Scheme of deductions and allowances

Arrangement of Income Tax Act 1961.

Section 28 defines various kinds of income
Section 29 permits deductions and
allowances laid down by section 30 to 44
while computing profit and gains of a
business or profession.

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Basic principles governing admissibility

of deductions
1. Onus to prove admissibility of an expenditure.
2. Allowance are cumulative means can not be
denied unless expressly prohibits by any other
section.
3. Allowable expenditure relates to the previous
year only. 4.Business should be carried on
during the previous year.
5. Expenditure should have been
incurred with assesses own
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business.

Basic principles governing

admissibility of deductions

6. No allowance in respect of nonassessable business.

7.Expenditure tainted with illegality.
8. No allowance for contingent liability.
9. No allowance for anticipated losses.
10. Relevance of distinction between
capital and revenue
expenditure
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Deduction expressly allowed

Rent/ rates/taxes/repairs/ insurance u/s 30

Depreciation u/s 32
Expenditure on scientific research u/s 35
Interest on borrowed capital u/s 36(1)(iii)
Bad debt {36(1)(iv)}
General deduction u/s 37(1)

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DEPRICIATION [Sec. 32]

Meaning of depreciation
Depreciation allowance [Sec. 32] - Depreciation shall be
determined according to the provisions of section 32.
Conditions for claiming Depreciation - In order to avail
depreciation, one should satisfy the following conditions:
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 during the relevant previous year.
4 Depreciation is available on tangible as well as intangible
assets.
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Assets qualify for depreciation

Block of Assets [Sec. 2(11)] - The term block of
assets means a group of assets falling within a
class of assets comprising
tangible assets, being buildings, machinery, plant or
furniture;
intangible
assets,
being
know-how, patents,
copyrights, trade marks, licenses, franchises or any
other business or commercial rights of similar nature.
In respect of which the same percentage of
depreciation is prescribed.

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Contd
Written Down Value [Sec. 43(6)] - Written down
value for the assessment year 2009-10 will be
determined as under:
Step 1
Step 2

Step 3

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Find out the depreciated value of the block on the

April 1, 2008.
To this value, add actual cost of the asset (falling in
the lock) acquired during the previous year 2008-09.
From
the
resultant
figure,
deduct
money
received/receivable (together with scrap value) in
respect of that asset (falling within the block of
assets) which is sold, discarded demolished or
destroyed during the previous year 2008-09.
7

Contd
Meaning of Actual Cost [Sec. 43(1)] - It means the
actual cost to the assessee as reduced by the proportion
of the cost thereof, if any, as has been met, directly or
indirectly, by any other person or authority.
If written down value of the block of asset is reduced to
zero, though the block is not empty - No depreciation is
admissible.
If the block of assets is empty or ceases to exist on the
last day of the previous year though the
written down value is not zero - No
depreciation is admissible.
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Rules of Depreciation & rates.

Actual Cost includes all expenses directly
related to acquisition of asset. Such as
cost price of asset, interest on capital for
asset, bank charges, installation charges,
other incidental charges .
Any subsidy or relief granted will be reduce
to arrive actual cost.

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Rule of Depreciation & rates.

50% rate of depreciation if asset used less than
180 days in first previous year.
If an asset is not used at all, no depreciation in
respect of that asset.
When a depreciable asset (on which depreciation is
claimed on straight line basis) of a power
generating unit is disposed in a previous year, then
terminal depreciation (loss) is
deductible or balancing charge
(gain) is taxable
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Additional depreciation
Condition for claiming additional depreciation
1. The assessee must be engaged in manufacturing or production
of any article or thing
2. New plant and machinery should be acquired and installed after
31.03.205
3. It should be eligible plant and machinery
Additional depreciation, in addition to normal depreciation, @
20% is available
.

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If asset is used for less than 180 days during the

previous year, in which its purchased, then additional
depreciation is restricted to 10% of actual cost.
When a depreciable asset(on which depreciation is
claimed on straight line basis) of a power generating unit
is disposed in a previous year, then terminal depreciation
(loss) is deductible or balancing charge (gain) is taxable

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Unabsorbed depreciation
1. Depreciation allowance is first deductible from
the profit and gain of B/P
2. If depreciation allowance is not fully deductible
under the head profit and gain of B/P than it is
deductible from income chargeable under other
heads excluding head salaries
3. If depreciation allowance is still unabsorbed , it
can be carried forward to the subsequent years
by the same assessee.

