1

EXPLANATORY NOTES

INCOME TAX –I
2018-17

COMPLIED BY
DR.M.KAMARAJ
ASSOCIATE PROFESSOR IN COMMERCE
DEPARTMENT OF COMMERCE
TAGORE ARTS COLLEGE,PONDICHERRRY
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Dr.M.KAMARAJ. ASSOCIATE PROFESSOR IN COMMERCE, DEPARTMENT OF

COMMERCE,
TAGORE ARTS AND SCIENCE GOVT.COLLEGE, PONDICHERRY
INCOME TAX -I
THEORY, PROBLEMS AND SOLUTIONS
CHAPTER-I .
BASIC CONCEPTS OF INCOME TAX.
MEANING OF TAX: It is a financial charge imposed on individuals or legal entities by the
Government of India. Indian taxation system is a well structured system derived from the Indian
constitution which contains the powers of the Union government and state government to levy taxes
on individual and other artificial bodies. The proceeds from taxed constitute a major source of
revenue to Government that spends the collected amount for the common benefits of the society.
Types of Tax: There are two types of tax. (i) Direct taxes ( Income tax) (ii) Indirect taxes ( Goods
and Services Taxes (GST),Excise Duty, Customs Duty).
Meaning of Income Tax: It is a tax on income, gains or profits earned by a person such as
individuals and other artificial entities.
History of Income tax in India: The income-tax was introduced in India for the first time in 1860
by British rulers. The period between 1860 to1886 was a period of experiments in the context of
Income tax. Income tax Act, 1922 was passed and remained in existence till 31st March1961.
IMPORTANT TERMS: Some important terms are there in relation to understand about tax. They
are as follows:
I. Previous year and Assessment year: Tax is levied on the total income of the previous year of an
assessee in the assessment year. This is under section 4 of the Income-tax Act, 1961. This statement
introduces two terms in relation to each other. These are:
a. Assessment Year [Section 2(9)1 - The assessment year is the period of 12 months
commencing on the 1st day of April every year. In simple words, it is the financial year of Govt. of
India starting on 1st April and ending on 31st March next.
b. Previous Year [Section 3(1)]--In simple words, previous year is the year preceding the
assessment year and it is subdivided into 4 categories as given below :—
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i. The financial year as only previous year [3(1)] :Previous year for this Act means the
financial year immediately preceding assessment year. As such, in case of continuing business, the
previous year shall always be financial year, i.e., 1st April to 31st March.
ii. In case of newly set up business [3(1) Proviso]: The previous year of a newly set up
business shall be the period between commencement of such business and 31st March next following.
iii. Previous year in case of Life Insurance Business [3(1) (g)] :The previous year in case
of Life Insurance Business is the period fixed for preparation of accounts under the Life Insurance
Corporation Act, 1956 which is two years.
4. Previous year in case of certain incomes:
(a) Cash credit (Section 68). Cash credit found in the books of assessee, if unexplained, shall be
deemed to be the income of the year in which it is found to be credited.
(b) Unexplained investments, money and valuable articles (Sections 69 & 69A)]. The previous
year in case of unexplained investments is the financial year in which investments were made and for
cash, bullion jewellery and other valuable, the financial year in which these are found in the
possession of assesses. The same rule is applicable for partly explained investments.
(c) In case of sale of business. The accounting period in such case does not change but the profits are
split up on the basis of date on which sale takes place. Profit for the period up-to-date of sale is
taxable in the hands of seller and after the date of sale in the hands of buyer.
Cases in which income is assessed in the same year in which it is earned:
(i) In case of persons leaving India (Section 174). For those persons who are leaving
India for ever, the income is assessed to tax in same year in which it is earned.
(ii) Non-resident Shipping Companies (Section 172). 7.5% of gross freight received by
non-resident shipping company for carrying passengers and cargo from Indian ports is deemed to be
the profit of the year and on which tax is levied in the same year in which it is received or is
receivable if such company has no representative in India.
(iii) In case of persons who are likely to transfer their assets to avoid tax (Section 175).
For those person who is likely to sell their assets with the intention to avoid tax, the income of such a
person for the period between close of last previous year and the commencement of such proceedings
may be assessed to tax in same year.
(iv) In case of discontinued business (Section 176). In case of discontinued business, the
income of such business is assessed to tax in the same year in which it is discontinued.
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II.ASSESSEE (sec.2(7) :Assessee means a person by whom any tax or any other sum of money is
payable under this act. Assessee may be decided in to three categories. They are;
(a) Ordinary assessee: any person against whom some proceedings under this act are going
on.
(b) Representative assessee or deemed assessee. A person may not be liable only for his
own income or loss but also on the income or loss of other persons.
(c) Assessee – in- default: Aperson is deemed to be an assessee –in-default if he fails to
fulfill his statutory obligations.
III. PERSON (SEC.2(31): The word person includes the following:
i) an Individual; ii)a Hindu Undivided family; iii)a Company iv)a Firm v)an association of persons or
a body of individuals, whether incorporated or not vi)a local authority and vii) every artificial
juridical person not falling within any of preceding sub-clauses.
IV. BLOCK OF ASSETS: It means a group of assets falling within a class of assets comprising; (a)
tangible assets being buildings, machinery, plant or furniture . (b) intangible assets being know-how,
patents, copyrights, trade marks ,licenses or any other business rights of similar nature in respect of
which same percentage if depreciation is prescribed.
V. MAXIMUM MARGINAL RATE (MMR): It means the rate of income-tax applicable in
relation to the highest slab of income in the case of an individual.
VI. FAIR MARKET VALUE: The ‘fair market value’ in relation to a capital asset means the price
that the capital asset would ordinarily fetch on sale in the open market on the relevant date.

VII. AGRICULTURAL INCOME (SEC. 2(IA)): Agricultural income means any rent or revenue
derived from land which is situated in India and is used for agricultural purposes. It is fully exempted
from tax.
VIII. CONCEPT OF INCOME:
Tax is calculated on total income and as such definition of Income is very essential. It is
defined u/s 2(24) as follows: “Income includes
(i) Profits and gains;
(ii) Dividend
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(iii) Any voluntary contributions received by a trust created wholly or partly for charitable
or religious purposes or by an institution established wholly or partly for such
purposes or by association or institution.
(iv) The value of any perquisite or profit in lieu of salary taxable.
(v) The profits and gains of any business of banking (including providing credit facilities)
carried on by a co-operative society with its members;
(vi) Any capital gain taxable
(vii) Any winnings from lotteries, crossword puzzles, races including horse races, card
games and other games of any sort or from gambling or betting of any from or nature
whatsoever.
IX. CONCEPT OF CAPITAL AND REVENUE:
Income and expenses can be classified as:
(a) Capital Receipts and Revenue Receipts;
(b) Capital Expenses and Revenue Expenses;
(c) Capital Losses and Revenue Losses.
A distinction between these is essential as:
(a) method of charging of tax on capital receipts is different from that of the revenue receipts;
and
(b) while computing income under the head profits and gains of ‘business or profession’ only
revenue receipts and revenue expenses are included.
Distinction between Capital Receipts and Revenue Receipts: Immaterial considerations.
Following considerations do not affect the nature of transaction.
(a) Receipts may be in lump sum or in installments;
(b) Magnitude of the amount;
(c) Name and treatment given by parties in the books of account;
(d) Payment is received out of capital or from any other source; and
(e) Whether amount is received under legal obligation or voluntarily.
Tests for Distinction
1. On the basis of nature of assets – fixed asset gives Capital receipt and circulating asset gives
Revenue receipt.
2. Receipt on termination of source of income is Capital receipt.
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3. Receipt on substitution of income is Revenue receipt.

4. Compensation received on termination of lease is capital receipt.
5. An article acquired as stock-in-trade gives Revenue receipt but if acquired as decoration piece
and sold later will give casual receipt.
Distinction between Capital Expenses and Revenue Expenses / Tests.
1. Nature of assets acquired – if fixed asset then it is a Capital expenditure, and if circulating
asset then a Revenue expenditure.
2. Nature of transaction – if it is acquired as a source of income it is Capital expenditure and if it
is to earn an income it is Revenue expenditure.
3. Nature of liability - a payment made to discharge a capital liability is Capital expenditure and
to discharge a revenue liability is Revenue expenditure.
4. Purpose of transaction – if it is to increase the efficiency of the asset it is Capital expenditure
but if it is to keep the asset in working order it is Revenue expenditure.
5. Nature to be determined – only in the hands of payer and not receiver.
Distinction between Capital losses and Revenue losses:
1. A loss due to sale of a capital asset is a Capital loss and a loss incurred during the sale of
stock-in-trade is a Revenue loss.
2. Loss caused due to embezzlement by an employee is Revenue loss.
3. Amount deposited in bank, withdrawn and misappropriated by an employee is a Capital loss.
4. Amount of deposit for securing an agency rights lost due to Company being liquidated as a Capital
loss.
5. Loss during working hours caused by employees or customers is a Revenue loss but it will be a
Capital loss if the loss is due to some abnormal situation e.g. dacoit.
X. RESIDENTIAL STATUS AND INCIDENCE OF TAX: Under section 4tax is levied on total
income of a person. Section 5 defines total income of a person on the basis of his residential status.
It divides a person into three categories: - (a) Ordinary Resident, (b) Resident but not ordinary
resident and (c) a non resident.
DETERMINATION OF STATUS:
A.INDIVIDUAL; An individual can be divided into three categories: (a)Ordinary Resident (b)Not
ordinarily resident (c) Non-resident
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1.Ordinary Resident u/s 6(1): An individual is resident of India if he fulfils any one of the
following two tests: (a)He was in India for a period or periods totaling in all to 182 days or more
during the relevant previous year. (OR)
(b)He was in India for a period or periods totaling in all to 60 days or more during the relevant
previous year and 365 or more during four previous years preceding the relevant previous year.
Relaxation (Explanation to Point (b)
(i)In case of an Indian citizen going abroad on a job approved by Central Govt. in test (b) 60 days
shall be replaced by 182 days.
(ii)In case of an Indian citizen or a person of Indian origin (he himself, either of his parents or
grandparents were born in undivided India) who come to visit India, and for members of the crew of
an Indian ship, for that previous year in test (b) words 60 days have been replaced by 182 days.
(iii)In case of a member of crew of an Indian ship in test (b) words 60 days shall be replaced by 182
days. While calculating number of days for stay in India, day of departure is to be included.
As per decision of Authority for Advance Rulings, both, the day of departure and day of
arrival, are to be counted in India.
2. Resident but not Ordinary Resident (Section 6(1) and 6(6) (R but N.O.R). An individual who
is resident u/s 6(1) can claim the beneficial status of N.O.R. if he can prove that:
(a) He was non-resident of India for 9 previous years out of 10 previous years preceding the
relevant previous year. (or)
(b) He was in India for a period or periods aggregating in all to 729 days or less during seven
previous years preceding the relevant previous years.
Ordinary Resident: Simply it means that an individual who has fulfilled one of the two tests of 6(1)
and thus has become resident in the relevant previous year can prove himself Ordinary Resident by
providing that:
(a) He was resident of India for 2 or more previous years out of 10 previous years preceding the
relevant previous year; and
(b) He was in India for a period of 730 days or more in 7 previous years preceding the relevant
previous year.
Resident but not ordinarily resident: Simply it means that an individual who has fulfilled one of
the two tests of 6(1) and thus has become resident in the relevant previous year can prove himself
Ordinary Resident by proving that:
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(a) He was non-resident of India for 2 or more previous years out of 10 previous years preceding
the relevant previous year; (OR)
(b) He was in India for a period of less than 730 days in 7 previous years proceeding the relevant
previous year.
3.Non-Resident (Section 2(3)): An individual who fails to fulfill any one of the above two tests
given in sec.6 (1) will be Non-resident in India.
B. IN CASE OF H.U.F. FIRM, ASSOCIATION OF PERSONS, OR BODY OF INDIVIDUALS
(U/S 6 (2) :The residential status of these persons is based upon their control and management i.e.,
the decision making power. If it is wholly or partially situated in India during the relevant previous
year it is resident. In case it is wholly situated outside India it is non-resident. Out of these persons
only H.U.F. can be N.O.R., others cannot. An H.U.F. can claim the status of N.O.R. if its Karta can
prove any one of the two tests given u/s 6(6). It can be said that if status of Karta is that of R but
NOR then the status of H.U.F. will also be N.O.R.
C. IN CASE OF COMPANY (U/S 6(3): Every Indian company is a resident company. An
Indian company is that which is incorporated in India under Indian Companies Act. Every other
company will be resident of India if its 100% control or management was in India during the relevant
previous year. Otherwise it will be a non-resident company. It can’t be N.O.R.
D.IN CASE OF EVERY OTHER PERSON (U/S 6(4): These persons are resident if their control
or management is situated in India, otherwise these are non-resident.
XI. INCIDENCE OF TAX
(I) SCOPE OF TOTAL INCOME OF A “RESIDENT” (SECTION 5(1))
(a) Income received or deemed to be received in India during the relevant accounting year. The
place and date of accrual is immaterial.
(b) Income which accrues or arises or is deemed to accrue or arise in India during the relevant
accounting year irrespective of the date and place of its receipt.
(c) Income accruing during the relevant accounting year outside India whether it is brought or
not in India during the year.
(II) SCOPE OF TOTAL INCOME OF “NOT ORDINARILY RESIDENT” (SECTION 5(2)
(a)Income received or deemed to be received in India during the relevant accounting year.
The date and place of accrual is immaterial.
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(b)Income which accrues or arises or is deemed to accrue or arise in India during relevant
accounting year irrespective of the date and place of its receipt.
(c)Income accruing or deemed to accrue or deemed to be received outside India during the
relevant accounting year from a business set up in or profession controlled from India.
(III) SCOPE OF TOTAL INCOME OF “NON-RESIDENT” (SECTION 5(2)
(a)Income received or deemed to be received in India during the relevant accounting years.
The date and place of accrual is immaterial.
(b)Income which accrues or arises or deemed to accrue or arise in India during the relevant
accounting year irrespective of the date and place of its receipt.
From the above provisions we find following treatment of various incomes received or
accrued in India or outside India.
TABLE -INCIDENCE OF TAX
Difference kinds of Income Different Types of Status
Resident Not Ordinarily Non-
Resident Resident
1. Income received or deemed to be received in Taxable Taxable Taxable
India. It is immaterial whether it is earned in
India or in a foreign country.
2. Income earned in India whether received, Taxable Taxable Taxable
paid in India or outside India.
3. Income earned and received outside India Taxable Taxable Taxable
from a business controlled or profession set up
in India. Income may or may not be remitted
to India.
4. Income earned and received outside India Taxable Taxable Taxable
from any other source (Except income under
point 3)
5. Income earned and received outside India in Taxable Taxable Taxable
the years preceding the previous year in
question and if the same is remitted to India
during that previous year.
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XII. EXEMPTED INCOMES:

Incomes can be classified into three categories:
A. Taxable incomes. B. Exempted incomes. C. Rebatable (Tax Free) incomes.
A. TAXABLE INCOMES: These incomes form part of total income are fully taxable. These
incomes are treated u/s 14 to 80 of this Act. These incomes are salaries, rent from hour property,
profits and gains of business or profession, profit on sale of capital assets i.e., capital gains, income
from other sources like dividend, interests and winning from lotteries, puzzles, races, card games,
betting etc.,
B. EXEMPTED INCOMES: The exempted incomes are given u/s 10 (1) to 10 (33) of the
Act and are not added in total income fully or partially. Hence no tax is payable on these incomes.
Some of these incomes are:
1. Agricultural income-Fully exempted u/s 10(1).
2. Share of income from HUF-Fully exempted u/s 10(2).
3. Share of income from firm assessed as firm (PFAF)-Fully exempted u/s 10(2A).
4. Any income from investment by an NRI in bonds and securities-Fully exempted u/s 10(4)(i).
No exemption on such bonds issued after 1.6.2002.
5. Any income from interest on Non-resident (External) Account-Fully exempted u/s 10(4)(ii).
No exemption on interest paid or credited on or after 1-4-05.
6. Interest paid to a non-resident person who is a person of Indian origin-Fully exempted u/s 10(4B).
No exemption on such bonds issued after 1.6.2002.
7. Travel Concession to an Indian Citizen employee-Exempted up to limits laid down u/s 10(5).
8. Certain incomes received by an individual who is not a citizen of India. These shall be exempted
up to limits and rules laid down under section 10(6)(ii) to (xi).
9. Perquisites and allowances given by Government to its employees posted abroad-Fully exempted
u/s 10(7).
10. Employees of foreign countries working in India under co-operative technical assistance
programme-Fully exempted u/s 10(8).
11. Gratuity – exempted u/s 10(10) as per limits.
12. Commuted value of pension – Fully exempted u/s 10 (10A) as per conditions given.
13. Amount received as leave encashment on retirement-Fully exempted u/s 10(10B) as per
conditions given.
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14. Retrenchment compensation given to workers-Fully exempted u/s 10 (10B) as per conditions
given.
15. Payment received out of Statutory Provident Fund-Fully exempted u/s 10 (11).
16.Payment received out of Recognized Provident Fund-Fully exempted u/s 10(12) if service is more
than 5 years.
17.Payment received out of superannuation Fund-Fully exempted as per conditions given u/s 10 (13).
18.House Rent Allowance – exempted being least of three conditions given u/s 10 (13A).
19.Any allowance given to meet the expenditure incurred during employment shall be exempted as
per conditions given u/s 10 (14).
20.Educational Scholarships-Fully exempted u/s 10(16).
21.Allowances received by MP/MLA/MLC fully Exempted u/s 10 (17).
22.Any award instituted or notified by State or Central Govt. – Fully exempted u/s 10 (17A).
23.Income of Pension Fund set up by the Life Insurance Corporation exempted as per
conditions given u/s 10 (23 AB).
24.Income of institutions set up for development of Khadi and Village industries exempted
as per conditions given u/s 10(23B).
25.Income of State level Khadi and Village Industries Boards-exempted as per conditions given u/s
I0(23BB).
26.Amount received as subsidy from or through Tea Board-Fully exempted u/s 10 (30).
27.Amount received as subsidy from or through Rubber, Coffee or any other Board set up
for growing 67 commercial crops-Fully exempted u/s 10(31).
28.Income by way of dividend from Indian company (Section 10(34).
Any income by way of dividends declared and distributed by an Indian company on or
after 1.4.2003 and referred to in section 115-0 shall be fully exempted.
29. Income from units of UTI and other Mutual Funds (Section 10(35)

MEANING OF AVERAGE TAX RATE: Average tax rate means the rate arrived at by dividing
the amount of income tax calculated on the total income by such total income

AVERAGE TAX RATE = Total Tax x100

Total Income
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PROBLEMS AND SOLUTIONS.

