesedeductions, the word ’paid’ means actually paid or incurred depending uponthe method of accounting. Under cash system, the word ’paid’ means ‘actuallypaid’, under mercantile system the word ’paid’ means ‘actually incurred’.


The following deductions are expressly allowed:

1. Rent, rates, taxes, repairs and insurance of building used forthe business (Sec 30): The building may be own building or rented one. As atenant, any amount paid towards the current repairs is also deductible. However,any premium paid towards rented house is not allowed.

2. Repairs and insurance expenses paid in relation to plant andmachinery and furniture are allowed (sec.32): Any expenditure incurred toreplace petrol engine by diesel engine in a jeep to augment the profit is allowed.

4. Site restoration fund (sec. 33 ABA): Deduction in respect ofprospecting for or extraction or production of petroleum or natural gas or bothin India and abroad is allowed. Amount of deduction is 20% of profits.

5. Expenditure on Scientific research (sec. 35) : Scientific researchmeans any activity for the extension of knowledge in the fields of natural orapplied science including for the extension of knowledge in the fields of naturalapplied science including agriculture, animal husbandry or fisheries.

The following deductions are allowed in respect of expenditure onscientific research:

(i) Revenue expenditure on in-house scientific research relatedto business [Sec.35 (1) (i)]: Any expenditure of revenue nature incurred onscientific research related to business is allowed in dull. Any expenditure incurredfor the payment of salaries, material within three years immediately precedingthe commencement of business is also allowed.

(ii) Contribution of outsiders [Sec 35 (1)(ii) ]: Any amount paid to(i) scientific research association which has object of undertaking scientificresearch or (ii) to a university, college, or other institution to be used for scientificresearch is deductable at 175% of the sum paid. The research programme maybe related to business or not related to business.

(iii) Payment of research in social science to any approved institution,university or college is deductible at 125 % of the sum paid u/s 35 (1) (ii) &35(1) (iii).

(iv) Capital expenditure incurred by an assessee who carries on scientificresearch himself is fully deductable u/s 35 (2) in that every year in which it isincurred. Unabsorbed part of such expenditure will be carried forward and setoff as unabsorbed depreciation.


If the asset is sold without having been used for other purposes, the saleproceeds or deduction allowed whichever is less is treated as business incomeif the previous year in which the sale took place. The excess of sale proceedsover deduction allowed however is taxed as capital gain.

(v) Contribution of National Laboratory [Sec.35 (2AA)]: Anyamount paid to any national laboratory will get a weighted deduction of 175%.National Laboratory means a scientific laboratory functioning at national levelunder the ageis of the Indian Council of Agricultural Research, Indian Council ofMedical Research or Council of Industrial and Scientific Research, the DefenseResearch and Development Organization, the Department of Electronics, theDepartment of Bio-Technology, or the Department of Atomic Energy and whichis approved by the prescribed authority for this purpose.

(vi) Any amount of expenditure incurred upto 31-3-2012 on scientificresearch by a company engaged in the business of bio-technology, drugs;pharmaceutical, electronic equipments, computers, telecommunications etc. willget a weighted deduction of 200% (sec. 35 2AA).

(vii) Contribution to research & Development: Sec. 35 2 ABprovides for weighted deduction at the rate of 125% in respect of contributionmade to IIT, approved university college etc., towards research activities. Thisweighted deduction is in addition to the special benefit available to a person forinhouse research. In case of Biotechnology, Drugs Pharmaceutical companiesa weighted deduction of 200% is allowed.

6. Expenditure incurred on acquisition of patent rights or copyrights (sec. 35A): Where capital expenditure is incurred by the assessee (after1966 but before 1-4-1998) on the acquisition of patent rights, copying for thepurpose of business, the whole amount is deductiable in 14 equal instalments.Where the right became effective in any year prior to the previous year in whichexpenditure is incurred, the number of completed years which have elapsedsince commencement of the patent shall be reduced from 14 years and thededuction is allowed in remaining years. In the case of patent rights acquired onor after 1-4-1998, the expenditure incurred on the acquisition of such rightsshall be capitalized and depreciation u/s 32 is allowed.

7. Expenditure incurred on Technical know-how (Sec.35 AB) : Anysum paid before 1-4-1998 on the acquisition of technical know-how for use forthe purpose of his business will be allowed as deduction by spreading it equallyover six years, namely, the year in which the lump-sum consideration is paid andthe five immediately succeeding years. Where the knowhow is developed in agovernment laboratory, or a laboratory owned by a public sector company or


university, the consideration will be spread over 3 years. But the know-howacquired after 1-4-1998 will be treated as capital expenditure and will bedepreciated u/s 32.

8. Capital expenditure to obtain licence to operatetelecommunication services (Sec. 35 ABB) : Any capital expenditure incurredand actually paid by an assessee on the acquisition of any right to operatetelecommunication services by obtaining licence will be allowed as deduction inequal instalments over the period starting from the year in which such paymenthas been made and ending in the year in which the licence comes to an end.

9. Expenditure on eligible project or scheme (Sec. 35 AC) : 100%deduction will be allowed from business income in respect of expenditure incurredfor an eligible projector scheme. Eligible project or scheme means such projector scheme which is meant for promoting social and economic welfare or upliftof the public as may be certified by the Government of India on therecommendation of National Committee Constituted by Central Governmentconsisting of persons of eminence in public life.\

10. Payment of Rural Development Fund ( Sec.35 CCA) : Anysum paid to Rural Development Fund set up and notified by the centralGovernment is fully deductible. This section applies to the National PovertyEradication Fund also. But once this deduction is claimed and allowed u/s 35CCA, the same is not allowed as a deduction under any other provision of thisAct.

11. Amortization of preliminary expense (Sec .35 AD) : Whereany Indian Company or resident non-corporate assessee incurs after 31st March1998 any preliminary expenditure, the assessee shall be allowed a deduction ofan amount equal to one-fifth of such expenditure of each of the five successiveprevious years beginning with the previous year in which the business commences.Expenses incurred before 1-4-1998 are to be spread over 10 years preliminaryexpenses include: expenditure in connection with the preparation of feasibilityreport, project report conducting marketing survey, engineering services, legalcharges for drafting agreements, Memorandum of Association, Printing ofMemorandum of Association and registration expenses. The maximum amounteligible for deduction under this section shall not exceed 5% of the cost of theproject. But in the case of Indian companies, it is at the option of the company,whether 5% of cost of the project or 5% of the capital employed in the businessof the company.

12. Expenditure for amalgamation or demerger of an undertaking(sec. 35 DD) : Where an Indian Company incurred expenditure after 31-3-


1999. Wholly and exclusively for the purpose of amalgamation of demerger ofan undertaking 20% of such expenditure for each of the five successive yearsbeginning with the year in which amalgamation of demerger takes place shall beallowed as deduction.

13. Expenditure on voluntary retirement (Sec. 35 DDA) : Theamount received by an assessee in consequence of an employee’s voluntaryretirement, the assessee shall be allowed a deduction of 20% of such expenditurefor each of the five successive previous years beginning with the year in whichsuch payment was made.

14. Expenditure on prospecting etc. for development of certainminerals (Sec. 35E) : Any expenditure incurred by an Indian Company orIndian Resident non-Corporate assessee wholly and exclusively on theprospecting of any mineral or on the development of mines or other naturaldeposit of any such minerals the assessee shall be allowed a deduction of anamount equal to 1/10th of he such expenditure for each of the ten successiveprevious years beginning with the year of commercial production.

Other Deductions (Section 36).While computing profits and gains business or profession the following

other deduction are allowed:

1. The amount of any insurance premium paid in respect ofinsurance against risk of damages or a destruction of stocks or stores usedfor the business is fully deductible [Sec 36(1)(i)].

2. Insurance premium paid by a federal milk co-operative societyis fully deductible [Sec.36 (1) (ia)].

3. Insurance of health of employees [Sec.36 (1) (ib)] : Any premiumpaid under a scheme framed in this behalf by the general Insurance Corporationof India and approved by the Central Government, shall be fully deductible.

4. Bonus or commission paid to an employee [Sec.36 (1) (ii) : Anybonus or Commission paid to an employees for services rendered shall bedeductible. But such sum should not, in any way, be paid as profit or dividend.

5. Interest on borrowed capital [Sec.36 (1) (iii) : Any interest paid inrespect of capital borrowed for the purpose of business/profession is fullydeductible. Interest on own capital is not deductible.

6. Employer’s contribution Provident Fund [Sec.36 (1) (iv) (v)]:Any amount paid by an assessee as an employer by way of contribution towards


Recognized Provident Fund, or an approved super annuation Fund or approvedGratuity Fund shall qualify for deduction .

7. Loss regarding animals [Sec.36 (1)(iv)] : In respect of animalswhich have been used for the purpose of business (not as stock in trade) andhave died or become useless for such for such purpose, deduction is allowed tothe extent of the amount equal to the difference between the actual cost to theassessee and the amount, if any, realized in respect of the carcasses of animals.If sale proceeds are Nil then the entire cost will be allowed as loss.

8. Bad debts[Sec. 36 (1) (vii) and (2)]: Amount of any bad debts ofpart thereof, which is written off as irrecoverable in the accounts of the assesseefor the previous year is allowed as deduction subject to the following conditions:

(a) The debt has been taken into account in computing the income ofthe assessee of the previous year in which the amount is written off or of anearlier previous year; or

(b) It represents money lent in the ordinary course of business of money lending which is carried on by the assessee.

(c) There must be a debt.

(d) Debt must be incidental to the business.

(e) Debt must have been taken into account while computing business income.

(f) Debt must have been written off in the books of account of the assessee.

Notes:

1. If the amount of any part thereof of bad debts is recovered at a laterdate, the same will be treated as business income of the previous year duringwhich such recovery takes place.

2. Bad debts of a discontinued business or to a successor of the businessare not deductible.

9. Provision for bad debts [Sec .36 (1) (iii a)] : Normally any provisionfor bad and doubtful debts is not allowed as deduction. But the same may beallowed in the case of rural branches of commercial banks.

10. Transfer to special reserve [Sec. 36 (1) (viii)] : The amounttransferred to a special reserve account and maintained by a financial corporationwhich is engaged in providing long term finance for industrial or agricultural or


infrastructure development, in India or by a public company formed andregistered in India with the main object of carrying on the business of providinglong term finance for construction or purchase of houses in India for residentialpurposes is allowed to the extent of 40% of its profits.

11. Family Planning Expenditure [Sec. 36 (1) (ix)] : Any bonafideexpenditure incurred by a company for the purpose of promoting family planningamongst its employees is allowed as deduction. If such expenditure is of acapital nature. It shall be allowed as a deduction in five equal annual instalmentscommencing from the precious year in which the expenditure is incurred.

12. Contribution of |Exchange Risk Administration Fund [Sec. 36(1)(x)] : The contribution made by the public financial institutions to theExchange Rick Administration Fund will be allowed as business deduction whilecomputing their income.

Expenses expressly disallowed

1. Advertisement expenses (Sec.37 (2B)]

Any expenditure incurred by an assessee on advertisement in anysouvenir, magazine, pamphlet etc. published by a political party.

2. Interest royalty, fees for technical services etc. Paid outside Indiawithout tax has been paid or without tax deducted at source shall be disallowed[Sec. 40 (9) (i)].

3. Any amount of income tax, arrears of income tax or advance incometax paid is disallowed [Sec. 40 (a) (ii) ].

4. Wealth tax paid on the wealth of an assessee shall be disallowed u/s40 (a) (ii a)].

5. Salary paid outside India without tax deducted at source shall bedisallowed u/s 40 (a) (iii).

6. Payment of provident fund of employees paid outside India withouttax deducted at source shall be disallowed.

7. Tax on prerequisites paid by employer shall be disallowed.

8. Payment to a relative by way of salary, provident fund or interestshall be disallowed u/s40A (2) to the extent of the amount consideredunreasonable by the assessing officer.

9. Payment in cash [Sec. 40 A (3)]: Any expenditure in respect ofwhich payment is made exceeding Rs. 20,000 otherwise than by a correct cheque


drawn on a bank will be disallowed (Rs.35,000 in case of payment made forplying, hiring or leasing good carriages). The ceiling of 20% penalty is withdrawn.Now entire amount is disallowed if that is not by crossed cheque.

10. Provision for gratuity [Sec 40 A (7)]: Mere provision for thepayment of gratuity to the employees on retirement or on termination of serviceswill not be allowed as a deduction.

10A. Disallowance for non-compliance of TDS provisions: As persection 40 (a) (ia) entire expenditure by way of interest, commission, brokerage,rent, royalty and fee for professional services and technical services is disallowablein case the tax is not deducted and remitted to Government as per the provisionsrelating to TDS.

11. Other expenses: Following are some instances of expenses whichare not allowed as deduction while computing profit or gains of business.

(i) Capital expenditure

(ii) All types or provisions, reserves, funds

(iii) Salary of rent paid to proprietor

(iv) Drawings of proprietor

(v) Personal expenses of proprietor

(vi) Fines and penalties

(vii) Income tax, wealth tax and other taxes of personal nature

(viii) Charity and donations

(ix) Past losses and provision for losses

(x) Amount paid to remove competitor

(xi) Registration expenses of business assets

(xii) Legal expenses relating to capital assets

(xiii) Gifts made on personal consideration

(xiv) Expenditure on raising capital

(xv) Expenditure on shifting registered office

(xvi) Life Insurance premium paid on the life of proprietor


(xvii) Expenditure on installations of electrical work in new production office

(xviii) Betterment charges paid to municipality.

(xix) Expenditure on constructing recreation club or a temple for the exclusive use of employees.

(xx) Expenditure on drafting memorandum and article of association

(xxi) Compensation paid for breach of contract to purchase business assets.

Payment by Partnership Firms [Section 40 (b)]

While computing income of firm assessed as such (FAS) the followingtwo payments are allowed.

1. Interest on capital : Any interest on capital paid by an FAS isallowed u/s 40 (b) provided:

(a) The payment of interest is authorized by the instrument of partnership

(b) The rate of interest shall not exceed 12% p.a.

2. Remuneration to partners: Partnership firm is entitled to pay salary,bonus, commission or any other remuneration to partners u/s 40 (b) provided.

(a) The payment of remuneration is authorized by the instrument of partnership.

(b) Remuneration is payable to working partners only.

(c) Payment of remuneration must be within the limits of the provision of Sec. 40(b) as stated below.

(A) In case of a Professional Firm

The following receipts will result in deemed profits:

1. Recovery of any loss or expenditure allowed as deduction in earlieryears(s).

(i) On the first Rs.3,00,000 book- profits or in case of loss

(ii) On the balance of book-profits

Rs.1,50,000 or 90% of book-profits whichever is higher.

60% of such book-profits.


2. Waiver of the claim by a creditor.

3. Profit on sale of assets on which depreciation is claimed on straightline method.

4. Sale of capital asset used for scientific research

5. Any amount withdrawn from special reserve.

6. Bad debts recovered written off earlier

Over Valuation or Under-valuation of Stock

In order to a rrive at true profit of a business stocks are to be valuedproperly. In case stock is over valued or under valued they are to be adjustedusing the following formula.

Over Valuation

Value of the stock given x

Under Valuation

Value of the stock given x

Procedure of Computation of Business Income

In a given problem we find a pre-prepared profit and loss account inwhich various items are debited and credited. While preparing the profit andloss account, principles of accountancy are formed. Accounting principles andprovisions of Income Tax Act normally differ from each other. Thus, the profitor loss as shown in the Income Statement may not be true. To find out the realprofit or loss, one has to give credit to the provisions of Income Tax Act. In theprocess we may find various expenses that are debited to the profit and lossamount as inadmissible and various items credited to profit and loss accountmay be either not related to this head or not taxable. Further there may be someexpenses which are not at all claimed in the profit and loss account. To give aneffect to all these, the following procedure as laid down in the chart may befollowed.

100

100 + Rate

100

100 - Rate


Chart Showing the Computation of Business Income

Net profit / loss as per profit and loss A/c xxx

Add: Inadmissible expenses

Income tax paid xx

Charity and donation xx

House hold expenses xx

Loss on sale of fixed assets xx

Life Insurance premium of proprietor xx

Interest on capital xx

Provision for bad debts xx

Salary to proprietor xx

Fines and penalties xx

Staff welfare fund xx

Gifts and presents xx

Contribution to un-recognized provident fund xx xxx

Less : Expenses not charged to P&L account

Depreciation xx

Sales tax paid xx

Excise duty paid xx xxx

Less: Inadmissible Incomes

Rent Received xx

Interest from Bank xx

Dividend received xx

Refund of income tax xx xxx

Business Income xxx


Illustration:1

How will you deal with the following while computing profits and gainsof business ?

(a) Salary paid to proprietor A 15,000.

(b) Commission paid to ‘X’ A 5,000 for securing business orders.

(c) Loss due to embezzlements by an employee A 10,000.

(d) Registration expenses of business asset A 20,000.

(e) Amount paid to keep the competitor away from the business A 25,000.

Solution

(a) Salary paid to proprietor -- disallowed

(b) Commission paid to secure business order in the normal course of business -- allowed.

(c) Loss due to embezzlement by an employee is incidental to the business -- allowed.

(d) Registration expenses of a business asset is a capital expenditure -- not allowed

(e) Amount paid to keep the competitor away is in order to increase the earning capacity is a capital expenditure -- not allowed.

Illustration 2

State, with reasons, whether the following are allowed as deductionsunder the Income Tax Act 1961.

(i) Re-roofing expenses of the factory in place of worn-out asbestos sheets A 10,000.

(ii) Contribution paid to Government to repair to Government to repair the approach road to factory A 40,000.

(iii) Amount deposited in staff welfare Fund A 10,000.

(iv) Legal expenses for drafting the deed of agreement A18,000.

(v) Commission paid on raising the loan A 12,000.

(vi) Goods stolen by pretended customer A 16000.


Solution

(i) Re-roofing expenditure in place of worn-out sheets is a non recurring expenditure not resulting in current repairs -- not allowed.

(ii) Contribution paid to Government to repair the approach road to factory -- allowable expenditure.

(iii) Deposit of staff welfare fund -- inadmissible.

(iv) Legal expenses for drafting deed of agreement is a capital expenditure covered u/s 35 D -- not allowed in full.

(v) Any expenditure incurred on raising loans -- Allowed

(vi) Loss on theft during the normal business hours -- allowable

Illustration: 3

State the admissibility of the following items of expenditure in computingbusiness income of an assessee.

(a) Donations to PM National Relief Fund A 80,000.

(b) Amount spent on the construction of recreation club for the exclusive use of employees A 1,20,000.

(c) Loss of stock by white ants A 6,000.

(d) While proceeding to deposit the daily proceeds of a business in the bank by the cashier, the cash of A 80,000 was stolen by stranger.

(e) Compensation of A 50,000 was paid to a retrenched employee whose continuation in service was detrimental to the interest of the business.

(f) Lump sum consideration paid for acquiring technical know-how on 20-4-05 A 60,00,000.

(g) Legal charges paid to defend a criminal paid to defend a criminal suit pending against the proprietor Rs,22,000.

Solution:

(a) Donations to PM National Relief Fund is inadmissible

(b) Amount spent on the construction of recreation hall is a capital expenditure -- not allowed.

