Profits and Gains of Business or Profession [Ss. 28 to 44 DB]

Under Section 28 of the Income Tax Act, the following types of incomes are chargeable to tax under the head “Profits and Gains of Business or Profession”.(i) Profits and gains of any business or profession which was carried on by the

assessee at any time during the previous year;Profession [S. 2 (36)] – profession includes vocation.(ii) Compensations due to or received:Any compensation or other payment due to or received for termination of an appointment or modification of its terms by – (a) A person, managing the whole or substantially the whole of the affairs of an Indian company;(b) a person, managing the whole or substantially the whole of the affairs in India of a non – Indian company;(c) a person, holding an agency in India for any part of the activities relating to the business of any other person;(d) any compensation paid or due for or in connection with the vesting of the management of any property or business in the government or a government controlled corporation.

(iii) Income of Trade Association etc. :Income derived by a trade, professional or similar association from specific services performed for its members;(iv) Receipts in connection with foreign trade:(a) Profits on sale of a licence granted under the Imports (Control) Order, 1955 usually called as Import Entitlement Licences;(b) Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India; (c) Repayment of any Customs or Excise Duty to any person against exports usually called as draw back of Customs or Excise Duties for exports;(d) Any profit on the transfer of the Duty Entitlement Pass Book scheme, being duty Remission Scheme under the Export and Import Policy;(v) Value of any Benefit or Perquisite:The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;(vi) Receipts of a partner from the firm:Any interest, salary, bonus, commission or remuneration received by a partner from firm;

Other receipts: (vii) Any sum whether received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business or not to share any know how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature; or information or technique likely to assist in the manufacture or processing of goods or provision for services.(viii) Any sum received under Keyman Insurance Policy(ix) Income from speculative transaction must be deemed as distinct and separate from any other business. [Explanation 2]Section 43(5) defines speculative transaction CIT vs. Shantilal (P) Ltd., [1983] 144 ITR 57 (SC) - payment of damages for breach of contract is not the same thing as settlement of contract otherwise than actual delivery of commodities.Business [S. 2(13)]: includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture.Trade: State of Punjab vs. Bajaj Electricals Ltd. [1968] 70 ITR 730(SC) observed: trade in its primary sense is the exchange of goods for goods or goods for money.

Commerce: If a person purchases goods with a view to selling them at profit, it is an ordinary case of trade. If such transactions are repeated on a large scale, it is called commerce.Manufacture: U.o.I. vs. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791

Adventure in the nature of Trade:G. Venkataswami Naidu & Co. vs. C.I.T. (1959) 35 ITR 594 (SC): Tests for determination:1. Is the purchaser a trader and are the purchases of the commodities and its

resale, allied to his usual trade or business, incidental to it?2. What was the nature and quantity of the commodity purchased and resold?3. Did the purchaser by an act subsequent to the purchase improve the quality

of the commodity to make that readily resalable?4. Were the transactions repeated?5. In regard to purchase of commodity, did the element of pride of possession

come into the picture?6. Dominating intention at the time of purchase whether to enjoy or to resale

Incomes though appear to be business income but not taxable under the head “Profits and Gains of Business or Profession”:1. Rent of House property even if property constitutes stock – in

– trade2. Dividends on shares in case of a dealer in shares3. Winnings from lotteries, races etc..4. Interests received on compensation or interest on enhanced

compensation even if it pertains to a regular business activity5. Sums received after discontinuance of a Business or Profession

– Taxable u/s 176 (3A)

Income from letting out business asset:C.E.P.T. vs. Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) – Assessee doing business of manufacturing silk cloth and dyeing silk yarn, let out his assets on monthly rent in the relevant accounting year – held business income.Universal Plast Ltd. vs. CIT [1999] 237 ITR 454 (SC) – held, where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same. In former case rent will be taxable under the head Income from Other Sources, in latter case as business income.Income from Illegal Business:Minister of Finance vs. Smith (1927) AC 193 (PC) – Assessee may be prosecuted for the offence but income is taxable.CIT vs. Kothari (1971) 82 ITR 794 (SC) – Income is taxable and not the gross receiptCIT vs Piara Singh (1980)124 ITR 40 (SC) – Loss sustained due to confiscation of gold or currency in smuggling business is deductible.

T.A. Qureshi vs. CIT [2006] 287 ITR 547 (SC) - Loss arising as a result of seizure and confiscation of illegal stock – in – trade is allowable as a business loss against income from illegal business. In this case heroin worth Rs. 2 Lakh was seized. Held: Explanation to Section 37(1) has no application to this case as the claim was of a business loss and not business expenditure. Explanation to S. 37 (1) – says: “For the removal of doubts, it is hereby declared that any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure”.

Income from profits and gains of business or profession, how computed [S. 29]:Section 29 lays down that income referred to in Section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D.Sections 30 to 36 lay down specific deductions/allowances admissible.Section 37(1) is a residuary section which allows deductions of business expenditures not covered under Sections 30 to 36. This is on the basis of accepted commercial principles.Section 38 lays down that where any building, plant, machinery or furniture is not exclusively used for the purposes of business or profession, deductions in respect thereof under Sections 30, 31 or 32 will be restricted to a fair proportionate part thereof which is attributable to the use for business or profession.Sections 37(2B), 40, 40A and 43B cover expenses which are not deductible, e.g. expenditures on advertisements published in souvenir, brochure etc. published by a political party, salary, interest royalty or fee for technical services paid outside India on which tax is not deducted at

source, payments made in a day to a person over Rs. 20,000/- otherwise than by an account payee cheque or account payee bank draft etc. Section 41 deals with deemed profits in cases where loss, expenditure, or trading liability was allowed as deduction but later any amount or benefit in respect thereof has been received by the assessee or his successor.Section 42 lays down special provision for deductions in case of business for prospecting, etc. for mineral oil.Sections 43C and 43D lay down special provisions for computation of cost of acquisition of certain assets and special provisions in case of income of public financial institutions, public companies etc. respectively.Section 44 lays down that Profits and Gains of Insurance Business will be computed in accordance with rules contained in the First Schedule.Sections 44A makes special provisions for deduction in the case of trade, professional or similar association.

Section 44AA casts a duty on certain persons carrying on profession or business to maintain accounts. For example, those whose income from business or profession exceeds 1 lakh 20 thousand rupees or total sales, turnover or gross receipts exceeds ten lakh rupees in any of the three years immediately preceding the previous year.Sections 44AB casts a duty on certain persons carrying on business or profession to get his accounts audited.Sections 44 AD to 44BD lay down special provisions for computation of profits and gains or for deductions in cases of certain businesses or professions.

General Principles regarding admissibility of Allowances and Deductions:1. List of allowances is not exhaustive2. Allowances are cumulative and not mutually exclusive3. Expenditure and losses in unlawful business:

CIT vs. Piara Singh (1980) 124 ITR 40 (SC) = AIR 1980 SC 1271; Dr. T.A. Quereshi vs. C.I.T (2006) 157 Taxman 514 (SC)].

