Bcom 402
Bcom 402
INCOME TAX LAW AND PRACTICE - II
Internal assessment = 20
External exam. = 80
Meaning of capital assets; Short term and long term capital gain and loss, computation of
capital gain, indexing of cost of acquisition and improvement.
Income from Other Sources: Computation of general income u/s 56(1) and specific
income u/s 56(2), and grossing up of income falling under other sources, Interest on
securities, types of securities.
UNIT II:
Set off and carry forward of losses, aggregation of income, deductions from gross total
income for individuals, HUF’s and Firms
UNIT III: Assessment of individuals and H.U.F including computation of tax liability.
UNIT IV: Assessment of firms and association of persons. including computation of tax
liability
1
• Enable the students in computing income and tax liability of various assesses as
specified above.
BOOKS RECOMMENDED
2. Income tax Law and Practice by V.P.Gaur & D.B. Narang: Kalyani Publishers.
3. Direct taxes Law and Practices by V.K. Singhania & Kapil Singhania- Taxman
publication.
4. Income tax Law and Practices by Mahesh Chandra, D.C. Shukla, K.A.Mahajan,
M.A. Shah – Pragati publication, New Delhi.
5. Conceptual clarity on Income Tax & Wealth Tax by Arvind Tuli & Dr. Mrs. Neeru
chadda – Kalyani Publication, New Delhi
Equal weightage shall be given to all the units of the syllabus. The external Paper shall be of
the two sections viz, A & B of three hours duration.
Section-A: This section shall contain four short answer questions selecting one from
each unit. Each question shall carry 5 marks .A candidate shall be required
to attempt all the four questions. Total weightage to this section shall be of
20 marks.
Section-B: This section shall contain eight long answer questions of 15 marks each.
Two questions with internal choice shall be set from each unit. A candidate
shall have to attempt any four questions selecting one from each unit. Total
weightage to this section shall be of 60 marks.
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MODEL QUESTION PAPER
3. Calculate tax payable in case of individual for the assessment year….. with suitable
example.
4. Discuss long term capital gain & short term capital gain.
Attempt any four questions selecting one from each unit. Each question carries
15 marks.
UNIT-I
1. Mr. X purchased a house in 1976 for Rs. 1,00,000. He incurred the following
expenses for the improvement of the house.
Renovation of the house for Rs. 25,000 and addition of 2 rooms after one year
for Rs. 50,000. The F.M.V. of the house on 1-4-81 was Rs. 110,000. He sold
the house in May 2012 for Rs. 14,00,000.
He purchased another house property within 2 months for Rs. 3,00,000 and
invested in capital gains account scheme Rs. 50,000. Calculate taxable capital
gain for the previous year _________. Cost inflation index for 1981-82 was 100
and for 1912-13 is 852.
3
OR
Following are the particulars for the year ________. Compute income under the
head other sources.
Rs.
UNIT-II
2. Mr. X earned gross total income of Rs. 5,00,000. In the previous year __________
and made the following donation during the year.
(iii) Rs. 20,000 for municipal corporation approved for promotion of family planning.
Calculate the amount of deduction admissible to him u/s 80G.
OR
Discuss with suitable example rules regarding set off and carry forward of losses.
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UNIT-III
3. Mr. K.L Seth a resident of Delhi [population above 25 lakhs] submits the following
details of his income for the financial year……
DA 6000 p.m
Bonus 7000
He is provided with an unfurnished accommodation for which employer charges Rs. 200
p.m. The municipal value of the house owned by employer is Rs. 22050 p.a. He is also
provided by employer with chauffeur driven car of 1.8 lt. capacity. The car is used for
official purposes only and the entire expenses of its running and maintenance are met by
the employer.
During the year Mr. K.L Seth has received dividends from co-op, society amounting to
Rs. 14000. He paid insurance premium of Rs. 3000 on a policy taken on his the life of his
father who is not dependent on him. During the year he had following income also.
(a) Winnings from lottery Rs. 50000 out of which tax @30% has been deducted at
source.
(b) He went to Nepal and won Rs. 35000 from gambling in a casino.
(d) He earned Rs. 14910 from his term deposits with a bank.
Computes his total income and tax liability for the assessment year……………….
5
OR
HUF with more than one co-parcener entitled to claim partition, owns a property which is
let out at Rs. 600 p.m per unit. The property consists of 10 identical residential units. The
municipal rental value of the property is Rs. 60,000p.a.
Income from the family business for the assessment year ……………..was Rs. 160000
after charging interest on loan. A lottery ticket worth Rs. 100 was purchased out of family
funds on the name HUF. It won a prize of rs. 100000. The Karta had acquired a shop out
of his own savings which he wife. Shop has an annual income (computed under the head
house property) of Rs. 24000.
Compute total income of HUF and tax payable for the assessment year ……………
UNIT-IV
4. From the information given below find out the amount of remuneration which can
be debited to P & L A/c of the firm and how much income of partners shall be chargeable
to tax under the head profits and gains. Salary and interest to partners has been paid as per
deed.
6
Rs.
To X 12000
To Y 9000
To Z 6000
OR
Mr. K, Mrs. L and Mr. M are members of an AOP sharing profits and losses equally.
During the year ending ……….total income of AOP was Rs. 237000. The details of
individual incomes of its members are given below:
Mrs. K Rs.
Mrs. L
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Bank interest on fixed deposits: 96000
Mr. M
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C. No. :- BCG-402 UNIT I
CAPITAL GAINS
STRUCTURE:
1.1 Introduction
1.2 Objective
1.7 Differences between Long term capital gains and Short term capital gains
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1.8 Full value of consideration
1.16 Summary
1.17 Glossary
1.1 INTRODUCTION
The provisions for computation of Income from capital gains are covered under sections
45 to 55. Section 2(14) defines the term capital gain and section 45, the charging section
lays down basis of change for taxability of capital gain/loss arises on transfer of capital
asset. Taxability of capital gain depends upon the nature of capital gain arises, i.e., short
term capital gain or long term capital gain. The type of capital gain depends upon the
period for which the capital asset is held. The taxability of capital gain shall satisfy the
conditions like there should be capital asset, the asset is transferred by the assessee, such
transfer takes place during the previous year, etc. To give relief to the assessee, the concept
of exemption introduced under section 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB.
Further this lesson will give some insight regarding the concept of 'income from other
sources'. Income chargeable under Income-tax Act, which does not specifically fall for
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assessment under any of the heads, must be charged to tax as "income from other sources".
This head is thus a residuary head of income under which income can be computed only
after deciding whether the particular item of income is otherwise assessable under any of
the first four heads. In addition to the taxation of income not covered by the other heads,
Section 56 (1) provides the general income details and Section 56(2) specifically provides
certain items of incomes as being chargeable to tax under the head in every case.
1.2 OBJECTIVES
- Which are the income chargeable under the head income from other sources.
Profits or gains arising from the transfer of a capital asset made in a previous year are
taxable as capital gains under the head "Capital Gains". Sections 45 to 55A of the Income-tax
Act, 1961 deal with capital gains. Section 45 of the Act, provides that any profits or gains
arising from the transfer of a capital asset effected in the previous year shall, save as
otherwise provided in Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, 54GA and 54H
be chargeable to income-tax under the head "Capital Gains" and shall be deemed to be the
income of the previous year in which the transfer took place. Doubts may arise as to
whether 'Capital Gains' being a capital receipt can be brought to tax as income. It may be
noted that the ordinary accounting canons of distinctions between a capital receipt and a
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revenue receipt are not always followed under the Income-tax Act. Section 2(24)(vi) of
the Income-tax Act specifically provides that "Income" includes "any capital gains chargeable
under Section 45(1)". It may not be out of place to mention here that in the absence of a
specific provision in Section 2(24) capital gains have no logic to be taxed as income. The
constitutional validity of the provisions of the Act relating to capital gains was challenged in
Navin Chandra Mafatlal v. C.I.T. (1955) 27 ITR 245. The Supreme Court while upholding
the competence of parliament in legislating with regard to capital gains as part of income,
observed that the term income should be given the widest connotation so as to include
capital gains within its scope. However, all capital profits do not necessarily constitute
capital gains. For instance, profits on re-issue of forfeited shares, profits on redemption of
debentures, premium on issue of shares, 'pagri' from tenants etc. are capital profits and not
capital gains, hence, not liable to tax. The capital gain is chargeable to income tax if the
following conditions are satisfied:
3. Transfer of capital assets should take place during the previous year.
1.4 Capital Asset: Sec. 2(14): Capital Asset means property of any kind (Fixed,
Circulating, movable, immovable, tangible or intangible) whether or not connected with
business or profession. In other words property of any kind held by an assessee whether
or not connected with his business or profession but does not include:
(ii) Personal effects that is to say, movable property (including wearing apparel and
furniture but excluding jewellery) held for personal use by the assessee or any member of
his family dependent on him. Jewellery includes ornaments made of gold, silver, platinum
or any other precious metal or any alloy containing one or more of such precious metals,
whether or not containing any precious or semi-precious stone, and whether or not worked
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or sewn into any wearing apparel and precious or semi-precious stones, whether or not
set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
(iii)Agricultural land in India, not being land situate (a) within the jurisdiction of a
municipality or a cantonment board and which has a population of not less than 10,000, or
(b) in any area within the distance, measured aerially, -
(I) not being more than two kilometers, from the local limits of any municipality or cantonment
board referred to in item (a) and which has a population of more than ten thousand but not
exceeding one lakh; or
(II) not being more than six kilometers, from the local limits of any municipality or cantonment
board referred to in item (a) and which has a population of more than one lakh but not
exceeding ten lakh; or (III) not being more than eight kilometers, from the local limits of
any municipality or cantonment board referred to in item (a) and which has a population of
more than ten lakh.
Explanation: - For the purposes of this sub-clause, "population" means the population
according to the last preceding census of which the relevant figures have been published
before the first day of the previous year;
(iv)6 % per cent Gold Bonds, 1977 or 7% per cent Gold Bonds, 1980 or National
Defence Gold Bonds, 1980 issued by the Central Government;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the
Central Government.
(vii) Deposit certificates issued under gold monetization scheme, 2015 [ w.e.f A.Y 2016-
17]
Short-term capital asset: Sec. 2(42A): means a capital asset held by an assessee for
not more than thirty six months immediately preceding the date of its transfer. But following
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assets shall be treated as short term capital assets if these assets are held by its owner (
before transfer) for not more than 12 months. (i) a security and shares of companies listed
in a recognized stock exchange in India. (ii) A unit of equity oriented fund (iii) a zero
coupon bonds.
Following assets shall be treated as short term capital assets if such assets are held by its
owner before transfer for not more than 24 months.
Any gain or loss occurring to the assessee on such assets shall be known as short term
capital gain or loss [ 2 (42B)]
Long-term capital asset: Sec. 2(29A): means a capital asset which is not a short-term
capital asset. i.e., the assets which are held by the assessee for a period exceeding 36 /24
months / 12 months as the case may be, months immediately preceding the date of their
transfer, are called long term capital assets.
Any gain or loss occurring on such assets shall be known as long term capital gain or loss,
[ 2 (42B)]
Short term capital gains: Any gain on transfer of short term capital assets is called short
term capital gain.
It is calculated as follows:
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Short term capital gain + ++
Long term capital gains: Any gain on transfer of long term capital asset is called long term
capital gain . It is calculated as follows:
Transfer includes:
Sale of asset
Exchange of asset
In a case where the asset is converted by the owner there of into, or is treated by
him as stock in trade of a business carried on by him, such conversion or treatment,
or
Any transaction involving the allowing of the possession of any immovable property
to be taken or retained in part performance of a contract of the nature referred to
in section 53 A of the transfer of property act, 1882; or
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Any transaction ( whether by way of becoming a member of , a acquiring shares
in, a co- operative society, company or other association of persons or by way of
any agreement or any arrangement or in any other manner whatsoever) which has
the effect of transferring or enabling the enjoyment of , any immovable property.
The definition of transfer is inclusive, thus transfer includes only above said five ways. In
other words, transfer can take place only on these five ways. If there is any other way
where an asset is given to other such as by way of gift, inheritance etc. it will not be termed
as transfer.
(ii) any transfer of a capital asset under a gift or will or an irrevocable trust; Provided that
this clause shall not apply to transfer under a gift or an irrevocable trust of a capital asset
being shares, debentures or warrants allotted by a company directly or indirectly to its
employees under the Employees' Stock Option Plan or stock purchase Scheme;
(iii) Any transfer of a capital asset by a company to its subsidiary company, if- (a) the
parent company or its nominees hold the whole of the share capital of the subsidiary
company, and (b) the subsidiary company is an Indian company;
(iv) Any transfer of a capital asset by a subsidiary company to the holding company, if -
(a) the parent company or its nominees hold the whole of the share capital of the subsidiary
company is, and (b) the subsidiary company is an Indian company[ section 47 (iv)];
(vi) any transfer in a scheme of amalgamation of a capital asset being share or shares held
in an Indian Company, by the amalgamating foreign company to the amalgamated foreign
company, if -
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(a) at least twenty-five per cent of the shareholders of the amalgamating foreign company
continue to remain shareholders of the amalgamated foreign company; and
(b) such transfer does not attract tax on capital gains in the country, in which the amalgamating
company is incorporated (applicable from the assessment year 1993-94);
(vic) any transfer in a demerger, of a capital asset, being a share or shares held in an Indian
company, by the demerged foreign company to the resulting foreign company, if -
(a) the shareholders holding not less than three-fourths in value of the shares of the demerged
foreign company continue to remain shareholders of the resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the country in which the demerged
foreign company is incorporated provided that the provisions of Sections 391 to 394 of
the Companies Act, 1956 (1 of 1956) shall not apply in case of demerger referred to in
this clause.
(vid) any transfer or issue of shares by the resulting company in a scheme of demerger to
the shareholders of the demerged company if the transfer or issue is made in consideration
of demerger of the undertaking.
(a) the transfer is made in consideration of the allotment to him of any share or shares in the
amalgamated company except where the shareholders itself is the amalgamated company,
and
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(viia) any transfer of a capital asset of such foreign currency convertible bonds or Global
Depository Receipts as are referred to in Section 115AC(1) or rupee denominated bond
of an Indian company or derivate , made by a non - resident on a recognized stock
exchange located in any International financial services centre and where the consideration
for such transaction is paid or payable in foreign currency, shall not be regarded as transfer.
[ Section 47 ( viiiab)
(viii) any transfer of agricultural land in India effected before the first day of March, 1970;
(ix) any transfer of a capital asset being any work of art, archaeological, scientific or art
collection, book, manuscript, drawing, painting, photograph or print to the Government or
a University or the National Museum, National Art Gallery, National Archives or any such
other public museum or institution as may be notified by the Central Government in the
Official Gazette to be of national importance or to be of renown throughout any State or
States[ section 47 (ix)];
(x) any transfer by way of conversion of bonds or debentures, debenture stock or deposit
certificates in any form, of a company, into shares or debentures of that company [Section
47 (x)].
(xi) any transfer made on or before 31.12.1998 by a person not being a company of a
capital asset being membership of a recognised stock exchange to a company in exchange
for shares allotted by that company to him (transferor). The shares cannot be transferred
for 3 years.
(xii) any transfer of land by a sick industrial company under a scheme prepared and
sanctioned under section 18 of the sick industrial companies ( Special provisions) Act,
1985 (1 of 1986) where such industrial company is being managed by its workers co-
operative: provided that such transfer is made during the period commencing from the
previous year in which such has become a sick industrial company and ending with the
previous year in which the entire networth of such company becomes equal to or exceeds
the accumulated losses [ Section 47 ( xii)]
Provided that -
(a) all the assets and liabilities of the firm or of the association of persons or body of
individuals relating to the business immediately before the succession become the assets
and liabilities of the company,
(b) all the partners of the firm immediately before the succession become the shareholders
of the company in the same proportion in which their capital account stood in the books of
the firm on the date of succession.
(c) the partners of the firm do not receive any consideration or benefit, directly or indirectly
in any form or manner, other than by way of allotment of shares in the company, and
(d) the aggregate of the share holding in the company of the partners of the firm is not less
than fifty per cent of the total voting power in the company and their shareholding continue
to be as such for a period of five years from the date of succession.
(xiiia) any transfer of a capital asset being a membership right held by a member of a
recognised stock exchange in India for acquisition of shares and trading or clearing rights
acquired by such member in that recognised stock exchange in accordance with a scheme
for demutualisation or corporatisation which is approved by the Securities and Exchange
Board of India established under Section 3 of the Securities and Exchange Board of India
Act, 1992 (15 of 1992).
(xiiib) any transfer of a capital asset or intangible asset by a private company or unlisted
public company (hereafter in this clause referred to as the company) to a limited liability
partnership or any transfer of a share or shares held in the company by a shareholder as a
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result of conversion of the company into a limited liability partnership under the provisions
of section 56 and 57 of limited liability partnership act, 2008 shall not regarded as transfer
on fulfillment of the following conditions: (a) all the assets and liabilities of the company
immediately before the conversion become the assets and liability of the limited liability
partnership (b) all the shareholders of the company immediately before the conversion
become the partner of the limited liability partnership and their capital distribution and
profit sharing profit ration in the LLP are in the same proportion as their shareholding in the
company on the date of conversion. (c) the aggregate of the profit sharing profit ratio of
the shareholders of the company in the LLP shall not be less than 50 % at any time during
the period of 5 years from the date of conversion.
Capital gains are generally charged to tax in the year in which 'transfer' takes place.
Any profits or gains arising from the transfer of a capital asset is called capital gain. Capital
gain is an increase in the value of a capital asset (investment or real estate) that gives it a
higher worth than the purchase price. The gain is not realized until the asset is sold. A
capital gain may be short-term (one year or less) or long-term (more than one year) and
must be claimed on income taxes.
In other words, A capital gain refers to profit that results from a sale of a capital asset, such
as stock, bond or real estate, where the sale price exceeds the purchase price. The gain is
the difference between a higher selling price and a lower purchase price. Conversely, a
capitalloss arises if the proceeds from the sale of a capital asset are less than the purchase
price.
Capital gains may also refer to a different form of profit received from an asset which
refers to "investment income" in the form of cash flow or passive income that arises in
relation to real assets, such as property; financial assets, such as shares/stocks or bonds;
and intangible assets.
Under section 45 (1) any profits or gains arising from the transfer of a capital asset
effected in the previous year shall, save as otherwise provided in section 54 , be chargeable
20
to income tax under the head capital gains and shall be deemed to be the income of the
previous year in which the transfer took place unless such capital gains are exempt under
section 54, 54B, 54EC, 54F, 54G, 54GA or 54GB.
Any capital gain arising as a result of transfer of a short-term capital asset is known as
short-term capital gain. According to Section 2(42A) of the Income-tax Act: "Short term"
capital asset means a capital asset held by an assessee for not more than thirty-six months
immediately preceding the date of its transfer. In the case of capital assets (being equity or
preference share in a company) held by an assessee for not more than 12 months immediately
prior to its transfer. (i) a security and shares of companies listed in a recognized stock
exchange in India. (ii) A unit of equity oriented fund (iii) a zero coupon bonds.
Following assets shall be treated as short term capital assets if such assets are held by its
owner before transfer for not more than 24 months.
Any gain or loss occurring to the assessee on such assets shall be known as short term
capital gain or loss [ 2 (42B)]
Long-term capital asset: Sec. 2(29A): means a capital asset which is not a short-term
capital asset. i.e., the assets which are held by the assessee for a period exceeding 36 /24
months / 12 months as the case may be, months immediately preceding the date of their
transfer, are called long term capital assets.
Any gain or loss occurring on such assets shall be known as long term capital gain or loss,
[ 2 (42B)]
Any capital gain arising as a result of transfer of a long-term capital asset is known as
long-term capital gain. Long term Capital gains are computed by deducting from the full
value of consideration for the transfer of a capital asset the following:
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- Expenditure connected exclusively with the transfer;
(iv) Exemption provided by Ss. 54, 54B, (iv) Exemption provided by Ss. 54B,
54D, & 54G, 54GA 54D 54EC, 54ED, 54F & 54G, 54GA
C. (A-B) is the short-term capital gain C. (A-B) is the long-term capital gain
1.7 Differences between Long term capital gains and Short term capital gains
Long Term Capital Gain Short Term Capital Gain
It arises out of transfer of long term capital It arises out of transfer of short
term assets capital assets
Tax rate is 20% Rates Applicable is 15 %
Cost of acquisition and cost of improvement No indexing is done.
are indexed on the basis of CII
If LTCA is acquired before 1-4-2001, then No such option is available to STCA
the fair market value of the asset as on
1-4-2001 is taken as the value of acquisition.
Long term capital loss can be set off only Short term capital loss can be set off
against long term capital gain. against short term capital gain or long
term capital gain.
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1.8 FULL VALUE OF CONSIDERATION
Full value of consideration means the whole or complete sale price or exchange value or
compensation including enhanced compensation received in respect of capital asset in
transfer. The following points are important to note in relation to full value of consideration.
When shares, debentures or warrants are received under employees stock option plan or
scheme are transferred under a gift or an irrecoverable trust , the market value on the date
of transfer shall be deemed to be the full value of consideration received or accruing as a
result of transfer for computation of capital gains.
Cost of Acquisition (COA) means any capital expense at the time of acquiring capital
asset under transfer, i.e., to include the purchase price, expenses incurred up to acquiring
date in the form of registration, storage etc. expenses incurred on completing transfer. In
other words, cost of acquisition of an asset is the value for which it was acquired by the
assessee. Expenses of capital nature for completing or acquiring the title are included in the
cost of acquisition. Cost inflation index for the first year in which the asset was held by the
assessee or for the year beginning on the 1st day of April, 2001 , which ever is later.
Cost to the previous owner deemed to be the cost of acquisition: If the asset is
acquired by an assessee in the following circumstances the cost of acquisition of the
asset shall be deemed to be the cost for which the previous owner of the property
acquired it.
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4. On any distribution of assets on the dissolution of a firm, body of individuals or
other association of persons at any time before 1-04-1987. Or
8. On the transfer by a subsidiary company to its Indian holding company which owns
whole of the share capital of the subsidiary company or
12. When any members of HUF converts his self acquired property into HUF property
or
13. On transfer of capital asset by the predecessor cooperative bank to the successor
cooperative bank in a business organization or
14. On transfer of shares in the predecessor cooperative bank in lieu of shares allotted
in the successor cooperative bank in a business reorganization or
Cost of share or security : With effect from assessment year 2010-11 , where
the capital gain arises from the transfer of specified security or sweat equity shares
referred to in section 17 (2) (vi), the cost of acquisition of such security or shares shall
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be the fair market value which has been taken into account for the purposes of section
17 (2) (vi)
Cost of bonus shares The cost of bonus shares or security which is received by the
assessee without any payment on the basis of his holding any financial asset will be as
under (a) Where bonus share or security was received prior to 1st April 1981, the fair
market value on 1str April 1981. (b) In any other case- nil
Cost of acquisition of goodwill If the asset is purchased from the previous owner –
purchase price In any other case – Nil The finance act ,1994 has amended the
above provision in following manner (a) In case the capital asset is goodwill, tenancy
rights, stage carriage permits or loom hours the cost of acquisition will be : (i) purchase
price , if such asset was purchased, and (ii) nil in all other cases except those covered
u/s 49 (1) (1) to (iv).
(b) in case a person is holding shares or other securities and assessee becomes entitled to
subscribe to an additional financial asset, the cost of such additional asset shall be :
(ii) Incase such right to subscribe is renounced in favour of some other person, the cost of
such renounced right is taken as NIL.
(i) In case assessee subscribes to such additional asset, the amount actually paid
shall be its cost.
(ii) In case asset is acquired by renounce the cost shall be price paid by him to
renounce and amount paid to the company or institution for such renounced
asset.
(iii) With effect from assessment year 1998-99 the above mentioned provisions
Situation Indexing
Long term capital assets acquired before Actual cost or FMV on 1-4-01 which
1-4-01 under gift, will, partition HUF , ever is more x CII of the year of
Inheritance i.e. u/s 49 (1) transfer / CII of 2001-02 i.e 100
Cost of improvement incurred on or after Cost of improvement x CII of year of
1-4-01 on above mentioned assets transfer CII of the year of improvement
Long term capital assets acquired on or Actual cost x CII of the year of transfer
after 1-4-01 ( Not under any of the CII of the year of acquisition
modes mentioned above) Cost of Cost of improvement x CII of the improve-
improvement year incurred after 1-4-01 ment year incurred after 1-4-01 of transfer
CII of the year of improvement
Long term capital assets acquired by Actual cost of FMV on 1-04-01 whichever
present seller u/s 49 (1) on or after is more x CII of the transfer /CII of the
1-4-01but was acquired by previous year in which present seller became its
owner before 1-4-01 owner.
Contrary views of high courts regarding
base year for indexation benefit if asset is
acquired u/s 49 (1) .
However, in the case of CIT vs. Manjula
J.Shah (2011) 16 Taxmann 42 (Bombay)
the honourable bombay high court has
held that while computing capital gains
arising on transfer of a capital asset
acquired by an assessee under a gift,
indexed cost of acuquisition has to be
computed with reference to the year in
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Similar decision has been given by the
honorable Delhi high court, in the case of
Arun Shungloo trust vs. CIT ( 2012) 18
Taxmann 216 ( Delhi).