(c) Loss of stock by white ants is an allowable loss


(d) Cash stolen by strangers while proceeding to deposit in bank is a revenue loss -- allowed.

(e) Compensation paid to retrenched employee is an expenditure.

(f) Amount paid for the acquisition of technical know-how is a capital asset and depreciation u/s 32 is allowed @ 25 % p.a.

(g) Legal charges paid to defend the proprietor is a personal expenditure -- not allowed.

Illustration 1.

Given below is the profit and loss account of Raj kumar for the yearending 31-3-2013.

Dr. Rs. (A) Rs. (A) Cr

1. Allowable depreciation as per IT Rules A 30,000.

2. Insurance includes life insurance premium of the proprietor A 2,000.

By Gross profit

By Discount

By Commission

By Bad debts recovered

By Rent received

To Salaries

To Bad Debts

To Provision for bad debts

To Insurance

To Advertising

To Interest on Capital

To Interest on loan

To Depreciation

To Net Profit

40,000

10,000

15,000

4,000

10,000

5,000

5,000

25,000

3,56,000

4,70,000

4,00,000

10,000

10,000

20,000

30,000

4,70,000


Solution:

Computation of Business Income ofRaj kumar for the A.Y. 2013-14.

Rs. (A) Rs.(A)

Illustration : 2

Mr. Ashaaz gives you the following particulars from his accounts for theyear ended 31-3-2013.

Balance as per Profit and loss Account

Add : Inadmissible Expenses

Provision for bad debt

Life insurance premium

Interest on capital

Depreciation taken separately

Less : Inadmissible Income

Rent received

Expenses not charged to P&L A/c

Depreciation

Business Income

150,00

2,000

5,000

25,000

30,000

30,000

3,56,000

47,000

4,03,000

60,000

3,43,000

Net Profit as per P&L A/c

Various items debited to P&L A/c

Staff Salaries

Rent to proprietor’s house

Charity

Depreciation

Legal expenses

Rs. (A)

2,50,000

40,000

10,000

8,000

40,000

10,000


Other information

(i) Charity was given to an approved institution

(ii) Gratuity was paid on ad-hoc basis

(iii) Allowable depreciation as per IT rules Rs. 50,000

(iv) Sales tax of the year 2011-2012 paid during the year Rs.12,000 not charged to P&L A/C

(v) Scientific research expenses were paid to an approved research institution.

Compute Business Income u/s 35(1) (iia) & (iii).

Bonus to employees

Gratuity to employees

Provisions for sales tax

Provision for bad debts

Travelling expenses

Scientific research expenses

Various Items credited to P&L A/c

Rent from house property

Dividends from Indian companies

Discount received

Rent from Staff quarters

Refund of sales tax

20,000

30,000

40,000

20,000

10,000

20,000

40,000

10,000

5,000

15,000

8,000

Balance as per Profit and loss Account

Add : Inadmissible Expenses

Rent to self

Charity

Depreciation (Separately treated)

Provision for sales tax

10,000

8,000

40,000

40,000

2,50,000


Notes:

1. Scientific research expenses paid to any approved institution deductionat 125% of the payment.

2. Refund of sales tax, rent from staff quarters are considered as businessincomes.

3. Sales tax is deductible on payment basis.

Problem 1.

The profit and loss account of Sri. Prasad for the year ended 31.3.2013showed the following particulars :

1,48,000

3,98,000

1,17,000

2,81,000

Provision for bad debts

Gratuity on ad-hoc basis

Less : Inadmissible Income

Rent form house property

Dividends

Less : Expenses not charged to P&L A/c

Depreciation

Sales tax of the year 2010-11

Weighted deduction for scientificreserarch expenditure @125% of20,000 comes to A 25,000 thedifference being

Business Income

20,000

30,000

40,000

10,000

50,000

12,000

5,000

(a) Profit as per P&L A/c

(b) Salary to Proprietor

(c) Advertisement expenses

(d) house hold expenses

Rs.

2,40,000

60,000

14,000

16,000


(Ans : A 3,64,000)

Problem 2.

Given below is the Profit & Loss A/c. of Mr. Raman singh for the yearending 31.3.2013. Compute his business income.

Dr. Profit and Loss Account Cr.

(e) Donation to an approved institution

(f) Life insurance premium (On proprietors’ Life)

(g) Provision for bad debts

(h) Interest on loan

(i) General expenses

(j) Depreciation (Allowable, 42,000)

(k) Staff welfare fund

Compute business income

20,000

8,000

12,000

14,000

18,000

38,000

12,000

By Gross profit

By Rent received

By Interest on bankdeposit

By Refund of salestax

To Staff salaries

To Rent, rates and taxes

To Discount

To Advertisement

To Fire insurance premium

To Life insurance premium

To Interest on capital

To Interest on bank loan

To Gifts and presents

To Donation to PM nationalrelief fund

To Wealth tax

To Staff welfare fund

To Net Profit

86,000

68,000

34,000

43,000

12,000

6,000

8,000

14,000

12,500

10,000

14,000

10,000

2,22,500

5,50,000

4,40,000

60,000

20,000

30,000

5,50,000


Additional information:

1. Allowable depreciation A 40.000.

2. Gifts were given to relatives.[Ans: A1,73,000]

Problem 3.

Sri Harsha is the proprietor of a general store and has prepared thefollowing profit and loss a/c. for the year ending 31st March, 2013. Computeincome from business for the A.Y.2013-14.

Dr. Profit and Loss Account Cr.By Gross profit

By Bank interest

By Dividends


By Refund of sales tax

To Salaries and allowances

To Rent and Taxes

To Printing and Stationery

To Depreciation

To Donation

To Legal charges

To General expenses

To Bad debts

To Provision for bad debt

To Income tax

To Repairs and maintenance

To Interest on bank loan


To Household expenses

To Technical know-how

To General reserve

To Net Profit

90,000

60,000

20,000

40,000

30,000

10,000

22,000

5,000

12,000

18,000

10,000

24,000

16,000

14,000

15,000

25,000

34,000

4,45,000

3,89,000

11,000

20,000

10,000

15,000

4,45,000


Other information:

1. Depreciation as per section 32 amounts to A 22,000.

2. Rent A 40,000 was paid to the building owned by the proprietor.

3.Donations are recognized u/s 80 G of the IT Act 1961.

4. Legal charges are in relation to a trade dispute.

5. General expenses include A10,000 not allowed u/s 37.

[Ans: A 2,01,000]Problem. 4

Shri Ram Mohan is the proprietor of a business. His profit and lossaccount for the year ending 31st March,2013 is as follows.

Table on page no 296.

By Gross profit

By Rent from houseproperty

By Interest on govt.securities

By Interst on debtors


To Salaries and wages

To Rent, rates and taxes

To General charges

To Commission

To Discount

To Brokerage

To Legal expenses

To Advertising

To Gift and present

To Bad debt written off

To Provision of bad debts

To Loss on sale of machinery

To Depreciation

To Wealth tax


To Net profit

62,000

28,000

10,000

2,000

3,000

5,000

15,000

18,000

12,000

10,000

15,000

10,000

40,000

10,000

8,000

4,02,000

6,50,000

5,62,800

31,200

20,000

10,000

26,000

6,50,000

Dr. Cr.


Other Information:

1. Allowable depreciation A 66,000.

2. Brokerage is paid for raising a commercial loan.

3. Commission was paid to finalize a commercial loan.

4. Bad debts recovered were disallowed earlier.

5. Advertising expenses incurred for insertions in a magazine released by a political party.

Compute business income for the A.Y.2013-14.

[Ans: A 3,73,800]

Problem 5

From the Profit and Loss Account Mr. Samuel for the ending 31 stMarch 2013. Find out his business income.

By Gross profit

By Interest on B.deposit

By Discount

By Sundry receipts

By Bad debt recovered

By Refund of sales tax

By Dividend

To Office Expenses

To General expenses

To Interest on loan


To Audit fee

To Rent

To Income tax

To Charity

To Legal expenses

To Compensation to worker

To Wealth tax

To Sales tax

To Net Profit

40,000

10,000

5,000

15,000

8,000

20,000

6,000

4,000

4,000

12,000

10,000

8,000

4,13,000

5,55,000

4,60,000

40,000

5,000

15,000

20,000

5,000

10,000

5,55,000

Dr. Cr.


Other information:

1. General expenses include the purchase of office equipment costing A8,000.2. Legal expenses are in relation to income –tax proceedings.3. Rent includes A 10,000 paid as rent of the house in which the assessee lives.4. Depreciation on all assets amount to A 14,000.5. Sales tax paid was in relation to the year 2011-12

[Ans: A 4.02,000]

Problem 6 6

From the below given information compute business income ofMr.Kishore for the A.Y. 2012-13.

By Gross profit

By Dividends

By Interest on debtors

By Commission


To Salaries

To Household expenses

To Charity

To Wealth tax

To Donations

To Income tax

To Bad debts

To Provision for bad debt

To Discount


To Depreciation

To Fire insurance


To Travelling

To General expenses

To Net Profit

10,000

5,000

10,000

10,000

15,000

7,000

3,000

2,000

3,000

15,000

12,000

1,000

4,000

6,000

14,000

1,00,000

2,17,000

1,72,000

10,000

10,000

15,000

10,000

2,17,000

Dr. Cr.


Further information:

1. Allowable depreciation A16,000.

2. General expenses include A 4,000 spent on rectifying the defective title of a business asset.

3. Travelling expenses include A 5000 spent on pleasure trip of the proprietor.

4. Donations are paid to an approved institution.

5. Bad debts recovered were disallowed earlier.

[Ans: A1,53,000]

Short Answer Type Questions1. Define business.

2. Mention any four disallowed expenses

3. Mention any four disallowed incomes.

4. Write any expenses allowed under the heads of Income from business.

Income From Profession

2UNIT


• Understand about professional incomes

• Understand about profession expenses

• Learn about non professional income and expenses

• Learn about net professional income

IntroductionA profession is an occupation requiring either purely an intellectual skill

or manual skill controlled by the intellectual skill of the operator e.g. medicine,law, engineering, auditing, painting, etc. All professions are business but allbusinesses are not profession. Only those businesses or professions where theprofits are dependent mainly upon the personal qualifications and in which nocapital expenditure is required or only capital expenditure of a comparativelysmall amount is required. Profession includes vocation also u/s 2 (36).

Computation of professional income

As has been discussed earlier, profession means all such human activitieswhich require human skill and technical expertise. A doctor or a lawyer or anarhitect or a chartered accountant are the persons who, if not working with anyemployer, practice independently to earn their living. These include many peoplelike beauticians, musicians, magicians, artists, etc.

Learning Objectives


They being non-tradeing assesses, normally prepare their accounts undercash system (Receipts and Payments account) or under mercantile system(income and expenditure account). When they follow cash system, all receiptsactually received and all payments actually made are considered with no respectto the year to which they belong. But when they are following mercantile systemof accounting, only those incomes and expenses are to be taken into considerationwhich belongs to the current /financial year.

The following models may help us to understand the computation ofprofessional income of professional like, a chartered accountant, a medicalpractitioner or an advocate.

(A) Professional Income of a Chartered Accountant.

Professional Receipts / Incomes

Audit fee

Financial consultancy

Examiner’s fee

Gifts from clients

Fees for Accountancy works

Any other receipts of professional nature

Less: Professional payments/expenses

Office expenses

Printing and stationery

Books and journals

Depreciation on office equipment

Salaries to staff

Travelling & Conveyance

Membership subscription

Postage and telegrams

Stipend to trainees

Any other expenditure

Professional Income

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx


(B) Medical Practitioner

Professional receipts/incomes

Consultancy fees

Visiting fees

Operation fees

Sale of medicines

Examiner’s fees

Gifts from patients

Other professional receipts

Less: Professional Payments/Expenses.

Staff salaries

Dispensary expenses

Travelling

Depreciation on equipments

Books and journals

Cost of medicines


Expenditure to increase professional knowledge

Other expenditures relating to the profession

Professional Income.

(C) An advocate/Legal Practitioner/Lawyer

Professional receipts/incomes

Practicing /Legal fees

Consultancy fees

Special commission fees

Examiner’s fees

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx


Gifts from clients

Less: Professional payments/expenses

Office expenses

Staff salaries

Depreciation on office equipment

Books and journals

Court paper and stamps

Travelling expenses


Postage

Telephone

Expenditure to increaseprofessional knowledge

Professional Income

Illustration: 1

Dr. Rama Swamy a medical practitioner gives you the receipts andpayment account for the year ending 31st March 2013.

Receipts and payments accountfor the year ending 31-3-2013

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

By Dispensary expenses

By Staff salaries

By Books and journals

By Donations

By Income tax

By Surgical equipment

To Opening balance

To Consultation fees

To Interest

To Dividends

To Rent

To Gifts from patients

40,000

80,000

20,000

10,000

40,000

20,000

60,000

40,000

10,000

10,000

12,000

18,000

Receipts Rs.(A) Payments Rs. (A)


Other Information

1. Allowable depreciation (including on surgical equipment) A 18,000.

2. Gifts include A 12,000 received from his father.

3. Travelling expenses include A 8,000 incurred on his pilgrimage trip to Tirupathi.

4. Salaries paid included an amount of A 10,000 paid to his domestic servant.

5. Closing stock of medicines A 18,000.

Compute professional income of Mr. Rama swamy

for the A.Y 2013-14

By Medicines purchased

By Shares purchased

By Travelling

By Municipal taxes of let out house

By Subscription of medical council

By Telephone charges

By Balance c/d

To Examiner’s fees

To Operation fees

To Royalty on medicalbooks

To Visiting fees

To Lecture fees

To Sale of medicines

40,000

30.000

40,000

40,000

20,000

8,000

3,88,000

28,000

32,000

20,000

4,000

2,000

4,000

1,48,000

3,88,000

Professional receipts

Consultation fees

Gifts (A 20,000 - A 12,000)

Examiner’s fees

Operation fees

Visiting fees

Sale of medicine

80,000

8,000

40,000

30,000

40,000

8,000 2,06,000

Rs. (A) Rs. (A)


Illustration : 2.

Below given is the Income and Expenditure A/c of Mr. Anuroop, anadvocate by profession, for the year ended 31-3-13

Income and Expenditure Account

1,46,000

60,000

Less : Professional Payments

Dispensary expenses

Staff salaries (A 40,000-A10,000)

Books and journals

Travelling ( A20,000 - A8,000)

Medicines purchased (28000-18000)

Telephone charges

Subscription

Depreciation

Professional Income

60,000

30,000

10,000

12,000

10,000

4,000

2,000

18,000

Rs. (A) Rs. (A)

By Legal fees

By Rent received

By Dividends

By Bank interests

By Special commisisonfees

By Gifts from clients

By Examiners fees

By Insurance claim

To Office Expenses

To Staff salaries

To Rent

To Printing & Stationery

To Courtfee & Stamps

To Municipal taxes of theproperty let

To Shares purchased

To Income tax paid

To Life Insurance Premiumpaid (On own life)

To Books and Journals

60,000

40,000

30,000

10,000

12,000

4,000

30,000

6,000

8,000

12,000

1,20,000

80,000

20,000

40,000

40,000

24,000

46,000

40,000

Expenditure Rs.(A) Income Rs. (A)


Other Information :

1. Closing Stock of court stamps A 1,000

2. Rent paid includes A 10,000 in relation to his residence.

3. Stock of stationery A 2000.

Compute professional income of Mr. Anuroop for A.Y. 2013-14.

Solution : Computation of Professional Income of Mr. Anuroopfor the A.Y 2013-14

To Travelling expenses

To Telephone Charges

To Surplus

10,000

8,000

1,80,000

4,10,000 4,10,000

Professional Incomes

Legal fees

Special commission fees

Gifts from clients

Examiner’s fees

Less : Professional Expenses

Office expenses

Salaries

Rent (30,000 - 10,000)

Printing & Stationery (10,000-2,000)

Court fees & Stamps (12,000-1,000)

Books and Journals

Travelling

Telephone charges

Professional Income

1,20,000

40,000

24,000

46,000

60,000

40,000

20,000

8,000

11,000

12,000

10,000

8,000

2,30,000

1,69,000

61,000

Rs. (A) Rs. (A)


Illustration 3From the following information computer professional income of

Mr. Pandit, a practicing chartered Accountant.

Receipt and Payments Accountfor the year ending 31-03-2013

Dr. Cr.

Other Information

1. Gifts include A18,000 received from his relatives on the occasion of his birthday celebration.

2. Closing stock of stationery A 2,000

3. Travelling expenses include A 4,000 in relation to his pleasure trip to Ooty.

By Office expenses

By Staff salaries

By Computer purchased

By Printing & Stationery

By Travelling

By Books & Journals

By Debentures purchased

By Income tax paid

By Life insurance premium paid

By Balance c/d

To Balance b/d

To Audit fee

To Fees for accounting works

To Race winnings

To Examiner fees

To Lecture fees

To Financial consultency

To Dividends

To Bank interest

To Gifts from clients

48,000

86,000

44,000

30,000

20,000

10,000

40,000

20,000

10,000

28,000

3,36,000

28,000

22,000

20,000

8,000

12,000

6,000

14,000

16,000

4,000

2,06,000

3,36,000

Receipt Rs.(A) Payments Rs. (A)


SolutionComputation of Professional Income of Mr. ‘X’

for the A.Y. 2013-14

Exercise

Mr. ‘A’ is a Medical practitioner. The following is the receipts andpayment account for the year ending 31-3-2013. Compute his professionalincome.

Receipts and Payments AccountDr. Cr.

Professional Receipts

Audit fees

Accountancy works

Examiner’s fee

Financial Consultancy

Gifts ( A 28,000 - A 18,000)

Less : Professional Payments

Office expenses

Staff Salaries

Depreciation on computer @60%

Printing & stationery (8,000-2,000)

Travelling (12,000 - 4,000)

Books and Journals

Professional Income

86,000

44,000

20,000

40,000

10,000

28,000

22,000

12,000

6,000

8,000

6,000

2,00,000

82,000

1,18,000

Rs. (A) Rs. (A)

By Dispensary expenses

By Staff salaries

By Cost of medicines

By Surgical equipments

To Opening balance

To Consultancy fees

To Visiting fees

To Interest on bank deposits

82,000

88,000

42,000

28,000

42,000

40,000

20,000

30,000


Other information

1. Gifts include A 12,000 received from his father in-law.

2. Stock of medicines on 31-3-2013 A 6,000.

3. 25% of motor car use is for domestic purpose.

4. Depn. On Surgical equipment @ 15%[Ans: A 63,000]

Problem 2. Murali, a practicing chartered accountant submits you thefollowing income and expenditure account for the year ended 31st march 2013.Compute his professional income.

Dr. Income and Expenditure Account Cr.

