4

Unit 1 : Income From Salaries

Key Points

Basis of Charge [Section 15]

(i) Salary is chargeable to tax either on due basis or on receipt basis, whichever is
earlier.
(ii) However, where any salary, paid in advance, is assessed in the year of payment,
it cannot be subsequently brought to tax in the year in which it becomes due.
(iii) If the salary paid in arrears has already been assessed on due basis, the same
cannot be taxed again when it is paid.

Taxability/Exemption of certain Allowances

Section
Allowance
Exemption
10(13A) House
Rent Least of the following is exempt:
Allowance
(a) HRA actually received
(b) Rent paid less 10% of salary
(c) 50% of salary, if accommodation is located in
Mumbai, Kolkata, Delhi or Chennai
40% of salary, if the accommodation is
located in any other city.
10(14)(ii) Children education ` 100 per month per child upto maximum of two
allowance
children
Transport
allowance
for
commuting
between the place
of residence and the
place of duty.
Hostel expenditure
of
employees
children

` 800 per month (` 1,600 per month for an

employee who is blind or handicapped)

` 300 per month per child up to a maximum of two

children

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Income from Salaries

4.2

Exemption of Terminal Benefits

Section Component Category of
Particulars [Taxability / Exemption
of salary
employee
under section 10]
10(10) Gratuity
Government Fully exempt u/s 10(10)(i)
NonLeast of the following is exempt :
Government (i) ` 10 lacs
(ii) Gratuity actually received
(iii) In case of employees covered by the
Payment of Gratuity Act, 1972
15/26 x last drawn salary x number of
completed years or part in excess of six
months
In case of employees not covered by
the Payment of Gratuity Act, 1972
1/2 x average salary of last 10 months x
number of completed years of service
(fraction to be ignored).
10(10A) Pension
Government
Non- Fully taxable.
Uncommuted &
Government
pension
Commuted Government/
pension
local
authorities/
Fully exempt under section 10(10A)(i)
statutory
corporation/
members
of
Civil services /
All-India
services
/
Defence
Services.
Other
If the employee is in receipt of gratuity
Employees
The amount exempt would be one-third of the
amount of commuted pension which he would
have received had he commuted his entire pension.
If the employee is not in receipt of gratuity
The amount exempt would be one-half of the
amount of commuted pension which he would
have received had he commuted his entire
pension.

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4.3

Income-tax

10(10AA) Leave Salary

Received
Government &
Fully taxable
during service NonGovernment
Received at Government
Fully exempt (at the time of retirement)
the time of NonLeast of the following is exempt :
retirement,
Government
(i)
` 3,00,000
(whether on
(ii)
Leave salary actually received
superannu(iii) Cash equivalent of leave standing at the
ation
or
credit of the employee [based on on
otherwise)
average salary of last 10 months]
(maximum 30 days for every year of
service)
(iv)

10(10B) Retrenchment
Compensation

10(10C) Voluntary
Central
and
Retirement
State
Compensation Government,
Public sector
company, any
other company,
local authority,
co-operative
society, IIT etc.

10 months salary (based on average

salary of last 10 months)

Least of the following is exempt :

(i)

Compensation actually received.

(ii)
(iii)

` 5,00,000
15/26 Average salary of last 3
months Completed years of service
and part thereof in excess of 6 months

Least of the following is exempt :

(i)
Compensation actually received
(ii)

` 5,00,000

(iii)

Last drawn salary x 3 months x

completed years of service

(iv) Last drawn salary x remaining months

of service

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Income from Salaries

4.4

Section 10(5) [Leave Travel Concession]

Exemption is available for 2 trips in a block of 4 calendar years.
S. No.

Journey performed by

Air

Any other mode :

(i)
(ii)

Exemption
Amount not exceeding air economy fare by the
shortest route.

Where rail service is

available
Where rail service is not
available

Amount not exceeding air conditioned first

class rail fare by the shortest route.

a) and public transport

does not exist
b) but public transport
exists.

Amount equivalent to air conditioned first

class rail fares by the shortest route
Amount not exceeding the first class or deluxe
class fare by the shortest route.

Provident Funds - Exemption & Taxability provisions

Particulars
Employers
Contribution
Employees
Contribution

Recognized PF

Unrecognized PF Statutory
PF

Amount in excess of Not taxable yearly

12% of salary is taxable
Eligible for deduction Not eligible for
u/s 80C
deduction

Fully
exempt
Eligible
for
deduction
u/s 80C
Interest
Amount in excess of Not taxable yearly Fully
Credited
9.5% p.a. is taxable
exempt
Amount
Exempt from tax if Employers
Fully
received on employee served a contribution and exempt
retirement,
continuous period of 5 interest thereon is u/s 10(11)
etc.
years or more or retires taxable as salary.
before rendering 5 Employees
years
of
service contribution is not
Interest
because
of
reason taxable.
employees
beyond the control of on
is
the employee. In other contribution
under
case, it will be taxable. taxable
income from other
source.

The Institute of Chartered Accountants of India

Public PF
N.A.
Eligible for
deduction
u/s 80C
Fully exempt
Fully exempt
u/s 10(11)

4.5

Income-tax

Valuation of Perquisites [Section 17(2) read with Rule 3]

(A) Rent-free residential accommodation
S. Category of
No. Employee
(A)
( B)
1

Unfurnished accommodation
(C)

Furnished
accommodation
(D)

Government License fee determined as per Value

determined
employee
government rules as reduced by the rent under column (C)
actually paid by the employee.
Add: 10% p.a. of the
furniture cost.
However,
if
the
furniture is hired, then
hire
charges
payable/paid should
be added to the value
determined
under
column
(C),
as
reduced by charges
recovered
from
employee.

Where accommodation is owned by

Nongovernment employer
employee
Location
Perquisite
value
In cities having a
population > 25 lacs
as per 2001 census.

Value
determined
under column (C)
Add: 10% p.a. of the
furniture cost.

15% of salary

However,
if
the
furniture is hired, then
hire
charges
In cities having a 10% of salary
payable/paid should
population > 10 lacs
be added to the value
25 lacs as per 2001
determined
under
census.
column
(C),
as
In other areas
7.5% of salary
reduced by charges
recovered
from
The perquisite value should be arrived at employee.
by reducing the rent, if any, actually paid
by the employee, from the above value.

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Income from Salaries

Where the accommodation is

taken on lease or rent by
employer
Lower of the following is taxable:
(a) actual amount of lease rent
paid or payable by employer
or
(b) 15% of salary
The lower of the above should be
reduced by the rent, actually paid
by the employee, to arrive at the
perquisite value.

4.6

Value determined under

column (C)
Add: 10% p.a. of the
furniture cost.
However, if the furniture is
hired, then hire charges
payable/paid should be
added
to
the
value
determined under column
(C), as reduced by charges
recovered from employee.

(B) Interest free or concessional loan

In respect of any loan given by employer to employee or any member of his
household (excluding for medical treatment for specified ailments or where loans
amount in aggregate does not exceed ` 20,000), the interest at the rate charged by
SBI as on the first day of the relevant previous year at maximum outstanding
monthly balance (aggregate outstanding balance for each loan as on the last day of
each month) as reduced by the interest, if any, actually paid by him or any member
of his household.
(D) Use of movable assets by employee/ any member of his household
(i)

10% p.a. of actual cost of asset owned by the employer or the amount of hire
charges incurred by the employer for the asset hired would be the perquisite
value.

(ii)

There would, however, be no perquisite for use of laptops and computers.

(E) Transfer of movable assets

Perquisite value would be the depreciated value of the asset computed by applying
the rates of depreciation mentioned in the following table, as reduced by any
amount paid by or recovered from the employee.
S.
No.

Assets

Rate of depreciation

Computers and electronic 50% of WDV for each completed year of usage
items

Motor cars

20% of WDV for each completed year of usage

Other assets

10% on SLM for each completed year of usage

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4.7

Income-tax

(F) Motor car

S.
No.
1

Car
owned/
hired by
Employer

Expenses
met by

Wholly
official
use

Wholly
personal use

Employer Not
a Running and
perquisite maintenance
expenses, wear
and tear or
hire charges,
driver
salary
less
amount
charged from
the employee
for such use.

Partly personal use

cc of
engine

Perquisite
value

upto 1.6 `
1,800
litres
p.m.
above 1.6 `
2,400
litres
p.m.
If chauffeur is also
provided, ` 900 p.m
should be added to the
above value.

Employee

Employer Not
amount
of
a Actual amount Actual
perquisite of expenditure expenditure incurred by
incurred.
the employer as reduced
by the perquisite value
arrived at in (2) above.

Employer

Employee

Not
a Wear and tear
perquisite or
hire
charges, driver
salary.

cc of
engine

Perquisite
value

upto 1.6 ` 600 p.m.

litres
above 1.6 ` 900 p.m.
litres
If chauffeur is also
provided, ` 900 p.m
should be added to the
above value.

The Institute of Chartered Accountants of India

Income from Salaries

4.8

Meaning of Salary:
S.
No.

Calculation of exemption of
Allowance / Terminal benefit /
Valuation of perquisite

Gratuity
(in
case
of
non-Government
employees covered by the Payment
of Gratuity Act, 1972)
a) Gratuity (in case of nonGovernment
employee
not
covered by Payment of Gratuity
Act, 1972)
b) Leave Salary
c) House Rent Allowance
d) Recognized Provident Fund
e) Voluntary
Retirement
Compensation
Rent free accommodation and
concessional accommodation

The Institute of Chartered Accountants of India

Meaning of salary

Basic salary and dearness allowance.

Basic salary and dearness allowance, if

provided in terms of employment, and
commission calculated as a fixed
percentage of turnover.

All pay, allowance, bonus or commission

or any monetary payment by whatever
name called but excludes(1) Dearness allowance not forming part
of computation of superannuation or
retirement benefit
(2) employers contribution to the
provident fund account of the
employee;
(3) allowances which are exempted from
the payment of tax;
(4) value of the perquisites specified in
section 17(2);
(5) any
payment
or
expenditure
specifically excluded under the
proviso to section 17(2) i.e., medical
expenditure/payment of medical
insurance premium specified therein.
(6) lump-sum payments received at the
time of termination or service or
superannuation
or
voluntary
retirement.

4.9

Income-tax

Deductions from gross salary [Section 16]

(1)

Entertainment allowance (allowable only in the case of government

employees) [Section 16(ii)]
Least of the following is allowed as deduction:
(1) ` 5,000
(2)
(3)

(2)

1/5th of basic salary

Actual entertainment allowance received

Profession tax [Section 16(iii)]

Any sum paid by the assessee on account of tax on employment is allowable
as deduction.
In case profession tax is paid by employer on behalf of employee, the amount
paid shall be included in gross salary as a perquisite and then deduction can
be claimed.

Relief when salary is paid in arrears or in advance [Section 89]

Step 1

Calculate tax payable of the previous year in which the arrears/advance

salary is received by considering:
(a) Total Income inclusive of additional salary
(b) Total Income exclusive of additional salary

Step 2

Compute the difference the tax calculated in Step 1 and Step 2 i.e., (a)
(b)

Step 3

Calculate the tax payable of every previous year to which the additional
salary relates:
(a) On total income including additional salary of that particular
previous year
(b) On total income excluding additional salary.

Step 4

Calculate the difference between (a) and (b) in Step 3 for every previous
year to which the additional salary relates and aggregate the same.

Step 5

Relief u/s 89(1) = Amount calculated in Step 2 Amount calculated in

Step 4

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Income from Salaries

4.10

Question 1
Mr. Harish, aged 52 years, is the Production Manager of XYZ Ltd. From the following details,
compute the taxable income for the assessment year 2015-16.
Basic salary

` 50,000 per month

Dearness allowance

40% of basic salary

Transport allowance (for commuting between place of residence and

office)

` 3,000 per month

Motor car running and maintenance charges fully paid by employer

(The motor car is owned by the company and driven by the
employee. The engine cubic capacity is above 1.60 litres. The motor
car is used for both official and personal purpose by the employee.)

` 60,000

Expenditure on accommodation in hotels while touring on official

duties met by the employer

` 80,000

Loan from recognized provident fund (maintained by the employer)

` 60,000

Lunch provided by the employer during office hours.

Cost to the employer

` 24,000

Computer (cost ` 35,000) kept by the employer in the residence of

Mr. Harish from 1.06.2014
Mr. Harish made the following payments:
Medical insurance premium: Paid in Cash

` 4,800
` 15,200

Paid by account payee crossed cheque

Answer
Computation of taxable income of Mr. Harish for the A.Y.2015-16
Particulars

Basic salary (` 50,000 x 12)

6,00,000

Dearness allowance @ 40% of basic salary

2,40,000

Transport allowance (` 3,000 x 12)

Less : Exemption under section 10(14) (` 800 x 12)

36,000
9,600

26,400

Motor car running & maintenance charges paid by employer (See Note-1)

28,800

Expenditure on accommodation in hotels while touring on official duty

is not a perquisite in the hands of employee and hence not
chargeable to tax

Nil

Loan from recognized provident fund not chargeable to tax

Nil

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4.11

Income-tax

Value of lunch provided during office hours

24,000

Less: Exempt under Rule 3(7)(iii) (See Note-2)

15,000

9,000

Computer provided in the residence of employee by the employer

not chargeable to tax [Rule 3(7)(vii)]
Gross Salary

Nil
9,04,200

Less : Deduction under Chapter VI-A

Deduction under section 80D in respect of medical insurance
premium paid by cheque amounting to ` 15,200 but restricted to
`15,000 (See Note-3)
Taxable income

15,000
8,89,200

Notes:
1.

As per Rule 3(2), if the motor car (whose engine cubic capacity is above 1.60 litres) is
owned by the employer and is used for both official and personal purpose by the
employee, then, the value of perquisite for use of motor car would be ` 2,400 per month.
Therefore value of perquisite for use of motor car would be ` 2,400 x 12 = ` 28,800

2.

As per Rule 3(7)(iii), lunch provided by the employer during office hours is not considered
as perquisite upto ` 50 per meal. Since, the number of working days is not given in the
question, it is assumed to be 300 days during the F.Y. 2014-15. Therefore, ` 15,000 (i.e.
300 x ` 50) would be exempt and the balance ` 9,000 (i.e. ` 24,000 - ` 15,000) would
be taxable.

3.

Medical insurance premium paid in cash of ` 4,800 is not allowable as deduction under
section 80D. Further, deduction for medical insurance premium paid through cheque is
restricted to ` 15,000, which is the maximum deduction allowable.

Question 2
Mr. Balaji, employed as Production Manager in Beta Ltd., furnishes you the following
information for the year ended 31.03.2015:
(i)

Basic salary upto 31.10.2014

` 50,000 p.m.
Basic salary from 01.11.2014
` 60,000 p.m.
Note: Salary is due and paid on the last day of every month.

(ii)

Dearness allowance @ 40% of basic salary.

(iii) Bonus equal to one month salary. Paid in October 2014 on basic salary plus dearness
allowance applicable for that month.
(iv) Contribution of employer to recognized provident fund account of the employee@16% of
basic salary.
(v) Profession tax paid ` 3,000 of which ` 2,000 was paid by the employer.

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Income from Salaries

4.12

(vi) Facility of laptop and computer was provided to Balaji for both official and personal use.
Cost of laptop ` 45,000 and computer ` 35,000 were acquired by the company on
01.12.2014.
(vii) Motor car owned by the employer (cubic capacity of engine exceeds 1.60 litres) provided
to the employee from 01.11.2014 meant for both official and personal use. Repair and
running expenses of ` 45,000 from 01.11.2014 to 31.03.2015, were fully met by the
employer. The motor car was self-driven by the employee.
(viii) Leave travel concession given to employee, his wife and three children (one daughter
aged 7 and twin sons aged 3). Cost of air tickets (economy class) reimbursed by the
employer ` 30,000 for adults and ` 45,000 for three children. Balaji is eligible for availing
exemption this year to the extent it is permissible in law.
Compute the salary income chargeable to tax in the hands of Mr. Balaji for the assessment year
2015-16.
Answer
Computation of Taxable Salary of Mr. Balaji for A.Y. 2015-16
Particulars

Basic salary [(` 50,000 7) + (` 60,000 5)]

6,50,000

Dearness Allowance (40% of basic salary)

2,60,000

Bonus (` 50,000 + 40% of ` 50,000) (See Note 1)

70,000

Employers contribution to recognised provident fund in excess of 12% of

salary = 4% of ` 6,50,000 (See Note 4)

26,000

Professional tax paid by employer

Perquisite of Motor Car (` 2,400 for 5 months) (See Note 5)
Gross Salary

2,000
12,000
10,20,000

Less: Deduction under section 16

Professional tax (See Note 6)
Taxable Salary

3,000
10,17,000

Notes:
1.

Since bonus was paid in the month of October, the basic salary of ` 50,000 for the month
of October is considered for its calculation.

2.

As per Rule 3(7)(vii), facility of use of laptop and computer is an exempt perquisite,
whether used for official or personal purpose or both.

3.

Mr. Balaji can avail exemption under section 10(5) on the entire amount of ` 75,000
reimbursed by the employer towards Leave Travel Concession since the same was
availed for himself, his wife and three children and the journey was undertaken by

The Institute of Chartered Accountants of India

4.13

Income-tax
economy class airfare. The restriction imposed for two children is not applicable in case
of multiple births which take place after the first child.
It is assumed that the Leave Travel Concession was availed for journey within India.

4.

It is assumed that dearness allowance does not form part of salary for computing
retirement benefits.

5.

As per the provisions of Rule 3(2), in case a motor car (engine cubic capacity exceeding
1.60 liters) owned by the employer is provided to the employee without chauffeur for
personal as well as office use, the value of perquisite shall be ` 2,400 per month. The
car was provided to the employee from 01.11.2014, therefore the perquisite value has
been calculated for 5 months.

6.

As per section 17(2)(iv), a perquisite includes any sum paid by the employer in respect
of any obligation which, but for such payment, would have been payable by the
assessee. Therefore, professional tax of ` 2,000 paid by the employer is taxable as a
perquisite in the hands of Mr. Balaji. As per section 16(iii), a deduction from the salary is
provided on account of tax on employment i.e. professional tax paid during the year.

Therefore, in the present case, the professional tax paid by the employer on behalf of the
employee ` 2,000 is first included in the salary and deduction of the entire professional tax of
` 3,000 is provided from salary.
Question 3
From the following details, find out the salary chargeable to tax for the A.Y.2015-16 Mr. X is a regular employee of Rama & Co., in Gurgaon. He was appointed on 1.1.2014 in the
scale of 20,000-1,000-30,000. He is paid 10% D.A. & Bonus equivalent to one month pay
based on salary of March every year. He contributes 15% of his pay and D.A. towards his
recognized provident fund and the company contributes the same amount.
He is provided free housing facility which has been taken on rent by the company at

` 10,000 per month. He is also provided with following facilities:

(i)

Facility of laptop costing ` 50,000.

(ii)

Company reimbursed the medical treatment bill of his brother of ` 25,000, who is
dependent on him.

(iii) The monthly salary of ` 1,000 of a house keeper is reimbursed by the company.
(iv) A gift voucher of ` 10,000 on the occasion of his marriage anniversary.
(v) Conveyance allowance of ` 1,000 per month is given by the company towards actual
reimbursement.
(vi) He is provided personal accident policy for which premium of ` 5,000 is paid by the
company.
(vii) He is getting telephone allowance @` 500 per month.

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Income from Salaries

4.14

(viii) Company pays medical insurance premium of his family of ` 10,000.

Answer
Computation of taxable salary of Mr. X for A.Y. 2015-16
Particulars
Basic pay [(` 20,0009) + (` 21,0003)] = ` 1,80,000 + ` 63,000

`
2,43,000

Dearness allowance [10% of basic pay]

24,300

Bonus

21,000

Employers contribution to Recognized Provident Fund in excess of 12% (15%12% =3% of ` 2,67,300) [See Note 1 below]

8,019

Taxable allowances
Telephone allowance

6,000

Taxable perquisites
Rent-free accommodation [See Note 1 & 2 below]

44,145

Medical reimbursement (` 25,000 - ` 15,000) [See Note 4 below]

10,000

Reimbursement of salary of housekeeper

12,000

Gift voucher [See Note 6 below]

10,000

Salary income chargeable to tax

3,78,464

Notes:
1.

It has been assumed that dearness allowance forms part of salary for retirement benefits
and accordingly, the perquisite value of rent-free accommodation and employers
contribution to recognized provident fund have been worked out.

2.

Where the accommodation is taken on lease or rent by the employer, the value of rentfree accommodation provided to employee would be actual amount of lease rental paid
or payable by the employer or 15% of salary, whichever is lower.
For the purposes of valuation of rent free house, salary includes:
(i)

Basic salary i.e., ` 2,43,000

(ii)

Dearness allowance (assuming that it is included for calculating retirement benefits)

i.e. ` 24,300

(iii) Bonus i.e., ` 21,000

(iv) Telephone allowance i.e., ` 6,000
Therefore, salary works out to
2,43,000 + 24,300 + 21,000 +6,000 = 2,94,300.

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4.15

Income-tax
15% of salary = 2,94,300 15/100 = 44,145
Value of rent-free house = Lower of rent paid by the employer (i.e. ` 1,20,000) or 15% of
salary (i.e., ` 44,145).
Therefore, the perquisite value is ` 44,145.

3.

Facility of use of laptop is not a taxable perquisite.

4.

Clause (v) of the proviso to section 17(2) exempts any sum paid by the employer in
respect of any expenditure actually incurred by the employee on his medical treatment or
treatment of any member of his family to the extent of ` 15,000. Therefore, in this case,
the balance of ` 10,000 (i.e., ` 25,000 ` 15,000) is a taxable perquisite. Medical
insurance premium paid by employer is exempt.

5.

Conveyance allowance is exempt since it is based on actual reimbursement for official

purposes.

6.

The value of any gift or voucher or token in lieu of gift received by the employee or by
member of his household below ` 5,000 in aggregate during the previous year is exempt.
In this case, the gift voucher was received on the occasion of marriage anniversary and
the sum exceeds the limit of ` 5,000.
Therefore, the entire amount of ` 10,000 is liable to tax as perquisite.
Note - An alternate view possible is that only the sum in excess of ` 5,000 is taxable in
view of the language of Circular No.15/2001 dated 12.12.2001 that such gifts upto
` 5,000 in the aggregate per annum would be exempt, beyond which it would be taxed as
a perquisite. As per this view, the value of perquisite would be ` 5,000.

7.

Premium of ` 5,000 paid by the company for personal accident policy is not liable to tax.

Question 4
From the following details, find out the salary chargeable to tax of Mr. Anand for the
assessment year 2015-16:
Mr. Anand is a regular employee of Malpani Ltd. in Mumbai. He was appointed on 01-03-2014
in the scale of 25,000-2,500-35,000. He is paid dearness allowance (which forms part of
salary for retirement benefits) @ 15% of basic pay and bonus equivalent to one and a half
month's basic pay as at the end of the year. He contributes 18% of his salary (basic pay plus
dearness allowance) towards recognized provident fund and the Company contributes the
same amount.
He is provided free housing facility which has been taken on rent by the Company at
` 15,000 per month. He is also provided with following facilities:
(i)

The Company reimbursed the medical treatment bill of ` 40,000 of his daughter, who is
dependent on him.

(ii)

The monthly salary of ` 2,000 of a house keeper is reimbursed by the Company.

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Income from Salaries

4.16

(iii) He is getting telephone allowance @ ` 1,000 per month.

(iv) A gift voucher of ` 4,700 was given on the occasion of his marriage anniversary.
(v) The Company pays medical insurance premium to effect an insurance on the health of
Mr. Anand ` 12,000.
(vi) Motor car running and maintenance charges of ` 36,600 fully paid by employer. (The
motor car is owned and driven by Mr. Anand. The engine cubic capacity is below 1.60
litres. The motor car is used for both official and personal purpose by the employee.)
(vii) Value of free lunch provided during office hours is ` 2,200.
Answer
Computation of taxable salary of Mr. Anand for A.Y. 2015-16
Particulars
`
3,02,500
Basic pay [(` 25,00011) + (` 27,5001)] = ` 2,75,000 + ` 27,500
Dearness allowance [15% of basic pay]
45,375
41,250
Bonus [` 27,500 1.5]
Employers contribution to Recognized Provident Fund in excess of 12% (18%
20,873
- 12% = 6% of ` 3,47,875)
Taxable allowances
Telephone allowance
12,000
Taxable perquisites
Rent-free accommodation [See Note 1 below]
60,169
25,000
Medical reimbursement (` 40,000 - ` 15,000) [See Note 2 below]
24,000
Reimbursement of salary of housekeeper [` 2,000 12]
Gift voucher [See Note 4 below]
15,000
Motor car owned and driven by employee, running and maintenance charges
borne by the employer [` 36,600 - ` 21,600 (i.e., ` 1,800 12)]
Value of free lunch facility [See Note 5 below ]
Salary income chargeable to tax
5,46,167
Notes:
1.
Where the accommodation is taken on lease or rent by the employer, the value of
rent-free accommodation provided to employee would be actual amount of lease rental
paid or payable by the employer or 15% of salary, whichever is lower.
For the purposes of valuation of rent free house, salary includes:
(i) Basic salary
` 3,02,500
(ii) Dearness allowance
` 45,375
(iii) Bonus
` 41,250
(iv) Telephone allowance
` 12,000
Total
` 4,01,125

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4.17

2.

Income-tax
15% of salary = ` 4,01,125 15/100 = ` 60,169
Value of rent-free house will be
Actual amount of lease rental paid by employer (i.e. ` 1,80,000) or
15% of salary (i.e., ` 60,169),
whichever is lower.
Therefore, the perquisite value is ` 60,169.
Any sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment or treatment of any member of his family is exempt
to the extent of ` 15,000. Therefore, in this case, the balance of
` 25,000 (i.e., ` 40,000 ` 15,000) is a taxable perquisite.

3.

Medical insurance premium paid by the employer to effect an insurance on the health
of the employee is fully exempt.
4.
If the value of any gift or voucher or token in lieu of gift received by the employee or
by member of his household is less than ` 5,000 in aggregate during the previous
year, the perquisite value is Nil. In this case, the gift voucher was received on the
occasion of marriage anniversary and the sum is less than ` 5,000. Therefore, the
perquisite value of gift voucher, is Nil.
5.
Free lunch provided by the employer during office hours is not a perquisite, assuming
that the value does not exceed ` 50 per meal.
Question 5
Shri Hari is the General Manager of ABC Ltd. From the following details, compute the taxable
income for the Assessment year 2015-16:
Basic salary
` 20,000 per month
Dearness allowance
30% of basic salary
Transport allowance (for commuting between place of residence and office)
` 2,000 per month
Motor car running and maintenance charges fully paid by employer
` 36,000
(The motor car is owned and driven by employee Hari. The engine cubic capacity is below
1.60 litres. The motor car is used for both official and personal purpose by the employee)
Expenditure on accommodation in hotels while touring on official duties met
by the employer.
` 30,000
Loan from recognised provident fund (maintained by the employer)
` 40,000
Lunch provided by the employer during office hours.
Cost to the employer
` 12,000
Computer (cost ` 50,000) kept by the employer in the residence of Hari
from 1.10.2014
Hari made the following payments:
Medical insurance premium : Paid in cash
` 2,000
Paid by cheque
` 3,200

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Income from Salaries

4.18

Answer
Computation of taxable income of Shri Hari for the A.Y. 2015-16
Particulars
Basic salary (` 20,000 x 12)
Dearness allowance @ 30%
Transport allowance (` 2,000 x 12)
Less : Exemption under section10(14) (read with Rule 2BB @ ` 800
p.m.)
Motor car maintenance borne by employer [` 36,000 - ` 21,600
(i.e., ` 1,800 12)]
Expenditure on accommodation while on official duty not a
perquisite and hence not chargeable to tax
Loan from recognized provident fund not chargeable to tax
Value of lunch provided during working hours (not chargeable to
tax as per rule 3(7)(iii)-free food provided by the employer during
working hours is not treated as perquisite provided that the value
thereof does not exceed fifty rupees per meal)
Computer provided in the residence of employee by the employer
not chargeable to tax [Rule 3(7)(vii)]
Gross Salary
Less :Deduction under Chapter VI-A
Deduction under section 80D in respect of medical insurance
premium paid by cheque
Premium paid in cash not eligible for deduction
Taxable income

24,000
9,600

`
2,40,000
72,000
14,400

14,400
Nil
Nil

Nil
Nil
3,40,800

3,200
Nil

3,200
3,37,600

Question 6
Mr. Vignesh, Finance Manager of KLM Ltd., Mumbai, furnishes the following particulars for the
financial year 2014-15:
(i)

Salary ` 46,000 per month

(ii)

Value of medical facility in a hospital maintained by the company ` 7,000

(iii) Rent free accommodation owned by the company

(iv) Housing loan of ` 6,00,000 given on 01.04.2014 at the interest rate of 6% p.a. (No
repayment made during the year). The rate of interest charged by State Bank of India
(SBI) as on 01.04.2014 in respect of housing loan is 10%.
(v) Gifts in kind made by the company on the occasion of wedding anniversary of Mr.
Vignesh ` 4,750.

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4.19

Income-tax

(vi) A wooden table and 4 chairs were provided to Mr. Vignesh at his residence (dining table).
This was purchased on 1.5.2011 for ` 60,000 and sold to Mr. Vignesh on 1.8.2014 for
` 30,000.
(vii) Personal purchases through credit card provided by the company amounting to ` 10,000
was paid by the company. No part of the amount was recovered from Mr.Vignesh.
(viii) An ambassador car which was purchased by the company on 16.7.2011 for ` 2,50,000
was sold to the assessee on 14.7.2014 for ` 80,000.
Other income received by the assessee during the previous year 2014-15:
(a)
(b)
(c)

Particulars
Interest on Fixed Deposits with a company
Income from specified mutual fund
Interest on bank fixed deposits of a minor married daughter

`
5,000
3,000
3,000

(ix) Contribution to LIC towards premium under section 80CCC

` 1,10,000

(x) Deposit in PPF Account made during the year 2014-15

` 40,000

Compute the taxable income of Mr. Vignesh and the tax thereon for the Assessment year
2015-16.
Answer
Computation of taxable income of Mr. Vignesh for the Assessment Year 2015-16
Particulars
`
`
(a)

Income from salaries (See Note 1)

(b)

Income from other sources

7,62,800

(i)

Interest on fixed deposit with a company

5,000

(ii)

Income from specified mutual fund exempt under

section 10(35)

Nil

(iii) Interest on Fixed Deposit received by minor daughter

(` 3,000 - ` 1500)

1,500

Gross total income

6,500
7,69,300

Less: Deductions under Chapter VI-A

Section 80C PPF
Section 80CCC (limited to Rs. 1,00,000) [See Note 2]
Total Income
Tax on total income
Add : Education cess @ 2%

The Institute of Chartered Accountants of India

40,000
1,00,000

1,40,000
6,29,300
50,860
1,017

Income from Salaries

Add : Secondary and Higher Education cess @ 1%

4.20
509

Total tax liability

52,386

Total tax liability (rounded off)

52,390

Note:
Computation of salary income of Mr. Vignesh for the Assessment Year 2015-16
Particulars

Income under the head salaries

5,52,000

Salary [ ` 46,000 x 12 ]
Medical facility [ in the hospital maintained by the company is exempt]

Rent free accommodation

82,800

15% of salary is taxable (i.e. ` 5,52,000 15% as per Rule 3(1))

Use of dining table for 4 months

2,000

[` 60,000 x 10 /100 x 4 /12]

Valuation of perquisite of interest on loan
[Rule 3(7)(i)] 10% is taxable which is to be reduced by actual rate of interest
charged i.e. [ 10% - 6% = 4%]

24,000

Gift given on the occasion of wedding anniversary ` 4,750 is exempt, since its
value is less than ` 5,000

Perquisite on sale of dining tables

Cost

60,000

Less: Depreciation on straight line method @ 10% for 3 years

18,000

Written Down Value

42,000

Less: Amount paid by the assessee

30,000

Purchase through credit card not being a privilege but

covered by section 17(2)(iv)
Original cost of car
Less: Depreciation from 16.7.2011 to 15.7.2012 @ 20%

12,000
10,000

2,50,000
50,000
2,00,000

Less: Depreciation from 16.7.2012 to 15.7.2013 @ 20% on

WDV
Value as on 14.07.2014- being the date of sale to employee
Less : Amount received from the assessee on 14.07.2014
Income from Salaries

The Institute of Chartered Accountants of India

40,000
1,60,000
80,000

80,000
7,62,800

4.21

Income-tax

Note 1. Under Rule 3(7)(viii), while calculating the perquisite value of benefit to the
employee arising from the transfer of any movable asset, the normal wear and tear is to be
calculated in respect of each completed year during which the asset was put to use by the
employer. In the given case the third year of use of ambassador car is completed on
15.7.2014 where as the car was sold to the employee on 14.7.2014. The solution worked out
above provides for wear and tear for only two years.
Note - 2 : Section 80CCE provides that the aggregate deduction under section 80C, 80CCC,
80CCD(1) cannot exceed Rs. 1,50,000. However, the maximum deduction which can be
availed under section 80CCC is only Rs. 1 lakh.
Question 7
Mrs. Lakshmi aged about 66 years is a Finance Manager of M/s. Lakshmi & Co. Pvt. Ltd.,
based at Calcutta. She is in continuous service since 1975 and receives the following salary
and perks from the company during the year ending 31.03.2015:
(i)

Basic Salary (` 50,000 x 12) = ` 6,00,000

(ii)

D.A. (` 20,000 x 12) = ` 2,40,000 (forms part of pay for retirement benefits)

(iii) Bonus 2 months basic pay.

(iv) Commission 0.1% of the turnover of the company. The turnover for the F.Y. 2014-15
was ` 15.00 crores.
(v) Contribution of the employer and employee to the recognized provident fund Account
` 3,00,000 each.
(vi) Interest credited to Recognized Provident Fund Account at 9.5% - ` 60,000.
(vii) Rent free unfurnished accommodation provided by the company for which the company
pays a rent of ` 70,000 per annum.
(viii) Entertainment Allowance ` 30,000.
(ix) Hostel allowance for three children ` 5,000 each.
She makes the following payments and investments :
(i)

Premium paid to insure the life of her major son ` 15,000.

(ii)

Medical Insurance premium for self ` 6,000 ; Spouse ` 6,000.

(iii) Donation to a public charitable institution registered under 80G ` 2,00,000 by way of
cheque.
(iv) LIC Pension Fund ` 12,000.
Determine the tax liability for the Assessment Year 2015-16.

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Income from Salaries

4.22

Answer
Computation of Total Income of Mrs. Lakshmi for A.Y. 2015-16
Particulars
Income from salary
Basic salary
Dearness allowance
Bonus
Commission (calculated as percentage of turnover)
Entertainment allowance
Childrens hostel allowance
Less : Exemption (` 300 x 12 x 2)
Interest credited to recognized provident fund account (exempt)
Rent free unfurnished accommodation
(Refer Working Note 1)
Excess contribution to PF by employer
(Refer Working Note 2)
Gross salary
Less : Deduction under section 80C
Life insurance premium paid for insurance of major son
Contribution to recognized provident fund
Restricted to
Deduction under section 80CCC in respect of LIC pension fund

6,00,000
2,40,000
1,00,000
1,50,000
30,000
15,000
7,200

7,800
70,000
1,81,200
13,79,000

15,000
3,00,000
3,15,000
1,50,000
12,000
1,62,000

Deduction limited to ` 1,50,000 as per section 80CCE

Deduction under section 80D
Total income before deduction under section 80G
Deduction under section 80G :
50% of ` 1,21,700 (10% total income)(Refer Working Note 3)
Total income
Tax on total income [20,000 + 1,00,000 + (11,56,150 -10,00,000) x 30%]
Add : Education cess @ 2%
Add : Secondary and higher education cess @ 1%
Total tax liability

The Institute of Chartered Accountants of India

1,50,000
12,000
12,17,000
60,850
11,56,150
1,66,845
3,337
1,668
1,71,850

4.23

Income-tax

Working Notes:
1. Value of rent free unfurnished accommodation
Particulars
Basic salary
Dearness allowance
Bonus
Commission @ 0.1% of turnover
Entertainment allowance
Childrens hostel allowance
Gross Salary
15% of salary
Actual rent paid by the company
The least of the above is chargeable perquisite.
2.

3.

`
6,00,000
2,40,000
1,00,000
1,50,000
30,000
7,800
11,27,800
1,69,170
70,000

Employers contribution to P.F. in excess of 12% of salary

Employers contribution
Less : 12% of basic salary, dearness allowance & commission
12% of ` 9,90,000

` 3,00,000
` 1,18,800

` 1,81,200
No deduction shall be allowed under section 80G in respect of any sum exceeding
` 10,000 unless such sum is paid by any mode other than cash. Here, since the donation
of ` 2,00,000 is made by cheque, the same is allowed.

Question 8
Mr. M is an area manager of M/s N. Steels Co. Ltd. During the financial year 2014-15, he gets the
following emoluments from his employer:
Basic Salary
Up to 31.8.2014
From 1.9.2014
Transport allowance
Contribution to recognised provident fund
Children education allowance (Total)
City compensatory allowance
Hostel expenses allowance (Total)
Tiffin allowance (actual expenses ` 3,700)
Tax paid on employment

` 20,000 p.m.
` 25,000 p.m.
` 2,000 p.m.
15% of basic salary
` 500 p.m. for two children
` 300 p.m.
` 380 p.m. for two children
` 5,000 p.a.
` 2,500

Compute taxable salary of Mr. M for the Assessment year 2015-16.

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Income from Salaries

4.24

Answer
Computation of taxable salary of Mr. M. for the Assessment Year 2015-16
Particulars
Basic Salary (` 20,000 x 5) +(` 25,000 x 7)
Transport allowance ( ` 2,000 x 12)
Less : Exempt under section 10(14) (` 800 x 12)
Children education allowance (` 500 x 12)
Less: Exempt under section 10(14) ( ` 100 x 2 x 12)
City Compensatory Allowance (` 300 x 12)
Hostel Expenses Allowance (` 380 x 12)
Less: Exempt under section 10(14) ( ` 300 x 2 x 12 i.e. ` 7,200
but restricted to the actual allowance of ` 4,560)
Tiffin allowance (fully taxable)
Tax paid on employment [See Note Below]
Employers contribution to recognized provident fund in excess of
12% of salary (i.e 3% of ` 2,75,000)
Gross Salary
Less : Tax on employment under section 16(iii)
Taxable salary

`
2,75,000

24,000
9,600

14,400

6,000
2,400

3,600
3,600

4,560
4,560

Nil
5,000
2,500
8,250
3,12,350
2,500
3,09,850

Note: Professional tax paid by employer should be included in the salary of Mr. M as a perquisite
since it is discharge of monetary obligation of the employee by the employer. Thereafter, deduction
of professional tax paid is allowed to the employee from his gross salary.
Question 9
Mr. X retired from the services of M/s Y Ltd. on 31.01.2015, after completing service of 30
years and one month. He had joined the company on 1.1.1985 at the age of 30 years and
received the following on his retirement:
(i)

Gratuity ` 6,00,000. He was covered under the Payment of Gratuity Act, 1972.

(ii)

Leave encashment of ` 3,30,000 for 330 days leave balance in his account. He was
credited 30 days leave for each completed year of service.

(iii) As per the scheme of the company, he was offered a car which was purchased on
01.02.2012 by the company for ` 5,00,000. Company has recovered ` 2,00,000 from him
for the car. Company depreciates the vehicles at the rate of 15% on Straight Line
Method.

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4.25

Income-tax

(iv) An amount of ` 3,00,000 as commutation of pension for 2/3 of his pension commutation.
(v)

Company presented him a gift voucher worth ` 6,000 on his retirement.

(vi) His colleagues also gifted him a Television (LCD) worth ` 50,000 from their own
contribution.
Following are the other particulars:
(i)

He has drawn a basic salary of ` 20,000 and 50% dearness allowance per month for the
period from 01.04.2014 to 31.01.2015.

(ii)

Received pension of ` 5,000 per month for the period 01.02.2015 to 31.03.2015 after
commutation of pension.

Compute his gross total income from the above for Assessment Year 2015-16.
Answer
Computation of Gross Total Income of Mr. X for A.Y. 2015-16
Particulars
Basic Salary = ` 20,000 x 10
Dearness Allowance = 50% of basic salary
Gift Voucher (See Note - 1)
Transfer of car (See Note - 2)
Gratuity (See Note - 3)
Leave encashment (See Note - 4)
Uncommuted pension (` 5000 x 2)
Commuted pension (See Note - 5)
Taxable Salary /Gross Total Income

`
2,00,000
1,00,000
6,000
56,000
80,769
1,30,000
10,000
1,50,000
7,32,769

Notes:
(1) As per Rule 3(7)(iv), the value of any gift or voucher or token in lieu of gift received by
the employee or by member of his household not exceeding ` 5,000 in aggregate during
the previous year is exempt. In this case, the amount was received on his retirement and
the sum exceeds the limit of ` 5,000.
Therefore, the entire amount of ` 6,000 is liable to tax as perquisite.
Note - An alternate view possible is that only the sum in excess of ` 5,000 is taxable in
view of the language of Circular No.15/2001 dated 12.12.2001 that such gifts upto
` 5,000 in the aggregate per annum would be exempt, beyond which it would be taxed as
a perquisite. As per this view, the value of perquisite would be ` 1,000 and gross taxable
income would be ` 7,27,769.
(2) Perquisite value of transfer of car: As per Rule 3(7)(viii), the value of benefit to the
employee, arising from the transfer of an asset, being a motor car, by the employer is the
actual cost of the motor car to the employer as reduced by 20% of such cost for each

The Institute of Chartered Accountants of India

Income from Salaries

4.26

completed year during which such motor car was put to use by the employer on a written
down value basis. Therefore, the value of perquisite on transfer of motor car, in this case,
would be:
Particulars

Purchase price (1.2.2012)

5,00,000

Less: Depreciation @ 20%

1,00,000

WDV on 31.1.2013

4,00,000

Less: Depreciation @ 20%

80,000

WDV on 31.1.2014

3,20,000

Less: Depreciation @ 20%

64,000

WDV on 31.1.2015

2,56,000

Less: Amount recovered

2,00,000

Value of perquisite

56,000

The rate of 15% as well as the straight line method adopted by the company for
depreciation of vehicle is not relevant for calculation of perquisite value of car in the
hands of Mr. X.
(3) Taxable gratuity
Particulars

Gratuity received

6,00,000

Less : Exempt under section 10(10) - Least of the following:

(i) Notified limit =

` 10,00,000

(ii) Actual gratuity =

` 6,00,000

(iii) 15/26 x 30,000 x 30 =

` 5,19,231

5,19,231

Taxable Gratuity

80,769

(4) Taxable leave encashment

Particulars

Leave Salary received

3,30,000

Less : Exempt under section 10(10AA) - Least of the following:

(i) Notified limit

` 3,00,000

(ii) Actual leave salary

` 3,30,000

(iii) 10 months x ` 20,000

` 2,00,000
(assuming that dearness allowance does not form part of
pay for retirement benefit)

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4.27

Income-tax
(iv) Cash equivalent of leave to his credit

` 2,20,000

330

x
20,000
30

2,00,000

Taxable Leave encashment

1,30,000

Note It has been assumed that dearness allowance does not form part of salary for
retirement benefits. In case it is assumed that dearness allowance forms part of pay for
retirement benefits, then, the third limit for exemption under section 10(10AA) in respect
of leave encashment would be ` 3,00,000 (i.e. 10 x ` 30,000) and the fourth limit
` 3,30,000, in which case, the taxable leave encashment would be ` 30,000 (` 3,30,000
-` 3,00,000). In such a case, the gross total income would be ` 6,32,769.
(5) Commuted Pension
Since Mr. X is a non-government employee in receipt of gratuity, exemption under
section 10(10A) would be available to the extent of 1/3rd of the amount of the pension
which he would have received had he commuted the whole of the pension.
Particulars
Amount received
Exemption under section 10(10A) =

1
3
3,00,000
3
2

Taxable amount

`
3,00,000
1,50,000
1,50,000

(6) The taxability provisions under section 56(2)(vii) are not attracted in respect of television
received from colleagues, since television is not included in the definition of property
therein.
Question 10
Mr. Narendra, who retired from the services of Hotel Samode Ltd., on 31.1.2015 after putting
on service for 5 years, received the following amounts from the employer for the year ending
on 31.3.2015:

Salary @ ` 16,000 p.m. comprising of basic salary of ` 10,000, Dearness allowance of

` 3,000, City compensatory allowance of ` 2,000 and Night duty allowance of ` 1,000.

Pension @ 30% of basic salary from 1.2.2015.

Leave salary of ` 75,000 for 225 days of leave accumulated during 5 years @ 45 days
leave in each year. He has not availed any earned leave during his tenure of 5 years and
utilized only his casual leave.

Gratuity of ` 50,000.

Compute the total income of Mr. Narendra for the assessment year 2015-16.

The Institute of Chartered Accountants of India

Income from Salaries

4.28

Answer
Computation of total income of Mr. Narendra for A.Y. 2015-16
Particulars

Income from Salaries

Gross salary received during 1.4.2014 to 31.1.2015 @
` 16,000 p.m. (` 16,000 x 10)
Pension for 2 months @ 30% of the basic salary of ` 10,000 p.m.
Leave Salary
Less: Exempt under section 10(10AA) (Note1)
Gratuity
Less: Exempt under section 10(10) (Note2)
Total Income

1,60,000
6,000
75,000
50,000
50,000
25,000

25,000

25,000
2,16,000

Notes:
1.

Leave encashment is exempt to the extent of least of the following :

Particulars
(i)

Statutory limit

(ii)

Cash equivalent of leave for 30 days for 5 years (` 10,000 150/30)

(iii)

10 months average salary (10 x ` 10,000)

(iv)

Actual amount received

`
3,00,000
50,000
1,00,000
75,000

Therefore, ` 50,000 is exempt under section 10(10AA).

2.

Assuming that the employee is not covered under the Payment of Gratuity Act, 1972,
Gratuity is exempt to the extent of least of the following :
Particulars

(i)

Statutory limit

10,00,000

(ii)

Half months salary for 5 years of service ( 5 x ` 5,000)

25,000

(iii)

Actual gratuity received

50,000

Therefore, ` 25,000 is exempt under section 10(10).

3.

It has been assumed that dearness allowance does not form part of salary for retirement
benefits and therefore, not included in Salary for the purpose of computation of leave
encashment and gratuity.

The Institute of Chartered Accountants of India

4.29

Income-tax

Question 11
Mr. Mohit is employed with XY Ltd. on a basic salary of ` 10,000 p.m. He is also entitled to
dearness allowance @ 100% of basic salary, 50% of which is included in salary as per terms of
employment. The company gives him house rent allowance of ` 6,000 p.m. which was increased
to ` 7,000 p.m. with effect from 1.01.2015. He also got an increment of ` 1,000 p.m. in his basic
salary with effect from 1.02.2015. Rent paid by him during the previous year 2014-15 is as under:
April and May, 2014

Nil, as he stayed with his parents

June to October, 2014

` 6,000 p.m. for an accommodation in Ghaziabad

November, 2014 to March, 2015

` 8,000 p.m. for an accommodation in Delhi.

Compute his gross salary for assessment year 2015-16.

Answer
Computation of gross salary of Mr. Mohit for A.Y. 2015-16
Particulars

Basic salary [(` 10,000 10) + (` 11,000 2)]

1,22,000

Dearness Allowance (100% of basic salary)

1,22,000

House Rent Allowance (See Note below)

21,300

Gross Salary

2,65,300

Note: Computation of Taxable House Rent Allowance (HRA)

April-May
(`)

Particulars
Basic salary per month

June-Oct
(`)

Nov-Dec
(`)

Jan
(`)

Feb-March
(`)

10,000

10,000

10,000

10,000

11,000

Dearness allowance (included

in salary as per terms of
employment) (50% of basic
salary)

5,000

5,000

5,000

5,000

5,500

Salary per month for the

purpose of computation of
house rent allowance

15,000

15,000

15,000

15,000

16,500

(in

Salary for the relevant period

(Salary per month relevant
period)

30,000

75,000

30,000

15,000

33,000

Rent paid for the relevant

period

Nil

Relevant
months)

period

The Institute of Chartered Accountants of India

30,000
16,000
8,000
16,000
(`6,0005) (`8,0002) (`8,0001) (` 8,0002)

Income from Salaries

4.30

House rent allowance (HRA)

12,000
30,000
12,000
7,000
14,000
received during the relevant
(`6,0002) (`6,0005) (`6,0002) (`7,0001) (`7,0002)
period (A)
Least of the following is
exempt [u/s 10(13A)]
1.

