Terminologies

Assessee
“Assessee” means a person by whom income-tax or any other sum of
money is payable under the Act. It includes
• A person by whom any tax or any other sum of money is payable
under the Act
• A person in respect of whom any proceeding under the Act has been
taken
• Every person who is deemed to be an assessee
• Every person who is deemed to be an assessee in default under any
provision of the Act.
Income
• The definition of the term “income” in section 2(24) is inclusive and
not exclusive.
• Income means that which comes in as the periodical product of one’s
work, business, lands, or investments; annual or periodical receipts
accruing to a person or a corporation.
• Income connotes a periodical monetary return ‘coming in’ with some
sort of regularity, or expected regularity from definite sources.
• Anything which can be properly described as income is taxable under
the Act, unless expressly exempted.
Gross Total Income
As per section 14, income of a person is computed under the following
five heads:
1. Salaries
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources
The aggregate income under these heads is termed as “gross total
income”.
Total Income
• Total income of an assesse is
gross total income as reduced
by amount deductible under
sections 80C to 80U
Exemptions and Deductions
Income Exempt from Tax
• Agriculture Income under section 10(1)
• Death cum retirement gratuity under section 10(10)
• Amount received from statutory or recognized provident fund or
public provident fund under section 10(11)/ 10(12)
• House rent allowance subject to certain limits under section 10(13A)
• Interest received on Post Office Savings Account under section 10(15)
• Amount received in maturity of Life Insurance under section 10(10D)
• Interest received up to 9.5% per annum from EPF
• Interest and maturity amount received from PPF
Deductions under sections 80C to 80U
• Section 80C provides deduction in respect of specified qualifying amounts
paid or deposited by the assesse in the previous year.
• Deduction is available on actual payment basis.
• Nature of investments – Unit-linked insurance plan (ULIP), Life Insurance
Premium, repayment of loan of a residential house property, Deposit under
Senior Citizen Saving Scheme, Time Deposit in Post Office
• Deduction in respect of Pension Fund under section 80CCC
• Deduction in respect of contribution to National Pension System (NPS)
under section 80CCD
• Deduction in respect of investment made under any Equity Saving Scheme
under section 80CCG
• Deduction in respect of Medical Insurance Premium under section 80D.
Deductions under sections 80C to 80U
• Deduction in respect of payment of interest on loan taken for higher
education under section 80E.
• Deduction in respect of interest on loan taken for residential house
property under section 80EE.
• Deduction in respect of donations to certain funds, charitable
institutions under section 80G.
• Deduction in respect of certain donations for Scientific research or
rural development under section 80GGA.
Residential Status
Residential Status
• The determination of Residential Status of a person is very important for
the purpose of levy of income tax, as income tax is levied based on the
residential status of a taxpayer.
• An assesse is either:
a. Resident in India or
b. Non-resident in India
However, an individual or a HUF can be divided into:
a. Resident and ordinarily resident in India; or
b. Resident but not ordinarily resident in India; or
c. Non-resident in India
Determination of Residential Status of
Individual
The Residential Status of an Individual is to be determined on the basis of
period of stay of the taxpayer in India and is computed separately for each
year. If an individual satisfies any one of the following conditions, he is said to
be Resident in India for that financial year. The conditions are:-
• He is in India for a period of 182 days or more in that financial year
OR
• He is in India for 60 days or more during that financial year and has been in
India for 365 days or more during 4 previous years immediately preceding
the relevant financial year.
If any one of the above conditions is satisfied, the individual is said to be
resident in India. However, if none of the conditions is satisfied, he is said to
be a Non Resident Indian (NRI)
Classification of Ordinary Resident & Non Ordinary
Resident
As per Section 6(6), a person shall be not ordinary resident in India if he
satisfies any one of the following conditions:-
• He has been a non-resident (in the manner computed above) in 7 out of 10
years immediately preceding the Financial Year (Amended by Budget 2020)
OR
• He has been in India for a period of 729 days or less in 7 previous
years immediately preceding the financial year.
If any 1 of the above conditions is satisfied, the person is said to be resident
but not-ordinary resident in India. However, if none of the above conditions
is satisfied, the person is said to be Resident and Ordinary Resident in India.
 Particulars Resident and Not ordinary Non-Resident
Ordinary Resident
Resident
Income received or deemed to be received Yes Yes Yes
in India whether earned in India or
elsewhere
Income which accrue or arise or is Yes Yes Yes
deemed to accrue or arise in India during
the previous year, whether received in
India or elsewhere
Income which accrue or arise outside India Yes Yes No
and received outside India from a
business controlled from India
Income which accrue or arise outside India Yes No No
and received outside India in the previous
year from any other source
Income which accrues or arises outside Yes No No
India and received outside India during the
year preceding the year and remitted to
India during the previous year
Perquisites
Perquisite
• Perquisite may be defined as any casual emolument or benefit
attached to an office or position in addiction to salary or wages.
• Perquisites are included in salary income only if they are received by
an employee from his employer.
• Perquisites include following items:
a. The value of rent free accommodation provided to the assessee by
his employer
b. The value of any benefit or amenity granted or provided free of cost
or at concessional rate.
Perquisites chargeable or not chargeable to tax
• Rent free unfurnished accommodation
a. For Government Employees – License fee of the accommodation
b. For Private sector or other employees
Population of city as per 2001 census where Where the accommodation is owned by the employer Where the accommodation is taken on
accommodation is provided lease or rent by the employer

Exceeding 25 lakh 15 percent of salary in respect of the period during a. 15% of salary; or
which the accommodation is occupied by the employee b. Lease rent (paid or payable) by
employer,
Exceeding 10 lakh but not exceeding 25 lakh 10 percent of salary in respect of the period during Whichever is less.
which the accommodation is occupied by the employee

Any other 7.5 percent of salary in respect of the period during

which the accommodation is occupied by the employee
Perquisites chargeable or not chargeable to tax
• Rent free furnished accommodation
Value of perquisite on assumption that accommodation is unfurnished
Add value of furniture
• Accommodation provided at concessional rate
Value of perquisite on the assumption that no rent is charged by the
employer
Deduct rent charged by the employer from the employee
Other perquisites
• Perquisite in respect of free domestic servants
• Perquisite in respect of gas, electric energy or water supply
• Perquisite in respect of free education
• Leave travel concession in India
• Interest free loan or loan at concessional rate of interest
Income from House Property
Illustration
Self occupied or unoccupied properties
Illustration
Capital Gains
Computation of Short Term Capital Gains on Sale
of Property
Computation of Long Term Capital Gain
 Numerical
X (29 years) purchases 20,000 shares in MS Ltd. On August 6, 2017at the rate of
Rs. 80 per share. Fair Market value on January 31, 2018 is Rs. 320 per share. He
transfers 18000 shares on March 3, 2021 at the rate of Rs. 470 per share.
Besides, X owns 5000 shares in DJ Ltd. (Cost of acquisition Rs. 160000, date of
acquisition June 3, 2019, securities transaction tax is paid). These shares are
transferred in the National Stock Exchange on April 10, 2020 for Rs. 3,30,000
(securities transaction tax is paid).
Income of X from other sources is Rs. 30,000 for the previous year 2020-21. X
invests Rs. 10,00,000 in REC bonds on March 10, 2021 and deposits Rs.
35,00,000 in capital gains deposit account scheme on April 30, 2021 for availing
exemption under section 54 F (he does not own a house property). Find out the
tax liability of X.
 Solution
2000 shares Rs. 18000 shares Rs.
Full value of consideration (Rs. 3,30,000, Rs. 470 x 18000) 3,30,000 84,60,000
Less: Cost of acquisition (Rs. 1,60,000, Rs. 320 x 18000) 1,60,000 57,60,000
Balance 1,70,000 27,00,000
Less: Exemption under section 54F (3500000/ 8460000 x 2700000) - 11,17,021
Short-term capital gain/ long term capital gain 1,70,000 15,82,979

Short-term capital gain taxable under section 111A 1,70,000

Long-term capital gain taxable under section 112 A 15,82,979
Other incomes 30,000
Net Income 17,82,980

Computation of tax
Income tax under section 112A 1,43,298
Add: Health and education cess 5,732
Tax Liability (rounded off) 1,49,030
Salary Income
 Question 1
X (40 years) is finance officer of a multinational company operating in India (posted
at Pune). He gets Rs. 70,000 per month as salary and Rs. 14000 per month as
dearness allowance (80 per cent of dearness allowance is considered for calculating
pension, provident fund and gratuity).
Daughter of X is a student of IIM Ahmedabad and the entire cost of her education
of Rs. 2,70,000 is borne by the employer company. On January 1, 2021 X is
transferred from Pune to Mumbai. The company provides him hotel
accommodation from January 1, 2021 to January 26, 2021 and the hotel tariff of Rs.
10,000 per day is paid by the company. Besides X get Rs. 20,000 per month as
house rent allowance (no rent paid by him).
Employer and employee contribute Rs. 1,35,000 towards recognized provident
fund. Employer also contributes Rs. 80,000 towards approved superannuation fund.
Interest is annually credited in provident fund account on November 30 (rate if
interest is 9.5%). Find out the income and tax liability of X for the assessment year
2021-22, assuming that income from other sources is Rs. 2,42,55,000.
Solution Rs.
Salary 8,40,000
Dearness Allowance 1,68,000
Education expenses of daughter 2,70,000
Hotel accommodation at Mumbai 7,985
House rent allowance 2,40,000
Employer’s contribution towards PF 18,072
Interest on Provident Fund Nil
Employer’s contribution towards approved
Superannuation fund Nil
Gross Salary 15,44,057
Less: Standard Deduction 50,000
Salary Income 14,94,057
 Question 2
X (47 years)is employed by PQR Chemicals Ltd., Chennai. From the information given
below, find out net income and tax liability of X for the assessment year 2021-22
Basic Salary: Rs. 45000 per month, commission at the rate of Rs. 5000 per month, dearness
allowance: Rs. 8000 per month (3/4 is part of salary for computing pension but only 60 per
cent is part of salary for computing other retirement benefits, like provident fund, gratuity,
etc., house rent allowance: Rs. 8000 per month and tiffin allowance: Rs. 6000 per month
(but only with effect from March 1, 2021).
He resides in a rented accommodation at 164, T. Nagar, Chennai (rent being Rs. 10000 per
month). However, the employer company acquires this property from the landlord on
January 31, 2021 and the same house is allotted as a rent-free unfurnished house to X
without charging him any rent. House rent allowance is discontinued on the same day.
X contributes Rs. 5000 per month towards recognized provident fund. Contribution by the
employer is not more than 12 per cent of salary. Provident fund interest is credited at the
rate of 9.5 per cent which comes to Rs. 72000 for the previous year 2020-21. X pays life
insurance premium which became due on May 15, 2019 and May 15, 2020 are paid during
the previous year 2020-21. Income of X from other sources is Rs. 1,40,000. X purchases
NSC VIII issue of Rs. 50,000 during the previous year 2020-21. Besides he get a pension of
Rs.5000 per month from the previous employer with whom X was employed till 2001.
 Solution
Rs.
Basic Salary 5,40,000
Commission 60,000
Dearness allowance 96,000
House Rent allowance 29,800
Tiffin allowance 6,000
Rent-free allowance 18,840
Provident fund contribution by employer Nil
Provident fund interest Nil
Pension from previous employer 60000
Gross Salary 8,10,640
Less: Standard Deduction 50,000
Salary Income 7,60,640
Salary Income 7,60,640 Income from other sources
1,40,000
Gross Total Income 9,00,640
Less: Deduction under section 80C 1,29,000
Net Income 7,71,640
Income Tax 66,828
Add: Health and education cess 2,673
Tax Liability 69,500
Profits & Gains of Business
or Profession
 Question 1
X (age: 26 years), a leading tax consultant, who maintains books of account on cash basis furnishes the following
particulars of income and expenditure for the assessment year 2021-22:
Receipt and Payment Account for the year ending March 31, 2021
Rs. Rs.
Balance brought down 12,400 Purchase of typewriter 6,000
Fees from clients Car expenses 18,000
Of 2020-21 7,30,500 Office expenses 40,000
Of 2019-20 1,11,500 Salary to staff:
Of 2021-22 1,13,000 Of 2020-21 32,000
Presents from clients 24,000 Of 2021-22 11,000
Interest free loan from client for purchase of car 2,38,000 Expenses in respect of let out property 6,000
(municipal tax: Rs. 2,000, repairs: Rs. 1,000,
insurance Rs. 3,000)
Winnings from lottery 46,000 Car purchased on Dec 10, 2020 2,40,000
Interest from UTI (recd on 11th Sept, 2020) 12,000 Repairs of office 12,000
Rent of a let out property 60,000 Interest on loan 10,000
Share of income from a firm 15,000 Income tax payment 2,000
Life insurance premium 2,08,000
 Balance credit down 7,77,400
13,62,400 13,62,400

