Tax Management (12mbafm428) Notes

Tax Management 12MBAFM428
MODULE 1 (7 Hours)
Basic concepts: assessment year, previous year, person, assesse, Income, charges on income,
gross total income, capital and revenue receipts, residential status, receipt and accrual of income,
connotation of income deemed to accrue or arise in India, incidence of tax, Tax Planning, Tax
Evasion, Tax Management.
MODULE 2 (8 Hours)
Explanation under various heads of income, income from salary (Theory & full fledged
problems), income from House Property (Theory only)
MODULE 3 (10 Hours)
Income under the head profit and gains of business or professions and its computation- basis-
method of accounting- scheme of business deductions/ allowance- deemed profits- maintenance
of books, Depreciation (Problems on computation of income from business/ profession of
individual assessee and depreciation).
MODULE 4 (8 Hours)
Income under capital gain, basis of charge, transfer of capital asset, inclusion & exclusion from
capital asset, capital gain, computation of capital gain (theory & problems), deductions from
capital gains.
MODULE 5 (6 Hours)
Income from other Sources (Theory Only) Ppermissible deductions under section 80Cto 80U,
set off and carry forward of losses and clubbuibg of incomes.
MODULE 6 (6 Hours)
Computation of taxable income of a firm and partners.
MODULE 7 (6 Hours)
Computation of taxable income of a company with special reference to MAT. Corporate
Dividend Tax.

MODULE 8 (6 Hours)
Central excise and custom acts- objects and provisions of the act in brief (theory)- goods,
excisable, CENVAT- customs act- Basic definition, charge. Central Sales tax and VAT (only
basic concept).

Page 1


INDEX

Modules
Page Numbers

1 03 14

2 15 36

3 37 54

4 55 63

5 64 79

6 80 82

7 83 86

8 87 102

Page 2


MODULE 1

FINANCIAL YEAR: The year starting from April 1 and ending on March 31 of the next year is
known as a financial year.

ASSESSMENT YEAR: AY is a financial year in which the income earned during the previous
year is taxed

PREVIOUS YEAR (sec 3): The year in which the income is earned is called the previous year.

PERSON sec 2(31):
The term persons include:
a) an individual
b) a Hindu undivided family
c) a company
d) a firm
e) an association of persons and a body of individuals whether incorporated or not
f) a local authority
g) Every artificial jurisdictional person not falling under any of the preceding category.
The aforesaid is an inclusive list and the last category covers all those that do not fall in any of
the preceding classification.

ASSESSEE [sec2 (7)]:
Assessee means a person by whom any tax or any other sum of money (i.e. penalty or interest is
payable under the act. It includes:
1. Every person in respect of whom any proceeding under the act has been taken for the
assessment of his income or loss or the amount of refund due to him.
2. any person who is deemed to be an assessee.(representative assessee)
3. an assessee in default ( advance tax and TDS not deducted)

GROSS TOTAL INCOME:
As per section 14, the income is computed under five heads:
Rounding off total Income:
The total income is to be rounded off to the nearest multiple of ten rupees.

Computation of total income:
Income from salaries XXX
Income from House properties XXX
Page 3


profit and gains from business and profession XXX
Capital gains XXX
Income from other sources XXX
Gross Total Income XXXXX
Less: deductions u/s 80 C to 80 U -XX
Net total Income (rounded off) XXXX

Computation of Tax Liability:
Tax on total income ----
Less: rebate u/s 88E ----
Balance ----
Add: surcharge ----
Total ----
Add: education cess ----
Tax ----
Less: Prepaid taxes ----
( TDS, self assessment and Advance tax)
Tax Liability ----

Income :

The Income Tax Act does not attempt to provide any comprehensive definition of income for tax
purposes; but gives an inclusive definition in Section 2(24). Income - tax is a tax on income from
various sources, estimated according to sets of rules which vary according to the source of income
from which it flows. Most type of income can be broadly classified into three main categories;
(a) income derived by a person by rendering personal service; (b) income from property, and (c)
income from the profits of a trade, profession or vocation. In economic terms, the first
category represents income from labour alone, the second represents income from capital alone
whilst the third category combines both capital and labour.Though the methods of assessing
income under these different heads are distinct, income for tax purposes must be money or
something capable of being turned into money. The income tax, whatever way it is charged is,
however, one tax. In every case, the tax is a tax on income, whatever may be the standard
by which the income is measured under different heads.

Income and Capital:

Income is, generally, contrasted with capital by treating receipt as income if it cannot be
classified as capital. Underlying many of the decisions as to what is, and what is not, taxable
income from property or profits is the broad concept that capital corresponds to a tree and
income to its fruit. This figure of speech would be apposite in regard to money invested in
Dept. of MBA, SJBIT Page 4


an income producing form, such as, capital sum which bears interest. An accretion to
capital is not income, although income does not escape tax merely because it is used, to
increase or recoup capital, nor is it any the less income because its production involves
wastage of capital. (British Tax Encyclopaedia - G.S.A.. Wheatcroft).

Capital expenditure and income expenditure:

In a rough way, the criterion of what is capital expenditure as against what is income
expenditure would be to say that capital expenditure is a thing that is going to be spent once
and for all, and income expenditure is a thing that is going to recur every year. (Lord
Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer (Surveyor of Taxes) [1910] SC 579,
5T.C. 529 - See Simons Income Tax Vol.I, pr.45). The contrasting phrase used by Lord
Dunedin - expenditure once for all - is illustrated by the decision in Ounsworth v. Vickers Ltd.
[1995] 3 KB 267, where the cost to a shipbuilding company of dredging a channel and
providing a deep water berth for the construction and delivery of a ship was held to be capital
expenditure. On the other hand, expenditure on stock in trade or other circulating capital is
recurrent, and is accordingly a revenue item.

Furthermore, a payment made for acquiring or creating a fixed asset or an amount received
on its realization is usually a capital sum. The most obvious instance is that of the price
received or paid on the sale or purchase of a capital asset of a physical or transferable kind,
provided that the thing sold or acquired is not something in which it is the business of the
particular taxpayer to deal. When an expenditure is made, not once and for all, but with a
view to bringing into existence an asset or advantage for enduring benefit of a trade, then, in absence
of indication to the contrary, such an expenditure is properly attributable to capital and not to
revenue. The benefit should endure in the way that a fixed capital endures; but enduring does not
mean everlasting. Moreover, the advantage need not be of a positive character. It may consist in getting
rid of an item of fixed capital that is onerous.

Evasion and avoidance of tax :

A sharp distinction must be made between evasion and avoidance of tax. Illegal methods of
reducing tax liability, by misstating or omitting items from the returns, are known as tax evasion, which
creates a statutory liability to substantial monetary penalties and to a criminal prosecution in serious
cases such as of fraud. Aiders and abettors are similarly liable. Tax avoidance, however, denotes adoption of
lawful means for reducing tax liability. Full use is made of loopholes in the tax system particularly
when the rates imposed are very high. When loopholes become too well known, the yield of
the tax will be less. A simple device is discovered which gradually gets into common use and
then the legislation stops it. A more refined device is then adopted which again is plugged by


legislation, and so on, a seesaw process goes on between a well-advised tax payer on one side
and the Legislature and the Revenue on the other. The result is frequent amendments in the
law of income-tax, making it a complicated branch of the laws.

Method of Accounting :

The income chargeable under the head profits and gains of business or profession or
income from other sources is required to be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee. The Central
Government is empowered to notify in the official gazette accounting standards to be followed
by any class of assessees or in respect of any class of income. (Sec. 145 Income Tax Act,
1961). The question whether one method of accounting or another should be employed
in assessing taxable income derived from a given pursuit is a question which must be decided
according to legal principles. But, it would be a mistake to treat such a question as
depending upon a search for an answer in the provisions of the legislation, a search for
some expression of direct intention to be extracted from the text of the enactment in which it
may be hidden.

The words income, profit, and gain are conceptions of the world of business affairs and
they cover infinite variety of activities. Every recurrent accrual of advantages that can be
expressed in terms of money is capable of inclusion under these conceptions. No single
formula could be devised which would effectively reduce to a just expression of a net
money sum, the annual result of every kind of pursuit or activity by which the members
of a community seek livelihood or wealth. But, nearly in every department of enterprise and
employment, the course of affairs and the practice of business have developed method of
estimating or computing in terms of money the result over an interval of time produced by
the operations of business, by the work of the individual, or by the use of capital. The practice
of these methods of computation and the general recognition of the principles upon which
they proceed are responsible, in a great measure, for the conceptions of income, profit and
gain, and, therefore, may be said to enter into the determination or definition of the subject
which the legislature has undertaken to tax. The Courts have always viewed the ascertainment
of income as governed by the principles recognised or followed in business and commerce,
unless the legislature has itself made some specific provision affecting a particular matter
or question, such as method of accounting in certain cases as provided under section 145-A
of the Income Tax Act, 1961.

There is a tendency to place increasing reliance upon the concepts as understood in the realm of
business and the principles and practices of commercial accountancy. The judicial
process of recognizing principles and practices evolved in business or general affairs while
deciding the questions presented before the Court inevitably leads to a development in the
law itself. A decision of Court adopting or resorting to any given accounting principle or


application of such principle would, ordinarily, settle for the future the rule to be observed,
and the rule thus assumes the character of a proposition of law. However, in some areas like
the distribution of expenditure between capital and income, it is difficult to formulate a
principle as an induction from commercial practice and the matter rests in the realm of facts
or discretionary judgement.

Residential Status

The Residential status of the assessee as defined in the IT. Act, 1961 is important to determine
his tax liability. This is so because, in the case of residents, all incomes are brought to tax
regardless of where they are received or where they accrue or arise. In the case of nonresidents or
persons who are resident but not ordinarily resident, only the following incomes are taxable.

i. Income received in India or deemed to have been so received;
ii. Income accruing or arising in India or deemed to have so arisen or accrued;
iii. Income accruing or arising outside India if derived from a business controlled in
or a profession set up in India (applicable only in the case of persons who are
residents but not ordinarily residents).

In the context of pensions and retirement benefits, these general principles merely imply that in
the case of a resident, all pensions or other superannuation benefits received on recurring basis
and not exempt would be taxable regardless of where they accrue, or arise, in the case of a
person who is a resident but not ordinarily resident or a non-resident, however, pension and other
retirement benefits would be taxable only if they accrue, arise or are received in India. Pensions
or other incomes initially accruing or arising abroad and received there would not be liable to tax
even if these are remitted to India subsequently.

Illustration

The following example indicates the implications of residential status for taxpayer with income
under the head "salaries (and pension)".

Mr. O is a resident. During the previous year 01.04.2000 to 31.03.2001 relevant to the
assessment year 2001-2002, he received the following income under the head "salaries".

Pension from the U.K. Government received in U.K., subsequently converted into rupees at the
rate of exchange for conversion in accordance with Rule 115 of the I.T. Rules and brought in
India Rs. 1,05,000.


Salary from M/s. DEF Limited, a
company situated in Delhi

Rs. 65,000
Gross Income under the head "Salaries" Rs. 1,70,000
Less :
Standard deduction u/s 16(i) at 33-1/3%
or Rs.20,000 whichever is lower

Rs. 20,000
--------------
Income from salaries includible in the
Total income

Rs. 1,50,000

In this example, if Mr. O had been a non-resident or not ordinarily resident, his pension of Rs.
1,05,000 would not be includible in his total income. The computation of income under the head
"salaries" would then be as under :

Salary from M/s. DEF Ltd., a
company situated in Delhi 65,000
Less :
Standard deduction u/s 16(1) 21,667
Limited to 33.33% of the salary 43,333

Income from the Head "Salaries"

The amount being less than Rs. 50,000 (the basic exemption limit) there would be no liability to
Income-tax.

Residents and Non-Resident Concepts

According to the current test of residence, an individual becomes a resident, if he

a. is in India for 182 days or more during the previous year; or
b. has been in India for atleast 365 days within the preceding four years and for
atleast 60 days in the relevant previous year.
In other situations the person is to be treated as nonresident.

Illustration

1. Mrs. E retired from U.S. Government service in Washington on 31
st
March, 1999. Since
then, she spends her time partly in Delhi where she owns a house and partly with her
daughter in Washington D.C., U.S.A. During the previous year relevant to the


assessment year 2000-2001 she was in India from 15th April 1999 to 22nd December,
1999. She then left India to be with her daughter in the U.S.A. for Christmas. She
returned to India on 28th J anuary, 2000.
As Mrs. E was in India for more than 182 days during the previous year, her residential
status for the assessment year 2000-2001 would be "resident".
2. For the assessment year 2001-2002 (previous year 1.4.2000 to 31.3.2001) the facts show
that she was with her daughter in the U.S. from 15
th
April to 10
th
November 2000. She
was in India from 12
th
November to 15
th
December, 2000. Then she went back to the U.S.
for the entire winter returning to Delhi only on 15
th
April 2001.
For the assessment year 2001-2002, the status of Mrs. E would be that of a non-resident
because :
a. during the previous year she was in India for less than 60 days;
b. her total stay in India during the preceding four year was less than 365 days.

Exceptions to the Rule Relating to Residence

An exception has been made in the case of those persons who are citizens of India and persons of
Indian origin and have to leave the country for employment abroad, or is an Indian citizen who
leaves India during the previous year as a member of the crew of an Indian ship as defined in
clause (18) of section 3 of the Merchant Shipping Act. 1958. In their case, the criterion of stay of
60 days (supra) has been enhanced to 182 days. That is to say, when a person leaves for
employment abroad, he will continue to be a resident if he remains in India for 182 days or more
in the previous year. If his stay in India during the previous year is less than 182 days, he will be
a non-resident.

The second exception to this rule relates to those individuals who being Indian citizens or
persons of India origin are residing outside India and visit India during a previous year. Such
individuals would become residents, if they remain in India for 182 days or more in the previous
year, or if during the preceding four years they have been in India for 365 days or more and
during the previous year have been in India for 182 days or more. A person is deemed to be of
Indian origin if he, or either of his parents or any of his grand parents, was born in undivided
India.

Illustration

1. PQR an Indian citizen is an Engineer with the Central Public Works Department
(CPWD). During the previous 1.4.2000 to 31.3.2001, he was sponsored by the
Government for a 10 month assignment to Tunisia. He left to India on 31
st
October, 1996
and was in Tunisia even after the close of the previous year.


As Mr. PQR was in India for less than 182 days during the previous year ended on
31.3.2001, his status would be "non-resident" for the assessment year 2001-2002.
2. Mr. L is an Indian citizen, settled in England. He visits India every year to meet his
relatives and friends. He came to India on 15
th
J uly 2000 and left on 17.1.2001. During
the preceding four years 1992-93 to 1996-97 he was in India for more than 365 days.
Since during the relevant previous year 1.4.2000 to 31.3.2001, he visited India from
15
th
J uly to 17
th
J anuary; his stay in India was for more than 182 days. Hence for the
assessment year 2001-2002 his status would be that of a resident.

"Not Ordinarily Resident"Definition

Apart from "resident" and "non-resident", a third category of residential status also exists,
namely, "not ordinarily resident". That is to say a person may well qualify as a resident by the
criterion laid out above, but yet qualify as "not ordinarily resident in India". In that event, his
income accruing or arising abroad will not form part of his total income, unless it is derived from
a business controlled in or a profession set up in India.

A person is not ordinarily resident in India, if

a. he has not been a resident in nine out of the ten previous years, or
b. has not been in India for 730 days or more during the preceding seven years.

Illustration

During the previous 2000-2001, relevant to the assessment year 2001-2002 Mr. A.L. was in India
for more than 182 days. He would thus in the first instance qualify as a resident but his total stay
in India during the preceding seven years was only 600 days. Mr. A.L. received a pension from a
company based in Canada, which accrued to him iCanada. This would not be includible in his
total income as it accrued to him outside India. The same would be the case if Mr. A.L. had not
been resident in nine out of ten preceding previous years.
There are three methods which are commonly used by the taxpayers to reduce their tax
liabilities

Tax Evasion,
Tax Avoidance and
Tax Planning
Tax Evasion


Dishonest taxpayers try to reduce their taxes by concealing income, inflation of expenses,
falsification of accounts and willful violation of the provisions of the Income-tax Act. Such
unethical practices often create problems for the tax evaders. Tax department not only imposes
huge penalties but also initiate prosecution in such cases.

Tax Avoidance

Tax avoidance is minimizing the incidence of tax by adjusting the affairs in such a manner that
although it is within the four corners of the laws, it is done with a purpose to defraud the
revenue. It is the act of dodging without directly breaking the law. For example if A gives gift to
his wife, the income from the asset gifted will be clubbed in the hand of A. But to avoid this
clubbing provision A decides to give gift to Bs wife and B reciprocates it by giving gift to As
wife. This is not tax planning but tax avoidance. Such practices are not acceptable. In the words
of J ustice Rangnath Misra of Supreme Court in the case of McDowell & Co Limited v CTO
[1985] 154 TR 148,tax planning may be legitimate provided it is within the framework of law.
Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the
belief that it is honorable to avoid payment of tax by resorting to dubious methods.

Tax Planning

Tax planning is arrangement of financial activities in such a way that maximum tax benefits, as
provided in the income-tax act are availed of. It envisages use of certain exemption, deductions,
rebates and reliefs provided in the act.

Income that is exempt from Tax

Agriculture Income:

Agriculture income is exempt from tax by virtue of sec 10(1). By virtue of sec 2(1A) the
expression Agriculture Income means:

1. Any rent or revenue derived from land, which is situated in India and is used for
agriculture purpose.

Rent or revenue should be derived from land (may be in cash or kind).
The land should be in India
The land should be for agriculture purpose.

2. Any income derived from such land by agricultural operations including processing
of the agriculture produce, raised or received as rent-in- kind so as to render it fit for
the market or sale of such produce.
3. Income attributable to a farmhouse subject to certain conditions.
The building should be occupied by a cultivator (as a landlord or tenant).
He should be in immediate vicinity of agriculture land.


The building is used as a dwelling house or as a store house or other out
building.
The land is assessed to land revenue or local rates or alternatively the land is
situated outside urban areas i.e. any area which is comprised within the
municipality jurisdiction having a population of not less than 10,000 persons
or within 8 kms from the limits of any such municipality.
If the above conditions are satisfied then, income from a farm building is exempt from tax.

Agriculture income is included for tax rate purposes on

Special Provisions in respect for newly established undertaking Sec 10(A):

Eligibility:

Any undertaking which satisfy the following conditions is eligible to get deduction:

1. It must begin manufacture or production in free trade Zone
2. It should not be formed by splitting/ reconstruction of business.
3. It should not be formed by transfer of old machinery. (Second hand imported and 20%)
4. Sale consideration should be remitted to India in convertible foreign exchange.
5. Books of account should be audited
6. Return of income should be submitted on Time.
Amount of deduction
The deduction under sec 10A is as under:

Profit of the business x Export turnover of the undertaking

Total turnover of the business carried on by the undertaking
Export turnover

It means the consideration in respect of export by the undertaking of articles or things or
computer software received in or bought in India by the assessee in convertible foreign exchange
within the prescribed period.