PROBLEM.1 : What will be the previous year in relation to assessment year 2018-19 in following
cases: (i)A business keeping its accounts on financial year basis. (ii)A newly started business
commencing its operations on 1-1-2018. (iii) A person giving Rs.1,00,000 as loan @ 12% p.a.
interest (on monthly basis) on 1-9-2017.
SOLUTION
(i)In case accounts are maintained on financial year basis the previous year in relation to assessment
year 2018-19 is financial year 1-4-2017 to 31-3-2018.
(ii)In case of newly started business the previous year is the period between the date of
commencement of business and 31st March preceding assessment year. As such for assessment year
2018-19 the previous year shall be the period between 1-1-2018 to 31-3-2018 (i.e. 3 months).
(iii)In case of a newly created source of income previous year is the period between date of creation
of the source and 31st March next following. As such for assessment year 2018-19 the previous year
is the period between 1-9-2018 to 31-3-2018.
PROBLEM- 2 : Determine whether the following are Capital or Revenue items:
(i) Remuneration received by a retired judge for acting as arbitrator under an agreement.
(ii) Premium on issue of shares.
(iii) “Salami” for premature termination of lease.
(iv) Amount paid to a director not resigning from directorship.
(v) Profit made from devaluation of Indian rupee.
SOLUTION:
(i) Arbitration remuneration is taxable as professional (revenue) receipt under the head “Profit
and Gains of Business or Profession” . In case such remuneration is received without any stipulation
or agreement it is causal receipt u/s 10(3).
(ii) Premium received on issue of shares is a Capital receipt as the amount is received against
fixed capital.
(iii) Salami is an illegal transaction as it is generally taken and given without any proof. It is an
underhand transaction. However, if declared or detected it is taxable as Revenue receipt.
(iv) Any receipt from employers is taxable under the head “salaries”. Compensation received for
not resigning from directorship is taxable as Revenue receipt under the head “Salaries”.
(v) Profit made on devaluation of Indian rupee is a Capital receipt.
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PROBLEM-3
Mr. B. a married citizen of India left for Germany for the first time on 15-9-2017 on a
business trip. He returned to India on 5.6.2018. During his absence from India he maintained a
dwelling house for himself in Calcutta. What will be his residential status for the assessment year
2018-19.

SOLUTION:
Determination of residential status of Mr. B.
Relevant Previous year 1-4-2017 to 31-3-2018
Stay in India in this previous year;
(1-4-2017 to 15-9-2017) (30+31+30+31+31+15)=168 days.
He fails to fulfill test (a) of 6(1)
Test (b) of 6(1)
(i) His stay exceeds 60 days during relevant previous year; and
(ii) Stay exceeds 365 days during 4 previous years preceding relevant previous year (as he
was never out of India before):
Hence he is resident u/s 6(1)(b) and he cannot claim the beneficial status of Not-ordinarily
resident as he was:
(i) resident of India for 2 out of 10 previous years preceding the relevant previous year; and
(ii) his stay during 7 previous years preceding the relevant previous year is more than 730 days.
Hence he is ordinary Resident.
PROBLEM-4. Dr. K.S. Sharma, an Indian national is working in U.S.A. Every year he comes
to India on leave and stays with his parents who are in Calicut. What would be the residential status
of Dr. K.S. Sharma during the assessment year 2018-19 under the following circumstances.
(a) He came to India on 19th December 2017 and stayed up to 5th February 2018. His total stay
during the preceding 7 years was 300 days.
(b) He came to India on 20th Sept. 2017 and stayed up to 31st March 2018.
His total stay during the preceding 7 years was 500 days.
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SOLUTION:
As Dr. K.S. Sharma is an Indian citizen rendering service in U.S.A. i.e., outside India and
comes to India on leave, according to Explanation to Section 6(1) of the Income-tax Act, 1961 his
residential status for assessment year 2018-19 would be as follows:
(a) He would be treated as non-resident as his total stay in India is less than 182 days (i.e., 49
days) daring the previous year 2017-18.
(b) He would be treated as resident u/s 6(1)(a) as he stayed in India for more than 182 days, i.e.,
194 days during the previous year 2017-18
He is Resident but not ordinarily resident as he was not in India for 730 days during 7
previous years preceding the relevant previous year.
PROBLEM-5
The following are the incomes of Shri. Kiran for the previous year 2017-18.
Rs.
(i) Profit from business in Dharwad 7,000
(ii) Income accrued in India but received in Italy 6,000
(iii) Profit from business in England received in India 5,000
(iv) Income from House property in Africa received in India 4,000
(v) Profit from business established in Iran and deposited in a bank there,
the business being controlled from India 3,000
(vi) Income from house property in Pakistan and deposited in a bank there 2,000
(vii) Past untaxed foreign income brought into India during this previous year 1,000
Compute the total income of Shri. Kiran for the assessment year 2018-19 if he is:
(a) Ordinary Resident;
(b) Not Ordinarily Resident;
(c) Non-resident.

SOLUTION
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Computation of Total Income of Shri. Kiran

Income Resident NOR Non-Resident
Rs. Rs. Rs.
I. Income received or deemed to be received in India
(a) Profit from business in England but received in India 5,000 5,000 5,000
(b) Income from house property in Africa but received in India 4,000 4,000 4,000
II. Income accruing or arising in India
(a) Profit from business in Dharward 7,000 7,000 7,000
(b) Income received in India but received in Italy 6,000 6,000 6,000
III. Income accruing outside India and received outside India
(a) Profit from business in Iran but controlled from India 3,000 3,000 NIL
(b) Profit from House Property in Pakistan 2,000 NIL NIL
IV. Past untaxed income brought into India during relevant
previous year (Exempted in all three cases) NIL NIL NIL
------------ ------------- ---------------
Total Income 27,000 25,000 22,000
----------- --------------- ---------------
PROBLEM-6
From the following particulars compute the total income of Mr. C.A. for the assessment year
2018-19 if he is (a) Ordinary Resident, (b) Resident but not ordinarily resident: or (c) Non-resident.
Rs.
(i) Income from House property in India (Computed) 32,000
(ii) Loss from house property in France (-) 60,000
(iii) Income from House property in England received
there and deposited in a Bank there 90,000
(iv) Business income in India 2,60,000
(v) Loss from business in England (-) 1,20,000
(vi) Profit from business in England which is controlled from there 1,00,000
(vii) Interest on debenture of an Indian Company 10,000
(viii) Income from profession set up in India received in England
for services rendered in India. 2,00,000
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SOLUTION
Computation of Total Income of Mr. C.A. for the assessment year 2018-19

Particulars Resident NOR Non-Resident

Rs. Rs. Rs.

(i) Income from House property in India

32,000 32,000 32,000
(ii) Loss from house property in France (-) 60,000 NIL NIL
(iii) Income from House property in England
received there and deposited in Bank there 90,000 NIL NIL
(iv) Business income in India 2,60,000 2,60,000 2,60,000
(v) Loss from business in England (-) 1,20,000 NIL NIL
(vi) Profit from business in England and
is controlled from there 1,00,000 NIL NIL
(vii) Interest on debentures of an Indian Company 10,000 10,000 10,000
(viii) Income from profession set up in India received
in England for services rendered in India 2,00,000 2,00,000 2,00,000
---------------- ------------ ----------------
Total Income 5,12,000 5,02,000 5,02,000
----------------- ------------ ----------------
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CHAPTER-2
SALARIES
I.DEFINITION OF HEAD SALARY: Under section 15, the following incomes are chargeable to
Income-tax under the head salaries:
(i) Any salary due from an employer or a former employer to an assessee in the previous
year whether paid or not;
(ii) Any salary paid or allowed to him in the previous year by or on behalf of an employer or
a former employer though not due or before it becomes due to him;
(iii) Any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer if not charged to income tax for any earlier previous year.
The important rule is that income once taxed cannot be taxed again , so any salary paid in
advance (if taxed in a previous year when the advance salary was received) will not be
included again in the total income of the person when the salary becomes due Advance
salary does not include loan.
II.CHARACTERISTICS OF SALARY.
For payment to be made taxable under the head ‘salaries’ it must fulfil the following
characteristics.
a. Relationship of Employer and Employee: For a payment to fall under the head ‘salaries
the relationship of employer and employee must exist between payee and the receiver of
the salary
b. Salary from more than one employer; Any amount of salary received or due form one or
more than one employer/source shall be taxable under this head.
c. Salary from Present, Past or Prospective Employer; Salary received or due from present,
past or future employer is also taxable under the head salary.
III. CHART SHOWING COMPUTATION OF INCOME FROM SALARIES:
Item Treatment
I. SALARY (SECTION 17(1) :
(i) Pay/Salary/Wages/Basic Pay :Fully Taxable u/s 1
(Whether due or received from present or past employer)
(ii) Bonus : Fully Taxable u/s 15
 18

(iii) Commission : Fully Taxable u/s 15

(Will be treated as salary if given as percentage of sale achieved by him).
(iv) Annuity : Fully Taxable u/s 15
(v) Pension : Fully Taxable u/s 15
(vi) Salary in lieu of leave : Fully Taxable u/s 15
[Subject to exemption u/s 10(10AA)]
(vii) Annual Accretion to R.P.F. :
(i) Excess of employer's contribution to recognized provident fund over 12% of employee's
salary-to be added in salary. [Salary=Pay+D.P./D.A. (D.A. if it enters into pay +
Commission on turnover achieved by him].
(ii) Excess of interest credited to employee's accumulated balance of R.P.F. over prescribed
rate [i.e. 9.5% of Credit Balance].

(viii) Transferred Balance : Balance transferred from unrecognised provident fund to recognized
provident fund is called Transferred Balance. Out of this balance taxable portion is added in salary.
(ix) Any advance or arrears of salary: Fully Taxable.
(x) Employer's contribution to pension fund (central Govt. Employees only) : Fully added in
salary income of the Year but shall qualify for deduction u/s 80C or 80CCD up to 10% of salary.

II.ALLOWANCES:
A. Fully Exempted Allowances :
1. Foreign Allowance given by Govt. to its employees posted abroad.
2.HRA received by Judges of High Court and Supreme Court.
3.Sumptuary Allowance received by Judges of High Court and Supreme Court.
B.Fully Taxable Allowances:
(i) Dearness Allowance/Additional D. A/ High Cost of Living allowance. In case it is mentioned that
D. A. enters into pay for service or retirement benefits or is given under the terms of employment it
is to be treated as pay and not D.A. … Fully Taxable
(ii) City compensatory/ Capital Compensatory Allowance (C-A) …Fully Taxable
iii) Lunch Allowance …Fully Taxable
(iv) Tiffin Allowance …Fully Taxable
 19

(v) Marriage Allowance …Fully Taxable

(vi) Family Allowance …Fully Taxable
(vii) Deputation Allowance …Fully Taxable
(viii) Project Allowance …Fully Taxable
(ix) Warden ship Allowance …Fully Taxable
(x) Non Practicing Allowance …Fully Taxable
(xi) Overtime Allowance …Fully Taxable
(xii) Water and Electricity Allowance …Fully Taxable
(xiii) Fixed Medical Allowance …Fully Taxable
(xiv) Entertainment Allowance given to non-Govt. employee …Fully Taxable
C).Partly Taxable Allowances :
1.House Rent Allowance ;
(a) Fully taxable, if received by an employee who is living in his own house or in a house for which
no rent is paid.
(b) Exempted up to least of following for those employees who are living in rented houses:
(i) Actual HRA received by the employee
(ii) Rent paid - 10% of salary : or
(iii) 40% of salary in ordinary towns and cities or 50% of salary in case of Mumbai, Kolkata. Delhi
and Chennai.
TAXABLE HRA = HRA RECEIVED – LEAST OF ABOVE .
SALARY = PAY + D.A. WHICH ENTERS INTO PAY FOR SERVICE OR RETIREMENT BENEFITS +
COMMISSION ON TURNOEVR ACHIEVED BY HIM.

2.Helper Allowance

3.Uniform Allowance Exempted up to actual expenditure incurred

4.Academic Research Allowance Employment. . Excess, if any, shall be taxable.
5. Conveyance Allowance
6. Travelling Allowance

Following allowance are exempted up to amount so notified.

7. Special Compensatory Allowances
 20

8. Border Area Allowances

9. Compensatory Field Area Allowance
10.Compensatory Modified Field Area Allowance
11. Any Special Allowance to Counter insurgency
12. Tribal Area Allowance - Exempted up to Rs. 200 p.m if received in the states of MP., Tamil
Nadu, U.P., Karnataka, Tripura. Assam, West Bengal, Bihar or Orissa.
13. Running or Flight Allowance - If given to employees of transportation system who do not receive
any daily allowance while away from their place of normal duty, it shall be exempted up to
Rs.10,000 p.m. or 70% of such allowance whichever is less.
14. Transport Allowance - It is exempted up to Rs. 1600 p.m whether to Govt. or non Govt.
employees. For handicapped or blind employees it is exempted up to Rs. 3200 p.m Excess is taxable.
15. Children's Education Allowance exempted up to Rs. 100 p.m. per child for education in India of
own two children only.
16. Hostel Expenditure Allowance — Exempted up to Rs. 300 p.m per child for Hostel expenditure
on own two children only.

IV.PERQUISITIES : (SECTION 17(2)1

A. EXEMPTED FROM TAX
Value of following benefits is not added in salary income :
I. Free medical facilities or reimbursement of medical expenditure
(a) If treatment was taken from a hospital maintained by employer : … Fully exempted
(b) If treatment is taken from a hospital maintained by Central, State Govt., local authority or a
hospital approved by Chief Commissioner of Income Tax. … Fully exempted
(c) In case treatment is taken from a private or unrecognized hospital, the benefit is exempted up to
Rs. 15,000 p.a. … Fully exempted
(d) In case employer under a scheme approved by the Central Govt. pays medical insurance premium
of employees … Fully exempted
(e) In case any health insurance premium is paid by employer to General Insurance Corporation
under notified scheme (Mediclaim u/s 80D) to insure the health of its employees and members of
their families. … Fully exempted.
 21

(f) In case treatment is taken outside India the expenses on stay and treatment of patient and stay of
one attendant shall be exempted up to foreign exchange allowed by RBI; and the expenses on travel
of patient and attendant shall be fully exempted provided gross total income of employee does not
exceed Rs. 2,00,000. … Fully exempted
2. Free refreshment supplied by employer to its employees during office hours in office premises
except free meals … Fully exempted
3. Free meals given at remote area or offshore installation shall be. … Fully exempted
4. Free recreational facilities provided by the employer to its employees. … Fully exempted
5. Provision of telephones including mobile phones given by the employer to employee to facilitate
the business of the employer. …Fully exempted
6. Free education which is provided by employer from its own resources shall be fully exempted.
7. Cost of refresher course attended by employee met by employer. In case employer meets
expenditure on higher education or training whether in India or abroad. Fully exempted
8.Any rent-free residential accommodation provided to Judges of High Court or Supreme Court.
… Fully exempted
9.Goods sold by an employer to his employees at concessional rate. Fully exempted
10.Free ration received by members of armed forces. … Fully exempted
11.Perquisites allowed by Govt. to its employees posted abroad. … Fully exempted
12.Rent free house given to an officer of Parliament, a Union Minister, and leader of opposition in
Parliament. … Fully exempted

13.Conveyance facilities provided to Judges of Supreme Court and High Court. … Fully exempted
14.Free conveyance provided by employer to employees for going to or coming from place of
employment. … Fully exempted
15.Any amount contributed by employer towards pension or deferred annuity scheme. Fully
exempted
16.Employer's contribution to staff group insurance scheme. Fully exempted … Fully exempted
17.Computers laptops given to [not transferred] an employee for official/ personal use. … Fully
exempted
18. Transfer of a moveable asset [computer, car or electronic items] without consideration to an
employee after such asset had been used by the employer for more than 10 years. … Fully exempted
 22

19. Accident insurance premium paid by employer for his own benefit. In case such premium is paid
for insurance whose benefit is to ac::rue to the employee: it will taxable. Fully exempted