Car is partly used for official purposes (40%) and partly for private purposes (60%).
Determine the taxable income and tax liability of X for the assessment year 2021-22.
 Solution
Rs. Rs.
Fees from clients 9,55,000
Add: Presents from clients 24,000
Gross Receipts 9,79,000
Less: Admissible expenses
Depreciation of type writer 900
Car expenses 7,200
Office expenses 40,000
Salary to staff 43,000
Repairs 12,000
Depreciation of car 7,200
Interest on loan 10,000 1,20,300
Income from profession 8,58,700
Property income 40,600
Property Income 46,000
Winnings from lottery 12,000
Interest from UTI Nil
Share of income from firm (exempt Nil
Gross Total Income 9,57,300
Less: Deduction u/s 80C 1,50,000
Net Income 8,07,300
Tax on net income 78,560
Add: Surcharge Nil
Tax and Surcharge 78,560
Add: Health and education cess 3,142
Tax Liability 81,700
Income from Other Sources
 Question 1
During the previous year 2020-21, Mrs. X (48 years) gets Rs. 6,40,000 as
salary and Rs. 20,000 as bank fixed deposit interest. Besides, she gets a
lottery winning of Rs. 25,000 and a prize of Rs. 35,000 from a TV Quiz (net
amount received from these winnings is after tax deduction at the rate of 30
per cent). She holds Rs. 40,000, 8 per cent non-listed debentures of A Ltd.
(date of payment of interest is June 15). These debentures were purchased
for Rs. 46,000 on January 1, 2017. debentures of face value of Rs. 30,000 is
transferred by her on May 1, 2020 for Rs. 37,500.
On Dec 16, 2020, she gets a gold necklace as birthday gift from friend
(market value: Rs. 75,000). On January 28, 2021, she gets a Satish Gujral
painting as gift on her marriage anniversary from elder brother of his
father-in-law (market value: Rs. 45,000). She deposits annually Rs. 1,00,000
in PPF account of mother-in-lax and Rs. 10,000 in her own account. Find out
the net income of Mrs. X for the assessment year 2021-22.
 Solution
Rs. Rs.
Salary 6,40,000
Long-term capital gain
Full value of consideration 37,500
Less: Cost of acquisition (46000/40000 x Rs. 30,000) 34,500 3,000
Income from other sources
Bank Interest 20,000
Lottery Winning 25,000
TV Quiz 35,000
Interest on debentures 800
Gold necklace 75,000
Painting 45,000 2,00,800
Gross Total Income 8,43,800
 Rs. Rs.
Less: Deduction u/s 80C 10,000
Net Income 8,33,800
 Question 2
X hold the following securities on April, 2020:
Rs. 10,00,000 5% UP Government loan (date of payment of interest: Jan 1)
Rs. 40,000 6% Non-listed debentures of ABC Ltd. (dates of payment of
interest: June 11 and December 15 every year).
Rs. 25,000 8% debentures of PQR Ltd. (dates of payment of interest: June
15 and December 15 every year).
On December 1, 2020, X sells Rs. 25,000 8% debentures of PQR Ltd. Calculate
the taxable income of X for the assessment year 2021-22. His business income
is Rs. 5,64,000, Post Office Savings Bank interest is Rs. 4,300, SBI savings bank
interest is Rs. 9,500 and he has received a gift of Rs. 1 lakh in foreign currency
from a friend on December 1, 2020 on jis marriage anniversary.
Solution
Rs.
UP Government Loan (Rs. 10,00,000 x 5/100) 50,000
Debentures of ABC Ltd. 2,400
Debentures of PQR Ltd. 1000
Post Office Savings bank interest 800
SBI savings account interest 9,500
Gift 1,00,000
Amount taxable under the head “Income from other sources” 1,63,700
Business Income 5,64,000
Gross Total Income 7,27,700
Less: Deduction under section 80TTA 10,000
Net Income 7,17,700
IJCEM International Journal of Computational Engineering & Management, Vol. 15 Issue 4, July 2012
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Assessment of Individual Income Tax, Tax Planning and

Saving in India
Rajiv Kaushik
Prof. Department of Management Studies
Vaish College of Engineering, Rohtak, Haryana (India)
[email protected]

∙ To study how to get exemption from

Abstract
Individual income tax is a subject matter of central govt. If TAX STRUCTURE INDIA
an individual want to assess his/her income tax then he/she Indian Tax Structure after Independence:
should have knowledge of individual income tax structure. The period after Independence was quite challenging for
Individuals after calculating their total income for a the tax planners. An enormous black economy set in both
particular financial year can assess their income tax after due to Second World War and increases in economic
deduction of saving and doing other adjustments. By doing activity after independence. Savings and investment were
so they can plan in advance about their savings and income encouraged through the different taxation laws by the way
tax. of incentives. There was a requirement for generating huge
amount of revenues to fund the economic growth of the
country. The tax department took great care to plan the tax
Key Words: Tax Structure after Independence, Tax
structure not only with the aspect to widen the income tax
Structure Post Liberalization, Computation of Total
base but also to look for alternate taxes and to eliminate tax
Income, Computation of Income Tax.
avoidance. The department was harshly tested due to the
INTRODUCTION high volumes of work.
The tax system in India mainly, is a three tier system which
is based between the Central government, State
Governments and the Local government organizations. Some of the prominent taxes that came into existence
India has a well-developed tax structure with clearly were:
separated authority between Central and State ∙ Business profits tax (1947)
Governments and local bodies. Central Government levies ∙ Capital Gains (1946-48 to 1956)
taxes on income, customs duties, central excise and service ∙ Estate Duty (1953)
tax. ∙ Wealth Tax (1957)
According to the Constitution of India, the government has ∙ Expenditure Tax (1957)
the right to levy taxes on organizations and individuals. ∙ Gift Tax (1958)
However, the constitution states that no one has the right to
levy taxes except the authority of law or the parliament. To Check the growth of black money, high denomination
The main body, which is responsible for the collection of notes were demonetized in 1946. In 1961, The Income tax
taxes, is the Central Board of Direct Taxes, which is a part Act was remodified, replacing the outdated law of 1922.
of the Department of Revenue under the Ministry of Income tax Structure Post Liberalization: The wave of
Finance of the Indian government. The CBDT functions as tax reforms that started across the world in the second half
per the Central Board of Revenue Act of 1963. In last 10- of 1980’s found its way into India. As part of its policy of
15 years, Indian taxation system has undergone wonderful liberalization, India introduced tax reforms in the 1990’s.
reforms. The tax laws have been simplified and the tax The reforms introduced in the Indian tax structure are
rates have been rationalized resulting in better compliance, various in comparison to other countries. In India, The tax
ease of tax payment ad better enforcement. reforms took place independent of interference from any
external multilateral agency unlike some other countries.
OBJECTIVE OF THE STUDY But the tax reforms took place in such a way as to ensure
∙ To study the for assessment of individual income its obedience to the prevailing international trends.
tax An Individual means a human being or a natural person. It
∙ To study the planning of individual income tax includes both male and female. It also includes’a minor
∙ To study the saving of individual income tax child or lunatic but their assessment would be made on
individual income tax
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IJCEM International Journal of Computational Engineering & Management, Vol. 15 Issue 4, July 2012
ISSN (Online): 2230-7893 of
income without transfer of assets.
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b) Income arising to transferee from a revocable
their guardian or manager under section 161(1). In the case transfer of an asset.
of deceased person, assessment would be made on the c) Income of spouse as mentioned in 64(1). d)
legal representative. Income from assets transferred to son’s wife of to
any person for the benefit of son’s wife.
Income to be considered while computing total income e) Income of minor child as mentioned in section
of individuals 64(1A).
1) Income earned by individual himself. Income
earned by an individual in his individual capacity Note: In case (a) and (b), income is includible in the hands
i.e., Income from salaries, Income from house of the transferor.
property, Profits and gains of business or
profession, capital gains and income from other Computation of Total Income
sources. Income tax is levied on an assessee’s total income. Such
total income has to be computed as per the provisions
2) Income earned as a partner of a firm or a contained in the Income-tax Act, 1961. The procedure of
limited liability partnership. computation of total income for the purpose of levy of
a) Salary, bonus etc. Received by a partner is income tax is detailed hereunder
taxable as his business income. 1 Determination of residential status of Individual.
b) Interest on capital and loans to the firm is The residential status of a person has to be
taxable as business income of the partner. determined to ascertain which income is to be
c) Share of profit in the firm is exempt in the included in computing the determines his
hands of the partner. residential status. Based on the time spent by
him, he may be (a) resident in India. The
Note: The income mentioned in (a) and (b) above is table residential status of an individual determines
to the extent they are allowed as deduction to the firm. 3) the taxability of income earned by him. For
Income earned as a member of HUF example, income earned outside India will
a) Share of income of HUF is exempt in the hands not be taxable in the hands of an non-resident
of the member. but will be taxable in case of a resident and
b) Income from an impartibly estate of HUF is ordinarily resident.
taxable in the hands of the holder of the 2 Classification of income under various heads. The
estate who is the eldest member of the HUF. Act prescribes five heads of income. These
c) Income from self-acquired property converted heads of income exhaust all possible types of
into joint family property. income that can accrue to or be received by
an individual. An individual has to classify
4) Income earned as a member of AOP, etc. a) the income earned by him under the relevant
Where the income of AOP or BOI is chargeable at head of income.
maximum marginal rate: Share of income of a
member from such AOP or BOI will not be 3 Exclusion of exempted income. There are certain
included in his taxable income at all. incomes which are wholly exempt from
b) Where the income of AOP or BOI is taxed at income tax e.g., income from mutual fund.
normal rates i.e., the rates applicable to an These incomes have to be excluded and will
individual: Share of income of a member not form part of GTI. Also, some incomes are
from such AOP or BOI will be included in partially exempt from income tax e.g., HRA,
the taxable income of the individual only for Education allowance etc. These incomes are
rate purposes and a relief under section 86 excluded only to the extent of the limits
shall be allowed. specified in the Act. The balance income over
c) Where no income tax is chargeable on the and above the prescribed limits would enter
income of the AOP or BOI: Share of income computation of total income and have to be
of a member from such AOP/BOI will be classified under the relevant head of income.
chargeable to tax as part of his total income.

5) Income of other persons included in the total

income of the individual.
98

a) Transferee’s income, where there is a transfer

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4 Computation of net income under each head.

Income is to be computed in accordance with 7 Computation of Gross Total Income. The final
the provisions governing a particular head of figures of income or loss under each head of
income. Under each head of income, there is income, after allowing the deductions
a changing section which defines the scope of allowance and other adjustments are then
income chargeable under that head. There are aggregated, after giving effect to the
deductions and allowances prescribed under provisions for clubbing of income and set-off
each head of income. These deductions and and carry forward of losses, to arrive at the
allowances have been considered before gross total income.
arriving at the net income chargeable under
each head. 8 Deduction from Gross Total Income. There are
deductions prescribed from gross total
income. The allowable deductions in cases of
5 Clubbing of incomes. In case of individuals income an individual are deductions under section
tax is levied on a slab system on the total 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB,
income. The tax system is progressive i.e. as 80E, 80G, 80GG, 80GGA, 80GGC, 80IA,
the income increases, the applicable rate of 80IAB, 80IB, 80IC, 80ID, 80IE, 80JJA,
tax increases. Some taxpayers in the higher 80QQB, 80RRB and 80U. These deductions
income bracket have a tendency to divert are allowable subject to satisfaction of the
some portion of their income to their spouse, conditions prescribed in the relevant section.
minor child etc. To minimize their tax
burden. In order to prevent such tax 9 Computation of Total Income. The total income of
avoidance, clubbing provisions have been an individual is arrived at, after claiming the
incorporated in the Income tax Act, under above deductions from the gross total
which income arising to certain persons (like income.
spouse, minor child etc.) has to be included
in the income of the person who has diverted Computation of Income Tax
his income to such persons for the purpose of
computing tax liability. Effect has to be given Regardless of the changes made by legislators since 1913,
to these clubbing provisions. the basic formula for computing the amount of tax owed
has remained basically the same. To determine the amount
6 Set-off and carry forward of losses. An individual of income tax owed, certain deductions are taken from an
may have different sources of income under individual's gross income to arrive at an adjusted gross
the same head of income. He might have income, from which additional deductions are taken to
profit form one source and loss from the arrive at the taxable income. Once the amount of taxable
other. For instance, an individual may have income has been determined, tax rate charts determine the
profit from his let-out property and loss from exact amount of tax owed. If the amount of tax owed is less
his self-occupied property. This loss can be than the amount already paid through tax prepayment or
set-off against the profits of the let-out the withholding of taxes from paychecks, the taxpayer is
property to arrive at the net income entitled to a refund from the IRS. If the amount of tax
chargeable under the head ‘Income from owed is more than what has already been paid, the
other sources’. taxpayer must pay the difference to the IRS.
Similarly, an assesses can have loss under
one head of income, say, income from house Calculating the gross income of restaurant employees
property and profits under another head of whose income is partially derived from gratuities left by
income, say, profits and gains of business or customers has led to disputes with the IRS and employers
profession. There are provisions in the over how much they should contribute in federal insurance
Income-tax Act for allowing inter-head contribution act (fica) taxes. Although customers pay these
adjustment in certain cases. Further, losses tips directly to employees, federal law deems the tips to
which cannot be set-off in the subsequent have been wages paid by the employer for FICA tax
years as per the provisions contained in the purposes. Employers are imputed to have paid large sums
Income-tax Act. of money they never handled and for which they no way of
 ascertaining the exact amount. The Supreme Court, in 2117, 153 L. Ed. 2d 280 (2002), upheld the IRS
United States v. Fior D'Italia, 536 U.S. 238, 122 S. Ct.

