Tax Law (LLB-403)

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, Sector A-8, Narela, New Delhi – 110040
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
Semester: Seventh Semester
(B.A.LL.B/BB.A.LL.B-VIIth Semester )
Name of the Subject: TAX LAW
UNIT:I BASIC CONCEPT
FACULTY NAME: Ms. Divya Kataria
(Assistant Professor)

BASIC CONCEPTS OF TAXATION
Tax is the most important source of revenue of the Government.
Taxes are generally classified into direct tax and indirect tax.
A tax is a compulsory charge or fees imposed by government on individuals or corporations.
The taxes may be imposed on the income and wealth of the persons or corporations and rate of taxes
may vary

TYPES OF TAXES
If tax is levied directly on the income or wealth of a person, then it is a direct
tax e.g. income-tax, wealth tax.
 If tax is levied on the price of a good or service, then it is called an
indirect tax e.g. excise duty, custom duty, service tax and sales tax or value
added tax. In the case of indirect taxes, the person paying the tax passes on the
incidence to another person.

DIRECT TAX INDIRECT TAX
It is levied on income and activities
conducted.
It is levied on product or services.
The burden of tax cannot be shifted in
case of direct tax.
The burden of tax shifted for indirect
taxes.
It is paid directly by person concerned. It is paid by one person but he recovers
the same from another person i.e. person
who actually bear the tax ultimate
consumer.
It is paid after the income reaches in the
hands of the taxpayer
It is paid before goods/service reaches the
taxpayer.
Tax collection is difficult. Tax collection is relatively easier.
Example Income tax, wealth tax etc. Example GST, excise duty custom duty
sale tax service tax

DEFINITION OF FINANCIAL YEAR
& ASSESSMENT YEAR
oFinancial Year : The financial year (FY) is the year in which you earn an income.(1st April to 31st march.)
It is also called “previous year”.
oAssessment Year: Means the period of twelve months commencing on the on the 1st April every year and
ending on the 31st march of the following year.
It is also called tax year.

DATES FINANCIAL YEAR ASSESSMENT YEAR
1st April 2013 to 31st March
2014
2013-14 2014-15
2015
2014-15 2015-16
2016
2015-16 2016-2017
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar
Council of India)

DEFINITION OF CERTAIN TERMS
oPERSON {Section:2(31)}
1.An individual,
2.Hindu undivided family(HUF)
3.A Company,
4. A firm,
5.An association of person or body of individuals, whether incorporated or not.
6.A legal authority, and
7.Every artificial juridical person.
oASSESEE [Section 2(7)]
An ASSESEE is a person by whom any tax or any other sum of money is payable under the
income tax act and includes:

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a) every person in respect of whom any proceeding under this Act has been taken for the assessment
of his income or assessment of fringe benefits or of the income of any other person in respect of
which he is assessable or to determine the loss sustained by him or by such other person or to
determine the amount of refund due to him or to such other person.
b) every person who is deemed to be an assessee under any provision of this Act.
c) every person who is deemed to be an assessee in default under any provision of this Act.

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INCOME: As per [Section 2(24)], Income includes :
1. Profits or gains of business or profession.
2. Dividend.
3. Voluntary Contribution received by a Charitable / Religious Trust or University / Education Institution
or Hospital
4. Value of perquisite or profit in lieu of salary taxable u/s 17 and special allowance or benefit
specifically granted either to meet personal expenses or for performance of duties of an office or an
employment of profit.
5. Export incentives, like Duty Drawback, Cash Compensatory Support, Sale of licences etc.

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6. Interest, salary, bonus, commission or remuneration earned by a partner of a Firm from such Firm.
7. Capital Gains chargeable u/s 45.
8. Profits and gains from the business of banking carried on by a cooperative society with its members.
9. 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.
10. Deemed income u/s 41 or 59.
11. Sums received by an assessee from his employees towards welfare fund contributions such as Provident
Fund, Superannuation Fund etc.

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12. Amount received under Keyman Insurance Policy including bonus thereon.
13. Amount received under agreement for (a) not carrying out activity in relation
to any business, or (b) not sharing any knowhow, patent, copyright etc.
14. Benefit or perquisite received from a Company, by a Director or a person
holding substantial interest or a relative of the Director or such person.
15. Gift as defined u/s 56 (2)(vi) . Any sum of money exceeding Rs. 50,000,
received by an Individual or a HUF from any person during the previous year
without consideration

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16. Any consideration received for issue of shares as exceeds the fair market value of
the shares referred to in Section 56(2)(vii)(b).
17. Any sum of money referred to in clause (ix) of Sub-Section (2) of section 56.

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Income Tax- Application of Income V/s Diversion of
Income.
1. Application of Income means spending of Income after it is being earned by the assessee.
Such amount shall not be excluded from total income of the assessee as it is merely application
of earned income. In other words, applied income shall be taxable in the hands of the assessee.
Example of Application of Income: – Mr. A is liable to pay Rs. 2,000/- per month to Ms. B (his
ex-wife) as an alimony sum. Mr. A being an employee of Mr. C, instructs him to pay Rs.2,000/-
per month out of his salary and disburse the remaining salary to him. Whether this amount of
Rs.2,000/- per month be included in the Total Income of Mr. A or is it a case of diversion of
income of Mr. A and not taxable in his hands?
.

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This is a case of Application of Income by Mr.A and not diversion of Income and hence it will
be included in the Total Income of Mr. A. This is because this amount of Rs. 2,000/- per month
is an obligation of Mr. A to pay to Ms. B out of his income and not an income in which Ms. B
had over riding entitlement from Mr. C before being earned by Mr. A. In other words, this is an
Income of Mr. A, which is applied by him to fulfill an obligation and hence included in his Total
Income and a mere arrangement to make Mr. C make such payments directly to Ms. B won’t
make it a case of Diversion of Income
2. Diversion of Income is the process of diverting income before it is earned by the assessee.
Such amount shall be excluded from the Total Income of the assessee as the income is diverted
to someone else before being earned by the assessee. In case of diversion of Income there is an
overriding title of any other person on such income. So the income before being earned by the
assessee reaches such person and hence not chargeable to tax in hands of the assessee.

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Example of Diversion of Income: – M/s ABC is a partnership firm in which A and his two sons B &
C are partners. The partnership deed provides that after the death of Mr. A, B & C shall continue the
business of the firm subject to a condition that 20 % of profit of the firm shall be given to Mrs. D
(Wife of Mr. A/ Mother of B & C). After the death of Mr. A, whether this 20% amount of profit be
included in the Total Income of Firm M/s ABC or is a case of diversion of income of M/s ABC and not
taxable in its hands?
This is a case if Diversion of Income and the said 20% amount shall not be included in the Total
Income of M/s ABC (i.e.) it is deductible from its Total Income. This is because the clause mentioned
in partnership deed has given an overriding title of the 20% profit to Mrs. D and such income is a
precondition for the firm to continue its business. In other words, this 20% profit reaches Mrs. D
before it becomes income of the firm and hence it is a case of diversion of Income.

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Difference Between Capital Receipts and
Revenue Receipts
CAPITAL RECEIPTS REVENUE RECEIPTS
Capital receipts refer to amounts received by a
business which lead to increase in the total
capital. They increase liabilities or reduce
assets. These are funds generated from non-
operating activities of a business hence are not
shown inside the income statement.
Revenue receipts are amounts received by a
business as a result of its core activities. These
are funds generated from a firm’s operating
activities hence are not shown inside the
balance sheet.
They are shown inside a balance sheet. They are shown on the credit side of Trading
and Profit & Loss Account.