Actual HRA received

12,000

30,000

12,000

7,000

14,000

2.

Rent paid 10% of

salary

N.A.

22,500

13,000

6,500

12,700

3.

40%
of
salary
(Residence
at
GhaziabadJune
to Oct, 2014)
50%
of
salary
(Residence at Delhi
Nov14- March15)

N.A.

30,000
(40%
` 75,000)
15,000
(50%
`30,000)

7,500
(50%
`15,000)

16,500
(50%
`33,000)

Exempt HRA (B)

Taxable HRA (Actual HRA
Exempt HRA) (A-B)

Nil

22,500

12,000

6,500

12,700

12,000

7,500

Nil

500

1,300

Taxable HRA (total) = ` 12,000 + ` 7,500 + ` 500 + ` 1,300 = ` 21,300

Question 12
(i)

Mr. Khanna, an employee of IOL, New Delhi, a private sector company, received the
following for the financial year 2014-15:
Sl. No.

Particulars

1.

Basic pay

1,20,000

2.

House rent allowance

1,00,000

3.

Special allowance

30,000

Mr. Khanna was residing at New Delhi and was paying a rent of ` 10,000 a month.
Compute the eligible exemption under section 10(13A) of the Income-tax Act, 1961, in
respect of house rent allowance received.
(ii)

If Mr. Khanna opts for rent free accommodation whereby IOL would be paying a rent of

` 10,000 per month to the landlord and recovers a sum of ` 2,500 per month from Mr.
Khanna which was in excess of his entitlement, what will be the perquisite value in
respect of such rent free accommodation?
(iii) Which of the above would be beneficial to Mr. Khanna i.e., house rent allowance or rent
free accommodation?

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Answer
(i)

The eligible exemption under section 10(13A) in respect of house rent allowance
received would be least of the following:
Particulars
(a)

Actual house rent allowance (HRA) received

(b)

Excess of rent paid over 10% of basic salary

Rent paid (10,000 x 12)
Less: 10% of basic pay (i.e. 10% of ` 1,20,000)

(c)

`
1,00,000

1,20,000
12,000

50% of salary (i.e. 50% of ` 1,20,000)

1,08,000
60,000

Least of the above is ` 60,000.

The house rent allowance received by Mr. Khanna would be exempt to the extent of
` 60,000 under section 10(13A). The balance of ` 40,000 is includible in his total income.
(ii) Perquisite value in respect of concessional accommodation
As per rule 3(1), where the accommodation is taken on lease or rent by the employer, the
actual amount of lease rental paid or payable by the employer or 15% of salary,
whichever is lower, as reduced by the rent, if any, actually paid by the employee is the
value of the perquisite.
(a) Actual rent paid by the employer = ` 10,000 x 12 = ` 1,20,000
(b) 15% of salary = 15% of basic pay plus special allowance =
15% of ` 1,50,000 = ` 22,500
Lower of the above is ` 22,500, which should be reduced by the rent of ` 30,000 paid by
the employee (i.e. 2,500 12 = ` 30,000). The perquisite value is, therefore, nil.
(iii) We have to see the cash flow from both the options to find out which is more beneficial.
Particulars

Option 1: HRA
Cash inflows [Basic Pay + HRA + Special Allowance]

2,50,000

Less: Cash outflows:

Rent paid
Tax (See Working Note 1 below)

1,20,000
Nil

1,20,000

Net cash flow

1,30,000

Cash inflows [Basic Pay + Special Allowance]

1,50,000

Less: Cash outflows:

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Income from Salaries

Rent recovery

4.32

30,000

Tax (See Working Note 2 below)

Nil

Net cash flow

30,000
1,20,000

Since the net cash flow is higher in Option 1, Mr. Khanna should opt for HRA, which
would be more beneficial to him.
Working Notes:
1.

Computation of tax under Option 1 (HRA):

Particulars

Salary:
Basic Pay

1,20,000

HRA (taxable)

40,000

Special allowance

30,000

Total salary

1,90,000

Tax on ` 1,90,000 (including cess)

2.

Nil

Computation of tax under Option 2 (Concessional accommodation)

Particulars
Salary:
Basic Pay
Special allowance
Concessional accommodation
Total salary
Tax on ` 1,50,000

`
1,20,000
30,000
Nil
1,50,000
Nil

Question 13
Mr. X and Mr. Y are working for M/s. Gama Ltd. As per salary fixation norms, the following
perquisites were offered:
(i)

For Mr. X, who engaged a domestic servant for ` 500 per month, his employer
reimbursed the entire salary paid to the domestic servant i.e. ` 500 per month.

(ii)

For Mr. Y, he was provided with a domestic servant @ ` 500 per month as part of
remuneration package.

You are required to comment on the taxability of the above in the hands of Mr. X and Mr. Y,
who are not specified employees.

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Income-tax

Answer
In the case of Mr. X, it becomes an obligation which the employee would have discharged
even if the employer did not reimburse the same. Hence, the perquisite will be covered under
section 17(2)(iv) and will be taxable in the hands of Mr. X. This is taxable in the case of all
employees.
In the case of Mr. Y, it cannot be considered as an obligation which the employee would meet.
The employee might choose not to have a domestic servant. This is taxable only in the case of
specified employees covered by section 17(2)(iii). Hence, there is no perquisite element in the
hands of Mr. Y.
Question 14
The following benefits have been granted by Ved Software Ltd. to one of its employees Mr.
Badri:
(i)
(ii)

Housing loan @ 6% per annum. Amount outstanding on 1.4.2014 is ` 6,00,000. Mr. Badri
pays ` 12,000 per month towards principal, on 5th of each month.
Air-conditioners purchased 4 years back for ` 2,00,000 have been given to Mr. Badri for

` 90,000.
Compute the chargeable perquisite in the hands of Mr. Badri for the A.Y. 2015-16.
The lending rate of State Bank of India as on 1.4.2014 for housing loan may be taken as 10%.
Answer
Perquisite value for housing loan
The value of the benefit to the assessee resulting from the provision of interest-free or
concessional loan made available to the employee or any member of his household during the
relevant previous year by the employer or any person on his behalf shall be determined as the
sum equal to the interest computed at the rate charged per annum by the State Bank of India
(SBI) as on the 1st day of the relevant previous year in respect of loans for the same purpose
advanced by it. This rate should be applied on the maximum outstanding monthly balance and
the resulting amount should be reduced by the interest, if any, actually paid by him.
Maximum outstanding monthly balance means the aggregate outstanding balance for loan as
on the last day of each month.
The perquisite value for computation is 10% - 6% = 4%
Month

Maximum outstanding balance as

on last date of month (`)

Perquisite value at 4%
for the month (`)

April, 2014

5,88,000

1,960

May, 2014

5,76,000

1,920

June, 2014

5,64,000

1,880

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July, 2014

5,52,000

1,840

August, 2014

5,40,000

1,800

September, 2014

5,28,000

1,760

October, 2014

5,16,000

1,720

November, 2014

5,04,000

1,680

December, 2014

4,92,000

1,640

January, 2015

4,80,000

1,600

February, 2015

4,68,000

1,560

March, 2015

4,56,000

1,520

Total value of this perquisite

20,880

Perquisite Value of Air Conditioners

Particulars
Original cost

`
2,00,000

Depreciation on SLM basis for 4 years @10% i.e. ` 2,00,000 x10% x 4

Written down value

80,000
1,20,000

Amount recovered from the employee

90,000

Perquisite value

30,000

Chargeable perquisite in the hands of Mr. Badri for the assessment year 2015-16
Particulars

Housing loan

20,880

Air Conditioner

30,000

Total

50,880

Question 15
Shri Bala employed in ABC Co. Ltd. as Finance Manager gives you the list of perquisites
provided by the company to him for the entire financial year 2014-15:
(i)
(ii)

Medical facility given to his family in a hospital maintained by the company. The
estimated value of benefit because of such facility is ` 40,000.
Domestic servant was provided at the residence of Bala. Salary of domestic servant is

` 1,500 per month. The servant was engaged by him and the salary is reimbursed by the
company (employer).
In case the company has employed the domestic servant, what is the value of perquisite?

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Income-tax

(iii) Free education was provided to his two children Arthy and Ashok in a school maintained
and owned by the company. The cost of such education for Arthy is computed at ` 900
per month and for Ashok at ` 1,200 per month. No amount was recovered by the
company for such education facility from Bala.
(iv) The employer has provided movable assets such as television, refrigerator and airconditioner at the residence of Bala. The actual cost of such assets provided to the
employee is ` 1,10,000.
(v) A gift voucher worth ` 10,000 was given on the occasion of his marriage anniversary. It
is given by the company to all employees above certain grade.
(vi) Telephone provided at the residence of Shri Bala and the bill aggregating to ` 25,000
paid by the employer.
State the taxability or otherwise of the above said perquisites and compute the total value of
taxable perquisites.
Answer
Taxability of perquisites provided by ABC Co. Ltd. to Shri Bala
(i)

Medical facility to employees family in a hospital maintained by the employer is not a

taxable perquisite. Regardless of the estimated value of benefit arising from such facility
to the employee, it is exempt from tax. Therefore, the value of perquisite is Nil.

(ii)

Domestic servant was employed by the employee and the salary of such domestic
servant was paid/reimbursed by the employer. It is taxable as perquisite for all categories
of employees.
Taxable perquisite value = ` 1,500 12 = ` 18,000.
If the company had employed the domestic servant and the facility of such servant is
given to the employee, then the perquisite is taxable only in the case of specified
employees. The value of the taxable perquisite in such a case also would be
` 18,000.

(iii) Where the educational institution is owned by the employer, the value of perquisite in
respect of free education facility shall be determined with reference to the reasonable
cost of such education in a similar institution in or near the locality. However, there would
be no perquisite if the cost of such education per child does not exceed ` 1,000 per
month.
Therefore, there would be no perquisite in respect of cost of free education provided to
his child Arthy, since the cost does not exceed ` 1,000 per month.
However, the cost of free education provided to his child Ashok would be taxable, since
the cost exceeds ` 1,000 per month. The taxable perquisite value would be ` 14,400
(` 1,200 12).

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Note An alternate view possible is that only the sum in excess of ` 1,000 per month is
taxable. In such a case, the value of perquisite would be ` 2,400.
(iv) Where the employer has provided movable assets to the employee or any member of his
household, 10% per annum of the actual cost of such asset owned or the amount of hire
charges incurred by the employer shall be the value of perquisite. However, this will not
apply to laptops and computers. In this case, the movable assets are television,
refrigerator and air conditioner and actual cost of such assets is ` 1,10,000.
The perquisite value would be 10% of the actual cost i.e., ` 11,000, being 10% of
` 1,10,000.
(v) The value of any gift or voucher or token in lieu of gift received by the employee or by
member of his household not exceeding ` 5,000 in aggregate during the previous year is
exempt. In this case, the amount was received on the occasion of marriage anniversary
and the sum exceeds the limit of ` 5,000.
Therefore, the entire amount of ` 10,000 is liable to tax as perquisite.
Note - An alternate view possible is that only the sum in excess of ` 5,000 is taxable in
view of the language of Circular No.15/2001 dated 12.12.2001 that such gifts upto
` 5,000 in the aggregate per annum would be exempt, beyond which it would be taxed as
a perquisite. As per this view, the value of perquisite would be ` 5,000.
Total value of taxable perquisite = ` 53,400 [i.e. ` 18,000 + 14,400 + 11,000 +
10,000].
(v) Telephone provided at the residence of the employee and payment of bill by the
employer is a tax free perquisite.
Note - In case the alternate views are taken for items (iii) & (v), the total value of taxable
perquisite would be ` 36,400 [i.e., ` 18,000 + 2,400 + 11,000 + 5,000].
Question 16
Ms. Rakhi is an employee in a private company. She receives the following medical benefits
from the company during the previous year 2014-15:

`
1

Reimbursement of following medical expenses incurred by Ms. Rakhi

(A)

On treatment of her self employed daughter in a private clinic

4,000

(B)

On treatment of herself by family doctor

8,000

(C)

On treatment of her mother-in-law dependent on her, in a nursing

home

5,000

Payment of premium on Mediclaim Policy taken on her health

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7,500

4.37

Income-tax
2,000
per month

Medical Allowance

Medical expenses reimbursed on her son's treatment in a government

hospital

Expenses incurred by company on the treatment of her minor son

abroad

1,05,000

Expenses in relation to foreign travel and stay of Rakhi and her son
abroad for medical treatment
(Limit prescribed by RBI for this is ` 2,00,000)

1,20,000

5,000

Discuss about the taxability of above benefits and allowances in the hands of Rakhi.
Answer
Tax treatment of medical benefits, allowances and mediclaim premium in the hands of
Ms. Rakhi for A.Y. 2015-16
Particulars
1.

Reimbursement of medical expenses incurred by Ms. Rakhi

(A)

The amount of ` 4,000 reimbursed by her employer for treatment of her selfemployed daughter in a private clinic qualifies for exclusion from perquisite,
subject a maximum of ` 15,000 as per clause (v) of the first proviso to section
17(2), since daughter falls within the definition of family, even though she is not
a dependent. As per the definition of family, the condition of dependency is
relevant only for parents, brothers and sisters of the individual and not for spouse
and children.

(B)

The amount of ` 8,000 reimbursed by the employer for treatment of

Ms. Rakhi
by family doctor qualifies for exclusion from perquisite, subject to a maximum of
` 15,000 under clause (v) of the first proviso to section 17(2).

(C)

The amount of ` 5,000 reimbursed by her employer for treatment of her

dependant mother-in-law in a nursing home does not qualify for exclusion upto
` 15,000, since mother-in-law does not fall within the definition of family, even
though she is dependent on Ms. Rakhi.

Therefore, the aggregate sum of ` 12,000, specified in (A) and (B) above, reimbursed
by the employer would be excluded from perquisite [since the same is less than the
maximum permissible limit of ` 15,000]. However, the sum of ` 5,000 specified in (C)
above is a taxable perquisite.
2.

Medical insurance premium of ` 7,500 paid by the employer for insuring health of Ms.
Rakhi is an exempt perquisite as per clause (iii) of the first proviso to section 17(2).

3.

Medical allowance of ` 2,000 per month i.e., ` 24,000 p.a. is a fully taxable allowance.

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4.

As per clause (ii)(a) of the first proviso to section 17(2), reimbursement of medical
expenses of ` 5,000 on her sons treatment in a hospital maintained by the Government
is an exempt perquisite.

5.
&
6.

As per clause (vi) of the first proviso to section 17(2), the following expenditure incurred
by the employer would be excluded from perquisite subject to certain conditions
(i) Expenditure on medical treatment of the employee, or any member of the
family of such employee, outside India [` 1,05,000, in this case];
(ii) Expenditure on travel and stay abroad of the employee or any member of the
family of such employee for medical treatment and one attendant who
accompanies the patient in connection with such treatment [` 1,20,000, in this
case].
The conditions subject to which the above expenditure would be exempt are as follows (i)

The expenditure on medical treatment and stay abroad would be excluded from
perquisite to the extent permitted by Reserve Bank of India;

(ii)

The expenditure on travel would be excluded from perquisite only in the case of an
employee whose gross total income, as computed before including the said
expenditure, does not exceed ` 2 lakh.

Assuming that the limit of ` 2 lakh prescribed by RBI pertains to both expenditure on
medical treatment of minor son as well as expenditure on stay abroad of Ms. Rakhi and
her minor son, such expenditure would be excluded from perquisite subject to a
maximum of ` 2 lakh. If such expenditure is less than ` 2 lakh, it would be fully
excluded. The foreign travel expenditure of Ms. Rakhi and her minor son borne by the
employer would be excluded from perquisite only if the gross total income of Ms. Rakhi,
as computed before including the said expenditure, does not exceed ` 2 lakh.
Question 17
AB Co. Ltd. allotted 1000 sweat equity shares to Sri Chand in June 2014. The shares were
allotted at ` 200 per share as against the fair market value of ` 300 per share on the date of
exercise of option by the allottee viz. Sri Chand. The fair market value was computed in
accordance with the method prescribed under the Act.
(i)

What is the perquisite value of sweat equity shares allotted to Sri Chand?

(ii)

In the case of subsequent sale of those shares by Sri Chand, what would be the cost of
acquisition of those sweat equity shares?

Answer
(i)

As per section 17(2)(vi), the value of sweat equity shares chargeable to tax as perquisite
shall be the fair market value of such shares on the date on which the option is exercised
by the assessee as reduced by the amount actually paid by, or recovered from, the
assessee in respect of such shares.

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4.39

Income-tax
Particulars

Fair market value of 1000 sweat equity shares @ ` 300 each

3,00,000

Less: Amount recovered from Sri Chand 1000 shares @ ` 200 each

2,00,000

Value of perquisite of sweat equity shares allotted to Sri Chand

1,00,000

(ii) As per section 49(2AA), where capital gain arises from transfer of sweat equity shares,
the cost of acquisition of such shares shall be the fair market value which has been taken
into account for perquisite valuation under section 17(2)(vi).
Therefore, in case of subsequent sale of sweat equity shares by Sri Chand, the cost of
acquisition would be ` 3,00,000.
Question 18
Mr. Shah an Accounts Manager has retired from JK Ltd. on 15.1.2015, after rendering services
for 30 years 7 months. His salary is ` 25,000/- p.m. upto 30.09.2014 and ` 27,000/thereafter. He also gets ` 2,000/- p.m. as dearness allowance (55% of it is a part of salary for
computing retirement benefits). He is not covered by the Payment of Gratuity Act, 1972. He
has received ` 8 Lacs as gratuity from the employer company. Compute the gratuity taxable in
the hands of Mr. Shah.
Answer
Computation of gratuity taxable in the hands of Mr. Shah for the P.Y. 2014-15
As per section 10(10)(iii), gratuity received by an employee would be exempt upto the least of
the following limits S.No.

Particulars

(i)

Gratuity received

8,00,000

(ii)

Half-months salary for every year of completed service (See Note below)

4,00,500

(iii)

Monetary limit

10,00,000

Therefore, ` 4,00,500 would be exempt under section 10(10)(iii). The balance ` 3,99,500
(i.e.` 8,00,000 ` 4,00,500) would be taxable.
Note: One of the limits for calculation of gratuity exempt under section 10(10)(iii) is one-halfmonths salary for each year of completed service (fraction of a year to be ignored), {{on the
basis of average salary for the ten months immediately preceding the month of retirement. In
this case, the month of retirement is January, 2015. Therefore, average salary for the months
of March 2014 to December 2014 has to be considered. The salary is ` 25,000 p.m. upto
30.9.2014 and ` 27,000 p.m. from 1.10.2014. Hence, average salary would be ` 26,700
{[(` 25,000 7) + (` 27,000 3) + (2000 55%10)]/10}.
Further, half-months salary should be multiplied by the number of years of completed service

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Income from Salaries

4.40

and any fraction of a year has to be ignored. Therefore, in this case, half-months salary
should be multiplied by 30 and the fraction of 7 months should be ignored.
Computation of average salary
Basic salary March 2014 to December 2014 (25,0007+27,0003)
Dearness allowance (2,000 10 55%)

`
2,56,000
11,000
2,67,000

Average salary = 2,67,000/10 = ` 26,700

Half-months salary for every year of completed service (fraction is to be
ignored) [30 26,700/2]

4,00,500

Question 19
Mr. Alok, a Government employee, retired from service on 31-7-2014 after rendering service
of 25 years and 7 months. He received gratuity of ` 7,00,000. His salary at the time of
retirement was as under:
Basic salary ` 16,000 p.m.; Dearness Allowance ` 8,000 p.m. (eligible for retirement benefits)
(i)

Compute the taxable portion of gratuity.

(ii)

If Mr. Alok is not a Government employee but covered by Payment of Gratuity Act, 1972
determine the taxable and exempt portion of gratuity.

Answer
(a) (i)

As per section 10(10), gratuity received by a Government employee on retirement is

fully exempt from tax. Since Mr. Alok is a government employee, gratuity amounting
to ` 7,00,000 received would be fully exempt. The taxable portion of gratuity shall
be Nil.

(ii) If Mr. Alok is not a Government employee but covered by the Payment of Gratuity
Act, 1972, then, gratuity received by him would be exempt upto least of the
following :
Particulars
(i)

Statutory limit

(ii)

Actual gratuity received

(iii) 15/26 x last drawn salary x years of service (including part of

the year in excess of 6 months) 15/26 x ` 24,000 x 26 years

`
10,00,000
7,00,000
3,60,000

Therefore, ` 3,60,000 is exempt under section 10(10).

Therefore, taxable portion of gratuity = ` 7,00,000 ` 3,60,000 = ` 3,40,000
Note: Salary, for the purpose of computation of exempt gratuity, means basic salary
plus dearness allowance i.e. ` 24,000 (` 16,000 + ` 8,000).

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Income-tax

Question 20
Distinguish between foregoing of salary and surrender of salary.
Answer
Foregoing of salary Waiver by an employee of his salary is foregoing of salary. Once
salary accrues, subsequent waiver does not absolve him from liability to income-tax.
Surrender of salary If any employee surrenders his salary to the Central Government under
the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the surrendered
salary would not be included in computing his taxable income, whether he is a private
sector/public sector or Government employee.
Question 21
How is advance salary taxed in the hands of an employee? Is the tax treatment same for loan
or advance against salary?
Answer
Advance Salary: Advance salary is taxable when it is received by the employee, irrespective
of the fact whether it is due or not.
It may so happen that when advance salary is included and charged in a particular previous
year, the rate of tax at which the employee is assessed may be higher than the normal rate of
tax to which he would have been assessed. Section 89(1) provides for relief in these types of
cases.
Loan or Advance against salary: Loan is different from salary. When an employee takes a
loan from his employer, which is repayable in certain specified installments, the loan amount
cannot be brought to tax as salary of the employee.
Similarly, advance against salary is different from advance salary. It is an advance taken by
the employee from his employer. This advance is generally adjusted against his salary over a
specified time period. It cannot be taxed as salary.
Question 22
Mr. Ashok, an employee of a PSU, furnishes the following particulars for the previous year
ending 31.03.2015:
Particulars
(i)

Salary income for the year

(ii)

Salary for financial year 2009-10 received during the year

(iii) Assessed income for the financial year 2009-10

`
7,25,000
80,000
2,40,000

You are requested by the assessee to compute relief under section 89 of the Income-tax Act,
1961 and the tax payable for assessment year 2015-16.
The rates of income tax for the assessment year 2010-11 are:

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Income from Salaries

4.42

Tax rate (%)

On first ` 1,60,000

Nil

On ` 1,60,000 ` 3,00,000

10

On ` 3,00,000 ` 5,00,000

20

Above ` 5,00,000

30

Education cess

Answer
Computation of relief under section 89 of Mr. Ashok for the A.Y. 2015-16
Particulars

Assessment year 2015-16

Salary Income for the year excluding arrears

7,25,000

Add: Arrears relating to Financial Year 2009-10

80,000

Total Income (including arrears)

8,05,000

Tax on ` 8,05,000
Nil

First

` 2,50,000

Nil

Next

` 2,50,000

10%

25,000

Balance

` 3,05,000

20%

61,000
86,000

` 8,05,000
Add: Education cess @ 2%

1,720

Secondary and higher education cess @1%

Tax on total income (including arrears)

(A)

860
88,580

Total Income excluding arrears

7,25,000

Tax on ` 7,25,000
Nil

First

` 2,50,000

Nil

Next

` 2,50,000

10%

25,000

Balance

` 2,25,000

20%

45,000
70,000

` 7,25,000
Add : Education cess @ 2%

1,400

Secondary and higher education cess @ 1%

Tax on total income (excluding arrears)

(B)

Difference between A & B

(I)

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72,100
16,480

4.43

Income-tax

Assessment Year 2010-11

Total Income assessed

2,40,000

Add: Arrears relating to Financial year 2009-10

80,000

Total income (including arrears)

3,20,000
18,000

Tax on ` 3,20,000
Add: Education Cess @ 2%

360

Secondary and higher education cess @1%

Tax on total income (including arrears)
(C)

180
18,540

Total Income excluding arrears

2,40,000
8,000

Tax on ` 2,40,000
Add: Education Cess @ 2%

160

Secondary and higher education cess @1%

Tax on total income (excluding arrears)

(D)

Difference between C & D

(II)

Relief under section 89

(I II)

80
8,240
10,300
6,180

Note: It has been assumed that salary income of ` 7,25,000 for the year, as given in the
question, does not include salary of ` 80,000 for the F.Y. 2009-10 received during the year.

Exercise
1.

2.

Where there is a decision to increase the D.A. in March, 2015 with retrospective effect from
1.4.2014, and the increased D.A. is received in April, 2015, the increase is taxable (a)

in the previous year 2014-15

(b)

in the previous year 2015-16

(c)

in the respective years to which they relate.

The entertainment allowance received by a Government employee is exempt up to the lower of

the actual entertainment allowance received, 1/5th of basic salary and (a). ` 4,000
(b). ` 6,000
(c). ` 5,000.

3.

Rajesh is provided with a rent free unfurnished accommodation, which is owned by his employer,
XY Pvt. Ltd., in New Delhi. The value of perquisite in the hands of Rajesh is -

The Institute of Chartered Accountants of India

Income from Salaries

4.44

(a). 20% of salary

(b). 15% of salary
(c). 10% of salary
4.

Anirudh is provided with furniture to the value of ` 70,000 along with house from February, 2014.
The actual hire charges paid by his employer for hire of furniture is ` 5,000 p.a.. The value of
furniture to be included along with value of unfurnished house for A.Y.2015-16 is(a). ` 5,000
(b). ` 7,000
(c). ` 14,000

5.

Employers contribution to superannuation fund during the previous year 2014-15 is (a). subject to fringe benefits in the hands of the employer
(b). fully taxable as perquisite in the hands of the employee
(c)

6.

taxable as perquisite in the hands of the employee if it exceeds ` 1 lakh.

Write short notes on (a). Profits in lieu of salary

(b). Specified employees

7.

Is retrenchment compensation received by workmen taxable under the Act? If yes, to what extent
is it taxable?

8.

When is provision of medical facilities or assistance by an employer not treated as a perquisite in

the hands of the employee? Discuss.

9.

Can an assessee claim relief under section 89 in respect of VRS compensation of ` 6 lakh
received by him from his employer, if he has claimed exemption of ` 5 lakh in respect of the same
under section 10(10C)? Discuss.

10. Explain the term Profit in lieu of salary.

Answers
1. a; 2. c; 3. b; 4. a; 5. c

The Institute of Chartered Accountants of India

Unit 2 : Income From House

Property
Key Points

Section 22 [Basis of Charge]

(i)
(ii)

Determination of annual value of the property is the first step in computation of

income under the head Income from house property.
The annual value of any property comprising of building or land appurtenant
thereto, of which the assessee is the owner, is chargeable to tax under the head
Income from house property.
(i) Property should consist of any building or land appurtenant thereto
(a) Buildings include residential buildings as well as factory buildings,
offices etc.
(b) Land appurtenant means land connected with the building.
(c) Income from letting out of vacant land is, however, taxable under the
head Income from other sources
(ii) Assessee must be the owner of the property
(a) Owner is the person who is entitled to receive income from the
property in his own right.
(b) The requirement of registration of the sale deed is not warranted.
(c) Ownership includes both free-hold and lease-hold rights.
(d) Ownership includes deemed ownership
(e) The person who owns the building need not also be the owner of the
land upon which it stands.
(f) The assessee must be the owner of the house property during the
previous year. It is not material whether he is the owner in the
assessment year.
(iii) The property may be used for any purpose, but it should not be used by the
owner for the purpose of any business or profession carried on by him, the
profit of which is chargeable to tax.

The Institute of Chartered Accountants of India

Income from House Property

(iv)

4.46

Property held as stock-in-trade etc.: Annual value of house property will be

charged under the head Income from house property in the following
cases also
(a) Where it is held by the assessee as stock-in-trade of a business;
(b) Where the assessee is engaged in the business of letting out of property
on rent;
Exceptions:
(1)
If letting out is supplementary to the main business, the income
will be assessed as business income.
(2)
If letting out of building along with other facilities, like
machinery and the two lettings are inseparable, the income will
either be assessed as business income or as income from other
sources, as the case may be.

Section 23(1) [Determination of Gross Annual Value(GAV) of Let-out Property]

Step 1:

Compare fair rent with municipal value

whichever is higher

Step 2:

Compare step 1 value with standard rent

whichever is lower is the Expected Rent

Step 3

Compare the Expected rent determined above with

actual rent

Actual rent <

Expected Rent

Actual rent >

Expected Rent
Actual rent <
Expected Rent
because of vacancy
Actual rent is GAV

Actual rent <

Expected Rent
because of any other
reason
Expected Rent is
GAV

The Institute of Chartered Accountants of India

4.47

Income-tax

Computation of Income from house property in case of property let out

throughout the previous year
Particulars

Amount

Gross Annual Value (GAV) [Calculated as per the chart given

above]
Less: Municipal taxes (paid by the owner during the previous
year)

Net Annual Value (NAV) = (A-B)

Less: Deductions under section 24
(a)
30% of NAV (irrespective of the actual
expenditure incurred)
(b) Interest on borrowed capital (actual without
any ceiling limit) (See conditions given below)

D
E

Income from house property (C-D-E)

Allowability of interest on borrowed capital under section 24(b)

(a)
(b)

Interest payable on loans borrowed can be claimed as deduction.

Interest payable on a fresh loan taken to repay the original loan is also admissible
as deduction.
(c)
Interest payable on borrowed capital for the period prior to the previous year in
which the property has been acquired or constructed, can be claimed as
deduction over a period of 5 years in equal annual installments commencing
from the year of acquisition or completion of construction.
(d) Interest related to year of completion of construction can be fully claimed
irrespective of completion date.
Computation of income from self-occupied property or property unoccupied due
to employment, business in another place
Particulars

Amount

Annual value under section 23(2)

Less: Deduction under section 24
Interest on borrowed capital
Interest on loan taken for acquisition or construction of
house on or after 1.4.99 and same was completed within 3
years from the end of the financial year in which capital was
borrowed, interest paid or payable subject to a maximum of
` 2,00,000 (including apportioned pre-construction interest).

Nil

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Income from House Property

4.48

In case of loan for acquisition or construction taken prior to

1.4.99 or loan taken for repair, renovation or reconstruction
at any point of time, interest paid or payable subject to a
maximum of ` 30,000.
Income from house property

(-)X

Other important points

(i)

If the assessee has occupied more than one house for his own residential
purposes, only one house (according to his own choice) is treated as selfoccupied and all other houses will be deemed to be let out.
(ii) In case of a house property which is deemed to be let-out, the Expected Rent
would be the gross annual value. All deductions permissible to a let-out property
would be allowable in case of a deemed to be let out property.
(iii) If a portion of a property is let-out and a portion is self-occupied, then, the
income will be computed separately for let out and self occupied portion.
Taxability of recovery of unrealised rent & arrears of rent received
(i)

(ii)

(iii)

(iv)

(v)

Unrealised rent [Section 25AA]

Arrears of rent [Section 25B]

Unrealised rent is deducted from actual

rent in determination of annual value
under section 23, subject to fulfillment
of
conditions
under
Rule
4.
Subsequently, when the amount is
realized, it gets taxed under section
25AA in the year of receipt.
Unrealised rent means the rent which
has been deducted from actual rent in
any previous year for determining
annual value.
Taxable in the hands of the assessee
whether he is the owner of that
property or not.
Taxable as income of the previous year
in which he recovers the unrealized
rent.
No deduction shall be allowed.

If the assessee has increased the rent

payable by the tenant and the same
has been in dispute and later on the
assessee receives the increase in rent
as arrears, such arrears is assessable
under section 25B.

The Institute of Chartered Accountants of India

Arrears of rent is in respect of rent

not charged to income-tax for any
previous year.
Taxable in the hands of the assessee
whether he is the owner of that
property or not.
Taxable as income of the year in
which he receives the arrears of rent.
30% of the amount of arrears shall be
allowed as deduction.

4.49

Income-tax

Question 1
Mr. Vaibhav own five houses at Cochin, all of which are let out. Compute the gross annual
value of each house from the information given below:
(` )
House-I

House-II

House-III

House-IV

House-V

Municipal value

1,20,000

2,40,000

1,10,000

90,000

75,000

Fair rent

1,50,000

2,40,000

1,14,000

84,000

80,000

Standard rent

1,08,000

N.A.

1,44,000

N.A.

78,000

Actual rent received / receivable

1,80,000

2,10,000

1,20,000

1,08,000

72,000

Answer
As per section 23(1) Gross Annual Value (GAV) is the higher of Expected rent and actual rent
received. Expected rent is higher of municipal value and fair rent but restricted to standard
rent.
Computation of GAV of each house owned by Mr. Vaibhav
Particulars

House-I

House-II

House-III

House-IV

(`)
House-V

(i)

Municipal Value

1,20,000

2,40,000

1,10,000

90,000

75,000

(ii)

Fair rent

1,50,000

2,40,000

1,14,000

84,000

80,000

(iii)

Higher of (i) & (ii)

1,50,000

2,40,000

1,14,000

90,000

80,000

(iv)

Standard rent

1,08,000

N.A.

1,44,000

N.A.

78,000

(v)

Expected rent [Lower

of (iii) & (iv)]

1,08,000

2,40,000

1,14,000

90,000

78,000

(vi)

Actual rent
received/receivable

1,80,000

2,10,000

1,20,000

1,08,000

72,000

GAV [Higher of (v) &

(vi)]

1,80,000

2,40,000

1,20,000

1,08,000

78,000

Question 2
Two brothers Arun and Bimal are co-owners of a house property with equal share. The
property was constructed during the financial year 1998-1999. The property consists of eight
identical units and is situated at Cochin.
During the financial year 2014-15, each co-owner occupied one unit for residence and the
balance of six units were let out at a rent of ` 12,000 per month per unit. The municipal value
of the house property is ` 9,00,000 and the municipal taxes are 20% of municipal value,
which were paid during the year. The other expenses were as follows:

The Institute of Chartered Accountants of India

Income from House Property

4.50

`
(i)

Repairs

40,000

(ii)

Insurance premium (paid)

15,000

(iii) Interest payable on loan taken for construction of house

3,00,000

One of the let out units remained vacant for four months during the year.
Arun could not occupy his unit for six months as he was transferred to Chennai. He does not
own any other house.
The other income of Mr. Arun and Mr. Bimal are ` 2,90,000 and ` 1,80,000, respectively, for
the financial year 2014-15.
Compute the income under the head Income from House Property and the total income of
two brothers for the assessment year 2015-16.
Answer
Computation of total income for the A.Y. 2015-16
Particulars

Arun (` ) Bimal(` )

Income from house property

I.

Self-occupied portion (25%)

Annual value

Nil

Nil

30,000

30,000

Loss from self occupied property

(30,000)

(30,000)

Let-out portion (75%) See Working Note below

1,25,850

1,25,850

95,850

95,850

Other Income

2,90,000

1,80,000

Total Income

3,85,850

2,75,850

Less: Deduction under section 24(b)

Interest on loan taken for construction ` 37,500 (being 25%
of ` 1.5 lakh) restricted to maximum of ` 30,000 for each coowner since the property was constructed before 1.04.1999
II.

Income from house property

Working Note Computation of income from let-out portion of house property

Particulars

Let-out portion (75%)

Gross Annual Value
(a) Municipal value (75% of ` 9 lakh)

6,75,000

(b) Actual rent [(` 12000 x 6 x 12) (` 12,000 x 1 x 4)]

8,16,000

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4.51

Income-tax
= ` 8,64,000 - ` 48,000
- whichever is higher

Less:

8,16,000
1,35,000

Municipal taxes 75% of 1,80,000 (20% of ` 9 lakh)

Net Annual Value (NAV)

Less:

6,81,000

Deduction under section 24

(a) 30% of NAV

2,04,300

(b) Interest on loan taken for the house [75% of ` 3 lakh]

2,25,000

4,29,300

Income from let-out portion of house property

2,51,700

Share of each co-owner (50%)

1,25,850

Question 3
Mr. Raman is a co-owner of a house property along with his brother holding equal share in the
property.
Particulars

Municipal value of the property

1,60,000

Fair rent

1,50,000

Standard rent under the Rent Control Act

1,70,000

Rent received

15,000 p.m.

The loan for the construction of this property is jointly taken and the interest charged by the
bank is ` 25,000, out of which ` 21,000 has been paid. Interest on the unpaid interest is
` 450. To repay this loan, Raman and his brother have taken a fresh loan and interest
charged on this loan is ` 5,000.
The municipal taxes of ` 5,100 have been paid by the tenant.
Compute the income from this property chargeable in the hands of Mr. Raman for the A.Y.
2015-16.
Answer
Computation of income from house property of Shri Raman for A.Y. 2015-16
Particulars

Gross Annual Value (See Note 1 below)

1,80,000

Less: Municipal taxes paid by the tenant, hence not deductible

Nil

Net Annual Value (NAV)

1,80,000

Less: Deductions under section 24

(i) 30% of NAV

The Institute of Chartered Accountants of India

54,000

Income from House Property

4.52

(ii) Interest on housing loan (See Note 2 below)

- Interest on loan taken from bank

25,000

- Interest on fresh loan to repay old loan for this property

5,000

84,000

Income from house property

96,000

50% share taxable in the hands of Shri Raman (See Note 3 below)

48,000

Notes:
1.

Computation of Gross Annual Value (GAV)

GAV is the higher of Expected rent and actual rent received. Expected rent is the higher
of municipal value and fair rent, but restricted to standard rent.
Particulars

(a) Municipal value of property

1,60,000

(b) Fair rent

1,50,000

(c) Higher of (a) and (b)

1,60,000

(d) Standard rent

1,70,000

(e) Expected rent [lower of (c) and (d)]

1,60,000

(f) Actual rent [15,000 x 12]

1,80,000

(g) Gross Annual Value [higher of (e) and (f)]

1,80,000

2.

Interest on housing loan is allowable as a deduction under section 24 on accrual basis.

Further, interest on fresh loan taken to repay old loan is also allowable as deduction.
However, interest on unpaid interest is not allowable as deduction under section 24.

3.

Section 26 provides that where a house property is owned by two or more persons whose
shares are definite and ascertainable, the share of each such person in the income of
house property, as computed in accordance with sections 22 to 25, shall be included in his
respective total income. Therefore, 50% of the total income from the house property is
taxable in the hands of Mr. Raman since he is an equal owner of the property.

Question 4
Mr. Krishna owns a residential house in Delhi. The house is having two identical units. First
unit of the house is self-occupied by Mr. Krishna and another unit is rented for
` 12,000 p.m. The rented unit was vacant for three months during the year. The particulars of
the house for the previous year 2014-15 are as under:
Standard Rent

` 2,20,000 p.a.

Municipal Valuation

` 2,44,000 p.a.

Fair Rent

` 2,35,000 p.a.

The Institute of Chartered Accountants of India

4.53

Income-tax
Municipal tax paid by Mr. Krishna

12% of the Municipal Valuation

Light and water charges

` 800 p.m.

Interest on borrowed capital

` 2,000 p.m.

Insurance charges

` 3,500 p.a.

Painting expenses

` 16,000 p.a.

Compute income from house property of Mr. Krishna for the A.Y.2015-16.
Answer
Computation of Income from house property of Mr. Krishna for A.Y. 2015-16
Particulars
(A) Rented unit (50% of total area)
Step I - Computation of Expected Rent
Municipal valuation (` 2,44,000 x )

1,22,000

Fair rent (` 2,35,000 x )

1,17,500

Standard rent (` 2,20,000 x )

1,10,000

Expected Rent is higher of municipal valuation and fair

rent, but restricted to standard rent

1,10,000

Step II - Actual Rent

Rent receivable for the whole year (` 12,000 x 12)

1,44,000

Step III Computation of Gross Annual Value

Actual rent received owing to vacancy (` 1,44,000 1,08,000
` 36,000)
Since, owing to vacancy, the actual rent received is lower
than the Expected Rent, the actual rent received is the
Gross Annual value
Gross Annual Value (GAV)

1,08,000

Less: Municipal taxes (12% of ` 1,22,000)

14,640

Net Annual Value (NAV)

93,360

Less : Deductions under section 24

(a) 30% of NAV

28,008

(b) Interest on borrowed capital (` 1,000 x 12)

12,000

Taxable income from let out portion

The Institute of Chartered Accountants of India

40,008
53,352

Income from House Property

4.54

(B) Self occupied unit (50% of total area)

Annual value

Nil

Less : Deduction under section 24:

12,000

Interest on borrowed capital (` 1,000 x 12)

Income from house property

(12,000)
_41,352

Note: No deduction will be allowed separately for light and water charges, insurance
charges and painting expenses.
Question 5
Mrs. Rohini Ravi, a citizen of the U.S.A., is a resident and ordinarily resident in India during the financial
year 2014-15. She owns a house property at Los Angeles, U.S.A., which is used as her residence. The
annual value of the house is $20,000. The value of one USD ($) may be taken as ` 60.
She took ownership and possession of a flat in Chennai on 1.7.2014, which is used for selfoccupation, while she is in India. The flat was used by her for 7 months only during the year
ended 31.3.2015. The municipal valuation is ` 32,000 p.m. and the fair rent is ` 4,20,000 p.a.
She paid the following to Corporation of Chennai :
Property Tax

` 16,200

Sewerage Tax

` 1,800

She had taken a loan from Standard Chartered Bank for purchasing this flat. Interest on loan
was as under:

`
Period prior to 1.4.2014

49,200

1.4.2014 to 30.6.2014

50,800

1.7.2014 to 31.3.2015

1,31,300

She had a house property in Bangalore, which was sold in March, 2012. In respect of this
house, she received arrears of rent of ` 60,000 in March, 2015. This amount has not been
charged to tax earlier.
Compute the income chargeable from house property of Mrs. Rohini Ravi for the assessment
year 2015-16, exercising the most beneficial option available.
Answer
Since the assessee is a resident and ordinarily resident in India, her global income would form part of
her total income i.e., income earned in India as well as outside India will form part of her total income.
She possesses a self-occupied house at Los Angeles as well as at Chennai. At her option,
one house shall be treated as self-occupied, whose annual value will be nil. The other selfoccupied house property will be treated as "deemed let out property.

The Institute of Chartered Accountants of India

4.55

Income-tax

The annual value of the Los Angeles house is ` 9,00,000 and the Chennai flat is ` 3,15,000. Since the
annual value of Los Angeles house is obviously more, it will be beneficial for her to opt for choosing the
same as self-occupied. The Chennai house will, therefore, be treated as "deemed let out property".
As regards the Bangalore house, arrears of rent will be chargeable to tax as income from
house property in the year of receipt under section 25B. It is not essential that the assessee
should continue to be the owner. 30% of the arrears of rent shall be allowed as deduction.
Accordingly, the income from house property of Mrs. Rohini Ravi will be calculated as under:
Particulars
1.

Self-occupied house at Los Angeles

Annual value

Nil

Less: Deduction under section 24

Nil

Chargeable income from this house property

2.

Nil

Deemed let out house property at Chennai

Annual value (Higher of municipal value and fair rent)
[4,20,000 x 9/12]

3,15,000

Less: Municipal Taxes (Property tax + Sewerage tax)

18,000

Net Annual Value (NAV)

2,97,000

Less: Deductions under section 24

30% of NAV
Interest on borrowed capital (See Note below)

89,100
1,91,940

2,81,040
15,960

3.

Arrears in respect of Bangalore property(Section 25B)

Arrears of rent received

60,000

Less: Deduction @ 30%

18,000

Income chargeable under the head "Income from house

property
Note : Interest on borrowed capital
Interest for the current year (` 50,800 + ` 1,31,300)
Add: 1/5th of pre-construction interest (` 49,200 x 1/5)
Interest deduction allowable under section 24

42,000
57,960
`
1,82,100
9,840
1,91,940

Question 6
Mr. A and Mr. B constructed their houses on a piece of land purchased by them at New Delhi.
The built up area of each house was 1,000 sq.ft. ground floor and an equal area in the first

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Income from House Property

4.56

floor. A started construction on 1-04-2013 and completed on 1-04-2014. B started the

construction on 1-04-2013 and completed the construction on 30-06-2014. A occupied the
entire house on 01-04-2014. B occupied the ground floor on 01-07-2014 and let out the first
floor for a rent of ` 15,000 per month. However, the tenant vacated the house on 31-12-2014
and B occupied the entire house during the period 01-01-2015 to 31-03-2015.
Following are the other information
(i)

(iii)

Fair rental value of each unit

(ground floor /first floor)
Municipal value of each unit
(ground floor / first floor)
Municipal taxes paid by

(iv)

Repair and maintenance charges paid by

(ii)

` 1,00,000 per annum

` 72,000 per annum
A ` 8,000
B ` 8,000
A ` 28,000
B ` 30,000

A has availed a housing loan of ` 20 lakhs @ 12% p.a. on 01-04-2013. B has availed a
housing loan of ` 12 lakhs @ 10% p.a. on 01-07-2013. No repayment was made by either of
them till 31-03-2015. Compute income from house property for A and B for the previous year
2014-15 (A.Y. 2015-16).
Answer
Computation of income from house property of Mr. A for A.Y. 2015-16
Particulars

Annual value is nil (since house is self occupied)

Nil

Less : Deduction under section 24(b)

2,40,000

Interest paid on borrowed capital ` 20,00,000 @ 12%

48,000

Pre-construction interest ` 2,40,000 / 5

2,88,000
As per second proviso to section 24(b), interest deduction restricted to

2,00,000

Loss under the head Income from house property of Mr. A

(2,00,000)

Computation of income from house property of Mr. B for A.Y. 2015-16

Ground floor First floor
(Self occupied)

Particulars
Gross annual value (See note below)

Nil

Less :Municipal taxes (for first floor)

Net annual value

The Institute of Chartered Accountants of India

90,000
4,000

(A)

Nil

86,000

4.57

Income-tax

Less : Deduction under section 24

(a) 30% of net annual value

25,800

(b) interest on borrowed capital

Current year interest
60,000

60,000

9,000

9,000

69,000

94,800

Income from house property (A)-(B)

(69,000)

(8,800)

Loss under the head income from house property of Mr. B

(both ground floor and first floor)

(77,800)

` 12,00,000 x 10% = ` 1,20,000

Pre-construction interest
` 12,00,000 x 10% x 9/12 = ` 90,000
` 90,000 allowed in 5 equal installments
` 90000 / 5 = ` 18,000 per annum
Total deduction under section 24

(B)

Note : Computation of Gross Annual Value (GAV) of first floor of Bs house

If a single unit of property (in this case the first floor of Bs house) is let out for some months
and self-occupied for the other months, then the Expected Rent of the property shall be taken
into account for determining the annual value. The Expected Rent shall be compared with the
actual rent and whichever is higher shall be adopted as the annual value. In this case, the
actual rent shall be the rent for the period for which the property was let out during the
previous year.
The Expected Rent is the higher of fair rent and municipal value. This should be considered
for 9 months since the construction of property was completed only on 30.6.2014.
Expected rent

= ` 75,000 being higher of -

Actual rent =

Fair rent = 1,00,000 x 9 /12 = ` 75,000

Municipal value = 72,000 x 9/12 = ` 54,000
` 90,000 (` 15,000 p.m. for 6 months from July to December, 2014)

Gross Annual Value = ` 90,000 (being higher of Expected Rent of ` 75,000 and actual rent of
` 90,000)
Question 7
Mr. Vikas owns a house property whose Municipal Value, Fair Rent and Standard Rent are
` 96,000, ` 1,26,000 and ` 1,08,000 (per annum), respectively.
During the Financial Year 2014-15, one-third of the portion of the house was let out for
residential purpose at a monthly rent of ` 5,000. The remaining two-third portion was selfoccupied by him. Municipal tax @ 11 % of municipal value was paid during the year.

