TEXT BOOK ON

INCOME TAX
LAW AND PRACTICE
(For B.Com., M.Com., M.B.A., C.A., CMA., & C.S., Courses)

11th Revised Edition

2020-21

Dr. K. RAJAVELU
Author and Publisher, Sri Venkateswara Padmavathi Publications
Founder & Principal, SVP Auditor Coaching College

SRI VENKATESVARA PADMAVADHI

PUBLICATIONS
Walajapet, Vellore Dist. Tamil Nadu. 632 513.

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Edition : 11th Edition

Copyright : K.RAJAVELU

Publishers : Sri Venkateswara Padmavathi Publications

Accounting Bhawan,

317, 3rd Main Road, Housing Board,

Walajapet. Vellore District. Tamil Nadu.

Mobile : 9080205950, 8056502239

Assisted by : Dr. S. Gayathri Brahmanandam

Assistant Professor,
P.G. & Research Dept of Commerce,
D.K.M. College for Women, (Autonomous), Vellore.

Type Setting : Mrs. S. Farzhana Begum Santhana Krishnan,

NAP DTP Centre, Navalpur, Ranipet.

Printing : M/s. Prompt Printers, Chennai.

Price : Rs. 499/-

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 DETAILED CONTENTS
Para No Description Page No

CHAPTER - 1
BASIC CONCEPTS OF INCOME TAX
1.0 Introduction 1.2
1.1 Meaning of Tax 1.2
1.2 Features of Tax 1.2
1.3 Types of Taxes 1.2
1.4 Meaning of Income Tax
1.3
1.5 Sources of Income Tax Law 1.3
1.6 Basis of Charge 1.4
1.7 Person 1.4
1.8 Assessee 1.5
1.9 Assessment 1.7
1.10 Assessment Year 1.7
1.11 Previous Year 1.7
1.12 Income
1.9
1.13 Gross Total Income 1.10
1.14 Maximum Exemption 1.11
1.15 Components of Tax Liability 1.11
1.16 Format for Individuals 1.13
1.17 Tax Liability of Individuals
1.14
1.17.1
General Citizen 1.14
1.17.2 Senior Citizen 1.14
1.17.3 Super Senior Citizen 1.14
1.17.4 Non Resident 1.14
1.17.5 Special Incomes 1.14
1.17.6 Tax Rebate
1.15
1.17.7 Surcharge
1.15

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1.17.8 Marginal Relief 1.15

1.17.9 HEC 1.16
1.17.10 Practical Illustrations on Individuals 1.16
1.17.11 Practical Exercises on individuals 1.18
1.18 Tax Liability of Other Persons 1.20
1.18.1 HUF
1.20
1.18.2 AOP 1.20
1.18.3 Firm 1.21
1.18.4 Company 1.21
1.19
Capital and Revenue 1.21
1.20
Other Important Terms 1.24
1.21 Theory Questions 1.25

CHAPTER - 2
RESIDENTIAL STATUS

2.0 Introduction 2.2

2.1 Classfication 2.2
2.2 Residential Status of an Individual 2.2
2.2.1 Basic Conditions 2.2
2.2.2 Exceptions to Basic Conditions 2.2
2.2.3 Additional Conditions 2.3
2.2.4 Provision for No. of Days of Stay in India 2.3
2.2.5 When Resident 2.3
2.2.6
When Resident But not Ordinarily Resident 2.3
2.2.7 When Non - Resident 2.3
2.3
Practical Illustrations on Residential Status 2.4
2.4
Practical Exercises on Residential Status 2.14
2.5 Residential Status of HUF 2.17
2.6
Residential Status of Firm 2.18

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2.7 Residential Status of Company 2.18

2.8 Residential Status of Other Persons 2.18
2.9 Scope of Total Income 2.18
2.9.1 Income Received in India 2.19
2.9.2 Income Deemed to be Received in India 2.19
2.9.3 Income Accrued in India 2.19
2.9.4 Income Deemed to be Accrued in India 2.20
2.9.5 Income Earnet out side India from Business 2.20
2.9.6 Other Income 2.20
2.9.7 Table Showing Tax Incidence 2.21
2.10
Practical Illustrations 2.21
2.11 Practical Exercises 2.23
2.12 Theory Questions 2.26

CHAPTER - 3
TAX FREE INCOMES

3.0 Introduction 3.2

3.1 Meaning 3.2
3.2 Analysis of Exemptions 3.2
3.3 Classification on the Basis of Taxability 3.2
3.4 Classification on the Basis of Heads of Income 3.3
3.5 Meaning of Agricultural Income 3.5
3.6 Computation of Agricultural Income 3.6
3.6.1 Provisions 3.6
3.6.2 Practical Illustrations 3.6
3.6.3 Practical Exercises 3.7
3.7
Computation of Composite Income 3.8
3.7.1 Provisions 3.8
3.7.2
Practical Illustrations 3.9

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3.7.3 Practical Exercises 3.10

3.8 Income Relating to Salary 3.11
3.9 Incomes Relating to Business or Profession 3.12
3.10 Incomes Relating to Capital Gains 3.13
3.11 Incomes Relating to Other Sources 3.13
3.12 Incomes Relating to Deductions 3.14
3.13 Income from Certain Funds 3.14
3.14 Income of Certain Individuals 3.15
3.15 Income of Certain Insititutions 3.15
3.16 Income Relating to Non-Residents 3.16
3.17 Special Incomes
3.17
3.18 3.18
Income of Units in SEZ
3.19 Income of Trusts 3.19
3.20
Income of Political Parties 3.20
3.21 Income of Electrol Trusts 3.21
3.22 Theory Questions 3.22

CHAPTER - 4
INCOME UNDER THE HEAD SALARIES - I
4.0 Introduction 4.2
4.1 Basic Theory 4.2
4.2 Determination of Basic Salary 4.5
4.2.1 Provisions 4.5
4.2.2 Practical Illustrations 4.5
4.2.3 Practical Exercises 4.7
4.3 Contribution to PF 4.7
4.3.1
Meaning 4.7
4.3.2 Types 4.8
4.3.3 Provisions 4.8

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4.3.4 Practical Illustrations 4.9

4.3.5 Practical Exercises 4.10
4.4 Allowances 4.11
4.4.1 Fully Taxable 4.11
4.4.2 Partly Taxable 4.12
4.4.3 Fully Exempted
4.13
4.4.4 Practical Illustrations 4.14
4.4.5 Practical Exercises 4.17
4.5 Perquisites : Meaning and Types 4.19
4.5.1 Meaning 4.19
4.5.2 Definition 4.19
4.5.3 Types 4.20
4.5.4 Tax Free 4.20
4.5.5 Taxable for
4.21
4.5.6 All
4.21
4.6 Taxable for Specified Employees 4.22
4.6.1 Accomodation Facility
4.22
4.6.2 Provisions 4.23
4.6.3 Practical Illustrations 4.26
4.7 Practical Exercises 4.28
4.7.1 Loan Facility
4.28
4.7.2 Provisions
4.28
4.7.3 Practical Illustrations 4.30
4.8 Practical Exercises 4.30
4.8.1 Use of Movable Assets
4.30
4.8.2 Provisions
4.31
4.8.3
Practical Illustrations 4.31
4.9 Practical Exercises 4.31
4.9.1 Transfer of Movable Assets
4.31
Provisions

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4.9.2 Practical Illustrations 4.32

4.9.3) Practical Exercises 4.33
4.10 Motor Car Facility 4.33
4.10.1 Provisions 4.33
4.10.2 Practical Illustrations 4.34
4.10.3 Practical Exercises 4.35
4.11 Domestic Servants 4.36
4.11.1 Provisions 4.36
4.11.2 Practical Illustrations 4.37
4.11.3 Practical Exercises 4.37
4.12 Other Perquisites
4.38
4.12.1 Gas & Electricity
4.38
4.12.2 Educational Facility
4.39
4.12.3 Medical Facility
4.39
4.12.4 Food Facility
4.39
4.12.5 4.40
Gift Facility
4.12.6 Travelling Facility 4.40
4.12.7 Sweat Equity Shares 4.40
4.12.8 Club Facility
4.40
4.12.9
Credit Card Facility 4.40
4.12.10 Other automotive Facility 4.40
4.12.11 Contribution to AF 4.41
4.12.12 Monetary Obiligations
4.41
4.13
Deductions from Salary Income 4.41
4.13.1 Provisions 4.42
4.13.2
Practical Illustrations 4.42
4.13.3
Practical Exercises 4.43
4.14 Different Meaning of Salary 4.44
4.15
Format for Computation of Income from Salary 4.45

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4.16 Guidance Notes 4.46

4.17 Comprehensive Illustrations 4.46
4.18 Comprehensive Exercises 4.62
Theory Questions
4.19 4.72

CHAPTER - 5
INCOME UNDER THE HEAD SALARIES - II
5.0 Introduction 5.2
5.1 Gratuity 5.2
5.1.1 Provisions 5.2
5.1.2 Practical Illustrations 5.3
5.1.3 Practical Exercises 5.4
5.2 Pension
5.6
5.2.1 Provisions 5.6
5.2.2 Practical Illustrations 5.6
5.2.3 Practical Exercises 5.7
5.3 Leave Salary 5.7
5.3.1 Provisions 5.7
5.3.2 Practical Illustrations 5.8
5.3.3 Practical Exercises
5.9
5.4 Refund of PF
5.10
5.5
Retrenchment Compensation 5.10
5.6 VRS Compensation 5.10
5.7
Format for Computation of Income from Salary 5.11
5.8 Comprehensive Illustrations on Retiret Employee 5.11
5.9 Comprehensive Exercises on Retiret Employee 5.12
5.10 Theory Questions
5.16

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CHAPTER - 6
INCOME UNDER THE HEAD HOUSE PROPERTY- I
6.0 Introduction 6.2
6.1 Meaning 6.2
6.2 Definition 6.2
6.3 Essential Conditions 6.2
6.4 Tax Free Incomes 6.2
6.5 Meaning of Annual Value 6.3
6.6 Definition of Annual Value 6.3
6.7 Factors in Annual Value
6.3
6.8 Deduction for Municipal Tax
6.4
6.9 Deduction from House Property Income 6.4
6.9.1 Standard Deduction 6.4
6.9.2 Interest on Loan 6.4
6.10 Special Provisions
6.5
6.11 Classification of House Property 6.6
6.12 Classification of Let out House 6.6
6.13 Let out House Without UR and VP 6.6
6.13.1 Provisions
6.6
6.13.2
Practical Illustrations 6.7
6.13.3 Practical Exercises 6.10
6.14 Let out House with UR 6.16
6.14.1 Provisions
6.16
6.14.2
Practical Illustrations 6.16
6.14.3 Practical Exercises 6.19
6.15 Let out House with VP 6.20
6.15.1 Provisions
6.20
6.15.2
Practical Illustrations 6.20
6.15.3 Practical Exercises 6.21

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6.16 Let out House with Both UR and VP 6.23

6.16.1 Provisions 6.23
6.16.2 Practical Illustrations 6.23
6.16.3 Practical Exercises 6.24
6.17 Theory Questions 6.26

CHAPTER - 7
INCOME UNDER THE HEAD HOUSE PROPERTY- II
7.0 Introduction 7.2
7.1 Classification 7.2
7.2 Only Two Houses Self Occupied 7.2
7.2.1 Provisions 7.2
7.2.2 Practical Illustrations 7.2
7.2.3 Practical Exercises 7.3
7.3 More Than Two Houses Self Occupied 7.3
7.3.1 Provisions 7.3
7.3.2 Practical Illustrations 7.4
7.3.3 Practical Exercises 7.5
7.4 7.6
Part of the House Self Occupied
7.4.1 Provisions 7.6
7.4.2
Practical Illustrations 7.6
7.4.3 Practical Exercises 7.7
7.5
Part of the Year Self Occupied 7.9
7.5.1 Provisions 7.9
7.5.2
Practical Illustrations 7.9
7.5.3 Practical Exercises 7.10
7.6
Both Part of the House and Part of the Year 7.12
7.6.1
Provisions 7.12
7.6.2
Practical Illustrations 7.13

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7.6.3 Practical Exercises 7.15

7.7 Comprehensive Illustrations 7.16
7.8 Comprehensive Exercises 7.22
7.9 Theory Questions
7.24

CHAPTER - 8
INCOME UNDER THE HEAD

BUSINESS OR PROFESSION - I
8.0 Introduction 8.3
8.1 Meaning of Basic Terms 8.4
8.2 Income Taxable Under the Head Business or Profession 8.4
8.3 General Principles for Income 8.5
8.4 General Principles for Deductions 8.5
8.5 Expenses Expressly Allowed 8.7
8.6 Expenditure on Building 8.7
Expenditure on Machinery 8.7
8.7
Depreciation
8.8 8.8
8.8.1 Meaning of Depreciation 8.8
8.8.2 Conditions of Depreciation 8.8
8.8.3 Meaning of Block of Assets 8.8
8.8.4 Meaning of WDV
8.8
8.8.5 Meaning of Cost of Asset 8.8
8.8.6 Meaning of Unabsorbed Depreciation 8.8
8.8.7 Method of Depreciation 8.8
8.8.8 Depreciation for Power Units
8.9
8.8.9
Rates of Depreciation 8.9
8.8.10
Meaning of Additional Depreciation 8.9
8.8.11 Summary of Provisions 8.9

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8.9 Practical Illustrations on Depreciation 8.11

8.10 Practical Exercises on Depreciation 8.15
8.11 Scientific Research 8.17
8.12 Eligible Projects 8.18
8.13 Telecommunication Projects 8.18
Skill Development 8.14
Projects Specified Business 8.19
Deduction u/s. 36 Prilimenary Expenses
8.15 8.19
Deduction u/s. 378.16 VRS
8.20
8.17 Patents 8.20
8.18 Agricultural Projects 8.20
8.19 8.20
8.20 8.21
8.21 8.21
8.22 Expenses Disallowed u/s.40 8.21
8.23 Expenses Disallowed u/s. 43(B) 8.21
8.24 Practical Illustrations on Expenses 8.22
Practical Exercises on Expenses
8.25 8.23
Compulsary Books
8.26 8.25
8.27 Compulsary Audit 8.26
8.28 Deemed Profits 8.26
Theory Questions
8.10 8.27

CHAPTER - 9
INCOME UNDER THE HEAD

BUSINESS OR PROFESSION - II
9.0 Introduction 9.2
9.1 Summary of Admissible Expenses 9.2
9.2 Summary of Inadmissible Expenses 9.2

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9.3 Guidence Notes 9.3

9.4 Computation of Income From Business From Profit 9.5
9.4.1 Provisions 9.5
9.4.2 Practical Illustrations 9.5
9.4.3 Practical Exercises 9.6
9.5 Computation of Income From Business From P/L A/c. 9.7
9.5.1 Provisions 9.7
9.5.2 Practical Illustrations 9.8
9.5.3 Practical Exercises 9.15
9.6 Computation of Income From Accounting Profession 9.24
9.6.1 Provisions 9.24
9.6.2 Practical Illustrations 9.24
9.6.3 Practical Exercises 9.27
9.7 Computation of Income From Medical Profession 9.30
9.7.1 Provisions 9.30
9.7.2 Practical Illustrations 9.30
9.7.3 Practical Exercises 9.32
9.8 Computation of Income From Legal Profession 9.36
9.8.1 Provisions 9.36
9.8.2 Practical Illustrations 9.36
9.8.3 Practical Exercises 9.37
9.9 Presumptive Taxation 9.38
9.9.1 Meaning
9.38
9.9.2 Small Business 9.38
9.9.3 Specified Profession 9.38
9.9.4 Transport Business 9.38
9.9.5 Practical Illustrations
9.39
9.9.6 Practical Exercises
9.39
9.10 Theory Questions
9.40

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CHAPTER - 10
INCOME UNDER THE HEAD CAPITAL GAINS - I
10.0 Introduction 10.2
10.1 Meaning of Capital Gain 10.2
10.2 Essential Conditions 10.2
10.3 Meaning of Capital Assets 10.2
10.4 Types of Capital Assets 10.3
10.5 Meaning of Transfer
10.3
10.6 Exceptions to Meaning of Transfer 10.4
10.7 Meaning of Relevent Terms 10.6
10.8 Types of Capital Gains
10.7
10.9 Computation of Short Term Capital Gains 10.7
10.9.1 Provisions 10.7
10.9.2 Practical Illustrations 10.8
10.9.3 Practical Exercises 10.8
10.10 Computation of Long Term Capital Gains 10.9
10.10.1 Provisions 10.9
10.10.2 Practical Illustrations 10.9
10.10.3 Practical Exercises 10.11
10.11
Assets Acquired by way of Will or Gift 10.13
10.11.1 Provisions 10.13
10.11.2
Practical Illustrations 10.13
10.11.3 Practical Exercises 10.14
10.12 Insurance Claim 10.15
10.12.1 Provisions
10.15
10.12.2
Practical Illustrations 10.16
10.12.3
Practical Exercises 10.16
10.13 Conversion of Capital Assets 10.16
10.13.1 Provisions
10.16

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10.13.2 Practical Illustrations 10.16

10.13.3 Practical Exercises 10.17
10.14 Compensation for Compulsory Acquisition 10.17
10.14.1 Provisions 10.17
10.14.2 Practical Illustrations 10.18
10.14.3 Practical Exercises 10.18
10.15 Assets being Land and Building 10.19
10.16 Depreciable Assets 10.19
10.16.1 Provisions 10.19
10.16.2 Practical Illustrations 10.19
10.16.3 Practical Exercises 10.20
10.17 Slump Sale 10.21
10.18 Real Estate Transactions 10.21
10.19 Advance Money 10.21
10.19.1 Provisions 10.21
10.19.2 10.21
Practical Illustrations
10.19.3 Practical Exercises 10.22
10.20 Intangible Assets 10.23
10.20.1 Provisions 10.23
10.20.2
Practical Illustrations 10.23
10.20.3
Practical Exercises 10.24
10.21 Bonus and Right Shares 10.24
10.21.1 Provisions 10.24
10.21.2
Practical Illustrations 10.25
10.21.3
Practical Exercises 10.25
10.22
Listed Equity Shares 10.26
10.22.1 Provisions 10.26
10.22.3
Practical Illustrations 10.26
10.22.3
Practical Exercises 10.27
10.23
Theory Questions 10.28

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CHAPTER - 11
INCOME UNDER THE HEAD CAPITAL GAINS - II
11.0 Introduction 11.2
11.1 List of Exemptions 11.2
11.2 Exemption u/s 54 11.2
11.2.1 Provisions 11.2
11.2.2 Practical Illustrations 11.2
11.2.3 Practical Exercises 11.5
11.3 Exemption u/s 54B 11.7
11.4 Exemption u/s 54D 11.7
11.5 Exemption u/s 54EC 11.8
11.5.1 Provisions
11.8
11.5.2 Practical Illustrations 11.8
11.5.3 Practical Exercises 11.9
11.6 Exemption u/s. 54EE 11.10
11.7 Exemption u/s 54F 11.10
11.8 Exemption u/s 54G 11.10
11.9 Exemption u/s 54 GA 11.11
11.10 Exemption u/s. 54GB
11.12
11.11 Tax Liability
11.12
11.12
Theory Questions 11.13

CHAPTER - 12
INCOME FROM OTHER SOURCES
12.0 Introduction 12.2
12.1 Basis of Charge 12.2
12.2 Method of Accounting 12.2
12.3 Incomes Chargeable under the Head 12.2
12.4 Dividend Income 12.3
12.4.1 Provisions 12.3

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12.4.2 Practical Illustrations 12.3

12.4.3 Practical Exercises 12.4
12.5 Interest on Securities 12.5
12.5.1 Provisions 12.5
12.5.2 Practical Illustrations 12.8
12.5.3 Practical Exercises 12.10
12.6 Casual Income 12.13
12.6.1 Provisions 12.13
12.6.2 Practical Illustrations 12.14
12.6.3 Practical Exercises 12.15
12.7 Gift Income 12.16
12.7.1 Provisions
12.16
12.7.2 Practical Illustrations 12.17
12.7.3 Practical Exercises 12.18
12.8 Other Incomes 12.20
12.8.1 Provisions
12.20
12.8.2
Practical Illustrations 12.21
12.8.3 Practical Exercises 12.22
12.9 Admissible Expenses 12.22
12.10 Inadmissible Expenses 12.23
12.11 Comprehensive Illustrations 12.23
12.12 Comprehensive Exercises
12.28
12.13 Theory Questions
12.32

CHAPTER - 13
CLUBBING OF INCOME OR AGGREGATION OF INCOME
13.0 Introduction 13.2
13.1 Meaning 13.2
13.2 Transfer of Income without Transfer of Asset 13.2

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13.3 Revocable Transfer of Asset 13.3

13.4 Remuneration of Spouse 13.3
13.5 Assets Transferred to Spouse 13.4
Assets Transferred to Son’s Wife
13.6 13.4
Assets Transferred for the Benefit of Spouse
13.7 13.4
Assets Transferred for the Benefit of Son’s Wife
13.8 Income of Minor 13.4
13.9 13.4
Conversion of Self-acquired Property
13.10 Clubbing of Loss 13.5
13.11 13.5
Procedure for Clubbing of Income
13.12 Deemed Income 13.5
13.13 13.6
Theory Questions
13.14 13.7

CHAPTER - 14
SET OFF AND CARRY FORWARD OF LOSSES
Introduction
14.0 14.2
Meaning of Set off
14.1 14.2
Inter Source Adjustment - Meaning
14.2 Inter Source Adjustment - Provisions 14.2
14.3 Inter Head Adjustment - Meaning 14.2
14.4 Inter Head Adjustment - Provisions 14.3
14.5 Carry Forward of Losses - Meaning 14.3
14.6 Carry Forward of Losses - Provisions 14.4
14.7 Practical Illustrations 14.4
14.8 Practical Exercises 14.5
14.9 Theory Questions 14.17
14.10 14.26