Cost of improvement is the capital expenditure incurred by an assessee for making any
addition or improvement in the capital asset. It also includes any expenditure incurred in
protecting or curing the title. In other words, cost of improvement includes all those
expenditures, which are incurred to increase the value of the capital asset. It means the
amount which bears the cost of improvement the same proportion as cost inflation index
for the year in which the assets is sold bears to the cost inflation index for the year in which
improvement to the asset took place.
The improvement to be so taken into account should be of such capital nature as it does
not fall in deductions allowed while computing the income chargeable under the heads:
(i) The income from the house property ( ii) profits and gains of business or profession
(iii) Income from other sources
Vide notifications issued u/s 48, the central govt. has notified the following cost inflation
index (C.II)
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Sl. No. Financial year Cost Inflation Index
1. 2001-02 100
2. 2002-03 105
3. 2003-04 109
4. 2004-05 113
5. 2005-06 117
6. 2006-07 122
7. 2007-08 129
8. 2008-09 137
9. 2009-10 148
10. 2010-11 167
11. 2011-12 184
12. 2012-13 200
13. 2013-14 220
14. 2014-15 240
15. 2015-16 254
16. 2016-17 264
17. 2017-18 272
18. 2018-19 280
Computation of capital gains in case of slump sale: Any gain arising from the slump
sale effected in the previous year shall be chargeable as long term capital gains of the
previous year in which the transfer take place.
Expenditure on transfer
Expenditure incurred wholly and exclusively for transfer of capital asset is called expenditure
on transfer. It is fully deductible from the full value of consideration while calculating the
capital gain. Examples of expenditure on transfer are the commission or brokerage paid
by seller, any fees like registration fees, and cost of stamp papers etc., travelling expenses,
and litigation expenses incurred for transferring the capital assets are expenditure on transfer.
Note: Expenditure incurred by buyer at the time of buying the capital assets like brokerage,
commission, registration fees, cost of stamp paper etc. are to be added in the cost of
acquisition before indexation.
28
1.12EXEMPTION FROM CAPITAL GAINS
Capital gain arising on the transfer of property used for residence u/s 54: The
exemption u/s 54 relates to the capital gain arising out of transfer of residential house.
The exemption is available to only Individual assesses or HUF, There occurs some
long term capital gain and such capital gain is re-invested in:
(a) Purchase of another residential house with in one year before or two years after
the sale of the house or
(b) Construction of new residential house within three years after the sale of the house.
The amount of capital gain so invested shall be exempted from tax w.e.f assessment year
2015-16, exemption u/s 54 (1) shall be available if the investment is made in purchase or
construction of one residential house situated in India subject to the existing time limits.
With regard to pre- investment of long term capital gain for the purchase or construction of
a residential house, following points should be noted:-
(1) Construction of a new house must be completed within 3 years from the date of
transfer of the house. Construction may have started before the sale of the house
but completion is required to be made within 3 years of sale.
(2) Exemption is allowed even if a part of the capital gain is invested to buy an old
house and the remaining part is invested to renovate it or to expand it by constructed
new rooms or adding another floor.
(3) This exemption is allowed even if assessee purchase or constructs one house or
he may sell two houses and invests the amount of long term capital gain to buy or
construct only one house.
In case the amount of capital gain is not re – invested for the purchase or construction of
the new house upto the last date of filing of return of income u/s 139 then it should be
deposited in the capital gain deposit scheme with a specified bank authorized by the central
29
government in accordance with the scheme. Any amount already utilized by the assessee
for the purchase or construction of the new house together with the amount so deposited
shall be deemed to be the cost of new house.
The amount deposited in the deposit account scheme must be utilized to purchase or
construct the new house within 3 years from the date of transfer of the old house.
If the amount deposited in this scheme is not utilized wholly or partly for the purchase or
construction of the new house within specified period , then,
(i) The amount not so utilized shall be charged u/s 45 as the income of the
previous year in which period of 3 years from the date of the transfer of the
original asset expires, and
(ii) The assessee shall be entitled to withdraw such amount in accordance with
the scheme.
A residential house property purchased or constructed by re- invested capital gain cannot
be transferred within 3 years of its purchase or construction.
If the house so acquired by reinvesting capital gain is sold within a period of 3 years from
the date of its purchase or construction, the previously exempted capital gain will be taxable
along with the capital gain on the sale of such house, if any, in the current previous year. In
the event of loss on sale of new house, it shall be adjusted out of old exempted capital gain
[ section 54]
Capital gain arising from the transfer of agricultural land (sec 54 B):
Any capital gain arising on the transfer of agricultural land situated in an urban
area is exempt subject to the following conditions
In case the amount of capital gain is not reinvested for the purchase of agricultural land
upto the last date of filing of return of income u/s 139 then the amount of capital gain should
30
be deposited in the capital gain deposit account scheme with a specified bank upto the
last date of filing of return. The proof of deposit is required to be attached with the return
of income of that year.
The amount deposited under this scheme must be utilized to purchase agricultural land
within 2 years from the date of transfer of agricultural land. In case amount deposited is not
utilized to purchase agricultural land within the stipulated period, than the amount which
remains unutilized shall be treated as capital gain of the previous year in which the period
of 2 years would expire.
Capital gain on compulsory acquisition of land and buildings (sec 54 D): This
exemption is available to all categories of taxpayers. To get exemption the following
conditions are to be satisfied.
1. The asset transferred is land or building or any right in land or building which
formed part of new industrial undertaking belonging to the tax payer.
3. The asset in question was used for the purpose of industrial undertaking at least
for two years immediately before the date of compulsory acquisition.
4. Assessee has purchased any other land or building with in a period of three years
from the date of receipt of compensation or constructed a building within such a
period.
If the new asset is not acquired by the due date for furnishing the return of income for the
relevant assessment year, the unutilized amount of capital gains must be deposited in a
Capital Gains Deposit Account. The cost of acquisition of the new asset is reduced by the
exemption granted from LTCG for a period of 3 years from its date of acquisition.
31
Investment in Financial Assets (Section -54 EC): This exemption is available
to all categories of taxpayers. To get exemption the following conditions are to be
satisfied.
(i) In case the capital gain arises from the transfer of a long term capital asset of land
or building or both ( to be called as the original asset) and the assessee has ,
at any time with a period of six months after the date of transfer , invested the
whole or any part of capital gains in the long term specified asset, such capital
gain shall be exempted in accordance with the following provisions of this
section:
(a) If whole of such capital gain is reinvested in the long term specified asset,
the whole of such capital gain shall be exempted.
(b) If the amount of the long term capital gain reinvested in specified asset is
less than the capital gain arising from the transfer of the original asset,
amount so invested in specified asset shall be exempted [ section 54 EC
(1)]
(ii) Where the long term specified asset is transferred or converted otherwise than by
transfer into money at any time within a period of 3 or 5 years ( If bond is
issued on or after 1-4-18 ) from the date of its acquisition , the amount of
capital gains arising from the transfer of the original asset not charged u/s 45
on the basis of the cost of such long term specified asset as provided in clause
(a) or as the case may be, clause (b) of sub section (1) shall be deemed to be
the income chargeable under the head capital gain relating to long term capital
asset of the previous year in which the long term specified asset is transferred
or converted ( Otherwise than by transfer) in to money.
In a case, where the original asset is transferred and the assessee invests the
whole or any part of the capital gain received or accrued as a result of transfer
of the original asset in any long term specified asset and such assessee takes
any loan or advance on the security of such specified asset, he shall be deemed
to have converted such specified asset into money on the date
32
(iii) The investment made on or after 1.4.2007 in the long term specified asset by an
assessee during any financial year shall not exceed fifty lakh rupees. The
investment is to be made within six months from the date of transfer of the
original capital asset. This means that exemption u/s 54EC shall be restricted
upto 50 lakhs only on investments made in the financial year in which original
asset/assets are transferred and in the subsequent financial years.
(iv) Cost in relation to long term specified asset being land or building or both, means
the amount invested in such specified asset out of capital gains received or
accruing as a result of the transfer of the original asset.
(v) Long term specified asset shall mean any bond redeemable after 5 years and
issued on or after 1st April, 2007 by the NHAI or by rural electrification
corporation limited and bonds issued after 1-4-18 by power finance corporation
limited ( Notified on 08.06.2017).
So, if land or building or both are transferred and there is a capital gain then the same can
be got exempted if the net sale considerations is re- invested within 6 months of sale in the
following bonds.
In case only a part of net sale consideration is re-invested then only the proportionate part
of capital gain shall be exempted.
33
Amount of exemption = Amount invested to purchase or construct a residential house X
Capital Gains
Net Consideration
(ii) The assessee does not own more than one residential house on the date of transfer
of the assets.
(iii) The assessee transfers above mentioned assets or assets other than a residential
building and there is a long term capital gain.
(iv) The assessee invests the net sale consideration of above mentioned assests to
construct a residential house within 3 years of the sale of the asset or purchases
an already built house within one year before or two years after the sale of the
above mentioned asset. W.e.f assessment year 2015-16 , exemption u/s 54
F shall be available if the investment is made in purchase or construction of
one residential house situated in India, subject to existing time limits.
(v) The assessee is required not to purchase another residential house within a period
of one year after or constructs within a period of 3 year after the date of
transfer of the mentioned asset/ assets.
The assessee can claim exemption u/s 54 F , in such a manner, which is most beneficial to
him. In this context, he has two options:
(i) He may calculate the exemption u/s 54 F for each asset separately and then compare
the most beneficial alternative or
(ii) He may calculate the exemption in following manner and then choose the beneficial
alternative
34
(b) Calculate percentage of LTCG to net consideration
(c) Allow exemption u/s 54 F out of LTCG of that asset whose percentage is
highest.
(d) If amount invested in house is more than net consideration of one asset, the
balance investment is to be taken up out of that asset whose percentage is
next highest and so on.
w.e.f assessment year 2018-19, if house property acquired after getting examples u/s 54
F is transferred after 2 years but before 3 years, capital gain so arising shall be long term
capital gain and the benefit of indexation shall also be available.
W.e.f assessment year 2006-07, this exemption has been introduced to encourage industrial
undertaking situated in an urban area to shift to a special economic zone. This exemption
is expected to help those industrial undertaking which may shift their premises from an
urban area to a special economic zone.
1. There is a transfer of assets like land and building or any right in land and
building , plant and machinery of an industrial undertaking situated in an urban
area.
2. The above mentioned transfer has been made with the intention of shifting of
an industrial undertaking from an urban area to a special economic zone.
This means that the assessee has bought land or acquired or constructed a building ,
purchased plant and machinery or has shifted the original assets and has transferred
the establishment from an urban area to a special economic zone within the time frame
35
of one year before and 3 years after the date on which the above mentioned transfer
took place.
Amount of exemption
(b) Amount spent on the purchase, construction, etc of new assets in a SEZ within
specified time frame.
New assets acquired by invested the amount of capital gain are not supposed to be
transferred within 3 years from the date of their purchase, construction, etc. and if transferred
exemption allowed earlier u/s 54 GA Shall be withdrawn and so capital gain arising from
such transfer and capital gain got exempted earlier, both will be taxed in the year in which
transferred.
Illustrations
Illustration 1: Mr. ghosh sold a house on 1-09- 2018 for Rs 15,00,000. The house
was inherited by him during 2001-02 from his father who had constructed it in 1991-92
for Rs 50,000. Mr. ghosh spent Rs 50,000 on renovation of the house in 2006-07. Fair
market value of the house as on 1-04-2001 was Rs 450,000. This house was under
negotiations for sale in May, 2010 and he received Rs 20,000 as advance money. The
contract could not materialize and the advance money was forfeited. Compute the amount
of capital gain assuming that he does not qualify for examination. [ C.II for 2001-02 =
100; 2006-07 = 122; 2010-11 = 167 & 2018-19 = 280]
Note: Advance money forfeited has been deducted from cost of acquisition as advance
was received and forfeited prior to 1-04-2014 i.e. , during the previous year 2013-14
Solution 2:
(a) Calculation of taxable capital gain of Mr. A for assessment year 2019-20
Full value of consideration Rs 20,00,000
Less: Expenses on transfer NIL
Net consideration 20,00,000
Less: Indexed cost of acquisition
Cost in 2001-02 500,000
Less: Advance forfeited in 2005-06 50,000
[450,000 x 280/100] 450,000 12,60,000
Indexed cost of improvement NIL 12,60,000
Taxable LTCG 740,000
Note: Advance money forfeited has been deducted from cost of acquisition as it was
forfeited prior to 1-4-2014.
(b) Calculation of taxable capital gain for the assessment year 2019-20
Full consideration value Rs 20,00,000
Less: expenses on sale NIL
Net consideration 20,00,000
Less: Indexed cost of acquisition
Cost in 2001-02 Rs 500,000 [ 500,000 x 280 /100] 14,00,000
Taxable LTCG 600,000
(c) Calculation of taxable capital gain for the assessment year 2019-20
Full value of consideration Rs 20,00,000
Less: expenses on sale NIL
Net consideration 20,00,000
37
Less: Indexed cost of acquisition
Illustration 3: Find out taxable capital gain from the particulars given below:
Net consideration of a residential house Rs 10 lakh ( 2-06-18) [ C II = 280]
Cost of acquisition of this house Rs 210,000 ( 1-05-07) [ CII = 129]
New house acquired on 1-9-18 for 200,000
Solution 3:
Computation of capital gain
Net consideration Rs 10,00,000
Less : Cost ( indexed 210,000 x 280/129) 455,814
Long term capital gain 544,186
Less: Exempted u/s 54 (1)
Cost of new house 200,000
Taxable long term capital gain 344,186
Illustration 4 : Mr. Rehman purchased a house on 1-11-2001 for Rs 200,000 and its
was improved in 2010-11 at a cost of Rs 100,000. What will be indexed cost during
2018-19 if CII for 2001-02 is 100 , for 2010-11 is 167 and for 2018-19 = 280
Solution 4:
38
Illustration 5: Find out indexed cost and capital gain in the following cases:
(a) WDV of office furniture as on 1-4-18 Rs 18,000 ( Which was purchased on
15-9-08 for Rs 20,000 and sold on 1-9-18 [ CII = 280] for Rs 26,000)
(b) Bonds purchased on 1-11- 06 [ CII = 122] for 260,000 were sold on 1-1-19 [
CII = 280] for Rs 400,000
(c) Cost of acquisition of house in mumbai in 1996-97 Rs 100,000
Cost of improvement made in 1999-00 Rs 50,000
FMV on 1-4-01 [ CII = 100] Rs 400,000
Cost of additions made in 2008-09 [ CII = 137] Rs 320,000
Sale price of the house on 1-11- 18 [ CII = 280] Rs 28,60,000
Expenses on sale Rs 60,000
(a) Mr. Mohan inherited a house at Jammu from his father Mr. Rohit on 1-1- 2006 [
CII = 117]. The house was acquired by Mr. Rohit in 1989-90 for Rs 60,000 and its
FMV at on 1-4-2001 was Rs 520,000 and its was sold in 2018-19 [ CII = 280] for
13,50,000
Solution 5: Computation of Capital gain
(a) STCG
Sale price Rs 26,000
Less: WDV as on date Rs 18,000
STCG Rs 8,000
(b) LTCG
Sale price Rs 400,000
Less: Cost price [ no indexing ] Rs 260,000
LTCG Rs 140,000
(c) LTCG
Sale price Rs 28,60,000
Less : Expenses on sale Rs 60,000
Net consideration Rs 28,00,000
Less:
Indexed cost [ 460,000 x 280/100] 12,88,000
Indexed cost of additions [ 320,000 x 280/137] 654,015 Rs 19,42,015
39
LTCG Rs 857,985
(d) LTCG
Sale price Rs 13,50,000
Less: expenses on sale NIL
Net consideration Rs 13,50,000
Less: Indexed cost [ 520,000 x 280 / 117] Rs 12,44,444
LTCG Rs 105,556
Illustration 6 : Mr. Avtar Singh purchased a plot in 2002-03 for Rs 400,000 and it was
sold on 15-1-19 for Rs 14,80,000 . He paid Rs 20,000 as brokerage charges. He
invested Rs 200,000 in bonds issued by NHAI on 31-3-19 and Rs 310,000 in Bonds
issued by Rural electrification corporation on 1-6- 2019 ( Both notified u/s 54 EC)
Compute the taxable amount of capital gain if CII for 2002-03 is 105 and for 2018-19
is 280.
Solution 6 : Computation of Taxable capital gain
Investment 393,333
LTCG NIL
40
Illustration 7: Mr. X provides the following information regarding the transaction for the
sale of residential house during the assessment year 2019-20
House purchased in 1988 for Rs 150,000
FMV on 1-4-01 [ CII = 100] Rs 620,000
Sold in oct, 2018 [ CII = 280] Rs 28,00,000
Amount invested in purchase of another house in April , 2018 Rs 800,000.
Find out Taxable Capital gain
Solution 7:
Computation of capital gain
Sale price of house / Net consideration Rs 28,00,000
Less: Indexed FMV [ 620,000 x 280/100] 17,36,000
LTCG 10,64,000
Less: Exemption u/s 54
Amount invested in new house within 2 years after sale 800,000
Taxable 264,000
Illustration 8: Mr. Z acquired a plot of land on 30-6-2006 [ CII = 122] for Rs 750,000
and spent Rs 28,500 on its registration and brokerage ,etc. This plot was sold for Rs
21,00,000 on 30-6-2018 [ CII = 280]. He had purchased a house for Rs 400,000 on
1-8-2017 for his own residence. He had paid Rs 5,000 as ground rent of plot held by
him. Compute the amount of taxable capital gain for the assessment year 2018-19.
Solution 8:
Computation of capital gain
Sale price of plot on 30-6-18 21,00,000
Less:
Indexed cost [ 750,000 + 28,500]
778,500 x 280 / 122 17,86,721
LTCG 313,279
Less: Exemption u/s 54 F
Amount invested in new house within 1 year before sale
[ 313,279 x 400,000 /21,00,000] 59,672
41
1.13 INCOME FROM OTHER SOURCE
“Income from other sources” is the fifth and last head of income included while computing
the gross total income of an assessee. Under the Income Tax act, income of every kind
which is not to be excluded from the total income shall be chargeable to income tax under
the head ‘Income from other sources’, if it is not chargeable to income tax under any of the
other heads of income. Thus, income from other sources is a residuary head of income i.e.
income not chargeable under any other head is chargeable to tax under this head. All
income other than income from salary, house property, business and profession or capital
gains is covered under ‘Income from other sources’
Section 56, 57, 58 and 59 of the Income Tax Act deal with the computation of income
under this head.
According to section 56 (1), every kind of income which is included in the total income
under this Act and which is not charged to tax under any first four heads specified in
section 14 is chargeable to income-tax under the head “ Income from Other Sources”.
42
6) Remuneration received for being as a director, not as employee.
7) Income received from a person other than the employer like University remuneration.
12) Tips received by a waiter or taxi driver not from their employer.
13) Any amount or pension received from LIC or other insurer under section 80CCC.
20) Commission received by a director for under righting the shares of a new company.
1) Any winning from lotteries, crossword puzzles, races including horse races, car
games or any other games or from gambling or betting of any form or natural.
3) Income from plant, machinery or furniture let on hire, provided such income is not
charged to tax under the head ‘profits and Gains of Business or Profession’.
4) Any sum received by the assessee from his employees as contribution to any
provident fund or superannuation fund or any fund set up under provisions of the
Employees State Insurance Act 1948, o from any other fund from the welfare of
43
such employees, provided such income is not charged to tax under the head ‘Profits
and Gains of Business or Profession’.
5) Income received in the form of interest on securities, provided such income is not
charged to tax under the head ‘Profits and Gains of Business or Profession.
6) Income from let-out of building along with plant, machinery or furniture and letout
of building is inseparable from such plant, machinery or furniture, provided income
from such let-out is not charged to tax under the head ‘Profits and Gains from
Business or Profession’.
7) Any sum or bonus received from key man insurance policy if such sum is not
chargeable to tax as salary or bonus income.
10) Any consideration received by a closely held company for the issue of shares that
exceeded the face value of such shares.
11) Any sum received as an advance or otherwise in the course of negotiation for the
transfer of a capital asset and such amount is forfeited due to non transfer of such
capital asset.
12) If a firm or closely held company receives any property in the form of shares of
a closely held company in any previous from any person:
a) Without any consideration, the aggregate fair market value of which exceeds
Rs.50,000, such aggregate fair market value of shares shall be taxable under
the head ‘Income from Other Sources’.
b) For a consideration which is less than the fair market value of such shares by
an amount exceeding Rs. 50000, the excess of aggregate fair market value of such
44
shares over such consideration shall be taxable under the head ‘Income
from Other Sources’.
a) Any sum of money received by an individual or HUF from any person without
consideration exceeds Rs.50000 in aggregate during the previous year, whole of
such amount shall be chargeable to tax under the head ‘Income from other sources’.
b) Immovable property:
(i)- Any immovable property received by an individual or HUF from any person
without any consideration having stamp duty exceeding Rs.50000, the stamp duty
value shall be taxable under the head ‘Income from other sources’.
The income from interest on securities shall be chargeable to tax under income from other
sources, if it is not taxable under the head income from business or profession. The following
amounts due to an assessee in the previous year shall be chargeable to income tax as
interest on securities.
45
1. Interest on any security of the central or state govts.
What is interest
Interest in the return which a person receives from another person for bearing the risk of
parting with the money and losing the income which he would have received on such
money had he deposited it in a bank. It simply means the return received by a creditor who
has given his money as debt.
What is securtity
A security is a document acknowledging the debt taken by a specific authority from general
public . It may be named as debt or loan or paper or debenture or security or certificate.
It is secured in some manner.
Content of security
It contains face value of security , date of maturity, rate of interest, date , place and period
of payment of interest, etc. These are transferable.
- A state government
- A local authority
- A company
- A statutory corporation
Taxability of interest
Any interest which accrues after a fixed period as mentioned on the face of the
security itself. In India, generally, interest accrues after a period of 6 months.
46
Any interest which accrues to a person during the previous year is added in his
gross total interest.
Interest accrues on the name of the person on whose name securities stand on
the date of accrual of interest. It is immaterial that he purchased these securities
a few days earlier than the date of accrual of interest. He has to include full
interest in his gross total income.
Deduction of Tax at source. It is the duty of the security issuing authority to deduct tax at
source before making the payment of interest on securities at the prescribed rate. Rates in
force means the rate or rates specified for the purpose of deduction by finance act of the
year in which deduction is to be made. The tax deducted at source will be deposited in the
government treasury on behalf of the security holder. The security holder account is credited
with the amount and while paying the tax on the total income the amount deducted at
source will be deducted.
However, in the case of the following securities tax is not deducted at source:
(i) Interest payable on 4 ¼ % national defence bonds, 1972 where the bonds are
held by an individual , not being a non- resident or
(v) Debentures issued by any co- operative society or any other institution notified
by the central government or
47
(vi) 6 ½ % gold bonds, 1977 or 7 % gold bonds, 1980 where the bonds are held
by an individual , not being a non- resident and the holder thereof makes a
declaration in writing before, the person responsible for paying the interest
that the total nominal value of gold bonds held by him did not exceed Rs
10,000 at any time during the period to which the interest relates or
(vii) No tax will be deducted at source from any security issued by central government
or a state government
(viii) No tax will be deducted at source if interest on term deposit with a bank does
not exceed Rs 10,000 in a previous year.
48
10. 10-years 9% (Tax free) secured redeemable non-convertible NTPC bonds-
IV issue (private placement).
11. 10-years 9% (Tax free) secured redeemable non-convertible REC bonds issued
by the Rural Electrification Corporation Ltd.
1) Political parties.
2) A local authority.
7) A non-resident of Indian origin and securities and bonds were issued before
June 1, 2002.
1. Tax free government securities: The interest on these securities is fully exempt from
tax. The interest on such securities is neither included in total income nor taxed.
2. Less tax government securities: These securities are issued by central govt or state
government. These securities are taxable securities. But no tax is deducted at source on
such securities. Therefore the interest on such securities will not be grossed up.
49
3. Tax free commercial securities: These securities are issued by local authority or
Statuary Corporation or a company in the form of debentures or bonds. Actually the
interest is not tax free. Income tax due on this interest is payable by the company or
authority or Statuary Corporation. These are called tax free because the assessee is not
required to pay tax on it. The interest due to an assessee is grossed up and this grossed up
amount is included in the total income.
4. Less tax commercial securities: These are taxable securities. In this case income tax
is deducted at source on the amount of interest calculated at the percentage stated on the
securities. In this type of securities, if the net amount of interest is given, it has got to be
grossed up. If the rate of percentage of interest is given it is not grossed up.
The taxable income under the head income from other sources shall be computed after
allowing the following deductions as provided in section 57:
50
3. Deduction in respect of employee’s contribution in staff welfare schemens [
57 (ia)]. Any amount received by employer from his employees as their
contribution of provident fund, ESI Fund or superannuation fund is deemed
as income u/s 59 (ic) if not taxable under the head profits and gains of business
or profession.
In case employer deposits any amount out of these incomes in these funds
before prescribed due date, such amount is allowed as deduction u/s 57 (ia).