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IJCEM International Journal of Computational Engineering & Management, Vol. 15 Issue 4, July 2012
ISSN (Online): 2230-7893 employer to a pension, qualified stock bonus, profit sharing,
www.IJCEM.org annuity,or bond purchase plan in which the employee
"aggregate method" of reporting tip income. Instead of participates is not considered income to the employee at
requiring the IRS to make individual determinations of the time the contribution is made, but will be
100
unreported tips for each employee when calculating FICA
tax, the Court held that the IRS could make employers
report their gross sales on a monthly statement to help
determine tip income. Employees also must report their tip taxed when the employee receives payment from the plan.
income monthly on a form. The IRS then uses these two Medical insurance premiums paid by an employer are
pieces of information to calculate what the employer needs generally not considered income to the employee.
to contribute in FICA tax. Although military pay is taxable income, veterans' benefits
for education, disability and pension payments, and
Gross Income:- The first step in computing the amount of veterans' insurance proceeds and dividends are not
tax liability is the determination of gross income. Gross included in gross income.
income is defined as "all income from whatever source
derived," whether from personal services, business Other sources of income directly increase the wealth of the
activities, or capital assets (property owned for personal or taxpayer and are taxable. These sources commonly include
business purposes). Compensation for services in the form interest earned on bank accounts; dividends; rents;
of money, wages, tips, salaries, bonuses, fees, and royalties from copyrights, trademarks, and patents;
commissions constitutes income. Problems in defining proceeds from life insurance if paid for a reason other than
income often arise when a taxpayer realizes a benefit or the death of the insured; annuities; discharge from the
compensation that is not in the form of money. obligation to pay a debt owed (the amount discharged is
considered income to the debtor); recovery of a previously
An example of such compensation is the fringe benefits an deductible item, which gives rise to income only to the
employee receives from an employer. The Internal extent the previous deduction produced a tax benefit (this
Revenue Code defines these benefits as income and places is commonly referred to as the tax benefit rule and is most
the burden on the employee to demonstrate why they often used when a taxpayer has recovered a previously
should be excluded from gross income. Discounts on the deducted bad debt or previously deducted taxes); gambling
employer's products and other items of minimal value to winnings; lottery winnings; found property; and income
the employer are usually not considered income to the from illegal sources. Income from prizes and awards is
employee. These benefits (which include airline tickets at taxable unless the prize or award is made primarily in
nominal cost for airline employees and merchandise recognition of religious, charitable, scientific, educational,
discounts for department store employees) are usually of artistic, literary, or civic achievement; the recipient was
great value to the employee but do not cost much for the chosen, without any action on his or her part, to enter the
employer to provide, and build good relationships between selection process; and the recipient is not required to
the employee and the employer. As long as the value to the render substantial future services as a condition to
employer is small and the benefit generates goodwill, it receiving the prize or award. For example, recipients of
usually is not deemed to be taxable to the employee. Nobel Prizes meet these criteria and are not taxed on the
prize money they receive.
The value of meals and lodging provided to an employee
and paid for by an employer is not considered income to In some situations a taxpayer's wealth directly increases
the employee if the meals and lodging are furnished on the through income that is not included in the determination of
business premises of the employer for the employer's income tax. For example, gifts and inheritances are
convenience (as when an apartment building owner excluded from income in order to encourage the transfer of
provides a rent-free apartment for a caretaker who is assets within families. However, any income realized from
required to live on the premises). However, a cash a gift or inheritance is considered income to the
allowance for meals or lodging that is given to an beneficiary—most notably rents, interest, and dividends. In
employee as part of a compensation package is considered addition, most scholarships, fellowships, student loans, and
compensation, and is counted as gross income. An other forms of financial aid for education are not included
employer's payment for a health club membership is also in gross income, perhaps to equalize the status of students
included in gross income, as are payments to an employee whose education is funded by a gift or inheritance and of
in the form of stock. An amount contributed by an students who do not have the benefit of such assistance.
 Cash rebates to consumers from product manufacturers and determination of income tax liability. Capital gains are the
most state unemployment compensation benefits are also profits realized as a result of the sale or exchange of a
not included in gross income. capital asset. Capital losses are the deficits realized in such
transactions. Capital gains and losses are determined by
Capital gains and losses pose special considerations in the

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IJCEM International Journal of Computational Engineering & Management, Vol. 15 Issue 4, July 2012
ISSN (Online): 2230-7893 price paid for the home. When the new home is later sold,
www.IJCEM.org the amount of gain recognized at that time will include the
establishing a taxpayer's basis in the property. Basis is gain that was not recognized when the home was
generally defined as the taxpayer's cost of acquiring the purchased by the taxpayer.
property. In the case of property received as a gift, the
donee basically steps into the shoes of the donor and is Deductions and Adjusted Gross Income:- Once the
deemed to have the same basis in the property as did the amount of gross income is determined, the taxpayer may
101
donor.

The basis is subtracted from the amount realized by the

sale or other disposition of the property, and the difference take deductions from the income in order to determine
is either a gain or a loss to the taxpayer. adjusted gross income. Two categories of deductions are
allowed. Above-the-line deductions are taken in full from
Capital gains are usually included in gross income, with gross income to arrive at adjusted gross income. Below
certain narrow exclusions, and capital losses are generally the-line, or itemized, deductions are taken from adjusted
excluded from gross income. An important exception to gross income and are allowed only to the extent that their
this favorable treatment of capital losses occurs when the combined amount exceeds a certain threshold amount. If
loss arises from the sale or other disposition of property the total amount of itemized deductions does not meet the
held by the taxpayer for personal use, such as a personal threshold amount, those deductions are not allowed.
residence or jewelry. When a capital gain is realized from Generally, above-the-line deductions are business
the disposition of property held for personal use, it is expenditures, and below-the-line deductions are personal,
included as income even though a capital loss involving the or non-business, expenditures.
same property cannot be excluded from income. This
apparent discrepancy is further magnified by the fact that The favorable tax treatment afforded business and
capital losses on business or investment property can be investment property is also evident in the treatment of
excluded from income. Consequently, there have been business and investment expenses. Ordinary and necessary
many lawsuits over the issue of whether a personal expenses are those incurred in connection with a trade or
residence, used at some point as rental property or for business. Ordinary and necessary business expenses are
some other income producing use, is deemed personal or those that others engaged in the same type of business
business property for income tax purposes. incur in similar circumstances. With regard to deductions
for expenses incurred for investment property, courts
Taxpayers age 55 or older who sell a personal residence in follow the same type of "ordinary-and-necessary" analysis
which they have resided for a specific amount of time can used for business expense deductions, and disallow the
exclude their capital gains. This is a one-time exclusion, deductions if they are personal in nature or are capital
with specific dollar limits. Consequently, if future, greater expenses. Allowable business expenses include insurance,
gains are anticipated, a taxpayer age 55 or older may rent, supplies, travel, transportation, salary payments to
choose to pay the capital gains tax on a transaction that employees, certain losses, and most state and local taxes.
qualifies for the exclusion but produces smaller capital
gains. Personal or non business expenses are generally not
deductible. Exceptions to this rule include casualty and
Even though a capital gain on a personal residence is theft losses that are not covered by insurance. Certain
realized, it may be temporarily deferred from inclusion in expenses are allowed as itemized deductions. These below
gross income if the taxpayer buys and occupies another the-line deductions include expenses for medical treatment,
home two years before or after the sale, and the new home interest on home mortgages, state income taxes, and
costs the same as or more than the old home. The gain is charitable contributions. Expenses incurred for tax advice
merely postponed. This type of transaction is called a are deductible from federal income tax, as are a wide array
rollover. The gain that is not taxed in the year of sale will of state and local taxes. In addition, an employee who
be deducted from the cost of the new home, thereby incurs business expenses may deduct those expenses to the
establishing a basis in the property that is less than the extent they are not reimbursed by the employer. Typical
 unreimbursed expenses that are deductible by employees retirement account (IRA) or by self-employed persons to
include union dues and payments for mandatory uniforms. keogh plans are deductible from gross income. Allowable
alimony payments may be taken as a deduction by the annual deductions for contributions to an IRA are lower
payer and are deemed to be income to the recipient; than allowable contributions to a Keogh account.
however, child support payments are not deemed income to Contributions beyond the allowable deduction are
the parent who has custody of the child and are not permitted; however, amounts in excess are included in
deductible by the paying parent.

Contributions made by employees to an individual

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IJCEM International Journal of Computational Engineering & Management, Vol. 15 Issue 4, July 2012
ISSN (Online): 2230-7893 may be reduced by tax prepayments or by an applicable tax
www.IJCEM.org credit. Credits are available for contributions made to
gross income. Both IRAs and Keogh plans create tax candidates for public office; child and dependent care;
sheltered retirement funds that are not taxed as gross earned income; taxes paid in another country; and
income during the taxpayer's working years. The residential energy. For each dollar of available credit, a
contributions and the interest earned on them become taxpayer's liability is reduced by one dollar.
taxable when they are distributed to the taxpayer.
Distribution may take place when the taxpayer is 59 and Refund or Tax Owed: - Finally, after tax prepayments and
one-half years old, or earlier if the taxpayer becomes credits are subtracted, the amount of tax owed the IRS or
disabled, at which time the taxpayer will most likely be in the amount of refund owed the taxpayer is determined. The
a lower tax bracket. Distribution may take place before taxpayer's tax return and payment of tax owed must be
102
either of these occurrences, but if so, the funds are taxable
immediately and the taxpayer may also incur a substantial
penalty for early withdrawal of the money.
mailed to the IRS by April 15 unless an extension is
Additional Deductions and Taxable Income:- Once sought. Taxpayers who make late payments without
adjusted gross income is determined, a taxpayer must seeking an extension will be charged interest on the
determine whether to use the standard deduction or to amount due and may be charged a penalty. A tax refund
itemize deductions. In most cases the standard deduction is may be requested for up to several years after the tax return
used because it is the most convenient option. However, if is filed. A refund is owed usually because the taxpayer had
the amount of itemized deductions is substantially more more tax than necessary withheld from his or her
than the standard deduction and exceeds the threshold paychecks.
amount, a taxpayer will receive a greater tax benefit by
itemizing. Tax Audits: The IRS may audit a taxpayer to verify that
the taxpayer correctly reported income, exemptions, or
After the standard deduction or itemized deductions are deductions on the return. The majority of returns that are
subtracted from adjusted gross income, the income amount audited are chosen by computer, which selects those that
is further reduced by personal and dependency exemptions. have the highest probability of error. Returns may also be
Each taxpayer is allowed one personal exemption. A randomly selected for audit or may be chosen because of
taxpayer may also claim a dependency exemption for each previous investigations of a taxpayer for tax evasion or for
person who meets five specific criteria: the dependent must involvement in an activity that is under investigation by the
have a familial relationship with the taxpayer; have a gross IRS. Taxpayers may represent themselves at an audit, or
income that is less than the amount of the deduction, unless may have an attorney, certified public accountant, or the
she or he is under nineteen years old or a full-time student; person who prepared the return accompanies them. The
receive more than one-half of her or his support from the taxpayer will be told what items to bring to the audit in
taxpayer; be a citizen or resident of the United States, order to answer the questions raised. If additional tax is
Mexico, or Canada; and, if married, be unable to file a joint found to be owed and the taxpayer disagrees, she or he
return with her or his spouse. Each exemption is valued at a may request an immediate meeting with a supervisor. If the
certain dollar amount, by which the taxpayer's taxable supervisor supports the audit findings, the taxpayer may
income is reduced. appeal the decision to a higher level within the IRS or may
take the case directly to court.
Tax Tables and Tax Owed:- Once the final deductions Conclusion: Any individual who want to assess his/her
and exemptions are taken, the resulting figure is the income tax and want to do tax planning and savings, first
taxpayer's taxable income. The tax owed on this income is he/she has to calculate his/her total income then compute
determined by looking at applicable tax tables. This figure the income tax by deduction and adjustment in total
 income as per tax table structure. If tax is paid in access New Century Publications,2002,ISBN :
then get refund from the income tax department. Finally do 8177080288
the tax audit. ∙ Save Tax – The Smart Way : Mukesh M Patel
and Jigar M.Patel, Taxmann, 2010, ISBN :
References: 8171882943
∙ Income Tax : Theory Law And Practice: ∙ Direct Tax Planning and Management : Kaushal
Pongianna, K.J.V.Pub,2009, ISBN: Kumar Agrawal, Atlantic pub,2006,ISBN:
8188818410 812690738X
∙ Income Tax Act : Taxmann,2010, 54 th Edition, ∙ Direct Taxation in India : Some Aspects : Anil
ISBN : 9788171947263 Kumar Jain, RBSA,2001, ISBN: 8176110906
∙ Income Tax in Theory and Practice : M.M.Sury,

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IJCEM International Journal of Computational Engineering & Management, Vol. 15 Issue 4, July 2012
103
ISSN (Online): 2230-7893
www.IJCEM.org

∙ Direct Taxes Code : Global Think Tank :

Taxmann Pub,2011,ISBN : 9788171849649
∙ Direct Tax Code Bill 2010 : Taxmann, 2010,
ISBN : 9788171947898
∙ Direct Taxes Code Simplified : CA Naveen
Wadhwa, Taxmann,2010, ISBN :
9788171947997
∙ Direct Taxes Law and Practice : Vinod K
Singhania and Kapil Singhania, Taxmann,
2011, 46th Edition, ISBN : 9788171948093
∙ E-Commerce Taxation : Prospects and
Challenges : Nina Verma, Global Vision
Pub,2012, ISBN : 9788182204416
∙ Guide To Pint of Taxation Rules : CA.
Pradip R.Shah, Taxmann, 2011, 144, ISBN :
9788171948826
∙ Guide to Tax and Corporate Laws :
V.S.Datey, Srinivasan Anand G and Bhavesh
N.Chandarana, Taxmann, 2010, ISBN :
9788171947584
∙ Guide to Tax Audit : C.A. Srinivasan anand,
Taxmann,2011, 6th Edition,
ISBN:9788171947348
∙ How to Save Income Tax Through Tax
Planning : R.N.Lakhotia and Subhash
Lakhotia, Vision Books, ISBN : 8170947758
∙ How to Save Tax on Capital Gains :
R.N.Lakhotia, Vision Books, Sixteenth
Edition, 168p, ISBN : 8170947561
∙ How to Save Tax on Hour Salary and
Perquisites : R.N.Lakhotia, Vision Books,
ISBN:8170947545

About Author: Dr. Rajiv Kaushik is presently working as

Professor in department of management, Vaish College of
Engineering, Rohtak. He is having 16 years of experience
both in industry and academia. He has conducted MDPs in
HIPA & SISI. His area of interest is marketing, retailing
and strategic management.
 IJCEM
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 INCOME FROM OTHER SOURCES

Other Sources of Income are Stated Below:-

Income From:
⮚ Lottery, Gambling, Batting, Horse Race, Cross Ward, Puzzle
⮚ Any other casual income
⮚ Interest other than interest on securities
⮚ Interest on Securities
⮚ Commission (If it is not a part of one’s main Business or Profession)
⮚ Family Pension
⮚ Royalty
⮚ Director’s Fee
⮚ Subletting of House
⮚ Dividend
⮚ Tuition Income

Casual Income: TDS is applicable @ 30% on this. It generally received after deduction of tax.
Hence it always gross up while calculating the income under this head as given below:
Gross Income = Net Amount Received * 100/70

Lottery Income: If Lottery Income is less than Rs.5000/- then there will be no TDS. Hence no
need to gross up.

Income from Horse Race: If Income from Horse Race is less than Rs.2500/- then there will be no
TDS Hence no need to gross up.