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CHAPTER - 15
DEDUCTIONS FROM GROSS TOTAL INCOME
15.0 Introduction 15.3
15.1 Deduction Under Section 80 C 15.4
15.2 Deduction Under Section 80 CCC 15.8
15.3 Deduction Under Section 80 CCD 15.8
15.4 Deduction Under Section 80 CCE 15.9
15.5 Deduction Under Section 80 D 15.9
15.6 Deduction Under Section 80 DD 15.11
15.7 Deduction Under Section 80 DDB 15.13
15.8 Deduction Under Section 80 E 15.14
15.9 Deduction Under Section 80 EE 15.15
Deduction Under Section 80 EEA
15.10 15.16
Deduction Under Section 80 EEB
15.11 15.16
Deduction Under Section 80 G
15.12 15.17
Deduction Under Section 80 GG
15.13 15.23
Deduction Under Section 80 GGA
15.14 15.24
Deduction Under Section 80 GGB
15.15 15.25
Deduction Under Section 80 GGC
15.16 15.25
Deduction Under Section 80 IA
15.17 15.25
Deduction Under Section 80 IAB
15.18 15.25
Deduction Under Section 80 IAC
15.19 15.25
Deduction Under Section 80 IB
15.20 15.26
Deduction Under Section 80 IBA
15.21 15.26
Deduction Under Section 80 IE
15.22 15.26
Deduction Under Section 80 JJA
15.23 15.26
Deduction Under Section 80 JJAA
15.24 15.26
Deduction Under Section 80 LA
15.25 15.27
Deduction Under Section 80 P
15.26 15.27

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15.27 Deduction Under Section 80 PA 15.28

15.28 Deduction Under Section 80 QQD 15.28
15.29 Deduction Under Section 80 RRB 15.28
15.30 Deduction Under Section 80 TTA 15.28
15.31 Deduction Under Section 80 TTB 15.29
15.32 Deduction Under Section 80 U 15.29
Theory Questions
15.33 15.30

CHAPTER 16
ASSESSMENT OF INDIVIDUALS

16.0 Introduction 16.2

16.1 Sources of Income 16.2
16.2 Deductions from Gross Total Income 16.2
16.3 Normal Rates of Tax 16.3
16.4 Special Rates of Tax 16.3
16.5 Procedure for Assessment of Individuals 16.3
16.6 Format for Assessment of Individuals 16.5
16.7 Practical Illustrations 16.6
16.8 Practical Exercises 16.23
16.9 Theory Questions 16.28

CHAPTER - 17
ASSESSMENT OF FIRMS

17.0 Introduction 17.2

17.1 Meaning of Firm 17.2
17.2 Essential Conditions 17.2
17.3 Features of the Assessment of Firm 17.2
17.4 Essential Conditions for Remuneration 17.2
17.5 Maximum Limit for Remuneration 17.3

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17.6 Book Profit 17.3

17.7 Deductions from Gross Total Income 17.4
17.8 Tax Liability 17.4
17.9 Share of Profit 17.4
17.10 Procedure for Assessment of Firm 17.5
17.11 Format for Assessment of Firm 17.5
17.12 Practical Illustrations 17.6
17.13 Practical Exercises 17.21
17.14 Theory Questions 17.24

CHAPTER 18
ASSESSMENT OF HUF AND
AOP
18.0 18.2
18.1 Introduction 18.2
18.2 Meaning of Hindu Undivided Family 18.2
Meaning of Co-parcener
18.3 18.2
18.4 Meaning of Karta 18.2
Schools of Hindu Law
18.5 18.3
18.6 Deductions from Gross Total Income 18.4
Tax Liability
18.7 18.4
18.8 Features of Assessment of HUF 18.4
Practical Illustrations
18.9 18.7
18.10 Practical Exercises 18.8
Meaning of AOP
18.11 18.8
Meaning of BOI
18.12 18.8
Tax Liability
18.13 18.8
18.14 Features of Assessment of AOP 18.9
18.15 Practical Illustrations 18.11
Practical Exercises
18.16 18.22
Theory Questions

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CHAPTER - 19
RETURN OF INCOME AND ASSESSMENT
19.0 Introduction 19.2
19.1 Meaning of Return of Income 19.2
19.2 Compulsory Filing of Return of Income 19.2
19.3 Due Date for Filing 19.3
19.4 Late Fee 19.3
19.5 Forms of Return 19.3
19.6 Filing Through Employer 19.4
19.7 Filing Through TRP 19.4
Return of Loss
18.8 19.4
19.9 Belated Return 19.4
19.10 Revised Return 19.5
19.11 Defective Return 19.5
19.12 Verification of Return 19.5
19.13 Submission of Return 19.6
PAN - Meaning
19.14 19.6
Persons Requiring PAN
19.15 19.6
19.16 Documents Requiring PAN 19.7
19.17 Meaning of Assessment 19.7
19.18 Types of Assessment 19.7
19.19 Self Assessment 19.8
Summary Assessment
19.20 19.8
Scrutiny Assessment
19.21 19.8
19.22 Best Judgement Assessment 19.9
19.23 Re-assessment 19.11
19.24 Theory Questions 19.12

23
Para No Description Page No

CHAPTER - 20
AUTHORITIES OF INCOME TAX
20.0 Introduction 20.1
20.1 Types of Authorities 20.1
20.2 Central Board of Direct Taxes 20.2
20.3 Commissioners of Income Tax 20.3
20.4 Joint Commissioners of Income Tax 20.3
Income Tax Officer
20.5 20.4
20.6 Assessing Officer 20.4
20.7 Powers Regarding Discovery and Production of Evidence 20.6
20.8 Powers Regarding Search and Seizure 20.6
20.9 Power to Requisition of Books of Account 20.7
20.10 Power to Call for Information 20.7
20.11 Power of Survey 20.7
20.12 Theory Questions 20.8

CHAPTER - 21
TDS, TCS AND ADVANCE TAX
21.0 Introduction 21.1
21.1 TDS 21.1
21.2 TCS 21.9
21.3 Advance Tax 21.10
21.4 Theory Questions 21.12
CHAPTER - 22
MULTIPLE CHOICE QUETIONS

22.0 Introduction 22.1

22.1 Questions 22.1
22.2 Answers 22.8
******

24
 STATEMENT OF NUMBER OF PRACTICAL
ILLUSTRATIONS AND EXERCISES
S.No. Topic Practical Practical
Illustrations Exercises

1. Basic Concepts 3 10

2. Residential Status of Individual 13 15

3. Scope of Total Income 3 10

4. Computation of Agricultural Income 3 2

5. Computation of Composite Income 4 5

6. Determination of Basic Salary 3 6

7. Contribution to PF 4 7

8. Allowances 11 9

9. Accomodation Facility 8 14

10. Loan Facility 2 9

11. Use of Movable Assets 1 3

12. Transfer of Movable Assets 3 4

13. Motor Car Facility 6 10

14. Domestic Servants 2 4

15. Deductions from Salary Income 3 6

16. Comprehensive Problems on Working Employee 19 42

17. Gratuity 3 10

18. Pension 1 3

25
S.No. Topic Practical Practical
Illustrations Exercises

19. Leave Salary 2 4

20. Comprehensive Problems on Retired Employee 1 13

21. Let out House Without UR and VP 7 18

22. Let out House with UR 2 4

23. Let out House with VP 2 4

24. Let out House with Both UR and VP 2 3

25. Only Two Houses Self Occupied 1 1

26. More Than Two Houses Self Occupied 2 1

27. Part of the House Self Occupied 1 4

28. Part of the Year Self Occupied 2 5

29. Both Part of the House and Part of the Year 2 2

30. Comprehensive Problems on House 5 2

31. Comprehensive Problems on Depreciation 10 14

32. Comprehensive Problems on Expenses 7 6

33. Computation of Income From Profit 2 5

34. Computation of Income From P/L A/c. 7 15

35. Computation of Income From Accounting 2 6

36. Computation of Income From Medical 2 6

37. Computation of Income From Legal 1 1

26
S.No. Topic Practical Practical
Illustrations Exercises

38. Presumptive Taxation 1 2

39. Computation of Short Term Capital Gains 1 4

40. Computation of Long Term Capital Gains 3 11

41. Assets Acquired by way of Will or Gift 3 5

42. Insurance Claim 1 1

43. Conversion of Capital Assets 1 3

44. Compensation for Compulsory Acquisition 1 2

45. Depreciable Assets 1 7

46. Advance Money 1 3

47. Intangible Assets 1 4

48. Bonus and Right Shares 3 2

49. Listed Equity Shares 2 4

50. Exemption u/s 54 5 10

51. Exemption u/s 54EC 2 4

52. Dividend Income 1 5

53. Interest on Securities 5 20

54. Casual Income 5 10

55. Gift Income 6 11

56. Other Incomes 3 2

27
S.No. Topic Practical Practical
Illustrations Exercises

57. Comprehensive Problems on Other Sources 7 16

58. Set off 20 32

59. Deduction Under Section 80 C 2 11

60. Deduction Under Section 80 D 1 5

61. Deduction Under Section 80 DD 1 1

62. Deduction Under Section 80 DDB 1 2

63. Deduction Under Section 80 E 1 3

64. Deduction Under Section 80 EEB 1 1

65. Deduction Under Section 80 G 6 5

66. Deduction Under Section 80 GG 1 2

67. Comprehensive Problems on Individuals 20 25

68. Comprehensive Problems on Firms 15 11

69. Comprehensive Problems on HUF 5 2

70. Comprehensive Problems on AOP 2 2

281 503

28
 Basic Concepts

CHAPTER - 1

BASIC CONCEPTS OF INCOME TAX

(1.0) Introduction
(1.1) Meaning of Tax

(1.2) Features of Tax

(1.3) Types of Taxes

(1.4) Meaning of Income Tax

(1.5) Sources of Income Tax Law
(1.6)
Basis of Charge
(1.7) Person
(1.8) Assessee
(1.9) Assessment

(1.10) Assessment Year

(1.11) Previous Year

(1.12) Income

(1.13) Gross Total Income

(1.14) Maximum Exemption for Different Persons

(1.15) Components of Tax Liability

(1.16) Format for Assessment of Individual

(1.17) Tax Rates of Individuals

(1.18) Tax Liability of Other Persons

(1.19) Capital & Revenue

(1.20) Meaning of Important Terms

(1.21) Theory Questions

1.1
 Basic Concepts

(1.0) INTRODUCTION
With reference to developing country like India, taxes are the most important way of collecting
funds for Government activities. It brings large revenues into public treasury and influence the
economic activity in a number of ways. The Government uses tax policy in pursuits of its several
economic and social objectives. The chapter deals with the various basic concepts relating to tax
system in India.

(1.1) MEANING OF TAX

The tax is a compulsory payment that has to be made by an individual or other persons to
Central Government, State Government and Local Government. Tax is based on certain well
established rules or criteria such as income earned, property owned or expenditure made. It may be
defined as Legal Execution by the State for purposes of the State.

(1.2) FEATURES OF TAX

The following are the important features of Tax.

(i) Tax is a compulsory payment by the tax payer to the Government.

(ii)
The tax can be levied and collected only by Authority of Law. In India the Central Government,
State Governments and Local Governments are authorised to collect tax.

(iii) The taxes are payable usually in cash but in sometimes it can be recovered in kind also.
(iv)
The tax is based upon certain criteria such as amount of Income, amount of Sales, amount
of Profit etc.

(v) The taxes are levied on the basis of prescribed rates which are subject to change from time
to time.

(1.3) TYPES OF TAXES

Generally taxes are classified into two types as under: (1) Direct Taxes, (2) Indirect Taxes

1.3.1. Direct Taxes : Direct Tax is a payment directly made to the Government by the person
who bears it. In other words, in the case of direct taxes tax burden is borned and paid by the same
person. The important item of direct taxes is Income tax, because the person who earns Income is
directly liable to pay Income Tax. The other items included in Direct Taxes are Security Transaction
Tax, Dividend Distribution Tax, Property Tax etc. The Direct Taxes are administered by Central Board of
Direct Taxes (CBDT).

1.3.2. Indirect Taxes : Indirect taxes, is a tax which is paid by one person and borned by another
person. The important item of Indirect Taxes is Goods and Services Tax. Under GST system tax is
paid by the seller of the goods and added with price of the goods thereby indirectly borned by the
buyer or customer. In otherwords GST, is paid to the Government by the seller of the goods, but actually
the burden is shifted to the buyer indirectly. The other items included in the Indirect Taxes are Excise
Duty and Customs Duty. The Indirect Taxes are administered by Central Board of Excise and Customs
(CBEC).

1.2
 Basic Concepts

(1.4) MEANING OF INCOME TAX

Income Tax is one of the Direct Tax. It is levied on the Income of the General Public. For this
purpose, income of the public is divided into five heads of Income. The rate of income tax is fixed on
the basis of level of income of the public. In addition there are certain special rates of income tax for
special types of incomes. Income tax is levied on the income earned during the particular previous
year and collected in the following assessment year. Income tax is a tax on income. Income tax may
be a real or nominal. It may be paid in cash or recovered in kind. It may be required to pay, in
sometimes, on the income of other persons. As per Article 270 of the Constitution of India, the matter
of income tax is concerned with the Central Government. However, the net tax proceeds are distributed
between the Central and the States on the basis of recommendation of the Finance Commission.

(1.5) SOURCES OF INCOME TAX LAW

The following are the sources of Income Tax Law in India. (i) Income Tax Act, 1961. (ii) Income
Tax Rules, 1962. (iii) Circulars issued by the Central Board of Direct Taxes (CBDT) and (iv) Judicial
Decisions (v) Annual Finance Act

(1.5.1) Income Tax Act, 1961

The Income Tax Act, 1961 became effective from the 1st day of April,1962. It contains 298
sections and XIV schedules for the determination of taxable income, determination of tax liability,
procedure for assessments, appeals, penalties and prosecutions.

(1.5.2) Income Tax Rules, 1962

At the time of drafting of any Law many situations and circumstances remain unseen or at
times the Legislaters wants the administrators of the Act to make provisions to suit their requirements.
The Legislaters has left many things to be decided by the department, and a mention to this effects
is made in the relevant sections of the Income Tax Act, 1961. The section 295 of the Income Tax Act
has given powers to the Central Board of Direct Taxes (CBDT) to make any rules regarding income
tax. These rules are known as Income Tax Rules, 1962 and these are also amended from time to
time. The income tax rules under this Act must be placed before the Parliament within the stipulated
period. The rules have to be in consistent with the Act and cannot limit any right conferred by the Act.

(1.5.3) Circulars by CBDT

To deal with certain specific problems, the Central Board of Direct Taxes issues circulars from
time to time. These circulars do not take the place of law but for the guidance of the officers and
public. The circulars of general directions issued by the Board are binding u/s 119 of the Income Tax
Act 1961, on all officers and persons employed in the execution of the Act.

(1.5.4) Judicial Decisions

In the course of assessment proceedings sometimes there may arise a dispute between the
department and the assessee over the interpretation of some of the provisions of the Act. The
Department’s interpretation of the law may be objected by the assessee as unreasonable and incorrect.
To redress such grievances the assessee can go to Court of Law as is prescribed in the Act. In such

1.3
 Basic Concepts

cases any decisions given by the Supreme Court become a law which will be binding on the income
tax department as well as on the tax payers. Every decision given by a High Court and Income Tax
Appellate Tribunal are also binding on the income tax department and tax payers.

(1.5.5) Annual Finance Act

Since the Income Tax Act, 1961 is the revenue law, these are bound to be amended from time
to time. These amendments are generally brought in annually along with the Union Budget.
Traditionally every year, budget is presented before the Parliament by the Finance Minister on the last
day of February. However in recent years the date of budget is changed to first day of the February. It
contains the Finance Bill which declares the financial prospects of the Central Government for the
next financial year. The Finance Bill mentions the rates of income tax and other taxes, rebates and
reliefs. (The Annual Finance Bill 2020 (2) was placed before the New Parliament by the Finance Minister
Smt. Nirmala Seetharaman on 6th July 2019). As soon as the Bill is passed by both the houses of
the Parliament and thereafter receives the assent of the President of india, it becomes the Finance
Act. It is applicable for the Previous Year 2019-20 and Assessment Year 2020-21.

(1.6) BASIS OF CHARGE OF INCOME TAX (SEC. 4)

According to section 4 of the Income Tax Act 1961, following are the provisions regarding charge
of income tax which may also be called as features of Income Tax.

(i) Income tax is charged for every assessment year.

(ii) It is charged on every person as specified under section 2(31) of the Act.
(iii) It is charged on the total income earned by the person during the previous year.
(iv) Total income is computed in accordance with the provisions of the Act.
(v) The tax is levied at the rates prescribed by the Finance Act.
(vi)
Income tax shall be deducted at source or paid in advance, where it is so deductible or payable
under any provision of the Act.

(vii) Income Tax Act, as amended on 1st April of any financial year shall apply for assessment of
the year.

(1.7) DEFINITION OF PERSON [2(31)]

According to Section 2(31) of the Income Tax Act, 1961, the term, person includes the following

(1) An Individual : It refers to natural human being and will include male or female, adult or
minor. For example, Mr. A, who is working in a Government office, Mr. B who owns house property
which is let out and Mr. C, who is practising accountant are individual persons.

(2) A Hindu Undivided Family : This is the creation of Hindu law and assumes that the
members of the family live together. The head of the family is known, Karta and all those who have
a right to claim partition are known as Coparcener. For example, A Hindu undivided family consisting
of 3 persons, in which Mr. A is a father and Mr. B and Mr. C are his sons, here Mr. A is termed as,
Karta and Mr. B and Mr. C are termed as Coparceners.

1.4
 Basic Concepts

(3) Company : The term, Company includes the following

: (i) Any Indian Company or

(ii) Any Body Corporate Incorporated under the Laws of Foreign Country or

(iii) Any institution, Association or a Body, whether Indian, or Non-Indian which is declared
as Company by CBDT.

(4) Firm : A firm means a partnership firm as defined under the Indian Partnership Act 1932. For
example, ABC & Co is a firm engaged in the business of Publications of Text Books in which A, B
and C are partners. Here the firm is treated as person for income tax purposes.

(5) Association of Persons & Body of Individuals : Association of Persons (AOP) means
two or more persons who join for a common purpose with a view to earn income. They must
combine to engage in an activity with common purpose to produce income. It may consist individual
or non-individual as its members. For example, where Mr. A, an individual, PQR & Co, a partnership
firm and ABC Ltd, a company joins together for a particular venture.

The term, Body of Individual (BOI) means a group of individuals (natural persons) who carries
on some activities with the objective of earning some income. It may or may not have a common
purpose. It must include individual members only. For example, Mr. A and Mr. B are legal
representatives of Mr. X, a deceased person, carrying on business without entering into partnership
is called as Body of Individuals.

(6) Local Authority : The expression, ‘Local Authority’ means :

(i) Panchayat as referred to in clause (d) of Article 243 of the Constitution or
(ii) Municipality as referred to in Article 243(p) of the Constitution or
(iii) Cantonment Board, as defined in sec.(3) of the Cantonment Acts, 1924.

For example, Walajapet Municipality or Corporation of Chennai and Edakkuppam Panchayat

are taxed as local authorities.

(7) Artificial and Judicial Persons : It is a residual category which includes, units of taxation,
not covered under any of the other categories of persons. These are not natural persons, but are
treated as separate entities. For example, Thirumala Thirupati Devasthanam, University of Madras,
Bar Council of Chennai, The Institute of Chartered Accountants of India are taxed as Artificial and
Judicial Persons.

(1.8) ASSESSEE
(1.8.1) Definition

According to Section 2(7) of the Income Tax Act, 1961, the term, Assessee means any persons
whose accounts are taken for assessment whether by voluntarily or compulsorily. He is a person
by whom any tax or any other sum of money like interest, fine or penalty payable under the Income
Tax Act,1961.

1.5
 Basic Concepts

(1.8.2) Types of Assessee

The term assessee is divided into three categories as under: (1) Ordinary Assessee (2)
Deemed Assessee (3) Assessee in Default.

(1.8.3) Ordinary Assessee : The term Ordinary Assessee includes

(i) Any person against whom some proceedings under Income Tax Act are going on. For example,
Mr.A carries on a small provision stores. His annual income does not exceed Rs.2,50,000.
He does not have any idea about Income Tax. However the Income Tax Department issues
notice to him to submit statement of Income. He has approached an Auditor and filed Return
of Income showing taxable income as Rs.2,00,000. The Income Tax Department accepted
the Return of Income. Here, issue of notice by the department is an act of proceedings under
the Income Tax Act. So, he is considered as an Assessee even though he is not liable to pay
any tax.

(ii) Any person who has filed Return of Loss under sec. 139 (3). For example, Mr.A carries on
small business enterprise. During the previous year he suffered a loss of Rs.50,000 from
business due to loss by fire. He filed return with department showing the loss amount. Here,
he does not liable to pay any amount of income tax, however he is treated as an assessee
on the reason that he has filed return of loss.

(ii) Any person, by whom any amount of penalty or interest is payable. For example, Mr. A
business man was levied income tax during the preceding previous year Rs.1,00,000. However
he fails to pay the income tax. During the previous year he paid that amount of income tax.
The department issued notice to him to pay penalty for delayed payment amounting to
Rs.10,000. Here, he is treated as an assessee even though he has no taxable income
during the current previous year.

(iv) Any person, who is eligible to get refund of tax. For example, Mr. A is working as a manager
in a company. The company deducts Rs.2,000 monthly as income tax and deposited with
the income tax department. However at the end of previous year the actual amount of income
tax comes to Rs.20,000 as per return of income. Here, he is eligible for claiming refund of
tax amounting to (2,000 x 12 = 24,000 - 20,000) Rs.4,000.Here, he is treated as an assessee
on the basis of income tax refund.

(1.8.4) Deemed Assessee

The concept of deemed assessee arises in the case of following situations.
(i) In case of a deceased person, the executor or legal representative will become deemed
assessee. For example, Mr. A is a retired Government Officer having Rs.1,00,000 from income
from house property. He is blessed with only one son. During the previous year he suddenly
died. Here, the son of Mr. A is treated as an assessee in the capacity of legal representative.

(ii) In case of a Minor or Lunatic or person of unsound mind, the guardian is considered as
deemed assessee. For example, Mr. A retired person from Private Company does not have
any taxable income. But his son carries on a business with taxable income of Rs.5,00,000.
During the previous year his son met with an accident and became a person of unsound

1.6
 Basic Concepts

mind. Here, Mr. A will be treated an assessee in respect of income from business in the
capacity of guardian of unsound mind person.

(iii) In case of a Non-resident having income in India, any person representing him is deemed
as assessee. For example, Mr. A in retired Government Officer in India. His pension income
is not taxable being less than the exempted limit. His son is working in America and settled
there as American Citizen. His son bought house properties in India which fetch annual rental
income of Rs.5,00,000. Here, Mr. A treated as an assessee in respect of income from house
properties of his son in the capacity of legal representative of non resident.