5. Deduction from any other income [ Section 57 (iii)]. Any expenditure which
is spent to earn an income changeable to tax under this head shall be deducted
from such income.
(i) The expenditure should be incurred solely for earning such income
6. Deduction from royalities received by authors: Other than those writing for
films- Actual expenses can be claimed as deduction.
51
Amount expressly disallowed [ Section 58]
The following expenses are not allowed to be deducted from such income:
(ii) Any interest chargeable under this act which is payable outside India on
which tax has not been paid or deducted at source.
(iii) Any payment which is chargeable under the head salaries if it is payable
outside India unless tax has been paid or deducted at source.
(iv) In case an assessee has income from lotteries, crossword puzzles, races
including horse races, card games and other games of any sort or from
gambling or betting of any form or nature whatsoever, such assessee shall
not be allowed any deduction in respect of any expenditure or allowance
in connection with such incomes.
In case of every assessee any payment to relatives and associates made in cash may be
disallowed under section 40 A in certain circumstances. The provisions of section 40 A are
made applicable under this head also by sub section 2 of section 58.
Under section 59 (i) the provisions of sub section (1) of section 41 have been made
applicable in computing the income of an assessee under section 56 as they are applicable
in computing the income under the head profits and gains of business or profession.
This provision deals with any allowance or deduction which has been allowed under this
head in the assessment of income in any earlier year in respect of any expenditure , loss or
trading liability incurred by the assessee subsequently during any previous year, the same
amount is received or recovered in cash or in any other manner shall be deemed to be the
income of that previous year in which it is recovered irrespective of the fact whether the
source of income continues to exist in that year or not.
52
1. In case a person sells his securities to another person a few days before the accrual
of interest and purchases them back after the date of accrual, and assessing office
is satisfied that the transaction has been made with intention of avoiding tax, such
interest shall be deemed as income of the transferor and not transferee [ Section
94 (1)]
2. In case a person has any beneficial interest in any securities and as a result of some
arrangement either no income is received by such person or the income received
by him is lower than the amount which he would have received, the interest, which
would have accured on such securities had there been no such arrangement, would
be included in the income of person making such arrangement.[ section 94 (2)]
3. The above provisions will not be applicable , if such person proves to the satisfaction
of the assessing officer that the transaction has not resulted into any avoidance of
tax or if at all there was some avoidance it was exceptional as there had not been
any avoidance of tax in any of three preceeding previous years [ section 94 (3)]
5. The assessing officer may direct any person to furnish a detail of securities held by
him by serving upon him a notice for not less than 28 days [ section 94 (5)]
TDS rates
3. Unlisted debentures 10 %
4. Bank interest 10 %
5. Casual incomes 30 %
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No TDS
5. Interest paid to an individual and HUF in account payee cheque for an amount not
exceeding Rs 5,000 by certain companies
1.16 SUMMARY
Any income arising from the transfer of a capital asset in the relevant previous year shall be
chargeable to income tax under the head ‘Capital Gains’ and shall be deemed to be the
income of the previous year in which transfer of asset takes place.It means tax is to be
levied on any profit or gain occurring on the transfer of a capital asset. The term capital
assets includes all types of properties, whether tangible or intangible, movable or immovable,
fixed or floating. Further two types of capital assets are there: Short term capital assets
and long term capital assets. If the assessee holds the capital asset up to 36 months, then
asset is considered as long term whereas, if the assessee holds the capital asset up to less
than 26 months, then asset is considered as short term.The gain from capital asset arises
only on its transfer. If the asset transferred is not a capital asset, then no capital gain shall
arise. The transfer includes, sale, exchange or relinquishment of the capital assets; or the
extinguishment of any rights therein; or the compulsory acquisition thereof under any law.
In other words long and short term gains arise only when there is transfer of an asset. Any
capital gain arising as a result of transfer of a short-term capital asset is known as short-term
capital gain whereas any gain arising as a result of transfer of long-term capital asset is
known as long term capital gain. In addition, the value for which the asset was acquired by
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the assessee is known as the cost of acquisition. In other words Cost of Acquisition (COA)
means any capital expense at the time of acquiring capital asset under transfer, i.e., to
include the purchase price, expenses incurred up to acquiring date in the form of registration,
storage etc. expenses incurred on completing transfer. Expenses of capital nature for
completing or acquiring the title are included in the cost of acquisition. Further if the assessee
makes any addition or improvement in the capital asset as an addition over and above the
cost of acquisition such cost or capital expenditure is termed as Cost of improvement. It
also includes any expenditure incurred in protecting or curing the title. In other words, cost
of improvement includes all those expenditures, which are incurred to increase the value of
the capital asset. The assessee has been provided the opportunity by the Act to avail tax
deduction arising out of capital gains by way of many specific sections.Under Sections
54, 54B, 54D, 54EC, 54F, 54G and 54H of the Act, capital gains arising from the transfer
of certain capital assets are exempt from tax under certain circumstances.
Under the Income Tax act, income of every kind which is not to be excluded from the total
income shall be chargeable to income tax under the head ‘Income from other sources’, if
it is not chargeable to income tax under any of the other heads of income. Thus, income
from other sources is a residuary head of income i.e. income not chargeable under any
other head is chargeable to tax under this head. All income other than income from salary,
house property, business and profession or capital gains is covered under ‘Income from
other sources’. Two types of income are included in this head, General Incomes covered
under section 56(1), and Specific Incomes covered under section 56(2).
Lastly we have discussed some issues related interest on securities. The income from
interest on securities shall be chargeable to tax under income from other sources, if it is not
taxable under the head income from business or profession. The following amounts due to
an assessee in the previous year shall be chargeable to income tax as interest on
securities.Interest on any security of the central or state govts, Interest on debentures or
other securities issued by a local authority, Interest on debentures issued by a company
(whether Indian or foreign), Interest on debentures or other securities issued by statutory
corporation. Interest on Securities is exempted from Tax. U/S 10(15).
ILLUSTRATION 1
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a) Rs 9000 10% (tax-free) Debentures of a listed company (rate of TDS 10%)
Compute his income from interest on securities for the year ending 31-3-2019.
SOLUTION
Rs
ILLUSTRATION 2
SOLUTION
56
Income Rs Rs
Gifts Received
iv) Received 80000 as gift from his NRI friend on 1.1.2019 80000
Illustration 3 : Mr. Mukundu furnishes the following information about his income for the
previous year 2018-19 . Compute his income under the head other sources
Income from letting on hire of building and machinery under composite lease Rs 17,000
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The following deductions are claimed by him:
Solution 3:
Less: expenses:
Depreciation 4,000
Illustration 4 : Compute income from other sources of Mr. Krishna Murthy who held the
following investments during the previous year 2018-19
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Rs 36,000, 10 % tax free commercial securities of a closely held company
Rs 6,300 received as interest on tax free public limited company securities ( Listed)
During the year, he also got a prize in karnatka state lottery . The net amount received by
him was Rs 35,000 . Interest on all securities is payable on 1ST January every year. Bank
charged Rs 200 as collection charges.
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Winning from lottery [ 35,000 x 100 /70] 82,700
Gross income 200
Less: Deduction of collection charges 82,500
Income from other sources
1.17GLOSSARY
Sections 45 to 55A of the Income-tax Act, 1961 deal with capital gains. Section
45 of the Act, provides that any profits or gains arising from the transfer of a
capital asset effected in the previous year shall, save as otherwise provided in
Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, 54GA and 54H be chargeable
to income-tax under the head “Capital Gains” and shall be deemed to be the
income of the previous year in which the transfer took place.
Section 2(14) of the Income-tax Act defines the term “capital asset” to means
Property of any kind held by an assessee whether or not connected with his business
or profession but does not include any stock-in-trade, personal effects , agricultural
land in India, 6½ per cent Gold Bonds, Special Bearer Bonds , Gold Deposit
Bonds.
The essential requirement for the incidence of tax on capital gains is the transfer of
a ‘capital asset’.· Any capital gain arising as a result of transfer of a short-term
capital asset is known as short-term capital gain. “Short term” capital asset means
a capital asset held by an assessee for not more than thirty-six months immediately
preceding the date of its transfer. In the case of capital assets (being equity or
preference share in a company) held by an assessee for not more than 12 months
immediately prior to its transfer.
Assets other than short-term capital assets are known as ‘long-term capital assets’
and the gains arising therefrom are known as ‘long-term capital gains’. Section 48
of the Act provides that the income chargeable under the head ‘capital gains’ shall
be computed by deducting from the full value of consideration received or accruing
as a result of the transfer of the capital asset the f amount of expenditure incurred
wholly and exclusively in connection with such transfer and the cost of acquisition
of the capital asset and the cost of any improvement thereto.
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‘Cost of acquisition’ of goodwill of a business or a right to manufacture, produce
or process any article or thing, tenancy rights, stage carriage permits or loom
hours is in the case of acquisition ofsuch asset by the assessee by purchase from a
previous owner, cost of acquisition means the amount of the purchase price; and
in any other case cost of acquisition shall be Nil.
Under Sections 54, 54B, 54D, 54EC, 54F, 54G and 54H of the Act, capital gains
arising from the transfer of certain capital assets are exempt from tax under certain
circumstances.
Income chargeable under Income-tax Act, which does not specifically fall for
assessment under any of the heads discussed earlier, must be charged to tax as
“income from other sources”.
Section 56(2) specifically provides for the certain items of incomes as being
chargeable to tax under the head such as Dividend, Keyman Insurance policy,
Winnings from lotteries, Contribution to Provident fund, Income by way of interest
on securities, Income from hiring machinery etc,Hiring out of building with machinery,
Money Gifts, Share premiums in excess of the fair market value to be treated as
income, income by way of interest received on compensation.
Admissible Deductions : The income chargeable under the head “Income from
other sources” is the income after making the deductions such as
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deduction shall be allowable in accordance with the provisions of Section
36(1)(va), i.e., if the employer has credited the employee’s accounts in the
respective funds;
any other expenditure (not being in the nature of capital expenditure) laid out
or expended whollyand exclusively for the purpose of making or earning such
income.
Any interest chargeable under the Income-tax Act which is payable outside
India and from which income-tax has not been paid or deducted at source.
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2. Difference between Long-term Capital Gain and Short –Term Capital Gain .
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3. Explain with the help of suitable illustration how capital gains are computed under
section 45(2) in case of conversion of capital asset into stock-in-trade.
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5. What are the incomes chargeable under the head “Income from other sources”?
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6. What deductions are allowed under the head “Income from other sources”?
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7. What are ‘capital assets’? What items are not included in capital assets?
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8. Explain the deduction given in respect of certain incomes.
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9. Explain Specific Income. What are the items to be included under general and
Specific Income?
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1. Dr. V.K. Singhania: Students Guide to Income-tax; Taxmann Publications Pvt. Ltd.,
New Delhi.
2. Girish Ahuja and Ravi Gupta: Systematic Approach to Income-tax and Sales-tax; Bharat
Law House, New Delhi.
3. Dr. H.C Meharotra and Dr S. P Goyal: Income Tax Law and Accounts; Sahitya Bhavan
Publications.
4. V. P Gaur & D. B Narang: Income Tax Law & Practice; Kalyani Publishers.
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5. V. K Singhania & Kapil Singhania: Direct Taxes Law & Practices; Taxman Publications.
6. Mahesh Chandra, D. C Shukla, K. A Mahajan & M. A Shah: Income Tax Law &
Practices; pragati Publication, New Delhi.
7. Arvind Tuli & Dr. Neeru Chadda: Conceptual Clarity on Income Tax and Wealth Tax;
Kalyani Publication, New Delhi.
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C. No. : - BCG-402 UNIT II
STRUCTURE:
2.1 Introduction
2.2 Objective
2.4Aggregation of Income
2.4.2 Income received from firm assessed as firm and Association of Persons (Section
66 & 67).
2.6 Summary
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2.7 Glossary
2.1 INTRODUCTION
This lesson discusses the provisions for set-off and carry forward of losses. Sometimes
the assessee incurs a loss from a source of income and unless such loss is set-off against
any income, the net result of the assessee’s activities during the particular accounting year
cannot be ascertained and consequently the tax payable would also be incapable of
determination. For this purpose, the Income-tax Act contains specific provisions (Sections
70 to 79) for the set-off and carryforward of losses.
This lesson also discusses the deductions from gross total income. The deductions are
available only to the assessees where the gross total income is positive. If however, the
gross total income is nil or negative, the question of any deduction from the gross total
income does not arise. For this purpose, the expression ‘gross total income’ means the
total income of the assessee computed in accordance with the provisions of the Income-
tax Act before making any deduction under Chapter VIA. The aggregate of income
computed under each head, after giving effect to the provisions for clubbing of income and
set off of losses, is known as “Gross Total Income”. Sections 80A to 80U of the Income-
tax Act lay down the provisions relating to the deductions allowable to assessees from
their gross total income. The income arises after deduction under section 80C to 80U is
called Total Income.
2.2 OBJECTIVES
What are the provisions of set off/carry forward and set off of losses
The conditions to be satisfied for carry forward and set off of loss from house
property, business lossand unabsorbed depreciation.
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· Up to what period the loss can be carried forward and set-off.
· What are the deductions allowable in the case of a person with disability.
Income tax is levied on the total income of previous year of an assessee. Hence it is
necessary to ascertain the total income by aggregating the income of different heads. An
assessee may have both positive income and negative income (loss). The department of
income tax have given relief to assessees that if there is loss from one head of income it can
be set off from other heads of income. But if a loss cannot be set off in the same assessment
year it can be forward and set off in future against income of that year. Therefore the topic
is divided into two headings namely: i) set-off of losses; and ii) carry forward and set off
losses. So when the income of the different sources is put together the loss one source is
to be adjusted against the income of other two sources. It is therefore, follows that where
the net results in respect of any source is a negative figure, it can be set off against a
positive figure in respect of another source of income under the same head of income.
Similarly, when the income of all heads is aggregated, the loss under one head is set off
against the income of another head and if at all the total result in loss, the same in carried
forward over future years for setting out.
Sections 70 -79 of income tax act deals with the provisions regarding set off and carry
forward and set off losses. All these provisions are divided under following two headings.
A loss can be set-off primarily within the same head and if it still remains unadjusted it can
be set off from other heads of income. It has been divided into following two types:
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1. Set-off of loss from one source against income from another source within the
same head of income. [Section 70].
The general rule is that loss from one source can be set-off from another source falling
under the same head of income. The income under one head is computed by adding
together the incomes from different sources which falls under the same head. Section 70
of the income tax reveals that the loss of one source is adjusted against the income of
another source falling under the same head of income. Suppose the assessee is running
two three different businesses and the income of the head is calculated by combining
different sources. So it is automatic that if there is loss under one source, the same is
adjusted or set off against the available income under other sources in the same head of
income For example, an assessee is running two businesses A and B. There is a profit of
Rs 200,000 in business A whereas there is a loss of Rs. 100,000 in business B. The
assessee can setoff loss from business B with the income of business A and his total
income will be Rs 100,000. However there are six exceptions to the rule that a loss can
be set-off against any other income under the same head.
Loss from speculation business cannot be set off against income from other sources.[
Section 73 (1)] This loss can be set off only against income from another speculation
business. It cannot be set off against any non- speculation business income . However,
non-speculation business loss can also be set off against speculation business income.
Loss in trading in derivates is to be treated as non- speculation business loss and not as
speculation loss.
The business of purchase and sale of shares not be treated as speculation business[
explanation to section 73] [ w.e.f A.Y 2015-16]
The business of purchase and sale of shares carried on by a company shall not be
deemed as a speculation business, if the principal business of such company is the business
of trading in shares.
Loss of specified business under section 35AD cannot be set off against income from
other business. This loss can be set off only against income from other specified business.
For example, business of cold chain facility, warehousing business for storage of agricultural
produce,etc. it cannot be set off against income from any other business. [ section 73 A
(1)]
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Long term capital loss cannot be set off against short term capital gain. This loss can be
set off only against long term capital gain. This loss cannot be set off from short term
capital gain. However, short term capital loss shall be allowed to be adjusted out of long
term as well as short term capital gain.
Loss from the activity of owning and maintaining race horses shall be set off against
income from owning and maintaining race horses only and not against any other income
under the head other sources.This means that loss from the activity of owning and maintaining
race horses cannot be set off against any other income falling under the head other sources.
Loss in respect of casual income falling under section 56(2)(ib), viz, lottery, gambling,
betting, winning from races (including horse races) cannot be set-off against any income
falling under head other sources. In fact, such a loss can’t be setoff at all.
Loss from an exempted source can’t be set-off from a source of income which is taxable.
For example, agriculture income can’t be set-off from non-agriculture income.
- No set off of loss against deemed incomes referred to in sections 68,69 , 69 A , 69B,
69C or 69D [ Amendments to Section 115 BBE (2)] [ w.e.f A.Y 2017-18]
Set off of any loss shall also be not allowable in respect of income under the aforesaid
sections.
2. Set-off of loss of one head against the income of another head in the same
assessment year, i.e., inter-head set-off [Section 71]:
The general rule is that loss under one head of income can be adjusted against income
under another head. However, there are certain exceptions to this rule as:
Where the net result of the computation under any head of income (other than ‘Capital
Gains’) is a loss, the assessee can set-off such loss against his income assessable for that
assessment year under any other head, including ‘Capital Gains’. If any capital loss or part
of a loss remains unadjusted then such loss shall be allowed to be carry forward to be set
off out of income under the head capital gains only in future years.
Long term capital gains on sale of long term asset of shares on which STT has been paid
exempt from tax u/s 10 (38) , hence long term capital loss on sale of such shares cannot be
set off out of any other long term capital gain and so such loss is to be ignored.
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Where the net result of the computation under the head “Profits and gains of business or
profession” is a loss, such loss cannot be set off against income under the head “Salaries”.
The assessee shall not be entitled to have such loss set off against such income. It simply
means that loss under the head profits and gains of business or profession cannot be set
off from income under the head salaries.[ Section 71 (2A)]
Where the net result of computation under the head ‘Capital Gains’ is a loss, such capital
loss cannot be set-off against income under any other head.
Speculation loss and loss from the activity of owning and maintaining race horses cannot
be set off against income under any other head.
- loss from a source whose income is exempted: If a person has loss from a source of
income which is exempted under any provision of this act, such loss cannot be set off out
of taxable income if any other head.
- share of loss from Firm/AOP: Share of loss from a firm assessed u/s 184 or 185 from an
association of person cannot be set off from the individual income of partners/ members.
- No Set off of loss against deemed incomes referred to in sections 68, 69, 69 A , 69B ,
69 C or 69 D [ Amendment to Section 115BBE (2)] [ w.e.f A.Y 2017-18] : Set off of any
loss shall also be not allowable in respect of incomes under the aforesaid sections.
If it is not possible to set off the losses during the same assessment year in which they
occurred, so much of the loss as the assessee has not been able to set off out of the
following losses can be carried forward for being set off against his income in the succeeding
years provided the losses have been determined in pursuance of a return filed by the
assessee within the time allowed and it is the same assessee who sustained the loss.
Loss under the head income form house property[ Section 71 B ]: Any loss under
this head can be carried forward up to 8 assessment years immediately following the
assessment year for which the loss was first computed and set off from the same head. Up
to assessment year 1998-99, loss under the head house property was not allowed to be
carried forward to future assessment years and hence section 71 B is not applicable on
house property loss prior to assessment year 1999-2000. Thus, loss under the head house
property can be carried forward even if the return if such loss is not filed on or before due
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date. However, for carry forward of other losses, return of loss is required to be filed on or
before due date.
Loss of speculation business[ Section 73]: Any speculation business loss can be
carried forward up to 4 assessment years immediately following the assessment year for
which the loss was first computed and set off against the profit of any speculation business
carried on by assessee.
Short term capital loss or long term capital loss[ Section 74]: Any loss under this
can be carried forward up to 8 assessment years immediately following the assessment
year for which the loss was first computed. Mode of set-off: A brought forward long term
capital loss can be set-off against long term capital gain while as brought forward short
term capital loss can be set off against any capital gain.
Loss from activity of owning and maintaining race horses[ Section 74 A]: such
loss can be carried forward up to 4 assessment years and can be set off against income
from owning and maintaining of horses.
With effect from AY 2003-04, unadjusted depreciation can be carried forward till it is fully
adjusted from any income during the succeeding previous years. It shall be treated as
depreciation of succeeding previous years. In case there is carry forward business loss as
well as carry forward unabsorbed depreciation, then the following order should be followed
for set off
Firstly current depreciation secondly brought forward business loss and thirdly
brought forward unabsorbed depreciation.
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2.4 AGGREGATION OF INCOME
Clubbing of income means Income of other person included in assesse’s total income,
for example: Income of husband which is shown to be the income of his wife is clubbed in
the income of Husband and is taxable in the hands of the husband. Under the Income Tax
Act a person has to pay taxes on his income. A person cannot transfer his income or an
asset which is his one of source of his income to some other person or in other words we
can say that a person cannot divert his income to any other person and says that it is not his
income. If he do so the income shown to be earned by any other person is included in the
assessee’s total income and the assessee has to pay tax on it. Inclusion of other’s Incomes
in the income of the assessee is called Clubbing of Income and the income which is so
included is called Deemed Income. It is as per the provisions contained in Sections 60 to
64 of the Income Tax Act. For example: A purchased a house property in the name of his
wife B. A let out this house property. The rental income earned by A in name of his wife B
is taxable in the hands of A.
While aggregating the income of an assessee,following are also included in the total income:
(ii) Income received from firm assessed as firm and Association of Persons(Section 66 &
67).
Section 60-65 deal with such cases where a particular income is earned or received by
another person and does not belong to the assessee but for Income-Tax purposes, such
incomes are included in the total income of the assessee.
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case, although rent will be received by his wife yet it shall be included in the income of rahul
i.e., transferor of income.
2. Revocable transfer of Asset[Section 61]: If any person transfers any asset to any
other person in such form and condition that such transfer is revocable at any time during
the lifetime of the transferee , the income earned through such asset is chargeable to tax as
the income of the transferor. Section 63 has defined the words “transfer” and “recovable
transfer” as under:
(i) It contains any provision for the re-transfer directly or indirectly of the whole or any
part of the income or assets of the transferor, or
(ii) It, in any way, gives the transferor a right to reassume power directly or indirectly over
the whole or any part of the income or assets.
(c) Specified revocable transfers excluded from clubbing provisions [ section 62 (1)] .
The provisions of section 61 shall not be applicable in the case of following revocable
transfers
(i) If the transfer is by way of trust which is not revocable during the life time of the
beneficiary or
(ii) If transfer is otherwise than by way of trust and is not revocable during the life time of
the transferee or
(iii) If transfer is made before the 1st day of April, 1961 , which is not revocable for a
period exceeding 6 years
For ex. X transfers a house property to A. However, X has right to revoke the transfer
during the life time of A . It is a revocable transfer and income arising from the house
property is taxable in the hands of X.
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has *substantial interest. This provision has an exception. The income to the spouse may
be by way of salary, bonus , commission, fee or any other remuneration.
However, if above income derived by the employed spouse from such concern is due to
his/ her knowledge , technical qualification or professional qualification or work experience,
etc, it shall not be clubbed with the income of the spouse holding substantial interest . In
other words, the income shall be taxable in the hands of the employed spouse.
In case of company – A person having atleast 20 % of the equity shares carrying voting
rights.
In case of cases- A person entitled to atleast 20 % of the voting power of the concern.
6. Income from asset transfer to a person for the benefit of spouse/ son’s wife
[Section 64(1)(vii)]: If an individual, directly or indirectly transfers asset, without adequate
consideration to a person or an association of persons for the benefit of his/her spouse /
son’s wife, income arising from such asset directly or indirectly is included in the income of
the transferor.
It simply means that when assets are transferred without adequate consideration to some
person or association of person, the ultimate benefit of which shall be of the spouse of the
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transferor, the income from such assets is considered to be the transferor’s income and so
added in his total income.
Where, from the assets transferred, only a portion of the income is meant for the immediagte
or deferred benefit of the spouse of the transferor, then only such income is to be added in
the total income of the transferor
7. Income of a minor child [Section 64(iA)]: All income which arises to the minor shall
be clubbed in the income of his parents. Income will be included in the income of that
parent whose total income is greater. This case has two exceptions.
(2) Income of minor child on account of manual work or involving application of his skill/
talent etc.
1. If an individual makes a gift in cash or by cheque to his spouse and that money is utilized
by the spouse for purchase of an asset. The income earned by the spouse from that asset
will not be clubbed in the income of the individual.
2. In order to invoke clubbing provisions there must be relation of husband and wife. That
means if a person transfers asset to his would be spouse before marriage income arising
from such asset will not be included in the income of transferor.
3. Negative income is also income. Under the Income Tax Act income does not means
positive income only. The term income includes negative income or loss also.
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4. Income from accretion to asset is not taxable in the hands of the transferor.
5. Income from saving out of pin money is not included in the income of husband.
6. Income of minor child is clubbed with the income of the parent whose income after
excluding the share of minor’s income is greater.
7. If trust is created for the benefit of minor child and income during minority of child is
being accumulated and added to corpus of trust and income from increased corpus is
given to the child after attaining majority, clubbing provisions are not applicable.