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Unabsorbed depreciation
5. No time limit is fixed for the purpose of C/f
of unabsorbed depreciation
6. In the subsequent year rule 2 will follows.
6. Order of priority for setting off in
subsequent years (i) current depreciation
(ii) B/F business loss
(iii) unabsorbed depreciation.
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General deduction u/s 37(1)

Conditions :-Expenditure should
1. not be in the nature described u/s 30-36
2. not be Capital in nature
3. not be Personal expenditure
4. have incurred in the previous year
5. be in respect of business carried on by the assessee.
6. have been expended wholly and exclusively for such
business.
7.
7. not have been incurred for any
purpose which is an offence or
prohibited by law
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Basis of Charge
Capital Gains tax liability arises only when the
following conditions are satisfied:
1.There should be a capital asset.
2.The capital asset is transferred by the assessee
3.Such transfer takes place during the previous year.
4.Any profit or gains arises as a result of transfer.
5.Such profit or gains is not claimed exempt from tax
under section 54, 54B, 54D, 54EC,
54F, 54G, and 54GA

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Capital Assets
Capital asset is defined to include property of any kind,
whether fixed or circulating, movable or immovable, tangible or
intangible. However, following are excluded from the definition
of capital assets:
1.Any stock-in-trade, consumable stores or raw material held for
the purposes of business or profession.
2.Personal effects of the assessee, that is to say, movable
property including wearing apparel and furniture held for his
personal use or for the use of any member of his family
dependent upon him. However, Jewellery,
Archaeological Collections, Drawings,
Paintings, Sculptures, or Art Work will not
be considered as personal effects.
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Contd
3. Agricultural land in India provided it is not situated

in any area within the territorial jurisdiction of a municipality

or cantonment board, having a population of 10,000 or
more; or
in any notified area.

4. 6 percent Gold Bonds, 1977 or 7 percent Gold Bonds,

1980 or National Defense Gold Bonds, 1980 issued by the
Central Government.
5. Special Bearer Bonds, 1991.
6. Gold Deposit Bonds issued under Gold Deposit Scheme,
1999.
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Short-term / Long-term
Capital Assets
Short term capital asset means a capital asset held by an
assessee for not more than 36 months, immediately prior to
its date of transfer. In other words, if a capital asset is held
by an assessee for more than 36 months, then it is known
as long term capital asset.
However in following cases 36 months will be replaced by
12 months : Equity or preference shares in a company
Listed Securities
Units of UTI
Units of a mutual fund specified under section 10(23D)
Zero coupon bonds
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Important Terms
1. Transfer of Capital Asset :- Transfer, in relation to capital
asset, includes sale, exchange or relinquishment of the
asset or the extinguishment of any rights therein or the
compulsory acquisition thereof under any law [sec.
2(47)].
2. Full Value of Consideration :- The expression full value
means the whole price without any deduction
whatsoever.
3. Expenditure on Transfer :- The expression expenditure
on transfer means expenditure incurred which is
necessary to effect the transfer.
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Contd
4. Cost of Acquisition :- Cost of acquisition of an asset
is the value for which it was acquired by the
assessee. In case of Depreciable Asset COA is the
WDV of asset in the beginning of the year. In case
of Slump Sale COA is the Net Worth of the
undertaking.
5. Cost of improvement :- Cost of improvement is
capital expenditure incurred by an assessee in
making any additions/ improvement to
the capital asset.

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Contd
6. Indexed Cost of Acquisition :- the amount which bears
to the COA, the same proportion as CII for the year in
which the asset is transferred bears to the CII for the
first year in which the asset was held by the assessee
or on 01.04.1981, whichever is later.
7. Indexed Cost of Improvement :- an amount which
bears to the COI, the same proportion as CII for the
year in which the asset is transferred bears to the CII
for the year of improvement.

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Capital Gain Exemption

1. Profit on sale of property used for residence [S. 54]:Available to Individual & HUF on transfer of Long-term
Residential Property and new residential House
property is purchased or constructed.
2. Capital gains on transfer of agricultural land [S.54B]:Available to Individual on transfer of Agricultural land
used by individual or his parent for agricultural
purposes during 2 year preceding date of transfer and
Agricultural land (urban or rural) is
purchased.

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Contd
3. Investment in certain bonds [S.54EC] :Available to all assesses on transfer of any
long-term capital asset for purchase of Bonds,
redeemable after 3 years issued by
(a) National Highway authority of India; or
(b) Rural Electrification Corporation,

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Contd
4. Capital gain on transfer of certain capital assets
not to be charged in case of investment in
residential house [S. 54F]:- Available to
Individual & HUF on transfer of Long-term Asset
other than Residential house Property and
residential House property is purchased or
constructed.

