NEW HORIZON COLLEGE MARATHALLI, BANGALORE VI SEMESTER BBA STUDY MATERIAL INCOME TAX ASSESSMENT YEAR Prepared by

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1 NEW HORIZON COLLEGE MARATHALLI, BANGALORE VI SEMESTER BBA STUDY MATERIAL INCOME TAX ASSESSMENT YEAR Prepared by MS. PRASANNA PRAKASH MS. SAYANTANI BANERJEE

2 Introduction UNIT-1, 2 The income tax was introduced in India for the first time in 1860 by British rulers following the mutiny of However on the recommendation of Law Commission and Direct Taxes Enquiry Committee and in consultation with Law Ministry a bill was framed. Income tax Act, 1961 is a comprehensive Act. This Act has been amended by several amending Acts since SCHEME OF INCOME TAX: According to the Act income of a person is computed in five parts and each part is known as Head of income. These heads are: Income under the head salaries; Income from house property; Profits and gains of business or profession; Capital gains; Income from other sources; The total of income computed under various heads is called gross total income of which deductions under Sec 80C to 80U are allowed. The resultant figure is called total income. PERSON [SEC 2(31)]: A. Individual B. Hindu Undivided Family C. Company D. Firm E. Association of Persons of Individuals F. Local authorities G. Artificial Juridical Persons ASSESSMENT YEAR: It means the period of 12 months commencing on the 1 st day of April every year. The assessment year is the financial year of the Govt. of India during which income of a person relating to the relevant previous year is assessed to tax. At present the assessment year is going on. PREVIOUS YEAR [SEC 3]:The previous year is the financial year preceding the assessment year, it may be said that the year in which the income is earned is called the previous year and the next year in which such income is computed and put to tax is known as the assessment year. For e.g. income earned by the assessee in the previous year is taxable in the assessment year

3 AGRICULTURAL INCOME [SEC 2(1A)]: Agricultural Income Includes: a. Any rent or revenue derived from agricultural land situated in India. b. Any income from: Cultivation of agricultural land ; A process carried on to make the produce or rent in kind marketable ; From the sale of produce c. Income from agricultural property E.g. Farm house However the agricultural house property must be situated in the vicinity of the agricultural land and must be used for agricultural purposes like farmer s residence, cattle-shed, godown etc. Also the land must be subject to some tax levied by the state or local government. If no tax is levied then the land should not be situated within municipal limits or within 8 kms of the city limits. If the land is within municipal limits then the population of the town should be below PARTLY AGRICULTURAL AND PARTLY BUSINESS INCOME Crop Agricultural income Business income Growing and manufacturing tea 60% 40% Rubber manufacturing business 65% 35% Coffee grown and cured 75% 25% Coffee grown, cured, roasted and 60% 40% grounded For other commercial crop if agricultural produce is used as raw materials. Market value of produce Balance amount RESIDENTIAL STATUS: The residential status of a person can be classified into 3 categories; 1. Ordinary resident [OR] 2. Not ordinary resident [NOR] 3. Nonresident [NR] RESIDENT [SEC 6(1)]: A person will be resident of India if he satisfies any one of the following two conditions; 1. He was in India for 182 days or more during the relevant previous year. 2. He was in India for 60 days or more during the relevant previous year and 365 days or more during 4 previous years preceeding the relevant previous year. EXCEPTIONS: For the following 3 categories 60 days in two above [ 1 and 2 ] will be replaced by 182 days. 1. For an Indian citizen going abroad on a job approved by the central government. 2. In case of Indian citizens or persons of Indian origin who came to visit India. 2

4 3. In case of members of crew of Indian ship. NOTE: While calculating the number of days for stay in India, the day of departure must be included. ORDINARY RESIDENT [SEC 6(1) AND SEC 6(6)]: For an individual to be an ordinary resident the following two condition u/s 6(6) must also be fulfilled. 1. He was resident in India during 2 out of 10 previous years preceeding the previous years. 2. He stays in India for atleast 730 days during 7 previous years preceeding the relevant previous years. NOT ORDINARY RESIDENT [SEC 6(1) BUT NOT SEC6 (6)]: An individual will be a not ordinary resident if he fulfills any one of the following two conditions: 1. He was a non-resident during 9 out of 10 previous years preceeding the relevant previous years. 2. He stays in India for less than 730 days during 7 previous years preceeding the relevant previous years. NON-RESIDENT [SEC 2(30)]: A person who fails to fulfill any one of the two conditions of the resident as per SEC 6(1) is a non-resident. INCIDENCE OF TAX: Types of income OR NOR NR 3

5 1. Income Received or deemed to be received in India [whether earned in India not]. T T T 2. Income earned in India whether received in India or outside India. T T T 3. Income earned and received outside India from a business or profession, controlled or setup in India. T T NT 4. Income earned and received outside India from any other source. T NT NT 5. Past untaxed income brought into India during the relevant previous year. NT NT NT T Taxable, NT Not Taxable. IMPORTANT QUESTIONS: 1. Give the meaning of Income Tax. 2. What is agricultural income? 3. What is previous year? 4. What is assessment year? 5. Who is an Assessee? 6. Define Person. 7. Who is deemed Assessee in default? 8. Mention any four canons of taxation. 9. Distinguish between capital and revenue expenses. 10. Give the basic conditions u/s 6(1) of Income Tax Act. 11. State the tax liability of an individual based on his residential status. 12. Who is a non resident individual? 4