4. No allowance in respect of exhaustion of capital or wasting assets

5. Expenditure claimed should have been incurred in the previous year. Exceptions: Ss. 41 and 176.

6. Business should be carried on during the previous year7. Expenditure should have been incurred in connection with

assessee’s own business8. No allowance in respect of a business set up after the date of

expenditure. Exception – S. 35D (Amortization of certain preliminary expenses)

9. Relevance of distinction between capital and revenue expenditure

Deductions Expressly Allowed:1. Expenses in respect of Business Premises [Section 30]

(i) Rent paid for premises(ii) Repair charges incurred but not of capital nature(iii) Any sums paid as land revenue, local taxes or Municipal Taxes(iv) Premium paid in respect of any insurance against risk of damage or destruction of premises.Note:(i) Rent paid to partner by the Firm also allowed(ii) If the assessee is a tenant and part of the premises is used as dwelling house, deduction will be allowed proportionately.

2. Repairs and Insurance of Machinery, Plant and Furniture being used for business purpose: [Section 31] (i) Current Repairs – not of capital nature(ii) Premium paid against risk of damage or destruction

3. Depreciation Allowance [Section 32]Reason for Allowance:Conditions:(i) confined to buildings, machinery, plant or furniture being

tangible assets; or Know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1.4.1998;

(ii) The asset must be owned by the assessee either wholly or partly;(iii) The asset must have been used for the purpose of business or profession in the accounting year.Building:C.I.T. vs. Alps Theatre [1967] 65 ITR 377 (SC) – held cost of land should be excluded from total cost of building.Approach roads, drains, fences are part of building.

Machinery and Plant:CIT vs. Mir Mohammad [1964]53 ITR 165 (SC) – both words bear the same meaning.S. 43 (3) defines plant as including ships, vehicles, books, scientific apparatus and surgical equipments but does not include tea bushes or live stocks (e.g. animals and human body).Plant in its ordinary sense includes whatever apparatus is used by a businessman or Professional for carrying on his business or profession not being his stock – in – trade.Thus plant has been held to include knives, loose tools, bottles and shells used by the manufacturer of soft drinks, gas cylinders, sanitary and pipeline fittings, electric fittings, ceiling and pedestal fans, internal telephone system, air – conditioning equipments, wells, fencing around a refinery etc. – may be in residential quarters or on premises of a business.Even buildings or rooms may be plant e.g. cold storage room in case of ice-cream manufacturer.

In deciding whether a structure is building or plant, functional test should be applied i.e. is it an apparatus with which the business is carried on, or a part of the premises in which the business is carried on. Former is a plant, latter is not.Commissioner of Income Tax vs. Anand Theatres [2000] 244 ITR 192 (SC) Hotel buildings and cinema theatres are not plants. Earlier case CIT vs. Dr. B. Venkata Rao [2000] 243 ITR 81 where building in which nursing home was carried on was held as a plant has been overruled.Recently the Supreme Court in ACIT vs. Victory Aqua Farm Ltd. decided on Sept. 4, 2015 held that a pond designed for rearing /breeding prawns is a “plant”.

(ii) Asset must be owned by the Assessee:(a) So, if assessee is a lessee of the assets, he is not entitled.(b) Assessee may be lessee of the land but he may be owner of the building(c) Assessee, a lessee of the building if makes any alteration or extension of permanent nature, he can claim depreciation on that part. [Explanation 1 to S. 32 (1)(d) Mysore Minerals Ltd. vs. CIT [1999] 239 ITR 775 (SC) – held if ownership has been acquired under an agreement but legal title is not transferred because of non – registration still transferee will be owner.(e) Depreciation in Hire Purchase agreements – depends upon terms of the agreement – if effect is immediate transfer of ownership, depreciation may be claimed as if asset purchased on installment. In such cases lessor under the agreement can sue for arrears of installments due but not to recover the asset back. If the agreement is that hirer will become owner when the last installment is paid or has option to purchase, the installments paid will be allowed as business expenditure.

(iii) Use of asset in Accounting Year:(a) Not necessary to be used throughout the Previous Year(b) Trial production as well as Commercial production both amount to use(c) Active use and passive use(d) Use of asset for less than 180 days in the year (P.Y.) of acquisition –

Depreciation @ 50% of normal rate [Second Proviso to S.32](e) Additional Depreciation Allowance on Plant or Machinery [S.32(1)

(iia)]:(i) If Plant or Machinery has been acquired or installed after 31.03.2005 by an assessee engaged in business of manufacture or production of any article or thing or generation and / or distribution of power, additional depreciation shall be allowed @ 20% of the actual cost.(ii) If assessee sets up an undertaking or enterprise after 31.03.2015 but before 1.4.2020 in notified backward area of State of Andhra Pradesh, Bihar, Telengana or West Bengal, additional depreciation will be allowed @ 35% of actual cost.In the aforesaid cases if asset is put to use for less than 180 days in the previous year in which it is acquired, additional depreciation will be 50% i.e. 10% or 17.5% as the case may be.

S. 38 (2) provides that in cases where any asset is used for business as well as for some other purpose (say personal use of the assessee) the depreciation shall be proportionately reduced.Computation of Depreciation: Two methods:(i) Straight Line Method: Applicable in case of assets used in generation or

generation and distribution of power w.e.f. 1.4.1998 (F.A. 1998)(ii) Written Down Value Method: In this method Depreciation is calculated as

certain percentage of the written down value of the block of the assets as is prescribed. There are 13 blocks of assets (Out of which 12 blocks are for tangible assets and one block is for intangible assets) and for each block different percentage has been prescribed as rate of depreciation. (e.g. 5%, 10%, 15%, 20%, 25%, 40%, 50%, 60%, 80%, and 100%)

Written Down Value: [S. 43 (6)]Written down value of a block of assets means the depreciated value of that block of assets on 1st day of the p.y. as increased by actual cost of any asset acquired in that block during the said p.y. and reduced by the sale proceeds of any assets disposed of during the said p.y. of that block. If the sale price of the assets exceeds the written down value of the block, the excess will be treated as a short term capital gain u/s 50.

S. No.

BLOCKS OF ASSETS Rate of Depreciation

Tangible Assets:1. Buildings:

(i) Buildings which are mainly used for residential purposes except Hotels and Boarding Houses

5%

(ii) Buildings other than those used mainly for residential purposes and not covered by (i) and (iii)

10%

(iii) Buildings acquired after 31.08.2002 for installing machinery and plant forming part of water supply project or water treatment system and which is put to use for the purpose of business of providing infrastructure facilities

100%

(iv) Purely temporary erections such as wooden structure

100%

2. Furniture and Fittings:Furniture and fittings including electrical fittings, electric fittings include electrical wiring, switches, sockets, other fittings and fans, etc.