20. The perquisite of difference of interest on loans taken by employee from employer shall be
exempted in following manner: … Fully exempted
(a) In case rate of interest on loan taken for any purpose by employee from his employer is equal to
or is less than the rate prescribed by the State Bank of India as on 1.4.2015, it is fully exempted.
(b) If loan is taken for medical treatment of notified illness, the interest is fully exempted.
(c) If total amount of loans does not exceed Rs.20,000 then also the interest is fully exempted.
21. Value of any shares or debentures given free of cost or at concessional rate to employees under
stock option scheme approved by the Central Govt.
22. Any un authorized use of a benefit is fully exempted.
B. TAXABLE FOR ALL EMPLOYEES
1. Rent Free House
I. Value of Unfurnished House Before calculating the value of rent free house, following information
is collected from the question:
A. Nature of employment: Govt., Semi Govt. or any other.
B. Place where rent free house is provided
1. Cities and towns population of which exceeds 25 lakhs as per census of 2001.
2. Cities and towns population of which exceeds 10 lakhs but not exceeding 25 lakhs.
3. Any other city or town or place.
C. Meaning of accommodation: It shall include a house, farm house, flat, hotel accommodation,
guest house, a caravan, mobile home, ship etc. But it shall not include any accommodation located at
remote area provided to an employee who is working at a mining site, or an offshore site or a project
execution site. Remote area means area located at least 40 kms., away from a town whose population
is up to 20000 as per latest census. For offshore sites there is no limit of distance. In case of transfer
of an employee from one place to another and he is allowed to maintain two accommodations at two
places, for a period not exceeding 90 days, the value of one accommodation with lower value shall
be taxable. But if period exceeds 90 days the value of both the accommodations shall become taxable
w.e, from the day 90 days are over.
D. Nature of accommodation: Owned by Employer / Hired or leased by employer.
 23

E. Meaning of salary for rent free house: (i) It shall include Pay + D. A (which Enters) + Fee +
Commission of all Types Bonus + All Fully Taxable Allowances Except D.A. which does not enter +
Taxable portion of other allowances + leave encashment during service if it relates to encashment of
current year's leave. (ii) It shall not include D.A. (which does not enter), arrears, advance salary,
provident fund excess, gratuitous bonus, value of other perks and profits in lieu of salary.
II. Rules regarding calculation of value of rent free house.
(i).For unfurnished accommodation :
A. Owned by employer
(a) Govt. Employees. The value of house is rent fixed [license feel by the govt. for such house. It can
be rent charged by Govt. from another employee of same status for similar type of house.
(b) Other employees. Value of house is calculated in following manner :
(i) In cities whose population is more than 25 lakhs
15% of salary is taxable value of rent free house.
(ii) In cities whose population is exceeding 10 lakhs but not exceeding 25 lakhs:
10% of salary is taxable value of rent free house.
(iii) At any other place
7.5% of salary is taxable value of rent free house.
(iv) Hotel accommodation [for more than 15 days on transfer from one place to another]
24% of salary for number of days hotel accommodation is provided or actual bill whichever is less is
taxable value.
Note : In case hotel accommodation is provided for more than 15 days then this perk is not taxable
for first 15 days and it will be taxable for remaining days.
B. Hired by employer :
15% of employee's salary or Actual rent paid by employer whichever is less is taxable value of rent
free house in all cities or towns.
(ii).For Furnished accommodation :
In case of all types of employees calculate value of unfurnished house.
If furniture is owned by employer add 10% of cost of these items.
If furniture is hired actual hire charges are added.
2.Concessional Rent House Calculate value of rent free house as per above and deduct rent paid by
employee
 24

3.Obligation of employee met by employer

In case any of the following payment is made by employer these are fully taxable. These are :
a) Gas and electricity bills issued on the name of employee but paid by employer-actual expenses
met by employer are taxable.
b) Education of Children bills issued on the name of employee but paid by employer-actual expenses
met by employer are taxable. Reimbursement of tuition fee of children is also fully taxable.
c) Income-tax, professional tax of employee paid by employer-actual expenses met by employer are
taxable.
(d) Salary of domestic servants employed by employee but paid by employer- actual amount paid by
employer is taxable.
4.Fringe Benefits given by employer to employee
a) Medical Bills for treatment in private or unmodified hospitals issued on the name of employee but
paid by employer : Taxable amount shall be actual bill pail by employer less Rs. 15,000.
(b) Interest free loans.
c) Any other bill issued on the name of employee but paid by employer- actual expenses met by
employer are taxable.
d) Use of movable assets owned by employer except computer and laptops actual benefit derived by
employee is taxable.
C. TAXABLE FOR SPECIFIED EMPLOYEES ONLY.
Following perks are taxable only if employee is either a director of company or has
substantial interest (20% or more equity shares) or his salary is more than Rs.50,000 p.a. This salary
means all monetary emoluments, which are taxable under the head salary after deductions
u/s 16.
1. Car: Car perk is taxable in the hands of the employees. For details please see the textbook.
2. Free Education: If employer provides free education to the members of the household of
employee reasonable amount which employee would have spent on similar type of education in same
or nearby locality is taxable but after allowing exemption of Rs.1,000 pm., per child.
3. Free gas, light, water: In case connection is on the name of employer and bill is also paid
by employer; actual cost of such benefit is taxable. It shall be reduced by any amount paid by the
employee.
 25

4. Free Servants:
(a) In case employee employs servants but their salary is paid by employer-Full salary is taxable
for all employees u/s 17(2)(iv).
(b) In case employer provides services of sweeper and watchman full salary of these employees
is taxable and it shall be reduced by any amount paid by employee. Taxable for full month even if
given for part of the month.
(c) In case gardener is provided along with rent free house owned by employer gardener’s salary
is added in FRV and is not taxable separately. But if house is owned by employee or is hired full
salary of gardener is taxable. Taxable for full month even if given for part of the month.
(d) In case employer provides any other servant his full salary is taxable. Taxable for full month
even if given for part of the month.
5. Any other Bill on the name of employer for personal expenses of employee paid by
employer shall be taxable. In case medical bills are in the name of employer and are paid by
employer these shall be taxable only after allowing exemption (as per rule given earlier) for specified
employees only.
PROFITS IN LIEU OF SALARY SECTION 17(3)
(i) Any compensation received on termination of employment or on modification of terms of
employment.
(ii) Any payment received by an employee out of provident fund or other fund to the extent it is
taxable.
(iii) Any amount received by an assesses from any person before joining the job or after leaving
the job.
These payments are fully taxable unless exempted u/s 10.

----------------------------------------------------------------------------------------------------
Item Treatments
----------------------------------------------------------------------------------------------------
1. Retrenchment Compensation: Fully taxable as salary u/s 17(3)-but subject to
exemption u/s 10(10B)1(only for workmen receiving compensation under Industrial Disputes Act,
1947).
2. Gratuity:
 26

(i) U/s 10(10) Gratuity received whether at the time of retirement, resigning etc., is fully exempted
in case of all government employees.
(ii) In case of employees covered under Payment of Gratuity Act, 1972-Exempted upto least of
following:
(a) Notified Limit Rs.10,00,000 (for whole life
(b) 15 days average wages for every one completed year of service and fraction of more than 6
months is to be counted as one year;
(c) Actual amount received.
(iii) In case of other employees, gratuity received is exempted upto least of the following and excess,
if any, is taxable.
(a) Actual gratuity received.
(b) Notified Limit Rs.10,00,000 (for whole life)
(c) ½ month’s average salary for every one year of completed service (Average salary drawn during
10 months before the calendar month of retirement).
3. Commutation of Pension: U/s 10 (10A)-Any amount received by a Government employee
as commutation of pension is fully exempted. But in case of other employee it is exempted upto any
of the following limits:
(a)If the employee gets the gratuity: Exempted up to 1/3rd of full value of commuted pension.
(b)If the employee does not get gratuity: Exempted upto ½ of full value of commuted pension.
4. Leave Encashment :
(a) Govt. and Semi-Govt. employees-Fully exempted on retirement.
(b) In case of other employees exempted only at the time of retirement at the rate of least of
following: (a) Actual amount received;
(b) Ten month’s average salary;
(c) Notified limit Rs.3,00,000/-
(d) Cash equivalent of leave due at the time of retirement. Excess is taxable.

5. Refund of balance from provident Fund:

(i) From Statuary Provident Fund-Exempted.
(ii) From Recognized Provident Fund-Fully exempted unless the employee leaves service of his own
accord before the expiry of 5 year’s continuous service. In this case taxable portion is to be added in
 27

salary. (iii) From Unrecognized Provident Fund- Taxable portion to be added in salary. Taxable
portion shall be Employer’s contribution + Interest on this amount.

6. Any other Payment (17(3)(iii): Any amount received from employee before joining the
employment is fully taxable.

DEDUCTIONS U/S 16

1.Entertainment Allowance u/s 16(ii): This deduction shall be admissible only to the Central or
State Government employees. The deduction shall be allowed in following manner. Least of
following shall be allowed as deduction:
(a) Statutory Limit Rs.5000
(b) 1/5th of basic salary (without any allowance etc.
(c) Actual amount of entertainment allowance received
2.Tax on Employment 16(iii) : Full amount paid as professional tax is allowed as deduction.

DEDUCTION U/S 80C OUT OF GTI : Rate of deduction (Section 80C(1) This deduction shall
be admissible only to an assess, being an individual or a Hindu undivided family. The amount of
deduction shall be actual amount paid or deposited during the previous year in prescribed saving
schemes (to be called as qualifying amount for deduction u/s 80C or Rs.1,50,000 which ever is less.
Qualifying amount for deduction u/s 80C:
1.Own contribution to P.F. : If S.P.F. fully qualifies (Govt. LIC, University, SBI, RBI etc.,)
If R.P.F. fully qualifies. If P.P.F. fully qualifies. Account can be in the name of self, spouse
or any child. If U.R.P.F. does not qualify.
2. Any amount contributed by employee towards Approved Superannuation fund-Fully
qualifies.
3. Life Insurance Premium paid by employee or by employer to assure life of employee,
his spouse or children (minor or major, married or unmarried) shall qualify up to actual
premium paid or 20% of sum assured whichever is less. Sum assured shall not include bonus
or any premium agreed to be returned.
 28

4. Any amount deducted from the salary payable by or on behalf of the Government to any
individual in accordance with the conditions of his service, for the purpose of securing to him
a deferred annuity or making provision for his spouse or children, in so far as the sum so
deducted does not exceed one-fifth of the salary.
5. Any amount contributed to keep in force a contract for a deferred annuity, not being an
annuity plan referred to in clause (12). The persons on whose name savings can be made are
in the case of an individual, the individual, the wife or husband and any child of such
individual, such contract does not contain a provision for the exercise by the insured of an
option to receive a cash payment in lieu of the payment of the annuity.
6. Any amount deducted by employer (Govt.) out of employee’s salary under group
insurance scheme fully qualifies.
7. Any amount invested by a person with UTI or LIC under Unit Linked Insurance Plan
(ULIP) fully qualifies.
8. Any amount invested in NSC VIII issue purchased earlier is deemed to be reinvested hence
fully qualifies.
9.Interest Accrued deposited on NSC VIII issue purchased earlier is deemed to be reinvested
hence fully qualified.
10. Any amount deposited under notified deposit scheme 92 fully qualifies.
11. Any amount paid to LIC under New Jeevan Dhara, New Jeevan Dhara, I, or New Jeevan
Akshay, New Jeevan Akshay I, New Jeevan Akshay II plans fully qualifies.
12. Any amount deposited with mutual fund under a scheme of pension fund i.e., UTI
retirement Pension Fund shall fully qualify.
13. Any amount deposited with nationalized bank under home deposit scheme of National
Housing Bank, fully qualifies.
14. Any amount deposited with an authority engaged in housing development or town and
rural development fully qualifies.
15. Any amount deposited with housing finance institutions fully qualifies.
16. Any amount invested in equity linked saving scheme.
17. Any amount repaid under house building loan taken from Govt. LIC, Bank, HDFC,
HUDCO or other housing finance institutions or employer (Not from friends or relatives)
18. Any amount paid as tuition fees (excluding any payment towards any development fees or
 29

donation or payment of similar nature whether at the time of admission.

19. Amount paid as subscription to equity shares or debenture of any eligible issue.
20. Amount paid as subscription to any units of any mutual fund.
21. Amount deposited in Banks in Fixed Deposit of at least 5 years duration.
22. Investment in notified bonds issued by NABARD will also qualify for deduction u/s 80C.
23. Following type of deposits will also qualify for deduction u/s 80C.
(1)Five year time deposit in an account under Post Office Time Deposit Rules 1981.
(2)Deposit in an account under the Senior Citizen Savings Scheme Rule 2004.
PROBLEMS AND SOLUTIONS
PROBLEM-1
Rs.
Compute salary from Particulars given below:
Net salary received 72,000
Income tax deducted at source 4,000
Professional tax 1,200
Group Insurance Premium deducted by Employer 1,200
Rent of house deducted out of salary 3,600
Life Insurance Premium paid by Employee 6,000

SOLUTION
Computation of Salary Rs
Net salary Received 72,000
Add: Amount deducted by employer
Income Tax 4,000
Professional Tax 1,200
Group Insurance 1,200
Rent of House 3,600
-----------
Salary 82,000
-------------
Note: Life Insurance premium is not to be added as it is paid by employee.
 30

PROBLEM-2
Compute gross salary from information given below for each situation separately.
(i) Salary @ Rs.3,500 p.m.
(ii) D.A. @ Rs.1,000 p.m.
(iii) C.C.A. @ Rs.200 p.m.
(iv) House Rent Allowance @ Rs.1,000 p.m.
(v) Commission on turnover achieved by him Rs.6,000
Situation: (a) Living in own house.
(b) Living in rented house at Delhi as D.A. enters into salary for service benefits
and rent paid Rs.1,500 p.m.,
(c) Living in rented house at Chandigarh and D.A. does not enter into pay for
service benefits and rent paid Rs.1,000 p.m.

SOLUTION
Computation of gross salary.
Case A: (own house) Rs.
Salary 42,000
D.A. 12,000
C.C.A. 2,400
Commission on Turnover achieved by him 6,000
H.R.A. (Fully taxable) 12,000
-----------
Gross Salary 74,400
-----------
Case B: Hired house at Delhi Rs. Rs.
Salary 42,000
D.A. (Enters into pay) 12,000
C.C.A. 2,400
Commission on Turnover achieved by him 6,000
House Rent Allowance received 12,000
 31

Less exempted up to least of following:

(a) Actual received 12,000
(b) Rent paid – 10% of salary
(18,000-10% of (42,000+12,000+6,000) 12,000
(c) 50% of salary 30,000
Least is exempted 12,000
----------
Taxable H.R.A. Received-Exempted 0 NIL
------------ _____
Gross Salary 62,400
-----------

Case C: Hired house at Chandigarh Rs. Rs.

Salary 42,000
D.A. 12,000
C.C.A. 2,400
Commission on Turnover achieved by him 6,000
House Rent Allowance received 12,000
Less exempted up to least of following:
(a) Actual H.R.A. 12,000
(b) Rent paid – 10% of salary
(12,000-10% of (42,000+6,000) 7,200
(c) 40% of salary 19,200
Least is exempted 7,200
----------
Taxable H.R.A. 4800 4,800
______ ------------
Gross Salary 67,200
-----------
 32

PROBLEM-3

Compute the value of benefit of house for each situation separately from particulars given below;
(a) Salary Rs.5,000 p.m., (Salary is due on last day of every month).
(b) DA @ 100% of Salary
(c) Bonus (i) Statutory Rs.10,000 and (ii) Gratuitous 5,000
(d) Conveyance allowance @ Rs.400 pm.,
(e) Entertainment allowance @ Rs.500 pm.,
(f) Arrears of salary for the previous year 2017-18 Rs.6, 000
(g) Cost of furnishing is Rs.25,000 and a hired air-conditioner is provided for 6 months every
year and rent paid in respect of such air-conditioner is Rs.1,000 p.m.
Situation: (i) Employee is a Govt. employee and rental value of the house is Rs.400 p.m.,
Situation: (ii) Employee is working with Punjab Government at Chandigarh (Population below 4
lakhs). The Government owns house and its Fair Rental value is Rs.9,000 p.a., The house was
provided to him from 1.5.2017.
Situation: (iii) Employee is working in a Public Ltd., Company at Delhi (Population above 25 lakhs)
and rent paid by company is Rs.48,000 p.a., Employee pays Rs.250 p.m., as rent.

SOLUTION
Calculation of value of rent free house:
Situation (i) Govt. Employee Rs.

Value of rent free house (400x12) 4,800

Add 10% of cost of furnishing 2,500
Add Actual Rent of Air-conditioner 6,000
-------
Value of furnished rent free house 13,300
-------
 33

Situation (ii) Punjab Govt. Employee Rs.

Taxable value of rent free house is rent fixed by

Government Rs.9,000 p.a. 9,000
Add 10% of Cost of furnishing (25,000x10/100) 2,500
-------
11,500
-------
Reduced to 11 months Rs.(11,500 x 11/12) 10,542
Add rent of Air-conditioner 6,000
-------
Value of Rent free furnished house 16,542
-------

Situation (iii) Any other employee at Delhi Rs.