6 UNIT:4 INCOME FROM SALARIES INTRODUCTION: Assessee: PY: Residential status: AY: Particulars Amount Amount 5

7 BASIC FEES COMMISSION INTERIM RELIEF PROFIT IN LIEU OF SALARY ADVANCE SALARY EMPLOYEES CONTRIBUTION TO PF ALLOWANCE (i) DEARNESS ALLOWANCE[DA] (ii) HOUSE RENT ALLOWANCE[HRA] (iii) EDUCATION ALLOWANCE (iv) MEDICAL ALLOWANCE (v) ENTERTAINMENT ALLOWANCE (vi) OTHER ALLOWANCES PERQUISITES: (i) RENT FREE ACCOMODATION (ii) MOTOR CAR FACILITY (iii)reimbursement OF EXPENSES (iv) OTHER PERQUISITES GROSS SALARY (-) DEDUCTIONS U/S 16 (i) Entertainment allowance (ii) Professional tax NET INCOME FROM SALARY XX XX 6

8 PROVIDENT FUND SPF RPF URPF PPF 1. Employer s contribution Tax free In excess of 12% of employees salary is taxable Not taxable in the year of contribution Not applicable 2. employee s contribution Qualifies for deduction u/s 80c Qualifies for deduction under sec 80c Not taxable and does not qualify for deduction Qualifies for deduction u/s 80c 3. Interest on provident fund Tax free In excess if 95% is taxable Not taxable in the year in which the amount is credited Tax free SALARY =BASIC + D.A(if it forms part of salary) + COMMISSION (if paid as % of turnover) ALLOWANCES: Allowance is a fixed quantity of money given by the employer to the employee in addition to salary, for the purpose of meeting some particular requirements connected with the services. It is taxable under section 15 due or receipt basis whichever is earlier. There are 3 categories of allowances. I]. FULLY TAXABLE: a). CCA- City Compensatory Allowance b). DA- Dearness Allowance c). Tiffin Allowance d). Medical Allowance e). Servant Allowance f). OTA- Overtime Allowance g). Marriage Allowance h). Lunch Allowance II]. PARTLY TAXABLE: a). HRA- House Rent Allowance 7

9 b). EA- Entertainment Allowance c). Special Allowance III]. FULLY EXEMPT FROM TAX: a). Foreign Allowance To Govt. Employees b). Allowances From UNO c). Allowances Paid To Judges Of High Court HOUSE RENT ALLOWANCE: House rent allowance is U/S 10(13A). The assesee can get deduction subject to the least of the following; a). 40% of the salary and 50% of the salary for employees residing in METRO CITIES. b). Excess of rent paid over 10% of salary c). Actual HRA received NOTE: SALARY= same as leave encashment. ENTERTAINMENT ALLOWANCE(included in salaries and then deducted){sec16(ii)}:- The least or the following is exempt; i). Rs ii). 20% of salary iii). Actual Entertainment Allowance received [EA] NOTE: For a non-govt. employee entertainment allowance is fully taxable. SPECIAL ALLOWANCES: I]. OFFICIAL ALLOWANCES: These allowances are fully exempt from tax to the exempt of actual expenditure. a). Transfer Allowance b). Daily Allowance c). Uniform Allowance d). Helper Allowance II]. PERSONAL ALLOWANCE: These allowances are exempt from tax on the following basis; a). Transport Allowance (Rs.800 p.m. is exempt from tax). b). Children Education Allowance (it is exempt upto Rs.100 month,upto maximum of two children ) 8

10 c). Children Hostel Accommodation Allowance(exempt upto Rs.300/month,upto maximum of two children d). Running Flight Allowance(this allowance is paid to an employee of a transport system to meet his personal expenditure provided he does not receive daily allowance). It is exempt upto 70% of such allowance or Rs whichever is lower. PERQUISITES: PERQUISITES EXEMPTED FOR ALL EMPLOYEES:- a). Free medical facility or reimbursement of medical expenditure for treatment from a private or unrecognized hospital is exempt from tax upto Rs.15000/annum. b). Free refreshments supplied by the employer to employee during office hours is exempt from tax,free meal is exempt from tax upto Rs.50/meal. c). Free education provided by the employer from its own resources is exempt from tax upto 1000/month/child. d). Free recreational facilities provided by employer to the employee is fully exempt from tax. e). Provision of telephone at residence including the mobile phone given by the employer to the employee to be used for official duties is fully exempt from tax. f). Cost of refresher course attended by the employee and higher education expenses in India or abroad is fully exempt from tax. g). Transfer of movable assets without any consideration to the employee is fully exempted from tax provided such moveable assets have been used by the employer for the past 10 years. h). Interest free loan given to the employee (provided the total amount of loan does not exceed Rs.20,000) is exempt from tax. If the loan exceeds Rs then the interest or concessional interest is taxable on the basis of SBI rate of interest. i) Gifts in kind of value exceeding Rs.5000 only is taxable. Cash/cheque gifts fully taxable.. j)rent FREE ACCOMODATION [RFA]: a). For govt. employees the value of RFA is based on the amount determined as per govt. rules. In case it is a furnished accommodation 10% of the original cost if furnitures or hire charges will be added to the amount as per govt. rules. b). For a non-govt. employee the taxable value of perquisite is determined as per the following rule: -- 9