(1.8.5) Assessee - in - Default

Any person who failes to perform any statutory obligations as per the Act is called as an
assessee in default. For example, any employer who is liable to deduct tax before payment of salary
to his employees, fails to do so, he will be assessed as assessee in default.

(1.9) DEFINITION OF ASSESSMENT (SEC. 2(8))

According to Section 2(8) of the Income Tax Act, 1961, The term assessment means the
procedure by which the Income of an assessee is determined by the Assessing Officer of the Income
Tax Deptment of Government of India. It may be by way of a normal assessement or by way of
reassessment of an income previously assessed.

(1.10) DEFINITION OF ASSESSMENT YEAR(SEC. 2(9))

The financial year in which tax is paid is called Assessment Year. According to Section 2(9) of
the Income Tax Act, 1961, Assessment Year means the period of twelve months commencing on
the First day of April every year and ending on last day of March of next year. For example, the current
Assessment Year started on 1st April 2020 and ending on 31st March 2021.

(1.11) PREVIOUS YEAR (SEC. 2(34))

(1.11.1) Definition

The year in respect of the income of which tax is leived is called Previous Year. According to
Section 2(34) of the Income Tax Act, 1961, Previous year means the financial year immediately
preceding the assessment year. For example, the current previous year is 2019-20 which commenced
on 1st April 2019 and ended on 31st March 2020.

(1.11.2) Provisions Regarding Previous Year

The various provisions regarding the determination of previous year are as follows

(i) Uniform Previous Year : All assesses are required to follow a uniform previous year, that is
financial year commencing from 1st April and ending on 31st March, as their previous year in respect
of all sources of their income. In otherwords an assessee may maintain books of account on the
basis of Calendar year (1st January to 31st December) or Academic year (1st June to 31st May) or

1.7
 Basic Concepts

Diwali year (Diwali day of one year to diwali day of the next year) or Tamil new year (usually April
14th to next year April 13th) or any other year but for the purpose of income tax Financial Year is
taken as Previous Year.

(ii) Previous Year May be Less than Twelve Months: Normally previous year consists twelve
months. However, it may be less than twelve months in certain cases. They are as follows:

(a) Newly Set up Business : In case a business or profession is newly set up the period
beginning from the date of setting up of the business and ending of the last day of that financial
year i.e. 31st March shall be the first previous year for that business. For example, if a new business
is setup on 01.10.2019 then the first previous year for that business will be the period of 6 months
starting from 01.10.2019 to 31.03.2020.

(b) Discontinued Business : In case a business or profession discontinued during the previous
year, the previous year will be only up to the date of discontinuation of business. For example, if a
partnership firm dissolved on 1st May 2020 then the previous year consists only one month.

(1.11.3) When Previous Year and Assessment Year will be Same ?

The general rule for the chargeability of income is that the income earned during a previous
year is taxed in the relevant assessment year. However, in certain exceptional circumstances the
income is taxed in the same year in which it is earned. These are as follows :

(i) Income of the Non-resident Shipping Company [Sec.172] : The income earned by non-resident
shipping company having any representative in India, is assessable during the previous year itself.
Before the departure of ship from any part in India, the master of the ship is required to furnish to
the Assessing Officer a return of income and to pay the amount of tax, payable if any.

(ii) Income of Persons Leaving India [Sec.174] : When it appears to the assessing officer
that any individual may leave India during the current assessment year with no present intention of
returning to India, the total income of such individual is chargeable to tax in the same year.

(iii) Association Formed for Particular Event or Purpose [Sec.174 A] : Some times, any
Association of Person (or) Body of Individuals that is formed or established or incorporated for any
particular event or purpose in any assessment year but is also dissolved in the same assessment
year or soon thereafter. In such cases, the Assessing Officer may assess income of the relevant
previous year plus income upto the date of dissolution, in the assessment year itself.

(iv) Income of Persons Trying to Transfer his Assets [Sec.175] : If any person trying to sell
or transfer his assets with a view to avoiding any payment of his tax liability, then the income from
such transfer is chargeable to tax in the year of transfer itself.

(v) Income from Discontinued Business [Sec.176] : Where any business or profession is
discontinued in any assessment year, the income upto the period of discontinuation may be
chargeable to tax during the particular year itself. For example, if a business is discontinued on
16th July 2020, the income for the period 1st April 2020 to 16th July 2020 will be taxable in the
assessment year 2020-21 itself.

1.8
 Basic Concepts

(1.11.4) Distinction between Previous Year and Assessment Year

(i) The previous year is a period during which the Income is earned by the General Public, where
as the assessement year is a period during which Tax on Income is levied and collected by the
Government

(ii) The prevsious year may be 12 months or sometimes less than 12 months, whereas the
assessement year is compulsorily for 12 months.

(iii) For the current period the previous year is from 01.04.2019 to 31.03.2020, whereas the
assessment year is from 01.04.2020 to 31.03.2021.

(1.12) INCOME (SEC. 2(24))

(1.12.1) Definition of Income

According to section 2(24) of the Income Tax Act, 1961 the term income includes the following
items :

(i) Profits and Gains.

(ii) Dividend.
(iii) Voluntary contributions received by a trust.
(iv) The value of perquisites or profits in lieu of salary.
(v) Any special allowance granted to the assessee to meet personal expenses.
(vi) Any allowance granted to meet personal expenses for the increased cost of living.
(vii) The value of benefit obtained from a company by a director.

(viii) The value of any benefit obtained by any representative assessee.

(ix) Any income chargeable under the head business.
(x) Any value of benefit from profession.
(xi)
Any capital gains.
(xii)
Insurance profit.
(xiii)
Casual incomes.
(xiv)
Any sum received under Keyman Insurance Policy. (Insurance Policy on employees)
(xv) Advance Money Received for Capital Assets.
(xvi)
Gift Income exeeding Rs. 50,000.
(xvii)
Issue of shares at premium.

(xviii) Fair market value of inventary converted into Capital Assets.

(xix) Any compensation for modification of terms of employment.

(1.12.2) Features of Income

The following are some important principles or features which explain the concept of “income”:
(i) Sources of Income : The income connotes a periodic monetary return coming with some sort
of regularity or expected regularity from definite source. The source, however, need not necessarily
be one which is expected to be continuously productive.

1.9
 Basic Concepts

(ii) Basis of Income : The income arises either on receipt basis or accrual basis. If the assessee
has got a right to receive the income he is liable to be taxed on such income on accrual basis even
if he may not have received the income.

(iii) Form of Income : Income may be realised in the form of money or money’s worth. i.e., in
cash or in kind. When income is realised in kind, its valuation is made according to the prescribed
rules.

(iv) Nature of Income : The Income Tax law does not make any distinction between legal income
and income tainted with illegality. So lllegal income is also taxable like any other income.

(v) Title of Income : Assessment

of income cannot be held up because of any dispute regarding
the title of the income. The recipient is taxable although there may be a rival claim to the source of
income. Where money has been received, a rival claim or a threat of litigation cannot make the income
contingent one.

(vi) Quantum of Income : A revenue receipt is always liable to tax whether it is received in lump-sum or in
installments. For example, arrears of pay revision, received in lump - sum, is income.

(vii) Tax free Income : If some tax - free income is received by the assessee, it has to be grossed
up for inclusion in his total income.

(viii) Real Income alone is Taxable : “Income” should refer to real income and not fictional or
technical income. Transactions entered into by commercial men must be looked at for income - tax
purposes from a commercial point of view and in trying to determine whether a certain transaction
resulted in profits, we have to see whether the transaction resulted in real profits.

(ix) Negative Income : Losses are negative profits. Both positive and negative profits are of a
revenue character and both must enter into computation of total income.

(x) Application of Income : Where an assessee applies an income to discharge on obligation

after the income reaches his hands, it is called as application of income. For example, Payment of
rent for residential house from salary income is an application income.

(xi) Diversion of Income : Where an assessee transfer or divert the income to other persons
before it reaches him, it is called as diversion of income. For example, transfer of income without
transferring the asset is a diversion income.

(1.13) DEFINITION OF GROSS TOTAL INCOME (SEC. 14)

According to Section 14 of the Income Tax Act, 1961, for the purposes of income tax and
computation of total income, all income shall be classified under the following heads of income :

(1) Income from Salaries.

(2) Income from house property.
(3) Profits and gains of business or profession.
(4) Income from Capital gains.
(5) Income from other sources.
The sum of income computed under the above five heads, after making adjustments for set
off and carry forward of losses, is known as Gross Total Income.

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(1.14) MAXIMUM EXEMPTION LIMIT FOR DIFFERENT PERSONS

In case of certain assesses there is no income tax on income earned during the previous
year upto a certain limit, which is called as Maximum Exemption Limit (MEL).

MEL for the Assessment Year 2020-21

Individual HUF Firm Company Others

General Senior Super Senior Non-resident

2.50,000
2,50,000 3,00,000Nil 5,00,000
Nil 2,50,000
Nil

(1.15) COMPONENTS OF TAX LIABILITY

The amount of Tax Liability consist of the following components :
(i) Normal Rate of Income Tax
(ii) Special Rate of Income Tax

(iii) Surcharge

(iv) Marginal Relief

(v) Health and Education Cess
(vi) Tax Rebate
(vii)
Tax Deducted at Source
(viii) Advance Tax paid
(ix)
Rounding of Income and Tax

(1.15.1) Normal Rates of Income Tax

Methods of Normal Rate of Tax

Slab Rate System Flat Rate System.

Individuals, Partnersihp Firm

HUF Company

AOP and BOI

Local Authority

Co-operative society
Other Persons

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 Basic Concepts

(1.15.2) Special Rates of Income Tax

In the cases certain incomes the rate of Income Tax is provided under special rate. For
Example, when the total Income of an assessee includes capital gain first of all such income is
taxed at special rates and balance of income is taxable at normal slab rate.

(1.15.3) Surcharge
It is an additional amount calculated on the amount of Income Tax payable by the assessee.
When the taxable income exceed a particular limit. For example, in the case of individuals sucharge
is applicable when the taxable income exceed Rs. 50,00,000.

(1.15.4) Marginal Relief

The marginal relief provides relaxation from the burden of surcharge to the assessee. It is
based on incremental Income over Rs. 50,00,000 or Rs. 1,00,00,000 as the case may be.

(1.15.5) Health and Education Cess

Normally the Cess is and additional amount calculated on the amount of Income Tax including
surcharge for a specific purposes. Health and education cess is collected by the Government for
providing funds for the Health and Educational Shemes to the general public. The amount of cess
cannot be utilised by the Government for any other purpose other than Health and education
purposes.

(1.15.6) Tax Rebate

The term Tax Rebate means an amount of concession allowed on the amount of tax liability
in certain circumstances. For example an individual resident assessee is eligible for tax rebate of
Rs. 12,500 if the Taxable Income does not exceed Rs. 5.00,000.

(1.15.7) Tax Deducted at Source

Deduction of tax by the person responsible for payment of income at the rates specified in
part II of schedule I of Finance Act is called as Tax Deducted at Source. For example the employer
is liable to make TDS from the Salary Income payable to the employees at average rate of Income
Tax on the estimated annual salary income.

(1.15.8) Advance Tax paid

Payment of income tax in advance on the basis of estimated current income as per Part III of
Schedule I Finance Act is callled as Advance Tax Paid. For example, an assessee engaged in
business having taxable income is liable to pay advance tax as per the applicable provisions.

(1.15.9) Rounding off of Income and Tax

The amount of taxable income [Sec. 288(A)] and the amount of income tax [Sec. 288(B)] shall
be rounded off to the nearest multiple of ten rupees. If the last figure in that amount is five or more,
the amount shall be increased to the next higher amount which is a multiple of ten and if the last
figure is less than five, the amount shall be reduced to the next lower amount which is a multiple
of ten.

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(1.16) FORMAT FOR ASSESSMENT OF AN INDIVIDUAL

(i) Computation of Taxable Income or Net Income or Total Income :

Income from Salaries (Section 15-17) xxxx

Income from House Property (Section 22-27)
xxxx

Profit and Gains of Business or Profession (Section 28 - 44DB) xxxx

Income from Capital Gains (Section 45 - 55A) xxxx
Income from Other Sources (Section 56 - 59)
xxxx

xxxx

Add : Clubbing of Income and Aggregation of Income (Section 60 - 69D) xxxx

Less : Adjustment on account of Set Off or Carryforward of Losses (Section 70-80) xxxx
Gross Total Income xxxx

Less : Deductions under Section 80C to 80U xxxx

Total Income (Rounded off to Rs. 10 u/s. 288(A)) xxxx

(ii) Computation of Tax Liability and Tax Payable :

Tax on Total Income (Normal and Special Rates)
xxxx
Less : Tax Rebate u/s 87A (if Applicable)
xxxx

Balance of Tax After Rebate xxxx

Add : Surcharge
xxxx

Tax including Surcharge xxxx

Add : Health and Education Cess (HEC) @ 4% xxxx

Tax Including HEC
xxxx

Less : Relief under sections 86, 89, 90, 90A and 91 xxxx
Tax Liability
xxxx

Less : Pre-paid Taxes

Tax paid on self assessment xxxx

Tax deducted or collection at source xxxx

Tax paid in advance
xxxx

xxxx

Add : Interest under sections 234A, 234B and 234C, if any xxxx
Tax Payable (rounded off to nearest Rs. 10 u/s. 288(B)) xxxx

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 Basic Concepts

(1.17)TAX RATES FOR INDIVIDUALS FOR ASSESSMENT YEAR 2020-21

TYPE OF RATES

NORMAL RATES SPECIAL RATES

General Citizen Long-term Capital Gain from other than Shares

Senior Citizen Long-term Capital Gain from Shares
Super Senior Citizen Short-term Capital Gain from Shares
Non-resident Casual Income
Dividend Income
Undisclosed Income

(1.17.1) Income Tax for General Citizen (Age below 60 years)

First Rs. 2,50,000 (upto Rs. 2,50,000) Nil
Next Rs. 2,50,000 (Rs. 2,50,001 to 5,00,000) 5 %
Next Rs. 5,00,000 (Rs. 5.00.001 to 10,00,000) 20 %
Balance of Net Income (Rs. 10,00,001 and above) 30 %

(1.17.2) Income Tax for Senior Citizen (Age 60 years or More but below 80 Years)
First Rs. 3,00,000 (upto Rs. 3,00,000) Nil
Next Rs. 2,00,000 (Rs. 3,00,001 to 5,00,000) 5 %
Next Rs. 5,00,000 (Rs. 5,00,001 to 10,00,000) 20 %
Balance of Net Income (Rs. 10,00,001 and above) 30 %

(1.17.3) Income Tax for Super Senior Citizen (Age 80 years or More)
First Rs. 5,00,000 (upto Rs. 5,00,000) Nil
Next Rs. 5,00,000 (Rs. 5,00,001 to 10,00,000) 20 %
Balance of Net Income (Rs. 10,00,001 and above) 30 %

(1.17.4) Income Tax for Non Resident (Irrespective of Age)

First Rs. 2,50,000 (upto Rs. 2,50,000) Nil
Next Rs. 2,50,000 (Rs. 2,50,001 to 5,00,000) 5 %
Next Rs. 5,00,000 (Rs. 5.00.001 to 10,00,000) 20 %
Balance of Net Income (Rs. 10,00,001 and above) 30 %

(1.17.5) Income Tax for Special Incomes

Long-term Capital Gain from other than Shares 20%
Long-term Capital Gain from Shares 10%
Short-term Capital Gain from Shares 15%
Casual Income 30%
Dividend Income over Rs. 10,00,000 10%
Undisclosed Income 60%

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 Basic Concepts

Explanation : Clarification regarding attaining prescribed age of 60 years / 80 years in case of senior/
very senior citizen whose date of birth falls on 1st April.
The CBDT has, (Circular No. 28/2016, dated 27.07.2016) Clarified that a person born on 1st
April would be considered to have attained a particular age on 31st march, the day preceding the
anniversary of his birthday.

(1.17.6) Tax Rebate u/s 87A (w.e.f. Assessment Year 2020-21)

A resident individual is allowed a Tax Rabate at 100% of Income Tax or Rs. 12,500 which ever
is less when his / her taxable income during the pervious year does not exceed Rs. 5,00,000.

(1.17.7) Surcharge (w.e.f. Assessment Year 2020-21)

(a) 10% of Income Tax in the case of person having a total income exceeding Rs. 50
lakhs but not exceeding Rs. 1 crore

(b) 15% of income Tax in case of a person having a total income exceeding Rs. 1 crore
but not exceeding Rs. 2 crores

(c) 25% of income Tax in case of a person having a total income exceeding Rs. 2 crores
but not exceeding Rs. 5 crores.

(d) 37% of income Tax in case of a person having a total income exceeding Rs. 5 crores.

(1.17.8) Marginal Relief (w.e.f. Assessment Year 2020-21)

(a) Marginal relief is available in case total income exceeds Rs. 50 lakhs. The additional
amount of income-tax payable (together with surcharges) on the excess of income over
Rs. 50 lakhs should not be more than the amount of income exceeding Rs. 50 lakhs.

(b) Where total income exceeds Rs. 1 crore, the total amount payable as income tax and
surcharge on such income shall not exceed the total amount payable as income tax
and surcharges on a total income of Rs. 1 crore by more than the amount of income
that eceeds Rs. 1 crore.

(c) Where total income exceeds Rs. 2 crores, the total amount payable as income tax
and surcharge on such income shall not exceed the total amount payable as income
tax and surcharge on a total income of Rs. 2 crores by more than the amount of income
that exceeds Rs. 2 crores.

(d) Where total income exceeds Rs. 5 crore, the total amount payable as income tax and
surcharge on such income shall not exceed the total amount payable as income tax
and surcharge on a total income of Rs. 5 crores by more than the amount of income
that exceeds Rs. 5 crores.

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 Basic Concepts

(1.17.9) Health and Education Cess For the Assessment Year 2020-21

4% on Income Tax - Tax Rebate + Surcharge

(1.17.10) PRACTICAL ILLUSTRATIONS ON TAX LIABILITY OF INDIVIDUALS

ILLUSTRATION (1) : (With Tax Rebate) The Taxable Income of Miss. Shivani for the Previous Year
2019-20 is Rs.3,45,000. Calculate the amount of tax payable for the Assessment Year 2020-21 assum2
ing that he is the age of (i) 20 years (ii) 70 years (iii) 90 years

Solution: Computation of Tax Liablity for the Assessement Year 2020-21 :

(i) 20 Years
On First Rs.2,50,000 Nil
On Balance of Income at 5% (3,45,000 - 2,50,000 = 95,000 x 5%) 4,750
4,750
Less : Tax Rebate u/s 87A (Rs. 4,750 or Rs. 12,500 WEL) 4,750
Nil
Add : Surcharge (Taxable Income below 50,00,000) Nil
Nil
Add : Health & Education Cess @ 4% Nil
Tax Liability Nil

(ii) 70 Years
On First Rs.3,00,000 Nil
On Balance of Income at 5% (3,45,000 - 3,00,000 = 45,000 x 5%) 2,250

2,250
Less : Tax Rebate u/s 87A (Rs. 2,250 or Rs. 12,500 WEL) 2,250
Tax Liability Nil

(ii) 90 Years
On First Rs.3,45,000 Nil
Tax Liability Nil

ILLUSTRATION (2) : (Without Tax Rebate) The Taxable Income of Mr. Balaji for the Previous Year
2019-20 is Rs.10,94,000. Calculate the amount of tax payable for the Assessment Year 2020-21 assum2
ing that he is the age of (i) 45 years (ii) 75 years (iii) 85 years
Solution: Computation of Tax Liability for the Assessement Year 2020-21 :
(i) 45 Years

On First Rs.2,50,000 Nil

On Next Rs. 2,50,000 @ 5% (2,50,000 x 5%) 12,500
On Next Rs. 5,00,000 @ 20% (5,00,000 x 20%) 1,00,000

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 Basic Concepts

On Balance of Income at 30% (10,94,000 - 10,00,000 = 94,000 x 30%) 28,200

1,40,700
Less : Tax Rebate u/s 87A (Taxable Income exceed Rs. 5,00,000) Nil
1,40,700
Add : Surcharge (Taxable Income below 50,00,000) Nil
1,40,700
Add : Health & Education Cess @ 4% (1,40,700 x 4%) 5,628
Tax Liability 1,46,328

(ii) 75 Years
On First Rs.3,00,000 Nil
On Next Rs. 2,00,000 @ 5% (2,00,000 x 5%) 10,000

On Next Rs. 5,00,000 @ 20% (5,00,000 x 20%) 1,00,000

28,200
On Balance of Income at 30% (10,94,000 - 10,00,000 = 94,000 x 30%)
1,38,200
Less : Tax Rebate u/s 87A (Taxable Income exceed Rs. 5,00,000) Nil
1,38,200
Add : Surcharge (Taxable Income below 50,00,000) Nil
1,38,200
Add : Health & Education Cess @ 4% (1,38,200 x 4%) 5,528
Tax Liability 1,43,728

(ii) 85 Years
On First Rs.5,00,000 Nil
On Next Rs. 5,00,000 @ 20% (5,00,000 x 20%) 1,00,000
28,200
On Balance of Income at 30% (10,94,000 - 10,00,000 = 94,000 x 30%)
1,28,200
Less : Tax Rebate u/s 87A (Taxable Income exceed Rs. 5,00,000) Nil
1,28,200
Add : Surcharge (Taxable Income below 50,00,000) Nil
1,28,200
Add : Health & Education Cess @ 4% (1,28,200 x 4%) 5,128
Tax Liability 1,33,328

ILLUSTRATION (3) : (With Marginal Relief) The Taxable Income of Mr. Tamilvendan (age 20 years) for
the Previous Year 2019-20 is Rs.51,00,000. Calculate the amount of tax payable for the Assessment
Year 2020-21.