Period of Deduction:

The assessee can claim deduction for a period of 10 consecutive assessment years beginning with
the assessment year relevant to the previous year in which the undertaking begins to manufacture
or produce.

The aforesaid deduction is not available to any undertaking from the assessment year 2010-11.


Special Provisions:
In case of an undertaking, which begins to manufacture or produce things or computer software
between 1April 2002 to March 31 2005 in any special economic zone, is available as follows for
10 assessment years:

First 5 years-100% of profit derived from the export of such articles or things or computer
software. (First 5 consecutive years).

Next 2 years- 50% of such profits and gains in deductible.

Next 3 years- a further deduction is available to the extent of 50% of the profit provided an
equivalent amount is created as Special Economic Zone re-investment Allowance Reserve.

Charitable and Religious trusts and institutions:

Income of a charitable trust is exempt according to the provisions of section 11, 12 and 13. The
trust should be one established in accordance with law and its objects should fall within the
definition of the term charitable purpose.

Here the charitable purpose includes relief to the poor, education, medical relief and the
advancement of any other object of general utility.

Income of the trust:

Income means the real income, which has been received by the assessee.
The amount deducted as tax at source cannot be considered as income for this purpose.
Depreciation should be allowed while computing income for this purpose.
Voluntary contribution or donations are deemed to be a part of income derived from
property held under trust.
If a voluntary contribution is made with a specific direction than it shall form a part of the
corpus of the trust and not deemed as the income of the trust.
Application of the income of the trust:

If the income applied to charitable or religious purposes, during the previous year fall short of
85% of the income derived during the year due to below mentioned reasons then the trust can us
the income as below:

Reason for less than 85% application
of income
When the income can be spend


Income has not been received during
the previous year

Any other reason
The year in which the income is received or
the following subsequent year.

During the previous year immediately
following the year in which the income is
derived.

If the income is not applied during the extended time then the income will be taxable in the next
year.

Accumulation of income:

The trust or institution may accumulate or set apart either the whole or part of its income for
future application for such purposes. Such income so accumulated will not form the income of
the trust.

Forfeiture of exemption:

If the benefits of any amenities or services are derived by any specified persons as per section 13
then the exemption given to trust stand forfeited.

The following income does not qualify for exemption:

1. Income for private religious purposes only
2. Income for the benefit of particular religious community
3. Income for the benefit of interested persons
4. Funds not invested in specified securities/ deposits


Module 2

INCOME UNDER THE HEAD SALARIES
Explanation Under Various Heads of Income
- Income from Salary
- Income from House Property
- Income under the heads profit and gains of business or profession.
- Income under capital gain
- Income from other sources.
Meaning of salary

1. Relationship of an employer and employee
2. Salary and wages not conceptually different
3. Salary can be from more than one source
4. It can be in cash or kind

Salary Sec 17(1):

Salary under 17(1) is defined to include the following:
1. wages
2. any annuity or pension
3. any gratuity
4. Any fees, commission, perquisites, or profits in lieu of or in addition to any salary or
wages.
5. any advance on salary
6. Any payment received by an employee in respect of any period of leave not availed by
him.
7. The portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in a recognized provident fund to the extent it is taxable.
8. The contribution made by the central government to the account of an employee under a
pension scheme.

Basis of Charge Sec 15:

1. Any salary due from an employer whether actually received or not.
2. Any salary received in the previous year whether actually due or not.
3. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer, if not charged to income tax for any previous year.


Computation of income from Salary:

Income from Salary
Income by way of allowance
Taxable value of perquisites
Gross Salary
Less: deductions u/s 16
Entertainment Allowance
Professional Tax
Income from salaries
Rs. Rs.
--

--
--
--

--

--
--
---

Leave Salary:

Leave Salary refers to the encashment of the leave standing to the credit of an employee either at
the time of his retirement/ or leaving his job or at any time during his service.

Tax treatment:

Nature of Leave encashment Status of employee Whether it is taxable
Leave encashment during
continuity of employment
Government/ non
government employee
Chargeable to Tax
Leave encashment at the time of
retirement / leaving the job
Government employee Fully exempted
Leave encashment at the time of
retirement / leaving the job
Non government
employee
Fully or partly exempted
from tax in some cases.

Non government employee getting Leave encashment at the time of retirement / leaving the job:

In case of a non-govt employee including a local authority or public sector undertaking, leave
salary is exempt from tax on the basis of following:
1. Period of earned leave (in no. of months) to the credit of employee x Average Salary per
month. (cannot exceed more than 30 days in a year)
2. 10 x average monthly salary
(Avg monthly salary=basic salary+dearness allowance+commission on turnover)
3. Amt specified by Govt. (300,000)
4. Leave encashment actually received


Note: Any part of the year is to be ignored.


Eg:

1. Mr. Pradeepkumar retires on 1
st
J uly 2007 after serving 18yrs of service and receives Rs.
80,000 as amount of leave encashment for 15 months. His employer allows 45 days
leaves for every completed year of services. During service he has encashed leave for a
period of 12 months. Calculate the taxable amount of leave encashment if his salary
during 1/7/06 to 1/7/07 is Rs. 5000/- per month.

Gratuity Sec 10(10):
Gratuity is a retirement benefit and is generally payable at the time of cessation of employment
and on the basis of duration of service.

Tax treatment of gratuity:

Status of employee Tax treatment
Government Employee Fully exempted from Tax
Non government employee
covered by the payment of
Gratuity Act, 1972
Exempted to the Least of the following:
3,50,000/-
Gratuity actually received
15 days last drawn salary x length of
service/26
Non government employee not
covered by the payment of
Gratuity Act, 1972
Exempted to the Least of the following:
3,50,000/-
Gratuity actually received
Half-month average salary for each
completed year of service.

Note:
1. In case where the employee is covered by gratuity Act, 1972 then the year is to be
rounded off to the nearest whole. (above 6 months the year to be rounded off to one.)

2. In case where the employee is not covered by the gratuity Act, 1972 then the years are the
completed years of service( any fraction is to be ignored).



1) X, an employee of PQ Co. Ltd, receives Rs. 78,000 as gratuity. He is covered by the
payment of gratuity Act, 1972. He retires on December 12, 2006 after rendering services of
38 years and 8 months. At the time of retirement his monthly basic salary and dearness
allowance was Rs.2,400/- and Rs. 800 respectively. Calculate the amount of exemption.
2) In the above example calculate the amount of exemption if X was not covered by the
Gratuity Act, 1972.

3) Mr. X retired on 1
st
April 2007 after serving for 30 years and 7 months. He was
getting salary Rs. 5,000/- pm from 1/1/2006 to 31/12/2006 and thereafter Rs.
5,200/- pm. He received DA @ Rs. 1,000 pm (forming part of salary for
computation of retirement benefits) and 2%commission on sales achieved by him.
Turnover achieved by him during 10 months (preceding the month in which he
retired) Rs. 8,00,000. He received a gratuity of Rs. 1,56,000. Compute the
exempted amount of gratuity.

Pension Sec 17(1)(ii):

Uncommuted Pension: Periodical payment of pension.

Commuted Pension: Lump sum payment in lieu of periodical payment.
Taxability of commuted pension:

Status of employee Gratuity received/ not
received
Exemption
Government Employee Gratuity may or may not be
received
Exempted from Tax

Non-Government
Employee
Gratuity is received One-third of the pension,
which he is normally
entitled to receive, is
exempt from tax.
Gratuity is not received One-half of the pension,
which he is normally
entitled to receive, is
exempt from tax.

Uncommuted Pension is always chargeable to tax for both government and non-government
employee.



Eg:

1. X retires from a private company on 30
th
April 2007. He gets a pension of Rs. 24000/- per
month. Upto 30
th
J une 2007. From 1
st
J uly 2007 onwards he gets two-third of his pension
commuted for Rs. 1,50,000/-. He was not in receipt of any gratuity at the time of retirement.
Compute the taxable amount of pension for the assessment year 2008-09.
2. Calculate the taxable pension of X for the AY 2008-09, in the above ex. if X was in
receipt of Gratuity as per gratuity Act 1972.

Pension Scheme for an employee joining Central Government on or after J an 1, 2004:
Under the new scheme it is compulsory for an employee to contribute 10% of salary every month
towards their pension account and a matching contribution will be made by the government.
Such contribution will be deductible under u/s 80 CCD. When the pension is received out of the
aforesaid amount it will be taxable in the hands of recipient.

Different form of Allowances:

Allowances is generally defined as a fixed quantity of money or other substance given regularly
in addition to salary for the purpose of meeting some particular requirement connected with the
services rendered by the employee or as compensation for unusual conditions for that service.
It is fixed, predetermined and given irrespective of actual expenditure.
House rent Allowance:
The least of the following amount would be taxable:
1. An amount equal to 50% of the salary, where the residential house is situated at Mumbai,
Kolkatta, Delhi or Chennai and an amount equal to 40% of salary where residential house
is situated at any other place.
2. House Rent Allowance received by the employee.
3. The excess of rent paid over 10% of the salary.

Salary means basic salary and includes dearness allowance and commission based on the fixed
percentage of turnover.

Eg:
Mr. X is employed in a company in Agra. He is getting a basic salary of Rs. 5000/- pm,
Dearness allowance @10% of basic pay, commission based on fixed percentage of
turnover Rs. 24,000/- pa. Actual rent paid by the assessee Rs. 2,500/- pm. Compute the
taxable amount of HRA.


Entertainment Allowance:
Entertainment Allowance is first included in the salary income and thereafter a deduction is
given on the following basis:

Status of Employee Exemption Amount
Government
Employee
Least of the following is deductible:
a) Rs. 5000
b) 20% of basic salary
c) actual amount of entertainment allowance
Non-government
employee
Entertainment allowance is not deductible
E.g.:
X, a government employee gets Rs. 40,000 per annum as basic pay. In addition, he receives Rs.
8,500 as entertainment allowance. His actual expenditure on entertainment for official purpose
however exceeds Rs. 9000/-. What would be the amount of deduction?

Special Allowances:

When exemption depends upon actual expenditure by the employee:
In these below mentioned cases the amount of expenditure is the least of the
Amount of allowance
The amount utilized pertaining to allowance

List of the allowances is as under:
1. Traveling Allowance/ transfer allowance
2. Conveyance allowance
3. Daily allowance
4. Helper allowance
5. Research Allowance
6. Uniform Allowance

When exemption does not depend upon the expenditure:
These allowances are exempt to the least of the following:
Amount of allowance
Amount specified in rule 2BB

Name of allowance Nature of allowance Exemption


Tribal Area/
scheduled area
allowance
This allowance if given in
Madhya Pradesh, Tamil Naidu,
Uttar Pradesh, Karnatka,
Tripura, Assam, West Bengal,
Bihar, Orrisa.
Rs. 200 pm
Children Education
Allowance
Given for children education Exemption limited for Rs.
100/- per month per child
limited to a maximum of two
children.
Hostel Expenditure
Allowance
This allowance is granted to an
employee to meet the hostel
expenditure on is child
Exemption limited for Rs.
300/- per month per child
limited to a maximum of two
children.
Transport Allowance It is given to an employee to
meet his expenditure for
commuting from his office to
his residence.
Exempted to the extent of
Rs. 800/- per month

Special
Compensatory ( Hill
Areas) Allowance
It includes any special
allowance in the nature of
special compensatory (hill
areas) allowance or high
altitude allowance or
uncongenial climate allowance
or avalanche allowance.
Amount exempt varies from
Rs. 300 per month to Rs.
7000 per month.
Underground
allowance
Underground allowance is
granted to an employee who is
working in uncongenial,
unnatural climate in
underground mines.
Exemption limited to Rs.800
per month.

Perquisites:
Perquisites can be defined as any casual emolument or benefit attached to an office or position in
addition to salary or wages. Therefore a perquisite to be taxable under the head salaries:
a. allowed by an employer to an employee
b. allowed during the continuance of his employment
c. directly dependent upon service
d. resulting in the nature of personal advantage to the employee
e. derived by virtue of employers authority

Perquisites: Sec 17(2)
The term perquisite is defined to include the following:
1. The value of rent free accommodation provided to the assessee by his employer.
2. The value of any concession in rent for accommodation provided by the employee


3. Value of any benefit or amenity granted or provided free of cost or at concessional rate
in any of the below cases:
a) by a company to an employee who is a director thereof
b) by a company to an employee, having an substantial interest in the company
c) any person not included in any of the above two categories having a cash salary of
more than 50,000/-
4. any sum paid by the employer in respect of any obligation which but for such payment
would have been payable by the assessee
5. any sum payable by the employer, to effect an assurance on the life of the assessee or to
effect a contract for an annuity
6. the value of any other fringe benefits or amenity as may be prescribed.

Taxability of perquisites:

When it is an obligation of Employee:
If the employer meets an obligation of an employee then the perquisite is always chargeable to
tax.
If the employer, pays any bills which are in the name of employee, then they are taxable in the
hands of employee.

When not an obligation of employee:
In any other case, where it is not an obligation of an employee, the below table list all perquisites
which are taxable in the hands of the employee, Remaining perquisites are not taxable in
employees hands regardless of the expenditure incurred by the employer.

Taxable Perquisites in the hands of the
employee
Exceptions
Furnished/ unfurnished house without rent or
at concessional rent
Exceptions are:
A rent free house in a remote area,
hotel accommodation in case of
transfer for not exceeding 15 days.
Services of a sweeper, gardener, watchman
or

Taxable in the hands of Specified
person only
Supply of gas, electricity or water for
household purpose
person only
Education Facility to employees family
members
person only
Leave travel Concession Exempted if it is given twice in a
block of four years.
Amount payable by an employer directly or
indirectly to effect an assurance on the life
of employee or to effect a contract of an

Any contribution to recognized
provident fund or super annuation fund is
exempted.


Interest free or concessional loan Following are exempted:
Loan not exceeding 20,000,
Loan for medical treatment
Providing use of movable asset Providing use of computer/ laptop
or motor car
Transfer of movable asset None
Medical expenditure reimbursement in
excess of Rs. 15,000
Following are exempted:
In employer/ govt hospital
Expenditure in case of specified
treatment

Specified/ Non specified Employee:
The following are specified employees:
a) An employee who is a director
Health insurance premium
Medical facilities outside
India


b) An employee, having a substantial interest in the company: 20% or more voting
power in the employer-company.
c) any person not included in any of the above two categories having a salary (excluding
the value of all benefits/ amenities not provided by way of monetary payment) of
more than 50,000/-.

Valuation of rent-free unfurnished accommodation:

a) Central and State Government Employees:
The value of such accommodation provided to employee is equal to the license fee, which would
have been determined by the central or state government.

b) Private sector or other employees:
Value of the perquisite depends on salary of the employee and lease rent of the accommodation.

Population of city as per
2001 census where
accommodation is
provided
Where the accommodation
is owned by the employer
Where the
accommodation is
taken on lease or rent
by the employer
Exceeding 25 lakhs 15% of salary in respect of
the period for which the
accommodation is
occupied by the employee
Lower of amount of
lease rent paid/ payable
or 15% of the salary
Exceeding 10 Lakhs but
not exceeding 25 lakhs
10% of salary in respect of
accommodation is
Lower of amount of
Any other 7.5% of salary in respect of
accommodation is
Lower of amount of

SALARY:
For the purpose of valuation the salary includes
a) Basic salary
b) Dearness allowance, if terms of employment so provide
c) Bonus
d) Commission
e) Fees
f) All other taxable allowance (excluding amount not taxable)
g) Any monetary payment which is chargeable to Tax


Eg:
X, an employee of ABC(P) Ltd is posted in Ajmer( population 18 Lakhs), draws Rs. 300,000
basic salary, Rs. 10,000 as dearness allowance(forming part of salary), and Rs. 5000 as
commission . Besides, the company provides a rent free accommodation in Ajmer. The house is
owned by company and has a fair rent of Rs. 50,000 p.a. Determine the taxable value of
perquisite.

Valuation of rent-free furnished accommodation:

Accommodation is not in a hotel:
a) Find out the value of the perquisite on the assumption that the accommodation is
unfurnished.
b) Valuation of furniture is done:
10% per annum of the original cost of the furniture if the furniture is owned by the
employer
actual hire charges payable, if furniture is hired by the employer.

Accommodation in a hotel:
The perquisite is valued at the lower of the two amounts:
a) 24% of salary paid or payable for the period during which such accommodation is
provided in the previous year.
b) Actual charges paid or payable by the employer to the hotel.

Eg:
X received during the previous year ending March 31,2007, emolument consisting of basic pay:
Rs. 162,000: special allowance: Rs 17,000 and reimbursement of medical expenditure: Rs.
3800/-. His employer has also provided a rent-free furnished flat in Mumbai. Lease rent of the
unfurnished flat is Rs. 50,000. Some of the household appliance provided to X (with effect from
J une1 ,2006) are owned by the employer ( cost price Rs. 36000). Employer pays Rs. 10,000 as
hire purchase charges for the three air conditioners installed. Compute the value of perquisite if:
a) X is a Secretary in the ministry of Law and Rs. 4000 is the license fee of unfurnished flat
as per the Central Government rules.
b) X is the managing director of ABC(P) Ltd. What difference would it make if X was
provided a hotel accommodation throughout the year (tariff being Rs. 120,000 per
annum)

Valuation provided at concessional rent:
The below rules will apply for furnished as well as unfurnished accommodation:
Find out the value of perquisites on the assumption that no rent is charged by the
employer.
From the value so arrived deduct the rent charged by the employer from the employee.


Valuation of perquisite in respect of free domestic servant:
The value of benefit to the employee (or any member of his household) resulting from the
provision by the employer for services of a sweeper, a gardener, a watchman or a personal
attendant, shall be the actual cost to the employer, that is, the total amount of the salary paid or
payable by the employer (or any other person on his behalf) for such services as reduced by the
amount paid by the employee for such services.

Valuation of perquisite in respect of gas, electricity or water provided free of cost:

This perquisite is taxable in the hands of specified employees only provided the connection is in
the name of employer. If in the name of employee then the employer would be paying on behalf
of the employee and is taxable in all cases.