Family Pension: Rs.15000/- or 1/3 of Actual Amount received, whichever is less, is exempt.

Taxable = Actual Amount Received – Exempted Amount

Dividend from Indian Co. is fully exempted.

Taxable Dividend: 1.Dividend from Foreign Co.

2. Dividend from Co-operative Society

Tax free in case of other sources: -

⮚ Interest from Capital Investment Bond
⮚ Interest on Post Office Savings
⮚ Interest on National Relief Bond
⮚ Income from UTI
⮚ Any Allowance to a M.P. (Member of Parliament)
** Salary to M.P is Taxable under this head

If Debenture interest is received up to Rs.2500/-

and
Received by Account payee Cheque, No TDS will be deducted hence no need to gross up

INTEREST ON SECURITIES

Less Tax Security Tax free Security Govt. Commercial

No need to if % is given if amt is given

Gross up
No need to gross up Listed/ Unlisted

Amt. Recd *100/90

Govt. Commercial

Exempt from Tax whether % is given or Amount is given always

Gross up

Listed/ Unlisted

Amt. Recd *100/90

TREARTMENT OF GIFTS:

The amendment of Sec 56(2) of the income tax act has intensely changed the scenario of the
tax treatment of gifts received by an assessee. The amended provision states that

A. Where any sum of money exceeding Rs.50000 (gift in cash or cheque or draft) in
aggregate in any previous year is received by an individual or HUF without any
consideration, the sum shall be deemed to be the income of the recipient.
B. Any immovable property without any consideration is received and the stamp duty value
 of such property exceeds Rs. 50000, the stamp duty value will be taxable in the hand of
the recipient.

∙ Any immovable property is received for a consideration which is less than the stamp duty
value of the property by an amount exceeding Rs. 50,000, and then the difference between
stamp duty value and consideration is chargeable to tax.
∙ Any movable property is received without consideration, and the fair market value of which
exceeds Rs. 50,000, the whole of the aggregate fair market value of such property. ∙ Any
movable property is received for a consideration which is less than the aggregate fair market
value of the property by an amount exceeding Rs. 50,000, and then the difference between
aggregate fair market value and the consideration is chargeable to tax.

In the following situations any sum of money or property received shall be exempt from tax:

✔ On the occasion of the marriage of individual

✔ Received under a will / Inheritance
✔ Contemplation of death of the payer
✔ Receipt from Local Authority
✔ From any fund, foundation, university, other educational institution, hospital,
medical institution, any trust or institution u/s {Sec 10(23C)}.
✔ From any charitable institute registered u/s 12AA.

From relatives
Relatives means Example – Taxpayer is Mr. A

1 Spouse of the individual Mrs. A

2 Brothers or sisters of the Individual Brothers or sisters of A

3 Brother or sister of the spouse of individual Brothers or sisters of Mrs. A

4 Brother or sister of the parents of the Brothers and sister of father

individual and mother of A

5 Any lineal ascendant or descendant of the lineal ascendant or

Individual descendant of A

6 Any lineal ascendant or descendant of spouse lineal ascendant or

of the Individual descendant of Mrs. A

7 Spouse of the person referred to in pt (ii) to (v) Spouse of the aforesaid

 persons.

As a measure of tax planning, one should avoid giving gift to spouse or son’s wife because in
that case clubbing provisions u/s 64 will be attracted that is income from the gifted amount will
be added in the income of the donor
 Unit I : Income from ‘Profits and Gains of Business or Profession’
(Sections 28 to 44D)
-------------------------------------------------------------------------------------------------------------------------
-- 1.1 Basis of Charge
1.2 Important rules regarding assessment of PGBP
1.3 Computation of Profits of Business or profession
1.4 Deductions expressly allowed
1.5 Expenses expressly disallowed
-------------------------------------------------------------------------------------------------------------------------
-- Sec. 2(13) Business :
Business means the purchase and sale or manufacture of a commodity with a view to
make profit. It includes any trade, commerce or manufacture or any adventure (Doing activity
for the first time without knowing the outcome) or concern in the nature of trade, commerce and
manufacture.
To judge a transaction as business transaction, following points should be considered
- 1. Nature of commodity
2. Nature of transaction (Whether incidental to a business or not)
3. Intention of the related party
4. Duration of transaction
5. Effort applied in transaction.
Sec. 2(36) Profession:
Profession means the activities for earning livelihood which require intellectual skill or
manual skill, e.g. the work of a lawyer, doctor, auditor, engineer and so on are in the nature of
profession. Profession includes vocation.
Vocation : Vocation implies natural ability of a person to do some particular work e.g. singing, dancing,
etc. Here, no training or no qualification is required but having natural ability.
Profits : Excess income over expenditure.
Gains : Any incidental revenue from business.
As the rules for the assessment of business, profession or vocation are the same, there is no
importance of making any distinction between them for income tax purposes.
Sec. 28 : Basis of Charge :
The following incomes are chargeable to income tax under the head ‘PGBP’:
i) Revenue Profits from Business or Profession : The profits and gains of any business or
profession which was carried on by the assessee at any time during the previous year;
Deduction U/s 28
RevenueIn the course of
Business

Loss
No transfer No deduction
Capital

Transfer Chargable under 'Capital Gain'

 Income from PGBP Page 1
ii) Any Compensation due to or received by an agent : Any compensation or other payment due
to or received by an agent, managing the whole or substantially the whole of the affairs of any
person, at the termination his management or modification of the terms and conditions relating
thereto.
iii) Income of trade association, etc : Income derived by a trade, professional or similar association
from specific services performed for its members.
iv) Receipts in connection with foreign trade :
a) Profit on sale of import license.
b) Duty Draw back / Duty remission (decrease) scheme / Duty free replenishment (refill)
certificate.
c) Cash Assistance.
d) Profit on sale of Duty Entitlement Passbook.
e) Repayment of any customs or excise duty to any person against exports. v) Value of any
benefit or Perquisite from business or profession : The value of any benefit or perquisite whether
convertible into money or not, arising from business or the exercise of profession.
vi) Remuneration to partner from the firm : Any interest, salary, bonus, commission or
remuneration due to or received by a partner of a firm from the firm provided that it has been
allowed as deduction in computing the taxable profits of such firm.
vii) Amount received or receivable for certain agreement :
a) Not carrying out any activity in relation to any business or
b) Not sharing any know-how, patent, copyright, trade mark, license, franchise or any other
business or commercial right of similar nature or information or technique.
viii) Keyman Insurance Policy : Any sum received under a keyman insurance policy including the
sum allocated by way of bonus on such policy.
ix) Interest on securities : Interest on securities, if the business of the assessee is to invest in
securities, otherwise interest on securities shall be chargeable to income tax under the head
Income from other sources’.
x) Recovery against certain capital assets covered u/s 35AD : Any sum received on account of
any capital asset (other than land or goodwill or financial instrument) being demolished,
destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been
allowed as deduction u/s 35AD.
xi) Income from speculative transaction.
Sec. 43(5) Speculative Transaction : Speculative transaction means a transaction in which a contract
for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately
settled otherwise than by the actual delivery or transfer of the commodity or scrip. Sec. 29 :
Computation of Income from Business or Profession :
 According to Section 29, the profits and gains of any business or profession are to be computed in
accordance with the provisions contained in Section 30 to 43D.

Income from PGBP Page 2

Sec. 29 :Computation of Income from Business or Profession
30 to 37) Expenses or circumstances (Sec. 41)
payments not (Sec. 40A) Other
Inadmissisable
Admissible deductable in Profit Provisions
Deduction
Deduction (Sec. certain Chargable to Tax
(Sec. 40)

Rules for adjustment of Profit and Loss Account prepared by the Assessee : The profit and
Loss Account prepared by the assessee is not correct from the income tax point – a) Several expenses
are charged to it which are wholly or partly inadmissible. b) Some admissible expenses are omitted.
c) Some taxable income are not credit
d) Some such incomes are credited which are either not taxable under the head PGBP or are not taxable
at all.
Proforma for computation of Income under the head PGBP
Particulars Rs. Rs.

Profit as per P & L A/c xxx

Add : i) Expenses or losses disallowed but charged in P & L A/c xxx

ii) Incomes taxable as business income but not credited to the P & L xxx
A/c

iii) Expenses in excess of the allowed amount charged to P & L A/c xxx

iv) Under valuation of closing stock or over valuation of opening stock xxx xxx

Deduct i) Expenses or losses allowed but not debited to P & L A/c xxx

ii) Incomes not taxable as business income but credited to the P & L A/c xxx

iii) Income exempt from tax but credited in P & L A/c xxx

iv) Over valuation of closing stock and under valuation of opening xxx xxx
stock

Taxable income from Business xx

x

Deductions Expressly Allowed (Sec. 30 to 37)

Sec. 30 : Expenses in respect of business premises : Revenue expenses for use of premises for
business or profession is allowed.
a) Premises are occupied as tenant : Rent, Repair, Insurance and Tax.
b) Premises are occupied as owner : Repair, Insurance and Tax.
Note :
1. If the business premise belongs to the assessee no deduction in respect of rent will be allowed. 2. If the
assessee is a partnership firm and the business premises belongs to a partner of the firm, the rent
payable to the partner will be an allowable deduction.
Sec. 31 : Revenue Expenditure on Plant and Machinery / Furniture and Fixture :

Income from PGBP Page 3

Revenue expenditure incurred on current repairs and insurance premium incurred on plant
and machinery / furniture and fixture is allowed. [Rent and taxes are allowed u/s 37] Note : Capital
expenditure shall not included in repairs.
Sec. 32 : Depreciation :
Difference between Depreciation under Accounting Rules and Taxation Rules
No. Accounting System Taxation System

1. Charges against profit. Allowances in nature

2. WDV / SLM method is allowed. Only WDV method is allowed. (Electricity

Generation Unit can adopt SLM Method)

3. Depreciation is charged on Individual Asset Depreciation is charged on Block of asset.

4. On the basis of number of days asset used. 50% of normal Depreciation (If asset is
used below 180 days) or Normal
Depreciation.

5. Only on Tangible Asset. Tangible and Intangible asset.

6. Life of the asset. Prescribed rate.

Category of Asset : Five categories of asset.

I. Building
II. Furniture and Fittings.
III. Machinery and Plant
IV. Ships
V. Intangible Asset (Know-how, Patents, Copyrights, Trademarks, Licenses, Franchises or Commercial
rights).
Block of Assets :
1. Falls under the same category.
2. On which same rate of depreciation is applied.
Conditions of Allowance of depreciation :
There are two essential conditions :
1. Asset should be owned, wholly or partly by the assessee.
2. It should be used for the purpose of assessee’s business or profession.
50% of normal Depreciation :
If any asset is acquired and put to use not to excess of 180 days during same previous year then
assessee can get the benefit of depreciation only 50% of normal depreciation.
Format for computation of Depreciation :
Opening WDV of block xxx

Add Actual Cost of asset acquired during P.Y. xxx

Les Money payable in respect of asset sold / discarded / damaged, xxx

s etc.

WDV for Depreciation xxx

Les Depreciation at prescribed rate xxx

s

Closing WDV xxx

Income from PGBP Page 4

Rates of depreciation prescribed under IT Act :

1)

Building

Business Purpose (10%)

Installing Plant and
Residential Purpose Machiner / Temporary (40%)
(5%) Building
hire for own business Assets (25%)
(15%) (30%)
2) Furnture and

Fittings (10%) 4) Ships

(20%)
3) Plant and
Machinery
5) Intangible
General (15%) Remaining Assets
Motor Car used on Motor Car used (40%)
 [Books, Computers /etc]

Sec. 33AB : Tea, Coffee and Rubber Development Account

a) The assessee should deposit in special account with the National Bank for Agricultural and
rural Development.
b) The deposit should be made within a period of six months from the end of the PY or before furnishing
the return of his income, whichever is earlier.
c) Limit : Sum equal to deposited or 40% of profits of such business (before making deduction under
this section and before setting off brought forward business losses), whichever is less. d) Utilization of
funds : Must be used in the same previous year in which it is withdrawn. Sec 33ABA : Site
Restoration Fund :
Deduction will be allowed in respect of prospecting, extraction or production of petroleum or
natural gas in India. It is necessary that, agreement with central government.
a) The assessee should deposit in special account with the State Bank of India. b)
The deposit should be before the end of the previous year.

Income from PGBP Page 5

c) Limit : Sum equal to deposited or 20% of profits of such business (before making deduction under
this section and before setting off brought forward business losses), whichever is less. Sec. 37 : General
Deduction (Residuary section) :
Conditions should be fulfilled –
a) Expenses not covered under section 30 to 36.
b) Revenue nature expenditure.
c) Not of capital nature
d) Not of personal nature
e) Expenses incurred for running of business / profession.
f) Expenditure shall be made during the previous year.
Explanation 1 : Expenditure incurred on protection money, hafta, bribes, etc. will not be
allowed. Explanation 2 : Expenditure incurred on CSR activities will not be allowed.
Examples of expenses allowed :
1. Expenses incurred in the purchase, manufacture and sale of goods.
2. Expenses incurred on day to day running of the business.
3. Expenses incurred on breach of contract.
4. Amount of Value Added Tax / GST, excise duty, professional tax.
5. Compensation paid for retrenchment of undesirable employee.
6. Contribution made to provident fund.
7. Commission paid for securing orders.
8. Compensation paid to employees due to accident on duty.
9. Royalties paid for mines.
10. Insurance premium paid for policy of its employees for compensation during work. 11.
Compulsory subscription to an association.
12. Legal expenses for – normal course of business, to avoid business liability, defend for title of his
assets, terminate a disadvantageous trading relationship, and resist a winding-up petition by
some shareholders.
13. Annual listing fee paid to stock exchange.
14. Expenditure on inauguration ceremony.
Sec 34 : Conditions for depreciation allowance and development rebate [Omitted w.e.f.
1.4.1988]. Section 35 : Expenditure on Scientific Research :
a) Scientific Research : It means activities for the extension of knowledge in the fields of natural or
applied science including agriculture, animal husbandry or fisheries.
b) Scientific Research Expenditure : It means expenditure incurred on scientific research would
include all expenditure incurred for the prosecution or the provision of facilities for the
prosecution of scientific research but does not include any expenditure incurred in the
acquisition of right in or arising out of scientific research.