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Income from House Property

4.58

The construction of the house began in June, 2007 and was completed on 31-5-2010.
Vikas took a loan of ` 1,00,000 on 1-7-2007 for the construction of building.
He paid interest on loan @ 12% per annum and every month such interest was paid.
Compute income from house property of Mr. Vikas for the Assessment Year 2015-16.
Answer
Computation of income from house property of Mr. Vikas for the A.Y. 2015-16
Particulars

Income from house property

I.

Self-occupied portion (Two third)

Net Annual value

Nil

Less: Deduction under section 24(b)

12,400

Interest on loan (See Note below) (` 18,600 x 2/3)

Loss from self occupied property
II.

(12,400)

Let-out portion (One third)

Gross Annual Value
(a) Actual rent received (` 5,000 x 12)
(b) Expected rent
[higher of municipal valuation (i.e.,
` 96,000) and fair rent (i.e., ` 1,26,000)
but restricted to standard rent
(i.e.,
` 1,08,000)] = ` 1,08,000 x 1/3

` 60,000
` 36,000

Higher of (a) or (b)

Less: Municipal taxes (` 96,000 x 11% x 1/3)
Net Annual Value

60,000
3,520
56,480

Less: Deductions under section 24

(a) 30% of NAV
(b) Interest on loan (See Note below) (` 18,600 x 1/3)
Income from house property

16,944
6,200

33,336
20,936

Note: Interest on loan taken for construction of building

Interest for the year (1.4.2014 to 31.3.2015) = 12% of ` 1,00,000 = ` 12,000
Pre-construction period interest = 12% of ` 1,00,000 for 33 months (from 1.07.2007 to 31.3.2010)
= ` 33,000
Pre-construction period interest to be allowed in 5 equal annual installments of ` 6,600 from

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4.59

Income-tax

the year of completion of construction i.e. from F.Y. 2010-11 till F.Y. 2014-15.
Therefore, total interest deduction under section 24 = ` 12,000 + ` 6,600 = ` 18,600.
Question 8
Mr. X owns one residential house in Mumbai. The house is having two identical units. First unit
of the house is self occupied by Mr. X and another unit is rented for ` 8,000 p.m. The rented
unit was vacant for 2 months during the year. The particulars of the house for the previous
year 2014-15 are as under:
Standard rent
Fair rent

` 1,62,000 p.a.
` 1,90,000 p.a.
` 1,85,000 p. a

Municipal tax (Paid by Mr. X)

15% of municipal valuation

Light and water charges

`
`
`
`
`

Municipal valuation

Interest on borrowed capital

Lease money
Insurance charges

500 p.m.
1,500 p.m.
1,200 p.a.
3,000 p.a.

Repairs
12,000 p.a.
Compute income from house property of Mr. X for the A.Y. 2015-16.
Answer
Computation of Income from house property for A.Y. 2015-16
Particulars
(A) Rented unit (50% of total area See Note 1 below)
Step I - Computation of Expected Rent
Municipal valuation (` 1,90,000 x )

95,000

Fair rent (` 1,85,000 x )

92,500

Standard rent (` 1,62,000 x )

81,000

Expected Rent is higher of municipal valuation and fair rent,

but restricted to standard rent

81,000

Step II - Actual Rent

Rent receivable for the whole year (` 8,000 x 12)

The Institute of Chartered Accountants of India

96,000

Income from House Property

4.60

Step III Computation of Gross Annual Value

80,000

Actual rent received owing to vacancy (` 96,000 ` 16,000)

Since, owing to vacancy the actual rent received is lower than
the Expected Rent, the actual rent received is the Gross
Annual Value
Gross Annual Value

80,000

Less: Municipal taxes (15% of ` 95,000)

14,250

Net Annual value

65,750

Less : Deductions under section 24 (i) 30% of net annual value

19,725
9,000

(ii) Interest on borrowed capital (` 750 x 12)

Taxable income from let out portion
(B)

28,725
37,025

Self occupied unit (50% of total area See Note 1 below)

Annual value

Nil

Less : Deduction under section 24 9,000

Interest on borrowed capital (` 750 x 12)

Income from house property

9,000
28,025

Note: No deduction will be allowed separately for light and water charges, lease money paid,
insurance charges and repairs.
Question 9
Mrs. Indu, a resident individual, owns a house in U.S.A. She receives rent @ $ 2,000 per
month. She paid municipal taxes of $ 1,500 during the financial year 2014-15. She also owns
a two storied house in Mumbai, ground floor is used for her residence and first floor is let out
at a monthly rent of ` 10,000. Standard rent for each floor is ` 11,000 per month and fair rent
is ` 10,000 per month. Municipal taxes paid for the house amounts to ` 7,500. Mrs. Indu had
constructed the house by taking a loan from a nationalised bank on 20.6.2008. She repaid the
loan of ` 54,000 including interest of ` 24,000. The value of one dollar is to be taken as ` 60.
Compute total income from house property of Mrs. Indu.
Answer
Computation of Income from House Property of Mrs. Indu for the A.Y. 2015-16
Particulars

House property in USA

GAV Rent received {treated as fair rent} ($2,000 p.m. x ` 60

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14,40,000

4.61

Income-tax

per USD x 12 months)

90,000

Less : Municipal taxes paid ($1,500 x ` 60 per USD)

Net Annual Value (NAV)

13,50,000

Less : Deduction under section 24

30% of NAV

4,05,000

9,45,000

House property in Mumbai ( Let-out portion - First Floor)

Expected rent (lower of standard rent and fair rent)
Standard Rent (` 11,000 x 12)

` 1,32,000

Fair rent (` 10,000 x 12 )

` 1,20,000

1,20,000

Actual rent received (10,000 12)

1,20,000

Gross Annual Value (higher of Expected rent and actual

rent)

1,20,000
3,750

Less : Municipal taxes paid (50% of ` 7,500)

Net Annual Value (NAV)

1,16,250

Less : Deduction under section 24

30% of NAV

` 34,875

Interest on housing loan (50% of ` 24,000)

` 12,000

46,875

69,375

Income from House property in Mumbai (Self-occupied

portion - Ground Floor)
Gross annual value

Nil

Less: Municipal taxes

Nil

Net Annual Value (NAV)

Nil

Less : Deduction under section 24

30% of NAV

Nil

Interest on housing loan (50% of ` 24,000)

12,000

Income from house property

(-) 12,000
10,02,375

Question 10
Nisha has two houses, both of which are self-occupied. The particulars of these are given
below:
(Value in ` )
Particulars

House - I

House - II

Municipal Valuation per annum

1,20,000

1,15,000

Fair Rent per annum

1,50,000

1,75,000

The Institute of Chartered Accountants of India

Income from House Property

Standard rent per annum

1,00,000

Date of completion

4.62

1,65,000

31-03-1999 31-03-2001

Municipal taxes payable during the year (paid for House II only)

12%

8%

Interest on money borrowed for repair of property during current

year

55,000

Compute Nisha's income from house property for the Assessment Year 2015-16 and suggest
which house should be opted by Nisha to be assessed as self-occupied so that her tax liability
is minimum.
Answer
In this case, Nisha has more than one house property for self-occupation. As per section
23(4), Nisha can avail the benefit of self-occupation (i.e., benefit of Nil Annual Value) only in
respect of one of the house properties, at her option. The other house property would be
treated as deemed let-out property, in respect of which the annual letting value would be the
gross annual value. Nisha should, therefore, consider the most beneficial option while
deciding which house property should be treated by her as self-occupied.
OPTION 1 [House I Self-occupied and House II Deemed to be let out]
If House I is opted to be self-occupied, Nishas income from house property for A.Y.201516 would be
Particulars
House I (Self-occupied) [Annual value is Nil]

Amount in `
Nil

House II (Deemed to be let-out) [See Working Note below]

54,060

Income from house property

54,060

OPTION 2 [House I Deemed to be let out and House II Self-occupied]

If House II is opted to be self-occupied, Nishas income from house property for A.Y.2015-16
would be
Particulars
House I (Deemed to be let-out) [See Working Note below]
House II (Self-occupied) [Annual value is Nil, but interest deduction
would be available, subject to a maximum of ` 30,000. In case of
money borrowed for repair of self-occupied property, the interest
deduction would be restricted to ` 30,000, irrespective of the date of
borrowal].
Income from house property

The Institute of Chartered Accountants of India

Amount in `
70,000

(30,000)
40,000

4.63

Income-tax

Since Option 2 is more beneficial, Nisha should opt to treat House - II as Selfoccupied and House I as Deemed to be let out, in which case, her income from
house property would be ` 40,000 for the A.Y. 2015-16.
Working Note:
Computation of income from House I and House II assuming that both are deemed to be
let out
Particulars

Amount in Rupees
House
II

House I
Gross Annual Value (GAV)
Annual Letting Value (ALV) is the GAV of house property
ALV = Higher of Municipal Value and Fair Rent but restricted to
Standard Rent
Municipal taxes (paid by the owner during the
previous year)

Less:

Net Annual Value (NAV)

Less:

1,00,000

1,65,00
0

Nil

9,200

1,00,000

1,55,80
0

30,000

46,740

55,000

70,000

54,060

Deductions under section 24

(a) 30% of NAV
(b) Interest on borrowed capital (allowed in full in
case of deemed let out property)

Income from deemed to be let-out house property

Question 11

Explain the treatment of unrealized rent and its recovery in subsequent years under the
provisions of Income-tax Act, 1961.
Answer
Unrealised rent refers to the rent payable but not paid by the tenant and which the owner is
also not able to realize from the tenant. As per Explanation below section 23(1), the amount of
rent which the owner cannot realize shall not be included in the actual rent while determining
the annual value of the property, subject to fulfillment of following conditions prescribed under
Rule 4 of the Income-tax Rules, 1962:
(a) the tenancy must be bonafide;
(b) the defaulting tenant has vacated the property or steps have been taken to compel him to
vacate the property;
(c) the defaulting tenant does not occupy any other property of the assessee; and

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Income from House Property

4.64

(d) the assessee has taken all reasonable steps to institute legal proceedings for the
recovery of unpaid rent or satisfies the Assessing Officer that the legal proceedings
would be useless.
If the conditions mentioned above are satisfied, then, the actual rent should be reduced by the
unrealized rent and thereafter, compared with the Expected rent (being the higher of fair rent and
municipal value, but restricted to standard rent) for computing the gross annual value.
As per section 25AA, the unrealised rent, when realised in any subsequent year, shall be
deemed to be the income chargeable under the head Income from house property in the
previous year in which such rent is realised, whether or not the assessee is the owner of the
property in that previous year.
Question 12
Explain briefly the applicability of section 22 for chargeability of income-tax for:
(i)

House property situated in foreign country and

(ii)

House property with disputed ownership.

Answer
Applicability of section 22 for chargeability of income-tax for
(i)

House property situated in foreign country

A resident assessee is taxable under section 22 in respect of annual value of a house
property situated in foreign country. A resident but not ordinarily resident or a non
resident is taxable in respect of income from such property if the income is received in
India during the previous year. Once incidence of tax is attracted under section 22, the
annual value will be computed as if the property is situated in India.

(ii) House property with disputed ownership

If the title of ownership of the house property is under dispute in a court of law, the
decision about who is the owner lies with the Income tax Department. The assessment
cannot be held up for such dispute. Generally, a person who receives the income or who
enjoys the possession of the house property as owner, though his claim is under dispute,
is assessable to tax under section 22.
Question 13
Ownership itself is the criteria for assessment under the head income from house property.
Discuss.
Answer
Section 27 enumerates certain cases, where the legal ownership may vest with one person
whereas the taxability is cast on another person who is deemed to be the owner.
In these specific cases, the charge of tax is on the deemed owner and not on the legal owner.
The exceptions are given below:

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4.65

Income-tax

(i)

In case of transfer of house property to spouse (not being a transfer in connection with
an agreement to live apart) or minor child (not being a married daughter) without
adequate consideration - transferor is the deemed owner.

(ii)

Holder of an impartible estate shall be deemed to be the individual owner of all the
properties comprised in the estate.

(iii) A member of a co-operative society/company/AOP to whom a building or part thereof is

allotted or leased under a house building scheme shall be deemed to be the owner of
building or part thereof.
(iv) A person who is allowed to take or retain possession of any building or part thereof is the
deemed owner of such building or part thereof if such possession is obtained in part
performance of a contract of the nature referred to in section 53A of the Transfer of
Property Act, 1882.
(v) A person who acquires any rights (excluding any rights by way of a lease from month to
month or for a period not exceeding one year) in or with respect to any building or part
thereof, by virtue of any such transaction as is referred to in section 269UA(f).
Therefore, legal ownership itself is not the criteria for assessment of income under the head
Income from house property.
Also, the provisions of section 25AA and 25B dealing with receipt of unrealised rent and
arrears of rent also fall in this category. The receipt is considered as income under the head
house property though the recipient may not have legal ownership of the property to which
the receipt relates.
Question 14
Discuss the following issues relating to Income from house property:
(i)

Income earned by residents from house properties situated in foreign countries.

(ii)

Properties which are used for agricultural purposes.

Answer
(i)

In case of resident individual, his global income is taxable in India. Therefore, income earned
by residents from house properties situated in foreign countries is taxable in India.
If the income from house properties situated outside India is chargeable to tax in India
the annual value of such property would be computed as if the property is situated in
India. Further, municipal taxes paid under the laws of that country can also be deducted
while arriving at the Annual Value of the property. The Madras High Court in CIT v.
Venugopala Reddiar [1965] 58 ITR 439 observed that while computing taxable income,
no distinction should be made between a house property situated in India and a house
property situated abroad.

(ii) If the property is used for agricultural purposes, the annual value of such property would
be treated as Agricultural Income as per section 2(1A)(c) and it is exempt under section

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Income from House Property

4.66

10(1) of the Act. However, if the house property is used for purpose other than
agriculture the annual value of such property cannot be treated as agricultural income.
Question 15
(1) X let out his property to Y. Y sublets it. How is sub-letting receipt to be assessed in the
hands of Y?
(2) Y has built a house on a leasehold land. He has let out the property and claims that the
income therefrom is chargeable under the head Income from other sources. He has
deducted expenses on repairs, security charges, insurance and collection charges in all
amounting to 40% of receipts. Is Mr.Ys claim valid?
(3) Z uses his property for his own business. Would the annual value be subject to tax under
the head Income from house property?
Answer
(1) Sub-letting receipt in the hands of Y can be assessed as Income from Other Sources or
as Profits and gains from business or profession depending upon the facts and
circumstances of each case. It is not assessable as income from house property.
(2) No, Mr.Ys claim is not valid. The income from letting out of house built on leasehold land
is assessable as Income from house property since ownership of land is not a prerequisite for assessment of income under this head. 30% of Net Annual Value is allowed
as deduction under section 24.
(3) Where the assessee uses his property for business, it is not assessable under the head
Income from house property. He is entitled to depreciation under section 32(1)(ii) on the
building.
Question 16
Discuss the tax liability in respect of arrears of rent.
Answer
As per section 25B, where the assessee receives any amount by way of arrears of rent in
respect of any property consisting of buildings or land appurtenant thereto of which he is the
owner, the amount so received shall be chargeable to tax under the head Income from House
Property. It shall be charged to tax as the income of the previous year in which such rent is
received even if the assessee is no longer the owner of such property. In computing the
income chargeable to tax in respect of the arrears so received, 30% shall be allowed as a
deduction, irrespective of the actual expenditure incurred.
Question 17
Mr. Kalpesh borrowed a sum of ` 30 lakhs from the National Housing Bank towards purchase
of a residential flat. The loan amount was disbursed directly to the flat promoter by the bank.
Though the construction was completed in May, 2015, repayments towards principal and
interest had been made during the year ended 31.3.2015.

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4.67

Income-tax

In the light of the above facts, state:

(i)

Whether Mr. Kalpesh can claim deduction under section 24 in respect of interest for the
assessment year 2015-16?

(ii)

Whether deduction under Section 80C can be claimed for the above assessment year,
even though the construction was completed only after the closure of the year?

Answer
(i)

Interest on borrowed capital is allowed as deduction under section 24(b)

As per section 24(b), Interest payable on loans borrowed for the purpose of acquisition,
construction, repairs, renewal or reconstruction of house property can be claimed as
deduction. Interest payable on borrowed capital for the period prior to the previous year
in which the property has been acquired or constructed, can be claimed as deduction
over a period of 5 years in equal annual installments commencing from the year of
acquisition or completion of construction.
It is stated that the construction is completed only in May, 2015. Hence, deduction in
respect of interest on housing loan cannot be claimed in the assessment year 2015-16.

(ii) Clause (xviii) of section 80C is attracted where there is any payment for the purpose of
purchase or construction of a residential house property, the income from which is
chargeable to tax under the head Income from house property. Such payment covers
repayment of any amount borrowed from the National Housing Bank.
However, deduction is prima facie eligible only if the income from such property is
chargeable to tax under the head Income from House Property. During the assessment
year 2015-16, there is no such income chargeable under this head. Hence, deduction
under section 80C cannot be claimed for A.Y. 2015-16.

Exercise
1.

2.

Ganesh is a member of a house building co-operative society. The society is the owner of the
flats constructed by it. One of the flats is allotted to Ganesh. The income from that flat will be
assessed in the hands of
(a)

Co-operative Society

(b)

Ganesh

(c)

Neither of the above.

Vacant site lease rent is taxable as

(a). Income from house property
(b). Business income
(c)

3.

Income from other sources or business income, as the case may be

Treatment of unrealized rent for determining income from house property

(a)

To be deducted from expected rent

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Income from House Property

4.

5.

6.

7.

8.

9.

(b)

To be deducted from actual rent

(c)

To be deducted under section 24 from annual value

4.68

Municipal taxes to be deducted from GAV should be

(a)

Paid by the tenant during the previous year

(b)

Paid by the owner during the previous year

(c)

Accrued during the previous year

Deduction under section 24(a) is

(a)

1/3rd of NAV

(b)

repairs actually incurred by the owner

(c)

30% of NAV

Interest on borrowed capital accrued up to the end of the previous year prior to the year of
completion of construction is allowed
(a)

as a deduction in the year of completion of construction

(b)

in 5 equal annual installments from the year of completion of construction

(c)

In the respective year in which the interest accrues

The ceiling limit of deduction under section 24(b) in respect of interest on loan taken on
1.4.2013 for repairs of a self-occupied house is
(a)

` 30,000 p.a.

(b)

` 1,50,000 p.a.

(c)

` 2,00,000 p.a.

(d)

No limit

Where an assessee has two house properties for self-occupation, the benefit of nil annual value
will be available in respect of (a)

Both the properties

(b)

The property which has been acquired/constructed first

(c)

Any one of the properties, at the option of the assessee

Leena received ` 30,000 as arrears of rent during the P.Y. 2014-15. The amount taxable under
section 25B would be (a)

30,000

(b)

21,000

(c)

20,000

10. Vidya received ` 90,000 in May, 2014 towards recovery of unrealised rent, which was deducted
from actual rent during the P.Y. 2013-14 for determining annual value. The amount taxable under
section 25AA for A.Y.2015-16 would be (a)

90,000

(b)

63,000

(c)

60,000

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4.69

Income-tax

11. Ganesh and Rajesh are co-owners of a self-occupied property. They own 50% share each. The
interest paid by each co-owner during the previous year on loan (taken for acquisition of property
during the year 2004) is ` 2,05,000. The amount of allowable deduction in respect of each coowner is
(a)

2,05,000

(b)

1,02,500

(c)

2,00,000

(d)

1,00,000

12. An assessee, who was deriving income from house property, realised a sum of ` 52,000 on
account of display of advertisement hoardings of various concerns on the roof of the building. He
claims that this amount should be considered under the head Income from house property and
not Income from other sources. How do you deal with the following issue under the provisions
of the Income-tax Act, 1961?
13. Ram owned a house property at Chennai which was occupied by him for the purpose of his
residence. He was transferred to Mumbai in June, 2014 and therefore, he let out the property
w.e.f. 1.7.2014 on a monthly rent of ` 8,000. The corporation tax payable in respect of the
property was ` 2,000 of which 50% was paid by him before 31.3.2015. Interest on money
borrowed for the construction of the property amounted to ` 12,000. Compute the income from
house property for the A.Y.2015-16.
14. What do you understand by Composite Rent? What is the tax treatment of Composite Rent
under the Income-tax Act, 1961?

Answers
1. b; 2. c; 3. b; 4. b; 5. c; 6. b; 7. a; 8. c; 9. b; 10. a; 11. c, 13. ` 37,700

The Institute of Chartered Accountants of India

Unit 3 : PROFITS AND GAINS OF

BUSINESS OR PROFESSION
Key Points

Method of Accounting [Section 145]

Income chargeable under this head shall be computed in accordance with the method
of accounting regularly and consistently employed by the assessee either cash or
mercantile basis.
Income chargeable under this head [Section 28]
(i) The profits and gains of any business or profession carried on by the assessee at
any time during the previous year.
(ii) Any compensation or other payment due to or received by a person, at or in
connection with (a) Termination of his management or modification of the terms and
conditions relating thereto, in case the person is managing the whole or
substantially the whole of the affairs of an Indian company.
(b) Termination of his office or modification of the terms and conditions
relating thereto, in case the person is managing the whole or substantially
the whole of the affairs in India of any other company.
(c) Termination of agency or modification of the terms and conditions relating
thereto, in case the person is holding an agency in India for any part of the
activities relating to the business of any other person.
(d) Vesting in the Government or in any corporation owned and controlled by
the Government, under any law for the time being in force, of the
management of any property or business.
(iii) Income derived by a trade, professional or similar association from specific
services performed for its members.
(iv) In the case of an assessee carrying on export business, the following incentives

(a) Profit on sale of import entitlements;

(b) Cash assistance against exports under any scheme of GoI;
(c) Customs duty or excise re-paid or repayable as drawback;

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4.71

Income-tax

(d) Profit on transfer of Duty Free Replenishment Certificate.

(v) Value of any benefit or perquisite, whether convertible into money or not,
arising from business or the exercise of profession.
(vi) Any interest, salary, bonus, commission or remuneration due to, or received by,
a partner of a firm from such firm (to the extent allowed as deduction in the
hands of the firm).
(vii) Any sum, received or receivable, in cash or kind under an agreement for
(a) not carrying out any activity in relation to any business; or
(b) not sharing any know-how, patent, copyright, trademark, licence, franchise
or any other business of commercial right of similar nature or information
or technique likely to assist in the manufacture or processing of goods or
provision of services.
(viii) Any sum received under a Keyman insurance policy including the sum allocated
by way of bonus on such policy.
(ix) Any sum, whether received or receivable, in cash or kind, on account of any
capital asset (other than land or goodwill or financial instrument) being
demolished, destroyed, discarded or transferred, in respect of which the whole
of the expenditure had been allowed as deduction under section 35AD.
Computation of income under the head Profits and gains of business or
profession
The income referred to in section 28 has to be computed in accordance with the
provisions contained in sections 30 to 43D.
Admissible Deductions
Section

Deduction

30

Amount paid on account of rent, rates, taxes, repairs (not including

expenditure in the nature of capital expenditure) and insurance for buildings
used for the purpose of business or profession.
In case the premises are occupied by the assessee as a tenant, the amount of
repairs would be allowed as deduction only if he has undertaken to bear the
cost of repairs to the premises.

31

Amount paid on account for current repairs and insurance of machinery,

plant and furniture used for the purpose of business or profession.

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Profits and Gains of Business or Profession

32

4.72

Depreciation
Depreciation is mandatorily allowable as deduction.
Conditions for claiming depreciation

Asset must be used for the purpose of business or profession at any

time during the previous year.
Note: If the asset is acquired during the previous year and is put to use
for less than 180 days during that previous year then, only 50% of the
depreciation calculated at the rates prescribed will be allowed.
The asset should be owned (wholly or partly) by the assessee.
The depreciation shall be allowed on the written down value of block
of assets at the prescribed rates (except in the case of assets of
power generating units, in respect of which depreciation has to be
calculated as a percentage of actual cost).
As per section 2(11), block of assets means a group of assets falling
within a class of assets comprising:
(a) buildings, machinery, plant or furniture being tangible assets,
(b) know-how, patents, copyrights, trade marks, licences, franchises
or any other business or commercial rights of similar nature being
intangible assets;
in respect of which, the same rate of depreciation is prescribed.

Written Down Value of Assets (W.D.V.) [Section 43(6)]

(1) W.D.V. of the block of assets on 1st April of the previous xxxx
year
(2) Add: Actual cost of assets acquired during the previous xxxx
year
(3) Total (1) + (2)

xxxx

(4) Less: Money receivable in respect any asset falling within

the block which is sold, discarded, demolished or xxxx
destroyed during that previous year
(5) W.D.V at the end of the year (on which depreciation is xxxx
allowable) [(3) (4)]
(6) Depreciation at the prescribed rate
( Rate of Depreciation WDV arrived at in (5) above)

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xxxx

4.73

Income-tax

Block of Assets

Depreciati
on (% of
WDV)

Mainly used for residential purposes except hotels and

boarding houses

5%

Buildings other than those mainly used for residential

purposes

10%

Purely temporary erections such as wooden structures

100%

Furniture and fittings (including electrical fittings)

10%

Tangible Assets
Building

Plant and Machinery

General rate

15%

Motor cars, motor lorries and motor taxis used in the business
of running them on hire

30%

Motor cars other than those used in a business of running

them on hire

15%

Specified Air Control Pollution Equipments/Water Control

Pollution Equipments

100%

Computers including computer software

60%

Books owned by assessees carrying on profession, other than

annual publications

60%

Books, being annual publications, owned by assesses carrying

on a profession

100%

Books owned by assesses carrying on business in running

lending libraries

100%

Ships

20%

Intangible Assets
Know-how, patents, copyrights, trademarks, licences,
franchises or any other business or commercial rights of
similar nature

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32(1)(iia) Additional depreciation at the rate of 20% of actual cost of plant or

machinery acquired and installed after 31.03.2005 by an assessee engaged
in the business of manufacture or production of any article or thing or in
the business of generation or generation and distribution of power, shall
be allowed.
If an asset is acquired and put to use for the purpose of business or
profession for less than 180 days during the previous year in which it is
acquired, additional depreciation will get restricted to 50% of the
depreciation allowable.
However, additional depreciation will not be allowed on the following
plant or machinery:

Ships, aircraft, road transport vehicles, office appliances;

Machinery previously used by any other person;

Machinery installed in any office premises, residential

accommodation, or guest house;

Machinery in respect of which, the whole of the actual cost is fully

allowed as deduction (whether by way of depreciation or otherwise) of any
one previous year.
32AC Manufacturing companies investing more than ` 100 crore in acquisition
and installation of new plant and machinery during the period from
1.4.2013 to 31.3.2015 entitled to deduction@15% under section 32AC(1).
Manufacturing companies investing more than ` 25 crore in new plant
and machinery in any previous year during the period from 1.4.2014 to
31.3.2017 entitled to deduction@15% under section 32AC(1A).
35
Expenditure on Scientific Research
Expenditure incurred by assessee

Any revenue and capital expenditure (other than cost of acquisition

of land) on scientific research for in house research related to its business
is allowable as deduction [Section 35(1)(i) & Section 35(1)(iv) read
with section 35(2)].

Deduction is also allowed in respect of any such expenditure incurred

during 3 years immediately preceding the year of commencement of
business. Such deduction is allowed in the year in which it has
commenced its business [Section 35(1)(i)/Section 35(2)].

In case of companies engaged in the business of bio-technology or

manufacture or production of article or thing, deduction of 200% of
expenditure incurred on scientific research on in-house research and
development facility is allowed (other than expenditure on cost of land or
building) [Section 35(2AB)].

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Contributions to Outsiders
Contributions made by any assessee to certain specified/ approved
institutions shall be entitled to weighted deduction as follows:
Section

35(1)(ii)
35(1)(iia)
35(1)(iii)
35(2AA)
35AD

Deduction (as
a % of
contribution
made)
Research Association for scientific
175%
research
Company for scientific research
125%
Research association for research in
125%
social science or statistical research
Contribution made to

National Laboratory / University

/ IIT

200%

This section provides for investment-linked tax deduction in respect of

the following specified businesses
setting-up and operating cold chain facilities for specified products;

setting-up and operating warehousing facilities for storing agricultural

produce;

laying and operating a cross-country natural gas or crude or petroleum oil

pipeline network for distribution, including storage facilities being an
integral part of such network;

building and operating a hotel of two-star or above category, anywhere in

India;

building and operating a hospital, anywhere in India, with at least 100 beds
for patients;

developing and building a housing project under a scheme for slum

redevelopment or rehabilitation framed by the Central Government or a
State Government, as the case may be, and notified by the CBDT
in accordance with the prescribed guidelines;

developing and building a housing project under a notified scheme for

affordable housing framed by the Central Government or State
Government;

production of fertilizer in India;

setting up and operating an inland container depot or a container freight

station notified or approved under the Customs Act, 1962;

bee-keeping and production of honey and beeswax;

setting up and operating a warehousing facility for storage of sugar;

laying and operating a slurry pipeline for transportation of iron-ore; and

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setting up and operating a semiconductor wafer fabrication

manufacturing unit, if such unit is notified by the Board in
accordance with the prescribed guidelines.
100% of the capital expenditure incurred during the previous year,
wholly and exclusively for the above businesses would be allowed as
deduction from the business income. However, expenditure incurred
on acquisition of any land, goodwill or financial instrument would
not be eligible for deduction.
Further, the expenditure incurred, wholly and exclusively, for the purpose
of specified business prior to commencement of operation would be
allowed as deduction during the previous year in which the assessee
commences operation of his specified business, provided the amount
incurred prior to commencement has been capitalized in the books of
account of the assessee on the date of commencement of its operations.
In respect of the following specified businesses, weighted
deduction@150% of investment made is allowable, if the operations have
been commenced on or after 1st April, 2012:
1. setting up and operating a cold chain facility.
2. setting up and operating a warehouse facility for storage of
agricultural produce.
3. building and operating anywhere in India, a new hospital with at least
100 beds.
4. business of developing and building a housing project under a
scheme for affordable housing framed by the Central or State
Government and notified by CBDT.
5. business of production of fertilizer in India.
An assessee availing investment-linked tax deduction under section 35AD
in respect of any specified business in any assessment year, is not eligible
for claiming profit-linked deduction under Chapter VI-A or section 10AA
for the same or any other assessment year in respect of such specified
business.

Any asset in respect of which a deduction is claimed and allowed

under section 35AD shall be used only for the specified business,
for a period of eight years beginning with the previous year in which
such asset is acquired or constructed. If such asset is used for any
purpose other than the specified business, the total amount of
deduction so claimed and allowed in any previous year in respect of
such asset, as reduced by the depreciation allowable under section
32 as if no deduction had been allowed under section 35AD, shall
be deemed to be the business income of the assessee of the previous
year in which the asset is so used.

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35CCC

150% of expenditure incurred by an assessee on notified agricultural

extension project in accordance with the prescribed guidelines.

35CCD

150% of expenditure (other than expenditure in nature of cost of any land

or building) incurred by a company on notified skill development project.

35D

Preliminary expenditure incurred by Indian companies and other resident

non-corporate assessees shall be allowed as deduction over a period of 5
years beginning with the previous year in which business commences or in
which extension of the undertaking is completed.
Maximum aggregate amount of the qualifying expenses that can be
amortized is 5% of the cost of project. In case of an Indian company, 5%
of the cost of project or at its option, 5% of the capital employed by the
company, whichever is higher.
One-fifth of the expenditure incurred by an Indian company wholly and
exclusively for the purpose of amalgamation or demerger, shall be allowed
as deduction for five successive previous years beginning with the
previous year in which the amalgamation or demerger has taken place.
One-fifth of the expenditure incurred by an assessee-employer in any
previous year in the form of payment to any employee in connection with
his voluntary retirement in accordance with a scheme of voluntary
retirement, shall be allowed as deduction in that previous year and the
balance in four equal installments in the immediately four succeeding
previous years.
Interest paid in respect of capital borrowed for the purposes of business
or profession.
However, any interest paid for acquisition of an asset for an existing
business or profession (whether capitalized in the books of account or
not) for any period beginning from the date on which the capital was
borrowed for acquisition of the asset till the date on which such asset was
first put to use, shall not be allowed as deduction).
Any sum paid by the assessee as an employer by way of contribution
towards a recognized provident fund or approved superannuation fund,
subject to prescribed limits.
Any sum paid by the assessee as an employer by way of contribution
towards a pension scheme referred to in section 80CCD, to the extent of
10% of salary of any employee. Salary includes dearness allowance, if the
terms of employment so provide. Correspondingly, section 40A(9)
disallows the sum paid in excess of 10% of the salary of any employee.

35DD

35DDA

36(1)(iii)

36(1)(iv)

36(1)(iva)

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36(1)(vii) Any bad debts written off as irrecoverable in the accounts of the assessee
for the previous year, provided the debt has been taken into account in
computing the income of the previous year or any earlier previous year.
In the case of an assessee eligible for deduction under section 36(1)(viia),
the amount of deduction under section 36(1)(vii) shall be limited to the
amount by which such debt or part thereof exceeds the credit balance in
the provision for bad and doubtful debts made under section 36(1)(viia).
36(1)(viia) Provision for bad and doubtful debts made by certain banks and financial
institutions.
Bank / Financial Institution

Maximum deduction

Scheduled Bank or a Non-scheduled bank or a

Co-operative bank other than a primary
agricultural credit society or a primary cooperative agricultural and rural development bank
Foreign Bank
Public Financial
Corporation/State
Corporation

7.5% of gross total

income + 10% of
aggregate
average
advances made by rural
branches of the bank
5% of gross total
income
Institution/State Financial 5% of gross total
Industrial
Investment income

36(1)(viii) In respect of any special reserve created and maintained by a specified

entity (banking company, specified financial corporations etc.), an amount
not exceeding 20% of the profits derived from the eligible business
(industrial or agricultural development, development of infrastructure
facility in India, development of housing in India) computed under this
head and carried to such reserve account.
Where the aggregate of the amounts carried to such reserve account from
time to time exceeds twice the amount of paid up share capital and of the
general reserves of the specified entity, no deduction is allowable in
respect of such excess.
36(1)(ix) Any bona fide expenditure incurred by a company for the purpose of
promoting family planning amongst its employees.
In case the expenditure or part thereof is of capital nature, one-fifth of such
expenditure shall be deducted for the previous year in which it was incurred;
and the balance in four equal installments in four succeeding previous years.
36(1)(xv) An amount equal to the securities transaction tax (STT) paid by the
assessee in respect of taxable securities transactions entered into in the
course of his business during the previous year, if the income arising from
such taxable securities transactions is included in the income computed
under the head Profits and gains of business or profession.

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36(1)(xvi) An amount equal to commodities transaction tax (CTT) paid in respect of

taxable commodities transactions entered into the course of business
during the previous year, if the income arising from such taxable
commodities transactions is included in the income computed under the
head Profits and gains of business or profession.
General
37(1)

An expenditure shall be allowed under section 37, provided:

it is not in the nature of expenditure described under sections 30 to 36;

it is not in the nature of capital expenditure;

it is not a personal expenditure of the assessee;

it is laid out and expended wholly and exclusively for the purpose of
business/ profession;

it is not incurred for any purpose which is an offence or which is

prohibited by law; and

it is not an expenditure incurred by the assessee on CSR activities

referred to in section 135 of the Companies Act, 2013.

37(2B) Any expenditure incurred for advertisement in any souvenir, brochure,

tract, pamphlet etc. published by a political party is not allowable as
deduction.
Amounts not deductible
Section
40(a)(i)

Particulars

Any interest, royalty, fees for technical services or other sum chargeable under
the Act, which is payable outside India or in India to a non corporate nonresident or to a foreign company, on which tax deductible at source has not
been deducted or after deduction has not been paid on or before the due date
specified under section 139(1).
However, if such tax has been deducted in any subsequent year or has been
deducted in the previous year but paid in the subsequent year after the due date
specified under section 139(1), such sum shall be allowed as deduction in
computing the income of the previous year in which such tax is paid.
40(a)(ia) 30% of any sum payable to a resident on which tax is deductible at source
under Chapter XVII-B and such tax has not been deducted or, after
deduction has not been paid on or before the due date for filing of return
of income under section 139(1).
However, if such tax has been deducted in any subsequent year or has been
deducted in the previous year but paid in the subsequent year after the due date
specified under section 139(1), 30% of such sum shall be allowed as deduction
in computing the income of the previous year in which such tax is paid.

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Profits and Gains of Business or Profession

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Where such person responsible for deducting tax is not deemed to be an

assessee-in-default on account of payment of taxes by the resident payee,
it shall be deemed that the payer has deducted and paid the tax on such
sum on the date of furnishing return of income by the resident payee.
Since the date of furnishing the return of income by the resident payee is
taken to be the date on which the payer has deducted tax at source and
paid the same, the expenditure/payment in respect of which the payer has
failed to deduct tax at source shall be disallowed under section 40(a)(ia) in
the year in which the said expenditure is incurred. Such expenditure will
be allowed as deduction in the subsequent year in which the return of
income is furnished by the resident payee, since tax is deemed to have
been deducted and paid by the payer in that year.
40(a)(ii)/ Any sum paid on account of income-tax or wealth-tax
(iia)
40(a)(iib) Any amount paid by way of royalty, licence fee, service fee, privilege fee,
service charge, or any other fee or charge, which is levied exclusively on,
or any amount appropriated, directly or indirectly, from a State
Government undertaking, by the State Government.
40(a)(iii) Any payment chargeable under the head Salaries, if it is payable outside
India or to a non-resident, if tax has not been paid thereon nor deducted
therefrom
40(a)(v) Tax paid by the employer on non-monetary perquisites provided to its
employees, which is exempt under section 10(10CC) in the hands of the
employee.
40(b)
In case of partnership firms or LLPs (i)

Salary, bonus, commission or remuneration, by whatever name

called, paid to any partner who is not a working partner;

(ii) Payment of remuneration or interest to a working partner, which is

not

authorized by the partnership deed; or

in accordance with the terms of the partnership deed.

(iii) Payment of remuneration or interest to a working partner authorized
by and in accordance with the terms of the partnership deed, but
relates to a period falling prior to the date of such partnership and is
not authorized by the earlier partnership deed.
(iv) Payment of interest to any partner authorised by and in accordance
with the terms of the partnership deed and falling after the date of
the partnership deed to the extent of the excess of the amount
calculated at 12% simple interest per annum.

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(v) Payment of remuneration to a working partner which is authorized

by and in accordance with the partnership deed to the extent the
aggregate of such payment to working partners exceed the following
limits (a) On the first ` 3,00,000 of the ` 1,50,000 or 90% of the
book-profit or in case of a loss
book-profit, whichever is
more.
(b) On the balance of book-profit
60%
Expenses or payments not deductible in certain circumstances
Section

Particulars

40A(2) Any expenditure incurred in respect of which a payment is made to a related

person or entity, to the extent it is excessive or unreasonable by the
Assessing Officer.
Few examples of related persons are as under:
Assessee

Related Person

Individual

Any relative of the individual

Firm

Any partner of the firm or relative of such partner and the

member of the family or association
Any member of the AOP or HUF or any relative of such
member
Director of the company or any relative of the director

HUF or
AOP
Company
Any
assessee

Any individual who has a substantial interest (20% or more

voting power or beneficial entitlement to 20% of profits) in
the business or profession of the assessee; or
A relative of such individual.

40A(3) Any expenditure, in respect of which a payment or aggregate of

payments made to a person in a single day otherwise than by account payee
cheque or account payee bank draft exceeds ` 20,000.
In case of payments made to transport operator for plying, hiring or leasing
goods carriages, an enhanced limit of ` 35,000 shall apply.
If the payment/payments exceed this limit, the entire expenditure would be
disallowed.
However, disallowance would not be attracted if the cases and
circumstances in which payment is made otherwise than by way of an
account payee cheque or bank draft are covered in Rule 6DD.

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40A(3A) Where an expenditure has been allowed as deduction on accrual basis in any
previous year, and payment is made in a subsequent previous year and such
payment (or aggregate of payments made to a person in a day is made in a
subsequent previous year) is in excess of the limits of ` 20,000/` 35,000
specified above, the payment/aggregate of payments so made shall be
deemed as profits and gains of the business or profession and charged to
tax as income of the subsequent previous year.
However, the deeming provision will not apply in the cases and
circumstances covered in Rule 6DD.
40A(7) Provision for payment of gratuity to employees.
However, disallowance would not be attracted if provision is made for
contribution to approved gratuity fund or for payment of gratuity that has
become payable during the year.
Profits chargeable to tax [Section 41]
41(1) Where deduction was allowed in respect of loss, expenditure or trading liability
for any year and subsequently, during any previous year, the assessee or
successor of the business has obtained any amount in respect of such loss or
expenditure or some benefit in respect of such trading liability by way of
remission or cessation thereof, the amount obtained or the value of benefit
accrued shall be deemed to be income.
41(3) Amount realized on transfer of an asset used for scientific research is taxable
as business income to the extent of deduction allowed under section 35 in the
year in which transfer takes place.
41(4) Any amount recovered by the assessee against bad debt earlier allowed as
deduction shall be taxed as income in the year in which it is received.
Certain Deductions to be allowed only on Actual Payment [Section 43B]
In respect of the following sums payable by an assessee, deduction is allowable only if the
sum is actually paid on or before the due date of filing of return under section 139(1).
(i) Tax, duty, cess or fee, under any law for the time being in force; or
(ii) Contribution to any provident fund or superannuation fund or gratuity fund or any
other fund for the welfare of employees; or
(iii) Bonus or commission for services rendered by employees, where such sum would not
have been payable to him as profits or dividend if it had not been paid as bonus or
commission; or
(iv) Interest on any loan or borrowing from any public financial institution or a State
Financial Corporation or a State Industrial Investment Corporation, in accordance
with the terms and conditions of the agreement governing such loan or borrowing; or

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(v) Interest on any loan or advance from a scheduled bank in accordance with the
terms and conditions of the agreement governing such loan or advances; or
(vi) Payment in lieu of any leave at the credit of his employee.
Other Provisions
Section

Particulars

43CA Where the consideration for the transfer of an asset (other than capital
asset), being land or building or both, is less than the stamp duty value, the
value so adopted or assessed or assessable (i.e., the stamp duty value) shall be
deemed to be the full value of the consideration for the purposes of
computing income under the head Profits and gains of business or
profession.
Further, where the date of an agreement fixing the value of consideration for
the transfer of the asset and the date of registration of the transfer of the
asset are not same, the stamp duty value may be taken as on the date of the
agreement for transfer instead of on the date of registration for such
transfer, provided at least a part of the consideration has been received by
any mode other than cash on or before the date of the agreement.
44AA Maintenance of accounts by certain persons carrying on profession or
business
Class of Persons

Threshold limit of gross

receipts/total income

Every person carrying

on
a
specified
profession,
namely,
legal,
medical,
engineering,
architectural profession
or the profession of
accountancy
or
technical consultancy
or interior decoration
or any other notified
profession
[i.e.,
authorised
representative,
film
artist,
company
secretary
and
information
technology].

If his total gross receipts

from profession does not
exceed ` 1,50,000 in any
one of the three years
immediately preceding the
previous year, or

Requirement

Maintenance of such
books of account and
other documents as may
enable the Assessing
Officer to compute his
total
income
in
accordance with the
Where the profession has provisions of the Act
been newly set up in the
previous year, his total gross
receipts in the profession
for that year does not
exceed ` 1,50,000.

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Profits and Gains of Business or Profession

Every
person
carrying
on
a
specified profession,
namely,
legal,
medical, engineering,
architectural
profession or the
profession
of
accountancy
or
technical consultancy
or interior decoration
or
authorised
representative or film
artist.

If his total gross receipts

from profession exceeds `
1,50,000 in any one of the
three years immediately
preceding the previous year,
or

Every
person
carrying on a nonspecified profession
or business.

(i)
If his total sales,
turnover or gross receipts
from business or profession
exceeds ` 10,00,000 in any
one of the three years
immediately preceding the
previous year, or his income
from business or profession
exceeds ` 1,20,000 in any
one of the three years
immediately preceding the
previous year.

Where the profession has

been newly set up in the
previous year, his total gross
receipts in the profession
for that year exceeds `
1,50,000.

(ii) Where the business or

profession has been newly
set up in the previous year,
his total sales, turnover or
gross receipts for that year
is likely to exceed `
10,00,000 or his income
from business or profession
for that year is likely to
exceed ` 1,20,000 in that
year.

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Maintenance of such
books of account and
other
documents
referred to in sub-rule
(2), namely, cash book,
journal, if accounts are
maintained according to
the mercantile system of
accounting, a ledger,
carbon copies of bills for
sums exceeding ` 25,
original bills and receipts
(payment vouchers in
case the expenditure
does not exceed ` 50).
Maintenance of such
books of account and
other documents as may
enable the Assessing
Officer to compute his
total
income
in
accordance with the
provisions of the Act.

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Income-tax

(iii) Where the profits and

gains from business are
deemed to be the profits
and gains of the assessee
under section 44AE, 44BB,
44BBB and the assesssee
has claimed his income to
be lower than the deemed
profits.
(iv) Where the profits and
gains from business are
deemed to be the profits
and gains of the assessee
under section 44AD, and he
has claimed such income to
be lower than the deemed
profits.
44AB Mandatory audit of accounts of certain persons
Category of person
Every person
business

Threshold limit for applicability of

section 44AB

carrying

on Total sales, turnover or gross receipts in

business > ` 1 crore in any previous year
Every person carrying on Gross receipts in profession > ` 25 lakh in
profession
any previous year
Every person carrying on a Income is claimed to be lower than the
business,
where
deemed deemed profits under the respective sections
profits
are
taxed
on
presumptive
basis
under
section 44AE, 44BB and
44BBB.
Every person carrying on a Income is claimed to be lower than the
business, where 8% of total deemed profits and such income exceeds the
turnover or gross receipts are basic exemption limit.
deemed to be the profits under
section 44AD.

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Profits and Gains of Business or Profession

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Presumptive taxation provisions applicable to residents

Section

Particulars

Deemed profits and gains

44AD Any individual, HUF or firm (other 8% of gross receipts or total

than LLP) who has not claimed turnover
deduction under section 10AA or
Chapter VI-A under the heading C Deductions in respect of certain
incomes engaged in any business
(except the business of plying, hiring or
leasing goods carriages referred to in
section 44AE) and whose total turnover
or gross receipts in the previous year
does not exceed ` 1 crore. However,
this section will not apply to
(i) a person carrying on specified
professions referred to in section
44AA(1),
(ii) a person earning income in the
nature of commission or brokerage;
(iii) a person carrying on agency
business.
44AE Any assessee who owns not more than
ten goods carriages at any time during
the previous year and who is engaged in
the business of plying, hiring and
leasing goods carriages.

For each goods vehicle, whether

heavy goods vehicle or other than
heavy goods vehicle, ` 7,500 per
month or part of a month during
which such vehicle is owned by the
assessee or an amount claimed to
have been actually earned from such
vehicle, whichever is higher.

Taxability in case of composite income

In cases where income is derived from the sale of rubber manufactured or processed
from rubber plants grown by the seller in India, coffee (grown and cured / grown,
cured, roasted and grounded) or tea grown and manufactured in India, the income
shall be computed as if it were income derived from business, and a specified
percentage of such income, as given in the table below, shall be deemed to be income
liable to tax -

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Income-tax

Rule
Nature of composite income

Busine
incom
(Taxab

7A

Income from the manufacture of rubber

35%

7B

Income from the manufacture of coffee

- sale of coffee grown and cured
- sale of coffee grown, cured, roasted and grounded

25%
40%

Income from the manufacture of tea

40%

Question 1
A car purchased by Dr. Soman on 10.08.2012 for ` 5,25,000 for personal use is brought into
professional use on 1.07.2014 by him, when its market value was ` 2,50,000.
Compute the actual cost of the car and the amount of depreciation for the assessment year
2015-16 assuming the rate of depreciation to be 15%.
Answer
As per section 43(1), the expression actual cost would mean the actual cost of asset to the
assessee.
The purchase price of ` 5,25,000 is, therefore, the actual cost of the car to Dr. Soman. Market
value (i.e. ` 2,50,000) on the date when the asset is brought into professional use is not relevant.
Therefore, amount of depreciation on car as per section 32 for the A.Y.2015-16 would be
` 78,750, being ` 5,25,000 x 15%.
Note : Explanation 5 to section 43(1) providing for reduction of notional depreciation from the
date of acquisition of asset for personal use to determine actual cost of the asset is applicable
only in case of building which is initially acquired for personal use and later brought into
professional use. It is not applicable in respect of other assets.
Question 2
M/s. Dollar Ltd., a manufacturing concern, furnishes the following particulars:

`
(i)

Opening writing down value of plant and machinery (15% block)

5,00,000

(ii)

Purchase of plant and machinery (put to use before 01.10.2014)

2,00,000

(iii)

Sale proceeds of plant and machinery which became obsolete- the plant
and machinery was purchased on 01-04-2012 for ` 5,00,000.