Mode of valuation If purchased from outside If supplied by the employer
from own sources
Cost to employer (A) Amount paid /payable by
the employer to the outside
agency
Manufacturing cost per unit
incurred by the employer
Sub: Amount recovered
from the employee (B)
Recovery from the
employee
Recovery from the employee
Taxable Value of
perquisite (A-B)
Balancing amount Balancing amount

Valuation in respect of free education:

This perquisite is taxable in the hands of a specified employee only and only in those cases
where the educational institute is owned and maintained by the employer or where such
education facility is provided in any institute by reason of employees employment with the
employer. The valuation of the facility would be as under:



Different Situations Amount chargeable to tax
Where the education facility is provided
to employees children
Where the cost/ value of benefit
does not exceed Rs. 1000 per
child per month
Where such amount exceeds Rs.
1000/-

Where education facility is provided to
other members of the household

NIL

Cost of education in a similar instituted in a
similar locality Rs 1000 amount
recovered by employee

Cost of education in a similar instituted in a
similar locality amount recovered by
employee

If the fee is paid by the employer for employees children then there is no exemption available for
both specified and non-specified employees. Similarly reimbursement of school fees is also
taxable in the hands of both specified and non-specified employees.

Valuation in respect of providing use of movable assets:
The value of benefit to the employee resulting from the use by the employee (or any member of
his household) of any movable asset (other than car, computer and laptop) belonging to the
employer shall be determined at 10% per annum of the actual cost of such asset. It is taxable in
the hands of all employees i.e. specified and non specified. The taxable amount shall be reduced
by the amount, if any, recovered by the employee.

Mode of Valuation Perquisite in respect of movable asset
Owned by employee Taken on hire by employee
A. Find the cost to the
employer
10% p.a of actual cost Amount of rent paid or
payable
B. Amount recovered
from the employee
Recovery from the employee Recovery from the employee
Taxable Value of
perquisite (A-B)
Balancing amount (if
positive)
Balancing amount (if
positive)


Valuation in respect of Transfer of movable
Asset: The valuation will be done as follows:

Mode of Valuation Perquisite in respect of sale of movable assets to employee

Electronic Items/
computers
Motor car Any other asset
Find out the cost to the
employer (A)
Actual cost to the
employer
Actual cost to the
employer
Actual cost to the
employer
Normal wear and tear
for completed years for
which the asset was
used by the employer
for his business. (B)
50% for each
completed year by
reducing balance
method
20% for each
completed year by
reducing balance
method
10% for each
completed year of
actual cost.
Amount recovered by
the employee (C)
Paid by employee
for acquiring such
asset
Paid by employee
for acquiring such
asset
Paid by employee
for acquiring such
asset
Taxable Value
(A-B-C)
Balancing amount
(if positive)
Balancing amount
(if positive)
Balancing amount
(if positive)

Electronic Items refer to data storage and handling devices like computer, digital diaries
and printers. They do not include household appliances.

Valuation of Medical Facilities:

Fixed medical Allowance is always chargeable to tax. But Medical expenditure reimbursed in
excess of Rs. 15,000 is chargeable to tax. The following are the exemptions to the rule that is in
the following cases there is no monetary ceiling:
In employer hospital
government hospital
Expenditure in case of specified treatment
Health insurance premium
Medical facilities outside India

Foreign Medical Facility:
For medical treatment outside of the employee or any member of the employee shall be
excluded to the extent it is permitted by the Reserve Bank of India.
However the cost of travel of the employee/ any member of his family and his one
attendant shall be excluded only for those employee whose gross total income excluding
such traveling expenditure does not exceed Rs. 200,000/-.



Leave travel concession:
The leave travel concession is exempted twice in a block of four years. And the exemption
is available to both Indian citizen and foreign citizen. Exemption is based on actual
expenditureand is available only in respect of fare. If the journey is performed by the
circuitous route then the amount of exemption is available in respect of the shortest route.
The exemption is available for the family meaning spouse and two children, parents, brothers
and sisters of individual who are mainly or wholly dependent on him.

Any other Facility provided to employee:
Any other facility or perquisite like car, lunch, refreshment, traveling, touring gift, credit cards,
clubs etc provided to employee is not taxable in the hands of employee.

Permissible deduction from Salary Income:
The following deductions are permitted from the head Income form salaries :
1. Entertainment Allowance
As discussed earlier the entertainment allowance is first included in the salary and then allowed
as deduction.
2. Professional Tax
Professional Tax also known as tax on employment is allowed as deduction in the year in which
it is paid. If the employer pays the professional tax, it is first included in the salary of the
employee as a perquisite as it is an obligation of the employee and then allowed as deduction
from the gross salary.

Provident Fund:

Provident Fund scheme is a retirement benefit scheme. Under this scheme, stipulated sum of
money is deducted from the employees salary and an equal matching contribution is made by
the employer. The contribution is invested in gilt-edged securities and interest is earned thereon.
Thus the balance of provident fund consist of:
a) Employers contribution
b) Interest on employers contribution
c) Employees contribution
d) Interest on employees contribution
Kinds of Provident Fund:
Employees provident fund ca be divided into three
a) Statuary Provident Fund:
It is set up under the provisions of Provident Fund Act, 1972. This fund is maintained by the
Government, semi government organization, local authority, railway, university and recognized
educational institutions.

b) Recognized Provident Fund:
A provident fund to which the provident Fund Act,1972 applies is a recognized provident fund.
This fund is recognized by the commissioner of Income Tax.


c) Unrecognized Provident Fund:
If the commissioner of Income Tax does not recognize a provident fund then it will be under the
category of unrecognized provident fund.

Public Provident Fund:
The central government has established a public provident fund with a view to benefit the
general public and mobilize saving. Any person whether salaried or self employed can invest in
the same.

Taxability of contribution to Provident fund.

Statutory
provident Fund
Recognized
Provident Fund
Unrecognized
Provident Fund
Employers
contribution to
provident fund
Exempt from tax Exempt upto12%
of salary. Excess is
taxable
Exempt from tax
Deductions u/s
80C on
employees
contribution
Available Available Not Available
Interest credited
to provident fund
Exempt from tax Exempt from tax
up to 9.5%; excess
of interest over this
is taxable
Exempt from tax
Lump sum
payment at the
time of
retirement
Exempt from tax Exempt from tax in
some cases, when
not exempt
provident fund will
be treated as
unrecognized
provident fund
Employees
contribution
exempt
Interest on
employee
contribution
taxable under
income from
other sources
Employers
contribution
and interest
thereon is
taxable under
the head
income form
salaries.



Deduction u/s 80C:
Section 80C is introduced from assessment year 2006-07 and it provides deduction in respect of
specified qualifying amount paid or deposited by the assesses in the previous year.

Deduction would be available from gross total income
It is available for Hindu undivided family and individuals
Deduction is available on the basis of specified qualifying investment/ contribution/
deposit/ payment made by the assessee during the previous year.
Maximum amount deductible is Rs. 100,000 under sec 80C, 80CCC and 80 CCD.

Salary General Format

Particulars Amount Amount
Salary or wages ( Including advance salary)

XXX
pension or Annuity ( retirement benefit)

XXX
Gratuity or leave salary

XXX
Fee, commission etc

XXX
Taxable allowance

XXX
Taxable perquisite

XXX
Profit in lieu or addition of salary

XXX
Contribution in excess of 12.5 % salary

XXX
Interest credited in excess of 9.5 %

XXX
Taxable balance transferred from UPRF to
RPF

XXX
Gross salary

XXX
Less deduction u/s 16
Entertainment allowance XXX

Profession tax XXX

Net salary

XXX

Income from other sources

Basic
It is a residuary head of income.
Any item chargeable to tax does not fall within the ambit of any other head of income
shall be chargeable to tax under this head of income.


Chargeability
Following head of income shall be chargeable to tax under the head other sources
1) Dividend income section 56 (2) (i)
2) Income by way of :-
i) Winning from lotteries
ii) Cross word puzzles
iii) Race including horse race
iv) Card games
v) Any other game of any sort
vi) Gambling
vii) Betting

3) Any interest on compensation or enhanced compensation received during the year.
4) Any sum of money or property received, movable or immovable , the aggregate value of
which exceeds Rs 50,000/- received from any person, without consideration or without
consideration by an individual or H U F during the year.

Income chargeable under this head of income, if and only if it is not chargeable under other
source.

Interest on securities (state and central government securities and debenture).
Any sum collected from the employees towards their share of contribution to any of the
welfare fund.
Income from letting of machinery , plant and furniture
Income from letting of machinery, plant and furniture together with building, if the
letting of the building is in separate to the letting of other assets.

Income chargeable under this head of income, if and only if it is not chargeable under other
source or salaries

Any sum received under key man insurance policy including sum allocated by way of bonus on
such policy when it is received by any person other than the employer who took the policy and
the employee in whose name policy was taken.

Dividend income

Section 2 (22) Define dividend to include-
a) Any distribution by a company to its share holders to the extent of accumulated
profit, whether capitalized or not, resulting in release of all or any part of the assets of
the company.


b) Any distribution to its share holders by the company
i) Of debenture, debenture stock or deposit certificate with or without interest.
ii) Distribution of bonus shares to the preference share holders by the company to
the extent of accumulated profit, whether capitalized or not.

c) Any distribution made by the company on its liquidation to the extent of distribution
attributable to accumulated profit of the company capitalised or not.
Notes

Where liquidation is as result of compulsory acquisition by the government or a
corporation owned or controlled by the government then

Accumulated profit shall not include any profit of the company prior to 3 consecutive
previous years immediately preceding the previous year in which acquisition taken place.

d) Any distribution by the company on account of reduction of share capital to the extent of
accumulated profit whether capitalized or not.
e) Any payment to the extent of accumulated profit by the company , not being a company
in which public are substantially interested, of any sum by way of

i) Loan or advance to a share holder who hold the beneficial ownership of equity
shares carrying not less than 10 % of voting power.
ii) Loans or advance to any concern ( HUF, Firm, AOP or BOI) in which such share
holder is a partner or a member holding substantial interest

20 % or more beneficial interest at any time during the previous year

iii) Any payment on behalf of or for the individual benefit of any such share holder
made to any person.
Exceptions

Any advance or loan to a shareholder or the concern in which such share holder had
substantial interest shall not be deemed as dividend if-

The loans and advance is given during the normal course of the business provided lending of
money is substantial part of the business of the company.

Any payment made by a company on purchase of its own shares from a share holder in
accordance with the provisions of section 77 A of the companies Act, 1956 shall not be regarded
as dividend.

Any distribution of shares pursuant to a demerger by the resulting company to the share


holder of the demergered company shall not be treated as dividend

Section 115 BB winning from lotteries etc

Where the total incomes of the assessee include the following income then tax shall be calculated
at 30 % of such income plus education cess.

Income by way of:-
Winning from lotteries
Cross word puzzles
Race including horse race
Card games
Any other game of any sort
Gambling
Betting

Notes
No expenditure or allowance can be allowed against such income
No chapter VI A deduction can be allowed
No benefit of set off or un absorbed depreciation is available against such income
No basic exemption Limit is available against such income.

Tax liability of any sum or property (Moveable or immovable)

The objective of this provision is to bring in to tax net the bogus transaction in the name
of gift from un known persons.
Any gift from non relative shall be subject to tax u/s 56 (2)

Any sum of money received without consideration in aggregate exceeding Rs
50,000/-

Whole of such sum shall be chargeable to tax.

Any immovable property received without consideration and stamp duty value exceeds Rs
50,000/-

The entire value of such property equivalent to stamp duty valuation.

Any immovable property received for consideration which is less than stamp duty value
exceeds Rs 50,000/-



The difference between value of consideration and stamp duty value shall be chargeable to tax.

Any immovable property received without consideration and Fair market value exceeds Rs
50,000/-
The whole of the aggregate of FMV shall be chargeable to tax.

Any immovable property received for consideration which is less than Fair market value
exceeds Rs 50,000/-

The difference between value of consideration and fair market value shall be chargeable to tax.
Notes
The benefit of basic exemption limit is not available in for the above transaction
Property include the following
Immovable property being land and building or both
Shares and securities
J ewellery
Archaeological collection
Drawing
Painting
Sculpture
Any work of art.
Expense admissible or in admissible

Admissible expense section 57

i) In respect of dividend income, other than dividend which is exempt from tax and
interest income,
any reasonable expense incurred by way of commission or remuneration for realisation of
such income is deductible.
ii) In respect of any sum collected from employees towards the welfare fund
contribution,
Deduction shall be allowed to the extent the amount is remitted within the relevant
due date
iii) In respect of family pension , least of the following shall be allowed as deduction
a) 33 1/3 of such pension or
b) Rs 15,000/-
iv) In respect of income earned by way of lease rental on letting of machinery, plant and
furniture with or without building, the following shall be allowed as deduction
a) Repairs
b) Insurance
c) Depreciation


v) Any other expenditure incurred by the Assessee not being
i) capital expenditure
ii) Personal expense
But laid out or expended for the purpose of making or earning any income chargeable
under this head of income can be allowed as deductions.

vi) In respect of interest received on compensation or enhanced compensation, then
A sum equal to 50% of such income shall be allowed as a deduction. No other deduction
shall be allowed as deduction.
In admissible expense Section 58

i) Personal expense
ii) Interest and salary payable out side India, if tax has not been paid or deducted at
source.
iii) Wealth tax
iv) Expense of the nature referred to in Section 40 A
v) No deduction shall be allowed for the following category of income
i) Winning from lotteries
ii) Cross word puzzles
iii) Card games
iv) Race including horse race
v) Gambling
vi) Betting

Income from House Property
Section 22 of the IT Act 1961 deals with the house property income. Income from houses,
buildings, bungalows and gowdowns are taxed under this head.
Points to be rememberd while calculating house property income
- Any building and land attached to the vicinity of the building.
- Assessee should be the owner of the property
- Property should not be used for Assessees own business or profession
Exempted House Property Incomes
The following are some of the property incomes, which are exempt from tax:
- Annual value of one self-occupied property.
- Property used for own business or profession, Property held for charitable purposes.
- Property income of a political party, Property income of a trade union.
- Property income of a hospital or other medical institution.
- Property income of an approved scientific research association.
- Property income of a local authority, Annual value of any one palace of an exruler.
- Income from farm house, Property income of a games association.


MODULE - III
INCOME UNDER THE HEAD BUSINESS & PROFESSION
This head is covered by sec 28 to sec 44D. This chapter deals with provisions which have a
bearing on the computation of taxable income.

Basis of charge (sec 28):
The following income is chargeable to tax under the head Profit and gains from business and
profession:
1. Profit and gain of any business and profession
2. any compensation or other payment due or received by any person specified in sec 28(ii)
any compensation received on termination of a managing agency of a foreign
company
any compensation received on termination of a managing agency of a Indian
company
Any compensation received on termination of any agency or modification of
terms of agency.
Any compensation received from government or a corporation on taking over of
management of property or business.

3. Income derived by a trade, professional or similar association from specific services
performed for its members.
4. The value of any benefit or perquisites, whether convertible into any money or not,
arising from the business or the exercise of any profession.
5. Profit on sale of license (export/ import license)
6. Cash assistance (subsidy received by any person against exports under any scheme of
government
7. Any drawback of any duty of customs or excise.
8. Any interest, salary, bonus, commission or remuneration received by a partner from firm.
9. Any sum received for not carrying out any activity in relation to any business or not to
share any know-how, patents, copyrights, trademarks etc.
10. income from a speculative transaction
11. Profits from an illegal business.

Meaning of term business:
The term business refers to any economic activity carried out with a view to earn profit. As per
section 2(13) term business is defined as any trade, commerce, manufacture or any adventure in
the nature of trade, commerce or manufacture. The definition covers every facet of an
occupation carried on by a person with a view to earn profit. The term business is a word of wide
import and in terms of fiscal statue it must be construed in a broad rather than in a restricted
sense.
Thus Production of goods from raw material, buying and selling of goods to make profits and


providing services to others are different form of business.


Profession and Vocation:
As per sec 2(36) profession includes vocation. The term profession is an occupation of requiring
purely intellectual skill or manual skill attained in special knowledge. While the term vocation
implies natural ability of a person for some work. The distinction between the term business,
profession or vocation is not important for the purpose of income tax.

Basic Principles for arriving at business Income:
One has to keep in mind the following general principles for arriving at business income:
1. Business or profession should be carried on by assessee.
2. Business or profession should be carried on during the previous year.
3. Income of the previous year is taxable during the following assessment year.
4. Tax incidence arises in respect of all business or profession.
5. Legal ownership v/s beneficial ownership.
6. Real profit v/s anticipated profit
7. Recovery of sum already allowed as deduction.
8. Mode of book entries not relevant.

Loses incidental to business:
General commercial principles have to be kept in view while determining the real and true
profits of a business and profession. Capital receipts are not taxable. Profits can only arise out of
the trading receipts and only the profit element of such receipt can be made taxable.
Business losses can be allowed as deduction if the following conditions are satisfied:
1. Losses are revenue in nature.
2. Losses should be incurred during the previous year.
3. Losses should be incidental to the business and profession carried on by assessee.
4. It should not be notional or fictitious
5. It should have been actually incurred and not merely anticipated to incur in future.
6. There should not be any direct or indirect restriction under the act against the
deductibility of such loss.

Specific deductions under the Act :
Section 30 to 37 cover expenses which are expressly allowed as deduction while computing
business income, section 40, 40A and 43B cover expenses which are not deductible.

Rent, rates taxes repairs and insurance for building (Sec 30):
Under this section following deductions are allowed for premises used for business or
profession:
1. The rent of premises, the amount of repair (not being capital expenditure), if he has
undertaken to bear the cost of repair.
2. Any sum on account of land revenue, local rates or municipal taxes. **
3. Amount of any premium in respect of insurance against risk of damage or destruction of
the premises.

** The amount is deductible as per the provision of sec 43B.


Repairs and insurance of machinery, plant and furniture (sec31):
The expenditure incurred on current repair (not being capital expenditure) and insurance in
respect of plant, machinery and furniture used for business purpose is allowed as deduction u/s
31.

Depreciation Allowance (Sec 32)
In order to avail depreciation u/s 32, the following conditions need to be satisfied:
1. Asset must be owned by the assessee.
2. It must be used for the purpose of business or profession
3. It should be used for the relevant previous year
4. Depreciation is available on tangible as well as intangible asset.

Use of the asset in the previous year:
The asset in respect of which depreciation is claimed must have been used for the purpose of the
business. Normal depreciation (i.e. full year depreciation) is available if an asset is used is put to
use at least for sometime during the previous year.

Depreciation allowance is limited to 50% of normal depreciation, if the following two conditions
are satisfied:
Where an asset is acquired during the previous year
It is used for the purpose of business or profession for less than 180 days during that
previous year.
If the above conditions are satisfied, the assessee would be entitled to 50% of normal
depreciation, even if the asset is used for a single day.

Depreciation Available:
Under the Indian Income Tax, one can claim depreciation on the following assets:

Tangible Asset Building, Plant, machinery or furniture
Intangible Assets acquired after March
31, 1998
Know-how, patents, copyrights, trade
marks, licenses, franchise, or any other
business or commercial rights of similar
nature.

Block of Assets sec 2(11):
The term block of assets means a group of assets falling within a class of assets comprising of:
Tangible assets, being building, machinery, plant or furniture
Intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchise,
or any other business or commercial rights of similar nature
In respect of which the same percentage of depreciation is prescribed.