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They are non-recurring in nature which means
that they don’t occur regularly.
They are recurring in nature and can be seen quite
often.
They are not available for distribution of profits. They are available for distribution of profits.
Capital receipts are not obtained by the normal
course of business operations.
Revenue receipts are obtained by the normal
course of business operations.
Examples – Issue of shares or debentures, Sale of
fixed assets, Loans received, Additional capital
introduced by the proprietor(s), etc.
Examples – Sales (inventory), Sales (services
rendered), Discount received from creditors or
suppliers, Sale of scrap, Interest earned,
Dividends received, Rent received, etc.

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Meaning of Assessment
Every taxpayer has to furnish the details of his income to the Income-tax Department. These details
are to be furnished by filing up his return of income. Once the return of income is filed up by the
taxpayer, the next step is the processing of the return of income by the Income Tax Department. The
Income Tax Department examines the return of income for its correctness. The process of examining
the return of income by the Income-Tax department is called as “Assessment”. Assessment also
includes re-assessment and best judgment assessment under section 144.

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Various Sections of Assessment under
Income Tax Act
 140 (A) - Self Assessment
143 (1)- Summary Assessment
143 (3) - Regular Assessment---Limited Scrutiny, Complete Scrutiny
 144 – Best Judgement
147 – Re- Assessment
153 (A)/(C) Block Assessment

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140 (A) Self Assessment
oIn this Kind of assessment the Income Tax Department had given the Opportunity to the assessee to
disclose his income truthfully
oThe department assumes the income declared by the assesse to be true but also keeps an eye on the
transactions that the assesse is making
oSince the assesse himself computes his income and tax liability therefore it is called self assessment

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Summary Assessment U/s 143(1)
oIn this type of assessment, the information submitted by the assessee in his return of income is cross-
checked against the information that the income tax department has access to
oIt is a type of assessment carried out without any human intervention
oIf there arises tax liability/Refund on summary assessment an intimation U/s 143(1) will be sent to
assessee through e-mail. These intimation should be treated as Demand Notice U/s 156(1) or refund order.
No separate demand notice will be issued

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oThe acknowledgement of return shall be deemed to be the intimation in a case where no sum is
payable by, or refundable to, the assessee and where no adjustment is required
oTime limit- Within 6 months from the end of the financial year in which return of income was filed

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143 (3) Regular Assessment - Scrutiny
Return has been Filed
Yes – Filed Not Filed
Issue of Notice U/s
142(1)(i)
Issue of Notice of U/s 143(2)
Issue of Notice U/s
143(2)

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Time limit for issue of notice U/s 143(2)
Notice should be Served on the Asseesssee within SIX months from the end of the Financial year in which
Return U/s 139(1) Or U/s 142(1) has been filed
Mandatory issue of Notice U/s 143(2)
Shri Rishav Prakash Jain, New ... vs Ito, New Delhi on 18 February, 2019 Income Tax Appellate
Tribunal - Delhi
The ld. counsel for the assessee, referring to various decisions including the decision of the Hon'ble Supreme
Court in the case of NTPC Ltd. vs. CIT reported in 229 ITR 383 (SC), submitted that the above ground is
purely a legal ground and goes to the root of the matter and does not

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require fresh facts to be investigated matter and does not require fresh facts to be investigated and
therefore, should be admitted. Referring to the information received under RTI Act, the ld. counsel for
the assessee submitted that in the instant case, no notice u/s 143(2) of the Act was issued subsequent
to filing of the return by the assessee in response to notice u/s 148 of the IT Act. Only notice u/s
142(1) of the Act was issued and served on the assessee. Therefore, in view of the various decisions
including the decision of jurisdictional High Court in the following cases the assessment order has to be
quashed:-

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Shri Rishav Prakash Jain, New ... vs Ito, New Delhi on 18 February, 2019
Since, in the instant case, admittedly, no notice u/s 143(2) of the Act was issued and served on the
assessee after the return in response to notice u/s 148 of the Act was filed by stating that the original
return filed may be treated as return filed in response to notice u/s 148, therefore, the reassessment order
passed by the Assessing Officer is not sustainable in law. We, therefore, accept the additional ground
raised by the ITA No.2061/Del/2012 assessee and quash the order passed u/s 143(3)/147 for non-
issuance of notice u/s 143(2) of the Act which is mandatorily
required. The additional ground raised by the assessee is accordingly allowed. Since the assessee
succeeds on this legal ground, the other grounds being academic in nature are not being adjudicated.

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Section 292BB – Effect of Assessment
Where an Assessee has appeared in any Proceeding or co-operated in any inquiry relating to an
assessment or re-assessment, it shall be deemed that any notice under any provision of this Act, which is
required to be served upon him, has been duly served upon him in time in accordance with the provisions
of this Act and such Assessee shall be Precluded from taking any objection in any proceeding or inquiry
under this Act that the notice was-
(1)Not served upon him; or
(2)Not served upon in time; or
(3) Served upon him in an improper manner;
Provided that nothing contained in this section shall apply where the Assessee has raised such objection
before the
Completion of such assessment or reassessment. s

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Limited Scrutiny Complete ScrutinyCONVERT
During the course assessment proceedings in ‘limited Scrutiny’ cases, if:
It comes to the notice of the Assessing officer that there is potential escapement of income exceeding
Rs.5 Lac/10 Lac ( for metro cities ) requiring substantial verification on any other issue (S), then, the case
may be taken up for ‘Complete Scrutiny ‘ with the approval of the Pr. CIT/CIT Concerned.
The AO has to take approval of Pr. CIT/CIT in writing after being satisfied about merits of the issue [ S
] necessitating ‘complete Scrutiny ‘ in that particular case.
‘Metro cities’ would mean Delhi, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad and Ahmedabad

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The case selected for Scrutiny Assessment can be of by two types - i.e. (1) Manual scrutiny cases and
(2) Compulsory Scrutiny cases.
(1) Manual scrutiny cases Following can be reason for manual scrutiny case:
 Not filing Income Tax Return
 Declaring lesser income compared to earlier year or Declaring more loss compared to earlier year.
 Mismatch in TDS credit between claim and 26AS.
 Non declaration of exempt income.
 Claiming large refunds in return of Income.
 Taking double benefit due to change in Job.
 High Value Transaction (as reflected in AIR).

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(2) Compulsory Scrutiny cases The following cases are compulsorily selected for scrutiny:
Cases involving addition in the earlier assessment year in excess of Rs. 10 lakhs on a substantial and
recurring question of law or fact which is confirmed in appeal or is pending before an appellate authority
may come under compulsory scrutiny.
Cases involving addition in an earlier year on the issue of transfer pricing in excess of Rs. 10 crore or
more on a substantial and recurring question of law or fact which is confirmed in appeal or is pending
before an appellate authority.
Computer Added Scrutiny Selection (CASS): cases are also being selected under CASS on the basis of
broad based selection filters. List of such cases shall be separately intimated in due course by DGIT

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(system) to the jurisdictional concerned. The cases for this purpose are mostly selected through the process
of computer assisted scrutiny selection (CASS) and there is no element of subjectivity in this process.
Cases in respect of which specific and verifiable information pointing out tax evasion is given by
Government Department/ Authorities. The Assessing Officer shall record reasons and take prior approval
from Pr. CCIT/CCIT/Pr. DGIT/DGIT concern before selecting such a case for scrutiny.
Cases where order denying the approval u/s 10 (23C) of the Act or withdrawing the approval already
granted has been passed by the competent authority, yet the assessee found claiming tax exemption under
the aforesaid provision of the Act.