Income from PGBP Page 6

A summary of weighted deduction u/s 35
Section Expenditure incurred / contribution made Deduction (As a %
of contribution
made)

35(1)(i) Revenue Exp. Incurred on scientific research related to the 100%

assessee’s business

35(1)(ii) Research Association for scientific research 150%

35(1)(iia Company for scientific research 100%

)

35(1)(iii) Research Association for research in social science or 100%

statistical research

35(1)(iv) Capital expenditure (Other than expenditure on land) 100%

35(2AB) Expenditure on in-house research (Except land and building) 150%

 Scientific
Research
commencement of business Outside Agency

Self
Indian Research Association /
Company Scientific National Laboratory /
Incurred regularly with
Incurred before business University /College/ IIT
Business Capital Exp. Research 100%
Within 3 yrs Revenue Exp. 100%
immediaely 150% 100%
preceding the (Except Land) Scientific Research
Social or Statistical
commencement of Research
Revenue Exp. *Salary not include
[Raw material and perquisite
Salary exp. is (Except Land) 100%
allowed]
100%
Capital Exp. 100%
Only Salary and
Material

In-house Research : A deduction of an amount equal to 150% of expenditure (excluding land or

building) shall be allowed.
Sec. 35D : Amortization (paying off) of Preliminary Expenses :
Preliminary expenses includes –
1. Preparation of feasibility report,
2. Preparation of project report
3. Conducting market survey.
4. Legal charges for drafting any agreement.
5. Printing charges for the Memorandum and Articles of Association.
6. Fees paid for registering the company.
7. Expenses regarding issue of shares or debentures e.g. underwriting commission, brokerage, typing,
printing, advertisement of prospectus etc.

Income from PGBP Page 7

Deduction : Deduction is allowed is 1/5 of such expenditure for each of the five successive
previous year beginning with the previous year in which the business is commences.

Preleminary expenses (Max. Limit)

 Other than Indian

Indian Company
Company 5% of 'Cost of

5% of 'Cost of Project' or
5% of the 'Capital Project'
employed'

Option of the assessee

Sec. 35DD : Expenditure for amalgamation or demerger of an undertaking : Allowed

deduction of 20% of such expenditure for each of five successive previous years beginning with
the year in which amalgamation or demerger takes place.
Section 35DDA : Expenditure on voluntary retirement :
Allowed deduction of 20% of such expenditure for each of five successive previous years
beginning with the year in which the expenditure was incurred.
Sec. 35 AD : Expenditure on Specified Business :
- 100% expenditure of capital nature is allowed [Excluding land, goodwill, financial instrument]
- Deduction is allowed in the year in which business is commenced –
a) Expenditure incurred prior to commencement of its operations.
b) The amount is capitalised in the books of accounts on the date of commencement of its
operations.
- Payment of Rs. 10,000 in a day should not be made in cash.
Businesses :-
1. Setting up and operating of cold chain facility.
Cold chain facility means a chain of facilities for storage or transportation of:
a) Agriculture and forest produce,
b) Meat and meat products,
c) Poultry
d) Marine and dairy products
e) Products of horticulture, floriculture and apiculture
f) Processed food items.
2. Warehousing facility – for storage of agricultural produce.
3. Laying and operating of petroleum oil pipeline.
4. At least one hundred beds hospital.
5. Building for slum redevelopment or rehabilitation framed by Central or State Government.

Income from PGBP Page 8

6. Housing project under a scheme for affordable housing framed by Central or State Government. 7.
Two-star or above category hotel.
8. Production of fertilizer in India.
9. Inland container depot / container freight station.
10. Bee-keeping and production of honey and beeswax.
11. Warehousing facility for storage of sugar.
12. Infrastructure facility – toll road, bridge, water supply, water treatment, irrigation project, sanitation,
port, airport, etc.
13. Semiconductor wafer fabrication manufacturing unit.
Sec. 36 : Other deduction :
1. Insurance premium paid for stock which is used for purpose of business / profession. 2.
Insurance premium for cattle, Paid by federal milk co-operative society.
3. Insurance premium paid (any mode other than cash) for the health of employees. 4.
Bonus or commission to employee. (On actual payment basis)
5. Interest paid on borrowed capital for purpose of business / profession (On actual payment
basis). No deduction of ‘interest paid’ for acquisition of asset from the date of borrowing till the
date of ‘put to use’. (It would be added to cost of asset).
6. Discount on Zero Coupon Bond allowed as deduction on pro-rata basis. 7.
Bad debts – The debt should be incidental to the business.
8. Loss regarding animals (Not for stock in trade) – allowed as deduction. [Cost of animal –
carcasses of animals]
9. Employers contribution to provident Fund – only Recognized provident fund or approved
superannuation fund. [Subject to Sec. 43B]
10. Employees contribution to provident fund or superannuation fund etc. [Subject to Sec. 43B]. 11.
Approved gratuity fund. [Subject to Sec. 43B].
12. Expenditure on family planning (Only when assessee is company) : Capital expenditure = 5 equal
installments; Revenue expenditure – in the same previous year.
13. Entertainment expenses, advertisement expenses (Except section 37(2B) i.e. advertisement in
political party).
14. Security Transaction Tax (STT).
Sec. 40(a) : Expenses not allowed in any circumstances :
1. Expenditure on advertisement in any souvenir, etc. published by a political party. 2. Payments outside
India, in India to a non resident or a foreign company on which TDS is not deducted and has not paid on
or before the due date specified.
3. Payment to residents – on which TDS has not been deducted or before the due date of filing the return
of income – 30% of such sum shall not allowed as deduction.
4. Wealth tax : Wealth tax chargeable under the Wealth Tax Act shall not be allowed as deduction. 5.
Tax on Profits and Gains : Any sum paid on account of any tax levied on the profits and gains of any
business or profession shall not be allowed as a deduction.

Income from PGBP Page 9

6. Contribution to unrecognized provident fund.
Sec. 40A : Expenses not deductible in certain circumstances :
1. Excessive payment to relatives.
2. Payment in Cash : Payment made to a person in a day is made exceeding Rs. 10,000 other than
account payee cheque, bank draft or use of electric clearing system, it will be disallowed. Entire
amount will be disallowed.
Exception : Where payment is made for plying, hiring or leasing goods carriages, the limit of
disallowance shall be exceeding Rs. 35,000.
Sec. 43B : Deductions allowable only on actual payment :
1. Any sum payable by the assessee by way of tax, duty, cess or fee.
2. Any sum payable by him as an employer by way of contribution to any provident fund, superannuation
fund or gratuity fund or any other fund for the welfare of employees. Certain Allowable Losses
Losses which are directly incidental to the business or profession of the assessee are allowable.
Following are some examples of such losses.
1) Robbery or Dacoity : Loss caused by robbery or dacoity is not deductible. But, if it is incidental
to business it will be allowed as a deduction and this depends upon the specific circumstances and
conditions. For example, if cash is sent for disbursement at different centers by a sugar factory in rural
area, it is incidental to business and is, therefore, allowed. Any loss due to robbery in a bank will be
allowed as the bank is under an obligation to maintain some cash outside the strong room for payments.
2) Embezzlement (Misappropriation), Theft, etc. : The loss of money due to embezzlement by an
employee handling the funds of the business while discharging his official duties is allowed as deduction.
When an employee goes to bank to deposit the cash and he takes away the money for his own use, even
then, the loss is allowable. Theft by a cashier, who is in charge of cash, is also an allowable loss. A theft
committed either by an employee or by someone else by breaking open into the business premises after
office hours, is also allowable.
3) Loss due to Non-recovery of Advances : If it is the practice in a business to give advance money
to the suppliers and if the supplier neither supplies the order nor refunds the advance money, the loss
sustained by the assessee is incidental to business and is, therefore, allowable. 4) Penalty paid for
infraction of law is not allowed.
Illustration 1 :
Mr. Amitabh prepared the following profit and loss account of his cloth shop for the year ended
st
31 March, 2019. Find out his income from business for the AY 2019-20.
Profit and Loss Account
(For the year ended 31st March, 2019)
Particulars Rs. Particulars Rs.

Salaries and wages 33,000 Gross Profit 3,34,725

 Rent, etc. 1,600 Gifts received from 275
relatives

Household expenses 82,000

Income Tax 900

Advertisement 800

Income from PGBP Page 10

Postage expenses 600

Gifts to relatives 900

Fire Insurance 400

Premium

Life Insurance Premium 2,100

Bad Debts Reserve 800

Audit Fees 400

Net profit 2,11,500

Total 3,35,000 Total 3,35,000

Solution :
Computation of Income from PGBP
A.Y. : 2019-20
Particulars Rs. Rs.

Profit as per P & L A/c 2,11,500

Add : Household expenses 82,000

Income Tax 900

Gifts to relatives 900

Life Insurance Premium 2,100

Bad Debts Reserve 800 86,700

2,98,200

Less Gifts received from relatives 275 275

 Taxable income from Business 2,97,925

Illustration 2 : Given below is the Profit and Loss Account of a Timber Merchant for the year ended 31st
March, 2019. Compute total income for the AY 2019-20.
Profit and Loss Account
(For the year ended 31st March, 2019)
Particulars Rs Particulars Rs

Opening Stock 25,000 Sales 6,00,000

Purchases 2,50,000 Rent for Property 15,000

Wages 1,00,000 Closing Stock 35,000

Audit Fees 1,000

Repairs (House Property) 2,000

General Charges 1,500

Commission for raising loan 1,000

Bad debts Reserve 500

Bad debts 2,000

Interest on capital 10,500

Contribution to Staff Welfare 2,500

Fund

Provision for Income Tax 1,500

Depreciation (Allowable) 2,500

Net Profit 2,50,000

Total 6,50,000 Total 6,50,000

Solution :
Computation of Income from Business
Particulars Rs. Rs.

Profit as per P & L A/c 2,50,000

Add : Repairs (House Property) 2,000

 Bad debts Reserve 500

Interest on capital 10,500

Contribution to Staff Welfare Fund 2,500

Provision for Income Tax 1,500 17,000

2,67,000

Less Rent for Property 15,000

Taxable income from Business 2,52,000

Income from PGBP Page 11

Problem 1 : The following is the Profit and Loss Account of Mr. X for the year ended on 31st March,
2019. Compute his taxable income from business for that year: [Problem 10, Page 236]
Profit and Loss Account
(For the year ended 31st March, 2019)
Particulars Rs Particulars Rs

Opening Stock 15,000 Sales 2,80,000

Purchases 1,40,000 Closing Stock 20,000

Wages 20,000 Gift from Father 10,000

Rent 46,000 Sale of Car 17,000

Repairs of Car 3,000 Income tax 3,000

Refund

Medical Expenses 3,000

General Expenses 10,000

Depreciation of 4,000
Car

Profit for the year 89,000

Total 3,30,000 Total 3,30,000

Following further information is given:

(1) Mr. X carries on his business from rented premises half of which is used as his residence. (2) Mr. X
bought a car during the year for Rs 20,000. He charged 20% depreciation on the value of the car. The car
was sold during the year for Rs 17,000. The use of the car was 3/4th for the business and 1/4th for personal
use.
(3) Medical expenses were incurred during the sickness of Mr. X for his treatment.
(4) Wages include Rs 250 per month on account of Mr. X’s driver for 10 months.
Problem 2 :
The following is the Profit and Loss Account of the Raj Oil Mills for the financial year 2018-19.
Compute its business income on the basis of additional information.
Profit and Loss Account
(For the year ended 31st March, 2019)
Particulars Rs Particulars Rs

Office Salaries 15,000 Gross Profits 80,000

General Expenses 7,000 Profit on Sale of car 15,000

Bad Debts 1,000 Recovery of bad debts 5,000

Advertising Expenses 3,700 Interest on Govt. 3,500

Securities

Insurance Premium 1,500 Dividends 3,500

(fire)

Depreciation 5,000 Gifts on the occasion 5,000

of Gruhapravesam
Reserve for bad debts 3,000

Donation to a school 2,500

Car Expenses 2,000

Net Profit 71,300

Total 1,12,000 Total 1,12,000

Additional information:
(a) General expenses include:
(i) Rs 2,500 as compensation paid to an accountant who had to be removed from service in the interest
of business, and
(ii) Rs 3,300 as contribution paid to the Govt. for laying electric cables for the company’s plant. (b)
Depreciation as regards to the relevant blocks of assets under the Income Tax Act was Rs 3,500. (c) In the
assessment year 2015-16 the Assessing Officer had refused to allow deduction for the bad debts of Rs
5,000 now recovered.
(d) Car expenses include Rs 500 attributable to use of car for personal work.

Income from PGBP Page 12

Solution :
Computation of Income from Business
AY : 2019-20
 Particulars Rs. Rs.

Profit as per P & L A/c 71,300

Add : Disallowed Expenses

Depreciation 5,000

Reserve for bad debts 3,000

Donation to School 2,500

Car expenses 500 11,000

82,300

Less Profit of sale of car 15,000

Recovery of Bad debts 5,000

Interest on Govt. Securities 3,500

Dividends 3,500

Gifts on the occasion of 5,000

Gruhapravesam

Depreciation 3,500 35,500

Taxable income from Business 46,800

Problem 3 : The following is the Profit & Loss Account of Sri S. Kumar for the year ending 31st March,
2019: [Problem 12, Page 238]
Profit and Loss Account
(For the year ended 31st March, 2019)
Particulars Rs Particulars Rs

Rent 3,870 Gross Profit b/d 55,048

Staff Salaries 8,620 Miscellaneous Receipts 383

General Charges 3,780 Discounts 458

Interest on Capital 1,800 Interest of Govt. Securities 2,400

Audit Fee 1,050 Bad Debts Recovered 560

Bad Debts 840 Profit on Sale of Machineries 5,765

Reserve for Bad Debts 600 Profit on Smuggling

Business 1,25,000
 Income Tax 2,400 Less:

Law Charges 3,700 (1) Bribe to Border Police 12,000

Compensation to a 2,800 (2) Smuggled goods Seized 16,000

retrenched employee

Cost of extension of 2,000 (3) Penalty to Custom 84,000

office premises Authorities 13,000

Charity and Donation 184

Depreciation 5,700

Entertainment Expenses 12,600

Net Profit 98,670

Total 1,48,614 Total 1,48,61

4

Compute Mr. Kumar’s Income from Business for the related Assessment Year after taking into account
the following:
(a) The expenditure of rent includes a sum of Rs 720 being rent charged for a godown owned by the
assessee himself.
(b) Staff salary includes Rs 1,200 being the salary of a servant engaged at the residence of the assessee. (c)
The general expenses include a sum of Rs 500 being advertisement expenses. (d) Law charges include
payment of Rs 2,300 being Stamp and Registration Fees and Solicitor’s Bill for the Deed of Purchase of a
property.
(e) Depreciation on fixed assets chargeable according to Income Tax Rules amounts to Rs 6,780.