In the aggregation process of total income of the assessee following income is included in
the total income of the assessee but this income is tax free(Section 67A). It is:
In certain cases, some amounts are deemed as income in the hands of the assessee though
they are actually not in the nature of income. These cases are contained in sections 68, 69,
69A, 69B, 69C and 69D. The Assessing Officer may require the assessee to furnish
explanation in such cases. If the assessee does not offer any explanation or the explanation
offered by the assessee is not satisfactory, the amounts referred to in these sections would
be deemed to be the income of the assessee. Such amounts have to be aggregated with
the assessee’s income.
Where any sum is found credited in the books of an assessee maintained for any previous
year, and the assessee offers no explanation about the nature and source thereof or the
explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the
sum so credited may be charged to income-tax as the income of the assessee of that
previous year.
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If the assessee fails to submit any satisfactory explanation or the A.O is not satisfied with
the explanation, the income is treated income from undisclosed sources
Where in the financial year immediately preceding the assessment year the assessee has
made investments which are not recorded in the books of account, if any, maintained by
him for any source of income, and the assessee offers no explanation about the nature and
source of the investments or the explanation offered by him is not, in the opinion of the
Assessing Officer, satisfactory, the value of the investments may be deemed to be the
income of the assessee of such financial year.
Where in any financial year the assessee is found to be the owner of any money, bullion,
jewellery or other valuable article and such money, bullion, jewellery or valuable article is
not recorded in the books of account, if any, maintained by him for any source of income,
and the assessee offers no explanation about the nature and source of acquisition of the
money, bullion, jewellery or other valuable article, or the explanation offered by him is not,
in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion,
jewellery or other valuable article may be deemed to be the income of the assessee for
such financial year.
Where in any financial year the assessee has made investments or is found to be the
owner of any bullion, jewellery or other valuable article, and the Assessing Officer finds
that the amount expended on making such investments or in acquiring such bullion, jewellery
or other valuable article exceeds the amount recorded in this behalf in the books of account
maintained by the assessee for any source of income, and the assessee offers no explanation
about such excess amount or the explanation offered by him is not, in the opinion of the
Assessing Officer, satisfactory, the excess amount may be deemed to be the income of the
assessee for such financial
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Unexplained expenditure, etc (69C).
Where in any financial year an assessee has incurred any expenditure and he offers no
explanation about the source of such expenditure or part thereof, or the explanation, if any,
offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount
covered by such expenditure or part thereof, as the case may be, may be deemed to be
the income of the assessee for such financial year:
Provided that, notwithstanding anything contained in any other provision of this Act, such
unexplained expenditure which is deemed to be the income of the assessee shall not be
allowed as a deduction under any head of income.
Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to,
any person otherwise than through an account payee cheque drawn on a bank, the amount
so borrowed or repaid shall be deemed to be the income of the person borrowing or
repaying the amount aforesaid for the previous year in which the amount was borrowed or
repaid, as the case may be:
Provided that, if in any case any amount borrowed on a hundi has been deemed under the
provisions of this section to be the income of any person, such person shall not be liable to
be assessed again in respect of such amount under the provisions of this section on repayment
of such amount. For the purposes of this section, the amount repaid shall include the
amount of interest paid on the amount borrowed.
The deduction from gross total income is available only where the gross total income is
positive. If however income is negative, the question of any deduction does not arise.
Section 80A to 80 U of the Income-tax Act lays down the provisions relating to the
deductions available to assessees from their gross total income.
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2.5.1 A. Deduction in respect of certain payments
A1. Deduction regarding approved savings in P.F., LIC Premium etc (80C)
Entitlement: Deduction from the Gross Total Income of an amount equal to the investments
made, subject to a maximum amount of Rs. 150,000.
Nature of Investments:
a. Life Insurance policy taken on the life of an individual assessee or spouse and any child
of such individual, and any member of the Hindu Undivided Family.
c. Deduction from the salary payable by or on behalf of the Government to any individual,
in accordance with the conditions of his service, for securing to him a deferred annuity or
making provision for his wife or children, to the extent of one-fifth of salary.
d. Any contribution made by an individual only to any provident fund to which the Provident
Funds Act, 1925, applies; a Recognised provident fund; an approved superannuation
fund.
g. Subscription to other notified savings certificates defined in Section 2(c) of the Government
Savings Certificates Act, 1959.
i. Any contribution to effect or keep in force any notified annuity plan of the LIC or any
other insurer.
j. Any subscription, to any units of any Mutual Fund or the Unit Trust of India under any
notified plan formulated by the Central Government.
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k. Subscription to the notified deposit scheme of or contribution to any such pension fund
set up by the National Housing Bank established under Section 3 of the National Housing
Bank Act, 1987.
l. Tuition fees (excluding any payment towards any development fees or donation or
payment of similar nature), whether at the time of admission or thereafter, to any university,
college, school or other educational institution situated within India;
a. Any instalment or part payment of the amount due under any self- financing or
other scheme of any development authority, housing board or other authority
engaged in the construction and sale of house property on ownership basis; or
b. Any instalment or part payment of the amount due to any company or cooperative
society of which the assessee is a shareholder or member towards the cost of the
house property allotted to him; or
(5) Any public company formed and registered repayment of principal part only not
interest in India with the main object of carrying on the business of providing long-term
finance for the construction or purchase of houses in India for residential purposes,
eligible for deduction under Section 36(1)(viii), or
(6) Any company in which the public are substantially interested or any co-operative
society, where such company or co-operative society is engaged in the business of
financing the construction of houses; or
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(7) The assessee’s employer where suchemployer is a public company or a public
sector company or a university established by law or a college affiliated to such university
or a local authority or a cooperative society;
d. Stamp duty, registration fee and other expenses for the purpose of transfer of such
house property to the assessee.
n. Subscription to equity shares or debentures or units forming part of any eligible issue of
capital.
o. Fixed deposits for a minimum period of 5 years in any Scheduled Banks (w.e.f. A.Y.
2007-08).
p. As subscription to such bonds issued by the National Bank for Agriculture and Rural
Development, as the Central Government may, by notification in the Official Gazette specify
in this behalf.
r. As five year time deposit in an account under the Post Office Time Deposit Rules, 1981.
Covered- individual.
Eligible Amount- Deposit or payment made to LIC or any other insurer in the approved
annuity plan for receiving pension.
Covered - Individual.
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1. For employees (Govt., or Non-Govt.,): Employees own contribution or 10% of salary
whichever is less and contribution of central govt. / other employer or 10% of salary
whichever is less.
A-4. deduction in respect of investment made under any notified saving scheme
(80CCG)
3. He has acquired listed shares or listed units of an equity oriented funds in accordance
with a notified scheme
4. The investment is locked in for a period of 3 years from the date of acquisition in
accordance with the above scheme.
7. Investments made in listed units of an equity oriented fund shall also be eligible.
If the above conditions are satisfied, a deduction will be allowed under section 80CCG.
The amount of deduction is 50% of the amount invested in equity shares. However, the
amount of deduction under this section cannot be more than ‘ 25,000. The deduction shall
be allowed for 3 consecutive assessment years beginning with assessment years in which
listed equity shares or units were first acquired. In case assessee fails to comply with any
of the above mentioned conditions, the deduction originally allowed shall be deemed to be
the owner of assessee of such previous year in which default is committed.
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Deduction regarding health insurance is allowed to individuals and HUFs. Where the
assessee is an individual, the sum referred to in sub-section (1) shall be the aggregate of
the following:
(a) the whole of the amount paid to effect or to keep in force an insurance on the health of
the assessee or his family or “any contribution made to the Central Government Health
Scheme” or such other scheme as may be notified by the Central Government in this
behalf or any payment made on account of preventive health check-up of the assessee or
his family and the sum does not exceed in the aggregate Rs 25000 (Rs 50000 in case of
senior citizens) OR actual premium deposited in any mode other than cash regarding
medical insurance policy or policies of assessee, his / her spouse and all dependent children
put together and preventive health check up amount upto Rs 5,000 only and contribution
made to CGHS.
(b) the whole of the amount paid to effect or to keep in force an insurance on the health of
the parent or parents of the assessee or any payment made on account of preventive
health check-up of the assessee or his family as does not exceed in the aggregate Rs
25000 (Rs 50000 in case of senior citizens). The deduction in respect of payment made
on account of preventive health check up shall not exceed Rs 5,000.
Where the assessee is a Hindu undivided family, the sum referred to in sub-section (1)
shall be the whole of the amount paid to effect or to keep in force an insurance on the
health of any member of that Hindu undivided family as does not exceed in the aggregate
Rs 25000 (Rs 50000 in case of senior citizens).
(C ) In case a senior citizen has not got health insurance coverage ( sometimes insurance
companies do not provide such coverage to senior citizens,) a deduction upto maximum of
Rs 350,000 shall be allowed regarding any payment made on account of medical
expenditure incurred in respect of a senior citizen. In case one parent has been medically
insured and the other being senior citizen is not medically insured but has to incur medical
expenses, the aggregate deduction regarding health insurance premium and medical
expenditure incuured will be allowed but is shall be limited to Rs 50,000.
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Persons Covered- Resident Individual/HUF.
Eligible Amount-
(a) Expenditure incurred on medical treatment [including nursing], training and rehabilitation
of a disabled dependent, or
(b) Any payment or deposit made under a scheme framed by LIC or any other insurer or
the administrator or the specified company and approved by the Board for payment of
lump sum amount or annuity for the benefit of dependent with disability.
Extent of Deduction: (a) Rs. 75,000/- in case of normal disability or (b) Rs. 125,000/- in
case of severe disability.
To claim Tax deductions under Section 80DDB, it is mandatory for an individual to obtain
‘Doctor Certificate’ or ‘Prescription’ from a specialist working in a Govt. or Private hospital.
For the purposes of section 80DDB, the following shall be the eligible diseases or ailments:
Neurological Diseases where the disability level has been certified to be of 40%
and above;
(a) Dementia
(d) Ataxia
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(e) Chorea
(f) Hemiballismus
(g) Aphasia
Malignant Cancers
Hematological disorders
Hemophilia
Thalassaemia
Eligible Amount- Any amount paid by way of interest on loan taken from any financial
institution or any approved charitable institution for his/her higher education or w.e.f. 14-
2008 for the purpose of higher education of his/her spouse, children and legal guardian of
the Individual. Relevant Conditions/Points:
2. All field of studies including vocational studies pursued after passing the senior secondary
examination or its equivalent from any school, board or university recognized by the central
govt. or state govt. or local authority or by any other authority authorised by the central
govt. or state govt. or local authority to do so.
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3. Approved charitable institution means an institution established for charitable purposes
and notified by the Central Government u/s. 10(23C) or referred in 80G(2)(a).
Persons Covered-All assessees [except for 80G (2)(c), which is applicable for donations
made only by company] to the Indian Olympic Association or to any other Association or
Institution for the development of infrastructure for sports & games or the sponsorship of
sports & games, in India.
Eligible Amount- Any sums paid in the previous year as Donations to certain funds,
charitable institutions etc. specified u/s. 80G (2).
Relevant Conditions/Points
2. Donations paid out of another year’s income or out of income not includible in the
assessment of current year are also eligible for deduction. Lt. F. No. 45/313/66 – ITJ (61)
dt. 2-12-1966.
Extent of Deduction
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(iii)Prime Minister’s Armenia Earthquake Relief Fund;
(x)Any fund set up by the State Government of Gujarat exclusively for providing relief to
the victims of earthquake in Gujarat;
(xi) Any Zila Saksharta Samiti constituted in any district under the chairmanship of the
Collector of that district;
(xiii) Any fund set up by a State Government for the medical relief to the poor;
(xiv) The Army Central Welfare Fund or the Indian Naval Benevolent Fund or the Air
Force Central Welfare Fund,
(xvii)Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund in respect of any
State or Union Territory;
(xxi) National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation
and Multiple Disabilities;
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(xxii)Any trust, institution or fund to which Section 80G(5C) applies for providing relief to
the victims of earthquake in Gujarat (contribution made during January 26, 2001 and
September 30, 2001) or
Jawaharlal Nehru Memorial Fund; Prime Minister’s Drought Relief Fund; National
Children’s Fund(deduction shall be allowed 100% w.e.f. A.Y 2014- 15); Indira Gandhi
Memorial Trust; Rajiv Gandhi Foundation.
Where the aggregate of sums exceed 10% of adjusted gross total income, then such
excess amount is ignored for computing such aggregate.
(b) 50% of qualifying amount if donation given to any other fund or any institution
which satisfies conditions mentioned in Section 80G(5); Government or any local authority
to be utilised for any charitable purpose other than the purpose of promoting family planning,
Any authority constituted in India for the purpose of dealing with and satisfying the need
for housing accommodation or for the purpose of planning, development or improvement
of cities, towns, villages or both; Any corporation referred in Section 10(26BB) for
promoting interest of minority community; For repairs or renovation of any notified temple,
mosque, gurudwara, church or other place.
iii.25% of such ‘Adjusted Total Income’. Whichever is less. Adjusted GTI= GTI - (LTCG
+ STCG on shares covered under STT + income referred to in section 115A+ all other
deductions u/s 80except 80GG).
Any sum contributed by an Indian Company, other than cash, in the previous year to any
political party or to an electoral trust shall be allowed as deduction while computing its
total income.
Any sum contributed by an assessee, other than cash, in the previous year to any political
party or to an electoral trust except local authority and every artificial juridical person
wholly or partly funded by the government shall be allowed as deduction while computing
its total income.
The term political party means a political party registered under section 29A of the
representation of the people act, 1951.
B-1. Deduction in respect of profits and gains from industrial undertakings or enterprise
engaged in infrastructure development (section 80-IA).
Where gross total income of assessee includes any profits and gains derived by an
undertaking or an enterprise from any eligible business, a deduction shall be allowed to
stated percentage of profit and gains from such business for stated number of years.
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Eligible business: developing, operating and maintaining or developing operating and
maintaining infrastructure facility.
Rate of deduction: 100% of profits and gains from such business for first 5 consecutive
AY’s out of first 15 years.
30 % or profits and gains for next 5 consecutive assessment years out of first 15
years starting from the date of commencement of operations.
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Specific conditions of commencement of operations
Rate of deduction: 100% of profits and gains from such business for any 10
consecutive AY’s out of first 15 years beginning from the year in which undertaking
starts operation.
B-2. Deduction in respect of profits and gains from certain industrial undertakings other
than infra-structure development undertakings (section 80-IB).
The deduction under section 80-IB is available to an assessee whose gross total
income includes profits and gains derived from the following business. **for details
refer to bare Act.
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B-4. Deduction in respect of employment of new workmen (80JJAA).
GTI should include should include profits and gains derived from manufacture of
goods in factory.
Additional wages means the wages paid to new regular workman in excess of 100
workmen employed during the previous year.
However in case of an existing factory additional wages shall be nil if the increase in
the number of regular workmen employed during the year is less than 10% of the
existing number of workmen employed in such factory as on the last day of the
preceding year.
B-5. Deduction in respect of royalty income etc., of authors of certain books other than
text books (80QQB).
Amount of deduction: the gross total income of assessee pertaining to the previous
year includes royalty or the copyright fees, there shall, in accordance with and subject
to the provisions of this section, be allowed a deduction of 100% of such income or
Rs. 300,000, whichever is less.
(b) A patentee;
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income of the previous year includes royalty, there shall, in accordance with and
subject to the provisions of this section, be allowed a deduction of 100% of such
income or Rs 300,000, whichever is less.
(c) A Post Office as defined in clause (k) of section 2 of the Indian Post Office
Act, 1898.
any time during the previous year, is certified by the medical authority to be a
person with
Deductions for senior citizens in respect of interest on deposits with bank and post office
[ Section 80 TTB] [ w.e.f AY 2019-20]
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A deduction of upto Rs 50,000 shall be allowed to a senior citizen in respect of interest
income from deposits with banks or post office or co- operative banks. It is important to
note that interest earned on every type of deposit shall be eligible for deduction under this
section.
2.6 SUMMARY
Income tax is levied on the total income of previous year of an assessee. Hence it is
necessary to ascertain the total income by aggregating the income of different heads. An
assessee may have both positive income and negative income (loss). The department of
income tax have given relief to assessees that if there is loss from one head of income it
can be set off from other heads of income. But if a loss cannot be set off in the same
assessment year it can be forward and set off in future against income of that year.
Set-Off of Losses from one source against Income from another source under the
same Head of Income [Section 70]: If the net result for any assessment year in respect of
any source falling under any head of income is a loss, the assessee is entitled to set off the
amount of such loss against his income from any other source under the same head.
However, Loss from Speculation Business, Loss from the activity of owning and maintaining
race horses, long-term capital loss can be set-off from any other source of income.
Where any individual transfers directly or indirectly any asset (other than a house property)
to the spouse, the income from such asset shall be included in the income of the transferor
Carry-Forward and Set-Off of Losses If it is not possible to set-off the losses during the
same assessment year in which these occurred, so much of the loss as has not been so
set-off out of the following losses, can be carried forward to the following assessment
year and so on to be set-off against the income of those years provided the losses have
been determined in pursuance of a return filed by the asessee and it is the same assessee
who sustained the loss.
However, losses suffered under the following heads are not allowed to be carried forward
and set off:
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(2) Losses under the head ‘Income from other sources’ (excepting loss suffered from the
activity of owning and maintaining race horses).
– W.e.f. assessment year 2000-2001, Section 72A has been substituted by new section
to provide for carry forward and set off of accumulated loss and unabsorbed depreciation
allowance in case of:
Submission of Return for Loss (Section 80): An assessee is not entitled to carry-forward
a loss unless he has filed a return of loss to the Department in time and in the prescribed
form. It is obligatory on the part of the assessee to file such return; otherwise he will be
deprived of the benefit of carryforward of losses. In fact, only that amount of loss is
allowed to be carried-forward which has been computed by the Assessing Officer and
not by the assessee.
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Sections 80A to 80U of the Income-tax Act lay down the provisions relating to the
deductions allowable to assessees from their gross total income.In order to further the
Government Policy of attracting investment and activity in the desired direction and to
provide stimulus to growth or to meet social objectives, concession in the form of
‘deduction’ from Taxable Income is allowed. Chapter VI-A of the Income-tax Act, 1961
contains such deduction provisions. With the advent of new philosophy of giving direct
assistance to the desired goal and avoiding indirect route of tax concessions, the numbers
of deductions are being omitted. This is also with a view to avoid complexity of tax law.
In computing Total Income of an assessee deductions under sections 80CCC to 80U are
permissible from “Gross Total Income”. [Section 80A (1)]
Where in computing the Total Income of an assessee of the Previous Year relevant to the
Assessment Year commencing on the 1st day of April, 2006 or any subsequent Assessment
Year, any deduction is admissible under Section 80-IA or Section 80-IAB or Section
80-IB or Section 80-IC or Section 80-ID or Section 80-IE, no such deduction shall be
allowed to him unless he furnishes a return of his income for such Assessment Year on or
before the due date specified under sub-section (1) of section 139.
“Gross Total Income” means the aggregate of income computed under each head as per
provisions of the
Act, after giving effect to the provisions for clubbing of incomes (Sections 60 to 64) and
set off of losses
and but before making any deductions under this chapter. [Section 80B(5)].
The deductions under Chapter VIA are not available from the following incomes though
these are included in the “Gross Total Income”:
The aggregate amount of deductions under Chapter VIA [Sections 80CCC to 80U] shall
not exceed the
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“Gross Total Income” of the assessee. [Section 80A (2)]
PRACTICAL PROBLEMS
ILLUSTRATION I
The following are the particulars of income and loss of an individual under different
heads of income . Set off losses in the assessment year 2019-20 and find out the net
result
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Illustration 2 :
Solution 2:
House property
Self occupied house - Loss (5,000)
Profit and Gains: Business Profit 20,000
Available income 15,000
B/F Business loss of 2016-17 10,000
Total Income 5,000
Long term capital loss of shares (STT Paid) not allowed to be C/F and so it is ignored.
Illustration 3 : The following are the particulars of income /loss of Mr. A . You are
required to set off losses and carry forward and set off where necessary
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Solution 3:
In Rs. In Rs.
Salary income – Computed 15,000
Business loss (53,000)
Capital gain
Short term 8,000
Long term 21,000 29,000
Other sources: Interest on securities 5,000
Gross total income ( Salary income) 15,000
Note: Business loss of Rs 53,000 shall be adjusted against income of all other heads
except income under the head ‘salaries’ and business loss to be C/F
In Rs.
Salary income – Computed 15,000
Business loss -15,000
Other sources: Interest on securities 5,000
Gross Total Income 15,000
Note: Business loss B/F from Assessment year 2018-19 cannot be set off as assessee has
no income under the head profits and gains of business or Profession . Hence, he can C/F
loss of assessment year 2018-19 . i.e., Rs 19,000. Business loss of assessment year
2019-20 i.e., Rs 10,000 will also be carried forward as it cannot be set off from salary
income
Illustration 4:
From the following particulars of income of assesses A,B and C . How the capital losses
shall be set off and carried forward for the previous year ending on 31-3-2019.
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Assessee - A
(i) Business income Rs 15,000
(ii) Short term capital loss Rs 1,200
(iii) Long term capital gain – Plot Rs 7,200
Assessee - B
(iv) Long term capital gain on sale of jewellery Rs 20,000
(v) Business income Rs 30,000
(vi) Short term capital loss Rs 40,000
(vii) Business income Rs 60,000
Assessee C
(viii) Short term capital gain Rs 20,000
(ix) Long term capital gain – land Rs 17,000
(x) Carry forward loss- short term capital assests Rs 50,000
Solution 4
Assessee- A
15,000
Business income
Long term capital gain – Plot 7,200
Long term capital gain on sale of jewellery 20,000 27,200
Set off short term capital loss (1,200)
Net capital gain 26,000
Gross total income 41,000
Assessee B
Business income
Short term capital loss to be C/F Rs. 40,000 30,000
Gross total income -
Assessee C 30,000
Business income 17,000
Long term capital gain – Land 20,000 60,000
Short term capital gain 37,000
Set off short term capital loss B/F 50,000
S.T capital loss still to be C/F 13,000 NIL
Gross total income 60,000
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Illustration 5 : Mr. Singh a resident of India, submits the following particulars of his
income for the assessment year 2019-2020.
Rupees
SOLUTION 5
Business Income
i. Profit from radio business 19,600
ii. Share of profit from electric business 1,800
21,400
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Less:Current year’s depreciation 2,500 18,900
Set off B/F loss from cycle business 3,900
Rupees Rupees
Set off B/F loss from radio business 1,900
Set off B/F loss from electric business 2,700 8,500
10,400
Set off B/F unabsorbed depreciation 1,000
9,400
iii.Speculation Business income 1,900
Set off B/F loss from speculation business -3,200
This loss shall be C/F to be set off against specul-
Ation income of future -1,300 Nil 9,400
Capital Gains
STCG 3,200
Set off STCL of 2015-16 4,100 -900
LTCG 9,250
Set off LTCL loss B/F 6,450 +2800
Taxable Capital gain 1,900
Total income 20,800
Note:
1. Loss from speculation business is not allowed to be set off out of the profits of a
non –speculation business.
ILLUSTRATION 6
Mr. M Rafiq submits the following information of his incomes and losses for the year
ending 31-3-2019.Compute his total income :
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Rs
1. Salary income (computed) 24,000
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Profits &Gains:
STCG +8,000
Set off STCL -24,000
-16,000
LTCG +8,000
STCL to be C/F -8,000 Nil
Other sources:
Note:
1. Business loss shall be set off from income from interest on securities.
2. House property loss of 58,000 shall be set off from salary income of
24,000 and balance from interest on securities 6,000.Unadjusted house
property loss 28,000 shall be C/F.
ILLUSTRATION 7
The assessment of M & Bros. for the assessment years 2018-19 and 2019-20 shows
the following results:
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Ass. Year 2018-19 Ass.Year 2019-20
Compute net assessable results for each of the two years giving full reasons for your
working.
SOLUTION 7
Profits &gains:
2.7 GLOSSARY
Set-Off Losses: When any loss relating to any particular previous year is set-off
against the income of same previous year, it is called set-off of losses.
Carry forward of loss: If any loss related to any previous year(or assessment year)
cannot be sett-off either under the same head or against the incomes of other
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heads during same previous year(or assessment year), such a loss can be carried
forward to future previous years for setting off against incomes of future previous
years(or assessment years).
Transfer of Income (section 60): Where a person transfers to any other person
income (whether revocable or not) from an asset without transferring that asset,
the income shall be included in the total income of the transferor. “Transfer” includes
any settlement, trust, covenant, agreement or arrangement.
Revocable transfer: Where a person transfers any asset to any other person with
a right to revoke the transfer, all income accruing to the transferee from the asset
shall be included in the total income of the transferor.
The income under revocable transfer of asset shall be included in the income of
transferor even when only a part of income from transferred asset has been applied
for the transferor.
Income to spouse from a concern in which such individual has substantial interest
[Section 64(1)(ii)]: All such income as arises directly or indirectly, to the spouse of
an individual by way of salary, commission, fees or any other remuneration, whether
in cash or kind from a concern in which such individual has a substantial interest,
shall be included in the income of the individual.