By Shares purchased

By Printing & Stationery

By Telephone expenses

By Life Insurnace

By Income Tax

By Motor car expenses

By Car driver salary

By Bal c/d

To Dividends

To Examiner fees

To Gifts from patients

To Race winnings

20,000

40,000

30,000

12,000

3,42,000

60,000

6,000

2,000

4,000

6,000

12,000

10,000

1,10,000

3,42,000

By Audit fees

By Accountancy works

By Rent from property

By Dividends

By Interest on bankdeposit

To Office rent

To Office expenses

To Staff salaries

To Books and journals

To Insurance (let out house)

To General expenses

40,000

20,000

30,000

6,000

40,000

10,000

90,000

40,000

20,000

10,000

22,000



Additional information

1. Gifts worth A 6,000 received from relatives.

2. Closing stocks stationery A 2,000

3. Salaries include A 10,000 paid to domestic servant.

[Ans: A 67,000]Problem 3

Shri Ajay is a leading layer in Hyderabad. He has prepared the followingIncome and Expenditure Account for the year ending 31st March, 2013. Computehis professional income.

Dr. Cr.

By Financial consultency

By Examiners fees

By lottery winnings

By Gifts from clients

To Travelling expenses

To Municpal taxes

To House hold expenses

To Donations

To Stationery, printing

To Depreciation on office equipment

To Surplus

8,000

4,000

10,000

5,000

15,000

8,000

69,000

2,65,000

28,000

30,000

15,000

10,000

2,65,000

By Practicing fees

By Special commission fee

By Rent on house proprety

By Bank Interest

By Dividends

By Examiner’s Fees

To Office rent

To Office salaries

To Telephone expenses

To household expenses

To Charity

To Income tax

40,000

30,000

10,000

15,000

10,000

6,000

3,40,000

60,000

40,000

10,000

20,000

30,000



Other information:

1. 50 per cent of motor car use is towards domestic purpose.

2. Charity is given to Ramakrishna mutt, Hyderabad.

3. Half of the premises where profession is carried on is used for own residence.

4. Gifts include A 6,000 from friend and well wishers.

[Ans: A 3,36,000]

Problem 4

‘X’ is a leading tax consultant, who maintain his books of account oneach basis furnishes the following particulars for the year ending 31st march,2013.

Receipts and Payments Accounts for the year ended 31-03-2013

By Gifts from clientsTo Life insurance premium

To Gift to daughter

To Contribution to PPF

To Books and journals

To Motor car expenses

To Depreciation on car

To Court fee and stamps

To Rent of the chamber

To Surplus

4,000

8,000

12,000

8,000

24,000

12,000

10,000

4,000

3,19,000

5,12,000

12,000

5,12,000

Purchase of computer

Car expenses

Office expenses

Salary to staff

2010-11

Balance b/d

Fees from clients

2010-11

2011-12

Gifts from clients

16,000

40,000

1,60,000

20,000

30,000

20,000

10,000

12,000

Receipts Rs.(A) Payments Rs. (A)


Notes:

1. Depreciation on computers 60 %

2. Depreciation on motor car A 10,000. Car is used partly for official and partly for private purposes. The A.O. felt that 40 % of car’s use in attributable to private purpose. Compute professional income for the Assessment Year 2013-14.

Problem 5

Mr.’X’ a practicing Chartered Accountant submits you the followinginformation. Compute Professional Income.

Receipts and Payment A/c for the year 31-03-2013

2011-12

Repairs

Income-Tax

Life insurance

Balance c/d

Examiner’s Fees 10,000

2,46,000

28,000

5,000

8,000

12,000

1,21,000

2,46,000

By Staff salaries

By Office expenses

By Stationery

By Books and Journals

By Shares purchased

By Govt. Securities

By Travelling

By Stipend to trainees

By General expenses

By Income tax

To Opening balance

To Audie fees

To Dividends

To Interest on securities

To Financial Consultance

To Fees for accounting works

To Gifts from clients

To Rent from house property

To Examiners fee

To Institute Fees

1,20,000

2,40,000

60,000

40,000

80,000

20,000

40,000

100,000

30,000

20,000

1,20,000

1,80,000

20,000

15,000

30,000

20,000

10,000

15,000

20,000

12,000


Additional information:

1. Gifts include A 10,000 received from parents.

2. Closing stock of stationery A 5,000

3. Salaries include A 20,000 paid to domestic servants.

4. General expenses include A 8,000 as charity paid to poor students.

[Ans: A 68,000]

Short Answe rType Questions

1. Define profession.

2. Mention any four professional incomes to the dcotor.

3. Mention any four professional incomes to the chartered accountant.

4. Mention any four professional income to the lawyer.

5. Mention any four professional expenses.

6. Write briefly differences between business and profession.

By Life insurance

By Membership subscription

By Closing Balance

7,50,000

18,000

5,000

2,85,000

7,50,000

Income from Capital Gains

3UNIT


• Understand about Capital gain

• Understand about long term capital gain

• Learn about cost of acquisition

• Learn about taxable capital gain

‘Capital Gains’ is the fourth head of income. Under this head of incomewe study the computation and taxability of gain arising from the sale or transferof capital assets. For the first time income was made chargeable to tax in1947-48. This charge was abolished from 1-4-1948. But it was revived fromthe assessment year 1957-58 and has continued since then. The taxability ofincome under this head depends upon the following factors:

1. Capital asset

2. Nature of capital asset

3. Sale or transfer of capital asset.

Basis of charge [Section 45]

Any profit or gain arising on the transfer of a capital asset [ Sec.2 (14)]is chargeable to tax under the head ‘Capital Gains’ in the previous year in whichthe transfer tool place (Sec. 45), if it is not eligible for exemption under Sections54,54B,54D,54EC,54F,54G,54GA and 54H. Incidence of tax on capital gains,

Learning Objectives


However, depends upon whether the capital gain is short-term capitalgain or long-term capital gains [Sec. 2(42 A)]. For taxation purpose the capitalgains are classified into two (i) Long Term Capital Gain(L.T.C.G) and (ii) ShortTerm Capital Gain(S.T.C.G.)Long term capital gain is taxed at a flat rate of 20%plus 2% secondary and higher education Cess) and short term capital gain is inincluded in the total income along with income under the head viz., Income fromSalary Income from House Property etc., and it is taxed on slab basis.

Thus, the essential elements of capital gains are:

1. There should be a capital asset.

2. There should be transfer or sale of capital asset.

3. Transfer or sale should have taken place during the previous year.

4. There must be profit or gain on such transfer, which will be known as capital gain.

5. Such capital gains should not be exempt u/s 54A, 54B, 54D, 54EC, 54F, 54G and 54GA.

Capital Asset: It is defined to include, property of any kind whetherfixed or circulating, tangible or intangible, moveable or immovable. Howeverthe following are not to be considered as capital asset.

A. Personal effects of the assessee i.e., articles which are used forpersonal use by the assessee or buy his family members e.g. furniture T.V.,refrigerator, musical instruments, motor cars, scooters etc.

The term personal effect does not include archaeological collection,drawings, painting. Sculptures or any work of art, In other works these itemsare considered as capital asset and profit on transfer of them becomes taxablecapital gain.

Note:

(i) An exception to the above rule is jewellery. The term jewelleryincludes ornaments made of Gold. Silver, Platinum or any other precious metal.Gold and Silver Coins used for religious worship of deities or ornaments arealso not considered as the items of personal use.

(ii) The house property in which assessee lives in considered as ‘Capitalasset”

B. Agricultural land situated in India.


(iii) The bonds are issued on or after 1-6-2005.

Capital Gain: Profit on transfer of capital asset is known as capitalgain if loss is there then it is treated as capital loss. If there is no profit or lossthen there is no capital gain. The difference between the consideration receivedand the cost of acquisition is capital gain or loss i.e., If the sale price is more thanthe cost price then the difference is known as capital gain or if the sale price isless the cost price then the difference is known as capital loss.

Hint: Capital Gain = Selling price of the asset (-) cost of the asset.

Capital Loss = Cost of the asset (-) selling price of the asset.

Note :- If transfer expenses e.g. Selling expenses, brokerage paid etc,are there the same is to be deducted from the sales money received.

Cost of Acquisition: Cost of acquisition means total of all the expensesincurred by the assessee for acquiring the asset i.e., purchase price and expensesincurred after purchase till its first use e.g. installation charges etc.

If the cost of the asset cannot be ascertained for some valid reasons theFair Market Value is taken as cost of acquisition.

If the assessee has constructed or manufactured the asset then allexpenses incurred by him on its construction or manufacture will be taken ascost of acquisition

If the asset is purchased before 1st April 1981 then the cost of acquisitionis higher of the following two amounts.

(a) . Actual Cost (b) Fair Market Value on 1-4-1981.

The benefit is allowed for (i) depreciable assets i.e. assets used in thebusiness or profession like building and machinery and eligible for claiming thedepreciation.

(ii) Intangible assets: Good will, tenancy rights, route permit licences,loom hours.

Indexed cost of acquisition: Indexed cost of a acquisition meansshowing inflated or increased cost price, instead of actual price. The increase isjustified on account of inflation. The net result of indexed cost of acquisition isreduction in tax liability.

Cost of improvement: Cost of improvement means expenditure ofcapital nature in making any addition or addition or alteration to the capital asset


e.g. Adding one more room to the existing structure in a building, bettermentcharges paid to the Municipal Corporation etc.

Expenses incurred by the assessee or previous owner before 1-4-81 isto be ignored completely. If he assessee has not opted for F.M.V. on 1-4-81 asthe cost of acquisition then also the expenses are to be ignored.

Summary for calculating indexed cost of acquisition:

1. For all long tern assets except the debentures and Bonds indexedcost of acquisition and indexed cost of improvement are to be calculated.

2. For Debentures and Bonds, even if they are long term capital assetsindexed cost of acquisition shall not to be calculated. It means to determine theincome from capital gain cost of acquisition is not to be considered.

3. For short term capital assets indexed cost of acquisition is not to becalculated.

4. If assets are used by the assessee in the business, which are subjecttp depreciation even if the period of holding is more than 3 years then the gainon transfer of such assets is always treated as short term capital gain.

Components for calculating Capital Gain The following are thecomponents to compute either long term of short term capital gain.

(1) Consideration (2) Transfer Expenses (3) cost of acquisition(4) Cost of improvement.

Capital gain on Financial Assets:

According to Income Tax Act shares, debentures, GovernmentSecurities, bonds and units of mutual funds are known as financial assets. Thesefinancial assets may be listed or unlisted. If the financial assets are held by theassessee for a minimum period of one year on the date of transfer then they areconsidered as long term capital asset i.e. if they are held for less than one yearperiod then they are considered as short term capital assets.

Note: If bonds and debentures are long term capital assets even thenindexation is not made i.e. for ascertaining long term capital gain indexed cost ofacquisition is not to be calculated.

Long term capital gainfor Securities /shares etc. Sec 112

According to Sec 112 an assessee is having an option to pay tax @20% (with indexation) or @ 10% without indexation.


This option is available. If listed securities are traded in a recognizedstock exchange and presently the securities is not subject to payment of securitiestransaction tax.

For availing the option the assessee has to satisfy for the followingconditions.

(1) The securities are long term capital asset i.e. holding period is a minimum of one year or more.

(2) Securities are listed in a recognized stock exchange in India.

Cost of acquisition in the case of Bonus Shares.

Bonus Shares: If the assessee receives bonus shares, then the cost ofacquisition is to be taken as Nil. The period of holding for such shares as shortterm/long term capital asset is to be determined from the date of allotment ofbonus shares to the date of transfer. If the Bonus shares are transferred withina period of one year, then the gain on such shares will be treated as short termcapital gain i.e., if the shares are transferred after one year from the date ofallotment, then the gain on transfer is treated as long term capital gain. The costof acquisition for Original shares and Bonus shares is explained as under.

1. The higher of the following two amounts is the cost of acquisition.

(a) Actual cost of the share

(b) Fair Market Value on 1-4-1981.

2. Actual amount paid for acquiring the shares is the cost of acquisition.

3. The Fair Market Value of the Shares on 1-4-1981 is the cost of acquisition.

4.The cost of acquisition of Bonus Shares in Nil.

1. If the Original shares are acquired before 1-4-1981.

2. If the original shares are acquired after1-4-1981.

3. If the Bonus Shares are allotted before 1-4-1981.

4. If the Bonus Shares are allotted after 1-4-1981.


Hint: (i) If it is a long –term capital asset, indexed cost of acquisition isto be calculated for calculating Capital Gain. (ii) If it is a short-term capitalasset, indexed cost of acquisition is not to be calculated.

Transfer of Depreciable Assets-Capital Gain [Sec 50]

Depreciable assets are Buildings, Machinery, Plant and furniture ownedby the assessee and used in his business. Or profession The profit on transfer ofthese asset will be always treated as short term capital gain i..e. The period ofasset the assessee is holding shall not be considered.

If the assessee is eligible to claim depreciation on an asset then profit ontransfer of such asset is always treated as short term capital gain. In otherwords on any business asset which depreciation cannot be claimed like land,investment etc then profit on transfer of such asset can be long term (if theperiod of holding is more than 3 years) or short term (if the period of holding isless than 3 years.)

Exemption from Long term Capital Gain under Sec. 54, 54B and 54Detc:

In order to promote investment in priority and specified areas, and toprovide financial security of the individual Income Tax Act Provides a relief tothe assessee on transferring certain long term capital assets. The net resultant isa substantial reduction in the tax liability. Generally the following provisions areto be observed by the assessee.

(1) Purchase or construction or investment in the permitted line ofinvestment with in the period of stipulation.

(2) To avail the benefit of tax, the assessee has to retain the ownershipof new asset for minimum period of 3 years i.e. not to transfer the new asset for3 years.

(3) If the amount of Capital Gain is not utilized for purchase or forconstruction or investment in specified asset before the die date of filling the‘return of income’, the amount can be deposited in any branch of public sectorbanks in accordance with the Capital gains Accounts Scheme 1988’. Theamount deposited will be given as exemption. If part of the amount is spentfor construction on purchase or for new specified investment and partly depositedin the bank within the stipulated period, then the aggregate of amount spend forconstriction purchase etc, and amount deposited will be allowed as exemption.Latter on he can draw the amount from the bank and can go head for purchasing/constructing the asset as the case may be.


(4) If the new asset is transferred before the stipulated period then theexemption availed earlier gets cancelled. The same amount shall be reducedfrom the cost of acquisition of the new asset to compute capital gain of thenewly purchased asset.

Date of transfer [Section 2 (47)]

A transfer does not take place merely because an agreement has beenentered into or consideration is paid there under in whole or in part. The word‘effected in the previous year in section 45 denotes that the title in the propertyhas passed from the transferer to transferee. No transfer can be said to beeffected till all the formalities for transferring the title to the transferee arecompleted.

Computation of Capital Gains [Section 48]

Computation of capital gain depends upon the nature of capital assettransferred viz., short -term capital asset or long –term capital gain while thegain arising from the transfer of long-term capital asset is known as long-termcapital gain.

Short term capital gain or loss shall be computed by deducting thefollowing amounts from the full value of sale consideration.

(i) Expenses incurred in connection with the transfer or sale of asset (i.e.,selling expenses)

(ii) Cost of acquisition of asset.

(iii) Cost of improvement of the asset.

Long term capital gain or loss shall be computed by deducting out of fullvalue of sale consideration the following amounts:

(i) Expenses included in connection with the transfer or sale of asset (selling expenses)

(ii) Indexed cost of acquisition of the asset.

(iii) Indexed cost of improvement of the asset.

Method of computation of Income From Capital Gain is as follows:


Computation of Income from Capital

Gains of Mr———— for the A.Y. 2013-14.

Full value of sale consideration

Less: Transfer expenses

Net sale consideration

Less: (i) Cost of acquisition

(ii) Cost of improvement

Income from capital gain

Less: Exemption u/s 54B,54CD,54G, 54GA,

Taxable STCG

Illustration 1.

Mr. Ranga Rao is holding the agricultural lands in Delhi since 1970.The FMV on 1.4.81. is at A 50,000; on 3rd Jan 2013, he sold the lands forA 6,00,000 and paid brokerage for selling the lands A 10,000. On Feb., 2013.He entered into a agreement to buy agricultural lands in a village and paidA 50,000 as advance, and on the same day he deposited A10,000 in anationalized bank under capital gain scheme. Compute capital gain for the currentassessment year (CII for the year 2012-13=852)

Solution

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

Computation of Mr Ranga Rao Income from Capital gainfor the A.Y. 2013-14.

Sale Consideration

Less : Selling ExpensesNet Consideration

Less : Indexed cost of acquisition =

Capital Gain

Less : Exempted u/s 54B advance + deposit

Income from Capital Gain

A 50,000 x 852

100

6,00,000

10,000

5,90,000

4,26,000

1,64,000

1,00,000

64,000


Illustration. 2

Mr X owns a building using for commercial purpose. He purchasedthe building for A 2,00,000 in 1982-83. During the previous year relevant tothe current assessment year through an order the Government has acquired thisbuilding and paid A 20,00,000 as compensation, Immediately he acquired apiece of land for A 3,00,000 and spent A 2,00,000 on construction and depositedA 1,00,000 in the public sector bank under capital gain scheme. Computecapital gain, if cost inflation index for 1982-83 is 109 and for 2011-12 it is 785

Solution

Computation of Mr. X’s Income from Capital Gain

for the Assessment Year 2013-14

Illustration 3.

X purchased a building for A 3,00,000 on August 31, 1988. On 1stOctober, 1992, he spent A 80,000 to add 3 more rooms. During the previousyear relevant to the current assessment year, building is sold out for A 25,00,000.He invested A 2,00,000 in the specified bonds within 3 months from the date oftransfer. (CII for 1988-89 is 161; for 1992-93 is 223;for 2011-12 is 785).Compute the income from capital gain.

Compensation Received



Capital Gain

Less : Exempted u/s 54B

A 3,00,000 + A 2,00,000 + A 1,00,000 (Restricted to LTCG)

Taxable long term - Capital Gain

A 20,00,000 x 852

100

20,00,000

--

20,00,000

17,04,000

2,96,000

2,96,000

NIL


Solution

Computation of Mr X’s Income from Capital Gain for the AssessmentYear 2013-14

Illustration 4

Mr.Murali Manohar purchases 1000 equity shares of Tata Steels Ltd.at A 1000 per share on 1st April 1975. He was allotted 200 bonus shares on31st March 1980. During the previous year relevant to the current assessmentyear. He sold 500 equity shares and 200 bonus shares at A 1500 per share.FMV on 1-4-81 was A 160 per share. Compute capital gains.

Computation of Mr. Murali Manohar’s Income from Capital Gainsfor the Assessment Year 2013-14

Sales consideration



Less : Indexed cost of improvement =

Capital Gain

Less : Exempted u/s 54B (A 2,00,000 or LTCG w.e.l)

Taxable long term - Capital Gain

25,00,000

50,000

24,50,000

15,87,578

3,05,650

5,56,772

2,00,000

3,56,772

A 3,00,000 x 852

161

A 80,000 x 852

223

Original Shares

Sales consideration (500 x A 1500)

Less : Indexed cost of acquisition 500 x 160 x (852/100)

Bonus Shares

Sale consideration (200 x A 1500)

Less : Indexed cost of acquisition = 200 x 160 (852/100)

Long-term Capital Gain

7,50,000

6,81,600

3,00,000

2,72,640

6,84,00

27,360

95,760


Notes :

1. Bonus shares and rights shares are long term capital assets (period ofholding is more than 12 months)

2. Cost of acquisition of Bonus shares and rights shares: Both shareswere held by the assessee, before 1-4-81 hence cost of acquisition would beactual cost of FMV whichever is higher.