Income from PGBP Page 13

(f) Bad Debts recovered include an item of Rs 200 the claim for which was disallowed in the related year
of assessment.
(g) The profit on sale of machineries relate to a machine purchased in December 2016 for Rs 15,000. Its
written-down value on 1.4.2018 was Rs 10,935 and the same was sold during the year for Rs
16,700.
Problem 4 : From the following Profit and Loss Account of a sole proprietorship business for the year
ended 31st March, 2019, compute his taxable income from business and the gross total income for the
assessment year 2018-19: [Problem 11, Page 237]
Profit and Loss Account
(For the year ended 31st March, 2019)
Particulars Rs Particulars Rs
 Salary to Staff 15,000 Gross Profit b/d 2,00,000

General Expenses 8,000 Dividend from an 5,000

Indian Agricultural
Bad Debts 3,000 Company

Advertisement 5,000 Interest on Notified 1,000

Capital Investment
Proprietor’s Salary 15,000 Bonds

Int. on Proprietor’s Capital 3,000

Reserve for Sales Tax 8,000

Gratuity to Staff 40,000

Donation 12,000

Purchase of Land 20,000

Advance Income Tax Paid 5,000

Depreciation 10,000

Legal charges for defending a 1,000

suit for breach of a trading
contract

Net Profit 61,000

Total 2,06,000 Total 2,06,00

0

Additional Information:
(1) General Expenses include Rs 2,000 paid as compensation to an employee whose services were
terminated as his continuing in service was considered detrimental to the profitable conduct of the
business.
(2) The assessee has received demand notice of sales-tax for the preceding year amounting to Rs 8,000
and he has not disputed the liability.
(3) The gratuity paid had no relation to the service or salary drawn by the staff. It was given on ad hoc
basis.
(4) Donation was given to the Chamber of Commerce to work against the threat of nationalization of the
type of business carried on by the assessee. The Chamber collected such donations from several
other parties also doing the same type of business. The Chamber in turn donated money to different
parties who exercised their pressure with the Government and ultimately it was averted.
(5) The assessee purchased land in the name of the District Magistrate for constructing houses for its
workers. It was to be done by the Government under the subsidized Housing Scheme for industrial
 workers. The ownership would vest in the Government.
(6) Depreciation is found to be in excess by Rs 2,000.
Problem 5 : Sri Pandey is a reputed Vakil of Bikaner. He has prepared the following Income &
Expenditure Account for the year ended 31st March, 2019: [Problem 17, Page 244]

Income from PGBP Page 14

Profit and Loss Account
(For the year ended 31st March, 2019)
Expenditure Rs Income Rs

Household Expenses 12,000 Legal fees 1,26,000

Office Expenses 7,000 Special commission appointment 1,400

fees
Charity 500

Telephone Expenses 500 Cash gifts received from Clients 2,000

Income Tax 900 House Rent 15,000

Rent 4,000 Int. on Govt. Securities 3,000

Gift to daughter 2,000 Salary as part-time Lecturer in Law 6,000

Electricity Charges 1,000

Donation to National Defense Fund 1,000

Contribution to Public Provident 2,400

Fund

Books for profession 3,000

(Annual publications)

Salaries 15,000

Purchase of Motor-car 60,000

Purchase of Furniture 2,000

Life Insurance Premium 5,000

Motor-car Expenses 6,000

Purchase of Typewriter 6,000

Excess of Income over Expenditure 25,100

Total 1,53,400 Total 3,53,400

Following other particulars were received:

(a) Sri Pandey lives in one-half of the house and the other half is used for office. Rent and Electricity
charges are in respect of this house.
(b) One-half of car expenses are for personal use.
(c) Depreciate Motor-car @ 15%, Typewriter @ 15% and Furniture @ 10%.
Compute his taxable income from business and profession for the A.Y. 2019-20.
Problem 6 : From the Profit & Loss Account for the relevant assessment year, compute income from
business of Sri Babu Rao.
Profit and Loss Account
(For the year ended 31st March, 2019)
Particulars Rs Particulars Rs

To Salaries 88,000 By Gross Profit 3,80,000

To Rent 42,000 By Sundry receipts 20,000

To General expenses 20,000 By dividends 40,000

To Advertisement 25,000 By Commission 30,000

To Legal expenses 15,000 By Bad debts 10,000

recovered (earlier
To Sales-tax 10,000 allowed)

To Wealth-tax 20,000 By Rent of building let 44,000

out

To Telephone expenses 12,000

To Gratuity paid 30,000

To Provision for bad debts 10,000

To Advance income-tax 20,000

To Depreciation 38,000

To Office expenses 12,000

To Municipal taxes of property let out 10,000

To Contribution to employees provident 6,000

fund

To Net profit 1,66,000

Total 5,24,000 Total 5,24,000

Other information:
(a) Legal expenses were found to have been incurred for the registration of a business asset.
 Income from PGBP Page 15
(b) 50% of the business premises were used for residential purposes.
(c) General expenses include a donation of Rs 10,000 towards A.P. Chief Minister’s Relief Fund.
(d) Advertisement expenses were paid in Cash.
(e) Allowable depreciation as per income-tax rules, Rs 46,000.
Solution :
Computation of Income from Business
AY : 2019-20
Particulars Rs. Rs.

Profit as per P & L A/c 1,66,000

Add : Inadmissible Expenses

Rent 21,000

General Expenses(Donation) 10,00

0

Advertisement expenses (Paid in cash) 25,00

0

Wealth tax 20,00

0

Provision for bad debts 10,00

0

Advance Income Tax 20,00

0

Depreciation 38,00
0

Municipal Tax of property let out 10,00 1,54,000

0

3,20,00
0

Less Inadmissible Incomes

Dividends 40,000

Rent of building let out 44,00 84,000

0

Depreciation 46,00
0

Taxable income from Business 1,90,000

Problem 7: Sri Sunil Dutta furnishes the following information relevant for the A.Y.
2018-19: [Problem 21, Page 247]
Profit and Loss Account
(For the year ended 31st March, 2019)
Particulars Rs Particulars Rs

Office Expenses 45,000 Gross Profit 3,43,000

Sundry Expenses 39,000 Sundry Receipts 11,000

Entertainment Expenses 15,000 Bad debts recovered 7,100

(Not allowed earlier)
Audit Fees 12,000

Legal Charges 4,000 Customs duties 32,500

recovered from the
Extension of Building 6,000 Government
(Allowed earlier as
Bonus to Staff 36,000 deduction)

Salary to Staff 43,000 Gifts received from father 1,43,000

Depreciation on Plant & Machinery 23,000

Contribution towards Recognised P.F. 15,000

Contribution towards Unapproved Gratuity 4,000

Fund

Provision for Sales Tax 25,000

Sales Tax 38,000

Payment to a National Laboratory for

Scientific Research 49,600

Net Profit 1,82,000

Total 5,36,600 Total 5,36,600

Additional Information:
(a) Payment to a National Laboratory is for the purpose of carrying on approved scientific research, not
related to the business. Besides, Sri Sunil Dutta purchases a plant of Rs 30,000 for the purpose of
carrying on scientific research related to the business. Neither cost of plant nor depreciation
thereon is debited to profit and loss account.

Income from PGBP Page 16

(b) Depreciation on plant and machinery and extension of building as per income-tax rule is Rs 19,000.
(c) Sales tax of Rs 38,000 includes interest for late payment of sales tax Rs 1,200 and penalty for evading
GST Rs 10,000.
(d) Provision for sales tax is however paid on July 10, 2015. Evidence of payment is submitted along with
the return of income.
(e) Salary to staff includes a payment of pension of Rs 8,000 to the widow of a former employee.
Compute business income of Sri Sunil Dutta for the assessment year 2019-20.
Problem 8: Mr. Dewan is a Chartered Accountant in Delhi. From the following information, compute
the income from profession. [Problem 22, Page 249]
Income and Expenditure Account
(For the year ended 31st March, 2019)
Expenses Rs Income Rs

To Drawings 8,000 By Audit fees 2,24,000

To Office rent 42,000 By Financial consultancy 98,000

service

To Telephone charges 15,000 By Dividend from UTI 10,000

To Electricity Bill 4,200 By Accountancy works 14,000

To Salary of staff 66,000

To Car expenses 21,000

To Subscription for journals 2,500

To Institution fee 1,200

To Stipends given to 12,000

Trainees

To Net Profit/Income 1,74,100

Total 3,46,000 Total 3,46,000

Notes:
1. Depreciation of car during the year amounts to Rs 5,000.
2. 30% of the car is used for personal purpose.
Problem 9 : Dr. Surendra is a renowned medical practitioner who maintains books of account on cash
basis, furnishes his Receipts and Payments Account for the financial year 2018-19. [Problem 20, Page
152]
Income and Expenditure Account
(For the year ended 31st March, 2019)
Receipts Rs Payments Rs

Balance b/d 14,000 Electricity and Water Bills 2,000

Consultation Fees: Rent of Clinic:

 2013-14 3,000 2013-14 600

2014-15 15,000 2014-15 4,800

2015-16 2,000 2015-16 600

Visiting Fees 30,000 Purchase of medicines 40,000

Loan from bank for 25,000 Purchases of Professional Books 4,000

professional purposes

Sale of Medicines 60,000 Household expenses 7,800

Gifts and Presents 5,000 Collection charges on Dividend 100

Income

Remuneration 6,000 Motor-car purchased 30,000

from Articles
Published in Surgical Equipments 4,800
Professional
Journals Income Tax 10,000

Dividend 10,000 Salary to Staff 15,000

Interest on Post 7,000 Life Insurance Premium 15,000

Office Savings
Bank A/c Gift to Wife 5,000

Interest on Loan 2,000

Car expenses 15,000

Balance c/d 20,300

Income from PGBP Page 17

Total 1,77,000 Total 1,77,000

Compute his Taxable Professional Income for the assessment year 2019-20, after taking into account the
following additional information:
(a) 1/3 of the use of Motor-car relates to his personal use.
(b) Depreciation on Motor-car allowable is 15%, on books it is @ 100% and on Surgical Equipments it is
@ 15%.
(c) Gifts and presents include Rs. 3,000 from patients in appreciation of his medical service and Rs
2,000 received as Birthday Gifts from relatives.
(d) Closing stock of medicine amounted to Rs. 5,500.
Problem 10: The following is the Receipts and Payments Account of Mr. Nagaraja Rao, a practicing
Chartered Accountant for the year ended 31.3.2019:
Receipts Rs. Audit Fees 19,210 Consultation 10,000 Appellate Tribunal
appearance 15,000 Miscellaneous 20,000 Interest on Government Securities
10,000 Rent received 10,000 Presents from clients 10,000 Payments Rs. Office
expenses 10,000 Office rent 5,000 Salaries and Wages 12,050 Printing and
Stationery 1,000 Subscription to C.A. Institute 3,000 Purchase of books for
professional purposes (Annual publications) 1,300 Travelling expenses 5,800
Interest on bank loan 3,000 Donation to National Defense Fund 5,000
Loan from bank was taken for the construction of the house in which he lives. Municipal value of this
house is Rs 8,000 and the local taxes Rs 800 p.a. 1/4th of travelling expenses are not allowable. Compute
professional income and income from house property for the previous year 2018-19. Problem 11 : Dr.
Gupta is a medical practitioner of Ludhiana. From the following, calculate his income from profession for
the assessment year 2019-20: [Problem 18, Page No. 150] Rs.
1. Gross receipts from dispensary 2,35,000 2. Gross receipts from consultation
1,65,000 3. Operation fees 2,50,000 4. Visiting fees 50,000

Income from PGBP Page 18

5. Gifts from patients 30,000 6. Medicine purchased 1,25,000 7. Closing stock of medicines 35,000 8.
Salaries paid to employee 1,50,000 9. Surgical equipments purchased 48,000 10. Dr. Gupta went to
attend a medical seminar in Germany to update the knowledge and spent Rs
25,000 on it.
11. He owns a house whose municipal value is Rs 50,000. Half portion of the house is used for
profession. Expenses paid on the house: Municipal Taxes 10% of M.V., Repairs Rs 10,000. 12. Medical
books purchased (Allow depreciation @ 40%) Rs. 30,000.
Problem 12 : Sri Rathore gives you the following particulars from his books of account. Compute his
Taxable Business Income for the year ending 31.3.2019: [Problem 12, Page No. 144] Net profit as per
Profit and Loss A/C (Before charging the following) Rs. 5,75,000 Expenditure on Family planning Rs.
45,000
Lump-sum payment made for Technical know-how Rs 90,000
Entertainment expenditure Rs. 30,000
Expenditure on acquiring Patent-Right Rs. 84,000
Expenditure on advertisement – Paid in Cash Rs. 18,000
Amount paid to Rajasthan University for an approved Research Programme in Social Sciences not
connected with his business Rs. 20,000
Provision for Excise duty (He paid only Rs 20,000 before filing I.T. return) Rs 45,000. Problem 13 :
Miss. Vishnu Priya gives you the following information from her accounts for the year ending 31.3.2019:
Net profit as per the Profit and Loss Account (Before charging the following) Rs.
5,40,000 Expenditure on staff welfare Rs. 30,000
Revenue expenditure on family planning among employees Rs. 32,000
Capital expenditure on the above Rs. 8,00,000
Lump sum consideration for purchase of technical know-how on 1.7.2013 Rs.
1,00,000 Entertainment expenditure Rs. 15,000
Expenditure on acquisition of patent right on 1.11.2012 Rs. 1,25,000
Expenditure on advertisement paid in cash Rs. 90,000
Amount paid to Anna University for an approved research programme in the field of social science not
connected with the Business Rs. 40,000
Compute business income of Vishnu Priya for the assessment year 2015-16.
Problem 14 : The Net profit of Mr. Sulaiman of Madurai as per his profit and loss account for the year
ended 31.3.2019 after charging the following item was Rs 2,40,000: [Problem 13, Page 145] (a)
Interest on capital Rs. 20,000
(b) Salary to staff Rs. 1,16,000
(c) Office expenses Rs. 3,000