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Best Judgment Assessment U/s. 144
 AO Can make Best Judgment Assessment in the following cases: -
1. Assessee has not filed return of income u/s. 139 (1) or has not made return or a revised
return u/s. 139(4) or 139 (5).
2. Assessee fails to comply with all the terms of a notice issued u/s. 142(1) or fails to comply
with direction issued u/s. 142(2A).
3. Assessee fails to comply with all the terms of notice issued u/s. 143(2).
 AO will determine the total income or loss to the best of his judgement and determine the sum payable by
the Assessee after taking into Account all relevant material which AO has gathered.

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 AO shall give Assessee an opportunity of being heard before making the best judgment assessment.
 Opportunity of being heard shall be given by AO by serving a notice calling upon the Assessee on
the specified date and time to explain the cause.
 Opportunity of being heard is not necessary if notice u/s. 142(1) is issued prior to best judgment
assessment.

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Time limit for completion of assessment U/s 143(3) &
144
Section 153(1) prescribes time limit for completion of assessment U/s 143(3), 144, 148
• Up to AY 2017-18 , Assessment shall be completed before expiry of 21 months from the
end of financial year in which return was filed
• For AY 2018-19 it will be Eighteen Months from end of Assessment year (30-Sept-
2020)
• For AY 2018-19 it will be Eighteen Months from end of Assessment year (30-Sept-
2020)

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There are two types of Best Judgment Assessment
a. Compulsory best judgment assessment: It is done when assessing officer finds that there is an act
amounting to non co-operation by the assessee or where assessee is found to be a defaulter in supplying
information to the department.
b. Discretionary best judgment assessment: It is done in cases where assessing officer is dissatisfied with
the authenticity of the accounts given by the assessee or where no regular method of accounting has been
followed by the assessee. The process of Best Judgment Assessment is applied in conformity with the
Principle of Natural justice. As per the provision of Section 144 of the Income Tax Act, 1961, the Assessing
officer is supposed to make an assessment of the income of an assessee to the best of his Judgment in the
following cases:

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•If the person fails to make return u/s as required 139(1) and has not made a return or a revised return
under sub-section (4) or (5) of that section; or
•If any person fails to comply with all the terms of a notice under section 142(1) or fails to comply with
the direction requiring him to get his account audited in terms of section 142(2A); or
•If any person after having filed a return fails to comply with all the terms of a notice under section
143(2) requiring his presence or production of evidence and documents; or
•If the Assessing officer is not satisfied about the correctness or the completeness of the accounts of
assessee or if no method of accounting has been regularly employed by the assessee.

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The best judgment assessment can only be made after giving the assessee an opportunity of being heard.
Such opportunity shall be given by issue of a notice to the assessee to show cause why the assessment
should not be completed to the best of his Judgment and that opportunity for hearing will not be necessary
where notice u/s142(1) already been issued.

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Re-Assessment (or) Income escaping assessment
Re-assessment is carried out if the Assessing officer has reason to believe that any income chargeable
to tax has escaped assessment for any assessment year.
Scope of assessment u/s 147
The objective of carrying out assessment u/s 147 is to bring under the tax net, any income which has
escaped assessment in original assessment.
Here, Original assessment means an assessment u/s 143(1) or 143(3) or 144 and 147 (as the case may
be).

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Procedure of assessment u/s 147
• For making assessment u/s 147, the assessing officer has to issue notice u/s 148 to the taxpayer and has
to give him an opportunity of being heard.
•If the Assessing officer has reason to believe that any income chargeable to tax has escaped assessment
for any assessment year, then he may, subject to provisions of section 148 to 153, access to re-assess
such income and also other income chargeable to tax which has escaped assessment and which comes to
his notice subsequently in the course of proceeding under this section. He is also empowered to re-
compute the loss or the depreciation allowance or any other allowance, as the case may be, for the
assessment year concerned.

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• Items which are the subject matters of any appeal, reference or revision can not be covered by the
Assessing officer under section 147.
Time limit for completion of assessment under section 147
As per section 153 (2), assessment u/s 147 shall be made within 9 month from the end of the financial
year in which notice u/s 148 was served.
Time limit for issuance of notice under section 148
•Notice u/s 148 can be issued within a period of 4 years from the end of the relevant assessment. If the
escaped income is likely to amount Rs. 1,00,000 or more and certain other condition satisfied, then
notice can be issued up to 6 years from the end of the relevant assessment year.

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•In case of escaped income relates to any assets (including financial interest in any entity) located
outside India, notice can be issue up to 16 years from the end of the relevant assessment year.
Notice u/s 148 can be issued by AO only after getting prior approval from the prescribed authority
mentioned in section 151.

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Assessment in case of Search and Seizure :-
(Sec 153A to 153C)
Also known as ‘Block Assessment’
Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and
section 153, in the case of a person where a search is initiated under section 132 or books of account, other
documents or any assets are requisitioned under section 132A after the 31st day of May, 2003,
The Assessing Officer shall –
(a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice,
the return of income in respect of each assessment year falling within six assessment years referred to in
clause (b) in the prescribed form and verified in the prescribed manner

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and setting forth such other particulars as may be prescribed and the provisions of this Act
shall, so far as may be, apply accordingly as if such return were a return required to be
furnished under section 139;
(b) Assess or reassess the total income of six assessment years immediately preceding the
assessment year relevant to the previous year in which such search is conducted or requisition
is made.
Note: Sec. 153A contemplates issue of notice for 6 years preceding the search but not for the
year of search or requisition and thus no return is required to be filed for the year of search u/s
153A. Only regular return u/s139 is to be filed.

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Time limit for completion of assessment u/s 153A/153C: [153B]
In case of person searched: 153A
 21 months from the end of the financial year in which last of the
authorization for search u/s 132 or requisition u/s 132A was executed.
Similar time limits shall apply in respect of the year of search also.
Similar time limits shall apply in respect of the year of search also.
In case of any other person: 153C
As provided in above clause (a) or clause (b) or 9 months from the end
of the Financial Year in which Books of accounts or documents or
assets seized/requisitioned are handed over to the AO having
jurisdiction over such person; whichever is later.

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Taxation of Agricultural Income
Tax on Agriculture : Constitutional Provisions
Article 246 along with Clause 82 of the Union List in Seventh Schedule empowers the Parliament to
legislate all taxes on income “other than Agricultural Income”.
Article 246(3) along with entry 46 in List II (State List) of the Seventh Schedule vests powers on the
States to levy tax on Agricultural Income.