Income to spouse from the assets transferred [Section 64(1)(iv)]: Where any
individual transfers directly or indirectly any asset (other than a house property) to
the spouse, the income from such asset shall be included in the income of the
transferor.
Income to Son’s Wife [Section 64(1)(vi)]: Where any individual transfers, directly
or indirectly, any asset to his/her son’s wife without adequate consideration, after
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1.6.1973, the income from such asset shall be included in the income of the
transferor.
Clubbing of Income of Minor Child [Section 64(1a)]: All income which arises or
accrues to the minor child (not being a minor child suffering from any disability of
the nature specified in Section 80U) shall be clubbed in the income of his parent.
However, any income which is derived by the minor from manual work or from
any activity involving application of his skill, talent or specialised knowledge and
experience will not be included in the income of his parent. In case the income of
an individual includes any income of his minor child in terms of this section [i.e.
Section 64(1A)], such individual shall be entitled to exemption of the amount of
such income or Rs. 1,500 whichever is less.
1. What do you mean by “Set-off and carry forward of losses”? Which losses can be
carried forward?
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2. Discuss the provisions of the Income-tax Act relating to the set-off of losses.
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3. Discuss the provisions of the Income-tax Act relating to carry-forward and set-off of
losses, with particular reference to the provisions of Section 72A of the Act.
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4. Explain in brief the deduction for the medical insurance premium paid by the
assessee.
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5. Enumerate the various rebates and reliefs available to individuals under the Income-
tax Act, 1961.
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6. What conditions are to be satisfied in order to claim a deduction for donations made
to certain funds or/ and charitable institutions? Illustrate.
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9. Explain Deemed income. Elaborate the incomes that are treated as deemed incomes.
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2.9 BOOKS RECOMMENDED
1. Dr. V.K. Singhania: Students Guide to Income-tax; Taxmann Publications Pvt. Ltd.,
New Delhi.
2. Girish Ahuja and Ravi Gupta: Systematic Approach to Income-tax and Sales-tax; Bharat
Law House, New Delhi.
3. Dr. H.C Meharotra and Dr S. P Goyal: Income Tax Law and Accounts; SahityaBhavan
Publications.
4. V. P Gaur & D. B Narang: Income Tax Law & Practice; Kalyani Publishers.
5. V. K Singhania& Kapil Singhania: Direct Taxes Law & Practices; Taxman Publications.
6. Mahesh Chandra, D. C Shukla, K. A Mahajan & M. A Shah: Income Tax Law &
Practices; pragati Publication, New Delhi.
7. Arvind Tuli& Dr. NeeruChadda: Conceptual Clarity on Income Tax and Wealth Tax;
Kalyani Publication, New Delhi.
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C. No. : - BCG-402 UNIT III
STRUCTURE:
3.1 Introduction
3.2 Objective
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A partition of the HUF can be both total and partial
3.14 Summary
3.15 Glossary
3.1 INTRODUCTION
Income tax is that percentage of your income that you pay to the government to fund
infrastructural development, pay the salaries of those employed by the state or central
governments, etc. All taxes are levied based on the passing of a law, and the law that
governs the provisions for our income tax is the Income Tax Act, 1961.
Income tax is only of the direct means of taxation like capital gains tax, securities transaction
tax, etc., and there are many other indirect taxes that we pay like sales tax, VAT, Octroi,
service tax,GST etc.
The income tax you pay every month or upon every contractual earning is what forms a
large part of the revenue for the Government of India. These revenue functions are managed
by the Ministry of Finance, which has delegated the responsibility to managing direct taxes
(like income tax, wealth tax, etc.) to the Central Board of Direct Taxes (CBDT).
Income tax is applicable for individuals, businesses, corporate, and all other establishments
that generate income. The Income Tax Act, 1961 regulates the collection, recovery, and
administration of income tax in India. The government requires the tax amount for various
purposes ranging from building the infrastructure to paying the state and central government’s
employees. It helps the government in generating a steady source of income that is used
for the development of the nation.
The income tax is paid every month from the monthly earnings, however, it is calculated on
an annual basis. The amount of income tax an individual has to pay depends on many
factors.
Under the Department of Revenue of the Ministry of Finance, the Income Tax Department
(IT Department) is responsible for monitoring the collection of Income Tax, Expenditure
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Tax, and various other Financial Acts that are passed every year in the Union Budget. The
Central Board of Direct Taxes (CBDT) regulates the policy and planning of taxes. CBDT
is also responsible for administering the direct tax laws through the IT Department. In
addition to the collection of taxes, the IT department is also involved in prevention and
detection of tax avoidance.
Income tax has to be paid by every individual person, Hindu Undivided Family (HUF),
Association of Persons (AOP), Body of Individuals (BOI), corporate firms, companies,
local authorities and all other artificial juridical persons that generate income.
Taxes are calculated on the annual income of a person, and an annual cycle (year) in the
eyes of the Income Tax law starts on the 1st of April and ends on the 31st of March of the
next calendar year. The law recognizes and classifies the year as “Previous Year” and
“Assessment Year”.
1. Voluntary payment by taxpayers into designated banks, like advance tax and self-
assessment tax.
2. Taxes Deducted at Source (TDS) which is deducted from your monthly salary,
before you receive it.
In this lesson the Income Tax Treatment with relation to Hindu Undivided Families (HUF)
and individuals is being discussed. The tax implications, rates of tax and other issues relating
to the above persons have been discussed elaborately. Hindu undivided family is treated
as a separate taxable entity for the purpose of income tax assessment.
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3.2 OBJECTIVES.
When and how it can be partitioned and what are the tax implications before
and after its partition.
What is an individual.
Section 4 of the income tax, 1961 read with section 2 (31) provides the different units of
assessment. These are:
(i) Individual
(iii) Firm
(vi) Company
Individual includes both male and female assessees. The total income has to be computed
as per the provisions of the Income-tax Act, 1961. In addition to individuals own income,
income of other persons received by him in some other capacity or received by other
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persons is to be clubbed with individual assesses income. It is important to note that no
special formalities are required to be fulfilled as in case of firm to claim the status of
individual for assessment purposes. An individual may have income under any/ all of the
following 5 heads:
Following steps are considered for computing total income and to charge tax.
Step 1 – Determination of the residential status of the Assessee: First all we want
determine the residential status of the assessee. The residential status of a person has to be
determined to find out which income is to be included in computing the total income. It
decides whether the individual is tobe taxed or not. The residential status of an individual is
determined on the basis of the duration of time spend by him in India. . Based on the time
spent by him, he may be (a) resident and ordinarily resident, (b) resident but not ordinarily
resident, or (c) non-resident.
Step 2 – Classification of income under different heads: The Act specifies five heads
of income. These heads of income consist of all possible types of income that can accrue
to or be received by an individual. An individual is required to classify the income earned
by him under the appropriate heads of income.
Step 3 – Exclusion of income not chargeable to tax: There are certain incomes which
are wholly exempt from income-tax e.g. agricultural income. These incomes have to be
excluded while calculating Gross Total Income. T the same time certain incomes are partially
exempt from income tax e.g. House Rent Allowance, Education Allowance etc.. These
incomes are excluded only to the extent of the limits specified in the Act. The balance
income over and above the prescribed limits would enter computation of total income and
have to be classified under the relevant head of income.
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Step 4 – Computation of income under each head: Income is to be computed in
accordance with the provisions governing a particular head of income. As per the rules
certain deductions and allowances are allowed. These deductions are allowed while
computing income under each head.
Step 5 – Clubbing of income of spouse, minor child etc.: In case of individuals, income-
tax is levied on a slab system on the total income. The tax system is progressive. That
means if income increases the tax amount to be paid also increases. We can see that some
taxpayers who have the higher income bracket have a tendency to divert some portion of
their income to their spouse, minor child etc. to minimize their tax burden. In order to
prevent such tax avoidance, clubbing provisions have been included in the Income-tax
Act. As per the provisions of income tax act income arising to certain persons (like spouse,
minor child etc.) have to be included in the income of the person when it is seen that the
income is diverted for avoiding tax.
Step 6 – Set-off or carry forward and set-off of losses: An individual may have different
sources of income under the same head of income. He might have profit from one source
and loss from the other. As per the provision we can set off the losses under one head or
form other heads or can carry forwards for the coming assessment years. All provisions
related to that should be considered while computing total income of the Assessee.
Step 7 – Computation of Gross Total Income: The final figures of income or loss under
each head of income, after allowing the deductions, allowances and other adjustments, are
then aggregated, after giving effect to the provisions for clubbing of income and set-off and
carry forward of losses, to arrive at the gross total income.
Step 8 – Deductions from Gross Total Income: There are deductions prescribed from
gross total income. The allowable deductions in case of an individual are deductions under
sections 80C, 80CCC, 80CCD, 80CCF, 80D, 80DD, 80DDB, 80E, 80G, 80GG,
80GGA, 80GGC, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80QQB, 80RRB,
80TTA and 80U. These deductions are allowed as per the rules prescribed in the income
tax act.
Step 9 – Compute Total income: After allowing all deductions allowable, we can compute
total income. Step 10 – Application of the rates of tax on the total income: Different slab of
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tax rates are available on basis of status and age of individual. . There also will be basic
exemption limit.
1. As a member of HUF: Exempted u/s 10(2). But where an individual converts his
individual property into common pool of HUF of which he is a member, income
from such property shall be included in his individual income.
If the member earns his own income, besides being the member of HUF , he will
pay tax on his own earned income.
But u/s 64 (2) where an individual converts his individual property into the common
part of HUF of which he is a member,income from such property shall be included
in his individual income.
2. Income received as share from AOP. Share from AOP is treated as: If the
individual income of all partners does not exceed the exempted first income slab,
then share from such AOP is to fully added. However, if the individual income of
any partner exceeds the first exempted income slab, then share from such AOP is
not to be added in the income of the individual.
For determining rates of tax, the individual income of each member or partner is to
be taken in to account as under:
(a) If individual income of all partners / members does not exceed Rs 250,000
whether a male or female ( For a resident senior citizen Rs 300,000 and for
resident super senior citizen Rs 500,000) each, the AOP shall pay tax at the
rates applicable to an individual .
(b) Share from such AOP is fully added in the individual income of the each
partner and is fully taxable again as partner’s individual income.
(c) Out of the tax a rebate of tax on share from AOP is allowed at average rate.
Average rate = Total tax / Total income x 100.
(d) No rebate of tax if total income of such AOP does not exceeed Rs 250,000.
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If total income of any one or more partners /members of AOP exceed Rs 250,000 , the
AOP shall pay tax at MMR i.e, 30 % on whole of its total income.
Share from such AOP shall be fully exempted while calculating individual income of partners
partners are not allowed any rebate u/s 86 .
3. As a partner of firm assessed as firm u/s 184. Exempted But remuneration and
interest on capital received is taxable under the head profits and gains to the
extent it is allowed as deduction to the firm.
4. As a partner of firm assessed as firm u/s 185. Exempted But remuneration and
interest on capital received from such firm is also exempted u/s 10 (2A). The following
sums received by partner from such firm shall also be exempted in the hands of the
partner. : (a) Any remuneration, Bonus, fees, commission,etc. (b) Interest on loan/
capital from such firm.
with effect from assessment year 1998-99 dividend received from or declared or distributed
by an Indian company on or after 1-6- 97 shall be fully exempted and shall not form part
of total income.
The following incomes although accruing to other persons are included in the income of
individual assessee:
1. Transfer of an income without transfer of asset: The income shall be included in the total
income of transferor.
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2. Revocable transfer of asset: The income from such assets is also included in the total
income of the transferor. If the assets is not revocable during the life time of the transferor,
it shall be regarded as irrecovable transferor for this purpose.
3. Income of minor child: With effect from assessment year 1993-94 , income of a minor
from whatsoever sources shall be added in the income of that parent whose other income
is higher. In case, income is included in the income of one parent shall always be included
in the income of that parent. Income of a minor handicapped or mentally retarded child
shall not be clubbed.
5. Income from the asset transferred by an individual in such a way that benefit accrues
directly or indirectly to the spouse or minor child of the transferor, the income from such
transferred assets shall be included in the total income of the transferor.
6. Share of income arising to spouse for being member of a trust or to minor child who is
beneficiary under a trust. The finance act, 1979 provides that any income arising to the
spouse or minor child from a trust shall be deemed to be the income accruing indirectly to
the spouse or minor child of such individual from the membership of the spouse to or from
the admission of minor to the benefits of a firm in which such individual is partner.
The final figures of income or loss under each head of income, after allowing the deductions,
allowances and other adjustments, are then aggregated, after giving effect to the provisions
for clubbing of income and set-off and carry forward of losses, to arrive at the gross total
income.
There are deductions prescribed from gross total income. The allowable deductions in
case of an individual are deductions under sections 80C, 80CCC, 80CCD, 80CCF,
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80D, 80DD, 80DDB, 80E, 80G, 80GG, 80GGA, 80GGC, 80-IA, 80-IAB, 80-IB, 80-
IC, 80-ID,80-IE, 80JJA, 80QQB, 80RRB, 80TTA and 80U. These deductions are allowed
as per the rules prescribed in the income-tax act.
After computing the total income, nest step is to compute the tax liability. The following
steps are to be followed:
ii. STCG on shares which are subject to STT- calculate tax @15%.
The basic exemption limit is Rs 2, 50,000 for the assessment year 2016-17.
B) Individual- Senior citizen (60 years or more but less than 80 years):
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Rs: 5, 00,000 to 10,00,000: 20%
4. Surcharge- if total income exceeds Rs 50 lakhs but does not exceed 1 crore
surcharge @ 10 % of tax and if total income exceeds Rs 1 crore surcharge @ 15
% of tax shall be added.
6. After adding education cess, rebates u/s 86 for share from AOP . This rebate is
allowed at average rate and relief u/s 89 (1) for arrears.
7. Balance is tax payable which will be rounded off to the nearest multiple of Rs 10.
The finance act, 2011 introduced the concept of alternate minimum tax on limited liability
partnership. However, the finance act, 2012 has extended the system of alternate minimum
tax on all persons other than a company subject to certain conditions. Thus, w.e.f Assessment
year 2013-14, Alternate minimum tax is also applicable on individuals.
u/s 35 AD or
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Any section ( Other than Section 80 P) included in Chapter VI-A under the
following Heading “C” – Deduction in respect of certain incomes” [ i.e. Under
section 80IA to section 80 RRB],
The provisions of alternate minimum tax shall not apply to an individual whose ‘ Adjusted
total income’ does not exceed Rs 20 Lakh.
Where the regular income tax payable by an individual for a particular previous year is less
than the alternate minimum tax payable for such previous year, the adjusted total income
shall be deemed to be the total income of such individual for such previous year and it shall
be liable to pay income tax on such total income @ 18 .5 %
Thus, AMT is an alternate amount of tax which an individual has to pay if the regular
income tax for any previous year is less than 18 .5 % of its adjusted total income as
defined for this purpose. Section 115 JC is an overriding section and provides a specific
tax rate on a specific figure for certain individuals. It provides a new concept of adjusted
total income for individuals, which is to be treated as total income of the individual and on
this total income , tax is required to be calculated @ 18.5 % . This tax is called ‘alternate
minimum tax’. AMT has brought into tax net those individuals who were earning profits
but were not paying any income tax due to various deductions or exemptions available to
them under the income tax , 1961.
Or
Whichever is higher.
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Note: In the case of unit located in an international financial services entre ( IFSC) which
desires its income solely in convertible foreign exchange, AMT shall be charged @ 9 % [
w.e.f A.Y 2019-20]
Surcharge
(ii) If adjusted total income Rs 50 lakhs but does not exceed 1 Crore 10 % of tax
Adjusted total income means the total income before giving effect to this newly inserted
chapter XII BA as increased by:
(i) Deductions claimed under any sections included in chapter VI-A under the heading
C i.e., deductions in respect of certain incomes ( Except section 80 P) and
(iii) Deduction claimed , u/s 35 AD less depreciation allowable u/s 32 on the cost of
that asset.
Total income shall be increased by the deduction claimed u/s 35 AD for the purpose of
computing adjusted total income, but the amount of depreciation allowable u/s 32
shall be reduced while calculating adjusted total income.
It is important to note that part C of Chapter VI- A covers various deductions u/s 80
in respect of certain incomes. These deductions ( For an individual) are as follows:
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(v) Deductions u/s 80 IC
(vii)Deductions u/s 80 IE
In other words, adjusted total income for the purposes of section 115 JC (1) shall be
calculated as follows:
[ Except section 80 P]
It means the income tax payable for a previous year by an individual on its total income in
accordance with provisions of IT act, 1961 other than the provisions of this chapter XIIB.
Every individual covered u/s 115 JC shall obtain a report, in prescribed form (29 C) from
an accountant [ as defined in section 288 (2) ] certifying that the adjusted total income and
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the alternate minimum tax have been computed in accordance with the provisions of this
chapter . Such report shall be furnished to income tax department on or before the due
date of filling of return u/s 139 (1).
1. The credit for tax paid by an individual under section 115 JC shall be allowed to
it in accordance with the provisions of this section [ Section 115 JD (1)]
2. Computation of amount of tax credit [Section 115 JD (2)] The tax credit of an
assessment year shall be the excess of alternate minimum tax paid over the regular
income tax payable for that year. In other words,
Amount of tax credit = Alternate minimum tax - tax payable on total income
computed as per normal provisions of the income tax act.
3. Time limit to carry forward tax credit : [ Section 115 JD (4)] The tax credit for any
assessment year can be carried forward up to fifteenth assessment year immediately
succeeding the assessment year for which tax credit becomes allowable u/s 115
JC (1).
4. Set off of tax credit [ Section 115 JD (5)] : Tax credit shall be allowed in any
assessment year, in which the regular income tax exceeds the alternate minimum
tax . Such set off shall be allowed to the extent of the excess of regular income tax
over the alternate minimum tax and the balance of the tax credit, if any, shall be
carried forward.
Note: No interest shall be payable on tax credit allowed [ Section 115 JD (3)]
If the amount of regular income tax or the alternate minimum tax is reduced or increased
as a result of any order passed under this act, the amount of tax credit allowed under
this section shall also be adjusted/ varied accordingly.
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Same as otherwise provided in this chapter, all other provisions of this act shall apply
to an individual referred to in this chapter
PROBLEMS
ILLUSTRATION 1 :
Compute the total income of Mr. Ram from the particulars given below: Rs.
ii) Rental Value of a house Rs 7500 p.m. self-acquired but transferred to HUF Pool.
Computed income from this house is 25200
iii) Share from firm assessed u/s 184in which he has 1/3rd share 45000
iv) Commission received by his wife from above mentioned firm for acting
as its selling agent 25000
SOLUTION 1 :
Other Sources:
ILLUSTRATION 2
For the accounting year ended 31st, March 2019 Mr. Shashi Kant furnishes the following
particulars of his Income. Rs.
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i) Salary received in India 60000
iii) Income from house property in Pakistan deposited in bank there 12000
vi) In this accounting year Mr. Shashi Kant has brought into India foreign
income of earlier years 42700
vii) Profit from sale of plant at Mumbai (50% received in Bangkok) 160000
a) He is resident,
b) He is not ordinarily resident, or
c) He is non-resident.
SOLUTION 2
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i) Profit from business in Germany but 15000 15000 15000
received in India
ILLUSTRATION 3
Mr. Verma is the manager of Punjab Cotton MillsLtd. He draws a salary of Rs.
33,000 p.m. His other items of income are:
a) Interest on fixed deposits with Andhra Bank Rs. 10800 and interest credited
in the savings a/c in the bank Rs. 12000.
d) Long term capital gains from sale of his residential house, occupied for the
last 20 years Rs. 115000.
f) Long term capital loss from Gold brought forward from the assessment
year 2017-18 Rs. 20000.
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iii) Donation to clean Ganga fund setup by Central Govt. Rs. 5000.
iv) Education of his children Rs. 4500.
Compute his total income and Tax payablefor the assessment year 2019-20.
SOLUTION 3
3,56,,000
Capital Gains
Other Sources
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Computation of Tax liability
On 2,50,000 Nil
Tax 4915
22,915
22,915
Note : (1) Since total income of the asseesee exceeds Rs 350,000 so he is not entitled
for a rebate u/s 87 A (2) He is entitled to get deduction u/s 80TTA but he will not get
deduction u/s 87TTB regarding his interest on Fixed deposits in banks as he is not a
senior citizen.
ILLUSTRATION 4
The total income of an individual ( 45 years old) computed under the normal provisions of
income tax act is Rs 10 lakh. However, the adjusted total income of the individual [computed
as per section 115 JC(2)] amounted to Rs 30 lakh. Calculate the final tax liability of the
individual for assessment year 2019-20.
Case 1
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Tax on Rs 10,00,000 as per slabs 112,500
Case 2
ILLUSTRATION 5
From the particulars given below, compute the total income and tax payable of Mr. dev a
central govt. employee working at Chandigarh.
(8) He owns two houses, one of which is let out at a rent of Rs 4,000 p.m and other
whose annual value is Rs 10,000 remained vacant through out the year on account
of his employment at ambala where he has taken a house on rent. The two houses
are subject to municipal taxes of Rs 5,000 and Rs 1,000 respectively.
(9) During the year he sold shares of hero Honda ltd. And earned a STCG of Rs
50,000 [ STT paid]
(10) He earned Rs 11,500 as interest from the government securities and bank
interest on SBI fixed deposits Rs 11,000 and on a saving account Rs 10,600 . He
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pays life insurance premium of Rs 25,000 on his life policy of Rs 400,000. He
deposited Rs 10,000 in home deposit account.
Solution 5
Computation of total income of Mr. Dev for the assessment year 2019-20
Salary
Basic pay @ Rs 25,000 p.m 25000p.m. 300,000
Travelling allowance – exempted exempted Nil
Entertainment allowance 1000p.m. 12000
Bonus -- 25000
Gross salary 337000
Deduction u/s 16
Std deduction 40,000
Entertianment allowance 5,000 45,000
Salary income 292000
Income from house property
Rent/ ARV (4000p.m.) 48000
Less: Municipal taxes 5000
NAV 43000
Less: Deductions u/s 24
Standard deduction 30 % of NAV (43000x30%) 12900
Let out income 30100
The other house is exempted u/s 23 (2) Nil
Capital gain : STCG on shares 50,000
Income from other sources
Bank interest on fixed deposits 11000
Interest on saving account 10600
Interest on govt. securities 10500
Gross total income 32,100
Deductions u/s 80 404200
80 C
Contribution to SPF 20,000
Premium of life insurance 25,000
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Contribution to home deposit account 10,000
80 TTA
Interest credited in SBI saving bank a/c restricted to 55000
Total income 339800
Working notes:
Illustration 6
The following are particulars of the income of the GND university teacher during the year
ending 31ST March, 2019
(a) Salary Rs 37,400 p.m plus Rs 9,000 p.m as grade pay from which 10 % is
deducted for statutory provident fund to which the university contributes 12 %
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(b) Rent free bungalow of the anuual letting value of Rs 18,000
(j) During the year, he sold his plot and earned a long term capital gain of Rs
40,000
During the year he paid Rs 24,000 as life insurance premium on his own policies and spent
Rs 600 on books purchased for his own use.
Find out his total income , tax and exempted income . population of Amritsar is 12 lakhs.
Solution 6
Computation of total income
Salary income
Pay Rs 37,400 P.m 448,800
Grade pay Rs 9,000 P.m 108,000
Wardenship Allowance Rs 2,000 p.m 24,000
Rent free accommodation at Amritsar
10 % of salary i.e., 448,800 + 108,000 + 24,000 = Rs 580,800 58,080
Employer’s contribution to SPF- exempted Nil
Gross salary 638,880
Less: Deductions u/s 16 : Standard deduction u/s 16 (i) 40,000
Salary income 598,880
Income from house property 29,560
Capital gain
LTCG on sale of plot 40,000
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Income from other sources
Interest – gross 2,500
Examinership remuneration 3,500
Interest on govt. Loan 7,800
Remuneration for writing articles 3,500
Interest on postal saving bank deposit 6,500
Less : Exempted u/s 10 (15) 3,500 3,000 20,300
Gross total income 688,740
Less: Deductions u/s 80
80C : Own contribution to SPF 55,680
Life insurance premium 24,000 79,680
80 D : Mediclaim 2,000
80 TTA: Interest on postal saving bank account 3,000
Total income 604,060
Tax 33,312
The term ‘Hindu undivided family’ has not been defined in the Income-tax Act. However,
in general parlance it means an undivided family of Hindus. Creation of a HUF is a God-
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gifted phenomenon. As soon as a married Hindu gets a child, a new HUF comes into
existence. It is not at all necessary that every HUF must have joint property or family
income. [R.SubramaniaIyer v. CIT (1955) 28, ITR, 352]. However, to become an
assessee under the Income-tax Act, there must be ‘income-yielding’ joint property of the
family.
A HUF may consist of a number of smaller HUFs. A smaller HUF has a legal existence
and may be assessable as a unit distinct from the apex joint family even when the bigger
HUF is in place [CIT v. Khanna (1963) 49 ITR 232].
Under Hindu Law, a Joint Hindu Family consists of all persons lineally descended from a
common ancestor (except those who have separated from the joint family by partitioning
of assets) and includes their wives and unmarried daughters, and also a stranger who has
been adopted by the family. [Surjit lal Chhabra v. CIT (1975) 101, ITR, p.776 (S.C.)].