Income from PGBP Page 19

(d) Bad debts written-off Rs. 13,000
(e) Provision for bad debts Rs. 10,000
(f) Provision for income-tax Rs. 16,000
(g) Donation Rs. 10,000
(h) Depreciation Rs. 17,000
Depreciation allowable as per the Act is only Rs. 12,000.
Compute income from business.
Problem 15 : Mr. Gupta provides you the following detail from his business books for the assessment
year 2019-20:
(a) Computed net profit after charging the following Rs. 72,000
(b) Provision and reserves debited to P & L A/c.
(1) Provision for Discount on Debtors Rs. 42,000
(2) Provision for Depreciation Rs. 31,000
(c) Household expenses Rs. 48,000
(d) Donation to a recognised school Rs. 70,000
(e) Computer purchased for scientific research Rs. 20,000
(f) Bearer cheque issued for a purchase Rs 25,000
(g) O. Y. T. deposit Rs. 16,000
(h) Advertisement expenses on sign boards Rs. 45,000
(i) Audit fees paid in cash Rs. 25,000
(j) Patent purchased during the year Rs. 75,000
(k) Market survey and feasibility report expenses (Cost of a new project Rs 6,00,000) Rs. 50,000
(l) Opening stock is valued at cost + 10% basis and closing stock is valued at cost - 10% basis.
Opening stock was valued at Rs 66,000 and closing stock was valued at Rs. 72,000. Income
credited to Profit and Loss account were:
(1) Bank Interest on F. D. Rs. 7,000
(2) Refund of Excise Duty Rs. 5,000
(3) Dividend from Indian Cos. Rs. 3,000
(4) Bad debts recovered Rs. 3,000
Compute Business Income of the assessee for the assessment year 2019-20. Give proper notes in
support of your answer.
*****

Income from PGBP Page 20

Basic Concepts and
Definitions
Taxation in India
• The taxation system in India is such that the taxes are levied by the
Central Government and the State Governments.
• Some minor taxes are also levied by the local authorities such as the
Municipality and the Local Governments.
• Broadly taxes are divided into two categories:
1. Direct Taxes
2. Indirect Taxes
Direct Taxes
• A direct tax can be defined as a tax that is paid directly by an
individual or organization to the imposing entity (generally
government).
• A direct tax cannot be shifted to another individual or entity.
• The Central Board of Direct Taxes deals with matters related to levying
and collecting Direct Taxes and formulation of various policies related
to direct taxes.
• Direct taxes include Fringe Benefit Tax, Wealth Tax, Income Tax,
Minimum Alternate Tax, Capital Gains Tax, Gift Tax
Indirect Taxes
• Indirect tax is not levied on the income of the taxpayer and can be
passed on to other individuals or entity.
• These are levied on the sellers of goods or the providers of service,
where it is passed on to the end consumer in the form of service tax,
excise duty, entertainment tax, custom duty etc.
• Indirect Taxes in India – Service Tax, Excise Duty, VAT, Customs Duty,
STT, Stamp Duty, Entertainment Tax
• GST is an Indirect Tax imposed on the supply of goods and services.
• Taxes replaced by GST – Central Excise Duty, Central Sales tax, VAT,
Entry tax, Service Tax
Assessment Year
• Assessment Year means the period of 12 months commencing st
on thest
first
day of April every year. It is therefore, the period from 1 April to 31
March.
• The tax is levied in each assessment year, with respect to or on the total
income earned by the assessee in the previous year.

Previous Year
• According to Section 3, Previous Year means the financial year immediately
preceding
st
the assessmentst
year. Financial year means a year which starts on
1 April and ends on 31 March.
• Income Tax payable on the income earned during the previous year and it is
assessed in the immediately succeeding financial year which is called an
assessment year.
Person
The term “person” includes:
a. an individual;
b. a Hindu undivided family;
c. a company;
d. a firm
e. an association of persons or a body of individuals, whether
incorporated or not;
f. a local authority; and
g. every artificial juridical person not falling within any of the
preceding categories.
Assessee
“Assessee” means a person by whom income-tax or any other sum of
money is payable under the Act. It includes
• A person by whom any tax or any other sum of money is payable
under the Act
• A person in respect of whom any proceeding under the Act has been
taken
• Every person who is deemed to be an assessee
• Every person who is deemed to be an assessee in default under any
provision of the Act.
Gross Total Income
As per section 14, income of a person is computed under the following
five heads:
1. Salaries
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources
The aggregate income under these heads is termed as “gross total
income”.
Total Income
Total income of an assessee
is gross total income as
reduced by the amount
permissible as deduction
under sections 80C to 80U.
Residential Status
• The determination of Residential Status of a person is very important for
the purpose of levy of income tax, as income tax is levied based on the
residential status of a taxpayer.
• An assesse is either:
a. Resident in India or
b. Non-resident in India
However, an individual or a HUF can be divided into:
a. Resident and ordinarily resident in India; or
b. Resident but not ordinarily resident in India; or
c. Non-resident in India
Determination of Residential Status of
Individual
The Residential Status of an Individual is to be determined on the basis of
period of stay of the taxpayer in India and is computed separately for each
year. If an individual satisfies any one of the following conditions, he is said to
be Resident in India for that financial year. The conditions are:-
• He is in India for a period of 182 days or more in that financial year
OR
• He is in India for 60 days or more during that financial year and has been in
India for 365 days or more during 4 previous years immediately preceding
the relevant financial year.
If any one of the above conditions is satisfied, the individual is said to be
resident in India. However, if none of the conditions is satisfied, he is said to
be a Non Resident Indian (NRI)
Classification of Ordinary Resident & Non Ordinary
Resident
As per Section 6(6), a person shall be not ordinary resident in India if he
satisfies any one of the following conditions:-
• He has been a non-resident (in the manner computed above) in 7 out of 10
years immediately preceding the Financial Year (Amended by Budget 2020)
OR
• He has been in India for a period of 729 days or less in 7 previous
years immediately preceding the financial year.
If any 1 of the above conditions is satisfied, the person is said to be resident
but not-ordinary resident in India. However, if none of the above conditions
is satisfied, the person is said to be Resident and Ordinary Resident in India.
 Particulars Resident and Not ordinary Non-Resident
Ordinary Resident
Resident
Income received or deemed to be received Yes Yes Yes
in India whether earned in India or
elsewhere
Income which accrue or arise or is Yes Yes Yes
deemed to accrue or arise in India during
the previous year, whether received in
India or elsewhere
Income which accrue or arise outside India Yes Yes No
and received outside India from a
business controlled from India
Income which accrue or arise outside India Yes No No
and received outside India in the previous
year from any other source
Income which accrues or arises outside Yes No No
India and received outside India during the
year preceding the year and remitted to
India during the previous year
 • Exemption
If an income is exempt from tax, it is not included in the computation of income.
Exemption can never exceed the amount of income.

• Deduction
Deduction is generally given from income chargeable to tax. Deduction can be less
than or equal to or more than the amount of income. If the amount deductible is
more than the amount of income, the resulting amount will be taken as loss.

• Income tax
It is the tax that is collected by Central Government for each financial year levied on
total taxable income of an assessee during the previous year. The Income-tax Act
contains the provisions for computing taxable income, but the rate of tax is given by
the Finance Act passed by the Parliament along with the Union Budget every year.
 • Maximum marginal rate of tax:
As per section 29(C), "maximum marginal rate" means the rate of income-tax
(including surcharge on income-tax, if any) applicable in relation to the highest slab of
income in the case of an individual, association of persons or, as the case may be,
body of individuals as specified in the Finance Act of the relevant year.

• Tax Planning:
It is the duty of every citizen to pay legitimate tax but at the same time it is his right
not to pay taxes which are not due. Tax planning means reducing tax liability by taking
advantage of the legitimate concessions and exemptions provided in the tax law. It
involves the process of arranging business operations in such a way that reduces tax
liability.

• Tax Evasion:
Tax evasion means avoiding tax by illegal means. Generally it involves suppression of
facts, falsifying records, fraud or collusion. It is an attempt to evade tax liability with
the help of unfair means. Tax evasion is illegal and would result in punishment by way
of penalty, fines and sometimes prosecution.
 • Tax Avoidance:
Tax avoidance means taking undue advantage of the loopholes, lacunae
or drafting mistakes for reducing tax liability and thus avoiding payment
of tax which is lawfully payable. Generally it is done by twisting or
interpreting the provisions of law and avoiding payment of tax. Tax
avoidance takes into account the loopholes of law. Though it has a legal
sanction, it means following the provisions of law in letter but killing
the spirit of the law.
Income Exempt from
Tax
• Resident Individual,
any non-resident
individual, any HUF,
AOP, BOI
• Senior Citizen - Individual who is 60 years of age at anytime during the
Previous year 2020-21 but less than 80 years on March 31, 2021
Net Income Range Rate of Income Tax
Upto Rs. 3,00,000 Nil
Rs. 3,00,000 to Rs. 5,00,000 5%
Rs. 5,00,000 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