11 Population of city as per 2001 census where accomodation is provided. More than 25 lakhs More than 10 lakhs but not less than 25 lakhs Less than 10 lakhs Where accomodation is owned by the employer 15% of the salary 10% of salary 7.5% of the salary Where accomodation is taken on lease/rent by the employer. Amount of rent paid/payable or 15% of salary which ever is less. Amount of rent paid/payable or 15% of salary which ever is less. Amount of rent paid/payable or 15% of salary which ever is less. If the accommodation is the furnished accomodation then 10% of cost of assets or furnitures or hire charges will be added to the above value. NOTE: For the purpose of RFA BAS Salary = BASIC +DA (if it is a part of salary for the purpose of computing retirement benefits)+ COMMISSION +BONUS+FEES+ALL TAXABLE ALLOWANCES+LEAVE ENCASHMENT RECEIVED DURING THE RELEVANT PREVIOUS YEAR+ANY OTHER MONETARY PAYMENT. k) HOTEL ACCOMODATION: Hotel accomodation is provided to the employee and is taxed in the following manner: a). It is provided for a total period of less than 15 days in the relevant previous year it is fully exempt from tax. b). If it is provided beyond 15 days it is taxable in the following manner i). 24% of the salary ii). Hotel bill payable by the employer whichever is less. l) CONCESSIONAL RENT ACOMODATION: The taxable value will be calculated as below: Find out the value if accomodation as if it is RFA. [Less] the concessional rent paid by the employee m) OBLIGATION OF EMPLOYEE MET BY EMPLOYER: If any bill is issued in the name of the employee but the amount is paid by the employer it is fully taxable as follows: A]. LIC premium of the employee. B]. Gas, electricity and water bill. C]. Domestic servant s salary who is employed by the employee D]. Club or telephone bill in the name of the employee it is fully taxable. 10

12 n) MOTOR CAR FACILITY: MOTOR CAR FACILITY CAR OWNED BY THE EMPLOYER CAR OWNED BY THE EMPLOYEE Expenses paid expenses paid by expenses paid expenses paid By employer employee by employer by employee not taxable USEAGE OF CAR: A. Fully official purpose. B. Fully private purpose C. Partly official and partly private purpose. {1A}- EXEMPT FROM TAX {1B}- THE TAXABLE VALUE OF PERQUISITE IS THE AGGREGATE OF THE FOLLOWING: 10% of the cost of car or actual hire charges. Running and maintenance expenditure Chauffeurs salary. LESS:- ANY AMOUNT COLLECTED FROM THE EMPLOYEE {1C}- THE TAXABLE VALUE OF PERQUISTE IS DETERMINED AS FOLLOWS: When cc of the car does not exceed 1600cc then it is Rs p.m. + Rs.900 p.m. for driver salary. When the car exceeds 1600cc then it is Rs.2400 p.m. + Rs.900 p.m. for driver salary {2A}- IT IS NOT TAXABLE. {2B}- THE TAXABLE VALUE OF PERQUISITE IS THE AGGREGATE OF THE FOLLOWING: 10% of the costs of car or the actual hire charges. Driver s salary. {2C}- THE TAXABLE VALUE OF PERQUISITE WILL BE DETERMINED AS 11

13 FOLLOWS: When the car less than 1600cc then it is Rs.600 p.m. + Rs.900 p.m. for driver salary. When the car is more than 1600cc then it is Rs.900 p.m. + Rs. 900 p.m. or driver salary. {3A}- IT IS NOT TAXABLE. {3B}- THE TAXABLE VALUE OF PERQUISITE IS THE ACTUAL EXPENSES INCURRED BY THE EMPLOYEE (-) ANY AMOUNT COLLECTED FROM THE EMPLOYEE. {3C}- THE TAXABLE VALUE OF PERQUISTE IS DETERMINED AS FOLLOWS: When cc of the car does not exceed 1600cc then it is Rs p.m. + Rs.900 p.m. for driver salary. When the car exceeds 1600cc then it is Rs.2400 p.m. + Rs.900 p.m. for driver salary PROBLEM Mrs. Ragini is an employee of State Bank Of India and she gives the following information for computing her taxable salary for A.Y i. Basic salary Rs.12, ,000 from 1/01/2011 ii. D.A is 15% of basic iii. Entertainment allowance Rs.250 per month iv. Bonus Rs.4000 v. Children education allowance for 3 children Rs.200 per child per month vi. Travelling expenses Rs.15,000 (actual amount spent is 14,000 ) vii. She and her family took medical treatment in private hospital. And the bank has reimbursed Rs.25,000 for this expenditure viii. The Bank provided her accommodation by deducting Rs.1000 per month from her salary. But the bank is paying rent of Rs.5000 per month to the land lord of the house. Furniture costing Rs.30,000 is also provided by the bank ix. The employee and the employer contributes 15% of her salary and D.A towards SPF. The interest on SPF is 10% during the year. x. During the bank has paid her employment tax of Rs.2000, income tax Rs.8000 and Health insurance premium Rs Solution: 12

14 Computation of taxable salary Assessee: Mrs.Ragini PY: Residential status: ordinary resident AY: Basic (Note1) _ 1,75,500 Bonus _ 4000 Employee s contribution to SPF(tax free for govt employee) Interest on SPF (tax free for govt employee) - - Allowance: D A 26,325 Children Education Allowance(200*12*3) (-) Deduction (100*12*2) Entertainment Allowance(250*12) 4,800 3,000 Travelling Allowance Perquisites: Reimbursement of medical expenses (-) exempt upto 15,000 Concessional rent accommodation(note 2) Employment tax paid by employer Income tax paid by employer Health insurance(tax free) GROSS SALARY (-)Deductions u/s (16): Professional Tax Entertainment tax TAXABLE SALARY 1,000 10,000 19,245 2,000 8,000 _ Note 1: Basic salary for the previous year is- From to ( 14500*9 ) = Rs

15 From to (15000*3 ) = Rs Total basic salary Rs NOTE: 2 Salary for concessional rent accommodation Basic 1, 75, 500 Bonus - 4,000 Children education allowance 4,800 Entertainment allowance - 3,000 Travelling - 1,000 1, 88, 300 RFA will be: 15/100 *1, 88, 300 = 28, 245 Or 5000*12 = Whichever is less (+) 10% of furniture 3,000 31,245 (-) rent paid by the employee 12,000 19,245 is the value of concessional furnished accommodation IMPORTANT QUESTIONS: 1. Briefly explain the income tax provisions of various provident funds. 2. Briefly explain the tax treatment of leave encashment. 3. Explain the Income tax rules regarding Gratuity. 4. What are the rules for pension according to the IT Act. UNIT 5 Income from house property: 14