The Supreme Court’s decision in the case of Surjit Lal Chhabra v. CIT (1975 101 ITR
776) has come to stay as one of the leading case laws. The ratio laid down by the
Supreme Court had been applied by the Andhra Pradesh, Orissa and Madras High Courts,
followed by Bombay, Patna, Madhya Pradesh and Delhi High Courts and relied upon by
the Punjab High Court. In the latest case, the Delhi High Court held in Commissioner of
Income-tax v. S.P. Chopra (1991, 191 ITR 455) that the income from the half share of the
property had to be treated as the individual income of the assessee under the personal law
and not as income of the family. The character of the property had to be determined in
accordance with the personal law of the assessee and not on the basis of how the property
had been treated by the revenue in respect of earlier assessments.
A son conceived or in his mother’s womb is equal in many respects to a son actually in
existence, viz., inheritance, partition, survivorship etc. But this doctrine does not apply to
the Income-tax Act. Hence, a son conceived is not treated a member of the H.U.F. for
Income-tax purposes. [T.S. Srinivasan v. C.I.T., (1966) 60, ITR, p.36 (S.C.)].
Jain and Sikh undivided families are also treated as Hindu undivided families unless, under
special circumstances, the assessee claims not to be treated as such. If such claim is
made, the assessee shall have to prove that there is some such custom in his family on
account of which it cannot be treated as a Hindu undivided family.
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A Hindu does not cease to be a Hindu merely because he declared for the purpose of the
Special Marriage Act, 1872, that he does not profess Hindu Religion. Such a Hindu does
form an H.U.F. with his children from such marriage. [CIT v. Partap Chand (1959), 36
ITR, 262]. Similarly, a Muslim family governed by the Marumakkathayam law constitutes
‘Tarwad’ or ‘Thavazhi’ and falls within the definition of a H.U.F. [V.K.P. Abdul Kadar
Haji v. Ag. ITO (1967) 66, ITR, 173].
If a Hindu gets converted as a Christian, the family of such a person will not be a HUF.
However a Hindu, along with his son (by a christian wife) who has been brought up as a
Hindu will be a HUF. [CWT v. R. Sridharan (1976) 104, ITR, 436 (S.C.)].
To claim the status of hindu undivided family, a family must satisfy the following two condtions:
1. Existence of common property in the family: The common property may consist of
ancestral property inherited from a male ancestor , property acquired with the
aid of ancestral property and property acquired by an individual from his own
sources but put into common pool of hindu undivided family.
2. Existence of hindu coparcenary: When there is a person who can calim share in
the property of HUF on partition, he is know as coparcencer. In order to
assess a family as HUF, there must be coparcenary. All HUF’s Mat not have
coparcenary and hence all HUF’s cannot be treated as HUF for assessment
purposes. The coparcenary implies the existence of more than one coparenary
in HUF members of HUF and coparcenary of HUF do not mean the same.
As HUF may have many members- Male or femal , minor or major ,etc. and
all members are not coparceners. A Hindu coparcenary includes only those
members who (i) Acquire by birth an interest in joint or coparcenary property
and (ii) Have the right to claim partition of such property . Such coparceners
are the male ancestor with his lineal descendants in the male line within three
degrees, i.e., sons, grandson, and great grandsons. However, w.e.f 1 . 9 .2015
, a daughter born in the family’s also a coparcener like male members of the
family.
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(i) Coparceners: The lineal male descendants of a person up to the third generation of
such person are known as coparceners. The coparceners acquire, on birth, ownership in
the ancestral properties of such ascendant and have a right to claim partition of such
property at any time. However, w.e.f. 9.9.2005 due to amendment of Hindu Succession
Act, the daughter of a coparcener shall by birth become a coparcener in her own right in
the same manner as the son. Hence, the daughter can also ask for partition.
(ii) Other members: Such members include wives of male members of the family and other
male members.
(a) All persons lineally descended from a common ancestor and includes their wives and
daughters (w.e.f. 9.9.2005).
(b) A male and widow or widows of deceased male member or members. [GowliBuddanna
v. C.I.T. (1966) 60, ITR, p. 293 (S.C.)]
However, an unmarried coparcener who receives share on the partition of joint family
properties, cannot form a Hindu undivided family unless he marries. After his marriage, he
can hold the property received from family as joint family property consisting of himself
and his wife. [C. Krishna Prasad v. C.I.T. (1974) 97, p. 493 (S.C.)].
Karta: Property of the family is ordinarily managed by the father or other senior member
for the time being of the family. He is called Karta. However, the senior member may give
up his right of management and a junior member may be appointed as Karta with the
consent of all other members. [Narendra Kumar J. Modi v. CIT (1976) 105, ITR, 109
(S.C.)]. In the absence of a male member in the family or when all male members are
minors, a woman member can be treated as manager of the family for income-tax purposes.
[Smt. ChampaKumariSinghi v. Addl. Member of the Board of Revenue (1962) 46, ITR,
p. 81].
Since daughter is also a copacener w.e.f. 9.9.05, it may be presumed that daughter can
also be karta of her father’s HUF.
It consists of:
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(i) Ancestral property;
(iv) Self-acquired property of any member thrown by him into the common stock to be
treated as family property. In the case of Pushpa Devi v. C.I.T. the Supreme Court has
held that a Hindu female, not being a coparcener, cannot blend her separate property with
Joint family property. However, she can make a gift of her property to the family. [(1977)
109, ITR p. 730].
The Supreme Court’s decision in the case of Pushpa Devi v. Commissioner of Income-tax
(1977, 109 ITR 730) had been later followed by the Calcutta, Andhra Pradesh and Madras
High Courts. In the latest case, the Madras High Court held in the case of RajathyAmmal
v. Commissioner of Wealth-tax (1987, 164 ITR 605) that a female member could not
throw her property into the family hotchpotch and the only way she could achieve her
purpose was either by gifting it or selling to the family.
Further, Section 64(2) provides that where an individual being a member of Hindu undivided
family transfers his separate property after 31st December, 1969 to the family for the
common benefit of the family, otherwise than for adequate consideration, such property is
known as converted property. The income derived from the converted property or any
part thereof shall be included in the total income of the transferor individual and not in the
income of the family.
School of Hindu Law: According to Hindu Law, HUFs are governed by two schools
viz. Mitakshara and Dayabhaga.
Mitakshara School applies to whole of India except the states of West Bengal and Assam.
Dayabhaga School applies to the States of West Bengal and Assam. The difference
between the two schools is as under:
(i) Foundation: In the Mitakashara School, the foundation of a coparcenary is laid down
when a son is born to the Mitakshara father. Under the Dayabhaga School the foundation
of a coparcenary is laid on the death of the father leaving, as survivors, one or more sons.
141
(ii) Right to partition: A Mitakshara son, in whom the interest in family property is
vested by birth, all along possesses a right to demand partition. A Dayabhaga son, on the
other hand acquires no interest in the family property by birth and, consequently, has no
right to demand partition of the HUF property from his father.
(iii) Quantum of share: Under Mitakshara Law, each coparcener takes as undefined
share in the coparcenary property. The share of the members decreases by birth in the
family and increases upon death of a coparcener. A Dayabhaga coparcener, on the other
hand, always takes a defined share in the property left by his deceased father. Thus, the
heirs of a deceased governed by the Dayabhaga School do not constitute a HUF
automatically on the death of the deceased and cannot be assessed as a HUF unless they
have by mutual consent agreed to form a joint family.
(iv) Gift out of ancestral property: A Mitakshara Karta may make a gift of movable
property of the family, out of love and affection, within reasonable limits. He can also make
a gift of immovable properties, within reasonable limits for pious purposes; i.e., for charitable
and religious purposes or to a daughter in fulfilment of a nuptial promise etc. However, a
gift to a stranger is void. On the contrary, a Dayabhaga father can alienate ancestral property,
both movable as well as immovable, by sale, gift, will or otherwise in the same way as he
can dispose of his separate property.
This Act came into force on and from 17th June, 1956. It lays down a uniform and
comprehensive system of inheritance and applies to persons governed by the Mitakshara
as well as the Dayabhaga Schools, superseding and abrogating all previous law or customs
or usage having the force of law. Under this Act, the heirs of a male Hindu dying intestate
on or after 17th June, 1956 are divided into three classes. Class I heirs get the right to the
deceased’s property simultaneously to the exclusion of all other Classes of heirs. Class II
relations succeed only if there is no class I relation and, the heirs in the first entry of class II
being preferred to heirs in the second entry, and so on, but heirs in any one entry taking in
equal shares amongst themselves.
The students should note that Section 4 of the Hindu Succession Act, 1956 clearly lays
down that “save as otherwise expressly provided in the Act, any text, rule or interpretation
of Hindu Law or any custom or usage as part of that law in force immediately before the
142
commencement of the Act shall cease to have effect with respect to any matter for which
provision is made in the Act.” And, Section 8 of the Hindu Succession Act, 1956, lays
down the scheme of succession to the property of a Hindu dying intestate. The schedule
classifies the heirs on which such property shall devolve.
(1) Son (2) Daughter (3) Widow (4) Mother (5) Son/daughter/widow of a predeceased
son (6) son/daughter of a predeceased daughter (7) Son/daughter/ widow of a predeceased
son of a predeceased son.
A son’s son is not mentioned as an heir under Class I of the schedule and, therefore, he
cannot get any right in the property of his grandfather under the provision. The right of a
son’s son in his grandfather’s property during the lifetime of his father which existed under
the Hindu Law as in force before the Act, is not saved expressly by the Act and, therefore
the earlier interpretation of Hindu Law giving a right by birth in such property ‘ceased to
have effect’.
Therefore, the property which devolves on a Hindu on the death of his father intestate after
coming into force of the Hindu Succession Act, 1956, does not constitute H.U.F. property
consisting of his own branch including his sons. [Shri VallabhdasModani v. C.I.T. (1982)
138, ITR, p. 673].
The Allahabad High Court’s decision supra in the case of Shri VallabhdasModani v.
Commissioner of Incometax was followed by the Andhra Pradesh High Court (1983, 144
ITR 18) and later approved by the Supreme Court in the case of Commissioner of Wealth-
Tax v. Chander Sen (1986, 161 ITR 370) holding that it is not possible to say that when a
son inherits the property in the situation contemplated by the Hindu Succession Act, 1956,
he takes as Karta of his own undivided family.
The gross total income of the family for the relevant previous year shall be computed under
the relevant heads (as per the provisions of the Income-tax Act) as it is computed for other
assessees. However, in this connection the following points are worth noting:
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Clubbing of Income
(i) If the funds of a Hindu Undivided family are invested in a company or a firm, fees
or remuneration received by the member as a director, or a partner in the company
or firm may be treated as income of the family in case the fees or remuneration is
earned essentially as a result of investment of funds. But, if the fees or remuneration
is earned essentially for services rendered by the member in his personal capacity,
the income shall constitute the personal income of the member.
(ii) For determining whether a particular income belongs to a member of the family
or to his undivided family, the Supreme Court has enunciated certain principles. The
question to be considered in such cases is, whether the remuneration received by
the coparcener is in substance merely a mode of return made to the family because
of the investment of the family funds in the business or whether it is a compensation
for services rendered by the coparcener. If it is the former, it is an income of the
HUF but if it is the latter it is the income of the individual. If the income was essentially
earned as a result of the funds invested, the fact that a coparcener has rendered
some service would not change the character of the receipt. But if, on the other
hand, it is essentially a remuneration for the services rendered by the coparcener, the
circumstances that his services were availed of because of the reason that he was a
member of the family which had invested funds in that business or that he had obtained
the qualification shares from out of the family funds would not make the receipt the
income of the HUF. [Raj Kumar Singh HukamChandji v. CIT (1970) 78 ITR 33].
The Supreme Court’s decision supra in the case of Raj Kumar Singh HukamChandji
v. Commissioner of Income-tax has come to stay as one of the most followed/
applied case laws. This decision had been followed by Patna (Full Bench), Allahabad,
Bombay and Gujarat High Courts, applied by Andhra Pradesh, Madras, Kerala,
Delhi, and Supreme Court itself. It would suffice to refer to the Supreme Court’s
decision in the case of Y.L. Aggarwalla and others v. Commissioner of Income-tax
(1978, 114 ITR 471) holding that the share income was a return made to the family
because of the investments of the family funds in the business and the share income
was not the individual income of minor sons but was the income of the Hindu undivided
family and had to be assessed in the hands of the family.
144
(iii) Where a member of a HUF is a partner in a firm on behalf of the family and on
partition of the property of the family, the share in the firm is allotted to such a
member, subsequent to such allotment when the firm settles its accounts the whole
income for that year would be the income of the individual member and no part of
the income would be added to the income of the family. [CIT v. Ashok Bhai Chiman
Bhai (1965) 56, ITR, 42 (S.C.)].
(iv) The personal earning, including income from self-acquired property of a member
of the HUF, even though he has sons, would not be included in the income of the
family. Such income shall be assessed as income of that individual. [KalyanjiVithal
Das v. CIT (1937) 5 ITR 90 (PC)].
(v) Any sum paid by an H.U.F to a member of the family out of its income is not
deductible in computing the income of the family. However, such amount will not be
included in the income of such individual whether the family had paid tax on its
income or not [Section 10(2)].
(vi) If any remuneration is paid by the Hindu Undivided family to the karta or any
other member for services rendered by him in conducting family’s business, the
remuneration is deductible if remuneration is (a) paid under a valid and bona fide
agreement; (b) in the interest of, and expedient for, the business of family; and (c)
genuine and not excessive. Jugal Kishore BaldeoSahai v. CIT [1967] 63 ITR 238
(SC).
(vii) If salary is paid by the Hindu undivided family to its karta for looking after its
interest in firms in which it is partner through said karta, such salary is allowable as
deduction - CIT v. Prakash Chand Agarwal [1982] 11 Taxman 55 (MP).
(viii) Income from ‘stridhan’ is not includible in the income of the family. Property
derived by a woman from her father or brother or husband or any other relative
either before or after her marriage is known as ‘stridhan’.
145
(x) Income from impartible estate is taxable in the hands of the holder of the estate
and not in the hands of the Hindu undivided family. Though, the impartible estate
belongs to the family, income arising therefrom belongs to the holder of the estate
who is the senior most male member of the family. Income from impartible estate is
taxable in the hands of the holder of the estate.
(xi) Personal income of the members cannot be treated as income of Hindu undivided
family.
(xii) Under the DayabhagaSchool of law, as stated in a preceding page, no son has
any right in the ancestral property during the lifetime of his father. If, therefore, the
father does not have any brother as a coparcener, income arising from ancestral
property is taxable as his individual income.
(i) Profits and gains from industrial undertakings engaged in infrastructure development
u/s 80 IA
146
(ii) Profits and gains from industrial undertakings engaged in development of special
economic zones u/s 80 IAB
(iii) Profits and gains from certain industrial undertakings from certain business u/s 80
IB
(iv) Profit and gains from the business of hotel and convention centre in specified areas
u/s 80 ID
(vii)Profits and gains from business of collecting and processing of bio- degradable
waste u/s 80 JJA
The hindu undivided family is a separate unit of assessment and is taxable through its
manager or karta. A single person, male or female , does not constitute a family. The
following rules are to be observed while making the assessment of hindu undivided family.
1. The share of income received by a member of HUF from the income of family
is not be included in his individual income being exempted in the hands of the
coparcener of HUF even though the family may not have paid the tax on such
income . [Section 10 (2)]
2. The income received by a member from an asset which was previously owned
by him but has been put into common pool of HUF shall remain as his individual
income
3. Salary paid out of the fund of HUF to a member is allowed as the legitimate
expenditure of the HUF , if the member has rendered some service to the
HUF
147
4. A member can carry on any business in his own name and the income from
such business shall be included in his individual total income. It is immaterial
that the funds were provided by HUF.
6. A Gift of property to the wife out of the family property is a bonafide transfer
and as such income from such property shall belong to the wife.
7. On the death of manager, the succeeding manager- not the member of family
or wife, shall be his legal representative.
8. In case any HUF holds share in a company and any loan is advanced to
members of HUF, it will not be deemed as dividend u/s 2 (22) (e) Because
individual members are not shareholders of that company.
Though only coparceners can demand partition, once the partition takes effect, the following
persons are entitled to a share:
(c) Mother, who gets an equal share if the partition takes place among her sons after
the death of her husband; and
(d) Wife, who gets a share equal to that of a son at the time of a partition between
father and sons.
148
A joint family, once assessed as a HUF, continues to be assessed as such till one or more
coparceners claim partition. Such claim must be made by the coparceners before the
assessment of the income of the HUF for the relevant assessment year is completed. On
the receipt of such a claim, the Assessing Officer must make an inquiry after giving due
notice to the members and record a finding whether there has been a partition and, if so,
the date of the partition. The income of the family from the first day of the previous year to
the date of partition is assessed as income of the HUF and from the next date of the
partition to the date of close of the previous year, as the individual income of the recipient-
members. If the recipient member forms another HUF along with his wife and son(s), the
income of the property which was subject to partition is chargeable to tax in the hands of
the new H.U.F.
Where the entire joint family property is divided among all coparceners and the family
ceases to exist as an undivided family, the partition is total. A partial partition may be as
regards: (a) the persons constituting the joint family, or (b) the properties belonging to the
joint family, or (c) both. The device of partial partition has been used as a medium for
reduction of proper tax liability. To curb such a practice, the Finance (No. 2) Act, 1980
inserted Sub-section 9 in Section 171 which lays down that partial partitions of HUFs
effected after 31st Dec., 1978 will not be recognised for tax purposes.
(i) In a case where a partial partition of a HUF has taken place after 31.12.1978, no
claim of such partition will be enquired into and the Assessing Officer will not record
a finding as to whether there has been a partition of the family property. Further, any
finding regarding partial partition recorded under Section 171(3) will be null and void
and of no legal effect.
(ii) Such family will continue to be assessed as if no such partial partition has taken
place, i.e., the property or source of income will be deemed to continue to belong to
the Hindu undivided family and no member will be deemed to have separated from
the family.
149
(iii) Each member or group of members of such family will be jointly and severally
liable for any tax, interest, penalty, fine or other sum payable under the Act by the
family, whether before or after such partition. The several liability of any member or
group of members of such family will be computed according to the portion of the
joint family property allotted to him on such partial partition. This amendment has
come into force with effect from April 1, 1980 and has, accordingly, been applicable
with effect from assessment year 1980-81 and onwards.
Residence of HUF
Non – Resident [ Section 2 (30)]: A HUF is said to be non- resident of India for
any previous year if it is not a resident as per section 6 (2). In other words, if the
control and management of the affairs of a HUF is situated wholly outside India it is
non- resident Hindu Undivided Family.
Not Ordinary Resident: A hindu undivided family can claim the status of ‘Not
ordinary resident’ if the karta ( Manager) of HUF can prove that:
(a) He was not a resident of India for 9 out of 10 Previous years exceeding the
relevant previous year or
(b)He was not in India for a period totaling 730 days or more during 7 previous
years preceding the relevant previous year.
The finance act, 2011 , introduced the concept of alternate minimum tax on limited liability
partnership. However, the finance act, 2012 has extended the system of alternate minimum
tax on all persons other than a company subject to certain conditions. Thus, w.e.f assessment
year 2013-14, alternate minimum tax is applicable on HUF’s also.
150
The provisions of alternate minimum tax shall apply to a HUF:
(a) u/s 35 AD or
(b) any deductions other than section 80P included in chapter VI-A under the
heading C- Deductions in respect of certain incomes[ i.e., u/s 80 IA to
Section 80 RRB] or
The provisions of alternate minimum tax shall not apply to a HUF whose Adjusted total
income does not exceed Rs 20 Lakh.
Scheme of AMT
Where the regular income tax payable by HUF for a particular previous year is less than
the alternate minimum tax payable for such previous year, the adjusted total income shall
be deemed to be the total income of such HUF for such previous year and it shall be liable
to pay income tax on such total income @ 18.5%.
Thus, AMT is an alternate amount of tax which a hindu undivided family has to pay if the
regular income tax for any previous year is less than 18 .5 % of its adjusted total income as
defined for this purpose. Section 115 JC is an overriding section and provides a specific
tax rate on a specific figure for certain HUF’s. It provides a new concept of Adjusted total
income for HUF’s which is to be treated as total income of the HUF and On this total
income, tax is required to be calculated @ 18.5 % . This tax is called Alternate minimum
tax . AMT has brought into tax net those HUF’s which were earning profits but were not
paying any income tax due to various deductions or exemptions available to them under
the income tax act, 1961
151
(ii) Tax @ 18.5 % on adjusted total income.
Whichever is higher.
(ii) If adjusted total income exceeds Rs 50 lakhs but does not exceed Rs 1 crore.
It means the income tax payable for a previous year by a hindu undivided family on its total
income in accordance with provisions of IT act, 1961 Other than the provisions of this
chapter XIIB.
Adjusted total income means the total income before giving effect to this newly inserted
chapter XII BA as increased by:
(i) Deductions claimed under any sections included in chapter VI-A Under the heading
C – Deduction in respect of certain incomes except section 80 P and
(iii) Deduction claimed u/s 35 AD less depreciation allowable u/s 32 on the cost of
that asset.
3.14 SUMMARY
An income tax is a tax imposed on individuals or entities (taxpayers) that varies with the
income or profits (taxable income) of the taxpayer. Details vary widely by jurisdiction.
Many jurisdictions refer to income tax on business entities as companies tax or corporate
tax. Income tax generally is computed as the product of a tax rate times taxable income.
152
The tax rate may increase as taxable income increases (referred to as graduated rates).
Taxation rates may vary by type or characteristics of the taxpayer. Capital gains may be
taxed at different rates than other income. Credits of various sorts may be allowed that
reduce tax. Some jurisdictions impose the higher of an income tax or a tax on an alternative
base or measure of income.
Individual income tax is a subject matter of central govt. If an individual want to assess his/
her income tax then he/she should have knowledge of individual income tax structure.
Individuals after calculating their total income for a particular financial year can assess their
income tax after deduction of saving and doing other adjustments. By doing so they can
plan in advance about their savings and income tax.
Income tax is levied on an assessee’s total income. Such total income has to be computed
as per the provisions contained in the Income-tax Act, 1961. The procedure of computation
of total income for the for the purpose of levy of income tax starts with the determination
of residential status of Individual. The residential status of a person has to be determined to
ascertain which income is to be included followed by the classification of income under
various heads.The Act prescribes five heads of income.These heads of income exhaust all
possible types of income that can accrue to or be received by an individual. An individual
has to classify the income earned by him under the relevant head of income then exclusion
of exempted income takes place as there are certain incomes which are wholly exempt
from income tax e.g., income from mutual fund. These incomes have to be excluded and
will not form part of GTI. The balance income over and above the prescribed limits would
enter computation of total income and have to be classified under the relevant head of
income. After the calculation of GTI under each head, net income under each head is
computed and then incomes are clubbed and if there is some losses which are to be setoff
and forwarded are accordingly dealt with. After following all these steps we compute
Gross Total Income, deduction from Gross Total Income and the finally computation of
total income takes place.
153
Historically, for generations India had a prevailing tradition of the joint family system or
undivided family. The system is an extended family arrangement prevalent throughout the
Indian subcontinent, particularly in India, consisting of many generations living in the same
home, all bound by the common relationship. A patrilineal joint family consists of an older
man and his wife, his sons and daughters and his grandchildren from his sons and daughters.
The family is headed by a senior person called a karta, usually the oldest male, who makes
decisions on economic and social matters on behalf of the entire family. The patriarch’s
wife generally exerts control over the household and minor religious practices and often
wields considerable influence in domestic matters. Family income flows into a common
pool, from which resources are drawn to meet the needs of all members, which are regulated
by the heads of the family. However, with urbanisation and economic development, India
has witnessed a break up of traditional joint family into more nuclear-like families, and the
traditional joint family in India accounted for a small number of Indian households
A Hindu undivided family or HUF is a legal term related to the Hindu Marriage Act. The
female members are also given the right of share to the property in the HUF. The term
finds reference in the provisions of the Income Tax Act, but the expression is not defined in
the act. There are various aspects of Hindu law relevant for the purpose assessment of
income and wealth in the status of HUF, as well as the impact of the provisions of Hindu
Succession Act 1956 as amended by Hindu Succession (Amendment) Act 2005 relevant
for the purpose of assessment of income and wealth in the status of HUF under the Income
Tax Act 1961.
In the case of Surjit lal Chhabra 101 ITR 776 SC, joint family and undivided family are
synonymous: “A joint Hindu family consists of persons lineally descended from a common
ancestor and includes their wives and unmarried daughters. The daughter, on marriage,
ceases to be a member of her father’s family and becomes a member of her husband’s
family.”
In 2016, a judgment of the Delhi High Court ruled that the eldest female member of a
Hindu Undivided Family can be its “karta” (manager)
ILLUSTRATION 1
A HUF with more than one coparcener entitled to claim partition, owns a property which
is let out at Rs. 600 per month per unit. The property consists of ten identical residential
154
units. Following deductions are claimed by the HUF including the expenses on tenant’s
amenities.