Written down Value sec 43(6):
Written down value for the year is determined as under:
1. Find out the depreciated value at the beginning of the year as on 1
st
of April.


2. To this value add actual cost of the asset acquired during the year.
3. From the resultant year, deduct money received/ receivable (together with scrap value) in
respect of that asset which is sold, discarded, demolished or destroyed during that year.
4. The resulting amount is the written down value of the block for that year.
5. The amount of reduction under step 3 cannot exceed the value of asset computed under
step 1 and step 2.

Computation of depreciation
Depreciation is calculated at the prescribed rate on the written down value. However the
following exceptions are there for the aforesaid:

Exception 1: When the written down value of a block of assets is reduced to zero.
No depreciation is admissible where written down value has been reduced to zero, though the
block of assets does not cease to exist on the last day.

Exception 2: If the block of asset ceases to exist
If a block of assets ceases to exist or if all assets of the block have been transferred and the block
of assets is empty on the last day of the previous year, no depreciation is admissible in such case.

Unabsorbed Depreciation:
When in the assessment of the assessee full effect cannot be given to depreciation allowance in
any previous year owing to there being no profit/ gain or there being insufficient profit/ gain, the
balance of depreciation allowance is called unabsorbed depreciation.

Steps for dealing with unabsorbed depreciation:

Step 1 Depreciation allowance of the previous year is first deductible from the
income under the head Profit & gains from business and Profession.
Step 2
If depreciation cannot be fully deducted under the head Profit & gains
from business and Profession because of inadequate or no profit, it is
deductible from income chargeable under the other head of income
(except income from salary) for the same assessment year.
Step 3 If depreciation allowance, is still unabsorbed then it can be carried
forward to the subsequent assessment year(s).

There is no time limit for the purpose of carrying forward of unabsorbed depreciation, it can be
carried forward for indefinite period.
The following priority order is to be followed when the unabsorbed depreciation is to be set off
in subsequent year:
a. Current depreciation
b. Brought forward business loss
c. Unabsorbed depreciation
For the above setoff continuity of the business is not necessary.


Tea/ coffee/ rubber development account (Sec33AB)
To claim the deduction under this section the following conditions need to be satisfied:
1. The assessee must be engaged in tea, coffee or rubber plantation.
2. It must make a deposit in special Account opened with NABARD( National bank for
Agriculture and rural development)
3. The amount has to be deposited within 6 months from the end of the previous year or
before the due date of furnishing the return of income, whichever is earlier.
4. The accounts of the assessee should be audited.
Methods of Accounting
There are two methods of accounting. They are:
Cash System of Accounting
Under this system all those receipts and payments, which are actually collected and spend during
the current previous year, are considered in order to calculate net profit.
Mercantile System of Accounting
Under this system all those receipts and payments, which are paid or due will be considered to
calculate net profit.

Scheme of Business Deductions / Allowances
Amount of deduction:
The least of following is allowed as deduction:
1. A sum equal to the amount deposited in the special account as discussed above.
2. 40% of profit of such business computed under the head profit and gains of business and
profession before making any deduction under section 33AB and also before adjusting
any bought forward losses.
The below points are also to be kept in mind:
1. When a deduction is claimed under this section, no deduction shall be allowed in respect
of such amount in any other year.
2. When a deduction is allowed and claimed under this section to an association of persons
or body of individuals no deduction shall be allowed to any member of the association or
body in respect of the same.
3. Any excess deposit in special account made during the previous year is not treated as
deposit in any other year.

Withdrawal of amount:
The amount standing to the credit of the special account may be withdrawn only in case of:
1. closure of business
2. dissolution of firm
3. death of an assessee
4. partition of HUF
5. liquidation of company

Amount cannot be utilized for certain purpose:
No deduction can be claimed in respect of any amount utilized for the purpose of
1. Any machinery or plant installed in the residential houses or a guest house.


2. Any office appliances except computer
3. Any plant or machinery whose full cost is allowed to be debited to P& L account.
4. Any new plant or machinery to be installed for setting up of a new unit to produce any
article included in eleventh schedule.
Site restoration fund (Sec 33ABA):
An assessee can claim deduction u/s 33ABA if he satisfies following conditions:
1. The assessee must be engaged in production of petroleum/ natural gas in India.
2. The assessee has an agreement with the agreement with the central government.
3. It must make a deposit in special account to be opened with SBI or deposited in an
account named site restoration fund to be opened in accordance with Government of
India with the ministry of Petroleum.
4. The deposit should be made within specified time limit i.e. before the end of previous
year.
5. The accounts of assessee should be audited.

Amount of Deduction:
a) Sum equal to amount deposited in the special account.
b) 20% of the profit of the business as computed under the head profit and gains from
business and profession before this deduction.
Whichever is less is allowed as deduction.
The below points are also to be kept in mind:
1. When a deduction is claimed under this section, no deduction shall be allowed in respect
of such amount in any other year.
2. When a deduction is allowed and claimed under this section to an association of persons
or body of individuals no deduction shall be allowed to any member of the association or
body in respect of the same.

Withdrawal of amount:
The amount can be withdrawn only for the purpose specified in the scheme or deposit scheme.

Amount cannot be utilized for certain purpose:
No deduction can be claimed in respect of any amount utilized for the purpose of
5. Any machinery or plant installed in the residential houses or a guest house.
6. Any office appliances except computer
7. Any plant or machinery whose full cost is allowed to be debited to P& L account.
8. Any new plant or machinery to be installed for setting up of a new unit to produce any
article included in eleventh schedule.

Reserve for shipping business (Sec 33AC):
No deduction under section 33AC is available from the assessment year 2005-06.

The quantum of deduction is an amount not exceeding 100% of the total income ( computed
before making any deduction under this section and u/s 80) as is debited to the profit and loss
account of the previous year in respect of which the deduction shall be allowed shall be


admissible.
The amount of deduction to be claimed must be transferred to a reserve account. The amount to
be credited to such reserve account must not exceed twice the amount of the paid up share capital
(excluding the amount capitalized from reserves) of the assessee company. In the year in which
the reserve exceeds this limit deduction u/s 33AC will be restricted to the amount which is
sufficient to reach this limit.
The amount credited to the reserve account shall be utilized by the assessee company before the
expiry of 8 succeeding previous yrs for
a. Acquiring a ship for the purpose of business of assessee.
b. Until the acquisition of a new ship, such reserve may be utilized for the business of the
assessee but not for distribution by way of dividends or profits or remittance outside India
as profits or for the creation of any asset outside India.

In case amount of reserve is not utilized in the aforesaid manner the amount of reserve shall be
treated in the following manner:
a. In case amount of reserve is utilized for a purpose other than as given above, the amount
so utilized for other purpose shall be deemed as profit of the previous year in which it is
so utilized.
b. In case amount of reserve is not utilized to acquire a ship within 8 exceeding previous,
the amount so unutilized shall be deemed as income of the previous year next following
the period of 8 succeeding previous years.
c. In case ship is acquired within succeeding previous years, it cannot be sold or otherwise
transferred for 8succeding previous years from the previous year in which it s acquired.
In case it is sold or transferred before the expiry of 8 succeeding previous years, the
amount of reserve utilized in acquiring the ship shall be deemed as profit of previous year
in which ship is sold or transferred.

Expenditure on Scientific Research (Sec 35):
Scientific research means any activities for the extension of knowledge in the fields of natural or
applied science including agriculture, animal husbandry or fisheries.

Under this section amount deductible in respect of scientific research may be classified as under:
Expenditure on research carried on by
assessee
Contribution to outsiders
1. Revenue expenditure
2. Capital expenditure
3. Expenditure on an approved in-
house research
1. Contribution to an approved
scientific research association.
2. Payment to National Laboratory

Revenue expenditure incurred by assessee:
Revenue expenditure incurred by assessee himself on scientific research, a deduction is allowed
only if the research is related to the business.

Pre-commencement period expense:


Any pre-commencement expenditure being revenue in nature (other than expenditure providing
perquisites to employee) incurred before the commencement of business on scientific research
related to the business are deductible in the previous year in which the business is commenced.

Capital expenditure incurred by assessee himself:
Where the assessee incurs any expenditure of a capital nature on scientific research related to his
business, the whole of such expenditure incurred in any previous year is allowable as deduction
for that year. The deduction is available even if the relevant asset is not put to use for research
and development in that particular year.
The aforesaid deduction is not available in respect of capital expenditure incurred on the
acquisition of any land. And no depreciation is allowable on such capital asset.

Expenditure on approved in-house research:
A weighted deduction is allowed in respect of expenditure on in-house research and development
expense incurred by the assessee. However the following points need to be kept in view:
1. The taxpayer is a company
2. It is engaged in the business of bio-technology or in the business of manufacture or
production of articles or things notified by the board.
3. The research and development facility is approved by the prescribed authority and
sufficient provision for audit is done for the accounts maintained by the facility.

Amount of deduction
A sum equal to one-one half times of expenditure so incurred shall be allowed as deduction.

Carry forward and set off deficiency shall be done in the same manner as for the unabsorbed
depreciation.

Contribution made to outsiders:
Where the assessee does not himself carry on scientific research but makes contributions to other
institutions for this purpose, a weighted deduction is allowed.
The amount of deduction is equal to one and one fourth times of any sum paid to a scientific
research association or to a university, college or other institution or to a national laboratory.
Scientific research carried on above may or may not be related to the business of the assessee.

Amortization of telecom license fees (sec 35ABB):
Deduction under this section is available if the following conditions are satisfied:
1. The expenditure is capital in nature.
2. It is incurred for acquiring any right to operate telecommunication services.
3. The expenditure is incurred either before the commencement of business or thereafter at
any time during any previous year.
4. The payment for the above has been actually made to obtain license.

The payment will be allowed as deduction in equal installment over the period for which the
license is valid. Any profit or loss on sale of telecom license is to be taken into consideration


while computing business income.

Expenditure on eligible product or scheme Sec. 35AC:
Deduction is available under this section for promoting social and economic welfare.
Any taxpayer can claim deduction by making a payment of any sum to a public sector company
or a local authority or to an association or institution approved by a national committee for
carrying out eligible project or scheme.
A company can also directly incur expenditure in respect of eligible project and claim the same
as deduction.
Payment to associations and institutions for carrying out rural development programmes:
This section provides deduction of sums paid by assessee to:
1. Any association or institution which has its object for carrying out any program of
rural development approved.
2. Any association or institution which has its object the training of persons for
implementation of a rural development program.
3. The national fund for rural development set up by the government.
4. The national Urban Poverty Eradication Fund set up and notified by the government.

Amortization of preliminary expenses (Sec35D):
Those expenses which are incurred before commencement of business for setting up any
undertaking or business are termed as preliminary expenditure.
Deduction under this section is available to an Indian company or a resident non corporate
assessee.

Qualifying Expenditure:
Legal charges for drafting any agreement between the assessee any other person relating
to setting up of business of the assessee.
Legal charges for drafting the memorandum and articles of association if the taxpayer is a
company.
Printing expenses of the memorandum and article of association if the taxpayer is a
company.
Registration fees of a company under the provisions of the companys Act.
Expenses in connection with the public issue of shares or debentures of a company,
underwriting commission, brokerage and charges for drafting, typing, printing and
advertising of the prospectus.

Maximum ceiling:
The aggregate expenditure cannot exceed the following-

In the case of corporate Assessee In the case of non-corporate Assessee
5% of cost of project
5% of capital employed,
whichever is more
5% of the cost of project.


Cost of Project means the actual cost of fixed assets which are shown in the books of assessee as
on the last day of the previous year in which the business of the assessee commences.

Amount of deduction:
One fifth of the qualifying expenditure is allowable as deduction in each of the five successive
years beginning with the year in which the business commences.

Amortization of expenditure in the case of amalgamation / demerger (Sec 35DD)
The provisions of the section are as under:
1. The taxpayer is an Indian company.
2. The expenditure is incurred for the purpose of amalgamation or demerger.
3. The expenditure is allowed as deduction in five successive years in five equal
installments.
4. The first installment is deductible in the year in which amalgamation or demerger takes
place.

Amortization of expenditure under voluntary retirement scheme (Sec 35 DDA)
1. Expenditure is incurred in any previous year by way of payment of any sum to an
employee in connection with his voluntary retirement.
2. Such expenditure is allowed as deduction in five equal installments beginning with the
year in which the expenditure was incurred.

Where the undertaking of an Indian company entitled to deduction for amortization of voluntary
retirement expenses is transferred before the expiry of 5 years in a scheme of amalgamation or
demerger, the deduction for the remaining period shall be available to the resulting company.
Similar provisions are applicable in the case of succession of firm or proprietary concern.

However, in the year of transfer and subsequent years, no deduction will be available to the
amalgamating company, demerged company, firm or proprietary concern.

Amortisation of Expenditure on prospecting etc for certain minerals (Sec35E):
This section provides for the amortisation of expenditure incurred wholly and exclusively on any
operation relating to prospecting for the minerals or group of associated minerals or on the
development of a mine or other natural deposit of any such minerals or group of associated
minerals as specified in the seventh schedule.
The expenditure which is incurred during the 4 years prior to the commercial production is
allowed as deduction in 10 equal installments over a period of 10 years.
In case where the installment of amortized expenditure relating to a given year cannot be wholly
absorbed by the profit against which the amortisation is to be allowed, the unabsorbed amount is
to be carried forward to the subsequent year. Such carry forward is permitted till the tenth year
from the commercial production after which it will lapse.

Other deductions (Sec 36):
The following deductions are provided under this section:
1. Insurance premium:


The amount of any premium paid in respect of insurance of stock or stores used for the purpose
of business or profession is allowed as deduction.
2. Insurance premium by federal milk cooperative society:
Insurance on the life of cattle owned by the members are allowed as deduction.
3. Premium on the health of employee
Insurance premium paid on the health of employee is allowable as deduction.
4. Bonus or commission to employee
Any bonus or commission paid to employee is allowable as deduction on payment basis and the
amount given should not be otherwise payable as profit or dividend.
5. Interest on borrowed capital
6. Discount on zero coupon bonds
Discount on zero coupon bonds (being the difference between the amount received and amount
payable on the redemption/ maturity of bonds) is allowed as deduction on pro-rata basis over the
life of bond.
These are issued by any infrastructure capital company or a public sector company on or after
J une 1, 2005.
7. Employer contribution to Provident Fund and Superannuation fund:
The deduction is allowed as per the limits laid down for the same.
8. Contribution towards approved gratuity fund.
9. Employees contribution towards staff welfare scheme
Any sum received from employee towards contribution for Provident fund or staff welfare
scheme is allowed as deduction provided it is paid on or before date.
10. Write off allowance for animals
Provided the animals are used for business or profession then loss on sale. Theft or death is
allowed as deduction.
11. Bad Debt.
A bad debt is allowable as deduction subject to the following conditions:
There must be a debt
Debt must be incidental to the business or profession of the assessee.
It must have been taken into account in computing assessable income.
Debt must have been written off in the books of account of the assessee.
Transfer to provision for bad and doubtful debts shall not be taken into account.
12. Transfer to Special reserve:
Under this section deduction is available to a financial corporation including a public and
government company which is engaged in providing the long term finance for industrial or
agriculture development.
Amount of Deduction:
The amount transferred during the previous year to the special reserve account.
40% of the profits derived from the business activities.
200% of (paid up share capital and general reserve as on the last day of the
previous year) minus the balance of the special reserve account.
Whichever is lower of the above.
13. Family Planning Expenditure:
Any bona fide expenditure incurred by a company for the purpose of promoting family planning


among its employees, is allowable as deduction.
If the expenditure is of capital nature, one-fifth of such expenditure is allowable as deduction for
the previous year in which it was incurred and the balance in four equal installments.
Any expenditure which could not be allowed as deduction due to inadequate profit shall be set
off and carried forward as unabsorbed depreciation.
14. Any amount paid by employer as premium under keymans insurance scheme is fully
allowed.
Advertising Expense
Deduction is not available in respect of expenditure incurred by an assessee on advertising in any
souvenir, brochure, tract, pamphlet or the like published by political party.

General Deduction (Sec37)
This is a residuary section in order to claim deduction under this section; the following
conditions need to be satisfied:
1. The expenditure should not be in the nature prescribed by section 30 to 36.
2. It should not be in the nature of capital expenditure.
3. It should not be personal expenditure of the assessee.
4. It should have been incurred in the previous year.
5. It should have been incurred with respect to the business carried on by the assessee.
6. It should have been expended wholly and exclusively for the purpose of business.
7. It should not have been incurred for any purpose which is an offence or prohibited by
law.

Specific disallowances under the Act:
The following expenses given by sections 40,40A and 43B are expressly disallowed under the
act.

Amount not deductible under sec 40
The following amounts are not deductible from the income as per this section:
1. Any sum paid for which TDS was deductible but was not deducted or was deducted but
paid to the government within the previous year or in subsequent year within the
prescribed time.
However if the tax is paid subsequently then the deduction is allowed in the year in which it is
paid.
2. Securities transaction tax
3. Fringe Benefit Tax
4. Income tax
5. Wealth Tax
6. Tax on non monetary perquisites paid by the employer.

Amount not deductible under sec 40A
1. Any payment made by an assessee to a relative or a person having substantial interest in
the company is disallowed to the extent it is excessive or unreasonable.
Hence if the expenditure is excessive or unreasonable having regard to the fair market value of
the goods, services, facilities etc, then the excessive portion shall be disallowed.


2. Amounts not deductible in respect of the expenditure exceeding Rs.20,000/-
If an assessee makes any payment in respect of any expenditure for an amount exceeding Rs.
20,000/- by way of cash or by a bearer cheque then 20% of the said payment will be disallowed
as deduction.
However, in some cases payment in excess of Rs. 20,000/- is allowed as deduction like when the
payment is to government or bank, or in a place where no banking facility exist, payment made
for agriculture produce, horticulture or animal husbandry etc.
3. Amount not deductible in respect of contributions to non-statuary funds.

Amount not deductible under (sec 43B)
The following expenses are allowed as deduction only on payment basis:
1. any sum payable by way of tax, cess, duty or fees
2. Any sum payable by an employer by way of contribution to provident fund or
superannuation fund or any other fund for the welfare of employee.
3. Any sum payable as bonus or commission to employee for service rendered.
4. Any sum payable as interest on any loan or borrowing from a public financial institution
or a state financial corporation or a state industrial investment corporation.
5. Interest on any loan or advance taken from a scheduled bank including co-operative bank.
6. Any sum payable by an employer in lieu of leave at the credit of his employee.

The above expenses are deductible in the year in which the payment is made. However if
payment is made before the due date of filing of return then the deduction will be allowed in the
year in which the expense is incurred.