16 Conditions to be fulfilled for an income to be taxed under this heading: There should be a building and / a land appurtenant thereto (adjacent or attached). The assessee must be the owner of the property. The property must not be used by the assessee for his or her own business or profession. Deemed owner: In the following cases a person is treated as the deemed owner: a) In case the property is transferred an individual to his / her spouse without adequate consideration. The transferor will be the deemed owner. b) In case the house property is constructed by a co-operative society and the flats or houses are given to the members then the member is the owner. c) In case any property is acquired under power of attorney.the holder of such power is the deemed owner. d) In case a self acquired property is converted into HVF property.the transferor is the deemed owner. e) In case of impartibly estate of HVF the holder is the deemed owner. Exempted Income from House Property: I. House property income used for agricultural property. II. House property income of a charitable trust. III. House property income of a trade union. IV. House property income of a politician property. V. House property income of a local authority. VI. House property income of a educational institution and hospital. VII. House property income of a approved scientific research association. VIII. Annual value of any one palace of an ex-ruler. IX. House property used for own business or profession. X. One self occupied house property. Categories of house property:- I. Let out house property for residential commercial purpose. II. Self occupied house property for residential purpose. III. Deemed to be let out. IV. Partly let out and partly self occupied. Computation of taxable income from let out House property (HP) 15

17 Gross Annual Value (GAV) (-) municipal taxes paid by assessee during the P.Y. Net Annual Value (NAV) (-) deduction U/S 24:- a) Standard 30% of NAV b) Interest on borrowed capital (for house) Income from house property Xxx xxx Xxx xxx xxx xxx xxx Computation of Gross Annual Value(GAV):- Step Particulars Selection Amt(Rs) Municipal Rental Value (or) Fair rental value Notional rent Notional rent (0r) Standard rent Expected rent Expected rent(or) Actual rent GAV before vacancy period loss (-)vacancy period loss GROSS ANNUAL VALUE whichever is higher whichever is lower whichever is higher xxx xxx xxx _ xxxxxxxxxxxx x Actual rent = annual rent unrealized rent received cost of common facilities. Municipal rental value:- The municipal corporation conducts periodical survey of house properties in their local limits for the purpose of levying taxes. The value thus determined by the municipality is called municipal rental value. Fair rental value:- Fair rental value refers to the rent of a similar type of the house in the house in the some locality Standard rent:- The rent fixed under the rent control act is called standard rent. Vacancy period:- It refers to the rent for the period during which the let out house property has remained vacant in the relevant previous year. PROBLEM: 1. Calculate GAV from the following particulars. 16

18 Annual rent Rs.8500 per month Municipal value Rs per annum Fair rental value RS per annum Standard rent Rs per annum The assessee could not realise one month rent and the house also remained vacant for 3 months during the previous year Solution:- Computation of GAV Assessee: P.Y: Residential status: A.Y: step Particulars selection amount Municipal rental value or Fair rental value Notional rent Notional rent or Standard rent Expected rent Expected rent or Actual rent(8,500*12)-8500 GAV before vacancy period loss (-)vacancy period loss(8,500*3) 65,000 69,000 69,000 55,000 55,000 93,500 69,000 55,000 93,500 25,500 GAV 68,000 Interest on borrowed capital:- It has two parts: a. Interest for current previous year( ) which is fully exempt, and b. Interest for the pre-construction period (PCP) which is allowed in five equal annual instalments starting from the previous year in which construction was completed. Where, PCP (Pre-construction period) It starts on the date of borrowing the loan up to repayment of loan or 31 st march immediately prior to the date of completion of construction, whichever is earlier. Computation Of Income Of a Self Occupied House Property. 17

19 GAV Nil (-)Municipal tax - NAV Nil (-)Deduction u/s 24 a. Standard deductions nil b. Interest on borrowed capital xxx xxx Income from house property xxx NOTE:- 1. The maximum interest on loan is Rs.1,50,000 if the following conditions are satisfied a. If the loan is borrowed on or after 11 th April(99) i.e.1/4/99 b. The loan is taken for construction or acquisition of house property. c. The construction is complete within 3years from the end of the previous year in which loan was taken. 2. The maximum (ceiling) interest on loan is Rs.30,000. If the following conditions are satisfied: a. The loan is taken before 1/4/1999. b. The loan is taken for the purpose of repair renewal or reconstruction of the house. 3. There is no limit on the interest on loan for a let out house property. Partly let Out, partly self occupied house property Period :- Where a house is self occupied for a part of the year and let out for the remaining part of the year. Then the benefit of self- occupied house property will not be available and the entire house will be treated as completely let out throughout the year. Portion:- Where a house property consists of two or more residential units (different floors) then one of them will be treated as self occupied house property throughout the year and the remaining units will be treated as let out house property. PROBLEM 18

20 1. Mr. Kishore is the owner of three houses. From the following particulars of his property compute taxable income from house property for the A.Y particulars House1 House2 House year of construction purpose actual rent received municipal value municipal tax paid by the owner municipal tax paid by the tenant interest on loan taken for renewal of the house 1996 Let out to a bank 30,000 pa 32,000 1,200 2,000 Nil 2000 Self occupied ,000 1, , Let out for a residence 24,000 pa 30,000 3, ,000 Solution:- House 1(let out) GAV Municipal value 32,000 Fair rental value Notional rent 32,000 Notional rent 32,000 Standard rent Expected rent 32,000 Expected rent 32,000 Actual rent 30,000 GAV 32,000 Computation of Income from HOUSE 1 (let out to bank): GAV = 32,000 (-) municipal tax 1,200 NAV 30,800 (-) Deductions U/S 24 i) Standard deduction [30,800*30\100] 9,240 ii) Interest on borrowed capital Taxable income from House1 let out 21,560 House 2 self occupied GAV nil 19