Rent paid by company = 48,000

Salary 60,000
Statutory Bonus 10,000
Conveyance Allowance 4,800
Entertainment Allowance 6,000
----------
Salary for rent free house 80,800
----------

15% of employee’s salary = 12,120

or
Rent paid by employer = 48,000
w.e. is less 12,120
Add: 10% of cost of furnishing 2,500
Add: Rent of Air-conditioner 6,000
 34

----------
20,620
Less: Rent paid by employee 3,000
----------
Value of Concessional Rent House 17,620
---------

Note: Gratuitous bonus is treated as a gift, hence not treated as part of salary for calculation of value
of rent free house.

PROBLEM-4

Mr. Ghosh retires on 31.10.2017 after 20 years service and received Rs.48,000 as leave
encashment for 12 months. His employer allows him 1 ½ month of leave for every one year of
service. He has already enchased leave for 18 months. His salary for 2016-17 was Rs.3000 and
from 1.4.2017 it was raised to Rs.4,000 p.m., Compute the taxable amount of leave encashment.

SOLUTION

U/s 10 (10 AA) leave encashment received at the time of retirement is exempted up to least of
following:
Rs.
(a) Notified Limit 3,00,000
(b) Average salary x 10 months
Average salary Rs.3,700 (Note-1) 37,000
(c) Actual amount received 48,000
(d) Cash equivalent for leave due (Note-2)
(3,700 x 2)
Exemption u/s 10 (10AA) 7,400
Taxable = Rs.48,000 – Rs.7,400 = Rs.40,600 7,400
 35

Note 1: Average salary = Salary for 10 months preceding the date of retirement/10.
Salary 1.2.2017 to 1.11.2017
(3,000 x 3 = 9,000) + (4,000 x 7 = 28,000) = 37,000.
Average Salary = 37,000 x 1/10 = 3,700

Note 2 Leave due

Leave due taking 1 month leave per year = 20
Less leave already enchased = 18
--------------
Leave due = 2 months
--------------

PROBLEM-5

The following are the particular of the Income of Shri. Arvind for the previous year ending on
31st March:
(i) Salary Rs.12,000 per month.
(ii) Contribution to recognized P.F. Rs.1,610 per month.
(iii) Employer contributes the same amount as the employee contributes towards P.F.
(iv) Dearness Allowance Rs.300 p.m., It is not considered for computation of his retirement
benefits.
(v) Interest credited to P.F. @ 13% is Rs.13,000
(vi) Contribution to Public Provident Funds is Rs.9,000
(vii) Bonus Rs.3000
(viii) His ration bill of Rs.2,000 p.m., is paid by employer.
(ix) Premium of life Policy is Rs.12,000 on a policy of Rs.1,00,000
(x) Deposited Rs.4,800 in Equity linked Saving Scheme (ELSS).
(xi) Repayment to House Building Loan taken from HDFC (a Govt. agency) Rs.20,500 during the
year
Find out taxable income of Shri. Aravind for the assessment year 2018-19
 36

SOLUTION
Computation of Taxable Salary Income of Sh. Arvind

Rs. Rs.

Salary (12,000 x 12) 1,44,000

D.A. (300 x 12) 3,600
Employer’s Contribution to
R.P.F. (6,610 x 12) 19,320
Less exempted 12% of 1,44,000 17,280 2,040
-----------
Interest credited to R.P.F. Balance @ 13% 13,000
Less exempted @ 9.5% (13,000 x 9.5/13) 9,500 3,500
Ration Bill paid by employer 24,000
Bonus 3,000
-------------
Salary Income as G.T.I. 1,80,140
Deduction u/s 80C: Q.A. (Note 1 ) Rs.65,620 100% 65,620
-------------
Total Income 1,14,520
------------
Qualifying Amount for deduction u/s 80C
(i) Own contribution to R.P.F. 19,320
(ii) Amount deposited in P.P.F. 9,000
(iii) Life Insurance Premium 12,000
(iv) Amount deposited in ELSS 4,800
(v) Repayment of House Building Loan: 20,500
-----------
Qualifying Amount 65,620
-----------
 37

PROBLEM-6

Shri. Sukhwasi is Secretary to Hamesha Naksan Ltd., Pune (Population 20 lakhs) and for the
period between 1.4.2017 and 31.3.2018 has received the following salary and other payments from
his company:
Rs.
(i) Salary 9,000 p.m.,
(ii) Dearness allowance 1,250 p.m.,
(iii) City compensatory allowance 400 p.m.,
(iv) Entertainment allowance 7,200 p.m.,
(v) Commission on Sales achieved by him 8,000
(vi) Rent-free accommodation of building (furnished) for which
Co. pays a municipal tax on Rs.36,000 per annum and furniture value is Rs.52,000
(vii) Medical bills reimbursed by company
(viii) He is provided with a car of 1.8 lt., capacity which is partly used for personal and partly
for employment purposes. During the year company incurred Rs.24,000 on
maintenance of car. Normal depreciation on car is Rs.30,000 and driver’s salary is
Rs.12,000 p.a., It was agreed by the Assessing Officer that 40% of the car time is used
for personal purposes.
(ix) As per terms of agreement his professional tax of Rs.2,000 was paid by the employer.
(x) During the year he travelled in connection with his job and was paid Rs.16,000 as
travelling allowance and Rs.12,000 as daily allowance.
(xi) He and his employer contributed Rs.17,500 p.a. (each) to R.P.F.,
(xii) During the year he paid Rs.6,450 as life insurance premium to insure the life of his
major son.
Compute his income under the head Salaries and qualifying amount for deduction u/s
80C.
 38

SOLUTION:

Computation of Salary Income of Sh. Sukhwasi

Rs. Rs.
Salary 1,08,000
Dearness Allowance 15,000
City Compensatory Allowance 4,800
Entertainment Allowance 7,200
Commission on turnover achieved by him 8,000
Medical Bills reimbursed – Exempted NIL
Professional Tax paid by employer 2,000
Employer’s contribution to R.P.F. 17,500
Less Exempted 12% of Salary + commission 13,420
---------- 3,580
Car (big) perk: Partly for personal use: Taxable @ Rs.2,400 pm.,
+Driver @ Rs.900 pm., 39,600
Travelling and Daily Allowance – exempted Nil
Value of rent free furnished house at Pune:
owned by employer
Salary (1,08,000 + 4,800 + (7,200 + 8,000) = 1,28,000
10% of Salary 12,800
ADD 10% of cost of furnishing 5,200
------------------- 18,000
--------------
Gross Salary 2,06,180
--------------
Deduction u/s 16:
U/s 16(iii) Professional Tax paid by employer 2,000
--------------
Salary Income 2,04,180
--------------
 39

Notes: 1 Qualifying Amount for deduction on u/s 80C

Own Contribution to R.P.F. 17,500
Life Insurance Premium Paid 6,450
---------------
Q.A. 23,950
---------------
2. Professional tax paid by employer is not added in salary for rent free house;
3. With the withdrawal of FBT, the car perk with driver is taxable in the hands of the
employee.

Problem-7
Mr. P. Chaudhary is employed in a firm of Kolkata and he furnishes the following particulars
of his income for the assessment year 2017-18
Rs.
(a) Salary received after deduction of his own contribution to 42,000
R.P.F. and income-tax at source
(b) Income-Tax deducted at source 1,800
(c) Own contribution to R.P.F. 4,200
(d) Employer’s contribution to R.P.F. 4,200
(e) Dearness Allowance at 50% of first Rs.10,000 and 25% of the
remaining basic salary per year
(f) Interest credited to R.P.F., @ 12% p.a., 1,200
(g) House rent allowance per annum (Rent paid Rs.1000 pm.) 12,000
(h) Reimbursement of medical expenses for medical treatment of
his wife (Hospital is notified) 62,000
(i) Free refreshment during working hours 3,600
(j) Free services of sweeper and watchman – Salary paid by
employer is Rs.300 p.m., and Rs.1,000 p.a., respectively
(k) Free lunch during office hours, the cost of which is estimated
at Rs.100 per meal for 300 days.
(l) Conveyance Allowance (He does not spend anything) 1,900
 40

(m) Premium paid on his life policy of Rs.95,000 10,000

Compute his salary income
SOLUTION:
Computation of Salary Income of Shri. P. Chaudhary
Rs. Rs.
Net Salary received 42,000
Add Income Tax deducted at Service 1,800
Add Own contribution to R.P.F. 4,200
----------
Salary 48,000
Dearness Allowance : 50% of 10,000 5,000
25% of 38,000 9,500
----------- 14,500
Employer’s contribution to R.P.F. 4,200
Less 12% of Salary 5,760
----------- NIL
Interest on R.P.F. Balance @ 12% 1,200
Less exempted @ 9.5% 950 250
-----------
Conveyance Allowance 1,900
Perks: (Specified employee)
Sweeper, Watchman (3,600 + 1,000) 4,600
Free refreshments during working hours exempted NIL
Free Lunch: Taxable Rs. (100-50) x 300 days 15,000
House Rent Allowance 12,000
Less exempted: Rs.
(A) Actual Received 12,000
(B) Rent paid – 10% of Salary
(12,000 – 9,800) 7,200
(C) 50% of Rs.48,000 24,000
Least is exempted 7,200
 41

---------------- 4,800
----------
Salary Income 89,050
----------
Notes: 1. He is neither a director, nor a shareholder but his salary income
exceeds Rs.50,000 (48,000 + 14,500 + 1,900 + 4,800 = 69,200. Hence he is
covered u/s 17(2) (iii) and as such he is a specified employee).

2. Q.A. for deduction u/s 80C

Own contribution to R.P.F. 4,200
Life Insurance Premium 10,000
-----------
Q.A. 14,200
3. Free lunch during working hours is exempted up to Rs.50 per meal
and excess, if any, is taxable.

PROBLEM-8
Mr. A received the following emoluments during the previous year
2017-18 at Patna (Population 20 Lakhs).
Rs.
Basic Salary (due on last day of the month from 1.1.2017) 10,000 p.m.,
Increment Rs.400 p.m., from 1.6.2017
D.A. (50% of this entrees in to pay for retirement benefits) 4,000 p.m.,
(Education Allowance for three children (one of the child is staying
in hostel ) (Per child) 400 p.m.,
Transport Allowance 1,000 p.m.,
Medical Allowance 400 p.m.,
Entertainment Allowance 1,000 p.m.,
House Rent Allowance (upto 31.08.2017) 4,000 p.m.,
Rent free house with effect from 1.9.2017; rent paid by employer 5,000 p.m.,
 42

The same accommodation was hired by employee till 31.08.2017 and later on employer hired it and was given
to the employee free of rent.The accommodation was furnished by employer at the cost of Rs.60,000.
Computer value of rent free house and taxable H.R.A. for the previous year ending on 31.3.2018.
SOLUTION:
Computation of taxable HRA and value of rent free house.
Rs.
Taxable HRA Period 1.4.2017 to 31.08.2017 : Salary for HRA
Salary (30.4.2017 to 31.5.2017 = 10,000 x 2 = 20,000)
(30.06.2017 to 31.8.2017 = 10,400 x 3 = 31,200) 51,200
D.A. 4000 pm., (50% enters into pay for retirement benefits)
(2000 x 5) 10,000
----------
Total 61,200
HRA received (4,000 x 5) 20,000
Less exempted up to least of following: Rs.
(a) Actual received 20,000
(b) Rent paid = 10% of salary (25,000-6,120) 18,880
(c) 40% of salary (Patna) 24,480
Least of above is exempted 18,880
Taxable HRA 1,120
Value of rent free house at Patna Rs.
– house hired by employer
Salary for rent free house (Rs.10,400 x 7) 72,800
D.A. @ 4,000 p.m., (50% enters) (Rs.2,000 x 7) 14,000
Transport Allowance (1,000 x 7) – (800 x7) 1,400
Entertainment Allowance (Rs.1,000 x7) 7,000
Education Allowance (400 x 3 x 7) = 8,400
Less exempted (200 x 7) 1,400 7,000
Medial Allowance (Rs.400x7) 2,800
Total 1,05,000
 43

15% of salary i.e., Rs.15,750 or actual rent paid by employer Rs.35,000

whichever is less is taxable 15,750
Add 10% of cost of furnishing (Rs.6,000 x 7/12) 3,500
Total taxable value of rent free furnished house for 7 months 19,250

Note: Employee will not get any exemption regarding hostel expenditure as
he is not getting any hostel expenditure allowance.

CHAPTER-3
INCOME FROM HOUSE PROPERTY
1. Definition of the head: The income from houses, buildings, bungalows, godowns etc. is to be
computed and assessed to tax under the head “Income from house property”.
2. Exempted incomes from House Property: The following incomes are not taxable under this
head. They are;
1. Income from agriculture house property.
2. Income from house property held for charitable purposes
3. Income from self –occupied house.
4. Income from house used for own business or profession.
5. Income from property held by registered trade union.
3. The procedure for computing income from house property.
I. Computation of annual rental value: Out of actual rent received deduct cost of common
facilities such as lift maintenance charges, lighting of common stairs, salary of common gardener and
watchman, pump maintenance charges etc., Water and electricity charges are to be deducted only if it
is expressly mentioned that rent includes them.
1. Let out house property: Out of Municipal Rent Value (MRV) or Faire Rental Value
(FRV) whichever is higher is selected as Expected Rental Value (ERV). In case Standard
Rent under Rent Control Act is given the comparison is made between the Standard rent and
ERV and whichever is less is selected as ARV except when actual rent is more than ERV.
Out of ARV so selected as per above amount of local/municipal taxes levied by
Local/Municipal authorities (Municipal Taxes, Water Tax, Sanitation Tax, Education Tax
etc.,) actually paid by the owner are allowed to be deducted. Balance is net annual value.
 44

2. Self-occupied property: One self-occupied house is exempted and A.V.is taken as to Nil.
If assessee owns more than one house and claims as self-occupied then only one house of his
own choice shall be exempted and other houses shall be deemed to be let-out.
3. Part of the year let out and part of the year self-occupied :Treat it as let out for fully
year and compute ARV in same manner. No benefit of self occupation.
4. If property consists of more than one unit/house: Each such unit/flat/house shall be
treated as one independent house and shall be given respective treatment.
5. Co-Owners :If a self-occupied house property is owned by co-owners, they shall not be
assessed as an association of persons if their shares are determinable. Income of house
property computed under this head shall be divided and added in their individual income.
6. Vacant but Self-occupied House : Annual value of such property is also taken to be nil.
7.House used for assessee’s own business: Annual value of such property is also taken to be
nil.
8.Deemed to be Let-out: Treated as let out house property.
II. Deductions from Net Annual Value (Section 24)
(a)Self-occupied House : Only one deduction of interest on loan taken to purchase,
repair , renovate construct the house + 1/5th of Pre construction period interest is allowed up
to Rs.30,000 or actual interest whichever is less. This limit has been increased to Rs.2,00,000
if loan is taken for acquiring or constructing the house on or after 1-4-99 and
construction/acquisition is completed within 3 years from the end of financial year in which
loan is taken. As a result here shall be loss, which can be set off from other houses or from
any other head.
(b) Let-out House:
1.Standard Deduction : 30% of net annual value every year whether claimed or not.
2.Interest on Loan taken to Actual interest for the previous purchase, construct or repair,year
2017-18 + 1/5th of pre renovate the house construction interest is allowed as deduction unless
purpose of loan is connected with house.

III. Treatment of unrealized rent : Amount of unrealized rent is deducted out of actual rent
received for calculating ARV if conditions as laid down are fulfilled.
 45

IV. Treatment of unrealized rent recovered: Deemed as income of the year in which
recovered.
V. Arrears of rent : Arrears of rent are deemed as income from house property of the year
in which recovered but after allowing standard deduction @ 30% of such amount.
VI. Joint Expenses : If somewhere expenses are given jointly for two or more houses, these
will be apportioned on some common basis and generally Municipal Rental Value serves as
common basis.
VII. Loss from House Property; Loss from house property can be set off from income under any
other head. Loss from self-occupied house due to interest on loan can be set off from any
other Head. Any loss under the head “House Property” whether from let out or self-occupied
house which remains unadjusted, can be carried forward for 8 succeeding previous years to
be set off from Income under the head ‘House Property’ only.