The money was actually used in the business of the HUF 5000
The income from business for the assessment year 2019-20 2,10,000
A lottery ticket of 100 Rs. Was purchased out of family funds on the name of HUF and it
won a prize of Rs. 100000. The Karta has acquired a shop out of his own savings which
he gifted to his wife. Shop has an annual income of Rs 24000.
Compute the HUF’s total income and tax payable for the assessment year 2019-20.
SOLUTION 1
155
Water pump expenses 800 2,800
Or
Computation of tax:
30,000
On 250000 Nil
Tax 30,275
156
ILLUSTRATION 2
The following particulars have been submitted by ram Lal in the capacity of Karta of a
HUF for assessment purposes:
a) Profit from families’ business, Rs. 25000 after charging an amount of Rs. 60,000 given
as salary to Karta’s brother who has been actively participating in it.
b) Salary income of Kartas another brother who is manager in a cooperative bank Rs.
11000 p.m.
c) Directors fees received by Karta Rs. 5000(HUF holds 20% shares in this company).
You are required to calculate total income and tax liability of the family for the assessment
year 2019-20.
SOLUTION 2:
157
Interest on loan 12000 21,450
10,050
[357050-68000=289050]
Tax Liability:
Tax 14830
158
Add: Health and Edu. Cess @ 4% 593
ILLUSTRATION 3
Mr. K . Ramanna is Karta of HUF consisting of Himself and his two brothers. He furnishes
the following particulars of Income.
(i) Mr. V. Ramanna , Karta younger brother, is manager of M/s steel ltd. And he
received Rs 120,000 as salary.
(ii) The family business profit was Rs 444,000 . Mr. K. Ramanna is member of
an AOP in the representative capacity and his ½ share of profits received from
such AOP is Rs 4,000. Mr. D. Ramanna, 3rd brother , is a lawyer and his
professional income is Rs 10,000.
(iii) The family has an ancestral house whose rental value is Rs 21,000 p.a Another
house, which was bought in the name of Mr. D Ramanna out of family funds
has annual letting value of Rs 9,000 . Taxes Paid in the respect of these houses
are Rs 2,100 and Rs 900 respectively.
(v) Dividend of Rs 5,000 Received by Mr. K. Ramanna out of her stridhan and
interest on Govt. securities Rs 4,000 and securities were purchased out of
family funds.
Solution 3
Income from house property
159
Let out Annual Rental Value 9,000
Less: Municipal taxes 900
NAV 8,100
Standard deduction : 30 % of NAV 2,430
Income from let out house 5,670
Self occupied house
NAV Nil 5,670
Profit and Gains of business or profession
Profits from family business 444,000
Income from other sources:
Interest on Govt. securities 4,000
Interest on debentures – Listed Net 9,000
Gross ( 9,000 X 100 / 90) 10,000 14,000
Gross total income 463,670
Less: Deductions u/s 80 Nil
Total income 463,670
ILLUSTRATION 4
Sanjay chopra , his two brothers and major son constitute an HUF and the following
statement of income has been submitted by them for assessment purposes:
(1) Profits from business carried on by the karta in the account and on behalf of HUF
Rs 180,000 after deducting Rs 6,000 paid to vijay a member of the HUF for working as
travelling salesman and Rs 20,000 paid to sanjay chopra for managing the affairs of the
business
(2) The family owns a house with the rental value of RS 10,000 , Local charges in
respect of this being Rs 500 . It is used for Residence of the family. Mr. chopra has created
a charge on this house for payment of Rs 5,000 P.a to his sister. Fire insurance premium
paid is Rs 100 and theft insurance Rs 200
(3) The HUF sold another house for Rs 11,50,000 on 10th april, 2018 ( Cost inflation
index in 2018-19 was 280) which was acquired in 1955. Its fair market value on 1st april,
2001 was Rs 420,000 [ CII for 2001-02 was 100]
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(4) Loss of stock in trade occasioned by enemy action Rs 5,000 not charged earlier.
(5) Sanjay chopra wins a prize of Rs 50,000 in rajasthan state lottery and claims it as
his personal winnings. It is on record that the ticket was brought in his name though the
rupee has been spent from the cash box of the business
(6) Dividend on units of mutual fund Rs 5,000 ( Gross) . Interest credited in saving
bank a/c Rs 15,000 and interest on debentures Rs 10,000 and interest on govt. securities
held by family was Rs 9,000
Compute total income of the family for the assessment year 2019-20 giving sufficient
explanation for each item.
Solution V
Computation of total income
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3.15 GLOSSARY
Individual includes both male and female assessees. The total income has to be
computed as per the provisions of the Income-tax Act, 1961. In addition to
individuals own income, income of other persons received by him in some other
capacity or received by other persons is to be clubbed with individual assesses
income. Following steps are considered for computing total income and to charge
tax.
The term ‘Hindu undivided family’ has not been defined in the Income-tax Act.
However, in general parlance it means an undivided family of Hindus. Creation of
a HUF is a God-gifted phenomenon. As soon as a married Hindu gets a child, a
new HUF comes into existence. It is not at all necessary that every HUF must
have joint property or family income.
The gross total income of the family for the relevant previous year shall be computed
under the relevant heads (as per the provisions of the Income-tax Act) as it is
computed for other assessees.
Income tax has to be paid by every individual person, Hindu Undivided Family
(HUF), Association of Persons (AOP), Body of Individuals (BOI), corporate
firms, companies, local authorities and all other artificial juridical persons that
generate income.
Coparceners: The lineal male descendants of a person upto the third generation
of such person are known as coparceners. The coparceners acquire, on birth,
ownership in the ancestral properties of such ascendant and have a right to claim
partition of such property at any time.
Hindu Succession Act, 1956: This Act came into force on and from 17th June,
1956. It lays down a uniform and comprehensive system of inheritance and applies
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to persons governed by the Mitakshara as well as the Dayabhaga Schools,
superseding and abrogating all previous law or customs or usage having the force
of law.
Karta: Property of the family is ordinarily managed by the father or other senior
member for the time being of the family. He is called Karta. However, the senior
member may give up his right of management and a junior member may be appointed
as Karta with the consent of all other members. [Narendra Kumar J. Modi v. CIT
(1976) 105, ITR, 109 (S.C.)].
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4. List the steps to be followed while computing Total income of the assessee?
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5. What are the steps to be considered for computing total income and to charge tax?
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6. What do you mean byPartition of a Hindu undivided family? Who is entitled to share
on partition?
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7. List the Income of other persons to be included in the total income of an individual?
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8. What is Karta?
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9. Explain the various steps to be followed while computing the taxable income of Hindu
Undivided Family?
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1. Dr. V.K. Singhania: Students Guide to Income-tax; Taxmann Publications Pvt. Ltd.,
New Delhi.
2. Girish Ahuja and Ravi Gupta: Systematic Approach to Income-tax and Sales-tax; Bharat
Law House, New Delhi.
3. Dr. H.C Meharotra and Dr S. P Goyal: Income Tax Law and Accounts; Sahitya Bhavan
Publications.
4. V. P Gaur & D. B Narang: Income Tax Law & Practice; Kalyani Publishers.
5. V. K Singhania & Kapil Singhania: Direct Taxes Law & Practices; Taxman Publications.
6. Mahesh Chandra, D. C Shukla, K. A Mahajan & M. A Shah: Income Tax Law &
Practices; pragati Publication, New Delhi.
7. Arvind Tuli & Dr. Neeru Chadda: Conceptual Clarity on Income Tax and Wealth Tax;
Kalyani Publication, New Delhi.
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C. No. :- BCG-402 UNIT IV
STRUCTURE:
4.1 Introduction
4.2 Objective
4.8 Computation of income on estimated basis in case, taxpayers are engaged in certain
business
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4.14 Method of Computing Share of a Member of Association of Persons, etc. (Section
67A)
4.17 Summary
4.18 Glossary
4.1 INTRODUCTION
Assessment is the act of judging or deciding the amount, value, quality, or importance of
something, or the judgment or decision that is made. It is a procedure used by government
assessors to determine the value of a property, or the income of a person or entity, in order
to charge taxes or to levy on the orders of a court. In other words it is a value calculated
as the basis for determining the amounts to be paid or assessed for tax or insurance
purposes. A tax assessor is responsible for preparing and maintaining the assessment roll,
the tax roll and collecting the tax levies in accordance with the quality standards.
• Responding to inquiries and requests for information related to assessment and taxation.
• Producing and mailing annual assessment and tax notices to tax prayers.
In this lesson the Income Tax Treatment with relation to Firms and Associations of Persons
is being discussed. The tax implications, rates of tax and other issues relating to the above
persons have been discussed elaboratory. With regard to firms the focus is on partnership
firms or Limited liability partnerships.
4.2 OBJECTIVE
What are the tax implications in the hands of partners and firm
Under Section 2(23) of the Income-tax Act, the terms “firm”, “partner”, and “partnership”
have the meanings respectively assigned to them in the Indian Partnership Act, 1932 and
Limited Liability Partnership Act, 2008.
The expression “partner” also includes a minor who has been admitted to the benefits
of partnership and a partner of a Limited Liability Partnership Act 2008. However
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a minor cannot validly enter into any partnership as a ‘full partner’ with other
persons but he can be admitted to the benefits of partnership only.
A joint Hindu family as such cannot be a partner in a firm. However, through its Karta it
may enter into a valid partnership with a third person or with a member of the undivided
family in his individual capacity. In such a case, the Karta occupies a dual position. On the
partnership he functions in his individual capacity; on the relations to other members of the
Hindu undivided family, in his representative capacity.
An incorporated company being a legal person may form a partnership with an individual
or with another company. In considering the maximum number of partners comprising a
firm, the company will be considered as one person only.
A partnership firm as such is not entitled to enter into a partnership with another firm,
H.U.F., individual, or a company. However, its partners in their individual capacity can
enter into another partnership.
A partnership firm including LLP is a separate entity in the eyes of income tax department.
It is so because the definition of the term ‘ person’ given u/s 2 (31) also includes ‘ firm’
including LLP. Though the income earned by firm/ LLP is the joint income of the partners
yet such income is taxable as the income of the firm/LLP . A firm /LLP is liable to pay tax
at the flat rate on normal income as well as on certain special income without any basic
exemption limit as there in case of individual and HUF.
Partnership [Section 2 (23) (iii)] Partnership shall have the meaning assigned to it in the
Indian Partnership Act, 1932 and shall include a limited liability partnership as defined in
the LLP act, 2008.
Meaning of partnership , Partner and Firm under Indian Partnership Act , 1932
Section 4 of the Indian Partnership Act has defined the word ‘ Partnership’ as “ the
relation between persons who have agreed to share the profits of a business carried on by
all or any of them acting for all”.
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- There must be an agreement entered into by all persons.
- The business to be carried on by all or by any one of them acting on behalf of all
and for the benefit of all.
The term ‘partner’ is defined as any person who has entered into partnership . Partners
entering into a contract with one another are called individually as partners and collectively
a firm and the name under which their business is carried on is called the firm’s name. The
word ‘ partner’ shall also include any person who being a minor has been admitted to the
benefits of partnership.
The term firm means the entity which comes into existence as a result of partnership
agreement.
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Necessity of have separate PAN:
A Partnership firm/LLP is required to have its own separate ‘ Permanent Account Number’
(PAN) which will be different from the permanent account number of the partner (s) if any.
The PAN of firm/LLP bears its name and is used for filing return of income of the firm. It
is important to note that the individual income of the partner (s) shall not be clubbed with
the income of the firm/LLP.
The share of income received by partners from the firm is exempt in the hands of partners
and hence is not included in their individual income. Under Income Tax act, a partnership
firm can be of following two types:
(ii) Such deed must show the respective share of each partner.
(iv) It is submitted along with its return for the assessment year 1993-94. In
case of firms coming into existence afte 1-4-1993 it is to be submitted
along with their first return.
(v) In case there is any change in the profit sharing ratio a revised deed must
be submitted.
(vi) The firm should not have been assessed to tax u/s 144 i.e., best judgement
assessment.
B) A firm /LLP which does not fulfill the conditions prescribed u/s 184
As given above or it is firm which fulfills conditions given u/s 184 but has been assessed
to tax u/s 144
Instrument of partnership
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It is the written partnership agreement entered into by partners. It has to be signed and
certified by all the existing partners except minors. In case firm has been dissolved
before filing or return of income, it should be signed by all those persons who were
partners in the firm immediately before its dissolution and in case partner has died the
instrument must be signed by his legal representatives immediately before its dissolution
as in case partner has died the instrument must be signed by his legal representative.
For a limited liability partnership the instrument of partnership is known as incorporation
document filed with the registrar.
The section 184 (2) of the act provides that a certified copy of the instrument of
partnership must accompany the return of the income of the firm of the previous year
relevant to the assessment year 1993-94 or the assessment year in respect of which
assessment as a firm is first sought.
Where in respect of an assessment year there is on the part of a firm any such failure as
is mentioned in section 144 and such firm is subjected to best judgement assessment,
the firm shall be assessed in the same manner as given below for firms which fails to
fulfill conditions prescribed u/s 184 [ Section 184 (5)].
Treatment if conditions prescribed u/s 184 are not fulfilled [ section 185]
In case a firm does not comply with the provisions of section 184 for any assessment
year, the firm shall be assessed in the same manner as given above but
(c) The amount of remuneration and interest shall not be added in the individual income
of partners.
(d) The firm shall pay tax in the same manner as in case of firm, which fulfils conditions
prescribed u/s 184.
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Firm dissolved or business discontinued.
Where any firm is dissolved or business is discontinued, the firm shall be assessed by the
assessing officer on its total income as if no such discontinuance or dissolution had taken
place . The notices may be issued in the name of the dissolved firm and the assessment be
made in the name of the discontinued firm [ section 189 (1)].
In case during the proceedings before assessing officer, or the commissioner ( Appeals)
the firm is found guilty of any acts as given u/s 271 to 275 , the penalty can be imposed on
such firms [ section 189 (2)].
Every person who at the time of such discontinuance or dissolutions was a partner of the
firm or the legal representative of any such person who is deceased , shall be jointly and
severally liable for the amount of tax, penalty and any other sum payable under the provisions
of this act. [ Section 189 (3)
Where such discontinuance or dissolution takes place after any proceedings in respect of
an assessment year have commenced the proceedings may be continued for the persons
referred above from the stage at which they stood at the time of such dissolution or
discontinuance [ Section 189 (4)]
Adjustment of net profit as per profit and loss account of the firm:
(a) While calculating firm’s business profit, the provisions as given u/s 28 to 44 are
applicable.
(b) Section 40 (b) lays down following rules regarding payment of salary , commission
or remuneration to working partners and interest on capital on all partners. These
rules are as follows:
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(ii) Any remuneration paid to a working partner, who is not authorized by or
which is not in accordance with terms of partnership deed ( Instrument of
partnership) is disallowed.
In case any payment for remuneration is made to one or more working partners during the
previous year, it is allowed up to limits given below. Excess is diallowed.
Finance Act, 2009 provides for uniform limits for both professional firms and non-
professional firms:
I. On the first Rs. 3,00,000 of the Rs. 1,50,000 or 90% of the book-
book-profitor in case of a loss profit, whichever
Is more
II. On the balance of the book-profit
Book-profit” means the net profit, as shown in the profit and loss account and make the
additions and deductions as per section 28 to 44D explained under the head income from
Business and Profession increased by the aggregate amount of the remuneration paid or
payable to all the partners of the firm if such amount has been deducted while computing
the net profit. Interest paid/payable to partners in excess of 12% shall also be disallowed
as per section 40(b).
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Certain explanations
4. The term book profit means the net profits as shown in the P/L a/c for the
relevant previous year computed according to provisions given u/s 28 to 44 D
of the act and after adding back the full amount of remuneration given to
partners.
In case there is a loss to a firm or book profit is less and actual remuneration given to
working partners is more than Rs 150,000 , then a maximum of Rs 150,000 shall be
allowed to be deducted out of book profit.
Change in constitution.
When a firm is assessed as firm for any assessment year it shall be assumed in same
capacity for every subsequent year unless there is change in the constitution of firm or
in the share of partners as evidenced by the instrument of partnership submitted along
with the return for first assessment. [ section 184 (3)]
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In case any change has been taken place during the previous year the firm shall furnish
a certified copy for the previous year in which such change takes place. In such case
the firm will continue to be assessed as firm. [ Section 184 (4)]
1. If one or more of the partners cease to be partners one or more partners quit or
retire from the firm or one or more new partners are admitted but one or more of
the old partners are still continuing with the firm after the change.
2. Where all the partners continue with a change in their respective shares or in the
shares or in the share of some of the firm.
In other words, if during the previous year one or more persons but not all have retired or
one or more partners have joined the partnership firm or there is a change in the profit
sharing ratio of the partners, it amounts to a change in the constitution of the firm.
2. It cannot have self occupied house, income from let out house property is computed
in same manner as already studied under the head ‘ house property’.
4. Income under the head capital gains is computed in same manner with no exemption
u/s 54, 54 B , 54 F
6. Carry forward and set off of losses is done in the same manner.
7. Deductions out of gross total income ; A firm can claim following deductions.
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u/s 80 GGC For donation to political parties.
Tax rates applicable to firm including LLP for assessment year 2019-20
(5) On winnings from lotteries,crossword puzzle, races, card games, gambling and
betting- rate of tax is 30 %.
(6) Tax so calculated shall be increased by surcharge @12 % of tax if total income of
the firm/ LLP exceeds Rs 1 crore.
(7) It is further increased by health and education cess @ 4 % plus surcharge, if any.
It is fully exempted from tax u/s 10 (2A) and as such is not added in individual income of
partners.
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Treatment of remuneration and interest received from firm/LLP
Following amounts shall be added in the individual income of partners under the head
profits and gains:
(a) Interest paid by firm to partners shall not be added in the individual income of
partners if it has been disallowed to firm as it was paid without its being
mentioned in deed. Interest paid by firm to partners shall be fully added in
individual income of partners if it has been fully allowed to firm and it was paid
as it was mentioned in deed and rate of interest was up to 12 %. Interest paid
by firm to partners shall be added in individual income of partners up to 12 %
P.a. If it has been allowed to firm ! 12 % P.a. if mentioned in deed.
(b) Remuneration paid to partners and allowed to firm shall be added in individual
income of partners in following manner.
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4.6 LOSSES OF REGISTERED FIRMS (Section 75)
Carry forward and set off of losses in case of change in constitution of firm or on
succession [Section 78(1)]Where a change has occurred in the constitution of a firm on
account of death or retirement, the firm is not entitled to carry forward and set off so much
of the loss proportionate to the share of a retired or deceased partner as exceeds his share
of profits, if any, in the firm in respect of the previous year.
Step 1: In the year of change first ascertain the share of outgoing partner in the profit or
loss of the firm.
Step 2: Compute share of loss of the outgoing partner for each of the preceding years
from which the loss is carried forward.
Step 3: Amount not allowed to be carried forward: (i) Sum of [Amounts computed in
Steps (1) and (2) where there is loss in the year of change]. (ii) Difference of
[Amounts computed in Steps (1) and (2) in case of profit in the year of change].
ASSESSMENT OF PARTNERS
As per Section 10(2A) of the Act, any person who is a partner of a firm which is assessed
as such, his share in the total income of the firm will not be included in computing his total
income. Partner includes a minor admitted to the benefits of partnership as per Section
2(23) of the Act.
Further, the explanation to Sub-clause (2A) provides that the share of a partner in the total
income of the firm assessed as a firm shall be an amount which bears to the total income of
the firm the same proportion as the amount of his share in the profits of the firm (in
accordance with the partnership deed) bears to such profits.
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Total Profits of the firm
Any interest, salary, bonus, commission or remuneration by whatever name called which is
due to or received by a partner of a firm from the firm will be chargeable to tax in the hands
of the partner under the head “profits and gains of business or profession”. However, if
such salary, interest, bonus, commission or remuneration (or any part thereof) has not
been allowed as deduction as per Section 40(b) in the hands of the firm, the amount not
allowed as deduction shall not be charged to tax in the hands of partners.
Further, deductions under Sections 32 to 37 can be claimed by a partner from any income
where any expenditure was incurred to earn such income.
When all the partners in the predecessor firm are replaced by new partners in the successor
firm, it is known as succession of one firm by another firm. If a firm is dissolved and some
of the partners take over the firm’s business or carry on a similar business with or without
new partners, it would be a case of succession by a new firm (62 I.T.R. 75).
In CIT v. K.H. Chambers (1965) 55 ITR 674, the Supreme Court laid down the following
requisites of succession:
Where the partnership deed does not provide specifically for continuance of the firm on
the death of a partner, there would be no change in constitution of the firm but it would be
a case of succession. [Addl. CIT v. ThyagasundaraMudaliar(1981) 127 ITR 520].
Where a firm is succeeded by another firm, separate assessments are made on the
predecessor and successor firms respectively in accordance with the provisions of Section
170 which provides that the predecessor shall be assessed in respect of the income of the
previous year in which the succession took place up to the date of succession and the
successor shall be assessed in respect of the income of the previous year after the date of
succession. If the predecessor cannot be found, or the tax assessed on the predecessor
cannot be recovered from him for the previous year (in which the succession took place)
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and the previous year immediately preceding such previous year, the unrealised tax payable
by the predecessor shall be recovered from the successor.
However, the successor firm is entitled to recover from the predecessor firm any tax paid
by it on behalf of the former. If any tax is due against any partner of the predecessor firm,
it cannot be recovered from the successor firm.
Joint and several liability of partners for tax payable by firm (Section 188A)
As per this section every person who was, during the previous year, a partner of a firm,
and the legal representative of any such person who is deceased, shall be jointly and
severally liable along with the firm for the amount of tax, penalty or other sum payable by
the firm for the assessment year to which such previous year is relevant, and all the provisions
of Income-tax Act, so far as may be, shall apply to the assessment of such tax or imposition
or levy of such penalty or other sum.
Where any business or profession carried on by a firm has been discontinued or where a
firm is dissolved, the assessment of the total income of the firm shall be made as if no such
discontinuance or dissolution had taken place and all the provisions of the Act, including
the provisions relating to penalty or any other sum (interest, fine) chargeable under the Act,
shall apply. Consequently, every person who was a partner of the firm at the time of
discontinuance of business or dissolution of the firm and legal representative of the deceased
partner shall be jointly and severally liable to the amount of tax penalty and any other sum.
Where the dissolution or discontinuance of business takes place after any proceedings in
respect of an assessment year have commenced, the proceedings may be continued against
the partners or legal representative of a deceased partner from the stage at which the
proceedings stood at the time of such dissolution or discontinuance.
Thus, every partner of the firm and the legal representative of the deceased partner is liable
to pay the tax which is already due or may have become due after the dissolution, irrespective
of his interest in the firm. However, if there was any irrecoverable amount at the time of
dissolution or discontinuance of business and later on it was recovered by the partners, the
partners shall personally pay the tax on their share so recovered.
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4.8 COMPUTATION OF INCOME ON ESTIMATED BASIS IN CASE TAX
PAYERS ARE ENGAGED IN CERTAIN BUSINESS (Section 44AD)
An assessee being an individual, a resident HUF or a partnership firm (not being a LLP),
who has not claimed any deduction under Sections 10A, 10AA, 10B, 10BA, 80HH to 80
RRB in the relevant assessment year is eligible to pay tax on estimated basis.
Further, the assessee should be engaged in any business (whether it is retail trading or
wholesale trading or civil construction or any other business). The turnover/gross receipt
of the eligible business shoud not exceed ‘1 crore during the previous year.
The following persons are not eligible to avail benefit under Section 44AD:
(d) a person who is in the business of plying, hiring or leasing goods carriages.
If the above conditions are satisfied, the income from eligible business is estimated @ 8%
of gross receipt or total turnover. Further, it is assumed that all the deductions have been
allowed and no other deduction is allowed.
However, in case of firm, the normal deduction in respect of salary and interest to partners
under Section 40(b) shall be allowed.
Any transfer of a capital asset or intangible asset by a private company or unlisted public
company (hereafter in this clause referred to as the company) to a limited liability partnership
or any transfer of a share or shares held in the company by a shareholder as a result of
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conversion of the company into a limited liability partnership in accordance with the
provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 shall
not treated as transfer for the purpose of capital gain under section 45 subject to the
following conditions:
(a) all the assets and liabilities of the company immediately before the conversion
become the assets and liabilities of the limited liability partnership;
(b) all the shareholders of the company immediately before the conversion become
the partners of the limited liability partnership and their capital contribution and profit
sharing ratio in the limited liability partnership are in the same proportion as their
shareholding in the company on the date of conversion;
(c) the shareholders of the company do not receive any consideration or benefit,
directly or indirectly, in any form or manner, other than by way of share in profit and
capital contribution in the limited liability partnership;
(d) the aggregate of the profit sharing ratio of the shareholders of the company in the
limited liability partnership shall not be less than fifty per cent at any time during the
period of five years from the date of conversion;
(e) the total sales, turnover or gross receipts in the business of the company in any of
the three previous years preceding the previous year in which the conversion takes
place does not exceed sixty lakh rupees; and
(f) no amount is paid, either directly or indirectly, to any partner out of balance of
accumulated profit standing in the accounts of the company on the date of conversion
for a period of three years from the date of conversion.