21 (-)Municipal tax NAV nil (-)Deduction u/s 24 a) Standard Deduction b) Interest on borrowed capital 7, Income from self occupied house property ( 7,000) House 3 let out GAV Municipal value 30,000 Fair rental value Notional rent 30,000 Notional rent 30,000 Standard rent Expected rent 30,000 Expected rent 30,000 Actual rent 24,000 GAV 30,000 Computation of income from House 3( let out for residence) GAV 30,000 (-)Municipal tax 3,000 NAV 27,000 (-)Deductions u/s 24 i) Standard deduction [27,000*30/100] 8,100 ii)interest on Borrowed capital 5, Taxable income from House 3 let out 13,900 Taxable Income from House Property is House 1 21,560 House 2 (7,000) House 3 13,900 Total Taxable Income from H.P 28,460 IMPORTANT QUESTIONS: 1. What is municipal valuation, fair rent, standard rent? 2. What is Annual value? 3. What is pre-construction period? 4. What is composite rent? 5. Elaborate the provision and condition of interest on borrowed capital for a selfoccupied as well as a let out house property. 6. Give examples of exempted income from house property. 7. What is expected rent? 20

22 UNIT 6: PROFITS AND GAINS FROM BUSINESS OR PROFESSIONS (Sections 28 to 44d) Introduction: Profits and gains from business or profession is one of the important sources of income for an individual or a business house as classified by the Indian income tax act This classification by income tax act and arrangement of the items from section 28 to 44D helps tax authorities to change tax on the income earned by the business houses and gains made by the professionals. The term business is vast and wide because it includes both manufacturing of goods and rendering services of all kinds. Business [Section 2(13)] According to section 2(13) of the Income Tax Act, the term Business means any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Profession [Section 2(36)] According to section 2(36) Profession refers to an occupation, where intellectual skill and tecnical expertise in a specified field is acquired for earning a livelihood. Lawyer, Doctor, Auditor are some of the examples of Profession. Further, profession includes Vocation. Vocation means an activity upon which a person spends the major portion of his time and out of which he makes his living. Music, Dancing, Writing books etc. INCOMES CHARAGEBLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION (SECTION-28). The profits and gains of any business or profession carried on during the previous year. Any compensation or other payments due to or received by a person for the termination or modification of the terms of office or agency. Income derived by a trade, profession or similar association from specific services performed for their members. Profit on sale of a license granted under the imports control order, Cash assistance received or receivable by any person against exports under any scheme of the government of India. Repayment of any customs or excise duty to any person against exports. The value of any benefit or perquisite whether convertible into money or not, arising from business or exercise of a profession. Any interest, profits, bonus, commission or remuneration due to received by a partner from the firm. Income from speculative transaction for eg : shares market dealings. IMPORTANT RULES FOR ASSESSMENT OF PROFITS AND GAINS OF BUSINESS OR PROFESSION: The business or profession should be carried on by the assessee during the previous year. The tax is chargeable on the aggregate income from all business or professions carried on by an assessee during the previous year. The profits and losses of speculation businesses are kept separately. Only the legal ownership is considered for taxing under this head. 21

23 No tax is payable on national profits. Income from illegal business or profession is also taxable. However, expenses incidental to such illegal businesses are allowed as deductions. Awards received by a sports person are considered as his/her professional income and are liable to tax. Expenses incurred before setting up of a business are not allowed. That is expenses incurred before incorporation of a business. Expenses of an isolated transactions can be allowed as deduction from profits earned from such transaction only. Business losses, which are incidental to the business carried on, are allowed as deductable items. Sums previously allowed, as deductions are taxable if recovered during the previous year. EXPENSES EXPRESSLY ALLOWED (SEC 30 TO 37) 1. Expenses in respect of business premises (sec 30) (a) Where the premises is occupied by the assessee as a TENANT. Rent paid for such premises. Cost of repairs and maintenance to the premises. Any sums paid on the account of land revenue, municipal taxes or logical taxes. The amount of any insurance premium paid in respect of such premises. (b) Where the premises is occupied by the assessee as a OWNER Cost of repair and maintenance to the premises. Any sums paid on account of land revenue, municipal taxes or local taxes. The amount of any insurance premium paid in respect of such premises. NOTE: If the premises belong to the assessee, no deduction in respect of rent will be allowed to him/her. 2. Expenses in respect of plant and Machinery and Furniture (sec 31) In respect of plant and machinery and furniture used for the purposes of the assessee s business or profession, the following deductions are allowed. The amount of expenditure incurred in respect of repairs of plant and machinery or furniture. The amount of any insurance premium paid in respect of plant and machinery or furniture. 3. Depreciation (sec 32) Depreciation means a decrease in the value of assets by wear and tear caused by their used in business over a period of time. Its cost is spread over its anticipated life by charging depreciation every year against the profits of the business or profession. 22

24 Assets Eligible for Depreciation: Tangible assets such as building, plant and machinery, furniture, motor car etc. Intangible assets such as know-how patents, trademarks, copyrights etc., licences, franchises or any other business or commercial rights of similar nature. Conditions for allowing Depreciation: The two essential conditions to be fulfilled for claiming depreciation allowance are: Asset should be owned by the assessee. It should be used for the purpose of assessee s business or profession. Blocks of Assets: The term block of assets means a group of assets falling with in a class of assets for which a single rate of depreciation is applicable. For eg: Tangible assets like plant and machinery typewriter, surgical equipments etc. Tangible assets like know-how, patents, copyrights, trademarks etc. Methods of Depreciation: In the case of assets of an undertaking engaged in the generation and distribution of power depreciation may be claimed at the prescribed rates on the actual cost, that is, on the basis of straight line method of depreciation. In the any other case, on any block of assets, at the prescribed rates on the written down value of such block of assets. Assets Acquired and put to use during the previous year. In the case of an asset acquired and put to use in the business during the previous year, only 50% of the normal depreciation will be allowed if it is used in business for less than 180 days. If it is used for 180 days or more than 180 days, then 100% of the normal depreciation will be allowed. 23