10%

3. Machinery and PlantA. General Rate: Applicable to all machinery or plant other than certain specified machines and plants

15%

B. Special Rates:(i) Motor Buses, motor lorries and motor taxies used in a business of running them on hire

30%

(ii) Aeroplanes and aeroengines 40%(iii) Motor cars (other than those used in a business of running them on hire) acquired or put to use on or after 1st April, 1990

15%

(iv) Books for professional use: (a) Books being annual publication 100% (b) Other books 60%(v) Computers (including computer software) 60%(vi) Life saving medical equipments 40%(vii) Ships and boats 20%

4. INTANGIBLE ASSETSKnow–how, Patents, Copyrights, Trade– Marks, licences, franchises or any other business or commercial rights of similar nature

25%

Actual Cost: [S. 43(1)] – means the actual cost of the assets to the assessee as reduced by that portion of the cost thereof, if any, as has been met, directly or indirectly by any other person or authority.

Chellapalli Sugar Mlls Ltd. vs. CIT (1975) 98 ITR 167 (SC) – held actual cost includes all expenditure necessary to bring such assets into existence and to put them in working conditions, e.g. interest paid before production started, Excise Duty, Sales Tax, Octroi, railway freight, insurance, transport charge, preliminary expenses e.g. stamp duty, registration fee, visit of employees to foreign country in respect to installation of plant or machinery etc.

Cases in which Actual Cost is taken at a notional figures:Various explanations to S. 43 – 1. Where asset is used in business after it ceases to be used for scientific research – as reduced by the amount of any deduction allowed (e.g. u/s 35) [Explanation 1]2. Where an asset is acquired by Gift or inheritance – Actual cost to assessee will be actual cost to the previous owner as reduced by amount of depreciation deemed to have been allowed on such asset. [Explanation 2]3. Where before the date of acquisition by the assessee, the assets were used by any other person for the purpose of his business or profession and the A. O. is satisfied that the main purpose of transfer of such asset to the assessee is the reduction of tax liability, the actual cost of the assets will be such amount as the A.O. may, with previous approval of Dy. Commr. determine having regard to all circumstances of the case. [Explanation 3]4. Where a business asset is transferred by the assessee to another person and is subsequently reacquired by him, the actual cost would be the actual cost to the assessee when he first acquired it as reduced by the amount of depreciation deemed to have been allowed in respect of such asset or actual cost at the time of reacquisition whichever is less. [Explanation 4]

5. Where a building, previously the property of the assessee, is brought into use for the purpose of business or profession, the actual cost of the asset to the assessee will be actual cost of the building to the assessee as reduced by depreciation which would have been allowable had the building been used for business or profession since the date of its acquisition by the assessee. [Explanation 5]6. Where a parent company transfers any asset to its 100% subsidiary Indian Company or vice versa, the actual cost of the asset to transferee company will be the same as it would have been in the hands of transferor company. [Explanation 6]7. Where an asset is transferred in a scheme of amalgamation to an Indian Company, the actual cost of asset to the amalgamated company will be the same as it would have been to the amalgamating company [Explanation 7]8. Explanation 8 makes it clear that any interest paid or payable in connection with acquisition of an asset which relates to a period after the asset is first put to use shall not form part of actual cost of the asset. [Explanation 8]

Set off and carry Forward of unabsorbed depreciation [Section 32 (2)]

(i) The unabsorbed depreciation has to be set off against the profits and gains (if any) of any business or profession carried on by the assessee. If the amount yet remains unabsorbed, it can be set off against any other income (except income under the head “Salaries”) of the taxpayer for the same year.

(ii) If the unabsorbed depreciation cannot be wholly set off, the amount of allowance not set off shall be carried forward to the following assessment year. No time limit is fixed for the purpose of carrying forward of unabsorbed depreciation. It can be carried forward for indefinite period, if necessary.

(iii) In the subsequent year(s), unabsorbed depreciation can be set off against any income whether chargeable under the head “Profits and Gains of Business or Profession” or under any other head [Except income under the head “Salaries”].

In the matter of set off, the following order of priority is followed in the subsequent year(s).(a) Current depreciation;(b) Brought forward business loss;(c) Unabsorbed depreciation.

Investment Allowance: [Section 32 AC](i) A company engaged in the business of manufacture or production of any article or thing acquires a new plant or machinery (excluding ship or aircraft) and installed after 31.3.2013 but before 1.4.2015 and actual cost of new asset exceeds one hundred crore rupees, Investment Allowance will be allowed at the rate of 15% of the actual cost for A.Y. 2014 – 15 and 15% of the actual cost as reduced by Investment allowance allowed (for A.Y. 2014 – 15) in the A.Y. 2015 – 16. No deduction will be allowed after A.Y. 2015 – 16 (i.e. from A.Y. 2016 – 17).(ii) If a company acquires and installs such new assets after 31.3.2014 but before 1.4.2017, Investment Allowance @ 15% will be available for the A.Y. relevant to the P.Y. in which asset is installed, if actual cost exceeds 25 crore rupees. No deduction will be allowed from A.Y. 2018 – 19.

Withdrawal of Investment Allowance:If the assessee sells or transfers the new asset within a period of 5 years from the date of installation, the amount of deduction allowed shall be deemed to be the income from business of the P.Y. in which the asset is sold or transferred . Such income shall be taxable in addition to taxability of Capital Gains which arises u/s 45.

However, if transfer is as a result of amalgamation or demerger, then tax liability will not arise provided that the Amalgamated Company or Demerged Company should not transfer the new asset within 5 years.

(iii) Investment Allowance (for investment in new plant or machinery) w.e.f. A.Y. 2016 – 17) [S. 32 AD]

Any assessee who sets up an undertaking or enterprise for manufacture or production of any article or thing after 31.3.2015 but before 1.4.2020 in a notified backward area of State of Andhra Pradesh, Bihar, Telengana or West Bengal, 15% of the actual cost will be allowed as Investment Allowance for the A.Y. relevant to the P.Y. in which such new asset is installed.

The provisions relating to sale or transfer of new plant or machinery are the same as u/s/32AC.

Deduction in respect of Deposit in Tea Development Account, Coffee Development Account and Rubber Development Account: [S. 33 AB]This deduction is available for assessees growing and manufacturing tea, coffee or rubber if deposit is made in a Special Account with the National Bank for Agriculture and Rural Development in accordance with the scheme approved by the Tea Board, or the Coffee Board or the Rubber Board. The amount of deduction will be least of the following:(i) actual amount so deposited; or (ii) 40% of the profits of such business.The deposit should be made within a period of 6 months from the end of the P.Y. or before furnishing return whichever is earlier.The amount standing to the credit of Special Account may be withdrawn only for the purpose specified in approved scheme. If amount withdrawn in any P.Y. is not utilized for specified purpose, the amount not so utilized will be treated as taxable profit of the said year.However, if the amount is withdrawn on closure of the business because of death of the assessee or on dissolution of the Firm or because of partition of HUF or liquidation of the Company, the amount will not be treated as income.

Deduction in respect of Prospecting for, or extraction or production of Petroleum or natural gas or both in India [S. 33ABA]If the assessee is engaged in any of the aforesaid business under an agreement with the Central Govt. of India for such business and deposits in the P.Y. any sum in a Special Account or in a Site Restoration Account with SBI in accordance with the scheme approved by the Ministry of Petroleum and Natural Gas then he shall be allowed deduction as under:(i) a sum equal to the amount deposited; or(ii) 20% of the profits of such business Whichever is less.Thus the aforesaid amount should be deposited before the end of the P.Y. The amount standing to the credit of such Special Account or Site Restoration Account may be withdrawn only for the purpose specified in the Scheme (e.g. for removal of equipments and installations, to restore the site and to prevent hazards to life, property or environment consequent to such removal.) else the amount will be treated as income of the P.Y. in which it is withdrawn.