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Definition U/S 2(IA)
Agricultural Income includes the following
(a).Any Rent or Revenue derived from Agricultural Land situated in India and is used for agricultural
purposes
(b) Any income derived from such land by
i. Agriculture or
ii. The performance by cultivator or receiver of rent in kind, of any process ordinarily employed to
render the produce fit to the market.
iii. The sale by the cultivator of the produce raised in respect of which the process has been performed

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c. Any income derived from any building owned and occupied by the receiver of the rent or revenue
of such land provided
i. The building is on the immediate vicinity of the land.
ii. The land is either assessed to land revenue or local tax

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Examples of Agricultural Income
The following are some of the examples of agricultural income:
•Income derived from sale of replanted trees.
•Income from sale of seeds.
•Rent received for agricultural land.
•Income from growing flowers and creepers.
•Profits received from a partner from a firm engaged in agricultural produce or activities.
•Interest on capital that a partner from a firm, engaged in agricultural operations, receives.

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Examples of Non-Agricultural Income
The following are some of the examples of non-agricultural income:
•Income from poultry farming, butter and cheese making.
•Income from land used for brick-making
• Income from stone quarries
•Income from fisheries
•Income from dairy farming.
•Income from the sale of silk cocoons produced by silk worms fed by mulberry leaves
•Royalty income from mines.
•Income from forest trees of spontaneous growth
•Income from supply of water for irrigation purposes
•Income from land used for storing agricultural produce
•Remuneration received by the manager of an agricultural farm

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Essentials for Agriculture income
i. That the income has relation to land
ii. That such land must be situated in India
iii. That the land must be used for agricultural purpose

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Types Of Agricultural Income
1. Any income received as rent or revenue from agricultural land
Rent can very simply be defined as a payment in cash or in-kind which the owner of the land
receives from another person in consideration of a grant of a right to use land. When the owner of land is not
performing agricultural operations himself but gives his land on contract basis, any amount received from the
actual cultivator by the owner of the land shall be agricultural income. Such rent may he in cash or in-kind,
i.e., a share in the produce grown by the cultivator.
The Privy Council decided in a case [C.i.T. vs. Karnakshya Narian Singh (1948) I.T.R. 395] that interest
on arrears of rent payable in respect of agricultural land cannot be agricultural income, because it is neither
‘rent’ nor ‘revenue derived from land’.

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The word revenue is used in a very broad sense of return, yield or income and not only in a narrow sense
of land revenue [C. I. T. v. Kamakshya Narain Singh]. This term embraces income other than rent and
that is why mutation fees received from the tenants on their getting occupancy holdings and fees paid by
the tenants at the time of renewal of their lease, are revenue derived from land and as such exempted
from tax.
In the above mentioned case the Privy Council has clearly laid down that revenue is derived from land
only if the land is immediate and effective source of the revenue and not the secondary and indirect
source. So any income or revenue which is indirectly derived from land cannot be presumed to he the
agricultural income. This point is further clarified by the Supreme Court in a case Bacha Guzdar v.
C.I.T. that dividend paid by a company to its shareholders out of its agricultural income is not an income
derived from land since the immediate and effective source of dividend income to the shareholder is the
shareholding in the company and not the land.

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2. Income derived from Agriculture
Income derived from land situated in India by applying agricultural operations shall be
agricultural income. If all the basic operations like preparation of land for sowing, planting, watering,
harvesting etc. are applied, any income resulting from such operations shall be agricultural income. On the
other hand, if grass, trees etc. have grown spontaneously or without the aid of human skill, effort, labour
etc., any income resulting from the sale of such grass, trees or lease rent of such land shall not he
agricultural income.
Agricultural income also includes income from orchards or from horticulture.

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If a particular income is derived from land but without applying agricultural operations, such an income
although derived from land cannot become agricultural income and so any income having remote connection
with land cannot he called as agricultural income. Income from poultry and dairy farming, fisheries, mining,
stone quarries, breeding and rearing of livestock, all these incomes although remotely linked with land but
cannot he called agricultural incomes because of the absence of important characteristics of agricultural
income, i.e., cultivation of land.
Income which is in the nature of by-products of agricultural land such as selling of milk, the pasturing of cattle
etc. can safely he included in agricultural income provided the endeavour is agricultural and it is reasonably
connected with land used for agricultural purposes [Beohar Singh vs. CIT. 16 I.T.R. 433, 443].

Council of India)
3. Any income accruing to the person by the performance of any process to render the produce
marketable
If, in the ordinary course, a process is to he employed by the cultivator himself or
the landlord who receives the produce as rent-in-kind, any income derived from such a process shall
he agricultural income. Such a process must be employed to render the produce fit for marketing. The
process may he manual or mechanical. It should be noted that the produce should not change its
original character in spite of the processing unless the produce cannot be sold in that form or
condition.

Council of India)
Following points are to he noted in this connection :
i. The process must he one which is ordinarily employed by the cultivator.
ii. The process is employed to render the produce fit to be taken to the market.
iii. The produce must retain its original character in spite of process unless the produce is
having no market if offered for sale in its original condition.

Council of India)
4. Any income received by the person by the sale of produce raised or received as rent-in-kind
Any income derived by any person by the sale of agricultural produce raised by him or received as rent-in-
kind shall also be agricultural income. Sometimes such person puts some extra effort by selling the produce
through his own shop, any extra profit raised due to shopping activities shall not he agricultural income.

Council of India)
5. Income from buildings used for agriculture
Any income derived from a building used for agricultural operations shall be agricultural
income provided
1. The building from where the income is received, is in the immediate vicinity of the land
and is occupied by the owner, or by the cultivator or by the receiver of rent-in-kind.
2. Building is used as a dwelling house or a store house or other out-building.
3. The cultivator or the receiver of the rent-in-kind, by reason of his connection with the
land, is in need of the house as a dwelling house or as a house to store the goods required
for agricultural operation.

Council of India)
4. The land if assessed to land revenue in India or is subject to a local rate assessed and collected by
officers of the Govt. and in case the land is not assessed to land revenue or to local rate, it should not be
situated within the urban areas.

UNIT-II Residential Status, Chargeability

RESIDENTIAL STATUS
Residential status of an assessee is important in determining the scope of
income on which income tax has to be paid in India.
The different types of Residential Status are:
Resident (R)
▪ An individual or HUF assessee who is resident in India may be further
classified into
▪ resident and ordinarily resident (ROR) and
▪ resident but not ordinarily resident (NOR).
Non Resident (NR)
To be determined in each previous year (1 April to 31 March next)

Importance of Residential Status:
Resident – World income is taxable in India
Non Resident – Only income arising or accruing in India is taxable in India
Resident but Not Ordinarily Resident – Income accruing or arising outside India may also be
taxable in India
Section:6 “Resident”
An individual is said to be resident in India in any previous year, if he satisfies any of the 2 basic conditions –
a. Physical presence in India for 182 days or more in a previous year
OR
b. Physical presence in India for 60* days or more in the relevant previous year and has been in India for 365
days or more during the 4 previous year immediately preceding the relevant previous year. *
Note: The day on which he enters India as well as the day on which he leaves India shall be taken into
account as the stay of the individual in India.

the above is subject to the following:
i. Citizen leaves for employment or as member of crew of an Indian ship – instead of 60 days, it
is 182 days
ii. Citizen or Person of Indian Origin already abroad comes on a visit - instead of 60 days, it is
182 days
Individual - Resident but Not Ordinarily Resident
Satisfies any one Basic condition and two Additional conditions –
a. Such person has been a non resident in India in at least 2 out of 10 previous years preceding the relevant
previous year;
or
b. The person has been in India for a period of 730 days during 7 years preceding the relevant previous year