25 RATES OF DEPRECIATION ON WRITTEN DOWN VALUE METHOD TANGIBLE ASSETS % OF WDV Residential building Commercial building Plant and machinery Surgical equipments Typewriter Motor car Furniture and fittings /Neon sign board Computer including software Books for professional use (annual publications) Books for professional use (other than annual publications) INTANGIBLE ASSETS Patents Trademarks Copyrights Cost of know-how, licenses etc % OF WDV [4] Expenditure on scientific research (sec 35) The following deductions shall be allowed in respect of expenditure on scientific research. (a) Revenue expenditure incurred by the assessee on scientific research during the previous year. (b) Capital expenditure on scientific research incurred by the assessee during the previous year except expenditure on acquisition of land. (c) Sums paid for social or statistical research to any approved university, college or other institutions shall be allowed at 175% of sums paid. [5] Expenditure incurred on the acquisition of patent rights or copy rights (sec 35A) Any capital expenditure incurred prior to 1 st April 1998, on the acquisition of the patent rights used for the business shall be allowed as a deduction in 14 equal annual instalments commencing from the previous year in which the expenditure is incurred. Where such expenditure is incurred after 31 st March 1998, the depreciation shall be allowed on it at 25% on the basis of MDV method. [6] Amortisation of preliminary expenses (sec 35D) Any preliminary expenditure incurred by an assessee shall be allowed as deduction of an amount equal to one-fifth of such expenditure for each of the 5 successive previous years beginning with the previous year in which the business commences. MAXMIUM LIMIT:- The maximum amount eligible for deduction under this section shall not exceed 5% of the cost of the project. The following expenditure is included in preliminary expenses: (a) Preparation of feasibility report. (b) Preparation of project report. 24

26 (c) Conducting market survey or any other survey. (d) Printing charges. [7] Expenditure on voluntary retirement (sec 35DDA) Where an assessee pays any sum to an employee in any previous year in connection with his voluntary retirement, he shell be allowed a deduction of 20% of such expenditure for each of the 5 successive previous year beginning with the previous year in which the previous year in which the expenditure was incurred [8] Other deductions (sec 36) (a) Insurance premium:- The amount of any premium paid in respect of insurance, against risk of damage of stock-in-trade of the business. (b) Insurance premium for the health of employee:- The amount of any premium paid by cheque for insurance on the health of the employees is allowed as deduction. (C) Bonus or Commission:- Any bonus or commission paid an employee for services rendered shall be deductable in full. (d)interest on Borrowed capital:- The amount of interest paid in respect of capital borrowed for the purposes of the business or profession is allowed as deduction. (e)contribution to provident fund:- Any sum paid by the assessee as an employer by way of contribution towards a recognized provident fund is allowed as deduction. (f)approved Gratuity Fund:- Any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund is as deduction. (g)bad debts:- The amount of any debt, which is written off as irrecoverable in the accounts of the assessee for the previous year, shall be allowed as deduction. (h)expenditure on family planning:- Any expenditure incurred by an assessee for the purpose of promoting family planning amongst the employee is allowed as a deduction. [9] General Deductions (sec 37(1)) (a) Expenses incurred in connection with any proceedings before the income tax authorities will be deducted as business expenditure. (b) Entertainment expenses, advertisement expenses, travelling expenses and guesthouse expenses are fully deductible. (c) Any amount of banking transaction tax paid during the previous year shall be allowed as deduction. (d) Expenses incurred in the purchase, manufacture and sale of goods. (e) General expenses incurred on day-to-day running of the business. (f) Expenses incurred in defending a case for damages for breach of trading contract. (g) Amount of sales tax actually paid will be allowed as deduction. (h) Compensation paid to an undesirable employee for the retrenchment of his/her service. (i)contribution made to provident fund maintained for the benefit of the employee. (j) Commission paid for procuring orders for the business. (k) Reasonable expenses incurred on the occasion of Diwali, Dhasara, commencement of business etc. 25

27 (l) Legal expenses incurred in connection with the business or profession. (m)welfare expenditure incurred by the assessee. (n) Payment of excise duty, sales tax etc. (o) Deposit under Tatkal telephone deposit scheme or own your telephone (OYT scheme). Expenses Expressly Disallowed (section-40): (a) Advertisement in Political Magazine. (b) Provision of Gratuity. (c) Excessive payments. (d) Payments in cash in excess of Rs (e) Payments made to the proprietor. (f) Personal payments of the proprietor. (g) Payments of taxes. (h) Provisions and Reserves. (i) Capital Expenditure. (j) Charity or Donation. (k) Past losses. (l) Fine or Penalty. (m)contribution to a political party. (n)payments made outside India. Format for computation of taxable income from Business/Profession. Assessee: Status: Previous year: Assessment year: Net profit as per profit& loss a/c Add: Expenses and losses expressly disallowed Eg: interest on capital Proprietors salary Personal payments of the proprietors Provisions and reserves All taxes except sales tax Excise duty and VAT Capital expenditure Fines and penalties Less: Incomes not taxable under the head business or profession Credited to P&L Eg: Rent from house property Profit on sale of assets Interest on deposits Dividend received Xxx xxx xxx 26