Expenditure on Scientific Research [S. 35]Following deductions are allowed in respect of Scientific Research:(i) Revenue Expenditure incurred by the assessee himself if he carries on Scientific Research in relation to his own business. 100% expenditure is deductible.(ii) Contributions made to outsiders: Where assessee contributes any sum to a Research Association, University, College or Institution approved for scientific research, a deduction of 175% of the amount so paid will be allowed as deduction. It is immaterial whether the Scientific Research is related or not to the assessee’s business.(iii) Sums paid for Social or Statistical Research to a Research Association, University, College or Institution approved for such research: Deduction will be allowed 125% of the sum paid whether the research is related or not with the assessee’s business.

(iv) Capital Expenditure on scientific ResearchCapital Expenditure incurred on scientific research in the P.Y. by the assessee himself related to his business is allowed in full as deduction except the expenditure for acquisition of any land. If the expenditure could not be absorbed owing to insufficiency of profit, the unabsorbed part can be carried forward as unabsorbed depreciation.(v) Sums paid to a National Laboratory or a recognized University or an Indian Institute of Technology for approved Scientific Research Programme: 200% of the sum so paid is allowed as deduction. National Laboratory means scientific laboratory functioning at national level under Indian Council of Agricultural Research or the Indian Council of Medical Research or the Council of Scientific and Industrial Research and approved by prescribed authority as National Laboratory.(vi) Expenditure on in-house Research: This deduction is available only to a company equal to 200% of expenditure incurred provided that expenditure is not incurred on land or building. This deduction shall not be allowed for expenditures incurred after 31.03.2017.(vii) Sums paid for Scientific Research to a Company registered in India and its main object is Scientific Research and Development: 125% of the sum paid is allowed as deduction.

Capital Expenditure to obtain Licence to operate Telecommunication Services: [S. 35ABB]Any capital expenditure incurred on the acquisition of any right to operate telecommunication services either before the commencement of the business or thereafter is allowed as deduction in equal installments over the period starting from the year in which such payment has been actually made and ending in the year in which licence comes to an end. If the licence fee is actually paid before commencement of the business, amount is deductible from the P.Y. in which the business is commenced.Expenditure on eligible Project or Scheme: [S. 35AC] 100% deduction is allowed.Deduction in respect of Expenditure on Specified Business: [S.35AD]Whole of any expenditure of capital nature excluding expenditure incurred on acquisition of land or good will is allowed to be deducted in the P.Y. in which the expenditure is incurred. For example, setting up and operating warehousing facility for storage of agricultural produce, Developing and building a housing project, Production of fertilizer in India etc.Payment in Rural Development Fund: [S. 35CCA] 100% deduction.

Amortization of certain preliminary expenses: [S. 35D]For example, expenditure in connection with – (i) Preparation of Project Report; (ii) Conducting market survey(iii) Legal charges for drafting of any agreement, Memorandum of Association; Articles of Association etc.Other Deductions: [S. 36] – Examples:(i) Insurance Premium paid: (a) against destruction or damage to stock or stores used for purposes of business;(b) for cattle by a Federal Milk Cooperative Society(c) for health of employees;(ii) Bonus or commission paid to employee(iii) Interest on borrowed capital(iv) Contribution to P.F. of the employee by the employer(v) Bad debts subject to certain conditions;(vi) Expenditure on Family Planning

General Deduction [S.37]S.37(1) Any expenditure (not being expenditure of the nature described in Ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and Gains of Business or Profession”.Further implied Conditions:(i) Expenditure Should have been incurred in the P.Y.(ii) Expenditure should be in respect of business or profession carried on by the assessee.1. Not of the nature described in Ss. 30 to 36:(i) Rationale behind the condition is that if a particular expenditure is covered under any of the sections 30 to 36 it should not be claimed under residuary section because an allowance granted under specific section may be subject to certain express or implied conditions and those conditions should not be nullified by claiming deduction under this section.2. Not being in the nature of Capital Expenditure: Points of Distinctions: (I) Acquisition of fixed assets or routine expenditure (ii) Benefit for several years or for one Previous Year

(iii) Improvements or Maintenance Capital expenditure improves the earning capacity of a business. Revenue expenditure maintains the profit making capacity of a business.(iv) Recurring or non recurring expenditureSome Judicial Rulings on Capital and Revenue Expenditures:(i) Removal of defect in title:In V. Jagamohan Rao vs. C.I.T. [1970] 75 ITR 373 (SC) – held where money is paid to perfect a title or remove defects in title, the expenditure is capital expenditure.(ii) Acquisition of Goodwill: In Devidas Vithaldas & Co. vs. CIT [1972] 84 ITR 277 (SC) – held expenditure on acquisition of goodwill is a capital expenditure irrespective of the fact whether payment is made in a lump sum at one time or in installments. However, where transaction is not one for acquisition of goodwill but the right to use it, the expenditure will be revenue expenditure.(iii) Mining Lease:In R.B. Seth Moolchand Suganchand vs. CIT [1972] 86 ITR 647 (SC) – held expenditure for acquiring right over or in the land to extract mineral would be of a capital nature. Where, however, mineral is on surface and assessee purchases the same to use as raw material, it will be expenditure for acquisition of stock – in – trade which is revenue expenditure.

(iv) Expenditure on renovation of premises:New Shorrock Spinning and Manufacturing CompanyLtd. Vs. C.I.T. [1956] 30 ITR 338 (SC); in M/s. Ballimal Naval Kishore vs. C.I.T [1997] 224 ITR 414 (SC) – If the assessee is owner of the premises, renovation of the premises will be capital expenditure.CIT vs. Madras auto Services (P.) Ltd. [1998]233 ITR 468 (SC) - If assessee is lessee of the premises and under the lease agreement whatever construction will be done on the lease premises will belong to the lessor from the day of construction, expenditure incurred by the lessee will be revenue expenditure.(v) Contribution made for construction of roads:Building includes roads, bridges, culverts, wells and tube-wells. Hence, construction of roads inside the factory or surrounding the factory is capital expenditure on which depreciation can be claimed.Lakshmiji Sugar Mills Co. (P.) Ltd. vs. C.I.T. [1971] 82 ITR 376 (SC) – Contribution made by sugar mill under a statutory obligation towards development of Govt. owned roads which was to facilitate supply of sugarcane to the Mill was held revenue expenditure.