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Profits and Gains of Business or Profession

4.88

Further, out of purchase of plant and machinery:

(a)

Plant and machinery of ` 20,000 has been installed in office.

(b) Plant and machinery of ` 20,000 was used previously for the purpose of business by the
seller.
Compute depreciation and additional depreciation as per Income-tax Act, 1961 for the
Assessment Year 2015-16.
Answer
Computation of written down value of Plant and Machinery of M/s. Dollar Ltd. for the
A.Y. 2014-15
Particulars

Opening written down value (as on 01.04.2014)

5,00,000

Add: Purchase of plant and machinery during the previous year

2,00,000
7,00,000

Less: Sale proceeds of obsolete plant and machinery sold during the year
Closing Written Down Value (as on 31.03.2015)

5,000
6,95,000

Computation of Depreciation and Additional Depreciation for A.Y. 2015-16 as per

section 32 of the Income-tax Act, 1961
Particulars
Normal Depreciation (` 6,95,000 x 15%)
Additional Depreciation(Refer Note 2)(` 2,00,000 ` 20,000 - ` 20,000) x 20%
Depreciation on Plant and Machinery

`
1,04,250
32,000
1,36,250

Notes:(1) Since the new plant and machinery was purchased and put to use before 1.10.2014, it
was put to use for more than 180 days in the year. Hence, full depreciation is allowable
for A.Y. 2015-16.
(2) As per section 32(1)(iia), additional depreciation is allowable in the case of any new
machinery or plant acquired and installed after 31.3.2005 by an assessee engaged, inter alia,
in the business of manufacture or production of any article or thing, at the rate of 20% of the
actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia,
(i)

any machinery or plant which, before its installation by the assessee, was used either
within or outside India by any other person;

(ii)

any machinery or plant installed in office premises, residential accommodation or in any

guest house.

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Income-tax
In view of the above provisions, additional depreciation cannot be claimed in respect of (i)

Plant and machinery of ` 20,000 used previously for the purpose of business by the
seller.

(ii)

Plant and machinery of ` 20,000, installed in office.

Therefore, in the given case additional depreciation has to be provided only on

` 1,60,000 (i.e., ` 2,00,000 - ` 40,000).
Question 3
JK Ltd., a manufacturing company purchased the following plant and machinery:
Date of Acquisition and Installation

Actual Cost (in ` Crores)

25-05-2013

90.00

31-08-2014

20.00

15-04-2015

30.00

From the above information compute the amount of depreciation available under section
32(1), additional depreciation, if any, and deduction under section 32AC for the Assessment
Years 2014-15, 2015-16 and 2016-17.
What will be the consequences if asset acquired on 31-08-2014 is sold on 01-05-2016?
Answer
Computation of depreciation allowance under section 32 for the A.Y. 2014-15
Particulars

` in crores

WDV as on 01.04.2013
Add: New Plant and Machinery acquired and installed during
P.Y.2013-14

Nil
the
90.00
90.00

Less: Asset sold during the year

Nil

WDV as on 31.3.2014 (before charging depreciation)

Less: Depreciation for P.Y.2013-14@15% on WDV of ` 90 crore
Additional Depreciation for the P.Y.2013-14 @ 20% of `90 crore,
being the new plant and machinery acquired and installed during
the P.Y.2013-14 (put to use for more than 180 days)
WDV as on 1.4.2014

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90.00
13.50

18.00

31.50
58.50

Profits and Gains of Business or Profession

4.90

Computation of depreciation allowance under section 32 for the A.Y. 2015-16

Particulars

` in crores

WDV as on 1.4.2014

58.50

Add: New Plant and Machinery acquired and installed during the
P.Y.2014-15

20.00
78.50

Less: Asset sold during the year

Nil

WDV as on 31.3.2015 (before charging depreciation)

78.50

Less: Depreciation for P.Y.2014-15@15% on WDV of ` 78.50

crore as on 31.3.2015

11.78

Additional Depreciation for the P.Y.2014-15@20% of `20

crore, being the new plant and machinery acquired and
installed during the P.Y.2014-15 (put to use for more than
180 days)

4.00
15.78

WDV as on 1.4.2015

62.72

Computation of depreciation allowance under section 32 for the A.Y. 2016-17

Particulars

` in crores

WDV as on 1.4.2015

62.72

Add: New Plant and Machinery acquired and installed during the
P.Y.2015-16

30.00
92.72

Less: Asset sold during the year

Nil

WDV as on 31.3.2016 (before charging depreciation)

92.72

Less: Depreciation for P.Y.2014-15@15% on WDV of ` 92.72

crore as on 31.3.2016

13.91

Additional Depreciation for the P.Y.2015-16@20% of `30

crore, being the new plant and machinery acquired and
installed during the P.Y.2015-16 (put to use for more than
180 days)

6.00
19.91

WDV as on 1.4.2016

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72.81

4.91

Income-tax
Computation of deduction under section 32AC for the A.Y.2014-15
Particulars

`
in
crores

New plant and machinery acquired and installed on 25.5.2013

90

Deduction under section 32AC is not allowable on ` 90 crore, since the

aggregate investment does not exceed ` 100 crore [See Note 1]

Nil

Computation of deduction under section 32AC for the A.Y.2015-16

Particulars

`
in
crores

New plant and machinery acquired and installed during the P.Y.2013-14

90.00

New plant and machinery acquired and installed during the P.Y.2014-15
(on 31.8.2014)

20.00

Aggregate investment in new plant and machinery during the period

from 1.4.2013 to 31.3.2015

110.00

Total deduction under section 32AC(1) @15% of aggregate investment of

` 110 crore

16.50

Less: Deduction allowed under section 32AC during the A.Y.2014-15

Nil

Deduction under section 32AC for the A.Y.2015-16 [See Note 2]

16.50

Computation of deduction under section 32AC(1A) for the A.Y.2016-17

Particulars
New plant and machinery acquired and installed during the P.Y.2015-16
Total deduction under section 32AC @15% of investment of ` 30 crores in
the previous year 2015-16

`
in
crores
30.00
4.50

Consequence on sale of new plant and machinery

The new plant and machinery in respect of which deduction has been claimed under section
32AC cannot be sold for a period of 5 years from the date of installation.
If it is sold, the deduction allowed earlier would be deemed as income chargeable to tax under
the head Profits and gains of business or profession of the previous year in which such new
plant and machinery is sold. Therefore, if the new plant and machinery acquired on 31.8.2014
is sold on 1.5.2016 (i.e., before the expiry of 5 years), then, the deduction of ` 3 crores (15%

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Profits and Gains of Business or Profession

4.92

of ` 20 crores) allowed under section 32AC in the P.Y.2014-15, would be deemed as business
income of P.Y.2016-17 (A.Y.2017-18).
This would be in addition to the taxability of gains arising on account of transfer of such plant
and machinery.
Notes:
1.

A manufacturing company would be entitled to deduction under section 32AC@15% of

aggregate investment in new plant and machinery acquired and installed during the
period from 1.4.2013 to 31.3.2015, if such investment exceeds ` 100 crore.

2.

For A.Y. 2015-16, deduction is allowable under section 32AC(1) @15% of total
investment made during the period from 01-04-2013 to 31.03.2015, as reduced by the
amount of deduction allowed for A.Y. 2014-15.
Further, as per section 32AC(1A), JK Ltd. would be eligible for deduction of ` 4.5 crores,
being 15% of ` 30 crores in A.Y. 2016-17, since the investment in new plant and
machinery exceeds ` 25 crores in the P.Y. 2015-16.

3.

Deduction under section 32AC is in addition to depreciation and additional depreciation

allowable under section 32. However, such deduction will not be reduced to arrive at the
written down value of the block of assets.

Question 4
Mr. Abhimanyu is engaged in the business of generation and distribution of electric power. He
always opts to claim depreciation on written down value for income-tax purposes. From the
following details, compute the depreciation allowable as per the provisions of the Income-tax
Act, 1961 for the assessment year 2015-16:
(` in lacs)
(i)

Opening WDV of block (15% rate)

42

(ii)

New machinery purchased on 12-10-2014

10

(iii) Machinery imported from Colombo on 12-4-2014.

This machine had been used only in Colombo earlier and
the assessee is the first user in India.

(iv) New computer installed in generation wing of the unit on 15-7-2014

Answer
Computation of depreciation under section 32 for A.Y.2015-16
Particulars

Depreciation@15% on ` 51,00,000, being machinery (put to use

for more than 180 days) [Opening WDV of ` 42,00,000 +

7,65,000

Normal Depreciation

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4.93

Income-tax

Purchase cost of imported machinery of ` 9,00,000]

Depreciation@7.5% on ` 10,00,000, being new machinery put to
use for less than 180 days

75,000
8,40,000

Depreciation@60% on computers purchased ` 2,00,000

1,20,000

9,60,000

Additional Depreciation (Refer Note below)

Additional Depreciation@10% of ` 10,00,000 [being actual cost of
new machinery purchased on 12-10-2014]
Additional Depreciation@20% on new computer installed in
generation wing of the unit [20% of ` 2,00,000]
Depreciation on Plant and Machinery

1,00,000

40,000

1,40,000
11,00,000

Note:The Finance Act, 2012 has extended the benefit of additional depreciation to new plant and
machinery acquired and installed in power sector undertakings. Accordingly, additional
depreciation is allowable in the case of any new machinery or plant acquired and installed by
an assessee engaged, inter alia, in the business of generation or generation and distribution
of power, at the rate of 20% of the actual cost of such machinery or plant.
Therefore, new computer installed in generation wing of the unit is eligible for additional
depreciation@20%.
Since the new machinery was purchased only on 12.10.2014, it was put to use for less than
180 days during the previous year, and hence, only 10% (i.e., 50% of 20%) is allowable as
additional depreciation.
However, additional depreciation shall not be allowed in respect of, inter alia, any machinery
or plant which, before its installation by the assessee, was used either within or outside India
by any other person. Therefore, additional depreciation is not allowable in respect of imported
machinery, since it was used in Colombo, before its installation by the assessee.
Question 5
Harish Jayaraj Pvt. Ltd. is converted into Harish Jayaraj LLP on 1.1.2015. The following
particulars are available to you:
S.
No.

Particulars

(i)

Cost of land

5,00,000

(ii)

WDV of machinery as on 1.4.2014

3,30,000

(iii)

Patents acquired on 1.6.2014

3,00,000

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Profits and Gains of Business or Profession

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(iv)

Building acquired on 12.3.2013 for which deduction was allowed

under section 35AD.

7,00,000

(v)

Above building was revalued as on the date of conversion into LLP as

12,00,000

(vi)

Unabsorbed business loss as on 1.4.2014 (Related to A.Y. 2011-12)

9,00,000

Though the conversion into LLP took place on 1.1.2015, there was disruption of business and
the assets were put into use by the LLP only from 1st March, 2015 onwards.
The company earned profits of ` 8 lacs prior to computation of depreciation.
Assuming that the necessary conditions laid down in section 47(xiiib) of the Income-tax Act,
1961 have been complied with, explain the tax treatment of the above in the hands of the LLP.
Answer
Tax treatment of depreciation and unabsorbed business loss of a private company on
its conversion into a LLP
1.

Depreciation

The aggregate depreciation allowable to the predecessor company and successor LLP shall
not exceed, in any previous year, the depreciation calculated at the prescribed rates as if the
conversion had not taken place. Such depreciation shall be apportioned between the
predecessor company and the successor LLP in the ratio of the number of days for which the
assets were used by them [Fifth proviso to Section 32(1)]
Therefore, depreciation has to be first calculated as if the conversion had not taken place and
then apportioned between the company and the LLP in the ratio of the number of days for
which the assets were used by them.
`

Block I

Machinery

3,30,000

15%

49,500

Block II

Patents

3,00,000

25%

75,000
1,24,500

Allocation of depreciation
Depreciation on machinery and patents have to be apportioned between the company and the
LLP in the ratio of the number of days for which the assets were used by them. Since
patents were acquired only on 1.6.2014, it could have been used by the company for 214 days
only. Therefore, the depreciation on assets has to be allocated between the company and LLP
as follows

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4.95

Income-tax

Asset

Machinery
Patents

Total
depreciation
for the year
49,500
75,000
1,24,500

Company
No. of
Depreciation
days of
usage
275
44,485
214
65,510
1,09,995

No. of days
of usage

LLP
Depreciation

31
31

5,015
9,490
14,505

Therefore, depreciation to be allowed in the hands of the company is ` 1,09,995 and

depreciation to be allowed in the hands of the LLP is ` 14,505.
2.

Unabsorbed business loss to be carried forward by the LLP:

Particulars

Profits of the company before depreciation

8,00,000

Less: Current year depreciation

1,09,995

Business income of the company after depreciation

6,90,005

Brought forward business loss

9,00,000

Unabsorbed business loss as on 31.12.2014 to be carried forward by the LLP

2,09,995

The LLP would be allowed to carry forward and set-off the unabsorbed business loss and
unabsorbed depreciation of the predecessor company [Section 72A(6A)].
3.

Actual cost of assets to the LLP

(1) The actual cost of the block of assets in case of the LLP shall be the WDV of the block of
assets as in the case of the company on the date of conversion. The WDV as on
1.1.2015 for Machinery and Patents are ` 2,85,515 and ` 2,34,490, respectively, which
would be the actual cost in the case of the LLP.
WDV of Machinery as on 1.1.2015 = ` 3,30,000 ` 44,485 = ` 2,85,515
WDV of Patents as on 1.1.2015 = ` 3,00,000 ` 65,510 = ` 2,34,490
(2) Land is not a depreciable asset. The cost of acquisition of land to the LLP would be the
cost for which the company acquired it, as increased by the cost of improvement.
(3) In respect of the building, deduction had been allowed in the earlier year under section
35AD. Hence, there is no question of depreciation during the current year. The actual
cost of the building to the LLP would be Nil.
Question 6
Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down value on
01.04.2014 was ` 40 lacs. It purchased another asset (second-hand plant and machinery) of

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Profits and Gains of Business or Profession

4.96

the same block on 01.11.2014 for ` 14.40 lacs and put to use on the same day. Sai Ltd. was
amalgamated with Shirdi Ltd. with effect from 01.01.2015.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the previous
year ended on 31.03.2015 assuming that the assets were transferred to Shirdi Ltd. at ` 60 lacs.
Answer
Statement showing computation of depreciation allowable to Sai Ltd. & Shirdi Ltd. for
A.Y. 2015-16
Particulars

Written down value (WDV) as on 1.4.2014

40,00,000

Addition during the year (used for less than 180 days)

14,40,000

Total

54,40,000

Depreciation on ` 40,00,000 @ 15%

6,00,000

Depreciation on ` 14,40,000 @ 7.5%

1,08,000

Total depreciation for the year

7,08,000

Apportionment between two companies:

(a)

Amalgamating company, Sai Ltd.

` 6,00,000 275/365
` 1,08,000 61/151

4,52,055
43,629
4,95,684

(b)

Amalgamated company, Shirdi Ltd.

` 6,00,000 90/365

1,47,945

` 1,08,000 90/151

64,371
2,12,316

Notes:
(1) The aggregate deduction, in respect of depreciation allowable to the amalgamating company
and amalgamated company in the case of amalgamation shall not exceed in any case, the
deduction calculated at the prescribed rates as if the amalgamation had not taken place.
Such deduction shall be apportioned between the amalgamating company and the
amalgamated company in the ratio of the number of days for which the assets were used by
them.
(2) The price at which the assets were transferred, i.e., ` 60 lacs, has no implication in
computing eligible depreciation.

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Question 7
M/s Sidhant & Co., a sole proprietary concern is converted into a company, Sidhant Co. Ltd.
with effect from November 29, 2014. The written down value of assets as on April 1, 2014 is
as follows:
Items

Rate of Depreciation

Building

10%

Furniture

10%

Plant and Machinery

15%

WDV as on 1st April, 2014

` 3,50,000
` 50,000
` 2,00,000

Further, on October 15, 2014, M/s Sidhant & Co. purchased a plant for ` 1,00,000 (rate of
depreciation 15%). After conversion, the company added another plant worth ` 50,000 (rate of
depreciation 15%).
Compute the depreciation available to (i) M/s Sidhant & Co. and (ii) Sidhant Co. Ltd. for
Assessment Year 2015-16
Answer
In the case of conversion of sole proprietary concern into a company as per section 47(xiv),
the depreciation should be first calculated for the whole year assuming that no succession had
taken place. Thereafter, the depreciation should be apportioned between the sole proprietary
concern and the company in the ratio of the number of days for which the assets were used by
them. It is assumed that in this case, the conditions specified in section 47(xiv) are satisfied.
Computation of depreciation allowable to Sidhant & Co. for A.Y.2015-16
Particulars

Building
WDV as on 1.4.2014

3,50,000

Depreciation@10%

35,000

Furniture
WDV as on 1.4.2014

50,000

Depreciation@10%

5,000

Plant and Machinery

WDV as on 1.4.2014

2,00,000

Add: Additions during the year (purchased on 15.10.2014)

1,00,000
3,00,000

Less: Depreciation for the year

(15% of ` 2,00,000 + 50% of 15% of ` 1,00,000)

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37,500

Profits and Gains of Business or Profession

4.98

(` 30,000 + ` 7,500)
(Depreciation on new machinery is restricted to 50% of
eligible depreciation, since the asset is put to use for less
than 180 days in that year)
Total depreciation for the year

77,500

Proportionate depreciation allowable to Sidhant & Co.

for 242 days
On
existing
assets
(i.e.
1.4.2014
to
28.11.2014)
(i.e. 242/365 x ` 70,000)
On new machine for 45 days i.e., 45/168 ` 7,500

46,411
2,009

48,420

Computation of depreciation allowable to Sidhant Co. Ltd. for A.Y.2015-16

Particulars
(i)

Depreciation on the assets on conversion

Proportionately for 123 days i.e. after conversion period
(123/365 x ` 70,000)+ (123/168 ` 7,500) = ` 23,589 + ` 5,491

(ii)

Depreciation @ 50% of normal rate of 15% on ` 50,000, being the value of

plant purchased after conversion, which was put to use for less than 180
days

Depreciation allowable to Sidhant Co. Ltd.

29,080

3,750
2,830

Note: Since it has not been specifically mentioned that M/s Sidhant & Co. and Sidhant Co.
Ltd. are manufacturing concerns or companies engaged in the business of generation or
generation and distribution of power, additional depreciation is not provided for.
Question 8
What are intangible assets? Give four examples. What is the rate of depreciation on a block of
intangible assets?
Answer
Intangible assets are assets which are not corporeal i.e., not capable of being touched. Such
assets are represented by rights of the persons through them.
According to Explanation 3(b) to section 32(1), the following are intangible assets :
(a) Know-how
(b) Patents
(c) Copyrights
(d) Trade Marks
(e) Licences

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Income-tax

(f) Franchises
(g) any other business or commercial rights of similar nature.
They are to be depreciated at the rate of 25%.
Question 9
A car purchased by S on 10.8.2009 for ` 3,25,000 for personal use is brought into the
business of the assessee on 01.12.2014, when its market value is ` 1,50,000.
Compute the actual cost of the car and the amount of depreciation for the Assessment year
2015-16 assuming the rate of depreciation to be 15%.
Answer
In this case, the car was purchased for personal use on 10.8.2009 for ` 3,25,000 and
subsequently brought into the business of the assessee on 1.12.2014. The actual cost of car
is ` 3,25,000.
Explanation 5 to section 43(1) provides for determination of actual cost of building used for
private purposes subsequently brought into business. This Explanation does not apply to any
other asset in as much as it refers only to buildings.
The admissible depreciation for A.Y.2015-16 is ` 48,750 (i.e.15% of ` 3,25,000). As the car
was not acquired during the previous year 2014-15, full depreciation is available for the year
even if it is put to use for less than 180 days during the previous year. The condition of
restricting depreciation to 50% of the prescribed percentage would apply only where the asset
was acquired by the assessee in the previous year.
Question 10
Gopichand Industries furnishes you the following information:
(` )
Block I

WDV of Plant and machinery (consisting of 10 looms)

5,00,000

Rate of depreciation 15%

Block II

WDV of Buildings (consisting of 3 buildings)

12,50,000

Rate of depreciation 10%

Acquired on 5-07-2014 5 looms for
Sold on 7-12-2014 15 looms for
Acquired on 10-01-2015 2 looms for
Compute depreciation claim for the Assessment year 2015-16.

The Institute of Chartered Accountants of India

4,00,000
10,00,000
3,00,000

Profits and Gains of Business or Profession

4.100

Answer
Computation of depreciation for Gopichand Industries for A.Y.2015-16
Particulars

Block 1 : Plant & machinery (Rate of depreciation 15%)

WDV as on 1st April (10 looms)

5,00,000

Add: Additions during the year

- 5 looms acquired on 5th July

4,00,000

- 2 looms acquired on 10th January

3,00,000
12,00,000

Less : Assets sold during the year

- 15 looms sold on 7th December
W.D.V. as on

31st

March (2 looms)

10,00,000
2,00,000
15,000

Depreciation on ` 2 lakhs @ 15% (limited to 50%)

Block II: Buildings (Rate of depreciation 10%)
WDV as on 1st April (3 buildings)

12,50,000

Depreciation on ` 12,50,000 @ 10%

1,25,000

Total depreciation for the year

1,40,000

Notes:
1.

Closing balance of Block 1 : Plant and machinery represents the looms acquired on 10th
January. These looms have been put to use or less than 180 days during the previous
year, and therefore, only 50% of normal depreciation is permissible.

2.

No additional depreciation @ 20% of the cost of new plant and machinery is provided for
assuming that all conditions contained in the section 32(1)(iia) have not been fulfilled.

Question 11
M/s. QQ & Co., a sole proprietary concern, was converted into a company on 1.9.2014. Before
the conversion, the sole proprietary concern had a Block of Plant and Machinery (Rate of
depreciation 15%), whose WDV as on 1.4.2014 was ` 3,00,000. On 1st April itself, a new plant
of the same block was purchased for ` 1,20,000. After the conversion, the company has
purchased the same type of Plant on 1.1.2015 for ` 1,60,000.
Compute the depreciation that would be allocated between the sole proprietary concern and
the successor company.

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4.101

Income-tax

Answer
Computation of depreciation in the case of transfer of business:
Depreciation is to be calculated as if there is no succession.

(`)

WDV as on 1st April

3,00,000

Add : Additions made before succession

1,20,000
4,20,000

Less : Sale consideration of the asset sold

Nil
4,20,000

Depreciation @ 15%

63,000

Allocation of depreciation between sole proprietary concern and the successor company:
The depreciation of ` 63,000 is to be allocated in the ratio of number of days the assets were
used by the sole proprietary concern and the company.
Exsole proprietary concern
1st April to 31st August = 153 days

` 63,000 x 153 / 365 = ` 26,408

Successor company
` 63,000 - ` 26,408

= ` 36,592 (i.e. ` 63,000 x 212 /365)

The depreciation of ` 12,000 [50% of 15% on ` 1,60,000] in respect of asset purchased by the
successor company on 1st January is fully allowable in the hands of the successor company.
Note: Since it has not been specified that the company is a manufacturing company or a
company engaged in the generation or generation and distribution of power, additional
depreciation has not been provided for.
Question 12
Honest Industry furnishes you the following details pertaining to the financial year 2014-15:
Description
Rate of depreciation
Opening balance as on 01-04-2014
Acquired before 30-09-2014
Acquired after 01-12-2014
Transferred in March 2015, one of the
patents held for the past 2 years

Plant
&
Machinery
15%

Building
10%

` 14,50,000
` 12,00,000
` 4,00,000

` 25,00,000

Intangible
assets (patents)
25%

Nil

` 15,00,000
` 5,00,000

` 18,00,000

Nil

` 3,00,000

A machinery acquired in July 2014 original cost ` 1,50,000 was destroyed by fire and the
assessee received compensation of ` 50,000 from the insurance company.

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Profits and Gains of Business or Profession

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Newly acquired building given above includes value of land of ` 3,00,000.

Calculate the eligible depreciation claim for the assessment year 2015-16.
Note : Ignore additional/accelerated depreciation.
Answer
Computation of depreciation allowable to Honest Industry for the A.Y. 2015-16
Particulars

Plant
& Building
Machinery

Rate of depreciation

Intangible
assets
(patents)

15%

10%

25%

Opening Balance as on 1.04.2014

14,50,000

25,00,000

15,00,000

Add: Assets acquired during the year

16,00,000

15,00,000

5,00,000

30,50,000

40,00,000

20,00,000

50,000

3,00,000

30,00,000

40,00,000

17,00,000

4,00,000

15,00,000

Depreciation@50% of applicable rate

30,000

75,000

Asset held for more than 180 days

26,00,000

25,00,000

17,00,000

Depreciation at the applicable rates

3,90,000

2,50,000

4,25,000

Less: Moneys payable in respect of

asset sold or destroyed
W.D.V as on 31.03.2015
Asset held for less than 180 days

Total Depreciation allowable

Total (` )

1,05,000
10,65,000
11,70,000

Note - Land is not a depreciable asset. Therefore, ` 3 lacs, being the value of land, has
been reduced from ` 18 lacs, being the value of building acquired during the year, for the
purpose of computing depreciation.
Question 13
Mr. Praveen Kumar has furnished the following particulars relating to payments made towards
scientific research for the year ended 31.3.2015:
Sl. No.
(i)
(ii)
(iii)
(iv)
(v)
(vi)

Particulars
Payments made to K Research Ltd.
Payment made to LMN College
Payment made to OPQ College
Payment made to National Laboratory
Machinery purchased for in-house scientific research
Salaries to research staff engaged in in-house scientific research

` (in lacs)
20
15
10
8
25
12

Note: K Research Ltd. and LMN College are approved research institutions and these

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payments are to be used for the purposes of scientific research.

Compute the amount of deduction available under section 35 of the Income-tax Act, 1961
while arriving at the business income of the assessee.
Answer
Computation of deduction allowable under section 35
Amount
(` in lacs)

Section

% of weighted
deduction

Amount of
deduction
(` in lacs)

K Research Ltd. [See Note 3]

20

35(1)(ii)

175%

35.00

LMN College

15

35(1)(ii)

175%

26.25

OPQ College [See Note 1]

10

Nil

Nil

National Laboratory [See Note 4]

35(2AA)

200%

16.00

Capital expenditure

25

35(1)(iv)
r.w. 35(2)

100%

25.00

Revenue expenditure

12

35(1)(i)

100%

12.00

Particulars
Payment for scientific research

In-house research [See Note 2]

Deduction allowable under section 35

114.25

Notes :1.

Payment to OPQ College : Since the note in the question below item (vi) clearly
mentions that only K Research Ltd. and LMN College (mentioned in item (i) and (ii),
respectively) are approved research institutions, it is a logical conclusion that OPQ
College mentioned in item (iii) is not an approved research institution. Therefore,
payment to OPQ College would not qualify for deduction under section 35.

2.

Deduction for in-house research and development : Only company assessees are
entitled to weighted deduction@200% under section 35(2AB) in respect of in-house
research and development expenditure incurred. However, in this case, the assessee is
an individual. Therefore, he would be entitled to deduction@100% of the revenue
expenditure incurred under section 35(1)(i) and 100% of the capital expenditure incurred
under section 35(1)(iv) read with section 35(2), assuming that such expenditure is laid
out or expended on scientific research related to his business.

3.

Payment to K Research Ltd. (Alternative Answer) : Any sum paid to a company registered
in India which has as its main object scientific research, as is approved by the prescribed
authority, qualifies for a weighted deduction of 125% under section 35(1)(iia). Therefore, it is
also possible to take a view that payment of ` 20 lakhs to K Research Ltd. qualifies for a
weighted deduction of 125% under section 35(1)(iia) since K Research Ltd. is a company.

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The weighted deduction under section 35(1)(iia) would be ` 25 lacs (i.e., 125% of ` 20 lacs),
in which case, the total deduction under section 35 would be ` 104.25 lacs.
4.

Payment to National Laboratory: The percentage of weighted deduction under section

35(2AA) in respect of amount paid to National Laboratory is 200%.

Question 14
Vivitha Bio-medicals Ltd. is engaged in the business of manufacture of bio-medical items. The
following expenses were incurred in respect of activities connected with scientific research:
Year ended

Item

Amount (` )

31.03.2012

Land

10,00,000

(Incurred after 1.9.2011)

Building

25,00,000

31.03.2013

Plant and machinery

5,00,000

31.03.2014

Raw materials

2,20,000

31.03.2015

Raw materials and salaries

1,80,000

The business was commenced on 01-09-2014.

In view of availability of better model of plant and machinery, the existing plant and machinery
were sold for ` 8,00,000 on 1.03.2015.
Discuss the implications of the above for the assessment year 2015-16 along with brief
computation of deduction permissible under section 35 assuming that necessary conditions
have been fulfilled. You are informed that the assessees line of business is eligible for
claiming deduction under section 35 at 200% on eligible items.
Answer
1.

As per section 35(2AB), where a company engaged in, inter alia, the business of
biotechnology incurs any expenditure on scientific research during the current year, it is
eligible for claiming weighted deduction of a sum equal to 200% of the eligible
expenditure.
Note : The benefit of weighted deduction under this section would be available for
expenditure incurred upto 31st March 2017 on in-house research and development facility.
The eligible expenditure and quantum of deduction will be:
(a) Current year capital expenditure (except expenditure in the nature of cost of any
land or building) or revenue expenditure incurred for scientific research (weighted
deduction @ 200%) under section 35(2AB).
(b) Any expenditure incurred during earlier 3 years immediately preceding the date of
commencement of business on payment of salary or purchase of materials, or
capital expenditure incurred other than expenditure on acquisition of land [actual
expenditure qualifies for deduction under section 35(1)].

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Income-tax

The deduction available under section 35 for scientific research will, therefore, be:
Particulars

(a)

Land

Nil

(b)

Building

(c)

Revenue expenses of last 3 years

2,20,000

(d)

Capital expenditure of last 3 years: Plant and machinery

5,00,000

25,00,000

Expenditure allowable under section 35(1)

32,20,000
3,60,000

Current year revenue expenditure ` 1,80,000 [200% of ` 1,80,000 is

allowable under section 35(2AB)]
Total deduction under section 35
2.

35,80,000

Section 41(3) provides that where a capital asset used for scientific research is sold,
without having been used for other purposes, the lower of sale proceeds or the total
amount of deduction earlier allowed under section 35 will be considered as income from
business of the previous year in which the sale took place.
Therefore, the income chargeable to tax under section 41(3) should be lower of the following:
(1) Sale proceeds i.e. ` 8,00,000
(2) Total amount of deduction earlier allowed under section 35 i.e. ` 5,00,000
` 5,00,000 will be deemed to be the income chargeable to tax under section 41(3).

3.

The difference between sale proceeds and business income under section 41(3) will be
treated as short-term capital gain.
`
Sale proceeds of plant and machinery

8,00,000

Less: Business Income as per section 41(3)

5,00,000

Short-term capital gain

3,00,000_

Question 15
Swadeshi Ltd., which follows mercantile system of accounting, obtained licence on 1.4.2013
from the Department of telecommunication for a period of 10 years. The total licence fee
payable is ` 18,00,000. The relevant details are:
Year ended
31st March

Licence fee payable

for the year (`)

Date

Amount (`)

2014

10,00,000

30.03.2014

3,70,000

15.05.2014

6,30,000

28.02.2015

5,40,000

2015

8,00,000

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Balance of ` 2,60,000 is pending as on 31.3.2015.

Compute the amount of deduction available to the assessee under section 35ABB for the
assessment years 2014-15 and 2015-16. Can any deduction be claimed under section 32 also?
Answer
As per section 35ABB, any amount actually paid for obtaining licence to operate
telecommunication services, shall be allowed as deduction in equal installments during the
number of years for which the licence is in force. Therefore, the year of actual payment is
relevant and not the previous year in which the liability for the expenditure was incurred
according to the method of accounting regularly employed by the assessee.
1.

` 3,70,000 paid on 30.03.2014 [P.Y.2013-14]

Unexpired period of licence

10 years

Hence ` 37,000 [i.e. ` 3,70,000/10] can be claimed under section 35ABB for period of 10
years commencing from A.Y.2014-15.
2.

` 11,70,000 paid during year ended 31.03.2015 [P.Y.2014-15]

Unexpired period of licence

9 years

Hence, ` 1,30,000 [i.e. ` 11,70,000/9] can be claimed under section 35ABB for a period
of 9 years commencing from A.Y.2015-16.
3.

Amount of deduction under section 35ABB

Assessment year
2014-15
2015-16

Amount (` )
37,000
37,000 + 1,30,000 = 1,67,000

Where deduction under section 35ABB is claimed and allowed, deduction under section 32(1)
cannot be allowed for the same previous year or any subsequent previous year.
Question 16
Win Limited commenced the business of operating a three star hotel in Tirupati on 1-4-2014.
It furnishes you the following information:
(i)
(ii)

(iii)

Cost of land (acquired in June 2012)

Cost of construction of hotel building
Financial year 2012-13
Financial year 2013-14
Plant and Machineries (all new) acquired during financial year 2013-14
[All the above expenditures were capitalized in the books of the
company]
Net profit before depreciation for the financial year 2014-15

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` 60 lakhs
` 30 lakhs
` 150 lakhs
` 30 lakhs

` 80 lakhs

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Income-tax

Determine the amount eligible for deduction under section 35AD of the Income-tax Act, 1961,
for the assessment year 2015-16.
Answer
Under section 35AD, 100% of the capital expenditure incurred during the previous year, wholly
and exclusively for the specified business, which includes the business of building and
operating a hotel of two-star or above category anywhere in India which commences its
operations on or after 1.4.2010, would be allowed as deduction from the business income.
However, expenditure incurred on acquisition of any land, goodwill or financial instrument
would not be eligible for deduction.
Further, the expenditure incurred, wholly and exclusively, for the purpose of specified
business prior to commencement of operation would be allowed as deduction during the
previous year in which the assessee commences operation of his specified business. A
condition has been inserted that such amount incurred prior to commencement should be
capitalized in the books of account of the assessee on the date of commencement of its
operations.
Accordingly, the deduction under section 35AD for the A.Y.2015-16 in the case of Win Ltd.
would be calculated as follows, assuming that the expenditures were capitalised in the books
of the company on 1.4.2014, being the date of commencement of operationsParticulars
Cost of land (not eligible for deduction under section 35AD)
Cost of construction of hotel building (` 30 lakhs + ` 150 lakhs)
Cost of plant and machinery
Deduction under section 35AD

` (in lakhs)
Nil
180
30
210

Note:(1) For A.Y.2015-16, the loss from specified business of operating a three star hotel would
be ` 130 lakhs (i.e. ` 210 lakhs ` 80 lakhs). As per section 73A, any loss computed in
respect of the specified business referred to in section 35AD shall be set off only against
profits and gains, if any, of any other specified business. The unabsorbed loss, if any, will
be carried forward for set off against profits and gains of any specified business in the
following assessment year.
(2) Since the entire cost of plant and machinery and building qualifies for deduction under
section 35AD, the same does not qualify for deduction under section 32.
Question 17
MNP Ltd. commenced operations of the business of a new four-star hotel in Chennai on
1.4.2014. The company incurred capital expenditure of ` 40 lakh during the period January,
2014 to March, 2014 exclusively for the above business, and capitalized the same in its books

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of account as on 1st April, 2014. Further, during the previous year 2014-15, it incurred capital
expenditure of ` 2.5 crore (out of which ` 1 crore was for acquisition of land) exclusively for
the above business. Compute the income under the head Profits and gains of business or
profession for the assessment year 2015-16, assuming that MNP Ltd. has fulfilled all the
conditions specified for claim of deduction under section 35AD and has not claimed any
deduction under Chapter VI-A under the heading C. Deductions in respect of certain
incomes. The profits from the business of running this hotel (before claiming deducting under
section 35AD) for the assessment year 2015-16 is ` 80 lakhs. Assume that the company also
has another existing business of running a four-star hotel in Kanpur, which commenced
operations 5 years back, the profits from which was ` 130 lakhs for assessment year 2015-16.
Would MNO Ltd. be entitled to deduction under section 35AD if it transfers the operation of the
hotel in Chennai to PQR Ltd, while continuing to own the said hotel?
Answer
Computation of income under the head Profit and gains of business or profession of
MNP Ltd. for A.Y. 2015-16
Particulars

`
(in lakh)

Profits from the specified business of new four-star hotel in

Chennai (before providing deduction under section 35AD)

`
(in lakh)
80

Less: Deduction under section 35AD

Capital expenditure incurred during the P.Y. 2014-15 (excluding
the expenditure incurred on acquisition of land) = ` 250 lakh
` 100 lakh (See Notes 1 & 2 below)

150

Capital expenditure incurred during January 2014 to March 2014

(i.e., prior to commencement of business) and capitalized in the
books of account as on 1.4.2014 (See Note 3 below)

40

Total deduction under section 35AD for A.Y.2015-16

Income from the specified business of new hotel in Chennai

190
(110)

Profit from the existing business of running a four-star hotel in

Kanpur (See Note 4 below)

130

Net profit from business after set-off of loss of specified business

against profits of another specified business under section 73A

20

Notes:
(1) According to the provisions of section 35AD, an assessee shall be allowed a deduction in
respect of 100% of the capital expenditure incurred wholly and exclusively for the
purpose of the specified business which, inter alia, includes the business in the nature of

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building and operating a new hotel of two-star or above category, anywhere in India.
Therefore, the newly commenced four-star hotel business of MNP Ltd qualifies for
deduction under section 35AD, since it has fulfilled all the conditions for claim of
deduction under that section.
(2) The expenditure on acquisition of land, however, does not qualify for deduction under
section 35AD.
(3) The capital expenditure incurred prior to commencement of specified business shall be
allowed as deduction under section 35AD(1) in the year of commencement of specified
business, if the same is capitalized in the books of accounts of the assessee on the date
of commencement of its operations. Therefore, the expenditure of ` 40 lakh is allowable
as deduction in A.Y. 2015-16, since it has been capitalized in the books of accounts of
MNP Ltd. as on 1.4.2014.
(4) As per section 73A, the loss computed under section 35AD in respect of a specified business
can be set off against the profit of another specified business. Building and operating a hotel
of two-star and above category, anywhere in India, is a specified business, therefore, the loss
from the business of new four-star hotel in Chennai can be set-off against the income of the
existing four-star hotel in Kanpur.
(5) Section 35AD(6A) provides that where the assessee, MNO Ltd., builds a hotel of two-star
or above category as classified by the Central Government and subsequently, while
continuing to own the hotel, transfers the operation of the said hotel to another person,
the assessee shall be deemed to be carrying on the specified business of building and
operating a hotel. Therefore, in this case, MNO Ltd. would be eligible to claim investment
linked deduction under section 35AD even if it transfers the operation of the Chennai
hotel to PQR Ltd.
Question 18
Briefly discuss about the provisions relating to deductibility of interest on capital borrowed for
the purpose of business or profession.
Answer
Under section 36(1)(iii), deduction is allowed in respect of interest on capital borrowed for the
purposes of business or profession while computing income under the head Profits and gains
of business or profession.
Further, Explanation 8 to section 43(1) clarifies that interest relatable to a period after the
asset is first put to use cannot be capitalized. Interest in respect of capital borrowed for any
period from the date of borrowing to the date on which the asset was first put to use should,
however, be capitalized in the case of extension of existing business or profession.
The proviso to section 36(1)(iii) provides that no deduction shall be allowed in respect of any
amount of interest paid, in respect of capital borrowed for acquisition of a new asset or for
extension of existing business or profession (whether capitalized in the books of account or
not) for any period beginning from the date on which the capital was borrowed for acquisition

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of the asset, till the date on which such asset was first put to use.
Question 19
Comment on the allowability of the following claim made by the assessee:
Mr. Achal, a hotelier, claimed expenditure on replacement of Linen and carpets in his hotel as
revenue expenditure.
Answer
The expenditure on replacement of linen and carpets in a hotel are in the nature of expenses
incurred for the business and are allowable as revenue expenses under section 37(1).
Question 20
What are the conditions to be satisfied for the allowability of expenditure under section 37 of
the Income-tax Act, 1961?
Answer
(1) The following conditions are to be fulfilled for the allowability of expenditure under section
37 (i)

The expenditure should not be of the nature described in section 30 to 36;

(ii)

It should not be in the nature of personal expenditure of the assessee;

(iii) The expenditure should have been laid out or expended wholly or exclusively for the
purposes of the business or profession;
(iv) It should not be in the nature of a capital expenditure;
(v) It should not have been incurred for any propose which is an offence or which is
prohibited by law.
(2) No deduction is allowable for expenditure incurred by the assessee on advertisement in
any souvenir, brochure, tract pamphlet or the like published by a political party [Section
37(2B)]
(3) As per Explanation 2 to Section 37(1), any expenditure incurred by the assessee on the
activities relating to Corporate Social Responsibilty referred to in Section 135 of the
Companies Act, 2013 shall not be deemed to be an expenditure incurred for the purpose
of business or profession. Hence, such expenditure shall be disallowed while computing
total income.
Question 21
State with reasons, for the following sub-divisions, whether the following statements are true
or false having regard to the provisions of the Income-tax Act, 1961:
(i)

For a dealer in shares and securities, securities transaction tax paid in a recognized
stock exchange is permissible business expenditure.

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(ii)

Income-tax

Where a person follows mercantile system of accounting, an expenditure of ` 25,000 has

been allowed on accrual basis and in a later year, in respect of the said expenditure,
assessee makes the payment of ` 25,000 through a cheque crossed as "& Co.,
disallowance of ` 25,000 under section 40A(3) can be made in the year of payment.

(iii) It is mandatory to provide for depreciation under section 32 of the Income-tax Act, 1961,
while computing income under the head Profits and Gains from Business and
Profession.
(iv) The mediclaim premium paid to GIC by Mr. Lomesh for his employees, by a draft, on
27.12.2014 is a deductible expenditure under section 36.
(v) Under section 35DDA, amortization of expenditure incurred under eligible Voluntary
Retirement Scheme at the time of retirement alone, can be done.
(vi) An existing assessee engaged in trading activities, can claim additional depreciation
under Section 32(1)(iia) in respect of new plant acquired and installed in the trading
concern, where the increase in value of such plant as compared to the approved base
year is more than 10%.
Answer
(i)

True : Section 36(1)(xv) allows a deduction of the amount of securities transaction tax
paid by the assessee in respect of taxable securities transactions entered into in the
course of business during the previous year as deduction from the business income of a
dealer in shares and securities.

(ii)

True : As per section 40A(3), in the case of an assessee following mercantile system of
accounting, if an expenditure has been allowed as deduction in any previous year on due basis,
and payment exceeding ` 20,000 has been made in the subsequent year otherwise than
by an account payee cheque or an account payee bank draft, then the payment so made
shall be deemed to be the income of the subsequent year in which such payment has
been made.

(iii) True : According to the Explanation 5 to section 32(1), allowance of depreciation is

mandatory. Therefore, depreciation has to be provided mandatorily while calculating
income from business / profession whether or not the assessee has claimed the same
while computing his total income.
(iv) True : Section 36(1)(ib) provides deduction in respect of premium paid by an employer to
keep in force an insurance on the health of his employees under a scheme framed in this
behalf by GIC or any other insurer. The medical insurance premium can be paid by any
mode other than cash, to be eligible for deduction under section 36(1)(ib).
(v) False : Expenditure incurred in making payment to the employee in connection with his
voluntary retirement either in the year of retirement or in any subsequent year, will be
entitled to deduction in 5 equal annual installments beginning from the year in which
each payment is made to the employee.

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(vi) False : Additional depreciation can be claimed only in respect of eligible plant and
machinery acquired and installed by an assessee engaged in the business of
manufacture or production of any article or thing or in the business of generation or
generation and distribution of power. In this case, the assessee is engaged in trading
activities and the new plant has been acquired and installed in a trading concern. Hence,
the assessee will not be entitled to claim additional depreciation under section 32(1)(iia).
Question 22
State, with reasons, the allowability of the following expenses under the Income-tax Act, 1961
while computing income from business or profession for the Assessment Year 2015-16:
(i)

Provision made on the basis of actuarial valuation for payment of gratuity

` 5,00,000. However, no payment on account of gratuity was made before due date of

(ii)
(iii)
(iv)
(v)
(vi)
(vii)

filing return.
Purchase of oil seeds of ` 50,000 in cash from a farmer on a banking day.
Tax on non-monetary perquisite provided to an employee ` 20,000.
Payment of ` 50,000 by using credit card for fire insurance.
Salary payment of ` 2,00,000 outside India by a company without deduction of tax.
Sales tax deposited in cash ` 50,000 with State Bank of India.
Payment made in cash ` 30,000 to a transporter in a day for carriage of goods

Answer
(i)

Not allowable as deduction

As per section 40A(7), no deduction is allowed in computing business income in respect
of any provision made by the assessee in his books of account for the payment of
gratuity to his employees except in the following two cases:
(1) where any provision is made for the purpose of payment of sum by way of
contribution towards an approved gratuity fund or;
(2) where any provision is made for the purpose of making any payment on account of
gratuity that has become payable during the previous year.
Therefore, in the present case, the provision made on the basis of actuarial valuation for
payment of gratuity has to be disallowed under section 40A(7), since, no payment has
been actually made on account of gratuity.
Note: It is assumed that such provision is not for the purpose of contribution towards an
approved gratuity fund.
(ii) Allowable as deduction
As per Rule 6DD, in case the payment is made for purchase of agricultural produce
directly to the cultivator, grower or producer of such agricultural produce, no
disallowance under section 40A(3) is attracted even though the cash payment for the
expense exceeds ` 20,000.

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(iii)

(iv)

(v)

(vi)

Income-tax

Therefore, in the given case, disallowance under section 40A(3) is not attracted since,
cash payment for purchase of oil seeds is made directly to the farmer.
Not allowable as deduction
Income-tax of ` 20,000 paid by the employer in respect of non-monetary perquisites
provided to its employees is exempt in the hands of the employee under section
10(10CC). As per section 40(a)(v), such income-tax paid by the employer is not
deductible while computing business income.
Allowable as deduction
Payment for fire insurance is allowable as deduction under section 36(1). Since payment
by credit card is covered under Rule 6DD, which contains the exceptions to section
40A(3), disallowance under section 40A(3) is not attracted in this case.
Not allowable as deduction
Disallowance under section 40(a)(iii) is attracted in respect of salary payment of
` 2,00,000 outside India by a company without deduction of tax at source.
Allowable as deduction
As per Rule 6DD, if the payment is made to the Government and, under the rules framed
by it, such payment is required to be made in legal tender, no disallowance under section
40A(3) is attracted even though the cash payment for the expense exceeds ` 20,000.

Therefore, in the given case, no disallowance under section 40A(3) is attracted since
payment of sales tax is covered by the above mentioned exception contained in Rule 6DD.
(vii) Allowable as deduction
The limit for attracting disallowance under section 40A(3) for payment otherwise than by
way of account payee cheque or account payee bank draft is ` 35,000 in case of
payment made for plying, hiring or leasing goods carriage. Therefore, in the present
case, disallowance under section 40A(3) is not attracted for payment of ` 30,000 made in
cash to a transporter for carriage of goods.
Question 23
Ramji Ltd., engaged in manufacture of medicines (pharmaceuticals), furnishes the following
information for the year ended 31.03.2015:
(i)

Municipal tax relating to office building ` 51,000 not paid till 30.09.2015.

(ii)

Patent acquired for ` 20,00,000 on 01.09.2014 and used from the same month.