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 Basic Concepts

Solution:
(i) Computation of Tax Liability on Total Income (Rs. 51,00,000)
On First Rs.2,50,000 Nil
On Next Rs. 2,50,000 @ 5% (2,50,000 x 5%) 12,500
On Next Rs. 5,00,000 @ 20% (5,00,000 x 20%) 1,00,000
12,30,000
On Balance of Income at 30% (51,00,000 - 10,00,000 = 41,00,000 x 30%)
13,42,500
Add : Surcharge at 10% (Taxable Income execeed Rs. 50,00,000) 1,34,250
Tax Liability 14,76,750

(ii) Computation of Tax Liability on Maximum Limit for Surcharge (Rs. 50,00,000)
On First Rs.2,50,000 Nil
On Next Rs. 2,50,000 @ 5% (2,50,000 x 5%) 12,500
On Next Rs. 5,00,000 @ 20% (5,00,000 x 20%) 1,00,000
12,00,000
On Balance of Income at 30% (50,00,000 - 10,00,000 = 40,00,000 x 30%)
13,12,500
Add : Surcharge at 10% (Taxable Income does not execeed Rs. 50,00,000) Nil
Tax Liability 13,12,500

(iii) Computation of Marginal Relief

Tax on Rs. 51,00,000 14,76,750
Less : Tax on Rs. 50,00,000 13,12,500
1,64,250
Less : Excess of Taxable Income over Rs. 50,00,000 (51,00,000 - 50,00,000) 1,00,000
64,250
(iv) Computation of Tax Liability after Marginal Relief
Tax on Total Income 14,76,750
Less : Marginal Relief 64,250
14,12,500
Add : HEC at 4% 56,500
14,69,000

(1.17.11) PRACTICAL EXERCISES ON TAX LIABILITY OF INDIVIDUALS

Exercise (1) : (General Citizen) The Taxable Income of Miss. Atchaya Priya (Age 19 Years) for the
Previous Year 2019-20 is Rs.2,85,100. Calculate the amount of tax payable for the Assessment Year
2020-21.

(Ans : First 2,50,000 at Nil Rate, Balance : 35,100 at 5%) = 1,755 - 1,755 =
Nil) Note : Taxable Income is less than Rs. 5,00,000, hence tax rebate is
allowed.

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 Basic Concepts

Exercise (2) : (General Citizen) The Taxable Income of Miss.Bavadharani (Age 20 Years) for the
Previous Year 2019-20 is Rs.3,45,000. Calculate the amount of tax payable for the Assessment Year
2020-21.

(Ans : First 2,50,000 at Nil rate Balance : 95,000 at 5%) = 4,750 - 4,750 =
Nil) Note : Taxable Income is less than Rs. 5,00,000, hence tax rebate is
allowed.

Exercise (3) : (General Citizen) The Taxable Income of Mr. Subash (Age 40 Years) for the Previous Year
2019-20 is Rs.4,94,900. Calculate the amount of tax payable for the Assessment Year 2020-21.
(Ans : Nil + 12,245 = 12,245 - 12,245 = Nil)

Note : Taxable Income is less than Rs. 5,00,000, hence tax rebate is allowed.

Exercise (4) : (General Citizen) The Taxable Income of Miss. Ramya (Age 21 Years) for the Previous
Year 2019-20 is Rs.7,25,800. Calculate the amount of tax payable for the Assessment Year 2020-21.
(Ans : Nil + 12,500 + 45,160 = 57,660 + 2,306 = 59,966)

Note : Taxable Income is more than Rs. 5,00,000, hence tax rebate is not allowed.

Exercise (5) : (General Citizen) The Taxable Income of Miss. Pavithra (Age 22 Years) for the Previous
Year 2019-20 is Rs.17,38,500. Calculate the amount of tax payable for the Assessment Year 2020-21.
(Ans : Nil + 12,500 + 1,00,000 + 2,21,550 = 3,34,050 + 13,362 = 3,47,412)

Note : Taxable Income is more than Rs. 5,00,000, hence tax rebate is not allowed.

Exercise (6) : (General Citizen) The Taxable Income of Mr. Arun (Age 21 Years) for the Previous Year
2019-20 is Rs.15,10,000. Calculate the amount of tax payable for the Assessment Year 2020-21.
(Ans : Nil + 12,500 + 1,00,000 + 1,53,000 = 2,65,500 + 10,620 = 2,76,120)

Note : Taxable Income is more than Rs. 5,00,000, hence tax rebate is not allowed.

Exercise (7) : (Senior Citizen) The Taxable Income of Mr. Aravind (Age 62 Years) for the Previous Year
2019-20 is Rs.9,46,300. Calculate the amount of tax payable for the Assessment Year 2020-21.
(Ans : Nil + 10,000 + 89,260 = 99,260 + 3,970 = 1,03,230)

Note : Taxable Income is more than Rs. 5,00,000, hence tax rebate is not allowed.

Exercise (8) : (Supper Senior Citizen) The Taxable Income of Mr. Bharath (Age 81 Years) for the
Previous Year 2019-20 is Rs.18,00,000. Calculate the amount of tax payable for the Assessment Year
2020-21.

(Ans : Nil + 1,00,000 + 2,40,000 = 3,40,000 + 13,600 = 3,53,600)

Note : Taxable Income is more than Rs. 5,00,000, hence tax rebate is not allowed.

Exercise (9) : (Comprehensive) The Taxable Income of Mr. Kamesh for the Previous Year 2019-20 is
Rs.32,35,000. Calculate the amount of tax payable for the Assessment Year 2020-21 assuming that his
age is (i) 46 years (ii) 62 Years (iii) 83 Years

(Ans : (i) Nil + 12,500 + 1,00,000 + 6,70,500 = 7,83,000 + 31,320 = 8,14,320

(ii) Nil + 10,000 + 1,00,000 + 6,70,500 = 7,80,500 + 31,220 = 8,11,720
(iii) Nil + 1,00,000 + 6,70,500 = 7,70,500 + 30,820 = 8,01,320)

Note : Taxable Income is more than Rs. 5,00,000, hence tax rebate is not allowed.
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 Basic Concepts

Exercise (10) : (Comprehensive)The Taxable Income of Mr. Paranthaman for the Previous Year 2019-
20 is Rs.18,18,800. Calculate the amount of tax payable for the Assessment Year 2020-21 assuming
that his age is (i) 25 years (ii) 65 Years (iii) 95 Years

(Ans : (i) Nil + 12,500 + 1,00,000 + 2,45,640 = 3,58,140 + 14,326 = 3,72,466

(ii) Nil + 10,000 + 1,00,000 + 2,45,640 = 3,55,640 + 14,226 = 3,69,866
(iii) Nil + 1,00,000 + 2,45,640 = 3,45,640 + 13,826 = 3,59,466)

Note : Taxable Income is more than Rs. 5,00,000, hence tax rebate is not allowed.

(1.18) TAX LIABILITY OF OTHER PERSONS FOR THE ASSESSMENT

YEAR 2020-21

(1.18.1) Hindu Undivided Family

(i) Income Tax
First Rs. 2,50,000 (upto Rs. 2,50,000) Nil

Next Rs. 2,50,000 (Rs. 2,50,001 to 5,00,000) 5 %

Next Rs. 5,00,000 (Rs. 5.00.001 to 10,00,000) 20 %

Balance of Net Income (Rs. 10,00,001 and above) 30 %

(ii) Surcharge
(a) 10% of Income Tax in the case of person having a total income exceeding

Rs. 50 lakhs but not exceeding Rs. 1 crore

(b) 15% of income Tax in case of a person having a total income exceeding Rs. 1 crore.

(iii) Health and Education Cess

4% on Income Tax - Tax Rebate + Surcharge

(1.18.2) Association Persons, Body of individuals and Artificial and Judicial

Persons
(i) Income Tax
First Rs. 2,50,000 (upto Rs. 2,50,000) Nil

Next Rs. 2,50,000 (Rs. 2,50,001 to 5,00,000) 5 %

Next Rs. 5,00,000 (Rs. 5.00.001 to 10,00,000) 20 %

Balance of Net Income (Rs. 10,00,001 and above) 30 %

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 Basic Concepts

(ii) Surcharge
(a) 10% of Income Tax in the case of person having a total income exceeding
Rs. 50 lakhs but not exceeding Rs. 1 crore

(b) 15% of income Tax in case of a person having a total income exceeding Rs. 1 crore.

(iii) Health and Education Cess

4% on Income Tax - Tax Rebate + Surcharge

(1.18.3) Partnership Firms (Including LLP)

(i) Income Tax
Flat Rate of 30% on total Income

(ii) Surcharge
12% of Income Tax in the case of Firm having a total income exceeding Rs. 1 crore

(iii) Health and Education Cess

4% on Income Tax - Tax Rebate + Surcharge

(1.18.4) Company
(i) In the case of Domestic Company :
(a) Income Tax is charged at a Flat Rate of 30% (25% where total turnover does
not exceed 400 Crores) (w.e.f. 2020-21)
(b) Surcharge is charged at 7% if taxable income between Rs. 1 Crore and
Rs. 10 Crores and 12% if taxable income exceed Rs. 10 Crores
(c) Health and Education Cess is charged at 4%

(ii) In the case of Foreign Company :

((a) Income Tax is charged at a Flat Rate of 40%,
(b) Surcharge is charged at 2% if taxable income between Rs. 1 Crore and
Rs. 10 Crores and 5% if taxable income exceed Rs. 10 Crores

(c) Health and Education Cess is charged at 4%

(1.19) CAPITAL AND REVENUE ITEMS

(1.19.1) Meaning of Capital Receipt

A receipt relating to fixed assets or fixed capital is called as capital receipt.

(1.19.2) Examples of Capital Receipts

Following are the important items of receipts which comes under the meaning of capital
receipts:

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 Basic Concepts

(i) Sale of fixed assets.

(ii) Sale of non trade investments.
(iii) Sale of technical know how.
(iv) Issue of shares and debentures.
(v)
Loan borrowed from banks and other institutions.
(vi)
Receipts of proceeds of LIC policy on maturity, except if it is in respect of keyman
insurance policy.

(vii) Discount on issue of debentures or premium on redemption of debentures in the hands

of debenture holders.

(viii) Compensation received for acquisition of land by Government.

(ix) Compensation for cancellation of a license for the business by the Government.

(1.19.3) Meaning of Revenue Receipt

A receipt relating to any assets other than fixed assets or working capital is called as
Revenue Receipt.

(1.19.4) Examples of Revenue Receipts

Following are the important items of receipts which comes under the meaning of revenue
receipt:

(i) Pension whether commuted or uncommuted.

(ii) Compensation received by the managing director on termination of his service due to
nationalisation of the company.

(iii) Profit on sale of shares from any company held as stock in trade.
(iv) Compensation received for loss of profits.
(v) Compensation received in respect of loss of stock in trade.
(vi) Interest on refund of income tax.
(vii) Lumpsum royalty received in advance.
(viii)
Damages received for the breach of contract.
(ix)
Royalties received by the authors of the books
(x)
Subsidy or grant received from the Government for business.

(1.19.5) Distinction between Capital and Revenue Receipts

Generally capital receipts are exempt from tax (except in the case of capital gains) whereas,
generally revenue receipts are taxable (except in the case of exemption u/s 10).

(1.19.6) Meaning of Capital Expenditure

An expenditure incurred to acquire the fixed assets or non trade investments or to
discharge capital liability or long term debts is called capital expendiure.

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 Basic Concepts

(1.19.7) Examples of Capital Expenditure

Following are the important items of expenditure which comes under the meaning of capital
expenditure:

(i) Registration of business.

(ii) Expenditure on issue of shares of a company.
(iii) Cost of acquisition of plant, machinery, or land and building.
(iv) Cost of extension of business and fitting new machinery.
(v) Expenditure incurred on the maintenance of business reputation.

(vi) Compensation paid for cancellation of contract for the acquisition of fixed assets.
(vii) Remuneration to promoters of a company.
(viii)
Amount of price paid to acquire a partnership business.
(ix) Advertisement expenditure at the flotation of a company.
(x) Expenditure incurred on completing imperfect title to an asset.

(1.19.8) Meaning of Revenue Expenditure

An expenditure incurred to purchase the stock in trade or trade investment or to discharge
current liabilities is called as revenue expenditure.

(1.19.9) Examples of Revenue Expenditure

Following are the important items of expenditure which comes under the meaning of revenue
expenditure:

(i) Salary and perquisite to employees.

(ii) Rent of business premises.

(iii) Discount on issue of debentures.

(iv) Entertainment expenses incurred on opening of new branches at different places.

(v) Expenditure on management of temple in business premises for recreation of employees.
(vi) Cost of training provided to employees.

(vii)
Insurance premium on stock and on profit.
(viii)
Professional tax paid by a person carrying on a business or profession.
(ix)
Litigation expenses for the purpose of protecting capital assets of a business and to
maintain an existing title to the business asset.

(x) Legal charges for obtaining a loan from a financial institution.

(1.19.10) Distinction between Capital Expenditure and Revenue Expenditure

Generally while computing Income from Business or Profession, capital expenditure is not allowed
as deduction (but depreciation or amortisation is allowed) whereas, revenue expenditure is allowed as
deduction.

(1.19.11) Meaning of Capital Loss

The Loss arising out of transfer of capital asset is called as capital loss.

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 Basic Concepts

(1.19.12) Examples of Capital Loss

(i) Loss on Sale of Fixed Assets
(ii) Loss on Sale of Investment
(iii) Loss of Fixed Asset by Fire.
(iv) Loss of cash by theft after business hours

(1.19.13) Meaning of Revenue Loss

The Loss arising out of sale of current asset is called as revenue loss.

(1.19.14) Examples of Revenue Loss

(i) Loss on Sale of Goods
(ii) Loss on Sale of Trade Investment
(iii) Loss of Stock by Fire.
(iv) Loss of cash by theft during business hours

(1.19.15) Distinction between Capital Loss and Revenue Loss

The capital loss is considered under the head capital Gains, whereas revenue loss is
considered under the head business or profession.

(1.20) OTHER IMPORTANT TERMS

(1.20.1) Residential Status : A basic criteria to determine the scope of total income consisting Resident,
Resident but not Ordinary Resident and Non-Resident.

(1.20.2) Tax Incidence : Scope of income of a person on the basis of residential status.

(1.20.3) Agricultural Income : A totally exempted income consisting rent from land, income from agricultural
operations and income from farm house.

(1.20.4) Casual Income : Income received by chance and without any stipulation which is non-recurring
and uncertain in nature.

(1.20.5) Tax Holiday : The period during which certain incomes have been exempted from tax subject to
certain conditions.

(1.20.6) Business : The real, systematic and organised activity with the aim of earning profit, including
trade, commerce, vocation, manufacture and adventure in the nature of trade.

(1.20.7) Profession : An occupation requiring intellectual skill or manual skill controlled by intellectual
skill like Legal, Medical, Engineering, Architectural, Accountancy, Technical consultancy, Interior decoration
and Film artist.

(1.20.8) Clubbing of Income : Inclusion of income of a person with income of another person in certain
cases subject to certain conditions.

(1.20.9) Set off : Adjustment of any loss against any income within a previous year.

(1.20.10) Carry Forward : Transfer of unadjusted loss of any previous year to succeeding years to set off
against income if any.

1.24
 Basic Concepts

(1.20.11) Capital Gain : Amount of gain arising from the transfer of capital asset.

(1.20.12) Speculation Business : A business which carrying on transactions for the purchase or sale of
any commodity including stock and shares, otherwise than by actual delivery.

(1.20.13) Tax Deducted at Source : Deduction of tax by the person responsible for payment of income at
the rates specified in part II of schedule I of Finance Act.

(1.20.14) Advance Tax : Payment of income tax in advance on the basis of estimated current income
as per Part III of schedule I of Finance Act.

(1.20.15) Return of Income : Accounting statement showing taxable income of an assessee during the
previous year in the prescribed form.

(1.20.16) PAN : Permanent Account Number allotted by income tax department on all India basis to an
assessee for identification.

(1.20.17) Exemption : The term exemption means exclusion from total income. If an income is exempt
from tax, it is not included in the computation of taxable income. For example, agricultural Income is
exemption from tax u/s 10(1).

(1.20.18) Deduction : The term deduction means reduction in the taxable amount. If a deduction is
allowed from income, such income is included in the computation of total income and thereafter deduca
tion is allowed. For example, standard deduction is allowed from Salary Income u/s 16 i (a)

(1.21) THEORY QUESTIONS

Part - A
1. What is mean by Tax?
2. What are the features of Tax?
3. What are the Two Types of Taxes?
4. What is Direct Tax?
5. What is Indirect Tax?
6. What is the Sources of Income Tax Law ?
7. What is Assessment ?
8. Who is an Assessee?
9. Who is Ordinary Assessee?
10. Who is Deemed Assessee?
11. Who is Assessee in Default?
12. Define the term Previous Year ?
13. Define the term Assessment Year ?
14. List out any Two items of Examples for Capital Receipts
15. List out any Two items of Examples for Revenue Receipts.
16. List out any Two Examples for Capital Expenditure.
17. List out any Two Examples for Revenue Expenditure.

1.25
 Basic Concepts

18. Define Gross Total Income ?

19. Define Person.

20. What is Surchage?

21. What is Health and Education Cess?
22. What is PAN?

23. What is Return of Income?

24. Distinguish between Capital Receipt and Revenue Receipt.
25. Distinguish between Capital Expenditure and Revenue Expenditure.

26. What is Income Tax.

Part - B
27. Distinguish between Previous Year and Assessement Year?

28. Explain the term Assessee.

Part - C
29. Define Income

30. Explain the Various Features of Income.

31. ‘Income of the Previous Year is Taxable in the following Assessment Year” - What are the
Exceptions to this Rule ?

*************

1.26
 Residential Status and Scope of Total Income

CHAPTER -2
RESIDENTIAL STATUS AND SCOPE OF
TOTAL INCOME

(2.0) Introduction

(2.1) Classification

(2.2) Residential Status of an Individual

(2.3) Practical Illustrations on Residential Status

(2.4) Practical Exercises on Residential Status

(2.5) Residential Status of a HUF

(2.6) Residential Status of a Firm

(2.7) Residential Status of a Company

(2.8) Residential Status of Other Persons

(2.9) Scope of Total Income

(2.10) Practical Illustrations on Scope of Total Income

(2.11) Practical Exercises on Scope of Total Income

(2.11) Theory Questions

2.1
 Residential Status and Scope of Total Income

(2.0) INTRODUCTION
Generally, for the purpose of education, employment and other Government schemes
a person is classified as Citizen and Non-citizen. But it is not applicable to the implementation
of Income Tax Act. Because the Act has it’s own criteria for classifying a person in order to arrive
at his total income. It is called as “Residential Status”. Therefore the taxability of a particular
income of a person is very much depend upon his residential status. We would discuss
about this in the following paragraphs.

(2.1) CLASSIFICATION OF RESIDENTIAL STATUS

The residential status of a person can be classified into three types, subject to certain
exceptions. The following chart indicate this.

(i) For Individual and HUF

Resident
Resident but Not Ordinarily Resident Non-resident

(ii) For Company, Partnership Firm, Association etc.

Resident Non-resident

(2.2) PROVISIONS FOR RESIDENTIAL STATUS OF AN INDIVIDUAL (Sec. 6)

For the purpose of determining the residential status of an individual the Act lay down two
types of conditions namely, Basic Conditions and Additional Conditions. These are discussed as
follows:

(2.2.1) BASIC CONDITIONS [SEC.6(1)]

(a) He is in India in the Previous Year for a period of 182 days or more. [Sec 6(1)(a)] (or)

(b) He is in India for a period of 60 days or more during the Previous Year and 365 days or
more during four years immediately preceding the previous year. [Sec 6(1)(b)]
(2.2.2) EXCEPTIONS TO BASIC CONDITIONS :

However, conditions as per Section 6 (1)(a) is alone applicable and condition as per Section
6 (1)(b) is not applicable in the following cases:

(i) In the case of an Indian Citizen who is going outside India for a job and his contract for such
employment outside India has been approved by the Central Government.

(ii) In the case of an Indian Citizen who is going outside India as a member of the Crew of an
Indian Ship.

(iii) In the case of persons who are Indian Citizens or Persons of Indian Origin living outside India
when they come to visit India.

2.2
 Residential Status and Scope of Total Income

(2.2.3) ADDITIONAL CONDITIONS [Sec.6(6)]

(i) He has been Resident in India in at least 2 out of 10 previous years (according to basic
conditions noted above) immediately preceding the relevant previous year.

(ii) He has been in India for a period of 730 days or more during 7 years immediately preceding
the relevant previous year.

(2.2.4) PROVISIONS FOR COMPUTATION OF DAYS OF STAY IN INDIA

(i) The day on which assessee enters India as well as on the day on which assessee leaves
India shall be included in the number of days of stay.

(ii) It is not essential that the stay should be at the same place.
(iii) It is not necessary that the stay in India should be for a continuous period.
(iv)
The presence in territorial waters in India would also be regarded as place in India.

(2.2.5) WHEN AN INDIVIDUAL IS RESIDENT?

If an individual satisfies any one of the basic conditions of (a) or (b) of section 6(1) and also
satisfies both of the additional conditions of (i) and (ii) of section 6(6), then he will be said to be a
Resident.

(2.2.6) WHEN AN INDIVIDUAL IS RESIDENT BUT NOT ORDINARILY RESIDENT?

If an individual satisfies any one of the basic conditions of (a) or (b) of section 6(1) and does
not satisfies the both of the additional conditions of (i) and (ii) of section 6(6), then he will be said
to be a Resident but Not Ordinarily Resident.

(2.2.7) WHEN AN INDIVIDUAL IS NON RESIDENT?

If an individual does not satisfies any one of the basic conditions of (a) or (b) of section 6(1),
then he will be said to be a Non-resident.

EXPLANATION (1) : What are the financial years to be considered for the purpose of applying
the test of basic condition number two [Sec 6(1)(b)] ?

Ans : The current Assessment Year is 2020-21, The current Previous Year is 2019-20. So, The
Four Previous Years preceding the current Previous Year are 2018-19, 2017-18, 2016-17 and 2015-
16.

EXPLANATION (2) : What are the financial years to be considered for the purpose of applying
the test of additional condition number one [Sec 6(6)(i)] ?

Ans : The Current Assessment Year is 2020-21, The Current Previous Year is 2019-20. The Ten
Previous Years preceding the current Previous Year are 2018-19, 2017-18, 2016-17, 2015-16,
2014-15, 2013-14, 2012-13, 2011-12, 2010-11, 2009-10.

EXPLANATION (3) : What is mean by seven years immediately preceeding to the relevant previous
year in respect of additional condition number two. Sec 6(6)(ii) What are the financial years to be
considered?

2.3
 Residential Status and Scope of Total Income

Ans : The Current Assessment Year is 2020-21, The Current Previous Year is 2019-20 , The Seven
Previous Years preceding the current Previous Year are 2018-19, 2017-18, 2016-17, 2015-16, 2014-
15, 2013-14, 2012-13.