Deemed profits and their chargeability:
The following receipts are chargeable to tax as business income:
1. Recovery against deduction
In any earlier years a deduction was allowed to the taxpayer in respect of loss of expenditure or
against trading liability incurred by the assessee will be taxable in the current year if he has
obtained a refund of such trading liability whether the concerned business is being carried on or
not.
2. Sale of assets used for scientific use:
Where any capital asset used in scientific research is sold without having been used for other
purposes and the sale proceeds to the extent of deduction earlier allowed u/s35 will be
chargeable to tax as profits from business and profession whether the business for which the
deduction was allowed is in existence or not.
3. Recovery of Bad Debts:
Similarly any bad debts allowed as deduction which was recovered subsequently will be assessed
as income to the extent of deduction allowed whether the business is in existence or not.
4. Recovery after discontinuance of business or profession:
Where any business or profession is discontinued by reason of the retirement or death of the
person carrying on such business, any sum recovered after the discontinuance of the business or
profession will be deemed to be the income of the recipient and charged to tax in the year of
receipt.



Taxability of undisclosed Income / Investment:

1. Cash Credit (Section 68: )
Under the section 68 unexplained cash credit in the books of the assessee for which the assessee
is unable to offer any explanation or if the explanation offered is not to the satisfaction of the
assessing officer, the same will be treated as income of the previous year in which such credit
appears in the books of accounts of assessee.
2. Unexplained Investment (Section 69: )
Under section 69 unexplained investment for which the assessee is not able to offer satisfactory
explanation or which is not recorded in the books of the assess will be deemed to the income of
the assessee in the financial year.
3. Unexplained money (Section 69A):
Any unexplained money, bullion or jewellery which is not recorded in the books of assessee for
which the assessee is not able to offer explanation to the satisfaction of assessing officer will be
treated as the income of the assessee in the financial year in which the assessee is found to be the
owner of the same.
4. amount of investment etc not fully disclosed in the books of account
(Section 69B)
Any investment in bullion, jewellery or other valuable articles the value of which is not fully
recorded in books for which assessee do not give any satisfactory explanation will be treated as
income of the financial year for which it is found
5. Unexplained Expenditure (Section 69C):
Any unexplained expenditure in any financial year for which the assessee offers no satisfactory
explanation about the source is taxable as income in the financial year where such unexplained
expenditure is incurred.
6. Amount borrowed or repaid on hundi (Section 69D):
Money borrowed by hundi and repayment of it otherwise through an account payee cheque or
bank draft will be treated as income in the previous year in which such borrowing or repayment is
made otherwise than through account payee cheque.

Section 44 A

For the purpose of this section specified profession means a profession of medicine,
engineering, architecture, film artiest, accountancy, authorized representative, company
secretaries.

In the case of specified profession if the gross receipt from profession do not exceed Rs 1,50,000
no specified books have been prescribed and the assessee has to maintain such books to enable
the assessing officer to assess the income of the assessee.

In case of specified profession if the gross receipt from profession exceeds Rs 1,50,000
prescribed books like
a. Cash Book
b. J ournal if accrual System of accounting is followed
c. Ledger


d. Serially numbered receipt for any receipt exceeding Rs 25
e. Original bill and receipt for any payment exceeding Rs 50 to be maintained

In the case of non specified profession or business where the gross income do not exceed Rs
1,20,000 or gross receipt do not exceed Rs 10,00,000 no requirement for maintaining any books
of accounts
In the case of non specified profession or business where the income exceeds Rs 1,20,000 or
gross receipt exceeds Rs 10,00,000 such books which may enable the assessing offices to
compute the income should be maintained

Section 44 AB

Following person are required to get their accounts Audited
Different Tax payers When they are covered by the provisions of compulsory
audit under section 44AB.
A person carrying on
business
A person carrying on
profession
If the total sales, turnover or gross receipt in business for the
previous year(s) relevant to the assessment year exceed or
exceeds Rs 40 Lakhs.
If his gross receipt in profession for the previous year(s)
relevant to the assessment year exceeds Rs 10 Lakhs.
A person covered
under section 44AD,
44 AE, 44AF, 44BB
or 44BBB
If such person claims that the profits and gains from the
business are lower than the profits and gains computed under
this section (irrespective of his turnover).

Special Provisions for computing income on estimated basis

Taxpayers engaged in the business of civil construction (Sec44AD)
1. Any Taxpayer who is an individual, HUF, AOP, BOI, firm, Company, Co-
operative Society or any other person who is engaged in the business of
civil construction or supply of labor for civil construction work is covered
under the section.
2. Any person whose gross receipt from Business does not exceed Rs 40 Lac.
3. Income from above mentioned business is estimated at 8% of the gross
receipt and all deduction under section 32 to 38 including depreciation is
deemed to have been already allowed and no further deduction is allowed.
4. If he so assessed than he is not required to maintain books of accounts as
per section 44 AA and is also not required to get his books of accounts
audited under section 44 AB.
5. A tax payer can declare his income to be lower than the deemed profit but
than he has to maintain books of accounts as per section 44 AA and is also
required to get his books of accounts audited under section 44 AB.



Taxpayer engaged in the business of plying, leasing or hiring trucks (Sec 44AE)
plying, hiring or leasing goods carriages. The taxpayer owns not more
than 10 goods carriage at any time during the previous year.

2. Income from above mentioned business is calculated as below:

Type of goods Carriage Estimated Income
Heavy goods Vehicle Rs 3500 for every month (or part of a month) during
which the goods carriage is owned by the tax payer.
Other than heavy goods
Vehicle
Rs 3250 for every month (or part of a month) during
which the goods carriage is owned by the tax payer.

3. All deduction under section 32 to 38 including depreciation is deemed to
have been already allowed and no further deduction is allowed.
5. A tax payer can declare his income to be lower than the deemed profit but
than he has to maintain books of accounts as per section 44 AA and is also
required to get his books of accounts audited under section 44 AB.

Taxpayers engaged in the business of retail traders (Sec44AF)
retail trade of any goods or merchandise is covered under the section.
2. Any person whose gross receipt from Business does not exceed Rs 40 Lac.
3. Income from above mentioned business is estimated at 5% of the gross
receipt and all deduction under section 32 to 38 including depreciation is
deemed to have been already allowed and no further deduction is allowed.



MODULE IV
INCOME UNDER CAPITAL GAIN
Any profit and gain arising on Transfer of a capital asset is chargeable under sec 45. Sec 46, 47
gives such transactions which are not considered as Transfer. While Sec 54, 54 B, 54 D, 54 EC,
54 F, 54 G, 54 GA & 54H gives the list of exemptions.

Basis of charge sec 45:

Capital gains gain tax liability arises only when the following conditions are satisfied:
There should be a capital asset
The capital asset is transferred by the assessee
Such Transfer takes place during the previous year
Any profit or gain arises as a result of transfer
Such profit or gain is not exempt from tax under Sec 54, 54B, 54D, 54EC, 54F, 54G,
54GA.

Capital Assets:
A capital asset is defied to include property of any kind, whether fixed or circulating, movable or
immovable, tangible or intangible. The following assets are, however, excluded from the
definition of Capital Assets.
1. Any stock and Trade, consumable or raw material held for the purpose of Business or
profession.
2. Movable property including wearing apparels and furniture held for his personal use or
for the use of any member of is family.
3. Agricultural land in India, which is situated in rural area.
4. 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or national defense Bonds, 1980 issued
by Central Government.
5. Special bearer bonds, 1991.
6. Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.

Short term / Long Term Capital Asset:
Short Term capital assets means a capital asset held by an assessee for not more than 36 months
immediately prior to its date of Transfer. Any asset which is held by assessee for more than 36
month is known as Long Term Capital Asset.

Exception:
In the following cases an asset held for not more than 12 months is treated as short term capital
asset.
Equity or preference share in a Company.
Securities (like debentures, government securities)
Units of UTI


Units of a mutual fund specified under section 10(23D)
Zero Coupon bonds
Transfer of Capital Assets:

Transfers in relation to capital assets include sale, exchange or relinquishment of asset or the
extinguishment of any rights therein or the compulsory acquisition thereof under any law {Sec 2
(47)}.

Following transactions are not regarded as Transfer:
1. Distribution of capital assets at the time of liquidation of a Company.
2. Distribution of assets at the partition of HUF.
3. Transfer of a capital asset under a gift or will or under an irrevocable trust.
4. Transfer of a capital asset by a Company to its 100% subsidiary.
5. Transfer of share of Indian Company held by a foreign company to another foreign
company in case of amalgamation.
6. Transfer of capital asset of a banking Company to another banking company n case of
amalgamation.
7. Transfer in a demerger of capital assets by the demerged company to the resulting
company.
8. Transfer of capital assets (being FCCB or GDR) by a non resident to another nonresident.
9. Transfer of agricultural land in India march 1, 1970.
10. Transfer of a capital asset (being work of art, manuscript, painting etc) to government /
university / national museum etc.
11. Transfer by way of conversion of bonds or debentures into shares.
12. Transfer by way of exchange of a capital asset being membership of a recognized stock
exchange for shares of a company.
13. Transfer of land by a sick Industrial Company which is managed by its workers Co-
operative.
14. Transfer of a capital asset by a firm to Company in case of conversion of firm into
Company.
15. Transfer of a capital asset, being a membership right held by a member of recognized
stick exchange in India.
16. Transfer of a capital asset to a Company in the case of conversion of preparatory concern
into a Company.Transfer involved in a scheme of lending of securities.
Mode of computation of capital gains (Sec48):

Computation of Short Term Capital Gain Computation of Long Tern Capital Gain


Find out full value of consideration
Deduct the following
Expenditure incurred wholly and
exclusively in connection with such
transfer
Cost of acquisition
Cost of improvement
From the resulting sun deduct the
exemption provided by section 54B,
54D, 54G and 54GA
The balancing amount is short term
capital gain.
Find out full value of consideration
Deduct the following
Expenditure incurred wholly and
exclusively in connection with such
transfer
Index cost of acquisition
Index cost of improvement
From the resulting sum deduct the
exemption provided by sections 54,
54B, 54D, 54EC, 54F, 54G, 54GA.
The balancing amount is long term
capital gain.

Cost of Acquisition (Sec 49):
Cost of Acquisition of an asset is the value for which it was acquired by the assessee. Expenses
in the capital nature for completing the title for the property are included in the cost of
acquisition.

Cost of asset for the previous owner Sec 49(1):
The cost of previous owner is deemed to be the cost of acquisition to the assessee in cases
where capital asset becomes the property of assessee under any of the mode described below:
1. Acquisition of property in case of partial or total partition of HUF
2. Acquisition of property in case of gift or will
3. Acquisition of property in case of :
Succession or inheritance
Any distribution of assets on the dissolution of a firm, BOI or AOP
Distribution of assets on the liquidation of a company
Under a transfer of revocable trust or an irrevocable trust.
Any transfer from a wholly owned subsidiary to its holding company or vice versa.
Under any scheme of amalgamation.
The holding period of the previous owner is also counted for determining whether the amount
is short term or long term capital asset nut indexation will be allowed from the time when the
asset is acquired by the assessee.

Cost of Acquisition being the fair market value as on April1, 1981:
In the following cases, the assessee may take at his option, either actual cost or the fair
market value of the asset ( other than a depreciable asset) as on April 1, 1981 as cost of
acquisition:
a) Where the capital asset became the property of the assessee before April 1, 1981.
b) Where the capital asset became the property of the assessee by any mode referred to
in sec 49(1) and the property was originally acquired before Aril 1, 1981.
In case of depreciable asset cost of acquisition is taken as the WDV at the end of the previous
year along with any expenses on transfer of the asset. Any such capital gain is treated as short
term capital gain.


Determination of indexed cost of Acquisition/ indexed cost of improvement:

Indexed Cost of Acquisition=

Cost of Acquisition x Cost inflation index for the year in
Cost inflation index for the year in which the asset is sold/ transferred
which the asset is acquired/1980-81

Indexed cost of improvement=

Cost of improvement incurred x Cost inflation index for the year in
Cost inflation index for the year in which which the asset is sold/ transferred
the improvement took place

Capital Gain in case of conversion of capital asset into stock in trade:
The fair market value of the capital asset on the date on which it was converted or treated as
stock in trade shall be deemed to be full value of the consideration received or accruing as a
result of the transfer of the capital asset.

Transfer of capital asset by a Partner to a firm:
In case an asset is transferred by a partner to a firm then the capital gain is chargeable to tax in
the previous year in which such transfer takes place and the amount recorded in the books of
account of the firm as the value of asset shall be taken as full value of consideration received as a
result of such transfer.

Distribution of capital asset on dissolution:
In case a firm is dissolved and the asset is given/sold to a partner than the capital gain will be
calculated as taxable in the hands of firm and it is taxable as income in the year it is transferred.
For computing capital gain the fair market value is taken of the asset is taken as the full value of
consideration.

Capital gain in case of self generated assets:
If any self generated assets like goodwill or right to carry on business, tenancy right route permit
etc is sold then the cost of acquisition is taken as nil. Only the cost of transfer is allowed as
deduction.
Capital Gain on transfer of Bonus share:

Different Situations

Special Provisions
Cost of Acquisition of bonus shares
allotted before April 1, 1981
Fair market value on April1, 1981 is taken
as cost of acquisition
Cost of Acquisition of bonus shares
allotted on or after April 1, 1981
Cost of Acquisition is taken as Zero


Period of holding bonus shares The period of holding shall be determined
from the date of allotment of bonus shares
(and not from the date of acquisition of
original shares)

CAPITAL GAIN- EXEMPTIONS

Capital Gain arising form the transfer of the residential Property (Sec
54) Exemptions under following conditions are met.
1. Only and individual and HUF can claim exemption under this section.
2. Exemption is available only if the capital asset which is transferred is a residential
house property, whose income is taxable under the head Income from house
property.
3. House property should be a long term Assets.
4. A new house property should be purchased / acquired within a specified time limit.
Particular Time limit
For purchasing a new residential property

For constructing a new residential property
Within One year before or within 2 years
after date of Transfer of house property.
The Construction should be Complete
within 3 years from the date of Transfer of
house property.
5. Amount of Exemption:
The amount of capital gain generated on Transfer of Residential
house property.
The amount invested in purchasing or constructing new residential
property, Which ever is lower.
6. If the amount is not utilized for purchase / construction of the new property till the
due date of submission of Return of Income than it should be deposited in capital
gain deposit account scheme.
7. If the new residential property is transferred within a period of
three years from the date of acquisition or completion of construction the
amount of assumption given earlier will be taken back.
Capital Gain arising form the transfer of Agricultural land (Sec 54B)
Exemption under this section is available if following provisions are met:
1. The tax payer is an individual
2. he transfers an agricultural land it may be a long term / short term capital assets
3. Agricultural land was used by the taxpayer or his parents for agricultural purpose for a
period of two years immediately preceding the date of Transfer.
4. The tax payer has purchased another land of agricultural purpose within a period of two
years from the date of transfer.
5. Land may be in urban or rural area.
6. Amount of exemption:
a. The amount of capital gain generated on Transfer of agricultural land.


b. The amount invested in purchasing a new agricultural land.
Whichever is lower.
7. If the amount is not utilized for purchase of the new agricultural land till the due date of
submission of Return of Income than it should be deposited in capital gain deposit
account scheme.
8. If the new agricultural land is transferred within a period of three years from the date of
acquisition the amount of exemption given earlier will be taken back.
Example:
Agricultural land purchased in 1984-85 for Rs 46500 is sold for Rs 380000 on 01-05-
2002. The assessee purchased another piece agricultural land on 1-08-2003 for Rs 70000 and
deposited Rs 30000 on 24-06-2003 in capital gain account scheme 1998.Calculate capital gain
chargeable to tax in to tax for AY 2003-04. The cost Inflation Index in 1984 85 was 125 and
2003-04 was 447.

Capital Gain under compulsory acquisition of land and building forming part of industrial
undertaking (section 54D)
Exemption under this section is available if following provisions are met:
1. The taxpayer may be an individual, HUF, Firm, Company or any other person
2. The asset may be short term / long term
3. Capital gain arises on transfer by way of compulsory acquisition of land or building
which forms a part of an industrial undertaking belonging to the taxpayer.
4. Such land or building was used by the assessee for the purpose of the industrial
undertaking for at least two years preceding the date of compulsory acquisition.
5. Assessee has purchased nay other land or building within a period of three years from the
date of receipt of compensation or constructed a building within such period.
6. Newly acquired land or building should be used for the purpose of shifting or
reestablishing the said undertaking or setting up another industrial undertaking.
a. The amount of capital gain generated on Transfer by way of Compulsory
acquisition of land or building.
b. The amount invested in new land of building.
Whichever is lower.
8. If the amount is not utilized for purchase / construction of the new land of building till the
due date of submission of Return of Income than it should be deposited in capital gain
deposit account scheme.
9. If the new land or building is transferred within a period of three years from the date of
its acquisition or completion of construction the amount of exemption given earlier
under section 54 D would be taken back.

Capital Gain not to be charged on investment in certain bonds (sec 54
EC) The salient features of section are as under:
1. The taxpayer may be an individual, Firm, Company or any other person
2. A long term capital asset is transferred by an assessee during the previous year.
3. Within six month from the date of transfer of the assets the assessee should invest
the whole or any part of the capital gain in long term specified assets.


4. from the assessment year 2006-07 this specified assets are any bonds redeemable
after three years issued after march 31, 2006 by
National highway authority of India
Rural Electrification Corporation Ltd.
i. The amount of capital gain generated on Transfer of capital asset.
ii. The amount invested in specified asset as discussed
above. Which ever is lower.
6. The cost of specified assets shall not be eligible under section 88 and deduction
under section 80C.
7. The investment made on or after 01-04-2007 can not exceed Rs 50 lacs.
8. If the specified asset is transferred / converted into money or any loan or advance is
taken on the security of specified asset within 3 year from the date of acquisition than
the exemption given will be charged to tax in the year in which it was so transferred /
converted into money or any loan or advance is taken

Capital Gain on transfer on a long term capital asset other than a house property (Sec 54
F): Exemption under this section is available if following provisions are met:
1. Only and individual and HUF can claim exemption under this section.
2. Exemption is available only if the capital asset which is transferred is a long term
capital asset but other than a residential house property (e.g. a plot of land, gold, share
etc)
3. A new house property should be purchased / acquired within a specified time limit.

Particular Time limit
For purchasing a new house

For constructing a new house
Within One year before or within 2 years after
date of Transfer of original asset.
The Construction should be Complete within 3
years from the date of Transfer of house property.
4. The exemption is available only if on the date of transfer of the original asset, the
taxpayer does not own more than one residential house other than the new house.
5. Amount of exemption will be calculated as
under: Cost of new house x Capital gain
Net sales consideration

6. If the amount is not utilized for purchase / construction of the new property till the due
date of submission of Return of Income than it should be deposited in capital gain deposit
account scheme.
7. If the new residential property is transferred within a period of three years from the date
of acquisition or completion of construction the amount of assumption given earlier will
be taken back.
8. If the assessee purchases a new house, within a period of two years of the date of transfer
of original asset, or construct within a period of 3 years of the transfer of such asset, a
residential house other than the new house then the exemption will be withdrawn.