(iii) Capital expenditure on scientific research ` 10,00,000 which includes cost of land
` 2,00,000.
(iv) Amount due from customer X, outstanding for more than 3 years, written off as bad debt
in the books ` 5,00,000.
(v) Income-tax paid ` 90,000 by the company in respect of non-monetary perquisites
provided to its employees.

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(vi) Provident fund contribution of employees ` 5,50,000 remitted in July ,2015.

(vii) Expenditure towards advertisement in souvenir of a political party ` 1,50,000.
(viii) Refund of sales tax ` 75,000 received during the year, which was claimed as expenditure
in an earlier year.
State with reasons the taxability or deductibility of the items given above under the Income-tax
Act, 1961.
Note: Computation of total income is not required.
Answer
(i)

As per section 43B, municipal tax is not deductible for A.Y. 2015-16 since it is not paid on or
before 30.09.2015, being the due date of filing the return for A.Y. 2015-16.
Note It is assumed that the company has not undertaken any international transaction
or has not entered into a Specified Domestic transaction during the year, and therefore,
does not have to file a transfer pricing report under section 92E. Therefore, the due date
of filing of return of the company would be 30th September, 2015.

(ii) Patent is an intangible asset eligible for depreciation@25%, as per section 32(2)(ii).
Since it has been acquired and put to use for more than 180 days during the previous
year 2014-15, full depreciation of ` 5,00,000 (i.e. 25% of ` 20,00,000) is allowable as
deduction.
(iii) Weighted deduction@200% is available under section 35(2AB) in respect of expenditure
incurred by a company on scientific research on in-house research and development
facility as approved by the prescribed authority. However, cost of land is not eligible for
deduction.
Deduction under section 35(2AB) = 200% of ` 8 lakhs = ` 16,00,000.
Note: It is presumed that the in-house research and development facility is approved by
the prescribed authority and is hence, eligible for weighted deducted@200% under
section 35(2AB).
(iv) Bad debts i.e. ` 5,00,000 written off in the books of account as irrecoverable is
deductible under section 36(1)(vii), provided the debt has been taken into account in
computing the income of the company in the current previous year or any of the earlier
previous years.
(v) As per section 40(a)(v), income-tax of ` 90,000 paid by the company in respect of nonmonetary perquisites provided to its employees, exempt in the employees hands under
section 10(10CC), is not deductible while computing business income of the employer
company.
(vi) The employees contribution to provident fund is taxable in the hands of the company
since it is included in the definition of income under section 2(24)(x).

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As per section 36(1)(va), provident fund contribution of employees is deductible only if

such sum is credited to the employees provident fund account on or before the due date
under the Employees Provident Fund and Miscellaneous Provisions Act, 1952. In this
case, since it is remitted after the due date under the said Act, it is not deductible. This
conclusion is supported by the Honble Gujarat High Court ruling in CIT v. Gujarat State
Road Transport Corporation [(2014) 223 Taxmann 398].
Note: The Delhi High Court, in CIT vs. Aimil Ltd.(2010) 321 ITR 508, has held that
provident fund contribution of employees is deductible in the hands of the employer even
if it is remitted after the due date under the Employees Provident Fund and
Miscellaneous Provisions Act, 1952, provided the same is remitted before the due date of
filing return of income.
(vii) Expenditure towards advertisement in souvenir of a political party is disallowed under
section 37(2B) while computing business income.
However, the same is deductible under section 80GGB from gross total income provided
the payment is made by any mode other than cash.
(viii) Refund of a trading liability is taxable under section 41(1), if a deduction was allowed in
respect of the same to the taxpayer in an earlier year. Since sales tax was claimed as
expenditure in an earlier year, refund of the same during the year would attract the
provisions of section 41(1).
Question 24
Answer the following with reference to the provisions of the Income-tax Act, 1961:
(a) Bad debt claim disallowed in an earlier assessment year, recovered subsequently. Is the
sum recovered chargeable to tax?
(b) Tax deducted at source on salary paid to employees not remitted till the due date for
filing the return prescribed in section 139. Is the expenditure to be disallowed under
section 40(a)(ia)?
(c) X Co. Ltd. paid ` 120 lakhs as compensation as per approved Voluntary Retirement
Scheme (VRS) during the financial year 2014-15. How much is deductible under section
35DDA for the assessment year 2015-16?
(d) Bad debt of ` 50,000 written off and allowed in the financial year 2012-13 recovered in
the financial year 2014-15.
Answer
(a) Recovery of a bad debt claim disallowed in the earlier year cannot be brought to tax
under section 41(4). Section 41(4) can be invoked only in a case where bad debts or part
thereof has been allowed as deduction earlier under section 36(1)(vii).
(b) The scope of section 40(a)(ia) has been expanded w.e.f. A.Y. 2015-16 to cover all sums
in respect of which tax is deductible under Chapter VII-B. Section 192, which requires

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deduction of tax at source from salary income, forms part of Chapter VII-B. Therefore,
salary payment without deduction of tax at source would attract disallowance under
section 40(a)(ia). However, only 30% of salary paid without deduction tax at source
would be disallowed under section 40(a)(ia).
(c) It is deductible in 5 equal annual instalments commencing from the previous year of
payment. ` 24 lakhs, being 1/5th of ` 120 lakhs, is deductible under section 35DDA for
the A.Y.2015-16.
(d) As per section 41(4), any amount recovered by the assessee against bad debt earlier
allowed as deduction shall be taxed as income in the year in which it is received.
Therefore, in this case, ` 50,000 would be taxable in the F.Y.2014-15 (A.Y.2015-16).
Question 25
State with reasons, whether the following statements are true or false, with regard to the
provisions of the Income-tax Act, 1961:
(a) Payment made in respect of a business expenditure incurred on 16th February, 2013 for
` 25,000 through a cheque duly crossed as "& Co." is hit by the provisions of section
40A(3).
(b) (i)

It is a condition precedent to write off in the books of account, the amount due
from debtor to claim deduction for bad debt.

(ii) Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B,
inter alia, from the amounts payable to a resident as rent or royalty, will result in
disallowance while computing the business income where the resident payee has
not paid the tax due on such income.
(c) Co-operative banks are not allowed to claim provision for bad and doubtful debts in
respect of advances made by rural branches of such banks.
Answer
(a) True : In order to escape the disallowance specified in section 40A(3), payment in
respect of the business expenditure ought to have been made through an account payee
cheque. Payment through a cheque crossed as & Co. will attract disallowance under
section 40A(3).
(b) (i)

True :
It is mandatory to write off the amount due from a debtor as not
receivable, in order to claim the same as bad debt under section 36(1)(vii).

(ii) True : Section 40(a)(ia) provides that failure to deduct tax at source from rent or
royalty payable to a resident, in accordance with the provisions of Chapter XVII-B,
will result in disallowance of 30% of such expenditure, where the resident payee has
not paid the tax due on such income.
(c) False : Sub-clause (a) of section 36(1)(viia) allows the co-operative banks to claim
deduction for provision for bad and doubtful debts in respect of advances made by rural

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branches of such banks. However, the deduction should not exceed 10% of the
aggregate average advances made by the rural branches of such banks computed in the
prescribed manner.
Question 26
Write short notes on:
(i)

Restrictions on deductions allowable to the partnership firm in respect of salary and

interest to its partners under section 40(b) of the Income-tax Act, 1961.

(ii)

Carry forward and set off of unabsorbed depreciation.

(iii) Additional depreciation.

Answer
(i)

In the case of a partnership firm, the deduction on account of interest and salary paid to
its partners are as subject to the following restrictions contained in section 40(b) (i)

It should be authorised by and in accordance with the terms of the partnership

deed.

(ii)

It should not relate to a period before the date of such deed.

(iii) Remuneration should be paid to a working partner.

(iv) The amounts allowable are subject to the following limits (1) In the case of interest
Simple interest up to 12% p.a. is allowable. This restriction is not applicable if
a person is a partner in his representative capacity in the firm and he receives
interest from the firm in his individual capacity. Similarly, the restriction is also
not applicable if a person who is a partner in his individual capacity receives
interest for and on behalf of someone else from the firm in which he is a
partner.
(2) In the case of salary, bonus, commission or remuneration paid by a firm
to its working partners It should not exceed the amount specified in the
table below For all firms
(a)

On the first ` 3,00,000 of the book profit

or in case of loss

` 1,50,000 or 90% of book

profit, whichever is more

(b)

On the balance of the book profit

@ 60%

(ii) Section 32(2) provides for carry forward of unabsorbed depreciation.

Where, in any previous year, the profits or gains chargeable are not sufficient to give full
effect to the depreciation allowance, such unabsorbed depreciation shall be added to the

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depreciation allowance for the following previous year and shall be deemed to be part of
that allowance.
If there is no depreciation allowance for that previous year, the unabsorbed depreciation
of the earlier previous year shall become the depreciation allowance of that year. The
effect of the provisions of section 32(2) is that unabsorbed depreciation brought forward
shall be deemed as the current year depreciation. Consequently, such unabsorbed
depreciation can be set-off not only against income under the head Profits and gains of
business or profession but also against income under any other head. Further, the
unabsorbed depreciation can be carried forward indefinitely till it is fully set off.
However, in the order of set-off losses under different heads of income, effect shall first
be given to current year depreciation, then to brought forward business losses and finally
to unabsorbed depreciation.
(iii) Section 32(1)(iia) provides that in the case of any new machinery or plant (other than
ships and aircraft) acquired and installed after 31.3.2005 by an assessee engaged in the
business of manufacture or production of any article or thing or in the business of
generation or generation and distribution of power, a further sum equal to 20% of the
actual cost of such machinery or plant shall be allowable as a deduction.
The additional depreciation is available to a new machinery or plant used in the
manufacture or production of any article or thing or generation or generation and
distribution of power. Additional depreciation will be taken into consideration for
computing the WDV of the relevant block of assets.
Additional depreciation is not available in respect of the following assets:
(A) any machinery or plant
(i)

which has been used in India or outside India by any other person before its
installation by the assessee; or

(ii)

installed in any office premises, residential accommodation including

accommodation used in the nature of guest house ; or

(iii) the whole of the actual cost of which is allowed as deduction (whether by way
of depreciation or otherwise) in computing the income under the head Profits
and gains of business or profession of any one previous year.
(B) any office appliances or road transport vehicles.
Question 27
Rao & Jain, a partnership firm consisting of two partners, reports a net profit of

` 7,00,000 before deduction of the following items:

(1) Salary of ` 20,000 each per month payable to two working partners of the firm (as
authorized by the deed of partnership).
(2) Depreciation on plant and machinery under section 32 (computed) ` 1,50,000.

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(3) Interest on capital at 15% per annum (as per the deed of partnership). The amount of
capital eligible for interest ` 5,00,000.
Compute:
(i)

Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.

(ii)

Allowable working partner salary for the assessment year 2015-16 as per section 40(b).

Answer
(i)

As per Explanation 3 to section 40(b), book profit shall mean the net profit as per the
profit and loss account for the relevant previous year computed in the manner laid down
in Chapter IV-D as increased by the aggregate amount of the remuneration paid or
payable to the partners of the firm if the same has been already deducted while
computing the net profit.
In the present case, the net profit given is before deduction of depreciation on plant and
machinery, interest on capital of partners and salary to the working partners. Therefore,
the book profit shall be as follows:
Computation of Book Profit of the firm under section 40(b)
Particulars
`
Net Profit (before deduction of depreciation, salary and interest)
Less: Depreciation under section 32
1,50,000
Interest @ 12% p.a. [being the maximum allowable as per
section 40(b)] (5,00,000 12%)
60,000
Book Profit

`
7,00,000

2,10,000
4,90,000

(ii) Salary actually paid to working partners = ` 20,000 2 12 = ` 4,80,000.

As per the provisions of section 40(b)(v), the salary paid to the working partners is
allowed subject to the following limits On the first ` 3,00,000 of book profit
or in case of loss
On the balance of book profit

` 1,50,000 or 90% of book profit, whichever is

more
60% of the balance book profit

Therefore, the maximum allowable working partners salary for the A.Y. 2015-16 in this
case would be:
Particulars

On the first ` 3,00,000 of book profit [(` 1,50,000 or 90% of

` 3,00,000) whichever is more]

2,70,000

On the balance of book profit [60% of (` 4,90,000 - ` 3,00,000)]

1,14,000

Maximum allowable partners salary

3,84,000

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Hence, allowable working partners salary for the A.Y. 2015-16 as per the provisions of
section 40(b)(v) is ` 3,84,000.
Question 28
During the financial year 2014-15, the following payments/expenditure were made/incurred by
Mr. Yuvan Raja, a resident individual (whose turnover during the year ended 31.3.2014 was
` 99 lacs) :
(i)

Interest of ` 12,000 was paid to Rehman & Co., a resident partnership firm, without
deduction of tax at source;

(ii)

Interest of ` 4,000 was paid as interest to Mr. R.D. Burman, a non-resident, without
deduction of tax at source;

(iii) ` 3,00,000 was paid as salary to a resident individual without deduction of tax at source;
(iv) Commission of ` 15,000 was paid to Mr. Vidyasagar on 2.7.2014. without deduction of
tax at source.
Briefly discuss whether any disallowance arises under the provisions of section
40(a)(i)/40(a)(ia) of the Income-tax Act, 1961.
Answer
Disallowance under section 40(a)(i)/40(a)(ia) of the Income-tax Act, 1961 is attracted where
the assessee fails to deduct tax at source as is required under the Act, or having deducted tax
at source, fails to remit the same to the credit of the Central Government within the stipulated
time limit.
The assessee is a resident individual, who was not subjected to tax audit during the
immediately preceding previous year i.e., P.Y.2013-14 (as his turnover was less than ` 100
lakh in that year) and the TDS obligations have to be considered bearing this in mind.
(i)

The obligation to deduct tax at source from interest paid to a resident arises under
section 194A in the case of an individual, only where he was subject to tax audit under
section 44AB in the immediately preceding previous year, i.e., P.Y.2013-14. From the
data given, it is clear that he was not subject to tax audit under section 44AB in the
P.Y.2013-14. Hence, disallowance under section 40(a)(ia) is not attracted in this case.

(ii)

In the case of interest paid to a non-resident, there is obligation to deduct tax at source
under section 195, hence non-deduction of tax at source will attract disallowance under
section 40(a)(i).

(iii) The scope of section 40(a)(ia) has been expanded w.e.f. A.Y. 2015-16 to cover all sums
in respect of which tax is deductible under Chapter VII-B. Section 192, which requires
deduction of tax at source from salary paid, is covered under Chapter VII-B. Therefore,
disallowance under section 40(a)(ia) is attracted for failure to deduct tax at source under
section 192 from salary payment. However, only 30% of the amount of salary paid

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without deduction of tax at source would be disallowed.

(iv) The obligation to deduct tax at source under section 194-H from commission paid in
excess of ` 5,000 to a resident arises in the case of an individual, only where he was
subject to tax audit under section 44AB in the immediately preceding previous year. From
the data given, it is clear that he was not subject to tax audit under section 44AB in the
P.Y.2013-14. Hence, there is no obligation to deduct tax at source under section 194H
during the P.Y. 2014-15. Therefore, disallowance under section 40(a)(ia) is not attracted
in this case.
Question 29
M/s. Arora Ltd., submits the following details of expenditure pertaining to the financial year
2014-15:
(i)

Payment of professional fees to Mr. Mani ` 50,000. Tax was not deducted at source.

(ii)

Interior works done by Mr. Hari for ` 2,00,000 on a contract basis. Payment made in the
month of March 2015. Tax deducted in March 2015 was paid on 30.06.2015.

(iii) Factory Rent paid to Mr. Rao ` 15,00,000. Tax deducted at source and paid on
01.10.2015.
(iv) Interest paid on Fixed Deposits ` 2,00,000. Tax deducted on 31.12.2014 and paid on
28.09.2015.
Examine the above with reference to allowability of the same in the assessment year 2015-16
under the Income-tax Act, 1961. You answer must be with reference to section 40(a) read with
relevant tax deduction at source provisions. Assume that the due date of filing the return of
income is 30.09.2015.
Answer
Allowability of expenses of M/s. Arora Ltd. for the A.Y. 2015-16
(i)

(ii)

(iii)

Payment of professional fees is subject to TDS under section 194J. Since no tax is
deducted at source, ` 15,000, being 30% of the expenditure of ` 50,000 is
disallowed under section 40(a)(ia).
Since the tax was deducted in March, 2015 and paid on or before the due date of
filing the return (i.e., on or before September 30th, 2015), the expenditure on interior
works will be allowed as deduction. Hence, disallowance under section 40(a)(ia) is
not attracted.
The maximum time allowable for deposit of tax deducted at source is upto the due date
of filing of return i.e., 30th September, 2015. In this case, since tax deducted under
section 194-I was paid after the due date of filing the return, ` 4,50,000 being 30% of
` 15,00,000 is disallowed under section 40(a)(ia) for the previous year 2014-15.

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(iv)

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The tax deducted at source can be deposited on or before the due date of filing of
return to avoid disallowance under section 40(a)(ia). In this case, disallowance would
not be attracted since tax deducted during December 2014 was deposited before 30th
September 2015 i.e. on 28.09.2015.

Question 30
Vinod is a person carrying on profession as film artist. His gross receipts from profession are
`
as under:
Financial year 2012-13

1,15,000

Financial year 2013-14

1,80,000

Financial year 2014-15

2,10,000

What is his obligation regarding maintenance of books of accounts for each Assessment Year
under section 44AA of Income-tax Act, 1961?
Answer
Section 44AA(1) requires every person carrying on any profession, notified by the Board in the
Official Gazette (in addition to the professions already specified therein), to maintain such
books of account and other documents as may enable the Assessing Officer to compute his
total income in accordance with the provisions of the Income-tax Act, 1961.
Thus, a person carrying on a notified profession shall be required to maintain specified books
of accounts:
(i)

if his gross receipts in all the three years immediately preceding the relevant previous
year has exceeded ` 1,50,000; or

(ii)

if it is a new profession which is setup in the relevant previous year, it is likely to exceed
` 1,50,000 in that previous year.

In the present case, Vinod is a person carrying on profession as film artist, which is a notified
profession. Since his gross receipts have not exceeded ` 1,50,000 in financial year 2012-13,
the requirement under section 44AA to compulsorily maintain the prescribed books of account
is not applicable to him.
Question 31
Ramamurthy had 4 heavy goods vehicles as on 1.4.2014. He acquired 7 heavy goods vehicles
on 27.6.2014. He sold 2 heavy goods vehicles on 31.5.2014.
He has brought forward business loss of ` 50,000 relating to assessment year 2011-12 of a
discontinued business. Assuming that he opts for presumptive taxation of income as per
section 44AE, compute his total income chargeable to tax for the assessment year 2015-16.

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Answer
Computation of total income of Mr. Ramamurthy for A.Y.2015-16
Particulars

Presumptive business income under section 44AE

4 heavy goods vehicles for 2 months (4 x ` 7,500 x 2)

60,000

Balance 2 heavy goods vehicles for 10 months (2 x ` 7,500 x 10)

1,50,000

7 heavy goods vehicles for 10 months (7 x ` 7,500 x10)

5,25,000

Business Income

7,35,000

Less: Brought forward business loss of discontinued business

Total Income

50,000
6,85,000

Note: The assessee is eligible for computing the income from goods carriages applying
the presumptive provisions of section 44AE, since he does not own more than 10 goods
carriages at any time during the previous year.
Question 32
Mr. Praveen engaged in retail trade, reports a turnover of ` 58,50,000 for the financial year
2014-15. His income from the said business as per books of account is computed at
` 3,90,000. Retail trade is the only source of income for Mr. Praveen.
(i)

Is Mr. Praveen eligible to opt for presumptive determination of his income chargeable to
tax for the assessment year 2015-16?

(ii)

If so, determine his income from retail trade as per the applicable presumptive provision.

(iii) In case Mr. Praveen does not opt for presumptive taxation of income from retail trade,
what are his obligations under the Income-tax Act, 1961?
(iv) What is the due date for filing his return of income under both the options?
Answer
(i)

Yes. Since his total turnover for the F.Y.2014-15 is below ` 100 lakhs, he is eligible to
opt for presumptive taxation scheme under section 44AD in respect of his retail trade
business.

(ii) His income from retail trade, applying the presumptive tax provisions under section
44AD, would be ` 4,68,000, being 8% of ` 58,50,000.
(iii) In case he does not opt for the presumptive taxation scheme under section 44AD, and
claims that his income is ` 3,90,000 (which is lower than the presumptive business
income of ` 4,68,000), he has to maintain books of account as required under section

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44AA(2) and also get them audited and furnish a report of such audit under section
44AB, since his total income exceeds the basic exemption limit of ` 2,50,000.
(iv) In case he opts for the presumptive taxation scheme under section 44AD, the due date
would be 31st July, 2015.
In case he does not opt for the presumptive taxation scheme and claims that his income is
` 3,90,000 as per books of account, then he has to get his books of account audited under
section 44AB, in which case the due date for filing of return would be 30th September, 2015.
Question 33
Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2014, he
owns 10 trucks (out of which 6 are heavy goods vehicles). On 2nd May, 2014, he sold one of
the heavy goods vehicles and purchased a light goods vehicle on 6th May, 2014. This new
vehicle could however be put to use only on 15th June, 2014.
Compute the total income of Mr. Sukhvinder for the assessment year 2015-16, taking note of
the following data :
Particulars
Freight charges collected
Less : Operational expenses
Depreciation as per section 32
Other office expenses
Net Profit
Other business and non- business income

`
8,70,000

6,25,000
1,85,000
15,000

8,25,000
45,000
70,000

Answer
Section 44AE would apply in the case of Mr. Sukhvinder since he is engaged in the business
of plying goods carriages and owns not more than ten goods carriages at any time during the
previous year.
Section 44AE provides for computation of business income of such assessees on a
presumptive basis. The income shall be deemed to be ` 7,500 from each goods carriage
(whether it is heavy or light vehicle) - for every month or part the month during which such
carriage vehicle is owned by the assessee in the previous year or such higher sum as
declared by the assessee in his return of income.
Mr. Sukhvinders business income calculated applying the provisions of section 44AE is
` 9,07,500 (See Notes 1 & 2 below) and his total income would be ` 9,77,500.
However, as per section 44AE(7), Mr. Sukhvinder may claim lower profits and gains if he
keeps and maintains proper books of account as per section 44AA and gets the same audited
and furnishes a report of such audit as required under section 44AB. If he does so, then his

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income for tax purposes from goods carriages would be ` 45,000 instead of ` 9,77,500 and
his total income would be ` 1,15,000.
Notes :
1.

Computation of total income of Mr. Sukhvinder for A.Y. 2015-16

Particulars

Presumptive Where books

income
are maintained

Income from business of plying goods carriages

[See Note 2 Below]
Other business and non business income
Total Income
2.

9,07,500
70,000
9,77,500

45,000
70,000
1,15,000

Calculation of presumptive income as per section 44AE

Type of carriage
(1)
9 goods carriage held throughout the year
1 goods carriage held upto 2nd May
1 goods carriage held from 6th May

No. of
months
(2)
12
2

Rate per
month
(3)
7,500
7,500

11

7,500
Total

Amount
(4)
8,10,000
15,000
82,500
9,07,500

Question 34
X Ltd. follows mercantile system of accounting. After negotiations with the bank, interest of ` 4
lakhs (including interest of ` 1.2 lakhs pertaining to year ended 31.03.2015 has been converted
into loan. Can the interest of ` 1.2 lakhs so capitalized be claimed as business expenditure?
Answer
Under section 43B, interest on term loans and advances to scheduled banks shall be allowed
only in the year of payment of such interest irrespective of the method of accounting followed
by the assessee.
Explanation 3D to section 43B provides that if any interest payable by the assessee is
converted into a loan, the interest so converted and not actually paid shall not be deemed as
actual payment, and hence would not be allowed as deduction. Therefore, the interest of ` 1.2
lakhs converted into loan cannot be claimed as business expenditure.
Question 35
Mr. B.A. Patel, a non-resident, operates an aircraft between London to Ahmedabad. For the
Financial year ended on 31st March, 2015, he received the amounts as under:
(i)

For carrying passengers from Ahmedabad ` 50 lacs.

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(ii)

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For carrying passengers from London ` 75 lacs received in India.

(iii) For carrying of goods from Ahmedabad ` 25 lacs.

The total expenditure incurred by Mr. B.A. Patel for the purposes of the business for the
financial year 2014-15 was ` 1.4 crores.
Compute the income of Mr. B.A. Patel under the head Profits and Gains from business or
profession for the financial year ended on 31st March 2015 relevant to assessment year 2015-16.
Answer
Under section 44BBA, in case of an assessee, being a non-resident, engaged in the business
of operation of aircraft, a sum equal to 5% of the aggregate of the following amounts shall be
deemed to be his business income:
(a) the amount paid or payable, whether in or out of India, to the assessee on account of
carriage of passengers, goods etc. from any place in India; and
(b) the amount received or deemed to be received in India by the assessee on account of
carriage of passengers, goods etc. from any place outside India.
Hence, the income of Mr. B.A. Patel chargeable to tax in India under the head Profits and
Gains of business or profession is determined as under:
Particulars
(i) For carrying passengers from Ahmedabad
(ii) For carrying passengers from London, amount received in India
(iii) For carrying goods from Ahmedabad
Total

`
50,00,000
75,00,000
25,00,000
1,50,00,000

Hence, income from business computed on presumptive basis as per section 44BBA is
` 7,50,000, being 5% of ` 1,50,00,000.
Note: No deduction is allowable in respect of any expenditure incurred for the purpose of the
business.
Question 36
List six items of expenses which otherwise are deductible shall be disallowed, unless
payments are actually made within the due date for furnishing the return of income under
Section 139(1). When can the deduction be claimed, if paid after the said date?
Answer
Section 43B provides that the following expenses shall not be allowed as deduction unless the
payments are actually made within the due date for furnishing the return of income under
section 139(1):
(i)

Any tax, duty, cess or fees under any law in force.

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(ii)

Income-tax

Any sum payable by the assessee as an employer by way of contribution to provident

fund or superannuation fund or gratuity fund or any other fund for the welfare of the
employees;

(iii) Any bonus or commission for services rendered payable to employees;

(iv) Any interest on any loan or borrowings from any public financial institution or State
financial corporation or State industrial investment corporation;
(v) Interest on loans and advances from a scheduled bank;
(vi) Any sum paid as an employer in lieu of earned leave at the credit of his employee.
In case the payment is made after the due date of filing of return of income, deduction can be
claimed only in the year of actual payment.
Question 37
Mr. Asim, a 60 year old individual, engaged in the business of roasting and grounding of
coffee, derives income of ` 10 lacs during the financial year 2014-15. Compute the tax
payable by him assuming he has not earned any other income during the financial year 201415. What would be your answer if Mr. Asim is also engaged in the business of growing and
curing coffee?
Answer
If Mr. Asim is engaged only in the business of roasting and grounding of coffee (and not
growing and curing of coffee), his entire income of ` 10 lakhs would be treated as business
income and his tax liability would be ` 1,23,600 (` 1,20,000+` 2,400+` 1,200).
If Mr. Asim is also engaged in the business of growing and curing of coffee, in addition to
roasting and grounding of coffee, the provisions of Rule 7B of the Income-tax Rules, 1962
would apply. As per Rule 7B, where income is derived from the sale of coffee grown, cured,
roasted and grounded by the seller in India, 40% of such income shall be treated as business
income and the balance as agricultural income.
Therefore, in such a case, the business income would be 40% of ` 10,00,000
= ` 4,00,000
Calculation of tax liability for A.Y 2015-16
Particulars
Tax on ` 10,00,000 [being the aggregate of non-agricultural income (i.e.
` 4,00,000) and agricultural income (i.e. ` 6,00,000)]
Less: Tax on ` 9,00,000 [being aggregate of agricultural income (i.e.
` 6,00,000) and basic exemption limit (i.e. ` 3,00,000)]
Less: Rebate u/s 87A

The Institute of Chartered Accountants of India

`
1,20,000

1,00,000
20,000
2,000
18,000

Profits and Gains of Business or Profession

Add: Education cess @ 2%
Secondary and higher education cess @ 1%
Total tax liability

4.128
360
180
18,540

Question 38
Mr. Tenzingh is engaged in composite business of growing and curing (further processing)
coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant
information pertaining to the year ended 31.3.2015 are given below:
Particulars

WDV of car as on 1.4.2014

WDV of machinery as on 1.4.2014 (15% rate)
Expenses incurred for growing coffee
Expenditure for curing coffee
Sale value of cured coffee

3,00,000
15,00,000
3,10,000
3,00,000
22,00,000

Besides being used for agricultural operations, the car is also used for personal use;
disallowance for personal use may be taken at 20%. The expenses incurred for car running
and maintenance are ` 50,000. The machines were used in coffee curing business operations.
Compute the income arising from the above activities for the assessment year 2015-16. Show
the WDV of the assets as on 31.3.2015.
Answer
Where an assessee is engaged in the composite business of growing and curing of coffee, the
income will be segregated between agricultural income and business income, as per Rule 7B
of the Income-tax Rules, 1962.
As per the above Rule, income derived from sale of coffee grown and cured by the seller in
India shall be computed as if it were income derived from business, and 25% of such income
shall be deemed to be income liable to tax. The balance 75% will be treated as agricultural
income.
Particulars
Sale value of cured coffee
Less: Expenses for growing coffee
Car expenses (80% of ` 50,000)
Depreciation on car (80% of 15% of
` 3,00,000)
Total costs of agricultural operations

Expenditure for coffee curing operations

3,00,000

The Institute of Chartered Accountants of India

`
3,10,000
40,000
36,000
3,86,000

`
22,00,000

4.129

Income-tax

Add: Depreciation on machinery

2,25,000
(15% of 15,00,000) (See Computation below)
Total cost of the curing operations
Total cost of composite operations
Total profits from composite activities

5,25,000
_9,11,000
12,89,000

Amount regarded as business income (25% of above)

Amount treated as agricultural income (75% of above)

3,22,250
9,66,750

Computation of value of depreciable assets as on 31.3.2015

Particulars
Car

Opening value as on 1.4.2014

Depreciation thereon at 15%
Less: Disallowance @20% for personal use
Depreciation actually allowed

`
3,00,000

45,000
9,000
36,000

Closing value as on 31.3.2015

Machinery Opening value as on 1.4.2014
Less: Depreciation @ 15%

2,64,000
15,00,000
2,25,000

Closing value as on 31.3.2015

12,75,000

Explanation 7 to section 43(6) provides that in cases of composite income, for the purpose of
computing written down value of assets acquired before the previous year, the total amount of
depreciation shall be computed as if the entire composite income of the assessee (and not just
25%) is chargeable under the head Profits and gains of business or profession. The
depreciation so computed shall be deemed to have been actually allowed to the assessee.
Question 39
Miss Vivitha, a resident and ordinarily resident in India, has derived the following income from
various operations (relating to plantations and estates owned by her) during the year ended
31-3-2015:
S. No.
(i)
(ii)
(iii)

Particulars
Income from sale of centrifuged latex processed from rubber plants
grown in Darjeeling.
Income from sale of coffee grown and cured in Yercaud, Tamil
Nadu.
Income from sale of coffee grown, cured, roasted and grounded, in
Colombo. Sale consideration was received at Chennai.

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`
3,00,000
1,00,000
2,50,000

Profits and Gains of Business or Profession

(iv)
(v)

Income from sale of tea grown and manufactured in Shimla.

Income from sapling and seedling grown in a nursery at Cochin.
Basic operations were not carried out by her on land.

4.130

4,00,000
80,000

You are required to compute the business income and agricultural income of Miss Vivitha for
the assessment year 2015-16.
Answer
Computation of business income and agricultural income of Ms. Vivitha for the A.Y.2015-16
Sr.
No.
(i)
(ii)
(iii)

(iv)
(v)

Source of income

Gross
(`)

Business
income
%
`
Sale of centrifuged latex from rubber 3,00,000 35% 1,05,000
plants grown in India.
Sale of coffee grown and cured in 1,00,000 25%
25,000
India.
Sale of coffee grown, cured, roasted 2,50,000 100% 2,50,000
and grounded outside India. (See
Note 1 below)
Sale of tea grown and manufactured 4,00,000 40% 1,60,000
in India
Saplings and seedlings grown in
nursery in India (See Note 2 below)
Nil
80,000
Total
5,40,000

Agricultural
income
`
1,95,000
75,000
-

2,40,000

80,000
5,90,000

Notes:
1.

Where income is derived from sale of coffee grown, cured, roasted and grounded by the
seller in India, 40% of such income is taken as business income and the balance as
agricultural income. However, in this question, these operations are done in Colombo, Sri
lanka. Hence, there is no question of such apportionment and the whole income is
taxable as business income. Receipt of sale proceeds in India does not make this
agricultural income. In the case of an assessee, being a resident and ordinarily resident,
the income arising outside India is also chargeable to tax.

2.

Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income whether or not
the basic operations were carried out on land.

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4.131

Income-tax

Question 40
Mr. Tony has estates in Rubber, Tea and Coffee. He derives income from them. He has also a
nursery wherein he grows and sells plants. For the previous year ending 31.3.2015, he
furnishes the following particulars of his sources of income from estates and sale of plants.
You are requested to compute the taxable income for the Assessment Year 2015-16:
Sl. No.

Particulars

(i)

Manufacture of Rubber

5,00,000

(ii)

Manufacture of Coffee grown and cured

3,50,000

(iii)

Manufacture of Tea

7,00,000

(iv)

Sale of plants from Nursery

1,00,000

Answer
Computation of taxable income of Mr. Tony for A.Y.2015-16
Particulars

(a)

Business
Income
(`)

Income from manufacture of rubber (Rule 7A)

Business income is 35% of ` 5,00,000

1,75,000

Agricultural income is 65% of ` 5,00,000

(b)

3,25,000

Income from growing and curing of coffee (Rule 7B)

Business income is 25% of ` 3,50,000

87,500

Agricultural income is 75% of ` 3,50,000

(c)

2,62,500

Income from manufacture of tea (Rule 8)

Business income is 40% of ` 7,00,000

2,80,000

Agricultural income is 60% of ` 7,00,000

(d)

Agricultural
Income
(`)

Income from sale of plants in nursery is agricultural

income [See Note below]

4,20,000
Nil

1,00,000

5,42,500

11,07,500

Note: Explanation 3 to Section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income, whether or not the
basic operations were carried out on land.
Question 41
Mr. Gupta is having a trading business and his Trading and Profit & Loss Account for the
financial year 2014-15 is as under:

The Institute of Chartered Accountants of India

Profits and Gains of Business or Profession

Particulars
To Opening stock

Amount
(` )

Particulars

49,00,000 By Closing stock

To Gross profit

20,50,000

Total

70,50,000 Total

Salary to employees (Including

Contribution to PF)
Donation to Prime Minister Relief
Fund

Amount
(` )

1,00,000 By Sales

To Purchase

4.132

70,00,000
50,000
70,50,000

5,00,000 By Gross Profit b/d

20,50,000

1,00,000

Provision for bad debts

50,000

Bonus to employees

50,000

Interest on bank loan

50,000

Family planning expenditure

incurred on employees

20,000

Depreciation

30,000

Income-tax

1,00,000

To Net profit

11,50,000

Total

20,50,000 Total

20,50,000

Other information:
(i)

Depreciation allowable ` 40,000 as per Income-tax Rules, 1962.

(ii)

No deduction of tax at source on payment of interest on bank loan has been made.

(iii) Payment of bonus to workers made in the month of October, 2014 on the occasion of
Diwali festival.
(iv) Out of salary, ` 25,000 pertains to his contributions to recognized provident fund which
was deposited after the due date of filing return of income. Further, employees
contribution of ` 25,000 was also deposited after the due date of filing return of income.
Calculate gross total income of Mr. Gupta for the Assessment Year 2015-16.
Answer
Computation of Gross Total Income of Mr. Gupta for the A.Y. 2015-16
Particulars
Income from Business or profession
Net profit as per Profit and Loss Account

The Institute of Chartered Accountants of India

`
11,50,000

4.133

Income-tax

Add : Expenses not deductible

Donation to Prime Minister Relief Fund (Refer Note 1)
Provision for bad debts (Refer Note 2)
Family planning expenditure incurred on employees
(Refer Note 3)
Depreciation as per Profit and Loss Account
Income-tax (Refer Note 4)
Employers contribution to recognized provident fund
(Note 5)
Less : Expense allowed
Depreciation as per Income-tax Rules, 1962
Add : Employees contribution included in income as per
Section 2(24)(x) (Refer Note 6)
Business Income / Gross Total Income

1,00,000
50,000
20,000
30,000
1,00,000
25,000

3,25,000
14,75,000
40,000
14,35,000
25,000
14,60,000

Notes:(1) Donation to Prime Minister Relief Fund is not allowed as deduction from the business
income. It is allowed as deduction under section 80G from the gross total income.
(2) Provisions for bad debts is allowable as deduction under section 36(1)(viia) (subject to
the limits specified therein) only in case of banks, public financial institutions, State
Financial Corporation and State Industrial Investment Corporation. Therefore, it is not
allowable as deduction in the case of Mr. Gupta.
(3) Expenditure on family planning is allowed as deduction under section 36(1)(ix) only to a
company assessee. Therefore, such expenditure is not allowable as deduction in the
hands of Mr. Gupta.
(4) Income-tax paid is not allowed as deduction as per the provisions of section 40(a)(ii).
(5) Since, Mr. Guptas contribution (by the employer) to recognized provident fund is
deposited after the due date of filing return of income, the same is disallowed as per
provisions of section 43B.
(6) Employees contribution is includible in the income of the employer by virtue of Section
2(24)(x). The deduction for the same is not provided for as it was deposited after the due
date. It has been assumed that it has not been already debited in the given profit and
loss account.
(7) TDS provisions under section 194A are not attracted in respect of payment of interest on
bank loan. Therefore, disallowance under section 40(a)(ia) is not attracted in this case.

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Profits and Gains of Business or Profession

4.134

(8) Since, the payment of bonus is made in October 2014, hence, no disallowance is
attracted.
Question 42
Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit &
Loss Account for the year ended 31.03.2015:
Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2015
Particulars
To Opening Stock
To Purchase of Raw Materials
To Manufacturing Wages & Expenses
To Gross Profit

To Administrative charges
To State VAT penalty
To State VAT paid

`
71,000
16,99,000

Particulars

By Sales

32,00,000

By Closing stock

2,00,000

5,70,000
10,60,000

________

34,00,000

34,00,000

3,26,000
5,000
1,10,000

To General Expenses

54,000

To Interest to Bank

60,000

By Gross Profit

10,60,000

By
Dividend
from
domestic companies
By
Income
agriculture (net)

from

15,000
1,80,000

(On machinery term loan)

To Depreciation

2,00,000

To Net Profit

5,00,000
12,55,000

12,55,000

Following are the further information relating to the financial year 2014-15:
(i)

Administrative charges include ` 46,000 paid as commission to brother of the assessee.

The commission amount at the market rate is ` 36,000.

(ii)

The assessee paid ` 33,000 in cash to a transport carrier on 29.12.2014. This amount is
included in manufacturing expenses (Assume that the provisions relating to TDS are not
applicable to this payment.)

(iii) A sum of ` 4,000 per month was paid as salary to a staff throughout the year and this
has not been recorded in the books of account.

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4.135

Income-tax

(iv) Bank term loan interest actually paid upto 31.03.2015 was ` 20,000 and the balance was
paid in October 2015.
(v) Housing loan principal repaid during the year was ` 50,000 and it relates to residential
property occupied by him. Interest on housing loan was ` 23,000. Housing loan was
taken from Canara Bank. These amounts were not dealt with in the profit and loss
account given above.
(vi) Depreciation allowable under the Act is to be computed on the basis of following
information:
Plant & Machinery (Depreciation rate @ 15%)

Opening WDV (as on 01.04.2014)

12,00,000

Additions during the year (used for more than 180 days)

2,00,000

Total additions during the year

4,00,000

Note: Ignore additional depreciation under section 32(1)(iia)

Compute the total income of Mr. Raju for the assessment year 2015-16.
Note: Ignore application of section 14A for disallowance of expenditures in respect of any
exempt income.
Answer
Computation of total income of Mr. Raju for the A.Y. 2015-16
Particulars

Profits and gains of business or profession

Net profit as per profit and loss account
Add:

5,00,000

Excess commission paid to brother disallowed under

section 40A(2)

10,000

Disallowance under section 40A(3) is not attracted since

the limit for one time cash payment is ` 35,000 in respect
of payment to transport operators. Therefore, amount of
` 33,000 paid in cash to a transport carrier is allowable
as deduction.

Nil

Salary paid to staff not recorded in the books (Assuming

that the expenditure is in the nature of unexplained
expenditure and hence, is deemed to be income as per
section 69C and would be taxable @ 30% under section
115BBE no deduction allowable in respect of such
expenditure) [See Note 1 below]

48,000

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Profits and Gains of Business or Profession

Bank term loan interest paid after the due date of filing of
return under section 139(1) disallowed as per section
43B
State VAT penalty paid disallowed [See Note 2 below]
Depreciation debited to profit and loss account

4.136

40,000

5,000
2,00,000

3,03,000
8,03,000

Less:

Dividend from domestic companies [Exempt under

section 10(34)]

15,000

Income from agriculture [Exempt under section 10(1)]

1,80,000

Depreciation under the Income-tax Act, 1961 (As per

working note)

2,25,000

4,20,000
3,83,000

Income from house property

Annual value of self-occupied property
Less:

Deduction under section 24(b) interest on housing loan

Nil
23,000

Gross Total Income

Less:

Deduction under section 80C in respect of Principal

repayment of housing loan

Total Income

(23,000)
3,60,000
50,000
3,10,000

Working Note:
Computation of depreciation under the Income-tax Act, 1961
Particulars
Depreciation@15% on ` 14 lakh (Opening WDV of ` 12 lakh plus assets
purchased during the year and used for more than 180 days ` 2 lakh)
Depreciation @7.5% on ` 2 lakh (Cost of assets used for less than 180 days)

`
2,10,000
15,000
2,25,000

Notes (Alternate views):

1.

It is also possible to take a view that the salary not recorded in the books of account was
an erroneous omission and that the assessee has offered satisfactory explanation for the
same. In such a case, the same should not be added back as unexplained expenditure,
but would be allowable as deduction while computing profits and gains of business and
profession.

2.

Where the imposition of penalty is not for delay in payment of sales tax or VAT but for
contravention of provisions of the Sales Tax Act (or VAT Act), the levy is not

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4.137

Income-tax

compensatory and therefore, not deductible. However, if the levy is compensatory in

nature, it would be fully allowable. Where it is a composite levy, the portion which is
compensatory is allowable and that portion which is penal is to be disallowed.
Since the question only mentions State VAT penalty paid and the reason for levy of
penalty is not given, it has been assumed that the levy is not compensatory and
therefore, not deductible. It is, however, possible to assume that such levy is
compensatory in nature and hence, allowable as deduction. In such a case, the total
income would be ` 3,05,000.
Question 43
Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account
for the year ended 31st March, 2015:
Trading and Profit and Loss Account for the year ended 31.03.2015
Particulars
To Opening stock
To Purchases
To Gross Profit

To Salary
To Rent and rates
To Interest on loan
To Depreciation
To Printing & stationery
To Postage & telegram
To Loss on sale of shares
(Short term)
To Other general expenses
To Net Profit

Particulars

90,000 By Sales
10,04,000 By Income from UTI
3,06,000 By Closing stock
14,00,000

12,11,500
2,400
1,86,100
14,00,000

60,000 By Gross profit b/d

36,000
15,000
1,05,000
23,200
1,640
8,100

3,06,000

7,060
50,000
3,06,000

3,06,000

Additional Information:
(i)

(ii)

It was found that some stocks were omitted to be included in both the Opening and
Closing Stock, the values of which were:

` 9,000
Opening stock
Closing stock
` 18,000
Salary includes ` 10,000 paid to his brother, which is unreasonable to the extent of
` 2,000.

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Profits and Gains of Business or Profession

4.138

(iii) The whole amount of printing and stationery was paid in cash by way of one time payment.
(iv) The depreciation provided in the Profit and Loss Account ` 1,05,000 was based on the
following information :
The written down value of plant and machinery is ` 4,20,000 as on 01.04.2014. A new
plant falling under the same block of depreciation was bought on 1.7.2014 for ` 70,000.
Two old plants were sold on 1.10.2014 for ` 50,000.
(v) Rent and rates includes sales tax liability of ` 3,400 paid on 7.4.2015.
(vi) Other general expenses include ` 2,000 paid as donation to a Public Charitable Trust.
You are required to advise Mr. Sivam whether he can offer his business income under section
44AD i.e. presumptive taxation.
Answer
Computation of business income of Mr. Sivam for the A.Y. 2015-16
Particulars

Net Profit as per profit and loss account

Add:

`
50,000

Inadmissible expenses / losses

Under valuation of closing stock
Salary paid to brother unreasonable [Section 40A(2)]
Printing and stationery paid in cash [Section 40A(3)]
Depreciation (considered separately)

18,000
2,000
23,200
1,05,000

Short term capital loss on shares

8,100

Donation to public charitable trust

2,000

1,58,300
2,08,300

Less:

Deductions items:
Under valuation of opening stock

9,000

Income from UTI [Exempt under section 10(35)]

2,400

Business income before depreciation

Less:

Depreciation (See Note 1)

11,400
1,96,900
66,000
1,30,900

Computation of business income as per section 44AD As per section 44AD, the business income would be 8% of turnover i.e., 12,11,500 x 8 /100
= ` 96,920
The business income under section 44AD is ` 96,920.

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4.139

Income-tax

As the business income under section 44AD is lower than the business income as per the
normal provisions of the Act, it is advisable for Mr. Sivam to offer his business income
under section 44AD.
Notes:
1.

Calculation of depreciation
Particulars

WDV of the block of plant & machinery as on 1.4.2014

Add : Cost of new plant & machinery

4,20,000
70,000
4,90,000

Less : Sale proceeds of assets sold

50,000

WDV of the block of plant & machinery as on 31.3.2015

Depreciation @ 15%

4,40,000
66,000

No additional depreciation is allowable as the assessee is not engaged

in manufacture or production of any article.
2.

Since sales-tax liability has been paid before the due date of filing return of income under
section 139(1), the same is deductible.

Question 44
Following is the profit and loss account of Mr. Q for the year ended 31-03-2015:
Particulars
To

Repairs on Building

To

Particulars

`
1,81,000

By

Gross Profit

6,01,000

Amount paid to IIT, Mumbai

By

I.T. Refund

8,100

for an approved scientific

By

Interest on Company

research programme

1,00,000

To

Interest

1,10,000

To

Travelling

1,30,550

To

Net Profit

93,950

Deposits

6,15,500

6,400

6,15,500

Following additional information is furnished:

(1) Repairs on building includes ` 1,00,000 being cost of building a new toilet.
(2) Interest payments include ` 50,000 on which tax has not been deducted and penalty for
contravention of Central Sales Tax Act of ` 24,000.

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Profits and Gains of Business or Profession

4.140

Compute the income chargeable under the head "Profits and gains of Business or Profession"
of Mr. Q for the year ended 31-03-2015 ignoring depreciation.
Answer
Computation of income under the head Profits and gains of business or profession of
Mr. Q for the A.Y. 2015-16
Particulars

Net profit as per profit and loss account

`
93,950

Add: Expenses not allowable

Expenses on building a new toilet Capital expenditure, hence not
allowable as per section 37(1).

1,00,000

Interest payable on which tax has not been deducted at source

[disallowed under section 40(a)] [See Note 1]

15,000

Penalty for contravention of Central Sales Tax Act [Penalty paid for
violation or infringement of any law is not allowable as deduction
under section 37(1)]

24,000

Payment to IIT, Mumbai for scientific research programme (to be

treated separately)

1,00,000

2,39,000
3,32,950

Less: Income not forming part of business income

Interest from company deposits (chargeable under the head
Income from other sources)(See Note 2 below)

6,400

Income-tax refund (not an income chargeable to tax)

8,100

_14,500
3,18,450

Less: Weighted deduction@200% under section 35(2AA) for

payment to IIT for an approved scientific research program.