(2.3) PRACTICAL ILLUSTRATIONS ON RESIDENTIAL STATUS

ILLUSTRATION (1) : (No. of Days) Mr. Arun of Singapore comes to India on 15.12.2019 and
remain in India till today. Calculate Number of Days of Stay in India during the Previous Year
2019-20.

Solution : Calculation of Number of days of stay in India during the Previous Year 2019-20.
The current Previous Year commenced on 1.4.2019 and ended on 31.3.2020. The Assessee

comes to India in the month of December 2019. It means he was present in India during the months
of December 2019 to March 2020. Therefore, the number of days of stay is calculated as below
:
April 2019 -
May 2019 -
June 2019 -
July 2019 -
August 2019 -
September 2019 -
October 2019 -
November 2019 -
December 2019 (15 to 31) 17 Days
January 2020 31 Days
February 2020 29 Days
March 2020 31 Days

108 Days

Note : While calculating the no.of days, the day on which the assessee comes to India is to be
considered as stay in India.

ILLUSTRATION (2) : (No. of Days) Mr. Arjun left India on 16.7.2019 to visit various foreign
countries. Calculate Number of Days of Stay in India during the Previous Year 2019-20.
Solution : Calculation of Number of days of stay in India during the Previous Year 2019-20.

The Current Previous Year commenced on 1.4.2019 and ended on 31.3.2020. The Assessee
left India in the month of July 2019. It means he was present in India during the months of April,
May, June and July. Therefore, the number of days of stay is calculated as below :

April 2019 30
May 2019 31
June 2019 30
July 2019 (1 to 16) 16
August 2019 -
September 2019 -

2.4
 Residential Status and Scope of Total Income

October 2019 -
November 2019 -
December 2019 -
January 2020 -
February 2020 -
March 2020 -
108 Days

Note : While calculating the no.of days, the day on which the assessee leaves India is to be
considered as stay in India.

ILLUSTRATION (3) : (Satisfying Basic Condition Number One - Resident) Mr. Anand leaves India
on 16.07.2019 for the first time on a visit to USA and returns on 04.01.2020. Determine his
Residential Status for the Assessment Year 2020-21.

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(1) Examining the Fulfillment of Basic Conditions u/s 6 (1)

(i) Calculation of No of days of Stay in India during the Previous Year 2019-20

April 2019 30 days

May 2019 31 days
June 2019 30 days
July 2019 (1 to 16) 16 days
August 2019 -

September 2019 -
October 2019 -
November 2019 -
December 2019 -
January 2020 28 days
February 2020 28 days

March 2020 31 days

194 days

He is in India for the more than 182 days (actual : 194 days) during the Previous Year 2019-20,
Hence the Basic Condition Number One is Satisfied. Therefore we need not Examine the Second Condition.

(2) Examining the Fulfillment of Additional Conditions u/s 6 (6)

(i) Fact : The assessee leaves India for the first time on 16.07.2019.
(ii) Interpretation :

(a) He has been staying in India for a long period.

(b) It implies that he has been present in India for a period of more than 730 days during
seven previous years preceding to 2019-20 as required by additional condition number
Two u/s [6(6)(ii)]

2.5
 Residential Status and Scope of Total Income

(c) It also implies that he has been resident in India for more than two years out of Ten
previous years preceding to 2019-20 as required by additional condition number One u/s
[6(6)(i)]

(d) Hence, both additional conditions are satisfied.

(3) Conclusion : The assessee satisfy the Number One of the Basic Conditions and Both the
Additional Conditions, therefore he is Resident in India.

ILLUSTRATION (4) : (Satisfying Basic Condition Number One - Resident) Mr. Elavarasan an Indian
Citizen, leaves India for the first time on September 20, 2017. He comes to India for a Visit of 146
days on April 10, 2018. He comes back on May 16, 2019. Find out the Residential Status for the
Assessment Year 2020-21.

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(1) Examining the Fulfillment of Basic Conditions u/s 6 (1)

Calculation of No of days of Stay in India during the Previous Year 2019-20.

April 2019 -
May 2019 (16 to 31) 16 days
June 2019 30 days
July 2019 31 days
August 2019 31 days
September 2019 30 days

October 2019 31 days

November 2019 30 days

31 days
December 2019
31 days
January 2020
28 days
February 2020
31 days
March 2020

320 days

It is more than 182 days (actual : 320 days), hence Basic Condition number ONE is Satisfied.
Therefore we need not Examine the Second Condition.

(2) Examining the Fulfillment of Additional Conditions u/s 6 (6)

(i) Fact : The assessee leaves India for the first time on 16.05.2019.
(ii) Interpretation :

(a) He has been staying in India for a long period.

(b) It implies that he has been present in India for a period of more than 730 days during
seven previous years preceding to 2019-20 as required by additional condition number
Two u/s [6(6)(ii)]

(c) It also implies that he has been resident in India for more than two years out of Ten
previous years preceding to 2019-20 as required by additional condition number One u/s
[6(6)(i)]

2.6
 Residential Status and Scope of Total Income

(d) Hence, both additional conditions are satisfied.

(3) Conclusion : The assessee satisfy the Number One of the Basic Conditions and Both the
Additional Conditions, therefore he is Resident in India.

ILLUSTRATION (5) : (Satisfying Basic Condition Number One - Resident) Mr. Chowthri a Citizen
of India, left India on 21-10-2017. Earlier to this date, he was always in India. During 2018-19
and 2019-20, he came to India for 168 days and 185 days respectively. Determine his Residential
Status for Assessment Year 2020-21.

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(1) Examining the Fulfillment of Basic Conditions u/s 6 (1)

(i) Calculation of No of days of Stay in India during the Previous Year 2019-20

185 days (given in the question)

It is more than 182 days (actual : 185 days), hence basic Condition number ONE is Satisfied.
Therefore we need not Examine the Second Condition.

(2) Examining the Fulfillment of Additional Conditions u/s 6 (6)

(i) Fact : The assessee leaves India for the first time on 21.10.2017.
(ii) Interpretation :

(a) He has been staying in India for a long period.

(b) It implies that he has been present in India for a period of more than 730 days during
seven previous years preceding to 2019-20 as required by additional condition number
Two u/s [6(6)(ii)]

(c) It also implies that he has been resident in India for more than two years out of Ten
previous years preceding to 2019-20 as required by additional condition number One u/s
[6(6)(i)]

(d) Hence, both additional conditions are satisfied.

(3) Conclusion : The assessee satisfy the Number One of the Basic Conditions and Both the
Additional Conditions, therefore he is Resident in India.

ILLUSTRATION (6) : (Satisfying Basic Condition Number Two - Resident) Mr. Fazhil migrated to
England on 15.03.2017 and took the Citizenship of that Country on 15.3.2019. He Visits India during
2019-2020 for 90 days. Determine the Residential Status for Assessment Year 2020-21.

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(1) Examining the Fulfillment of Basic Conditions u/s 6 (1)

(i) Calculation of No of days of Stay in India during the Previous Year 2019-20
90 days (given in the question)

It is less than 182 days (actual : 90 days), hence basic Condition number ONE is not Satisfied.
Therefore we need to Examine the Second Condition.

2.7
 Residential Status and Scope of Total Income

(ii) Calculation of No of days of stay in India during 4 Years Prior to Relevant Previous Year
Previous Year Number of Days of Stay in India
2015-16 365

2016-17 350 (366 - 16)

2017-18 Nil

2018-19 Nil

715

It is more than 365 days (actual : 715 days), hence basic Condition number TWO is Satisfied.
Now, we Proceed to Examine Additional Conditions.

(2) Examining the Fulfillment of Additional Conditions u/s 6 (6)

(i) Fact : The assessee leaves India for the first time on 15.03.2017.
(ii) Interpretation :

(a) He has been staying in India for a long period.

(b) It implies that he has been present in India for a period of more than 730 days during
seven previous years preceding to 2019-20 as required by additional condition number
Two u/s [6(6)(ii)]

(c) It also implies that he has been resident in India for more than two years out of Ten
previous years preceding to 2019-20 as required by additional condition number One u/s
[6(6)(i)]

(d) Hence, both additional conditions are satisfied.

(3) Conclusion : The assessee satisfy the Number Two of the Basic Conditions and Both the
Additional Conditions, therefore he is Resident in India.

ILLUSTRATION (7) : (Satisfying Basic Condition Number Two - Resident) Mr. Bhatt, a foreign Citizen
leaves India for the first time in the Last 20 Years on November 20,2017. During the Calendar
Year 2018, he Comes to India on September 1 for a Period of 30 days. During the Calendar Year
2019, he does not Visit India at all but Comes to India on January 16, 2020. Determine the
Residential Status of Mr. Bhatt for the Assessment Year 2020-21.

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(1) Examining the Fulfillment of Basic Conditions u/s 6 (1)

(i) Calculation of No of Days of Stay in India During the Previous Year 2019-20
April 2019 -
May 2019 -
June 2019 -
July 2019 -
August 2019 -
September 2019 -
October 2019 -
November 2019 -

2.8
 Residential Status and Scope of Total Income

December 2019 -
January 2020 (16 to 31) 16 days
February 2020 29 days
March 2020 31 days

76 days

It is less than 182 days (actual : 76 days), hence Basic Condition Number ONE is not Satisfied.
Now, we Proceed to Examine Condition Number TWO.

(ii) Calculation of No of days of Stay in India During 4 Years Prior to 2019-20

Previous Year Number of Days of Stay in India
2015-16 365

2016-17 366
2017-18 234 (Apr.30 + May 31 + June 30 + July 31 + Aug 31 + Sep 30 + Oct 31 + Nov 20)
2018-19 30
995
It is more than 365 days (actual : 995 days), hence Basic Condition Number TWO is Satisfied.
Now, we Proceed to Examine Additional Conditions.

(2) Examining the Fulfillment of Additional Conditions u/s 6 (6)

(i) Fact : The assessee leaves India for the first time on 20.11.2017.
(ii) Interpretation :

(a) He has been staying in India for a long period.

(b) It implies that he has been present in India for a period of more than 730 days during
seven previous years preceding to 2019-20 as required by additional condition number
Two u/s [6(6)(ii)]

(c) It also implies that he has been resident in India for more than two years out of Ten
previous years preceding to 2019-20 as required by additional condition number One u/s
[6(6)(i)]

(d) Hence, both additional conditions are satisfied.

(3) Conclusion : The assessee satisfy the Number Two of the Basic Conditions and Both the
Additional Conditions, therefore he is Resident in India.

ILLUSTRATION (8) : (Satisfying Basic Condition Number One - ROR) Mr. George comes to
India, for the first time, on April 16, 2017. During his Stay in India visited various places in India
and returned to his home country on 05.10.2019. Determine his Residential status for the Assessment
Year 2020-21.

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(1) Examining the Fulfillment of Basic Conditions u/s 6 (1)

Calculation of No of days of Stay in India during the Previous Year 2019-20

April 2019 30 days

May 2019 31 days

2.9
 Residential Status and Scope of Total Income

June 2019 30 days

July 2019 31 days
August 2019 31 days
September 2019 30 days
October 2019 (1 to 5) 5 days
November 2019 -

December 2019 -
January 2020 -
February 2020 -
March 2020 -
188 days

It is more than 182 days (actual : 188 days), hence basic Condition number ONE is Satisfied.
We need not Proceed to Examine basic Condition number TWO.

(2) Examining the Fulfillment of Additional Conditions u/s 6 (6)

(i) Fact : The assessee comes to India for the first time on 16.04.2017.
(ii) Interpretation :

(a) He has been staying in India for a short period only.

(b) It implies that he has not been present in India for a period of more than 730 days during
seven previous years preceding to 2019-20 as required by additional condition number
Two u/s [6(6)(ii)]

(c) It also implies that he has not been resident in India for more than two years out of Ten
previous years preceding to 2019-20 as required by additional condition number One u/s
[6(6)(i)]

(d) Hence, both additional conditions are not satisfied.

(3) Conclusion : The assessee satisfy the Number One of the Basic Conditions and doesn’t satisfy
Both the Additional Conditions, therefore he is Resident but Not Ordinarily Reisdent in India.
ILLUSTRATION (9) : (Satisfying Basic Condition Number One - ROR) Mr. Jasper of France
comes to India, for the first time in the last 30 Years on March 20, 2019. On September 1, 2019
he leaves India for Nepal on a Business trip. He comes back on February 26, 2020. Determine
the Residential Status of Mr.Jasper for the Assessment Year 2020-21.

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(1) Examining the Fulfillment of Basic Conditions u/s 6 (1)

Calculation of No of days of Stay in India during the Previous Year 2019-20

April 2019 30 days

May 2019 31 days
June 2019 30 days
July 2019 31 days
August 2019 31 days

2.10
 Residential Status and Scope of Total Income

September 2019 1 day

October 2019 -

November 2019 -
December 2019 -
January 2020 -
February 2020 (26 to 29) 4 days
March 2020 31 days

189 days

It is more than 182 days (actual : 188 days), hence basic condition number ONE is Satisfied.
We need not Proceed to Examine basic Condition Number TWO.

(2) Examining the Fulfillment of Additional Conditions u/s 6 (6)

(i) Fact : The assessee comes to India for the first time on 20.03.2019.
(ii) Interpretation :

(a) He has been staying in India for a short period only.

(b) It implies that he has not been present in India for a period of more than 730 days during
seven previous years preceding to 2019-20 as required by additional condition number
Two u/s [6(6)(ii)]

(c) It also implies that he has not been resident in India for more than two years out of Ten
previous years preceding to 2019-20 as required by additional condition number One u/s
[6(6)(i)]

(d) Hence, both additional conditions are not satisfied.

(3) Conclusion : The assessee satisfy the Number One of the Basic Condition and does not satisfy
both the Additional Conditions, therefore he is Resident but not Ordinarily Resident
in India.

ILLUSTRATION (10) : (Satisfying Basic Condition Number Two - ROR) Mr. Isaac, a foreign
National (not being a person of India origin), comes to India for the first time on April 15, 2015.
During the Financial Years 2015-16, 2016-17, 2017-18, 2018-19 and 2019-20, he is in India for 130
days, 80 days, 13 days, 210 days and 75 days respectively. Determine the Residential Status of
Mr. Isaac for the Assessment Year 2020-21.

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(1) Examining the Fulfillment of Basic Conditions u/s 6 (1)

(i) Calculation of No of days of Stay in India during the Previous Year 2019-20
75 days (given in the question)

It is less than 182 days hence basic Condition number ONE is not Satisfied. Now, we Proceed
to Examine Condition number TWO.

2.11
 Residential Status and Scope of Total Income

(ii) Calculation of No of days of stay in India during 4 Years Prior to Relevant Previous Year

Previous Year Number of Days of Stay in India

2015-16 130

2016-17 80
2017-18 13
2018-19 210

433

It is more than 365 days hence basic Condition number TWO is Satisfied. Now, we proceed
to Examine Additional Conditions.

(2) Examining the Fulfillment of Additional Conditions u/s 6 (6)

(i) Fact : The assessee comes to India for the first time on 15.04.2015.
(ii) Interpretation :

(a) He has been staying in India for a short period only.

(b) It implies that he has not been present in India for a period of more than 730 days during
seven previous years preceding to 2019-20 as required by additional condition number
Two u/s [6(6)(ii)]

(c) It also implies that he has not been resident in India for more than two years out of Ten
previous years preceding to 2019-20 as required by additional condition number One u/s
[6(6)(i)]

(d) Hence, both additional conditions are not satisfied.

(3) Conclusion : The assessee satisfy the Number One of the Basic Condition and does not satisfy
both the Additional Conditions, therefore he is Resident but not Ordinarily Resident
in India.

ILLUSTRATION (11) : (Satisfying Basic Condition Number Two - ROR) Mr. David Warner an
Australian Cricketer has been coming to India for 100 days Every Year since 2008-09. Determine
his Residential Status for the Assessment Year 2020-21.

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(1) Examining the Fulfillment of Basic Conditions u/s 6 (1)

(i) Calculation of No of days of Stay in India during the Previous Year 2019-20
100 days (given in the question)

It is less than 182 days hence basic Condition number ONE is not Satisfied. Now, we Proceed
to Examine Condition number TWO.

(ii) Calculation of No of days of Stay in India during 4 years Prior to Relevant Previous Year
100 x 4 = 400 days

It is more than 365 days (actual : 400 days), hence basic Condition number TWO is Satisfied.
Now, we Proceed to Examine Additional Conditions.

2.12
 Residential Status and Scope of Total Income

(2) Examining the Fulfillment of Additional Conditions u/s 6 (6)

(i) Fact : The assessee comes to India every year for 100 days since 2008-09.
(ii) Interpretation :

(a) He has been staying in India for a short period only.

(b) It implies that he has not been present in India for a period of more than 730 days during
seven previous years preceding to 2019-20 as required by additional condition number
Two u/s [6(6)(ii)]

(c) It also implies that he has not been resident in India for more than two years out of Ten
previous years preceding to 2019-20 as required by additional condition number One u/s
[6(6)(i)]

(d) Hence, both additional conditions are not satisfied.

(3) Conclusion : The assessee satisfy the Number One of the Basic Condition and does
not satisfy both the Additional Conditions, therefore he is Resident but not Ordinarily
Resident in India.

ILLUSTRATION (12) : (Not Satisfying Basic Conditions - NR) Mr. Fazhil came to India from
Japan for the first time on 2.10.2018. He Returns to his home Country after Staying in India upto
28.9.2019. Determine the Residential Status of Mr. Isaac for the Assessment Year 2020-21.

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(i) Examining the Fulfillment of Basic Conditions u/s 6 (1)

April 2019 30 days

May 2019 31 days
June 2019 30 days
July 2019 31 days
August 2019 31 days
September 2019 (1 to 28) 28 days
October 2019 -

November 2019 -
December 2019 -
January 2020 -
February 2020 -
March 2020 -

181 days
Conclusion :

The assessee does not satisfy any of the Basic Conditions, hence, he is Non Resident in India.

ILLUSTRATION (13) : (Not Satisfying Basic Conditions - NR) Mr. Clinton, a German National,
came to India for the first time on 1.7.2013. During the Period from 1.7.2013 to 31.3.2020, he
Stayed in India as follows - from 1.7.2013 to 31.10.2013; from 1.5.2014 to 31.10.2014; from 1.11.2015
to 31.12.2015 and from 1.7.2018 to 31.1.2019. Determine his Residential Status for the Assessment
Year 2020-21.
2.13
 Residential Status and Scope of Total Income

Solution : Determination of Residential Status for the Assessment Year 2020-21.

(i) Examining the Fulfillment of Basic Conditions u/s 6 (1)

(a) Calculation of No of days of Stay in India during the Previous Year 2019-20

April 2019 30 days

May 2019 31 days
June 2019 30 days
July 2019 31 days
August 2019 31 days
September 2019 -

October 2019 -
November 2019 -
December 2019 -
January 2020 -
February 2020 -
March 2020 -
153 days

It is less than 182 days hence Basic Condition Number ONE is not Satisfied. Now, we proceed
to Examine Condition number TWO.

(b) Calculation of No of days of stay in India during the 4 Years Preceding to Previous Year
2019-20

2015-16 : 61 days, 2016-17 : Nil, 2017-18 : Nil, 2018-19 : 274 days (31 + 31 + 30 + 31 + 30
+ 31 + 31 + 28 + 31) = 335 days

He also does not Satisfy the basic Condition Number Two as he is not in India for more than
365 days in the 4 Years Prior to Relevant Previous Year.

Conclusion : The assessee does not satisfy any of the Basic Conditions, hence, he is
Non Resident in India.

(2.4) PRACTICAL EXERCISES ON RESIDENTIAL STATUS

EXERCISE (1) : Mr. A an Indian citizen left India on 21.9.2019. Calculate Number of Days of Stay
in India during the Previous Year 2019-20.
Ans : Apr (30) + May (31) + June (30) + July (31) + Aug (31) + Sep (21) = 174 Days

EXERCISE (2) : Mr. C left India on 16.7.2019 and returned to India on 4.1.2020. Calculate Number
of Days of Stay in India during the Previous Year 2019-20.
Ans : Apr (30) + May (31) + June (30) + July (16) + Jan (27) + Feb (29) + Mar (31) = 194 Days

EXERCISE (3) : Mr. B of England comes to India on 15.1.2019 and return back to his home country
on 15.1.2020. Calculate Number of Days of Stay in India during the Previous Year 2020-21.
Ans : Apr (30) + May (31) + June (30) + July (31) + Aug (31) + Sep (30) + Oct (31) + Nov (30) + Dec
(31) + Jan (15) = 290 Days

2.14
 Residential Status and Scope of Total Income

EXERCISE (4) : Miss.Hemalatha left for Singapore on 15th March 2016 after Staying in India for 15
Years. He came back on 31st October 2019. Determine her Residential status for the Assessment
Year 2020-21. (Madras, B.Com., Nov. 2005)
No. of Days : Aug (1) + Sep (30) + Oct (31) + Nov (30) + Dec (31) + Jan (31) + Feb (29) + Mar (31)
= 214 Days

Type : Leaves India for the first time

Conclusion : Resident)

EXERCISE (5) : Mr. X, after 30 Years of stay in India, went to America on January 29, 2017. He
return to India on 1st July 2019 and joined with an American Company as its Overseas branch
Manager. Determine his Residential Status for the Assessment Year 2020-21.

Ans : (Madras, B.C.S., Nov. 2006)

No. of Days : July (31) + Aug (31) + Sep (30) + Oct (31) + Nov (30) + Dec (31) + Jan (31) + + Feb
(29) + Mar (31) = 275 Days

Type : Leaves India for the first time

Conclusion : Resident)

EXERCISE (6) : Mr. Balu a married citizen of India left for Japan for the First time on 15.9.2018
on a Business trip. He returned to India on 5.6.2019. Determine her Residential Status for the
Assessment Year 2020-21. (Pondicherrry, B.Com., Nov. 2008)
No. of Days : June (27) + July (31) + Aug (31) + Sep (30) + Oct (31) + Nov (30) + Dec (31) + Jan
(31) + Feb (29) + Mar (31) = 302 Days
Type : Leaves India for the first time
Conclusion : Resident

EXERCISE (7) : Mr. Venkatasubramaniam went to Singapore for Engineering course on 5th
August 2019 and came back to India on 25th February 2020. His family remaind in India. He had
never been out of India before. What is the Residential Status for the Assessment Year 2020-21.