Travancore – Cochin Chemical Ltd. vs. CIT [1977] 106 ITR 900 (SC) – The assessee along with three other public undertakings approached the Govt. of Kerala to construct new road and under agreement to meet certain percentage of the cost of construction paid the amount. Held that since the road to be constructed was new and contribution was made under the agreement and not under a statutory obligation, the expenditure was capital in nature.In L.H. Sugar Factory & Oils Mills (P.) Ltd. vs. CIT [1980] 125 ITR 293 (SC) – The assessee made two contributions on request of Collector, one was for construction of a dam and road connecting to dam and another contribution was for construction of roads around its factory. It was found that construction of dam and road connecting the dam was nothing to do with assessee’s business and not advantageous to assessee’s business, hence that amount was not deductible. But construction of road in the area around the factory of the assessee was advantageous to the assessee’s business and relying on Lakshmiji Sugar Mills case the expenditure was held revenue expenditure.

(vi) Compensation for breach of a contract to purchase capital asset:Swadeshi Cotton Mills Co. Ltd. vs. CIT [1967] 63 ITR 65 (SC) – held capital expenditure.

3. Not being personal expenses of assessee:Personal expenses means to satisfy personal needs e.g; food, cloth, shelter, medical expenditure, defending oneself from prosecution or penalty paid for violation of law etc.M. Subramaniam Bros. vs. CIT [2001] 250 ITR 769 (Mad.) - Where in a partnership firm comprising father and his three sons as partners, the father sent one of the sons abroad for higher studies under an agreement with the firm that on return he will serve the firm for 5 years – Expenses incurred by the firm on education of son was not allowed as business expenditure. However, on similar facts contrary opinion had been expressed in CIT vs. Kohinoor Paper Products [1997] 226 ITR 220 (M.P.) relying on C.I.T. vs. Southern Leather Industries [1987] 164 ITR 194 (Mad) wherein three partners of a firm undertook foreign tours for attending the International Trade Fair with intent to advance business which was held as business expenditure.

4. Expenditure should have been laid out wholly and exclusively for the purpose of business or professionGuidelines:(i) Incurred as trader or House holder (ii) Voluntary expenditure without compelling needCIT vs. Dhanarajgiri Raja Narasingiriji [1973] 91 ITR 544 (SC) - Assessee company lodged a complaint with police alleging misappropriation of the company’s funds by its managing agent. Consequently Govt. instituted a criminal case against the Managing Agent. The assessee also employed his own lawyer to prosecute the case. Held the expenditure was deductible although Govt. was conducting prosecution and assessee had no need to engage his own lawyer. It was also held that it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest better.Similarly fixing remuneration of employee is the businessman’s concern and not of the Income tax department.

(iii) Direct concern and Direct purpose: One has to look at direct purpose of expenditure and not remote or indirect results, e.g. in Malayala Manorama Co. vs. CIT [2006] 150 Taxman 505 (Ker) – assessee company engaged in business of printing and publishing newspapers and periodicals contributed a sum of money to a trust which undertook work of rehabilitation of victims of earthquake – held not related to business of assessee – not deductible though indirectly would have impact on readers of its journals etc.Similarly donations to political party for non – business consideration was held not deductible. [CIT vs. Scindia Steam Navigation Co. Ltd. [1980] 125 ITR 118 (Bom). However, such donations are now deductible under Sections 80GGB and 80GGC (inserted in 2003) if donations are made by companies or any other persons respectively. (iv) Unremunerative expenditure:Expression ‘for the purpose of business’ is wider in scope than expression ‘for the purpose of earning profit.’ Business or commercial expediency may require providing facilities like schools, hospitals for employees/ex-employees/their children, expenditure for protection of assets from expropriation.

(v) Embezzlement LossBadridas Daga vs. C.I.T. [1958] 34 ITR 10 (SC); Associated Banking Corpn. Of India Ltd. vs CIT [1965] 56 ITR 1 (SC) – held losses arising from misappropriation of money by the employee cannot be claimed as deduction under Section 37 (1) but if the amount is irrecoverable, it can be claimed as loss incidental to carrying on the business. Such loss can be claimed of the P. Y. in which amount becomes irrecoverable. Same will apply for losses occurred due to theft, robbery, dacoity, loss due to non – recovery of advances etc.(vi) Other examples of Business expendituresLegal and accountancy expenses, Fees paid for prosecuting appeals, taking proceedings for reducing tax liabilities, legal expenditures relating to breach of trading contract, termination of disadvantageous trading relationship, to defend title to business assets such as land, buildings, shares, goodwill etc. (should be distinguished from expenses for perfecting title which is capital expenditure).Expenses incurred by an individual assessee in defending himself in a criminal proceeding (even if ended in acquittal) e.g. selling goods on excessive price – are not allowable. However, legal expenses incurred by a company to protect the good name of its business, defending directors, officers and other employees against criminal charges relating to transaction of company’s business would be allowable.

Explanation to S. 37 (1) – says “For the removal of doubts, it is hereby declared that any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure”.Section 37 (2B) – Notwithstanding anything contained in sub – section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.

Expenses Expressly Disallowed under Section 40Section 40 expressly disallows many expenses. For example – (a) Payment outside India of any salary, interest, royalty, fee for technical services etc. on which tax has not been deducted at source;(b) Payments to residents if tax is not deducted at source – 30% of such sum shall be disallowed u/s 40A.(c) Excessive payments [S. 40A] – Payments to relatives or to an associate concern if A.O. considers it to be excessive or unreasonable.(d) Payment in cash: in a day made to a person over Rs. 20,000/- otherwise than by an account payee cheques or account payee bank draft subject to certain exceptions e.g., payment made to a person living in rural area where no banking facility is available; payments made to cultivator , grower of agricultural produce, forest produce or produce of animal husbandry on purchase of products from them; Payments to Bank or LIC etc.

Capital Gains {Ss. 45 to 55]Meaning:Any profit or gain arising from the transfer of a capital asset is known as capital gain.Chargeability: [S. 45 (1)]By virtue of Section 45 (1) of the Income Tax Act any profit or gain arising from the transfer of a capital asset is chargeable to tax under the head “Capital Gains” and is deemed to be income of the previous year in which the transfer takes place.Essentials for chargeability:1. There must be a Capital Asset. 2. Capital Asset must have been transferred in the previous year. 3. Any Profit or Gain should arise from such transfer. 4. The Profit or Gain should not be exempt under Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54EC, 54F, 54G, 54GA and 54H.

Meaning of Capital Asset: [S.2 (14)]: means – property of any kind held by an assessee, whether or not connected with his business or profession, but does not include:

(i) any stock – in – trade, consumable stores or raw materials held for the purposes of his business or profession;

(ii) Personal effects of the assessee, that is to say, movable property including wearing apparel and furniture, held for personal use by the assessee or any member of his family dependent on him but excluding jewellery, archaeological collections, drawings, paintings, sculptures or any work of art. Thus jewellery etc. are treated as capital asset, even though they are meant for personal use of the assessee.

(iii) Agricultural land in India provided it is not situated:(a) in any area within the jurisdiction of a Municipality or a Cantonment Board having a population of 10,000 or more; or (b) within a distance of 2 Kms from the local limits of a Municipality or a Cantonment Board having a population of more than 10,000 but not more than one Lakh; or(c) within a distance of 6 Kms from the local limits of a Municipality or a Cantonment Board having a population of more than one Lakh but not more than ten Lakh; or(d) within a distance of 8 Kms from the local limits of a Municipality or a Cantonment Board having a population of more than ten Lakh.] (iv) 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds 1980 issued by the Central Government;(v) Special Bearer Bonds, 1991 issued by the Central Govt. and(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999.Explanation: Property includes any rights in or in relation to an Indian Co. including rights of management or control or any other rights whatsoever.