Hindu Undivided Family
Resident unless Control and Management of affairs wholly outside India
R-NOR if Manager (Karta) is a non resident in India in 2 out of 10 preceding previous years
or is in India for 730 days in 7 preceding previous years
 Company
Resident in India
▪ If an Indian Company – Section 2(26)
▪ If Control and Management of its affairs is situated wholly in India
Firm, Association of Persons and Any other person
Resident unless control and management of its affairs is situated wholly outside India
If Control & Management of its affairs is:
Wholly or Partly inside India: Resident
Wholly outside India: Non-Resident

SCOPE OF TOTAL INCOME
The scope of Total Income depends on the Residential Status of the tax payer. The incidence of tax under
different circumstances is given in the following table:
ROR RNOR NR
Income received in India Yes Yes Yes
Income deemed to be received in India Yes Yes Yes
Income accruing or arising in India Yes Yes Yes
Income deemed to accrue or arise in India Yes Yes Yes
Income received/ accrued outside India
from a business in India Yes Yes No
Income received/ accrued
outside India from a business controlled
outside India Yes No No

INCOME THAT IS EXEMPT FROM TAX
In the following cases Income is exempt from Income Tax:-
oAgriculture Income [Sec. 10(1)]
oPayments received from family income by a member of HUF [Sec. 10(2)]
oShare of profit from a firm [Sec. 10(2A)]
o Interest received by a non resident from prescribed securities [Sec. 10(4)]
oInterest received by a person who is resident outside India on amounts credited in the non-resident
(External) account [Sec. 10(4)]

oLeave travel concession provided by as employer to his Indian citizen employee [Sec. 10(5)]
oRemuneration received by foreign diplomats of all categories [Sec. 10(6)]
oSalary received by a foreign citizen as an employee of a foreign enterprise provided his stay in India does
not exceed 90 days [Sec. 10(6)(vi)]
oSalary received by a non-resident foreign citizen as a member of ship’s crew provided his total stay in
India does not exceed 90 days [Sec. 10(6)(vii)]
oRemuneration received by an employee, being a foreign national, of a foreign government deputed in
India for training in a Government establishment or public sector undertaking [Sec. 10(6)(xi)]

oTax paid on behalf of foreign companies [Sec. 10(6A)]
oTax paid by Government or an Indian concern in case of a non-resident / foreign company [Sec. 10(6B)]
o Income arising to notified foreign companies from services provided in or outside India in project
connected with the security of India [Sec. 10(6C)]
oCommuted value of pension and any payment received by way of commutation of pension by as individual
out of annuity plan of LIC or any other insurer from a fund set up by that corporation or insurer [Sec.
10(10A)]
oLeave salary [Sec. 10(10AA)]
oRetrenchment compensation [Sec. 10(10B)]

oCompensation received by victims of Bhopal gas leak disaster [Sec. 10(10BB)]
oCompensation from the Central Government or a state Government or a local authority received by an
individual or his legal heir on account of any disaster [Sec. 10(10BC)]
oCompensation received from a public sector company at the time of voluntary retirement or separation
[Sec. 10(10C)]
oTax on perquisite paid by employer [Sec. 10(10CC)]
oAny sum (including bonus) on life insurance policy (not being a key-man insurance policy) [Sec.
10(10D)]
oAny amount from provident fund paid to retiring employee [Sec. 10(11)]

oSpecial allowance granted to an employee [Sec. 10(14)]
oInterest from certain exempted securities [Sec. 10(15)]
oAmount from an approved superannuation fund to legal heirs of the employee [Sec. 10(13)]
oHouse rent allowance subject to certain limits [Sec. 10(13A)]
oPayment made by an Indian company, engaged in the business of operation of an aircraft, to acquire an
aircraft on lease from a foreign Government or foreign enterprise [Sec. 10(15A)]
oScholarship granted to meet the cost of education [Sec. 10(16)]
oDaily allowance of a member of parliament or state Legislature (entire amount is exempt), any other
allowance subject to certain conditions [Sec. 10(17)]

oRewards given by the central or state Government for literary, scientific or artistic work or attainment or
for service for alleviating or for service for alleviating the distress of the poor, the weak and the ailing, or
for proficiency in sports and games or gallantry awards approved by the Government [Sec. 10(17A)]
oPension and family pension of gallery award winners [Sec. 10(18)]
oFamily pension received by family members of armed forces [Sec. 10(19)]
oNational property income of any one place occupied by a former ruler [Sec. 10(19A)]
oIncome from local authorities [Sec. 10(20)]

oAny income of housing boards constituted in India for planning, development or improvement of cities,
town or villages [Sec. 10(20A)]
oAny income of an approved scientific research association [Sec. 10(21)]
oIncome of specified non- agencies [Sec. 10(22B)]
o Any income (other than interest on securities income from property income received for rendering any
specific services and income by way of interest or dividends) of approved professional bodies [Sec.
10(23A)]
oAny income received by any person on behalf of any Regimental Fund or non public fund established by
the armed forces of the union for the welfare of the past and present members of the such forces or their
dependents [Sec. 10(23AA)]

oIncome of funds established for the welfare of employees [Sec. 10(23AAA)]
oAny income of the pension fund set by LIC or any other insurer approved by the controller of insurance or
Insurance Regulatory and Development Authority [Sec. 10(23AAB)]
oAny income (other than business income) of a trust or a society approved by Khadi and village industries
commission [Sec. 10(23B)]
oIncome of an authority whether known as Khadi and village industries board or by any other name for the
development of Khadi and village industries [Sec. 10(23BB)]

oIncome of the European Economic Community derived in India by way of, interest, dividends or
capital gains in certain cases under the European Community International Institutional Partners
Scheme, 1993 [Section 10(23BBB)]
oAny income arising to anybody or authority established, constituted or appointed under any enactment
for the administration of public religious or charitable trusts or endowments or societies for religious or
charitable purposes [Section 10(23BBA)]
oIncome of SAARC Fund for Regional Projects, set up by Colombo Declaration [Section 10(23BBC)]
oAny income of Secretariat of Asian Organisation of Supreme Audit Institutions [Section 10(23BBD)]

oIncome of Insurance Regulatory Authority [Section 10 (23 BBE)]
oIncome of North Eastern Development Financial Corporation to the extent of 60 % for assessment year
2007-08 [Section 10(23 BBF)]
oIncome of the Central Electricity Regulatory Commission (applicable from the assessment year 200809)
[Section 10(23BBG)]
oAny income received by any person on behalf of specified national funds and approved public charitable
institution, educational institute and hospital [Section 10(23C)]
oIncome of Mutual Fund set up by — a public sector bank or a public financial institution [Section
10(23D)]
oIncome of investor protection fund [Section 10(23EA)]

oIncome of Credit Guarantee Funds Trust for Small Industries [Section 10(23EB)]
oIncome of Investor Protection Fund by way of contributions from commodity exchange and the members
thereof (applicable from the assessment year 2008-09) [Section 10 (23EC)]
oAny income by way of dividend, or long term capital gains of venture capital funds and venture capital or
undertaking [Section 10(23FA)]
o Income of venture capital fund/venture capital company [Section 10(23FB)]
oIncome by way of interest on securities, property income and income from other sources of a registered trade
union or an association of registered trade unions [Section 10(24)]