Ans : (Madras, B.C.S., Apr. 2006)

No. of Days : Apr (30) + May (31) + June (30) + July (31) + Aug (5) + Feb (5) + Mar (31) = 163 Days
No. of days of stay in Four PY : More than 365 days

Type : Leaves India for the first time

Conclusion : Resident

EXERCISE (8) : Mr. Gatting a foreign Citizen leaves India for the First time in the Last 20 Years on
November 25, 2017. During the Calander Year 2018 he comes to India on 1 September and stays
for the Period of 20 days. During the Calander Year 2019 he does not Visit India at all but comes
to India on January 15, 2020. Determine his Residential Status for the Assessment Year 2020-21.

Ans : (Madras, B.C.S., Nov. 2007)

No. of Days : Jan (17) + Feb (29) + Mar (31) = 77 Days

No. of days of stay in Four PY : More than 365 days

Type : Leaves India for the first time

Conclusion : Resident)

2.15
 Residential Status and Scope of Total Income

EXERCISE (9) : Mr. Abbas left India for the first time on 15th Dec. 2019 and returned back to India
on 2nd February 2020. Determine his Residential Status for the Assessment Year 2020-21.
Ans : (Madras B.Com.,(CS), Nov. 2011)
No. of Days : Feb (28) + Mar (31) = 59 Days
No. of days of stay in Four PY : More than 365 days
Type : Leaves India for the first time

Conclusion : Resident

EXERCISE (10) : Mr. Villiam, a foreign national came to India for the first time on 13th September
2019. He leaves India on 27th April 2020. Determine his Residential Status for the Assessment
Year 2020-21. (Madras B.Com.,(CS), Nov. 2010)
No. of Days : Sep (18) + Oct (31) + Nov (30) + Dec (31) + Jan (31) + Feb (29) + Mar (31)
= 201 Days
Type : Foreign National comes to India for the first time
Conclusion : Resident but Not Oridinarily Resident)

EXERCISE (11) : Mr. Vinoth, an Indian national came to India during May 2019 to settle here
permanently. During April 1994 and April 2019, he was in Australia and never came to India. Determine
his Residential Status for the Assessment Year 2020-21.

No. of Days : June (30) + July (31) + Aug (31) + Sep (30) + Oct (31) + Nov (30) + Dec (31) + Jan
(31) + Feb (29) + Mar (31) = 305 Days

Type : Foreign National comes to India for the first time

Conclusion : Resident but Not Oridinarily Resident

EXERCISE (12) : Mr. Roshan came to India for the first time in 2016-17 and was in India as follows.
Previous Years 2017-18 : 26 Days, 2018-19 : 15 Days, 2019-20 : 185 Days. Determine his
Residential Status for the Assessment Year 2020-21. (Madras B.Com.,(CS), Nov. 2009)
No. of days of stay in PY : 185 days (given)

Type : Foreign National comes to India for the first time

Conclusion : Resident but Not Oridinarily Resident

EXERCISE (13) : Mrs. Kamala gives the following information regarding her stay in India. Previous
Years 2014-15 : 150 Days, 2015-16 : 125 Days, 2016-17 : 50 Days, 2017-18 : 200 Days, 2018-19
: 145 Days, 2019-20 : 132 Days. Determine his Residential Status for the Assessment Year

2020-21. (Madras B.Com.,(CS), Nov. 2010)

No. of days of stay in PY : 132 days (given)
No. of days of stay in Four PY : More than 365 days
Type : Foreign National comes to India for the first time
Conclusion : Resident but Not Oridinarily Resident

EXERCISE (14) : Mr. Hari got a job in Malaysia and left for Malaysia on 30-9-2017. He never left
India earlier. Determine his Residential Status for the Assessment Year 2020-21.
Ans : (Bharathidasan, B.Com., Nov. 2006)
No. of days of stay in PY : Nil
Conclusion : Non Resident

2.16
 Residential Status and Scope of Total Income

EXERCISE (15) : Mr. Kim Jong-un, a Foreign national came to India for the first time for a visit of
250 days on October 10, 2019. Determine his Residential Status for the Assessment Year 2020-21.
Ans :

No. of days of stay in PY : 22+30+31+31+29+31 = 174 days

Type : Foreign National comes to India for the first time
Conclusion : Non Resident

(2.5) DETERMINATION OF RESIDENTIAL STATUS OF

HINDU UNDIVIDED FAMILY [Sec. 6(2)]
The residential status of a Hindu Undivided Family is determined on the basis of two factors,
the control and management of the family and the residential status of the karta of such family these
provisions may be summarised as follows :

(2.5.1) WHEN AN HINDU UNDIVIDED FAMILY IS CONSIDERED AS RESIDENT?

A Hindu Undivided Family will be called as a resident if the following two conditions are satisfied:

(i) The Place of Control and Management : This condition focus on the place where control and
management of affairs of Hindu undivided family is situated. Control and management means defacto
control and management. The defacto control and management is situated at a place where the
head, the seat and directing power are situated. Normally karta of the family is vested with the right
of control and management. If every decision concerning family affairs has been taken by karta in
India, the family will be resident. If every decision taken by karta in outside India, then the family will
be non-resident. It is to be noted here that it is for the family or karta to prove that control and
management is wholly outside India.

(ii) The Residential Status of the Karta : This condition focus on the two additional conditions
prescribed in case of an individual as per section 6(6) (Refer paragraph no. 3.3.2.). A Hindu undivided
family is treated as resident in India if karta or manager of the family (including successive kartas)
satisfies two additional conditions as laid down by section 6 (6) To conclude a Hindu undivided
family will be treated as resident in India if : (a) The defacto control and management is wholly or
partly in India. (b) The karta or manager of the family satisfies the two additional conditions as per
section 6 (6).

(2.5.2)WHEN A HINDU UNDIVIDED FAMILY WILL BE TREATED AS RESIDENT BUT

NOT ORDINARILY RESIDENT ?

If the control and management of the family is wholly or partly is situated in India, but the
karta or manager of the family does not satisfy the two additional conditions as per sec 6 (6) (b),
then the family will be treated as resident but not ordinarily resident in India.

(2.5.3) WHEN A HINDU UNDIVIDED FAMILY WILL BE TREATED AS NON-RESIDENT?

A Hindu undivided family is treated as non-resident in India if control and management of it’s
affairs is wholly situated outside India. Here the factor that the fulfillment of the two additional
conditions as per section 6 (6) is not to be considered.

2.17
 Residential Status and Scope of Total Income

(2.6) DETERMINATION OF RESIDENTIAL STATUS OF A FIRM [Sec. 6(2)]

A partnership firm may be classified into only two types as resident in India and
non-resident in India. A firm is resident in India in any year if control and management of it’s
affairs is wholly or partially situated in India during that year. It will be a non-resident, if the
control and management of it’s affairs is situated wholly outside India during that year. In the
case of a firm control and management is vested in partners and especially in the hands of
managing partner.

(2.7) DETERMINATION OF RESIDENTIAL STATUS OF A COMPANY [Sec. 6(3)]

For this purpose company is divided into two types, namely Indian company and
Foreign company. Indian company is always treated as “resident”, whether it’s control and
management of the affairs of the company is situated in India or outside India. Foreign
Company is said to be “resident”, If its control and management is wholly situated in India
and it is said to be “non-resident”, if it’s control and management is situated wholly or partially
outside India. The term control and management refers to head and brain which directs the
affairs of the company. Normally control and management of a company’s affairs is situated
at the place where meetings of board of directors are held. It is to be noted here that if the
board of directors of a foreign company hold all their meetings in India, the company will be
resident in India, even though, the company has business operations only outside India.
It is also to be noted here a non Indian company will be resident in India only if it’s
control and management is situated wholly in India.

(2.8) DETERMINATION OF RESIDENTIAL STATUS OF ANY OTHER

PERSONS [Sec. 6(4)]

In this category all other persons like Association of Persons, Local Authorities and
Artificial and Judicial Persons are covered. In the case of all these entities the residential status
is determined on the basis of situation of control and management. As in the case of earlier
persons if the control and management is wholly or partly situated in India than these persons
will be residents in India and if the control and management is wholly situated outside
India than these persons will be non residents.

(2.9) SCOPE OF TOTAL INCOME OR TAX INCIDENCE (Sec. 5)

As stated earlier in this chapter, the purpose of determination of the residential status of
different entities is to decide about the taxability of income. Therefore, after determining the residential
status, the next step is to analyse it’s effect on total income. The scope of the total income is the
matching of residential status and type of income. After studying the various types of residential
status now we proceed to study the various types of income. The income may be classified, for this
purpose, as follows:

(i) Income received in India.

(ii) Income deemed to be received in India.

2.18
 Residential Status and Scope of Total Income

(iii) Income earned or accrued in India.

(iv) Income deemed to be earned or accrued in India.
(v)
Income received and earned or accrued outside India from business controlled from India or
profession set up in India.

(vi) Any other incomes received and earned or accrued outside India.

(2.9.1) INCOME RECEIVED IN INDIA

The receipt of income refers to the first occasion when the money comes under the control of
recipient. It means all incomes primarily received by the assessee during the previous year. Following
are the some of the examples :

(a) Income from a Business in Bangalore Controlled from USA

(b) Profits from Business in Iran Received in India.

(c) Income from house Property in Iran Received in India

(d) Salary earned and received in India

(e) Dividend declared in Japan, received in India

(f) Interest on Savings bank Deposit in SBI
(g) Taxable Income from house Property in India

(h)
Income from Salary Received in India for Services Rendered in Germany
(i)
Income from business carried from Hyderabad
(j) Share of Income from a Business in Mumbai
(k) Share of Income from Joint Venture India
(l)
Salary Received in India but services Rendered in Pakistan

(m) Profit from business in Canada but received in India

(n) Income from House property in Karachi received in Bombay

(o) Income accrued in Canada but received in India

(2.9.2) INCOME DEEMED TO BE RECEIVED IN INDIA

The following incomes shall be deemed to be received in India in the previous year even
though it is not actually received.

(i) The annual accretion to a Recognised Provident Fund account of employee.

(ii) Transferred balance of Unrecognised Provident Fund to recognised provident fund.

(iii) Tax Deducted at Source.

(iv) Pension Fund.
(v) Deemed Profits.

(2.9.3) INCOME EARNED OR ACCRUED OR ARISED IN INDIA

The term earned or accrued or arised means ” The occasion when the assessee obtains a
right to receive an income”. Following are the some of the examples :

2.19
 Residential Status and Scope of Total Income

(a) Interest from an Indian Company Received in London.

(b) Pension from former Employer in India Received in USA.

(c) Rent from a Property in Delhi Received in USA

(d) Interest from Deposits with an Indian Company Received in USA

(e) Pension for service rendered in India, received in France
(f) Profit on sale of building in India but received in Sri Lanka
(g) Income Accrued in India but Received in U.S.A.
(h)
Income accrued in India but received in Japan
(i) Income earned in India but received in Canada.

(2.9.4) INCOME DEEMED TO BE EARNED OR ACCRUED OR ARISED IN INDIA

The following incomes are deemed to be accrued or arised in India :

(ii) Income from any Property, Asset or Source of Income Situated in India.

(iii) Income from the transfer of any Capital Asset Situated in India.

(iv) Any Income which Falls under the Head ‘Salaries’ if it is Earned in India.

(v) Salary Payable by the Government of an Indian Citizen / National for

Services Rendered Outside India.

(vi) Dividend paid by an Indian Company Outside India.

(vii) Interest paid by Government Outside India.

(viii) Royalty paid by Government Outside India.

(ix) Fees for Technical Services paid by Government Outside India.

(2.9.5) INCOME RECEIVED OR EARNED OUTSIDE INDIA FROM BUSINESS CONTROLLED

FROM INDIA OR PROFESSION SET UP IN INDIA.

Following are the some of the examples :

(a) Profit from Business in Sri Lanka controlled from India

(b) Profit from Business in England controlled from India
(c) Gain from Profession in Sri Lanka setup in India
(d) Gain from Profession in England setup in India

(2.9.6) ANY OTHER INCOME RECEIVED OR EARNED OR ACCRUED OUTSIDE INDIA

Following are the some of the examples :

(a) Interest from an Indian Company Received in London.

(b) Pension from former Employer in India Received in USA.

(c) Rent from a Property in Delhi Received in USA.

(d) Interest from Deposits with an Indian Company Received in USA.

(e) Income from house Property in Pakistan Deposited in a Bank there.

2.20
 Residential Status and Scope of Total Income

(f) Income from agriculture in Napal.

(g) Income earned and received in Pakistan and deposited in a bank there.

(h) Dividend Received in Germany from a British company.

(i) Income from house Property Situated in London.

(j) Income from agriculture in London.

(k)
Income from Agriculture in Australia.
(l)
Income from agriculture in Pakistan

(m) Income earned on Received in Pakistan from Bank Deposit

(n) Income from house property in America and deposited there.

(o) Income were earned in Africa on received there but brought to India.

(2.9.7) TABLE SHOWING TAX INCIDENCE

S.No. Different types of Incomes Res ROR NR

(i) Income received in India Taxable Taxable Taxable

(ii) Income deemed to be received in India Taxable Taxable Taxable
(iii) Income earned or accrued in India Taxable Taxable Taxable
(iv) Income deemed to be earned or accrued in India Taxable Taxable Taxable
(v) Income from business outside India controlled from India Taxable Taxable No Tax
(vi) Any other income earned or received outside India
Taxable No Tax No Tax

Note :
1. Past untaxed income or previous period income earned and received outside India and remitted
thereafter to India is not Taxable all the three cases.

2. Income from business from outside India controlled from India is Taxable only in the hands of Resident
and Resident But Not Ordinarily Resident.

3. Income from business from outside India controlled from outside India is Taxable only in the hands of
Resident under the heading income deemed to be earned or accrued in India.

(2.10) PRACTICAL ILLUSTRATIONS ON SCOPE OF TOTAL INCOME :

ILLUSTRATION (1) : Mr. Laxmanan earns the following Income during the Financial Year
2019-20: Rs.
(a) Interest from an Indian Company Received in London. 1,000
(b) Pension from former Employer in India Received in USA. 4,000
(c) Income from agriculture in Bhutan and Remitted to India 5,000
(d) Income from Property in England Received there. 4,000
(e) Past foreign Untaxed Income brought to India. 10,000

Compute his Income for the Assessment Year 2020-21 if he is: (i)Resident and Ordinarily Resident in
India. (ii) Not Ordinarily Resident in India. (iii) Non-resident in India.

2.21
 Residential Status and Scope of Total Income

Solution : Determination of Taxable Income with Reference to Residential Status.

Item Classification Res ROR NR
Rs. Rs. Rs.

(a) Interest from an Indian Company Earned in India 1,000 1,000 1,000
(b) Pension from former Employer Earned in India 4,000 4,000 4,000
(c) Income from agriculture in Bhutan Other Income 5,000 - -
(d) Income from Property in England Other Income 4,000 - -
(e) Past foreign Untaxed Income - - - -
Total 14,000 5,000 5,000

ILLUSTRATION (2) : The following are the Particulars of Income of Mr. Karthik for the Previous
Year 2019-20: Rs.
(a) Rent from a Property in Delhi Received in USA 80,000
(b) Income from a Business in USA controlled from Delhi 1,20,000
(c) Income from a Business in Bangalore Controlled from USA 1,80,000
(d) Rent from a Property in USA received there but Subsequently Remitted to India 60,000
(e) Interest from Deposits with an Indian Company Received in USA 20,000
(f) Profits for the Year 2018-19 of a Business in USA remitted to
India during the Previous Year 2019-20 (Not taxed earlier) 75,000
Compute his Income for the Assessment Year 2020-21 if he is (i) Resident and Ordinarily
Resident in India. (ii) Not Ordinarily Resident in India. (iii) Non-resident in India.

Solution : Determination of Taxable Income with Reference to Residential Status.

Item Classification Res ROR NR
Rs. Rs. Rs.

(a) Rent from a Property in Delhi Earned in India 80,000 80,000 80,000
(b) Income from a Business in USA Business outside 1,20,000 1,20,000 1,20,000
(c) Income from Business in Bangalore Earned in India 1,80,000 1,80,000 1,80,000
(d) Rent from a Property in USA Other Income 60,000 - -
(e) Interest from Indian Company Earned in India 20,000 20,000 20,000
(f) Past profit outside India - - - -
Total 4,60,000 4,00,000 2,80,000

ILLUSTRATION (3) : The following is the Income of Mr. Mani for the Previous Year 2019-20:
Rs.
(a) Profits from Business in Iran Received in India. 5,000
(b) Income from house Property in Iran Received in India 500
(c) Income from house Property in Pakistan Deposited in a Bank there. 1,000
(d) Profits of Business in Pakistan Controlled in India 20,000
(e) Income from Profession in India but Received in England. 2,000
(f Profits Earned from Business in Kanpur. 6,000
)
(g) Income from agriculture in England 5,000
(h) Past untaxed foreign Income brought into India during the Previous Year. 10,000

2.22
 Residential Status and Scope of Total Income

Compute his Taxable Income for the Assessment Year 2020-21 if he is (i) Resident and Ordinarily
Resident in India. (ii) Not Ordinarily Resident in India. (iii) Non-resident in India.

(Thiruvalluvar, M.Com., Apr. 2007)

Solution : Determination of Taxable Income with Reference to Residential Status.

Item Classification Res ROR NR

Rs. Rs. Rs.
(a) Profits from Business in Iran Received in India 5,000 5,000 5,000
(b) Income from house Property in Iran Received in India 500 500 500

(c) Income from Property in Pakistan Other income 1,000 - -

(d) Profits of Business in Pakistan Business outside 20,000 20,000 -
(e) Income from Profession in India Earned in India 2,000 2,000 2,000
(f) Profits from Business in Kanpur Earned in India 6,000 6,000 6,000
(g) Income from agriculture in England Other income 5,000 - -
(h) Past untaxed foreign Income - - - -

Total 39,500 33,500 13,500

Note : Past untaxed foreign income brought to India is not taxable.

(2.11) PRACTICAL EXERCISES ON SCOPE OF TOTAL INCOME

EXERCISE (1) : The following are the details of income of Mr. Jagan : Rs.
(a) Salary earned and received in India 25,000
(b) Profit from hotel business in Japan 50,000
(c) Dividend declared in Japan, received in India 10,000
Compute Mr. Jagan Taxable Income if he is a resident. (Madras, B.Com., Nov. 2006)
(Ans : Rs. 25,000 + 50,000 + 10,000 = 85,000)

EXERCISE (2) : The following are the details of income of Mr. Raj : Rs.
(a) Income from agriculture in Napal 20,000
(b) Income earned and received in Pakistan and deposited in a bank there 5,000
(c) Dividend 1,000
Compute Mr. Raj Total Income if he is a not ordinarily resident.
(Ans : Nil) (Madras, B.Com., (CS) April 2009)
Note : Other Incomes earned outside India are Not Taxable in the hands of NOR.

EXERCISE (3) : Compute the total Income of a Non-resident from the following Information :
Rs.
Salary for 3 months Received in India (computed) 9,000
Dividend Received in Germany from a British company 22,000
Interest on Savings bank Deposit in SBI 1,000

Taxable Income from house Property in India 3,400

(Ans : NR : Rs. 9,000 + 1,000 + 3,400 = 13,400) (Periyar, B.Com., Apr. 2006)
Note : Other Incomes earned outside India are Not Taxable in the hands of NR.

2.23
 Residential Status and Scope of Total Income

EXERCISE (4) : Mr. Y has following Incomes for the Assessment Year 2020-21. Rs.
(a) Income from house Property Situated in London 40,000
(b) Income from Salary Received in India for Services Rendered in Germany 28,000
(c) Profit from Business in Pakistan controlled from India 1,20,000
(d) Profit from Business in Madurai 1,10,000
(e) Agricultural Income in India 50,000

Compute the Gross Total Income of Mr. Y for the Assessment Year 2020-21 if he is
(i) Resident in India. (ii) Non-Resident in India. (Madras, B.Com., Nov. 2008)
Ans : Res : Rs. 40,000 + 28,000 + 1,20,000 + 1,10,000 = 2,98,000,
NR : Rs. 1,10,000 + 28,000 = 1,38,000

Note : Other Incomes earned outside India are Not Taxable in the hands of NR.

EXERCISE (5) : The following are the details of income of Mr. Kumar : Rs.
(a) Income from business carried from Hyderabad 50,000
(b) Income accrued in India but received in Dubai 75,000
(c) Income from agriculture in London 1,00,000
Compute Mr. Kumar Taxable Income if he is (i) Resident, (ii) Resident but not Ordinarily
resident, (iii) Non-resident. (Periyar, B.Com., Nov. 2006)
(Ans : Res : Rs. 50,000 + 75,000 + 1,00,000 = 2,25,000,
NOR : Rs. 50,000 + 75,000 = 1,25,000,

NR : Rs. 50,000 + 75,000 = 1,25,000)

Note : Other Incomes earned outside India are Not Taxable in the hands of NR.

EXERCISE (6) : The following are the details of income of Mr. Sankar : Rs.
(a) Income from business in Chennai, managed in France 50,000
(b) Pension for service rendered in India, received in France 30,000
(c) Profit from Business in Sri Lanka, deposited in a bank there 24,000
(d) Profit on sale of building in India but received in Sri Lanka 36,000

Compute Mr. Kumar Taxable Income if he is (i) Resident, (ii) Resident but not Ordinarily resident,
(iii) Non-resident. (Thiruvalluvar, M.Com., May. 2019)
(Ans : Res : Rs. 50,000 + 30,000 + 24,000 + 36,000 = 1,40,000,
NOR : Rs. 50,000 + 30,000 + 36,000 = 1,16,000,
NR : Rs. 50,000 + 30,000 + 36,000 = 1,16,000)

Note : Other Incomes earned outside India are Not Taxable in the hands of NOR and NR.

EXERCISE (7) : The following are the details of income of Mr. John : Rs.
(a) Dividend 50,000
(b) Income from Agriculture in Australia 1,00,000
(c) Share of Income from a Business in Mumbai 60,000
(d) Income Accrued in India but Received in U.S.A. 50,000
Compute Mr. John’s Taxable Income if he is (i) A resident, (ii) A not Ordinarily Resident and

(iii) A Non-resident. (Madras, B.Com., Apr. 2008)

(Ans : Res : Rs. 50,000 + 1,00,000 + 60,000 = 2,10,000,

2.24
 Residential Status and Scope of Total Income

NOR : Rs. 50,000 + 60,000 = 1,10,000,

NR : Rs. 50,000 + 60,000 = 1,10,000)

Note : Other Incomes earned outside India are Not Taxable in the hands of NOR and NR.