Capital Gain on transfer of assets in cases of shifting of industrial undertaking from urban area
(Sec 54G):
To claim exemption under this section following conditions need to be fulfilled:
1. A capital asset used for the purpose of an industrial undertaking situated in an urban area is
transferred.
2. The transfer is effected in the course of, or in consequence of, the shifting of such industrial
undertaking to any area other than an urban area.
3. The assessee has within a period of one year before or 3 years after the date on which the
transfer took place:
a) Purchased a new machinery or plant for the purpose of business of the industrial
undertaking in the area to which the said undertaking has shifted.
b) Acquired building or land or constructed building for the purpose of his business in
the said area.
c) Shifted the original asset and transferred the establishment of such undertaking to
such area.
d) Incurred expenses on such other purposes as may be specified in a scheme framed by
the central government.
4. The amount of exemption is equal to-
The amount of capital gain generated on transfer of capital assets in case of shifting of
an industrial undertaking
The cost and expenses incurred in relation to all or any of the purposes mentioned in
point 3.
Whichever is lower.
5. If the amount is not utilized for purchase / construction /acquisition of the new asset till the
due date of submission of Return of Income than it should be deposited in capital gain
deposit account scheme.
6. If the new asset is transferred within a period of three years from the date of its
purchase/construction/acquisition the amount of exemption given earlier under section 54 G
would be taken back.
Section 50 B Slump sales

Definition
Section 2 ( 42 C) Transfer of one or more undertaking as a result of lump sum consideration
without value being assigned to individual assets and liability on such sales.

Notes
Determination of asset and liability for the purpose of payment of stamp duty or registration fee
shall not be regarded as assignment of individual value to assets and liability.

Taxability

Any profit and gains arising from the slump sales affected during the previous year shall be
charged to income tax as capital gains


If the undertaking held for more than 36 month then such gains shall be regarded as long term
capital gain else it is regarded as short term capital gain.
The net worth of the division so transferred shall be regarded as cost of acquisition and cost of
improvement.

Meaning of net worth

It shall be the aggregate value of total asset of the undertaking or division as reduced by the
value of liability of such undertaking or division as appearing in the books of accounts.

Any changes in the value of asset on account of revaluation of asset and liability shall be ignored
for the purpose of computing net worth.

Value of asset for the purpose

In case of depreciable assets, WDV of block of asset
In case of other asset the book value of such assets.
Report from CA
A report from the chartered Accountant indicating computation of net worth and certifying the
correctness of net worth is required.

Section 55 A Reference to valuation Officer

With a view to ascertaining the FMV of a capital asset for the purpose of capital gains and other
purpose the assessing officer may refer the valuation of capital asset to a valuation officer.

Valuation of capital asset is performing under the following situation
In case where the value of the asset as claimed by the assessee is in accordance with the estimate
by the registered value , if the assessing officer is of the opinion that the value so determined is
less than its FMV.

In any other case, if the assessing officer is of the opinion that
FMV of the asset as claimed by the assessee by more than 15 % of the value claimed or by more
than 15,000/-

Having regarded to the nature of the capital asset and other relevant circumstance it is necessary
to make the reference.



MODULE V
INCOME FROM OTHER SOURCES
Deduction

In computing total income there shall be allowed from the gross total income deduction
specified in section 80 C to 80 U.
The aggregate amount of deduction shall not be exceeding Gross Total income.
Deduction is permitted up to Gross total income.
In case where Assessee avails deduction u/s 10 A, 10 AA, or 10 B no deduction shall be
claimed under any provision of Chapter VI A section 80A (4).
Where goods or service held for the purpose of eligible business are transferred to any
other business or goods and services held for normal business are transferred to eligible
business, if the value of consideration as recorded in the books of eligible business
doesnot correspond to the market value, then the profit eligible for deduction shall be
computed by adopting market value of such goods and service

Type of deduction

Deduction based on payment
Deduction based on receipts

Deduction based on the payment

Section 80 C Deduction in respect of Life insurance premia, deferred annuity, contribution
to PF etc.

Eligible Assessee

1) Individual
2) H U F


Eligible investment or contribution

1) Life insurance/ Annuities

Amount paid towards
i) Life insurance premium
ii) Defered Annuities

Contribution towards-
i) Unit linked plan 1971
ii) Notified plan of the L I C or any other insurer
iii) Unit linked plan of LIC or
iv) Mutual fund notified U/s 10 ( 23 D)
Deduction from salary

Salary payable by or on behalf of the government to any employee in accordance with condition
of service, for the purpose of securing deferred annuity or making provision for his spouse or
children not exceeding 1/5
th
of the salary.

2) Employee welfare fund

Contribution by the individual to the following is eligible for deduction

i) Any provident fund to which Provident fund Act 1925 applies
ii) Public provident fund
iii) Recognised provident fund
iv) Approved super Annuation fund

3) Central Government / Post office / other notified scheme

Post office

5 year time deposit in an account under Post Office Time Deposit scheme.

National saving certificate/ Notified Saving certificate.
Investment or subscription to National Saving certificate/ notional saving certificate

NABARD Bond
Subscription to the bonds issued by NABARD
Term deposit with Schedule bank


Term deposit for a period not less than 5 years in a scheduled bank in accordance with the
scheme notified by the Central Government

Mutual fund u/s 10 (23 D) or Unit notified by the central Government

i) Subscription to any of Mutual fund u/s 10 (23 D) or Unit notified by the central Government.
ii)Contribution by an individual to a pension fund set up by Mutual fund u/s 10 (23 D) or Unit
notified by the central Government.

Senior citizen saving certificate

Deposit in an account under senior citizen saving scheme.
4) Housing related

Repayment of any loan borrowed for the purpose of purchase or construction of residential
house from the following entity shall be allowed as a deduction

Government approved Institution
Specified employer
Any board or corporation or body established under central or state Act or
Notified institution.
Note

Any expenditure incurred for stamp duty and registration fee shall be allowed as deduction

iii) Payment in part / installation under any self financing or similar scheme of any
housing board or development authorities engaged in construction and sales of houses
iv) Payment in part / installation towards cost of the house allotted , due to any company
or co operative society of which Assessee is a share holder or a member.

1) Tuition Fee

Eligible payment

Tuition fee to any university, college or school or other educational institution situated in
India for the purpose of Full time education.
Deduction is permissible in respect of Two children of the assesses.
Non eligible items
Development fee
Donation
Any payment of above nature



2) Others
Subscription to any deposit scheme
Contribution to any such sum specified by National Housing Bank
Deposit with public sector Company engaged in providing long term finance for
purchase or construction of residential house in India.
Deposit with any authority constituted in India for the purpose of dealing with and
satisfying the needs for housing accommodation for the purpose of planning,
development or improvement of cities, towns and villages or both.
Quantum of deduction.
Least of the following
Aggregate of contribution or
Rs 1 Lakhs

Section 80 CCC contribution made to certain pension fund

Eligible Assessee
Individuals


Contribution made to annuity plan of-
L I C or
Any insurer approved by IRDA

For receiving pension from the fund is exempt up to Rs 1, 00,000/-

Taxability
a. The pension amount received by the assessee or his nominee from the fund is
taxable in the year of receipts
b. If the assessee or his nominee surrender the policy before its maturity, then,
surrender value including bonus and interest shall be taxable in the year of
receipts ( Receipts basis).


No deduction u/s 80 C if the assessee avails benefit under this section

Section 80 CCD Deduction in respect of contribution to the pension plan of Central
Government.

Eligible Assessee
Individuals


Contribution made to a pension plan notified by the Central Government.
Quantum of deduction

In case where assessee derives salary income

10 % of salary income

In case where the assessee derives any other income

10 % of Gross Total Income.

Taxability
The amount standing to the credit together with amount credited (bonus and interest) received
either assessee or nominee whether wholly or partially-
As a pension on closure of the account
Opting out of pension scheme

Shall be chargeable to tax in the year of receipts (Receipts basis)

No deduction u/s 80 C if the assessee avails benefit under this section

Section 80 D medical insurance premium

Eligible Assessee

1) Individual
2) H U F


Premium paid by any mode other than cash-
i) Medical insurance scheme of the General insurance corporation approved by
the Central Government.
ii) Any other insurer approved by I R D A


i) In case normal person
Deduction is permissible up to 15,000/-
iii) In case of senior citizen
Deduction is permissible up to 20,000/-
Note

In case of an individual, in addition to above deduction, a separate limit of Rs 15,000/- is
allowable as a deduction in respect of medical insurance premium paid on the health of parents.

Section 80 DD maintenance including medical treatment of a dependent with disability.

Eligible Assessee

1) Individual
2) H U F resident in India

i) Any expenditure incurred for the following-
Medical treatment including nursing
Training and rehabilitation of the individual

ii) Amount deposited by the assessee under the following-
Under any scheme of L I C
Any other insurer or administer or specified company which is approved by
the board for the purpose of maintenance of dependent with disability.


Normal cases
Flat amount of Rs 50,000/- shall be allowed as deduction irrespective of deposit or contribution


made.
Dependent with severe disability

Flat amount of Rs 1, 00,000/- shall be allowed as deduction irrespective of deposit or
contribution made.

Conditions for deduction

L I C, or any other insurer or administer or specified company provide for the
payment of annuity or lump sum amount to the dependent with disability in
the event of death of individual or member of HUF in whose name policy was
taken.
The assessee nominates either the dependent with disability or trust or any
other person to receive the payment on his behalf, for the benefit of
dependent with disability.


Taxability
If the dependent with disability predecease the individual or member of HUF in whose name the
subscription is made, the amount so deposited shall be the income of the assessee.

Assessee claiming deduction under this section is required to furnish a certificate which is issued
by the medical authority in the year in which deduction is claimed along with the return of
Income u/s 139 ( 1).

Where the condition of disability requires re asseseement of its extent after a specified period
which is stipulated in the above certificate, then the deduction shall be allowed after the expiry of
the said period only a certificate is obtained from the medical authority and furnished along with
the Return of income.

Section 80 DDB medical treatment for specified disease or ailment
Eligible Assessee

1) Individual
2) H U F resident in India


Deduction can be claimed under this section towards the medical treatment of specified disease
or ailment

In case of an individual
For himself or dependent
Normal cases
Amount of expenditure incurred or
Rs 40,000/-
In the case of senior citizen
Amount of expenditure incurred or

Rs 60,000/-



Condition for deductions
Assessee claiming deduction under this section is required to furnish a certificate which is issued
by -
neurologist or
oncologist or
urologist or
haematologist

In the year in which deduction is claimed along with the return of Income u/s 139 (1).

Section 80 E deductions in respect of loan taken for higher education
Eligible Assessee
Individual


i) Any amount paid towards interest on loan borrowed from below entity for pursuing
higher education shall be allowed as a deduction
financial institution
Approved charitable institution

ii) The higher education shall be pursued either by the assessee or any relative of his
family.
iii) The amount shall be actually paid out of income chargeable to tax during the previous
year.
Period of deduction

Interest shall be allowed as deduction during the initial year and immediately succeeding 7
year
or
Until the interest is repaid by the assessee in full
Whichever is earlier?
Meaning of Higher education

Higher education means any of the study course persuaded-
a) After passing the senior secondary or its equivalent from any school
b) Board or university recognised by the Central Government, state Government or local
authority or any other recognised authorities.

Notes


The student for which the individual is a legal guardian also include here
Section 80 G deductions

There are three deduction rate which is specified according to its categories

Segment 1
100% of deduction with out having restriction
Segment 2

50 %% of deduction with out having restriction

Segment 3

Donation eligible for 100% of the restricted amount
And
Donation eligible for 50% of the restricted amount

Steps for computing adjusted total income
Step no 1
Compute gross total income before giving effect of the above deduction and reduce the following

i) All the deduction under Chapter VI A
ii) Short term capital Gain u/s 112
iii) Long term capital gain u/s 11A
iv) Income of a non resident chargeable to tax in respect of interest and dividend
Step no 2
Compute 10 % of above (which is called adjusted total income)
Step no 3
Compute the actual donation qualifying for the restricted amount (100% or 50 % as the case may
be)

Step no 4

Maximum permissible deduction is given for deduction qualifying 100 % of restricted amount
and after that 50% of the restricted amount


Notes

Donation in kind is not deductible.

Section 80 GGB Rent paid
Eligible Assessee
Individual

Rent paid is allowed as deduction to the extent of least of the following

Excess of rent paid over 10 % of Gross total Income
25 % of the total income
Rs 2000/- P m

Notes

Total income for the purpose means Gross total income before giving effect of this deduction (80
GGB)

Conditions

Assessee should not be in receipts of HRA.
The assessee or his spouse or minor child or the H UF in which he is a member should
not own any residential accommodation at other place
No claim in respect of self occupied property is made in respect of any accommodation.
Assessee must file a declaration in form 10 BA wherein he confirms the details of rent
paid and fulfilment of any other conditions.

Section 80 GGA donation in respect of scientific research and rural development
Eligible Assessee
All the assessee who does not have income chargeable under the head profit and gains from
business and profession.

Donation to
i) Approved scientific research institution or association
ii) University or college


iii) Institution for scientific research or statistical research or research in social science.
iv) Public sector company, local authority or an institution or association approved by the
national committee for carrying out any eligible project or scheme or
v) National Fund for Rural Development Are fully deductible
Notes
Where a deduction is allowed and claimed under this section then no deduction for the
same is allowed under any other section.

In case a person making contribution to institution or association, which was granted
approval under section 80 GGA is eligible to claim contribution even if the same was
withdrawn later.

Section 80 GGB contribution by the company to the political party
Eligible contribution

Contribution Refereed to section 293 A of the companies Act 1956 or
Electoral trust
Shall be allowed as deduction while computing the total income

Section 80 GGC contribution by the Person to the political party
Eligible contribution

Contribution to the political party
Electoral trust
Shall be allowed as deduction while computing the total income

Section 80 IA deduction in respect of industrial undertaking engaged in infrastructure
development.

Type of business eligible for deduction
1) Infrastructure facilities
2) Telecommunication service
3) Developer of any industrial undertaking or SEZ
4) Power generation.


Infrastructure facilities

Eligible business

Any enterprise carrying on

i) Developing or
ii) Maintaining and operating or
iii) Developing, maintaining and operating any infrastructure facility
Conditions to be complied with
i) The enterprise should be owned by the following entity
a) A company registered in India or consortium of such companies
b) An authority or board or corporation or any other body or
corporation established or constituted under Central or state Act.

ii) The enterprise should enter in to an agreement with Central or state Government or a
local authority or any other statutory body for-

a) Developing or
b) Maintaining and operating or
c) Developing, maintaining and operating any infrastructure facility

iii) The enterprise should start operation on or before 1
st
April 1995

Meaning of infrastructure facility

a) A road including toll road, bridge or a rail system
b) Highway project being housing and other activity being an integral part of the high way
project
c) A water supply project
Water treatment system
Irrigation project
Sanitation system
Sewage system
Solid waste management system.

d) A port ,airport, inland port or navigational channel in the sea


100% profit derived from such business for 10 assessment year out of 20 assessment years
beginning from the year of operation.
Telecommunication service
Eligible business
Any enterprise providing-
i) Telecommunication service whether basic or cellular including radio paging , ii)domestic
satellite service network of trunking ,
iii) Broad band network and internet services.


The enterprise should start its operation on or after 1
st
April 1995 but before 31
st
march 2005.


100% profit derived from such business for 5 asseseement year and 30 % of profit in the next 5
assessment year out of beginning from the year of operation.

Developing, maintaining and operating any infrastructure facility
Eligible business
Any undertaking which-
i) Develops
ii) Develops and operates
iii) Maintain and operates an industrial park or SEZ notified by the Central Government.

The enterprise should start its operation on or after 1
st
st
march 2009.
In case of an industrial undertaking the enterprise should start its operation on between 1
st
April
2006 but before 31
st
march 2009?


100% of profit derived from such business for a period of 15 year beginning from the year of
operation.


Power generation.
Eligible business
I. An enterprise setup in any part of India for generation
or generation and distribution of power.
II. An undertaking, which starts transmission or
distribution of power by laying a network of new
transmission or distribution lines.
III. An undertaking which undertake substantial renovation
or modernization of existing network of transmission or
distribution of lines.

In respect of enterprise setup in any part of India for generation or generation and distribution of
power.

The enterprise should have start its operation on or after 1
st
st
march
2011.

In respect of enterprise which starts transmission or distribution of power by laying a network of
new transmission or distribution lines

st
st
march
2011.

In respect of enterprise which undertake substantial renovation or modernization of existing
network of transmission or distribution of lines.

st
st
march
2011

Substantial renovation or modernization means
An increase in the plant and machinery in the network of transmission or distribution line by at
least 50% of the book value of plant and machinery.
Set-off and carry forward losses
Income-tax is a composite tax on the total income of a person earned during a period of one
previous year. There might be cases where an assessee has different sources of income under the
same head of income. Similarly, he may have income under different heads of income. It might also
happen that the net result from a particular source/head may be a loss. This loss canbe set off
against other sources/head in a particular manner. For example, where a person carries on two


businesses and one business gives him a loss and the other a profit, then the income under the head
Profits and gains of business or profession will be the net income i.e. after the adjustment of the
loss. Similarly, if there is a loss under one head of income, it should normally be adjusted against
the income from another ead of income while computing the Gross Total Income, of course subject
to certain restrictions. These provisions for set off
or carry forward and set off of loss are contained in sections 70 to 80 of Income-tax Act.

Steps in Set-off and carry forward
There are three steps involved in this
Step1 Inter-source adjustment under the same head of income (Para 10.5)
Step 2
Inter head adjustment in the same assessment year. (Para 10.6). Step 2 is only applied if it is not
possible to set off a particular loss under Step1
Step3
Carry forward of a loss (Para 10.7) this step is on ly applicable if a loss is not set off under Step 1
and 2.

Clubbing of Income
Generally an assessee is taxed in respect of his own income. But sometimes in some exceptional
circumstances this basic principle is deviated and the assessee may be taxed in respect of income
which legally belongs to somebody else. Earlier the taxpayers made an attempt to reduce their tax
liability by transferring their assets in favour of their family members or by arranging their
sources of income in such a way that tax incidence falls on others, whereas benefits of income is
derived by them . So to counteract such practices of tax avoidance, necessary provisions have
been incorporated in sections 60 to 64 of the Income Tax Act Hence, a person is liable to pay tax
on his own income as well as income belonging to others on fulfillment of certain conditions.
Inclusion of others Incomes in the income of the assessee is called Clubbing of Income and the
income which is so included is called Deemed Income. It is as per the provisions contained in
Sections 60 to 64 of the Income Tax Act.