28 Bad debts recovered Winning from lottery, card games, races etc., Less: Losses and expenses allowed as per income tax rule but not Debited to P&L A/C : Eg: Bad debts written off Depreciation Bonus or commission paid Sales tax, exercise duty and VAT xxx Add: Incomes and gains taxable under the head business not credited to P&L A/C : Eg: Commission received Discount received Interest from debtors Rent from employees (Quarters) Bad debts recovered Unrecovered business incomes Add: over valuation of opening stock and under valuation of closing Stock Less: Under valuation of opening stock and overvaluation of closing Stock xxx xxx xxx Taxable income from business PROBLEMS: Problem 1: Profits and Loss a/c of M/s Raju company for the previous year Particulars Amt Particulars Xxx Amt To general expenses To fire ins. premium To Bad debts To salaries To advertisement(in cash) To proprietors salary To interest on capital To income tax To depreciation To sales tax (due) To adv. Income tax paid To donations To motor car expenses To municipal tax of quarters let to By gross profit b/d By bad debts recovered (disallowed earlier) By interest on govt securities By rent received from employees By interest from debtors for delayed payments

29 employees To net profit The following other information is available: (a)general expenses include Rs.2800 paid as compensation to an old employee whose services were terminated in the interest of biz and Rs.2200 by way of help to poor student. (b)depreciation calculated according rates of income tax comes to Rs (c)sales tax was paid on 1 st May 2016 due dates for filing of return is 31 st July 2016 (d) 50% motor car expenses is for proprietors personal use. Compute of taxable income from business of M/s Raju and co. for the assessment year Solution: Particulars Amt Amt Net profit as per p & l a/c Add: Expenses expressly disallowed General expenses Advertisement Proprietors salary Interest on capital Depreciation Income tax Advance income tax paid Donations Motor car expenses (750x ½) Less: Incomes not taxable under the head business Interest on govt securities Bad debts recovered Less: Depreciation (8000) (2900) Income from business Problem 2: Smt. Jyothi is a registered medical practioner she keeps her books on cash basis and for the year ended her summarised cash account is as under: Receipts Rs Payments Rs

30 To opening bal b/d To bank loan To sale of medicines To consultation of fess To visiting fess To interest on investment To rent from property To sale of furniture To sale of bldg By cost of medicine By surgical equipments By motors car By car expenses By salary By rent of dispen By general expenses By life insurance premium By interest on bank loan By provident insurance By fixed deposit in bank By closing bal c/d (a) 1/3 rd car expenses are for personal use. (b) WDV of house property on 1 st April, 2015 was Rs There were no other assets in these blocks. (c) Rate of depreciation on car and surgical equipments is 15%. Computation of income from profession from smt. Jyothi for the assessment year Particulars Amt Amt Add: Professional income: Sale of medicines Consultation fees Visiting fees Less: Professional expenses Cost of medicines Depreciation of equipments (6000x15%) Depreciation of motor car (12000x15/100x2/3) Car expenses (1800x2/3) Salary Rent of dispensary

31 General expenses Interest on loan (26660) Income from profession

32 Unit 6: CAPITAL GAINS [SECTION 45 TO SECTION 54] Basis of charge [u/s 45]: 1. There is a capital Assets. 2. Such capital asset has been transferred by the assessee. 3. Such transfer of capital asset takes place during the previous year [ ]. 4. Any profit or gain arises from transfer of such capital asset during the previous year. 5. The profit or gain arising from transfer of such capital asset is not exempt from tax. Capital asset [u/s 2(4)]: The term capital asset means property of any kind held by an assessee whether related to his/her business or profession or not. Capital asset may be movable or immovable, tangible or intangible, fixed or floating. Capital assets include land, building, machinery, investment, goodwill, jewellery, shares, debentures bonds, a licenses to manufacture, leasehold rights and so on. What is not included in capital assets: There are certain assets which are not considered as capital assets from the purpose of computing capital gains tax under the income tax rules. They are: 1. Commercial goods: Such as stock in trade, consumable stores or raw materials held for his/her own business or profession. 2. Movable assets for personal use: Such as household furniture personal cars, refrigerator, television, dvd, vcr, electrical appliances and the like. 3. Agricultural land: If land is not situated within the limits of any municipality having a population of or more. Agricultural land not falling 8 kms from the local limits of such municipalities. 4. Gold bonds: Includes 6.5% gold bonds, 1997 or 7%gold bonds 1980 or national defence gold bonds, 1980 issued by the central govt. 5. Special bearer bonds, Gold deposit bonds: Gold deposit bonds issued under the gold deposit scheme, 1999 notified by the central govt. NOTE: Jewellers is treated as capital asset. (Exception to personal effect) Transfer of capital asset [sec 2(47)]: The tax liability on capital gains arises only if there is a transfer of a capital asset, transfer in relation to a capital asset includes the following: 1. Sale, exchange or relinquishment (fore going of rights) of a capital asset. 2. Extinguishment (destruction) of any rights in a capital asset. 31