EXERCISE (8) : Which of the following incomes are taxable when the residential status of
Mr. David is (i) Resident, (ii) Resident but not Ordinarily resident, (iii) Non-resident.

(a) Share of Income from Joint Venture India Rs.10,000

(b) Income from agriculture in Pakistan Rs.20,000

(c) Income from Business (controlled from India) in Pakistan Rs.10,000 and remitted to India
(d) Salary Received in India Rs.9,800 but services Rendered in Pakistan
(e) Income earned on Received in Pakistan from Bank Deposit Rs.5,000. (Periyar, B.Com, Apr. 2007)
(Ans : Res : Rs. 10,000 + 20,000 + 10,000 + 9,800 + 5,000 = 54,800,

NOR : Rs. 10,000 + 10,000 + 9,800 = 29,800,

NR : Rs. 10,000 + 9,800 = 19,800)

Note : (1) Other Incomes earned outside India are not Taxable in the hands of NOR and NR.
(2) Income from business outside India controlled from India is Taxable in the hands of NOR.
EXERCISE (9) : Following are the incomes of Rathman for the Previous year 2019-20 :

Rs.
(i) Profit from the business in Bangalore 10,000
(ii) Income accrued in India but received in Japan 4,000
(iii) Profit from business in Canada but received in India 5,000
(iv) Income from House property in Karachi received in Bombay 4,000
(v) Profit from business established in England and deposited there, the
business being controlled from India 20,000
(vi) Income from house property in America and deposited there. 2,000
(vii) Past untaxed income brought into India during the Previous year. 10,000
Compute the total income of Rathnam for the Assessment year 2020-21 if he is :
(a) Resident (b) Not ordinarily resident (c) Non Resident (Periyar, B.com. May 2006)
(Ans : Res : Rs. 10,000 + 4,000 + 5,000 + 4,000 + 20,000 + 12,000 = 45,000,
NOR : Rs. 10,000 + 4,000 + 5,000 + 4,000 + 20,000 = 43,000,
NR : Rs. 10,000 + 4,000 + 5,000 + 4,000 = 23,000)

Note : (1) Other Incomes earned outside India are not Taxable in the hands of NOR and NR.
(2) Past untaxed income is not Taxable in the hands of all the three persons.
(3) Income from business outside India controlled from India is Taxable in the hands of NOR.

EXERCISE (10) : Which of the following income are taxable when the residential status of Mr. Anil
is (i) Resident, (ii) Resident but not ordinarily resident, (iii) Non-resident.

Income accrued in Canada but received in India Rs.2,000

Rs. 5,000 were earned in Africa on received there but brought to India.
Rs. 5,000 earned in India but received in Canada.

Rs. 10,000 earned and received in Sri Lanka from a business controlled from India.
House property income from Sri Lanka Rs. 2,000.

2.25
 Residential Status and Scope of Total Income

Rs. 4,000 untaxed past year income brought to India.

Profit earned from business in Kanpur Rs. 10,000. (Periyar, B.com., Nov. 2006)
(Ans : Res : Rs. 2,000 + 5,000 + 5,000 + 10,000 + 2,000 + 10,000 = 34,000,
NOR : Rs. 2,000 + 5,000 + 10,000 + 10,000 = 27,000,
NR : Rs. 2,000 + 5,000 + 10,000 = 17,000)

Note : (1) Other Incomes earned outside India are not Taxable in the hands of NOR and NR.
(2) Past untaxed income is not Taxable in the hands of all the three persons.
(3) Income from business outside India controlled from India is Taxable in the hands of NOR.

(2.12) THEORY QUESTIONS

Part - A
1. What are the different types of Residential Status ?

2. What are the Basic Conditions ?

3. What are the Additional Conditions ?

4. Who is a Resident Individual ?

5. When an Individual is called as Resident but not Ordinarily Resident ?

6. What are the Incomes deemed to be received in India ?

7. What are the Incomes taxable in the hands of Resident ?

8. What are the Incomes taxable in the hands of a Non-resident ?

Part - B

9. How the Residential Status of Hindu Undivided Family is determined ?

10. How the Residential Status of a Company is determined ?

11. What are the Incomes Deemed to be Accrued in India ?

12. Explain the Basis of Charge of Income.

Part - C
13. What are the different Categories of Assesses according to the Residential Status. How is this
status determined ?

14. How will you ascertain Residential Status of an Individual Assessee ?

*****

2.26
 CHAPTER - 3
TAX FREE INCOMES

(3.0) Introduction
(3.1) Meaning
(3.2) Analysis of Exemptions
(3.3) Classification of the Basis of Taxablity
(3.4) Classification on the Basis of Heads
(3.5) Agricultural Income

(3.6) Computation of Agricultural Income

(3.7) Computation of Composite Income
(3.8) Income Relating to Salary
(3.9)
Income Relating to Business or Profession
(3.10) Income Relating to Capital Gains
(3.11) Income Relating to Other Sources
(3.12) Income Relating to Deductions

(3.13) Income Relating to Certain Funds

(3.14) Income Relating to Certain Individuals
(3.15) Income Relating to Certain Institutions
(3.16) Income Relating to Non-Residents
(3.17) Special Incomes

(3.18) Deduction for Units in Special Economic Zone

(3.19) Income of Trusts
(3.20) Income of Political Parties
(3.21) Income of Electoral Trust
(3.22) Theory Questions
 (3.0) INTRODUCTION
The Chapter deals with various Incomes that are not included in the total income.

(3.1) MEANING
The Income Tax Act grants absolute exemption in respect of certain categories of
incomes and these incomes are not to be included in the total income. Such incomes
which are absolutely exempt are enumerated in section 10 of the Income Tax Act. In addition
sections 10A, 10AA, 10B, 11, 12, 13 and 13A provides for exemption in respect of certain specific
incomes. Such incomes which do not form part of total income may also be called incomes exempt
from tax.

(3.2) ANALYSIS OF EXEMPTIONS

The various incomes that are exempted from tax are classified as follows :
1. Classification on the basis of Taxablity
2. Classification on the basis of Heads of Income

(3.3) CLASSIFICATION ON THE BASIS OF TAXABLITY

(1) FULLY EXEMPTED INCOMES

1. Agricultural income [sec 10(1)]

2. Income from HUF [sec 10(2)]
3. Income from Firm [sec 10(2A)]
4. Interest by Non-residents [sec 10(4)]
5. Remuneration by Non-citizens [sec 10(6)]
6. Compensation Received any Disaster [sec 10(10BC)]
7. Amount under LIC policy [sec 10(10D)]
8. Payment from Sukanya Samridhi Account [sec 10(11)]
9. Interest on Investments [sec 10(15)]
10. Educational Scholarships [sec 10(16)]
11. Allowances by MP’s and MLA’s [sec 10(17)]
12. Awards [sec 10(17A)]
13. Income Local Authority [sec (20)]
14. Income of News Agencies [sec 10(22B)]
15. Income of professional institutions [sec 10(23A)]
16. Income of a Member of Scheduled Tribe [sec 10(26)]
17. Income from Transfer of Unit of US64 [sec.10(33)]
18. Capital Gain from Urban Agricultural Land [sec.10(37)]
19. Capital Gain Arising from Shares [sec 10(38)]
 20. Income from Sporting event [sec.10(39)]
21. Income Under Reverse Mortgage Scheme [Sec10 (43)]
22. Income of New Pension Scheme [Sec.10(44)]
23. Income of Political Parties [sec. (13A)]
24. Income of Electoral Trust [sec. 13B]

(2) PARTLY EXEMPTED INCOMES

1. Gratuity [sec 10(10)]

2. Pension [sec 10(10A)]
3. Leave Salary [sec 10(10AA)]
4. Retrenchment Compensation [sec 10(10B)]
5. Compensation on VRS [sec 10(10C)]
6. House Rent Allowance [sec 10(13A)]
7. Special Allowances [sec 10(14)]
8. Family Pension [sec 10(19)]
9. Income of Minor [sec.10(32)]
10. Dividend from Indian Companies [sec 10(34)]
11. Units from UTI [sec 10(35)]

(3.4) CLASSIFICATION ON THE BASIS OF HEADINGS

(1) AGRICULURAL INCOME
(2) INCOMES RELATING TO SALARY
(i) Leave Travel Concession [Sec.10(5)]
(ii) Gratuity : [Sec.10(10)]
(iii) Commuted Pension [Sec.10(10A)]
(iv) Leave Salary [Sec.10(10AA)]
(v) Retrenchment Compensation [Sec.10(10B)]
(vi)
Amount Received under Voluntary Retirement Scheme [Sec.10(10C)]
(vii) House Rent Allowance [Sec.10(13A)]
(viii)
Notified Special Allowances [Sec.10(14)]

(3) INCOMES RELATING TO BUSINESS OR PROFESSION

(i) Share of Income from Hindu Undivided Family [Sec.10(2)]
(ii) Share of Income from Partnership Firm [Sec.10(2A)]
(4) INCOMES RELATING TO CAPITAL GAINS
(i) Income from Transfer of Units of US 64 [Sec.10(33)]
(ii) Income from Buyback of Shares [Sec.10(34A)]
(iii) Capital Gain from Urban Agricultural Land [Sec.10(37)]
(iv) Income under Reverse Mortgage Scheme [Sec.10(43)]
(5) INCOMES RELATING TO OTHER SOURCES
(i) Interest on Certain Securities [Sec.10(15)]
(ii) Family Pension of Armed Forces Killed in Action [Sec.10(19)]
(iii) Dividend from Indian Company [Sec.10(34)]

(6) INCOMES RELATING TO CLUBBING OF INCOME

(i) Income of Minor [Sec.10(32)]
(7) INCOMES RELATING TO DEDUCTIONS u/s 80
(i) Amount received under a Life Insurance Policy [Sec.10(10D)]
(ii) Income of New Pension Scheme [Sec.10(44)]

(8) INCOMES RELATING TO CERTAIN FUNDS

(i) Income of Mutual Fund [Sec.10(23D)]
(ii) Income of SAARC Fund [Sec.10(23BBC)]

(9) INCOMES RELATING TO CERTAIN INDIVIDUALS

(i) Daily Allowances of MP’s and MLA’s [Sec.10(17)]
(ii) Income of a Scheduled Tribe Individual [Sec.10(26)]
(iii) Income of a Scheduled Tribe Individual [Sec.10(26)]
(iv) Income of Individuals of Sikkim State [Sec.10(26 AAA)]

(10) INCOMES RELATING TO CERTAIN INSTITUTIONS

(i) Income of Local Authority [Sec.10(20)]
(ii) Income of News Agencies [Sec.10(22B)]
(iii) Income of Professional Institutions [Sec.10(23A)]

(iv) Income of European Economic Community (EEC) [Sec.10(23BBB)]

(11) INCOMES RELATING TO NON-RESIDENTS

(i) Interest Income by Non - Resident [Sec.10(4)]
(ii) Remuneration to Non Citizens of India : [Sec.10(6)]
(12) OTHER INCOMES
(i) Educational Scholarship [Sec.10(16)]
(ii) Awards [Sec.10(17)]
The following perquisites are taxable to all employees both specified and Non-specified employees. (1)
Domestic Servants engaged by employer; (2) Gas, Electricity and Water in the name of employer; (3)
Educational Facility; (4) Motor car Facility; (5) Other automotive Facility.

Explantion : Meaning of Specified Employee : The following are specified employees for the purpose
of section 17 (2) (iii); (i) A director employee of employer company (or) (ii) An employee who has
substantial interest in the employer company (or) (iii) An employee(not covered by above) whose
income under the head ‘Salaries’ excluding the value of all non-monetary benefits and amenities,
exceeds Rs.50,000. While computing the limit of Rs.50,000, the following are deducted or excluded:
(a) All non monetary benefits; (b) Monetary benefits which are exempt under Sec 10; (c) Deduction u/
s 16.

(4.6) TAXABILITY OF ACCOMMODATION FACILITY (Rule 3(1))

The term accommodation includes a house, flat, form house, accommodation in a hotel, motel,
service apartment ,guest house, caravan, mobile home, ship or other floating structure.

(4.6.1) PROVISIONS

(A) Government Employee : This category includes Central and State Government Employees
but does not includes employees of a Local Authority or a Foreign Government. The basis of valuation
of accommodation is a sum equal to the “Licence Fee” in accordance with rules framed by the
Government.

(B) Non-Government Employee : For the purpose of valuation of perquisites under this category,
the factors such as ownership of the accommodation, the population of the place in which the
accommodation is located, amount of salary of the empolyee, rent of the accommodation if it is not
owned by employer, cost of furniture provided (or), hire charges for furniture in the case of furnished
accommodation , the amount of rent recovered from the empolyee in the case of concessional rent
accommodation etc., The valuation rules are as follows:

(i) Accommodation Owned by Employer :

(a) If the population of the town is Below 10 Lakhs.
7.5 % of Salary p.a.
(b) If the population of the town is Above 10 Lakhs but Below 25 Lakhs.
10% of salary p.a
(c) If the population of the town is Above 25 Lakhs.
15% of salary p.a

(ii) Accommodation Not Owned by Employer or Hired by Employer: Rent paid by Employer (or)
15% of Salary whichever is less.

(iii) Concessional Rent Accommodation : Actual valuation as per any of the above Situations Minus
Rent recovered from the Employee.

(iv) Furnished Accommodation : The term Furniture includes Television sets, Radio, Refrigerator, Air
Conditioner and other household appliances. Amount at 10 % of cost of Furniture provided or Actual
Hire Charges for Furniture as the case may be shall be added with the Actual valuation as per anyone
of the above situations.

(v) Accommodation at Hotel : An Amount at 24% of salary per annum or actual hire charges to
such hotel whichever is less is taxable value of perquisite. How ever, it is fully exempt if (i) Such
accommodation is provided for a period not exceeding 15 days. (ii) It has been provided on the transfer
of the employee from one place to another.

(vi) Accommodation in case of Employee on Transfer : Where on account of his transfer from one
place to another, the employee is provided with accommodation at the new place of posting while
retaining the accommodation at the other place, the value of perquisite shall be determined with
reference to only one such accommodation which has the lower value (as determined according to the
above provisions) for a period not exceeding 90 days and thereafter the value of perquisite shall be
charged for both such accommodations.

Explanation:
For the purpose of valuation of perquisite in respect of accommodation facility, Salary
includes. Basic salary, dearness allowance or pay, ( if terms of employment so provide ), bonus,
commission, fees, all other taxable allowances, any monetary obligations met by the employer
and does not include, dearness allowance if it is not forming part of salary, employer’s
contribution to provident fund account of an employee, all allowances which are exempt from
tax and value of perquisites However the salary does not include advance salary and arrear salary.
(4.6.2) PRACTICAL ILLUSTRATIONS :

ILLUSTRATION (1) : (Government Employee) Mr. Agalin an officer of the Government of Tamil
Nadu, draws Rs.25,000 p.m as basic salary. He is provided with a rent free unfurnished house at
Chennai whose market rent is Rs.7,800 p.m, however the licence fee as per Government rules is
Rs.1,250 p.m.

Solution : Computation of Taxable Value of Rent Free House.

Licence fees (1,250 x 12) Rs. 15,000

ILLUSTRATION (2) : (Non-Government Employee - Population Below 10 lakhs) Mr. Madhavan,

an employee of ABC (P) Ltd., posted at Ranipet in which population is not exceeding 10,00,000 draws
Rs. 3,00,000 as Basic Salary, Rs. 40,000 as Dearness Allowance (forming part of salary) and Rs.
50,000 as Commission. Besides, the Company Provides Rent free unfurnished accommodation. The
house is owned by the Company. Fair rent of the accommodation is Rs. 66,000 per annum. Determine
the Taxable Value of Perquisite.

Solution : Computation of Taxable Value of Rent Free House :

Accommodation : Owned by the Employer
Population : Less than 10,00,000
Taxable Value : 7.5% of Salary Rs.
Salary :
Basic Salary 3,00,000
DA 40,000
Commission 50,000
3,90,000
Taxable Value (3,90,000 X 7.5%) 29,250

Note : Salary for this purpose Basic Salary + DA (if it is forming part of salary) + Commission and All
Other Taxable Allowances.
ILLUSTRATION (3) : (Non-Government Employee - Population Above10 lakhs) Mr. Murugan is
working in a Public Company in Coimbatore (Population 18 lakhs). He gets a salary at the rate of
Rs.20,000 p.m. Dearness allowance Rs.500 p.m. (50% of salary in terms of employment so provide)
and City Compensatory allowance Rs.300 p.m. He has been provided a rent free house by the company,
fair rental value of which is Rs.1,200 p.m. Compute Taxable Value of Perquisite.
(Ma d ra s
, B.Com., Apr. 2007)
Solution : Computation of Taxable Value of Rent Free House :
Accommodation : Owned by the Employer
Population : Less than 25,00,000
Taxable Value : 10% of Salary Rs.
Salary :
Basic Salary 2,40,000
DA 3,000
C.C.A 3,600

2,46,600
Taxable Value (2,46,600 X 10%) 24,660

Note : Salary for this purpose basic salary + DA (if it is forming part of salary) + commission and all
other taxable allowances.

ILLUSTRATION (4) : (Non-Government Employee - Population above 25 lakhs) Mr. Raghul is

working in a Private Company at Chennai (Population 80 lakhs). From the following Information, you
are asked to Compute the Value of Rent-free unfurnished House. (The house is owned and Provided
to Mr. Raghul by the Company). (a) Basic Salary Rs. 3,00,000; (b) Dearness Allowance (Forming part
of salary) Rs. 1,00,000; (c) Fees Rs. 50,000; (d) Entertainment Allowance Rs. 10,000
(Madras,
B.Com., Nov. 2007)
Solution : Computation of Taxable Value of Rent Free House :

Accommodation : Owned by the Employer

Population : More than 25,00,000
Taxable Value : 15% of Salary Rs.
Salary :
Basic Salary 3,00,000
D.A 1,00,000
Fees 50,000
E.A. 10,000
4,60,000

Taxable Value (4,60,000 X 15%) 69,000

Note : Salary for this purpose basic salary + DA (if it is forming part of salary) + commission and all
other taxable allowances.

ILLUSTRATION (5) : (Non-Government Employee - Hired by Employer) Mr. Rajiv, an employee

of ABC Ltd., posted at Chennai, draws Rs.3,00,000 as Basic Salary, Rs.10,000 as dearness allowance
(forming part of salary) and Rs.5,000 as commission. Besides, the Company Provides a Rent free
unfurnished accommodation in Chennai. The house is not owned by the Company. Rent paid by the
Employer for the Accommodation is Rs.50,000 per Annum. Determine the Taxable Value of the
Perquisite.

Solution : Computation of Taxable Value of Rent Free House :

Accommodation : Not Owned by the Employer
Taxable Value : 15% of Salary or Actual Rent (WEL) Rs. Rs.
Salary :
Basic Salary 3,00,000
D.A 10,000
Commission 5,000
3,15,000
15% of Salary (3,15,000 x 15%) 47,250
Actual Rent 50,000
Taxable Value (47,250 or Rs.50,000 WEL) 47,250
Note : Salary for this purpose basic salary + DA (if it is forming part of salary) + commission (always)
and all other taxable allowances.

ILLUSTRATION (6) : (Non-Government Employee - Furnished House) Mr. Krishnan is a Non

Government employee Provided with a Rent free house whose Taxable Value is Rs.30,000. In addition,
some of the household appliances is Provided in the house Costing Rs.40,000 (WDV Rs.5,000). The
Employer pays Rs.20,000 as hire Charges for two Air conditioners during the Previous Year. Determine the
Taxable Value of Furnished Rent Free House.

Solution : Computation of Taxable Value of Furnished Rent Free House : Rs. Rs.
Value of Unfurnished House 30,000
Add : 10% of Cost of Furniture (40,000 x 10%) 4,000
Actual hire Charges 20,000
24,000
54,000

ILLUSTRATION (7) : (Non-Government Employee - Concessional Rent House) Mr. Uma

Maheswaran provided with a house hired by his employer company and received during the current
previous year, emoluments consisting of Basic Pay : Rs.1,62,000; Special allowance : Rs.17,000 and
Reimbursement of Medical Expenditure: Rs.3,800. Rent Recovered from the Employee is Rs. 16,000
Compute the Value of the Perquisite. Actual rent paid by the employer Rs. 50,000 p.a.

Solution : Computation of Taxable Value of Concessional Rent House

Accommodation : Not Owned by the Employer
Taxable Value : 15% of Salary or Rent Paid (WEL)
Salary : Rs. Rs.
Basic 1,62,000
Special Allowance 17,000
1,79,000
15% of Salary (1,79,000 X 15/100) 26,850
Actual Rent 50,000
(WEL) 26,850
(ii) Stay Period : 25 Days
Salary
No of Days Stayed
No of Days in the Year
Actual Rent (1,000 X 25)
Less: Rent Recovered from the Employee 16,000
10,850

ILLUSTRATION (8) : (Non-Government Employee - Accommodation at Hotel) Mr. Vanjinathan

of Bangalore is appointed at Chennai. He stayed in a hotel for a short period and thereafter shifted in
a house provided by the Employer. The room rent in Hotel is Rs. 1,000 per day. The Salary for Valuation
of Accommodation is Rs. 4,00,000. Compute the Taxable Value of Perquisite of Accommodation at
hotel if the Number of days of stay in hotel is (i) 12 days, (ii) 25 days.

Solution : Computation of Taxable Value of Perquisite of Accommodation at Hotel.

(i) Stay Period : 12 days Rs. Rs.