PROBLEMS AND SOLUTIONS

PROBLEM-1

From the particulars given below compute ARV in each case separately:
Rental Value A B C D
Rs. Rs. Rs. Rs.
MRV 60,000 48,000 36,000 96,000
FRV 75,000 60,000 45,000 1,16,000
Real Rent 69,000 54,000 40,000 1,20,000
Standard Rent Not applicable 72,000 42,000 1,15,000
SOLUTION:
Computation of Annual Rental Value
Case (a) Rent Control Act is not applicable Rs.
MRV 60,000
FRV 75,000 whichever is higher is ERV 75,000
ERV 75,000 or Real Rent Rs.69,000
Whichever is higher is ARV 75,000
Case (b) Rent Control Act is applicable Rs.
 46

MRV 48,000
FRV 60,000
Whichever is higher or 60,000
Standard Rent 72,000
Whichever is less is ERV 60,000
Real Rent of Rs.54,000 is less than ERV 60,000
as such ERV is ARV 60,000
Case (c) Rent Control Act is applicable Rs.
MRV 36,000
FRV 45,000
Whichever is higher 45,000
Standard Rent 42,000
Whichever is less is ERV 42,000
Or Real Rent 40,000
Whichever is higher Annual Rental Value 42,000
Case (d) Rent Control Act is applicable Rs.
MRV 96,000
FRV 1,16,000
Whichever is higher 1,16,000
Standard Rent 1,15,000
Whichever is less is ERV 1,15,000
or Real Rent 1,20,000
Whichever is higher is Annual Rental Value 1,20,000
PROBLEM-2
Mr. Sri Kant owns two houses, the particulars of which are given below
for the previous year 2017-18
Particulars House A House B
Rs. Rs.
Rent Received NIL 1,72,000 p.a.,
Standard Rent 5,00,000 p.a., 1,50,000 p.a.,
Municipal Valuation 4,90,000 p.a., 1,60,000 p.a.,
 47

Fair Rent 5,00,000 p.a., 1,80,000 p.a.,

Municipal Taxes paid 49,000 p.a., 16,000 p.a.,
during the years
Fire Insurance (due) 5,000 p.a., 3,000 p.a.,
Ground Rent paid 4,500 p.a., 3,900 p.a.,
Interest on money 36,000 p.a., 18,000 p.a.,
borrowed during
98-99 for construction
of house (50% paid)
Unrealized rent NIL 6,000
(Pertaining to this year)
Nature of occupation Self occupied Let out

Compute income from house property for the assessment year 2018-19 assuming that the Assessing
Officer is satisfied with the non-recovery of rent.
Solution.
A. Self Occupied House Rs. Rs. Rs.
Annual Value is taken as NIL NIL
Deduction u/s 24
Interest on Loan Rs.36,000 but restricted to 30,000
Loss from self occupied house (-)30,000
B. Let out House
MRV 1,60,000
FRV 1,80,000
Whichever is higher is FRV i.e., 1,80,000
Or Standard Rent 1,50,000
Whichever is less is ERV 1,50,000
But real rent Rs.1,72,000 less unrealized rent
Rs.6,000 = Rs.1,66,000 is more than ERV
Hence it is ARV 1,66,000
Less Municipal Taxes 16,000
 48

Net Annual Value 1,50,000

Deduction u/s 24:

Standard Deduction : 30% of NAV 45,000
Interest on Loan 18,000 63,000
Income from Let out house 87,000
Income under the head House property 57,000

Note: Deduction regarding interest is allowed on due basis.

PROBLEM-3
Mr. Ansari is owner of two houses and he provides following information
about these houses;
A B
Date of Completion 1.6.2009 1.8.2008
Rs. Rs.
Standard Rent (under Rent Control Act) 15,000 p.a., -
Fair Rental Value 18,000 p.a., 24,000 p.a.,
Municipal Rental Value 12,000 p.a., 20,000 p.a.,
Actual Rental Value 1,000 p.a., Self-occupied
Municipal Taxes 1,200 10% of M.R.V.
Ground Rent (Due) 400 -
Fire Insurance Premium 500 400 p.a.,
Interest on Loan taken for the construction of house
for the year 2015-16 4,000 11,000
2015-16 4,000 11,000
2016-17 3,000 11,000
2017-18 3,000 7,000
Calculate his income from the house property for the year ended 31.3.2018.
 49

SOLUTION:
Computation of Income from House Property
Rs. Rs. Rs.

A. Let out (10 months) date of completion 1.6.2017

Fair Rental Value for the year (18,000 x 10/12) 15,000
Municipal Rental Value for the year
(12,000 x 10/12) 10,000
w.e., is higher is to be taken 15,000
Standard Rent (15,000 x 10/12) 12,500
Whichever is less 12,500
or Actual Rent (10 months) 10,000
Whichever is higher is ARV 12,500
Less: Actual Municipal Taxes paid 1,200
Net Annual Value 11,300
Deductions u/s 24:
(i) Standard Deduction : 30% of 11,300 3,390
(ii) Interest on Loan taken
(a) for the previous year 2009-10 3,000
(b) for the preceding previous years
(4000+4000+3000) x 1/5 2,200 8,590 (+) 2,710
Income from let out House “A”
B. Self-occupied : Annual Value is taken as NIL
Deductions:
(a) Interest on loan for the year 2009-10 7,000
(b) 1/5th of Interest of (2006-07 and
2007-08) (11,000+11,000)x1/5) 4,400
11,400 (-) 11,400
Loss from Self-Occupied House (-) 11,400
Loss from House Property to be C/F 8,690
 50

Note: Deduction for the pre-construction interest of self occupied house for the previous year 2017-
18 has been excluded because house was completed during the previous year 2017-18.

PROBLEM-4
Mr. Parampal Singh owns a house property as Poona. It was completed on 1-11-2017 and is
used as follows:

(a) 25% of floor area is used for his own business

(b) 25% of floor area is self-occupied for his own residence.
(c) 25% of floor area is let out for residential purposes @ Rs.1,000 p.m.,
(d) 25% of floor area was let out for non-residential purposes @ Rs.1000 p.m., with effect from
1.4.2017 to 28.2.2018 and self occupied from 1.3.2018 onwards.
The other expenses incurred by Mr. Singh in respect of house property are;
Municipal Taxes Rs.4,000 p.a.,
Fire Insurance Premium Rs.1,200 p.a.,
Repairs of House Property Rs.3,200 p.a.,
Interest on Loan for construction of house Rs.36,000
Compute Income under the head house property for the assessment year 2018-19
SOLUTION:
As each portion is an independent unit, the income shall be computed in following manner:
Fair rental value of full house Rs.1,000 x 4/1 x 12 =Rs.48,000

Rs. Rs.
Unit-I (1/4th Area) used for own business NIL
Unit-II (1/4th Area) under own occupation
Annual Value NIL
Interest on loan taken (1/4th of Rs.36,000) 9,000
Loss from self-occupied unit (-) 9,000
Unit 3 & 4 1/4th let out for full year and 1/4th area
let out for 11 months and under own
occupation for one month
 51

Rs.
Fair rental value of two units (48,000x1/2) 24,000
Actual Rental Value (12,000+11,000) 23,000
Whichever is higher is ARV 24,000
Less Municipal Taxes (1/2 of Rs.4,000) 2,000
Net Annual Value 22,000
Deductions u/s 24
Standard Deduction : 30% of NAV 6,600
Interest on loan (1/2 of Rs.36,000) 18,000 24,600
Loss from let out units -2,600
Loss from house property (-) 11,600
PROBLEM-5
Mr. X of Daryaganj, New Delhi, owns several properties which are let-out to tenants. He is
owner of the house in which he is living at Daryaganj and its Municipal valuation is Rs.9,000 p.a.,
From the following statement of account for the year ending on March 31, 2018. Compute his
income from house property.
Rs. Rs.
To Municipal Tax By rent
(60% being tenant’s share) Greenpark House 12,000
Greenpark House 400 By rent
Vasant Vihar House 800 Vasant Vihar House 24,000
South Extension House 320 By rent
Gupta Colony Flat 240 South Extension
Daryaganj Bungalow 600 House (Occupied
To Ground rent of for 10 months) 15,000
Gupta Colony Flat 250 By rent
To Repairs 6,000 Gupta Colony Flat
To Collection Charges (Completed on 1/10/2009)
(i) Greenpark 480 Let-out for residential
(ii) Vasant Vihar 800 purposes 6,000
(iii) South Extension 640
 52

(iv) Gupta Colony 480

2,400
To Interest paid to Bank
(Loan taken for construction
of South Extension House) 3,000
To Life Insurance Premium 6,500
To Excess of receipts
over Expenses 36,490
__________ _______
57,000 57,000

Municipal valuation of the houses (annual): Greenpark House Rs.12,000. Vasant Vihar
House Rs.20,000. South Extension House Rs.16,000 Gupta Colony Flat Rs.12,000.
SOLUTION:
Computation of Total Income of Mr. X of New Delhi.
Rs. Rs. Rs.
Greenpark House:
Rent received 12,000
Less: Municipal Taxes paid by Landlord 400
Net Annual Value 11,600
Deduction u/s 24:
Standard Deduction: 30% of NAV 3,480 8,120

Vasant Vihar House

Municipal Valuation 20,000
Rent received 24,000
w.e. is higher 24,000
Less: Municipal Taxes paid by Landlord 800
Net Annual Value 23,200
Deduction u/s 24:
Standard Deduction 30% of NAV 6,960 16,240
 53

South Extension House

Municipal Value 16,000
Or Annual Rent
(15,000x12/10) 18,000
Whichever is higher 18,000
Less: Loss due to vacancy 3,000
Annual Rental Value 15,000
Less: Municipal Taxes 320
Net Annual Value 14,680

Deduction u/s 24:

Standard Deduction
30% of NAV 4,404
Interest on loan 3,000 7,404 7,276
Gupta Colony Flat
Rent received for 6 months 6,000
(1/10/2009 to 31/3/2010)
Municipal Valuation for
6 months 6,000 6,000
Less: Municipal Taxes paid by
Landlord 240
Net Annual Value 5,760

Deductions u/s 24:

Standard Deduction : 30% of NAV 1,728 4,032
Daryaganj House (Self-occupied) Net AV is NIL
Income from House Property 35,668

Notes:
1. Q.A. for rebate of tax u/s 88: L.I. Premium Rs.6,5002.Municipal Taxes which have been met
by the Landlord himself, are 40% of the total Municipal Taxes due.
 54

CHAPTER-4

PROFITS AND GAINS OF BUSINESS OR PROFESSION

1.Meaning of Business . Business means any economic activity carried on for earning profits.

2.Meaning of Profession. A profession is an occupation requiring purely intellectual skill of

manual skill controlled by the intellectual skill of the operator.

3.Chargeable incomes to tax: The following incomes are chargeable to tax under the head
profits and gains of business or profession.

i) Business pr Professional Income.

ii) Compensation
iii) Income of a Trade or Professional Association
iv) Export Incentives
v) Salary, interest, bonus, commission received by a partner from a firm
vi) Speculation Business. Income from any business whether legal or illegal is taxable.
vii) Deemed Profits: Deemed profits means any benefits or cash obtained, by a way of
remission or in respect of loss or expenditure, by a person, the amount obtained
shell be deemed to be profits and gains of business or profession.

4.Computation of Business Profits.

For computation of Business profits, the Profit and Loss Account serves at the basis. The
profit and loss account shows certain expenses and loss which are either fully or partly disallowed
under the provisions of Income-tax Act. On the credit side there are certain incomes which are either
tax-free or are not taxable under this Lead. The following table can help a person to compute the
business income of an assessed:

Balance as per P and L A/c Profit (+) Rs.

Loss (-) Amount

I. Add expenses claimed but not allowed under the Act:

 55

(i)All provisions and reserves (Reserve for bad debts/Depreciation/Income Tax etc.) except
creation of reserve by financial corporation’s u/s 36

(ii) All taxes (i.e., Income Tax, Advance Income Tax, Wealth Tax etc.) except Sales Tax,
Excise duty and Local taxes of premises used for business.

(iii) Rent paid to self

(iv) All capital expenses except on scientific research

(v) All capital losses

(vi) All charities and donations

(vii) All expenses relating to other heads of income

(e.g., Taxes on house property etc.)

(viii) Cultivation expenses

(ix) Any interest on capital unless the amount is borrowed

(x) Any personal expenses (Drawings etc.)

(xi) Any depreciation, if wrongly debited

(xii) Gift and presents (Non advertisement)

(xiii) Any type of fine or penalty

(xiv) Any payment to a partner (In case of A.O.P. only)

by way of salary, interest, bonus, commission or remuneration

(xv) Any salary or interest payable outside India unless tax is

deducted at source or is paid according to the law

(xvi) Past losses (i.e., loss of the past years)

(xvii) Any other expenditure which is not incurred according

 56

to the provisions of law

(xviii) Salary paid to self or any other member of family for casual help

(xix) Personal life insurance premium

(xx) Any amount invested in savings such as NSC, NSS, PPF etc.

(xxi) Rent for residential portion (xxii) Speculation loss

(xxiii) Bad Debt still recoverable

(xxiv) Legal expenses on criminal case or a personal case of employee

(xxv) Legal Expenses on acquiring an asset

(xxvi) Legal Expenses on curing title of assets

(xxvii) Loss by theft from residence

(xxviii) Expenses on illegal business

(xxix) Employer's contribution to unrecognized provident fund

(xxx) Difference in trial balance

(xxxi) Difference due to under crediting of stock

(xxxii) Cost of Patent rights being capital expenditure

(xxxiii) Cost of Technical knowhow being capital expenditure

(xxxiv) Preliminary expenses capital expenses

Total of these items is added in the profit or adjusted of the loss (+) =A

II. Deduct [out of the amount arrived at (A) above] any expenditure which is allowable under the art,
but has not been debited to P and L A/c:

(i) Actual bad debts (not charged in P and L A/c)

 57

(II) Depreciation (-Do-)

(iii) Any other expenditure incurred according to provision of law

(iv) Difference due to under debiting of stock

Total of these is deducted from (A) above and we get =B

III. Deduct out of the amount arrived at (B) above any income which is either exempt or not taxable
under this head

(a) Income exempted from tax

(i) Post office saving bank interest

(ii) Agricultural receipts

(iii) Gifts from relatives

(iv) Income-tax refund

(v) Bad debt recovered-disallowed earlier

(vi) Life Insurance Maturity Amount

(vii) Any capital receipt

(viii) Withdrawal from PPF

(b) Income taxable under other hands

(i) Part-time salary

(ii) Interest on Securities

(iii) Rent from House property Let

(iv) Capital Gains

 58

(v) Dividend, Bank interest, winnings from Lotteries, race course etc.

Total of these is deducted from (B) above and we get taxable profit from the business.

Add : Income from any other business (legal or illegal) to get income taxable under head Profits

5.Computation of Professional Income

The above-mentioned method is not suitable to compute professional income because

professional persons usually do not prepare profit and loss account. They prepare Income and
Expenditure Account or Receipt and payment Account. To compute the professional income, it is
easier to take Professional receipts of the previous year and deduct out of these the professional
expenses incurred during that year.

The following illustration can help a person to compute the professional income of an
assessee.

I.In case of Doctor or Medical Practitioner

Add. All Professional Receipt :

(1) Consultation fees ,(ii) Operation fees ,(iii) Visiting fees ,(iv) Sale of medicines ,(v) Gift from
patients ,(because these are received as token of gratitude for professional services rendered),(vi)
Nursing home receipts ,(vii) Value of any perquisite received by such person ,(viii) Examiner's
fees ,(ix) Any other professional receipt.

Less : Professional Expenses :

(i) Dispensary Expenses (i.e., rent, light, water charges, salary to staff, telephone expenses etc.) ,(ii)
Cost of Medicines

(a) If accounts are maintained on cash basis Actual purchases of medicines made shall be taken as
cost of medicines ,(b) If accounts are maintained on mercantile bases ,Opening Stock + Purchases
made during the year (—)

Closing Stock shall be taken as the cost of medicines (iii) Depreciation on Surgical Equipment and
X-ray ,Machines, etc., at prescribed rates
 59

(iv) Depreciation on cost of books for profession , (v) Motor car expenses : depreciation relating to
professional work ,(vi) Expenditure incurred to increase professional knowledge ,(vii) Nursing home
expenses

(viii) Any other expenditure incurred during the year ,

2.In case of Chartered Accountant Professional Receipts:

Add: Professional Receipts :

(i) Audit fees

(ii) Income from accountancy work

(iii) Institute fees

(iv) Examiner's fees

(v) Gift from clients, if any

(vi) Consultancy Services

(vii) Any other receipt

Total Professional Receipts

Less : Professional Expenditure

(1) Office expenses

(ii) Institute expenses

(iii) Cost of books

(iv) Motor car expenses relating to professional work

(v) Membership fees

(vi) Depreciation on office equipment, car or scooter

(vii) Any other expenditure incurred to increase professional knowledge

 60

(viii)Stipend to trainees

(ix) Subscriptions

(x) Depreciation on office furniture Total Professional expenses Professional Income

3. Income of a Lawyer of an Advocate Professional Receipts

Add: Professional Receipts :

(1) Practicing fees

(ii) Legal Fees

(iii) Special commission

(iv) Present from clients

(v) Examiner's fees

(vi) Any other receipt Total Professional Receipts

Less : Professional Expenses

(i) Office expenses

(ii) Salary of staff, if any

(iii) Cost of books for profession

(iv) Depreciation of office equipment

(v) Expenditure incurred to increase professional knowledge

(vi) Subscription

(vii) Purchase of stamp paper and court fee

(viii) Travelling expenses

Total Professional Expenses

 61

Problems and Solutions

PROBLEM-1
Ram Prasad is a registered medical practitioner. He has prepared the following Income and
Expenditure Account for the year ending 31st March, 2018. You are required to prepare a statement
showing his income from profession.
Income and Expenditure Account
Rs. Rs.
Household Expenses 20,000 Consultation fees 10,000
Car purchased 30,000 Visiting fees 20,000
Travelling Expenses (Personal) 4,000 Gains on Race(Gross) 10,000
Charity & Donations 1,000 Share in sale proceeds
Income Tax 2,000 of an ancestral house 34,000
Salaries 8,000 Profit on sale of securities 6,000
Gift to daughter 7,000 Dividend on units(gross) 5,000
Establishment Exp. 1,000 Interest on P.O. Savings Bank 600
Surgical Equipment 4,000
Books 2,000 Gifts from Father-in-law 2,000
Life Insurance premium 2,000 Bad debts recovered (Not
Wealth-Tax 1,000 allowed in earlier year) 2,000
Interest on Capital 1,000 Interest on Fixed deposit 1,300
Surplus 7,900 -------
90,900 90,900
--------- -------
Rate of Depreciation allowable on car is 15% and surgical equipments is at 15%. In case of
books for depression the rate of depreciation is 60%.
 62

SOLUTION:
Computation of Professional Gain
Professional Receipts Rs. Rs.
Consultation fees 10,000
Visiting Fees 20,000
30,000
Less Professional Expenses:
Depreciation of Car (30,000 x 15%) 4,500
Salaries 8,000
Establishment Expenses 1,000
Surgical Equipment (4,000 x 15%) 600
Books: Dep. @ 60% of Rs.2000 1,200
15,300
Professional Gain 14,700

PROBLEM-2

Following is the Profit and Loss Account of Kesari Mallya for the previous year 2017-18.
Profit and Loss Account
Rs. Rs.
To Salaries 25,650 By Gross Profit 80,000
To Rent 1,000 By Bank interest 450
To Commission on Sales 100 By Bad Debts recovered
To Income Tax 2,600 (last year allowed) 2,000
To Entertainment expenses 600 By Income from house
property 4,800
To Commission paid to collect interest By Interest on commercial
on securities 25 securities 2,000
To Embezzlement by cashier 1,000
To Municipal Tax (House) 600
To Bad debts (allowed) 450
 63

To Repairs to House 1,625

To Office Expenses 9,180
To Depreciation 5,000
To LIC premium 1,320
To Net Profit 40,100
---------- --------
89,250 89,250
---------- --------
Allowable Depreciation on the Assets in Rs.4,500
Compute the taxable business income for the Assessment Year 2018-19.