33 3. Compulsory acquisition of a capital asset under any law. 4. Conversion of a capital asset into stock-in-trade. 5. The maturity or redemption of zero coupon bonds. 6. Handling over the possession in part performance of a contract of sale. 7. Transfer of rights in immovable properties through the medium of co-operative societies. 8. Converting a business into ltd company. 9. Transfer of leasehold rights in property by way of sub-lease. 10. Assessee holding shares of a subsidiary company and exchanging the same for holding company shares. 11. Assessee giving shares and others asset to his wife in connection with separation. 12. Reduction in the face value of preference shares amounts to extinguishment of rights in shares. Transaction not regarded as transfer: Section 47 The following transaction is not considered as transfer for the purpose of capital gains tax: 1. Capital assets derived from total or partial partition of HUF. 2. Under a will or gift or irrecoverable trust. 3. Transfer of capital asset by a parent company to its 100% owned subsidiary co. 4. Transfer of capital asset by a 100% held subsidiary co. to its parent company. 5. Transfer of assets/shares in a scheme of amalgamation. 6. Transfer of agricultural land in India before Transfer of capital assets of historical importance being works of art manuscript, museum etc of national importance notified by the govt. 8. Transfer of debentures or bonds into shares. 9. Any transfer of foreign currency bonds or global depositary receipts held by a non-resident to another non-resident, where the transfer in made outside India. 10. Transfer of membership in a registered stock exchange. 11. Transfer of land by a sick company to its workers. Types of capital assets: For the purpose of capital gain tax, capital asset are classified into two types namely 1. Short term capital assets 2. Long term capital assets Short term capital assets:- Capital asset held by an assessee for not more than 36months (3 yrs) immediately prior to its date of transfer is called short term capital asset. 2. Long term capital asset:- Capital asset held by an assessee for more than 36months (3yrs) immediately prior to its date of transfer is called long term capital asset. Exceptions: 32

34 In the following cases, 36months (3yrs) is substituted for 12months (1yr) to decide whether the capital asset is a short term/long term capital asset. 1. Shares of a company 2. Listed securities 3. Units of unit trust of India 4. A unit of mutual fund notified u/s 10(23D) 5. Zero coupon bonds. Difference between short term capital gain and long term capital gain: FACTORS SHORT TERM GAINS LONG TERM CAPITAL GAINS Arising from transfer of long term SOURCE Arising from transfer of short term capital assets. capital assets. 20% TAX RATE 15% Exempt are available. EXEMPTIONS SET OFF LOSSES CARRY FORWARD AND SET OFF OF LOSSESS No exemption. Losses can be set off against short term or long capital gains. Can be carried forward and set off against short term or long term capital gains. Losses can be set off against long term capital gains. Can be carried forward and set off against long term capital gains only UNIT 7: INCOME FROM OTHER SOURCES [Section 56 t0 59] Any income which is taxable under the Income Tax Act, but does not find place under the head of income from salaries, income from house property, profits and gains of business or profession and capital gain, will be taxed under the head Income from other sources. Chargeable incomes 33

35 Under the head Income from other sources [sec.56(2)] The following incomes shall be taxed under the head income from other sources: 1. Dividends received except from Indian companies. 2. Winnings from lotteries, crossword, puzzles, card games, betting are gambling races including horse race, or any form of this nature. 3. Income by way of interest on securities. 4. Income from plant and machinery or furniture if it is not charged under the head profits and gains of business or profession. 5. Income from plant & machinery or furniture and also building if it is let on composite rent and inseparable from the said property. 6. Income received under key man insurance policy including bonus. 7. Any sum of money exceeding Rs received from any person other than a relative without consideration by an individual or HUF, the whole of such sum. 8. Interest on bank deposits, interest on loans, interest on debenture. 9. Sub rent received by a tenant by sub-letting the whole or a part of the house property under his possession. 10. Remuneration received for examination work by a teacher or a lawyer. 11. Any royalty received. 12. Director s fees received by an individual being a director of any company for attending meetings. 13. Ground rent received by the owner of vacant land. 14. Remuneration received for writing articles in journals other than professional journals in case of professionals. 15. Income from undisclosed sources. 16. Income from agricultural land situated abroad. 17. Interest received by an employee from unrecognized provident fund only to the extent of interest on his own contribution. 18. Salary received by a member of parliament (MP), a member of legislative assembly (MLA) or a member of legislative council (MLC). 19. Commission received by an insurance agent, if it is not chargeable under the head income from business or profession 20. Gratuity received by a director who is not an employee of the company. 21. Family pension received by a window and legal heirs of the deceased employee (the amount of exemption in the case is 33.33% of the amount of family pension or Rs whichever is least). 22. Amount withdrawn from National Savings Scheme, 1987 (NNS). 23. Tips received by a taxi driver from passengers. 24. Income realised from display of boards of various concerns on top of assesses building for advertisement purposes is assessable as income from other sources. Securities: The term security means a document acknowledging the debt taken by the government or corporate sector from the general public. It is held by the investor as a guarantee of his rights to receive interest or principal at the time of maturity. 34

36 Kinds of security: Securities can be classified into four types namely 1. Tax free Government Securities 2. Less tax Government Securities 3. Tax free commercial securities 4. Less tax commercial securities 1. Tax Free from Government Securities: These are the securities on which the interest received is fully exempt from tax u/s 10(15). The interest on the following securities bounds and deposits are fully exempt from tax. a) 12yrs National savings Annuity Certificate. b) National Defense Gold Bonds, c) Post office cash certificate-5yrs. d) National plan certificate-10yrs. e) National plan savings certificate-12yrs. f) Post office national saving cert (7yrs or 12yrs). g) Post office savings bank account. h) Post office cumulative time deposit account (15yrs). i) Gold deposit bonds, 1999 j) 7% capital investment bonds. 2. Less Tax Government Securities: The central govt or sate govt issues these securities. The interest on these securities is taxable, but no tax is deducted at sources on such securities, therefore the interest on the securities will not be grossed up. 3. Tax Free Commercial Securities: Securities issued by non-govt organisations like local authority company etc. It is call tax free commercial securities, since tax due on its interest in payable by the company. 4. Less Tax Commercial Securities: In case of less tax commercial securities, Income Tax is Deducted At Sourse (TDS).The amount of interest is calculated at the percentage stated on the face value of such securities. The balance amount of interest shall be payable to the holder of such securities. members/partners are not entitled to set-off their share of loss from the personal incomes. 35