oAny income received by a person on behalf of statutory provident fund, recognized provident fund, approved
superannuation fund, approved gratuity fund and approved coal-mines provident fund [Section 10(25)]
oIncome of Employee’s State Insurance Fund [Section 10 (25A)]
oIncome of a member of Scheduled Tribe, living in Nagaland, Manipur, Tripura, Arunachal Pradesh and
Mizoram from any source arising by reason of his employment therein and income by way of dividend and
interest on securities [Section 10(26)]
oIncome of Sikkim individual which accrues or arise to him/her from any source in the state of Sikkim or
income from dividend/interest on securities from anywhere in the world (exemption available to a Sikkim
woman who, on or after April 1, 2008, marries a Non- Sikkim individual) [Section 10 (26AAA)]

oAny income of a statutory Central or State corporation or of a body/institution, financed by the
Government formed for promoting the interest of Scheduled Castes/Tribes [Section 10(26B)]
oIncome of National Minorities Development and Finance Corporation [Section 10 (26BB)]
oIncome of ex-serviceman corporations [Section 10 (26BBB)]
oIncome of co-operative society formed for promoting interests of members of Scheduled
Castes/Scheduled Tribes [Section 10(27)]
o Income of certain Commodity Boards/Authorities [Section 10(29A)]

oIncome by way of subsidy from Tea Board for replanting or replacement of tea bushes or for the purpose of
rejuvenation or consolidation of areas used for cultivation of tea in India [Section 10(30)]
oSubsidy received by planters of Rubber, Coffee etc. [Section 10(31)]
oIncome of a minor child up to Rs. 1,500 in respect of each minor child whose income is includible under
section 64(1A) [Section 10(32)]
oCapital gains on transfer of US-64 units [Section 10(33)] Dividend on or after April, 2003 from domestic
companies [Section 10(34)]
oIncome on units of Mutual Funds on or after April 1, 2003 [Section 10(35)]
oCapital gains on transfer of listed equity shares [Section 10(36)]

oCapital gain on compensation received on compulsory acquisition of urban agriculture land [Section
10(37)]
oLong term capital gain on transfer of securities not chargeable to tax in cases covered by transaction tax
[Section 10(38)]
oIncome of an international sporting event held in India [Section 10(39)]
oGrant received by subsidiary company from holding company [Section 10 (40)]
oCapital gain in above case [Section 10 (41)]
oIncome of notified non-profit body/authority [Section 10(42)]

oAny amount received by an individual as a loan (either in lump sum or installment in transaction of reverse
mortgage) [Section 10(43)]
oAny income received by any person, or on behalf of, the New Pension System Trust (established on
February 27, 2008) [Section 10(44)]
oAllowance or Perquisite to the chairman of UPSC [Section 10(45)]
oIncome arising to a body, authority or Board or trust or Commission [Section 10(46)]
oIncome of an infrastructure debt fund [Section 10(47)]
oComplete tax holiday for industrial units situated in free trade zones [Section 10 A]

oSpecial provision in respect of newly established 100% export oriented undertakings [Section 10B]
oSpecial provision in respect of certain industrial undertakings in North-Eastern region [Section 10C]

Heads of Income ( Sec 14, 14 A )
A person receives income i.e. taxable income from different sources. All these different sources of income
are classified & Assessed under certain group or heads. These are know as “ Heads of Income”.
Income From Five Heads are as Follows:
1. Income from salary
2. Income from house property
3. Income from profit or gain from business or profession.
4. Income from capital gain.
5. Income from other sources

Complete Process of Computation of Taxable Income &
Tax
1) Determine the residential status of the assesse
2) Determine the incidence of tax
3) Classify income after considering specific exemption into respective head.
4) Aggregate the income.
5) Apply clubbing Provision.
6) Setoff/Carry forward losses (if any)
7) Balance shall be gross total income.
8) Allow deduction 80C to 80U chapter VI A.
9) Balance shall be total income.
10) Determine the tax payable, applying the rates applicable

11. Deduct rebate/relief of tax.
12. Add surcharge.
13. Add educational cess.
14. Balance is tax payable.
15. File return of income before the due date of filing.

Income from Salary
Meaning
Salaries U/ S 17 ( 1 ) include the following:
1.Wages
2.Pension
3.Gratuity
4.Any Fees, Commission, Perquisite, Profit in Lieu of Salary
5.Any Advance Salary
6.Bonus
7.Annuity
8. Income From Provident Fund
9.Leave Encashment
10.Allowances

Basis of Charge
Income is taxable under head “Salaries”, only if there exists Employer - Employee Relationship between the
payer and the payee.
The following incomes shall be chargeable to income- tax under the head “Salaries”:-
1.Salary Due
2.Advance Salary [u/s 17(1)(v)]
3.Arrears of Salary Note:
(i)Salary is chargeable on due basis or receipt basis, whichever is earlier.
(ii)Advance salary and Arrears of salary are chargeable to tax on receipt basis only.

List of Allowances exempt from Tax
• Conveyance Allowance
•House Rent Allowances
•Entertainment Allowance
• Any Allowance granted to an employee to meet the hostel expenditure of his child
• Children Education Allowance
• Overtime Allowance

PERQUISITE
Perquisite may be defined as any Casual Emolument or Benefit attached to an office or position in Addition to
Salary or Wages. It also denotes something that benefits a man by going in to his own pocket. Perquisites may
be provided in cash or in kind. Perquisites are included in salary income only if they are received by an
employee from his employer.
The term “perquisites” is defined by section 17 (2) as including the following items:
1.The value of Rent-free Accommodation provided to the assessee by his employer
2.The value of any concession in the matter of rent respecting any accommodation provided to
the assessee by his employer

3. The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the
following cases :
i. By a company to an employee who is a director thereof ;
ii. By a company to an employee, being a person who has substantial interest in the company
;
iii. By any employer (including a company) to an employee to whom provisions of (i) and (ii)
above do not apply and whose income under the head “salaries” exclusive of the value of all benefits or
amenities not provided for by way of monetary benefits, exceeds Rs. 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. Obligation of Employee met by Employer.

5. Any sum payable by the employer, whether directly or through a fund other than a recognized
provident fund or approved superannuation fund or a deposit-linked insurance fund, 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

Mrs. X was born on July 1, 1940, She is Deputy Manager in a company in Mumbai. She is getting a monthly
salary and dearness allowance of Rs.45000 and Rs.12000 respectively. She also gets a house rent allowance of
Rs.6000/month. She is a member of recognized provident fund wherein she contributes 15% of her salary and
half dearness allowance. Her employer also contributes an equal amount.
She is living in the house of minor son in Mumbai
During the previous year 2007-08, her minor son has earned an income of Rs.30000(computed) as rent from a
house property, which had been transferred to him by Mrs.X without consideration a few years back
During the pre-year 2007-08 she sold Government of India

Capital Indexed Bonds for Rs.150000 on Sep 30, 2007, which she purchased on July 1, 2002 for
Rs.80000
Her employer gave her an interest free loan of Rs.150000 on Oct 1, 2007 to one of her sons’ wife for the
purchase of an Alto Maruthi Car. Nothing has been repaid to the company towards loan.
During the pre-year 2007-08 she paid Rs.15000 by cheque to GIC towards Medical Insurance Premium
of her dependent mother.
Compute the taxable income and tax liability of Mrs..X for the assessment year 2008-09