SOLUTION:
Computation of Business Income of Mr. Kesari Mallya
Rs. Rs.
Net profit as per P & L A/c 40,100
ADD: Inadmissible Expenses:
Income Tax 2,600
Commission paid to collect interest on securities 25
Municipal Tax (House) 600
Repairs of House Property 1,625
Depreciation 5,000
Life Insurance premium 1,320
11,170
51,270
Less: Incomes not taxable under this head:
Bonus Interest 450
Income from House Property 4,800
Interest on Commercial Securities 2,000
7,250
44,020
Less: Allowable deprecation 4,500
 64

Business Income 39,520

Note: Embezzlement by cashier has been presumed to be a normal loss.
PROBLEM-3
Following is the Profit and Loss Account of a Merchant.
Rs. Rs.
To Rent 6,000 By Gross Profit 52,300
To Salary of Staff 5,400 By Interest from Debtors 2,800
To Divali Punjan Expenses 200 By rent from Property 2,400
To Interest on Loan 12,500 By Sundry Incomes 1,600
To Sundry Expenses 5,500 By Commission 3,700
To Bad Debts 600
To Charity 100
To Reserve for Bad Debts 200
To Rates 600
To Entertainment 850
To Loss by theft 1,400
To Net Profit 29,450
Total 62,800 Total 62,800
---------- --------
Notes:
1. Rent includes Rs.1,200 of a shop belonging to the assessee himself.
2. Salary of staff includes salary of Rs.2,400 of a son, who is a B.Com. Student and who
casually helps in the business.
3. A loan of Rs.6,000 @ 15 per cent p.a. is taken from his wife out of funds advanced by him
and interest is included in interest on loan.
4. Sundry Expenses include Rs.900 being expenses incurred on pilgrimage to Haridwar.
5. Entertainment includes Rs.150 spent on tea of some guest of a local M.L.A.
6. Loss by theft took place when a pretended customer stole a necklace worth Rs.600; Rs.800
were stolen from his house is the night by de-locking.
7. He earned Rs.4, 000 in gold smuggling not shown in books.
8. Rates include Rs.400 for the property let. Compute the merchant’s Business income.
 65

SOLUTION:
Calculation of Business Profits of a Merchant
Rs. Rs.
Balance as per P & L A/c 29,450
Add: expenses debited but not allowed Charity 100
Reserve for Bad debts 200
Rent paid to self 1,200
Salary to son 2,400
Interest on loan from wife(funds advanced by him) 900
Pilgrimage expenses 900
Expenses on Tea to Guests 150
Loss by theft-stolen from house 800
Rates of let-out property 400
7,050
36,500
Less: Allowable Expenses NIL
---------
36,500
Less: Income not taxable under this head –
Rent from property 2,400

(a) Business Profit 34,100

(b) ADD: Smuggling business income 4,000

Profits and Gains of Business or Profession 38,100

Notes:
1. Loss by theft from shop during working hours is a revenue loss, hence allowed.
2. Income may be legal or illegal – it is taxable if declare or detected.
 66

PROBLEM-4

Following are the details of income from the books of M/s. Kartik Traders owned by Mr.
Sharma for the year 2017-18
Profit & Loss Account

Rs. Rs.
To Opening Stock 72,000 By Sales 12,00,000
To Purchases 8,00,000 By Closing Stock 81,000
To Wages 30,000
To Carriage & Freight 40,000
To G.P. C/d 3,39,000
--------------- ----------------
12,81,000 12,81,000
---------------- ----------------
To Staff Salaries 90,000 By G.P. B/d 3,39,000
To Rent & Taxes 20,000 By Life Policy
amount 5,000

To Advertisement 20,000 By Sale of old

machinery 2,000
To Audit Fee 20,000 By Interest 4,000

To Donations 10,000
To Income Tax 10,000
To Reserve for Bad Debts 10,000
To Depreciation 10,000
To Sale Tax 10,000
To Printing & Stationery 20,000
 67

To Contribution to Staff Welfare

Fund 10,000
To Patents Purchased 90,000
To Interest on Capital 10,000
To Net Profit C/d 20,000
3,50,000 3,50,000
---------- -------------
Additional information:

1. The Opening stock has been valued at cost minus 10% basis, but not the closing stock.
2. Purchase include a payment for Rs.30,000 by a bearer chaque to a supplier.
3. Depreciation allowable as per I.T. rules for the year was Rs.8,000
4. Freight includes Railway Demurrage Rs.2,000 and railway penalty Rs.5,000
5. Advertisement includes expenses on 30 gift articles given to select customers at a cost of
Rs.300 each.
6. Entertainment expenses of Rs.8,000 spent during the year have not been debited.
7. He has carried forward the Business loss of Rs.6,000 from the earlier assessments. Compute
his net business income for the assessment year 2018-19
SOLUTION:
Computation of Business Profit
Rs. Rs.
Net Profit as per P & L A/c 20,000
Add Disallowed expenses
Donations 10,000
Income Tax 10,000
Reserve for Bad Debts 10,000
Depreciation 10,000
Contribution to Staff Welfare Fund 10,000
Cost of Patents 90,000
Interest on Capital 10,000
Purchases in cash (100% of
 68

Rs.30,000) 30,000
Railway Demurrage-allowed -
Railway Penalty 5,000
1,85,000
2,05,000

Less Allowed Expenses:

Depreciation on Patents 22,500
(90,000 x 25%)
Depreciation 8,000
Entertainment Exp. 8,000
Value of Stock under debited
(72,000 x 100/90) – 72,000) 8,000
46,500
1,58,500
Less: Incomes not taxable under this head

Life Policy 5,000

Sale of old machine 2,000
Interest 4,000
11,000
Business Profit of the year 1,47,500
Set off B/F Business Loss 6,000
-------------
Taxable Business Profit 1,41,500
 69

PROBLEM-5
Dr. Satish is Medical Practitioner. He gives you the following summary of cash book for the
year ending 31.03.2018;
Rs. Rs.

To Balance 10,000 By rent of Clinic 18,000

To Consultation fees 60,000 By Purchase of medicine 38,000
To Visiting fee 45,000 By Staff Salaries 24,000
TO Gifts and Presents 8,000 By Surgical equipment 40,000
To Sale of Medicine 42,000 By Motor car expense 8,000
To Dividend from U.T.I. 6,000 By Purchase of motor car 1,40,000
To Life Insurance Maturity 1,00,000 By Household expenses 7,000
To Interest from National
Defense Bonds 6,000 By Closing Balance 2,000
------------- -------------
2,77,000 2,77,000
------------- -------------
Other Information’s:
(i) 50% of the motor car expense incurred in connection with profession. Car was purchased in
December 2009.
(ii) Household expenses include Rs.6,800 for life insurance premium.
(iii) Gifts and presents include Rs.3,000 from relatives.
(iv) Closing stock of Medicine Rs.12,000 and on 1.04.2018 opening stock was Rs.4,000.
Compute his professional gain on the assessment year 2018-19.

SOLUTION:
Computation of Professional Gain
Professional Receipts Rs. Rs.
Consultation fees 60,000
Visiting fees 45,000
Gifts & Presents (8,000-3,000) 5,000
 70

Sale of Medicines 42,000

1,52,000
Less professional expenses
Rent of Clinic 18,000
Medicines 38,000
Staff Salaries 24,000
Depreciation on Surgical Equipment
(40,000 x 15%) 6,000
Motor Car Expenses (1/2) 4,000
Depreciation on Car
(1,40,000 x 15% x 1/2) x 1/2 5,250
95,250
Professional Gain 56,750

Note: As the accounts are maintained on cash system hence opening and closing stocks of medicines
have been ignored.
PROBLEM-6
Mr. Kedambi an advocate furnishes the following receipts and payment for the previous year
2017-18
Receipts and Payments A/c
Rs. Rs.
To Balance B/d 6,540 By rent 2,400
To Legal Fees 84,400 By Telephone 3,000
To Salary (as a part-time By Salaries 2,400
law lecturer) 3,600 By Subscription of
Law Journal 240
To Interest on debentures
(Not-listed) 2,700 By Travelling 560
To Gifts from clients 10,000 By Office expenses 600
To Rent 6,000 By Purchase of stamp
To Interest on foreign security 8,000 paper and court fee stamps 1,600
 71

To Refund of Company Deposit 2,000 By Interest on loan 870

By Donation to a School 5,000
By Income Tax paid 8,420
By Municipal Tax 600
By LIC Premium 6,000
By Wealth Tax 1,600
By Balance C/d 89,950
----------------- -------
1,23,240 ,23,240
------------------ -------
(a) The loan was borrowed for constructing his residential house, Its rental value is Rs.300 per
month.
(b) School is recognised for I.T. Purposes.
(c) Gifts from clients include Rs.2,000 received from his father. Compute the professional
income.

SOLUTION:
Compute of Professional Gain
Professional Receipts
Legal Fees 84,400
Gifts from clients (10,000-2,000) 8,000
92,400
Less: Professional Expenses:
Rent 2,400
Telephone 3,000
Salaries 2,400
Subscription to law journals 240
Travelling 560
Office Expenses 600
Purchase of stamp paper & fee 1,600
10,800
 72

Professional Gain 81,600

Notes:
1. Salary received as part time lecturer is taxable’s under the head salaries.
2. Gifts from father are not taxable as professional receipts.

4. DEPRECIATION :

I. Definition:

Normal wear and tear of the assests owned by assessee, used in business or profession during the
previous year. The asset may be used at any time during the year.

2. Assets :

Building machinery, plant and furniture, Plant includes ships, vehicles, books, scientific apparatus,
surgical equipment. sanitary and pipeline fittings of hotel, and service lines, switch gears etc. of
electric supply company, patent right, know-how etc.

3. Allowance :

(i) Deduction of depreciation is to be allowed at the prescribed rates out of the profit of previous
year.

(ii) Depreciation is to be allowed @ 50% of normal dep. in case asset is acquired during the relevant
previous year and is actually used for less than 180 days. Full dep. if used for 180 days or more. In
case asset was acquired prior to the relevant previous year and is put in to use during relevant
previous year, condition of use for 180 days is not applicable.

(iii) It is allowed on written-down value basis in case of all assets. But in case assessee is engaged in
generation or generation and distribution of power he has the option to adopt actual cost basis as per
rates given in Annexure IA of the Rules.

(iv) No depreciation is allowed in the year in which asset is sold, demolished, destroyed or discarded.
 73

4. Method of Depreciation :

It provides for new concept of block of assets, new higher rates, only one type of depreciation, short-
term capital gain or loss instead of balancing charge, terminal depreciation.

A. Block of assets:

Block of assets means aggregate of WDV as on 1-4-2019 of all those assets which have a common
percentage of rate of depreciation but are within same group of assets.

B. New rate of depreciation

I. Tangible Assets

Group I : Building

1. 5% Block Block: All buildings used mainly for residential purposes except hotels and boarding
houses.

2. 10%:All non-residential buildings.

3. 100% Block :All buildings acquired on or after 1.9.2002 for installing machinery and plant
forming part of water supply project or water treatment system and which is put to use for the
purpose of business of providing infrastructure facilities u’s 801A (4) (i).

4. 100% Block :(i). Purely temporary erections such as wooden structures.

IMPORTANT RATES OF DEPRECIATION RATDV BASIS]

[A/Y 2018-19]

I. Tangible Assets : Group I Buildings :

(i) 5% Block : All buildings used mainly for residential purposes except hotels and boarding houses.

(ii) 10% Block :All non-residential buildings.

 74

(iii) 100% Block : All building acquired on or after 1-9-2002 for installing machines plant forming
part of water supply project or water treatment system and which is put to use for the purpose of
business of providing infrastructure facilities U/s 80 IA(4) (1).

(iv) 100% Block : Purely temporary erections such as wooden structures.

Group II Furniture : 10% Block : Furniture and fittings including electric fittings, fans
etc.

Group III Plant and Machinery 1. 15% Block :

(i) Plant and machinery; except given at 2 to 7,

(ii) Motor Cars except used as taxi,
(iii) Scooter, Motor-cycle, bus, truck,
(iv) Air-conditioners;
(v) Surgical equipment

2. 30% Block :

(i)Motor Buses, motor lorries and motor taxis used in a business of running them on hire, (ii)Moulds
used in rubber and plastic goods industry.

3. 40% Block: (i)Aircraft, Aero engines, (ii).Life saving medical equipment,

4. 50% Block: (i).Containers made of glass and plastic used as refills,

(ii).Textile machinery acquired under Technology Up gradation Fund Scheme during 1-4-2001 to 31-
3-2004.

5. 60% Block :(i).Computers, (ii).Books required for professional use other than annual publications,
(iii).Gas Cylinder-, including valves, Burners, Direct Fire glass melting, furnaces, (iv).Mineral Oil
concerns.

6. 80% Block : Energy saving devices.

7. 100% Block : (i).Pollution Control Equipment for air, water or solid pollution,

(ii).Books owned by assesses carrying on business in lending libraries,

 75

(iii).Books being annual publications.

Group IV Ships : 20% Block : Inland vessels and Ocean going ships.

II. Intangible Assets : 25% Block : Know-how, patents, copyrights, trademarks, licenses, franchises
or any other business or commercial rights.

C. Actual cost of assets:

(i).Cost actually met by assessee

(ii) Actual cost to include cost of installation, expense on insurance, freight, loading and unloading
expenses on modification and repairs before use of asset, interest paid on acquiring the asset before
asset has been put into use.

(iii) Cost of cars imported into India after 28-2-75 but before 1.4.2001-No depreciation was allowed.
Cars acquired between 1-4-67 to 28-2-73 cost was deemed as 25,000 if higher cost was paid.

(iv) Asset used for scientific research but converted into business asset-actual cost of asset less any
amount allowed as deduction in respect of it.

(v) Asset acquired by way of gift or inheritance - the W.D.V. of previous owner is taken as cost of
present assessee. On all assets (including ocean going ships) the depreciation is to be calculated on
written down value basis.

D. Method of depreciation

5. W.D.V. (a) For assessment year 2018-19

(i) W.D.V. (aggregate) of all the assets falling within same group as on 1-4-2017.

(ii) Add actual cost of any new assets of same group acquired (put into use during the year).

iii) Deduct any amount received on account of sale, demolition, discarding or destruction of any
assets during the year.

Resultant amount shall be the W.D.V. for the purposes of calculation of depreciation.

6. Computation of depreciation .Depreciation = W.D.V. of block x rate for such block/100.

 76

7. Additional Depreciation [Section 32(1) (iia)] With effect from assessment year 2006-07 an
additional deduction 20% of actual cost of P & M is allowed if new plant and machinery is acquired.

8. Unabsorbed depreciation

1.With effect from 2002-03 depreciation which remains unadjusted as either there is no
income or less income in the relevant previous year, it can be carried forward till it is fully adjusted
from any ille0111e during the succeeding previous years. It shall be treated as depreciation of the
succeeding previous year. 2.The unabsorbed depreciation of discontinued business shall be carried
forward.

9. Short-term capital gain [Section 50]

a).Transfer of one or more assets – Short - Term Capital Gain = Total consideration Less.

(i) W.D.V. of such block of assets :

(ii) Exp. incurred on such transfer :

(iii) Actual cost of any asset acquired during the year belonging to same block.

b).Transfer of all the assets in same block–Out of total consideration received less actual cost
or W.D.V.of all the assets and actual cost of any new asset acquired during the year and
difference is called Short-Term Capital Gain/ Loss as the case may be.

10. Terminal Dep. & Balancing charge ;In case depreciation is claimed on Actual Cost Basis

Terminal depreciation: The Finance Act (2) 1998 has introduced these two concepts. In case any
asset (plant and machinery and building) is sold, demolished, destroyed or discarded during the year
and money realized is less than the WDV of the asset, the difference between the WDV and money
realized can be fully debited to P & L account of the same year as terminal depreciation or balancing
terminal depreciation.