MODULE VI

COMPUTATION OF TAX LIABILITY OF A FIRM AND PARTNERS

Partnership Firms in Indian Tax System
A partnership is a common vehicle in India for carrying on business activities (particularly
trading) on a small or medium scale. A profession is generally carried on through a partnership.
There is no restriction on a company's participation in a partnership, but this is rate in practice.

Under the general law a partnership is not a separate entity distinct from the partners, but for tax
purposes a partnership is an entity.

Partnership firm arises from a contract between two or more persons who contribute some
tangible and some intangible assets together with an objective of earning profit therefrom which
will be shared between them in predefined portion. Therefore-

1. The firm should be evidenced by an instrument [Section 184(1i)]
2. The individual shares of the partners in the asset of the firm and the profits (or losses)
should be specified in the instrument [Section 184(1ii)]
3. A certified copy of the instrument of partnership shall accompany the return of income
of the previous year in respect of which assessment of the firm is first sought [Section
184(2)]
4. Whenever Changes takes place in the constitution of the firm due to death or resignation
of the partner or in the profit sharing ratio of the existing partners, a certified copy of the
revised instrument of partner shall be submitted along with return of income of the
related year. Where a minor is admitted to the benefit of the firm and the shares of the
partners are unequal, it is necessary to specify how the shares of loss of the minor will be
borne by
the major partner.

The provisions related to the taxation of partnership firms are included in Chapter XVI of the
Income Tax Act, 1961.U/s 184(1) of the Act, with effect from April 1, 1993 a firm shall be
assessed as a partnership firm (PFAS), if the given conditions are satisfied as follows:

Partnership is evidenced by a partnership deed and a certified copy thereof, which is duly
signed by all partners, and is filed along with the Return of Income (ROI).
Individual shares (profit/loss) of all the partners are also specified in the instrument i.e. in
the partnership deed
Whenever there is some change in the constitution of the firm, then the firm requires to
furnish along with the ROI, the certified copy of the partnership deed that is duly signed
by all the partners.
A change in constitution of the firm has been defined under section 187 of the Act which
includes admission of new partner(s), retirement of existing partner(s) as well as any
change in the profit/loss-sharing-ratio and excludes dissolution of the firm incase of death


of any of its partners.

In addition to the basic corporate tax rate the following important taxes are applicable

1. Minimum Alternate Tax rate of 18.5% (plus applicable surcharge and cess)
2. Dividend Distribution Tax of 16.22% is charged on domestic companies
3. Foreign dividends received by an Indian company currently are taxed at a rate of 30%
(plus the surcharge and cess). To encourage Indian companies to repatriate funds, it is
proposed that where the total income of an Indian company includes any dividend
declared, distributed or paid by a foreign subsidiary company, the dividends will be taxed
at 15% on a gross basis. No deduction in respect of any expenditure or allowance will be
allowed in computing the dividend income.
4. Wealth tax is charged @ 1% of the amount by which the net wealth exceeds Rs.3 Million
5. Fringe benefits are taxable at 30% tax rate and additional 3% education cess on the total
tax amount. For corporate with turnover of over INR 10 million, there is additional 10%
surcharge on the 30% tax.
6. Short term capital gains are taxed at normal basic income tax rate and Long term capital
gains are charged 10% -20%. Short term gains on sale transactions of equity shares / unit
of an equity oriented fund attract 15% tax rate while long term tax gained on similar
transaction is exempted from tax.
7. Withholding Tax
Current rates for withholding tax for payment to non-residents are as follows

Interest 20% *
Dividends (Domestic Companies) Nil
Royalties 20%
Technical services 10%
Any other services 40% of the income

8. Note: Applicable to Non-resident belonging to countries that are not party to DTAA with
India. Rates will be competitive for DTAA partner countries.
9. *In order to augment long-term, low cost funds from abroad for the infrastructure sector
interest received by a non-resident from an infrastructure debt fund set up in accordance
with guidelines to be prescribed and notified by the central government will be taxed at a
rate of 5% (plus the applicable surcharge and education cess) on the gross amount
10. In addition several other taxes will be charged as indirect charges CENVAT, VAT,
Service Tax, Customs duty etc

Income Tax Rates for Companies (A.Y. 2013-14) (F.Y. 2012-13)
To know the income tax slab for companies first of all you should know about the classification of
companies.


There are two types of companies as given below
Domestic Company: The company which is registered in India is called domestic company.
Domestic company is further classified as public company and private company.
Foreign Company: The company which is registered outside India is called foreign company.
Which company is liable to pay tax?
All companies irrespective of the status and income is liable to pay tax according to the income tax
slab / rates applicable to particular assessment year. For example the company will pay tax for the
period 1-4-2012 to 31-3-2013 according to income tax slab for A.Y.2013-14.
How to calculate taxable income of a company?
The same method will be applicable for calculation the taxable income of a company as applicable to
individuals. The income is computed separately under each head and then aggregated to compute the
gross total income. As for obvious reason there is no need to mention that the company will not have
salary income as individuals.
What is income tax rates/ income tax slab for A.Y.2013-14 for a company?
Income tax rates on domestic company
The flat rate @ 30% will be taxed on total income of a domestic company
Surcharge @ 5% will be applicable for those domestic companies whose taxable income is
more than Rs. 1 Crore.
Education Cess @ 3% will be applicable on income tax. Education cess will be livable on the
amount of income tax and surcharge.
Income tax rates on foreign company
Income from royalty or fees for technical services from Government or an Indian Concern (a)
in pursuance of an agreement made on or before 31st March 1976 @ 50% (b) in pursuance
of an agreement made on or after 1st April, 1976 but on or before 31st May, 1997 @ 30% (c)
in pursuance of an agreement made on or after 1st J une, 1997 but on or before 31st May, 2005
@ 10% (d) Any other income will be taxed @ 40%.
Surcharge will be applicable @ 2% if income is more than Rs.1 Crore.
Education cess will be levied at 3 % on income-tax and surcharge.



MODULE VII
COMPUTATION OF TAXABLE INCOME OF A COMPANY
A MAT was introduced for the first time in the AY 1988-89. It was felt that due to various concession
provided in Tax Laws big corporate groups become zero tax companies. Therefore, to counter this, as
system of MAT was introduced.
The there is a difference between Two Profits i.e. Regular Profit and Book Profit.
1. Regular Profit is the profit computed by applying the provisions of Tax Laws. Whereas Book
Profit is computed on the basis of Schedule VI of the Companies Act, 1956.
2. Rate of Depreciation is different in Tax Law and Companies Act.
3. In Tax Laws real income is computed, whereas in Companies Act, deductions are allowed for
provisions and reserves also which leads to computation of not real income but conservation
income.
4. Tax Laws allowed various incentives and deductions from Profits like deduction u/s 80IA ,
80IB. This is not so in computation of Book Profit under the Companies Act.
2.2. SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COMPANIES
(MAT) [ Sec. 115JB ]
1. Where in the case of an assessee, being a company, the income-tax, payable on the total
income as computed under this Act in any previous year relevant to the assessment year commencing
on or after the 01-04-2007, is less than 10%. of its Book Profit, such book profit shall be deemed to be
the total income of the assessee and the tax payable by the assessee on such total income shall be the
amount of income tax at the rate of 7.5%.

2. Every assessee, being a company, shall prepare its profits and loss account for the relevant
previous year in accordance with the provisions of Part II and III of Schedule VI to the Companies
Act. 1956:
Provided that while preparing the annual accounts including profit and loss account,-
(i) the accounting policies;

(ii) the accounting standards followed for preparing such accounts including profit and loss account;

(iii) the method and rates adopted for calculating the depreciation,
shall be the same as have been adopted for the purpose of preparing such accounts including profit
and loss account and laid before the company at its annual general meeting in accordance with the
provisions of section 210 of the Companies Act, 1956:

Provided further that where the company has adopted or adopts the financial year under the
Companies Act, 1956, which is different from the previous year under this Act,-


(i) the accounting policies;

(ii) the accounting standards adopted for preparing such accounts including profit and loss account;

(iii) the method and rates adopted for calculating the depreciation,
shall correspond to the accounting policies, accounting standards and the method and rates for
calculating the depreciation which have been adopted for preparing such accounts including profit and
loss account for such financial year or part of such financial year falling within the relevant previous
year.
2.3. EXPLANATION 1. COMPUTATION OF BOOK PROFIT
STEP 1 :
The Net Profit as shown in the Profit and Loss account prepared as per Part II and III of Schedule VI
for the relevant PY, shall be increased by the following , if debited to the Profit and Loss Accounts :
1. the amount of Income Tax paid or payable, and the provision thereof. Even Corporate
Dividend Tax shall be added back.
However,
1. Income tax penalty or its interest Whether tax including Wealth Tax penalty or its
interest.
2. Penalties under other laws, ( Although this is disallowed as deduction under the
Income Tax Act.
Are allowed as deduction and therefore shall not subjected to MAT.
1. The amount carried on to any reserves, by whatever name called.
Also
1. Reserve created even as per the direction of RBI shall be added back
2. Reserve created u/s 80IA or Sec. 10A(IA) shall also be added back.
3. Excess provisions are in the nature of reserve and therefore to be added back.
4. The Amount or Amounts set aside to provisions made for meeting liabilities, other than
ascertained liabilities, i.e. unascertained liabilities is not allowed as deduction e.g.
Doubtful Debt etc. ,
5. As per Supreme Court Judgment in BHARAT EARTH MOVERS provisions for
encashment of leave made on scientific basis is an ascertained liability therefore
allowed as deduction.
6. Provision for Gratuity as per actuary is an ascertained liability therefore allowed as
deduction.
7. The amount by way of provision for losses of subsidiary companies is not allowed as
deduction. Even actual losses of subsidiary company shall be not allowed as deduction.


Is such provisions or losses are debited to P & L A/c then it shall be added back to Net
Profit.
8. The Amount or amounts of dividends paid or proposed is not allowed as deduction.
STEP 2 :
Following Profits are not subjected to MAT and therefore if they are credited to P & L A/c is shall be
subtracted.
1. the amount of Profit relatable to income to which Sec. 10 [other than the provisions
contained in section 10(23G)] , 10A, 11 or 12 apply are not subjected to MAT.
It means assessee shall not pay MAT on the income referred to and exempt u/s 10, 10A, 10B, 11 and
12.
However,
1. the amount of Profit relatable to any income to which section 10(23G) or 10BA applies
are subjected to MAT and if they are credited to P & L A/c then no adjustment should
be made.
2. the profit of sick industrial company for the assessment years
3. commencing from the assessment year relevant to previous year which the company
has become sick and
4. ending with assessment year during which the entire net worth of such company
becomes equal to or exceeds the accumulated losses shall be allowed as deductions.
STEP 3 :
The Profit as per Profit and Loss Account shall be reduced by the following :
1. the amount withdrawn from any reserve or provision ( excluding a reserve creaed
before the 1-4-1997 other wise than by way of a Debit to the Profit and Loss Account )
, if any such amount is Credited to the Profit and Loss Account.
Provided that where this section is applicable to an assessee in any previous year, the amount
withdrawn from reserves created or provisions made in a previous year televant to the assessment
year commencing on or after the 1-4-1997 shall not be reduce from the Book Profit unless the Book
Profit of such year has been increased by those Reserves or Provisions ( out of which the said amount
was withdrawn) under this Explanation or Explanation below the second proviso to section 115J A, as
the case may be.
Meaning thereby
1. any Reserve created out of P & L A/c is credited, is shall be reduced from Net Profit
to compute Book Profit.
2. The amount of brought forward business loss as per Books of Accounts (excluding
depreciation) or unabsorbed depreciation as per Books of Accounts, whichever is Less
is allowed as deduction.
3. Deduction u/s 80HHC, 80HHE, 80HHF is allowed as deduction. From assessment year
2005-2006 no deduction is allowed under these sections.


2.4. ANALYSING COMPUTATION OF TOTAL INCOME AND BOOK PROFIT
Whether following expenditure are allowed as deduction in
computing
Total Income Book Profit
Income Tax including corporate dividend tax No No
Wealth Tax No Yes
Income Tax or Wealth Tax No Yes
Any other penalty lived in any other law No Yes
Reserves No No
Ascertained liability Yes Yes
Unascertained Liability No No
Provision for ascertained liability No Yes
Provision of Unascertained Liability No No
Loss of subsidiary Co. No No
Provision for losses of Subsidiary Co. No No
Dividend No No
Whether deductions u/s 80C to 80U allowed Yes No
Whether Incomes referred to in section 10, 10A. 10B, 11 and 12
can be claimed as exempt
Yes Yes
Whether incomes referred to in section 10(23G) and 10BA can
be claimed as exempt
Yes No



MODULE VIII
CENTRAL EXCISE ACT
Tax is of two types Direct Tax and Indirect Tax. Direct Tax is the tax, which is paid directly by
people to the government, while indirect tax is the tax, which is paid indirectly by people to the
government. Income Tax is paid directly to the government therefore it is a direct tax while excise
duty is paid by people to the manufacturer who pays it to the government, therefore it is an indirect
tax. The Constitution of India (COI) has given power to levy tax to central and state government
under seventh schedule. The taxation in India is either charged by the state governments or by the
central government. In the basic scheme of taxation in India, it is conceived that central government
will levy.
As per section 3 of Central Excise Act (CEA) excise duty is levied if: -
- There is a good.
- Goods must be moveable
- Goods are marketable
- Goods are mentioned in the central excise tariff act (CETA).
- Gods are manufactured in India.
Therefore we can say that excise duty is not levied on:

Services such as doctors treating the patients, accountants preparing the accounts, in these cases
service tax are levied.
Immovable goods such as roads, bridges and buildings.
Non-Marketable goods, i.e., goods for which no market exists, e.g., melted iron ore at 1600 degree
Celsius.
Goods that are not mentioned in CETA; and Goods manufactured or produced out of India.

Chapter I Preliminary
Section 1. Short title, extent and commencement.
Section 2. Definitions.
Section2A. References of certain expressions

Chapter - II Levy and collection of duty
Section 3. Duties specified in the First Schedule and the Second Schedule to the Central
Excise Tariff Act, 1985 to be levied
Section 3A. Power of Central Government to change Excise Duty on the basis of capacity of
production in respect of notified goods.
Section 4. Valuation of excisable goods for purposes of charging of duty of excise.
Section 4A. Valuation of excisable goods with reference to retail sale price.
Section 5. Remission of duty on goods found deficient in quantity.
Section 5A.

Power to grant exemption from duty of excise.



Section 5B.
Non reversal of Cenvat Credit
Section 6. Registration of certain persons.
Section 7. Omitted.
Section 8. Restriction on possession of excisable goods.
Section 9. Offences and penalties.
Section 9A. Certain offences to be non-cognizable.
Section
9AA.
Offences by companies.
Section 9B. Power of Court to publish name/ place of business, etc., of persons convicted
under the Act.
Section 9C. Presumption of culpable mental state.
Section 9D. Relevancy of statements under certain circumstances.
Section 9E. Application of section 562 of the Code of Criminal Procedure, 1898, and of the
Probation of Offenders Act, 1958.
Section 10. Power of Courts to order forfeiture.
Section 11. Recovery of sums due to Government.
Section
11A.
Recovery of duties not-levied or not-paid or short-levied or short-paid or
erroneously refunded.
Section
11AA.
Interest on delayed payment of duty.
Section
11AC.
Penalty for short-levy or non-levy of duty in certain cases.
Section
11B.
Claim for refund of duty and interest, if any, paid on such duty.
Section
11BB.
Interest on delayed refunds.
Section
11C.
Power not to recover duty of excise not-levied or short-levied as a result of
general practice.
Section
11D.

Section
11DD.

Section
11DDA
Duties of excise collected from the buyer to be deposited with the Central
Government.

Interest on the amounts collected in excess of the duty.

Provisional attachment to protect revenue in certain cases.
Section
11E.
Liability under Act to be first charge


Section 12. Application of the provisions of Act [No. 52 of 1962] to Central Excise Duties.

Chapter -
IIA
Indicating amount of duty in the price of goods, etc. for purpose of refund
and crediting certain amounts to the fund
Section
12A.
Price of goods to indicate the amount of duty paid thereon.
Section
12B.
Presumption that the incidence of duty has been passed on to the buyer.
Section
12C.
Consumer Welfare Fund.
Section
12D.
Utilisation of the Fund.

Chapter - III Powers and duties of Officers and Landholders
Section
12E.
Powers of Central Excise Officers.
Section
12F.
Power of search and seizure.
Section 13. Power to arrest
Section 14. Power to summon persons to give evidence and produce documents in inquiries
under this Act.
Section
14A.
Special audit in certain cases.
Section
14AA.
Special audit in cases where credit of duty availed or utilised is not within the
normal limits, etc.
Section 15. Officers required to assist Central Excise Officers.
Section 16. Omitted.
Section 17. Omitted.
Section 18. Searches and arrests how to be made.
Section 19. Disposal of persons arrested.
Section 20. Procedure to be followed by officer-in-charge of police station.
Section 21. Inquiry how to be made by Central Excise Officers against arrested persons
forwarded to them under section 19.
Section 22. Vexatious search, seizure, etc., by Central Excise Officers.
Section 23. Failure of Central Excise Officer in duty.


Chapter -
IIIA
Advance Rulings
Section
23A.
Definitions.
Section
23B.
Vacancies etc., not to invalidate proceedings.
Section
23C.
Application for advance ruling.
Section
23D.
Procedure on receipt of application.
Section
23E.
Applicability of advance ruling.
Section
23F.
Advance ruling to be void in certain circumstances.
Section
23G.
Powers of Authority.
Section
23H.
Procedure of Authority.
Chapter -
IV
Transport by Sea
Section 24
to 30.
Omitted.
Chapter - V Settlement of Cases
Section 32. Customs and Central Excise Settlement Commission.
Section
32A.
J urisdiction and powers of Settlement Commission.
Section
32B.
Vice-Chairman to act as Chairman or to discharge his functions in certain
circumstances.
Section
32C.
Power of Chairman to transfer cases from one Bench to another.
Section
32D.
Decision to be by majority.
Section
32E.
Application for settlement of cases.
Section
32F.
Procedure on receipt of an application under section 32E.
Section
32G.
Power of Settlement Commission to order provisional attachment to protect
revenue.
Section
32H.
Power of settlement Commission to reopen completed proceedings.


Section
32I.
Powers and procedure of Settlement Commissions.
Section
32J.
Inspection, etc., of reports.
Section
32K.
Power of Settlement commission to grant immunity from prosecution and penalty.
Section
32L.
Power of Settlement Commission to send a case back to the Central Excise
Officer.
Section
32M.
Order of settlement to be conclusive.
Section
32N.
Recovery of sums due under order of settlement.
Section 32-
O.
Bar on subsequent application for settlement in certain cases
Section
32P.
Proceedings before Settlement Commission to be judicial proceedings.
Section
32PA.
Omitted

Chapter -
VI
Adjudication of Confiscations and Penalties
Section 33.