• Salary (45000*12) 540000
•Dearness allowance (12000*12) 144000
• House rent allowance(6000*12) 72000
(fully taxable as she is
not staying in a rented house)
• Employers contribution to recognized
PF in excess of 12% of salary [(15%-12% ) 18360
of Rs.6,12,000] 3*612,000=18,36,000/100
(45000*12+1/2 of 12000*12)-meaning of salary for RPF
540,000+72,000=612,000
• Interest free loan[8% if 150000 from Oct 1, 2007
to March 31, 2008] 8/100*150000*6/12 6000

GROSS SALARY 780360
Less: standard deduction nil
Income from salary 780360
2.Income from house property
(deemed income of transferor
if property was transferred
to minor for inadequate
consideration u/s 64) 30000
3.Long term capital gains
[150,000-(80,000*555/447)] index
cost of acquisition to be used 51387

GROSS TOTAL INCOME 861747
Less: deduction
• Under section 80C: •
1.Employee’s contribution
to Recognised provident fund
is saving. Therefore it comes under
section 80C [15% of(45000*12+1/2
of 12000*12)] 91800
• 2. Under section 80D (Medi claim insurance ) 15000
NET INCOME ROUNDED OFF 754950

Tax on 51387@ 20%
How ever tax liability
cannot exceed 10% of (150000-80000) 7000
Tax on balance 156569
TOTAL 163569
Add: surcharge nil
TOTAL 163569

Add: education cess[2% of 163569] 3271
Add: secondary and higher education cess [1 % of 163569] 1636
TOTAL TAX LIABILITY ROUNDED OFF 168480

Mr. Deepak an employee in a company , gets a basis salary of Rs 10,000 per month is employer has provided
him the following facilities:-
a. He has been provided a credit card. Annual fee of such card is Rs 8,000 which is incurred by employer.
The card is used for office as well as personal purpose
b. His employer is a corporate member of a club of which initial fees is Rs. 1,00,000 and annual
expenditure of Rs. 30,000 paid by the employer. The membership is enjoyed by Mr. Deepak
c. He has been given a gift voucher of Rs. 13,500
d. He has been provided the of laptop used for office as well as personal purpose. The cost of the asset
Rs.1,20000.

e. In his office chamber , AC machine has been installed for 30,000
f. Calculate gross salary of Mr. Deepak for the assessment year 2008-09

Particulars employee Amount
Basic salary 1,20,000
Credit card(perquisites
becomes fringe benefit if it
falls under B category of
perquisites-therefore taxable
in the hands of company
employer. If he is not a
company employer, it is
taxable I the hands of
employee.)
exempted Nil

Club membership fee(taxable
to company employer)
exempted Nil
Gift voucher is equal to cash
gift (taxable to company
employer)
exempted Nil
Laptop facilities A.C machine
facility
Exempted
Used for office purpose
Nil
Gross Taxable salary 1,20,000

DEDUCTIONS UNDER CHAPTER
VI-A
Deductions to be made [Section 80A] :
The total income of an assessee is to be computed after making deductions permissible u/s 80C to
80U. However, the aggregate amount of deductions cannot exceed the Gross Total Income.
No deduction from certain (following) Incomes :
Long term Capital Gains referred u/s 112, and Short Term Capital gains referred u/s 111A.
Winnings from lotteries, races, etc. as referred to in section 115BB.
Incomes referred to in section 115A (1) (a), 115AC, 115ACA, 115AD, 115BBA and 115D.
3/1/2015 159

Deductions for payment of Life
Insurance Premium (Section:80C)
Deduction under this section is allowed as follows –
Deduction is available only in respect of ‘specified sums’ actually paid or deposited during the previous
year (sum not actually paid and outstanding is not allowed)
Specified sums must have been paid/deposited by an Individual or HUF; and
The total amount of deduction under this section is subject to a maximum limit of Rs.1,50,000.

Contribution to Certain Pension Funds
(Section:80CCC)
oAmount paid or deposited by individual in the previous year :
 out of his income chargeable to tax
 to effect or keep in force a contract for any annuity plan of LIC or any other insurer
 for receiving pension from the fund referred to in section 10(23AAB).
oQuantum of Deduction: Deduction shall be allowed to the extent of lower of the following –
 Amount so paid or deposited; or › Rs. 1,50,000

Contribution to Pension Scheme of Central
Government or any other Employer (Section:80
CCD)
oDeduction in respect of: Deduction is available in respect of both of the following –
› Sum deposited by assessee in his account in notified pension scheme; and
› Contribution made by Central Govt. or any other employer to assesse’s A/c.
o Quantum of Deduction: Deduction shall be allowed to the extent of aggregate of the following –
›Sum paid/deposited by assessee to the credit of his a/c or 10% of salary, whichever is lower
›Sum contributed by the employer in assesse’s A/c or 10% of salary, whichever is lower

Aggregate Limit u/s 80C, 80CCC &
80CCD
The aggregate amount of deductions under section 80C, section 80CCC and section 80CCD shall not, in any
case, exceed Rs.1,50,000.
Deduction in respect of Health
Insurance Premium (Section:80D)
Deduction is available in respect of the amount paid to effect or to keep in force health insurance under a
scheme –
› made by General Insurance Corporation of India (GIC) and approved by Central Government; or
› made by any other insurer and approved by Insurance Regulatory and Development Authority.

Deduction shall be to the extent of lower of –
› Health insurance premia paid in respect of health of any member of that HUF; or
› Rs. 25,000 (Rs. 30,000 in case the insured is a senior citizen).
Maintenance of a Dependant Being Person with Disability (Section:80DD)
Deduction is available in respect of –
› expenditure incurred for medical / treatment / nursing / training/ rehabilitation, or
› amount paid under scheme LIC / UTI other insurer approved by CBDT for maintenance, of a
“dependant”, being a person with disability.
Deduction shall be allowed to the extent of –
› Rs. 75,000 (Rs. 1,25,000 in case of dependant suffering with severe disability), irrespective
of expenditure incurred or sum paid

Deduction in respect of Medical Treatment, etc.
(Section:80DDB)
Deduction is available in respect of sum actually paid during previous year for medical treatment of
prescribed disease or ailment for the following –
› In case of individual: himself or his spouse, children, parents, brothers and sisters,
› In case of HUF: its member(s),
› dependant mainly on such individual or HUF for his support and maintenance.
Deduction shall be available to the extent of lower of the following –
› sum actually paid; or › Rs. 40,000 (Rs. 60,000 in case of a senior citizen).