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Contd
5. Compulsory acquisition of land & building
[S.54D]:- Available to all assesses on
Compulsory acquisition of land or building
which was used in the business of industrial
undertaking during 2 years prior to date of
transfer, if New land or building for the industrial
undertaking is purchased or constructed.

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Contd
6. Shifting of undertaking to rural area [Sec.54G]:Available to all assesses on Transfer of plant,
machinery or land or building for shifting industrial
undertaking from under area to rural area, if (a)
Purchase/ Construction of plant, machinery, land or
building in such rural area or, (b) Shifting original
assets to that area or, (c) Incurring notified
expenses.

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Contd
7. Shifting of undertaking to SEZ [Sec.54GA]:Available to all assesses on Transfer of plant,
machinery or land or building for shifting
industrial undertaking from urban area to
special Economic Zone, if (a) Purchase/
Construction of plant, machinery, land or
building in such SEZ or (b) Shifting the original
asset to SEZ or, (c) Incurring notified expenses.

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Computation of Short-term
Capital Gains
Particulars
Full Value of Consideration
Less: Expenses incurred wholly and exclusively for
such transfer
Net Consideration
Less: Cost of Acquisition

Amount
XXX
xxx
XXX
xxx

Less: Cost of Improvement

xxx

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

xxx

Taxable Short -term Capital gains

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XXX

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Computation of Long-term
Capital Gains
Particulars
Full Value of Consideration
Less: Expenses incurred wholly and exclusively for
such transfer
Net Consideration
Less: Indexed Cost of Acquisition

Amount
XXX
xxx
XXX
xxx

Less: Indexed Cost of Improvement

xxx

Less: Exemption u/s 54, 54B, 54D, 54EC, 54F, 54G, 54GA

xxx

Taxable Long- term Capital gains

XXX

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Indexed Cost

Indexed Cost
of
Acquisition /
Improvement

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Cost of
acquisition /
improvement
x Cost
inflation
Index of the
year of
transfer

Cost Inflation
Index (CII) for the
first year in which
the asset was held
by the assessee or
for the year
beginning on
1.4.1981,
whichever is later /
the year of
improvement
Index

32

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General [Section 56(1)]

Income of every kind, which is not to be
excluded from the total income and not
chargeable to tax under any other head, shall
be chargeable under the head Income from
Other Sources.

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Specific Income [Section 56(2)]

1. Dividends.
2. Lottery winnings etc.: Winnings from lotteries, crossword
puzzles, races including horse races, card games and
other games of any sort or from gambling or betting of
any form or nature whatsoever.
3. Any sum received by an employer-assessee from his
employees as contributions to any welfare fund, if the
same is not chargeable under the head Profits and
Gains of Business or Profession.
4. Income by way of interest on securities if not chargeable
as Profits and Gains of Business or Profession
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Contd
5. Income from letting on hire of Plant, machinery or
furniture belonging to the assessee, if not chargeable
to under the head Profits and Gains of Business or
Profession.
6. Income from letting on hire of machinery, plant or
furniture and also buildings, and the letting of
buildings is inseparable from letting of such
machinery, plant or furniture, if the same is not
chargeable to income tax under the head Profits and
Gains of Business or Profession.
7. Interest on bank deposits and loans
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Contd
8. Any sum received under a Keyman insurance policy
including the sum allocated by way of bonus on such
policy, if the same is not chargeable to income-tax under
the head Profits and Gains of Business or Profession
or under the head Salaries.
9. Cash Gifts exceeding Rs. 50,000
10.Interest on foreign government securities
11. Agricultural income received from outside India
12.Income from sub-letting
13.Directors fee
14.Income of race establishment
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Index

37

Cash Gifts exceeding Rs. 50,000

1.10.2009 onward- exceeding Rs 50,000 or
immovable property being land or building or
both; (ii) shares and securities; (iii) jewellery; (iv)
archaeological collections; (v) drawings; (vi)
paintings; (vii) sculptures;
(viii) any work of art; or (ix) bullion;
Exception any sum received from relatives ,on
occasion of marriage of individual, by way of will/
inheritance, in contemplation of death of the
payee, received from local
authority. Charitable institute
registered u/s 12AA.
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Meaning of relative

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U/S 56(2)(V)

39

Deduction from head income from other sources

Commission paid for realizing dividend or

interest on securities
Deduction in respect of employees
contribution towards staff welfare scheme
Repair , depreciation in case of letting out
P&M , furniture, building.
Standard deduction @ least of (Rs.15000
or 33.33% of family pension)

Any other expense for

earning income
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