Personal Effects:Personal effects are not capital assets under section 2 (14), if the following conditions are satisfied:1. It should be movable property;2. It should be held for personal use by the assessee or any member of his family dependent on him;3. it should not be jewellery, archaeological collections, drawings, paintings, sculptures or any work of art.Car, cycle, scooter, motor – cycle owned and used by the assessee are personal effects.Jewellery:Jewellery is a capital asset. Jewellery includes the following:(i) ornaments made of silver, gold, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi precious stones and whether or not stitched in any wearing apparel.(ii) precious or semi precious stones, whether or not set in any furniture, utensil or wearing apparel.

Types of Capital Assets: There are two types of capital assets: 1. Long – term capital asset [Section 2 (29A)]; and 2. Short – term capital asset [Section 2 (42A)].Short – term Capital Asset:According to Section 2 (42A) a short – term capital asset means capital asset held by an assessee for not more than 36 months immediately prior to its date of transfer.However, in the case of shares held in a company, listed securities, units of UTI or units of mutual funds specified under Section 10 (23D), the asset is treated as short term capital asset if the share, security or unit as the case may be is held by the assessee for not more than 12 months immediately prior to its transfer and not 36 months. Long – term Capital Asset:According to Section 2 (29A) asset other than short – term capital asset is regarded as long – term capital asset.

Period of Holding:In determining the period for which any capital asset is held by the assessee – (a) In the case of a share held in a company in liquidation, the period subsequent to the date on which the company goes into liquidation is excluded.(b) In the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in Section 49 (1) of the Act for example, by way of inheritance, gift, partition etc. the period for which the asset was held by the previous owner should be included.(c) In the case of a share in an Indian Company, which becomes the property of the assessee in a scheme of amalgamation, the period for which the share in the amalgamating company was held by the assessee should be included.(d) In case of issue of shares by the resulting company in a scheme of demerger to the shareholder of the demerged company, the period of holding shares in demerged company will be included in total period of holding of share in resulting company.

Transfer of Capital Asset [Section 2 (47)]Transfer in relation to a capital asset includes:(i) the sale, exchange or relinquishment of the asset;(ii) the extinguishment of any rights therein.(iii) the compulsory acquisition thereof under any law;(iv) the conversion of an asset into stock – in – trade or the treatment of it as such;(v) Allowing possession of an immovable property to be taken in part performance of a contract. [Section 53A of the Transfer of Property Act, 1882. (vi) Any transaction (whether by way of becoming a member of, or acquiring shares in a co – operative society, company or other association of persons or by way of agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of any immovable property.

Capital Gains from Insurance Claim on Destruction of Capital Asset: [S. 45 (1A)]By virtue of Section 45 (1A) profits or gains arising from any compensation (whether in terms of money or in kinds) received by any person under an insurance from an insurer in the previous year on account of damage to or destruction of any capital asset is chargeable to Capital Gains tax, if the damage or destruction occurs as a result of:(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or(ii) riot or civil disobedience;(iii) accidental fire or explosion; or(iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war).The profits or gains will be deemed to be the income of the previous year in which the compensation is received. In Vania Silk Mills Ltd. vs. C.I.T. (1991) 191 ITR 647 (SC) the Supreme Court had held that insurance claim received on account of destruction of asset is not chargeable to tax as destruction does not amount to transfer. The effect of this judgment has been nullified to some extent by inserting sub section (1A) in section 45 w.e.f. Assessment Year 2000 – 01.

Capital Gains on conversion of Capital Asset into Stock – in – Trade: [S. 45 (2)]By virtue of Section 45 (2) the notional profit arising from transfer by way of conversion of capital asset into stock – in – trade is chargeable to tax in the year in which stock – in – trade is sold.For the purpose of computing the capital gain in such cases, the fair market value of the capital asset on the date on which it was converted or treated as stock – in –trade is deemed to be the full value of the consideration received or accruing as a result of such transfer. The sub-Section was earlier added by the Finance Act, 1962, then it was omitted by Finance Act, 1966 and re – inserted by the Taxation Law (Amendment) Act, 1984 w.e.f. A.Y. 1985 – 86 nullifies the judgment of the Supreme Court in C.I.T vs. Bai Shirinbai Kooka (1962) 46 ITR 86 (SC).

Capital Gain on Transfer of Security by Depository: [S. 45 (2A)]By virtue of Section 45 (2A) where any person has beneficial interest in the securities deposited with a depository, profits or gains arising from transfer of such securities will be deemed to be the income of such person (i.e. the beneficial owner) and not that of the depository who is deemed to be the registered owner of such securities.The cost of acquisition and period of holding of such securities will be determined on the basis of first – in – first – out method.

Capital Gains on Transfer of Capital Asset by a Partner to a firm etc. [S. 45 (3)]By virtue of Section 45 (3) profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co – operative society) in which he is or becomes a partner or member, by way of capital contribution or other wise, shall be chargeable to tax as his income of the pervious year in which such transfer takes place.For the purpose of computation of the profit or gains in such cases the amount recorded in the Account Book of the firm, association or body as the value of the capital asset will be deemed to be the full value of the consideration received or accruing on the transfer of such capital asset.Earlier these transactions were not regarded as transfer because firm, co-operative society etc. were not separate persons in eye of law. [C.I.T. vs. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj); Malabar Fisheries Co. vs C.I.T. [1979] 120 ITR 49 (SC)

Capital Gains on distribution of Capital Assets by a firm etc. [S. 45 (4)]By virtue of Section 45 (4) profits or gains arising from the transfer by way of distribution of capital assets by a firm, or other association of persons or body of individuals (not being a company or a co – operative society) to its partner or member on its dissolution or otherwise will be chargeable to tax as income of the firm, association or body as the case may be, of the previous year in which such transfer takes place.For the purpose of computation of profit or gains in such cases the market value of the asset on the date of such transfer shall be deemed to be the full consideration received or accruing as a result of such transfer.

Capital Gains on Compulsory acquisition of Capital Asset: [S. 45 (5)]Where an asset is compulsorily acquired under any law the capital gains in such a case will be determined as follow:(i) The initial compensation will be taken as sale consideration and capital gains will be computed accordingly. It will be chargeable as income of the previous year in which such compensation (or part thereof) is first received and not of the year in which the Capital Asset is transferred.(ii) When the compensation is enhanced by a court, tribunal or any authority then – (a) it will be taxable as capital gain of the previous year in which enhanced compensation is received by the assessee;(b) In this case the cost of acquisition and the cost of improvement of the capital asset will be taken as nil.

(c) Litigation expenses for getting the compensation enhanced are deductible as expenses on transfer;(d) If the enhanced compensation is received by any other person (because of the death of the transferor or for any other reason), it will be taxable as income of the recipient.(e) Enhanced compensation can be short – term capital gains or long – term capital gains depending upon the nature of original capital gains.The amount of compensation received is chargeable to capital gains tax even though it may be a subject matter of dispute by the Govt. However, if the compensation is subsequently reduced by the court, tribunal or other authority, the capital gains has to be recomputed and refund may be made.