Deduction in respect of interest on Loan
taken for Higher Education (Section:80E)
Deduction in available in respect of sum paid by the assessee in the previous year, out of his income
chargeable to tax, by way of interest on loan taken –
› for his higher education, or
› for the higher education of his relative.
100% of the amount of interest on such loan Deduction will be admissible

Deduction in respect of Donations
(Section:80 G)
Deduction is allowed under this section to all assesses in respect of donations of sum of money in the
following manner –
› 100% deduction will be allowed if donations are given to any of the 19 specified funds.
› 50% deduction will be allowed if donations made to any of the 5 specified funds.
› 100% deduction shall be allowed subject to the qualifying amount if donations are made for
promoting family planning.
› 50% deduction shall be allowed subject to the qualifying amount if donations are made
towards any of the 5 specified purposes

Deduction in respect of Rent Paid
(Section:80 GG)
Rent actually paid for any furnished or unfurnished residential accommodation occupied by the
Individual, who is not in receipt of any House Rent Allowance (HRA).
The deduction shall be allowed to the extent of least of the following –
› Rs. 5,000 per month;
› 25% of adjusted total income;
› Rent paid less 10% of adjusted Total Income

Deduction in respect of person with
Disability (Section:80U)
Eligible Assessee: Individual resident in India, who, at any time during the previous year, is certified by
the medical authority to be a person with disability
Deduction: Rs. 75,000 (Rs. 1,25,000 for severe disability). Severe disability means 80% or more of
disability.

Other Deductions
oDeduction in respect of certain Donations for Scientific Research or Rural Development [Sec.80GGA]
oDeduction in respect of Contribution to Political Parties [Sec. 80GGB & 80GGC]
oProfits & Gains from Industrial Undertaking engaged in Infrastructure Development [Sec. 80 IA]
oProfits & Gains from Undertaking engaged in Development of SEZs [Sec. 80IAB]
oProfits & Gains from Industrial Undertaking engaged in other than in Infrastructure Development
[Sec.80IB]

oDeduction in respect of income of Co- operative Society [Sec. 80P]
oDeduction in respect of Royalty Income, etc. of Author of certain Books other than Text Books
[Sec.80QQB]
oDeduction in respect of Royalty Income of Patents [Sec. 80 RRB]

Unit -III:
Heads of Income and Rules of Tax

INCOME FROM HOUSE
PROPERTY
Sec 22 of Income Tax Act 1961
Income from houses, buildings, bungalows
Tax is based on Annual value.
POINTS TO BE REMEMBERED
Assessee should be the Owner of the Property
Should be not be used for Own Business or Profession
In Case of Dispute Regarding Title
Property Let Out along with other Assets
In case of sub-Letting

Computation of Gross Annual Value
(GAV)
Step 1 : Calculate Expected Rent as follows:-
PARTICULARS AMOUNT AMOUNT
(a) Fair Rent of the House xxx
(b) Municipal Value of House xxx
(c) Whichever is more of (a) and
(b)
xxx
(d) Standard Rent xxx
Expected Rent [whichever is less of
(c) and (d)]
XXX

FAIR RENT
The rent which a similar property will fetch at the same or nearby similar locality.
MUNICIPAL RENT
The value fixed by the municipal or local authority.
STANDARD RENT
Rent fixed by the Rent Control Act
Max rent an owner can claim from his tenant as rent
ACTUAL RENT
Rent for which property has been let out

Step 2 : Compare Expected Rent & Actual Rent Receivable (ARR).
Where the property or any part thereof is let out,
If ARR is more than ER referred to in Step 1, then,
GAV = ARR
If ARR is less than ER and it is due the vacancy of property then, GAV = ARR
If ARR is less than ER not owing to vacancy GAV = ER
Note: ARR = Rent Received / Receivable less Unrealized Rent

Net Annual Value
Net Annual Value is the sum computed after deducting from Gross Annual Value, the taxes levied by any local
authority in respect of the property.
NAV = GAV – Municipal Taxes Paid

Deduction Admissible u/s:24
i. Statutory deduction :- 30% of Annual Value (i.e. 30% of NAV)
ii. Interest payable on capital borrowed for acquisition, construction, repair, renewal or
reconstruction of house property :- Actual amount of interest for the year on accrual basis plus 1/5th of
the interest, if any, pertaining to the pre- acquisition or pre-construction period

Deduction for Interest on Capital
Borrowed in case of SOP
Maximum limit of deduction in respect of interest on capital borrowed in case of a Self-occupied property
whose annual value is assessed at NIL, is Rs. 1,50,000
CASE MAXIMUM DEDUCTION
Interest on capital borrowed on or after
1-4-1999 for acquisition or construction
of house
Rs. 1,50,000
In any other case Rs. 30,000

COMPUTION OF HOUSE PROPERTY
INCOME
Particulars Amount Amount
Gross Annual Value xxx
Less: Municipal tax -Paid
by owner
xxx
Net Annual Value xxx
Deduction U/S 24 xxx

1. Standard deduction -30% of
NAV
xxx
2. Int. on borrowed capital-
Paid or due
xxx xxx
Income from House Property xxx

Profits and Gains of Business & Profession
Meaning of Business [ Section:2(13)] : “Business” simply means any economic activity carried on for
earning profits. Sec. 2(3) has defined the term as “ any trade, commerce, manufacturing activity or any
adventure or concern in the nature of trade, commerce and manufacture”.
Meaning of Profession [Section:2(36)] : “Profession” may be defined as a vocation, or a job requiring some
thought, skill and special knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession
refers to those activities where the livelihood is earned by the persons through their intellectual or manual
skill.

INCOME FROM BUSINESS &
PROFESSION
-:- KEY POINTS -:-
• Must be carried on by Assessee.
• Must be carried on during the previous year.
• Only profit of the previous year are to be taxed.
• Income includes negative income i.e. Loss.
• A Person Cannot do business with one self. Hence, notional profit is not taxable. If a proprietor
withdraws goods casting Rs.50000 for personal use at an agreed value of Rs.60000 then profit of
Rs.10000 shall not be taxable

• There is no difference between legal & illegal business for taxation purpose. Even income from illegal
business shall be taxable.

Basis of Charge : [ Sec 28 ]
The following income shall be chargeable to income tax under the head “ Profit & Gains of Business or
Profession.
• The profit or gains of any business or profession.[Sec 28 (i)]
• Income derived by a trade, professional or similar association from specified services performed for its
members. [ Sec 28 (ii) ]
• The Value of any benefit or perquisite, whether convertible into money or not, arising from business or the
exercise of profession.
[ Sec 28 (iv) ]
• Any interest, Salary, bonus, commission or remuneration due to or received by a partner from a firm. [ Sec
28 (v) ]

oAny Sum received for not carrying out any activity in relation to any business or not to
share any know-how, patent, copyright, trademark etc. [ Sec 28(va) ]
• Income from speculative transaction

SPECIFIC DEDUCTIONS [Sec.30 to Sec 37]
1. Rent, Rates ,Taxes & Insurance for Building used for the purpose of business. [ Sec
30 ]
2. Repairs & Insurance of Plant & Machinery , Furniture [ Sec 31 ]
3. Depreciation of building or plant & machinery.[ Sec 32 ]
4. Investment Allowance [ Sec 32 AC ]
5. Tea/Coffee/Rubber Development A/c [ Sec 33 AB ]
6. Site Restoration Fund [ Sec 33 ABA ]

7. Reserve for Shipping Business [ Sec 33 AC ]
8.Scientific Research Expenditure [ Sec 35 ]
9. Amortisation of telecom licence fees [ Sec 35 ABB ]
10. Expenditure on eligible projects or scheme [ Sec 35 AC ]
11. Deduction in respect of exp on specific business [ Sec 35 AD ]
12. Payment to Association and institution for carrying out rural development program [Sec 35 CCA]
13. Weighted deduction for expenditure incurred on Agricultural Extension Project [ Sec 35 CCC ]

Tax Law (LLB-403)

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