The Stay Period is Less than 15 days, therefore, Taxable Value Nil

4,00,000
25 days
365 days
25,000
24% of Salary (4,00,000 X 24 / 100 X 25 / 365) 6,575
Taxable Value (25,000 or 6,575 WEL = 6,575) 6,575
(4.6.3) PRACTICAL EXERCISES :

EXERCISE (1) : Mr. Subramani is a Central Government Employee in Chennai. He is Living in a

furnished house provided by the Government at free rent. His salary is Rs.10,000 p.m. License fee
fixed for the house is Rs.600 p.m. Determine the Value of Perquisite for the Purpose of Income Tax.
Ans : Taxable Value : 600 x 12 = 7,200 (Madras, B.Com., Apr. 2007)

EXERCISE (2) : Mr. Sridhar provides the following particulars : Salary Rs.1,16,500. The employer
provides a rent free house at Cuddalore (Population 8 Lakhs) on 1 October 2019. The Municipal Value
is Rs.34,000 and fair market value is Rs.37,000. Determine the Taxable Value of perquisite in respect
of rent free House for the Assessment Year 2020-21.
Ans : Taxable Value : 1,16,500 x 7.5% = 8,738

EXERCISE (3) : Mr. Arumugam is working in a Public Ltd. Company in Vellore (Population 12 Lakhs).
He gets salary at the rate of Rs. 10,000 p.m. dearness allowance Rs. 500 p.m (50% of salary in
terms of employment so provide) and city compensatory allowance Rs. 300 p.m. He has been provided
a rent free house by the company, fair rental value of which is Rs. 1,200 p.m. Compute taxable value
of perquisite.
Ans :
Salary : 1,20,000 + 3,000 + 3,600 = 1,26,600

Taxable Value : 1,26,600 x 10% = 12,660

EXERCISE (4) : Mr. Elango is an employee of XYZ Ltd. He gets basic salary of Rs. 3,200 p.m. D.A ( 50
% enter for retirement benefits ) Rs. 1,600 p.m. Medical allowance Rs. 400 p.m. Profession Tax paid by
employee Rs. 3,200 p.a. He has been provided with a rent free accommodation in Chennai (Population 30
Lakhs). Calculate taxable amount of rent free accommodation.
Ans :
Salary : 38,400 + 9,600 + 4,800 = 52,800
Taxable Value : 52,800 x 15% = 7,920

EXERCISE (5) : Mr. Kishore is an employee of Zigma Ltd. He gets basic salary of Rs. 6,400 p.m.
D.A (50 % enter for retirement benefits) Rs. 3,200 p.m. Medical allowance Rs. 800 p.m. Profession
tax paid Rs. 6,400 p.a. He has been provided with a rent free accommodation in Mumbai. Calculate
taxable amount of rent free accommodation.
Ans :
Salary : 76,800 + 19,200 + 9,600 = 1,05,600
Taxable Value : 1,05,600 x 15% = 15,840

EXERCISE (6) : Sundhar submits following information regarding his salary Income.
1. Basic Salary Rs. 15,000 p.m
2. D.A. (forming part of salary) 40 % of basic salary
3. CCA Rs. 300 p.m
4. Children Education Allowance Rs. 200 p.m. per child for 2 children
5. Transport allowance Rs. 1,000 p.m
He is provided with a rent free unfurnished accommodation which is hired by the employer. Rent
Rs. 24,000. Calculate taxable amount of rent free accommodation.
Ans :

Salary : 1,80,000 + 72,000 + 3,600 + 2,400 + 12,000 = 2,70,000

15% Salary : 40,500
Actual Rent : 24,000
Taxable Value : 40,500 (or) 24,000 (WEL) 24,000

EXERCISE (7) :Mr. Raj is provided with a Rent free house whose taxable value is
Rs. 20,000 in addition he is provided with facility of furniture as under :
(i) Television owned by employer costing Rs. 20,000 (WDV Rs. 10,000)
(ii) Air conditioner hired by employer (hire charges Rs. 500 p.m)
Compute the taxable value of furnished rent free house.
Ans : Taxable Value : 20,000 + 2,000 + 6,000 = 28,000

EXERCISE (8) : M/s. Victor company took a house on rent and allotted it to its employees. From the
following information find out the value of perquisite of accommodation. Rs.
(i) Rent paid for the year 48,000
(ii) Salary 5,00,000
(iii) Cost of Furniture Provided in the House 60,000
(iv) Rent charged from employee per month 1,000
Ans :
Salary : 5,00,000
15% Salary : 75,000
Actual Rent : 48,000
Taxable Value : 75,000 (or) 48,000 (WEL) 48,000
Furniture Value : 60,000 x 10% 6,000
Rent Recovered : 1,000 x 12 12,000
Net Taxable Value : 48,000 + 6,000 - 12,000 42,000

EXERCISE (9) : Calculate the value of perquisite, if any chargeable to tax in respect of free
accommodation provided by the employer in a hotel to an employee, of Mr. Yahoo for the current
previous year. Salary and taxable allowances is Rs. 5,00,000.
(a) For 10 days when he was transferred from Delhi to Mumbai
(b) Throughout the Year as per Contract of Employment. (C.A. Inter. May 2003)
Ans :
a) The stay period is less than 15 days, Taxable value is Nil
b) Taxable value 24% of Rs.5,00,000 = 1,20,000

EXERCISE (10) : Mr. Nataraj is employed in Delhi and gets the following emoluments. (Assume
population is 26 lakhs). Basic Salary Rs. 8,000 p.m.; DA Rs. 6,000 (Forming part) p.m.; Bonus
Rs. 10,000; CCA Rs. 2,000 p.m.; Conveyance allowance Rs. 500 p.m. (actual amount spent Rs. 4,000) He
is provided with a rent free house. Calculate taxable value of perquisite. (Madras B.Com., Nov. 2013)
Ans : Rs. 96,000 + 72,000 + 10,000 + 24,000 + 2,000 = 2,04,000 x 15% = 30,600

EXERCISE (11) : Mr. Arun gets Salary of Rs. 12,000 p.m. and is provided with rent free unfurnished
accommodation at Ludhiana (population 20 lakhs as per 2001 census) whose fair rental value is Rs. 1,300
p.m. He gets leave encashment for the current previous year Rs. 6,000 during the year. House was prop
vided to him with effect from 01.07.2015 His salary is the on 1st day of every month calculate the value of
rent free accommodation. (Madras B.Com., (CS) Nov. 2013)
Ans : Rs. 12,000 x 9 = Rs. 1,08,000 x 10% = Rs. 10,800

EXERCISE (12) : Mr. Ravinder is in receipt of annual salary of Rs. 2,00,000. He is provided with a
furnished accommodation at Gurgaon (Population is 11 lakhs) for which is employer pays a rent of Rs.
4,000 p.m. and deducts Rs. 1,000 p.m. from employee’s salary. The cost of furnishing of the resi4
dence amount to Rs. 30,000. Calculate the value of perquisite if house is occupied for 9 months only.
Ans : Rs. 17,000 (Madras B.Com., (CS) April 2014)

EXERCISE (13) : Mr. Vasan a Manager in a company was transferred to Delhi where he stayed in a hotel
for 25 days and actual bill is Rs. 40,000. His salary details are : (i) Basic pay Rs. 60,000 p.m.; (ii) Project
allowance Rs. 4,000 p.m.; (iii) Bonus (including gratitous bonus of Rs. 10,000) : 1,60,000;
(iv) Commission on Sales Rs. 49,000; Find the value of rent free accommodation.
Ans : Rs. 9,67,000 x 25 / 365 x 24% = 15,896 or 40,000 WEL = Rs. 15,896

EXERCISE (14) : Askok is in receipt of the following amount from his employer during the previous year.
Basic pay Rs. 1,80,000; Dearness allowance 25% of basic pay; Commission 5% of basic pay; and Bonus
Rs. 8,000.
His employer has paid income tax of Rs. 5,000 and professional tax of Rs. 1,500 on his behalf.
Besides, his employer provided refrigerator and television costing Rs. 24,000 and paid Rs. 500 per month
towards rent of other furniture provided.
Compute the value of perquisite in respect of rent free furnished house, if Ashok stays in a city with
a population of (i) Not exceeding 10 lakh; (ii) Exceeding 10 lakh but not exceeding 25 lakh; and
(iii) Exceeding 15 lakh. (CS Dec. 2006)
Ans :
(i) Rs. 1,80,000 + 42,000 + 9,000 + 8,000 = 2,42,000 x 7.5% = Rs. 26,550;
(ii) Rs. 2,42,000 x 10% = Rs. 32,600;
(iii) Rs. 2,42,000 x 15% = Rs. 44,700
 CHAPTER -7
INCOME UNDER THE HEAD
HOUSE PROPERTY - II

(7.0) Introduction

(7.1) Classification of Self-Occupied Houses

(7.2) One or Two House(s) under Self Occupation

(7.3) More than Two Houses under Self Occupation

(7.4) Part of The House Property Self Occupied

(7.5) Part of The Year Self Occupied

(7.6) Both Part of the House and Part of the Year Self Occupied

(7.7) Comprehensive Illustrations

(7.8) Comprehensive Exercises

(7.9) Theory Questions

 (7.0) INTRODUCTION
The present chapter deals with the various provisions regarding taxability of self-occupied house
property under different circumstances.

(7.1) CLASSIFICATION OF SELF-OCCUPIED HOUSES

For the purpose of better presentation of the subject, the self-occupied houses are classified
into five types as under :
(i) One or Two House(s) under Self Occupation
(ii) More than Two Houses under Self Occupation
(iii) Part of The House Property Self Occupied
(iv) Part of The Year Self Occupied
(v) Both Part of the House and Part of the Year Self Occupied

(7.2) ONE OR TWO HOUSE(S) UNDER SELF OCCUPATION

(7.2.1) PROVISIONS
(i) According to Section 23(2), where the property consists of a house which is in the occupation of
the owner for the purposes of his own residence or remain unoccupied due to his employment,
business or profession at any other place, it is called as self occupied house.
(ii) The annual value of such house shall be taken to be Nil.

(iii) W.e.f. Assessment Year 2020-21, the benefit of Nil annual value is available for two house
properties.
(iv) The standard deduction u/s 24(a) is not applicable to such self occupied house properties.
(v) The deduction for interest on loan is allowed subject to the certain conditions :
(a) Where the loan is borrowed for the purpose of construction or acquisition of the house
property before 1-4-1999, the deduction is allowed upto Rs.30,000 per annum.
(b) Where the loan is borrowed for the purpose of construction or acquisition of the house
property after 1-4-1999, the deduction is allowed upto Rs.2,00,000 per annum.
(c) Where the loan is borrowed for the purpose of repaires and renewal or reconstruction
of house property, the deduction is allowed is upto Rs.30,000 whether the date of
borrowing of loan is before 1-4-1999 or after 1-4-1999.

(d) The above mentioned limit of Rs. 2,00,000 or 30,000 as the case may be is allowed at
aggregate for the both house properties.
(e) The maximum deduction for interest on loan includes interest paid during the
pre-construction period.
(7.2.2) PRACTICAL ILLUSTRATION

ILLUSTRATION (1) : Miss. Nishitha has two houses, both of which are self occupied. The particulars
of these are given below. I house II house
Rs. Rs.

Municipal Valuation per annum 1,20,000 1,15,000

Fair Rent per annum 1,50,000 1,75,000
Standard Rent per annum 1,00,000 1,65,000
Date of Completion of Construction 31-03-2017 31-3-2018
Municipal Taxes payable during the year 12% 8%
Interest on money borrowed for acquisition of house properties1,80,000 80,000
Compute Income from House Property for the Assessment Year 2020-21.

Solution : Computation of Income from House Property for the Assessment Year 2020-21.
Annual value (since both the houses are self occupied) Nil
Less : Interest on loan (1,80,000 + 80,000 = 2,60,000 Restricted to 2,00,000) 2,00,000
Income from House property (-) 2,00,000
(7.2.3) PRACTICAL EXERCISE

EXERCISE (1) : Mr. Adhaam owns two houses and both are used by him for his own residence.
Compute income from house property from the following particulars for the Assessment Year 2020-
21. House - I House - II
Rs. Rs.
Fair Rent 2,72,000 3,68,000
Municipal Valuation 2,84,000 3,52,000
Standard Rent 2,90,000 3,60,000
Municipal Taxes Levied 20,000 14,000
Municipal Taxes Paid 10,000 7,000
Repairs 14,000 12,000
Insurance Premium 3,000 2,200
Interest on loan (borrowed during August, 2008) 90,000 1,20,000

Ans : Nil - 2,00,000 (90,000 + 1,20,000 = 2,10,000 restricted to) = (-) 2,00,000 (C.S., Inter Dec. 2004)

(7.3) MORE THAN TWO HOUSES UNDER SELF OCCUPATION

(7.3.1) PROVISIONS

(i) When more than two houses are self occupied by the assessee for residential purposes, only two
houses is treated as self-occupied and all other houses will be deemed to be let out.

(ii) The house property actually self occupied by the assessee but as per the provisions of the Act,
it is treated as let out house is called as deemed to be let out.

(iii) The income from house property deemed to be let out is computed as per the provisions applicable
to let out house property. However, the details regarding actual rate shall not be available.

(iv) The option to select a house property as deemed to be let out is to be made on the basis of
favourable to the assessee. It means the option which gives minimum income from house property
shall be treated as deemed to be let out and the options which gives more income from house property
shall be treated as self occupied as it.

(v) For this purpose, taxable income from house property shall be computed on the assumption that all
the houses are deemed to be let out and thereafter, selection of option shall be made.
(7.3.2) PRACTICAL ILLUSTRATIONS :

ILLUSTRATION (1) : Mr. Santhanam has three houses A, B and C, all of which are self occupied.
The particulars of these are given below. A B C
Rs. Rs. Rs.
Municipal Valuation per annum 2,30,000 1,70,000 2,10,000
Fair Rent per annum 2,90,000 2,00,000 2,20,000
Standard Rent per annum 2,42,000 2,30,000 2,10,000

Date of Completion of Construction 31-03-2017 31-3-2018 31.03.2018

Municipal Taxes payable during the year 15% 15% 15%
Interest on money borrowed for acquisition of house properties 80,000 50,000 70,000
Compute Income from House Property for the Assessment Year 2020-21.

Solution :
(i) Computation of Income from Houses when they are deemed to be let out.
A B C
Rs. Rs. Rs.
Municipal value 2,30,000 1,70,000 2,10,000
Fair rent 2,90,000 2,00,000 2,20,000
Expected rent (WEH) 2,90,000 2,00,000 2,20,000
Standard rent 2,42,000 2,30,000 2,10,000
Gross annual value (WEL) 2,42,000 2,00,000 2,10,000
Less : Municipal taxes (15% of municipal value) 34,500 25,500 31,500
Net annual value 2,07,500 1,74,500 1,78,500
Less : Standard deduction (30% of net annual value) 62,250 52,350 53,550
1,45,250 1,22,150 1,24,950
Less : Interest on loan 90,000 80,000 70,000
Income from house property 55,250 42,150 54,950

(ii) Selection of option : The income from house B is minimum, hence it shall be taken as deemed to
be
let out and house A, house C shall be taken as self occupied as it.
(iii) Calculation of taxable income from house property : Rs.
Deemed to be let out (House B) 42,150
Self occupied house (House A) (Nil - 90,000) (-) 90,000
Self occupied house (House C) (Nil - 70,000) (-) 70,000
Total (-) 1,17,850

ILLUSTRATION (2) : Mr. Nethaji has three houses, all of which are self occupied. The particulars
of these are given below. A B C
Rs. Rs. Rs.
Municipal Valuation per annum 1,20,000 1,15,000 3,00,000
Fair Rent per annum 1,50,000 1,75,000 3,50,000
Standard Rent per annum 1,00,000 1,65,000 3,40,000

Date of Completion of Construction 31-03-2017 31-3-2018 31.03.2018

Municipal Taxes payable during the year (paid for House II) Only 8% 8% 8%
Interest on money borrowed for acquisition of house properties 20,000 30,000 50,000
Compute Income from House Property for the Assessment Year 2020-21.
Solution :
(i) Computation of Income from Houses when they are deemed to be let out.
A B C
Rs. Rs. Rs.
Municipal value 1,20,000 1,15,000 3,00,000
Fair rent 1,50,000 1,75,000 3,50,000
Expected rent (WEH) 1,50,000 1,75,000 3,50,000
Standard rent 1,00,000 1,65,000 3,40,000
Gross annual value (WEL) 1,00,000 1,65,000 3,40,000
Less : Municipal taxes (15% of municipal value) 9,600 9,200 24,000
Net annual value 90,400 1,55,800 3,16,000
Less : Standard deduction (30% of net annual value) 27,120 46,740 94,800
63,280 1,09,060 2,21,200
Less : Interest on loan 20,000 30,000 50,000
Income from house property 43,280 79,060 1,71,200

(ii) Selection of option : The income from house A is minimum, hence it shall be taken as deemed to be
let out and house B, house C shall be taken as self occupied as it.
(iii) Calculation of taxable income from house property : Rs.
Deemed to be let out (House A) 43,280
Self occupied house (House B) (Nil - 30,000) (-) 30,000
Self occupied house (House C) (Nil - 50,000) (-) 50,000

Total (-) 36,720

(7.3.3) PRACTICAL EXERCISE

EXERCISE (1) : Mr. Swamy has Three Houses all of which are self-occupied. The particulars of the
houses for the previous year 2019-20 are as under. A B C
Rs. Rs. Rs.

Municipal Valuation per annum 3,00,000 3,60,000 3,30,000

Fair Rent per annum 3,75,000 2,75,000 3,80,000

Standard Rent per annum 3,50,000 3,70,000 3,00,000
Date of Completion of Construction 31-03-2005 31-3-2010 01.04.2014
Municipal Taxes payable during the year 12% 8% 6%
Interest on Loan for construction 20,000 25,000 15,000
Compute Income from House Property for the Assessment Year 2020-21.
Ans :
(i) Deemed to be let out : House A : 1,99,800, House B : 2,06,840, House C : 1,81,140
(ii) Selection : House C is deemed to be let out.
(iii) IHP : House A : 1,81,140, House B : - 20,000, House C : - 25,000, Total : 1,36,140
Professional Expenses : 1,200 + 6,000 + 10,000 + 3,000 + 3,000 + 6,000 + 2,000 = 31,200
Income from Profession : 51,000 - 31,200 = 19,800

(9.9) PRESUMPTIVE TAXATION SCHEME

(9.9.1) Meaning :
In order to give relief to small tax payers from the burden of accounts and audit, the Income Tax
Act has indroduced the new scheme of taxation. Under this scheme, the assessee is given option to
file the return of income on the basis of fixed percentage or amount of the estimated income. It is
based on total turnover or gross receipts during the previous year. It is called as presumptive taxation

scheme. For the assessement year 2020-21, the following three schemes are in force.
(9.9.2) SMALL BUSINESS [Sec. 44AD)

(i) The scheme is applicable only to an individual, HUF and partnership firms.
(ii) The assessee must be engaged in any business other than agency business and transport
business.
(iii) The total tunover or Gross receipts during the previous year should not exeed Rs. 2 Crores.
(iv) Estimated income is calculated at 8% of total tunover or gross receipts. However it is 6% for
the transactions by account payee cheque or bank draft.

(9.9.3) SPECIFIED PROFESSION [Sec. 44ADA)

(i) The scheme is applicable only to an individual engaged in the specified profession. (ii) Specified
profession for the purpose are : (a) legal ; (b) medical ; (c) engineering; (d) architectural ; (e)
accountancy ; (f) technical consultancy ; (g) interior decoration ; and (h) any profession notified
by the Central Board of Direct Taxes.
(ii) The gross receipts from such profession during the previous year is below Rs. 50 Lakhs.
(iii) Estimated income is calculated at 50% of gross receipts.

(9.9.4) TRANSPORT BUSINESS [Sec. 44AE)

(i) The scheme is applicable to any assessee engaged in the buiness of plying, hiring and leasing
goods carriages.
(ii) The assessee does not own more than 10 goods carriages.
(iii) Estimated income is calculated as under :
(A) Heavy goods vehicles : Rs. 1,000 per ton of gross vehicle weight for every month or a part
of the month during which the vehicles is owned by the assessee during the previous year.
(B) Rs. 7,500 for every month or a part of the month during which the vehicles is owned by the
assessee during the previous year.
Note : Heavy vehicle means gross weight of the vechicles exeeds 12,000 kgs.
(9.9.5) PRACTICAL ILLUSTRATION :

ILLUSTRATION (1) : Mr. Anbarasan, commenced the business of operating goods vehicles on
01.04.2019. He purchased the following vehicles during the previous year 2019-20. Compute his income
under section 44AE for Assessment Year 2020-21.
S.No. Gross vehicle weight (in kilograms) Number Date of purchase
1. 7,000 2 10.04.2019
2. 6,500 1 15.03.2020
3. 10,000 3 16.07.2019
4. 11,000 1 02.11.2020
5. 15,000 2 29.08.2019
6. 15,000 1 23.02.2020

Solution : Computation of Income from Business under section 44AE for the Assessment Year
2020-21.
Type of Carriage Number of Date of No. of months No. of Months Deemed Amount
Vehicles Purchase for which x No. of Income per Rs.
Vehicle is vehicles month
owned
(A) (B) (C) (D) (E) (F) (E)x(F)=(G)
For Heavy Goods Vehicle 2 29.08.2019 8 16 15,000 2,40,000
1 23.02.2020 2 2 15,000 30,000

For Goods Vehicle Other 2 10.04.2019 12 24 7,500 1,80,000

than Heavy Goods Vehicle 1 15.03.2020 1 1 7,500 7,500

3 16.07.2019 9 27 7,500 2,02,500

1 02.01.2020 3 3 7,500 22,500
Profit from the business referred to u/s 44AE 6,82,500
Note : Since the assessee does not own more than 10 vehicles at any time during the previous year 2019-
20, he is eligible to opt for presumptive taxation scheme under section 44AE.

(9.9.6) PRACTICAL EXERCISES :

EXERCISE (1) : Mr. Sivakumar is engaged in the business of plying goods carriages. On 1st April
2019, he owns 10 trucks (out of which 6 are medium goods vehicles and 4 are light goods vehicles.
On 2nd May 2019, he sold one of the medium goods vehicle and purchased a light goods vehicle on
6th May 2019. This new vehicle could however be put to use only on 15th June 2019. Compute his
income under section 44AE for Assessment Year 2020-21.
Ans : (2 x 12 x 7,500) 1,80,000 + (2 x 2 x 7,500) 30,000 + (7 x 10 x 7,500) 5,25,000 = 7,35,000.

EXERCISE (2) : Mr. Roshan owns the following commercial vehicles (i) 2 light commercial vehicles
- One for 9 months and two days and the other for 12 months. (ii) 2 heavy goods vehicle - one (whose
gross vehicle weight is 13 MT) for 6 months and 25 days and the other (whose unlaiden is 14 MT) for
11 months and 12 days. (iii) 2 medium goods vehicles - One for 6 months and the other for 8 months
and 15 days. Compute his income under section 44AE for Assessment Year 2020-21.

Ans :
(i) 10 x 7,500 + 12 x 7,500 = 1,65,000; (ii) 7 x 13,000 + 12 x 14,000 = 2,59,000;
(iii) 6 x 7,500 + 9 x 7,500 = 1,12,500. Total Rs. 1,65,000 + 2,59,000 + 1,12,500 = 5,36,500.