2,00,000

Profit and gains of business or profession

1,18,450

Note 1. Section 40(a)(ia) provides for disallowance of 30% of any sum paid, on which tax is
deductible under Chapter XVII-B, but the same has not been deducted. Hence, ` 15,000 being
30% of ` 50,000 has to be added back while computing business income.
2. Interest on company deposits may also be treated as business income presuming that the
interest has been earned by Mr. Q out of available temporary surplus funds which are not
immediately required for his business purposes but nevertheless meant only for Mr. Qs business
activities. In such a case, income under the head Profit and gains of business or profession would
be ` 1,24,850.

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4.141

Income-tax

Question 45
Following is the profit and loss account of Mr. A for the year ended 31.3.2015:
To
To
To

To
To
To

Particulars
Repairs on building
Advertisement
Amount paid to Scientific
Research
Association
approved u/s 35
Interest
Traveling
Net Profit

`
1,30,000
51,000
1,00,000

1,10,000
1,30,000
94,500
6,15,500

Particulars
By Gross profit
By Income Tax Refund
By
Interest
from
company deposits
By Dividends

`
6,01,000
4,500
6,400

3,600

6,15,500

Following additional information is furnished:

(1) Repairs on building includes ` 95,000 being cost of raising a compound wall for the own
business premises.
(2) Interest payments include interest of ` 12,000 payable outside India to a non-resident
Indian on which tax has not been deducted and penalty of ` 24,000 for contravention of
Central Sales Tax Act.
Compute the income chargeable under the head Profits and gains of business or profession
of Mr. A for the year ended 31.3.2015 ignoring depreciation.
Answer
Profits and gains of business or profession of Mr. A for the year ended 31.3.2015
Particulars
Net profit as per profit and loss account
Add: Expenses not allowable
(i) Expenses on raising compound wall capital expenditure,
hence disallowed
(ii) Interest payable outside India to a non-resident, as tax has
not been deducted at source [Section 40(a)(i)]
(iii) Penalty for contravention of CST Act [Penalty paid for
violation or infringement of any law is not allowable as
deduction under section 37(1)]
(iv) Contribution for scientific research (to be treated separately)
Less: Income not forming part of business income
Interest from company deposits

The Institute of Chartered Accountants of India

`
94,500

95,000
12,000
24,000
1,00,000

6,400

2,31,000
3,25,500

Profits and Gains of Business or Profession

Dividend
Income-tax refund
Less: Deduction under section 35 for scientific research [See
Note below]
Profit and gains of business or profession

3,600
4,500

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14,500
3,11,000
1,75,000
1,36,000

Note: Contribution to approved scientific research association qualifies for deduction @ 175%
under section 35(1)(ii).
Question 46
Briefly explain the term "substantial interest". State three situations in which the same
assumes importance.
Answer
As per Explanation to section 40A(2), a person shall be deemed to have a substantial interest
in a business or profession, if, (1) in case where the business or profession is carried on by a company, such person who,
at any time during the previous year, is the beneficial owner of shares (not being shares
entitled to a fixed rate of dividend, whether with or without a right to participate in profits),
carrying not less than 20% of the voting power.
(2) In any other case, such person who, at any time during the previous year, is beneficially
entitled to not less than 20% of the profits of such business or profession.
Following are the situations under which the substantial interest assumes importance (i)

Taxability of deemed dividend under section 2(22)(e);

(ii)

Disallowance of excessive or unreasonable expenditure under section 40A(2) to an

individual who has a substantial interest in the business or profession of the assessee,
and

(iii) Clubbing of salary income of spouse, under section 64(1)(ii) in respect of remuneration
received by the spouse from a concern in which the individual has a substantial interest.
Question 47
Raghav Industries Ltd. furnishes you the following information for the year ended 31-03-2015:
(i)

Scientific research expenditure related to its business ` 2,40,000 fully revenue in nature.

(ii)

Building acquired for scientific research (including cost of land ` 5,00,000) in June 2014
for ` 12,00,000.

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Income-tax

(iii) Amount paid to Indian Institute of Science, Bangalore for scientific research
` 50,000.
(iv) Demerger expenses incurred in financial year 2013-14 ` 5,00,000.
(v) Contribution to the account of employees as per pension scheme referred to in section
80CCD amounted to ` 30,00,000. Amount above 10% of the salary of employees is
` 7,00,000.
(vi) Amount recovered from employees towards provident fund contribution ` 12,00,000 of
which amount remitted upto the end of the year was ` 7,00,000 and the balance was
remitted before the 'due date' for filing the return prescribed in Section 139(1).
(vii) Tax on non-monetary perquisites provided to the employees, borne by the employer
` 4,50,000.
(viii) Gain due to change in the rate of exchange of foreign currency ` 1,00,000 related to
import of machinery. The machinery was acquired two years ago and put to regular use
since then.
Explain in brief how the above said items would be dealt with for the A.Y. 2015-16.
Note: Computation of total income not required.
Answer
(i)

The entire revenue expenditure of ` 2,40,000 on scientific research related to the

business of the company qualifies for deduction under section 35(1)(i).
Note If Raghav Industries Ltd. is a company engaged in the business of biotechnology or in
any business of manufacture or production of any article or thing, not being an article or thing
specified in the list of the Eleventh Schedule, it would be entitled to a weighted deduction of `
4,80,000 (200% of ` 2,40,000, being the revenue expenditure on scientific research related
to its business) under section 35(2AB), if the in-house research and development facility is
approved by the prescribed authority and the company has entered into an agreement with
the prescribed authority for cooperation in such research and development facility and for
audit of accounts maintained for that facility.

(ii) As per section 35(1)(iv) read with section 35(2), if any capital expenditure (other than
expenditure on acquisition of land) is incurred on scientific research related to the
business carried on by the assessee, the whole of such capital expenditure is allowable
as deduction in the previous year in which it is incurred.
Therefore,
` 7,00,000 (i.e. ` 12,00,000 ` 5,00,000, being the cost of land) is allowable as
deduction for the A.Y.2015-16. It is assumed that the scientific research is related to the
business of Raghav Industries Ltd.
(iii) The amount of ` 50,000 paid to Indian Institute of Science, Bangalore, for scientific
research qualifies for a weighted deduction@175% of the sum paid as per section
35(1)(ii). Therefore, Raghav Industries Ltd. would be entitled to a deduction of
` 87,500 (i.e., 175% of ` 50,000) for the A.Y.2015-16.

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(iv) As per section 35DD, one-fifth of the expenditure incurred on demerger would be
allowable as deduction for five successive previous years beginning from previous year
2013-14. Therefore, in the previous year 2014-15, ` 1,00,000, being one-fifth of
` 5,00,000 would be allowable as deduction.
(v) The employers contribution to the account of an employee under a pension scheme
referred to in section 80CCD, upto 10% of salary of the employee in the previous year, is
allowable as deduction under section 36(1)(iva) while computing business income.
Disallowance under section 40A(9) would be attracted only in respect of the amount in
excess of 10% of salary. Accordingly, ` 23 lakhs would be allowed as deduction and ` 7
lakhs would be disallowed.
(vi) As per section 2(24)(x), the amount of provident fund contribution recovered from
employees i.e. ` 12 lakhs would be taxable as income of Raghav Industries Ltd.
However, the company can claim deduction under section 36(1)(va) of amount credited
to the account of the employee in the provident fund before the due date under the
relevant Act.
If ` 7 lakhs has been remitted before the said due date, the same is allowable as
deduction. If it has not been so remitted, then the same is not allowable as deduction.
The deduction would be restricted to the amount remitted before the due date.
The balance ` 5 lakhs remitted after the due date under the said Act but before the due
date of filing the return is not allowable as deduction.
(vii) The tax of ` 4,50,000 borne by the employer on non-monetary perquisites provided to
the employees is disallowed under section 40(a)(v).
(viii) As per section 43A, the gain of ` 1,00,000, arising at the time of making payment in
respect of an imported machinery, due to change in rate of exchange of foreign currency,
has to be reduced from the actual cost of machinery, and depreciation would be
computed on such reduced cost.
Question 48
Explain the tax treatment of Limited Liability Partnership under the Income-tax Act, 1961.
Answer
The taxation scheme of LLPs in the Income-tax Act, 1961 is on the same lines as applicable for
general partnerships, i.e. tax liability would be attracted in the hands of the LLP and tax
exemption would be available to the partners. Therefore, the same tax treatment would be
applicable for both general partnerships and LLPs.
The rate of income-tax applicable to LLPs is the same as the rate applicable for firms i.e. 30% of
total income.
The provisions of section 40(b) requiring payment of remuneration only to working partner in
accordance with the terms of the partnership deed for a period commencing on or after the date
of the partnership deed, would apply to LLPs as well. Further, disallowance of interest in excess

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of 12% per annum and salary exceeding the prescribed percentage of book profit would also be
applicable in the case of LLPs.
However, whereas a partnership firm can opt for presumptive taxation scheme under section
44AD, an LLP cannot opt for such scheme.

Exercises
1.

An assessee uses plant and machinery for the purpose of carrying on his business. Under
section 31, he shall be eligible for deduction on account of(a). both capital and revenue expenditure on repairs
(b). current repairs
(c). current repairs plus 1/5th of capital expenditure on repairs.

2.

An electricity company charging depreciation on straight line method on each asset separately,
sells one of its machinery in April, 2014 at ` 1,20,000. The WDV of the machinery at the
beginning of the year i.e. on 1st April, 2014 is ` 1,35,000. No new machinery was purchased
during the year. The shortfall of ` 15,000 is treated as (a). Terminal depreciation
(b). Short-term capital loss
(c). Normal depreciation.

3.

X Ltd. acquires an asset which was previously used for scientific research for ` 2,75,000. The
asset was brought into use for the business of X Ltd., after the research was completed. The
actual cost of the asset to be included in the block of assets is (a). Nil
(b). Market value of the asset on the date of transfer to business
(c). ` 2,75,000 less notional depreciation under section 32 upto the date of transfer.

4.

A Ltd. has unabsorbed depreciation of ` 4,50,000 for the P.Y.2014-15. This can be carried
forward (a). for a maximum period of 8 years and set-off against business income.
(b). Indefinitely and set-off against business income.
(c). Indefinitely and set-off against any head of income.

5.

Deduction under section 33AB is allowed to an assessee provided the assessee deposits the
profits with NABARD (a). before the end of the previous year
(b). within 6 months from the end of the previous year
(c). within 6 months from the end of the previous year or before the due date for filing the return
of income, whichever is earlier.

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Profits and Gains of Business or Profession

6.

4.146

XYZ Ltd. incurred capital expenditure of ` 1,50,000 on 1.4.2014 for acquisition of patents and
copyrights. Such expenditure is (a). Eligible for deduction in 14 years from A.Y.2015-16
(b). Eligible for deduction in 5 years from A.Y.2015-16
(c). Subject to depreciation under section 32

7.

8.

Under section 44AE, presumptive taxation is applicable at a particular rate provided the assessee
is the owner of a maximum of certain number of goods carriages. The rate per month or part of
the month relevant for A.Y.2015-16 and the maximum number specified under the section are (a).

` 7,500 for each goods carriage in the case of an assessee owning not more than 10 goods
carriages at any time during the year

(b).

` 3,500 per carriage for an assessee owning not more than 10 goods carriages at the end
of the previous year

(c).

` 5,000 for a heavy goods carriage and ` 4,500 for other goods carriages for an assessee
owning not more than 12 goods carriages at the end of the previous year

In the case of a non-resident engaged in the business of operation of aircraft, the income is
determined under section 44BBA at (a). 7.5% of turnover
(b). 10% of turnover
(c). 5% of turnover

9.

The W.D.V. of a block (Plant and Machinery, rate of depreciation 15%) as on 1.4.2014 is
` 3,20,000. A machinery costing ` 50,000 was acquired on 1.9.2014 but put to use on 1.11.2014.
During Jan2015, part of this block was sold for ` 2,00,000. The depreciation for A.Y.2015-16
would be (a). ` 21,750
(b). ` 25,500
(c). ` 21,125

10. Employers contribution to provident fund/superannuation fund/gratuity fund is allowed as

deduction in computing income under the head Profits and gains of business or profession,
provided it has been paid (a). before the end of the previous year
(b). on or before the due date by which the employer is required to credit an employees
contribution to the employees account in the relevant fund.
(c). on or before the due date for filing the return of income under section 139(1).
11. The written down value of plant and machinery in the books of Alpha Ltd. is ` 75,00,000 as on 1st
April, 2014, on which date, the installed capacity of the company was 12,000 tons. Alpha Ltd.
borrowed ` 10,00,000 @10% p.a. from ICICI Bank on 1.8.2014 for purchase of new plant and
machinery for extension of its existing business, which would increase its installed capacity to
13,000 tons. The new plant and machinery was purchased on the same date but was put to use

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Income-tax

only w.e.f. 1.11.2014. Compute the depreciation admissible under section 32 for the A.Y.2015-16,
assuming the applicable rate of depreciation on plant and machinery to be 15%.
12. Is it compulsory for an assessee to claim depreciation under section 32 of the Income-tax Act,
1961?
13. Write short notes on (i)

Enhanced depreciation

(ii)

Set-off and carry forward of unabsorbed depreciation.

14. Discuss the provisions dealing with the computation of business income on a presumptive basis
in case of resident assessees.
15. Discuss the concept of block of assets under the Income-tax Act, 1961.
16. Which are the deductions allowable only on actual payment under section 43B?
17. Write short notes on the following (a)

Compulsory maintenance of books of accounts

(b)

Compulsory tax audit.

(c)

Shipping business in case of non-resident.

(d)

The circumstances where the provisions of section 40A(3), regarding cash payments in
excess of ` 20,000, does not apply.

(e)

Amortisation of expenditure under voluntary retirement scheme.

(f)

Deduction to be allowed on actual payment basis.

(g)

Special provisions under section 44DA for computing income by way of royalty, fee for
technical services, etc. in case of non-residents.

18. What is the tax treatment regarding cash payments in excess of limits prescribed in section
40A(3)?

Answers
1. b; 2. a; 3. a; 4. c; 5. c; 6. c; 7. a; 8. c; 9. a; 10. c 11. ` 13,04,375.

The Institute of Chartered Accountants of India

Unit 4 : CAPITAL GAINS

Key Points

Scope and year of chargeability [Section 45]

Any profits or gains arising from the transfer of a capital asset effected in the previous year
will be chargeable to tax under the head Capital Gains, and shall be deemed to be the
income of the previous year in which the transfer took place [Section 45(1)]
Section

Deemed Income

Deemed Full Value of

consideration for
computation of capital
gains under section 48

45(1A)

Any profits or gains arising from money or other The value of money or
asset received under an insurance from an insurer the fair market value of
on account of damage / destruction of any other asset received
capital asset, as a result of, flood, hurricane,
cyclone, riot or civil disturbance, accidental fire or
explosion, action by an enemy or action taken in
combating an enemy shall be deemed to be the
income of the previous year in which such money
or other asset is received.

45(2)

The profits or gains arising from the transfer by The fair market value of
way of conversion by the owner of a capital asset the capital asset on the
into stock-in-trade of a business carried on by him date of such conversion
shall be chargeable to income-tax as his income of
the previous year in which such stock-in-trade is
sold or otherwise transferred by him.

45(3)

The profits or gains arising from the transfer of

a capital asset by a person to a firm or other
association of persons (AOP) or body of
individuals (BOI) in which he is or becomes a
partner or member, by way of capital
contribution or otherwise, shall be chargeable
to tax as the income of the previous year in
which such transfer takes place.

The Institute of Chartered Accountants of India

The amount recorded in

the books of account of
the firm, AOP or BOI as
the value of the capital
asset.

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Income-tax

45(4)

The profits or gains arising from the transfer

of a capital asset by way of distribution of
capital assets on the dissolution of a firm or
other AOPs or BOIs or otherwise, shall be
chargeable to tax as the income of the firm,
AOP or BOI, of the previous year in which
the said transfer takes place.

The fair market value of

the capital asset on the
date of such transfer.

45(5)

Capital gains arising from the transfer by way

of compulsory acquisition under any law, or
a transfer, the consideration for which was
determined or approved by the Central
Government or RBI will be chargeable as
income of the previous year in which the
consideration or part thereof is first received.

Compensation
or
consideration determined
or approved in the first
instance by the Central
Government or RBI

If the compensation or consideration is

further enhanced by any court, Tribunal or
other authority, the enhanced amount will
be deemed to be the income chargeable of
the previous year in which the amount was
received by the assessee.
However, any amount of compensation
received in pursuance of an interim order of
a court, Tribunal or other authority shall be
deemed to be income chargeable under the
head Capital Gains of the previous year in
which the final order of such court, Tribunal
or other authority is made.

Amount by which the

compensation
or
consideration is enhanced
or further enhanced. For
this purpose cost of
acquisition and cost of
improvement shall be
taken as Nil.

Definitions [Section 2]
Section
2(14)

Term
Capital
Asset

Definition
Capital Asset means
(a) property of any kind held by an assessee, whether or
not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor
which has invested in such securities in accordance with the
regulations made under the SEBI Act, 1992.
Exclusions from the definition of Capital Asset:
Stock in trade [other than securities referred to in (b) above],
raw materials or consumables held for the purposes of
business or profession;

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Capital Gains

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Personal effects except jewellery, archeological

collections, drawings, paintings, sculptures or any work of
art;
Rural agricultural land in India i.e. agricultural land
not situated within specified urban limits.
The agricultural land described in (a) and (b) below, being
land situated within the specified urban limits, would fall
within the definition of capital asset, and transfer of
such land would attract capital gains tax (a) agricultural land situated in any area within the
jurisdiction of a municipality or cantonment board having
population of not less than ten thousand according to last
preceding census, or
(b) agricultural land situated in any area within such
distance, measured aerially, in relation to the range of
population according to the last preceding census as
shown hereunder Shortest
aerial Population according to
distance from the the last preceding census
local limits of a of which the relevant
municipality
or figures
have
been
cantonment board published before the first
referred to in item day of the previous year.
(a)
(i)

2 kilometers

> 10,000 1,00,000

(ii)

6 kilometers

> 1,00,000 10,00,000

(iii)

8 kilometers

> 10,00,000

Gold Deposits Bonds issued under the Gold

Deposit Scheme, 1999 notified by the Central
Government;
6% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or
National Defence Gold Bonds, 1980, issued by the
Central Government;
Special Bearer Bonds, 1991 issued by the Central
Government.
Note: Property includes and shall be deemed to have always
included any rights in or in relation to an Indian company,
including rights of management or control or any other rights
whatsoever.

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Income-tax

2(42A)

Shortterm
capital
asset

Capital asset held by an assessee for not more than 36

months immediately preceding the date of its transfer is a
short term capital asset.
However, a security (other than a unit) listed in a
recognized stock exchange in India, a unit of UTI or a
unit of an equity oriented fund or a zero coupon bond
will be treated as short term capital asset if it is held for
not more than 12 months immediately preceding the date
of its transfer.
2(29A)
LongCapital asset which is not a short-term capital asset is a
term
long term capital asset. The following assets are,
therefore, long-term capital assets:
capital
asset
a security (other than a unit) listed in a recognized
stock exchange in India, a unit of UTI or a unit of an
equity oriented fund or a zero coupon bond held for
more than 12 months; and
any other capital asset held for more than 36
months.
Transactions not regarded as transfer [Section 47] : Some Examples

Any distribution of capital assets on the total or partial partition of a HUF

Any transfer of capital asset under a gift or will or an irrevocable trust

Any transfer of a capital asset by a holding company to its subsidiary or vice

versa, if :
the parent company or its nominees hold whole of the share capital of
subsidiary company, and
the transferee company is an Indian company

Any transfer, in a scheme of amalgamation, of a capital asset by the

amalgamating company to the amalgamated company if the amalgamated
company is an Indian company

Any transfer, in a demerger, of a capital asset by the demerged company to the

resulting company, if the resulting company is an Indian company

Any transfer by way of conversion of bonds, debentures, debenture stock,

deposit certificates of a company, into shares or debentures of that company.

Any transfer of a capital asset or intangible asset by a private company or

unlisted public company to a LLP or any transfer of a share or shares held in a
company by a shareholder on conversion of a company into a LLP in
accordance with LLP Act, 2008 provided all conditions satisfied:
total sales, turnover or gross receipts in the business of the company does
not exceed ` 60 lakh in any of the three preceding previous years;

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Capital Gains
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4.152

the shareholders of a company become partners of the LLP and their

capital contribution and profit sharing ratio in the LLP are in the same
proportion as their shareholding in the company on the date of
conversion;
no consideration or benefit, directly or indirectly, other than share in profit
and capital contribution in the LLP arises to the shareholders;
the erstwhile shareholders of the company continue to be entitled to
receive atleast 50% of the profit of the LLP for a period of 5 years from
the date of conversion;
all assets and liabilities of the company immediately before conversion
become the assets and liabilities of the LLP;
no amount is paid, either directly or indirectly, to any partner out of the
accumulated profit standing in the accounts of the company on the date of
conversion for a period of 3 years from the date of conversion.

Any transfer of a capital asset or an intangible asset by a sole proprietary

concern to a company in a scheme of succession provided:
atleast 50% of the voting power in a company is held by sole proprietor and
shareholding continues for a period of 5 years from the date of the
succession;
all assets and liabilities of the sole proprietary concern relating to the
business immediately before succession become the assets and liabilities of
the company;
the sole proprietor does not receive any consideration or benefit, directly or
indirectly, in any form or manner, other than by way of allotment of shares
in the company.

Any transfer of a capital asset in a scheme of reverse mortgage under a scheme

made and notified by the Central Government.
Mode of computation of Capital Gains [Section 48]
Computation of long-term capital gains
Gross Sale consideration

xx

Less: Expenditure incurred wholly and exclusively in connection with such

transfer (for example, brokerage on sale)

Net Sale Consideration

_xx
xx

Less: Indexed cost of acquisition and indexed cost of improvement

_xx

Less: Exemption under sections 54/54B/54EC/54F/54G etc.

xx
_xx
xx

Long-term capital gains

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Notes:
(i) Deduction on account of securities transaction tax paid will not be allowed.
(ii) Indexed Cost of Acquisition =
Cost of
acquisition

CII for the year in which the asset is transferred

CII for the year in which the asset was first held by
the assesse or 1981-82, whichever is later

(iii) Indexed Cost of Improvement =

Cost of
improvement

CII for the year in which the asset is transferred

CII for the year in which the improvement took place

(iv) Benefit of indexation will not apply to long term capital gains from transfer of
bonds or debentures other than capital indexed bonds issued by the government.
Computation of short-term capital gains
Gross Sale consideration

xx

Less: Expenditure incurred wholly and exclusively in connection with

such transfer (for example, brokerage on sale)

xx

Net Sale Consideration

xx

Less: Cost of acquisition and cost of improvement

xx

Less: Exemption under sections 54B/54D/54G

xx
xx
xx

Short-term capital gains

Capital Gains : Special Provisions
Section

Particulars

50

Any income from transfer of depreciable assets is deemed to be capital

gains arising from transfer of short-term capital assets, irrespective
of the period of holding (i.e., indexation benefit would not be available
even if the period of holding of such assets is more than 36 months).

50B

Capital Gains on Slump Sale

Any profits and gains arising from slump sale effected in the previous
year shall be chargeable to income-tax as capital gains arising from the
transfer of capital assets and shall be deemed to be the income of the
previous year in which the transfer took place.
Where the undertaking being transferred under slump sale is held for
more than 36 months, the resultant gain is long-term; However, no

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4.154

indexation benefit would be available. If the undertaking is held for

less than 36 months, the resultant gain is short-term.
Net worth is deemed to be the cost of acquisition and the cost of
improvement. Net worth shall be aggregate value of total assets minus
value of liabilities of such undertaking as per books of account.
Capital gains = Sale consideration Net Worth.
Aggregate value of total assets would be the aggregate of the following :
i) Written Down Value of depreciable assets;
ii) Nil, in case of capital assets in respect of which the whole of the
expenditure has been allowed or is allowable as deduction under
section 35AD; and
iii) Book value for other assets.
Revaluation of assets shall be ignored for computing Net Worth.
50C

Computation of capital gains on sale of land or building or both

Where consideration received or accruing as a result of transfer of a
capital asset, being land or building or both, is less than the value
adopted or assessed or assessable by the stamp valuation authority for
the purpose of payment of stamp duty in respect of such transfer, the
value so adopted or assessed or assessable, shall, for the purpose of
section 48, be deemed to be the full value of consideration received or
accruing as a result of such transfer.
Where the assessee claims before any Assessing Officer that the value
adopted or assessed or assessable by the stamp valuation authority
exceeds the fair market value of the property on the date of transfer,
the Assessing Officer may refer the valuation of the capital asset to the
Valuation Officer, provided the value so adopted or assessed or
assessable has not been disputed in any appeal or revision.
Sl.
No.

Condition

Deemed
Sale
Consideration

1.

Actual Consideration < Stamp Stamp Duty Value

Duty Value

2.

Actual Consideration > Stamp Actual

Duty Value
Consideration

3.

Value ascertained by Valuation Stamp Duty Value

Officer > Stamp Duty Value

4.

Value ascertained by Valuation Value ascertained by

Officer < Stamp Duty Value
Valuation Officer

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Sale

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Income-tax

50D

51

Fair Market Value deemed to be full value of consideration in

certain cases
Where, on transfer of a capital asset, consideration received is not
ascertainable or cannot be determined then, fair market value of the
asset as on the date of transfer shall be deemed as the full value of
consideration received or accruing as a result of such transfer.
Advance money received and forfeited upto 31.3.2014
Where the assessee has received advance money on an earlier occasion
for transfer of capital asset, but the transfer could not be effected due
to failure of negotiations, then, the advance money forfeited by the
assessee has to be reduced from the cost of acquisition (and indexation
would be calculated on the cost so reduced) while computing capital
gains, when the capital asset is transferred or sold.
However, such advance money received on or after 1.4.2014 would be
taxable under section 56(2) under the head Income from other sources.
Therefore, advance money received and forfeited on or after 1.4.2014
should not be deducted from the cost for determining the indexed cost of
acquisition while computing capital gains arising on transfer of the asset.

111A

Tax on short-term capital gains on sale of equity shares and units

of equity oriented fund on which STT is chargeable
Any short-term capital gains on transfer of equity shares or units
of an equity oriented fund shall be liable to tax @15%, if securities
transaction tax has been paid on such sale..
In case of resident individuals and HUF, the short term capital
gain shall be reduced by the unexhausted basic exemption limit and the
balance shall be taxed at 15%.
No deduction under Chapter VI-A can be claimed in respect of
such short term capital gain.

112

Tax on long term capital gains

Any long term capital gains, other than long term capital gains
exempt under section 10(38), shall be liable to tax@20%.
In case of resident individuals and HUFs, the long term capital
gain shall be reduced by the unexhausted basic exemption limit, and the
balance shall be subject to tax at 20%.
Capital gains on transfer of listed securities (other than units) or
zero coupon bonds shall be chargeable to tax @10% computed without
the benefit of indexation or @20% availing the benefit of indexation,
whichever is more beneficial to the assessee.
The assessee is not entitled to claim any deduction under Chapter
VI-A in respect of long term capital gains.

The Institute of Chartered Accountants of India

Capital Gains

Sl. No.
1

Nature of asset
Goodwill of business, trademark, brand name
etc.,
- Self generated
- Acquired from previous owner
The cost of improvement of such assets would
be Nil.
Where capital assets became the property of the
assessee by way of distribution of assets on total
or partial partition of HUF, under a gift or will,
by succession, inheritance, distribution of assets
on liquidation of a company, etc.
Bonus Shares
If bonus shares are allotted before 1.4.1981
If bonus shares are allotted on or after 1.4.1981

4.

4.156

Cost of acquisition
Nil
Purchase price
Cost to the previous
owner.

Fair Market Value on

1.4.1981
Nil

Rights Shares
Where by virtue of holding a capital asset, being
a share or any other security, the assessee
becomes entitled to subscribe to additional
shares or is allotted addition shares without any
payment, then, the period for treating such
shares and securities as a short-term capital asset
or otherwise shall be calculated from the date of
allotment of such shares and securities.
Original shares (which forms the basis of Amount actually paid
for
acquiring
the
entitlement of rights shares)
original shares
Rights entitlement (which is renounced by the Nil
assessee in favour of a person)
Amount actually paid
Rights shares acquired by the assessee
for acquiring the rights
shares
Purchase
price paid to
Rights shares which are purchased by the person
the
renouncer
of rights
in whose favour the assessee has renounced the
entitlement
as
well as
rights entitlement
the amount paid to the
company which has
allotted
the
rights
shares.

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4.157

Income-tax

Capital Gains : Exemptions under section 10

Section
10(33)

Particulars
Any income arising from the transfer of a capital asset being a unit
of Unit Scheme 1964 of UTI

10(37)

Where any individual or HUF owns urban agricultural land which

has been used for agricultural purposes for a period of two years
immediately preceding the date of transfer by such individual or a
parent of his or by such HUF and the same is compulsorily
acquired under any law or the consideration for such transfer is
determined or approved by the Central Government or the RBI,
resultant capital gain will be exempt provided the compensation or
consideration for such transfer is received on or after 1.4.2004.

10(38)

Any income arising from the transfer of a long term capital asset
being an equity share in a company or a unit of an equity oriented
fund shall be exempt, if such transaction is chargeable to securities
transaction tax.

The Institute of Chartered Accountants of India

Capital Gains

4.158

Exemption of Capital Gains [Sections 54 to 54GB]

S. No. Particulars
1
2

Eligible
Assessee
Asset
transferred

Section 54

Section 54B Section 54EC Section 54D

Individual / Individual / Any assessee

HUFs
HUFs
Residential
Urban
Any Asset
House
Agricultural
Land

Period of Long-term
holding of capital asset
the asset
transferred

Other
Conditions

Income from
such house
should
be
chargeable
under
the
head Income
from house
property

The Institute of Chartered Accountants of India

At least 2
years
immediately
preceding
the date of
transfer

Long-term
capital asset
(including a
depreciable
asset held for
more than 36
months)
Land should be used for
agricultural
purposes by
assessee or
his parents
or a HUF for
two years

Any
assessee
Land
&
building
forming part
of
an
industrial
undertaking

Section 54G

Section 54GA

Section 54F

Section 54GB

Any assessee

Any assessee

Individual / HUFs

Land, Building,
Machinery or
Plant or any
right in land or
building used
for business of
Industrial
Undertaking.

Individual
/
HUFs
Any
asset
other
than
Residential
House.

Land, Building,
Machinery, Plant
or any right in
land or building
used
for
business of an
industrial
undertaking
situated in an
urban area.
Long-term/ Short Long-term
term
capital capital asset
asset

At least 2 Long-term/
years
Short-term
immediately capital asset
preceding the
date
of
transfer.
The transfer
should be by
way
of
compulsory
Acquisition of
the industrial
undertaking

Shifting
the Shifting
to
Industrial
Special
Undertaking
Economic Zone
from Urban
Area to Rural
Area

Assessee
should
not
own more than
one residential
house on the
date of transfer

Residential
property (house
or plot of land)

Long-term capital
asset

Eligible company
should utilize the
amount invested
in purchase of
new plant and
machinery.

4.159

Income-tax

S. No. Particulars
5

Section 54

Section 54B Section 54EC Section 54D

Qualifying
asset
i.e.,
asset
in
which
capital gains
has
to
invested

One
Residential
House
situated in
India

Agricultural
Land

Time limit
for
purchase/
construction

Purchase
within 1 year
before or 2
years after
the date of
transfer

(Urban/
Rural)

Long
Term Land
Building
Specified
Asset Bonds
of NHAI or
RECL
(Redeemable
after 3 years)

or
construct
within
3
years after
the date of
transfer

The Institute of Chartered Accountants of India

Purchase
within
2
years from
the date of
transfer

Purchase
within
6
months from
the date of
transfer

Section 54G

or Land, Building,
New Plant &
Machinery and
expenses on
the
shifting
Industrial
Undertaking

Purchase/
construct
within 3 years
after transfer,
for shifting or
reestablishing
the existing
undertaking
or setting up
a
new
industrial
undertaking.

Purchase/
construct
within 1 year
before or 3
years after the
transfer.

Section 54GA

Section 54F

Section 54GB

Land, Building,
new plant and
machinery and
expenses
on
shifting
the
industrial
undertaking to
the SEZ.

One
Residential
House situated
in India

Equity shares of
an
eligible
company, being
newly
incorporated SME
company
in
engaged
manufacturing
sector

Purchase/
construct within
1 year before or
3 years after the
transfer.

Purchase
within 1 year
before or 2
years after the
date of transfer
or

Equity Shares to
be
subscribed
before the due
date of filing the
return.

Construct
within 3 years
after the date
of transfer

Thereafter, within
one year from the
date
of
subscription, new
plant
and
machinery should
be purchased by
the company.

Capital Gains

S. No. Particulars
7

Section 54

Amount of Cost of new

Exemption Residential
House
or
Capital Gain,
whichever is
lower,
is
exempt

The Institute of Chartered Accountants of India

Section 54B Section 54EC Section 54D

Cost of new
Agricultural
Land
or
Capital Gain,
whichever is
lower, is
exempt

Capital Gain or
amount
invested
in
specified
bonds,
whichever is
lower.
Maximum
permissible
investment in
such bonds
out of capital
gains arising in
any financial
year is ` 50
lakhs.

Cost of new
asset
or
Capital Gain,
whichever is
lower.

4.160

Section 54G

Section 54GA

Section 54F

Section 54GB

Cost of new
assets
plus
expenses
incurred
or
Capital Gains,
whichever is
lower,
is
exempt.

Cost of new
assets
plus
expenses
incurred
for
shifting
or
Capital
Gain,
whichever
is
lower, is exempt.

Cost of new
Residential
House Net
sale
consideration
of
original
asset, entire
Capital gain is
exempt.
Cost of new
Residential
House < Net
sale
consideration
of
original
asset,
proportionate
capital gain is
exempt.

Cost of new plant

& machinery
Net
sale
consideration of
residential house,
entire Capital gain
is exempt.
Cost of new
Residential
House < Net sale
consideration of
Residential
House,
proportionate
capital gain is
exempt.

4.161

Income-tax

Question 1
Mr. Dinesh received a vacant site as gift from his friend in November 2002. The site was
acquired by his friend for ` 3,00,000 in April 1990. Dinesh constructed a residential building
during the year 2004-05 in the said site for ` 15,00,000. He carried out some further extension
of the construction in the year 2007-08 for ` 5,00,000.
Dinesh sold the residential building for ` 55,00,000 in January 2015 but the State stamp
valuation authority adopted ` 65,00,000 as value for the purpose of stamp duty.
Compute his long term capital gain, for the assessment year 2015-16 based on the above
information. The cost inflation indices are as follows:
Financial Year
1990-91
2002-03
2004-05
2007-08
2014-15

Cost inflation index

182
447
480
551
1024

Answer
Computation of long term capital gain of Mr. Dinesh for the A.Y. 2015-16
Particulars
`
`
Full value of consideration (Note 1)
65,00,000
Less: Indexed cost of acquisition-land (` 3,00,000 1024/447) 6,87,248
(Note 2 & 3)
Indexed Cost of acquisition-building (` 15,00,000 1024/ 32,00,000
480) (Note 3)
Indexed Cost of improvement-building (` 5,00,000 x 9,29,220 48,16,468
1024/551)
Long-term capital gain
16,83,532
Notes:
1.

As per section 50C, where the consideration received or accruing as a result of transfer
of a capital asset, being land or building or both, is less than the value adopted by the
Stamp Valuation Authority, such value adopted by the Stamp Valuation Authority shall be
deemed to be the full value of the consideration received or accruing as a result of such
transfer. Accordingly, full value of consideration will be ` 65 lakhs in this case.

2.

Since Dinesh has acquired the asset by way of gift, therefore, as per section 49(1), cost
of the asset to Dinesh shall be deemed to be cost for which the previous owner acquired
the asset i.e., ` 3,00,000, in this case.

The Institute of Chartered Accountants of India

Capital Gains
3.

4.162

Indexation benefit is available since both land and building are long-term capital assets.
However, as per the definition of indexed cost of acquisition under clause (iii) of
Explanation below section 48, indexation benefit for land will be available only from the
previous year in which Mr. Dinesh first held the land i.e., P.Y. 2002-03.
Alternative view: In the case of CIT v. Manjula J. Shah 16 Taxmann 42 (Bom.), the
Bombay High court held that indexation cost of acquisition in case of gifted asset can be
computed with reference to the year in which the previous owner first held the asset.
As per this view, the indexation cost of acquisition of land would be ` 16,87,912 and long
term capital gain would be ` 6,82,868.

Question 2
Mr. Abhishek a senior citizen, pledged his residential house with a bank, under a notified
reverse mortgage scheme. He was getting loan from bank in monthly installments. Mr.
Abhishek did not repay the loan on maturity and hence gave possession of the house to the
bank, to discharge his loan. How will the treatment of long-term capital gain be on such
reverse mortgage transaction?
Answer
Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse
mortgage under a scheme made and notified by the Central Government shall not be
considered as a transfer for the purpose of capital gain.
Accordingly, the pledging of residential house with bank by Mr. Abhishek will not be regarded
as a transfer. Therefore, no capital gain will be charged on such transaction.
Further, section 10(43) provides that the amount received by the senior citizen as a loan,
either in lump sum or in installment, in a transaction of reverse mortgage would be exempt
from income-tax. Therefore, the monthly installment amounts received by Mr. Abhishek would
not be taxable.
However, capital gains tax liability would be attracted at the stage of alienation of the
mortgaged property by the bank for the purposes of recovering the loan.
Question 3
Ms. Anshu transfers land and building on 02-01-2015 and furnishes the following information:
Particulars

(` )

(i)

Net consideration received

23,00,000

(ii)

Value adopted by Stamp Valuation Authority

25,00,000

(iii) Value ascertained by Valuation Officer on reference by the Assessing Officer

27,00,000

(iv) This land was acquired by Anshu on 1-04-1981. Fair Market Value of the
land as on 01-04-1981 was

1,10,000

The Institute of Chartered Accountants of India

4.163
(v)

Income-tax
Anshu constructed a residential building on the land at a cost of
` 3,20,000 (construction completed on 01-12-2002 during the financial
year 2002-03)
Brought forward short term capital loss incurred on sale of shares during
financial year 2009-10 ` 1,50,000,

Anshu seeks your advice regarding the amount to be invested in NHAI bonds so as to be
exempt from capital gain tax under the Income-tax Act, 1961.
Cost inflation index for FY 1981-1982 : 100
Cost inflation index for FY 2002-2003 : 447
Cost inflation index for FY 2014-2015 : 1024
Answer
Computation of Capital Gains of Ms. Anshu for the A.Y. 2015-16
Particulars

Full value of consideration [See Notes (i) & (ii) below]

`
25,00,000

Less: Indexed Cost of acquisition [See Note (iii) below]

Indexed cost of land (` 1,10,000 1024/100)
Indexed cost of building (` 3,20,000 1024/447)

11,26,400
7,33,065

18,59,465

Long-term capital gain

6,40,535

Less: Brought forward short-term capital loss set off [See Note
(iv) below]

1,50,000

Taxable capital gains (Amount to be invested in NHAI bonds to

get full exemption from tax on capital gains) [See Note (v) below]

4,90,535

Notes :
(i)

As per section 50C(1), where the consideration received or accruing as a result of

transfer of a capital asset, being land or building or both, is less than the value adopted
by the Stamp Valuation Authority for the purpose of payment of stamp duty, such value
adopted by the Stamp Valuation Authority shall be deemed to be the full value of the
consideration received or accruing as a result of such transfer. Accordingly, full value of
consideration would be ` 25 lacs in this case.

(ii)

As per section 50C(3), where the valuation is referred by the Assessing Officer to
Valuation Officer and the value ascertained by such Valuation Officer exceeds the value
adopted by the Stamp Valuation Authority for the purpose of payment of stamp duty, the
value adopted by the Stamp Valuation Authority shall be taken as the full value of the
consideration received or accruing as a result of the transfer. Since the value ascertained
by the Valuation Officer (i.e. ` 27 lakhs), is higher than the value adopted by the Stamp

The Institute of Chartered Accountants of India

Capital Gains

4.164

Valuation Authority (i.e. ` 25 lakhs), the full value of consideration in this case would be
` 25 lakhs.
(iii) Since the cost of land acquired by Anshu on 1.4.1981 is not given in the question, the fair
market value as on 1.4.1981 is taken as the cost of acquisition. Indexation benefit is
available since land and building are both long-term capital assets, as they are held by
Anshu for more than 36 months.
(iv) As per section 74, brought forward unabsorbed short term capital loss can be set off
against any capital gains, short term or long term, for 8 assessment years immediately
succeeding the assessment year for which the loss was first computed. Therefore, shortterm capital loss on sale of shares during the F.Y.2009-10 can be set-off against the
current year long-term capital gains on sale of land and building.
(v) As per section 54EC, an assessee can avail exemption in respect of long-term capital
gains, if such capital gains are invested in the bonds issued by the NHAI redeemable after
3 years. Such investment is required to be made within a period of 6 months from the date
of transfer of the asset. The exemption shall be the amount of capital gains or the amount
of such investment made, whichever is less. Therefore, in this case, if Anshu invests the
entire capital gains in bonds of NHAI, she can get full exemption from tax on capital gains.
Question 4
Mr. Mithun purchased 100 shares of M/s Goodmoney Co. Ltd. on 01-04-2005 at rate of
` 1,000 per share in public issue of the company.
Company allotted bonus shares in the ratio of 1:1 on 01.12.2013. He has also received
dividend of ` 10 per share on 01.05.2014.
He has sold all the shares on 01.10.2014 at the rate of ` 4,000 per share through a
recognized stock exchange and paid brokerage of 1% and securities transaction tax of 0.02%
to celebrate his 75th birthday. The cost inflation Index are as follows:
Financial Year
Cost Inflation Index
2005-06
497
2014-15
1024
Compute his total income and tax liability for Assessment Year 2015-16, assuming that he is
having no income other than given above.
Answer
Computation of total income and tax liability of Mr. Mithun for A.Y. 2015-16
Particulars
Short term capital gains on sale of bonus shares
Gross sale consideration (100 x ` 4,000)
Less : Brokerage @ 1%
Net sale consideration

The Institute of Chartered Accountants of India

`
4,00,000
4,000
3,96,000

4.165

Income-tax

Less: Cost of acquisition of bonus shares

Total Income (Short term Capital Gains)
Tax Liability
15% of (` 3,96,000-` 3,00,000)
Less: Rebate U/s 87A
Add : Education cess @ 2%
Secondary and higher education cess @ 1%
Tax payable
Tax payable (Rounded Off)

NIL
3,96,000
14,400
2,000
12,400
248
124
12,772
12,770

Notes:
(1) Long-term capital gains on sale of original shares through a recognized stock exchange
(STT paid) is exempt under section 10(38).
(2) Since bonus shares are held for less than 12 months before sale, the gain arising there
from is a short term capital gain chargeable to tax@15% as per section 111A after
adjusting the unexhausted basic exemption limit. Since Mr. Mithun is over 60 years of
age, he is entitled for a higher basic exemption limit of ` 3,00,000 for A.Y. 2015-16.
(3) Dividend income is exempt under section 10(34).
(4) Brokerage paid is allowable since it is an expenditure incurred wholly and exclusively in
connection with the transfer. Hence, it qualifies for deduction under section 48(i).
(5) Cost of bonus shares will be Nil as such shares are allotted after 1.04.1981.
(6) Securities transaction tax is not allowable as deduction.
Question 5
Mr. Selvan, acquired a residential house in January, 2000 for ` 10,00,000 and made some
improvements by way of additional construction to the house, incurring expenditure of
` 2,00,000 in October, 2004. He sold the house property in October, 2014 for
` 75,00,000. The value of property was adopted as ` 80,00,000 by the State stamp valuation
authority for registration purpose. He acquired a residential house in January, 2014 for
` 25,00,000. He deposited ` 20,00,000 in capital gains bonds issued by National Highways
Authority of India (NHAI) in June, 2015.
Compute the capital gain chargeable to tax for the assessment year 2015-16.
What would be the tax consequence and in which assessment year it would be taxable, if the
house property acquired in January, 2014 is sold for ` 40,00,000 in March, 2016?
Cost inflation index : F.Y.1999-2000 : 389
F.Y. 2004-2005 : 480
F.Y. 2014-2015 : 1024

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Capital Gains

4.166

Answer
(I)

Computation of Capital Gains Chargeable to tax for A.Y. 2015-16

Particulars

Sale consideration (i.e. Stamp Duty Value) (Note 1)

Less: Indexed Cost of Acquisition
` 10,00,000 1024/389
Indexed Cost of Improvement
` 2,00,000 1024/480

`
80,00,000

26,32,391
4,26,667

30,59,058
49,40,942

Less: Exemption under section 54 (Note 2)

25,00,000

Taxable Capital Gains

24,40,942

Notes:
1. As per the provisions of section 50C, in case the stamp duty value adopted by the
stamp valuation authority is higher than the actual sale consideration, the stamp
duty value shall be deemed as the full value of consideration.
2.

Exemption under section 54 is available if a new residential house is purchased

within one year before or two years after the date of transfer. Since the cost of new
residential house is less than the capital gain, capital gain to the extent of cost of
new asset is exempt under section 54.

3.

Exemption under section 54EC is available in respect of investment in bonds of

National Highways Authority of India only if the investment is made within a period
of six months after the date of such transfer. In this case, since the investment is
made after six months, exemption under section 54EC would not be available.

(II) If the new asset purchased by the assessee on the basis of which exemption under
section 54 is claimed, is transferred within 3 years from the date of its acquisition, then
for computing the taxable short-term capital gain on such transfer, the cost of acquisition
of such asset shall be taken as Nil.
Particulars (A.Y.2016-17)
Sale consideration

`
40,00,000

Less: Cost of acquisition

Nil

Short-term capital gains

40,00,000

Question 6
Mr. Rakesh purchased a house property on 14th April, 1979 for ` 1,05,000. He entered into an
agreement with Mr. Bobby for the sale of house on 15th September, 1982 and received an

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4.167

Income-tax

advance of ` 25,000. However, since Mr. Bobby did not remit the balance amount, Mr. Rakesh
forfeited the advance.
Later on, he gifted the house property to his friend Mr. Aakash on 15th June, 1986.
Following renovations were carried out by Mr. Rakesh and Mr. Aakash to the house property:

`
By Mr. Rakesh during F.Y. 1979-80

10,000

By Mr. Rakesh during F.Y. 1983-84

50,000

By Mr. Aakash during F.Y. 1993-94

1,90,000

The fair market value of the property as on 1.4.1981 is ` 1,50,000.

Mr. Aakash entered into an agreement with Mr. Chintu for sale of the house on 1st June, 1995
and received an advance of ` 80,000. The said amount was forfeited by Mr. Aakash, since Mr.
Chintu could not fulfil the terms of the agreement.
Finally, the house was sold by Mr. Aakash to Mr. Sanjay on 2nd January, 2015 for a
consideration of ` 12,00,000.
Compute the capital gains chargeable to tax in the hands of Mr. Aakash for the assessment
year 2015-16. Cost inflation indices are as under:
Financial Year
1981-82
1983-84
1986-87
1993-94
2014-15

Cost inflation index

100
116
140
244
1024

Answer
Computation of taxable capital gains of Mr. Aakash for the A.Y. 2015-16
Particulars
Sale consideration
Less: Indexed cost of acquisition (Working Note: 1)

`
12,00,000
5,12,000
6,88,000

Less: Indexed cost of improvement (Working Note: 2)

12,38,756

Long term capital loss

(5,50,756)

Working Note: 1
Indexed cost of acquisition is determined as under:
Cost to the previous owner i.e., Mr. Rakesh is ` 1,05,000

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Capital Gains

4.168

Fair Market Value on 1st April, 1981 is ` 1,50,000

Cost to the previous owner or FMV on 1st April, 1981, whichever is more, is
to be taken as cost of acquisition of Mr. Aakash

` 1,50,000

Less: Advance money forfeited by Mr. Aakash (as per section 51)
(Note : Advance forfeited by Mr. Rakesh, the previous owner, should,
however, not be deducted)

_` 80,000

Cost of acquisition

_` 70,000

Indexed cost of acquisition (` 70,000 1024/140)

` 5,12,000

140 is the CII for F.Y. 1986-87, being the first year in which property is held by Mr. Aakash
and 1024 is the CII for F.Y. 2014-15, being the year in which the property is sold.
Alternative view: In the case of CIT v. Manjula J. Shah 16 Taxmann 42, the Bombay High
Court held that the indexed cost of acquisition in case of gifted asset can be computed
with reference to the year in which the previous owner first held the asset. As per this
view, the indexation cost of acquisition of house would be ` 7,16,800, taking CII of 100 for
the F.Y. 1980-81 since F.M.V. as on 1st April, 1981 is taken as cost of acquisition of Mr.
Aakash.
Note: Clause (ix) of Section 56(2), inserted by the Finance (No.2) Act, 2014, provides that
the advance which is forfeited in the previous year 2014-15 relevant to A.Y. 2015-16 would
be chargeable to tax under the head Income from Other sources and hence, such
forfeited amount shall not be reduced from the cost of acquisition of the transferred capital
asset. In the present case, the advance was forfeited in a previous year prior to P.Y. 201415. Therefore, such amount would be deductible from the cost of acquisition while
determining the Capital gains on transfer of such asset.
Working Note: 2
Indexed cost of Improvement is determined as under:
Expenditure incurred before 1st April, 1981 should not be considered
Expenditure incurred on or after

1st

NIL

April, 1981

During 1983-84: Indexed cost of Improvement [` 50,000 1024/116]

` 4,41,379

During 1993-94: Indexed cost of Improvement [` 1,90,000 1024/244]

` 7,97,377

Total indexed cost of improvement

`12,38,756

Question 7
X Co. (P) Ltd., converted into a Limited Liability Partnership (LLP) by name All Trade LLP, with
effect from 01.04.2014.
The following details are given to you:
Asst. year 2007-08 : Business loss brought forward
Asst. year 2014-15 : Business loss brought forward

The Institute of Chartered Accountants of India

` 2,00,000
` 5,00,000

4.169

Income-tax

(These are related to erstwhile X Co. (P) Ltd.)