Cost of Indexing

Financial Year C.I.I Financial Year C.I.I

1981-82 100 1997-98 331

1982-83 109 1998-99 351

1983-84 116 1999-00 389

1984-85 125 2000-01 406

1985-86 133 2001-02 426

1986-87 140 2002-03 447

1987-88 150 2003-04 463

1988-89 161 2004-05 480

1989-90 172 2005-06 497

1990-91 182 2006-07 519

1991-92 199 2007-08 551

1992-93 223 2008-09 582

1993-94 244 2009-10 632

1994-95 259 2010-11 711

1995-96 281 2011-12 785

1996-97 305 2012-13 852


Option of FMV as on 1-4-1981 :

(a) If the assets were acquired before 1-4-1981

Cost of acquisition = original cost or FMV as on 1-4-81, whichever is higher.

(b) If the assets were acquired after 1-4-1981

Cost of acquisition = the price paid for the asset (+) theimprovements made.

Questions

1. What is meant by capital gain ?

2. What is meant by shortterm capital gain ?

3. What is meant by long term capital gain ?

4. What is meant by indexing ?

5. What is cost of acquasition ?

6. Distinguish between short term capital gain and long term capital gain.

Exercise

1. Sonaakshi sold his residential house on 14th Jan 2013 for A 10,94,850and paid A10,000 on brokerage hehad purchased the house in November,1985 for A 1,00,000 and spent A 14,000 on its registration and 38,500 on itsimprovement. Out of the sale proceeds, he purchased another house for hisown residence for A 1,00,000 on 20th March,2013 and National SavingsCertificates VIIIth issue for A 50,000 on 31st March 2012 (1985-86 CII =133; 2012-13=852). Compute taxable capital gain for the relevant AssessmentYear.

(Ans : Taxable capital gain A 7933)

2. Mr. Abhishek sells agricultural land situated within municipal limitsfor A 30,00,000 on 1 st May 2012, which was purchased by him on 1st Oct1987 for A 3,00,000. On 15th Aug 2012, he deposits A 10,00,000 in a bankunder capital gains Accounts Scheme 1988. He purchases another agriculturalland on 31st March, 2012 for A 7,00,000 by withdrawing from the depositaccount of capital gain (CII for 1987-88=150, 2011-12=852)

(Ans: LTCG = A12,96,000, taxable LTCG A 29,600, STCG A 3,00,000).


3. On 31st Dec 2012 Bhargav sells gold for A 11,85,000 (Cost ofacquisition on 1st March 1993 for A 1,05,000). Expenses sale are A 2000. On1 st March 2013 he acquires bonds of NABARD (Investment being A 7,00,000).These bonds are redeemable after 60 months. Find out the amount of exemptionunder section 54EC (CII for 1992-93 is 223, 2011-12=852.)

(Ans: Exemption u/s 54EC A 7,00,000 taxable LTCG Rs. 81,834)

4. Mr. Ramesh purchased land and building for the purpose of carryinghis profession as a doctor for A 1.20,000 on 30-6-1992. These lands werecompulsorily acquired by the Govt, of A.P. on 31-12-12 in consequence ofwidening roads, and paid a compensation of A 8,60,000; from the transferconsideration A 2,60,000 were invested in similar asset before 31-3-112.Compute taxable capital gain for the A.Y. 2012-13 (CII for the year 1992-93=223,2011-12 852 )

(Ans: Rs. 1,41,525)

5. Mr ‘X’ Purchased shares of A Ltd on 30-6-2006 for A 6,10,000and that of ‘B’ on 31-12-2011 for A1,60,000 . Shares of A Ltd and B Ltdwere sold on 30-6-2012 for A 12,50,000 and A 1,20,000 respectively. Transferexpenses were at 2%; Compute taxable capital gain for the A.Y. 2012-13 (CIIfor the year, 2011-12=852, CII 2005-06 =529)

(Ans. LTCG on shares of A Ltd A 2,42,543 short term capital losson shares of B Ltd A 42,400).

6. From the information given below compute taxable capital gains.

Residentialhouse property

UrbanAgricultural land

Shares of X Ltd.

House holdFurniture

1-4-1979

30-09-96

31-12-08

30-09-92

1,25,000 FMVA 1,60,000

2,40,000

1,20,000

2,40,000

30-06-12

01-02-13

01-07-12

01-06-12

15,40,000

18,20,000

4,80,000

60,000

40,000

20,000

5%

--

Asset Date of Cost of Date of Transfer Transfer acquisition acquisition transfer Consideration expenses


Note : From the transfer consideration received on residential houseproperty of A 10,00,000 reinvested on another house property. SimilarlyA 4,00,000. re-invested on the purchase of agricultural lands in urban areasfrom the consideration of unban agricultural lands.

CII for the years 1981-82=100; 1996-97= 305; 2011-12=852.

(Ans : Nil; LTCG: A 7,92,574, STCG A 3.36,000; House holdfurniture not taxable)

7. From the information given below compute taxable capital gains.

Note: Current year CII =852.

(Ans: Nil + Short term capital loss A 1,50,000 +

LTCG A 11,200 + A3,00,250 = A1,61,450).

Date of acquistion

Cost of acquisition

Date of transfer

Transfer consideration

Transfer expenses

Reinvestment same inthe asset

CII

1-6-1988

2,40,000

30-06-2012

12,60,000

60,000

8,00,000

161

30-06-1992

10,00,000

(W.D.V,6,00,000)

1-2-2013

4,50,000

Nil

Nil

-

1-4-79

80,000

(FMV1,20,000)

30-9-2012

10,43,600

10,000

2,40,000

100

31-12-2005

1,20,000

31-12-2012

5,18,250

5,000

2,00,000

480

Particular Compulsory Plant Gold and Shares of acquisition of Machinery Jewellery X Ltd land & building

Income from Other Sources

4UNIT


• Understand about securities, gross interest & Net interest

• Understand about taxable and tax free securities

• Learn about gross income

• Learn about income from other sources

Introduction

‘Income from other sources’ is the fifth and last head of income underthe Income Tax Act,1961. An income which does not specifically fall under theproceeding first four heads of income (viz. Income from salaries, Income fromhouse property, profits and gains of business or profession and capital gains) isto be included under this head. That is called “Income from other sources”

The following are the some of the items of incomes which are includedunder the head of Income from other sources.

1. Royalties received

2. Director’s sitting fee for attending board meetings.

3. Salary on pension received from a foreign Government.

4. Income from subletting of the premises taken on lease.

Learning Objectives


5. Salary received by MPs, MLAs.

6. Examination remuneration received by teachers/lecturers/professors.

7. Ground rent received.

8. Interest on loan, saving banks or fixed deposits.

9. Agricultural income received from outside India.

10. Gratuitous payments received by a member of the family from a company in which the family had substantial interest.

11. Income from subletting the house property.

12. Director’s commission for underwriting shares of a new company.

13. Rent from a vacant piece of plot (land).

14. Insurance commission.

15. Casual incomes.

16. Annuity payable under a will, contract, trust deed.

17. Interest on securities issued by a foreign government.

18. Family pension received by family members of a deceased employee.

19. In case of retirement, interest of employee’s contribution if provident fund is unrecognized.

20. Income from undisclosed sources.

21. Annuity payable to the lender of a trade mark.

22. Income from markets, fisheries, rights of ferry.

23. Income received after discontinuance of business.

24. Income of a minor clubbed with income of parents (exemption upto A 1,500 for each child).

25. Pension received from the government as freedom fighters.

26. Income from racing establishments.

27. Commission received (eg. Chit funds commission).

28. Income from interest on securities (securities means bonds issued by the government and debentures of a limited company).


29. Dividends received from foreign company.

30. Winning from lotteries, gambling, betting, cross word puzzles in the nature of casual income.

Exceptions

Gifts of money received by an individual or an HUF is not taxable in thefollowing cases.

1. Gift received from any relative.

2. Gift received on the marriage of the individual.

3. Gift received under a will or by inheritance.

4. Gift received in contemplation of death of the donor.

Meaning of ‘Relative’

1. Spouse of the individual.

2. Brother of sister of the individual.

3. Brother or sister of the spouse of the individual.

4. Brother or sister of father/mother of the individual.

5. Any lineal assendent or descendent of the individual.

6. Any lineal assendent or descendent of the spouse of the individual.

7. Spouse of the persons referred to in clause 2 to 6.

Interest on Securities [Sec.56(2) (1d)]

Income by way of interest on securities is taxable under the head “incomefrom other sources”, if the same is not taxable as business income under section28. But then, what is a security?

“A security is a document acknowledging the debt by a specific authorityfrom general public. It may be names as a Debt, Loan, Paper, Debenture,Bonds, or Security or Certificate. It is secured in some manner. A mere debt isnot a security unless and until it is secured”.

Contents of Security

It contains face value of security, date of maturity rate of interest, date,place and period of payment of interest.


Who can Issue a Security?

Securities may be issued by the following authorities:

1. The Central Government

2. State Government

3. Local Authority

4. Company

5. Statutory Corporation

Interest on Securities

According to Section 2 (28 B) Interest on Securities means:

(a) Interest on security of the Central Government or State Government;

(b) Interest on debentures or other securities for money issued by or onbehalf of a local authority or a company or a corporation established by Centralor State or Provincial Act.

When an investor invests his money in the bonds issued by Government/Local Authority/ Corporations or Debentures issued by a Limited Company,the interest received from them is considered as income from interest on securities.

Types of Securities

Securities are issued by Companies, Government both Central and State.Local authorities are also eligible to raise funds by issuing securities, Followingare the types of securities which are currently in operations;

(a) Securities issued by Central Government.

(b) Securities issued by the State Government.

(c) Debentures and bonds issued by local authority.

(d) Debentures and bonds issued by corporations.

(e) Debentures issued by companies.

From the tax point of view securities are classified into three types.

They are:

1. Securities which are exempted from tax

2. Tax- Free Securities


3. Less-tax securities

Securities

Securities Exempt from Tax

According to Section 10 (15) interest on these securities is fully exemptfrom tax and does not form part of total income of an assessee. In other words,it is not taken into account in computing total income. Under section 10 (15)(i)the Central Government by notification specifies these securities, bonds etc.The following are the securities which are exempt from tax:

1. 12 year National Savings Annuity Certificates

2. National Defense Gold Bonds 1980

3. Special Bearer Bonds 1991.

4. Treasury Savings Deposit Certificates

5. Post Office Cash Certificates (5years)

6. National Plan Certificates (10 years)

7. National Plan Savings Certificates (12 years)

8. Post Office National Savings Certificates (12 Years/7 years)

9. Post office Savings Bank (POSB) Account.

10. Public Accounts of Post Office Savings Account Rules

11. Post Office CTD (Interest upto A 5,000)

12. Fixed Deposit

Less-Tax SecuritiesSecurities which areexempted from Tax Tax-free Securities

Government Commerical Government Commerical

Listed in Unlisted inStock Exchange Stock Exchange Listed in Unlisted in

Stock Exchange Stock Exchange


13. Special Deposit Scheme 1981.

14. Non- Resident Rupee Deposit Scheme

15. Interest on 7 percent Capital Investment Bonds

16. Interest received by a Non Resident Indian from Notified Bonds

17. Interest on 9 percent Relief Bonds

18. Interest Payable to any Foreign Bank Performing Central Bank functions outside India

19. Interest on Gold Deposit Bonds issued under Gold Deposit Scheme 1999.

20. Interest on deposit made by retired Government Employee out of money due to him on account of retirement for lock-in-period of 3 years.

21. Interest on Securities held by the Welfare Commission, Bhopal Gas Victims

22. Interest on notified bonds issued by a local authority/public sector enterprises etc.

23. 10 % Secured redeemable NTPC Bonds 1986.

24. 10 % Secured irredeemable Bonds issued by Mahanagar Telephone Nigam Ltd. Etc.

Tax-Free Securities

These securities are those which are issued by a local authority,corporations, government or company in the form of Debentures of Bonds.Actually these are not tax-free. But tax is paid by the issuing authority on behalfof security holder. The person who is holder of such security is liable to pay taxnot only on the interest he is to receive but also the amount of tax which hasbeen deposited by the security issuing authority on his behalf. The amount ofinterest actually received by holder is the net interest i.e., before deduction oftax. To include it in the gross total income of assessee. It can be grossed up byusing the following formula:

Grossing up = Net interest received x100

100 - Rate of Tax


Tax free securities are of two types:

1. Tax-free Government Securities

2. Tax-free Commercial Securities

Tax-free Government SecuritiesThese securities are no longer in existence. Even if these are issued,

then no tax is deducted at source. Hence the question of grossing up does notarise.Tax-free Commercial Securities

As mentioned earlier, these securities are not actually tax-free. Tax ispaid by the issuing authority on behalf of the security holder has to pay tax notonly on the interest he receives but also on the amount of tax paid by the issuingauthority on his behalf. Hence, the amount received by the security holder is tobe treated as per net interest. It should be grossed up for inclusion in the totalincome. The present rate of deduction in case of securities listed in the stockexchanges is 10 % plus education cess at 3%and in case of unlisted in thesecurities, also 20% plus education cess 3%. There is no surcharge. ForGovernment. Corporations and Local authorities tax deduction rate is always10 %, plus Education cess of 3% on tax is included.

Rates of TDS are given in the following table for the A.Y. 2012-13. Individual

1. Dividends

2. Interest on units of UTI

3. Bank interest if amount of interest exceeds A 5,000

4. Interest on securities issued by

(a) Central or State Govt.

(b) Local authority or statutory corporation.

(c) Company

(i) Listed

(ii) Unlisted

5. Winnings from lotteries races, puzzels, card games

Nil

Nil

10 (balances 90)

Nil

10 (balance 90)

10 % (balance 90%)

20 (balance 80)

30 (balance 70)

Nature of Income Rate


Grossing up

Interest received by the assessee is net interest and the same is to beconverted into gross interest. This practice is known as grossing up.

When face value of securities and rate of interest is given for governmentsecurities (tax free). Less tax government securities, less-tax commercialsecurities no grossing up is required.

But incase of tax free commercial securities even if face value and rateof interest is given compulsory grossing up shall be done.

When interest amount (net) is given in the problem, interest on all securities(except tax free government securities) must be grossed up.

Grossing up is required in the case of the following securities.

(i) 8% saving (taxable) bonds, if the amount of interest payable exceeds A 10,000

(ii) Tax free commercial securities

(iii) Less Tax commercial securities.

Grossing up Procedure (Tax free Commercial Securities)

a. If the tax free commercial securities are listed in the stock exchange (same rate)

Gross interest = Net interest x

b. If the tax free commercial securities are unlisted in the stock exchange:

Gross interest= Net interest x

Illustration : 1

Mr. X invested A 1,00,000 in 8% tax-free debentures of a company.What will be his taxable interest for the previous year 2012-13

i. If securities are listed in the stock exchange.

ii. If securities are not listed in the stock exchange.

Solution:

Net interest = Face Value of investment x Interest Rate

100

90

100

90


= 1,00,000 x 8% = A 8,000.

Grossing up

In case of listed tax-free commercial securities:


= 8,000 x = A 8,889.

In case of unlisted Tax- free commercial securities:


= A 8,000 x = A 8,889

Less-Tax Securities

This is the most common form of security. Out of the amount of interestdue to security-holder, tax has to be deducted by the issuing authority beforemaking payment of interest to the security holder. The interest received by theassessee in net interest and the same is to be grossed up and is to be included inthe total income. These securities can be issued both by the government andcommercial Authorities.

There can be two types of problems. They are:

(a) When rate of interest and face value of security is given (both inGovernment and Commercial securities)

Gross interest = Face value of security x

(b) When interest amount received is given received is ‘net’ interestand the same is to be converted into gross interest.

i. For government and listed commercial securities:

Gross Interest = Net Interest x

100

90

100

90

100

90

100

90

Rate

100.

100

90.


ii. For unlisted commercial securities:

Gross Interest = Net Interest x

Notes:

1. If the nature of the security is not mentioned in the problems, then the general assumption is that the security is of less-tax and unlisted nature.

2. Grossing up should be done if the net interest is more than Rs.2500.

3. In the case of tax free Government security, interest need not be grossed up.

Deductions (Sec.57)The following deductions are allowed in computing the income from

other sources.

1. From interest on securities and dividends [Sec.57 (i)]

In respect of interest on securities and dividends any reasonableexpenditure incurred by way of commission on remuneration to broker or toany other person for realization of such incomes is deductable and any intereston loan taken for purchase of such investment is also allowed as deduction.

Broadly the amounts deductible can be classified into (a) collectioncharges (b) Interest on loan taken to purchase the securities. Not only theinterest paid but also interest due is allowed as deduction.

Winning from lotteries, Crossword puzzles, Horse races and Card gamesetc. [Sec 56 (2) (1b)]

Winning from lotteries, crossword puzzles, races including horse races,card games and other games of any sort or from gambling or betting or any formor nature whatsoever is taxable under section56 under the head ‘Income fromother sources’.

Income from lottery winning, crossword puzzle and horse race winningin subject deduction of tax at source. Tax at source is to be deducted whenwinning exceed A 10,000. Hover, in the case of winnings from horse races, taxdeducted at source when the amount of winning exceeds A 5000.

In computing the taxable income from winning by way of lottery,crossword puzzle, races including horse races. Card games and other games.Gambling and betting etc., no deduction is allowed in respect of any expenditure

100

90


incurred in earning such income. However, an assessee is entitled to claimdeduction for any revenue expenditure incurred in owning and maintaining racehorses to be run in horse race on which wagering or betting is lawfully allowed.

Computation of Income from Interest on securities under the head‘income from other sources” for the assessment year 2013-14 is done

as shown below

Interest on tax-free government securities

Face value of security x

Interest on tax-free commercial securities (listed)

Net interest = Face value x


Interest on tax-free commercial securities (unlisted)

Net interest = Face value x


Interest on less-tax Government securities

Interest on less-tax Commercial securities (listed)

Interest on less-tax Commercial securities (unlisted)

8% saving (Taxable bonds if the amount of interestexceeds A 10,000)

Gross Interest

Less : Deduction u/s 57

1. Collection charges xxx

2. Interest paid on loan taken to purchase the securities xxx

Income from interest on securities

Interest Rate

100

Interest Rate

100100

90

Interest Rate

100100

90

Rs. (A)

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxxx

xxx

xxxx

1.

2.

3.

4.

5.

6.

7.


Illustration: 1

Sharma held the following investments:

(a) A 90,000 – 10 % (Tax-free ) debentures of listed company

(b) A 50,000 – 12% (Tax-free) Punjab Government Loan

(c) A Collection charges A 2000.

Compute his income from interest on securities for the year ending 31-3-2011.

Solution

Computation of Mr. Sharma’s Income from Interest on Securitiesfor the Assessment Year 2013-14

(a) 90,000 - 10% (Tax free) Debentures (listed) 10,000

90,000 x 10% =

(b) 50,000 - 12% (Tax free) Punjab Government loan:

50,000 x 12 % = A 60,00 6,000

Gross Interest 16,000


Collection charges 2,000

Income from interest on securities 14,000

Working Notes

1. Tax-free Commercial Securities must be grossed up.

2. Tax-free Government securities should not be grossed up become there is no TDS on a security issued by the Central and State Government securities.