Balancing Charge: In case money realized is more than the WDV, the excess amount shall be
deemed as business profit of the year in which asset is sold, demolished, destroyed or discarded. In
no case the profit shall exceed the amount of depreciation charged so far. If money realized is more
than cost, capital gain shall be computed as per provisions u/s/48.
 77

Problems and solutions

PROBLEM-1.
From the particulars given below compute the depreciation and other claim for the
assessment year 2018-19;
Assets Actual Cost W.D.C. on Rate of depreciation
01-04-2017
1. Building I 8,00,000 4,50,000 10%
Building II 6,00,000 80,000 10%
2.Plant and Machinery
A 12,10,000 9,50,000 15%
B 4,00,000 2,00,000 15%
C 5,60,000 3,10,000 40%
Following assets were
bough and installed in June 10%
2017 4,00,000 5%
1. Building III 2,80,000
Building IV
2.Plant and Machinery 8,00,000 15%
D 1,60,000 40%
E
Following assets were sold
during the year; Net Consideration Rs.5,00,000
1. Building II Net Consideration Rs.8,50,000
2. Plant B Net Consideration Rs.5,00,000
3.Plant C
 78

SOLUTION:
Calculation of Description and Other Claims:
Assets W.D.V. Depreciation
----------------------------------------------------------------------------------------------------

Rs. Rs.
Building – 5% Block
W.D.V. on 1-4-2017 NIL
Actual cost of new asset 2,80,000
Less: Money realized NIL
W.D.V. on 31-3-2018 2,80,000
Depreciation @ 5% 14,000 14,000
W.D.V. 1-4-2018 2,66,000
Building – 10% Block
W.D.V. on 1-4-2017
Building I 4,50,000
Building II 80,000
5,30,000
Add: Actual cost of new asset 4,00,000
9,30,000
Less: Money realized 5,00,000
W.D.V. on 31-3-2018 4,30,000
Depreciation on @ 10% 43,000 43,000
W.D.V on 1-4-2018 3,87,000
P & M – 15% Block
W.D.V. on 1-4-2017
Plant A 9,50,000
Plant B 2,00,000
11,50,000
Add: Actual cost of new asset 8,00,000
19,50,000
 79

Less : Money realized 8,50,000

W.D.V. on 31.03.2018 11,00,000

Normal Depreciation @ 15% 1,65,000
Additional Depreciation @ 20% of
8,00,000 1,60,000 3,25,000 3,25,000
W.D.V. on 1-4-2018 7,75,000

Total depreciation 3,82,000

P & M – 40% Block

W.D.V. on 1-4-2017 3,10,000
Add: Actual Cost of new asset 1,60,000
4,70,000
Less: Money realized 5,00,000
S.T. Capital Gain 30,000
------------
II. TEA DEVELOPMENT ACCOUNT SEC.33AB

1.alloowance: A special deduction is to be allowed in case assessed is engaged in the business of

growing and manufacturing tea, coffee or rubber as an incentive to those who help in the increase of
tea production. Compulsory audit of the unit. Least of following shall be the deduction

2. Rate of Deduction : (i) Amount deposited in a special account with NABARD or Tea Deposit
Account. or

(ii) 40% of profits from such business. Profit before allowing this deduction & loss before adjusting
any brought forward losses.

It is an account opened with National Bank for Agriculture and Rural Development (NABARD).

3. Special Account: Amount to be deposited (a) before the expiry of six months from close of
previous year; or (b) before the filling of return.
 80

4. When to Deposit : Withdrawal from this account will not be allowed except on: (a) Closure of
business; (b) Death of an assessee; (c) Partition of FIEF;

(d) Dissolution of firm; (e) Liquidation of a company.

CHAPTER-4

CAPITAL GAINS
1.Basis of charge(sec.45): Any profits or gains arising from the transfer of a capital asset effected in
the previous year shall be chargeable to tax.
2.Capital assets: It means the property of any kind held by an assessee whether or not connected
with his business or profession and any security held by a foreign institutional investor which has
invested in such security in accordance with the regulations made under SEBI Act 1992.
3.Capital gain: Gain on Transfer of Capital Asset is called Capital gain (Section 45).Property of any
kind held by assessee: whether or not connected with his business or profession. It includes Plant
and Machinery. “Building”- Whether business premises or residential, all assets of a business,
goodwill, patent /right, etc., does not include (i) Stock in trade (ii) Personal effects – House-hold
goods except Jewellery; archaeological collection, drawings, paintings, sculpture or any
other work of art. (iii) Agricultural land situated in rural areas; (iv) Gold Bonds 1999 (v) Rural
Agricultural land.
4.Transfer (Section 2(47) Includes sale, exchange, relinquishment of the asset or the extinguishment
of any rights therein or the compulsory acquisition under any law. It must be effected during the
previous year. Transfer not regarded as transfer (Section 47)
(i)Transfer of assets on partition of H.U.F.
(ii) Transfer of assets to shareholders on liquidation of company;
(iii) Transfer or assets under a gift, will or irrevocable trust;
(iv) Transfer of assets by a parent company to subsidiary company;
(v) Transfer of assets by a parent company provided in (iv)and (v) the recipient company is Indian
Company and patent company holds 100% of share-capital of subsidiary company;
(vi) Transfer of assets on amalgamation of companies;
(vii) Transfer of shares on amalgamation of companies;
(viii) Transfer of agricultural land before 1st March 1970; and
(ix) Transfer of assets of historical importance to a Museum, Archives or National Gallary of Art.
 81

(x) Conversions of debenture or Bonds into shares or debenture;

5. Gain Capital Gain = Sale Price – (Section 48)
(i) Cost of acquisition (Indexed) The cost at which asset was acquired by the assessee. But
in following cases, the cost will mean as mentioned against each; Assets acquired without paying any
price – In case asset is received by way of transfer under partition of H.U.F. under gift or will, under
succession or inheritance, on liquidation of Company, under revocable or irrevocable trust or by a
parent company from subsidiary company-the Cost will be the cost at which assets were acquired by
previous owner plus cost of any improvement less depreciation, if any (section 49(1).Shares of
amalgamated company – The cost of shares of amalgamated company shall be the cost of acquisition
of shares of amalgamating company (Section 49(2).Depreciating assets – Calculate S.T.C. Gain or
loss as per section 50. Advance money-to be adjusted out of cost of acquisition (section 51) Cost is
unascertainable-Fair market value as on the date of acquisition to be taken as cost of acquisition
(Section 55). Option of FMV as on 1-4-81. If an assessee had opted for F.M.V. on 1-4-81, it will be
cost of acquisition for all purposes (55 (2). Cost of Shares-Cost of new shares received n
amalgamation of companies, on transfer of shares into stock or vice versa or transfer of lower
denomination shares into higher denomination shares or vice versa the cost of acquisition will be the
cost at which original shares were acquired (section (56)(2)(v) Cost of Bonus Shares – with effect
from 1-4-95, Cost of bonus shares is to be taken as NIL, but if bonus shares were allotted before 1-4-
2001, FMV on 1-4-2001 is their cost. +
(ii) Cost of any improvement (Indexed) :An expenditure of capital nature incurred by
assessee after acquiring an asset shall be added in cost of acquisition.
(iii) Expenses on Transfer (Indexed) Balance is called Capital Gain.
Indexing at a Glance
Indexing
Indexing at a Glance u/s 48(iii)
situation

1. No indexing
1. Short Term Capital assets.
 82

2. No indexing
2. Repurchase of units acquired u/s
80 CCB.
3. No indexing w.e. from assessment year 1998-99.

3. Bonds and Debentures except

capital indexed bonds.
4. Actual cost or FMV on 1-4-2001 (whichever is more)
FMV x C.I.I. of the year of sale
4. Long term capital assets acquired C.I.I. of 2001-02 (.e). 100
before 1-4-2001 under gift, will
partition of H.U.F. inheritance i.e.
u/s 49(1).

5. Actual cost
5. Long term capital assets acquired x C.I.I. of the year of sale
on or after 1-4-2001 (not under any C.I.I. of the year of acquisition
of the modes mentioned in 4 above).

6. Cost of improvement
6. Cost of improvement incurred x C.I.I. of the year of sale
after 1-4-2001. C.I.I. of the year of improvement

7. Actual cost of FMV on 2001

7. Long term capital asset acquired (whichever is more)
by present seller under section 49(i) FMV or COST
after 2001 but was x C.I.I. of the year of sale
acquired by previous owner before C.I.I. of the year in which present seller became its
2001 owner.
 83

6.Treatment of Capital Gain.

A) Shot-term Capital Gain: Gain on asset held by assessee for a period upto 36 months.In case of
shares this period is 12 months. In case of securities (Listed) and units of Mutual Fund or
U.T.I. this period is also 12 months.
B) Long-term Capital Gain: Gain on asset held by assessee for a period exceeding 36 months. (For
shares 12 months).
7. Exempted Capital Gain:
1. Income from sale of shares in certain cases (Section 10(36) Any income arising from the
transfer of a long-term capital asset being an eligible equity share in a company purchased on or after
the 1st day of March, 2003 and before the 1st day of March 2004 and held for a period of twelve
months or more is fully exempted.
2. Any income from long-term capital asset being self cultivated urban agricultural land on
compulsory acquisition (Section 10(37).: In the case of an assessee, being an individual or a Hindu
undivided family, Capital gain arising from the compulsory acquisition of self cultivated urban
agricultural land shall be fully exempted.
3. Long Term Capital Gain on transfer of securities covered under Securities Transaction Tax
(Section 10(38): Any income arising from the transfer of a long-term capital asset,
being shares and the transaction of sale of such securities is entered into in a recognized stock
exchange in India on or after 1-10-2004 shall be fully exempted.
4. Income from transfer of asset of an undertaking engaged in the business of generation,
transmission or distribution of power (section 10(40): Income from transfer of capital asset of
an undertaking engaged in the business of generation, transmission or distribution of power
where such transfer takes place on or before 31-3-2006 and transfer is made to the Indian
company as notified u/s 81A.
5. Sale of residential House Property (asset is long term) (Section 54): That part of capital gain of
individual and HUF from sale of such house property which is long-term capital asset, is exempted
which is invested in-Purchase of another house within one year before or two years after the sale.
Construction of another house within 3 years after the sale. Condition: Such exempted gain will be
added to new capital gain for the new house purchased or constructed if sold or transferred within 3
years from the date of purchase or construction.
 84

6. Sale of Self-cultivated agricultural land (urban) (Section 54B): That part of capital gain from the
sale of agricultural land (urban) land is exempted which is reinvested in purchase of another
piece of land within 2 years after sale.
7. Compulsory acquisition Capital assets (Section 54D): That part of capital gain arising from of
compulsory acquisition of land, building or any right in such asset used by assessee for 2 years
for his own business, shall be exempted which is reinvested in purchase of another land or building
or right in land or building within 3 years of the acquisition. The new assets so acquired cannot be
sold or transferred for a period of 3 years, otherwise old exempted gain will he put to tax.
8. Sale of any long term capital asset (Section 54EC):Investment of long term capital gain within 6
months from date of sale in Bonds issued by National Highways Authority of India or by Rural
Electrification Corporation Ltd., Gain so invested is exempted. The new bonds cannot be sold or
transferred for a period of 3 years.
9. Sale of long term capital assets (Section 54F) : Where a long-term asset (other than residential
house) is transferred and Net consideration is reinvested in construction or purchase of a residential
house within three years or one year before two years after sales respectively, so much of capital gain
shall be exempted as is in proportion of amount invested to full consideration. No exemption if
assessee owns another house or acquires another house in one year before or two year after or
constructs another in three years.
10. Transfer asset due to shifting of factory from urban to non- urban areas (section 54G): In case
assessee has to transfer his assets due to shifting of his factory from urban areas to non-urban
areas and he purchases new machinery or plant, or acquires land or building or has incurred the
expenses on shifting with one year before or two years after sale, the capital gain shall be treated as
below. Difference between capital gain and cost of new asset is taxable u/s 45; If capital gain is less
than cost of new asset-fully exempted. (It is subject to certain conditions).
11. Transfer of assets of an industrial undertaking shifting from an Urban area to a Special
Economic Zone (SEZ) (Sec.54GA) : In case an industrial undertaking transfers its assets with the
intention of shifting from an urban area to SEZ, capital gain so arising if invested within specified
time frame, it shall exempted.
12. Gain on compulsory acquisition (Section 54H): In case compensation on compulsory acquisition
is received after the date of transfer, the period available for investment shall be counted from the
date of receipt of such compensation.
 85

D. Treatment of Capital Loss :

(a) Short Term capital Loss can be set off from Short Term capital Gain or Long Term capital Gain.
(b)Long Term Capital Loss can be set off only from Long Term Capital Gain. If any amount of
capital loss remains unadjusted, it can be carried forward for a succeeding previous years to be set off
in following manner:- S.T. Capital loss to be set off from S.T. or L.T. Capital gain. Long Term
Capital loss to be set off only from L.T. Capital gain.
c) Tax on Capital Gains:
(a) Total income shall be divided in three parts; (i) Short Term capital gain on shares (which are
subject to Securities Transactions Tax). (ii) Long terms capital gain on all assets except on shares
(which are subject to Securities Transactions Tax) which is fully exempted u/s 10(38). (iii) Balance
total income.
(b) On short term capital gain on shares (which are subject to Securities Transaction Tax)
income tax shall be levied @ 15% of such gain u/s 111A; (c) On Long term capital gain on
all assets (except on shares which are subject to Securities Transactions Tax which is fully exempted
u/s 10(38) tax shall be levied @ 20% of such gain u/s 112;
(d) On balance total income tax is to be calculated at scheduled rates.
(e) In case the balance total income is less than the exempted limit of Rs.1,60,000 in case of
individuals Rs.1,90,000 in case of female individuals and Rs.2,40,000 in case of senior citizens
the difference between actual balance income and exempted limit shall be adjusted from short term
capital gain if there is no long term capital gain and if there is long term gain it shall be adjusted from
such long term capital gain and balance capital gain shall be taxed at prescribed rates as per above.
(f) Deductions u/s 80C to 80U are also not admissible out of short/long term capital gain.

(B).PROBLEMS AND SOLUTIONS

PROBLEM-1
Find out the indexed cost of following long term capital assets if they are sold during the
previous year 2017-18.
 86

Sl.No. Asset Year of Purchase Cost FMV on

01.04.2001
1. Jewellary 2004-05 1,60,000 -
2. Bonds 2006-07 2,00,000 -
3. House 2010-11 1,50,000 4,00,000
4. Plot inherited in Acquired by father 1,00,000 2,00,000
1999-2000 in 1998-99
C.I.I. for 2004-05 is 113, for 2006-07 is122 is 133, for 2010-11 is 167 and 2017-18 is 272.
SOLUTION:
Computation of Indexed Cost.
Sl.No. Asset Indexing Indexed Cost Rs.
1. Jewellary 1,60,000 x 272/113 3,85,132
2. Bonds No indexing 2,00,000
3. House 4,00,000 x 272/167 6,51,497
4. Plot 2,00,000 x 272/122 4,45,901
For transfer covered u/s 47 (iii) index of the year in which acquired by present seller is taken.
PROBLEM-2
From the particulars given by Ramesh, compute the taxable Capital gain for the assessment
year 2018-19
Name of asset Date of Purchase Cost Rs. Date of Sale Sale Price Exp.
Rs. Rs.
Govt. Securities 01-10-2016 10,000 30-06-2017 15,000 200
Furniture (W.D.V. 15-02-2003 5,000 20-02-2018 3,000 -
on 1.4.2017
Rs.4,000)
Land (Fair Market 10-01-1992 12,000 06-01-2018 1,50,000 1,000
Value on 1.4.2001
Rs.2,60,000)
Residential House 01-12-2005 40,000 05-05-2017 4,00,000 2,000
 87

The assessee has not other residential house on 05-05-2017. He purchased another house for
residential purposes on 20-03-2018 for Rs.90,000. C.I.I. for 2017-18 is 272. 2001-02-100, 2002-03
is 105, and for 2005-06 is 117.
SOLUTION:
Computation of Capital Gain:
A. Short Term Capital Assets Rs. Rs.
(i) Furniture S.P. 3,000
Less: W.D.V . 4,000
S.T.C.Loss (-) 1,000

(ii) Govt. Securities: S.P. 15,000

Less: Expenses on Sale 200
Net Consideration 14,800
Less: Cost 10,000 + 4,800
Short Term Capital Gain + 3,800

B. Long Term Capital Assets

(i) Land S.P. 1,50,000

Less: Expenses 1,000
Net Consideration 1,49,000
Less: Indexed FMV (60,000x272/100) 1,63,200
L.T.C. Gain (-) 14200
(ii) Residential House: S.P. 4,00,000
Less expenses on Sale 2,000
Net Consideration 3,98,000
Less Indexed cost
(40,000 x 272/117) 92,991
Long Term Capital Gain 3,05,009
Exemption U/s 54: Amount
invested in new house Rs.90,000 3,05,009 Nil
 88

Long Term Capital Loss to be C/F 14,200

Long Term Capital Loss to be C/F.