Total income of All Trade LLP, for the financial year 2014-15 (Before set off of
brought forward business losses of erstwhile company i.e. X Co. (P) Ltd.)

` 6,00,000

Assume that all the conditions prescribed in section 47(xiiib) were satisfied by X Co. (P) Ltd. at
the time of conversion to LLP.
(i)

Explain whether All Trade LLP can set off and carry forward the business loss of its
predecessor i.e. X Co. (P) Ltd.?

(ii)

State whether the change in the profit sharing ratio of the shareholders of the company in
the LLP at later date would have any tax consequence.

Answer
(i)

Section 72A(6A), provides that where a private company is succeeded by a LLP fulfilling
the conditions laid down in the proviso to section 47(xiiib), then, notwithstanding anything
contained in any other provision of the Income-tax Act, 1961, the accumulated loss and
unabsorbed depreciation of the predecessor company shall be deemed to be the loss or
allowance for depreciation of the successor LLP for the purpose of the previous year in
which the business reorganisation was effected and other provisions of the Act relating to
set-off and carry forward of losses and depreciation allowance shall apply accordingly.
Therefore, All Trade LLP can carry forward and set-off the business loss of ` 6 lakh of
erstwhile X Co (P) Ltd. against its business income for the F.Y.2014-15. The unabsorbed
business loss of ` 1 lakh, relating to A.Y. 2014-15, will be carried forward to the next year.

(ii) Section 47(xiiib) requires that the shareholders of the company become partners of the
LLP in the same proportion as their shareholding in the company. Further, the aggregate
of the profit sharing ratio of the shareholders of the company in the LLP should be not
less than 50% at any time during the period of 5 years from the date of conversion. If the
entity fails to fulfill this condition, the benefit of set-off of business loss availed by the LLP
would be deemed to be the profits and gains of the LLP chargeable to tax in the previous
year in which the LLP fails to fulfill the condition.
Question 8
Ms. Chhaya transferred a vacant site to Ms. Dayama for ` 4,25,000. The stamp valuation
authority fixed the value of vacant site for stamp duty purpose at ` 6,00,000. The total income
of Chhaya and Dayama before considering the transfer of vacant site are ` 50,000 and
` 2,05,000, respectively. The indexed cost of acquisition for Ms. Chhaya in respect of vacant
site is ` 4,00,000 (computed).
Determine the total income of both Ms. Chhaya and Ms. Dayama taking into account the
above said transaction.

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Answer
Section 56(2)(vii) would get attracted in case of transfer of immovable property for inadequate
consideration, since the difference between the stamp duty value and sale consideration is
more than ` 50,000 and therefore ` 1,75,000 ( i.e. ` 6,00,000 - ` 4,25,000) will be taxed
under the head income from other sources in the hands of transferee, i.e., Ms. Dayama.
Further, for the transferor, Ms. Chhaya, the value adopted for stamp duty purpose will be
taken as the deemed sale consideration under section 50C for computation of capital gains.
Chhaya
(Transferor)
`

Particulars
Capital gains
Deemed sale consideration under section 50C

6,00,000

Less: Indexed cost of acquisition

4,00,000

Dayama
(Transferee)
`

2,00,000
Income from other sources
Difference between stamp duty value and sale consideration
of immovable property, taxable under section 56(2)(vii)

1,75,000

Other income (computed)

Total income

50,000

2,05,000

2,50,000

3,80,000

Question 9
Mr. Chandru transferred a vacant site on 28.10.2014 for ` 100 lakhs. The site was acquired
for ` 9,99,300 on 30.6.2000. He invested ` 50 lakhs in eligible bonds issued by Rural
Electrification Corporation Ltd. (RECL) on 20.3.2015.
Again, he invested ` 20 lakhs in eligible bonds issued by National Highways Authority of India
(NHAI) on 16.4.2015.
Compute the chargeable capital gain in the hands of Mr. Chandru for the A.Y. 2015-16.
Financial year

Cost Inflation Index

2000-01

406

2014-15

1024

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Income-tax

Answer
Computation of chargeable capital gain of Mr. Chandru for the A.Y.2015-16
Particulars
Sale consideration

`
1,00,00,000

Less: Indexed cost of acquisition (` 9,99,300 1024/406)

25,20,402
74,79,598

Less: Deduction under section 54EC (See Note 3 below)

50,00,000

Long term capital gain

24,79,598

Note:
(1) Since the site was held for more than 36 months prior to the date of transfer, it is a longterm capital asset and the capital gain arising upon its transfer is long-term capital gain.
(2) In order to claim exemption under section 54EC, Mr. Chandru has to invest in specified
bonds of RECL or NHAI within a period of 6 months from the date of transfer of the asset.
(3) As per second proviso to section 54EC(1), out of capital gains arising from transfer of
one or more capital assets in a financial year, the investment eligible for exemption,
cannot exceed ` 50 lakhs, whether such investment is made in the same financial year
or in the subsequent financial year or in both the years.
In this case, Mr. Chandru has invested ` 50 lakhs in RECL bonds in the F.Y.2014-15 and
` 20 lakhs in NHAI bonds in the F.Y.2015-16, both within six months from the date of
transfer. However, he would be eligible for exemption of only ` 50 lakhs for investment
made in such bonds.
Question 10
How will you calculate the period of holding in case of the following assets?
(1) Shares held in a company in liquidation
(2) Bonus shares
(3) Flat in a co-operative society
(4) Transfer of a security by a depository (i.e., demat account)
Answer
(1) Shares held in a company in liquidation - The period after the date on which the
company goes into liquidation shall be excluded while calculating the period of holding.
Therefore, the period of holding shall commence from the date of acquisition and end
with the date on which the company goes into liquidation.
(2) Bonus shares - The period of holding shall be reckoned from the date of allotment of
bonus shares and will end with the date of transfer.

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(3) Flat in a co-operative society - The period of holding shall be reckoned from the date of
allotment of shares in the society and will end with the date of transfer.
Note Any transaction whether by way of becoming a member of, or acquiring shares in, a
co-operative society or by way of any agreement or any arrangement or in any other manner
whatsoever which has the effect of transferring, or enabling enjoyment of, any immovable
property is a transfer as per section 2(47)(vi). Hence, it is possible to take a view that any
date from which such right is obtained may be taken as the date of acquisition.
(4) Transfer of security by a depository - The period of holding shall be computed from the date on
which the securities were credited to the demat account and will end with the date of transfer
(sale). The first-in-first-out (FIFO) method will be adopted for determining the period of holding.
Question 11
Mr. A is a proprietor of Akash Enterprises having 2 units. He transferred on 1.4.2014 his Unit 1
by way of slump sale for a total consideration of ` 25 lacs. Unit 1 was started in the year
2003-04. The expenses incurred for this transfer were ` 28,000. His Balance Sheet as on
31.3.2014 is as under:
Liabilities

Total
Assets
Unit 1 (`) Unit 2
(`)
(`)
Own Capital
15,00,000 Building
12,00,000 2,00,000
Revaluation Reserve (for 3,00,000 Machinery
3,00,000 1,00,000
building of unit 1)
Bank loan (70% for unit 1)
2,00,000 Debtors
1,00,000
40,000
Trade creditors (25% for
unit 1)
60,000
1,50,000 Other assets
1,50,000
Total
21,50,000 Total
17,50,000 4,00,000

Total
(`)
14,00,000
4,00,000
1,40,000
2,10,000
21,50,000

Other information:
(i)

Revaluation reserve is created by revising upward the value of the building of Unit 1.

(ii)

No individual value of any asset is considered in the transfer deed.

(iii) Other assets of Unit 1 include patents acquired on 1.7.2012 for ` 50,000 on which no
depreciation has been charged.
Compute the capital gain for the assessment year 2015-16.
Answer
Computation of capital gains on slump sale of Unit 1
Particulars
Sale value
Less: Expenses on sale

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`
25,00,000
28,000

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Income-tax

Net sale consideration

24,72,000

Less: Net worth (See Note 1 below)

12,50,625

Long-term capital gain

12,21,375

Notes:
1.

Computation of net worth of Unit 1 of Akash Enterprises

Particulars

Building (excluding ` 3 lakhs on account of revaluation)

9,00,000

Machinery

3,00,000

Debtors

1,00,000

Patents (See Note 2 below)

28,125

Other assets (` 1,50,000 ` 50,000)

_1,00,000

Total assets

14,28,125

Less: Creditors
Bank Loan
Net worth
2.

37,500
1,40,000

1,77,500
12,50,625

Written down value of patents as on 1.4.2014

Value of patents:

Cost as on 1.7.2012

50,000

Less: Depreciation @ 25% for Financial Year 2012-13

12,500

WDV as on 1.4.2013

37,500

Less: Depreciation for Financial Year 2013-14

_9,375

WDV as on 1.4.2014

28,125

For the purposes of computation of net worth, the written down value determined as per
section 43(6) has to be considered in the case of depreciable assets. The problem has been
solved assuming that the Balance Sheet values of ` 3 lakh and ` 9 lakh (` 12 lakh ` 3
lakh) represent the written down value of machinery and building, respectively, of Unit 1.
3.

Since the Unit is held for more than 36 months, capital gain arising would be long term
capital gain. However, indexation benefit is not available in case of slump sale.

Question 12
Sachin received ` 15,00,000 on 23.01.2015 on transfer of his residential building in a
transaction of reverse mortgage under a scheme notified by the Central Government. The
building was acquired in March 1991 for ` 8,00,000.

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Is the amount received on reverse mortgage chargeable to tax in the hands of Sachin under
the head Capital gains?
Cost inflation index for the F.Y. 1990-91 182; F.Y. 2014-15 - 1024
Answer
As per section 47(xvi), any transfer of a capital asset in a transaction of Reverse Mortgage
under a scheme made and notified by the Central Government will not be regarded as a
transfer. Therefore, capital gains tax liability is not attracted.
Section 10(43) provides that the amount received by a senior citizen as a loan, either in lump
sum or in installments, in a transaction of Reverse Mortgage would be exempt from incometax. Therefore, the amount received by Sachin in a transaction of Reverse Mortgage of his
residential building is exempt under section 10(43).
Question 13
Mr. Roy, aged 55 years owned a Residential House in Ghaziabad. It was acquired by Mr. Roy
on 10-10-1986 for ` 6,00,000. He sold it for ` 53,00,000 on 4-11-2014. The stamp valuation
authority of the State fixed value of the property at ` 65,00,000. The assessee paid 2% of the
sale consideration as brokerage on the sale of the said property.
Mr. Roy acquired a residential house property at Kolkata on 10-12-2014 for ` 10,00,000 and
deposited ` 3,00,000 on 10-4-2015 and ` 5,00,000 on 15-6-2015 in the capital gains bonds of
Rural Electrification Corporation Ltd. He deposited ` 4,00,000 on 6-7-2015 and ` 3,00,000 on
1-11-2015 in the capital gain deposit scheme in a Nationalized Bank for construction of an
additional floor on the residential house property in Kolkata.
Compute the Capital Gain chargeable to tax for the Assessment Year 2015-16 and income-tax
chargeable thereon assuming Mr. Roy has no other income.
Cost Inflation Index for Financial Year 1986-87: 140 and Financial Year 2014-15: 1024
Answer
Computation of Capital Gains chargeable to tax in the hands of Mr. Roy
for the A.Y. 2015-16
Particulars
`
`
Gross Sale Consideration on transfer of residential house
[As per section 50C, in case the actual sale consideration is
lower than the stamp duty value fixed by the stamp valuation
authority, the stamp duty value shall be deemed as the full value
of consideration]
Less:

Brokerage@2%
` 53,00,000

of

actual

sale

consideration

65,00,000

of
_1,06,000

Net Sale Consideration

63,94,000

Less: Indexed cost of acquisition [` 6,00,000 x 1024/140]

43,88,571

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4.175

Income-tax

Long-term capital gain

20,05,429

Less: Exemption under section 54

-

Acquisition of residential house property at Kolkata on

10.12.2014 (i.e., within the prescribed time of two years
from 4.11.2014, being the date of transfer of residential
house at Ghaziabad).

Amount deposited in Capital Gains Accounts Scheme on or

before the due date of filing return of income for construction
of additional floor on the residential house property at Kolkata.
Since Mr. Roy has no other source of income, his due date for
filing return of income is 31st July, 2015
[Therefore, ` 4,00,000 deposited on 6.7.2015 will be eligible
for exemption whereas ` 3,00,000 deposited on 1.11.2015 will
not be eligible for exemption under section 54]

10,00,000

4,00,000

14,00,000

Exemption under section 54EC

Amount deposited in capital gains bonds of RECL within six
months from the date of transfer (i.e., on or before
3.5.2015) would qualify for exemption.
[Therefore, in this case, ` 3,00,000 deposited in capital
gains bonds of RECL on 10.4.2015 would be eligible for
exemption under section 54EC, whereas ` 5,00,000
deposited on 15.6.2015 would not qualify for exemption]
Long-term capital gain
Computation of tax liability of Mr. Roy for A.Y. 2015-16
Particulars
Tax on ` 55,429 (i.e Long term capital gain ` 3,05,429 less basic exemption
limit of ` 2,50,000) is charged @ 20% [Section 112]
(Since long-term capital gains is the only source of income, the entire basic
exemption limit can be exhausted against this income)
Less: Rebate under section 87A

3,00,000
3,05,429
`
11,086

Add: Education cess@2% and Secondary & higher education cess @ 1%

Total tax liability

2,000
9,086
273
9,359

Total tax liability (rounded off)

9,360

Note: As per the decision of Gauhati High Court in CIT vs Rajesh Kumar Jalan 286 ITR 274
and Haryana High Court in CIT vs Jagriti Agarwal 245 CTR 629, exemption under section 54
is allowable even if the amount of capital gain is deposited in Capital Gains Accounts Scheme

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within the period specified for filing a belated return under section 139(4) [i.e., on or before
31.3.2017, being one year from the end of A.Y.2015-16].
If we apply the above interpretation in this case, Mr. Roy would be eligible for exemption
under section 54 in respect of ` 3,00,000 deposited in Capital Gains Accounts Scheme on
01.11.2015 also, since the said date falls within the time specified under section 139(4). On
the basis of this interpretation, the long term capital gain chargeable to tax in the hands of Mr.
Roy would be Nil and the consequent tax liability would also be Nil.
Question 14
Mr. Raj Kumar sold a house to his friend Mr. Dhuruv on 1st November, 2014 for a
consideration of ` 25,00,000. The Sub-Registrar refused to register the document for the said
value, as according to him, stamp duty had to be paid on ` 45,00,000, which was the
Government guideline value. Mr. Raj Kumar preferred an appeal to the Revenue Divisional
Officer, who fixed the value of the house as ` 32,00,000 (` 22,00,000 for land and the balance
for building portion). The differential stamp duty was paid, accepting the said value
determined. What are the tax implications in the hands of Mr. Raj Kumar and Mr. Dhuruv for
the assessment year 2015-16? Mr. Raj Kumar had purchased the land on 1st June, 2010 for
` 5,19,000 and completed the construction of house on 1st October, 2012 for ` 14,00,000.
Cost inflation indices may be taken as 711 for the financial year 2010-11, 785 for the financial
year 2011-12 and 1024 for the financial year 2014-15.
Answer
In the hands of the seller, Mr. Raj Kumar
As per section 50C(1), where the consideration received or accruing as a result of transfer of
land or building or both, is less than the value adopted or assessed or assessable by the
stamp valuation authority, the value adopted or assessed or assessable by the stamp
valuation authority shall be deemed to be the full value of consideration received or accruing
as a result of transfer.
Where the assessee appeals against the stamp valuation and the value is reduced in appeal
by the appellate authority (Revenue Divisional Officer, in this case), such value will be
regarded as the consideration received or accruing as a result of transfer.
In the given problem, land has been held for a period exceeding 36 months and building for a
period less than 36 months immediately preceding the date of transfer. So land is a long-term
capital asset, while building is a short-term capital asset.
Particulars

Long term capital gain on sale of land

Consideration received or accruing as a result of transfer of land
Less: Indexed cost of acquisition ` 5,19,000 x 1024/711
Long-term capital gain (A)

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22,00,000
7,47,477
14,52,523

4.177

Income-tax

Short-term capital loss on sale of building

Consideration received or accruing from transfer of building

10,00,000

Less: Cost of acquisition

14,00,000

Short term capital loss (B)

4,00,000

As per section 70, short-term capital loss can be set-off against long-term capital gains.
Therefore, the net taxable long-term capital gains would be ` 10,52,523 (i.e., ` 14,52,523
` 4,00,000).
In the hands of the buyer Mr. Dhuruv
As per section 56(2)(vii), where an individual or HUF receives from a non-relative, any
immovable property for a consideration which is less than the stamp value (or the value
reduced by the appellate authority, as in this case) by an amount exceeding ` 50,000, then
the difference between such value and actual consideration of such property is chargeable to
tax as income from other sources. Therefore, ` 7,00,000 ( i.e. ` 32,00,000 - ` 25,00,000)
would be charged to tax as income from other sources under section 56(2)(vii) in the hands of
Mr. Dhuruv.
Question 15
Compute the net taxable capital gains of Smt. Megha on the basis of the following informationA house was purchased on 1.5.1997 for ` 4,50,000 and was used as a residence by the
owner. The owner had contracted to sell this property in June, 2008 for ` 10 lacs and had
received an advance of ` 70,000 towards sale. The intending purchaser did not proceed with
the transaction and the advance was forfeited by the owner. The property was sold in April,
2014 for ` 16,00,000. The owner, from out of sale proceeds, invested ` 4 lacs in a new
residential house in January, 2015.
Cost inflation index :- F.Y. 1997-98 331; F.Y. 2014-15 - 1024
Answer
Computation of net taxable capital gains of Smt. Megha for the A.Y.2015-16
Particulars

Sale consideration

16,00,000

Less: Indexed cost of acquisition (See Working note below)

11,75,589

Long term capital gain

4,24,411

Less: Exemption under section 54 (See Note 1 below)

4,00,000

Taxable long term capital gain

The Institute of Chartered Accountants of India

24,411

Capital Gains

4.178

Working Note:
Indexed cost of acquisition
Purchase price
Less: Amount forfeited (See Note 2 below)
Cost of acquisition
Indexed cost of acquisition ` 3,80,000 1024/331

`
4,50,000
70,000
3,80,000
11,75,589

Notes:
(1) Exemption under section 54 is available if one new residential house is purchased within
two years from the date of transfer of existing residential house, which is a long-term
capital asset. Since the cost of new residential house is less than the long-term capital
gains, capital gains to the extent of cost of new house, i.e., ` 4 lakh, is exempt under
section 54.
(2) As per section 51, any advance received and retained by the assessee, as a result of
earlier negotiations for sale of the asset, shall be deducted from the purchase price for
computing the cost of acquisition of the asset.
Question 16
State, with reasons, whether the following statements are True or False.
(i)

Alienation of a residential house in a transaction of reverse mortgage under a scheme

made and notified by the Central Government is treated as "transfer" for the purpose of
capital gains.

(ii)

Zero coupon bonds of eligible corporation, held for more than 12 months, will be longterm capital assets.

(iii) In the case of a dealer in shares, income by way of dividend is taxable under the head
"Profits and gains of business or profession".
(iv) Where an urban agricultural land owned by an individual, continuously used by him for
agricultural purposes for a period of two years prior to the date of transfer, is
compulsorily acquired under law and the compensation is fixed by the State Government,
resultant capital gain is exempt.
(v) Zero Coupon Bond means a bond on which no payment and benefits are received or
receivable before maturity or redemption.
(vi) Income from growing and manufacturing tea in India is treated as agricultural income
wholly.

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Income-tax

Answer
(i)

False : As per section 47(xvi), such alienation in a transaction of reverse mortgage under
a scheme made and notified by the Central Government is not regarded as "transfer" for
the purpose of capital gains.

(ii) True : Section 2(42A) defines the term 'short-term capital asset'. Under the proviso to
section 2(42A), zero coupon bond held for not more than 12 months will be treated as a
short-term capital asset. Consequently, such bond held for more than 12 months will be a
long-term capital asset.
(iii) False : In view of the provisions of section 56(2)(i), dividend income is taxable under the
head "Income from other sources" in the case of all assessees. However, the dividend
referred in to in section 115-O is exempt under section 10(34).
(iv) False: As per section 10(37), where an individual owns urban agricultural land which has
been used for agricultural purposes for a period of two years immediately preceding the
date of transfer, and the same is compulsorily acquired under any law and the
compensation is determined or approved by the Central Government or the Reserve
Bank of India, resultant capital gain will be exempt.
In this case, the compensation has been fixed by the State Government and hence the
exemption will not be available.
(v) True : As per section 2(48), Zero Coupon Bond means a bond issued by any
infrastructure capital company or infrastructure capital fund or a public sector company
on or after 1st June 2005, in respect of which no payment and benefit is received or
receivable before maturity or redemption from such issuing entity and which the Central
Government may notify in this behalf.
(vi) False : Only 60% of the income derived from the sale of tea grown and manufactured by
the seller in India is treated as agricultural income and the balance 40% of the income
shall be non-agricultural income chargeable to tax [Rule 8 of Income-tax Rules, 1962].
Question 17
Singhania & Co. own six machines, put in use for business in March, 2014. The depreciation on
these machines is charged @ 15%. The written down value of these machines as on 1st April, 2014
was ` 8,50,000. Three of the old machines were sold on 10th June, 2014 for ` 11,00,000.
A new plant was bought for ` 8,50,000 on 30th November, 2014.
You are required to:
(i)

determine the claim of depreciation for Assessment Year 2015-16.

(ii)

compute the capital gains liable to tax for Assessment Year 2015-16.

(iii) If Singhania & Co. had sold the three machines in June, 2014 for ` 21,00,000, will there
be any difference in your above workings? Explain.

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Answer
(i)

Computation of depreciation for A.Y.2015-16

Particulars

W.D.V. of the block as on 1.4.2014

8,50,000

Add: Purchase of new plant during the year

_8,50,000
17,00,000

Less: Sale consideration of old machinery during the year

11,00,000

W.D.V of the block as on 31.03.2015

_6,00,000

Since the value of the block as on 31.3.2015 comprises of a new asset which has been
put to use for less than 180 days, depreciation is restricted to 50% of the prescribed
percentage of 15% i.e. depreciation is restricted to 7%. Therefore, the depreciation
allowable for the year is ` 45,000, being 7% of ` 6,00,000.
Note: It is assumed that the firm is not eligible for additional depreciation under section
32(1)(iia).
(ii) The provisions under section 50 for computation of capital gains in the case of
depreciable assets can be invoked only under the following circumstances:
(a) When one or some of the assets in the block are sold for consideration more than
the value of the block.
(b) When all the assets are transferred for a consideration more than the value of the block.
(c) When all the assets are transferred for a consideration less than the value of the block.
Since in the first two cases, the sale consideration is more than the written down value of
the block, the computation would result in short term capital gains.
In the third case, since the written down value exceeds the sale consideration, the
resultant figure would be a short term capital loss.
In the given case, capital gains will not arise as the block of asset continues to exist, and
some of the assets are sold for a price which is lesser than the written down value of the
block.
(iii) If the three machines are sold in June, 2014 for ` 21,00,000, then short term capital gains
would arise, since the sale consideration is more than the aggregate of the written down
value of the block at the beginning of the year and the additions made during the year.
Particulars

Sale consideration

21,00,000

Less:
W.D.V. of the machines as on 1.4.2014

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8,50,000

4.181

Income-tax
Purchase of new plant during the year

8,50,000

Short term capital gains

17,00,000
4,00,000

Question 18
Ms. Paulomi has transferred 1,000 shares of Hetal Ltd., (which she acquired at a cost of
` 10,000 in the financial year 2002-03) to Dhaval, her brother, at a consideration of ` 3,12,934
on 15.5.2014 privately.
During the financial year 2014-15, she has paid through e-banking ` 15,000 towards medical
premium, ` 50,000 towards life insurance premium and ` 25,000 towards PPF.
Assuming she has no other source of income, compute her total income and tax payable for
the Assessment Year 2015-16.
Cost Inflation Index: for F.Y.2002- 03: 447; F.Y.2014-15 : 1024
Answer
Computation of total income and tax liability of Ms. Paulomi for A.Y. 2015-16
Particulars
Sale consideration
Less: Indexed cost of acquisition (` 10,000 1024/447)

`
3,12,934
22,908

Long term capital gain

2,90,026

Total income

2,90,030

Tax liability
Income-tax @ 20% on ` 40,030 (` 2,90,030 ` 2,50,000)

8,006

Less: Rebate under section 87A

2,000
6,006

Add: Education cess and secondary and higher education cess @ 3%

Total tax payable
Tax payable (rounded off)

180
6,186
6,190

Notes :
1.

As per section 112, deductions under Chapter VI-A are not allowable against long term
capital gain. Therefore, Paulomi is not entitled to deduction under section 80C in respect
of payment of life insurance premium and contribution to PPF. She is also not entitled to
deduction under section 80D in respect of medical insurance premium paid by her.

2.

Since Paulomi has not transferred her shares through the Stock Exchange and,
therefore, has not paid securities transaction tax, she is not entitled to claim exemption
under section 10(38) in respect of long term capital gain.

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She is, however, entitled to reduce the long-term capital gain by the unexhausted basic
exemption limit and pay tax on the balance @20% as per section 112. In this case, since
she has no other source of income, the entire basic exemption limit of ` 2,50,000 to the
extent of long-term capital gain can be reduced from the long-term capital gain.

Question 19
Aarav converts his plot of land purchased in July, 2002 for ` 80,000 into stock-in-trade on 31st
March, 2014. The fair market value as on 31.3.2014 was ` 1,90,000. The stock-in-trade was
sold for ` 2,25,000 in the month of January, 2015.
Find out the taxable income, if any, and if so under which head of income and for which
Assessment Year?
Cost Inflation Index:F.Y. 2002-03: 447; F.Y. 2013-14: 939; F.Y. 2014-15: 1024.
Answer
Conversion of a capital asset into stock-in-trade is a transfer within the meaning of section
2(47) in the previous year in which the asset is so converted. However, the capital gains will
be charged to tax only in the year in which the stock-in-trade is sold.
The cost inflation index of the financial year in which the conversion took place should be
considered for computing indexed cost of acquisition. Further, the fair market value on the
date of conversion would be deemed to be the full value of consideration for transfer of the
asset as per section 45(2). The sale price less the fair market value on the date of conversion
would be treated as the business income of the year in which the stock-in-trade is sold.
Therefore, in this problem, both capital gains and business income would be charged to tax in
the A.Y. 2015-16.
Particulars
Capital Gains
Sale consideration (Fair market value on the date of conversion)
Less: Indexed cost of acquisition (` 80,000 939/447)
Long-term capital gain
Profits & Gains of Business or Profession
Sale price of stock-in-trade
Less: Fair market value on the date of conversion

`
1,90,000
1,68,054
21,946
2,25,000
1,90,000
35,000

Computation of taxable income of Mr. Aarav for A.Y.2015-16

Particulars
`
Profits and gains from business or profession
35,000
Long term capital gains
21,946
56,946

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Question 20
Discuss the tax implications arising consequent to conversion of a capital asset into stock-intrade of business and its subsequent sale.
Answer
The conversion of a capital asset into stock-in-trade is treated as a transfer under section
2(47). It would be treated as a transfer in the year in which the capital asset is converted into
stock-in-trade. However, as per section 45(2), the profits or gains arising from the transfer by
way of conversion of capital assets into stock-in-trade will be chargeable to tax only in the
year in which the stock-in-trade is sold. For the purpose of computing capital gains in such
cases, the fair market value of the capital asset on the date on which it was converted into
stock-in-trade shall be deemed to be the full value of consideration received or accruing as a
result of the transfer of the capital asset. Indexation benefit is available upto the year of
conversion of capital asset in stock-in-trade.
On subsequent sale of such stock-in-trade, business profits would arise. The business income
chargeable to tax would be the difference between the price at which the stock-in-trade is sold
and the fair market value on the date of conversion of the capital asset into stock-in-trade.
Question 21
What is the cost of acquisition of self-generated assets, for the purpose of computation of
capital gains?
Answer
1.

Cost of acquisition of a capital asset, being goodwill of a business or a trade mark or

brand name associated with a business or a right to manufacture, produce or process
any article or thing, or right to carry on any business, tenancy rights, stage carriage
permits and loom hours [Section 55(2)(a)]
(i)

If the above capital assets have been purchased by the assessee, the cost of acquisition
is the amount of the purchase price. For example, if Mr. A purchases a stage carriage
permit from Mr. B for ` 2 lacs, that will be the cost of acquisition for Mr. A.

(ii)

If the above capital assets are self-generated, the cost of acquisition shall be taken as nil.

(iii) In case the capital asset is acquired by any mode given under clauses (i) to (iv) of section
49(1), the cost of acquisition will be the cost to the previous owner if the previous owner
paid for it. However, if it was self-generated by the previous owner, the cost of acquisition
will be taken as nil.
2.

Cost of acquisition of other self-generated assets not covered under section 55(2)(a):
In respect of self-generated goodwill of a profession and other self-generated assets not
specifically covered under section 55(2)(a), the decision of the Supreme Court in CIT v. B.C.
Srinivasa Setty [1981] 128 ITR 294 will apply. In that case, the Supreme Court held that if the
cost of acquisition of a self-generated asset is incapable of determination, then transfer of such
asset is not taxable and consequently the gains thereon cannot be brought to charge.

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Question 22
Mr. Malik owns a factory building on which he had been claiming depreciation for the past few
years. It is the only asset in the block. The factory building and land appurtenant thereto were
sold during the year. The following details are available:
Particulars

Building completed in September, 2008 for

10,00,000

Land appurtenant thereto purchased in April, 2002 for

12,00,000

Advance received from a prospective buyer for land in May, 2003, forfeited
in favour of assessee, as negotiations failed

50,000

WDV of the building block as on 1.4.2014

8,74,800

Sale value of factory building in November, 2014

8,00,000

Sale value of appurtenant land in November, 2014

40,00,000

The assessee is ready to invest in long-term specified assets under section 54EC, within specified time.
Compute the amount of taxable capital gain for the assessment year 2015-16 and the amount
to be invested under section 54EC for availing the maximum exemption.
Cost inflation indices are as under :
Financial Year
2002-03
2003-04
2014-15

Cost inflation index

447
463
1024

Answer
Computation of taxable capital gain of Mr. Malik for A.Y.2015-16
Particulars
Factory building
Sale price of building
Less: WDV as on 1.4.2014
Short-term capital loss on sale of building
Land appurtenant to the above building
Sale value of land
Less: Indexed cost of acquisition (` 11,50,000
1024/447)
Long-term capital gains on sale of land
Chargeable long term capital gain

The Institute of Chartered Accountants of India

`
8,00,000
8,74,800
(-) 74,800

40,00,000
26,34,452
13,65,548
12,90,748

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Income-tax

Investment under section 54EC

In this case, both land and building have been held for more than 36 months and hence, are
long-term capital assets. Exemption under section 54EC is available if the capital gains arising
from transfer of a long-term capital asset are invested in long-term specified assets like bonds
of National Highways Authority of India and Rural Electrification Corporation Ltd., within 6
months from the date of transfer. As per section 54EC, the amount to be invested for availing
the maximum exemption is the net amount of capital gain arising from transfer of long-term
capital asset, which is ` 12,90,748 (rounded off to ` 12,91,000) in this case.
Notes :
1.

Where advance money has been received by the assessee, and retained by him, as a
result of failure of the negotiations, section 51 will apply. The advance retained by the
assessee will go to reduce the cost of acquisition. Indexation is to be done on the cost of
acquisition so arrived at after reducing the advance money forfeited i.e. ` 12,00,000 `
50,000 = ` 11,50,000. It may be noted that in cases where the advance money is
forfeited during the previous year 2014-15 or thereafter, the amount forfeited would be
taxable under the head Income from Other Sources and such amount will not be
deducted from the cost of acquisition of such asset while calculating capital gains.

2.

Factory building on which depreciation has been claimed, is a depreciable asset. Profit /
loss arising on sale is deemed to be short-term capital gain/loss as per section 50, and
no indexation benefit is available.

3.

Land is not a depreciable asset, hence section 50 will not apply. Being a long-term
capital asset (held for more than 36 months), indexation benefit is available.

4.

As per section 74, short term capital loss can be set-off against any income under the
head Capital gains, long-term or short-term. Therefore, in this case, short-term capital
loss of ` 74,800 can be set-off against long-term capital gain of ` 13,65,548.

Question 23
Mr. A is an individual carrying on business. His stock and machinery were damaged and
destroyed in a fire accident.
The value of stock lost (total damaged) was ` 6,50,000. Certain portion of the machinery
could be salvaged. The opening WDV of the block as on 1-4-2014 was ` 10,80,000.
During the process of safeguarding machinery and in the fire fighting operations, Mr. A lost his
gold chain and a diamond ring, which he had purchased in April, 2003 for ` 1,20,000. The
market value of these two items as on the date of fire accident was ` 1,80,000.
Mr. A received the following amounts from the insurance company:
(i)

Towards loss of stock

` 4,80,000

(ii)

Towards damage of machinery

` 6,00,000

(iii) Towards gold chain and diamond ring

` 1,80,000

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You are requested to briefly comment on the tax treatment of the above three items under the
provisions of the Income-tax Act, 1961.
Answer
(i)

Compensation towards loss of stock: Any compensation received from the insurance
company towards loss/damage to stock in trade is to be construed as a trading receipt.
Hence, ` 4,80,000 received as insurance claim for loss of stock has to be assessed
under the head Profit and gains of business or profession.
Note - The assessee can claim the value of stock destroyed by fire as revenue loss,
eligible for deduction while computing income under the head Profits and gains of
business or profession.

(ii) Compensation towards damage to machinery: The question does not mention
whether the salvaged machinery is taken over by the Insurance company or whether
there was any replacement of machinery during the year. Assuming that the salvaged
machinery is taken over by the Insurance company, and there was no fresh addition of
machinery during the year, the block of machinery will cease to exist. Therefore,
` 4,80,000 being the excess of written down value (i.e ` 10,80,000) over the insurance
compensation (i.e. ` 6,00,000) will be assessable as a short-term capital loss.
Note If new machinery is purchased in the next year, it will constitute the new block of
machinery, on which depreciation can be claimed for that year.
(iii) Compensation towards loss of gold chain and diamond ring: Gold chain and
diamond ring are capital assets as envisaged by section 2(14). They are not personal
effects, which alone are to be excluded. As per section 45(1A), if any profit or gain
arises in a previous year owing to receipt of insurance claim, the same shall be
chargeable to tax as capital gains. The capital gains has to be computed by reducing the
indexed cost of acquisition of jewellery from the insurance compensation of ` 1,80,000.
Question 24
Mr. A who transfers land and building on 02.01.2015, furnishes the following information:
(i)

Net consideration received ` 12 lakhs.

(ii)

Value adopted by stamp valuation authority, which was not contested by Mr. A ` 19.5
lakhs.

(iii) Value ascertained by Valuation Officer on reference by the Assessing Officer ` 20 lakhs.
(iv) This land was distributed to Mr. A on the partial partition of his HUF on 1.4.1981. Fair
market value of the land as on 1.4.81 was ` 1,10,000.
(v) A residential building was constructed on the above land by Mr. A at a cost of ` 3,20,000
(construction completed on 1.12.2003) during the financial year 2003-04.
(vi) Brought forward unabsorbed short-term capital loss (incurred on sale of shares during
the financial year 2010-11) ` 75,000.

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Mr. A seeks your advice as to the amount to be invested in NHAI/RECL bonds so as to be

exempt from clutches of capital gain tax. Cost inflation indices for the financial years 1981-82,
2003-04 & 2014-15 are 100, 463 and 1024, respectively.
Answer
Computation of Capital Gains of Mr. A for the Assessment Year 2015-16
Particulars

Full value of consideration (deemed) (See Note-1&2)

`
19,50,000

(Indexation benefit is available since land and buildings are longterm capital assets)
Less: Indexed cost of land (` 1,10,000 1024/100)
Indexed cost of building (` 3,20,000 1024/ 463)
Long-term capital gain

11,26,400
7,07,732 18,34,132
1,15,868

Less: Brought forward short-term capital loss set off(See Note-4)

75,000

Amount to be invested in NHAI / RECL bonds

40,868

Notes :
(1) Where the consideration received or accruing as a result of transfer of a capital asset,
being land or building or both, is less than the value adopted or assessed by any
authority of a State Government (Stamp Valuation Authority) for the purpose of payment
of stamp duty in respect of such asset and the same is not contested by the assessee,
such value adopted or assessed shall be deemed to be the full value of the consideration
received or accruing as a result of such transfer [Section 50C(1)]. Accordingly, the full
value of consideration will be ` 19.5 lakhs in this case.
(2) It is further provided in section 50C(3) that where the valuation is referred by the
Assessing Officer to Valuation Officer and the value ascertained by such Valuation
Officer exceeds the value adopted or assessed by the Stamp Valuation Authority, the
value adopted or assessed by the Stamp Valuation Authority shall be taken as the full
value of the consideration received or accruing as a result of the transfer. Since the value
ascertained by the valuation officer (i.e. ` 20 lakhs) is higher than the value adopted by
the stamp valuation authority (i.e. ` 19.5 lakhs), the full value of consideration in this
case is ` 19.5 lakhs.
(3) Cost of land which is acquired on partition of HUF is the cost to the previous owner.
Since date and cost of acquisition to the previous owner are not given, fair market value
as on 1.4.1981 is taken as the cost and indexed.
(4) Brought forward unabsorbed short term capital loss can be set off against any capital
gains, short term or long term, for 8 assessment years immediately succeeding the
assessment year for which the loss was first computed.

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(5) As per section 54EC, an assessee can avail exemption in respect of long-term capital
gains, if such capital gains are invested in the bonds issued by the NHAI / RECL
redeemable after 3 years. Such investment is required to be made within a period of 6
months from the date of transfer of the asset. The exemption shall be the amount of
capital gain or the amount of such investment made, whichever is less.
Question 25
Mr. X is in possession of agricultural land situated within urban limits, which is used for
agricultural purposes during the preceeding 3 years by his father. On 4.4.2014, this land is
compulsorily acquired by the Central Government of India on a compensation fixed and paid
by it for ` 10 lakhs. Advise X as to the tax consequences, assuming that the entire amount is
invested in purchase of shares.
Answer
Section 10(37) exempts the capital gains arising to an individual or a Hindu Undivided Family
from transfer of agricultural land by way of compulsory acquisition, or a transfer, the
consideration for which is determined or approved by the RBI or the Central Government.
Such exemption is available where the compensation or the enhanced compensation or
consideration, as the case may be, is received on or after 1st April, 2004 and the land has
been used for agricultural purposes during the preceding two years by such individual or a
parent of his or by such Hindu undivided family.
Since all the above conditions are fulfilled in this case, X is entitled to exemption under section
10(37) of the entire capital gains arising on sale of agricultural land.
Question 26
Mr. Sagar, a resident individual acquired a plot of land at a cost of ` 75,000 in June,
1999. He constructed a house for his residence on that land at a cost of ` 1,25,000 in the
financial year 2001-02.
He transferred the house for ` 15,00,000 in May, 2014 and acquired another residential
house in June, 2014 for ` 8,00,000.
He furnishes other particulars as under
Insurance agency commission earned

45,000

(Net of TDS of ` 5,000)

Investment in NSC VIII issue

20,000

(i.e. on 20-3-2015)
Cost inflation index details are given below:
Financial Year
1999 2000

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Cost Inflation Index

389

4.189

Income-tax

2001 2002

426

2014 2015

1024

Compute the total income of Mr. Sagar for the assessment year 2015-16.
Answer
Computation of total income of Mr. Paari for the A.Y. 2014-15
Particulars

Capital Gains
Sale consideration
Less: Indexed cost of land (` 75,000 X 1024/389)
Indexed cost of building (` 1,25,000 X 1024/426)

15,00,000
1,97,429
3,00,469

4,97,898
10,02,102

Less: Exemption under section 54 (See Note 2 below)

8,00,000

Long-term capital gain

2,02,102

Profit and gains from business or profession/Income

from other sources
Insurance agency commission earned (Gross)
(` 45,000 + ` 5,000)
Gross Total Income

50,000
2,52,102

Less: Deduction under Chapter VI-A

Section 80C - Investment in NSC VIII
Total Income

20,000
2,32,102

Notes:
(1) Since the building and the land are held for more than 36 months, the same are longterm capital assets and the capital gain arising on sale of such assets is a long-term
capital gain.
(2) As per the provisions of section 54, the capital gain arising on transfer of a long-term
residential property shall not be chargeable to tax to the extent such capital gain is
invested in the purchase of a residential house property one year before or two years
after the date of transfer of original asset or constructed a residential house property
within three years after such date. Since Mr. Parri has purchased another residential
house in June, 2014 for ` 8,00,000, the capital gain arising on transfer of residential
house property in May, 2014 is exempt under section 54 to that extent.

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Question 27
Mr. Y submits the following information pertaining to the year ended 31st March, 2015:
(i)

On 30.11.2014, when he attained the age of 60, his friends in India gave a flat at Surat
as a gift, each contributing a sum of ` 20,000 in cash. The cost of the flat purchased
using the various gifts was ` 3.40 lacs.

(ii)

His close friend abroad sent him a cash gift of ` 75,000 through his relative for the above
occasion.

(iii) Mr. Y sold the above flat on 30.1.2015 for ` 3.6 lacs. The Registrars valuation for stamp duty
purposes was ` 3.7 lacs. Neither Mr. Y nor the buyer, questioned the value fixed by the Registrar.
(iv) He had purchased some unlisted equity shares in X Pvt. Ltd., on 5.2.2007 for ` 3.5 lacs.
These shares were sold on 15.3.2015 for ` 2.8 lacs.
You are requested to calculate the total income of Mr. Y for the assessment year 2015-16.
[Cost Inflation Index for F.Y. 2006-07: 519, 2014-15: 1024]
Answer
Computation of total income of Mr.Y for A.Y. 2015-16
Particulars

Capital Gains
Short term capital gains (on sale of flat)
(i) Sale consideration

3,60,000

(ii) Stamp duty valuation

3,70,000

Consideration for the purpose of capital gains as per

section 50C (stamp duty value, since it is higher than
sale consideration)
Less: Cost of acquisition [As per section 49(4), cost to
be taken into consideration for 56(2)(vii) will be the
cost of acquisition]

3,70,000

3,40,000

Long term capital loss on sale of equity shares of X

Pvt. Ltd
Sale consideration

2,80,000

Less: Indexed cost of acquisition(` 3,50,000

1024/519)

6,90,559

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30,000

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Income-tax

Long term capital loss to be carried forward

4,10,559

(See Note 1 below)

Income from other sources:
Gift from friends by way of immovable property on
30.11.2014 [ See Note 3 below].

3,40,000

Gift received from a close friend (unrelated person)

[See Note 2 below ]

75,000

Total income

4,45,000

Notes:
1.

In the given problem, unlisted shares of X Pvt. Ltd. have been held for more than 36
months and hence, constitute a long term capital asset. The loss arising from sale of such
shares is, therefore, a long-term capital loss. As per section 70(3), long term capital loss
can be set-off only against long-term capital gains. Therefore, long-term capital loss cannot
be set-off against short-term capital gains. However, such long-term capital loss can be
carried forward to the next year for set-off against long-term capital gains arising in that
year.

2.

Any sum received from an unrelated person will be deemed as income and taxed as
income from other sources if the aggregate sum received exceeds ` 50,000 in a year
[Section 56(2)(vii)].

3.

Receipt of immovable property without consideration would attract the provisions of

section 56(2)(vii).

Question 28
Mr. Bala sold his vacant site on 21.09.2014 for ` 7,00,000. It was acquired by him on
01.10.1995 for ` 1,50,000.
The State stamp valuation authority fixed the value of the site at the time of transfer @
` 13,00,000.
Compute capital gains in the hands of Bala and give your reasons for computation.
Cost inflation index : F.Y.1995-96: 281 and F.Y. 2014-15 : 1024.
Answer
Computation of capital gains of Bala for the A.Y.2015-16
Particulars
Deemed sale consideration as per section 50C

`
13,00,000

Less : Indexed cost of acquisition (` 1,50,000 1024 /281)

5,46,619

Taxable long term capital gain

7,53,381

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Note: According to section 50C(1), where the consideration received or accruing as a result of
the transfer of land or building or both is less than the value adopted or assessed or
assessable by the State Stamp Valuation Authority for the purpose of payment of stamp duty
in respect of such transfer, then the value so adopted or assessed or assessable by the State
Stamp Valuation Authority shall be deemed to be the full value of the consideration received
or accruing as a result of the transfer.
In this case, since the consideration of ` 7,00,000 received on transfer of land is less than the
value of ` 13,00,000 fixed by the State Stamp Valuation Authority, the value adopted by the
State Stamp Valuation Authority is deemed to be the full value of consideration and capital
gains is calculated accordingly.
Question 29
Mr. X furnishes the following data for the previous year ending 31.3.2015:
(a) Unlisted Equity Shares of AB Ltd., 10,000 in number were sold on 31.5.2014, at ` 500 for
each share.
(b) The above shares of 10,000 were acquired by X in the following manner:
(i)

Received as gift from his father on 1.6.1980 (5,000 shares) the fair market value on
1.4.1981 ` 50 per share.

(ii)

Bonus shares received from AB Ltd. on 21.7.1985 (2,000 shares).

(iii) Purchased on 1.2.1994 at the price of ` 125 per share (3,000 shares).
(c) Purchased one residential house at ` 25 lakhs, on 1.5.2015 from the sale proceeds of
shares.
(d) X is already owning a residential house, even before the purchase of above house.
You are required to compute the taxable capital gain. He has no other source of income
chargeable to tax.
(Cost Inflation Index Financial year 1985-86: 133; 1993-94: 244; Financial year 2014-15:
1024)
Answer
Computation of taxable capital gain of Mr. X for A.Y. 2015-16
Particulars

`
50,00,000

Sale consideration received on sale of 10,000 shares @ ` 500 each

Less: Indexed cost of acquisition
(a)
(b)

5,000 shares received as gift from father on 1.6.1980

Indexed cost 5,000 x ` 50 x 1024/100
2,000 bonus shares received from AB Ltd
Bonus shares are acquired on 21.7.1985 i..e after 01.04.1981.

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25,60,000
Nil

4.193

Income-tax
Hence, the cost is Nil.