Illustration : 2

Mr. Anil holds the following securities on April 1,2012:

A 1,00,000 – 5% Up Government Loan (Date of payment of interestJanuary 1)

A 90,000 x 10

90


A 40,000 – 6 % Unlisted debentures of ABC ltd. (Date of payment ofinterest June 1)

A 25,000 – 8% Debentures of Z ltd. (Date of payment of interest: June30, December 31)

On December 1,2012 he sells 25,000 -8% debentures of Z ltd.Calculate the taxable income of Mr, Anil for the Assessment Year 2013-14.Business Income is A 64,000 and Collection charges A 1000.

Computation of Mr. Anil’s Income from Other Sources for theAssessment Year 2012-13.

1,00,000 – 5% Up Government Loan 5,000

40,000 – 6% Debentures of ABC Ltd 2,400

25,000 – 8% Debentures of Z Ltd. (A 2000 x ½) 1,000

Gross Interest 8,400

Less: Deductions : Collection charges 1,000

Interest on securities 7,400

Add: Income from Business 64,000

Net Taxable Income 71,400

Illustration 3

Mr. Maheshwar who draws a salary of A 20,000 p.m. received thefollowing gifts on or after 1/10/2012.

(i).Gifts of A 5,00,000 on 16-10-2012 from a friend.

(ii).Gift of a Jewellery fair market value of which value is A 3,00,000 in 17/10/2012 from his would be wife.

(iii).Gift of A 51,000 each received from his 4 friends on the occasion of his marriage on 21-10-2012.

(iv). Gift of A 1,00,000 on 22-11-2012 from his mother’s sister.

(v). Gift of A 60,000 on 25-11-2012 from his father’s brother.

(vi). Gift of A 50,000 from his wife’s friend on 1-12-2012.

(vii). Gift of A 21,000 on 15-12-2012 from his mother’s friend.


(viii). Gift of A 26,000 on 25-12-2012 from brothers father-in-law.

(ix). Gift of A 1,21,000 from his wife’s brother.

(x). Gift of A 26,000 from his employer.

(xi). Scholarship of A 1,20,000 from a charitable institution registered under section 12AA.

(xii). He has purchased an immovable property from Mr. Bhardwaj who is not his relative for a sum of A 24,90,000 whose stamp duty value is A 24,50,000.

Compute his total income for the A.Y. 2012-13.

Computation of Total Income of Mr.Maheshwar.for the A.Y. 2012-13

A. Income from Salary Salary A 20,000 x12

Add : Cash gifts from Employer.


B. Income from other Sources:

(i) Gift from a friend is taxable

(ii) Gift of jewellary is taxable w.e.f. 1-1-2009

(iii) Gift received from his 4 friends are exempt as they have been received on the occasion of his marriage.

(iv) Gift from his mother‘s sister is exempt as thedonor is covered in the definition of relative

(v) Gift from his father’s brother is exempt as thedonor is covered in the definition of relative

(vi) Gift A 50,000 from his wife’s friend on1-12-2010 is taxable.

(vii) Gift of A 21,000 from his mother’s friend istaxable

2,40,000

26,000

2,66,000

Nil

5,00,000

3,00,000

Nil

Nil

Nil

50,000

21,000

2,66,000


Total income.

Problems:

1. Vinayaka held the following investments.

(a) A 81,340 – 10 % (Tax free) Debentures of Limited Company.

(b) A 70,000 -12% (Tax-free Rajasthan Development Loan

(c) Collection charges A 2,000

Compute his income from interest on securities for the year ending31-3-2012

[Ans: A 15,468]

2. Mr Naresh has the following investments as on 1st April.2012;

A 10,000 - 10% Municipal bonds

A 20,000 - 10% National Defense certificates

A 30,000 - 15% A.P. Government loan

A 40,000 - 13.5% Tax free Government securities.

(viii) Gift from his brother’s father – in- law is taxable as the donor is not covered in the definition of a relative

(ix) Gift from his wife’s brother is not taxable as the donor is covered in the definition of relative

(x) Gift from employer is taxable under income from salary

(xi) Gift in the form of scholarship from charitable institution u/s 12 AA.

(xii) Difference between stamp duty, value and purchase Price should exceed 50,000 then only it is taxable.

not taxable 8,97,000

11,63,000

26,000

Nil

Nil

Exempt


A 56,492 – 12% Tax free debentures of Reliance energy Ltd. (unlisted)

A 60,000 -10% Tax free debentures of Nagarjuna Ltd. (listed)

A 70,000 – 15% Panyam Cements Ltd. Debentures (listed. Less tax)

On 1st Dec,2012 Mr. Naresh bought A 90380 -20 % tax freedebentures of XYZ Ltd., and for this purpose he took a loan at 15% and paidbrokerage A 1,000. The interest on these investment was realized throughbank and the banker charged 5% as collection charges on gross interest.Compute income from interest on securities.

[Ans: Income from interest on securities A 39,436.]

3. Following are the particulars of investment of Mr Bhupesh Gupta forthe previous year 2012-13.

(i) A 1,00,000 – 2% Tax Free Kerala Government Securities.

(ii) A 2,60,000 -6% Tax Free Debentures of Birla Jute Co., Limited.

(iii) A 60,000 – 8.5% N.R.I. Bonds (Second Series) of S.B.I.

(iv) A 90,000 – 4% (Less Tax) A.P. Government Bonds.

(v) A1,80,000 – 10 % Fixed deposit with Indian Bank.

(vi) A 70,000 – 8% Preference Shares of a Company.

(vii) Bank Charges paid A 60/-

(viii) Interest paid on loan taken for the purchase of tax free Government Securities A 850/-

(ix) Income from other heads is A 2,07,414.

Compute the income from interest on securities and tax liability.

[Ans: Income from interest on Securities A 22,023]

4. Mr. Sanmukha furnished the following particulars of his income:

i. Interest on term deposits with bank (net)

ii. Dividends (gross) from tea company (60 % of the income of the company is agricultural income)

iii. Interim dividend at 10% on shareholding A15,000 in a textile mill, it was declared and paid on 25-12-2012.

iv. Dividend from UTI on unit 1964 scheme

10,764

3,000

1,500

17,000


Compute Mr. Sanmukha’s income under the head income from other sources.

[Ans: A 83,600; Dividends are exempted from tax.]

Short Answer Type Questions

1. Define security.

2. Mention any four incomes under the head of income from other sources.

3. Mention various types of securities.

4. What is grossing up ?

5. Mention any four securities are fully exempted from tax.

v. Dividend from a Foreign Company in UK (tax deducted at source has not been paid by the company to the Government of India)

vi. Director’s fee.

vii. Income from letting out of plant and machinery

viii. Royalty from mining.

ix. Monthly rent received by sub-letting a house (The house was got on rent at 200 p.m., expenses was incurred on house repairs A 3,000 and others 1,000)

x. Winning from Lotteries

He claims the following expenses:

a. Collection charges for UTI dividend

b. Interest on money borrowed to purchase shares of Textile Mill.

c. Depreciation and other expenses in respect of plant & machinery.

4,000

2,000

30,000

10,000

1,000 p.m

25,000

300

1,000

5,000


Deductions from Gross totalIncome

5UNIT


• Identify gross total income

• Understand about qualifying savings u/s 80 C

• Learn about deduction u/s 80 CCD, 80 CCF, 80 D, 80 E,80 GGA

• Understand about taxable income

IntroductionWhile computing the total income of an assessee some deductions are

allowed from the gross total income, in addition to deductions that are allowedfrom the gross total income, In addition to deductions that are allowed underdifferent heads of income. These deductions are allowed under section 80 Cto 80 U.

Note: These deductions are not allowed from (a) Long term capitalgains (b) winning from lotteries, horse races etc., (c) Short term capital gain ontransfer of equity shares. (d) Short term capital gain on transfer of equity orientedunits of mutual funds.

The aggregate of the deductions allowable under section 80 C to 80 Uis to be limited to the gross total income i.e., deductions allowable under thissection should not result in negative income i.e. loss.

The following are some of the important deductions available to anassessee whose status is an “individual”.

Learning Objectives


Gross qualifying savings under section 80 C

1. Life Insurance Premium on Life Policy(*): (Maximum Premium eligible limited to 20% of sum assured)

2. Contribution to Statutory or Recognized PROVIDENT FUND.

3. Contribution to 15 yr PPF (public provident fund) (*). (Maximum Rs. 70000/-)

4. NSC VIII issue (Including Accrued Interest for Ist Five Yr)

5. Contribution to ULIP of UTI or LIC Mutual Fund Contribution to

Section

80C

80CCC

80CCD

80CCE

80CCF

80D

80DD

80DDB

80E

80G

80GG

80GGA

80GGC

80QQB

80RRB

80U

Sl.No

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

Particulars

Qualified Savings

Payment or Deposit in respect of Pension Fund.

Payment to new pension scheme for governmentand for other employees.

Limit on deductions

Investment in infrastructure Bonds

Medical Insurance Premium

Deduction in respect of medical treatment andmaintenance etc. of handicapped dependents.

Medical Treatment or expenses of dependent.

Interest on higher education loan.

Donations.

Deduction for rent paid.

Donation for Scientific Research & RuralDevelopment.

Donation to political Parties.

Royalty income of authors of books.

Royalty income from patent.

Handicapped Resident persons.


Notified units of MUTUAL FUND or UTI

6. Contribution to Notified pension fund set up by Mutual Fund or UTI, Tution Fees : paid to University, College or Educational Inst. In India Max. 2 Children for FULL TIME education. (Excluding Development Fees, Donation etc.)

7. Payment towards purchase or construction of residential house property including repayment of Loan taken for the same.

8. Investment in approved Debenture or equity share of Public Company or Units of Mutual funds, engaged in infrastructure development.

9. Subscription to Notified BOND of NABARD.

10. Fixed Deposit for 5 or more years in Sch. Bank in accordance with the scheme framed and notified by Central Govt.

11. Deposit in Senior Citizens Saving Scheme.

1. Qualified Savings (sec 80 C) Deduction is allowed upto A1,00,000.

2. Payment or Deposit in respect of Pension Fund (Sec.80 CCC)

The deduction is least of the following two amounts.

(a) Actual amount paid/deposited. (b) A 1,00,000.

3. Payment for Pension fund to Government and other employees(Sec. 80 CCD):table with rama Krishna sir.

4. Limit on Deduction u/s 80C (Sec.80CCE): Deduction is least orthe following two amounts

(a) Aggregate of gross qualifying amount u/s 80 C, 80CCC and 80 CCD

(b) A1,00,000 (Excluding employer’s contribution to New Pension Scheme.

5. Special Deduction u/s 80CCF: Investment in InfrastructureBonds Sec. 80CCF:

Deduction: The least of the following two amounts is allowed asdeduction.

(a) Actual amount invested/deposited. (b) A 20,000


6. Medical Insurance Premium (Sec. 80 D)

Deduction:-

Health Policy for Lease of the following two amounts

7. Deduction in respect of medical treatment and maintenance ofdependent who is a person with disability (Sec. 80DD)

Dependent Person

Deduction: normal disability severe disability (with less than 80 % disability) (with more than 80% disability)

A 50,000 is allowed as deduction A 1,00,000 is allowed as deduction

8. Deduction in respect of medical treatment of chronic specified diseaseas prescribed by the C.B.D.T. such as AIDS, Cancer etc.: (Sec. 80 DDB)


(a) Actual amount spent (b) 40,000/60,000

9. Interest on Higher Education Loan: (Sec 80E)

Deduction: Actual amount of interest paid is allowed as deduction.

10. Donations: (Sec 80 G)

(a) Donation of any amount will be allowed as deduction.

1. Own/spouse/dependent children

(+)

2. Parents of the assessee (dependent or not)

3. If the mediclaim policy is for senior citizen or super senior citizen.

(a) Actual premium paid

(b) Rs.15,000.


(b) Rs.15,000.


(b) Rs. 20,000


(b) Donation in kind will not be allowed as deduction

(c) Donation made out of taxable income alone qualifies for deduction,i.e., if donations are made out of tax-free income then they are not eligible fordeduction.

Steps:

(1) First calculate gross qualifying amount (i.e, finding out individual limit.)

(2) Finding out the overall limit.

(3) Rate of Deduction.

Step 1.Calculating the gross qualifying amount for each donation made

Donations

No Limit Donations With Limit Donations

(1) No Limit Donations: Actual amount donated will be the grossqualifying amount. It means qualifying amount is 100 % of the amount donatede.g. If donated amount is A 15,000 then the qualifying amount is A 15,000.

(2) With Limit Donations: the qualifying amount is least of the followingtwo amounts.

(a) Actual amount donated. (b) 10 % of Gross Total Adjusted income.

Note: Adjusted Gross Total Income = G.T.I. (-) Long Term Capitalgains (-) other deductions u/s 80 except 80 G.

Step 2. Finding out the overall limit i.e., Net qualifying donations.

= Take the total of the qualifying amounts with limit and without limit –(as calculated in the above step.)

Step 3: Rate of Deduction.

Note : The rate of deduction is explained in the following.

I. Qualifying Amount is 100% and deduction rate is 100%.

II. Qualifying Amount is 100% but deduction rate is 50%.

III. Qualifying Amount is limited – and – rate of deduction is 100%.

IV. Qualifying amount is limited – and rate of deduction is 50%.


5. Deduction for Rent paid (Sec. 80 GG)

The deduction is least of the following three amounts:-

(a) Rent paid (-) 10 % Adjusted G.T.I. (b) 25% of Adjusted G.T.I (c) A 24,000 per annum.

12. Donations for Scientific Research or Rural Development(Sec. 80 GGA)

Deduction : Actual amount donated or contributed will be given asdeduction.

13. Donations to Political Parties u/s 80GGC:

Deduction = Actual amount donated.

II. Deduction for incomes received in India.

14. Royalty income of authors of the books (Sec. 80 QQB)

Deduction for situation 1: Royalty received in India but inlumpsum.


(a) Actual royalty received (b) 3,00,000.

Deduction for situation 2 : Royalty received in India not inLumpsum.


(a) Actual royalty received (b) 15 % of value of the books sold.

Deduction for situation 3: Royalty received from foreign countries.


(a) Actual royalty received (b) Royalty amount brought to India.

Note: the amount should be brought within 6 months from the end of theprevious year relevant to the current assessment year.

15. Deduction in respect of Royalty income on Patents u/s 80 RRB.

Deduction (i):- If royalty is received in India, the least of the followingtwo amounts will be allowed as deduction.

(a) Actual amount of royalty received (b) A 3,00,000.


Deduction (ii) :- If royalty is received in foreign currency the deductionis least of the following two amounts.

(a) Actual amount of royalty income brought to India. (b) A 3,00,000.

III. Deductions in special Cases

16. Blind or Physically Challenged / Handicapped Persons (Sec80 U):

Deduction:

(i) If disability is 40% or less than 80 % A 50,000.

(ii) If disability is 80 % or more than 80% (serious disability) A 1,00,000.

Illustration: 1.

Mr. X a person with disability, submits the following information.Compute (a) taxable income (b) the tax payable for the assessment year2013-14.

Rs.(A)

Salary (per annum) 1,94,600

Rent (per annum) 3,500

Dividend from Co-operative Society 1,000

Interest on Bank Deposits 8,000

Interest on Government Securities 1,000

Winning from Lotteries (gross) 4,000

NSC (VIII issue) Purchased during the year 10,000

Deposit under PPF scheme 15,000

He earned a long-term Capital Gain of A 12,000 on sale of gold duringthe year . Interest earned on NSC VIII issue 1,000

Solution

Computation of Total income at Miss. Varsha for the AssessmentYear 2013-14.


Total Income

(b) Computation of Tax on Total Income

Tax on winning from lotteries (30% of A40,00)

Tax on long term capital gain (20% of A 12,000)

Tax on balance of Total income ( A 2,00,000)

Add : Education cess @20% + Additional Cess 1%

Total Tax Payable

Income from salary

Basic salary


Income from house property

Rent received

Less : Statutory deduction @30%

Capital Gains

Long term capital gains

Income from other sources

Dividend from co-operative soceity

Interest on bank deposits

Interest on Government securities

Winning from lotteries

Interest earned on NSC

Gross Total Income


U/s 80 C Rs. 10,000 + Rs. 15,000

U/s 80 U

1,94,600

Nil

42,000

12,600

1,000

8,000

1,000

4,000

1000

25,000

50,000

1,94,600

29,400

12,000

15,000

2,51,000

75,000

1,76,000

Rs. (A) Rs. (A)

1,200

2,400

Nil

3,600

108

3,708


Illustration:2

Seeta who is a resident in India, is a person with disability. He providesthe following particulars of his income for the year ending 31.3.2013.

Salary for working as a telephone operator in a company 5,000 p.m.

Honorarium from school for blind for giving his service 47,000

Interest on government securities (gross) 44,000

Income from Unit Trust of India (gross) 5,000

He has contributed A 2000 to Prime Minister’s National Relief Fundand donated A 1,000 to the school for blind. Which is approved as a charitableinstitution. He has also paid A 3000 by cheque as premium for mediclaimpolicy. His father is also a person with disability and is dependent on him formedical treatment and rehabilitation. Seta spends A 8000 during the year onhim.

Compute his total income for the assessment year 2013-14, assumingthat he has deposited A 20,000 in Public Provident Fund Account.

Solution :

Computation of Total Income of Mrs. Seetafor the Assessment Year 2013-14

Income from salary

Basic salary



Honorarium

Interest on Government securities

UTI Dividend

Gross Total Income

Less : Deduction u/s 80 C to 80 U

U/s 80 C

U/s 80 D

60,000

---

47,000

44,000

Exempt

20,000

3,000

60,000

91,000

1,51,000

Rs. (A) Rs. (A)


Total Income

Exercises

1. Raghava’s gross total income is A 50,000. He pays A 2000 by wayof contribution to Public provident fund. A 3,000 as life insurance premiumA 200 to Jawaharlal Nehru Memorial fund and A 500 to Prime Minister’sNational Relief Fund. Compute his total income.

[Ans: A 44,400]

2. Mr A had a gross total income of A 4 lakhs, which included A 10,000as 1/4th share from association of persons for the assessment year 2013-14.During the year he has made the following donations:

(a) National Defense Fund A 60,000

(b) Prime Minister’s National Relief Fund A 1,00,000

(c) Family Planning Association of India A 10,000

(d) All India Congress Committee A 1,00,000

(e) Notified charitable hospital A 50,000

In addition to the above, he paid a life insurance premium of A15,000on a policy of A1,00,000. Compute the relief in respect of donations and lifeinsurance premium.