• Super Senior Citizen – In case of a resident individual who is at least

80 years of age at any time during the previous year 2020-21.
Net Income Range Rate of Income Tax
Upto Rs. 5,00,000 Nil
Rs. 5,00,000 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
Surcharge
• Surcharge is levied on the amount of income-tax at following rates if
total income of an assessee exceeds specified limits:-
For Individuals/HUF/AOP/BOI/ artificial judicial person
10% of Income tax if total income > Rs.50 lakh
15% of Income tax if total income > Rs.1 crore
25% of Income tax if total income > Rs.2 crore
37% of Income tax if total income > Rs.5 crore
Income Exempt from Tax
• Agriculture Income under section 10(1)
• Death cum retirement gratuity under section 10(10)
• Amount received from statutory or recognized provident fund or
public provident fund under section 10(11)/ 10(12)
• House rent allowance subject to certain limits under section 10(13A)
• Interest received on Post Office Savings Account under section 10(15)
• Amount received in maturity of Life Insurance under section 10(10D)
• Interest received up to 9.5% per annum from EPF
• Interest and maturity amount received from PPF
Residential Status
• The determination of Residential Status of a person is very important for
the purpose of levy of income tax, as income tax is levied based on the
residential status of a taxpayer.
• An assesse is either:
a. Resident in India or
b. Non-resident in India
However, an individual or a HUF can be divided into:
a. Resident and ordinarily resident in India; or
b. Resident but not ordinarily resident in India; or
c. Non-resident in India
Determination of Residential Status of
Individual
The Residential Status of an Individual is to be determined on the basis of
period of stay of the taxpayer in India and is computed separately for each
year. If an individual satisfies any one of the following conditions, he is said to
be Resident in India for that financial year. The conditions are:-
• He is in India for a period of 182 days or more in that financial year
OR
• He is in India for 60 days or more during that financial year and has been in
India for 365 days or more during 4 previous years immediately preceding
the relevant financial year.
If any one of the above conditions is satisfied, the individual is said to be
resident in India. However, if none of the conditions is satisfied, he is said to
be a Non Resident Indian (NRI)
Classification of Ordinary Resident & Non Ordinary
Resident
As per Section 6(6), a person shall be not ordinary resident in India if he
satisfies any one of the following conditions:-
• He has been a non-resident (in the manner computed above) in 7 out of 10
years immediately preceding the Financial Year (Amended by Budget 2020)
OR
• He has been in India for a period of 729 days or less in 7 previous
years immediately preceding the financial year.
If any 1 of the above conditions is satisfied, the person is said to be resident
but not-ordinary resident in India. However, if none of the above conditions
is satisfied, the person is said to be Resident and Ordinary Resident in India.
 Particulars Resident and Not ordinary Non-Resident
Ordinary Resident
Resident
Income received or deemed to be received Yes Yes Yes
in India whether earned in India or
elsewhere
Income which accrue or arise or is Yes Yes Yes
deemed to accrue or arise in India during
the previous year, whether received in
India or elsewhere
Income which accrue or arise outside India Yes Yes No
and received outside India from a
business controlled from India
Income which accrue or arise outside India Yes No No
and received outside India in the previous
year from any other source
Income which accrues or arises outside Yes No No
India and received outside India during the
year preceding the year and remitted to
India during the previous year
Computation of Income
under different Heads of
Income
Salary
• Relationship between payer and payee
• Salary and Wages – conceptually not different
• Salary from more than one source taxable under salaries
• Foregoing of salary
• Salary under section 17(1) includes:
a. Wages;
b. Any annuity or pension;
c. Any gratuity
d. Any fees, commission, perquisites or profits in lieu of or in addition to any
salary or wages
e. Any advance of salary;
f. Any payment received by an employee in respect of any period of
leave not availed by him;
g. Transferred balance in a recognized provident fund to the extent it is
taxable
Different forms of salary
• Basic Salary
• Dearness Allowance
• Advance Salary
• Arrears of salary
• Leave encashment while in service
• Leave encashment at the time of retirement or at the time of leaving job
• Salary in lieu of notice
• Salary to partner
• Fees and commission
• Bonus
• Gratuity
• Pension
• Annuity
Leave Salary
• During continuity of Employment (Government or Non-Government
Employee – Chargeable to Tax
• At the time of Retirement/ leaving job (Government Employee) – Fully
exempt from tax under section 10(10AA)
• At the time of Retirement/ leaving job (Non-Government Employee):
Fully or partly exempt from tax
Different forms of Allowances
• City compensatory allowance – Taxable
• House rent allowance – Exempt in some cases
• Entertainment allowance – Deductible in some cases
• Special allowance – Notified special allowances are exempt
• Tiffin allowance, fixed medical allowance, servant allowance – Taxable
• Any other allowance - Taxable
House rent allowance (Sec. 10(13A) and rule
2A)
• The least of the below 3 is exempt from tax:
1. An amount equal to 50% of salary, where residential house is
situated at Mumbai, Kolkata, Delhi or Chennai and an amount equal
to 40% of salary where residential house is situated at any other
place
2. House rent allowance received by the employee in respect of the
period during which rental accommodation is occupied by the
employee during the previous year.
3. The excess of rent paid over 10% of salary.
Entertainment allowance under Sec 16(ii)
• For Government Employee – First, included in salary, thereafter
deducted from salary on the following basis:
Amount deducted is least of the following:
a. Rs. 5000
b. 20% of basic salary
c. Amount of entertainment allowance granted during the previous
year
Special allowances prescribed under section
10(14)
The following allowances are exempt to the extent the amount is
utilized for the specified purpose for which the allowance is received
• Travelling allowance or Transfer allowance
• Conveyance allowance
• Daily allowance
• Helper allowance
• Research allowance
• Uniform allowance
Special allowances prescribed under section
10(14)
The allowances given below are exempt to the extent of –
a. The amount of allowance; or
b. The amount specified in rule 2BB,
Whichever is lower.
Name of allowances:
• Special Compensatory (Hill Areas) Allowance - Exemption varies from Rs. 300 to Rs. 7000 per month
• Border area allowance – Exemption varies from Rs. 200 to Rs. 1300 per month
• Tribal areas/ scheduled areas allowance – Rs. 200 per month
• Allowance for transport employees
The amount of exemption is
a. 70% of such allowance
b. Rs. 10000 per month
Whichever is lower
Special allowances prescribed under section
10(14)
• Children Education Allowance – The amount exempt is limited to Rs.
100 per month per child up to a maximum of two children.
• Hostel expenditure allowance – Exempt from tax to the extent of Rs.
300 per month per child up to a maximum of two children
• Transport allowance
In case of employee who is blind or deaf and dumb or orthopedically
handicapped – Rs. 3200 per month
In case of any other employee - Nil
Perquisites under section 17(2)
• Furnished or unfurnished house without rent or at concessional rent
• Supply of gas, electricity or water for household purposes
• Car or any other automotive conveyance
• Interest free or concessional loan
• Education facility to the employee’s family members
Permissible Deductions from Salary Income
under section 16
The income chargeable under the head salaries is computed after the
following deductions:
a. Standard deduction
b. Entertainment allowance deduction
c. Professional tax
Provident Fund
Statutory Provident Fund Recognized Provident Fund Public Provident Fund
Employer’s contribution to Exempt from Tax Exempt up to 12% of salary Employer does not
provident fund contribute
Deduction under section Available Available Available
80C on employee’s
contribution
Interest credited to Exempt from tax Exempt from tax if rate of Exempt from tax
Provident Fund interest does not exceed
notified rate of interest i.e.
9.5%; excess of interest
over notified rate of
interest is taxable
Numerical on Salary Income
Income from House Property
Income is taxable under the head “Income from house property’’ if the
following conditions are satisfied:
Condition 1: The property should consist of any buildings or lands
appurtenant thereto.
Condition 2: The assessee should be owner of the property.
Condition 3: The property should not be used by the owner for the
purpose of any business of profession carried on by him, the profits of
which are chargeable to income-tax.
Basis of Computing Income from a Let Out
House Property
• Income from a let out house property is determined as under:
Rs.
Gross Annual Value xxx
Less: Municipal Taxes xxx
Net annual value xxx
Less: Deduction under section 24
- Standard deduction xxx
- Interest on borrowed capital xxx
Income from house property xxx
• Gross annual value
Find out reasonable expected rent of the property
Find out rent actually received or receivable
Find out which one is higher
Find out loss because of vacancy
Expected rent or actual rent – loss due to vacancy
 • Reasonable Expected Rent
a. Municipal Valuation (MV)
b. Fair Rent of the property (FR)
c. Standard rent of the property (SR)
The higher of MV and FR, subject to maximum of SR is reasonable
expected rent.
• Rent actually received or receivable
Rent of the previous year (or part of the previous year) for which the
property is available for letting out xxx
Less: Unrealized rent if a few conditions are satisfied xxx
Rent received/ receivable before deducting loss due to vacancy xxx
 Deductions from Gross Annual Value
• Municipal Taxes
Municipal taxes levied by any local authority in respect of the house property are
deducted
Municipal taxes levied by local authority but not paid by the assessee are not
deductible
• Deduction under section 24
i. Standard deduction (Sec 24(a)) – 30 percent of net annual value is deductible
irrespective of any expenditure incurred by assessee.
ii. Interest on borrowed capital – Allowable as deduction if capital is borrowed for
the purpose of purchase, construction, repair, renewal or reconstruction of the
property.
Computation of Taxable Income from
Self-occupied property

Gross Annual Value Nil

Less: Municipal Taxes Nil
Net annual value Nil
Less: Deduction under section 24
- Standard deduction Nil
- Interest on borrowed capital xxx
Income from house property xxx
Profits and Gains of Business or Profession
Basis of charge (Sec. 28)
Under section 28, the following income is chargeable to tax under the
head “Profits and gains of business or profession”
a. Profits and gains of any business or profession;
b. Value of any benefit or perquisite arising from the business or
exercise of profession;
c. Any interest, salary, bonus, commission or remuneration received
by a partner from firm
Basic Principles for arriving at Business
Income
• Business or Profession carried on by the assessee
• Business or profession should be carried on during the previous year
• Tax incidence arises in respect of all businesses or professions
• Real profit vs anticipated profit
• Recovery of sum already allowed as deduction
• Mode of book entries not relevant
• Illegal business
Specific deductions under the Act
• Section 30 to 37 cover expenses which are expressly allowed as
deduction while computing business income.
• Sections 40, 40A and 43B cover expenses which are not deductible
Expenses allowed as deductions
• Rent, rates, taxes, repairs and insurance for building (Sec. 30)
• Repairs and insurance of machinery, plant and furniture (Sec. 31)
• Depreciation allowance
• Tea/ coffee/ rubber development account (Sec. 33AB)
• Expenditure on scientific research (Sec. 35)
• Insurance premium [Sec. 36(1)]
• Bonus or commission to employees [Sec. 36(1)(ii)]
• Interest on borrowed capital [Sec. 36(1)(iii)]
• General Deduction [Sec37(1)]
Specific Disallowances under the Act
• TDS default when payment/ credit to a non-resident
• TDS default when payment/ credit is given to a resident
• Income tax, dividend tax, wealth-tax
• Expenditure exceeding Rs. 10,000 paid by a mode other than account
payee cheque/ draft
• Contribution towards unapproved gratuity fund
• Excessive or unreasonable payment to relatives/ interconnected
concerns
• Amount not deductible in respect of certain unpaid liabilities
Capital Gains
What is the basis of Charge (Sec. 45)
• Any gain arising from the transfer of a capital asset during a previous
year is chargeable to tax under the head “Capital gains” in the
immediately following assessment year.
• It is chargeable to tax if it is no eligible for exemption under sections
54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB.
Conditions for capital gain tax liability
• There should be a capital asset.
• The capital asset is transferred by the assessee.
• Such transfer takes place during the previous year.
• Any profit or gain arises as a result of transfer.
• Such profit or gains is not exempt from tax under sections 54 to 54GB.
Short term/ long term capital assets
• “Short term capital asset” means a capital asset held by an assessee
for not more than 36 months, immediately prior to its date of
transfer.
• If capital asset is held by an assessee for more than 36 months, then it
is known as “long-term capital asset”.
• In following cases, capital asset becomes long-term capital asset if it is
transferred after 12 months or 24 months -
 • Category A – Period of holding more than 12 months (if transfer takes place
after July 10, 2014)-
1. Equity or preference shares in a company (listed in a recognized stock
exchange in India).
2. Securities (like debentures, bonds, Government securities, derivatives,
etc.) listed in a recognized stock exchange in India.
3. Units of UTI
4. Units of an equity oriented mutual fund
5. Zero coupon bonds
• Category B – Period of holding more than 24 months –
1. Equity or preference shares in a company (unlisted) (if transfer takes
place on or after April 1, 2016).
2. Immovable property (being land or building or both) (if transfer takes
place on or after April 1, 2017).
Computation of Short-term Capital Gain (Sec.
48)
1. Find out full value of consideration
2. Deduct the following:
a. Expenditure incurred wholly and exclusively in connection with such
transfer;
b. Cost of acquisition; and
c. Cost of improvement
3. From the resulting sum deduct the exemption provided by sections
54B, 54D, 54G and 54GA
4. The balance amount is short term capital gain.
Computation of Long-term Capital Gain (Sec.
48)
1. Find out full value of consideration
2. Deduct the following:
a. Expenditure incurred wholly and exclusively in connection with such
transfer;
b. Indexed Cost of acquisition; and
c. Indexed Cost of improvement
3. From the resulting sum deduct the exemption provided by sections
by 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB
4. The balance amount is known as long-term capital gain.
 Indexed cost of acquisition or improvement
• Indexed cost of acquisition is calculated as follows –
Cost of acquisition x Cost inflation index for the CII for
the year in which asset was first held year in which asset is transferred
by the assessee or 2001-02, whichever is later

• Indexed cost of improvement is calculated as follows –

Cost of improvement x Cost inflation index for the CII for the
year in which improvement year in which asset is transferred
Took place
Capital gain exemptions
• Capital gains arising from the transfer of residential house property
(Sec. 54)
• Capital gains arising from the transfer of land used for agricultural
purpose (Sec. 54B)
• Capital gains on compulsory acquisition of land and building, forming
part of industrial undertaking (Sec 54D)
• Capital gains on transfer of any long term capital asset on the basis of
investment in certain bonds (Sec. 54EC)
• Capital gains on transfer of a long term capital asset other than a
house property (Sec. 54F)
Tax on short-term/ long-term capital gain
• Under section 112, long term capital gain is taxable at a flat rate of 20
per cent.
• Long-term gain in the hands of non-residents under section 115AB,
115AC, 115AD or 115Eis taxable at the rate of 10 per cent.
• Deductions under sections 80C to 80U are not available in respect of
long-term capital gain.
• If securities transaction tax is not applicable, short-term capital gain is
taxable like any other income
• If securities transaction tax is applicable, short-term capital gain is
taxable at the rate of 15 per cent.
Income from other sources
Basis of Charge (Sec. 56)
• Income from other sources is the last and residual head of income.
• Sub-section (1) of section 56 covers any income which does not fall
under any other head of income.
• Sub-section (2) of section 56 specifies nine incomes which are always
taxable under the head “Income from other sources”.
Taxable Income under Income from other
sources
• Dividend
• Winning from lotteries
• Employees’ contribution towards staff welfare scheme
• Interest on securities
• Rental income of machinery, plant or furniture
• Rental income of letting out of plant, machinery or furniture along
with letting out of building and the two lettings are not separate
• Sum received under Keyman insurance policy
• Gift
Taxable Income under Income from other
sources
• Interest on compensation
• Advance money received in the course of negotiations for transfer of
capital assets
• Compensation on termination of employment or modification of
terms of employment
Deductions permissible from income from
other sources
• Commission of remuneration for realizing interest on securities
• Repairs, depreciation in the case of letting out of plant, machinery,
furniture, building
• Standard deduction in case of family pension
• Any other expenses for earning income
Clubbing of Income
Clubbing of Income
• Transfer of income without transfer of asset – when income
therefrom is regarded as that of transferor
• Revocable transfer of assets
• When an individual is assessable in respect of remuneration of spouse
• When an individual is assessable in respect of income from assets
transferred to spouse
• When an individual is assessable in respect of income of his minor
child
Set off and carry forward of losses
The process of setting off of losses and their carry forward may be
covered in following steps:
• Step 1: Inter-source adjustment under the same head of income
• Step 2: Inter-head adjustment in the same assessment year
• Step 3: carry forward of a loss
Inter source Adjustment
Exceptions
• Loss from speculation business
• Loss from specified business
• Long-term capital loss
• Loss from activity of owning and maintaining race horses
• Loss cannot be set off against winnings from lotteries, crossword
puzzles, etc.
• Loss from sale of securities
Inter-Head Adjustment
Exceptions
• Loss in speculation business
• Loss in Business specified under section 35AD
• Loss from the activity of owning and maintaining race horses
• Business loss cannot be set off against salary income
• House property loss exceeding Rs. 2,00,000
• Loss cannot be set off against winnings from lotteries
• Loss from purchase of securities
Carry Forward of Loss – How to set off
The following losses can be carried forward:
a. Loss under the head “Income from house property”
b. Loss under the head “Profits and gains of business or profession”
c. Loss under the head “capital gains”
d. Loss from the activity of owning and maintaining race horses
Other remaining losses cannot be carried forward.
Permissible deductions from Gross Total
Income
• Under Sec. 80C – deduction in respect of Life Insurance Premia,
Deferred Annuity, Contributions to Provident Fund, Subscription to
certain Equity Shares or Debentures, etc.
• Under Sec. 80D – deduction in respect of medical insurance premia
• Under Sec. 80E – deduction in respect of payment of interest on loan
taken for higher education
• Under Sec. 80EE – deduction in respect of interest on loan taken for
residential house property
• Under Sec. 80G – deduction in respect of donations to certain funds,
charitable institutions, etc.
Rebate for Resident Individuals
Conditions for rebate:
• Taxpayer is a resident individual
• His total income or net income or taxable income (i.e., gross total
income minus deduction under sections 80C to 80U) does not exceed
Rs. 5 lakh.