(c)

3000 shares purchased on 1.2.1994 @ ` 125 per share. The

indexed cost is 3000 x 125 x 1024/244
15,73,770 41,33,770

Long term capital gain

8,66,230

Less : Exemption under section 54F (See Note below)

4,33,115

` 8,66,230 x ` 25,00,000 / ` 50,00,000

Taxable long term capital gain

4,33,115

Note: Exemption under section 54F can be availed by the assessee subject to fulfillment of
the following conditions:
(a) The assessee should not own more than one residential house on the date of transfer of
the long-term capital asset;
(b) The assessee should purchase a residential house within a period of 1 year before or 2
years after the date of transfer or construct a residential house within a period of 3 years
from the date of transfer of the long-term capital asset.
In this case, the assessee has fulfilled the two conditions mentioned above. Therefore, he is
entitled to exemption under section 54F.
Question 30
Ms. Vimla sold a residential building at Jodhpur for ` 15,00,000 on 01-07-2014.
The building was acquired for ` 1,50,000 on 01-06-1997.
She paid brokerage @ 2% at the time of sale of the building. She invested ` 7 lakhs in
purchase of a residential building in December 2014 and deposited ` 2 lakhs in NHAI Capital
Gains Bond in March, 2015. Compute her taxable capital gain.
Cost inflation index of F.Y.1997-98: 331; F.Y. 2014-15: 1024
Answer
Computation of taxable capital gain of Ms. Vimla for A.Y.2015-16
Particulars
Sale price of residential building
Less : Brokerage @ 2%
Net consideration

15,00,000
30,000
14,70,000

Less : Indexed cost of acquisition

` 1,50,000 x 1024/331

4,64,048
10,05,952

Less: Deduction under section 54 for purchase of new

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Capital Gains

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residential house in December 2014

7,00,000

Taxable long term capital gain

3,05,952

Note : One of the conditions for claiming exemption under section 54EC for the investment in
RECL/NHAI Capital Gains bonds is that the deposit should be made within 6 months from the
date of transfer. In this case, the transfer took place on 1.7.2014 and the 6 months period
within which the deposit should be made for the purpose of section 54EC would expire by
1.1.2015. The investment in REC/NHAI Capital Gains bonds was made only in March 2015.
Therefore, the assessee is not eligible for exemption under section 54EC.
Question 31
Mrs. Malini Hari shifted her industrial undertaking located in corporation limits of Faridabad, to
a Special Economic Zone (SEZ) on 1.12.2014.
The following particulars are available:
Particulars
(a)

Land: Purchased on 20.01.2003

Sold for

(b)

4,26,000
22,00,000

Building [Construction completed on 14.03.2005]

WDV of building as on 01.04.2014
Sold for

(c)

8,20,000
11,39,000

WDV of cars as on 01.04.2014

7,40,000

Sold for

6,00,000

(d)

Expenses on shifting the undertaking

1,15,000

(e)

Assets acquired for the undertaking in the SEZ (on or before 25.06.2015):
(i)

Land

3,00,000

(ii)

Building

5,00,000

(iii)

Computers

1,00,000

(iv)

Car

4,20,000

(v)

Machinery (Second hand)

2,00,000

(vi)

Furniture

50,000

There is no intention of investing in any other asset in this undertaking.

Compute the exemption available under section 54GA for the assessment year 2015-16.
Cost inflation indices for F.Y.2002-03 447; F.Y.2014-15: 1024.

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Income-tax

Answer
Where an assessee shifts an existing undertaking from an urban area to a SEZ and incurs
expenses for shifting and acquires new assets for the undertaking in the SEZ, exemption
under section 54GA would be available in such a case.
The capital gain, short-term or long-term, arising from transfer of land, building, plant and
machinery in the existing undertaking would be exempt under section 54GA if the assessee, within
a period of one year before or three years after the date on which the transfer took place,
(i)

acquires plant and machinery for use in the undertaking in the SEZ;

(ii)

acquires land or building or constructs building for the business of the undertaking in the
SEZ;

(iii) incurs expenses on shifting of the undertaking.

Computation of capital gain :
(a) Land:
Sale price

22,00,000

Less: Indexed cost of acquisition 4,26,000 x 1024/447

Long-term capital gain

9,75,893
12,24,107

(b) Building:
Sale value

11,39,000

Less: Opening WDV

8,20,000

Short-term capital gain under section 50

3,19,000

(c) Plant:
Car
Sale value

6,00,000

Less: Opening WDV

7,40,000

Short term capital loss under section 50

Net short term capital gain (` 3,19,000 ` 1,40,000)

(-)1,40,000
1,79,000

Total capital gain (LTCG+STCG) i.e. ` 12,24,107 + ` 1,79,000 = ` 14,03,107

Exemption under section 54GA is available in respect of the following assets acquired
and expenses incurred:
Particulars

Land

3,00,000

Building

5,00,000

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Capital Gains

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Plant:
Computers

1,00,000

Car

4,20,000

Machinery

2,00,000

Expenses of shifting

1,15,000

Total Exemption

16,35,000

Note:
1.

The total exemption available under section 54GA is the lower of capital gains of
` 14,03,107 or the amount of investment which is ` 16,35,000. Hence, the amount of
exemption available under section 54GA is ` 14,03,107. The taxable capital gains would
be Nil.

2.

Furniture purchased is not eligible for exemption under section 54GA.

3.

There is no restriction regarding purchase of second hand machinery.

4.

Computers and car would constitute Plant.

Question 32
Mr. Thomas inherited a house in Jaipur under will of his father in May, 2003. The house was
purchased by his father in January, 1980 for ` 2,50,000. He invested an amount of ` 7,00,000 in
construction of one more floor in this house in June, 2005. The house was sold by him in
November, 2014 for ` 37,50,000. The valuation adopted by the registration authorities for charge
of stamp duty was ` 47,25,000 which was not contested by the buyer, but as per assessees
request, the Assessing Officer made a reference to Valuation officer. The value determined by the
Valuation officer was ` 47,50,000. Brokerage @ 1% of sale consideration was paid by Mr. Thomas
to Mr. Sunil. The fair market value of house as on 01.04.1981 was ` 2,70,000.
You are required to compute the amount of capital gain chargeable to tax for A.Y. 2015-16
with the help of given information and by taking CII for the F.Y. 2003-04 : 463, F.Y. 2005-06:
497 and for F.Y. 2014-15:1024.
Answer
Computation of Long term Capital Gain for A.Y. 2015-16
Particulars
Sale consideration as per section 50C (Note-1)
Less: Expenses incurred on transfer being brokerage @ 1%
of sale consideration of ` 37.50 lacs

The Institute of Chartered Accountants of India

`
47,25,000
37,500
46,87,500

4.197

Income-tax

Less: Indexed cost of acquisition (Note-2)

(` 2,70,000 1024/463)
Indexed cost of improvement (` 7,00,000 1024/497)
Long term capital gain

5,97,149
14,42,254

20,39,403
26,48,097

Notes:
1.

As per section 50C, where the consideration received or accruing as a result of transfer
of a capital asset, being land or building or both, is less than the valuation by the stamp
valuation authority, such value adopted or assessed by the stamp valuation authority
shall be deemed to be the full value of consideration. Where a reference is made to the
valuation officer, and the value ascertained by the valuation officer exceeds the value
adopted by the stamp valuation authority, the value adopted by the stamp valuation
authority shall be taken as the full value of consideration.
Sale consideration

` 37,50,000

Valuation made by registration authority for stamp duty

` 47,25,000

Valuation made by the valuation officer on a reference

` 47,50,000

Applying the provisions of section 50C to the present case, ` 47,25,000, being, the value
adopted by the registration authority for stamp duty, shall be taken as the sale
consideration for the purpose of charge of capital gain.
2.

The house was inherited by Mr. Thomas under the will of his father and therefore, the cost
incurred by the previous owner shall be taken as the cost. Fair market value as on 01.04.81,
accordingly, shall be adopted as the cost of acquisition of the house property. However,
indexation benefit will be given from the year in which Mr. Thomas first held the asset i.e.
P.Y.2003-04.
Alternative view: In the case of CIT v. Manjula J. Shah 16 Taxmann 42 (Bom.), the
Bombay High Court held that the indexed cost of acquisition in case of gifted asset can
be computed with reference to the year in which the previous owner first held the asset.
As per this view, the indexation cost of acquisition of house would be ` 27,64,800 and
long term capital gain would be ` 4,80,446.

Question 33
Ms. Vasudha contends that sale of a work of art held by her is not exigible to capital gains tax.
Is she correct?
Answer
As per section 2(14)(ii), the term personal effects excludes any work of art. As a result, any
work of art will be considered as a capital asset and sale of the same will attract capital gains
tax. Thus, the contention of Ms. Vasudha is not correct.

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Question 34
Ms. Vasumathi purchased 10,000 equity shares of ABC Co. Pvt. Ltd. on 28.2.2005 for
` 1,20,000. The company was wound up on 31.7.2014. The following is the summarized
financial position of the company as on 31.7.2014:
Liabilities

` Assets

60,000 Equity shares

6,00,000

General reserve

40,00,000

Provision for taxation

Agricultural lands
Cash at bank

42,00,000
6,50,000

2,50,000
48,50,000

48,50,000

The tax liability was ascertained at ` 3,00,000. The remaining assets were distributed to the
shareholders in the proportion of their shareholding. The market value of 6 acres of
agricultural land (in an urban area) as on 31.7.2014 is ` 10,00,000 per acre.
The agricultural land received above was sold by Ms. Vasumathi on 28.2.2015 for

` 15,00,000.
Discuss the tax consequences in the hands of the company and Ms. Vasumathi.
The cost inflation indices are: F.Y.2004-05: 480; F.Y.2014-15 : 1024
Answer
In the hands of the company
As per section 46(1), distribution of capital assets amongst the shareholders on liquidation of
the company is not regarded as transfer in the hands of the company. Consequently, there
will be no capital gains in the hands of the company.
In the hands of Ms. Vasumathi (shareholder)
Section 46(2) provides that such capital gains would be chargeable in the hands of the
shareholder.
Particulars
Ms. Vasumathi holds

1/6th

of the shareholding of the company

Market value of agricultural land received (1 acre @ ` 10 Lakhs)

10,00,000
58,333

Cash at bank [1/6th of (` 6,50,000 ` 3,00,000)]

10,58,333
Less: Deemed dividend under section 2(22)(c) ` 50,000)

1/6th

of (` 40,00,000-

6,58,333

Consideration for computing Capital Gain

4,00,000

Less: Indexed cost of acquisition of Shares (` 1,20,000 x 1024/ 480)

2,56,000

Long term capital gains

1,44,000

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4.199

Income-tax

Notes:
1.

Where the capital asset became the property of the assessee on the distribution of the
capital assets of a company on its liquidation and the assessee has been assessed to
capital gains in respect of that asset under section 46, the cost of acquisition means the
fair market value of the asset on the date of distribution. Hence, the short-term capital
gains in the hands of Ms. Vasumathi (shareholder) at the time of sale of urban
agricultural land should be computed as follows:
Particulars

Sale consideration

15,00,000

Less: Fair market value of the agricultural land on the date of

distribution

10,00,000

Short term capital gain

5,00,000

2.

Dividend under section 2(22)(c) amounting to ` 6,58,333 will be exempt under section 10(34).

3.

The tax liability ascertained at ` 3,00,000 has to be reduced from bank balance while
computing full value of consideration under section 46(2). ` 50,000, being the difference
between ` 3,00,000 and ` 2,50,000, has to be reduced from General Reserve for calculating
deemed dividend under section 2(22)(c).

Question 35
State with reasons whether the following statements are true or false having regard to the
provisions of the Income-tax Act, 1961:
(a) Capital gain of ` 75 lakh arising from transfer of long term capital assets on 1.5.2014 will
be exempt from tax if such capital gain is invested in the bonds redeemable after three
years, issued by NHAI under section 54EC.
(b) As per section 49(2A), read with section 47(xa) of the Income-tax Act, 1961, no capital
gains would arise on conversion of foreign currency exchangeable bonds into shares or
debentures, for facilitating the issue of FCEBs by companies.
Answer
(a) False : The exemption under section 54EC has been restricted, by limiting the maximum
investment in long term specified assets (i.e. bonds of NHAI or RECL, redeemable after 3
years) to ` 50 lakh, whether such investment is made during the relevant previous year
or the subsequent previous year, or both. Therefore, in this case, the exemption under
section 54EC can be availed only to the extent of ` 50 lakh, provided the investment is
made before 1.11.2014 (i.e., within six months from the date of transfer).
(b) True : As per section 47(xa), any transfer by way of conversion of bonds referred to in
section 115AC into shares and debentures of any company is not regarded as transfer.

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Capital Gains

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Therefore, there will be no capital gains on conversion of foreign currency exchangeable

bonds into shares or debentures.
Question 36
Mrs. X, an individual resident woman, wanted to know whether income-tax is attracted on sale
of gold and jewellery gifted to her by her parents on the occasion of her marriage in the year
1979 which was purchased at a total cost of ` 2,00,000?
Answer
The definition of capital asset under section 2(14) includes jewellery. Therefore, capital gains is
attracted on sale of jewellery, since jewellery is excluded from personal effects. The cost to the
previous owner or the fair market value as on 1.4.1981, whichever is more beneficial to the
assessee, would be treated as the cost of acquisition. Accordingly, in this case, long term capital
gain @ 20% will be attracted in the year in which the gold and jewellery is sold by Mrs.X.
Question 37
Mr. Kumar, aged 50 years, is the owner of a residential house which was purchased in
September, 1993 for ` 5,00,000. He sold the said house on 5th August, 2014 for ` 24,00,000.
Valuation as per stamp valuation authority of the said residential house was ` 40,00,000. He
invested ` 5,00,000 in NHAI Bonds on 12th January, 2015. He purchased a residential house
on 5th July, 2015 for ` 10,00,000. He gives other particulars as follows:
Interest on Bank Fixed Deposit

` 32,000

Investment in public provident fund

` 50,000

You are requested to calculate the taxable income for the assessment year 2015-16 and the
tax liability, if any.
Cost inflation index for F.Y. 1993-94 and 2014-15 are 244 and 1024, respectively.
Answer
Computation of total income of Mr. Kumar for the A.Y.2015-16
Particulars

Capital Gains:
Sale price of the residential house

24,00,000

Valuation as per Stamp Valuation authority

40,00,000

(Value to be taken is the higher of actual sale price

or valuation adopted for stamp duty purpose as per
section 50C)
Therefore, Consideration for the purpose of Capital
Gains

The Institute of Chartered Accountants of India

40,00,000

4.201

Income-tax

Less: Indexed Cost of Acquisition

` 5,00,000 x 1024/244

20,98,361
19,01,639

Less: Exemption under section 54

` 10,00,000
Exemption under section 54EC ` 5,00,000

15,00,000

Long-term capital gains

4,01,639

Income from other sources:

Interest on bank deposits
Gross Total Income

32,000
4,33,639

Less: Deduction under Chapter VI-A

Section 80C Deposit in PPF (restricted to
` 32,000)
Total Income

32,000
4,01,639

Computation of Tax liability of Mr. Kumar for A.Y. 2015-16

Tax on ` 1,51,639 @ 20% [i.e. long term capital gain less basic
exemption limit (` 4,01,639 - ` 2,50,000)]
Less: Rebate u/s 87A
Add: Education Cess@2% & SHEC @ 1%
Tax Payable
Tax Payable (Rounded off)

30,328
2,000
28,327
850
29,177
29,180

Notes:
1.

The basic exemption limit of ` 2,50,000 can be adjusted against long term capital gains.

2.

Deduction under section 80C should be restricted to gross total income excluding long
term capital gain.

Question 38
Mr. Pranav, a resident individual aged 55 years, had purchased a plot of land at a cost of
` 75,000 in June, 1999. He constructed a house for his residence on that land at a cost of
` 1,25,000 in August, 2001. He sold that house in May, 2014 at ` 16,00,000 and purchased
another residential house in June, 2014 for ` 8,00,000. He furnishes other income and
investment as follows :

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Capital Gains

4.202

Particulars

Interest on fixed deposit with a bank (Net of TDS ` 5,000)

45,000

Investment in PPF

20,000

CII for financial year 1999-2000, 2001-02 and 2014-15 are 389, 426 and 1024 respectively.
You are required to compute taxable income and tax payable by Mr. Pranav for the
assessment year 2015-16.
Answer
Computation of taxable income and tax payable by Mr. Pranav for the A.Y. 2015-16
Particulars
1.

Income from Capital Gains

Full value of consideration

16,00,000

Less : Indexed cost of acquisition of land

(` 75,000 1024/389)
Less

: Indexed cost of
(` 1,25,000 1024/426)

construction

1,97,429
of

house
3,00,469
11,02,102

Less : Deduction under section 54

Cost of new residential house

8,00,000

Long term capital gains

2.

3,02,102

Income from other sources

Interest on Bank deposit (Net)

45,000

Add : Tax deducted at source

5,000

Gross total income

50,000
3,52,102

Less: Deduction under section 80C :

Investment in PPF

20,000

Taxable income

3,32,102

Components of Total income

Special income
Long-term Capital gains
Normal Income (` 50,000 ` 20,000)

3,02,102
30,000
3,32,102

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4.203

Income-tax
Nil

Tax on normal income of ` 30,000

Tax on LTCG
[LTCG (Maximum amount not chargeable to tax - Normal Income) @
20%] under section112 = {` 3,02,102 (` 2,50,000 ` 30,000)} x 20%
Less: Rebate under section 87A

16,420
2,000
14,420

Add : Education cess @ 2%

288

Secondary and higher education cess @ 1%

145

Tax payable

14,853

Less: Tax deducted at source

5,000
9,853

Tax payable (rounded off)

9,850

Question 39
Mr. C inherited from his father 8 plots of land in 1980. His father had purchased the plots in
1960 for ` 5 lakhs. The fair market value of the plots as on 1-4-1981 was ` 8 lakhs.
(` 1 lakh for each plot)
On 1st June 2001, C started a business of dealer in plots and converted the 8 plots as
stock-in-trade of his business. He recorded the plots in his books at ` 45 lakhs being the fair
market value on that date. In June 2005, C sold the 8 plots for ` 50 lakhs.
In the same year, he acquired a residential house property for ` 35 lakhs. He invested an
amount of ` 5 lakhs in construction of one more floor in his house in June 2006. The house
was sold by him in June 2014 for ` 63,50,000.
The valuation adopted by the registration authorities for charge of stamp duty was
` 85,50,000. As per the assessee's request, the Assessing Officer made a reference to a
Valuation Officer. The value determined by the Valuation Officer was ` 87,20,000.
Brokerage of 1 % of sale consideration was paid by C.
The relevant Cost Inflation Indices are :
F.Y. 1981-82

100

F.Y. 2001-02

426

F.Y. 2005-06

497

F.Y. 2006-07

519

F.Y. 2014-15
1024
Give the tax computation for the Assessment Year 2015-16.

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Capital Gains

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Answer
Computation of total income and tax liability of Mr. C for A.Y. 2015-16
Particulars

Capital Gains on sale of residential house property

Value declared by Mr. C ` 63,50,000
Value adopted by Stamp Valuation Authority ` 85,50,000
Valuation as per Valuation Officer ` 87,20,000
Gross Sale consideration (See Note 1)

85,50,000

Less: Brokerage@1% of sale consideration

63,500

Net Sale consideration

84,86,500

Less: Indexed cost of acquisition (` 35,00,000 1024/497)

Indexed cost of improvement (` 5,00,000 1024/519)
Long-term capital gains (Total Income)

72,11,268
9,86,513

81,97,781
2,88,719

Tax on total income (See Note 2)

Long-term
capital
(` 2,88,719 ` 2,50,000)
Less: Rebate u/s 87A

gain

taxable@20%

Add: Education cess @ 2%

Secondary and higher education cess @ 1%
Total tax liability
Tax liability (rounded off)

7,744
2,000
5,744
115
57
5,916
5,920

Notes:
1.

As per section 50C, in case the value of sale consideration declared by the assessee is
less than the value adopted by the Stamp Valuation Authority for the purpose of charging
stamp duty, then, the value adopted by the Stamp Valuation Authority shall be taken to
be the full value of consideration. In case the valuation is referred to the Valuation Officer
and the value determined is more than the value adopted by the Stamp Valuation
Authority, the value determined by the Valuation Officer shall be ignored. Therefore, in
the present case, the sale consideration would be the stamp valuation of ` 85,50,000,
since the same is more than the sale value declared by Mr. C and less than the value
determined by the Valuation Officer.

2.

As per section 112, the unexhausted basic exemption limit can be exhausted against the
long-term capital gains. Since Mr. C does not have any other income in the current year,

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Income-tax

the whole of the basic exemption limit of ` 2,50,000 is exhausted against the long-term
capital gains of ` 2,88,719 and the balance long-term capital gains shall be
taxable@20%. It is assumed that Mr. C is a resident individual below the age of 60
years.

Exercise
1.

Distribution of assets at the time of liquidation of a company (a) is not a transfer in the hands of the company or the shareholders
(b) is not a transfer in the hands of the company but capital gains is chargeable to tax
on such distribution in the hands of the shareholders
(c) is not a transfer in the hands of the shareholders but capital gains is chargeable to
tax on such distribution in the hands of the company.

2.

For an assessee, who is a salaried employee who invests in shares, what is the benefit
available in respect of securities transaction tax paid by him on sale of 100 listed shares
of X Ltd. which has been held by him for 14 months before sale?
(a) Rebate under section 88E is allowable in respect of securities transaction tax paid
(b) Securities transaction tax paid is treated as expenses of transfer and deducted from
sale consideration.
(c) Long term capital gains is completely exempt under section 10(38)

3.

Under section 50C, the guideline value for stamp duty is taken as the full value of
consideration only if (a) the asset transferred is building and the actual consideration is less than the
guideline value
(b) the asset transferred is either land or building or both and the actual consideration
is less than the guideline value
(c) the asset transferred is building, irrespective of the actual consideration.

4.

When there is a reduction of capital by a company and amounts are distributed to

shareholders,
(a) the entire distribution is subject to capital gains tax.
(b) the entire distribution is subject to tax under the head Income from other sources.
(c) The distribution attributable to accumulated profits is chargeable as deemed
dividend and distribution attributable to capital is subject to capital gains tax.

5.

Where there is a transfer of a capital asset by a partner to the firm by way of capital
contribution or otherwise, the consideration would be taken as -

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Capital Gains

4.206

(a) The market value of the capital asset on the date of transfer
(b) The cost less notional depreciation of the capital asset
(c) The value of the asset recorded in the books of the firm.
6.

Under section 54EC, capital gains are exempted if invested in the bonds issued by NHAI
& RECL (a) within a period of 6 months from the date of transfer of the asset
(b) within a period of 6 months from the end of the previous year
(c) within a period of 6 months from the end of the previous year or the due date for
filing the return of income under section 139(1), whichever is earlier

7.

Any payment made by a company on purchase of its own listed shares from a shareholder in
accordance with the provisions of section 77A of the Companies Act, 1956(a) shall be regarded as dividend
(b) shall not be regarded as dividend but capital gains tax liability is attracted in the
hands of the shareholder
(c) shall neither be regarded as dividend nor will it attract capital gains tax in the hands
of the shareholder.

8.

Discuss the conditions to be satisfied for claiming exemption of tax in respect of (a) Capital gains on compulsory acquisition of agricultural land situated within specified
urban limits
(b) Capital gains on sale of listed equity shares/units of an equity oriented fund.

9.

Write short notes on (i)

Capital gains in the case of slump sale under section 50B

(ii)

Reference to Valuation Officer under section 55A

10. What is the tax treatment, under the Income-tax Act, 1961, of capital gains arising on
transfer of assets in case of shifting of industrial undertaking from an urban area to any
special economic zone? Discuss.
11. List ten transactions which are not regarded as transfer for the purpose of capital gains.
Discuss the provisions relating to the same.
12. Explain the computation of capital gain in case of depreciable asset under section 50.
13. What are the transactions not regarded as transfer as per section 47 of the Income-tax
Act, 1961?

Answers
1. b; 2. c; 3. b; 4. c; 5. c; 6. a; 7. b

The Institute of Chartered Accountants of India

Unit 5 : INCOME FROM OTHER

SOURCES
Key Points

Where any income, profits or gains includible in the total income of an assessee,
cannot be included under any of the other heads, it would be chargeable under the
head Income from other sources. Hence, this head is the residuary head of income
[Section 56(1)]
Specific Incomes Chargeable under this head [Section 56(2)]
(1) Dividend Income
(2) Casual income (winnings from lotteries, cross word puzzles, races including
horse races, card games and other games, gambling, betting etc.). Such winnings
are chargeable to tax at a flat rate of 30% under section 115BB and no
expenditure or deduction under Chapter VIA can be allowed from such
income. No loss can be set-off against such income and even the unexhausted
basic exemption limit cannot be exhausted against such income.
(3) Sum of money or property received by an Individual or a Hindu
undivided family [Section 56(2)(vii)]

1
2
3

4
5

Nature of Particulars
asset
Money
Without
consideration
Movable
Without
property
consideration
Movable
Inadequate
property
consideration

Taxable value

The whole amount, if the same exceeds

` 50,000.
The aggregate fair market value of the
property, if it exceeds ` 50,000.
The difference between the aggregate fair
market value and the consideration, if such
difference exceeds ` 50,000.
Immovable Without
The stamp value of the property, if it exceeds
property
consideration ` 50,000.
Immovable Inadequate
The difference between the stamp duty value
property
consideration and the consideration, if such difference
exceeds ` 50,000.

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Income from Other Sources

4.208

Receipts exempted from the applicability of section 56(2)(vii)

Any sum of money or value of property received (a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer or donor, as the case may be; or
(e) from any local authority as defined in the Explanation to section 10(20); or
(f) from any fund or foundation or university or other educational institution or
hospital or other medical institution or any trust or institution referred to in section
10(23C); or
(g) from any trust or institution registered under section 12AA
Meaning of relative for the purpose of section 56(2)(vii)
(a) in case of an individual
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of any of the persons referred to above.
(b) In case of Hindu Undivided Family, any member thereof.
(4) Other receipts chargeable under this head
Section
56(2)(viia)

Provision
(i)

Transfer of shares of a company without consideration or for

inadequate consideration would attract the provisions of
section 56(2), if the recipient is a firm or a company.
(ii) If such shares are received without consideration, the aggregate
fair market value on the date of transfer would be taxed as the
income of the recipient firm or company, if it exceeds
` 50,000.
(iii) If such shares are received for inadequate consideration, the
difference between the aggregate fair market value and the
consideration would be taxed as the income of the recipient
firm or company, if such difference exceeds ` 50,000.

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Income-tax

(iv) However, the provisions of section 56(2)(viia) would not apply

in the case of transfer of shares (1) of a company in which the public are substantially interested;
or
(2) to a company in which the public are substantially
interested.
56(2)(viib) Consideration received in excess of FMV of shares issued by a closely
held company to any person, being a resident, to be treated as income
of such company, where shares are issued at a premium
56(2)(viii) Interest received on compensation/enhanced compensation deemed
to be income in the year of receipt and taxable under the head
Income from Other Sources.
56(2)(ix) Any sum of money received as an advance or otherwise in the course
of negotiations for transfer of a capital asset, if such sum is forfeited
and the negotiations do not result in transfer of such asset.
Deductions allowable [Section 57]
S.No.
Particulars
Deduction
1.
In case of dividends (other than Any reasonable sum paid by way of
dividends u/s 115-O) or interest on commission or remuneration to a
securities
banker or any other person.
2.
Family Pension
Sum equal to

33 1/3% of such income or

` 15,000,
whichever is less
3.
Interest on
50% of such interest income
compensation/enhanced
compensation received
Deductions not allowable [Section 58]
S.
Deductions not allowable
No.
1.
Any personal expense of the assessee
2.
3.
4.
5.
6.

Any interest chargeable to tax under the Act which is payable outside India
on which tax has not been paid or deducted at source.
Any payment taxable in India as salaries, if it is payable outside India unless
tax has been paid thereon or deducted at source.
Any payment to a relative or associate concern otherwise than by account payee
cheque or draft, if the aggregate of such payments exceed ` 20,000 during a day
Income-tax and wealth-tax paid.
Any expenditure or allowance in connection with income by way of earnings
from lotteries, cross word puzzles, races including horse races, card games and
other games of any sort or from gambling or betting of any form or nature

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Income from Other Sources

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Question 1
State whether the following are chargeable to tax and the amount liable to tax :
(i)

A sum of ` 1,20,000 was received as gift from non-relatives by Raj on the occasion of
the marriage of his son Pravin.

(ii)

Interest on enhanced compensation of ` 50,000 was received as per court decree in

December 2014 by Mr. Yogesh. Out of the said amount, a sum of ` 35,000, relates to
preceding financial years.

(iii) Interest on enhanced compensation of ` 96,000 received on 12-3-2015 for acquisition of

urban land, of which 40% relates to the earlier year.
Answer
S.No.

Taxable/Not
Taxable

(i)

Taxable

Amount
liable to
tax (` )
1,20,000

Reason

(ii)

Taxable

25,000

As per section 56(2)(viii), interest on enhanced

compensation is taxable in the year in which it is
received. Deduction of 50% in respect of the said
income is allowed under section 57(iv). Therefore,
` 25,000 (i.e., ` 50,000 ` 25,000) is taxable in
the hands of Mr. Yogesh in the F.Y.2014-15.

(iii)

Taxable

48,000

As per section 145A, interest received by the

assessee on enhanced compensation shall be
deemed to be the income of the year in which it is
received, irrespective of the method of accounting
followed by the assessee.

The exemption from applicability of section 56(2)(vii)

would be available if, inter alia, gift is received from a
relative or gift is received on the occasion of marriage
of the individual himself. In this case, since gift is
received by Mr. Raj from a non-relative on the
occasion of marriage of his son, it would be taxable in
his hands under section 56(2)(vii).

Interest of ` 96,000 on enhanced compensation is

chargeable to tax in the year of receipt i.e. P.Y.201415 under section 56(2)(viii) after providing deduction
of 50% under section 57(iv). Therefore, ` 48,000 is
chargeable to tax under the head Income from other
sources.

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Question 2
On 10.10.2014, Mr. Govind (a bank employee) received ` 5,00,000 towards interest on
enhanced compensation from State Government in respect of compulsory acquisition of his
land effected during the financial year 2009-10.
Out of this interest, ` 1,50,000 relates to the financial year 2011-12; ` 1,65,000 to the financial
year 2012-13; and ` 1,85,000 to the financial year 2013-14. He incurred ` 50,000 by way of legal
expenses to receive the interest on such enhanced compensation.
How much of interest on enhanced compensation would be chargeable to tax for the assessment
year 2015-16?
Answer
Section 145A provides that interest received by the assessee on enhanced compensation
shall be deemed to be the income of the assessee of the year in which it is received,
irrespective of the method of accounting followed by the assessee and irrespective of the
financial year to which it relates.
Section 56(2)(viii) states that such income shall be taxable as Income from other sources.
50% of such income shall be allowed as deduction by virtue of section 57(iv) and no other
deduction shall be permissible from such Income.
Therefore, legal expenses incurred to receive the interest on enhanced compensation would
not be allowed as deduction from such income.
Computation of interest on enhanced compensation taxable as Income from other
sources for the A.Y 2015-16:
Particulars

Interest on enhanced compensation taxable under section 56(2)(viii)

5,00,000

Less: Deduction under section 57(iv) (50% x ` 5,00,000)

2,50,000

Taxable interest on enhanced compensation

2,50,000

Question 3
The following details have been furnished by Mrs. Hemali pertaining to the year ended
31.3.2015 :
(i)

Cash gift of ` 51,000 received from her friend on the occasion of her Shastiaptha
Poorthi, a wedding function celebrated on her husband completing 60 years of age. This
was also her 25th wedding anniversary.

(ii)

On the above occasion, a diamond necklace worth ` 2 lacs was presented by her sister
living in Dubai.

(iii) When she celebrated her daughter's wedding on 21.2.2015, her friend assigned in Mrs.
Hemali's favour, a fixed deposit held by the said friend in a scheduled bank; the value of

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the fixed deposit and the accrued interest on the said date was ` 51,000.
Compute the income, if any, assessable as income from other sources.
Answer
(i)

Any sum of money received by an individual on the occasion of the marriage of the
individual is exempt. This provision is, however, not applicable to a cash gift received
during a wedding function celebrated on completion of 60 years of age.
The gift of ` 51,000 received from a non-relative is, therefore, chargeable to tax under
section 56(2)(vii) in the hands of Mrs. Hemali.

(ii) The provisions of section 56(2)(vii) are not attracted in respect of any sum of money or
property received from a relative. Thus, the gift of diamond necklace received from her
sister is not taxable under section 56(2)(vii), even though jewellery falls within the
definition of property.
(iii) To be exempt from applicability of section 56(2)(vii), the property should be received on
the occasion of the marriage of the individual, not that of the individuals son or daughter.
Therefore, this exemption provision is not attracted in this case.
Any sum of money received without consideration by an individual is chargeable to tax
under section 56(2)(vii), if the aggregate value exceeds ` 50,000 in a year. Sum of
money has, however, not been defined under section 56(2)(vii).
Therefore, there are two possible views in respect of the value of fixed deposit assigned
in favour of Mrs. Hemali
(1) The first view is that fixed deposit does not fall within the meaning of sum of
money and therefore, the provisions of section 56(2)(vii) are not attracted. It may
be noted that fixed deposit is also not included in the definition of property.
(2) However, another possible view is that fixed deposit assigned in favour of Mrs.
Hemali falls within the meaning of sum of money received.
Income assessable as Income from other sources
If the first view is taken, the total amount chargeable to tax as Income from other sources
would be ` 51,000, being cash gift received from a friend on her Shastiaptha Poorthi.
As per the second view, the provisions of section 56(2)(vii) would also be attracted in respect
of the fixed deposit assigned and the Income from other sources of Mrs. Hemali would be
` 1,02,000 (` 51,000 + ` 51,000).
Question 4
Decide the following transactions in the context of Income-tax Act, 1961:
(i)

Mr. B transferred 500 shares of Reliance Industries Ltd. to M/s. B Co. (P) Ltd. on
10.10.2014 for ` 3,00,000 when the market price was ` 5,00,000. The indexed cost of
acquisition of shares for Mr. B was computed at ` 4,45,000. The transfer was not

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Income-tax

subjected to securities transaction tax.

Determine the income chargeable to tax in the hands of Mr. B and M/s. B Co. (P) Ltd.
because of the above said transaction.
(ii)

Mr. Chezian is employed in a company with taxable salary income of ` 5,00,000. He

received a cash gift of ` 1,00,000 from Atma Charitable Trust (registered under section
12AA) in December 2014 for meeting his medical expenses.
Is the cash gift so received from the trust chargeable to tax in the hands of Mr. Chezian?

Answer
(i)

Transfer of shares without consideration or for inadequate consideration would attract the
provisions of section 56(2)(viia), if the recipient is a firm or a company. The purpose of
this provision is to prevent the practice of transferring unlisted shares at prices much
below the fair market value.
The provisions of section 56(2)(viia) would, however, not be attracted in the case of, inter
alia, transfer of shares of a company in which public are substantially interested. In this
case, the shares of Reliance Industries Ltd. are transferred. Since Reliance Industries
Ltd. is a company in which public are substantially interested, the provisions of section
56(2)(viia) would not be attracted in the hands of M/s. B Co. (P) Ltd.
The indexed cost of acquisition (` 4,45,000) less the actual sale consideration
(` 3,00,000) would result in a long term capital loss of ` 1,45,000 in the hands of Mr. B,
which is eligible for set off against any other long term capital gain.

(ii) The provisions of section 56(2)(vii) would not apply to any sum of money or any property
received from any trust or institution registered under section 12AA. Therefore, the cash
gift of ` 1 lakh received from Atma Charitable Trust, being a trust registered under
section 12AA, for meeting medical expenses would not be chargeable to tax under
section 56(2)(vii) in the hands of Mr. Chezian.
Question 5
Check the taxability of the following gifts received by Mrs. Rashmi during the previous year
2014-15 and compute the taxable income from gifts for Assessment Year 2015-16:
(i)

On the occasion of her marriage on 14.8.2014, she has received ` 90,000 as gift out of
which ` 70,000 are from relatives and balance from friends.

(ii)

On 12.9.2014, she has received gift of ` 18,000 from cousin of her mother.

(iii) A cell phone worth ` 21,000 is gifted by her friend on 15.8.2014.

(iv) She gets a cash gift of ` 25,000 from the elder brother of her husband's grandfather on
25.10.2014.
(v) She has received a cash gift of ` 12,000 from her friend on 14.4.2014.

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Answer
Computation of taxable income of Mrs. Rashmi from gifts for A.Y.2015-16
Sl.
Particulars
No.
1. Relatives and friends
2.

Cousin of Mrs. Rashmis

mother
Friend

3.
4.

Elder brother of husbands

grandfather
5. Friend
Aggregate value of gifts

Taxable
amount (` )
Nil

Reason for taxability or otherwise of

each gift
Gifts received on the occasion of marriage
are not taxable.
18,000 Cousin of Mrs. Rashmis mother is not a
relative. Hence, the cash gift is taxable.
Nil Cell phone is not included in the definition
of property as per Explanation to section
56(2)(vii). Hence, it is not taxable.
25,000 Brother of husbands grandfather is not a
relative. Hence, the cash gift is taxable.
12,000 Cash gift from friend is taxable.
55,000

Since the sum of money received by Mrs. Rashmi without consideration during the previous
year 2014-15 exceeds ` 50,000, the whole of the amount is chargeable to tax under section
56(2)(vii) of the Income-tax Act, 1961.
Question 6
Smt. Laxmi reports the following transactions to you:
(i)

Received cash gifts on the occasion of her marriage on 18-7-2014 of ` 1,20,000. It

includes gift of ` 20,000 received from non-relatives.

(ii)

On 1-8-2014, being her birthday, she received a gift by means of cheque from her
mother's maternal uncle, the amount being ` 40,000.

(iii) On 1-12-2014 she acquired a vacant site from her friend for ` 1,05,000. The State stamp
valuation authority fixed the value of site at ` 1,80,000 for stamp duty purpose.
(iv) She bought 100 equity shares of a listed company from another friend for ` 60,000. The
value of share in the stock exchange on the date of purchase was ` 1,15,000.
Determine the amounts chargeable to tax in the hands of Smt. Laxmi for the A.Y. 2015-16.
Your answer should be supported by reasons.
Answer
Computation of amount chargeable to tax in hands of Smt. Laxmi for A.Y. 2015-16
Particulars
(i)

Cash gift of ` 1,20,000 received on the occasion of her marriage is not

taxable since gifts received by an individual on the occasion of marriage is
excluded under section 56(2)(vii), even if the same are from non-relatives.

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(ii)

Income-tax
Even though mothers maternal uncle does not fall within the definition of
relative under section 56(2)(vii), gift of ` 40,000 received from him by
cheque is not chargeable to tax since the aggregate sum of money
received by Smt. Laxmi without consideration from non-relatives(other than
on the occasion of marriage) during the previous year 2014-15 does not
exceed ` 50,000.

Nil

(iii) Purchase of land for inadequate consideration on 1.12.2014 would attract

the provisions of section 56(2)(vii). Where any immovable property is
received for a consideration which is less than the stamp duty value of the
property by an amount exceeding ` 50,000, the difference between the
stamp duty value and consideration is chargeable to tax in the hands of
Individual. Therefore, in the given case ` 75,000 is taxable in the hands
of Smt. Laxmi.

75,000

(iv) Since shares are included in the definition of property and difference
between the purchase value and fair market value of shares is
` 55,000 (` 1,15,000 - ` 60,000) i.e. it exceeds ` 50,000, the difference
would be taxable under section 56(2)(vii).
Amount chargeable to tax

55,000
1,30,000

Question 7
State with proper reasons whether the following statement is True/False with regard to
provisions of Income-tax Act, 1961:
A receives ` 2 lakh from his friends on the occasion of his marriage on 22.04.2014 and ` 1
lakh from the brother of his father-in-law on 31.12.2014. As income includible under other
sources for the previous year 2014-15 would be ` 3 lakh.
Answer
False : As per section 56(2)(vii), where any sum of money is received without consideration by
an individual or a Hindu undivided family from any person or persons and the aggregate value
of all such sums received during the previous year exceeds ` 50,000, the whole of the
aggregate value of such sum shall be included in the total income of such individual or Hindu
Undivided Family under the head Income from other sources.
However, in order to avoid hardship in genuine cases, certain sums of money received have
been exempted, which includes, inter-alia, any sum received on the occasion of the marriage
of the individual and any sum received from any relative. As such, ` 2 lakh received from
friends on the occasion of marriage is exempt.
However, brother of father-in-law is not included in the definition of relative. Hence, ` 1 lakh is
taxable under the head Income from other sources.
The statement that ` 3 lakh is includible in As income is, therefore, false.

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Question 8
From the following particulars of Pankaj for the previous year ended 31 st March, 2015,
compute the income chargeable under the head Income from other sources:
Sl. No.

Particulars

(i)

Directors fee from a company

10,000

(ii)

Interest on bank deposits

(iii)

Income from undisclosed source

12,000

(iv)

Winnings from lotteries (Net)

35,000

(v)

Royalty on a book written by him

9,000

(vi)

Lectures in seminars

5,000

(vii)

Interest on loan given to a relative

7,000

(viii)

Interest on debentures of a company (listed in a recognised stock

exchange) net of taxes

3,600

(ix)

Interest on Post Office Savings Bank Account

(x)

Interest on Government Securities

(xi)

Interest on Monthly Income Scheme of Post Office

3,000

500
2,200
33,000

He paid ` 1,000 for typing the manuscript of book written by him.

Answer
Computation of income of Pankaj chargeable under the head Income from other
sources for the A.Y. 2015-16
Particulars

1.

Directors fees

2.

Interest on bank deposit

3.

Income from undisclosed source (taxable @ 30% u/s 115BBE)

4.

Royalty on books written (See Note below)

9,000

Less: expenses

1,000

`
10,000
3,000
12,000
8,000

5.

Lectures in seminars

5,000

6.

Interest on loan given to a relative

7,000

7.

Interest on listed debentures

Net Received
Add: T.D.S. @ 10%

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Income-tax

3600 10

400

4,000

100 10
8.

Interest on Post Office Savings Bank [exempt under section

10(15)]

9.

Interest on Government securities

2,200

10. Interest on Post Office Monthly Income Scheme

33,000

11. Winnings from lotteries (taxable @ 30% u/s 115BB)

Net

35,000

35,000 30
Add: T.D.S. @ 30%

100 30

15,000

Income from Other Sources

50,000
1,34,200

Note : Royalty income would be chargeable to tax under the head Income from Other
Sources, only if it is not chargeable to tax under the head Profits and gains of business or
profession. This problem has been solved assuming that the same is not taxable under the
head Profits and gains of business or profession and hence, is chargeable to tax under the
head Income from other sources.
Question 9
Rahul holding 28% of equity shares in a company, took a loan of ` 5,00,000 from the same
company. On the date of granting the loan, the company had accumulated profit of `
4,00,000. The company is engaged in some manufacturing activity.
(i)

Is the amount of loan taxable as deemed dividend in the hands of Rahul, if the company
is a company in which the public are substantially interested?

(ii)

What would be your answer, if the lending company is a private limited company (i.e. a
company in which the public are not substantially interested)?

Answer

Any payment by a company, other than a company in which the public are substantially
interested, of any sum by way of advance or loan to an equity shareholder, being a person
who is the beneficial owner of shares holding not less than 10% of the voting power, is
deemed as dividend under section 2(22)(e), to the extent the company possesses
accumulated profits.
(i)

The provisions of section 2(22)(e), however, will not apply where the loan is given by a
company in which public are substantially interested. In such a case, the loan would not
be taxable as deemed dividend in the hands of Rahul.

(ii)

However, if the loan is taken from a private company (i.e. a company in which the public
are not substantially interested), which is a manufacturing company and not a company
where lending of money is a substantial part of the business of the company, then, the

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provisions of section 2(22)(e) would be attracted, since Rahul holds more than 10% of
the equity shares in the company.
The amount chargeable as deemed dividend cannot, however, exceed the accumulated profits
held by the company on the date of giving the loan. Therefore, the amount taxable as deemed
dividend in the hands of Rahul would be limited to the accumulated profit i.e., ` 4,00,000 and
not the amount of loan which is ` 5,00,000.
Question 10
When would the dividend income be taxed in the hands of a shareholder?
Answer

The provisions relating to the year of taxability of dividend are contained in section 8 of the
Income-tax Act, 1961.
(a) Any dividend declared by a company or distributed or paid by it within the meaning of
section 2(22) shall be deemed to be the income of the previous year in which it is so
declared, distributed or paid, as the case may be.
(b) Any interim dividend shall be deemed to be the income of the previous year in which the
amount of such dividend is unconditionally made available by the company to the
member who is entitled to it.
Students may note that any dividend which is liable for dividend distribution tax covered by
section 115-O (being a dividend declared by a domestic company) is exempt under section
10(34) and hence would not be chargeable to tax. However, dividend referred to in Section
2(22)(e) is not subject to dividend distribution tax in the hands of the domestic company under
section 115-O, but would be chargeable to tax in the hands of the shareholder.
Question 11
How is dividend stripping enforced by section 94(7) of the Income-tax Act, 1961?
Answer

According to section 94(7),where :

(a) any person buys or acquires any securities or units within a period of three months prior
to the record date ; and
(b) such person sells or transfers such securities within a period of three months after such
record date or transfers such units within a period of nine months after such record date ;
and
(c) the dividend or income on such securities or units received or receivable by such person
is exempt from tax,
then, the loss, if any, arising to him on account of such purchase and sale of securities or
units, to the extent such loss does not exceed the amount of dividend or income received or
receivable on such securities or units, has to be ignored for the purposes of computing his
income chargeable to tax.

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Exercise
1.

Income from letting of machinery, plant and furniture is (a). always chargeable to tax under the head Profits and gains of business and profession
(b). always chargeable to tax under the head Income from other sources
(c). chargeable under the head Income from other sources only if not chargeable
under the head Profits and gains of business and profession.

2.

In respect of winnings from lottery, crossword puzzle or race including horse race or card
game etc.
(a). no deduction under Chapter VI-A is allowed and basic exemption limit cannot be
exhausted.
(b). no deduction under Chapter VI-A but unexhausted basic exemption can be
exhausted.
(c). Both deduction under Chapter VI-A and basic exemption are allowed.

3.

The deduction allowable in respect of family pension taxable under Income from other sources is
(a). 33-1/3% of the pension
(b). 30% of the pension or ` 15,000, whichever is less
(c). 33-1/3% of the pension or ` 15,000, whichever is less

4.

Deemed dividend under section 2(22)(e) is chargeable to tax (a). On the basis of method of accounting regularly employed by the assessee
(b). On the basis of mercantile system of accounting only
(c) On payment basis as prescribed under section 8 of the Income-tax Act, 1961.

5.

Ganesh received ` 60,000 from his friend on the occasion of his birthday.
(a) The entire amount of ` 60,000 is taxable.
(b) ` 25,000 is taxable.
(c) The entire amount is exempt.

6.

Write short notes on (a) Bond washing transactions

(b) Dividend stripping

7.

State the incomes which are chargeable only under the head Income from other
sources.

8.

Which are incomes chargeable under the head Income from other sources only if they
are not chargeable under the head Profits and gains of business or profession?

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9.

4.220

What are the deductions allowable from the following income (a) Dividend
(b) Income from letting on hire machinery, plant or furniture.

10. What are the inadmissible deductions while computing income under the head Income
from other sources.
11. Karans bank account shows the following deposits during the financial year 2014-15.
Compute his total income for the A.Y. 2015-16, assuming that his income from house
property (computed) is ` 62,000.
(i)

Gift from his sister in Amsterdam

` 2,30,000

(ii)

Gift from his friend on his birthday

` 10,000

(iii) Dividend from shares of various Indian companies

` 12,600

(iv) Gift from his mothers friend on his engagement

` 25,000

(v) Gift from his fiance

` 75,000

(vi) Interest on bank deposits (Fixed Deposit)

` 25,000

12. What are the deductions allowable under section 57 of the Income-tax Act, 1961 in
respect of Income from other sources?
Answers
1. c; 2. a; 3. c; 4. c; 5. a; 11. ` 1,97,000

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