Capital Gains on Units of UTI, Mutual Funds etc. [S.45 (6)]An assessee who purchases units of Mutual Fund, UTI or Equity Linked Saving schemes and after the scheme is over, the same is repurchased by the Mutual Fund, UTI etc. the assessee will be liable to pay Capital Gains Tax on Profits or Gains arising from such repurchase.

Rate of Taxation: [S. 112]From Assessment Year 1998 – 99 Long Term Capital Gains are taxable at a flat rate of 20% in hands of all kinds of assessees.Previously the rate was for individual 20%, companies 40% and other assessees 30%When liability to tax arises only because of inclusion of long term capital gains in total income, tax will be levied on excess over the minimum exemption limit.

Computation of Capital Gains: [S. 48]Capital Gains is computed by deducting from full value of consideration received or accruing as a result of transfer the following amount:(i) Expenditure incurred wholly and exclusively in connection with such transfer (e.g. brokerage or commission for securing a purchaser, registration fee, travelling expenses in connection with transfer); and(ii) the cost of acquisition of the capital asset and cost of improvement thereto.However, in case of transfer of a long term capital asset after deducting the expenditure incurred wholly and exclusively in connection with such transfer, the indexed cost of acquisition and indexed cost of improvement has to be deducted.Indexed Cost of Acquisition: is the amount which bears to the cost of acquisition the same proportion as the cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the year in which the asset was acquired by the assessee or for the year beginning on April 1, 1981 whichever is later. Thus:Indexed Cost of Acquisition / Cost of Acquisition = Cost Inflation Index for the Year in which the asset is transferred / Cost Inflation Index for the Year in which asset was acquired or for the year beginning on April 1, 1981 which ever is later.

Indexed Cost of Improvement: is the amount which bears to the cost of improvement the same proportion as the cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the year in which the improvement to the asset took place. Thus: Indexed Cost of Improvement / Cost of Improvement = Cost Inflation Index for the Year in which the asset is transferred / Cost Inflation Index for the Year in which improvement to the asset took place.S. 46:By virtue of Section 46 distribution of assets in kind of a company to its shareholders on its liquidation is not considered as transfer for the purposes of S. 45 (1).

Financial Year

Cost Inflation Index

Financial Year

Cost Inflation Index

1981-82 100 1998-99 3511982-83 109 1999-2000 3891983-84 116 2000-2001 4061984-85 125 2001-2002 4261985-86 133 2002-2003 4471986-87 140 2003-2004 4631987-88 150 2004-2005 4801988-89 161 2005-2006 4971989-90 172 2006-2007 5191990-91 182 2007-2008 5511991-92 199 2008-2009 5821992-93 223 2009-2010 6321993-94 244 2010-2011 7111994-95 259 2010-2012 7851995-96 281 2010-2013 8521996-97 305 2010-2014 9391997-98 331 2010-2015 1024

Capital Gains exempt from Tax(A) Only Long Term Capital Gains:(i) Capital Gains arising from transfer of residential house [S.54]:If assessee has within a period of one year before or two years after the date of transfer purchased residential house in India or within a period of 3 years from the date of transfer constructed a residential house in India. The amount of exemption will be to the extent of the cost of new residential house purchased or constructed. If the amount of capital gains could not be utilized for acquisition or construction of the new house before the date of furnishing the return, the amount not so utilized should be deposited in Capital Gains Account Scheme, 1988 with any specified bank authorized by Central Government.If the new house purchased or constructed is transferred within a period of 3 years of its purchase or construction, the exemption given earlier will be withdrawn.

(ii) Capital Gains arising from the transfer of Agricultural Land [S. 54B]:If the assessee has purchased within a period of 2 years from the date of transfer any other agricultural land for agricultural purposes.Provisions of deposit in Capital Gains Account Scheme, 1988 and consequence of transfer of the new acquired agricultural land within 3 years will be the same as in S. 54.(iii) Capital Gains on Compulsory acquisition of Land or building used as Industrial Undertaking by the assessee: [S. 54D]If the assessee within a period of 3 years purchased any land or building or constructed any building for shifting or re - establishing the Industrial Undertaking.Provisions of deposit in Capital Gains Account Scheme, 1988 and consequence of transfer of the new acquired land or building within 3 years will be the same as in S. 54.

(iv) Exemption on investment of Long Term Capital Gains in Specified Long Term Assets i.e. in certain Bonds [S. 54EC]If investment is made within 6 months from the date of transfer. Maximum for investment which qualifies exemption is 50 lakh rupees. Here deposit in Capital Gains Account Scheme, 1988 does not apply but consequence of transfer of the Bond within 3 years or taking loan against such bond within 3 years is the same i.e. exemption allowed will be withdrawn.(v) Exemption on investment of Long Term Capital Gains for purchase or construction of residential house in India [S. 54F]This exemption is available to individuals and HUFs. The residential house should have been purchased 1 year before or 2 years after or constructed within 3 years. Provisions of deposit in Capital Gains Account Scheme, 1988 and consequence of transfer of the new acquired/constructed residential house within 3 years will be the same as in S. 54.

(B) Long Term Capital Gains or Short Term Capital Gains:(i) Exemption of Capital Gains arising on transfer of assets in cases of shifting of Industrial Undertaking from Urban Area to Rural Area [S.54G]Capital asset transferred should be any land, building plant or machinery. New asset in the rural area should be purchased within 1 year before or 3 years after the date of transfer.Provisions of deposit in Capital Gains Account Scheme, 1988 and consequence of transfer of the new asset within 3 years will be the same as in S. 54.(ii) Exemption of Capital Gains on transfer of Assets in cases of shifting of Industrial Undertaking from Urban Area to any Special Economic Zone [S. 54 GA]: Conditions are the same as in S. 54 GSection 54H simply extends time for investment to qualify for exemption in cases where capital asset is compulsorily acquired in any P.Y. but payment is made not on the date of compulsorily acquisition of the asset. In such cases time limit for investment will be reckoned form the date of receipt of the amount by the assessee.

Income from other sources [Ss. 56 to 59]S. 56 (1) – Any income not exempted from taxation and not chargeable under any head specified in S. 14 from A to E is chargeable to income tax under the head Income from Other Sources.Without prejudice to the generality of provisions of S. 56 (1) by virtue of S. 56 (2) following income are also chargeable under the head Income from Other Sources:(i) Dividends(ii) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting;(iii) any sum received by assessee form his employees as contributions to any Provident fund or Superannuation Fund or any fund set up under Employees’ state Insurance Act, 1948, or any other Fund for the welfare of such employees, if the same is not taxable as Profits and Gains of Business or Profession.(iv) Income by way of interest on securities if the same is not taxable as Profits and Gains of Business or Profession.(v) Income from letting out of machinery, plant or furniture, if the same in not taxable as Profits and Gains of Business or Profession.