Section
33A.
Power of adjudication.

Adjudication procedure
Section
34.
Option to pay fine in lieu of confiscation.
Section
34A.
Confiscation or penalty not to interfere with other punishments.

Chapter -
VIA
Appeals
Section 35. Appeals to Commissioner (Appeals).
Section
35A.
Procedure in appeal.
Section
35B.
Appeals to the Appellate Tribunal.
Section
35C.
Orders of Appellate Tribunal.
Section
35D.
Procedure of Appellate Tribunal.


Section
35E.
Powers of Committee or Chief Commissioners of Central Excise or
Commissioners of Central Excise to pass certain orders.
Section
35EA.
Omitted.
Section
35EE.
Revision by Central Government.
Section
35F.

Section
35FF.
Deposit, pending appeal, of duty demanded or penalty levied.

Interest on delayed refund of amount deposited under the proviso to section 35 F.
Section
35G.
Appeal to High Court.
Section
35H.
Application to High Court.
Section 35-
I.
Power of High Court or Supreme Court to require statement to be amended.
Section
35J.
Case before High Court to be heard by not less than two judges.
Section
35K.
Decision of High Court or Supreme Court on the case stated.
Section
35L.
Appeal to the Supreme Court.
Section
35M.
Hearing before Supreme Court.
Section
35N.
Sums due to be paid notwithstanding reference, etc.
Section 35-
O.
Exclusion of time taken for copy.
Section
35P.
Transfer of certain pending proceedings and transitional provisions.
Section
35Q.
Appearance by authorised representative.
Section
35R.
Appeal not to be filed in certain cases.

Chapter -
VIB
Presumption as to Documents
Section
36A.
Presumption as to documents in certain cases.
Section
36B.
Admissibility of micro films, facsimile copies of documents and computer print outs
as documents and as evidence.


Chapter -
VII
Supplemental Provisions
Section 37. Power of Central Government to make rules.
Section
37A.
Delegation of Powers.
Section
37B.
Instructions to Central Excise Officers.
Section
37C.
Service of decisions, orders, summons, etc.
Section
37D.
Rounding off of duty, etc.
Section 37
E.
Publication of information respecting persons in certain cases.
Section 38. Publication of rules and notifications and laying of rules before Parliament.
Section
38A.
Effect of amendments, etc., of rules, notifications or orders.
Section 39. Repeal of enactments.
Section 40. Protection of action taken under the Act.

CENVAT
Cenvat, or the Central Value Added Tax, is a component of the tax structure employed by
many countries in the western section of Europe. The inspiration for this tax is derived from a
tax system that is generally referred to as VAT, or a Value Added Tax. Both Cenvat and VAT
are designed with the express purpose of minimizing a cascading effect when it comes to
taxes on income, goods and services, and other forms of tax revenue. The aim of this tax is to
aid in maintaining a tax structure that is considered equitable for both the citizens incurring
the tax and the government that is collecting the tax revenue.

CUSTOMS ACT
The charging section of the Customs Act, 1962 is section 12 which provides for levy of
duty on imports as well as on exports at the rates which are prescribed under the Customs
Tariff Act, 1975 read along with the relevant exemption notification. The taxable event to
attract customs duty is import into or export from India. The export duties are applicable to a
handful of commodities. In the case of Apar India Ltd., the Honble Supreme Court has held
that rate of duty will be the rate prevailing on the date of filing of bill of entry under section
46 or granting permission for entry inwards whichever is later."
CHARGES ON CUSTOMS ACT
TYPES OF DUTIES
The various types of customs duties are:
i. Basic duty


It may be at the standard rate or in the case of import from some countries, at the preferential
rate. The effective rate shall be determined after considering the notification, if any.
ii. Additional customs duty
This is equal to the Central Excise duty leviable on the product manufactured in India and if
the said product is not manufactured in India then on like product manufactured in India.
Proviso to section 3(2) of the Customs Tariff Act provides that
(a) where the imported goods are notified under section 4A of Central Excise Act, and
(b) in relation to the goods on which the MRP is required to be printed either under the
provisions of Standards of Weights & Measures Act, or the rules made thereunder, or
under any other law
then in such case the value of imported goods shall be deemed to be the retail price declared
on the imported article less abatement allowed as per the notification issued under sub-section
(2) of section 4A of Central Excise Act.
As per the proviso to section 3(2) of the Custom Tariff Act in case of an article imported into
India for which tariff value has been fixed under section 3(2) of the Central Excise Tariff Act,
the value for the purpose of computing CVD would be deemed to be tariff value.
iii. Additional duty of customs in lieu of sales tax
This is leviable in order to provide a level playing field to indigenous goods, which have to
bear sales tax, local tax and other charges.
Notification No. 102/2007-Cus dated 14-9-2007 allows refund of said duty if the importer on
subsequent sale of goods has paid appropriate amount of sales tax or VAT as the case may be.
The importer shall have neither taken the credit of additional duty of customs nor shall not
have passed on credit of such additional duty of customs to any person. The importer is also
required to substantiate that the incidence of duty has been borne by him.
iv. Antidumping/safeguard duty
This is leviable with a view to protecting domestic manufacturer of certain goods from unfair
injury out of international competitive rates.
v. Education Cess
This is leviable at the rate of 2% on aggregate of basic customs duty and additional customs
duty. (vide Finance (VI) Act, 2004)


Secondary and Higher Education Cess. is leviable at the rate of 1% on aggregate of basic
customs duty and additional customs duty w.e.f. 1-3-2007. (vide Finance Act, 2007).
3. PROCEDURE OF IMPORT-EXPORT
Goods may be imported in or exported from India through sea, air, land, by post or as a baggage with
passengers. The procedure to be followed would vary depending on the mode of import or export.
Normally, import procedures have to be followed by both; i.e., the importer as well as by the person-
in-charge of conveyance.
Import Manifest
As per the provisions of section 30 of the Customs Act, the person-in-charge of a vessel or an aircraft
or a vehicle carrying imported goods or any other person as specified by the Government shall deliver
to the proper officer an Import Manifest or Import Report as per the following time limit:
(i) in the case of a vessel or an aircraft prior to arrival of the vessel or the aircraft and
(ii) in the case of a vehicle within 12 hours after its arrival in the customs station.
In case of default, a penalty up to rupees fifty thousand can be levied on the person-in-charge if he
does not deliver the manifest or report to the proper officer within the time period and does not show
sufficient cause for the delay.
Procedures for Import
The importer is required to submit necessary details like the description of the product, name of the
supplier, invoice number, bill of lading number, quantity of goods, classification, rate per unit etc. in
order to get the bill of entries prepared under EDI (Electronic Data Interchange system). However in
case of custom house, where manual bills of entries are processed, the importer either himself or
through agent is required to submit the bill of entry along with the documents mentioned above. The
bill of entry can be for the purpose of warehousing of goods or for clearance for home consumption.
The following steps are normally taken for the clearance of goods:
(i) Filling of Bill of Entry for home consumption or warehouse or in case of EDI system
submitting the details.
(ii) Appraisement of Bill of Entry In case of first appraisement, inspection is done first then
duty is assessed. In case of second appraisement, assessment is done first and duty is assessed.
(iii) Payment of duty The duty assessed has to be paid.
(iv) Inspection of cargo is done where second appraisement method is followed.
(v) The cargo is then delivered.


In case of exports instead of Bill of Entry the exporter has to submit Shipping Bill or submit the data,
like description of export product, FOB value, quantity unit, invoice No., Bill of Lading, etc, to enable
authorities to prepare shipping bill in EDI system.
Section 17 as replaced by the Finance Act, 2011 has introduced the self-assessment procedure. The
importer is now along with the above information is required to give details of duty payment required
to be made on importation of goods. The self-assessment will be verified by the proper officer and if
required he may tests imported goods. He may also ask for various records in addition to the
documents already submitted. In case after examination of documents it is found that the duty is to be
reassessed he will reassessed the duty. The proper officer shall pass an order with in 15 days from the
date of reassessment of the Bill of entry, in case importer or the exporter does not agree with the
reassessment.
Warehousing
The importer of goods can file the warehouse Bill of Entry and may store such goods in an authorized
warehouse upon execution of bond and clear the goods from such warehouse as and when needed as
per the provisions of the Act. Goods other than capital goods intended for use in a 100% EOU can be
warehoused for a period of three years and for capital goods to be used in a 100% EOU the time
period is five years. In relation to any other goods, except those mentioned aforesaid the time limit is
one year. The interest free period for which goods may remain warehoused is up to ninety days, for
goods other than to be used by a 100% EOU. The owner of any warehoused goods can relinquish his
title to the goods upon payment of rents, interests, other charges and penalties, before the proper
officer has made an order for clearance of goods for home consumption.
4. CLASSIFICATION OF GOODS UNDER THE ACT
Section 2 of the Customs Tariff Act, 1975 provides that the custom duty shall be levied at the rate
specified in the schedules to the Act read with exemption notification if any. Thus the customs duty is
leviable under the Customs Act, 1962 on the basis of value or quantity as specified in the Import
Tariff to the Customs Tariff Act, 1975. Basic customs duty is charged in accordance with the First
Schedule to the Customs Tariff Act, 1975 which is import Tariff. There are 21 sections in the Import
Tariff, divided into 98 Chapters in all, with section notes and chapter notes. These notes are statutorily
binding in nature. The interpretation of the Tariff schedule is strictly governed by six "Interpretative
Rules" incorporated in First Schedule itself. Imported goods are to be classified under the appropriate
headings, sub-headings, sub-division to sub-headings strictly, in accordance with section notes,
chapter notes that are appearing in the Tariff.
In the event when classification cannot be made as above and when more than one classification
appear appropriate under the Tariff and goods imported do not find appropriate classification, then a
resort to, "Interpretative Rules" may be taken.
5. VALUATION OF GOODS
The quantification of customs duty payable essentially requires the calculation of the value for
customs purpose. As per the provisions, customs duty is payable as a percentage of value often


called Assessable Value or Customs Value. The value may either be (a) Value as defined in
section 14(1) of Customs Act, or (b) Tariff Value prescribed under section 14(2) of Customs Act.
Tariff value
Tariff value is the value that is fixed by Central Government for any class of imported goods or
exported goods. Government takes into consideration trends of value of such or like goods while
fixing tariff value. Once so fixed, duty is payable as percentage of this value.
Customs value
Customs value as calculated as per section 14(1) is the value normally used for calculating customs
duty payable. As per section 14(1) value for the purpose of customs duty is the
(a) Price at which such or like goods are ordinarily sold or offered for sale and the
(b) Price is for delivery at the time and place of importation and such
(c) Price is in course of international trade, where neither seller nor buyer has interest in the
business of the other or one of them has no interest in the business of the other and the,
(d) Price is the sole consideration for sale or offer for sale.
The price mentioned above has to be computed for customs duty purpose at the rate of exchange, as
on date of submission of bill of entry, as fixed by the Central Government. As per the provisions
contained in section 14(1A) of the Act, the price referred to above, in case of imported goods has to
be determined in accordance of the Customs Valuation Rules, 1988. Subject to three conditions laid
down in section 14(1) of Customs Act, 1962, of time, place and special circumstances, price of
imported goods is to be determined in terms of provisions contained in section 14(1A) and in
accordance with the provisions contained in Valuation (Determination of Price of Imported Goods)
Rules, 1988. The Special Circumstances have been statutorily provided in Rule 4(2) and in the
absence of these exceptions it is mandatory for customs authorities to accept the price actually paid or
payable for the goods in a particular transaction. Valuation Rule 4(2) deals with the extraordinary or
special circumstances under which the transaction value of the goods cannot be accepted. They are as
follows:
(a) The sale is not in the ordinary course of trade under fully competitive conditions.
(b) The sale involves any abnormal discount or reduction from the ordinary competitive price.
(c) The sale involves special discount limited to exclusive agents.
(d) Non-existence of objective and quantifiable data with regard to the adjustments required to
be made, under the provisions of rule 9, to the transaction value.


(e) Restrictions of a non-statutory nature or non-commercial nature on the disposition or use of
the goods after import, which substantially affect the value of the goods.
(f) Sale or price being subject to some condition or consideration for which a value cannot be
determined.
(g) There exists an additional consideration, direct or indirect.
CENTRAL SALES TAX AND VAT
Central Sales Tax

If tax forms a part of aggregate sales price then amount of tax collected by a registered dealer shall
be deducted from his gross turnover. Tax is calculated by the following formula.

Rate of tax x Aggregate of sales price 100+Rate
of tax
If the turnover of a dealer is taxable at different rates, then above formula shall be applied
separately in respect of each part of the turnover liable to a different rate of tax.

Returned Goods shall be deducted

If goods are returned by the buyer within 6 months, its sales price will be deducted from aggregate
sale price after submitting necessary evidence. Sale price of rejected goods will be deducted even
after six months .

Transaction exempt from sales tax
a. Subsequent sale by transfer of documents;
b. Sale of goods which are generally exempt or chargeable under the 316 Local sales tax
provisions at lower rate;
c. Exemption by virtue of a notification;
d. Sale in course of import or export ;
e. Sale to a registered dealer to manufacture or processing of goods in a special economic
zone; and
f. Sale to any official of foreign diplomatic mission in India or UN body.

COLLECTION OF TAX SECTION 9 A
The central sales tax can be collected from the buyers only by the registered dealers on the inter-
state sale effected by them. According to rules prescribed under this Act., Dealers who are not
liable to pay tax under general sales tax law the period of filing the return in a financial year is
Quarter ending on 30 J une Quarter
ending on 30 September Quarter
ending on 31 December Quarter


ending on 31 March

REGISTRATION OF DEALERS

According to Section 7, registration of dealer can be done in any of the two ways-
1. Compulsory registration
2. Voluntary registration317

COMPULSORY REGISTRATION SECTION 7 (1)

Every dealer who is liable to pay Central sales tax should make an application for registration
under the Act. To appropriate authority in his state. If a dealer does not get himself registered, he
would be subject to penalty under section 10 which is imprisonment which may extend to six
months or fine or both and in case of continuing offence, a fine of Rs. 50 per day till the default
continues.

VOLUNTARY REGISTRATION SECTION 7 (2)

Under following circumstances any dealer can voluntarily apply for registration even though he is
not liable to pay tax under central sales tax Act.
1. If he is registered under sales tax law of state but, is not liable to pay tax under central sales
tax Act
2. If there is no sales tax Act in a state or any part of it, any dealer having a place of business in
that state or part there of
3. If he deals in a tax-free goods in a state

The dealer can apply for registration at any time and ,if he does not apply for registration no
penalty will be imposed upon him.

Advantages of Registration
1. A registered dealer has to pay actual sales Tax @ 4% only on goods purchased by him for
manufacture or resale and, he buys the same against Form C. otherwise, he will be charged @
10%.
VALUE ADDED TAX (VAT)

The recent biggest change in the tax system in India is the introduction of value added tax
(VAT) from April 2005. VAT is not new for our country because over the years the traders have
been paying an excise duty which is nothing but a central VAT on production. In the state, the
state government charges sales tax on the sale of goods and also many other charges like octroi,
electricity tax, motor vehicle tax, entertainment tax and many more. Different state government
charges different rates of tax. While in order to attract industries and promote trade some state


government give tax concessions. By introducing VAT at state level, all different rates of sales
tax will become uniform throughout the India.

Definition

VAT is a tax paid at each point of exchange of goods where value is added starting from
production till final consumption.

Difference between VAT and sales tax.

In case of VAT consumer pays tax on the value of product only once while in case of sales tax
he pays tax on some parts of the product more than once
For instance, a car manufacturer may produce some parts, import some parts, and buys some
other parts. On the parts purchased he has to pay sales tax. When the car is sold to the final
consumer, then consumer has to pay sales tax on the car which also includes tax on the parts on
which sales tax has been already paid by the seller. Thus consumer is paying tax more than
once. But, under VAT every buyer has to pay tax. After adding value to it, the seller charges
VAT from the consumer and after filing VAT 321 return the seller can deduct the amount of
VAT he has paid to the seller and pays the difference between the VAT he has charged from the
consumer and the VAT he has paid to the seller, to the government.

Incidence of VAT

Every business already registered for sales tax is automatically registered for VAT on 1 April
2005. If annual turnover is less than Rs. 5 lakhs then no need to register for VAT. Businesses
with a turnover of between Rs. 5 and 50 lakhs have two options -
1. Register for VAT
2. Pay tax at the small percentage of turnover also called as composition scheme under this
dealer will not be entitled to claim refund of VAT he has paid to the supplier.



Computation of Tax

All incomes
Less: Losses, expenses, & Allowable Exemptions

Gross Total Income
Less: Allowable Deductions

Tax: Total Income * Tax rate
Less: Relief & Rebates

=Tax Payable

Gross Total Income

For the purpose of tax computation total gross income is the aggregate of the income from
various sources, after excluding qualifying exemptions, grouped under the following heads:

Income from house/property
Capital gains
Profits and gains of business or profession
Income from other sources such as foreign dividends, interests etc. Income from other
sources including interest on securities, winnings from lotteries, and also, income of other
persons may be included in the income of the company.

The income is adjusted for current and brought forward losses and qualifying exemptions to
arrive at the Gross Total Income. which should be adjusted allowable deductions to arrive at the
net income

Allowable Deductions

In computing taxable total income, Gross Total Income should be adjusted for allowable
deductions to arrive at the net income, several deductions are allowed which include the
following.

Capital Allowances expenses on R&D, mergers & acquisitions qualify for deduction
Depreciation available at specific percentage depending on the nature of the asset and
depreciation not set off against current years income can be carried forward for set off
against any future income for an unlimited period.
Stock/Inventory valuation at market value or cost whichever is lower
Interest Interest paid on the borrowings


Losses can be set off against any other income in the same Assessment Year
and against business profits in subsequent assessment years subject to certain
conditions.

The net income thus arrived is the chargeable income which is subjected to tax to determine
the tax accrued from which the tax rebates and credits are deducted to arrive at the actual tax
payable.

Tax Rebates Available for Corporate Tax:

Domestic companies are allowed to deduct dividend received from other
Domestic Companies in certain cases
Special Provisions apply to Venture Fund and Venture Capital companies
Subject to certain conditions Deductions are allowed to Exports and new undertakings
Special Deductions for developing, maintaining, and operating new infrastructure
and power facilities
Business Losses can be carried over for eight years
Interest, Dividends and Long-Term Capital Gain income earned by an Infrastructure
Fund from investments in shares or long-term finance in enterprises carrying on the
business of developing, monitoring and operating specified infrastructure facilities
or in units of Mutual Funds involved with the infrastructure of power sector are to
be tax exempt.


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