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previous year the deduction calculated at the prescribed rates as if the succession,
had not taken place.
(iii) Cost of Acquisition of the asset in case the predecessor company has claimed
deduction under section 35AD shall be taken to be nil in the hands of LLP.
(iv) Actual cost of the block of the asset in the hand of successor LLP: Where
in any previous year, any block of assets is transferred by a private company or
unlisted public company to a limited liability partnership and the conditions specified
in the proviso to clause (xiiib) of section 47 are satisfied, then, notwithstanding anything
contained in clause (1), the actual cost of the block of assets in the case of the limited
liability partnership shall be the written down value of the block of assets as in the
case of the said company on the date of conversion of the company into the limited
liability partnership.
(v) Carry Forward and set off of losses (Section 72A(6A): Where there has
been reorganisation of business whereby a private company or unlisted public company
is succeeded by a limited liability partnership fulfilling the conditions laid down in the
proviso to clause (xiiib) of section 47, then, notwithstanding anything contained in any
other provision of this Act, the accumulated loss and the unabsorbed depreciation of
the predecessor company, shall be deemed to be the loss or allowance for depreciation
of the successor limited liability partnership for the purpose of the previous year in
which business reorganisation was effected and other provisions of this Act relating
to set off and carry forward of loss and allowance for depreciation shall apply
accordingly.
However, if any of the conditions laid down in the proviso to clause (xiiib) of section
47 are not complied with, the set off of loss or allowance of depreciation made in any
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previous year in the hands of the successor limited liability partnership, shall be deemed
to be the income of the limited liability partnership chargeable to tax in the year in
which such conditions are not complied with.
“Accumulated loss” means so much of the loss of the predecessor firm or the
proprietary concern or the private company or unlisted public company before
conversion into limited liability partnership or the amalgamating company or the
demerged company, as the case may be, under the head “Profits and gains of business
or profession” (not being a loss sustained in a speculation business) which such
predecessor firm or the proprietary concern or the company or amalgamating company
or demerged company, would have been entitled to carry forward and set off under
the provisions of section 72 if the reorganisation of business or conversion or
amalgamation or demerger had not taken place.
Applicability :
(i) The scheme of alternate minimum tax (AMT) is applicable on a limited liability
partnership as defined in section 2 (1) (n) of the limited liability partnership
act, 2008.
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Thus, alternate minimum tax is applicable to a limited liability partnership formed
and registered in India under LLP act , 2008. It is not applicable to a foreign
LLP i.e., a LLP formed, registered or incorporated outside India and having
a place of business within India.
(ii) With effect from assessment year 2013-14, the scheme of AMT is also applicable
on partnership firms governed by the partnership act, 1932.
Where the regular income tax payable for a previous year by a person other than a company
is less than the alternate minimum tax payable for such previous year then the adjusted
total income shall deemed to be the total income of that person for such previous year and
it shall be liable to pay income tax on such adjusted total income @ 18.5% plus Health
and education cess @ 4%.
In order to widen the tax base vis-à-vis profit linked deductions, the provisions regarding
AMT has been broaden to cover all persons other than a company, who has claimed
deduction under any section (other than section 80P) included in Chapter VI-A under the
heading “C – Deductions in respect of certain incomes” or under section 10AA, shall be
liable to pay AMT.
Accordingly, where the regular income-tax payable for a previous year by a person (other
than a company) is less than the alternate minimum tax payable for such previous year, the
adjusted total income shall be deemed to be the total income of such person and he shall
be liable to pay income-tax on such total income at the rate of eighteen and one-half per
cent.
(i) “adjusted total income” shall be the total income before giving effect to
provisions of Chapter XII-BA as increased by the deductions claimed under any
section (other than section 80P) included in Chapter VI-A under the heading
“C – Deductions in respect of certain incomes” and deduction claimed under
section 10AA;
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(ii) “alternate minimum tax:” shall be the amount of tax computed on adjusted
total income at a rate of eighteen and one half per cent; and
(iii) “regular income-tax” shall be the income-tax payable for a previous year
by a person other than a company on his total income in accordance with the
provisions of the Act other than the provisions of Chapter XII-BA.
Adjusted total income means the total income before giving effect to this newly inserted
chapter XII BA as increased by:
(i) Deductions claimed under any sections other than 80 P included in chapter VI- A
Under the heading “C – i.e., Deduction in respect of certain incomes and
(iii) Deduction claimed u/s 35 AD less Depreciation allowable u/s 32 on cost of that
asset.
It is important to note that Part C of chapter VI-A coveres various deductions u/s 80 in
respect of certain incomes. These deductions for LLP /Firms are as follows:
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In other words, adjusted total income for the purposes of section 115 JC (1) shall be
calculated as follows:
It means the income tax payable for a previous year by a limited liability partnership /Firm
on its total income in accordance with provisions of IT act, 1961 other than the provisions
of this chapter XIIB.
Every LLP/Firm covered u/s 115 JC shall obtain a report , in prescribed form an accountant
[ as defined in section 288 (2)] certifying that the adjusted total income and the alternate
minimum tax have been computed in accordance with the provisions of this chapter. Such
report shall be furnished to income tax department on or before the due date of filling of
return under section 139 (1).
1. The credit for tax paid by a limited liability partnership /Firm under section 115 JC
shall be allowed to it in accordance with the provisions of this section [ Section
115 JD (1)]
2. Computation of amount of tax credit [ Section 115 JD (2)] The tax credit of an
assessment year shall be the excess of alternate minimum tax paid over the regular
income tax payable for that year . In other words,
Amount of tax credit= alternate minimum tax - tax payable on total income
computed as per normal provisions of income tax act
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3. Time limit to carry forward tax credit Section 115 JD (4)]. The tax credit for any
assessment year immediately succeeding the assessment year for which tax credit
becomes allowable u/s 115 JC (1).
4. Set off of tax credit [ Section 115 JD (5)]. Tax credit shall be allowed in any
assessment year , In which the regular income tax exceeds the alternate minimum
tax. Such set off shall be allowed to the extent of the excess of regular income tax
over the alternate minimum tax and the balance of the tax credit, if any, shall be
carried forward.
If the amount of regular income tax or the alternate minimum tax is reduced or increased as
a result of any order passed under this act, the amount of tax credit allowed under this
section shall also be adjusted / Varied accordingly.
Same as otherwise provided in this chapter, all other provisions of this act shall apply to a
limited liability partnership / Firm referred to in this chapter.
PROBLEMS
ILLUSTRATION 1
A and B are active partners and C and D are sleeping partners in a firm. A profit and loss
account, drawn for the year ending 31-3-2019 shows a profit of Rs. 25000. The Profit
has been arrived at after allowing salary and interest to partners as follows:
A B C D
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Further the long term capital gains of the firm are Rs. 40000.Partners share the profit and
loss equally. Compute the total income of the firm and its tax liability. Interest to all the
partners and salary to working partners has been paid as per deed.
SOLUTION 1:
Rs. Rs.
Salary to partners
A 25000
B 23000
Capital gain:
190
Tax 15,500
ILLUSTRATION 2
Profit and Loss Account of ABC and Co. (a firm of chartered accountants) for the year
ending 31-3- 2019 is as follows:
Rs. Rs.
202500 202500
Other information:
i) Out of expenses of Rs. 10000, Rs. 6400 is notdeductible by virtue of section 36 and 37.
Find out the amount of net income of the firm for the assessment year 2019-20. The
remuneration and interest on capital to partners have been paid according to partnership
deed which has been submitted along with return.
SOLUTION 2:
191
Interest on capial (37500x 12/20) 22500
53600
Or
ILLUSTRATION 3
The doctors Dr. Ahalya and Somnathare running a nursing home under a partnership firm
profits and losses equally and showed Rs. 16600 as profit for the previous year 2018-19
after charging the following:
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House property rent 9600
Compute firms’ total income and find out the income of partners taxable under the head
profit and gains. Firm’s deed provides for payment of operation charges, remuneration,
bonus, honorarium and interest on capital.
SOLUTION 3
47550
Less:Allowable expenses
45675
193
Book Profit 32075
N.A.V 9600
Firms Tax: 30% of 28100=Rs. 8430 + Health and Edu. cess@4 % i.e. Rs.337= Rs
8767, rounded off to 8770
Bonus 2000
10200
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2. Dr Somnath: Operation Charges 1500
Honorarium 3000
Bonus 2000
8500
Notes: 1.share of income from Firm is fully exempted u/s 10(2A) in the hands of
partners.
ILLUSTRATION 1
Asim, john and Rahim are partners in a firm assessed as u/s 185 sharing profits and losses
in the ratio of 5:3:2. Profit and loss account for the year ending on 31-3-2019 was as
follows:
To interest on capital
Asim 2000
John 1500
Rahim 1000
To Depreciation 2500
195
To interest on loan from John 300
To Balance:
Asim 9000
John 5400
Rahim 3600
43000 43000
Compute the Business Income for Firm as AOP and U/s 185.
SOLUTION 1
Rs Rs
Interest on capital
Asim 2000
John 1500
22500
Depreciation 2500
196
Commission to Rahim 1000
28800
25800
Depreciation 2400
ILLUSTRATION 2
PQR and Co. A partnership firm with three partners P, Q and R sharing profits and losses
in the ratio of 3:2:1, gives the following particulars of its profit and loss account for the year
ending on 31st March 2019:
e) Bad debts recovered and credited to P/L A/c-15000.This is recovery out of a debt of
40000 written off as bad in 2017-18 of which only Rs 30000 was allowed in the relevant
assessment.
Compute the total income of the firm as u/s 18. Each item of information above should be
fully dealt with in your answer.
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SOLUTION 2
Rs Rs
Drawings 40000
Depreciation 75000
Salaries to Q 12000
197000
187000
Depreciation 90000
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which may either be received by the AOP or BOI or by any member thereof. A family
other than HUF carrying on a joint business shall be treated as an AOP.
For the formation of an AOP the association need not necessarily be on the basis of a
contract, consent and understanding may be presumed [Shanmugham& Co. v. CIT (1971)
81 ITR 310 (S.C.)].
Applying the ratio laid down by the Supreme Court in the case of N.V. Shanmugham&
Co. v. Commissioner of Income-tax (1971, 81 ITR 310) the Calcutta High Court held in
the case of Gopal Chand Sen v. Income-tax Officer and others (1977, 109 ITR 820) that
an assessment of business income has to be done in the hands of receivers and in such an
assessment, the receivers are never assessed as independent earners of income. The income
in the hands of the receiver is assessable in the like manner and to the same extent as it
would have been assessed on the real owners.
With effect from assessment year 1989-90, the following provisions are applicable to
assessees other than companies, co-operative societies and societies registered under the
Societies Registration Act, 1860 or any law corresponding to that Act in force in any part
of India.
(1) Interest paid by the AOP to a member will not be allowed as a deduction from the
income of the Association of Persons [Section 40(ba)]. In cases where interest is
paid by the AOP to any member, who has also paid interest to the AOP, the net
amount of interest that will be disallowed is the amount of interest paid by the AOP to
the member less the amount of interest paid to the AOP by the member [Explanation
1 to Section 40(ba)].
(3) In the cases of interest paid by AOP to such individual or by such individual to the
AOP in a representative capacity any interest paid by the AOP to the person
represented by such person or vice versa, will not be allowed under Section 40(ba)
[Explanation 2(ii) to Section 40(ba)].
(5) Any salary, bonus, commission or remuneration (by whatever name called) paid
by the AOP to a member will not be allowed as a deduction.
Section 167B makes the following provisions as regards the incidence of charge of tax on
the association of persons.
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A. Where shares of members are determinate
1. In case total income excluding share from AOP of any member of AOP does not
exceed the exempted limit i.e., Rs 250,000 for individuals both males and
females, Rs 300,000 for resident senior citizens of 60 years or more but less
than 80 years, Rs 500,000 for resident super senior citizens of 80 years or
more the total income of such AOP shall be assessed to tax at same rates as
are applicable to an individual.
2. In case total income of any member of AOP exceeds the exempted limit- the total
income of such AOP shall be assessed at MMR.
3. In case AOP has any member whose total income in case of foreign companies
only is taxable at a higher than MMR, the total income of such AOP shall be
split up in two parts.
2. In the above case , If AOP has any member such as company or Firm whose
individuals income is taxable at a rate higher than MMR an amount equal to the share of
income of such member shall be taxable at such higher rate and balance total income of
AOP/ BOI shall be taxable at MMR.
1. Income of AOP is calculated head wise. It cannot have any income under the head
salaries.
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2. In case of house property rules given under the head income from house property
are applicable. It cannot have self occupied house.
3. Profits and gains of business or profession are to be computed in the same manner
as given under the head profits and gains of business or profession.
4. Income under the head capital gains is to be computed in the same manner as per
provisions of capital gains but exemptions u/s 54, 54 B and 54 F are not
allowed.
5. Set off and carry forward of losses is to be done as per provisions of section 70 to
74 of the act.
6. Deductions out of gross total income: AOP can claim the following deductions.
Section 67A seeks to provide for the method of computing a member’s share in the
income of an association ofpersons or a body of individuals, wherein the shares of the
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members are determinate, in the same manner as provided for in Sub-sections (1) to (3) of
Section 67 for computing a partner’s share in a firm. This section lays down the following
methods of computing the member’s share:
(a) Any interest, salary, bonus, commission or remuneration, by whatever name called,
paid to any member in respect of the previous year shall be deducted from the total
income of the association or body and the balance ascertained and apportioned among
the members in the proportion in which they are entitled to share the income of the
association or body.
(b) Where the amount apportioned to a member under (a) hereinabove is a profit,
any interest, salary, bonus, commission or remuneration paid to the member by the
AOP in respect of the previous year shall be added to that amount - the result shall
constitute the member’s share in the income of the association or body.
(c) Where the amount apportioned to a member under (a) is a loss, any interest,
salary, bonus, commission or remuneration aforesaid paid to the member by the
association or body in respect of the previous year shall be adjusted against that
amount, the result shall be adjusted against that amount, and the result shall be treated
as the member’s share in the income of the association or body.
See also explanatory notes on the provision of DTL (Amendment) Act, 1987 Board circular
No. 551 dated 23.1.1990 [(1990, 183 ITR 1 (SC)].
Section 167B seeks to provide that where the individual shares of the members of an
association or body in the whole or any part of the income of such association or body are
indeterminate or unknown, tax shall be charged on the total income of the association or
body at the maximum marginal rate. However, where the total income of any member of
such association or body is chargeable to tax at a rate which is higher than the maximum
marginal rate, tax shall be charged on the total income of the association or body at such
higher rate. Also, where the total income of any member of an association of persons or
body of individuals as above for the previous year (excluding his share from such association
or body) exceeds the maximum amount which is not chargeable to tax in the case of that
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member, tax shall be charged on the total income of the association or body at the maximum
marginal rate. However, where any member or members of such association or body of
individuals is or are chargeable to tax for the previous year at a rate or rates which is or are
higher than the maximum marginal rate, tax shall be charged on that portion or portions of
the total income of the association or body of individuals which is or are relatable to the
share or shares of such member or members at such higher rate or rates, as the case may
be, and the balance of the total income the association or body shall be taxed at the
maximum marginal rate.
In the explanation to the above provisions, it is provided that the shares of the members of
an association or body in the whole or any part of the income of such association or body
shall be deemed to be indeterminate or unknown if such shares (in relation to the whole or
any part of such income) are indeterminate or unknown on the date of formation of such
association or body or any time thereafter.
The charge of tax on the member’s share in AOP will depend on the following factors:
(i) Income-tax is not payable by the member in respect of his share in the income of
the AOP, computed in the manner provided in Section 67A.
(ii) His share in the income of the AOP is includible in his total income for rate purposes.
204
(iii) Where the AOP is chargeable to tax on its total income at the ‘maximum marginal
rate’ or at any higher rate, the share of the member will not be includible in his total
income. In this case, the member’s share in the income of the AOP will not be
included in his income even for rate purposes.
(iv) In any other case, the member’s share will form part of his total income.
(v) Where no income-tax is chargeable on the total income of the AOP, the share of
the member will be chargeable to tax part of his total income. Section 86 will not be
applicable to such cases.
Every person who was at the time of such discontinuance or dissolution a member of the
AOP and the legal representative of any such person who is deceased, shall jointly and
severally be liable for the amount of tax, penalty or other sum payable.
Where such discontinuance or dissolution takes place after any proceeding in respect of
an assessment year have commenced, the proceedings may be continued against the
members from the stage at which the proceedings stood at the time of such discontinuance
or dissolution.
4.17 SUMMARY
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Under Section 2(23) of the Income-tax Act, the terms “firm”, “partner”, and “partnership”
have the meanings respectively assigned to them in the Indian Partnership Act, 1932 and
Limited Liability Partnership Act, 2008.
The expression “partner” also includes a minor who has been admitted to the benefits
of partnership and a partner of a Limited Liability Partnership Act 2008. However
a minor cannot validly enter into any partnership as a ‘full partner’ with other
persons but he can be admitted to the benefits of partnership only.
A joint Hindu family as such cannot be a partner in a firm. However, through its Karta it
may enter into a valid partnership with a third person or with a member of the undivided
family in his individual capacity. In such a case, the Karta occupies a dual position. On the
partnership he functions in his individual capacity; on the relations to other members of the
Hindu undivided family, in his representative capacity.
An incorporated company being a legal person may form a partnership with an individual
or with another company. In considering the maximum number of partners comprising a
firm, the company will be considered as one person only.
“Association of persons” means an association in which two or more persons join in for a
common purpose or common action to produce income, profits or gains”. An association
of persons may consist of non-individuals (Companies, firms joint families) [Ipoth v. CIT
(1968) 67 ITR 106 (S.C.)]. A minor can join an AOP if his lawful guardian gives his
consent. [Murugesan& Bros. v. CIT (1973) 88 ITR 432 (SC)]. Applying the ratio laid
down by the Supreme Court in the case of G. Murugesan and Bros. v. Commissioner of
Income-tax (1973, 88 ITR 432), the Kerala High Court held in the case of Commissioner
of Income-tax v. Goel C. Dalal and Perin C. Dalal (1990, 184 ITR 248) that in order to
acquire the status of an association of persons, the persons must join in a common purpose
or action and the object of the association must be to produce income. It is not enough
that the persons receive the income jointly.
Section 67A seeks to provide for the method of computing a member’s share in the
income of an association of persons or a body of individuals, wherein the shares of the
members are determinate, in the same manner as provided for in Sub-sections (1) to (3) of
Section 67 for computing a partner’s share in a firm. This section lays down the following
methods of computing the member’s share:
206
(a) Any interest, salary, bonus, commission or remuneration, by whatever name called,
paid to any member in respect of the previous year shall be deducted from the total
income of the association or body and the balance ascertained and apportioned among
the members in the proportion in which they are entitled to share the income of the
association or body.
(b) Where the amount apportioned to a member under (a) hereinabove is a profit,
any interest, salary, bonus, commission or remuneration paid to the member by the
AOP in respect of the previous year shall be added to that amount - the result shall
constitute the member’s share in the income of the association or body.
(c) Where the amount apportioned to a member under (a) is a loss, any interest,
salary, bonus, commission or remuneration aforesaid paid to the member by the
association or body in respect of the previous year shall be adjusted against that
amount, the result shall be adjusted against that amount, and the result shall be treated
as the member’s share in the income of the association or body.
PROBLEMS
ILLUSTARATION 1
The total income of a AOP in which A, B & C are members share profits and losses
in the ratio of 1:2:2 was assessed at Rs. 16000. In computing the total income of
Rs. 16000 the Income Tax Officer has made the necessary adjustments in respect
of the following sums:
C has borrowed capital for his investment in the firm and had paid interest of
Rs. 15000 separately to the lender. Compute the share of the respective partners
for their individual assessment.
SOLUTION 1 :
Income
BalanceShare 3000
B and C cannot adjust their share of loss from their individual income. A’s share
shall be added in his individual income.
ILLUSTRATION 2
Arun and Barun were members of an AOP whose accounting year ends on 31st
March every year. On Ist April 2018 shanti (Barun’s wife) joined the firm as a
member and there after all the three members are entitled to share profits and
losses equally. Shanti invested a sum of Rs. 200000 as her capital in the firm, the
source of such investment being the gift received from her father. The other two
members have no capital in the firm. Shanti is actively engaged in the business.
208
For the assessment year 2019-20, the firms total income has been determined
by the income tax officer at Rs. 45000 after making due adjustments in respect of
the following items:
1) Salary:
Arun 15000
Barun 10000
2) Interest on Capital
Shanti 28000
3) Brokerage:
Arun 12000
4) Rent
Arun won a prize of Rs. 10000 in west Bengal State Lottery and a sum of Rs. 3000
was deducted at sourceout of the same. Shanti holds 10000 equity shares of a
companyon which a dividend of 95 paise per sharewas declared by the company
in its Annual General Meeting held on 28 March 2019.Apart from the above, no
partner has any other income whatsoever.
SOLUTION 2 :
Income
Interest 28000
209
Brokerage 12000 Nil 12000
Share of Income
House Property: For Barun[rent 9000 less 30%] Nil 6300 Nil
Barun cannot setoff his share of loss from AOP out of his individual Income
ILLUSTRATION 3
Mr. K, Mrs. L and Mr. M are members of an AOP sharing profits and losses equally.
During the year ending 31-3-2019 total income of AOP was 338,000. The details of
individual income of its members are given below:
Mr. K
210
Mrs. L
SOLUTION 3
AOP shall pay tax at the rates applicable to an individual as total income of each (or all)
of its members without adding share from AOP as calculated below does not exceed
the exempted limit.
On 2,50,000 Nil
211
Mr. K
Income 42,000
296,667
Tax Liability:
On 2,50,000: Nil
On 46,670@ 5% 2334
Tax 2334
Mrs. L
212
Income from other sources: Bank Interest 54,000
3,54,667
Tax Liability:
Tax 5234
Tax 5234
5443
[5443 X 100/354,670 =]
213
Interest (Govt. securities) 15000 27,600
Tax liability = Nil as total income does not exceed Rs 500,000 as he is super
senior citizen
4.18 GLOSSARY
Partnership Firm: Under Section 2(23) of the Income-tax Act, the terms “firm”,
“partner”, and “partnership” have the meanings respectively assigned to them in
the Indian Partnership Act, 1932 and Limited Liability Partnership Act, 2008.
As per the scheme, a partnership firm shall be assessed as a firm if the following
conditions are satisfied:
• A copy of the partnership deed certified by all the partners in writing (other than
the minors) is submitted along with the return of income in respect of which
assessment as a firm is first sought.
As per Section 10(2A) of the Act, any person who is a partner of a firm which is
assessed as such, his share in the total income of the firm will not be included in
computing his total income. Partner includes a minor admitted to the benefits of
partnership as per Section 2(23) of the Act.
When all the partners in the predecessor firm are replaced by new partners in the
successor firm, it is known as succession of one firm by another firm. If a firm is
dissolved and some of the partners take over the firm’s business or carry on a
214
similar business with or without new partners, it would be a case of succession by
a new firm.
Alternate Minimum Tax: From the assessment year 2012-13 onwards, where the
regular income tax payable for a previous year by a person other than a company
is less than the alternate minimum tax payable for such previous year then the
adjusted total income shall deemed to be the total income such person for such
previous year and it shall be liable to pay income tax on such adjusted total income
@ 18.5% plus education & SHEC @ 3%.
For the formation of an AOP the association need not necessarily be on the basis
of a contract, consent and understanding may be presumed.
Section 167B makes the following provisions as regards the incidence of charge
of tax on the association of persons.
• Where the shares of the members are indeterminate In these cases, tax will be
charged on the total income of the AOP at the maximum marginal rate, that is,
the rate of tax as well as surcharge, if any, applicable to the highest slab of
income in the case of an individual as specified in the Finance Act of the relevant
year
215
Section 67A seeks to provide for the method of computing a member’s share in
the income of an association of persons or a body of individuals, wherein the
shares of the members are determinate, in the same manner as provided for in
Sub-sections (1) to (3) of Section 67 for computing a partner’s share in a firm.
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4. Explain the difference between the change in constitution and succession of a firm.
Illustrate.
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7. Discuss tax liability of the members of Association of Persons. State the circumstances,
if any, under which their share of income from an association of persons is not chargeable
to tax?
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2. Girish Ahuja and Ravi Gupta: Systematic Approach to Income-tax and Sales-tax;
Bharat Law House, New Delhi.
3. Dr. H.C Meharotra and Dr S. P Goyal: Income Tax Law and Accounts;
SahityaBhavan Publications.
4. V. P Gaur & D. B Narang: Income Tax Law & Practice; Kalyani Publishers.
6. Mahesh Chandra, D. C Shukla, K. A Mahajan & M. A Shah: Income Tax Law &
Practices; pragati Publication, New Delhi.
7. Arvind Tuli& Dr. NeeruChadda: Conceptual Clarity on Income Tax and Wealth
Tax; Kalyani Publication, New Delhi.
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Directorate of Distance Education
UNIVERSITY OF JAMMU
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University of Jammu, Jammu.
219
INCOME TAX LAW AND PRACTICE-II
Course Review
Gurcharan Singh
Edited by
Rohini Gupta Suri
All rights reserved. No part of this work may be reproduced in any form, by
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220