[Ans. Deductions u/s 80 G A 1,84,250]

3. Mr. Sujiya requests you to compute his total income and Tax liabilityfor the assessment year 2013-14 from the following:

Rs.(A)

Business profits 1,47,000

U/s 80 DD

U/s 80 U

U/s 80 G

PMNRF (100% of A 2,000)

School for blind (50% of A 1,000)

50,000

50,000

2,000

500 1,25,500

25,500


Interest on bank deposits 23,000

Interest on company deposits 10,000

Winnings from state lotteries 55,000

Long-term Capital gains from sale of jewellery(25 years)2,00,000

[Ans. A 4,35,000,Tax liability A 56,195]

4. The following are the income particulars of Mr.yakub Ali. Computehis total income for the A.Y. 2013-14.

Rs.(A)

Salary (gross) 75,000

Income from house property (computed) 25,000

Interest on bank deposits 12,000

Casual income 16,000

Tamil Nadu lottery prize 80,000

His payments are as follows:

Life Insurance premium 10,000

Donation to National Defense Fund 3.000

Tax advocate fee 1,000

Interest on money borrowed for payment of tax 500

[Ans. A1,95,000: Deduction u/s 80 G A 3,000]

Short Answer Type Questions1. What is grosstotal income ?

2. What is Net total income ?

3. Write the following

(a) 80 D (b) 80 E (c) 80 CCD (d) 80 E

Long Answer Type Questions1. What are the deductions under section 80 GGA ?

2. Mention any six items in qualifying savings u/s 80 C.

Assessment of Individual

6UNIT


• Understand about procedure for computing net income

• Learn about gross total income

• Learn about net total income

• Learn about tax liability

Introduction

An individual means a natural person. Individual would include a male,female, minor child and a lunatic. In case of a minor child and lunatic, theguardian or legal representative is liable to pay the tax. An individual has to payincome tax on his total income at a graded scale of rates according to theamount of his total income.

Procedure for computing total income

1. First ascertain the residential status of an individual.

2. Computing the income under different heads e.g:- Income from Salary, Income from House Property etc.

3. Aggregation of incomes.

4. Setting off the losses of the current year and the brought forward losses and lastly unabsorbed allowances of last year if any.

Learning Objectives


5. Computing Gross Total Income and deducting the deductions from Gross Total Income.

6. Rounding off of the total income.

7. Calculating tax liability.

8. Calculating tax due or refund of tax.

Gross Total Income and Total income.

According to the provisions of section 14 of the Income Tax Act, theterms Gross Total Income (GTI) means the aggregate of the income compoundas per the respective provisions of the following heads.

(i) Income from Salaries

(ii) Income from House Property

(iii) Profits and Gains of Business or Profession

(iv) Capital Gains

(v) Income from Other Sources

In these heads of income, the income arising to other persons, such aswife, minor child, son;s wife, etc., shall also be included. The aggregate value ofall these heads of income is called as the GTI.

According to the provisions of section 2(45) of the Income Tax Act, theterm Total Income (TI) means the total amount of income specified as per section5 and calculated as per the provisions of the Act.

A specimen Performa for calculation of Total Income and Tax Liabilityis given below:

Particulars Rs. Rs. Rs.

1. Income from Salaries

(a) Basic Salary

(b) Taxable Allowances

(c) Taxable value of Perquisites

(d) Taxable value of Profits in lieu of salary

Gross Salary

Less: Deduction u/s 16

xxx

xxx

xxx

xxxxxx


(i) Entertainment allowance

(ii) Tax on employment/Professional Tax

Net Taxable Salary

2. Income from House Property

(a) Self-occupied Property

Less: Deductions u/s 24 for interest on loans

Loss from self-occupied Property

(b) Let out Property

Gross Annual Value

Less: Municipal Taxes

Net annual Value.

Less: Deductions u/s 24

Income from let out property

Net Income from House Property

3. Profits and Gains of Business or Profession

Net Profit as per P&L account

Add / Less : Adjustments required to be made in the profit as per the

provisions of the Act.

Net Business Income

4. Capital Gains

a. Short Term capital gain

b. Short term capital loss

c. Long term capital gain

d. Sale consideration

Less : Transfer expenses

Net consideration

xxx

(+)xxx

Nil

(-) xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

(-) xxx

(-) xxx

xxx

xxx

(-) xxx

(-) xxx

xxx

xxx


Indexed Cost of acquisition

Indexed Cost of improvement

Gross LTCG.

Less: Exemptions under sections 54,54B,54D,

54EC,54ED,54F, 54H

Net Long Term Capital Gains

Total Capital Gain

Less: Carried forward Capital Loss

Taxable Capital Gains

5. Income from Other Sources

General income u/s 56(1)

Specific income u/s 56(2)

Less: expenses allowed u/s 57


Add: Income from other persons

Aggregate of Incomes

Less: Adjustment for set off and carry forward

of losses and allowances

Gross Total Income

Less: Deductions u/s 80C to 80 U

(a)

(b)

(c)

Total Taxable Income

(Rounded off to nearest rupees ten)

(-) xxx

(-) xxx

xxx

(-) xxx

xxx

xxx

xxx

xxx

(-) xxx

xxx

(-) xxx

xxx

(+) xxx

xxx

(-) xxx

xxx

(+) xxx

xxx

(-) xx

xxx

xxx

xxx


Computation of Tax Liability

Tax on casual incomes

Tax on Long – term capital gains

Tax on regular income

Total Tax

Add: Education Cess 3%

Less: Relief u/s 89 (1) and rebate u/s 86

Net Tax Payable

Add: Interest payable, if any, for delay in filing of return (u/s 234 A) or short payment /deferment of advance tax (u/s 234 B & 234 C)

Less : Advance tax paid

Tax Deducted at Source (TDS)

Balance Tax Payable /Balance Refundable

Rounding off of Total Income [Section 288 A]

As per the provisions of section 288 A of the Income tax Act, the totalincome computed as above, should be rounded off to the nearest multiple ofrupees ten and for this purpose any part of a rupee consisting of paise shall beignored. For example. If the total income is A 97,547, it shall be rounded off toA 97,550 and if it is A 97,544.90, it shall be rounded off to A 97540.

Rounding off of Tax [Section 288 B]

As per the provisions of the Income tax Act, the amount of tax, includingtax deductible at source or payable in advance, interest, penalty, fine or anyother sum payable and the amount of refund due, etc., shall be rounded off tothe nearest multiple of ten rupees. For example, if the tax payable is A 10,558.65,it shall be rounded off to A 10,660 and if it is A 10552.45, it shall be rounded offto A 10,550.

xxx

xxx

xxx

xxx

(+) xxx

xxx

(-) xxx

xxx

(+) xxx

xxx

(-) xxx

(+/-) xxx

xxx

(+) xxx


Illustration 1.

Mr. Sriram is a Senior Citizen gives you the following income particulars.

Compute his Tax Liability for the A.Y. 2013-14.

1. Pension from Government A 3,30,000

2. Long term capital Gain A 50,000

3. Short term capital Gain A 30.000

4. Interest on fixed deposit A 10,000

5. Winning from Lottery A 1,00,000

6. Deposited in NSC. VIII issue

A 15,000. Pension scheme u/s 80CCC

A 30,000.

Solution

Computation of Total Income

1. Salary- pension 3,30,000

2. Capital Gain

a. LTCG A 50,000

b. STCG A 30,000 80,000

3. Other Sources

a. Fixed Deposit Interest A 10,000

b.Winning from Lottery A1,00,000 1,10,000

Gross Total income 5,20,000

Less: Deduction u/s 80 C & 80 CCC to the maximum extent of 1,00,000 45,000

Total Income 4,75,000

Computation of Tax Liability Rs.

Tax on total income 4,75,000

Senior citizen basic exemption Limit 2,50,000


Taxable income 2,25,000

20% Tax on long term Capital Gain ( A50,000) 10,000

30 % Tax on Lottery income ( A1,00,000) 30,000

On balance income Rs 75,000, Normal rate 10% 7,500

47,500

Add; Education Cess at 3% 1,425

Tax payable 48,925

Illustration 2

Mr. Sriharsha submits the Following income particulars. Compute theTotal income and Tax liability for the A.Y. 2013-14.

(a) Short Term Capital gain A 50,000

(b) Long term Capital gain A 1,80,000

He has deposited Rs. 20,000 in PPF

Solution

Computation of Total Income of Mr. Sriharsha

Capital gain

Short term Capital gain A 50,000

Long term capital gain A 1,80,000

Gross Total Income A 2,30,000

Deduction u/s 80C to 80 U Nil

Total Income A 2,30,000

Tax Liability

Tax on long term capital gain at 20 %after allowing basic exemptionLimit(A 2,30,000- Rs.1,80,000 = 50,000) 10,000

Add : Education Cess at 2% + 1% additional cess 300

Tax Payable 10,300


Illustration 3

From the below given information compute total income of Mr.Rahulfor the Assessment year 2013-14.

(i) Interest on Government. Securities A 10,000 (gross).

(ii) Interest on Tax-freeGovt. Securities A15,000 (Net)

(iii) Interest on less-tax debenture of X Ltd A 9,000 (net)

(iv) Interest on less-tax debenture of Y Ltd A 9,000 (net) (unlisted)

(v) Interest on less-tax debenture of Z Ltd A 4,500(listed) (net)

(vi) Lottery winning received A 69,100 (net)

(vii) Interest on Bank Deposits A 16,000 (gross)

(viii) Rent from open lands A 46,000.

(ix) Medical insurance premium paid A 18,000

(x) Life insurance premium paid A 28,000

Solution

Computation of Total Income of Mr. Rahulfor the Assessment Year 2013-14

(i) Interest on Govt. Securities

(ii) Interest on tax-free Govt. Securities

(iii) Interest on Less-tax debentures of

‘X’ Ltd A 9,000 x

(iv) Interest on tax free debentures of Y Ltd.

A 9,000 x

(v) Interest on tax-free debentures of Z ltd

A 4,500 x

(vi) Lottery winning A 69,100 x

(vii) Interest on bank deposits

100

90

100

90

100

90 100

90

10,000

15,000

10,000

10,000

5,000

1,00,000

16,000


(viii) Rent from open lands

Gross total income

Less: Deduction u/s 80 ‘D’ (Max)

Deduction u/s 80 ‘C’

Total Income

Note : Interest on tax-free Govt., Securities need not be grossed.up

Illustration: 4

Mr. Amar submits you the following particulars. Compute total incomefor the Assessment Year 2013-14.

(a) Salary received A 1,80,000

(b) Rent received A,90,000

(c) Rent from letting of plant & machinery, building etc. A 80,000

(d) Agricultural income from Indian lands A 60,000

(e) Agricultural income from Srilankan lands A 80,000

(f) Business profits Rs,1,20,000 after charging depreciation A 30,000 income-tax A 30,000 donation of PM National Relief Fund A 20,000

(g) Share of income from HUF A 81,000

(h) Share of income from Association of persons A 70,000

(i) Medical insurance Premium paid A 16,000

Solution

Computation of Total Income of Mr. Amar

for the A.Y. 2013-14.

Income from Salary

Salary received 1,80,000

Less deduction u/s 16. Nil 1,80,000

Income from House Property

46,000

2,12,000

43,000

1,69,000

15,000

28,000


Rent received 90,000

Less: Standard deduction u/s 24 (a) 30% 27,000 63,000

Business Income

Profit as per P&L Account 1,20,000

Add : Inadmissible expenses

Income tax 30,000

Donations 20,000 1,70,000

Share of income from HUF exempt u/s 10 (2) NT

Share of income from AOP 70,000

2,40,000


Rent for letting of plant etc. 80,000

Indian agricultural income exempt u/s 10 (1) NT

Foreign agricultural income 80,000 1,60,000

Gross total income

Income from salary 1,80,000

Income from house property 63,000

Business income 2,40,000

Other income 1,60,000 6,43,000

Less: Deduction u/s ‘D’ (Max) 15,000

Deduction u/s 80 G (full) 20,000 35,000

Total Income 6,08,000

Problems

1. Compute total income from the following information;

(i) Salary received 1,60,000

(ii) Rent received 1,20,000


(iii) Municipal taxed paid on let out house 10,000

(iv) Business profit A 2,40,000 after charging depreciation A 26,000, donations to National Defense funds A15,000, income tax A 20,000.

(v) Long term Capital loss 60,000

(vi) Short term capital loss 40,000

(vii) Interest on bank deposits 16,000

(viii) Interest on Govt. Securites 14,000

(ix) Medical claim paid 18,000

(x) Life insurance premium paid 24,000

(Ans: GTI A 5,82,000; Deduction u/s 80C A 24,000,80D A15,000, u/s 80G A15,000; Long term loss A 60,000 c/f to next year

to be set off from next year long term capital gain.)

2. Information relating to Sanju is given below:

(a) Income from house property A 75,000

(b) Salary received A 1.50,000

(c) Interest on Govt. Securities A 40,000

(d) Commission as LIC agents A 50,000

(e) Director’s remuneration A 60,000

(f) Rent from letting of plant, machinery, building etc.A 80,000

(g) Lottery winnings A 69,100 (net)

(h) Long term capital gains A 80,000

(i) Short term capital loss A 20,000

(j) Share of income from Hindu Undivided family A 40,000.

(k) Half share of income from Association of persons A 48,000.

(l) Dividends from Indian Companies A60,000

(m) Donation to an approved Institution A 10,000.

Compute total income for the A.Y. 2012-13.


(Ans: A 6,10,000 [Hint GTI A 6,15,000 deduction u/s 80 G A5,000, Dividends form Indian companies exempt u/s 1- 934) share if income

from HUF exempt u/s 10 (2)]. Income from H.U.F.& AOP is not included inthe income of an individual.)

3. Amresh submits the following information regarding his income forthe previous year 2011-12.

Rs.

1. Salary (per month) 30,000

2. Rent Received from House property in Delhi (per month)8,000

3. Winning from lottery (Gross) 1,00,000

He makes following deposits during the year

1. Contribution towards PPF 40,000

2. Premium paid in cash on Mediclaim policy for his dependent father 10,000

He has a son being a person with disability, depended on him, for whomhe incurred expenses for his medical treatment and rehabilitation. He alsodeposited a sum of A 25,000 for the benefit of his son under a scheme framedby the UTI for such a purpose. (a) Compute Amresh Total income and taxliability for the assessment year 2013-14.

[Ans: Total Income A 4,37,200, Tax Liability A47,092.]

4. From the following particulars compute total income of Mr. RajKumar. Rs.(A)

(i) Income from Salary 2,08,000

(ii) Income from house property 76,000

(iii) Income from long-term capital gains on shares A 81,000 and on building A1,90,000

(iv) Income from other sources 24,000

(v) Winning from Horse races (gross) 68,000

Deductions allowable as per I.T. Act.

(1) A 86,000 u/s 80 C (2) A 5,000 u/s 80 D (3) A 10,000 u/s 80 G.

[Ans: 4,65,000]


5. Mr.Sri Ramulu submitted his particulars of income and payments forthe previous year 2012-13. Compute total income and tax liability for theassessment year 2012-13.

Rs.(A)

(i) Income from salary 5,00,000

(ii) Income from House property (let out) 18,000

(iii) Loss from house property (self occupied) 3,400

(iv).Income from other sources 50,000

(v).Qualified savings 1,20,000

(vi). Medical Insurance premium 16,000

(vii). Interest on Higher education loan 15,000

[Ans: 4,34,600]

Short Answer Type Questions

1. What is Gross total income ?

2. Define total income.

3. Mention any four heads of incomes.

4. Compute the tax liability of Mr. Shekar.

Total Income A 5,25,000


Service Tax

7UNIT


• Understand about meaning of service tax

• Understand about features of service tax

• Learn about service provider and service receiver

• Learn about procedure for registration

7.1 IntroductionService Tax is a form of indirect tax imposed on specified services

called “taxable services”. Service tax is a part of Central Excise in India. It is atax levied on services provided in India, except the State of Jammu and Kashmir.The responsibility of collecting the tax lies with the Central Board of Excise andCustoms(CBEC).

Service tax cannot be levied on any service which is not included in thelist of taxable services. Over the past few years, service tax been expanded tocover new services. The objective behind levying service tax is to reduce thedegree of intensity of taxation on manufacturing and trade without forcing thegovernment to compromise on the revenue needs. The intention of thegovernment is to gradually increase the list of taxable services until most servicesfall within the scope of service tax. For the purpose of levying service tax, thevalue of any taxable service should be the gross amount charged by the serviceprovider for the service rendered by him.

Learning Objectives


7.2 Service Tax in IndiaService Tax was first brought into force with effect from 1 July 1994.

All service providers in India, except those in the state of Jammu and Kashmir,are required to pay a Service Tax in India. Initially only three services werebrought under the net of service tax and the tax rate was 5%. Gradually moreservices came under the ambit of Service Tax. The rate of tax was increasedfrom 5% to 8% w.e.f 14 May 2003. From 10 September 2004 the rate ofService Tax was enhanced to 10% from 8%. Besides this 2% education cesson the amount of Service Tax was also introduced. In the Union Budget of Indiafor the year 2006-2007, service tax was increased from 10% to 12%. OnFebruary 24, 2009 in order to give relief to the industry reeling under the impactof economic recession, The rate of Service Tax was reduced from 12 per centto 10 per cent.

7.3 Silent features of Service Tax1. Scope: It is leviable on taxable services ‘provided’ or ‘to be provided’

by a service provider. The services ‘to be provided’ in future are taxed only ifpayment in its respect is received in advance.

Two separate persons required Payment to employees notcovered: For charge of service tax, it is necessary that the service providerand service recipient should be two separate persons acting on ‘principal toprincipal basis’. Services provided by an employee to his employer are notcovered service tax and, therefore, salaries or allowances paid to them cannotbe charged to service tax.

2. Rate: It is leviable @ 12% of the value of taxable services. EducationCess @ 2% and Secondary and Higher Education Cess @ 1 % are chargeableon the amount of service tax, thus, making the effective rate of service tax at12.36% of the value of taxable service.

3. Taxable services: Service tax is leviable only on the taxable services.Taxable services mean the services taxable under section 65(105) of the Finance Act, 1994.

4. Value: For the levy of the service tax, the value shall be computed inaccordance with section 67 read with Service Tax (Determination of Value)Rules, 2006.

5. Free services not taxable : No service tax is leviable upon theservices provided free of cost.


6. Payment of service tax : The person providing the service (i.e. theservice provider) has to pay service tax in such manner and within such periodas is prescribed in the Service Tax Rules, 1994. The service tax is to be paidonly on the receipt of payment towards the value of taxable services.

7. Procedures: Provisions have been made for registration,assessment including self assessment, rectifications, revisions, appeals andpenalties on the service provider.

8. CENVAT credit: The credit of service tax and excise duty acrossgoods and services is allowable in accordance with the CENVAT Credit Rules,2004.

Accordingly, output service provider (i.e. provider of any taxableservice) can avail credit not only of the service tax paid on any input serviceconsumed for rendering any output service but also of the excise duty paid onany inputs and capital goods used for rendering output service. CENVAT creditso availed can be utilized for payment of service tax on taxable output service.

9. Services provided by an unincorporated association/body to its members also taxable

[Explanation to Sec. 65] : ‘Taxable service’ includes any taxableservice provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration. Hence, the services (falling under any categoryof taxable service) provided or to be provided by any unincorporated association/body to member thereof shall be liable to service tax. This provision is anexception to the ‘principle of mutuality’.

10. Performance of statutory activities/duties, not ’service’: Anactivity performed by a sovereign /public authority under provisions of lawdoes not constitute provision of taxable service to a person and, therefore, noservice tax is leviable on such entities.