Note: Long Term Capital loss can be set off only from Long Term Capital Gain.
PROBLEM-3
From the particulars given below, compute the taxable income of Sh. A.K. Syal for the
assessment year 2018-19 Rs.
(i) Sale price of sharers of A Ltd., acquired on 1.6.2016
and sold on 1.05.2017 2,00,000
Cost price of these shares 1,00,000
(ii) Sale price of shares of B Ltd., acquired in 2004-05 (C.I.I.-113)
sold on 1-12-2017 (C.I.I. = 272) 3,50,000
cost price of shares of B Ltd., 1,50,000
(ii) Sale Price of Jewellery sold on 1-09-2017 1,80,000
cost of Jewellery acquired in 2007-08 (C.I.I. = 129) 60,000
Long Term Capital loss of Rs.1,00,000 has been B/F from A/Y 2016-17.
SOLUTION:
Computation of Taxable Income of Sh. A.K. Syal for the assessment year 2010-11.
Short-term Capital Assets Rs. Rs. Rs.
Shares of A Ltd., : S.P. 2,00,000
C.P. 1,00,000
S.T. Capital Gain 1,00,000
Long term Capital Assets
Jewellery Sale Price 1,80,000
Less: Indexed Cost (60,000 x 272/129) 1,26,511
Long Term Capital Gain 53489
Shares:
Sale Price 3,50,,000
Less: Indexed Cost (1,50,000x272/113) 3,61,062
Long Term Capital Loss not
 89

allowed to be set-off (-) 11,062 NIL

Available Long Term Capital gain
B/F Long Term Capital Loss (-)100,000
Long Term Capital Loss to be C/F (-)46,511
Long Term Capital Gain NIL
Total Capital Gain 1,00,000

Note: Loss on sale of long term shares (Subject to STT) cannot be set-off out of any other long term
capital gain and hence it is ignored.

PROBLEM NO.4
Following are the particulars of assets sold during the previous year 2017-18. Calculate the
taxable amount of capital gains if C.I.I. for 2017-18 is 272.
Assets Year of C.I.I. Cost of F.M.V.as on Selling Expenses Selling
Acquisitio Acquisition 1-4-2001 Brokerage Price
n Rs. etc., Rs.
Rs.
Shop 1995-96 (100) 50,000 1,40,000 10,000 5,20,000
Jewellery 1998-99 (100) 60,000 1,45,000 5,50,600
Shares 2003-04 (109) 90,000 - 2,000 2,50,000
Shares 2007-08 (129) 18,000 - 1,000 30,000
Plant 2003-04 (109) 4,00,000 - 7,00,000
(WDV)
(Depreciable 2004-05 (113) 2,00,000 - 5,90,000
Residential
House)
SOLUTION:
Computation of Capital Gains Income
Short-term Capital Gains Rs. Rs.
Plant: It is presumed that Block of Plant has ceased to exist.
Sale consideration 7,00,000
 90

Less: W.D.V. 4,00,000

Taxable Short-Term Capital Gains 3,00,000
Long-Term Capital Gains
Residential House : S.P. 5,90,000
Less: Cost (2,00,000 x 272/113) 4,81,415
1,08,585
Shop: S.P. 5,20,000
Less : Expenses on Sale 10,000
Net Consideration 5,10,000
Less: C.P. (1,40,000 x 272/100) 3,80,800
1,29,200
Jewellery : S.P. 5,50,000
Index (1,45,000 x 272/100) 3,94,400
1,55,600
Shares: S.P. 2,50,000
Less: Expenses on Sale 2,000
Net 2,48,000
Less: Cost (90,000 x 272/109) 2,24,587
Long Term Capital Gain 23413
Exempted U/s 10(38) NIL
Total L.T. Capital Gain 6,93,384
Long Term Capital Loss
Shares : S.P. 30,000
Less: Expenses on Sale 1,000
Net 29,000
Less: Cost (18,000 x 272/129) 37,953
L.T. Capital Loss (-) 8953 (Ignore)
Note: Since long term capital gain on sale of equity share is excepted u/s 10(38) and so long term
capital loss on sale of equity shares shall be ignored.
 91

CHAPTER-5
INCOME FROM OTHER SOURCES
(A).Theory.
Meaning of Income from other sources: It means every income which does not specifically fall
under any of the preceding four heads and certain specified incomes shall be included in this head.
There are two type of income i) General incomes ii) specified incomes.
A) General Incomes u/s 56(1)
1. Agricultural Income from outside India.
2. Receipts from person other than employer.
3. Income from subletting or rent of vacant land.
4. Director’s fee/sitting fee.
5. Remuneration for delivering lectures or writing articles.
6. Withdrawal from NSS u/s 80CCA – principal amount + interest.
7. Repurchase of units u/s 80CCB – principal amount.
8. Casual incomes other than those taxable u/s 56(2).
9. All types of interest except taxable u/s 56(2).
B) Specified Incomes u/s 56(2)
1. Dividend from Foreign companies, Deemed Divided as from co.operative society.
2. Interest on securities.
3. Winnings from lotteries, races, crossword puzzles, T.V. game shows card games, gambling
and betting.
4. Any amount received as gift or fits received during 2009-10 which is not exempted u/s 56(v).
5. Income from letting of plant and machinery where it is not regular business.
6. Income from letting of building along with furniture and plant and machinery and rent is
inseparable.
7. Any amount deducted by employer out of employee’s salary as their contribution towards
provided fund or ESI fund.
C) Deduction for expenses u/s 57
A. No deduction of any expenditure out of casual incomes, races, puzzles etc., u/s56(2).
B. 1. Bank commission, collection charges
 92

2. Interest on loan taken to acquire an asset whose income is taxable under this head.
3. Std. deduction @ 1/3 of family pension or Rs.15,000 whichever is less.
4. Depreciation and expenses on repairs, fire insurance premium, local taxes etc., relating to let
our period.
5. Amount paid by employer to provident fund or ESI authorities by appropriate date.
6. Any other expenditure which is not a personal or is of capital expenditure and is incurred to
earn an income taxable under this head.
D) TDS: Tax deducted at sources (TDS):
It means that before making payment of interest on securities, it is the duty of the security –
issuing authority to deduct tax at source on such interest payable at the rate specified for the purpose
of deduction during that previous year.
E) Rates of TDS for Individual HUF AOP (No surcharge)
Interest on securities issued by local authority or statutory bodies – 10.3%
Listed debentures of a company - 10%
Unlisted debentures - 20%
Bank Interest - 10%
Casual Incomes 30%
Note:-
Surcharge has been abolished w.e.f., a/y 2010-11
F) No TDS:
1. Interest on Govt. securities.
2. Deemed dividend u/s 2(22)(c)
3. Interest on any security notified u/s 193.
4. Interest paid to an individual in a/c payee cheque for an amount not exceeding Rs.2,500 by
certain companies.
5. Dividend paid by an Indian company.
6. Bank interest credited or paid upto Rs.5,000
7. Race winning if it is upto Rs.2,500
8. Winning from lotteries and puzzle amount if not more than Rs.5,000
9. In case of card games and games of other sort if upto Rs.5,000. No TDS in
case of betting.
 93

(B). PROBLEMS AND SOLUTIONS

PROBLEM-1
Compute income from the other sources form the particulars given below:
Rs.
1. Interest on deposits with a company 10,000
2. University remunerations on working as examiner 6,000
3. Royalty for wring books 60,000
He claims to have spent Rs.20,000 on writing these books
4. Dividend declared by R. Co. on 1.3.2018 but paid on 1.5.18 6,000
5. Interim dividend paid on 1.5.2017 3,000
6. Stake money on race horses 1,50,000
Horses are maintained by him and expenses on
maintenance of these horses are 2,40,000
7. Family pension received 36,000

SOLUTION:
Computation of Income from Other Sources
General Incomes u/s 56(1) Rs. Rs.
Interest on deposits with Company 10,000
University remuneration 6,000
Royalty for writing books 60,000
Less expenses 20,000 40,000
Family pension 36,000
Less standard deduction 33 1/3% 12,000 24,000
80,000
Specific Incomes 56(2)
Dividend
(a) From R. Co. Exempted NIL 9,000
(b) Interim dividend received on 1.5.2017 – exempted NIL NIL
Stake money on race horse 1,50,000
Less Expenses on maintenance of race horses 2,40,000
 94

Loss to be C/F as it can not be set off 90,000

NIL
Income from Other Sources 80,000
PROBLEM-2
From the following particulars of Mr. Edward for the previous year ended 31st March 2018,
compute his total Income for the Assessment year 2018-19;
He received: Rs.
(i) Director’s fee from a company 10,000
(ii) Interest on Bank Deposits 3,000
(iii) Income from undisclosed sources 12,000
(iv) Winnings from lotteries (Net) 24,500
(v) Royalty on a book written by him 8,000
(vi) By giving lectures in functions 5,000
(vii) Interest on loan given to a relative 7,000
(viii) Interest on tax free debentures of a company
(listed in recognized stock exchange) (NET) 3,600
(ix) Divided on shares 6,400
(x) Interest on post office savings bank A/c 500
(xi) Interest on Government Securities 2,200
He paid Rs.100 for collection of dividend and Rs.1,000 for typing the manuscript of book
written by him.
Solution:
Computation of Income from Other Sources
General Incomes u/s 56(1)
Rs. Rs. Rs.
Director’s fees 10,000
Interest on Bank Deposits 3,000
Income from undisclosed sources 12,000
Royalty on Books (8,000 – 1000) 7,000
Remuneration for delivering lectures 5,000
Interest on loan given to relatives 7,000 44,000
 95

Specific Incomes 56(2)

Dividend – Exempted NIL
Interest on Securities
(a) Interest on tax free listed securities
Rs.3,600 (gross = 3,600 x 100/90) 4,000
(b) Interest on Govt. Securities 2,200 6,200
Winnings from lotteries: Net Rs.24,500
Gross amount = 24,500 x 100/70 35,000 41,200
Gross Income from other sources 85,200
Deduction for Bank Commission of Dividend – Not allowed NIL
Income from other sources 85,200

Note: Interest on Post Office Saving Bank account is exempted.

Problem-3
An assessee had the following investments as on 1st April 2017;
(i) Rs.40,000, 12% Central Govt. Loan;
(ii) Rs.30,000, 10% Govt. Securities:
(iii) Rs.20,000, 9% Preference shares of paper mill company;
(iv) Rs.50,000, 10% Bombay Port Trust Bonds;
(v) Rs.20,000, 11% Debentures of a limited company (unlisted);
(vi) Rs.10,000, 10% Securities issued by Govt. of England;
(vii) Rs.10,000, 10% 10-years National Plan Certificates;
(viii) Rs.20,000, 14% Municipal debentures;
(ix) Interest accrued on NSC VIII issue purchased on 11.03.2017 Rs.1,130
(x) Rs.16,000, 10% (Tax-free) Debentures of a limited company (unlisted).
On 1st September 2017, he bought Rs.50,000, 12% Maharashtra Govt. Bonds for Rs.60,000
the interest on which is payable on 30th June and 31st December. For this purpose he took a loan
from loan taken for purchase of a motor car 9% p.a.
Bank charged 2% of interest and dividend as collection charges and 3% commission on
purchase of securities.
Calculate the income from other sources.
 96

SOLUTION:
Computation of Income from Other Sources
Rs. Rs.
Interest on Securities:
40,000, 12% Central Govt. Loan 4,800
30,000, 10% Govt. Securities 3,000
50,000, 11% Bombay Port Trust Bonds 5,500
20,000, 15% Debentures of a Company (Unlisted) 3,000
20,000, 14% Municipal Debentures 2,800
16,000, 10% Tax-free debentures of a Company 2,000
(unlisted) (Net 1,600; Grossed up=(1,600x100/80)
50,000, 12% Maharashtra Govt. Bonds (Half
yearly) 3,000
Interest accrued on NSC VIII issue 1,130 25,230
Dividend
20,000, 9% Preference Shares of Paper mill- Exempted NIL
Interest
10,000, 10% Securities issued by a Foreign Govt. 1,000
Total 26,230
Deductions:
Collection Charges @ 2% of (26,230 – 1,130) 502
Interest on Borrowed Money
(40,000 x 15/100 x 7/12) 3,500 4,002
Income from other Sources 22,228
Note:
(a) Commission on purchase of securities shall not be allowed as deduction as it is capital
expenditure.
(b) Interest on money borrowed for some other purpose shall not be allowed as deduction out of
interest on securities.
(c) No collection charges on accrued interest of N.S.C. VIII issue.
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PROBLEM-4
Mr. Shivanand has following investment in the previous year ended 31st March, 2018;
(i) Rs.11, 000, 10% Karnataka State Govt. Loan
(ii) Rs.30, 000, 13.5% Debentures of Lohia Machine Tools Ltd., (Listed)
(iii) Rs.35, 000, 11% Securities of Sugar Mill Company (not listed)
(iv) Rs.32, 000, 10% Tax-free Commercial Securities.
(v) Rs.3, 580, received as interest on Tamil Nadu Govt. Securities.
(vi) Rs.3, 600, received as interest on the Securities of a Paper Mill Company (not listed).
(vii) Rs.4,500 received as interest on securities of Textile Company (listed).
During the previous year 2017-18 he purchased Rs.50,000, 7% capital investment Bonds on
1st October, 2017. For this purpose he borrowed Rs.30,000 from Bank at 15% p.a. Interest on all
Securities is payable on 30th June and 31st December. The bank charged 1.5% commission on net
realization of interest as collection charges.
He was also a Director in a company from which he received Rs.3,000 as directors fees. His
other incomes are:
(i) Winning form Lottery Rs.25,000
(ii) Income from Agriculture in Sri Lanka Rs.10,000
(iii) Winnings from Horse race Rs.15,000
(iv) Interest on Post Office Savaging Bank Account Rs.2,000.
Find out his taxable income from other Sources for the Assessment Year 2018-19.

SOLUTION:
Computation of Income from Other Sources:
Rs. Rs.
General Incomes u/s 56(1)
Director’s fee 3,000
Income from Agriculture in Sri Lanka 10,000
Interest on P.O. Saving Bank A/c Exempted 13,000
Specific Incomes u/s 56(2)
Winning from horse race 15,000
Winning from Lottery 25,000 40,000
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Interest on Securities Rate TDS Gross

Rs.11,000, 10% Karnataka Govt. Loan NIL NIL 1,100
Rs.30,000, 13% Listed Debentures 10% 405 4,050
Rs.35,000, 11% Sugar Mill Debentures 20% 770 3,850
Received Rs.3,580 as int. on Govt.
Securities NIL NIL 3,850
Received Rs.3,600 as interest on unlisted
Securities Rs. (3,600 x 100/80) 20% 900 4,500
Received Rs.4,500 as interest on listed
Securities (4,500 x 100/90) 10% 500 5,000
Rs. 50,000, 7% Capital Investment Bonds NIL NIL Exempted
Rs.32,000, 10% (Tax Free) unlisted
Securities (3,200 x 100/80) 20% 800 4,000
Gross Interest 3,375 26,080

Deductions:
1. Collection Charges 1.5% of (26,080-3,375) 341 25,739
Income from other Sources 78,739
Note:
No deduction of interest on loan for purchase of capital Investment Bonds as their interest is
exempted.
PROBLEM-5
Mr. Subramaniam, furnished the following particulars of his investment for the previous year
ended 31.03.2018.
(a) (i) Rs.30,000 units of UTI (Dividend declared Rs.4,000)
(ii) Rs.40, 000 in Post Office S.B. A/c at 5% interest p.a.
(iii) Rs.90, 000 Fixed Deposit in Syndicate Bank at 11% interest p.a. made on
1-11-2016, amount of interest credited to his account.
(iv) Rs.40, 000, deposit in Panjab Finance Corporation at 13% interest p.a.
(v) Rs.25, 000, 10% debentures of Pfizer Ltd., (Listed) (Interest is paid in A/c payee
cheque)
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(vi) Rs.30, 000, 10% Haryana Electricity Board Bonds.

(vii) Rs.4, 500 Interest received on National Development Bonds.
(b) on 01-11-2017 he purchased Rs.45,000, 7% Capital Investment Bonds for which he borrowed
Rs.30,000 @ 15% interest.
(c) On 25-04-2017 he inherited Rs.45,000, 10% Debentures of Bata Limited (Listed) from his
uncle.
(d) The interest on all these securities is payable on 31st December every year. The bank charged
1% commission on collection of net amount of interest and dividend.
From the above compute his income from Other Sources and bank does not charge any
commission on collection of interest on deposits with same bank.
SOLUTION:
Computation of Income from Other Sources:
Rs. Rs.
Income Rate TDS
(a) (i) Dividend on Units of UTI –
Exempted u/s 10(35) NIL NIL NIL
(ii) Interest on P.O.S.B. A/c
Exempted u/s 10 (15) NIL NIL NIL
(iii) Interest on deposit with Panjab
Finance Corporation 5,200 NIL NIL
(iv) Rs.25,000, 10% debentures of
Pfizer Ltd., 2,500 NIL NIL
(vi) Rs.30,000, 10% Haryana State
Electricity Bonds 3,000 10% 300
(vii) Interest on National Development
Bonds 4,500 NIL NIL
(b) Rs.45,000, 7% Capital Investment
Bonds-Exempted NIL NIL NIL
(c) Rs.45,000, 10% Bata Debenture (Listed) 4,500 10.3% 464
Gross Income 19,700 770
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Deductions:

1. Bank Commission: 1% of (19,700 – 770) 189

2. Interest on Loan to purchase Capital Investment
Bonds Not Allowed as interest is exempted NIL 189 19,511
ADD: Income on Bank Deposit 9,900
Income from other Sources 29,411
Note:
In case of interest on bank deposit, tax shall be deducted at source @ 10.3% but as there will
be no collection charges, hence it has been treated separately.