(vi) Income from letting out of machinery, plant or furniture along with building where letting out of building is inseparable from letting out of machinery, plant or furniture if the same is not chargeable as Profits and Gains of Business or Profession.(vii) Any sum received under a Keyman’s Insurance Policy, if the same in not taxable as Profits and Gains of Business or Profession.(viii) Money or property exceeding Rs. 50,000/- received without consideration by an individual or HUF on or after 1.10.2009 other than money or property received from:(a) any relative or (b) on the occasion of marriage of individual; or (c)

undera will or inheritance; or (d) in contemplation of death of the payer; or (e)

from any fund, foundation, university, educational institution, hospital, medical institution or trust referred to in S. 10 (23) (c).

Relative means (i) spouse of the individual; (ii) brother or sister of the individual (iii) brother or sister of either of the parent of individual, (iv) brother or sister of the spouse of individual, (v) any lineal ascendant or descendent of the individual, (vi) any lineal ascendant or descendant of the spouse of the individual, (vii) spouse of the persons referred to in cl. (ii) to (vi).

Other incomes: Apart from aforesaid 8 incomes which are specified by S. 56 (2) other incomes which do not fall under any of the other heads of income are taxable u/s 56 (1).Though it is not possible to enlist all such incomes, some examples are as follow:(i) Income from subletting of House Property;(ii) Income from letting or subletting of vacant land;(iii) Director’s fee;(iv) Agricultural Income received from outside India;(v) Fee, commission, remuneration etc. received by an employee from a person other than his employer;(vi) Insurance Commission;(vii) Salaries payable to M.Ps., and M.L.As.

Deductions: [S. 57] – Income chargeable under the head Income from Other Sources is computed after making following deductions:(i) In the case of dividend income and interest on securities:(a) any reasonable sum paid by way of remuneration or commission for the purpose of realizing dividend or interest;(b) Interest on borrowed capital if it is used for investing in shares or securities(ii) In the case of income from machinery, plant or furniture let on hire:(a) Current repairs to building as under S. 30 (a) (ii);(b) Current repairs to machinery, plant or furniture and insurance premium as u/s 31;(c) Depreciation and unabsorbed depreciation on building, plant or furniture as u/s 32

(iii) Any other expenditure (not being a capital expenditure) expended wholly and exclusively for the purposes of earning such income.(iv) In the case of income in the nature of family pension – Rs. 15,000/- or 33 and one 3rd % of such income whichever is less;(v) In the case of [income specified in Section 2 (24) (x) i.e.,] amount received as contribution from employer towards any welfare fund if such amount is credited by the taxpayer to the employee’s account in the relevant fund on or before the due date.Amounts not deductible: The following amounts are not deductible while computing income under the head “Income from Other Sources: [S. 58](i) any personal expenses of the assessee;(ii) any interest chargeable under the Act which is payable outside India, on which tax has not been paid or deducted;(iii) any amount chargeable under the head ‘salaries’, if it is payable outside India, unless tax has been paid thereon or deducted at source(iv) any amount not allowable by virtue of Section 40A (For example, excessive expenditure paid to relative, payment exceeding Rs. 20,000/- paid otherwise than by crossed cheques or bank drafts;

(v) in the case of assessees being foreign companies, any expenditure in respect of income by way of royalties and technical service fees received under agreement made after March 31, 1976;(vi) any expenditure or allowance in connection with any income by way of winnings from lotteries, crossword puzzles, races, card games and other games of any sort or from gambling or betting of any form.However, disallowance is not applicable in computing the income of an assessee being the owner of horses maintained by him for running in horse races.

S. 59 lays down that while computing income under S. 56, provisions of S. 41 (1) shall apply as they apply for computing income under Profits and Gains of Business or Profession.S. 41 lays down that where any deduction or allowance has been made in respect of loss, expenditure and subsequently the amount is obtained by the assessee or his successor, the same will be treated income of the P.Y. in which it is received and will be taxable under the head Profits and Gains of Business or Profession irrespective of the fact as to whether in such P.Y. such business or profession continues or not.

Set off and carry forward of losses [Ss. 70 to 80]MeaningSet off means adjustment of losses against income of the same year from a different source or head of incomeCarry forward means carrying the loss which could not be set off in the preceding year for adjusting the same against the income of the subsequent year.Modes of Set off and carry forward – The process may be divided into Three steps:1. Inter-source adjustment under the same head of income [S.70]2. Inter head adjustment in the same A.Y. [S.71] – This is applied only when inter – source adjustment is not possible.3. Carry forward of loss [Ss. 72 to 79] – This is applied only when inter – source adjustment is not possible in the P.Y. because of inadequacy of income.

Inter-source Adjustment under the same head of Income [S.70]If the assessee has incurred any loss from any source of income in any P.Y., he can set off such loss against the income from any other source under the same head of income.Exceptions:(i) Loss from Speculation business cannot be set off against income of other non-speculation business. [S. 73(1)](ii) Loss of specified business u/S. 35AD cannot be set off against income from other business. This loss can be set off only against income from other specified business.(iii) Loss from the business of owning and maintaining race horses; (iv) Long Term Capital Loss cannot be set off against Short Term Capital Gains;(v) Losses from Lottery, Crossword Puzzles, gambling, card games or betting etc. cannot be set off against such income or any other income. [S. 58(4)](vi) Loss from exempted source of income cannot be set off against any taxable income.Speculative transaction [S.43 (5)] – means a transaction in which contracts for sale or purchase of commodities including stocks and shares are settled without actual delivery of commodities or scrips.

Inter-head Adjustments in the same A.Y. [S.71]Exceptions:(i) Loss from speculation business [S.73(1)](ii) Loss of specified business u/S. 35AD (iii) Loss from the business of owning and maintaining race horses;(iv) Long Term Capital Loss cannot be set off only against income from Long Term Capital Gains; (v) Loss under the head Profits and Gains of Business or Profession cannot be set off against income from salary.(vi) Losses from Lottery, Crossword Puzzles, gambling, card games or betting etc. cannot be set off against such income or any other income. [S. 58(4)](vii) Loss from exempted source of income cannot be set off against any

taxable incomeNote: Unabsorbed depreciation is not treated as a loss from business or

profession. Hence, unabsorbed depreciation can be set off against income under the head “Salaries”.

Carry forward of Losses:Only following losses can be carried forward:(i) Loss under the head “Income from House Property” can be carried

forward for maximum 8 following A.Ys. and can be set off only against Income from House Property.

(ii) Loss under the head “Profits and Gains of Business or Profession” whether of speculative or non speculative Business. Loss of non-speculative business can be carried forward for maximum 8 A. Ys. and can be set off against income of speculative or non – speculative business. Loss of speculative business can be carried forward for 4 A. Ys. and can be set off only against income of speculative business.

(iii) Loss of Specified Business can be carried forward for any number of A.Ys. without limit but it can be set off only against income from Specified Business.

(iv) Long Term and Short Term Capital Losses can be carried forward for 8 A. Ys. However, Long Term Capital Loss can be set off only against Long Term Capital Gain.

(v) Losses from owning and maintaining race horses can be carried forward for 4 A.Ys. And can be set off against such income only.