11. Import/Export of services: While import of services is chargeableto tax u/s 66A, the export of services has been made exempt from tax. Import/export provisions are discussed separately.

7.4 Definition of PersonThe term person in not specifically defined under service tax laws. Since

the word person has not been specifically defined under the Act for the purposesof service tax, we can resort to the definition under the General Clauses Act,1897. Under Section 3(42) of the GCA, ‘Person’ “shall include any company


or association or body of individuals, whether incorporated or not being whomthe law regards as capable of rights and duties. Any being that is so capable is aperson, whether a human being or not, and no being that is not so capable is aperson, even though he be a man.”

A detailed analysis of meanings attributed to the term “person” in variousstatutes / judicial pronouncements / dictionaries is set out hereafter for readyreference:

Section 11 of the Indian Penal Code (Act 45 of 1960), read with theGeneral Clauses Act, reads: “The word “person” includes any Company orAssociation or body of persons, whether incorporated or not.”

Section 2(31) of the Income Tax Act, 1961 reads: “Person” includes:(i)an individual; (ii) a Hindu undivided family; (iii) a company; (iv) a firm; (v) anassociation of persons or body of individuals whether incorporated or not; (vi)a local authority, and; (vii) every artificial juridical person, not falling without anyof the preceding clauses.

Thus, though the term ‘Person’ has not been defined for the purposes oflevy of Service Tax, the term ‘person’ can be construed to be of a very wideconnotation in terms of definition under the General Clauses Act and other judicialpronouncements/definitions in other statutes discussed. The term ‘person’ couldinclude the Government viz the Central Govt. / State Govt etc since the definitionof ‘person’ under many statutes specifically includes the Government.

7.4.1 Service ProviderService provider is the person who provides the taxable service on

receipt of charges and is responsible for paying the Service tax to theGovernment. If the service provider is a Non Indian resident or who does nothave any establishment in India, in that case the service receiver is liable to payService Tax.

Service tax is levied on taxable services only and not on the serviceprovider. The service provider is only an instrument to deposit the service tax tothe credit of Central Government who has been made as a person liable. As perSection 68, every person providing taxable services to any person or personsnotified under sub-section (2) shall pay service tax. The terms ‘service provider’has not been defined.

Various definitions suggest that service provider is bound to have differentmeanings for different taxable services. The definitions use the words like anyperson, any commercial concern, any agency, any establishment etc. as isillustrated in some of the services mentioned below-


• Any person air travel agent, architect, CA, CS, mandap keeper, C & F agent, courier, broker, tour operator, cargo, cable operator etc.

• Any commercial concern advertising, aircraft operator, business auxiliary services, manpower recruitment, drycleaner, convention etc.

• Any agency broadcasting, commissioning & installation, manpower recruitment etc.

• Any establishment beauty parlour, coaching centre

• Others banking company, port, AAI, financial institution, body corporate etc.

• New services — the term used is ‘any person’ in all services.

7.4.3 Service ReceiverService receiver is a person who receives or avail the service provided

by the service provider. Service receiver has also not been defined and forservice receiver, various terms have been used such as — any person, policyholder, subscriber, customer, client, exhibitor, franchisee, shipping line etc.However, Finance Act, 2008 has substituted ‘any person’ in all the taxableservices in place of client or customer as service tax is levied on services andstatus of service recipient should not determine the tax treatment.

Service tax is payable only when a taxable service is rendered orprovided to the service receiver. While generally, in case of sale, receiver is thebuyer or customer, in case of a service, service receiver is the client. Thereshould exist a relationship of service provider and service receiver between thetwo parties to a service. Services are rendered to the client who can be called apolicy holder (as defined in Insurance laws) or a subscriber (as defined inTelegraph Laws) or shipping line or franchisee or a customer or just a client, asthe case may be. Oxford English Dictionary defines client to mean a person ororganisation using the services of a lawyer or other professional person orcompany. Clients collectively are clientele.

7.5 Registration ProcedureSection 69 of the Finance Act, 1994 read with Rule 4 of the Service

Tax Rules, 1994 prescribe the manner and form for registration as an assessee,of any person liable to pay service taxin accordance with the provisions of Section68 of the Finance Act, 1994. Below set, in brief is the procedure for registration:


1. Fill the Form ST-1 in duplicate. (Form ST-1 is available on thedepartmental website ( www.cbec.gov.in ) Enclose photocopy of PAN cardand proof of address to be registered.

2. Copy of PAN card is necessary as a PAN based code (ServiceTax Code) is allotted to every assessee.

3. These forms are required to be submitted to the jurisdictional CentralExcise office ( in case of six Service Tax Commissionerates, to the jurisdictionalDivision office. There are separate service tax commissionerates in Mumbai,Chennai, Delhi, Kolkata, Bangalore and Ahmedabad)

4. A person liable to pay service tax should file an application forregistration within thirty days from the date on which the service tax on particulartaxable service comes into effect or within thirty days from the commencementof his activity.

5. Where a person, liable for paying service tax on a taxable service,

(i) provides such service from more than one premises or offices; or

(ii) receives such service in more than one premises or offices; or,

(iii) is having more than one premises or offices, which are engagedin relation to such service in any other manner, making such person liable forpaying service tax, and has centralised billing system or centralised accountingsystem in respect of such service, and such centralised billing or centralisedaccounting systems are located in one or more premises, he may, at his option,register such premises or offices from where centralised billing or centralisedaccounting systems are located.

5.1 The registration under sub-rule (2), shall be granted by theCommissioner of Central Excise in whose jurisdiction the premises or offices,from where centralised billing or accounting is done, are located, provided thatnothing contained in this sub-rule shall have any effect on the registration grantedto the premises or offices having such centralised billing or centralised accountingsystems, prior to the 2nd day of November, 2006.

6. A single registration is sufficient even when an assessee is providingmore than one taxable services. However, he has to mention all the servicesbeing provided by him in the application for registration and the field office shallmake suitable entries/endorsements in the registration certificate.

7. An assessee should get the registration certificate (registrationnumber) within 7 days from the date of submission of form S.T.1, under normalcircumstances.


8. A fresh registration is required to be obtained in case of transfer ofbusiness to another person.

9. Any registered assessee when ceases to provide the taxable serviceshall surrender the registration certificate immediately.

10. In case a registered assessee starts providing any new servicefrom the same premises, he need not apply for a fresh registration. He cansimply fill in the Form S.T.1 for necessary amendments he desires to make in hisexisting information. The new form may be submitted to the jurisdictionalSuperintendent for necessary endorsement of the new service category in hisRegistration certificate.

Short Answer Type Questions1. Define ‘Service tax’.

2. Define person as per service tax.

3. Who is Service provider.

4. Who is Service receiver.

5. What is meant by CENVAT credit.

Long Answer Type Questions1. Explain the silent features to service tax.

2. Explain about registration procedure as per service tax rules 1994.

3. Write briefly about Service provider and Service receiver.

Value Added Tax

8UNIT


• Understand about VAT

• Understand about history of VAT

• Learn about objectives, advantages and disadvantages

• Learn about list of goods tax rates.

8.1 DefinitionVAT is a tax on consumer spending. It is collected by VAT-registered

traders on their supplies of goods and services effected within the State, forconsideration, to their customers. Generally, each such trader in the chain ofsupply from manufacturer through to retailer charges VAT on his or her salesand is entitled to deduct from this amount the VAT paid on his or her purchases.

Value added tax is not only a simple taxation system, but also is themost common model used in the world today.. From economic point of view,the value added is the difference between the worth of outputs and inputs. Butin compilation of the law, it is defined according to the accounting standardsand by relaying on invoice method. By considering the above point, the valueadded is defined as the difference between the value of the goods and servicessupplied and value of the goods and services bought by a person in a specificperiod of time.

Learning Objectives


By considering the above definition, the value added tax is a kind ofmultiphase tax, which is calculated and collected according a percentage ofvalue added of the goods and services produced and supplied in the process ofproduction and distribution cycle. This tax in fact, is a kind of tax on multiphasesales, which exempts the purchase of intermediate goods and services from taxpayment.

8.2 History of VATThe value added tax system was first introduced by Von Siemens in

1951. In fact, it was designed in order to solve the financial problems of Germangovernment. But in spite of the intense inclination and tendency of some countriessuch as Argentina and France to know about its structure; theVAT wasn’t implemented by any country until 1954. After 1954, Brazil, Denmarkand Germany; were among the first countries which introduced the VAT in theirtaxation systems. In Asia; South Korea was the first Asian country, which in1977 with the help of International Monetary fund (IMF), succeeded to implementthe VAT in its taxation system. Subsequently, other countries such as Turkey,Pakistan, Bangladesh and Lebanon used the VAT as their taxation system. Atpresent; more than 120 countries are using VAT as their taxation system.

In order to implement this kind of taxation model in Iran, the bill of VATwas first presented to the Islamic Consultative Assembly (Parliament) of Iran inJanuary of 1987 by the government of that time. The VAT bill was reviewed bythe Economic Committee of the Parliament and after making necessaryrevisions, it was presented to the Parliament for voting. After approving 6 Articles,due to government request and for the reason of stabilizing the prices (economicadjustment policies) it was returned to the government.

In 1991, the financial department of the International Monetary Fund, forthe purpose of reforming Iranian taxation system, proposed the use of VATpolicy as one of the main factors for increasing the efficiency and reformingtaxation system of Iran. Following suggestions of the IMF experts; several studieson this subject have been made in the Ministry of Economic Affairs and Financeand implementation of the VAT in Iran was discussed and agreed by majority ofthe internal and external experts, but it wasn’t implemented in practice. TheMinistry of Economic Affairs and Finance, in accordance with its plan foreconomic mobilization of the country started the projects of reforming the taxationsystem and omission of different kinds of exemptions and duties by substitutingthe larger tax basis. The feasibility studies of the above project have also beencarried out. Due to importance of expanding of tax basis, as one of the mainprinciples of the policy of economic stabilization, the taxation Deputy of the TaxRevenue Department of the Ministry of Economic Affairs and Finance, since


1997 has carried out a number of scientific researches on socio-economic andcultural impacts of implementing the VAT in Iran. The bill of the value added tax(new version) after considering the economic effects of implementing VAT, andafter several revisions, has been presented to the Parliament.

8.3 Objectives of VATThe primary objective of VAT must be to enhance competitiveness while

removing the cascading effect of taxes and levies. While ensuring that this primaryobjective is in the forefront of the evolution of VAT law, the State must ensurethat barriers to inter-state trade should be eliminated inorder to create a unifiednational market. All of us will agree that the VAT regime must be simple,transparent, consistent in structure and approach, ensure revenue neutrality andmechanism must be self regulated.

One of the most important criteria for implementation of VAT by theState will be to design and maintain a suitable mechanism to carefully monitorthe revenues under VAT and a comparative study of the same with the presentscenario to ensure current revenue levels.

Following are the objectives in brief

1. Increase in government revenue

2. Developing stable source of government revenue

3. To make the tax system more transparent

4. To avoid cascading effect.

5. To reduce tax evasion practices

6. To increase in exports.

8.4 Advantages and Disadvantages of VAT8.4.1 Advantages of VAT

During the last 40 years that the value added tax system has been used,the number of countries which added to the user of this kind of taxation systemincreased to more than 120 countries. This taxation system which was used atthe beginning only by European countries, gradually with an increasing rate usedby many developed and under development countries.

By reviewing the reports of those countries which has been using thevalue added tax system, all of them demonstrate their satisfaction of using it.The advantages counted for the value added tax system are as follows:


• Income generator for covering the government expenses

• Stability

• Minimizing the tax evasion

• The ease of auditing control

• Disciplined trade

• Improving foreign trade

• Rebuilding the economy

• Effective support

• The minimum negative effect on allocation of resources

• Facilitating the entrance to regional protocols

• Resolving the negative effects of taxation on economy

• Etc...

1. Income generator for covering the government expenses

Due to the vastness of tax basis of value added tax system which usuallyincludes the majority of goods and services, this kind of taxation called bygovernments as a “money producing engine”. The reason of using this metaphoris the tax basis in this model which includes the vast groups of goods and servicesand also the large and floating incomes which it generates for the governments.Taxes which were collected by the objective of balancing the distribution ofincomes or achieving economic efficiency usually has the smaller tax basis andhigher tax rates. On the other hand, increasing the tax rates due to the fact thatdecreases the investment and production motivation causes the black-marketand prepares the situation for tax evasion and ultimately decreases thegovernment income. But due to the vastness of tax basis in value added taxsystem, the governments can use the lower rates of taxes on all the final salesrelated to all economic sectors and as a result can generate more income forcovering their expenses without decreasing the investment motivation.

2. Minimizing the Tax evasion

In the value added tax model due to the lower rates of taxes incomparison to other type of taxation system with the limited tax basis, the taxevasion decreases and as a result the a reliable source of income made forgovernments. On the other hand if one firm (seller) “cheats” it means anotherfirm ( the buyer) loses, because both firms have to report their transactions and


they have opposing interests, the system is selfenforcing and that makes evasiondifficult.

3. Facilitating the entrance to regional protocols

Some of the regional protocols due to the reasons such as: The necessityof unified model of taxation system in economical relations between the membersof protocols, creation of unified tax screw, motivating the members towardefficiency, development of industries, using the benefit of neutralization andincreasing the internal competition, made the admission of the value added taxas one of the criteria for acceptance of the members in protocol.

4. Restructuring and improving the taxation system

As the structure of economy growth and become more complicated,the necessity of keeping accounts in different small and big size business unitsincreases. Thus, in value added tax system, each business unit required to keepit’s account in a comprehensive manner, so the use of computers for recordkeeping and processing data in order to produce timely information is more thanthe traditional tax system models and thus it will result the renewal and deepchange in old and traditional taxation system and a dramatic improvement intimes and jobs of tax system personnel.

5. The ease of auditing control

Due to the fact that in value added tax system, the invoices of sales arethe base of tax calculation and the amount of sales of goods and services recordedin the specified columns of invoice and according to that value added taxcalculated and collected and also because the invoices recorded in the generaljournal and ledgers of the firms, so (especially in the case of unique tax rate) thesystem of auditing is simple and effective.

6. The minimum negative effect on allocation of resources

From economical point of view, value added tax is a neutral tax; becauseit has no effects on production factors ( investment, employment and etc..) andalso has the minimum negative effects on economical decisions of the businessunits. The reason is because in value added tax system the tax calculated onvalue added generated by production factors in production cycle and thus ithasn’t any bias to an any kind of production method. According to the abovementioned points, It is said that the value added tax has not any distortion onmarket forces in relation of optimized allocation of resources. The neutrality ofvalue added tax is one of the key reasons of acceptance of it by the central andeastern European countries.


8.4.2 Disadvantages of value added tax

Usually the governments and their policy maker who have the valueadded tax system in their agenda , due to the following reasons are worry aboutthe implementation of it as their taxation system:

1. The diminution effects of value added tax

As the value added tax in practice is a tax on consumption and usuallycalculated with a fix rate on predetermined commodities, therefore the screw oftaxes on low income peoples is greater than the other groups of income. So it iswhy those countries that starting to use VAT for the first time are worry aboutthe diminution nature of it.

There is an answer to above critics and that is as follows:

(1) value added tax is not following the social equity objective and theinequity of tax rates by implementing other supporting polices of governmentsfrom low income groups can be justified.

(2) It can be asked the same question from the opposition of VAT, Dothe traditional tax systems really completely fulfill their social equity objectives ?and finally because a portion of governments incomes are indirect taxes , theeffects of diminution of VAT in comparison to the other kind of taxation especiallytax on sales in different stages is significantly lower.

2. The effects of value added tax on increases of prices level

Some times the above mentioned sentence appear as a criticism againstVAT, but the experience of those countries which implement and used the VATshows that there is not any thing to be worry about, because first of all theopposition of VAT can’t propose any rational reasons for increasing the generalprice levels and secondly using the VAT system cause a deflation on economyand as a result has a deflation effects on economy.

8.5 Difference between VAT and Sales TAXThe following are the differences between VAT and sales tax

1. The current Sales Tax is not applicable to all goods and services. Forexample, raw materials purchased for manufacturing goods in Hyderabad arenot subject to tax, nor are many food items and most building materials. Similarly,some services are excluded from the scope of the tax - construction servicesand bar/restaurant services, for example. VAT will apply to virtually all goodsand services.


2. Most local enterprises pay Sales Tax at the time of importation. Thistax is then recovered, like any other business expense, through the prices fixedby businesses for the goods and services they sell. At present, businesses arenot required to issue special invoices or to identify the sales tax paid or payableon invoices or till slips. Enterprises engaged in manufacturing activities in Botswanawith a turnover above Rs. 75,000 per annum are required to register for salestax and must charge and account for 10% sales tax on all sales. Thesemanufacturing enterprises are exempt from Sales Tax on their main raw materialpurchases.

3. For those services which are covered by Sales Tax, there is noregistration threshold. Therefore, all enterprises have to collect and account for10% tax on their sales. Moreover, service providers do not qualify for any reliefin respect of sales tax paid on any inputs.

4. With VAT, all enterprises making taxable supplies above a value ofRs. 250,000 per annum must register and are therefore obliged to apply VATon all sales of taxable supplies. This means that wholesalers and retailers will berequired to register if they have a turnover of more then Rs. 250,000 per annum.On the other hand, small service providers will drop out of the tax net. However,the net effect of the change from Sales Tax to VAT should be a significant increasein the taxpayer base.

5. Under Sales Tax, most imports are assessed for tax at the time ofimportation and no further liability arises as the goods go through wholesalersand retailers to final consumers. Under VAT, however, all imports will be assessedfor VAT at the time of importation and the VAT payable on imports will beallowed as a deduction against the output tax charged on sales made by importerswho are registered for VAT purposes.

6. As the VAT will apply all the way through from importation/productionto the final sale to consumer, VAT will generally apply to the full price payable byconsumers. This should mean a significantly improved value base compared tothe Sales Tax which applies tax only to the value of imports or the ex-factoryvalue of goods.


8.6 VAT rates in Andhra PradeshList of goods Exempt from tax Under Section 7Name of the Commodity

Agricultural implements manually operated or animal driven

Aids and implements used by handicapped persons

Aquatic feed, poultry feed and cattle feed including grass, hay and straw

Betel leaves

Books, periodicals and journals

Charkha, Ambar Charkha and Gandhi Topi

Charcoal

Jowar, Maize, Ragi, Bajra, Kodan, Kutki, Barley, Varigalu or varigarice, Korralu or Korra Rice.

Condoms and contraceptives

Cotton yarn in hank and silk yarn in hank

Curd, Lussi, Butter Milk and separated milk

Earthen pot

Electrical energy

Firewood other than asuarinas poles, eucalyptus logs and cut sizesthere of.

Fishnet and fishnet fabrics

Fresh milk and pasteurized milk other than UHT milk and skimmedmilk powder

Fresh plants, saplings and fresh flowers

Vegetables and fruits other than those cured, frozen, preserved,processed, dried, dehydrated or canned.

Garlic and Ginger

Bangles made of shell, Glass, Lac or Plastic

Handlooms, parts and accessories thereof and goods produced fromhandlooms

Sl.No.

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.


Human blood and blood plasma

Kumkum, Bindi, alta and Sindur

Meat, Fish, Chicken, prawn, prawn seed and other aquatic productswhen not cured or frozen, and eggs, livestock and animal hair

National Flag

Organic manure

Non-judicial stamp paper sold by Government Treasuries; postal itemslike envelope, post card etc. Sold by Government; rupee note, whensold to the Reserve Bank of India and cheques, loose or in book form

Raw wool

Semen including frozen semen

Silk worm laying, cocoon and raw silk

Slate and slate pencils

Tender green coconut

Toddy, Neera and Arak

Unbranded bread

Unprocessed and unbranded Salt

Water other than-(i) aerated, mineral, distilled, medicinal, ionic, battery,de-mineralised water, and (ii) Water sold in sealed container

Prasadam, Bhog or Maha Bhog by Religious Institutions

Plantain Leaves , Bamboo Matting

Puffed Rice, Parched Rice, Murmuralu and Atukulu

Husk of pulses, paddy, groundnut and wheat bran

Leaf plates and leaf cups-pressed or stitched and loose and unstitchedvistarakulu

Unbranded broomsticks

Seeds for sowing and gardening puposes.

Cotton Fabrics., man made fabrics and woolen fabrics

Sugar , Tobacco

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

44.

45.


Schedule – III

List of goods taxable @ 1%

Schedule IV

List of goods taxable @ 4%

Name of the Commodity

Agricultural implements not operated manually or not driven by animal

All intangible goods including copyright, patent, rep license, DEPB

All kinds of bricks including fly ash bricks, refractory bricks

Asphaltic roofing sheets

Earthen tiles other than ceramic and glazed tiles

All types of yarn and sewing thread other than cotton yarn in hank andsilk yarn in hank.

Aluminium utensils and enameled utensils

Arecanut, betel nut and betel nut powder

Bamboos, Casuarina poles, eucalyptus logs and cut sizes thereof

Bearings of all kinds

Beedi leaves

Transmission rubber belts

Bicycles, tricycles, cycle rickshaws & parts and accessories thereof

S.No

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

Name of the Commodity

Bullion and Specie

Articles and Jewellery made of bullion or specie or both andJewellery embedded with precious stones and semi-preciousstones and gold coated or gold covered jewellery

Precious stones, that is to say, Diamonds, Emeralds, Rubees,Sapphires and semi-precious stones and pearls

S.No

1.

2.

3.


Bitumen

Branded bread

Bulk Drugs

Centrifugal, monobloc and submersible pumps.

Coffee beans and seeds, cocoa pod, green tea leaf and chicory

Chemical fertilizers and Bone Meal including mixtures or Nurientelements such as Iron, Zinc, Copper and biological derivatives such asEnzymes, Co-enzymes and Aucines

Pesticides, Insecticides, fungicides, herbicides, weedicides and otherplant protection equipment and accessories thereof

Coir and Coir products excluding coir mattresses

Cotton waste and Cotton yarn waste

Crucibles

Electrodes including welding electrodes and welding rods

Exercise Note books including Graph books and laboratory note books,Office stationery including computer stationery, writing pads andAccount Ledgers

Fibres of all types and fibre waste

Ferrous and non-ferrous metals and alloys and extrusions thereof

Flour, Atta, Maida, Suji, Besan and Ravva

Parched and fried grams or dhalls

Jaggery

Hand Pumps, parts and fittings thereof

Herb, bark, dry plant, dry root, commodity known as jari booti anddry flower

Hose Pipes

Hosiery goods of all kinds

Rice bran including de-oiled rice bran

Ice

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.


Incense Sticks commonly known as, Agarbathi, dhupkathi or dhupati

Industrial cables, (High voltage cables, XI. PE Cables, Jelly filledcables, optical fibre cables)

IT Products (with HSN Codes), that is to say

(1) Word Processing Machines and Electronic Typewriters (84.69)

(2) Electronic Calculators (84.70)

(3) Computer Systems and Peripherals, Electronic Diaries (84.71)

(4) Parts and Accessories of HSN 84.69,84.70 and 84, 71 for items listed above (84.73)

(5) DC Micromotors / Stepper motors of an output not exceeding 37.5 Watts (85.01)

(6) Parts of HSN 85.01 for items listed above (85.03)

(7) Uninterrupted Power Supplies (UPS) and their parts (85.04)

(8) Permanent magnets and articles intended to become permanent magnets (Ferrites) (85.05)

(9) Electrical Apparatus for line telephony or line telegraphy, including line telephone sets with cordless handsets and telecommunication apparatus for carries-current line systems or for digital line systems; videophones (85.17)

(10) Microphones, Multimedia Speakers, Headphones, Earphones and Combined Microphone / Speaker Sets and their part (85.18)

(11) Telephone answering machines (85.20)

(12) Parts of Telephone answering machines (85.22)

(13) Prepared unrecorded media for sound recording or similar recording of other phenomena (85.23)

(14) IT software on any media (85.24)

(15) Transmission apparatus other than apparatus for radio broadcastingor TV broadcasting, transmission apparatus incorporating reception apparatus, digital still image video cameras (85.25)

37.

38.

39.


(16) Radio communication receivers, Radio pagers (85.27)

(i) Aerials, antennas and their parts (85.29)

(ii) Parts of items at 85.25 and 85.27 listed above (85.29)

(17) LCD Panels, LED Panels and parts thereof (85.31)

(18) Electrical capacitors, fixed, variable or adjustable (Pre-set) and parts thereof (85.32)

(19) Electrical resistors (including rheostats and potentiometers), other than heating resistors (85.33)

(20) Printed circuits (85.34)

(21) Switches, Connectors and Relays for upto 5 AMPS at voltage not exceeding 250 Volts, Electronic fuses (85.36)

(22) Data/Graphic Display tubes, other than TV Picture tubes and parts thereof (85.40)

(23) Diodes, transistors and similar semi-conductor devices; Photosensitive semi-conductor devices, including photovoltaic cells whether or not assembled in modules or made up into panels; Light emitting diodes; Mounted piezo-electric crystals (85.41)

(24) Electronic Integrated Circuits and Micro – assemblies (85.42)

(25) Signal generators and parts thereof (85.43)

(26) Optical fibre cables (85.44)

(27) Optical fibre and optical fibre bundles and cables (90.01)

(28) Liquid Crystal Devices, Flat Panel display devices and parts thereof (90.13)

(29) Cathode ray oscilloscopes, Spectrum Analysers, Cross-talk meters, Grain measuring instruments, Distortion factor meters, Psophometers, Network & Logic analyzer and Signal analyzer

Kerosene sold through public distribution system

Nawar

Napa Slabs (Rough and polished flooring stones)

Ores and minerals

40.

41.

42.

43.


Paper of all kinds and news print

Pipes of all varieties including G.I. Pipes, C.I. Pipes, ductile pipes andPVC Pipes

Plastic footwear

Printed material like diary, calendar etc.,

Printing Ink excluding toner and cartridges

Processed and branded salt

Pulp of bamboo, wood, waste paper and bagasse

Rail coaches, engines and wagons

Readymade Garments

Renewable energy devices and spare parts

Safety Matches

Sewing Machines and parts and accessories thereof

Ships and other vessels

Silk fabrics other than Handloom silk fabrics

Skimmed Milk Powder and UHT Milk

Spices of all varieties and forms including cumin seed, aniseed, turmericand dry chillies

Sports goods excluding apparels and footwear

Starch and Sago

Tamarind, Tamarind seed, dhall, kernel, powder and husk

Tractors and Threshers, Harvesters and attachments and parts thereof

Transmission towers

Umbrellas

Vanaspathi, Hydrogenated Vegetable Oil.

Vegetable Oils – All kinds of vegetable Oils including solvent oils andCoconut Oil

Writing Instruments

44.

45.

46.

47.

48.

49.

50.

51.

52.

53.

54.

55.

56.

57.

58.

59.

60.

61.

62.

63.

64.

65.

66.

67.

68.


Coal Including coke in all its forms, but excluding charcoal

Iron and steel, that is to say:

(i) Pig Iron, Sponge Iron, and cast iron including ingot moulds, and bottom plates.

(ii) Steel semis, ingots, slabs, blooms and billets of all qualities, shapes and sizes.

(iii) Skelp bars, tin bars, sheet bars, hoe-bars and sleeper bars;

(iv) Steel bars, rounds, rods, squares, flats, octagons and hexagons; plain and ribbed or twisted, in coil from as well as straight length

(v) Steel structurals, angles, joints, channels, tees, sheet piling sections, Z sections or any other rolled sections

(vi) Sheets, hoops, strips and skelp, both black and galvanized, hot and cold rolled, plain and corrugated in all qualities, in straight lengths and in coil form as rolled and in revitted condition.

(vii) Plates, both plain and chequered in all qualities

(viii) Discs, rings, forgings and steel castings;

(ix) Tool, alloy and special steels of any of the above categories

(x) Steel tubes, both welded and seamless, of all diameters and lengths including tube fittings

(xi) Tin-plates, both hot dipped and electrolytic and tin free plates

(xii) Fish plate bars, bearing plate bars, crossing sleeper bars, fish plates, bearing plates, crossing sleepers and pressed steel sleepers, rails – heavy and light crane rails;

(xiii) Wheels, tyres, axies and wheel sets

(xiv) Wire rods and wires rolled, drawn, galvanized, aluminized, tinned or coated such as by copper

Iron and Steel scrap, that is to say

(i) Iron scrap, cast-iron scrap, runner scrap and iron skull scrap

(ii) Steel melting scrap in all forms including steel skull, turnings and borings

69.

70.

71.


72.

73.

74.

75.

76.

77.

78.

(iii) Defectives, rejects, cuttings or end pieces of any of the categoriesof item (i) to (xiv) of entry 71

Oil Seeds, that is to say

(i) Sesamum or Til (orientale)

(ii) Soyabeen (Glycine seja)

(iii) Rape seed and mustard 1. Toria (Brassica campestris vartoria) 2. Rai (Brassica Juncea) 3. Jamba – Taramira (Eruca satiya) 4. Sarcon – yellow and brown (brassica compestris varsarson) 5. Banarasi Rai or True mustard (Brassica nigra)

(iv) Linseed (linum usitatissimum)

(v) Sunflower (Helianthus annus)

(vi) Nigar seed (Guizotia abyssinica)

(vii) Neem, vepa (Azadi rachta indica)

(viii) Mahua, illupai, ippe (Madhuca indica, M. Latifolia), Bassia, Latifolia and Madhuca Longifolia Syn. M. Longifolia)

(ix) Karanja, Pongam, Honga (Pongamia pinnata syn. P Glabra)

(x) Kusum (Schleichera Oleosa, syn. S. Trijuga)

(xi) Punna undi(Calophyllum, inophyllum)

(xii) Kokum (Carcinia indica)

(xiii) Sal (Shorea robusta);

(xiv) Tung (Aleurite Jordi and A.Montana)

(xv) Red Palm (elaeis guinenisis)

(xvi) Safflower (corthanus tinctorius)

Castor (Ricinus communis)

Coconuts other than tender coconuts (cocos nucifera)

Copra

Groundnut or peanut (hypogea)

Cotton seeds

Jute, Cotton, Crude Oil


Schedule VI ( Goods subjected to tax at special rates) of 12.5%

Description

a Longifolia Syn. M. Longifolia)

Hides and Skins, Tanned or Un-Tanned

All kinds of Pulses and Dhalls

Wheat

Paddy (Oryza sativa L)

Rice (Oryza sativa L.)

P.V.C. cloth, Waterproof cloth, Tarpaulin and Rexine

Oil cakes and Deoiled cakes

“Drugs & Medicines

Veterinary medicines including Poultry Feed supplements

All kinds of packing material including Hessian cloth and jute twine butexcluding storage tanks made of any materials.

79.

80.

81.

82.

83.

84.

85.

86.

87.

88.

All liquors, bottled and packed asper the provisions of the A.P. ExciseAct,1968 (including imported liquor)but excluding toddy and arrack

(a) Where cost of such liquor is morethan A 700/-per case.

(b) Where cost of such liquor is A700/- or below per case

Petrol

Aviation motor spirit and any othemotor spirit.

Aviation turbine fuel

Diesel Oil

Point of levy

At the point of firstsale in the State.

At the point of firstsale in the State.

At the point of firstsale in the State




Rate of tax

90%

70%

32.55%

32.55%

32.55%

21.33%

1.

2.

3.

4.

5.


Explanation – I

For the purpose of item (1) when any distillery or brewery or any dealersells liquor to the Andhra Pradesh Beverages Corporation Limited, or CanteenStores Department, the sale by the Andhra Pradesh Beverages CorporationLimited or Canteen Stores Department shall be deemed to be the first sale.

Explanation – II:-

For the purpose if item (1) sale of liquor by any distillery or brewery oranydealer to Andhra Pradesh Beverages Corporation Limited or Canteen Stores.Department shall be exempt from tax under this Act.

Explanation III

For the purpose of item(1) , a case means 12 number of 1000ml; 12numbers of 750 ml; 24 numbers of 375ml; 48 numbers of 150ml; 90 numbersof 100 ml bottles of IML/Wine and 12 number of bottles of Beer.

Explanation – IV

For the purpose of items 2,3,4 and 5 a sale by one oil company toanother oil company shall not be deemed to be the first sale in the State.Accordingly any sale by one oil company to any other person (not being an oilcompany) shall be deemed to be the first sale in the State.

Note: The expression ‘oil company’ in this explanation means:

(a) Hindustan Petroleum Corporation Limited

(b) Indian Oil Corporation Limited

(c) Bharat Petroleum Corporation Limited

(d) Indo-Burma Petroleum Company Limited

(e) Chennai Petroleum Corporation Limited and

(f) Reliance Industries

(g) Reliance Petro Marketing Private Ltd

(h) Reliance Petroleum Private Ltd.,

(i) Oil Natural Gas Commission

(j) Such other oil company as the Government may, from time totime, by notification in the Gazette specify in this behalf.


8.6 Registration Procedure under AP VAT Act, 2005(1) Every dealer other than a casual trader shall be liable to be registered

in accordance with the provisions of the Act.

(2) Every dealer commencing business and whose estimated taxableturnover for twelve consecutive months is more than Rs.40,00,000/- (Rupeesforty lakhs only) shall be liable to be registered as a VAT dealer before thecommencement of business.

(3) Every dealer whose taxable turnover in the preceding three monthsexceeds A10,00,000/- (Rupees ten lakhs only) or in the twelve preceding monthsexceeds A 40,00,000/- (Rupees forty lakhs only ) shall be liable to be registeredas a VAT dealer.

(4) Every dealer whose taxable turnover during the period from 1stJanuary 2004 to 31st December 2004 is more than Rs.40,00,000/- (Rupeesforty lakhs only), shall be liable to be registered as a VAT dealer.

(5) Notwithstanding anything contained in sub-sections (2), (3) and (4),the following classes of dealers shall be liable to be registered as VAT dealersirrespective of their taxable turnover namely.

(a) Every dealer importing goods in the course of business from outsidethe territory of India;

(b) Every dealer registered or liable to be registered under the CentralSales Tax Act 1956, or any dealer making purchases or sales in the course ofinterstate trade or commerce or dispatches any goods to a place outside theState otherwise than by way of sale;

(c) Every dealer residing outside the State but carrying on business withinthe State and not having any permanent place of business;

(d) Every dealer liable to pay tax on goods listed in Schedule VI;

(e) Every commission agent, broker, delcredere agent, auctioneer orany other mercantile agent by whatever name called, who carries on the businessof buying, selling, supplying or distributing goods on behalf of any non residentprincipal.

(f) Every dealer availing sales tax deferment or sales tax holiday;

(g) Every dealer executing any works contract exceeding Rs.5,00,000/- (Rupees five lakhs only) for the Government or local authority or every dealeropting to pay tax by way of composition on works contract;


(h) every dealer liable to pay tax under sub-section (9) of section 4 ofthe Act; (Clause (h) is inserted by Act No 10 of 2006, dated 4th January 2006,w.e.f 1-12-2005.)

(6) (a) Any dealer effecting sale of goods liable to tax under the Act andwho is not otherwise liable to register may also opt for registration as a VATdealer and such registration shall be subject to such conditions as may beprescribed

(b) Any dealer intending to effect sale of goods liable to tax under theAct, and who is not otherwise liable to register, may also opt for registration asa VAT dealer and such registration shall be subject to such conditions as may beprescribed.

(7) Every dealer not registered or not liable for registration as VATdealer and who sells any goods and has a taxable turnover exceeding A 5,00,000/- (Rupees five lakhs only) in a period of twelve consecutive months or hasreason to believe that his taxable turnover in a period of twelve consecutivemonths will exceed A 5,00,000/- (Rupees five lakhs only), shall apply forregistration as TOT dealer in the manner prescribed.

(8) Subject to the provisions contained in sub-section (5), every dealerwho held a registration certificate under the Andhra Pradesh General Sales TaxAct 1957 shall be deemed to be registered as TOT dealer under the Act providedthe dealer had a taxable turnover exceeding A 5,00,000/- (Rupees five lakhsonly ) but below A 40,00,000/- (Rupees forty lakhs only) during the periodfrom 1st January, 2004 to 31st December, 2004 and had not discontinued hisbusiness or his Registration Certificate had not been cancelled during that period.

(9) Where a registered dealer dies or transfers or otherwise disposes ofhis business in whole, the successor or the transferee, unless already in possessionof registration shall be liable to be registered under the Act.

(10) An application for registration shall be made to the authorityprescribed in such manner and within such time as may be prescribed.

(11) If the authority to whom an application is made under sub-section(10) is satisfied that the application is bonafide and is in order and in conformitywith the provisions of the Act and the rules made thereunder, he shall register theapplicant and grant him a certificate of registration in the prescribed form.

18. (1) The authority prescribed shall issue a registration identificationnumber known as:


(a) Taxpayer Identification Number (TIN) to a dealer registered as VATdealer;

(b) General Registration Number (GRN) to a dealer registered as TOTdealer.

(2) Every VAT dealer or TOT dealer who is allotted a TaxpayerIdentification Number (TIN) or General Registration Number (GRN) shallindicate such number on all returns, forms, tax invoices or any other documentsused for the purposes of the Act.

19. (1) Any VAT dealer or TOT dealer registered under Section 17 ofthe Act shall apply for cancellation or amendment of registration, in suchcircumstances as may be prescribed.

(2) The authority prescribed may, for good and sufficient reasons cancel,modify or amend any certificate of registration issued by him: provided that noorder shall be passed under this sub-section without giving the dealer a reasonableopportunity of being heard.

Short Answe rType Questions1. Define VAT.

2. Mention any four exempted goods from tax under Sec. 7.

3. Mention any four goods which are taxable at 1%.

4. Mention any four goods which are taxable @4%.

Long Answer Type Questions1. Explain the objectives of VAT.

2. Explain the advantages and disadvantages of VAT.

3. Explain the differences between VAT and Salestax.

4. Mention any 10 exempted goos from tax u/s 7.

5. Mention any 10 list of goods which are taxable @ 4%.

6. What is the registration procedure under AP VAT Act 2005.

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